<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 15, 2000
Registration No. 333-96509
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
AMENDMENT NO. 1 TO
FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------------
DCH TECHNOLOGY, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<S> <C> <C>
COLORADO 2810 84-1349374
- ------------------------- ---------------------------- ------------
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
27811 Avenue Hopkins #6
Valencia, California 91355
(661) 775-8120
(Address and Telephone Number of Principal Executive Offices)
27811 Avenue Hopkins #6
Valencia, California 91355
(Address of Principal Place of Business or Intended Principal Place of Business)
Mr. David A. Walker
President
DCH Technology, Inc.
27811 Avenue Hopkins #6
Valencia, California 91355
(661) 775-8120
(Name, Address and Telephone Number of Agent for Service)
Copy to:
Cathryn S. Gawne, Esq.
Sheila M. Leunig, Esq.
Silicon Valley Law Group
152 N. Third Street, Suite 900
San Jose, California 95112
Telephone: (408) 286-6100
Facsimile: (408) 286-1400
Approximate Date of Proposed Sale to Public: As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of
<PAGE>
the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Title of each class Amount to be Proposed Proposed Amount of
of securities to be registered maximum maximum registration fee
registered offering price per aggregate
unit offering price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 3,535,049 shares $5.625 (1) $19,884,651 (1) $ 5,250
Par Value $0.01
Common Stock 35,000 shares $ 0.75 (2) $ 26,250 (2) $ 6.93
Par Value $0.01
Common Stock 107,300 shares $ 0.50 (2) $ 53,650 (2) $ 14.16
Par Value $0.01
Common Stock 650,000 shares $ 0.40 (2) $ 260,000 (2) $ 68.64
Par Value $0.01
Common Stock 609,672 shares $ 0.30 (2) $ 182,902 (2) $ 48.29
Par Value $0.01
Total 4,937,021 shares $20,407,453 $5,388.00(3)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated in accordance with Rule 457(c).
(2) Calculated in accordance with Rule 457(g).
(3) Previously paid.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment, which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities, and it is not soliciting an offer to buy these
securities, in any state where the offer or sale is not permitted.
Subject to Completion, March 15, 2000
[DCH TECHNOLOGY, INC. LOGO]
4,937,021 Shares
Common Stock
We have prepared this prospectus to allow DCH Technology, Inc.
shareholders or their respective pledgees, donees, transferees or other
successors in interest to sell up to 4,937,021 shares of our common stock which
they own or may acquire upon exercise of warrants previously acquired in private
placements. We will receive no proceeds from the sale of these shares, except
for the proceeds from the exercise of the warrants.
Our common stock is listed on the NASD O-T-C Market Bulletin Board
under the symbol "DCHT." On February 28, 2000, the closing price of our common
stock was $7.06 per share.
______________________
See "Risk Factors" beginning on page 6 for a discussion of material issues to
consider before purchasing our common stock.
_______________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is March , 2000.
--
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary 3
Risk Factors 6
Use of Proceeds 10
Price Range of Common Stock and Dividend Policy 11
Capitalization 13
Selected Consolidated Financial Data 14
Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Business 21
Management 35
Related Party Transactions 40
Selling Stockholders 41
Principal Stockholders 44
Description of Capital Stock 46
Shares Eligible for Future Sale 48
Plan of Distribution 49
Legal Matters 50
Experts 51
Where You Can Find Additional Information 51
Index to Financial Statements F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock. In this
prospectus, "DCH," "we," "us" and "our" refer to DCH Technology, Inc.
All trademarks, service marks or trade names referred to in this prospectus
are the property of their respective owners.
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information described more fully elsewhere in this
prospectus. You should read the entire prospectus carefully.
Our objective is to seek out patented technologies, secure those patented
technologies through licensing agreements with the patent holders and to convert
the technologies into viable products, which we then produce, market and sell.
Our business focuses primarily on technologies related to the use of hydrogen in
gas sensor systems and fuel cell systems.
Our hydrogen gas sensor products capitalize on the rapidly growing need for
regulatory systems to monitor dangerous levels of hydrogen in various industry
applications. The current gas sensor market is estimated at $1.1 billion based
on an industry study conducted by management and continues to grow as new and
innovative uses for these products are found. Because hydrogen is explosive when
found in low level concentrations, detecting and regulating the gas in order to
activate safety equipment or alarms is a vital step in protecting personnel and
avoiding hazardous situations. Our hydrogen sensor equipment offers a fast and
reliable safety solution to a vast number of industries that utilize hydrogen in
the production of their own products or that create hydrogen as a byproduct. We
have one hydrogen sensor product already on the market and are currently
developing a second sensor device.
Our hydrogen fuel cell products represent a viable alternative to
traditional energy resources, such as oil and gas. Recently, the United States
government and major car manufacturers have turned their attention to the need
for cleaner, longer lasting and more efficient fuel sources than fossil fuels.
We believe that our hydrogen fuel cell technology is the alternative fuel source
of the future, not just for automobiles, but for small, portable consumer
products as well. Our first two fuel cell products are currently under
development and are projected to be ready for the market in approximately 12 to
18 months. Meanwhile, we continue to develop the underlying hydrogen fuel cell
technology and to strengthen our relationships with government and corporate
partners interested in exploiting this technology.
We feel that it is important to the growth and success of our company that
we establish strategic relationships within the industries that are most in
need of our products. By forging these relationships early on we anticipate
that that we will be able to penetrate relevant markets and reach higher sales
volumes quicker than our competitors. To date, we have identified 34 industries
where hydrogen sensors are used or needed. We also have several strategic
partners that help in the design and development of the technologies underlying
our hydrogen sensor and fuel cell products. These partners include the
Department of Energy, Lockheed Martin, Sandia National Laboratory, Oak Ridge
National Laboratory, Simon Fraser University, and Los Alamos National
Laboratory.
3
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Common stock offered by selling stockholders 4,937,021 shares
Common stock to be outstanding after this 22,105,113 shares excluding an
Offering aggregate of 2,385,306 shares reserved
for outstanding warrants.
Use of proceeds Other than the proceeds from the
exercise of the warrants, none of the
proceeds from the sale of the
common stock offered by this
prospectus will be received by us.
Any warrant exercise proceeds
received by us will be used for
working capital and general
corporate purposes.
O-T-C Market Bulletin Board symbol: DCHT
</TABLE>
4
<PAGE>
SUMMARY OF CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------
December 31
---------------------------------------------------------
1999 1998 1997
------------- ---------------- ------------
Consolidated Statements of Operations Data:
<S> <C> <C> <C>
Sales $ 543,199 $ 207,580 $ 89,751
Cost of products sold 332,394 66,480 -
Loss from operations (3,566,495) (4,581,839) (185,957)
Net loss (3,587,473) (4,577,656) (185,957)
Net loss per common share $ (.25) $(.48) $ (.04)
Weighted-average common shares outstanding 14,518,656 9,579,059 4,211,936
At
December 31,
-------------------------------------
1999 1998
------------ ------------
Consolidated Balance Sheet Data:
Current Assets $ 1,744,879 $ 304,345
Property And Equipment - Net $ 217,665 $ 108,659
Other Assets $ 313,577 $ 128,025
Total Assets $ 2,276,121 $ 541,029
Current Liabilities $ 843,934 $ 247,229
Long Term Liabilities $ 30,344 $ 180,359
Total Stockholders Equity $ 1,401,843 $ 113,441
</TABLE>
5
<PAGE>
RISK FACTORS
An investment in the shares of our common stock offered by this prospectus
involves a high degree of risk. You should consider carefully the following
risk factors as well as the other information set forth in this prospectus
before you decide to buy our common stock.
Risks Related to DCH's Operations
We have a history of losses, and we expect losses for the foreseeable future.
Since our inception in November 1994, we have incurred substantial losses.
Our net loss equaled $4,577,656 for the year ended December 31, 1998, as
compared to $3,587,473 for the year ended December 31, 1999. As of December 31,
1999, we had an accumulated deficit of $8,618,404.
We anticipate that our expenses relating to developing, marketing and
supporting our current and future products will increase substantially in the
future. Accordingly, for the foreseeable future we expect to experience
additional losses as these increased expenses exceed our total revenues. These
additional losses will increase our accumulated deficit.
Our revenues currently depend on one product, the Robust Hydrogen Sensor.
To date, we have generated nearly all of our revenues from one product, the
Robust Hydrogen Sensor. We expect that the Robust Hydrogen Sensor will continue
to account for a substantial majority of our revenues for the foreseeable
future. Currently, three other technologies are under development, including a
second hydrogen sensor and two hydrogen fuel cells. Our future financial
performance is dependent, in significant part, upon the successful development,
introduction and customer acceptance of new and enhanced versions of the Robust
Hydrogen Sensor, other hydrogen sensors, our hydrogen fuel cell technologies and
related new products that we may develop. We cannot assure you that we will be
successful in upgrading the Robust Hydrogen Sensor or that we will successfully
develop new products, or that any new product will achieve market acceptance.
For more information on the sources of our revenues, please see the sections of
this prospectus entitled "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Hydrogen sensor and fuel cell technologies are new and evolving technologies,
they compete with other gas sensor products and methods of fuel generation, and
may not receive widespread acceptance.
Hydrogen sensor and fuel cell technologies are in their very early stages
of development. Like many new technologies, they are characterized by rapidly
evolving technological developments, quickly changing marketing and sales
strategies, multiple and aggressive market participants, fluctuating demand and
uncertain market acceptance for products and services.
6
<PAGE>
Our hydrogen sensor equipment competes against other gas sensor products
that may be more sensitive or more reliable than those we offer. Although the
need for hydrogen monitoring devices is increasing as more related safety
hazards are identified, many industries that utilize hydrogen may choose not to
adopt expensive hydrogen sensing safety systems. In addition, because the
adoption of hydrogen monitoring systems by various industries is largely driven
by the passage of new regulatory laws by the Occupational Safety and Health
Administration and other federal, state and local governing bodies, industries
may choose to forgo the advantages of these detection systems until they are
required by law to adopt them. These factors may delay or lessen the demand for
our hydrogen sensor products.
Businesses and consumers remain uneducated about the benefits of
alternative fuel sources, such as our hydrogen fuel cell technology. This
ignorance may delay the acceptance and penetration of our fuel cell products
into markets that have historically been served by traditional fuel sources.
Businesses and consumers also have the option of using other methods of
alternative fuel generation, including carbonate, phosphoric acid, polymer
electrolyte or solid oxide fuel cells systems, as well as traditional fossil
fuels such as oil and gasoline. These methods may maintain or even increase
their acceptance to the detriment of our hydrogen fuel cell technology.
The loss of the services of one or more of our key personnel or our failure to
hire, integrate or retain other qualified personnel could disrupt our business.
We depend upon the continued services and performance of our executive
officers and other key employees, particularly David A. Walker, our President
and Vice President of Business Operations and David P. Haberman, our Chairman
and Vice President of Technology and Planning. Competition for qualified
personnel in technology, particularly in the fuel cell industry, is intense and
we may not be able to retain or hire necessary personnel as a result of the
highly specialized nature of our products. In addition, the amount of our
limited working capital may impose compensation restrictions on us that make it
difficult to attract and hire necessary employees. Currently, we do not carry
key man insurance to cover any of our personnel.
Governmental regulation of the hydrogen fuel cell and hydrogen sensor technology
may restrict our business.
Government regulation of the use of hydrogen for industrial applications
and fuel cell generation varies greatly from country to country. There is some
risk that the United States and other countries will increase their regulation
of these technologies in the future. As our products are utilized solely in
connection with hydrogen, any new law or regulation pertaining to the commercial
use of hydrogen, or the application or interpretation of existing laws, could
adversely impact our sales, increase our cost of doing business or otherwise
have a material and adverse effect on our business, results of operations and
financial condition.
We are subject to various federal, state and local laws and regulations
relating to, among other things, land use, safe working conditions, handling and
disposal of hazardous and potentially hazardous
7
<PAGE>
substances and emissions of pollutants into the atmosphere. This will also be
true for our future hydrogen fuel cell manufacturing facilities. We believe that
we have obtained all necessary government permits and have been in substantial
compliance with all of these applicable laws and regulations.
Since 1991, the National Environmental Protection Act (NEPA) has required
that each local Department of Energy procurement office file and have approved
by the Department of Energy in Washington, DC, appropriate documentation for
environmental, safety and health impacts with respect to procurement contracts
entered into by that local office. The costs associated with compliance with
environmental regulations may or may not be recovered under existing or future
contracts to which we are a party. In addition, contract work may be delayed
until such approval is received.
Product defects and product liability claims related to our hydrogen sensors and
hydrogen fuel cell products could expose us to significant liability.
Although we test our products extensively prior to introduction, we cannot
assure you that our testing will detect all serious defects, errors and
performance problems prior to the commercial releases of our future software
products. Any future defects, errors or performance problems discovered after
commercial release could result in the diversion of scarce resources away from
customer service and product development, lost revenues or delays in customer
acceptance of our products and damage to our reputation, which, in each case,
could have a material and adverse effect on our business, results of operations
or financial condition.
In addition to the potential for product defects, hydrogen itself is a
dangerous element. For example, hydrogen is highly explosive when it reaches
concentrations in the air of greater than four percent. The volatility of
hydrogen may compromise the safety and effectiveness of our products, which may
cause damage to our reputation, result in lost sales and revenues or have other
material and adverse effects on our business.
We have not experienced any product liability claims to date, but we may be
subject to such claims in the future. A product liability claim brought against
us could have a material and adverse effect on our business, results of
operations or financial condition.
We would lose revenues and incur significant costs if our systems or material
third-party systems are not year 2000 compliant.
We have assessed the impact of the year 2000 issue on our business and
operations and have completed our year 2000 contingency plan. Despite this, the
failure of our internal systems, or any material third-party systems, to be year
2000 compliant could have a material and adverse effect on our business, results
of operations and financial condition.
We believe that the current versions of our Robust Hydrogen Sensor products
and our internal systems are year 2000 compliant. However, we cannot assure you
that our products and internal systems will not experience year 2000 problems in
the future. Any such problems could result in a decrease in sales of our
products, an increase in the allocation of our resources to
8
<PAGE>
address year 2000 problems of our customers without additional revenue and an
increase in litigation costs relating to losses suffered by our customers due to
year 2000 problems.
We may also experience material delays from our major partners, including
the United States government, due to year 2000 issues relating either to their
management information or production systems. We have inquired of these third
parties in an attempt to ascertain their year 2000 readiness. At this time, we
are unable to estimate the nature or extent of any potential adverse
impact resulting from the failure of third parties, such as its
suppliers and customers, to achieve year 2000 compliance. Moreover, such third
parties, even if year 2000 compliant, could experience difficulties resulting
from year 2000 issues that may affect their suppliers, service providers and
customers. As a result, although we do not currently anticipate that it will
experience any material shipment delays from its major product suppliers or
any material payment or sales delays from its major customers due to year 2000
issues, these third parties could experience year 2000 problems that could have
a material adverse effect on our business, results of operations and financial
condition.
To date, we have not incurred any material costs in identifying or
evaluating year 2000 compliance issues. However, we may fail to discover year
2000 compliance problems in our systems that will require substantial revisions
or replacements. There can be no assurance that third-party software, hardware
or services incorporated into our material systems will not need to be revised
or replaced, which could be time-consuming and expensive. Our inability to fix
or replace third-party software, hardware or services on a timely basis could
result in lost revenues, increased operating costs and other business
interruptions, any of which could have a material and adverse effect on our
business, results of operations and financial condition. Moreover, the failure
to adequately address year 2000 compliance issues in our software, hardware or
systems could result in claims of mismanagement, misrepresentation or breach of
contract and related litigation, which could be costly and time-consuming to
defend.
On January 1, 2000, a critical date in regards to all year 2000 compliance
systems, we did not experience any problems with our products or internal
systems. However, there can be no assurance that we will not experience any
year 2000 problems in the foreseeable future.
We are heavily reliant on third parties for certain components and any delays,
defects or other problems in supplying these components could adversely affect
our business.
We are heavily reliant on the ability of Allied Signal, Inc. to manufacture
the semiconductor wafer for the Robust Hydrogen Sensor, as it is currently the
sole source for these component parts. We are currently in negotiations with
two other potential sources of component parts, including the University of
Pennsylvania and AMI, Inc. Electronic circuit boards for the Robust Hydrogen
Sensor are fabricated by our manufacturing partner International Circuits and
Components, Inc. Sensor casing and other hardware are fabricated by various
small manufacturers. Although delays in the shipment and receipt of our
component parts may occur, historically we have experienced only those delays
that tend to occur in the normal course of business. However, any significant
delays in the shipment or receipt of any of our component parts could have a
material adverse impact on our business, results of operations and financial
condition.
9
<PAGE>
Growth in the volume of orders for our products may strain the capacity of
these component suppliers, and delays or other problems with component suppliers
could have a material and adverse effect on our business.
Some of the information in this prospectus contains forward-looking statements.
Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they:
- discuss our expectations about our future performance;
- contain projections of our future operating results or of our future
financial condition; or
- state other "forward-looking" information.
We believe it is important to communicate our expectations to our
stockholders. There may be events in the future, however, that we are not able
to predict accurately or over which we have no control. The risk factors listed
in this section, as well as any cautionary language in this prospectus, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that the
occurrence of any of the events described in these risk factors and elsewhere in
this prospectus could have a material and adverse effect on our business,
results of operations and financial condition and that upon the occurrence of
any of these events, the trading price of our common stock could decline and you
could lose all or part of your investment.
USE OF PROCEEDS
Other than the proceeds from the exercise of the warrants, we will not
receive any of the proceeds from the sale of the common stock offered by this
prospectus. The holders of the warrants are not obligated to exercise their
warrants, and there can be no assurance that we will receive any additional
proceeds. If all of the warrants are exercised, however, the gross proceeds to
us would be $618,231, assuming exercise as of February 28, 2000.
We currently intend to use these proceeds as working capital and for
general corporate purposes, including possible acquisitions of or investments in
complementary businesses, products or technologies.
10
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock price is likely to be highly volatile. The market price
of our common stock has been, and is likely to continue to be, highly volatile
as the stock market in general, and the market for technology companies in
particular, has been highly volatile. Investors may not be able to resell their
shares of our common stock following periods of volatility because of the
market's adverse reaction to volatility. The trading prices of many technology
companies' stocks have reached historical highs within the last 52 weeks and
have reflected valuations substantially above historical levels. During the same
period, these companies' stocks have also been highly volatile and have recorded
lows well below historical highs. We cannot assure you that our stock will trade
at the same levels of other technology stocks or that technology stocks in
general will sustain their current market prices.
Factors that could cause such volatility may include, among other things:
- actual or anticipated fluctuations in our quarterly operating results;
- announcements of technological innovations and further developments;
- changes in financial estimates by securities analysts;
- conditions or trends in the hydrogen sensor and hydrogen fuel cell
industries;
- changes in the market valuations of other technology companies,
especially our partners and competitors; and
- general market conditions.
Since May 16, 1997, our common stock has been traded on the OTC
Bulletin Board under the symbol "DCHT." The following table sets forth, for the
periods indicated, the high and low bid prices for the common stock as
reported by the OTC Bulletin Board. The following quotations should not be
construed to imply that an established trading market exists for the common
stock; trading to date has been sporadic. The quotations do not reflect
adjustments for retail mark-ups, markdowns, or commissions and may not
necessarily reflect actual transactions.
11
<PAGE>
<TABLE>
<CAPTION>
Period Low Bid High Bid
- ------ ------- --------
<S> <C> <C>
Fiscal 2000
First Quarter (through February 28, 2000) $2.97 $10.00
Fiscal 1999
Fourth Quarter $0.25 $4.12
Third Quarter $0.47 $0.88
Second Quarter $0.72 $1.38
First Quarter $0.78 $2.06
Fiscal 1998
Fourth Quarter $0.56 $1.59
Third Quarter $1.50 $4.75
Second Quarter $0.44 $8.12
First Quarter $0.19 $0.62
</TABLE>
On February 28, 2000, the closing price of our common stock on the OTC
Bulletin Board was $7.06 per share and there were approximately 1,846 holders of
record of the common stock.
The market price for our common stock has historically been volatile.
Significant volatility in the market price of shares of our common stock may
arise in the future due to factors such as our developing business, historic
losses and relatively low price per share. In addition, future announcements
concerning us or our competitors may have a significant impact on the market
price of the common stock. Such announcements might include financial results,
the results of testing, technological innovations, new commercial products,
changes to government regulations, developments concerning proprietary rights,
or litigation. As long as there is only a limited public market for the common
stock, the sale of a significant number of shares of common stock at any
particular time could be difficult to achieve at the market prices prevailing
immediately before such shares are offered, and the offering of a significant
number of shares of common stock at one time could cause a severe decline in the
price of the common stock.
To date, no dividends have been declared or paid on any of our common
stock. We currently intend to retain earnings, if any, to fund the development
and growth of our business and do not anticipate paying cash dividends on the
common stock in the foreseeable future. Payment of future dividends, if any,
will be at the discretion of our Board of Directors after taking into account
various factors, including our financial condition, operating results, current
and anticipated cash needs and plans for expansion.
12
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1999, our
capitalization on an actual basis and as adjusted to reflect the conversion of
the exercise of the warrants being registered in this prospectus. This
information should be read in conjunction with our Consolidated Financial
Statements and the related Notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As
Actual Adjusted
---------------- ------------
<S> <C> <C>
Long Term Liabilities $ 30,344 $ 30,344
Stockholders' Equity
Preferred stock, $0.10 par value; 5,000,000 shares authorized; no - -
shares issued and outstanding accrual and
as adjusted
Common stock, $0.01 par value; 50,000,000 shares authorized;
19,725,995 shares issued and outstanding; and 20,834,911 shares
issued and outstanding as adjusted $ 193,259 $ 217,112
Additional paid-in capital $ 9,775,433 $10,369,811
Common stock subscribed 145,556 shares $ 131,000 $ 131,000
Less: Investment in Limited Liabilites Companies ($79,445) ($79,445)
Accumulated deficit (8,618,404) (8,618,404)
-----------
Total Stockholders' Equity 1,401,843 2,020,074
----------- ----------
Total Capitalization $ 1,432,187 $ 2,050,418
=========== ===========
</TABLE>
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below are summary consolidated statements of operations data for
the years ended December 31, 1999 and 1998, respectively, and summary balance
sheet data as of December 31, 1999 and 1998. You should read this information in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our Consolidated Financial Statements and related
Notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended Year Ended
---------- -----------
December 31, December 31,
------------ ------------
1999 1998
---- ----
Consolidated Statements of Operations Data:
<S> <C> <C>
Sales $ 543,199 $ 207,580
Cost of products sold 332,394 66,480
Net loss from operations (3,566,495) (4,581,839)
Net loss (3,587,473) (4,577,656)
Net loss per share $(0.25) $(.48)
Weighted-average common shares outstanding 14,518,656 9,579,059
December 31, 1999 December 31, 1998
----------------- -----------------
Consolidated Balance Sheet Data:
Current Assets $ 1,744,879 $ 304,345
Property And Equipment - Net $ 217,665 $ 108,659
Other Assets $ 313,577 $ 128,025
Total Assets $ 2,276,121 $ 541,029
Current Liabilities $ 843,934 $ 247,229
Long Term Liabilities $ 30,344 $ 180,359
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
TOTAL STOCKHOLDERS EQUITY $1,401,843 $113,442
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We seek out patented technologies, secure those patented technologies
through licensing agreements with the patent holders and convert the
technologies into viable products, which we then produce and sell. We focus on
technologies related to the use of hydrogen, primarily hydrogen gas sensors and
fuel cells. To date, we have obtained our funding from private placements of
equity securities and product sales and loans from officers and principal
stockholders.
Our limited operating history makes it difficult to evaluate our business.
DCH was founded in November 1994 and we commercially released our first product,
the Robust Hydrogen Sensor, in November 1998. Accordingly, we have a limited
operating history, and we face all of the risks and uncertainties encountered by
early stage companies. Among other things, we are faced with the need to
establish our credibility with customers, vendors, distributors, advertising and
other service providers, and prospective strategic partners. These parties are
often understandably reluctant to do business with companies that have not had
an opportunity to establish a track record of performance and accountability.
Early stage companies must also devote substantial time and resources to
recruiting qualified senior management and employees at all levels, and must
make significant investments to develop and manufacture products and establish
brand recognition. If we are unable to overcome some of these obstacles, we may
be unable to achieve our business goals and raise sufficient capital to expand
our business. These risks and uncertainties are increased due to the new and
evolving nature of the hydrogen sensor and hydrogen fuel cell technologies. In
addition, because we have a limited operating history, our past results may not
be meaningful and you should not rely on them as indicators of our future
performance.
Our operating results are volatile and unpredictable, and are likely to
fluctuate significantly in the future. We may fail to meet the expectations of
public market analysts and investors, which could cause the market price of our
common stock to decrease significantly. Our revenues, gross margins and other
operating results may vary significantly from quarter to quarter. The
fluctuations may be due to a number of factors, many of which are beyond our
control, including actions of our competitors, market acceptance of our
products, changes in pricing and margins, and unanticipated costs.
We are growing rapidly and effectively managing our growth may be
difficult. We are currently experiencing a period of significant expansion. In
order to execute our business plan, we must continue to grow significantly by
expanding our product line and hiring new employees. This growth will strain our
management, resources and systems. Our ability to compete
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effectively and manage future growth, if any, will require us to implement and
improve our operational, financial and management information systems on a
timely basis and to attract, hire, train and retain additional personnel. If we
cannot effectively manage our growth, our business could be harmed.
Because of these and other factors, we do not believe that quarter-to-
quarter comparisons of our historical results of operations are good predictors
of our future performance. Furthermore, it is possible that in some future
quarters our results of operations may fall below the expectations of securities
analysts and investors. In this event, the trading price of our stock will
likely be materially and adversely affected.
Year Ended December 31, 1999 Compared With Year Ended December 31, 1998
For the year ended December 31, 1999, we had sales of $543,199 compared to
sales of $207,580 for the year ended December 31, 1998. The increased sales in
1999 were due primarily to our introduction of our Robust Hydrogen Sensor
product line in November 1998. In accordance with the growth in sales, the cost
of products sold increased to $332,394 for the year ended December 31, 1999
compared to $66,480 for the comparable period in 1998. Gross profit was $210,805
for the year ended December 31, 1999 compared to $141,100 for the year ended
December 31, 1998, also reflecting the increased sales.
Selling, general and administrative expenses were $2,870,256 for the year
ended December 31, 1999, compared to $2,880,897 for the comparable period in
1998. Substantially all of the selling, general and administrative expenses in
the first three quarters of 1999 were derived from the commercialization and
introduction of the Robust Hydrogen Sensor product line, while the 1998 expenses
reflected stock-based awards issued by us to employees and non-employees in
consideration of services or goods provided.
Depreciation and amortization increased to $65,336 for the year ended
December 31, 1999, compared to $31,857 for the year ended December 31, 1998, due
to purchases by us of equipment for our operations.
We expended $841,708 on research and development during the year ended
December 31, 1999 compared to expenditures of $1,810,185 for the year ended
December 31, 1998. The decrease was due to the movement of the Robust Hydrogen
Sensor product line from the research and development phase to initial
production, while research and development efforts continued on other DCH
products.
As a result of the foregoing factors, our net loss decreased to $3,587,473
for the year ended December 31, 1999, from a net loss of $4,577,656 for the year
ended December 31, 1998. Due in part to an increase in the number of shares
outstanding during the period, the net loss per share decreased to $.25 for the
year ended December 31, 1999 from $.48 for the comparable period in 1998.
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Liquidity and Capital Resources
To date, we have funded our operations primarily through private placements
of equity securities and secondarily through product sales and loans from
officers and principal stockholders. Equity placements generated net proceeds of
$2,862,756 during the year ended December 31, 1999 and $1,310,729 for the year
ended December 31, 1998. At December 31, 1999, we had a working capital of
$900,945, including cash of $1,193,084, compared to working capital of $57,117,
including $1,802 in cash, at December 31, 1998.
Our cash increased by $1,191,282 during the year ended December 31, 1999.
The increase was due primarily to financing activities, which provided
$3,416,355 to us during the year ended December 31, 1999. Operating activities
during the year ended December 31, 1999 utilized $2,021,190 of cash, and
investing activities utilized $203,383 during the same period. In October 1998,
we advanced the sum of $100,000 to Hydrogen Burner Technology, Inc.
("HBT"),
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one of our customers, in anticipation of future services. The advance was to be
repaid on or before September 30, 1999. On September 30, 1999, HBT and we agreed
upon the services to be performed; HBT also agreed to issue 13,000 shares of its
common stock to us in repayment of the advance.
We remain dependent upon our ability to obtain outside financing through
the issuance of additional securities until it achieves sustained profitability
through increased sales. Management believes that we will require significant
resources for the remainder of the year 2000, principally to fund our working
capital needs to support the commercialization of our hydrogen sensor and fuel
cell products and continuing research and development efforts. At the present
time, we estimate that we will require approximately $15,300,000 to fund our
operations (including the commercialization of our products and ongoing research
and development) through the year 2001. We estimate that it would require
approximately $2,300,000 to fund our operations for 2000. We expect to generate
the necessary resources for our 2000 business plan through a combination of the
contribution from sales of our products and additional private placements of
equity securities. No assurances can be given, however, that we will be able to
obtain such additional resources.
We anticipate that our capital requirements of approximately $13,000,000
for the balance of the period ending December 31, 2001 will be met through cash
generated from operations and from equity investments. There can be no
assurance, however, that we will be able to generate capital sufficient to meet
these long-term needs.
We may engage in future acquisitions that may harm our financial results,
cause our stock price to decline, or dilute our stockholders' interest.
We may acquire or make investments in complementary businesses, products,
services or technologies on an opportunistic basis when we believe they will
assist us in carrying out our business strategy. We do not have any present
understanding, nor are we having any discussions relating to any such
acquisition or investment. Any such acquisition or investment could harm our
operating results or cause our stock price to decline because:
- the amount of time and level of resources required to successfully
integrate its business operation could be substantial;
- challenges in assimilating personnel, organizational structure, and
technology could cause significant delays in executing other key areas of our
business plan;
- the key personnel of the acquired company may decide not to work for
us, which could result in the loss of key technical or business knowledge to us;
- our management's attention could be diverted from our other business
operations; and
- we may have to incur debt or issue equity securities to pay for any
future acquisitions, the issuance of which could be dilutive to our existing
stockholders.
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We may be unable to meet our future financing requirements. We currently
anticipate that our available funds will be sufficient to meet our anticipated
needs for working capital, capital expenditures and business expansion through
the year ending December 2000. If cash generated from operations is
insufficient to satisfy our liquidity requirements after that date, we may need
to raise additional funds through the sale of additional equity or debt
securities or through a credit facility. Our capital requirements depend on many
factors, including but not limited to the following:
- the rate at which we develop and introduce our products;
- the market acceptance and competitive position of our products;
- the level of promotion and advertising required to market our products
and to attain a competitive position in the marketplace; and
- the response of competitors to our products.
If we require additional funding, such funding might not be available on
terms favorable to our stockholders or us, and might not be adequate to address
our needs. If adequate funds are not available or are not available on
acceptable terms, we may not be able to fund expansion, take advantage of
unanticipated acquisition opportunities, develop or enhance services or products
or respond to competitive pressures.
If we are unsuccessful in generating anticipated resources from one or more
of the anticipated sources and we are unable to replace any shortfall with
funding from another source, we may be able to extend the period for which
available resources would prove adequate by deferring the satisfaction of
various commitments or otherwise scaling back operations. If we were unable to
generate the required resources, our ability to meet our obligations and to
continue our operations would be adversely affected. Our financial statements
have been prepared under the assumption of a going concern. Failure to generate
required resources and to achieve sustained profitability would have an adverse
effect on the financial position, results of operations, cash flows and our
prospects and ultimately on our ability to continue as a going concern.
Year 2000 Readiness Disclosure
The year 2000 issue refers to the potential for failure of computer systems
that use two digits rather than four digits to identify the applicable year.
Many computers and other equipment with embedded chips or microprocessors may
not be able to appropriately interpret dates after December 31, 1999, because
such systems use only two digits to indicate a year in the date field rather
than four digits. If not corrected, many computers and computer applications
could fail or create miscalculations, causing disruptions to our operations. In
addition, the failure of customer and supplier computer systems could result in
interruption of sales and deliveries of key supplies or utilities. Because of
the complexity of the issues and the number of parties involved, we cannot
reasonably predict with certainty the nature or likelihood of such impacts.
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We have actively addressed this situation and anticipate that we will not
experience a material adverse impact to our operations, liquidity or financial
condition related to systems under control. We have has addressed the year 2000
issue in four overlapping phases: (i) identification and assessment of all
critical software systems and equipment requiring modification or replacement
prior to 2000; (ii) assessment of critical business relationships requiring
modification prior to 2000; (iii) corrective action and testing of critical
systems; and (iv) development of contingency and business continuation plans to
mitigate any disruption to our operations arising from the year 2000 issue.
We have obtained information from its external service providers,
significant suppliers and customers, and financial institutions to confirm their
plans and readiness to become year 2000 compliant, in order to better understand
and evaluate how their year 2000 issues may affect our operations. Based on this
information received to date, we believe that we have received reasonable
assurances that our material service providers, suppliers, customers and
financial institutions are Year 2000 compliant.
In 1998, we contracted with a year 2000 consultant who, in concert with our
personnel and one of our aerospace customers, conducted a comprehensive
evaluation of all its systems, including the internal network, local
microcomputers, test equipment, financial systems and software embedded in its
products. Based on this testing, we were found to be year 2000 compliant in all
of our products and internal systems. We have also received assurances from
the suppliers of the software we employ that such software is year 2000
compliant, and have obtained assurances that any computer software and hardware
purchased in 1999 is year 2000 compliant. We do not believe that our insistence
upon year 2000 compliant hardware or software will materially increase the cost
thereof.
We sell our products for integration in other systems developed by its
customers. While we believe those systems to be year 2000 compliant, we have no
control over the ability and internal commitment of such customers to meet this
goal. Therefore, the possibility remains that some of our products may be
integrated with other companies' non-year 2000 compliant equipment.
On January 1, 2000, a critical date in regards to all year 2000 compliance
systems, we did not experience any problems with our products or internal
systems. However, there can be no assurance that we will not experience any
year 2000 problems in the foreseeable future.
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BUSINESS
Overview
We seek out patented technologies, secure those patented technologies
through licensing agreements with the patent holders and convert the
technologies into viable products that we then produce and sell. We focus on
technologies related to the use of hydrogen, primarily hydrogen gas sensors and
fuel cells.
History
DCH was formed in November 1994 as a partnership between David P. Haberman,
our Vice President of Technology and Planning and Chairman of our Board of
Directors, and David A. Walker, our President, Vice President of Business
Operations and a member of the Board of Directors. Our initial strategy was to
assist a small engineering company in Marina Del Rey, California in the
manufacturing and sale of aircraft thermocouples based on the engineering
company's design and development work.
We initially established offices in Sherman Oaks, California in December
1994. We were incorporated in California in January 1995.
By mid-1995, we had abandoned the thermocouple business when the local
engineering company's design was found to have irrecoverable flaws. We then re-
directed our efforts toward the commercialization of a hydrogen gas detector
developed and patented by Sandia National Laboratories ("Sandia") in
Albuquerque, New Mexico. From this time until mid 1997, we funded ourselves
primarily through research contracts and the resale of aerospace equipment.
After investigating the hydrogen energy industry and related technologies,
we decided to pursue the licensing of the Sandia patent. In April 1996, we
entered into a license with Sandia and began to concentrate on the production
and qualification of the hydrogen sensors. We commenced initial pre-production
and qualification of the hydrogen sensors in February 1997, and continued
redesign of the sensors to improve performance and reduce costs.
In May 1997, in an attempt to raise capital and provide a trading market
and liquidity for our stockholders, all of the outstanding capital stock of DCH
was acquired by Connection Sports, Inc., a publicly traded Colorado corporation
("CSI") in exchange for the issuance of 6,000,000 shares of CSI common stock. At
the time of the acquisition, CSI was a shell corporation with no assets, and
there was no pre-existing relationship or affiliation between or among us, CSI
and their respective officers and directors. CSI's name was changed after the
acquisition to DCH Technology, Inc. This stock exchange transaction is treated
as an acquisition by us of the net tangible book value of the assets of CSI, at
the date of the acquisition. In this prospectus, the term "DCH" refers to DCH
Technology, Inc., a Colorado corporation, and DCH Sensors Corp., its wholly
owned California subsidiary.
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We expanded our offices and moved to Valencia, California in June 1998.
This relocation allowed us to set up offices, manufacturing and engineering
areas, including a design and engineering laboratory, a test and calibration
laboratory and a manufacturing/assembly area. Our offices are located at 27811
Avenue Hopkins #6, Valencia, California 91355; our telephone number is (661)
775-8120. We also have a web site, located at http:\\www.dcht.com.
General / Products
We seek out patented technologies, secure those patented technologies
through licensing agreements with the patent holders, and convert the
technologies into viable products which we then produce and sell. We focus on
technologies related to the use of hydrogen. To date, we have licensed four
technologies: three technologies involving hydrogen gas sensors and one
concerning hydrogen fuel cells. They are:
The Robust Hydrogen Sensor, licensed from Sandia National Laboratory. We
currently manufacture products based on this technology. The Robust Hydrogen
Sensor is discussed below under "Hydrogen Gas Sensors---The Robust Hydrogen
Sensor."
The Thick Film Hydrogen Sensor, licensed from Oak Ridge National
Laboratory. This technology is still under development. The Thick Film Hydrogen
Sensor is discussed below under "Hydrogen Gas Sensors---Thick Film Hydrogen
Sensor."
The Universal Gas Detector, licensed from Simon Fraser University. This
technology is still under development. The Universal Gas Detector is discussed
below under "Hydrogen Gas Sensors---Universal Gas Detector."
The PEM Fuel Cell, licensed from Los Alamos National Laboratory. This
technology is still under development. The PEM Fuel Cell is discussed below
under "Fuel Cells--PEM Fuel Cell," as is a separate license for an additional
PEM fuel cell technology.
In addition to these technologies, we may license an additional technology,
the Fiber Optic Sensor, from the National Renewable Energy Laboratory. The Fiber
Optic Sensor is discussed below under "Hydrogen Gas Sensors---Fiber Optic
Hydrogen Sensor."
Hydrogen Gas Sensors
Our sensors are used for detection of hydrogen, the most plentiful element
on the earth. Hydrogen is one of two major elements of water, which covers over
60% of the planet. It appears in different forms in plants, animals, fossil
fuels and a wide range of chemical compounds. Hydrogen is a combustible,
odorless and colorless gas that is widely used in industrial, commercial and
medical applications. When hydrogen burns, it generates only energy and water,
and thus is a clean non-polluting fuel. Based on industry analyses and
investments by several automobile manufacturers in hydrogen-based fuel cells, we
believe that in the future, hydrogen may replace fossil fuels in both electrical
power generation and as the fuel of choice for the automotive industry.
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Hydrogen is also the key component in the manufacture of chemicals,
especially ammonia and methanol. It is used in large quantities in refineries
for manufacturing gasoline and heating oil, as well as to make fertilizers,
glass, refined metals, vitamins, cosmetics, semiconductor circuits, soaps,
lubricants, cleaners, margarine, peanut butter and rocket fuel. Our sensors act
to monitor and measure the amount of hydrogen used in processes within these and
other industries.
In addition to its uses, however, hydrogen carries certain dangers.
Hydrogen is explosive when it reaches an approximate four percent concentration
in air or oxygen (this is known as the "Lower Explosive Limit" of hydrogen). In
order to avoid these explosions, it is necessary to monitor and measure the
concentration of hydrogen in areas of concern and to either sound warnings as
this danger point is approached or to activate control equipment which results
in the avoidance of hazardous situations. Our sensors act to alert, warn,
measure and/or control the flow and use of hydrogen.
Based on industry sources, we estimate that the total annual worldwide
sales of gas detectors amounted to approximately $1.09 billion in 1997.
Approximately one-half of these sales involved gas detectors for carbon
monoxide, hydrogen sulfide, ammonia, oxygen and hydrogen, with hydrogen
detectors comprising approximately 9.8% of total sales.
Our technologies have opened additional markets for hydrogen gas sensors.
For example, our sensors have been sold to Westinghouse for installation in the
Leningrad Nuclear Power Plant as safety monitors, as they were the only
economically priced hydrogen gas sensors that could withstand the harsh
environment of a nuclear power plant.
We have licensed certain sensor technologies from several sources, and are
currently developing products based on these technologies: the Robust Hydrogen
Sensor, the Thick Film Hydrogen Sensor and the Universal Gas Detector. We are
also developing a Fiber Optic Hydrogen Sensor.
The Robust Hydrogen Sensor
The Robust Hydrogen Sensor technology was invented and patented (patent
number 5,279,795) by the U.S. Department of Energy at Sandia in Albuquerque, New
Mexico. The technology, an Applications Specific Integrated Circuit, or
microchip, was developed by Sandia for the U.S. Department of Defense for a
classified nuclear weapons application. After Sandia had patented the
technology, it was made available to the commercial market for licensing. This
process permits the U.S. government to receive royalties and licensing fees for
the technology without expending the resources required to commercialize
products.
We licensed the Robust Hydrogen Sensor from Sandia in April 1996. The
Sandia license agreement, which expires on the earlier of January 1, 2015 or the
expiration of Sandia's patent rights, required us to pay an up-front license
fee, payable in three equal installments. All of these installments have been
paid. In addition to the license fee, we will pay a royalty to Sandia for every
sensor sold (whether sold alone or installed in a device or system), subject to
certain
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minimum royalties. In 1998 and 1999, we paid royalties of $1,000 and $8,000,
respectively, to Sandia under the Sandia license agreement. No royalties were
earned in 1997.
The Robust Hydrogen Sensor technology consists of an array of two sensing
elements: field effect transistors and resistors, both made of palladium nickel.
Hydrogen reacts with the palladium nickel, and the reactions produce changes in
the electrical signal of both devices corresponding to the amount of hydrogen in
the environment. The field effect transistors detect hydrogen in concentrations
from approximately 0.0001% to one percent. The resistors allow sensing from
about one percent to 100% concentration. The technology also includes a micro-
thermometer (temperature diode) and micro-heaters for maintaining on-chip
temperature control and other chip functions. In addition, the heaters are used
to temporarily heat the chip to "boil" off hydrogen molecules, which may stick
to the palladium nickel, thus freeing the sensor for repeated use.
The Sandia license agreement defines two fields of use for the licensed
technology. The first field of use, covering the petrochemical, energy, waste
management, environmental and manufacturing industries, is exclusive to us
through April 24, 2001. After that date, the license in this field becomes non-
exclusive for the remaining term of the license agreement. The second field of
use covers all other commercial applications and is non-exclusive.
We offer the Robust Hydrogen Sensor technology in three basic forms. The
first, an integration kit, is used for installation into customized systems as
leak detectors and measurement devices. The second form consists of a hand-held
unit, affording portability in hydrogen detection and measurement. The third
form is a sensor system, a fixed installation arrangement for leak detection
and/or measurement in remote locations. We anticipate that this third product
will have the ability to be remotely interrogated whenever desired, and may be
coupled with a modem or radio tag which could power the sensor and send a
reading back to a computer or other equipment at another location.
To date, we have received over $700,000 in orders for its Robust Hydrogen
Sensor products. The largest of these was received in March 1998, when
Westinghouse Nuclear Products Division (Monroeville, Pennsylvania) placed an
order for a retrofit of the reactor and turbine areas of the Leningrad Nuclear
Power Plant in Russia. Westinghouse Nuclear Products Division was the only
customer that accounted for 10% or more of our gross revenues in fiscal 1998,
accounting for 48% of revenues in that year.
Thick Film Hydrogen Sensor
The Thick Film Hydrogen Sensor technology was invented and patented (under
U.S. patent numbers 5,367,283 and 5,451,920) by the U.S. Department of Energy at
Oak Ridge National Laboratory in Oak Ridge, Tennessee ("ORNL"). The sensor,
developed by Barbara Hoffheins and Robert Lauf of ORNL, relies on the fact that
palladium absorbs and then discharges hydrogen.
We commenced the development of the Thick Film Hydrogen Sensor technology
from Lockheed Martin Energy Research ("LMER"), an ORNL contractor, in September
1996,
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pursuant to a Cooperative Research and Development Agreement ("CRADA") (the
"ORNL CRADA"). Under the ORNL CRADA, we have provided a business plan and
product definition for commercialization of the technology, while LMER continues
development efforts for certain products based on the technology. The ORNL
CRADA, which expires in September 2001, anticipates an aggregate expenditure, in
cash and in-kind, of $1,170,000.
Concurrently with entering into the CRADA, DCH and LMER entered into a
license agreement. The LMER license grants us the sole commercial right and
license to manufacture, use, sell or offer for sale the products based on the
Thick Film Hydrogen Sensor technology in the following fields of use: (i)
production, storage and transportation of hydrogen for use in the generation of
power; (ii) use of hydrogen in fuel cells and high yield energy storage; and
(iii) safety applications in the chemical and petroleum industries.
The license has an initial term of five years, with re-negotiation for
renewal every five years thereafter. It provides for an initial license fee
(paid by DCH in September 1996) and royalties on sales of products incorporating
the Thick Film Hydrogen Sensor technology. To date, no revenues have been
generated from such sales; based on the progress of research and development
efforts to date, management of we anticipate that production of products will
commence in approximately 9 to 12 months.
The sensor is fabricated with conventional thick film materials and methods
(primarily because of significant cost advantages). The design consists of
several electronic compositions that are separately screen-printed and fired
onto an alumna substrate. The key sensor composition is primarily composed of
palladium metal because of its documented affinity for hydrogen. Changes in
hydrogen concentration in the palladium correspond to changes in the electrical
resistance of the palladium and can be easily measured.
Universal Gas Detector
A patent application was filed for the Universal Gas Detector technology on
March 27, 1998 (priority claimed by United States Provisional Application
60/041,653). We licensed the invention from Simon Fraser University in Burnaby,
British Columbia, Canada on July 28, 1998. The technology is intended to
selectively detect any reducing gas or oxidizing gas and/or their vapors, and
involves a detecting system that can be designed to use any commercially
available sensor head.
The license grants us the exclusive right and license, for any use, to
make, have made, use, maintain, execute, copy, market, lease and sell products
based on the technology.
The license term extends from July 28, 1998 until the end of the term for
which patent rights are granted. It provides for an initial license fee (paid by
DCH in April 1998) and royalties on sales of products incorporating the
universal gas detector technology. To date, no revenues have been generated from
such sales; based on research and development efforts to date, we anticipate
that production of products may commence in approximately 18 to 24 months.
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The technology consists of software and electronics, which can be set to
selectively detect any reducing gas or oxidizing gas (and/or their vapors) to
which it is exposed. This involves a detecting system that can be designed to
use any commercially available sensor head.
Fiber Optic Hydrogen Sensor
The Fiber Optic Hydrogen Sensor technology was invented by the U.S.
Department of Energy at the National Renewable Energy Laboratory ("NREL") in
Golden, Colorado. DCH, through Amerisen, a joint-venture with Midwest Research
Technology, Inc. ("MRT"), commenced development of the Fiber Optic Hydrogen
Sensor technology in May 1996 pursuant to a CRADA with NREL. The NREL CRADA
required NREL to have primary responsibility for design and development of a
prototype sensor, while Amerisen would develop and manufacture a hydrogen
detector test station and demonstrate the sensor to potential customers. Each
party would contribute in-kind support, valued at an aggregate of $1,700,000.
The NREL CRADA expires in September 2000. The parties are currently negotiating
a license for the Fiber Optic Hydrogen Sensor technology. There can be no
assurance that such a license can be negotiated on terms acceptable to us.
Fuel Cells
The fuel cell was invented by William Robert Grove in 1839. A fuel cell is
a device that uses a fuel (usually hydrogen) to create electricity. The method
it uses to create the electricity is fairly simple: Hydrogen is introduced to
one side of the fuel cell (known as the anode). The hydrogen atom is stripped of
its electron as it progresses through the cell. The electron goes through a
conductor to create an electrical current. At the other end, the hydrogen joins
up with oxygen and forms water.
When a fuel cell is used it creates clean power (electricity) with pure
water as the only byproduct. The amount of power that can be created is
significant. ONSI Corporation, one of our competitors, has manufactured a fuel
cell delivering 200kW of power. Ballard Power Systems, another competitor of us,
makes fuel cells used in buses in the U.S. and Canada which generate 205 kW (275
HP). Fuel cells are being considered for use to power electric vehicles by many
of the major automobile manufacturers.
The fuel cell industry is generally considered to be in its infancy (even
though the basic technology is almost 160 years old), because fuel cells
historically have been large and extremely expensive to manufacture. However,
with the interest and financing from government labs (like Los Alamos National
Lab) and private entities (like Daimler Benz), the fuel cell is quickly becoming
economically viable and physically practical.
PEM Fuel Cell
Several fuel cell manufacturers have indicated that in addition to the
transportation sector, fuel cells might be used in markets such as emergency
power supplies, medical applications, and portable low-power sources. We are
working with Los Alamos National Laboratory in Los Alamos, New Mexico ("LANL")
to commercialize its Proton-Exchange-
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Membrane ("PEM") fuel cell -- a small, stackable device (each unit is a little
smaller than a baseball cap) that will deliver low power (less than 50 to 500
watts) reliably and cleanly. The current configuration of the PEM fuel cell is
not powerful enough to operate an automobile, but it can provide enough power
for people in third world countries or in an emergency situation or other venue
where no power is present to operate such items as small medical equipment,
communication devices and camping equipment.
The PEM fuel cell technology, relating to annular feed air breathing fuel
cell stacks, was invented and patented (under U.S. patent numbers 5,514,486 and
5,595,834) by the U.S. DOE at LANL. The fuel cell is designed to provide clean,
economic low power (from less than 50W to 5kW).
We commenced development of the PEM fuel cell technology with LANL in March
1999, pursuant to a CRADA (the "LANL CRADA"). Under the LANL CRADA, we have
provided a business plan and product definition for commercialization of the
technology, while LANL continues development efforts for 50W and 300W fuel cells
based on the technology. The LANL CRADA for the PEM fuel cell technology expires
in October 2000 and contemplates aggregate development expenditures (in cash and
in-kind) of $1,200,000.
In connection with the LANL CRADA, DCH received two licenses for the PEM
fuel cell technology. The first license grants us the exclusive license to
make, have made, use, import, sell and offer to sell the products based on the
patented technology (with sublicense rights) in the fields of use of power
generation for marine, aerospace, military, portable and remote-area
applications. This exclusive license commenced in March 1999 and continues
until the expiration of the last patent on the technology.
The exclusive license agreement provides for an up-front fee (paid by DCH
in March 1999) and annual license fees due on January 31st of each year of the
term of the exclusive license; these fees will be credited against royalties on
net sales of the fuel cells and other payments (such as sublicense fees).
The second license grants us the non-exclusive license to make, have made,
use, import, sell and offer to sell the products based on the patented
technology (with sublicense rights) in the all fields of use except power
generation for marine, aerospace, military, portable and remote-area
applications. The nonexclusive license commenced in March 1999 and continues
until the expiration of the last patent on the technology.
The nonexclusive license agreement provides for an up-front fee (paid by
DCH in March 1999) and annual license fees due on January 31st of each year of
the term of the nonexclusive license; these fees will be credited against
royalties on net sales of the fuel cells and other payments (such as sublicense
fees).
An additional PEM fuel cell technology, relating to adiabatic fuel cell
stacks, was invented and patents were applied for (under US patent application
numbers 08/810,119 and 09/135,965) by the US DOE at LANL. The fuel cell is
designed to provide clean, economic power up to about 10kW.
27
<PAGE>
This license grants us the non-exclusive license to make, have made, use,
import, sell and offer to sell the products based on the technology (with
sublicense rights) in the all fields of use. The nonexclusive license commenced
in October 1999 and continues until the expiration of the last patent on the
technology.
The license agreement provides for an up-front fee (paid by DCH in October
1999) and annual license fees due on January 31st of each year of the term of
the nonexclusive license; these fees will be credited against royalties on net
sales of the fuel cells and other payments (such as sublicense fees).
To date, no revenues have been generated from sales of fuel cells pursuant
to either the exclusive or nonexclusive licenses; we anticipate that based on
the progress of our research and development efforts, production of products
will commence in approximately 12 months.
Marketing and Sales
Hydrogen Sensors
We have devised a marketing strategy for its hydrogen sensors, and are
currently in the process of implementing this strategy. Our strategy involves
three components: establishing DCH in the "hydrogen community," comprised of
trade groups such as the National Hydrogen Association, the California Hydrogen
Business Council and the Congressional Hydrogen Technical Advisory Panel;
establishing a coalition with the insurance industry to require use of hydrogen
detection systems; and using commissioned independent sales representatives
specializing in particular industries to sell our products.
The strategy differs in each of our target markets: for example, in the
government/aerospace industries, we have utilized contacts with NASA to test its
sensors on certain aircraft engines. We also contemplate additional testing on
engines and installation of the sensors at various NASA sites. In the energy
industry, we intend to participate in the creation and refinement of the various
codes and standards governing sensor systems as well as to persuade insurance
companies to promote the use of hydrogen sensors as safety devices. To date, we
have participated in the associations listed above and have contracted with
companies including Westinghouse to provide hydrogen sensors. Our marketing
strategy in the petrochemical industry involves the introduction of sensors on a
test basis to oil refineries through our pipe corrosion detection feature, a
relatively new field of use. We also believe that refineries will recognize the
value of our hydrogen sensors as a cost-saving safety device.
As part of our overall business plan, we have entered into strategic
partnerships with several organizations. We believe that strategic partnerships
are a key to future growth, especially in the hydrogen gas detection and
measurement business. We have identified 34 industries where hydrogen sensors
are used. By creating alliances with value added resellers and distributors, we
anticipate that we will be able to penetrate multiple markets and realize higher
sales volumes.
28
<PAGE>
In addition, we have made alliances with multiple transformer gas analysis
companies, which are testing our equipment for use in transformer cooling oil.
These companies may become value-added resellers of our equipment based upon
qualification of our sensors in test procedures. On January 21, 1999, we
announced the signing of a distribution agreement with Horiba, Ltd., an
international gas analyzer company. The distribution agreement permits Horiba to
distribute and sell products in Japan based on the Robust Hydrogen Sensor
technology, utilizing both the DCH Hand Held Unit design and integrating our
electronics into a Horiba gas analyzer. The Horiba distribution agreement was
renewed through January 2001, and will be automatically renewed for a five-year
term if Horiba sells 50 of such products during the year 2000.
We plan to use distributors to market our products overseas and currently
have agreements with ten distributors worldwide for the Robust Hydrogen Sensor
product line.
We also have increased our visibility by providing presentations at
national and international conferences advocating the use of hydrogen sensors,
and have participated in the formation of a coalition to provide insurance
industry risk assessments.
Fuel Cells
We have developed a marketing plan for our fuel cell product line,
targeting certain domestic and international markets. The plan has not been
fully implemented, however, because the product is still in development. Based
on independent marketing analysis, we believe that the single largest barrier to
market acceptance of our fuel cells will be the lack of market knowledge about
the benefits of fuel cells. With this in mind, we have embarked on a market
education program. We have manufactured several prototype demonstration units of
our fuel cells and have successfully operated hardware at trade shows and
conferences. In addition, our personnel have spoken at conferences about the
fuel cell product. As we near the commercial introduction of our fuel cells,
these educational activities will continue to increase.
Research and Development
We believe that continuing research and development of our licensed
technology is critical to penetrating existing markets through superior product
features, opening new markets and obtaining a competitive advantage. Due to our
limited resources, we currently conduct our research and development activities
with strategic partners: sensor development in connection with federal research
laboratories such as ORNL; applications development in conjunction with our
field representatives; and advanced systems designs for specialized industries
with customers.
To date, a significant portion of our research and development has occurred
through CRADAs with the U.S. Department of Energy: the ORNL CRADA, the LANL
CRADA and the NREL CRADA. See "Business - General/Products."
29
<PAGE>
During the years ended December 31, 1998 and 1999, we expended $59,484,
$1,810,185 and $841,708 respectively, on research and development. None of these
expenses were funded by our customers.
Manufacturing
At the present time, our Robust Hydrogen Sensor product line constitutes
the only products of DCH in production. We subcontract specialty processes
relating to the Robust Hydrogen Sensor product line to several major
manufacturers. Semiconductor wafer production for our hydrogen sensor element
occurs at Allied Signal's Microelectronics and Technology Center in Columbia,
Maryland. Electronic circuit boards are fabricated by International Circuits and
Components, Inc. in Anaheim, California. Housings and other hardware are
fabricated by various small manufacturers. We conduct final assembly,
calibration and finished product testing of the sensors. The production cycle
for our Robust Hydrogen Sensor currently averages approximately eight weeks. To
date, we have not experienced any interruption in the manufacture of our
products and anticipate that sources for each of our subcontracting activities
will be readily available. We are currently in the initial production phase for
our sensor product line, and anticipate going into full production within a
year.
Backlog
The commercial order backlog for our products at December 31, 1999 was
$496,574 compared with $327,865 at December 31, 1998. We have also agreed to
provide up to an additional $2,376,065 worth of hydrogen sensors over the next
three years to a fuel cell manufacturer. Since we generally ship our products
within the same quarter that we receive a purchase order from the customer for
such products, we believe that our backlog at any particular time is generally
not indicative of the level of future sales.
Competition
We compete in both the hydrogen sensor and fuel cell markets. We may not be
able to compete successfully against current and future competitors in our
markets. The markets in which we are engaged are new, rapidly evolving and
intensely competitive, and we expect competition to intensify further in the
future both from existing competitors and new market entrants. We believe that
our ability to compete depends on many factors both within and beyond our
control, including:
- the ease of use, performance, features, price and reliability of our
solutions as compared to those of our competitors;
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed by us and our competitors;
- the quality of our customer service and support; and
- the effectiveness of our sales and marketing efforts.
30
<PAGE>
Many of our current and potential competitors are likely to enjoy
substantial competitive advantages, including:
- longer operating histories;
- greater name recognition;
- more extensive customer bases; and
- cooperative relationships among themselves or with third parties to
enhance their products.
Increased competition is likely to result in price reductions, reduced
gross margins and loss of market share, any one of which could impair our
finances and business prospects. We cannot assure you that we will be able to
compete successfully against existing or potential competitors or that
competitive pressures will not materially impair our finances or business
prospects.
The markets for our products are at a very early stage of development, are
rapidly changing and are characterized by an increasing number of market
entrants. As is typical for a new and rapidly evolving industry, demand for and
market acceptance of recently introduced products are subject to a high level of
uncertainty and risk. Acceptance and usage of our fuel cells is dependent on
continued growth in use of alternative energy sources by businesses and
consumers. Businesses that already have invested substantial resources in
traditional or other energy sources may be reluctant to adopt new alternative
sources. Individuals with established patterns of purchasing goods and services
may be reluctant to alter those patterns. Accordingly, it is not assured that
sufficient demand for our products will develop to sustain its business.
The hydrogen sensor market is extremely competitive, with several
manufacturers competing for acceptance. This is due in large part to the rise
in hydrogen sales in the United States, which have increased dramatically at an
average annual rate of more than 25% during 1993-1997. In addition, although
the need to monitor hydrogen gas at low concentrations has been recognized for
many years now, the need for monitoring devices continues to expand rapidly as
more hazards are identified and more stringent government regulations are
passed. The current market for gas sensors, including hydrogen and other gas
detection devices, is estimated at $1.1 billion. The current annual market for
hydrogen gas detection equipment is estimated at $107,000,000.
Most of our competitors in the hydrogen sensor market have far greater
financial, marketing and manufacturing resources than us by virtue of their
being long established in the field. The attributes upon which competition is
based are primarily reliability, ease of use, product support, response speed,
accuracy and price. We believe that our hydrogen sensor products offer several
advantages, including a faster reaction time of less than two seconds near the
Lower Explosive Limit (current detectors may take as long as two minutes to
return a reading) and extended sensor life. In addition, our sensors are
hydrogen-specific and therefore not prone to false readings, and operate in
hostile environments such as radioactive areas. Finally, the sensors indicate a
complete range of hydrogen presence, similar to that offered by mass
spectrometers but at a much lower cost.
31
<PAGE>
Competition in the fuel cell industry is comprised primarily of companies
that do research and testing but have no foreseeable path to commercialization.
This undeveloped industry is estimated to be worth more than $10 billion by
year 2010. We are competing primarily on the basis of fuel cell efficiency,
environmental considerations and cost. We believe our simple, passive technology
will provide significant economic, utilization and performance advantages over
our competitors' technology. For example, we believe that our hydrogen fuel
cells have significant advantages over existing low power fuel cells in
development at other companies. These advantages include a smaller size and
weight, no moving parts (it is a completely passive device), low cost and
simplicity of design. Despite this, we can give no assurance that such
advantages will continue or that our hydrogen fuel cells under development will
be commercially successful
Several companies in the United States and Canada are involved in fuel cell
development, including United Technology's ONSI Corporation and Ballard Power
Systems Corporation. Ballard Power Systems Corporation focuses primarily of
development of fuel cell technology for large stationary power systems and
secondarily for transportation. Our products focus primarily on smaller,
consumer sized fuel cell designs for portable or remote electric power. In
Japan, at least six manufacturers have demonstrated interest in developing and
marketing fuel cells. In Europe, companies in Germany, Holland, Spain and Italy
are actively engaged in fuel cell development and are potential competitors,
although these efforts are not as well advanced as the progress of the United
States and Japanese companies. Almost all of these companies are also
significantly larger than we are, possess greater financial resources and have
established product lines in electric generation equipment and in other fields.
In addition to the hydrogen fuel cell, other types of fuel cells are also
being developed by different companies worldwide. These fuel cells, generally
referred to by the electrolyte medium they use, include phosphoric acid,
polymer electrolyte and solid oxide systems. These fuel cells are in various
stages of development and aim at different application including stationary
power, transportation and portable power. The phosphoric acid fuel cell system,
developed by United Technology's ONSI Corporation (80KW and Higher) is in
advanced stages of development and has limited commercial sales. This system is
significantly less efficient and is expected to be more expensive compared to
our fuel cell technology, but nonetheless provides an alternative fuel cell
product.
Government Regulation
We are permitted to export our hydrogen sensors without restriction, as the
U.S. Department of Commerce, Bureau of Export Control has designated the sensor
as an unrestricted export item. Our production of hydrogen fuel cells will be
subject to various Occupational Safety and Health Administration (OSHA), other
federal, state and local laws, insurance companies and industry professional
regulations relating to, among other things, land use, safe working conditions,
handling and disposal of hazardous and potentially hazardous substances and
emissions of pollutants into the atmosphere. To date, we believe that we have
obtained all necessary government permits and have been in substantial
compliance with all of these applicable laws and regulations.
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<PAGE>
Employees
As of December 31, 1999, we employed 26 people on a full-time basis,
consisting of 13 people in engineering/development/manufacturing, 9 in
administration and 4 in sales/customer service. Our employees are not
represented by a labor union, and it has experienced no work stoppages. We
believe that its employee relations are good. The loss of key employees could
cause delays in completing contracted work and research and development and
commercialization activities.
Intellectual Property
We are in the process of registering our trademark "Robust Hydrogen Sensor"
and "Hydrogen is the Future -- We Can Sense It!" with the United States Patent
and Trademark Office.
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary rights in
products and services. If the protection of our trademarks and proprietary
rights is inadequate, our brand and reputation could be impaired and we could
lose customers.
We have entered into confidentiality and invention assignment agreements
with our employees and contractors, and nondisclosure agreements with its
suppliers and strategic partners in order to limit access to and disclosure of
its proprietary information. There can be no assurance that these contractual
arrangements or the other steps taken by us to protect our intellectual property
will prove sufficient to prevent misappropriation of our technology or to deter
independent third-party development of similar technologies.
In addition, litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Because laws protecting certain ownership
rights in hydrogen sensor and hydrogen fuel cell products are uncertain and
still evolving, we cannot give you any assurance about the future viability or
value of any of our current technology ownership rights. Such litigation,
whether successful or unsuccessful, could have a material and adverse effect on
our business, results of operations or financial condition.
While we intend to pursue registration of our trademarks and service marks
in the U.S. and internationally, effective trademark, service mark, copyright
and trade secret protection may not be available in every country in which our
services are made available online. We do not currently own any patented
technology registered with the United States Patent and Trademark Office.
Although we do not believe that we infringe the proprietary rights of third
parties, there can be no assurance that third parties will not claim
infringement by us with respect to past, current or future technologies. We
expect that participants in our markets will be increasingly subject to
infringement claims as the number of services and competitors in our industry
segment
33
<PAGE>
grows. Any such claim, whether meritorious or not, could be time-consuming,
result in costly litigation, cause service upgrade delays or require us to enter
into royalty or licensing agreements. Such royalty or licensing agreements might
not be available on terms acceptable to us or at all. As a result, any such
claim could have a material adverse effect upon our business, results of
operations and financial condition.
Litigation
We are not currently involved in any litigation proceedings.
Facilities
Our principal executive, administrative, and engineering operations are
located in two leased facilities totaling 6,700 square feet in Valencia,
California. The main office is occupied under a lease expiring on May 31, 2001.
The production facility is in a separate building nearby (approximately 150
yards from the main office) occupied under a lease expiring on April 30, 2002.
We lease approximately 3,300 square feet in Madison, Wisconsin where we conduct
research and development on the fuel cell product and where we plan to expand
into limited production. This lease expires on April 30, 2002. We also occupy a
small sales office (approximately 150 square feet) in Washington, DC under a
month-to-month lease. Management considers that the current facilities are
adequate for the present level of operations and that additional office and
factory space is available in the immediate vicinity.
34
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information, as of December 31,
1999, concerning DCH's executive officers and directors:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NAME AGE POSITION(S)
- --------------------------------------------------------------------------------
<S> <C> <C>
David P. Haberman 38 Chairman of the Board of Directors and
Vice President, Technology and Planning
- --------------------------------------------------------------------------------
David A. Walker 42 President, Vice President of Business
Operations and Director
- --------------------------------------------------------------------------------
Stephanie L. Hoffman 42 Vice President and General Manager, Fuel
Cell Division
- --------------------------------------------------------------------------------
Randall S. Firestone 44 Director
- --------------------------------------------------------------------------------
Dr. William L. Firestone 78 Director
- --------------------------------------------------------------------------------
Robert S. Walker 56 Director
- --------------------------------------------------------------------------------
Raymond N. Winkel 70 Director
- --------------------------------------------------------------------------------
</TABLE>
David P. Haberman is the Chairman of DCH's Board of Directors and has
served in that capacity and as Vice President, Technology and Planning since co-
founding DCH with David A. Walker in November 1994. Mr. Haberman served as an
engineering consultant at CBOL Corporation between 1993 and 1994 and served in
various technical capacities at the Astronautics Corporation of America from
1983 to 1993. He is an experienced applications engineer and has a background in
the design and development of hardware. In addition, Mr. Haberman was elected to
the Board of Directors of the National Hydrogen Association in April 1999 and
previously served on that Board between 1996 and 1998. Since October 1998, Mr.
Haberman has also served as a member of the Hydrogen Technical Advisory Panel,
which reports to Congress on hydrogen-related issues. Mr. Haberman also serves
as an American delegate to the International Standards Organization (ISO) on
hydrogen safety.
David A. Walker was appointed President of DCH upon the retirement of Dr.
William L. Firestone in April 1999. Prior to that, he served as Vice President,
Operations of DCH since co-founding DCH with David P. Haberman in November 1994.
In addition, he served on the Board of Directors from the inception of DCH
through May 1997, and has served on the current Board since January 1999. Mr.
Walker also worked as an independent management consultant for the Management
Resource Group and the George S. May International Company between January 1990
and November 1994. Between 1981 and 1990, he served in various management
capacities for Rockwell International. He is a member of the American Society
for Quality, the American Management Association, a Certified Quality Auditor
and Certified Management Consultant. Mr. Walker holds a B.S. degree in Business
Administration from California Baptist College and a M.S. degree in Human
Resource Management from Chapman University. Mr. Walker is no relation to Board
Member Robert S. Walker.
Stephanie L. Hoffman, has served as Vice President and General Manager of
our fuel cell division since her appointment in September 1999. From 1989 to
1999, Ms. Hoffman served as Director of Strategic Technology Planning, Manager
and Program Planner for advanced
35
<PAGE>
product portfolios for the Cutler-Hammer division of Eaton Corporation, a leader
in fuel cell technology development. During her employment with Eaton
Corporation, Ms. Hoffman managed in-depth opportunity and risk assessments of
fuel cell technologies, products and services and developed commercial business
plans for fuel cell market entry. She is a member of the Society of Automotive
Engineers, the Society for Competitive Intelligence Professionals and has served
on the Steering Committee for Advanced Automotive Electrical/Electronic Systems
with DaimlerChrysler, BMW, Ford, GM and Volvo. In 1980, Ms. Hoffman received her
B.A. in General Studies from Luther College. Ms Hoffman also holds a certificate
of completion in General Business Management from Northwestern University
Kellogg School of Business and has attended executive business courses at the
University of Chicago School of Business, the University of Michigan Business
School and California Institute of Technology.
Randall S. Firestone has served as a member of DCH's Board of Directors
since December 1997. Mr. Firestone is a licensed California attorney and has
operated his own practice in Hermosa Beach, California, specializing in civil
litigation, since 1984. Mr. Firestone has done extensive lecturing and volunteer
work and served on the Speaker's Bureau of the Anti-Defamation League from 1979
through 1986. Mr. Firestone is the son of Dr. William L. Firestone, a member of
DCH's Board of Directors.
Dr. William L. Firestone has served as a member of DCH's Board of Directors
since May 1997. He served as President of DCH Technology between May 1997 and
April 1999. Dr. Firestone had been in retirement before joining DCH. He served
as General Manager at Rogerson Kratos Co. from 1991 to 1993. From 1988 to 1991
he was an independent management consultant. Between 1983 and 1988, he served as
President of Jerrold Electronics and Teloc, Inc. Prior to this, he served as a
Vice President and General Manager of Texscan Corporation, RCA, Hallicrafters
Corp. and Whittaker Corp. between 1965 and 1983. Between 1955 and 1965, he
served in various capacities at Motorola. Dr. Firestone holds a B.S. in
Electrical Engineering from the University of Colorado, an M.S. in Electrical
Engineering from the Illinois Institute of Technology, and a Ph.D. in Electrical
Engineering from Northwestern University. Dr. Firestone is the father of Randall
Firestone, a member of DCH's Board of Directors.
Daniel Teran has served as a member of DCH's Board of Directors since
December 1997. Mr. Teran is a Certified Public Accountant licensed in the state
of California and has had his own practice in the city of Los Alamitos in Orange
County since July 1989. He offers services in accounting, systems setup and
design and taxation. He also provides tax planning and tax return preparation
for individuals and businesses, and represents clients in audits with the
Internal Revenue Service and the California Franchise Tax Board. Prior to July
1989, he worked as Chief Financial Officer for the Stephen Hopkins Development
Company (a shopping center developer) and as Controller for NRC Construction
Company. He also served as an auditor for Seidman and Seidman (a large national
public accounting firm). He is an active member of the American Institute of
Certified Public Accountants and the California Society of Certified Public
Accountants, and has served on various committees within these professional
organizations. He received a B.S. degree in Accounting from California State
University at Long Beach.
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<PAGE>
Robert S. Walker has served as a member of DCH's Board of Directors since
January 1999. Mr. Walker has served as President of the Wexler Group, a
Washington D.C.-based lobbying firm, since his retirement from Congress in 1997
where he had served as a representative from Pennsylvania since 1977. During
his tenure in the House, he authored the Hydrogen Future Act of 1996 and served
as Chairman of the House Science Committee. Also, he served as Vice Chairman of
the Budget Committee, Chairman of the Republican Leadership, Chief Deputy
Minority Whip, and a member of Speaker Newt Gingrich's six person Advisory
Group. For many years, he was an active and influential member of the Republican
majority in Congress. Mr. Walker also serves on the Board of Trustees of the
Aerospace Corporation, the United States Space Science Foundation, and the
Susquehana Center for Public Policy. He is also a member of the Advisory Board
for the Imax Corporation. He is a fellow at Millersville University and Franklin
and Marshall College, and serves as a regular academic lecturer. In addition, he
continues to be a frequent guest on CNBC's "Hardball," PBS's "The Lehrer
Newshour," and other C-SPAN, CNN, FOX and MSNBC programs. Mr. Walker began his
career as a high school teacher and congressional aide. He received a B.S.
degree in Education from Millersville University, an M.A. degree in Political
Science from the University of Delaware and an Honorary Doctor of Laws from
Franklin and Marshall College. Mr. Walker is no relation to DCH President and
Board member David A. Walker.
Raymond N. Winkel, a retired US Navy Rear Admiral, has served as a member
of DCH's Board of Directors since December 1996. He served as Vice President of
Programs for Astronautics Corporation of America in Milwaukee, Wisconsin from
1984 until his retirement in 1995. Prior to this, he was Vice President of the
Telephonics Corporation between 1980 to 1983. However, the majority of his
career was spent in the United States Navy, working his was up as one of the few
enlisted men to ever reach flag Rank. Admiral Winkel joined the Navy in 1947,
flew the four engine P4Y2 Privateer Anti-Submarine Warfare Aircraft during the
Korean War and later served in several important capacities until joining the
Naval Air Systems Command in Washington in 1971. Admiral Winkel has been awarded
the Air Medal, the Naval Aviator's Gold Wings, the Legion of Merit, the
Presidential Meritorious Service Medal, the Secretary of the Navy Commendation
Medal, the Good Conduct Medal, the National Defense Service Medal (with the
Bronze Star), the China Service Medal, the Korean Presidential Unit Citation
Ribbon and a number of other medals and citations. Adm. Winkel earned a B.S.
degree at Naval Post Graduate School in Monterey, California, a M.S. degree from
Villanova University, and graduated from the Advanced Management Program at
Harvard University.
All of our officers serve at the discretion of the Board of Directors.
Directors serve until the next annual meeting of DCH's shareholders, or until
their successors have been duly elected and qualified.
Committees of the Board of Directors
The Board of Directors of DCH currently has a Compensation Committee, an
Audit Committee, a Legal Committee, a Public Policy Committee and a Technical
Committee. The functions of each of these committees are described and the
members of each are listed below.
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<PAGE>
The Compensation Committee is chaired by David A. Walker. Dr. William L.
Firestone, Daniel Teran and Robert S. Walker serve as the other Committee
members. The Compensation Committee renders advice with respect to compensation
matters and administers our equity and incentive compensation plans.
The Audit Committee is comprised of Daniel Teran (who serves as Chairman),
Randall S. Firestone and Robert S. Walker. The Audit Committee is responsible
for supervising our auditors and reviewing the financial condition of us.
Randall S. Firestone serves as the sole member of the Legal Committee. The
Legal Committee is responsible for monitoring changes in the law that may be
applicable to DCH, and for supervising the activities of our outside legal
counsel.
The Public Policy Committee is chaired by Robert S. Walker; David P.
Haberman and Raymond N. Winkel serve as the other members of the Committee. The
Public Policy Committee is responsible for monitoring and reporting on activity
occurring in government relating to hydrogen and other matters that could affect
us, our products and/or our marketing strategies.
The Technical Committee is chaired by Raymond N. Winkel; it also consists
of David P. Haberman and Dr. William L. Firestone. Dr. John Barclay (President
of CryoFuel Systems, Inc.) is an outside adviser to this Committee. The
Technical Committee examines new and existing technologies and renders advice to
us regarding potential products based on those technologies.
Executive Compensation Summary
The following table provides compensation information for the period
indicated with respect to the persons who served as our Chief Executive Officers
(the "Named Executive Officers") for the fiscal year ended December 31, 1999. No
other executive officer of DCH received total salary and bonus in excess of
$100,000 during the year ended December 31, 1999.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
- ----------------------------------------------------------------------------------------
NAME SALARY ($) NUMBER OF SECURITIES
UNDERLYING OPTIONS (#)
- ----------------------------------------------------------------------------------------
<S> <C> <C>
David A. Walker, President $0 (1) 1,350,000
- ----------------------------------------------------------------------------------------
Dr. William L. Firestone (2) $ 0 675,000
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Walker received $10,563 during the year ended December 31, 1999 as
reimbursement for automobile expenses.
(2) Dr. Firestone resigned as President of DCH on April 20, 1999. David A.
Walker was elected on that same date.
38
<PAGE>
Employment Agreements
We currently have employment agreements with each of David P. Haberman and
David A. Walker, our Vice President, Technology and Planning, and President,
respectively. Each employment agreement commenced on January 1, 1995 and
terminates on December 31, 2000, and provides for an annual salary currently set
at $100,000. Neither of the employment agreements provides for additional
payments upon a change in control. Messers. Haberman and Walker have declined
any cash compensation due under their respective employment agreements since the
inception of their contracts. Mr. Walker has accepted approximately $10,563 as
reimbursement for automobile expenses incurred during the year ended December
31, 1999.
Fiscal Year Option Grants
There were no option grants to the named Executive Officers for the
year ended December 31, 1999. During this same year, we granted other officers,
employees and consultants options to purchase an aggregate of 2,135,356 shares
of our common stock.
Fiscal Year Option Exercises and Fiscal Year-End Option Values
Shown below is information regarding unexercised stock options held by the
Named Executive Officer at December 31, 1999. No named executive officers
exercised options in the year ended December 31, 1999.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Name Number of Unexercised Options at Value of Unexercised In-the-
Year End(#) Money Options at Year End($) (1)
-------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David A. Walker 1,350,000 0 $4,009,500 $0
- -------------------------------------------------------------------------------------------------
Dr. William L. 675,000 0 $2,004,750 $0
Firestone
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on a per share fair market value of our common stock equal to $2.97
at December 31, 1999, the closing price for our common stock on that date as
reported by various market makers for our common stock on the NASD Over-The-
Counter Market Bulletin Board.
Director Compensation
Members of the Board of Directors did not receive cash compensation in 1998
for their services to DCH in such capacity. However, in 1998 each Director
received 30,000 shares of our restricted common stock for their service as Board
members. In addition, each Board member was granted in 1998 options to purchase
50,000 shares of our common stock, at an exercise price of $0.25 per share,
expiring in 2008. The options vested immediately upon the date of grant.
Effective in 1999, compensation for members of the Board of Directors
(regardless of whether such members are employees of DCH) is as follows:
39
<PAGE>
For serving on the Board of Directors, $10,000 per year;
For each Board meeting, $2,000;
For chairing a committee, $2,000;
For serving on a committee, $2,000; and
For each working committee meeting, $2,000
Although the above compensation has not yet been paid out, we expect to do so in
2000.
At our option, the above compensation, payable at the end of the year, may
be paid in cash or in shares of our common stock.
In addition, each non-employee director receives reimbursement for the
expenses that he incurs in travelling to meetings of the Board of Directors or
any of its committees.
RELATED PARTY TRANSACTIONS
No officer or director has loaned us an amount in excess of $60,000.
In the year ended December 31, 1998, certain officers and directors were
granted options to purchase shares of our common stock as consideration for past
services performed, including services performed during prior fiscal years. All
of these options have an exercise price of $0.25 per share, expire on December
31, 2008 and were fully vested on the date of grant. The following table sets
forth such option grants:
<TABLE>
<CAPTION>
Name Underlying Options During Fiscal Year
- ---- ------------------ ------------------
<S> <C> <C>
Randall S. Firestone 50,000 1998
William L. Firestone 393,525 1998
281,475 1997
David P. Haberman 364,000 1998
364,000 1997
364,000 1996
308,000 1995
Daniel Teran 50,000 1998
David A. Walker 363,000 1998
342,200 1997
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C>
326,600 1996
318,200 1995
Raymond N. Winkel 100,000 1998
</TABLE>
On October 30, 1998, David P. Haberman, our Chairman of the Board of
Directors and Vice President, Technology and Planning, exercised options to
purchase 80,000 shares of our common stock at an exercise price of $0.25 per
share. On December 21, 1999 David P. Haberman also exercised options to
purchase 15,000 shares of our common stock at an exercise price of $0.25 per
share. No other officers or directors exercised options during the year ended
December 31, 1999.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested directors, and will be on terms no less favorable
to us than could be obtained from unaffiliated third parties.
SELLING STOCKHOLDERS
This prospectus relates to the offering by the selling stockholders for
resale of shares of our common stock acquired by them upon conversion of
preferred stock and exercise of warrants which the selling stockholders received
in private placements and other transactions. All of the shares of common stock
offered by this prospectus are being offered by the selling stockholders for
their own accounts.
This offering will benefit certain selling stockholders. The selling
stockholders will receive substantial proceeds from selling their shares of
common stock in this offering. We will pay the offering expenses of the
selling stockholders in this offering, other than brokers' commissions. We
currently estimate these expenses to be $40,000.
The following table sets forth information with respect to the common stock
beneficially owned by the selling stockholders as of the date of this
prospectus, including shares obtainable upon the conversion of preferred stock
and exercise of warrants convertible or exercisable, respectively, within 60
days of such date. The selling stockholders provided us the information included
in the table below. To our knowledge, each of the selling stockholders has sole
voting and investment power over the shares of common stock listed in the table
below. Other than as set forth below, no selling stockholder, to our knowledge,
has had a material relationship with us during the last three years, other than
as an owner of our common stock or other securities.
41
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP OF
COMMON STOCK PRIOR TO THE COMMON STOCK AFTER THE
OFFERING OFFERING
SELLING NUMBER OF NUMBER OF NUMBER OF PERCENT OF
STOCKHOLDER SHARES SHARES TO BE SHARES CLASS
SOLD UNDER
THIS
PROSPECTUS
<S> <C> <C> <C> <C>
Aronson, Herbert 15,728 15,728 -0- *
H. and Irene
Aronson, as
Trustees of the
Aronson second
Amended Trust
Dated March 9,
1999
Bastien, 100,000 100,000 -0- *
Christopher
Bison Investment 35,000 35,000 *
Booras, Gary 81,373 81,373 -0- *
Borelli, Raymond 16,000 16,000 -0- *
Brown, Eliot 250,000 250,000 -0- *
Capibara, S.A. 55,556 55,556 -0- *
Caruso, Carmen 6,667 6,667 -0- *
Catmull, Janet & 10,000 10,000 -0- *
Joseph
Cherniak, Mark 190,400 137,500 52,540 *
Firestone, Herman 20,000 20,000 -0- *
B. and Betty
Firestone, Randall 1,113,170 80,000 -0- *
S.
Firestone, Solway 20,000 20,000 -0- *
Fred
Firestone, 1,958,854 92,000 1,866,854 8.7%
William
Garvin Drive LP 40,000 40,000 -0- *
Guillen, Lisette 500 500 -0- *
Haddasah Baskin 800,000 800,000 -0- *
Technology Stock
Trust
Hallett, Edward R 22,000 16,000 6,000 *
InfraSol 40,000 40,000 -0- *
Karon, Gary 30,000 30,000 -0- *
Karon, Harry 125,000 125,000 -0- *
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Keeshin, Brett 33,334 33,334 -0- *
LeFort, David 6,667 6,667 -0- *
LeFort, Peter 32,097 6,667 -0- *
Mauro, Robert 10,000 10,000 -0- *
McDermott, 150,000 150,000 -0- *
Robert
McNeill, Christa 6,667 6,667 -0- *
B.
McNeill, Robin F. 6,667 6,667 -0- *
Metersky, Morton 8,000 8,000 -0- *
Miller, Karen 25,000 25,000 -0- *
Morris, Lois 7,300 7,300 -0- *
MSW Partners 70,000 70,000 -0- *
Murphy, Jay 15,000 15,000 -0- *
Parmacek, Eric 137,500 137,500 -0- *
Ralex Corp. 950,000 950,000 -0- *
Ram Capital 1,219,672 719,672 500,000 2.4%
Reid, Dennis & 67,500 67,500 -0- *
Kathy
Renewable 20,000 20,000 -0- *
Energy Group
Ryan, Kevin 200,000 200,000 -0- *
Segal, Mark 137,500 137,500 -0- *
Shahnazari, Linda 7,500 7,500 -0- *
Slayton, Alfred 12,500 12,500 -0- *
Spurgeon, Chester 8,000 8,000 -0- *
Tam, Joseph 24,800 45,556 -0- -0-
Thomas, Mark & 10,000 10,000 -0- *
Regina
Thomas, Marvin & 10,000 10,000 -0- *
Betty
Walker, Daniel & 10,000 10,000 -0- *
Robin
Walker, Dennis 10,000 10,000 -0- *
Walker, John & 10,000 10,000 -0- *
Mary
Walker, Michael & Carol 10,000 10,000 -0- *
</TABLE>
43
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Walker, Timothy 10,000 10,000 -0- *
& Martha
Winkel, Ray 80,040 8,000 72,040 *
Winkel, Robert & 20,000 20,000 -0- *
Sharon
Zfat, Ruben 166,667 166,667 -0- *
Zier, Larry 60,000 50,000 10,000 *
</TABLE>
* Less than one percent.
Randall S. Firestone has served as a Director since 1997 and is the son of
Dr. William L. Firestone, also member of our Board of Directors.
Eric Parmacek is Dr. William Firestone's nephew and has conducted certain
private placement fundraising efforts on behalf of DCH during the past 1.5
years.
Ralex Corporation has conducted and continues to assist DCH with certain
private placement fundraising activities.
Ram Capital has conducted and continues to assist DCH with certain private
placement funding activities. Ram Capital also produces an investment
report on DCH.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of February 2, 2000 (i) by each director of
DCH; (ii) by each person known by DCH to own beneficially more than five percent
of our common stock; (iii) by the executive officers named in the Summary
Compensation Table set forth in "Executive Compensation" and (iv) by all
directors and executive officers of DCH as a group.
Unless otherwise indicated in the footnotes to the table, the following
individuals have sole vesting and sole investment control with respect to the
shares they beneficially own. The address of all persons listed below is c/o
DCH Technology, Inc. 27811 Avenue Hopkins, #6, Valencia, California 91355.
44
<PAGE>
The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rules, beneficial ownership includes any shares as to which
the individual has sole or shared voting or investment power and also any
shares which the individual has the right to acquire within 60 days after
February 2, 2000. The inclusion herein of such shares, however, does not
constitute an admission that the named stockholder is a direct or indirect
beneficial owner of such shares. Unless otherwise indicated, each person
named in the table has sole voting and investment power (or shares such power
with his or her spouse) with respect to all shares of common stock listed as
owned by such person. The total number of outstanding shares of common stock at
February 2, 2000 is 19,325,995.
<TABLE>
<CAPTION>
Name And Address Of Beneficial Amount And Nature Of Percent Of Class Percent Of Class
Owner Beneficial Ownership (1) Before the Offering After the Offering
Executive Officers and Directors:
<S> <C> <C> <C>
David A. Walker 2,371,280 11.5% 10.7%
David P. Haberman 2,257,966 10.9% 10.2%
Randall S. Firestone 1,163,170 6% 5.6%
Dr. William L. Firestone 1,898,854 9.5% 8.9%
Daniel Teran 80,000 * *
Robert S. Walker * *
Raymond Winkel 180,040 * *
All executive officers and 7,951,310 34.6% 32.6%
directors as a group (7 persons)
</TABLE>
(*) Less than one percent.
The shares listed as owned by David A. Walker include 1,350,000 shares of
common stock issuable to him pursuant to options exercisable on or within 60
days of February 28, 2000.
The shares listed are owned by David P. Haberman include 1,400,000 shares
of common stock issuable to him pursuant to options exercisable on or within 60
days of February 28, 2000.
The shares listed as owned by Randall S. Firestone include 50,000 shares
of common stock issuable to him pursuant to options exercisable on or within 60
days of February 28, 2000.
45
<PAGE>
The shares listed as owned by Dr. William L. Firestone include 675,000
shares of common stock issuable to him pursuant to options exercisable on or
within 60 days of February 28, 2000.
The shares listed as owned by Daniel Teran include 50,000 shares of common
stock issuable to him pursuant to options exercisable on or within 60 days of
February 28, 2000.
The shares listed as owned by Raymond Winkel include 100,000 shares of
common stock issuable to him pursuant to options exercisable on or within 60
days of February 28, 2000.
The shares listed as owned by all executive officers & directors include an
aggregate 3,625,000 shares of common stock issuable to them pursuant to options
exercisable on or within 60 days of February 28, 2000.
Our executive officers and directors will retain significant control over
DCH after this Offering. After this offering, our executive officers and
directors will, in the aggregate, beneficially own approximately 32.6% of our
outstanding common stock. As a result, these stockholders may, as a practical
matter, be able to influence all matters requiring stockholder approval
including the election of directors, merger or consolidation and the sale of all
or substantially all of our assets. This concentration of ownership may delay,
deter or prevent acts that would result in a change of control, which in turn
could reduce the market price of our common stock.
DESCRIPTION OF CAPITAL STOCK
The descriptions in this section and in other sections of this prospectus
of our securities and various provisions of our Articles of Incorporation and
our Bylaws are descriptions of the material terms of our securities.
Our Articles of Incorporation and Bylaws have been filed with the SEC as
exhibits to this registration statement of which this prospectus forms a part.
We are authorized to issue 50,000,000 shares of common stock, 20,703,141
shares of which were outstanding at February 28, 2000, and 5,000,000 shares of
preferred stock, none of which were outstanding at February 28, 2000. All
outstanding shares of common stock are duly authorized, validly issued, fully
paid and non-assessable.
Description of Common Stock
The holders of common stock are entitled to one vote per share on all
matters on which the holders of common stock are entitled to vote and do not
have cumulative voting rights in the election of directors. Holders of common
stock are entitled to dividends when, if and as may be declared by the Board of
Directors out of funds legally available therefore. Under the Colorado
Corporations Code, we may declare and pay dividends only out of our surplus, or
if there shall be no such surplus, out of our net profits for the fiscal year in
which the dividend is declared or the preceding year. In the event of the
liquidation, dissolution or winding up of DCH, holders of shares of common stock
are entitled to share ratably in the assets, if any, available for distribution
after payment of all creditors and the liquidation preferences on any
outstanding shares of preferred stock. Holders of common stock have no
preemptive rights to subscribe for any additional securities of any class, which
we may issue, nor any conversion, redemption or sinking fund rights. The rights
and privileges of holders of common stock are subject to the preferences of any
shares of preferred stock that we may issue in the future.
Description of Preferred Stock
We may issue shares of preferred stock in one or more classes or series
within a class as may be determined by our Board of Directors, who may
establish, from time to time, the number of shares to be included in each class
or series, may fix the designation, powers, preferences and
46
<PAGE>
rights of the shares of each such class or series and any qualifications,
limitations or restrictions thereof, and may increase or decrease the number of
shares of any such class or series without any further vote or action by the
shareholders. Any preferred stock so issued by the Board of Directors may rank
senior to the common stock with respect to the payment of dividends or amounts
upon liquidation, dissolution or winding up of DCH, or both. In addition, any
such shares of preferred stock may have class or series voting rights. Moreover,
under certain circumstances, the issuance of preferred stock or the existence of
the unissued preferred stock may tend to discourage or render more difficult a
merger or other change in control of DCH.
No shares of preferred stock are currently outstanding and we have no
present plans to issue any shares of preferred stock. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of our outstanding voting stock.
Description of Warrants
Prior to the February 28, 2000 issuance of our common stock, we also issued
warrants to purchase shares of our common stock to several of the selling
stockholders. These warrants may be exercised at any time during the five-year
period following their issuance at exercise prices ranging from $0.30 to $0.75
per share.
Application of California General Corporation Law
Although we are incorporated in Colorado, our headquarters is in the State
of California. Section 2115 of the California General Corporations Law
("Section 2115") provides that certain provisions of the California General
Corporations Law shall be applicable to a corporation organized under the laws
of another state to the exclusion of the law of the state in which it is
incorporated, if the corporation meets certain tests regarding the business done
in California and the number of its California stockholders.
An entity such as us can be subject to Section 2115 if the average of the
property factor, payroll factor and sales factor deemed to be in California
during its latest full income year is more than 50 percent and more than one-
half of its outstanding voting securities are held of record by persons having
addresses in California. Section 2115 does not apply to corporations with
outstanding securities listed on the New York or American Stock Exchange, or
with outstanding securities designated as qualified for trading as a national
market security on NASDAQ, if such corporation has at least 800 beneficial
holders of its equity securities. Since the average of our property factor,
payroll factor and sales factor deemed to be in California during our latest
fiscal year was almost 100%, and over one-half of our outstanding voting
47
<PAGE>
securities are held of record by persons having addresses in California, and our
securities do not currently qualify as a national market security on NASDAQ, we
are subject to Section 2115.
During the period that we are subject to Section 2115, the provisions of
the California General Corporations Law regarding the following matters are made
applicable to the exclusion of the law of the State of Colorado:
- general provisions and definitions;
- annual election of directors;
- removal of directors without cause;
- removal of directors by court proceedings;
- filling of director vacancies where less than a majority in office
were elected by the stockholders;
- directors' standard of care;
- liability of directors for unlawful distributions;
- indemnification of directors, officers and others;
- limitations on corporate distributions of cash or property;
- liability of a stockholder who receives an unlawful distribution;
- requirements for annual stockholders' meetings;
- stockholders' right to cumulate votes at any election of directors;
- supermajority vote requirements;
- limitations on sales of assets;
- limitations on mergers;
- reorganizations;
- dissenters' rights in connection with reorganizations;
- required records and reports;
- actions by the California Attorney General; and
- rights of inspection.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is Holladay Stock
Transfer, Inc., in Scottsdale, Arizona.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of additional shares of our common stock may adversely affect our
stock price and could harm our ability to raise funds from stock offerings in
the future. To date, we have had a very limited trading volume in our common
stock. Sales of substantial amounts of common stock, including shares issued
upon the exercise of outstanding options and warrants, under Securities and
Exchange Commission Rule 144 or otherwise could adversely affect the prevailing
market price of our common stock and could impair our ability to raise capital
at that time through the sale of our securities.
On February 28, 2000, 20,703,141 shares of our common stock were
outstanding. In addition, 1,849,672 shares of common stock were
issuable upon exercise of
48
<PAGE>
warrants held by the selling stockholders. Of the outstanding shares, 11,678,020
shares of common stock are immediately eligible for sale in the public market
without restriction or further registration under the Securities Act of 1933,
unless purchased by or issued to any "affiliate" of ours, as that term is
defined in Rule 144 promulgated under the Securities Act of 1933, described
below. All other outstanding shares of our common stock are "restricted
securities" as such term is defined under Rule 144, in that such shares were
issued in private transactions not involving a public offering and may not be
sold in the absence of registration other than in accordance with Rules 144,
144(k) or 701 promulgated under the Securities Act of 1933 or another exemption
from registration.
In general, under Rule 144 as currently in effect, a person, including an
affiliate, who has beneficially owned shares for at least one year is entitled
to sell, within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of one percent
of the then outstanding shares of our common stock or the average weekly trading
volume in our common stock during the four calendar weeks preceding the date on
which notice of such sale is filed, subject to various restrictions. In
addition, a person who is not deemed to have been an affiliate of ours at any
time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years would be entitled to sell
those shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from an affiliate, such person's
holding period for the purpose of effecting a sale under Rule 144 commences on
the date of transfer from the affiliate. As of February 2, 2000, 7,647,975 of
our outstanding restricted shares were eligible for sale under Rule 144.
The shares of common stock issuable upon exercise of the warrants held by
the selling stockholders are being registered under this registration statement.
There has been very limited trading volume in our common stock to date.
Sales of substantial amounts of our common stock under Rule 144, this prospectus
or otherwise could adversely affect the prevailing market price of our Common
Stock and could impair our ability to raise capital through the future sale of
our securities.
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
- - ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
- - block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
49
<PAGE>
- - purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
- - an exchange distribution in accordance with the rules of the applicable
exchange;
- - privately negotiated transactions;
- - short sales;
- - broker-dealer may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;
- - a combination of any such methods of sale; and
- - any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The selling stockholders may also engage in puts and calls and other
transactions in our securities or derivatives of our securities and may sell or
deliver shares in connection with these trades. The selling stockholders may
pledge their shares to their brokers under the margin provisions of customer
agreements. If a selling stockholder defaults on a margin loan, the broker may,
from time to time, offer and sell the pledged shares.
Broker-dealers engaged by the selling stockholders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling stockholders, or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event,
any commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling stockholders. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby has been
passed upon for us by Silicon Valley Law Group, San Jose, California.
50
<PAGE>
EXPERTS
The financial statements included in the registration statement on Form SB-
2 have been audited by Lucas, Horsfall, Murphy & Pindroh, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their report appearing elsewhere herein and in the registration statement, and
are included in reliance upon such report given upon the authority of said firm
as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2. This prospectus, which is a part of the registration
statement, does not contain all of the information included in the registration
statement. Some information is omitted, and you should refer to the
registration statement and its exhibits. With respect to references made in
this prospectus to any contract, agreement or other document of DCH, such
references are not necessarily complete and you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document. You may review a copy of the registration
statement, including exhibits, at the Securities and Exchange Commission's
public reference room at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 or Seven World Trade Center, 13/th/ Floor, New York, New York 10048
or Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661.
The public may obtain information on the operation of the public reference
room by calling the Securities and Exchange Commission at 1-800-SEC-0330.
We also file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements or other information on file at the public
reference rooms. You can also request copies of these documents, for a copying
fee, by writing to the Securities and Exchange Commission.
Our Securities and Exchange Commission filings and the registration
statement can also be reviewed by accessing the Securities and Exchange
Commission's Internet site at http://www.sec.gov, which contains reports, proxy
------------------
and information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission.
You should rely only on the information provided in this prospectus or any
prospectus supplement. Neither we nor the selling stockholders have authorized
anyone else to provide you with different information. Neither we nor the
selling stockholders are making an offer to sell, nor soliciting an offer to
buy, these securities in any jurisdiction where that would not be permitted or
legal. Neither the delivery of this prospectus nor any sales made hereunder
after the date of this prospectus shall create an implication that the
information contained herein or our affairs have not changed since the date
hereof.
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pages
----------------
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
<PAGE>
Independent Auditors' Report
----------------------------
The Stockholders and Board of Directors of
DCH Technology, Inc.
We have audited the accompanying consolidated balance sheet of DCH Technology,
Inc. and Subsidiary as of December 31, 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1999 and 1998. 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 audits 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 consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of DCH Technology, Inc. and Subsidiary
at December 31, 1999 and the results of its operations and its cash flows for
the years ended December 31, 1999 and 1998 in conformity with generally accepted
accounting principles.
/s/ LUCAS, HORSFALL, MURPHY & PINDROH, LLP
- ------------------------------------------
Pasadena, California
February 22, 2000
F-2
<PAGE>
DCH Technology, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEET
December 31, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 1,193,084
Accounts receivable 143,128
Inventory 127,319
Prepaid expenses 90,248
Other receivable 191,100
------------
TOTAL CURRENT ASSETS 1,744,879
PROPERTY AND EQUIPMENT - NET 217,665
OTHER ASSETS
Intangible assets, net of amortization 98,577
Investments with no readily determinable fair value 215,000
------------
TOTAL OTHER ASSETS 313,577
------------
$ 2,276,121
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 244,539
Accrued expenses 510,690
Accrued payroll and vacation 74,872
Capital lease obligation, net of long-term portion 13,833
------------
TOTAL CURRENT LIABILITIES 843,934
LONG TERM LIABILITIES
Capital lease obligation, net of current portion 30,344
------------
TOTAL LIABILITIES 874,278
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY
Preferred stock, $0.10 par value
5,000,000 shares authorized,
- 0 - shares issued and outstanding -
Common stock, $0.01 par value,
50,000,000 shares authorized, 19,325,995
issued and outstanding 193,259
Additional paid-in-capital 9,775,433
Common stock subscribed, 145,556 shares 131,000
Less: investment in limited liability companies (79,445)
------------
10,020,247
Accumulated deficit (8,618,404)
------------
TOTAL STOCKHOLDERS' EQUITY 1,401,843
------------
$ 2,276,121
============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
DCH Technology, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
1999 1998
----------------- -----------------
<S> <C> <C>
Sales $ 543,199 $ 207,580
Cost of products sold 332,394 66,480
------------ ------------
Gross profit 210,805 141,100
Operating expenses:
Selling, general and administrative expenses 2,870,256 2,880,897
Depreciation and amortization 65,336 31,857
Research & development 841,708 1,810,185
------------ ------------
Total operating expenses 3,777,300 4,722,939
------------ ------------
(Loss) from operations (3,566,495) (4,581,839)
Other income (expenses)
Equity (loss) in limited liability companies (19,554) -
Interest income and other income (expenses) (1,424) 4,183
------------ ------------
Net (loss) $ (3,587,473) $ (4,577,656)
============ ============
Weighted average common shares outstanding 14,518,656 9,579,059
============ ============
Net (loss) per common share
Basic $ (0.25) $ (0.48)
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-4
<PAGE>
DCH Technology, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------------------------ Additional
Shares Paid-in-
Issued Amount Subscribed Capital
---------- -------- --------- ----------
<S> <C> <C> <C> <C>
Balances at December 31, 1997 7,279,731 $ 72,797 $ - $ 319,806
Issuance of common stock
and warrants for services 2,874,882 28,749 - 2,118,938
Issuance of common stock
options for services - - - 1,194,353
Issuance of common stock
and warrants for cash 1,978,446 19,784 - 1,270,945
Issuance of common stock
to acquire interest
in Infrasoll LLC and
Renewable Energies, LLC 60,000 600 - 98,400
Issuance of common stock
pursuant to exercise of
stock options 80,000 800 - 19,200
Common stock subscription - - 100,000 -
Net loss - - - -
---------- -------- --------- ----------
Balances at December 31, 1998 12,273,059 122,730 100,000 5,021,642
Issuance of common stock, options
and warrants for services 848,469 8,485 - 1,216,660
Issuance of common stock
and warrants for cash 4,810,087 48,101 - 2,814,655
Issuance of common stock
for payment of debt 16,043 160 - 14,278
Issuance of common stock pursuant
to exercise of warrants and options 1,218,337 12,183 - 609,798
Payment on common stock subscriptions 160,000 1,600 (100,000) 98,400
Common stock subscription - - 131,000 -
Investment in limited liability companies - - - -
Net loss - - - -
---------- -------- --------- ----------
Balances at December 31, 1999 19,325,995 $ 193,259 $ 131,000 $ 9,775,433
========== ======== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Investment
in Limited Total
Subscription Liabilities Accumulated Stockholders'
Receivable Companies Deficit Equity
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1997 $ - $ - $ (453,275) $ (60,672)
Issuance of common stock - - - 2,147,687
and warrants for services
Issuance of common stock
options for services - - - 1,194,353
Issuance of common stock
and warrants for cash - - - 1,290,729
Issuance of common stock
to acquire interest
in Infrasoll LLC and
Renewable Energies, LLC - - - 99,000
Issuance of common stock
pursuant to exercise of
stock options - - - 20,000
Common stock subscription (100,000) - - -
Net loss - - (4,577,656) (4,577,656)
------------- ------------- ----------- -------------
Balances at December 31, 1998 (100,000) - (5,030,931) 113,441
Issuance of common stock, options
and warrants for services - - - 1,225,145
Issuance of common stock
and warrants for cash - - - 2,862,756
Issuance of common stock
for payment of debt - - - 14,438
Issuance of common stock pursuant
to exercise of warrants and options - - - 621,981
Payment on common stock subscriptions (100,000) - - 100,000
Common stock subscription - - - 131,000
Investment in limited liability companies - (79,445) - (79,445)
Net loss - - (3,587,473) (3,587,473)
------------- ------------- ----------- -------------
Balances at December 31, 1999 $ - $ (79,445) $ (8,618,404) $ 1,401,843
============= ============= =========== =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
DCH Technology, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net loss $ (3,587,473) $(4,577,656)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Depreciation and amortization 65,336 31,857
Loss on disposal of equipment 6,628 -
Issuance of stock, warrants and options for services 1,225,145 3,342,040
Loss from investment in partnerships 19,554
Investment received for services (150,000) -
Change in:
Accounts receivable (84,299) (47,099)
Inventory 16,395 (143,714)
Prepaid expenses (90,248) 1,500
Other receivable (60,100) -
Accounts payable 73,109 125,102
Accrued expenses 469,891 40,799
Accrued payroll and vacation 74,872 -
Deferred revenue - (1,200)
------------- ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (2,021,190) (1,228,371)
------------- ------------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES
Advance to customer - (100,000)
Purchase of licenses and intellectual property (87,000) (30,000)
Purchase of equipment (116,883) (118,988)
------------- ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (203,883) (248,988)
------------- ------------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES
Sale of common stock and warrants 2,862,756 1,310,729
Advances from stockholders - 167,292
Repayments of stockholder advances (165,921) -
Principal payments on capital lease (2,461) -
Proceeds for exercise of warrants 621,981 -
Proceeds from common stock subscriptions receivable 100,000 -
------------- ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 3,416,355 1,478,021
------------- ------------
NET INCREASE (DECREASE) IN CASH 1,191,282 662
CASH, BEGINNING OF PERIOD 1,802 1,140
------------- ------------
CASH, END OF PERIOD $ 1,193,084 $ 1,802
============= ============
Supplemental disclosure of cash flow information is as follows:
Cash paid for
Interest $ 1,085 -
Income taxes 2,578 $ 1,600
</TABLE>
Non-cash transactions
During the year ended December 31, 1998, $99,000 of common stock was
issued in connection with the Company's acquisition of interests
in Infrasoll, LLC and Renewable Energies, LLC.
During the year ended December 31, 1999, $65,000 of Hydrogen Burner
Technology common stock was received in satisfaction of related
advance to customer, accounts payable and deferred revenue.
During the year ended December 31, 1999, the Company entered into two
capital lease agreements for $46,638 to purchase computer equipment.
During the year ended December 31, 1999, the Company issued $14,438 of
common stock in payment of debt.
See Accompanying Notes to Consolidated Financial Statements
F-6
<PAGE>
DCH Technology, Inc., and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Organization and Business
-------------------------
DCH Technology, Inc. (the Company), formerly Connection Sports
International, Inc., a Colorado corporation, was incorporated on February
23, 1996. The Company seeks out patented technologies, secures those
patented technologies through licensing agreements with the patent holders
and converts the technologies into viable products which DCH then produces
and sells. DCH focuses on technologies related to the use of hydrogen,
primarily hydrogen gas sensors and fuel cells.
Business Recapitalization and Restatement
-----------------------------------------
On May 28, 1997, all of the outstanding capital stock of DCH Technology,
Inc. was acquired by Connection Sports International, Inc. (CSI). In
connection with this transaction, all of the shares of DCH Technology, Inc.,
were exchanged for 6,000,000 shares of CSI with CSI as the surviving
corporation, which changed its name to DCH Technology, Inc. This stock
exchange transaction is treated as an acquisition by the Company of the net
tangible book value of the assets of CSI, at the date of the acquisition.
Operating results of CSI for all periods prior to the date of its
acquisition are not included in the operating results of the Company since
such reverse merger is not treated as a pooling of interest for accounting
purposes. DCH Technology, Inc. was engaged in the business of specializing
in licensing and converting new ideas and technology into state-of-the art
products.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of DCH
Technology, Inc. and its wholly owned subsidiary. Significant intercompany
accounts have been eliminated.
Revenue Recognition
-------------------
Revenue from product sales is recognized at the time the product is shipped
to its customer. Provision is made at the time the related revenue is
recognized for estimated product returns. The Company provides for the
estimated cost of post-sale support and product warranties upon shipment.
When other significant obligations remain after products are delivered,
revenue is recognized only after such obligations are fulfilled. Service
revenue is recognized ratably over the contractual period or as services are
performed.
Product Warranty
----------------
Management estimates the reserve based on the expected returns for the
various products lines and average estimated repair cost.
Advertising Costs
-----------------
Advertising and promotion costs are expenses as incurred.
F-7
<PAGE>
DCH Technology, Inc., and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
Allowance for Doubtful Accounts
-------------------------------
No allowance for doubtful accounts has been provided, as it is the
management's belief that receivables are fully collectible at December 31,
1999.
Recently Issued Accounting Pronouncements
-----------------------------------------
In 1997, the Financial Accounting Standards Board (FASB) issued Statements
No. 130, "Reporting Comprehensive Income", and No. 131, "Disclosures about
Segments of an Enterprise and Related Information". The Company's adoption
of these statements had no material impact on the accompanying financial
statements.
Investments With no Readily Determinable Fair Value
---------------------------------------------------
The Company acquired shares of two privately held companies without readily
determinable market values in exchange for services rendered. The Company
accounts for these transactions as prescribed by Accounting Principles Board
(APB) 18 under the "cost method."
Under this method, the Company's investment balance remains unchanged with
respect to the activity of the investee and is impacted only with respect to
permanent impairment of the investment. The net accumulated earnings of the
investee subsequent to the date of the investment are recognized by the
Company only to the extent such earnings are distributed by the investee as
dividends. Dividends received in excess of earnings are considered a return
of investment and are recorded as reductions of cost of the investment.
Year 2000 Issues
----------------
Many computers and other equipment with embedded chips or microprocessors
may not be able to appropriately interpret dates after December 31, 1999,
because such systems use only two digits to indicate a year in the date
field rather than four digits. If not corrected, many computers and computer
applications could fail or create miscalculations, causing disruptions to
the Company's operations. In addition, the failure of customer and supplier
computer systems could result in interruption of sales and deliveries of key
supplies or utilities. Because of the complexity of the issues and the
number of parties involved, the Company cannot reasonable predict with
certainty the nature of likelihood of such impacts.
The Company is actively addressing this situation and anticipates that it
will not experience a material adverse impact to its operations, liquidity
or financial condition related to systems under control. The Company is
addressing the Year 2000 issue in four overlapping phases: (i)
identification and assessment of all critical software systems and equipment
requiring modification or replacement prior to 2000; (ii) assessment of
critical business relationships requiring modification prior 2000; (iii)
corrective action and testing of critical systems; (iv) development of
contingency and business continuation plans to mitigate any disruption to
the Company's operations arising from the Year 2000 issue.
F-8
<PAGE>
DCH Technology, Inc., and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
The Company is in the process of implementing a plan to obtain information
from its external service providers, significant suppliers and customer,
and financial institutions to confirm their plans and readiness to become
Year 2000 compliant, in order to better understand and evaluate how their
Year 2000 issues may affect the Company's operations. The Company currently
is not in a position to assess this aspect of the
Year 2000 issues; however, the Company plans to take the necessary steps to
provide itself with reasonable assurance that its service providers,
customers and financial institutions are Year 2000 compliant.
The Company is developing contingency plans to identify and mitigate
potential problems and disruptions to the Company's operations arising from
the Year 2000 issue. The total cost to achieve Year 2000 compliance is not
expected to be material. Amounts spent to date have not been material.
While the Company believes that its own internal assessment and planning
efforts with respect to its external service providers, suppliers,
customers and financial institutions are and will be adequate to address
its Year 2000 concerns, there can be no assurance that these efforts will
be successful or will not have a material adverse effect on the Company's
operations.
Inventory
---------
Inventory is stated at the lower of cost or market using the first-in,
first-out method (FIFO). Inventories consist of parts and assemblies that
are included in the final product.
At December 31, 1999, inventory consisted of the following:
Raw materials $ 51,816
Work-in-process 68,566
Finished goods 6,937
-------------
$ 127,319
=============
Research and Development
------------------------
Research and development expenditures are charged to operations as incurred.
Property and Equipment
----------------------
Property and equipment is stated at cost. The assets are being depreciated
using a combination of straight-line and accelerated methods over their
estimated useful lives of five to seven years.
It is the policy of the Company to capitalize significant improvements and
to expense repairs and maintenance.
F-9
<PAGE>
DCH Technology, Inc., and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
Stock Based Compensation
------------------------
The Company accounts for stock-based compensation as prescribed by Statement
of Financial Accounting Standard (SFAS) Number 123, and has adopted its
disclosure provisions. If the intrinsic value method of accounting is used
SFAS 123 requires pro forma disclosures of net income and earnings per share
as if the fair value based method of accounting for stock based compensation
had been applied.
Loss Per Share
--------------
Basic (loss) per share excludes any dilutive effects of options, warrants
and convertible securities. Basic (loss) per share is computed using the
weighted-average number of common shares outstanding during the period.
Diluted earnings per share is computed using the weighted-average number of
common and common stock equivalent shares outstanding during the period.
Common equivalent shares are excluded from the computation if their effect
is antidilutive.
Intangible Assets
-----------------
Intangible assets, principally licenses agreements, are amortized on the
straight-line method over the remaining life of the agreements. The carrying
amounts of intangible assets are assessed for impairment when operating
profits from the related assets' indicates carrying amounts may not be
recoverable. Carrying values are reviewed periodically for impairment
whenever events or changes in circumstances indicate the carrying amounts of
assets may not be recoverable.
Statement of Cash Flows
-----------------------
For the purpose of the statement of cash flows, cash includes amounts "on-
hand" and amounts deposited with financial institutions.
Impairment of Long Lived Assets
--------------------------------
The Company evaluates its long lived assets by measuring the carrying amount
of the asset against the estimated undiscounted future cash flows associated
with them. At the time such evaluations indicate that the future
undiscounted cash flows of certain long lived assets are not sufficient to
recover the carrying value of such assets, the assets are adjusted to their
fair values. No adjustment to the carrying value of the assets was indicated
as of December 31, 1999.
Accrued Expenses
----------------
At December 31, 1999, accrued expenses consist of the following:
Officers' salaries $ 242,000
Board of Directors' fees 104,000
Licenses fees 41,000
Research and development 91,125
Other 32,565
------------
$ 510,690
============
F-10
<PAGE>
DCH Technology, Inc., and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
Use of Estimates in Preparation of Consolidated Financial Statements
--------------------------------------------------------------------
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenue, expenses and
disclosure of contingent assets and liabilities to prepare these financial
statements in accordance with generally accepted accounting principles.
Accordingly, actual results may differ from those estimates.
Reclassification of Financial Statement Presentation
----------------------------------------------------
Certain reclassifications have been made to the 1998 financial statements to
conform with the 1999 financial statement presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Automobiles $ 34,260
Equipment 203,924
Furniture and fixtures 15,842
Leasehold improvements 35,973
Tools 2,900
-------------
Total 292,899
Less accumulated depreciation 75,234
-------------
Net $ 217,665
=============
Depreciation expense was $47,887 and $26,082 for the years ended December
31, 1999 and 1998, respectively.
3. INVESTMENT IN LIMITED LIABILITY COMPANIES
During the year ended December 31, 1998, the Company invested in two limited
liability companies (LLC). The investments are accounted for in accordance
with the provisions of Accounting Principles Board (APB) Opinion Number 18,
Equity Method of Accounting for Investments in Common Stock. As the
Company's ownership interest in all of the limited liability companies in
the investment portfolio is more than 20% and less than or equal to 50%, the
investment in the limited liability companies is accounted for using the
equity method. Under this method, the investor adjusts the carrying amount
of an investment for its share of the earnings or losses of the investee and
reports the recognized earnings and losses in income.
The Company does not actively participate in the management of the limited
liability companies.
Dividends received from an investee reduce the carrying amount of the
investment.
F-11
<PAGE>
DCH Technology, Inc., and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT IN LIMITED LIABILITY COMPANIES (Continued)
The cost of the initial investments in limited liability companies was as
follows:
Infrasoll LLC $ 66,000
Renewable Energies Group LLC 33,000
------------
$ 99,000
=============
The financial position and results of operations of Infrasoll, LLC and
Renewable Energies Group, LLC as of December 31, 1999 and for the year then
ended are as follows:
Renewable
Energies
Infrasoll, LLC Group, LLC
-------------- ----------
Financial Position
------------------
Assets:
Cash $ 12,077
Accounts receivable 25,000
Investments, available-for-sale 178,200 $ 89,100
--------- ----------
215,277 89,100
Liabilities:
Accounts payable 44,113 26,858
--------- ----------
44,113 26,858
--------- ----------
Net assets $ 171,164 $ 62,242
========= ==========
DCH Technology, Inc Investment in
Limited Liability Companies $ 85,582 $ 20,747
========= ==========
Results of Operations
---------------------
Revenues $ 45,000 -
Less: Operating expenses 66,203 $ 26,858
--------- ----------
Net Loss $ (21,203) $ (26,858)
========= ==========
DCH Technology Allocated Loss in
Limited Liability Companies $ (10,602) $ (8,952)
========= ==========
The difference in the amount carried on the balance sheet, as investments in
the limited liability companies, and the amount of net assets attributable
to the Company in largely attributed to unrealized holding gains and losses.
As the primary asset of the limited liability companies is investment in DCH
Technology, Inc. common stock, the investment in the limited liability
companies has been reflected as a reduction of the stockholders' equity.
F-12
<PAGE>
DCH Technology, Inc., and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. WARRANTS
The Company has issued to consultants and others warrants to purchase the
Company's common stock.
The following is a summary of warrant activity for the year ended December
31, 1999 and 1998:
<TABLE>
<CAPTION>
Weighted
Exercise Average
Price per Exercise
Warrants Share Price
------------------ ----------------- ---------------
Balance at December 31, 1997 - - -
<S> <C> <C> <C>
Granted 380,634 $0.75 - 2.00 $1.47
Exercised - - -
Forfeited - - -
------------------ ----------------- ---------------
Balance at December 31, 1998 380,634 $0.75 - 2.00 $1.47
Granted 3,208,009 0.40 - 0.78 0.47
Exercised (1,203,337) 0.25 - 0.63 0.51
Forfeited (110,000) 0.75 - 1.50 1.16
------------------ ----------------- ---------------
Balance at December 31, 1999 2,275,306 $0.40 - 2.00 0.55
================== ================= ===============
</TABLE>
As allowed by SFAS 123, the Company recognized APB 25 compensation expense
of $77,000 and $1,844 for the years ended December 31, 1999 and 1998,
respectively.
5. INCOME TAXES
Income taxes are provided pursuant to SFAS No. 109 Accounting for Income
Taxes. This statement requires the use of an asset and liability approach
for financial reporting for income taxes. If it is more likely than not that
some portion or all of a deferred tax asset will not be realized, a
valuation allowance is recognized. Accordingly, as the realization and use
of the net operating loss carryforward is not probable at December 31, 1999,
the tax benefit of the loss carryforward is offset by a valuation allowance
of the same amount.
F-13
<PAGE>
DCH Technology, Inc., and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INCOME TAXES (Continued)
The composition of the Company's deferred tax assets is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Total deferred tax assets $ 1,851,300
Total valuation allowance (1,851,300)
-------------------
Total deferred tax assets $ -
===================
</TABLE>
The tax effects of temporary differences and carryforwards that give rise to
deferred assets are as follows:
<TABLE>
<CAPTION>
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $ 1,851,300
-------------------
Gross deferred tax assets 1,851,300
Valuation allowance (1,851,300)
-------------------
Net deferred tax assets $ -
===================
</TABLE>
The components of deferred income tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
Temporary differences: 1999 1998
--------------------- ----------------------
<S> <C> <C> <C> <C>
Stocks & Warrants compensation $ 230,806 $ (69,279)
Net operating loss carryforward (855,254) (1,091,313)
Increase in valuation allowance 624,448 1,160,592
--------------------- ----------------------
$ - $ -
===================== ======================
</TABLE>
No provision for income taxes has been recorded for the periods ended
December 31, 1999 and 1998 as the Company has incurred losses during these
periods.
The Company has approximately $7,900,000 of federal and state loss
carryforwards available to reduce future federal and state tax liabilities
which will begin to expire at various times starting 2013 and 2002,
respectively.
6. STOCK OPTIONS
During the year ended December 31, 1998, the Board of Directors awarded
3,625,000 stock options to certain officers and Board members to purchase
shares of the Company's restricted common stock at an exercise price of
$0.25 per share. The options vested immediately and have a term ending
December 31, 2008.
F-14
<PAGE>
DCH Technology, Inc., and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. STOCK OPTIONS (Continued)
The following table summarizes information about stock option transactions
for the year ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
---------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year - 0 -
Awards:
Granted in the year ended December 31, 1998 3,625,000 $ 0.25
Exercised in the year ended December 31, 1998 (80,000) 0.25
----------------
Outstanding at December 31, 1998 3,545,000 $ 0.25
Granted 2,748,023 0.65
Exercised (15,000) 0.25
----------------
Outstanding at December 31, 1999 6,278,023 0.43
================
Exercisable at December 31, 1998 3,545,000 0.25
================
Exercisable at December 31, 1999 $ 6,278,023 $ 0.43
================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Weighted
Average
Remaining Weighted Weighted
Number of Years of Average Number of Average
options Contractual Exercise Options Exercise
Exercise prices outstanding Life Price Exercisable Price
- ------------------- --------------- --------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.25 3,545,000 10.0 $ 0.25 3,545,000 $ 0.25
$0.25 - 0.90 6,278,023 7.8 0.43 6,278,023 0.43
</TABLE>
During the fiscal 1997 year, the Company adopted SFAS 123. Under the
provisions of this standard, the Company has elected to continue using the
intrinsic-value method of accounting for stock-based awards granted to
employees. For the acquisition of goods or services from non-employees,
valuation is based on the fair value of the consideration received or the
fair value of the equity instruments issued, whichever is more reliably
determinable. Under APB 25 the Company has recognized compensation expense
of $211,898 for the year ended December 31, 1999, for its stock-based awards
to employees.
F-15
<PAGE>
DCH Technology, Inc., and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. STOCK OPTIONS (Continued)
The following table reflects pro forma net loss and earnings per share had
the Company elected to adopt the fair value approach of SFAS 123 for the
compensation of employees for the year ended December 31, 1999:
<TABLE>
<CAPTION>
Net loss:
<S> <C>
As reported $ (3,587,473)
Pro forma $ (4,232,943)
Loss per share:
As reported $ (0.25)
Pro forma $ (0.29)
</TABLE>
The estimated fair value of each option granted is calculated using the
Black-Scholes option-pricing model.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has used market information for similar instruments and applied
judgment to estimate fair values of financial instruments. At December 31,
1999, the fair values of cash, accounts receivable and accounts payable
approximated carrying values based the short maturity of these items.
8. CONCENTRATION OF CREDIT RISK
The Company has accounts receivable that comprised more than 50% of the
total accounts receivable from the following entities:
Entity
------
Customer A $ 129,955
Individual accounts receivable
Comprising less than 20% of total
Accounts receivable 13,173
-----------
$ 143,128
===========
9. COMMITMENTS AND CONTINGENCIES
Uninsured Cash Balances
-----------------------
Cash balances, as reflected on the bank statements, are insured by the
Federal Deposit Insurance Corporation (FDIC) for up to $100,000 per
institution. As of December 31, 1999 the Company's cash balance exceeded the
FDIC insurance limit by $1,184,653.
F-16
<PAGE>
DCH Technology, Inc., and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES (Continued)
Operating Leases
----------------
The Company leases its present facilities under various operating leases
expiring between October 2000 and December 2003.
Minimum future lease payments are as follows:
<TABLE>
<CAPTION>
Fiscal year
Ending
------------------
<S> <C>
2000 $ 69,806
2001 45,206
2002 21,565
2003 12,000
---------
$ 148,577
=========
</TABLE>
Rent expense for the years ended December 31, 1999 and 1998, was $50,608 and
$30,245, respectively.
Capital Lease Obligations
-------------------------
The Company entered into agreements to lease certain computer equipment
under non-cancelable lease agreements during the year ended December 31,
1999. As of December 31, 1999, equipment under the capital lease agreements
are included in property and equipment aggregated $43,638. Accumulated
depreciation related to this equipment totaled $2,332 at December 31, 1999.
Future minimum lease payments under capital lease obligations at December
31, 1999, are as follows:
<TABLE>
<S> <C>
2000 $ 20,163
2001 20,163
2002 16,803
---------
Total minimum payments 57,129
Less amount representing interest (12,952)
--------
Total principal 44,177
Less portion due within one year (13,833)
--------
Long-term portion $ 30,344
========
</TABLE>
Interest paid on capital lease obligations was $700 and $0 for the years
ended December 31, 1999 and 1998, respectively.
F-17
<PAGE>
9. COMMITMENTS AND CONTINGENCIES (Continued)
Intangible Assets
-----------------
The Company has entered into various license and intellectual property
agreements with the respective owners. The patent license agreements require
the Company to pay initial license fees, which are being amortized over the
remaining lives of the license agreements. In addition to the annual
payments for the license the Company has agreed to pay royalties based on
various factors included in these agreements.
The patent license agreements generally contain performance benchmarks. If
the Company fails to meet the benchmarks, the agreement may be kept in place
at the sole discretion of the licensor.
The total amortization expense related to the intangibles was $17,449 and
$5,775 for the years ended December 31, 1999 and 1998, respectively.
Royalties
---------
The Company has entered into certain license agreements which requires
minimum royalty payments as follows:
<TABLE>
<CAPTION>
Fiscal year
Ending
---------------
<S> <C>
2000 $ 64,000
2001 62,000
2002 62,000
2003 62,000
2004 62,000
Thereafter 772,000
-------------
$ 1,084,000
=============
</TABLE>
The future minimum royalty payments may be reduced as licenses are cancelled
as the technology becomes obsolete.
Royalty expense for the years ended December 31, 1999, and 1998 was $59,671
and $18,773, respectively.
Employment Agreements
---------------------
The Company currently has employment agreements with each of David P.
Haberman and David A. Walker, its Vice President, Technology and Planning,
and President, respectively. Each employment agreement commenced on January
1, 1995 and terminates on December 31, 2000, and provides for an annual
salary currently set at $100,000. Neither of the employment agreements
provides for additional payments upon a change in control.
F-18
<PAGE>
DCH Technology, Inc., and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SUBSEQUENT EVENT
Subsequent to December 31, 1999, the Company received approximately $3.34
million dollars from private placements of DCH Technology, Inc. common stock
with investors.
F-19
<PAGE>
DCH TECHNOLOGY, INC.
4,937,021
Shares of
Common Stock
________________________
PROSPECTUS
________________________
March , 2000
--
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24 INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article V of our Bylaws require us to indemnify, to the fullest extent
allowed by the Colorado Business Corporation Act (the "CBCA"), any person who
serves or who has served at any time as a director or an officer of DCH, and any
director or officer who, at the request of us, serves or at any time has served
as a director, officer, partner, trustee, employee, or agent of any other
foreign or domestic corporation or of any partnership, joint venture, trust,
other enterprise or employee benefit plan, against any and all liabilities and
reasonable expenses incurred in connection with any claim, action, suit, or
proceeding to which such director or officer is made a party, or which may be
asserted against him, because he is or was a director or an officer. This
Article also provides that directors of DCH shall not be liable to us or any of
our shareholders for monetary damages caused by a breach of fiduciary duty as a
director.
Sections 7-109-102 and 103 of the CBCA authorize the indemnification of
directors and officers against liability incurred by reason of being a director
or officer and against expenses (including attorney's fees) judgments, fines and
amounts paid in settlement and reasonably incurred in connection with any action
seeking to establish such liability, in the case of third-party claims, if the
officer or director acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, and in the
case of actions by or in the right of the corporation, if the officer or
director acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interest of the corporation and if such officer or
director shall not have been adjudged liable to the corporation, unless a court
otherwise determines. Indemnification is also authorized with respect to any
criminal action or proceeding where the officer or director had no reasonable
cause to believe his conduct was unlawful.
The above discussion of our Bylaws and the CBCA is only a summary and is
qualified in our entirety by the full text of each of the foregoing.
Our directors, officers and subsidiaries are covered by an insurance policy
that insures them against certain losses, liabilities and expenses. The annual
aggregate liability limit under the policy is $2,000,000. The policy contains
numerous exclusions, including exclusions for personal profit, libel and slander
and certain environmental liabilities.
ITEM 25 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemization of various expenses, all of
which we will pay, in connection with the sale and distribution of the
securities being registered. All of the amounts shown are estimates, except the
Securities and Exchange Commission registration fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................$ 5,388.02
Accounting Fees and Expenses.......................................$ 10,000.00
Legal Fees and Expenses............................................$ 25,000.00
Miscellaneous......................................................$ 9,611.98
Total.........................................................$ 50,000.00
</TABLE>
II-1
<PAGE>
ITEM 26 RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order is information regarding shares of common
stock issued and options and warrants and other convertible securities granted
by us during the past three years. Also included is the consideration, if any,
received by us for such shares and options and information relating to the
section of the Securities Act, or rule of the SEC under which exemption from
registration was claimed.
We have conducted private placements of equity securities in the past three
years pursuant to exemptions from registration provided by the Securities Act of
1933.
On October 1, 1997, we closed a private placement of 163,000 shares of our
common stock. An aggregate of $81,500 was raised in this placement. The issuance
and sale of these shares was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof as a transaction by an issuer
not involving a public offering. All of the purchasers represented to us that
they were acquiring the shares for their own accounts and not for the account or
benefit of another person; that the shares were being acquired for investment
and not with a view to the distribution thereof; and that the purchasers did not
intend to sell or otherwise dispose of all or any part of the shares at the time
of purchase or upon the occurrence or nonoccurrence of any predetermined event.
Each purchaser also agreed that he or she would offer or resell shares only if
the shares were registered under the Securities Act or an exemption from such
registration was available. No advertising or public solicitation was used in
the placement. We placed a restrictive legend on the certificates representing
the shares and placed "stop transfer" instructions with the transfer agent.
On December 31, 1997, we issued an aggregate of 492,320 shares of common
stock to 10 investors for services previously rendered to us. The issuance of
these shares was exempt from the registration requirements of the Securities Act
pursuant to Rule 701 thereof. At the time of the issuance, we were not subject
to the reporting requirements of the Securities Exchange Act of 1934, and the
value of the securities issued did not exceed $1,000,000 (at the date of
issuance, the shares had an aggregate value of $244,859). The shares were issued
for bona fide services previously provided to us, and were not in connection
with a capital-raising transaction.
On January 7, 1998, we closed a private placement of 65,000 shares of its
common stock, raising an aggregate of $32,000. The issuance and sale of these
shares was exempt from the registration requirements of the Securities Act
pursuant to section 4(2) thereof as a transaction by an issuer not involving a
public offerings. All of the purchasers represented to us that they were
acquiring the shares for their own accounts and not for the account or benefit
of another person; that the shares were being acquired for investment and not
with a view to the distribution thereof; and that the purchasers did not intend
to sell or otherwise dispose of all or any part of the shares at the time of
purchase or upon the occurrence or nonoccurrence of any predetermined event.
Each purchaser also agreed that he or she would offer or resell shares only if
the shares were registered under the Securities Act or an exemption from such
registration was available. No advertising or public solicitation was used in
the placement. We placed a restrictive legend on the certificates representing
the Shares and placed "stop transfer" instructions with its transfer agent.
II-2
<PAGE>
On April 11, 1998, we closed a private placement of 236,401 shares of its
common stock, raising an aggregate of $107,977. The issuance and sale of these
shares was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof as a transaction by an issuer not involving a
public offering. All of the purchasers represented to us that they were
acquiring the shares for their own accord and not for the account or benefit of
another person; that the shares were being acquired for investment and not with
a view to the distribution thereof; and that the purchasers did not intend to
sell or otherwise dispose of all or any part of the shares at the time of
purchase or upon the occurrence or nonoccurrence of any predetermined event.
Each purchaser also agreed that he or she would offer or resell shares only if
the shares were registered under the Securities Act or an exemption from such
registration was available. No advertising or public solicitation was used in
the placement. We placed a restrictive legend on the certificates representing
the shares and placed "stop transfer" instructions with its transfer agent.
On April 30, 1998, we consummated an offering of 1,293,586 shares of its
common stock pursuant to Rule 504 of Regulation D promulgated under the
Securities Act of 1933, as amended (the "Securities Act"). An aggregate of
$707,627 was raised in this placement; all purchasers represented to us that
they were "accredited investors" as defined in the Securities Act.
On May 18, 1998, we closed a private placement of 217,029 shares of its
common stock, raising aggregate proceeds of $325,126. The issuance and sale of
these shares was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof as a transaction by an issuer not involving a
public offering. All of the purchasers represented to us that they were
acquiring the shares for their own accord and not for the account or benefit of
another person; that the shares were being acquired for investment and not with
a view to the distribution thereof; and that the purchasers did not intend to
sell or otherwise dispose of all or any part of the shares at the time of
purchase or upon the occurrence or nonoccurrence of any predetermined event.
Each purchaser also agreed that he or she would offer or resell shares only if
the shares were registered under the Securities Act or an exemption from such
registration was available. No advertising or public solicitation was used in
the placement. We placed a restrictive legend on the certificates representing
the shares and placed "stop transfer" instructions with its transfer agent.
On July 31, 1998, we issued an aggregate of 60,000 shares of common stock
to two limited liability companies, in consideration of an equity interest in
each of the limited liability companies. The issuance and sale of these shares
was exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) thereof as a transaction by an issuer not involving a public
offering. All of the purchasers represented to us that they were acquiring the
shares for their own accord and not for the account or benefit of another
person; that the shares were being acquired for investment and not with a view
to the distribution thereof; and that the purchasers did not intend to sell or
otherwise dispose of all or any part of the shares at the time of purchase or
upon the occurrence or nonoccurrence of any predetermined event. Each purchaser
also agreed that he or she would offer or resell shares only if the shares were
registered under the Securities Act or an exemption from such registration was
available. No advertising or public solicitation was used in the placement. We
placed a restrictive legend on the certificates representing the shares and
placed "stop transfer" instructions with its agent.
On September 9, 1998, we closed a private placement of 19,210 shares of our
common stock, raising aggregate proceeds of $25,000. The issuance and sale of
these shares was exempt
II-3
<PAGE>
from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof as a transaction by an issuer not involving a
public offering. All of the purchasers represented to us that they were
acquiring the shares for their own accord and not for the account or benefit of
another person; that the shares were being acquired for investment and not with
a view to the distribution thereof; and that the purchasers did not intend to
sell or otherwise dispose of all or any part of the shares at the time of
purchase or upon the occurrence or nonoccurrence of any predetermined event.
Each purchaser also agreed that he or she would offer or resell shares only if
the shares were registered under the Securities Act or an exemption from such
registration was available. No advertising or public solicitation was used in
the placement. We placed a restrictive legend on the certificates representing
the shares and placed "stop transfer" instructions with its transfer agent.
On October 6, 1998, we closed a private placement of 147,220 shares of
common stock, raising aggregate proceeds of $93,000. The issuance and sale of
these shares was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof as a transaction by an issuer not involving a
public offering. All of the purchasers represented to us that they were
acquiring the shares for their own accord and not for the account or benefit of
another person; that the shares were being acquired for investment and not with
a view to the distribution thereof; and that the purchasers did not intend to
sell or otherwise dispose of all or any part of the shares at the time of
purchase or upon the occurrence or nonoccurrence of any predetermined event.
Each purchaser also agreed that he or she would offer or resell shares only if
the shares were registered under the Securities Act or an exemption from such
registration was available. No advertising or public solicitation was used in
the placement. We placed a restrictive legend on the certificates representing
the shares and placed "stop transfer" instructions with its transfer agent.
On December 31, 1998, we closed a private placement of 1,539,658 shares of
common stock for services previously rendered to us. The issuance and sale of
these shares was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof as a transaction by an issuer not involving a
public offering. All of the purchasers represented to us that they were
acquiring the shares for their own accord and not for the account or benefit of
another person; that the shares were being acquired for investment and not with
a view to the distribution thereof; and that the purchasers did not intend to
sell or otherwise dispose of all or any part of the shares at the time of
purchase or upon the occurrence or nonoccurrence of any predetermined event.
Each purchaser also agreed that he or she would offer or resell shares only if
the shares were registered under the Securities Act or an exemption from such
registration was available. No advertising or public solicitation was used in
the placement. We placed a restrictive legend on the certificates representing
the shares and placed "stop transfer" instructions with its transfer agent.
On December 31, 1998, we issued an aggregate of 1,335,224 shares of common
stock to 26 investors for services previously rendered to us. The issuance of
these shares was exempt from the registration requirements of the Securities Act
pursuant to Rule 701 thereof. At the time of issuance, we were not subject to
the registration requirements of the Securities Exchange Act of 1934, and the
value of the securities issued did not exceed $1,000,000 (at the date of
issuance, the shares had an aggregate value of $619,627). The shares were issued
to investors for bona fide services previously provided to us, and were not in
connection with a capital-raising transaction.
On February 2, 1999, we issued an aggregate of 100,000 shares of common
stock to one investor for services previously rendered to us. The issuance of
these shares was exempt from the
II-4
<PAGE>
registration requirements of the Securities Act pursuant to Rule 701 thereof. At
the time of the issuance, we were not subject to the registration requirements
of the Securities Exchange Act of 1934, and the value of the securities issued
did not exceed $1,000,000 (at the date of issuance, the shares had an aggregate
value of $75,000). The shares were issued to an investor for bona fide services
previously provided to us, and were not in connection with a capital-raising
transaction.
On March 31, 1999, we closed a private placement of 184,667 shares of
common stock, raising aggregate proceeds of $114,667. The issuance and sale of
these shares was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof as a transaction by an issuer not involving a
public offering. All of the purchasers represented to us that they were
acquiring the shares for their own accord and not for the account or benefit of
another person; that the shares were being acquired for investment and not with
a view to the distribution thereof; and that the purchasers did not intend to
sell or otherwise dispose of all or any part of the shares at the time of
purchase or upon the occurrence or nonoccurrence of any predetermined event.
Each purchaser also agreed that he or she would offer or resell shares only if
the shares were registered under the Securities Act or an exemption from such
registration was available. No advertising or public solicitation was used in
the placement. We placed a restrictive legend on the certificates representing
the shares and placed "stop transfer" instructions with its transfer agent.
On May 6, 1999, we issued an aggregate of 102,000 shares of common stock to
2 investors for services previously rendered to us. The issuance of these shares
was exempt from the registration requirements of the Securities Act pursuant to
Rule 701 thereof. At the time of the issuance, DCH was not subject to the
registration requirements of the Securities Exchange Act of 1934, and the value
of the securities issued did not exceed $1,000,000 (at the date of issuance, the
shares had an aggregate value of $61,549). The shares were issued to investors
for bona fide services previously provided to us, and were not in connection
with a capital-raising transaction.
On May 11, 1999, we closed a private placement of 635,195 shares of common
stock, raising an aggregate of $410,137. The issuance and sale of these shares
was exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) thereof as a transaction by an issuer not involving a public
offerings. All of the purchasers represented to us that they were acquiring the
shares for their own accounts and not for the account or benefit of another
person; that the shares were being acquired for investment and not with a view
to the distribution thereof; and that the purchasers did not intend to sell or
otherwise dispose of all or any part of the shares at the time of purchase or
upon the occurrence or nonoccurrence of any predetermined event. Each purchaser
also agreed that he or she would offer or resell shares only if the shares were
registered under the Securities Act or an exemption from such registration was
available. No advertising or public solicitation was used in the placement. We
placed a restrictive legend on the certificates representing the shares and
placed "stop transfer" instructions with its transfer agent.
On June 23, 1999, we consummated an offering of 637,582 shares of its
common stock pursuant to Rule 504 of Regulation D promulgated under the
Securities Act of 1933, as amended (the "Securities Act"). An aggregate of
$475,552 was raised in this placement; all purchasers represented to us that
they were "accredited investors" as defined in the Securities Act.
II-5
<PAGE>
On September 27, 1999 (prior to becoming a "reporting company" under
the Securities Exchange Act of 1934), we consummated an offering of 890,000
shares of our common stock pursuant to Rule 504 of Regulation D promulgated
under the Securities Act of 1933, as amended (the "Securities Act"). An
aggregate of $348,900 was raised in this placement; the purchaser represented to
us that he was an "accredited investor" as defined in the Securities Act.
On September 30, 1999, we closed a private placement of 446,951 shares of
common stock to three investors, raising an aggregate of $180,000. The issuance
and sale of these shares was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof as a transaction by an issuer
not involving a public offering. All of the purchasers represented to us that
they were acquiring the shares for their own accounts and not for the account or
benefit of another person; that the shares were being acquired for investment
and not with a view to the distribution thereof; and that the purchasers did not
intend to sell or otherwise dispose of all or any part of the shares at the time
of purchase or upon the occurrence or nonoccurrence of any predetermined event.
Each purchaser also agreed that he or she would offer or resell shares only if
the shares were registered under the Securities Act or an exemption from such
registration were available. No advertising or public solicitation was used in
the placement. We placed a restrictive legend on the certificates representing
the shares and placed "stop transfer" instructions with its transfer agent.
On September 30, 1999, we issued an aggregate of 563,436 shares of common
stock to employees and consultants for services previously rendered to us. The
issuance of these shares was exempt from the registration requirements of the
Securities Act pursuant to Rule 701 thereof. At the time of the issuance, we
were not subject to the registration requirements of the Securities Exchange Act
of 1934, and the value of the securities issued did not exceed $1,000,000 (at
the date of issuance, the shares had an aggregate value of $231,538). The shares
were issued to investors for bona fide services previously provided to us, and
were not in connection with a capital-raising transaction.
On October 27, 1999, we closed a private placement of 1,173,337 shares
of common stock to investors, raising an aggregate of $603,231. The issuance and
sale of these shares was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof as a transaction by an issuer
not involving a public offering. All of the purchasers represented to us that
they were acquiring the shares for their own accounts and not for the account or
benefit of another person; that the shares were being acquired for investment
and not with a view to the distribution thereof; and that the purchasers did not
intend to sell or otherwise dispose of all or any part of the shares at the time
of purchase or upon the occurrence or nonoccurrence of any predetermined event.
Each purchaser also agreed that he or she would offer or resell shares only if
the shares were registered under the Securities Act or an exemption from such
registration were available. No advertising or public solicitation was used in
the placement. We placed a restrictive legend on the certificates representing
the shares and placed "stop transfer" instructions with its transfer agent.
On January 6, 2000 we closed an offering of 1,591,112 shares of common
stock pursuant to Rule 506 of Regulation D promulgated under the Securities Act
of 1933, as amended (the "Securities Act"). An aggregate of $2,351,000 has been
raised in this placement. All purchasers have represented to us that they are
"accredited investors" as defined in the Securities Act.
II-6
<PAGE>
ITEM 27. EXHIBITS
Form SB-2 Exhibit No. Description
- --------------------- ------------
2.1 Articles of Incorporation of Connection Sports
International, Inc., as amended. (1)
2.2 Bylaws of DCH Technology, Inc. (1)
3.1 Agreement and Plan of Reorganization, dated May 28,
1997, by and among Connection Sports International,
Inc., DCH Technology, Inc., a California corporation,
and its shareholders. (1)
3.2 Specimen certificate for the Registrant's Common
Stock. (1)
5.1 Legal Opinion of Silicon Valley Law Group
6.1 License Agreement, dated April 24, 1996, by and between
Registrant and Sandia Corporation. (1)(2)
6.2 Limited Exclusive Field of Use Patent License
Agreement, dated March 15, 1999, by and between
Registrant and The Regents of the University of
California. (1)(2)
6.3 Nonexclusive Field of Use Patent License Agreement,
dated March 15, 1999, by and between Registrant and The
Regents of the University of California. (1)(2)
6.4 LANL Modular CRADA Stevenson-Wydler Cooperative
Research and Development Agreement No. LA98C10384,
dated October 30, 1998, by and between Registrant and
The Regents of the University of California. (1)(2)
6.5 Stevenson-Wydler Cooperative Research and Development
Agreement No. ORNL 96-0454, dated September 26, 1996,
as amended, by and between Registrant and Lockheed
Martin Energy Research Corporation. (1)(2)
6.5(a) Amendment B to Cooperative Research and Development
Agreement No. ORNL 96-0454. (1)(2)
II-7
<PAGE>
6.6 Sole Commercial Patent License Agreement, dated
September 26, 1996, by and between Registrant and
Lockheed Martin Energy Research Corporation. (1)(2)
6.7 Exclusive License Agreement, effective as of May 15,
1998, by and between Registrant and Simon Fraser
University. (1)(2)
6.8 Stevenson-Wydler Cooperative Research and Development
Agreement, dated May 6, 1996, as amended, by and
between Amerisen and Midwest Research Institute. (1)(2)
6.8(a) Modification Number 3 to Cooperative Research and
Development Agreement No. CRD-96-046.(1)(2)
6.9 Agency Agreement, dated January 18, 1999, by and
between Registrant and Horiba, Ltd. (1)
6.10 Employment Agreement, dated December 31, 1994, by and
between Registrant and David A. Walker. (1)
6.11 Employment Agreement, dated December 31, 1994, by and
between Registrant and David P. Haberman. (1)
6.12 Limited Liability Company Operating Agreement, dated
July 31, 1998, of Renewable Energies Group LLC. (1)
6.13 Operating Agreement of Infrasol LLC, dated July 31,
1998. (1)
6.14 Standard Industrial/Commercial Multi-Tenant Lease-
Gross, dated April 28, 1998, by and between Registrant
and Bradmore Realty Investment Company, Ltd. (1)
6.15 Standard Industrial/Commercial Multi Tenant Lease-
Gross, dated April 2, 1999, by and between Registrant
and Valencia Gardens. (1)
6.16 Lease Agreement, dated as of April 22, 1999, by and
between Registrant and Welton Family Limited
Partnership. (1)
23.1 Consent of Lucas, Horsfall, Murphy & Pindroh, LLP
23.2 Consent of Silicon Valley Law Group (contained in
Exhibit 5.1)
25.1 Power of Attorney (*)
27.1 Financial Data Schedule
(*) Previously Filed.
(1) Incorporated by reference from Registrant's Registration Statement on
Form 10-SB (File No. 000-26957).
(2) Portions omitted pursuant to a request for confidentiality filed with the
Commission.
II-8
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually, or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement; notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
(230.424(b) of this Chapter) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the Registration
Statement.
[Provided, however, that paragraphs (b)(1)(i) and (b)(1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to Section 13 or Section 15(d)
of the Securities and Exchange of 1934 that are incorporated by reference in the
registration statement].
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the Offering.
II-9
<PAGE>
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 and, where applicable, each filing of
an employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934, that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Valencia, State of California, on March 15, 2000.
DCH TECHNOLOGY, INC.
By: /s/ David A. Walker
_____________________
David A. Walker
President
II-10
<PAGE>
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------------------- ----------------------- ----
/s/ David A. Walker President, Director, March 15, 2000
- -------------------- Chief Executive Officer and
David A. Walker Chief Financial Officer
(principal accounting officer)
/s/ David P. Haberman* Vice President and Director March 15, 2000
- ---------------------
David P. Haberman
/s/ Randall S. Firestone* Director March 15, 2000
- ------------------------
Randall S. Firestone
Director March __, 2000
- ---------------------
Robert S. Walker
Director March __, 2000
- ---------------------
Raymond N. Winkel
/s/ Dr. William L. Firestone* Director March 15, 2000
- ----------------------------
Dr. William L. Firestone
* By /s/ David A. Walker
-------------------
David A. Walker
Attorney-in-Fact
II-11
<PAGE>
Exhibit 5.1
OPINION OF SILICON VALLEY LAW GROUP
[Letterhead of Silicon Valley Law Group]
March 15, 2000
DCH Technology, Inc.
27811 Avenue Hopkins, #6
Valencia, CA 91355
Re: Form SB-2 Registration Statement
--------------------------------
Ladies and Gentlemen:
We are rendering this opinion in connection with the Registration Statement
on Form SB-2 (File No. 333-96509) originally filed by DCH Technology, Inc. (the
"Company") with the Securities and Exchange Commission under the Securities Act
of 1933, as amended (such Registration Statement as amended from time to time is
referred to herein as the "Registration Statement"). The Registration Statement
relates to the registration of an aggregate of 4,957,021 shares of the Company's
Common Stock, $0.01 par value per share (the "Shares"), that may be offered for
resale by certain parties listed therein, some of which are issuable upon
exercise of the Company's warrants held by the parties listed in the
Registration Statement. We understand that the Shares are to be offered and
sold in the manner described in the Registration Statement.
We have acted as your counsel in connection with the preparation of the
Registration Statement and are familiar with the proceedings taken by the
Company in connection with the authorization and preparation for issuance of the
Shares. We have examined all such documents as we consider necessary to enable
us to render this opinion.
Based upon the foregoing, we are of the opinion that the Shares have been
duly authorized and when issued and delivered by the Company, following any
exercise of warrants under the Registration Statement in accordance with the
terms of such warrants, will be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under "Legal Matters" in
the Registration Statement.
Very truly yours,
/s/ Silicon Valley Law Group
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified accountants, we hereby consent to the use of our report
included herein dated February 22, 2000 and the reference to our firm
under the caption "Experts" included in or made part of this Form SB-2.
/s/ LUCAS, HORSFALL, MURPHY AND PINDROH, LLP
Pasadena, CA
March 15, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 1,193,084 1,802
<SECURITIES> 0 0
<RECEIVABLES> 143,128 58,829
<ALLOWANCES> 0 0
<INVENTORY> 127,139 143,714
<CURRENT-ASSETS> 1,744,879 304,345
<PP&E> 292,899 147,726
<DEPRECIATION> 75,234 39,067
<TOTAL-ASSETS> 2,276,121 541,029
<CURRENT-LIABILITIES> 843,934 247,229
<BONDS> 0 0
0 0
0 0
<COMMON> 193,259 122,730
<OTHER-SE> 9,826,988 5,121,642
<TOTAL-LIABILITY-AND-EQUITY> 2,276,121 541,029
<SALES> 543,199 207,580
<TOTAL-REVENUES> 543,199 211,763
<CGS> 332,394 66,480
<TOTAL-COSTS> 332,394 66,480
<OTHER-EXPENSES> 3,798,278 4,722,873
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 66
<INCOME-PRETAX> (3,587,473) (4,577,656)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,587,473) (4,577,656)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,587,473) (4,577,656)
<EPS-BASIC> (0.25) (0.48)
<EPS-DILUTED> (0.25) (0.48)
</TABLE>
