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U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 1995
-----------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to __________________
Commission file number 0-17569
----------------------
FIBERCHEM, INC.
(Name of small business issuer in its charter)
Delaware 84-1063897
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1181 Grier Drive, Suite B, Las Vegas, Nevada 89119
(address of principal executive offices) (Zip Code)
Issuer's telephone number: (702) 361-9873
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.0001 Par Value
--------------------------------------------------
(Title of class)
Indicate by check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. YES
X NO
- --- ---
Indicate by check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $1,149,122
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the last sale price of such stock on December 26, 1995
of $1.03 was $19,311,934.
As of December 26, 1995, the Issuer had 20,611,844 shares of Common Stock,
par value $.0001 per share, outstanding.
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ITEM 1. DESCRIPTION OF BUSINESS
(a) BUSINESS DEVELOPMENT
FiberChem, Inc. ("FiberChem," the "Company" or "FCI") was formed on April
6, 1987, under the name Tipton Industries, Inc. ("Tipton"). On December 18,
1987, Tipton acquired all of the issued and outstanding stock of FiberChem,
Inc., a New Mexico corporation, for approximately 79% of Tipton's Common Shares.
The transaction was accounted for as a reverse purchase of Tipton by the
Company. Pursuant to stockholder approval on December 21, 1988, Tipton and
FiberChem (New Mexico) were merged into the Company, a newly formed Delaware
corporation, which changed its name to FiberChem, Inc.
Pursuant to an agreement effective June 30, 1992, the Company sold its
wholly-owned subsidiary, AgriBioTech, Inc. ("ABT"), to the management of ABT
(the "Purchaser"). The Company sold ABT because ABT's purpose (to design,
develop, manufacture and market various products for applications in all phases
of the agriculture industry) was not related to FCI's primary business. The
Company had been unable to devote time to the further development of ABT's
technology having decided to focus the Company's efforts on fiber optic chemical
sensor technology. The Purchaser agreed to purchase all of the issued and
outstanding shares of Common Stock of ABT, which were all owned by the Company,
for ABT's approximate book value of $551,116. See "Item 12. Certain
Relationships and Related Transactions."
From inception through the period ended September 30, 1995, the Company and
its wholly-owned subsidiaries FCI Environmental, Inc. ("FCI Environmental"),
Fiberoptic Medical Systems, Inc. ("FMS") and PetroTester, Inc. have operated in
the same industry segment.
(b) BUSINESS OF ISSUER
FiberChem develops, produces, markets and licenses its patented fiber optic
chemical sensor ("FOCS-Registered Trademark-") technology which detects and
monitors hydrocarbon pollution in the air, water and soil. The Company has
developed a range of products and systems based on FOCS-Registered Trademark-,
which provide IN SITU and continuous monitoring capabilities with real-time
information obtained from sites.
Since its inception in 1988, FiberChem has invested approximately $20
million in research and development relating to a wide range of technologies,
and now focuses on products for the environmental monitoring industry. In late
1994, the Company began marketing its products through independent
manufacturer's representatives in the United States and independent distributors
internationally. The Company launched its new PetroSense-Registered Trademark-
product line, based on the FOCS-Registered Trademark- technology, in late 1994,
and is continuing to explore further commercial applications for its
technologies.
FiberChem has developed its advanced monitoring systems to comply with
regulations of and enforcement measures by federal, state and local governments.
The Company believes that the applications for and use of its PetroSense-
Registered Trademark- products will continue to expand, as, for example, in the
recently developed application on offshore oil production platforms. The United
States alone now spends over $100 billion per year on environmental protection
measures, and the United States Environmental Protection Agency (the "EPA")
forecasts that the market will grow to $160 billion per year by the year 2000.
International markets for environmental monitoring products are expected to be
as large, or even larger, than the U.S. markets.
PRODUCTS AND APPLICATIONS
The PetroSense-Registered Trademark- product line includes a continuous
monitoring system ("CMS-5000") designed for IN-SITU measurement of petroleum
hydrocarbons in a wide variety of applications including leak detection at above
ground storage tank ("AST") and underground storage tank ("UST") sites,
monitoring
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of soil and water remediation processes and fence line monitoring at
contaminated sites. A CMS-5000 typically sells for between $15,000 and $50,000.
The CMS-5000 also can be used to monitor hydrocarbon levels for regulatory
compliance in applications such as sea water from offshore oil production, bilge
water from shipping, and both storm water and waste water around industrial
facilities. The CMS-5000 is also available with analog outputs for use in
industrial applications where some control function needs to be performed.
The use of on-board modems allows the CMS-5000 to warn of alarm conditions
through remote communications. Conversely, the unit itself can be interrogated
remotely to provide retrieval of logged data, status and service information.
This is particularly important for unmanned sites.
Up to sixteen of the Company's Digital Hydrocarbon Probes ("DHPs") can be
interfaced to the CMS-5000 to allow monitoring at several different locations
within a site. The DHP typically sells for about $4,000. The DHP can also be
used as a standalone product to interface with existing data loggers that use
the environmental industry standard communications protocol referred to as
Standard Digital Interface ("SDI-12"). A second version of the DHP, which
typically sells for about $2,000, has been developed by the Company. This
product uses the RS-485 communications protocol, allowing direct interface with
computers and programmable logic controllers for other industrial applications.
The PetroSense-Registered Trademark- Portable Hydrocarbon Analyzer ("PHA-
100") is a hand held instrument using an analog hydrocarbon probe which can
measure hydrocarbons in the air, soil and in or on water. The PHA-100 typically
sells for about $6,900. The microprocessor in the instrument converts the data
generated by the probe into a parts per million ("ppm") reading. The user can
store the reading for retrieval and can print the data on an external printer
after as many as 100 separate measurements are completed. Recent improvements
in calibration have expanded the effective range of the PHA-100 down to the
parts per billion ("ppb") range (in water) for benzene, toluene, ethyl benzene,
xylene ("BTEX"), common petroleum hydrocarbon components of gasoline, diesel and
jet fuel.
Applications for the PHA-100 include quarterly monitoring of AST and UST
sites as well as pipelines, the detection of contamination from leaks in soil,
the detection of breakthrough levels of petroleum hydrocarbons in process and
processed water at refineries and on offshore production platforms and general
environmental monitoring.
The PetroSense-Registered Trademark- Field Kit is a product that is an
integral part of each of the CMS-5000, PHA-100 and DHP. The field kits contain
calibration solutions, traceable to the National Institute of Standards and
Technology standards, that are used to calibrate the hydrocarbon probes. Other
accessories contained in the field kit consist of cleaning solutions, computer
and power adapters, and disposable calibration vials and tubes which are added
for the customer's convenience. A vapor calibration procedure has been
developed for soil gas applications. There is a field kit for the CMS-5000
containing a few months' worth of supplies and a field kit for the DHP probes
with a 30-day supply. In addition, refill kits are available to replenish each
field kit on an "as needed" basis.
The Company has pursued federal, state and local approvals for its
products. In November 1994, the Company received Underwriters Laboratories
approval for its product line in the United States and Canada. In April 1995,
the Company received notification from KEMA, an authorized certification body
for Europe, that its products had met their highest standard for intrinsic
safety (CENELEC), and, as such, were approved for use in all hazardous
environments including offshore platforms. The products have also been designed
and tested to meet European Union CE Mark standards which take effect January 1,
1996 for the European Community.
Both the Company's PHA-100 and DHP have been extensively tested by Ken
Wilcox Associates, Inc. ("KWA"), an independent testing laboratory, in
accordance with EPA protocols. These evaluations meet the requirements of the
EPA for external vapor-phase leak detection systems and liquid-phase out-of-
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tank product detectors. KWA also certified that the data produced by the
Company's products is equivalent to the EPA's standard method for groundwater
analysis.
The Company's products were included in the EPA's Office of Underground
Storage Tanks list of products meeting certain minimum third-party certification
guidelines, both for vapor and liquid product detection. In addition, the
Company has received written or verbal assurance from 47 states that its
products meet their requirements. Certain states rely on the EPA list and
certain others have no specific requirements.
Recently developed applications of FOCS-Registered Trademark- include the
use of the technology to replace a Freon-Registered Trademark- extraction method
of analysis currently used on offshore oil production platforms. EPA
regulations require oil companies to monitor the hydrocarbon content in sea
water returned to the ocean during the oil production process. The conventional
Freon-Registered Trademark- method involves periodic sampling of the sea water
output and analysis of the samples in the oil production platform's laboratory.
The Company's products can be used to monitor the sea water output continuously,
thereby eliminating the use of Freon-Registered Trademark- gas and achieving a
significant reduction in cost for the operator.
THE TECHNOLOGY
The Company's FOCS-Registered Trademark- technology, which is proprietary
and patented, is at the center of the Company's products. FiberChem
manufactures a probe which contains a short length (approximately 5 cm) of fiber
optic cable. Commercially produced fiber optic cable is coated to keep all
wavelengths of light contained. The Company treats the fiber optic cable with
the FOCS-Registered Trademark- technology, modifying the cable's coating to
permit a certain amount of light to be lost when it comes into contact with
hydrocarbon molecules. The resulting change in light transmission is then
recorded and transmitted by the probe either to one of the Company's monitoring
devices (see "Products and Applications" above) or to other industry standard
devices. The Company's devices measure changes in ppm or, in some instances, in
lesser concentrations. Up to 16 probes can be linked together to provide a
continuous monitoring system for various types of sites, including USTs, ASTs,
remediation sites, pipelines and offshore oil production platforms.
The FOCS-Registered Trademark- technology has been further developed
through a joint venture with Texas Instruments Incorporated ("TI") to produce a
new generation of semiconductor-based sensor products ("Sensor-on-a-Chip-TM-").
Prototype chips have been produced for applications in the consumer market as
well as new commercial markets such as fuel dispensing equipment. The Company
has entered into a development agreement with Gilbarco, Inc. ("Gilbarco"), a
subsidiary of GEC p.l.c., to incorporate the Sensor-on-a-Chip-TM- technology in
Gilbarco's next generation of products. Gilbarco is the largest manufacturer of
fuel dispensing equipment in the United States. See "Research and Development"
below.
The Company believes that its patents and patent applications, coupled with
the trade secrets, proprietary information and experience in development
acquired by the Company, provide the Company with a competitive advantage. It
is the Company's policy to apply for international patent rights in addition to
United States patent rights. FiberChem holds 20 United States patents covering
sensor technologies and has applied for four additional patents. All of the
United States patents are valid for 20 years from their respective dates of
issuance, the oldest of which was issued in 1989. The Company holds nine
international patents, and has a total of 15 international patent applications
pending in Canada, Taiwan, Japan, South Korea, the People's Republic of China
and most Western European countries. The sensor technologies are also protected
in the United States by registered trademarks.
THE MARKET
FiberChem's primary markets and potential markets are the petroleum
production, refinery and distribution chain. Major oil companies, distributors
and retailers of gasoline, diesel and aircraft fuel are
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important customers. Other important markets and customers include remediation
companies, environmental consultants, shipping ports, airports and military
bases.
CUSTOMERS AND DISTRIBUTORS
The Company has implemented both domestic and international sales
organizations for sales and marketing of its petroleum hydrocarbon product line.
Domestically, the network of 21 manufacturer's representatives, four
distributors and rental companies has been upgraded during the year ended
September 30, 1995 ("Fiscal 1995") to take into account the importance of the
products' potential in offshore and storm water markets. A regional sales
manager was added in Houston, Texas in August 1995.
Internationally, the Company has entered into agreements with a number of
companies in various markets to market and distribute the Company's products.
In the first half of Fiscal 1995, the Company appointed Universal Electronics
and Computers, Inc., Shinhan Scientific, Inc. and Mitsui Mineral Development
Engineering Co., Ltd. for the emerging markets of Taiwan, South Korea and Japan,
respectively.
In Europe, the Company has signed a Letter of Intent with the Lobbe Group's
Lobbe Umwelttechnik to distribute its products in key European countries
including Germany, France, Spain, Denmark and several Central and Eastern
European countries. Also, the Company has appointed Imbema Sieger Polymetron
for the Benelux countries; Oy JuVeGroup, Ltd. for Finland, Sweden, the Baltics
and Northwest Russia; Instrunor for Norway; and GeoTechnical Instruments, Ltd.
for the United Kingdom. In each case, the distributor is developing marketing
plans for sales in the fiscal year ending September 30, 1996 ("Fiscal 1996").
Additional appointments of international distributors are expected in Fiscal
1996.
In addition, the Company is cooperating with groups in Finland, which are
putting together a consortium to clean up certain highly contaminated regions in
the Kola Peninsula area of Russia. The proposal would entail the use of the
Company's equipment for site assessment and monitoring.
As an integral part of its marketing plan, the Company has undertaken
evaluations of its products by major oil companies. To date, the following
companies have completed evaluations of the Company's products: Amoco
Production Company, Amoco Offshore, Ashland Petroleum Company, Exxon Corp.,
Shell USA, CalNev Pipeline Company, B.P. Oil Company, Williams Pipeline Company
and Unocal 76 Products Company. In each case, the evaluation met the
requirements of the client for the use tested. In some cases, the Company was
given access to and use of test data to aid in sales to other companies.
Evaluations are ongoing with other major companies, including Shell KLSA
(Amsterdam), Chevron Corp. and Phillips Petroleum Company.
As a result of these evaluations and of referrals from satisfied users of
the Company's products, the Company has been able to identify a large number of
potential projects which it believes may be funded for purchase of the Company's
products during the 1996-1997 time frame, including 47 projects on a global
basis. The Company has provided quotes to prospective customers for
approximately $6,000,000 of projects during Fiscal 1996. The Company has
identified another $20 million of potential projects for Fiscal 1996 and 1997
for which the Company either has not yet quoted prices or for which it has
quoted prices for 1997 or later budgets.
Management believes that the results, preliminary and unaudited, of the
Company's first quarter of Fiscal 1996, show evidence of the impact of the
Company's marketing plan. Sales improved significantly over previous
quarters. Orders were received for projects for companies such as Shell Oil
Co., Star Petroleum Co., British Petroleum Co., Pennzoil Co., Solvay
Polymers, Inc., 76 Products Co., Chevron Oil Co., AGIP division of ENI,
Explorer Pipeline Co., Scott Air Force Base, Alyeska Pipeline Co., Santa Fe
Pipeline Co., Citgo Petroleum Co., U.S. Coast Guard, and a Big Three
automotive manufacturer.
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LETTER OF INTENT WITH THE LOBBE GROUP
On June 7, 1995, FCI Environmental signed a letter of intent with the Lobbe
Group ("Lobbe") to develop certain European markets for FCI Environmental's
petroleum hydrocarbon products. Specifically, FCI Environmental will market its
products through various subsidiary companies of Lobbe. Lobbe has submitted the
Company's products for specific agency approvals in most Eastern and Western
European countries, and the Company believes that most approvals are being
finalized for issuance.
MARKET DEVELOPMENT AGREEMENT WITH MITSUI MINERAL DEVELOPMENT ENGINEERING
CO., LTD.
On May 31, 1995, the Company, through FCI Environmental, entered into a
two-year joint market development agreement with Mitsui Mineral Development
Engineering Co., Ltd. ("MINDECO") pursuant to which the Company and MINDECO are
developing the Japanese market for the Company's products, initially limited to
petroleum hydrocarbon sensors. In general, the Company will supply the products
and MINDECO will demonstrate, market and sell them. In addition, the Company
and MINDECO have agreed to use their best efforts to achieve a minimum sales
target of $1,000,000. At the end of the term, the Company and MINDECO have the
right to either 1) convert the market development agreement into a
distributorship agreement, 2) terminate the market development agreement, or 3)
automatically renew the market development agreement for one year on a non-
exclusive basis.
EXCLUSIVE REPRESENTATIVE AGREEMENT WITH SHINHAN SCIENTIFIC CO., LTD.
On February 9, 1995, FCI Environmental entered into a two-year exclusive
representative agreement with Shinhan Scientific Co., Ltd. ("Shinhan"), a
corporation of the Republic of Korea. Pursuant to the agreement, FCI
Environmental agreed to provide environmental products, accessories and parts to
Shinhan, and Shinhan agreed to act as an independent contractor of FCI
Environmental to promote and sell such products exclusively in the Republic of
Korea. Shinhan is actively involved in the developing UST regulatory process in
the Republic of Korea.
EXCLUSIVE DISTRIBUTION AGREEMENT WITH UNIVERSAL ELECTRONICS & COMPUTERS,
INC.
On February 7, 1995, FCI Environmental entered into a two-year exclusive
distribution agreement with Universal Electronics & Computers, Inc. ("UECI"), a
corporation of the Republic of China. Pursuant to the agreement, FCI
Environmental agreed to provide UECI with certain environmental products,
accessories and parts, and UECI agreed to act as an independent contractor of
FCI Environmental to promote and sell such products exclusively in the Republic
of China.
LETTER OF INTENT WITH AMERASIA CONSULTING, LTD.
On November 1, 1994, the Company entered into a letter of intent with
AmerAsia Consulting, Ltd. ("AmerAsia"), pursuant to which AmerAsia agreed to
develop, on a non-exclusive basis, marketing and joint venture opportunities for
the Company in Asia and Europe and to introduce the Company to parties in those
areas interested in marketing the Company's technology and products. In
consideration for its consulting services, AmerAsia receives compensation
specific to each opportunity identified by it as mutually agreed upon by the
Company and AmerAsia. FiberChem has, to date, granted to AmerAsia options to
purchase 125,000 stock exercisable at $1.00 per share, which was at or above the
fair market value on the dates such options were granted. Shinhan, UECI and
MINDECO, with which the Company has entered into the agreements described above,
were all introduced to the Company by AmerAsia.
MARKETING AGREEMENT WITH PINNACLE ENVIRONMENTAL GROUP, INC.
On March 7, 1995, FCI Environmental entered into a marketing agreement with
Pinnacle Environmental Group, Inc. ("Pinnacle"), pursuant to which FCI
Environmental and Pinnacle are using
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their joint efforts to market and design an automated storm water monitoring
system for a large industrial facility located in the Great Lakes region. The
term of the agreement is for one year, with an automatic one-year renewal if not
terminated by either party. This relationship has resulted in an initial order
from one of the three major United States automobile manufacturers.
COMPETITION
Management believes that the unique capabilities of the Company's FOCS-
Registered Trademark- technology provide competitive advantages in its markets.
The Company is unaware of any other product in the marketplace, that can monitor
petroleum hydrocarbons at all three desired monitoring points, i.e., the vapor
area above the water body, the floating hydrocarbons at the water/air interface
and the hydrocarbons dissolved in the water. Management believes that this
capability, coupled with the FOCS-Registered Trademark-'s rapid response time
and reversibility (the ability to measure both increasing and decreasing levels
of pollutants), together with its response to a wide variety of petroleum
hydrocarbons, provide the Company with a competitive advantage.
Most UST and AST leak detection methods currently in use are periodic
tests. The early warning and early detection of leaks provided by the Company's
continuous monitoring system enable users to minimize environmental damage,
liability and cleanup costs relating to leaks that might otherwise occur and
remain undetected between periodic tests. In addition, the Company's products
permit USTs and ASTs to be evaluated without being taken out of service, whereas
many competing methods of detecting and quantifying the presence of petroleum
hydrocarbons in the field (e.g., for groundwater monitoring wells, soil
remediation sites, process streams and waste water streams) consist of
extracting a sample, then analyzing the sample using field or laboratory
analytic instruments such as gas chromatographs. This process may take several
days. The Company's PHA-100 provides IN SITU, real-time results with accuracy
closely correlating with laboratory results.
GOVERNMENT REGULATION
In the United States, numerous environmental laws have been enacted over
the last three decades. These include the Resource Conservation and Recovery
Act, the Clean Air Act, The Clean Water Act, the National Environmental Policy
Act which established the EPA and others. The Clean Air and Clean Water Acts
require measurement, monitoring and control of municipal, industrial and other
discharges not only of hydrocarbons but of numerous other substances including
heavy metals, toxic gases, chlorinated solvents and fertilizer and pesticide
residues.
USTs (such as retail gasoline station storage tanks) are one of the markets
most directly impacted by governmental regulations. These regulations generally
require leak detection using continuous monitoring systems, such as the
Company's products, or periodic testing. The Company's products have been
certified by third-party tests to meet the requirements of the EPA for
applications in UST leak detection. Although present federal laws do not
require leak detection for ASTs, many state and local governments have enacted
or are considering regulations requiring leak detection for ASTs.
In 1993, the Securities and Exchange Commission issued staff Accounting
Bulletin No. 92 which requires public companies to account for their
environmental liabilities. The Company believes that its products and
technologies have benefited and will benefit from these requirements because its
products enable users to make measurements to help determine and limit the
extent of contamination.
INTERNATIONAL REGULATORY ACTIVITY
Several countries have environmental laws or regulations in place or being
implemented that impact the market for the Company's products. Belgium has a
new environmental law that impacts on retail gas stations. Canada has an AST
regulation in process. The Republic of South Korea has a new UST law which is
currently being implemented. Taiwan has committed to significant expenditure of
environmental cleanup. Finland has proposed leak detection for retail gasoline
stations. The Company is
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working with its international distributors to promote the Company's products
and enhance its name recognition in these countries so that the Company will be
in a position to benefit when regulations are promulgated.
MANUFACTURING
The Company manufactures the FOCS-Registered Trademark- sensors and probes
at its facilities located in Las Vegas, Nevada. Printed circuit boards
incorporated in the Company's products are fabricated and assembled by other
companies using high quality commercially available components.
The PHA-100 incorporates an instrument originally developed and
manufactured to the Company's specifications by others. Component parts and
subassemblies are now being purchased directly by the Company, but final
assembly and testing is performed by the Company. The data logging and control
instrument incorporated in the CMS system is commercially available from a
number of manufacturers; however, the Company has chosen one primary supplier,
and integrates the instrument with the Company's DHP, operating and control
software, personal computers and peripheral devices such as alarms. Accessory
kits are configured by the Company using both commercially available and
specially manufactured components.
RESEARCH AND DEVELOPMENT
The Company has centered its focus on the continuing development of the
petroleum hydrocarbon product line with emphasis on the Sensor-on-a-Chip-TM-
development in cooperation with TI and a development agreement with Gilbarco.
The Company has expended $1,184,415 and $2,320,065 for research and development
during the fiscal years ended September 30, 1995 and 1994, respectively. The
Company recorded as fees and grants $57,848 in payments received from third
parties for sensor development funding during the year ended September 30, 1994.
At September 30, 1995, the Company is concentrating on the following sensors and
contracts:
SENSORS
The Company is further developing numerous other sensors for specific
contaminants and properties. Certain sensors are completed, but will not be
introduced into manufacturing until the design of the chip-based platform is
finalized. Other sensors are still in the development stage. The current
status of the Company's sensor development is outlined in the table below,
showing analytes (chemicals) measured, their stage of development, targeted
sensitivity (capability of measurement) and the particular media monitored:
<TABLE>
<CAPTION>
Stage of Targeted
Type Development Sensitivity/Media
- --------------------------------- ----------- ----------------------------------------
<S> <C> <C>
Petroleum Hydrocarbons Commercial < 1ppm in water; < 10ppm in air, soil
Trichloroethylene ("TCE") Commercial < 10ppm in water, remediation
Tetrachloroethylene Commercial < 10ppm in water, remediation
Oxygen Prototype < 1ppm in air, water, soil
Carbon Dioxide Prototype < 5ppm in air, water, soil
Carbon Monoxide Prototype < 5ppm in air
Illegal Narcotics Prototype < 400pptrillion in air, water
pH Prototype 2-12 in water
Heavy Metals (total of 7) Development ppb in water (1)
Phosphates Development ppm in water, soil (1)
Sulfates Development ppm in water, soil (1)
Hydrazine Development ppb in air, water, soil (1)
</TABLE>
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<TABLE>
<CAPTION>
Stage of Targeted
Type Development Sensitivity/Media
- ----------------------------------- ----------- ------------------------------
<S> <C> <C>
Total Organic Carbon ("TOC") Research ppb in water (1)
Total Organic Chloride ("TOCl") Research ppb in water (1)
</TABLE>
(1) Targeted sensitivity for sensors in the development and research stage will
be established as they enter into the prototype stage.
During Fiscal 1994, the Company completed its research and development
commitment with the following agencies and individuals: (1) a final report of
the Company's findings was accepted by the Advance Research Project Agency, a
governmental contracting agency. The first phase of work was a proof of
principle project developing FOCS-Registered Trademark- for the detection of
illegal narcotics. There is no assurance that additional funding will be made
available by this government agency for second and third phase work; (2) the
Company completed the final report and it has been accepted by the American
Water Works Association Research Foundation ("AWWARF"). The Company pursued
development of three environmental sensors to help monitor pollutants in
drinking water. While FiberChem has the right to manufacture and market these
sensors worldwide, once developed, AWWARF will receive royalty payments based on
the sale of any of the sensors developed. AWWARF will receive, on a quarterly
basis, 25% of all sales receipts until it has received $150,000, the amount of
AWWARF's funding, and .5% of all sales receipts after $150,000; and (3) the
completion of research work on sensors with Professor Otto S. Wolfbeis
("Wolfbeis"). In 1992, Wolfbeis was hired to continue development of sensors
including, but not limited to, potassium sensors, nitrate sensors for anionic
detergents, oxygen sensors with extreme sensitivity and various biosensors. In
December 1994, the Company and Wolfbeis terminated their development agreement.
However, the Company retains the rights to the proprietary information, trade
secrets and to patents applied for or to be applied for covering these
technologies. The Company retains all proprietary FOCS-Registered Trademark-
technology rights under the above agreements.
TEXAS INSTRUMENTS, INC. ("TI")
On June 15, 1995, the Company entered into an intellectual property license
agreement and a cooperative development agreement with TI. Under the License
Agreement, TI licensed the Company's patented FOCS-Registered Trademark- for use
with TI's optoelectronic technology. The Company granted TI an exclusive
worldwide royalty-bearing license to develop, produce and market chip-based
chemical sensors for specific applications. In exchange, TI granted the Company
a non-exclusive worldwide royalty-bearing license to certain TI technology. The
license agreement terminates when the last Company or TI patent concerning the
technology under the license agreement expires. Under the cooperative
development agreement, the Company and TI agreed to design and develop certain
custom FOCS-Registered Trademark- based sensors for TI's exclusive field of use.
The first chip-based sensor has been developed for sensing a toxic gas. Design
and chemical composition are currently being completed and prototypes are
undergoing final evaluation and testing. The License Agreement and Cooperative
Development Agreement replaces a similar agreement between the Company and TI,
entered into in January 1992, with a goal of miniaturizing the Company's FOCS-
Registered Trademark- technologies into microchip sensors. This development work
with TI is also the basis for the Sensor-on-a-Chip-TM- product which is the
subject of the joint development agreement with Gilbarco described below. The
Company has been granted a United States patent on chip-based sensors and has
applied for a patent on the toxic gas sensor.
JOINT DEVELOPMENT AGREEMENT WITH GILBARCO, INC.
On September 29, 1995, the Company, through FCI Environmental, entered into
a joint development agreement with Gilbarco to develop a cost-effective
hydrocarbon sensor for their use in retail gasoline operations using FCI
Environmental's patented Sensor-on-a-Chip-TM- technology. The initial term of
the agreement expired on October 27, 1995, but the parties agreed that further
joint development
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is warranted, and a development contract was signed on December 2, 1995. The
Company expects to receive purchase commitments for prototype and evaluation
quantities in early calendar 1996 and for production quantities later in
calendar 1996.
EG&G ENERGY MEASUREMENTS AGREEMENT
In June 1995, the Company entered into a Cooperative Research and
Development Agreement ("CRADA") with the Department of Energy through its
operating entity EG&G Energy Measurements Remote Sensing Laboratory in Las
Vegas, Nevada to develop low-cost, rugged demountable probes suitable for use
with the Sensor-on-a-Chip-TM- platform.
COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company has determined the costs and effects of compliance with
federal, state and local environmental laws to be minimal in amount and
exposure. The Company spends less than .1% of its total expenditures to comply
with the various environmental laws.
EMPLOYEES
As of December 26, 1995, the Company and its subsidiaries employed 23
persons on a full-time basis. These include, Geoffrey F. Hewitt, President and
Chief Executive Officer; Melvin W. Pelley, Chief Financial Officer and David R.
LeBlanc, Vice President of Sales and Marketing for FCI Environmental. These
three persons devote substantially all of their business time to the Company's
affairs. The Company also employed three administrative persons, four
scientists, four technicians, one manager of manufacturing, one materials and
production control specialist, three engineers, three marketing and sales
support persons, and one regional sales manager.
ITEM 2. DESCRIPTION OF PROPERTIES
In September 1989, the Company leased approximately 15,000 square feet of
space in a new multi-tenant showroom/warehouse/distribution facility within
Hughes Airport Center, 1181 Grier Drive, Suite B, Las Vegas, Nevada. The Company
is currently using approximately 8,000 square feet of its facility for
production, 4,000 square feet for research, development and engineering and the
remaining 3,000 square feet for marketing and administrative purposes. The
lease was for five years and expired on February 28, 1995. The Company and the
lessor have agreed to a month-to-month lease which is terminable by either party
upon 30 days notice. Current base monthly payments under the month-to-month
lease are $12,786. Rent expense during Fiscal 1995 and 1994 was $168,572 and
$165,004, respectively. The Company is pursuing alternatives including a
renewal of the current lease at approximately the current base monthly rental
charge.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year ended September 30, 1995.
10
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Common Stock of FiberChem is traded in the over-the counter market and
is quoted on the National Association of Securities Dealers Automated Quotation
System, Inc. ("NASDAQ") under the symbol "FOCS."
The following table sets forth for the periods indicated, the reported high
and low closing bid prices of the Company's Common Stock from October 1, 1993,
as reported by NASDAQ. Bid quotations represent high and low prices quoted
between dealers, do not reflect retail mark-up, mark-down or commission, and do
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Bid
------------------
Security Period High Low
- ----------------- ------------------------------------ -------- -------
<C> <S> <C> <C>
COMMON STOCK FISCAL YEAR ENDED SEPTEMBER 30, 1994
------------------------------------
FIRST QUARTER $3.81 $1.09
SECOND QUARTER $3.31 $1.63
THIRD QUARTER $1.75 $ .94
FOURTH QUARTER $1.72 $ .94
FISCAL YEAR ENDED SEPTEMBER 30, 1995
------------------------------------
FIRST QUARTER $1.19 $0.75
SECOND QUARTER $1.25 $0.75
THIRD QUARTER $1.03 $0.75
FOURTH QUARTER $1.47 $0.84
FISCAL YEAR ENDING SEPTEMBER 30, 1996
-------------------------------------
------------
FIRST QUARTER $1.47 $ .75
(October 1, 1995 to December 26, 1995)
</TABLE>
On December 26, 1995, the closing bid price of a share of the Company's
Common Stock was $1.03.
On December 26, 1995, the Company had in excess of 2,500 beneficial holders
of its Common Stock.
The Company has not paid any cash dividends on its Common Stock to date and
does not anticipate paying any in the foreseeable future. The Board of
Directors intends to retain any earnings to support the growth of the Company's
business. On October 1, 1994 the Company declared dividends on its Convertible
Preferred Stock to holders of record on that date. The dividends are cumulative
and were payable, at the discretion of the holders, in cash (11%) or additional
shares of Convertible Preferred Stock (8%). In November 1994, the Company paid
cash dividends of $53,340 and issued 14,362 shares of Convertible Preferred
Stock dividends. Subsequent to the issuance of the Convertible Preferred Stock
dividend, the Company reacquired 10,000 shares of the Convertible Preferred
Stock dividend for $15 per share.
On October 1, 1995, the Company declared dividends on Convertible Preferred
Stock to holders of record as of that date. In November, 1995, the Company paid
cash dividends of $23,645 and issued 15,214 shares of Convertible Preferred
Stock dividends.
11
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and notes thereto of the Company appearing
elsewhere in this Report.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended September 30, 1994 ("Fiscal 1994"), the Company
introduced its current product line. The PetroSense-Registered Trademark-
Portable Hydrocarbon Analyzer ("PHA-100") was introduced in March 1994. The
PetroSense-Registered Trademark- Continuous Monitoring System ("CMS-5000") was
introduced in May 1994 and completed successful field testing in November 1994.
Sales volume increased throughout Fiscal 1994 and the year ended September 30,
1995 ("Fiscal 1995"); however, sales volume has not reached a level to sustain
profitable operations as of September 30, 1995. During Fiscal 1995, the Company
recruited and trained a United States sales organization consisting of
independent manufacturer's representatives and entered into agreements with
European, Asian and other foreign companies for the marketing and distribution
of its products in their respective international territories.
During Fiscal 1995, the Company determined that sales to many of its major
potential customers, including major petroleum production, storage and
distribution companies, would require significant direct selling efforts, and
would in many cases be subject to these potential customers' evaluation,
budgeting, funding and approval processes. Management believes that most of
such potential customers' budgeting cycles begin in the second half of a
calendar year for approval and funding during the following calendar year or
years. The Company and its distributors have made significant numbers of product
demonstrations and provided a substantial number of price quotes to existing and
potential customers for these customers' budgetary purposes. Consequently, the
Company expects that a substantial portion of such quotes will result in a
significant increase in revenues during Fiscal 1996, although there can be no
assurances that such will be the case.
The Company has incurred substantial losses and is in need of financing to
continue its operations. In October 1995, the Company entered into an agreement
with Rauscher Pierce & Clark Ltd. ("RPC") wherein RPC, acting as financial
advisor and placement agent, would assist the Company in a private placement.
The Company and RPC are offering up to $4,700,000 in 8%, 3-year convertible
promissory notes and $2,300,000 in common stock, with detachable warrants. The
Company believes that it will be able to place all or a substantial portion of
these securities during January 1996, resulting in net proceeds to the Company,
after associated expenses, of between $4,000,000 and $6,000,000.
Based on the Company's anticipated equity and debt funding efforts and the
Company's product sales and expected sales, Management believes that it will
have adequate capital resources to continue its operations into the foreseeable
future. However, there can be no assurance that forecasted sales levels will be
realized to achieve profitable operations, nor that the anticipated financing
will occur, nor that it will be in an amount sufficient to enable the Company to
continue its operations.
During Fiscal 1994, the Company raised additional capital through the
issuance of an aggregate of 270,700 shares of Convertible Preferred Stock at $15
per share in exchange for cash proceeds of $3,326,174 (net of offering expenses
of $734,326). Dividends are cumulative and are payable annually, at the sole
discretion of the holders, in cash (11%) or additional shares of Convertible
Preferred Stock (8% of the number of shares owned at date of declaration). In
November 1994, the Company paid cash dividends of $53,340 and issued 14,362
shares of Convertible Preferred Stock dividends. Subsequent to the issuance of
the Convertible Preferred Stock dividend, the Company reacquired 10,000 shares
of the Convertible Preferred Stock dividend for $15 per share. In November 1995,
the Company paid cash dividends of $23,645 and issued 15,214 shares of
Convertible Preferred Stock dividends. As of December 26, 1995, the Company had
229,676 shares of Convertible Preferred Stock outstanding. Also during Fiscal
1994, the Company received an aggregate of $2,950,823 (net of $1,815,099 of
promissory notes
12
<PAGE>
from officers, directors and employees of the Company) from the exercise of
3,722,403 options, and received cash proceeds of $650,850 from the exercise of
433,900 Class D Warrants. During Fiscal 1995, the Company received an aggregate
of $321,652 from the exercise of 313,736 options.
The Company had working capital of $2,213,375 at September 30, 1995, as
compared with working capital of $4,338,902 at September 30, 1994, a decrease
of $2,125,527. The Company had a decrease in cash and cash equivalents of
$2,565,917 and a decrease in stockholders' equity of $2,436,124 during Fiscal
1995. These decreases resulted primarily from the Company's net cash used in
operating activities of $2,675,997 during Fiscal 1995, offset in part by net
cash provided by financing activities of $242,595. Net cash used in operating
activities during Fiscal 1994 was $3,931,486, offset by net cash provided by
financing activities of $6,773,550.
The net cash used in operating activities during Fiscal 1995 considered
changes in current assets and liabilities as well as non-cash transactions
including the write-down of accounts receivable, inventories, technology costs
and patents totaling $271,353, amortization expense of $282,718, depreciation
expense of $54,301, accrued interest receivable of $81,310, Common Stock issued
for financial consulting services of $57,225 and Common Stock issued for other
services of $198,450. The net cash used in operating activities during Fiscal
1994 considered changes in current assets and liabilities and non-cash
transactions including Common Stock issued for financial consulting services of
$2,137,974, Common Stock issued for other services of $277,214, amortization
expense of $271,370 and depreciation expense of $79,747.
During Fiscal 1995, the Company's inventories increased by $346,127 or 48%.
During Fiscal 1994, inventories increased by $298,667, or 72%. These increases
are primarily attributable to the production of the PHA-100 and of the
PetroSense-Registered Trademark- Digital Hydrocarbon Probes ("DHP-100") for sale
with the CMS-5000. Accounts receivable increased during Fiscal 1995 by $454,089
or 203% reflecting an increased level of sales over Fiscal 1994, as well as the
granting of extended payment terms in the case of certain sales transactions.
As of December 18, 1995, approximately $360,000 of the September 30, 1995
accounts receivable balance of $565,766 had been collected. During Fiscal 1994,
accounts receivable increased by $108,494, or 94%, reflecting receivables for
the initial sales of the Company's products introduced during Fiscal 1994.
During Fiscal 1995, the net cash used in investing activities was $132,515.
This included payments of $107,986 in fees for the filing, processing and
maintenance of patents and patent applications, primarily in foreign countries,
and the purchase of $24,529 in equipment. During Fiscal 1994, the net cash used
in investing activities was $174,639, including payments of $115,580 in patent
fees and the purchase of $60,559 in equipment.
During Fiscal 1995, the Company received net cash from financing activities
of $242,595, which included (i) $21,000 in proceeds from a note payable, less
payments on the note of $4,302 and $18,000 in funds used to set up a certificate
of deposit as security for the note, (ii) $53,340 in cash dividends issued to
preferred stockholders, (iii) $150,000 used to repurchase 10,000 shares of the
Convertible Preferred Stock issued as dividends, (iv) $321,652 received from the
exercise of options, (v) $19,196 received as payments on notes receivable for
the exercise of options, and (vi) $106,389 received on the note receivable from
the sale of a subsidiary. During Fiscal 1994, the Company received net cash
from financing activities of $6,773,550, which included the receipt of (i)
$3,326,174 (net of cost of issuance of Convertible Preferred Stock of $366,571
and $367,755 of Convertible Preferred Stock issued as expenses of the offering)
from the issuance of an aggregate of 270,700 shares of Preferred Stock at $15
per share, (ii) an aggregate amount of $3,309,154 from the issuance of Common
Stock of the Company from the exercise of warrants and options (net of
$1,815,099 of promissory notes from officers, directors and employees of the
Company), (iii) $106,390 from the note receivable from the sale of a subsidiary
and (iv) $31,832 as payments on notes receivable for the exercise of options.
13
<PAGE>
During Fiscal 1995, the Company issued to an individual 7,543 shares of
Common Stock of the Company, valued at $10,000, for services performed on behalf
of the Company's wholly-owned subsidiary, FCI Environmental. During Fiscal
1994, the Company issued the following shares of Common Stock of the Company:
(1) 10,000 shares valued at $2.50 per share to the Company's patent counsel for
services; and (2) 3,000 shares valued at $2.50 per share and 1,000 shares valued
at $1.25 per share issued to separate individuals for services performed on
behalf of FCI Environmental.
Effective October 22, 1993, the Company entered into a Consulting Agreement
with Liviakis Financial Communications, Inc. ("Liviakis"). Liviakis was to
provide consulting services to the Company for a 24 month period. These
services are in connection with financial public relations, and investment
markets and other matters relating to corporate finance. Liviakis received
1,730,000 shares of FCI's Common Stock (valued at $1.09 per share) in
consideration for the foregoing. In addition, the Company also agreed to pay
Liviakis a fee, during the aforementioned period, of 4,375 shares of FCI's
Common Stock per month. Of the aggregate consideration for these agreements,
the portion attributable to services to be provided in the future has been
included in deferred compensation in the accompanying consolidated financial
statements as of September 30, 1995 and 1994 and is being amortized over the
term of the agreement. The Liviakis agreement provided that Liviakis would
provide a significant portion of the services required under the agreement in
the first 30-60 days of the agreement. These activities included significant
and immediate direct communications with existing stockholders, stockbrokers and
others to maintain and enhance visibility of the Company in the financial and
investment community; the identification, discussion and analysis of candidates
for possible mergers and acquisitions; introductions to corporate financial and
technical consultants; and other financial and corporate matters. Since these
activities were not directly attributable to capital raising activities, they
have been expensed by the Company. Further, in October 1993, the Company paid
an individual associated with the Liviakis agreement 183,500 shares of the FCI's
Common Stock, valued at $1.09 per share, which was equal to 10% of the fee paid
to Liviakis. During Fiscal 1995 and 1994, the Company expensed an aggregate of
$57,225 and $2,137,974, respectively, related to these agreements. As of
December 1, 1995, at the Company's request, Liviakis agreed not to sell any of
the Company's stock held by Liviakis for a period of six months. In addition,
during December 1995, the Company's directors and officers agreed, at the
Company's request, not to sell any of the Company's securities held by them for
a period of six months. These commitments include approximately 2,288,224
shares of Common Stock, 176,428 shares of Convertible Preferred Stock, and
1,676,552 options and warrants to purchase Common Stock.
In November 1993, the Company entered into an agreement with Irwin J.
Gruverman ("Gruverman") to provide consulting services to the Company and its
subsidiaries for a two-year period. These services include, but are not limited
to, medical applications of FCI's FOCS-Registered Trademark- technology, funding
and business relationships, personnel recommendations, technology review and
financial consulting. Gruverman was granted options to purchase 150,000 shares
of FCI's Common Stock at $2.00 per share, which price was above the fair market
value of the Common Stock when the option was granted, exercisable until
September 15, 1996. In April 1994, Gruverman was granted options to purchase
20,000 shares of FCI's Common Stock under the same terms for agreeing to serve
on the Board of Directors of the Company (see "Item 10. Executive Compensation
- - Consulting Agreements").
See "Item 10. Management - Executive Compensation" and Note 7 to the
Company's Consolidated Financial Statements for information concerning the
Company's material contracts for compensation and rent.
RESULTS OF OPERATIONS
The Company's total revenues for Fiscal 1995 were $1,149,122 as compared to
total revenues of $239,382 for Fiscal 1994. The Company's current products were
introduced during Fiscal 1994, and the first sales of the PHA-100 were recorded
in March 1994. Initial sales of the CMS-5000, introduced in May 1994, were
recorded in September 1994. During Fiscal 1995, the Company recruited and
trained a
14
<PAGE>
United States sales organization consisting of independent manufacturer's
representatives and entered into agreements with European, Asian and other
foreign companies for the marketing and distribution of its products in their
respective international territories. The Company and its representatives and
distributors have made significant numbers of product demonstrations and
provided a substantial number of price quotes to existing and potential
customers. Management believes that a substantial portion of such quotes will
result in a significant increase in revenues during Fiscal 1996 although there
can be no assurances that such will be the case.
During Fiscal 1995, the Company had cost of revenues of $519,226, or a
gross profit of 55% of sales, as compared to cost of revenues of $123,972, or a
gross profit of 48%, during Fiscal 1994. The increase in gross profit and gross
profit margin resulted from the increased sales volume and from an increase in
CMS-5000 sales as a percent of total sales. The CMS-5000 carries a higher gross
profit as a percent of net selling price.
Revenues from one customer were $213,100 and $43,215 during Fiscal 1995 and
Fiscal 1994, respectively. Revenues from another customer amounted to $74,400
and $32,250 during Fiscal 1995 and Fiscal 1994, respectively.
The Company's research and development and engineering expenditures
declined to $1,184,415 during Fiscal 1995 from $2,320,065 during Fiscal 1994.
During Fiscal 1994, the Company's research and development and engineering
expenditures included substantial expenditures related to prototypes, testing,
and third party certifications of the Company's products introduced during
Fiscal 1994. The Company has focused its research and development and
engineering efforts on its hydrocarbon sensors and systems and has also
maintained its aggressive Sensor-on-a-Chip-TM- development program with TI (see
"Item 1. Business - Research and Development").
The Company incurred general and administrative expenses of $1,483,339
during Fiscal 1995 as compared to $1,699,542 for Fiscal 1994. The decrease of
13% in Fiscal 1995 from Fiscal 1994 is primarily attributable to reductions in
administrative and executive personnel and compensation.
During Fiscal 1994, the Company expensed $2,137,974, as the result of the
issuance of an aggregate of 2,018,500 shares of FCI's Common Stock, of which
56,875 were held in escrow at September 30, 1994, valued at $1.09 per share,
relating to the agreement with Liviakis. During Fiscal 1995, the Company
expensed $57,225 related to 52,500 of the shares of Common Stock held in escrow
at September 30, 1994, and at September 30, 1995, 4,375 shares of Common Stock
were held in escrow. See Note 5 of the notes to the Company's Consolidated
Financial Statements. Also during Fiscal 1995, the Company expensed $100,000
for consulting services related to strategic business, marketing and financial
planning.
Marketing expenses during Fiscal 1995 and Fiscal 1994 were $681,775 and
$212,863, respectively. The increase of $468,912, or 220%, reflects increased
personnel, travel and other costs related to the recruiting, training and
support of the Company's manufacturer's representatives and distributors, as
well as an increase in commissions to its representatives on increased sales
revenue.
During Fiscal 1995, the Company determined that certain inventories
purchased during 1992 for resale with the Company's products would no longer be
offered for sale, and accordingly wrote off the cost of such inventories in the
amount of $70,489.
During Fiscal 1995, the Company discontinued certain foreign patent
applications on certain limited technologies. Underlying United States and
certain issued foreign patents applicable to such technology are being
maintained. Also during Fiscal 1995, the Company determined that further
15
<PAGE>
development or licensing of certain technologies related to potential medical
applications would be unlikely in the short term. Therefore, the Company
expensed patent application and prosecution costs incurred to date of $124,384
less accumulated amortization of $40,395, and technology acquisition costs of
$68,000 less accumulated amortization of $62,841.
The Company earned fees and grants of $57,848 in Fiscal 1994 in connection
with a contract with the United States' Advanced Research Projects Agency
("ARPA") for the detection of illegal narcotics. The Company completed the
first-phase contract (proof of principle) in February 1994. It is unlikely that
a second-phase contract (prototype) will be entered into with ARPA.
Interest income during Fiscal 1995 was $211,853, as compared to $190,901
during Fiscal 1994, an increase of $20,952 or 11%. Interest income consists
primarily of interest earned on the Company's cash and short-term investments
and on notes receivable for the exercise of stock options and for the sale of a
subsidiary. Interest income from cash and short-term investments during Fiscal
1995 was $82,789, compared to $118,951 during Fiscal 1994, reflecting the
decrease in cash and short-term investments during Fiscal 1995. Interest income
from notes receivable was $129,064 during Fiscal 1995 and $71,950 during Fiscal
1994. Notes receivable for the exercise of options were executed on March 15,
1994 and carried an initial annual interest rate of 5% which increased to 7%
annually as of September 15, 1994.
Interest expense consists primarily of interest on insurance premium
installment payments and the December 1994 loan from Bank of America Nevada (see
Note 4 of the Notes to the Company's Consolidated Financial Statements).
As a result of the foregoing, during Fiscal 1995, the Company incurred a
net loss of $2,829,307, or $0.14 per share as compared with a net loss of
$6,005,513, or $0.35 per share for Fiscal 1994. The net loss during Fiscal 1994
includes a $2,137,974 expense relating to the Liviakis agreement.
Management does not consider that inflation has had a significant effect on
the Company's operations to date, nor is inflation expected to have a material
impact over the next year.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements of the Company are contained in a
separate section of this Form 10-KSB which follows Part III.
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The names, ages and respective positions of the Executive Officers and
Directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Scott J. Loomis 47 Chairman of the Board and Class B Director
Leonard Chill 63 Chairman of the Board and Class C Director (retired 8/95)
Geoffrey F. Hewitt 52 President and Chief Executive Officer
Walter Haemmerli 66 Class B Director
Gerald T. Owens 68 Class C Director
Irwin J. Gruverman 62 Class A Director
Dale W. Conrad 55 Class A Director
Byron A. Denenberg 61 Class C Director
Melvin W. Pelley 51 Chief Financial Officer and Secretary
</TABLE>
The names, ages and respective positions of the Executive Officers and
Directors of FCI Environmental are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Dale W. Conrad 55 Chairman of the Board and Director
Geoffrey F. Hewitt 52 President, Chief Executive Officer and Director
Melvin W. Pelley 51 Chief Financial Officer, Secretary and Director
Scott J. Loomis 47 Director
David R. LeBlanc 39 Vice President - Sales and Marketing
</TABLE>
SCOTT J. LOOMIS has served as Chairman of the Board of Directors since
August 1995 and as a Director of the Company since June 1989. He served as
President of the Company from April 1994 to August 1995. Mr. Loomis has
served as a Director of FCI Environmental since January 1990. Mr. Loomis has
served as a Director of AgriBioTech, Inc. ("ABT"), formerly a subsidiary of the
Company, since January 1988, as Vice President of ABT since April 1994 and as
President from June 1992 until March 1994. Mr. Loomis spends a small percentage
of his business time on the Company's affairs. Since 1985, Mr. Loomis has been
President of AgriResearch and Development, Inc. From 1979 until July 1986, Mr.
Loomis was President of MLM Properties Ltd., engaged in real estate investments.
Mr. Loomis has been a licensed attorney in the State of Arizona since 1974.
17
<PAGE>
LEONARD CHILL served as Chairman of the Board of Directors since April 1994
and as a Director of the Company since July 1989. He retired from these
positions in August 1995. Mr. Chill has served as President and Chief Executive
Officer of Synthetic Industries, a textile manufacturer located in Georgia,
since 1973.
GEOFFREY F. HEWITT has served as President and Chief Executive Officer of
the Company, as well as Chief Executive Officer of FCI Environmental since
August 1995. He has also served as President and Director of FCI Environmental
since April 1994. He served as Chief Operating Officer of FCI Environmental
from April 1994 to August 1995. Prior thereto, from 1977 until March 1994, Mr.
Hewitt served as Vice President of worldwide sales and marketing for H.N.U.
Systems, Inc., a manufacturer of environmental and material analysis
instrumentation.
WALTER HAEMMERLI has served as a Director of the Company since February
1990. Mr. Haemmerli has been the Chief Executive Officer since 1978 of Manport
AG, Zurich, Switzerland, an investment management company owned by him. Mr.
Haemmerli was employed by Union Bank of Switzerland, Geneva, Basle and Zurich
form 1960 to 1978, holding the position of Vice President from 1970. Mr.
Haemmerli serves on the Board of Directors and is Vice-Chairman of Privatbank
Vermag AG, Chur, Switzerland, and is a Member of the Board of Directors for
American Cold Storage, Inc., Louisville, Kentucky.
GERALD T. OWENS has served as a Director of the Company since December
1987. Mr. Owens served with Mobil Oil from 1962 to 1983 when he retired. At
retirement, he was President of Mobil Sales and Supply Corporation, a
wholly-owned subsidiary of Mobil Oil, and he was a Vice President of Mobil Oil.
From 1951 to 1961, Mr. Owens practiced law with the law firm of Andrews and
Kurth in Houston, Texas. Mr. Owens received an L.L.B. degree from the
University of Texas in 1950 and a B.A. degree in history in 1948 from the
University of Texas. He serves as Chairman of the Board of Trustees for the
Kenny Stout Memorial Golf Foundation, and as a member of the Board of Trustees
for the Monterey Institute of International Studies.
IRWIN J. GRUVERMAN has served as a Director of the Company since May 1994.
Since 1990, Mr. Gruverman has served as the General Partner for G&G Diagnostics
Funds, a venture capital business, and in 1982 founded and currently serves as
Chairman of the Board of Directors and Chief Executive Officer of Microfluidics
Corporation, an equipment manufacturer and process research and development
company.
DALE W. CONRAD has served as a Director of the Company since August 1995.
He has also served as Chairman of the Board of Directors of FCI Environmental
since March 1993, as President of Environmental from March 1993 until April
1994, and as Chief Executive Officer of FCI Environmental from March 1993 until
August 1995. Prior thereto, from 1988 to 1991, he was President and Chief
Executive Officer of Biotope, Inc., Redmond, Washington, a defunct company
engaged in the design and manufacturing of blood diagnostic equipment. From
1983 to 1988 he was President of Advanced Technology Laboratories, Inc. ("ATL"),
Bothell, Washington, which manufactures and markets real-time ultrasound medical
diagnostic equipment. From 1981 to 1983 Mr. Conrad was Executive Vice President
and General Manager for Advanced Diagnostic Research Corporation ("ADR"), Tempe,
Arizona, a designer, manufacturer and marketer of diagnostic ultrasound
scanners. From 1965 to 1981, he held various positions at Texas Instruments,
Inc., including Site Manager for the College Station, Texas plant from 1979 to
1981.
BYRON A. DENENBERG has served as a Director of the Company since August
1995. Mr. Denenberg has been a private investor since 1991. Mr. Denenberg was
co-founder in 1969 of MDA Scientific, Inc. ("MDA"), a manufacturer and marketer
of toxic gas monitoring systems, where he was CEO from inception until 1991.
MDA was purchased by Zwellweger Uster AG in 1988. From 1960 to 1969 Mr.
Denenberg held sales, marketing and operation positions in analytic and control
instrumentation with Leeds & Northrup Company, Boston, Massachusetts; Waters
Associates, Framingham,
18
<PAGE>
Massachusetts, and Geneva, Switzerland; and Anacon, Inc., Ashland,
Massachusetts. Mr. Denenberg received a B.S. degree in Mechanical Engineering
from Bucknell University, Lewisburg, Pennsylvania. He currently serves as a
Director of RCT Systems, Inc., MST Measurement Systems, Inc., FPM Analytics,
Inc., Microsensor Technologies, Inc., Safety Assurance Corporation, and KSM
Entertainment Group.
MELVIN W. PELLEY has been the Chief Financial Officer and Secretary of the
Company since April 1994 and has been Chief Financial Officer and Secretary of
FCI Environmental since June 1993. Prior thereto, from 1988 he was Vice
President of Finance and Administration of Acoustic Imaging Technologies
Corporation, Phoenix, Arizona, a manufacturer of diagnostic ultrasound medical
equipment. From 1983 to 1988 he was Director of Costs, Financial Planning and
Analysis of ATL. From 1977 to 1983, Mr. Pelley was Chief Financial and
Administrative Officer for ADR.
DAVID R. LEBLANC has served as Vice President of Sales and Marketing of FCI
Environmental since July 1994. Prior thereto, from 1990 Mr. LeBlanc held
various positions with Bran + Luebbe, Inc., a manufacturer of environmental
testing equipment, including, most recently, as the Sales and Marketing Manager,
North America. From 1987 until 1990, Mr. LeBlanc was the Canadian Sales Manager
of H.N.U. Systems (Canada), Inc.
Officers serve at the discretion of the Board of Directors. All Directors
hold office until the expiration of their terms and the election and
qualification of their successors. The Company's Board of Directors is divided
into three classes of approximately equal size with the members of each class
elected, after an initial phase-in-period, to three-year terms expiring in
consecutive years. Mr. Chill and Mr. Owens were elected to three-year terms as
Directors at the Company's May 1995 Annual Meeting of Stockholders, with Mr.
Denenberg subsequently replacing Mr. Chill, and Mr. Loomis and Mr. Haemmerli
were elected to three-year terms as Directors at the Company's May 1993 Annual
Meeting of Stockholders. Mr. Gruverman was appointed to the Board of Directors
in May 1994. Mr. Conrad and Mr. Denenberg were appointed to the Board of
Directors in August 1995. In January 1993, the Company established a Stock
Option Committee consisting of Leonard Chill and Scott J. Loomis. The Stock
Option Committee is responsible for the granting of stock options under the
Company's 1993 and 1994 Stock Option Plans. The Company also established a
Compensation Review Committee consisting of Leonard Chill and Scott J. Loomis.
The Compensation Review Committee is responsible for reviewing the compensation
of the Company's employees. In August 1995, Mr. Owens and Mr. Haemmerli were
appointed to a single Compensation Review and Stock Option Committee. Also, in
August 1995, Mr. Loomis and Mr. Owens were appointed to a newly established
Audit Committee. The Board of Directors did not have a standing nomination
committee or committee performing similar functions during the fiscal year ended
September 30, 1995.
COMPLIANCE WITH 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, Directors and persons who own more than ten percent of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
Directors and ten percent shareholders are required by regulation to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on the
Company's copies of such forms received or written representations from certain
reporting persons that no Form 5's were required for those persons, the Company
believes that, during the time period from October 1, 1994 to September 30,
1995, all filing requirements applicable to its officers, Directors and greater
than ten percent beneficial owners were complied with, except that one report
covering one transaction was filed one day late by Irwin J. Gruverman.
19
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The compensation paid and/or accrued to each of the executive officers of
the Company and its subsidiaries and of all executive officers as a group, whose
annual compensation exceeds $100,000, for services rendered to the Company
during the three fiscal years ended September 30, 1995, was as follows:
(A) SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
------------------------------------
Annual Compensation Awards Payouts
--------------------------------------- ---------------------- ---------
Long-Term
Other Restricted Securities Incentive All
Name of Individual Fiscal Annual Stock Underlying Plan Other
and Principal Position Year Salary($) Bonus($) Compensation($) Awards($) Options/SARs(#) Payouts($) Compensation($)
- ---------------------- ------ --------- --------- --------------- --------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Geoffrey F. Hewitt 1995 $ 177,596 $ -- $ -- -- 75,000 $ -- $ --
President and CEO of 1994 $ 94,792 $ -- $ -- -- 300,000 $ -- $ --
FiberChem, Inc. and of 1993 $ -- $ -- $ -- -- -- $ -- $ --
FCI Environmental, Inc.
Scott J. Loomis 1995 $ -- $ -- $28,500(1) -- 10,000 $ -- $ --
Chairman of the Board of 1994 $ -- $ -- $53,334(1) -- 44,375(2) $ -- $ --
FiberChem, Inc. 1993 $ -- $ -- $ -- -- 10,000 $ -- $ --
Dale W. Conrad 1995 $ 112,535 $ -- $ -- -- 60,000 $ -- $ --
Chairman of the Board of 1994 $ 222,261 $ -- $ -- -- 205,822(2) $ -- $ --
FCI Environmental, Inc. 1993 $ 126,202 $ -- $ -- -- 450,000 $ -- $ --
Melvin W. Pelley 1995 $ 113,346 $ -- $ -- -- 25,000 $ -- $ --
Chief Financial Officer of 1994 $ 110,000 $ -- $ -- -- 40,000(2) $ -- $ --
FiberChem, Inc. and of 1993 $ 31,660 $ -- $ -- -- 100,000 $ -- $ --
FCI Environmental, Inc.
David R. LeBlanc 1995 $ 123,558 $ -- $ -- -- 5,000 $ -- $ --
Vice President - Sales and 1994 $ 25,080 $ -- $ -- -- 100,000 $ -- $ --
Marketing of 1993 $ -- $ -- $ -- -- -- $ -- $ --
FCI Environmental, Inc.
</TABLE>
(1) Directors' compensation granted during Fiscal 1995 and 1994. Amounts
awarded, net of applicable taxes, have reduced the promissory notes
issued by Mr. Loomis to the Company for the exercise of options.
(2) Options were granted in connection with the early incentive option
plan discussed below, except for 10,000 options granted, at market
price (NASDAQ bid price), to Mr. Loomis in lieu of directors' fees.
(b) OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options/SARs
Underlying Granted Exercise
Options/SARs to Employees or Base Expiration
Name of Individual Granted In Fiscal Year Price($/Share) Date
----------------------- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Geoffrey F. Hewitt 75,000 9.0% $ 1.00 September 30, 1998
Scott J. Loomis 10,000 1.2% $ 1.00 September 30, 1998
Dale W. Conrad 50,000 6.0% $ 1.00 September 30, 1998
10,000 1.2% $ 1.38 September 30, 1998
Melvin W. Pelley 25,000 3.0% $ 1.00 September 30, 1998
David R. LeBlanc 5,000 0.6% $ 1.00 September 30, 1998
</TABLE>
20
<PAGE>
(c) AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Shares Options/SARs Options/SARs
Acquired on Value at Fiscal Year End (#) at Fiscal Year End ($)
Name of Individual Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
------------------ ------------ ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Geoffrey F. Hewitt 21,237 $(4,359)(1) 346,071/0 $151,406/$0
Scott J. Loomis 0 $ 0 110,111(2)/0 $ 48,174/$0
Dale W. Conrad 5,376 $ 462 260,445/0 $113,653/$0
Melvin W. Pelley 3,663 $ 129 61,337/0 $ 26,835/$0
David R. LeBlanc 5,260 $ (1,046) 98,350/0 $ 43,028/$0
Leonard Chill 8,864 $ (453)(1) 72,041/0 $ 31,518/$0
Walter Haemmerli 16,250 $ 6,988 10,000/0 $ 4,375/$0
Irwin J. Gruverman 14,400 $ 6,192 165,600/0 $ 72,450/$0
Byron Denenberg 666 $ 286 9,334/0 $ 4,084/$0
</TABLE>
(1) Certain options were exercised at exercise prices which exceeded fair
market value at the time of exercise, resulting in negative "Value
Realized."
(2) Includes 65,736 options held by AgriResearch & Development, Inc., of which
Mr. Loomis is a Director and principal shareholder.
(d) LONG-TERM INCENTIVE PLANS
Effective January 1, 1994, the Company implemented an Internal Revenue Code
Section 401(k) Profit Sharing Plan (the "Plan"). The Plan provides for
voluntary contributions by employees into the Plan subject to the limitations
imposed by Internal Revenue Code Section 401(k). The Company will match
employee contributions at a rate of 25% of the employee's contribution up to a
maximum of 1% of the employee's compensation. The Company matching funds are
determined at the discretion of management and are subject to a five-year
vesting schedule from the date of original employment.
(e) DIRECTORS COMPENSATION
In March 1994, the Board of Directors approved directors' compensation for
non-management directors. The payment of compensation was made by the Company
through the reduction of promissory notes received for the exercise of stock
options or for the exercise of stock options or Class D Warrants if no
promissory note had been received. During Fiscal 1994, the Company expensed an
aggregate of $158,652 in Directors' compensation for the Company's five non-
management directors, applying $118,568 to the payment of promissory notes and
interest, $30,000 to the exercise of 20,000 stock options and $10,084 of accrued
liabilities and payroll taxes. In addition, for Fiscal 1994, the Company
granted to each of its non-management directors options to purchase 10,000
shares of FCI Common Stock at $1.50 per share. For Fiscal 1993, the Company
granted to its non-management directors each, in lieu of cash, options to
purchase 10,000 shares of FCI Common Stock at $1.50 per share for services
rendered to the Company. Also, in March 1994, the Board of Directors of the
Company adopted the following compensation structure to pay non-management
Directors, the Chairman of the Board (if not serving as a paid management
employee) and President (if not serving as a paid management employee) of the
Company:
21
<PAGE>
<TABLE>
<CAPTION>
Compensation Activity Amount Occurrence
--------------------------------- ----------- -------------
<S> <C> <C>
Base Directors Compensation $10,000 Year
Attendance at Meeting $ 1,000 Meeting
Official Committee Assignment $ 2,000 Year
Chairman of the Board $ 750 Month
President $ 2,000 Month
</TABLE>
During Fiscal 1995, the Company expensed an aggregate of $104,833 in
Directors' compensation for the Company's seven non-management Directors,
applying $48,047 to the payment of promissory notes and interest, $32,318 to the
exercise of 32,056 stock options and $24,468 of accrued liabilities and payroll
taxes. In addition, on April 7, 1995, the Company granted to each of its five
non-management Directors 10,000 options at $1.00 per share, which was the market
value of the Common Stock on that date. On August 25, 1995 and on September 1,
1995 the Company appointed a new Director. Both new Directors were granted
10,000 options at $1.38 per share, which was the market value of the Common
Stock on the date of their respective appointments.
(f) EMPLOYMENT CONTRACTS
Geoffrey F. Hewitt serves under an employment agreement with FCI
Environmental, effective March 14, 1994. Mr. Hewitt is compensated at a rate of
$185,000 per annum and is entitled to receive bonuses, if any, at the discretion
of the Board of Directors. The employment contract is terminable without cause
with 90 days notice. In addition, Mr. Hewitt applies $28,000 of his salary
towards the exercise of employee stock options.
Melvin W. Pelley serves under an employment agreement with FCI
Environmental, effective June 14, 1993. Mr. Pelley is compensated at a rate of
$120,000 per annum, and is entitled to receive bonuses, if any, at the
discretion of the Board of Directors. The employment contract is terminable
without cause with 90 days notice. In addition, Mr. Pelley applies 5% of his
net pay to the payment on the promissory notes held by the Company for the
exercise of options and applies $7,500 of his salary towards the exercise of
employee stock options.
David R. LeBlanc serves under an employment agreement with FCI
Environmental, effective July 18, 1994. Mr. LeBlanc is compensated at a rate of
$125,000 per annum and is entitled to receive bonuses, if any, at the discretion
of the Board of Directors. The employment contract is terminable without cause
with 90 days notice. In addition, Mr. LeBlanc applies $10,000 of his salary
towards the exercise of employee stock options.
(g) CONSULTING AGREEMENTS
The Company entered into a Consulting Agreement with Liviakis, effective as
of October 22, 1993. Liviakis is to provide consulting services to the Company
for a 24 month period. These services are in connection with financial public
relations and investment markets and other matters relating to corporate
finance. Liviakis received 1,730,000 shares of the Company's Common Stock
(valued at $1.09 per share) in consideration of the foregoing. In addition, the
Company has agreed to pay Liviakis a monthly fee during the aforementioned
period of 4,375 shares of Common Stock. See "Item 6. Management's Discussion
and Analysis or Plan of Operation - Liquidity and Capital Resources." Liviakis
did not receive any of the aforementioned compensation as a sales agent in the
Company's Convertible Preferred Stock offering.
In November 1993, the Company entered into an agreement with Irwin J.
Gruverman to provide consulting services to the Company and its subsidiaries for
a two year period. These services include, but are not limited to, medical
applications of FCI's FOCS-Registered Trademark- technology, funding and
business relationships,
22
<PAGE>
personnel recommendations, technology review and financial consulting. Mr.
Gruverman was granted options to purchase 150,000 shares of FCI's Common Stock
at $2.00 per share, exercisable until September 15, 1996. In April 1994, Mr.
Gruverman was granted options to purchase 20,000 shares of FCI's Common Stock
under the same terms for agreeing to serve on the Board of Directors of the
Company.
In April 1994, the Company entered into noncancellable consulting
agreements with the Company's former President, Johnny R. Thomas and Vice
President, John C. Francis. Under the terms of the consulting agreements, these
two individuals are to provide services to the Company from April 1994 through
September 1995 and will each be compensated at a rate of $66,000 (net of payroll
taxes) per annum. The agreements cannot be cancelled for any reason. See "Item
10. Executive Compensation-(f) Employment Contracts" above.
In August 1995, the Company entered into an agreement with Dale W. Conrad
to provide consulting services to the company on an as requested basis at an
hourly rate. The services include advice and assistance in technical,
operational, and administrative matters. From August through December, 1995,
the Company paid Mr. Conrad $8,394 under this agreement, all of which was
applied to promissory notes and to the exercise of stock options. The agreement
is terminable by either party upon written notice.
In September 1995, the Company proposed a form of agreement with Gordon
Werner and other individuals ("Werner") pursuant to which Werner would be
compensated for marketing strategy and business and financial planning services
for the Company. In consideration for these services, Werner was granted
warrants to purchase 200,000 shares of Common Stock of the Company at an
exercise price of $1.50 per share and compensation in the amount of $100,000,
which was expensed by the Company in Fiscal 1995.
(h) STOCK OPTIONS
The Company has adopted three stock option plans during the past three
fiscal years in order to compensate officers, Directors and their affiliates,
employees, consultants and others who have been instrumental in the success of
the development of the Company's FOCS-Registered Trademark- technology and the
introduction of the Company's products. These stock option plans have included
incentive stock options and non-qualified stock options with varying exercise
prices and expiration dates. In January 1993, the Company's Board of Directors
adopted a 1993 Employee Stock Option Plan ("1993 Plan"), approved by
stockholders at the May 1993 Annual Stockholders Meeting, covering an aggregate
of 2,300,000 shares of FCI Common Stock. As of September 30, 1995, all shares
in connection with this plan have been issued (with initial exercise prices
ranging from $1.28 per share to $2.25 per share and current exercise prices of
$1.00 per share).
On October 15, 1993, the Board of Directors of the Company approved a plan
which would simplify the current stock options granted under these various
plans. It was resolved that all previously granted employee and Director
variable priced options and all other fixed priced plans, excluding 41,819
options allocated to the payment of promissory notes to officers of the Company
and 994,899 options originally granted to Medit Mediterranean G.P.L. s.r.l.
("Medit") and subsequently assigned to others, have a fixed exercise price of
$1.50 per share and an expiration date of September 15, 1996. In addition, the
Board of Directors resolved that all options previously granted or to be granted
to employees and directors are transferable to third parties, except for those
options granted under the 1993 Plan. The market price of the Company's Common
Stock was less than $1.50 on October 15, 1993. Options granted to consultants
were not changed by the Board of Directors.
Also, in October 1993, the Board of Directors approved a plan to
encourage early exercise of stock options held by employees and Directors and
all holders of Class D Warrants. Forty
23
<PAGE>
holders who owned an aggregate of 3,028,954 options were granted one new option
to purchase one share of FCI's Common Stock at $1.50 per share until September
15, 1996 for each two options then owned. These new options become exercisable,
pro-rata, when existing options are exercised; however, 50% of the new options
expired March 15, 1994 for the pro-rata portion of old options that were not
exercised by that date, and the remaining 50% of the new options expired on May
27, 1994 for the pro-rata portion of the old options that were not exercised by
that date. As of May 27, 1994, 174,071 of the 1,514,477 new options issued had
expired. All owners of Class D Warrants were granted a right to receive one new
Class D Warrant to purchase one share of FCI's Common Stock at $1.50 per share
until September 15, 1996 for each four Class D Warrants then owned. These new
warrant rights become exercisable, pro-rata, when existing Class D Warrants are
exercised; however, the new warrant rights expired March 15, 1994 if the
existing Class D Warrants were not then exercised. Accordingly, as of March 15,
1994, 104,203 new Class D Warrants were issued and 477,047 rights to Class D
Warrants expired.
In March 1994, the Company's Board of Directors approved a plan by which
employees and Directors of the Company and its subsidiaries would be given an
opportunity to exercise stock options eligible under the early incentive plan
described above through the execution of promissory notes. As of March 15,
1994, the Company received promissory notes aggregating $1,815,099 for the
exercise of 1,210,066 stock options. The promissory notes bear interest at 5%
per annum until September 15, 1994, and at 7% per annum thereafter, and were
initially due on or before September 15, 1995. Employees have agreed to apply
5% or more of their net paycheck each pay period toward payment of their
respective note until the note is paid in full. On April 7, 1995, the Board of
Directors extended the due date of the notes to March 15, 1998. The underlying
FCI Common Stock is being held in escrow, as collateral, until payment is made
on the promissory notes. As of September 30, 1995, an aggregate of $217,262
has been paid on these notes.
In March 1994, the Company's Board of Directors adopted a 1994 Employee
Stock Option Plan ("1994 Plan"), approved by stockholders at the May 1994 Annual
Stockholders meeting, covering an aggregate of 1,000,000 shares of FCI Common
Stock. As of September 30, 1995, the Company has issued options to purchase
975,578 shares of FCI Common Stock (with initial exercise prices ranging from
$1.00 per share to $2.125 per share and current exercise prices of $1.00 per
share) under the 1994 Plan to employees of the Company's wholly-owned
subsidiary, FCI Environmental.
In December 1994, the Board of Directors of the Company granted options to
purchase 150,000 shares of FCI Common Stock at an exercise price of $1.50 per
share to a former consultant to the Company for services. The exercise price
was changed to $1.00 on April 7, 1995 (on which date the market value of the
Common Stock was $1.00) and the expiration date was extended from June 30, 1995
to September 30, 1995. As of September 30, 1995, all options had been exercised
at a total exercise price of $150,000.
In April 1995, the Company's Board of Directors adopted a 1995 Employee
Stock Option Plan ("1995 Plan"), approved by the stockholders at the May 8, 1995
Annual Stockholders Meeting, covering an aggregate of 1,000,000 shares of FCI
Common Stock. As of September 30, 1995, the company has issued 87,543 stock
options (with initial and current exercise prices ranging from $1.00 per share
to $1.38 per share) under the 1995 Plan to employees of FCI Environmental and
Directors of FCI.
On April 7, 1995, the Company's Board of Directors resolved that all
options to purchase shares of the Company's Common Stock granted prior to April
7, 1995, and which had an exercise price in excess of $1.00 per share, would as
of April, 7, 1995 have an exercise price of $1.00 per share, which price was
above the fair market value of the Common Stock as of the last quoted market
trade on April 7, 1995. Options to purchase an aggregate of 2,309,479 shares at
prices ranging from $1.125 to $2.15 per share were accordingly changed to $1.00
per share.
On August 1, 1995, the Company's Board of Directors resolved that the
exercise price of all outstanding Class D Warrants be changed from $1.50 per
share to $1.00 per share, which price was above
24
<PAGE>
the fair market value of the Common Stock as of the last quoted market trade on
August 1, 1995. During Fiscal 1995, no Class D Warrants were exercised. The
Company received cash proceeds of $650,850 for the exercise of 433,900 Class D
Warrants during Fiscal 1994. As of September 30, 1995, the Company has
outstanding Class D Warrants for the purchase of 1,999,385 shares of Common
Stock at $1.00 per share. All Class D Warrants are currently exercisable and
expire on September 15, 1996.
Since inception through September 30, 1995, of all stock option plans and
grants, the Company has received an aggregate of $5,772,083 from the exercise of
4,680,069 options, including $1,815,099 for the exercise of stock options upon
the receipt of promissory notes discussed above.
During Fiscal 1995, certain options to purchase FCI Common Stock involving
executive officers of the Company earning in excess of $100,000 were repriced.
The table on the following page provides information regarding the repricing of
certain options:
<TABLE>
<CAPTION>
Length of
Number of Original
Securities Market Price Exercise Option Term
Underlying of Stock at Price at Remaining at
Options/SARs Time of Time of New Date of
Repriced or Repricing or Repricing or Exercise Repricing or
Name of Individual Date Amended (#) Amendment ($) Amendment ($) Price ($) Amendment
------------------ ---------- -------------- ---------------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Geoffrey F. Hewitt 4-7-95 78,366 $1.00 $1.625 $1.00 527 days
4-7-95 68,750 $1.00 $1.625 $1.00 708 days
4-7-95 68,750 $1.00 $1.625 $1.00 892 days
4-7-95 68,750 $1.00 $1.625 $1.00 1073 days
Scott J. Loomis 4-7-95 100,111(1) $1.00 $1.50 $1.00 527 days
Dale W. Conrad 4-7-95 205,821 $1.00 $1.50 $1.00 527 days
Melvin W. Pelley 4-7-95 40,000 $1.00 $1.50 $1.00 527 days
David R. LeBlanc 4-7-95 95,274 $1.00 $1.50 $1.00 1073 days
Leonard Chill 4-7-95 70,381 $1.00 $1.50 $1.00 527 days
Irwin Gruverman 4-7-95 170,000 $1.00 $2.00 $1.00 527 days
Gerald T. Owens 4-7-95 27,500 $1.00 $1.50 $1.00 527 days
Privatbank 4-7-95 19,500 $1.00 $1.50 $1.00 527 days
</TABLE>
(1) Includes options to purchase 65,736 shares held by AgriResearch &
Development, Inc., of which Mr. Loomis is a Director and principal
shareholder.
(i) STOCK BONUS PLANS
On February 20, 1990, the Company's stockholders authorized the
Board of Directors to design and implement a stock bonus plan providing for
the issuance of up to 143,000 shares of Common Stock which have been
registered and reserved for issuance. In May 1990, the Board of Directors
adopted the Company's Employee Stock Bonus Plan ("Bonus Plan"). Pursuant
to the Bonus Plan, full-time employees of the Company will be granted a
stock bonus equivalent to 15% of their annual salary. The stock granted
under the Bonus Plan is vested at a rate of 20% per year. However, an
employee must work 12 consecutive months before any stock is vested. All
employees of the Company, including, but not limited to, its executive
officers, received shares under the Bonus Plan. As of September 30, 1995,
an aggregate of 143,000 shares of Common Stock were eligible to be received
with 142,497 actually being vested by employees. For the fiscal years
ended September 30, 1995 and 1994, no executive officer received any shares
of Common Stock under the Bonus Plan. In addition, an aggregate of 15,000
shares of Common Stock are available to be granted as bonus compensation at
the discretion of the Managing Committee ("Discretionary Bonus Plan"). As
of December 1995, 8,500 Discretionary Bonus Plan shares have been
25
<PAGE>
issued to employees of the Company. For the fiscal years ended September 30,
1995 and 1994, no shares of FCI Common Stock under the Discretionary Bonus Plan
were granted to any executive officers.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date of this Report, certain
information concerning those persons known to the Company, based on information
obtained from such persons, with respect to the beneficial ownership (as such
term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) of
shares of Common Stock, $.0001 par value, of the Company by (i) each person
known by the Company to be the owner of more than 5% of the outstanding shares
of Common Stock, (ii) each Director and executive officer of the Company and its
subsidiaries, (iii) each executive officer named in the Summary Compensation
Table and (iv) all officers and Directors as a group:
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address of Beneficial Percentage of
Beneficial Owner Ownership (1) Class (2)
------------------------ ---------------- ----------------
<S> <C> <C>
Scott J. Loomis 1,154,801 (5) 5.6%
P.O. Box 35238
Tucson, AZ 85740
Gerald T. Owens 182,323 (7) (4)
32 Los Robles Road
Carmel Valley, CA 93924
Walter Haemmerli 2,788,050 (6) 12.3%
Manport AG
Basteiplatz 3, CH 8001
Zurich, Switzerland
Irwin J. Gruverman 308,060 (8) 1.5%
30 Ossipee Road
Newton, MA 02164
Byron A. Denenberg 30,000(13) (4)
RCT Systems, Inc.
327 Messner Drive
Wheeling, IL 60090
Dale W. Conrad 725,822 (9) 3.5%
7204 Wellington Point Road
McKinney, TX 75070
Geoffrey F. Hewitt (3) 375,000(10) 1.8%
Melvin W. Pelley (3) 165,000(11) (4)
David R. LeBlanc (3) 105,000(12) (4)
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address of Beneficial Percentage of
Beneficial Owner Ownership (1) Class (2)
----------------------------- -------------------- --------------------
<S> <C> <C>
Liviakis Financial 1,835,000 8.9%
Communications, Inc.
2118 P. Street Suite C
Sacramento, CA 95816
All Directors and Officers as 5,834,056 24.2%
a Group (9 persons)
</TABLE>
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole investment power with respect to all shares of Common Stock
beneficially owned by them. A person is deemed to be the beneficial owner
of securities that can be acquired by such person within 60 days from the
date hereof upon the exercise of warrants or options or upon the conversion
of convertible securities. Each beneficial owner's percentage ownership is
determined by assuming that options or warrants or shares of Convertible
Preferred Stock that are held by such person (but not those held by any
other person) and which are exercisable or convertible within 60 days from
the date hereof have been exercised or converted.
(2) Based on 20,611,844 shares issued and outstanding as of December 26, 1995.
(3) The address of this person is c/o FCI Environmental, Inc., 1181 Grier
Drive, Suite B, Las Vegas, Nevada 89119.
(4) Represents less than one percent ownership.
(5) Includes 32,353 Class D Common Stock Purchase Warrants and an aggregate of
44,375 shares of Common Stock issuable upon exercise of a like number of
options. Includes 452,140 shares of Common Stock held in escrow against
promissory notes for the exercise of options. Also includes 486,668 shares
of Common Stock, 151,590 Class D Common Stock Purchase Warrants and 65,736
shares of Common Stock issuable upon exercise of a like number of options
held by Agri Research and Development, Inc., of which Mr. Loomis is a
Director and principal stockholder.
(6) Includes 32,000 Class D Common Stock Purchase Warrants, 3,586 shares of
Convertible Preferred Stock convertible into 35,860 shares of Common Stock,
and an aggregate of 10,000 shares of Common Stock issuable upon exercise of
a like number of options. Also includes 602,056 shares of Common Stock,
433,830 Class D Common Stock Purchase Warrants, 165,286 shares of
Convertible Preferred Stock convertible into 1,652,860 shares of Common
Stock and an aggregate of 2,194 shares of Common Stock issuable upon
exercise of a like number of options, all held by Privatbank Vermag A.G.,
Chur, Switzerland, as custodian for certain customers, of which company Mr.
Haemmerli is Vice-Chairman.
(7) Includes 39,965 Class D Common Stock Purchase Warrants and an aggregate of
37,500 shares of Common Stock issuable upon exercise of a like number of
options. Includes 26,866 shares of Common Stock held in escrow against
promissory notes for the exercise of options.
(8) Includes 163,080 shares of Common Stock issuable upon exercise of a like
number of options. Also includes 2,500 shares of Common Stock held by G&G
Diagnostics, L.P. I, 15,000 shares of Common Stock held by G&G Diagnostics,
L.P. II, and 7,556 shares of Convertible Preferred Stock convertible into
75,560 shares of Common Stock held by G&G Diagnostics, L.P. III, all of
which Mr. Gruverman is a principal.
(9) Includes an aggregate of 257,299 shares of Common Stock issuable upon
exercise of a like number of options. Includes 402,477 shares of Common
Stock held in escrow against promissory notes for the exercise of options.
(10) Includes an aggregate of 339,819 shares of Common Stock issuable upon
exercise of a like number of options.
27
<PAGE>
(11) Includes an aggregate of 59,609 shares of Common Stock issuable upon
exercise of a like number of options. Includes 80,000 shares of Common
Stock held in escrow against promissory notes for the exercise of options.
(12) Includes an aggregate of 98,350 shares of Common Stock issuable upon
exercise of a like number of options.
(13) Includes an aggregate of 7,202 shares of Common Stock issuable upon
exercise of a like number of options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Item 10. Executive Compensation" for information concerning stock
options granted and employment and consulting agreements entered into during
Fiscal 1994 and Fiscal 1995 with officers and Directors of the Company.
The Company signed an agreement effective June 30, 1992, to sell its
wholly-owned subsidiary, ABT to the Company's former President, Johnny R. Thomas
(25% interest), the Company's former Vice-President, John C. Francis (25%
interest; which interest was subsequently transferred to Dr. Thomas when Mr.
Francis declined employment with ABT and reacquired by Mr. Francis when he
joined ABT in April 1994), the Company's current President, Scott J. Loomis (25%
interest), and an officer of ARD, an entity affiliated with Mr. Loomis and a
principal stockholder of the Company (25% interest) (collectively referred to as
the "Purchaser"). The Purchaser agreed to purchase all of the issued and
outstanding shares of Common Stock of ABT, which were all owned by the Company,
for the approximate book value of ABT of $551,116, after eliminating
intercompany accounts of approximately $1,247,700, and less a contingent
liability to ARD for future royalties due from the Company. The net sales price
of $425,559 is payable in four equal installments of principal plus interest at
a rate of 8% per annum, commencing on July 1, 1993 and annually thereafter until
paid in full. As of December 27, 1995, the Purchaser owed $106,390 principal
amount to the Company. In addition, the Purchaser shall pay a royalty to the
Company on certain products sold for a period of ten years commencing on the
date the first commercial sales of these products are made by the new company.
As of September 30, 1995, the Company received royalties from ABT for commercial
sales of ABT's products of $2,416 cash and accrued a receivable of $2,440 for
Fiscal 1993 and Fiscal 1994, respectively. The Company sold ABT because ABT's
purpose (to design, develop, manufacture and market various products for
applications in all phases of the agriculture industry) was not related to FCI's
primary business. The Company had been unable to devote time to the further
development of ABT's technology, having decided to focus the Company's efforts
on fiber optic chemical sensor technology.
In March 1994, the Company's Board of Directors approved a plan by which
employees and directors of the Company and its subsidiaries would be given an
opportunity to exercise stock options eligible under the Company's early
incentive plan through the execution of promissory notes (see Item 10. Executive
Compensation - Stock Option Plans). As of March 15, 1994, the Company received
promissory notes aggregating $1,815,099 for the exercise of 1,210,066 stock
options. The promissory notes bear interest at 5% per annum until September 15,
1994, and at 7% per annum thereafter, and are due on or before September 15,
1995. Employees have agreed to apply 5% or more of their net paycheck each pay
period toward payment of their respective note until the note is paid in full,
plus all employees and directors have agreed to pay an additional 5% of the note
on or before March 15, 1995. The underlying FCI Common Stock is being held in
escrow, as collateral, until payment is made on the promissory notes. As of
September 30, 1995, an aggregate of $217,262 has been paid on these notes.
In July 1994, the Company and Medit terminated their exclusive distributor
agreement dated September 24, 1991. The Company paid $60,000 in October 1994
for the return of all products purchased by Medit, the return of all proprietary
information, including but not limited to, research and development data,
drawings, processes, specifications, inventions, sales and customer information,
patents, trademarks and other similar information. Beginning in December 1991,
Medit signed a series of private placement equity agreements, wherein Medit
agreed to invest an aggregate of $3,600,000 for the
28
<PAGE>
purchase of 3,000,000 shares of FCI Common Stock and 1,500,000 Common Stock
options, exercisable at the lower of $1.50 per share or $.50 per share below the
NASDAQ bid price on the date of option exercise. The $3,600,000 was evidenced
by notes receivable, was to be paid over five dates between February 20, 1992
and June 30, 1994. Medit authorized the Company's management to negotiate the
assignment of Medit's notes payable and its options to third parties in
financing transactions deemed to be of value to the Company. As of January
1993, the Company had received the full $3,600,000 amount due on the notes. In
addition, as of September 30, 1995, the Company had received an aggregate of
$1,203,203 from the exercise of all the 1,500,000 Common Stock options. The
Managing Director of Medit served on the Company's Board of Directors until his
resignation effective April 1, 1994.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
The following is a complete list of exhibits which are incorporated herein as
part of this Report.
3.1 Articles of Incorporation of Registrant, as amended. (1)
3.2 By-Laws of Registrant. (2)
4.2 Class D Warrant Agreement of the Registrant with form of Warrant
Certificate. (3)
10.1 Lease Agreement and Reimbursement Agreement dated July 27, 1989 by and
between the Company and Howard Hughes Properties for Hughes Airport
Center, 1181 Grier Drive, Suite B, Las Vegas, Nevada. (4)
10.2 Employee Stock Bonus Plan. (3)
10.3 Amendments dated October 23, 1990 and February 21, 1991 to the Industrial
Real Estate Lease (Exhibit 10.10) for the Company's facilities. (5)
10.4 Licensing, Production and Marketing Agreement dated May 10, 1991 with
Sippican, Inc. (6)
10.5 Distribution Agreement by and between Medit Mediterranea G.P.L. s.r.l.
dated September 24, 1991. (7)
10.6 Amendment dated May 6, 1991 and September 26, 1991 to the Industrial Real
Estate Lease (Exhibit 10.10) for the Company's facilities. (8)
10.7 Amendment dated September 25, 1991 to the Sippican Licensing Agreement.
(8)
- --------------------------
(1) Incorporated by reference from the Company's January 13, 1988 Post
Effective Amendment to the Registration Statement on Form S-18 (File No.
33-12097-C) as declared effective on March 3, 1988.
(2) Incorporated by reference from the Company's April 15, 1987 Amendment to
the Registration Statement on Form S-18 (File No. 33-12097-C) as declared
effective on March 3, 1988.
(3) Incorporated by reference from the Company's Registration Statement No.
33-35985
(4) Incorporated by reference from the Company's Registration Statement No.
33-29338.
(5) Incorporated by reference from the Company's April 24, 1991 Post
Effective Amendment to the Registration Statement on Form S-18 (File No.
33-35985) as declared effective on April 30, 1991.
(6) Incorporated by reference from the Company's Current Report on Form 8-K
for May 17, 1991.
(7) Incorporated by reference from the Company's Current Report on Form 8-K
for September 24, 1991.
(8) Incorporated by reference from the Company's Annual Report on Form 10-K
for September 30, 1991.
29
<PAGE>
10.8 Agreement dated December 17, 1991 by and between the Company and Medit
Mediterranea G.P.L. s.r.l. (9)
10.9 Agreement dated January 1992 by and between the Company and Texas
Instruments, Inc. (10)
10.10 Agreement dated January 25, 1992 by and between the Company and M Squared
Technology, Ltd. (11)
10.11 Agreement dated January 27, 1992 by and between the Company and Medit
Mediterranea G.P.L. s.r.l. regarding private stock placement. (11)
10.12 Non-qualified stock option plan. (12)
10.13 Asset Purchase and Consulting Agreement dated April 15, 1992 between the
Company and Otto Wolfbeis. (13)
10.14 Agreement dated December 10, 1992 by and between the Company and
Tanknology Environmental, Inc. (14)
10.15 Agreement dated June 17, 1992 by and between the Company and Johnny R.
Thomas, John C. Francis, Scott J. Loomis and Reese Woodling. (15)
10.16 Agreement dated December 15, 1992 by and between the Company and
Privatbank Vermag AG regarding the extension of bonds. (15)
10.17 Employment contract with Dale W. Conrad, as amended, dated March 3, 1993.
(15)
10.18 Agreement by and between the Company and M Squared Technology, Ltd.,
dated April 1, 1993. (16)
10.19 Termination agreement with Tanknology Environmental, Inc., dated April
27, 1993. (16)
10.20 Qualified Stock Option Plan. (17)
10.21 Consulting agreement by and between the Company and with Irv J.
Gruverman, dated November 4, 1993. (18)
10.22 Promissory notes dated July 9 and July 30, 1993 by the Company to the
order of John C. Francis. (18)
- ------------------------------
(9) Incorporated by exhibit by reference from the Company's Current Report on
Form 8-K for December 17, 1991.
(10) Incorporated by exhibit by reference from the Company's Current Report on
Form 8-K for January 8, 1992.
(11) Incorporated by reference from the Company's Current Report on Form 8-K
for January 25, 1992.
(12) Incorporated by reference from the Company's Registration Statement on
Form S-8 for April 28, 1992. (No. 33-47518).
(13) Incorporated by reference from the Company's Registration Statement on
Form S-3 for May 14, 1992. (No. 33-47614).
(14) Incorporated by reference from the Company's Current Report on Form 8-K
for May 26, 1992.
(15) Incorporated by reference from the Company's Report on Form 10-K for
September 30, 1992.
(16) Incorporated by reference from the Company's Current Report on Form 8-K
for April 21, 1993.
(17) Incorporated by reference from the Company's Proxy Statement dated May 3,
1993.
(18) Incorporated by reference from the Company's Report on Form 10-K for
September 30, 1993.
30
<PAGE>
10.23 Promissory notes dated July 9, July 30, August 31, September 30, October
29 and November 30, 1993 by the Company to the order of Johnny R.
Thomas. (18)
10.24 Consulting agreement by and between the Company and Liviakis Financial
Communications, Inc., executed on December 13, 1993, effective as of
October 22, 1993. (18)
10.25 Qualified Stock Option Plan. (19)
10.26 Termination of Distributor Agreement with Medit Mediterannea, G.P.L.
s.r.l. dated July 20, 1994. (20)
10.27 Employment contract with Geoffrey F. Hewitt dated February 17, 1994.
(21)
10.28 Termination of Distributor Agreement with Sippican, Inc. dated February
24, 1994. (21)
10.29 Amended employment agreement with Dale W. Conrad, dated May 12, 1994.
(21)
10.30 Consulting agreement with Johnny R. Thomas, dated April 1, 1994. (21)
10.31 Consulting agreement with John C. Francis, dated April 1, 1994. (21)
10.32 Employment contract with David R. LeBlanc dated June 8, 1994. (21)
10.33 FCI FiberChem, Inc. and FCI Environmental, Inc. 401(k) Profit Sharing
Plan. (21)
10.34 Termination of Asset Purchase & Consulting Agreement with Otto Wolfbeis
dated November 1, 1994. (21)
10.35 Qualified Stock Option Plan (22)
10.36 License Agreement with Texas Instruments, Incorporated, dated June 15,
1995. (23)
10.37 Cooperative Development Agreement with Texas Instruments, Incorporated,
dated June 15, 1995. (23)
*10.38 Form of Distribution Agreement
*10.39 Form of agreement for services with Gordon Werner and others dated as of
September 15, 1995.
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of KPMG Peat Marwick LLP.
- ---------------------------------
* filed with this Report.
(18) Incorporated by reference from the Company's Report on Form 10-K for
September 30, 1993.
(19) Incorporated by reference from the Company's Proxy Statement dated May 23,
1994.
(20) Incorporated by reference from the Company's Current Report on Form 8-K for
July 20, 1994.
(21) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1994.
(22) Incorporated by reference from the Company's Report on Form S-8 for August
1, 1995.
(23) Incorporated by reference from the Company's Report on Form 8-K/A for
August 30, 1995.
- ------------------------------
31
<PAGE>
(b) REPORTS ON FORM 8-K
A report on Form 8-K/A was filed by the Company August 30, 1995 (amending
Form 8-K filed June 30, 1995) reporting an event under Item 5. Other Events.
- ---------------------------------------
32
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: December 26, 1995
FIBERCHEM, INC.
By: /s/ Geoffrey F. Hewitt
--------------------------
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Geoffrey F. Hewitt President and Chief Executive Officer December 26, 1995
- ---------------------------- (Principal Executive Officer)
Geoffrey F. Hewitt
/s/ Melvin W. Pelley Chief Financial Officer December 26, 1995
- ---------------------------- (Principal Accounting Officer)
Melvin W. Pelley
/s/ Scott J. Loomis Chairman and Director December 26, 1995
- ----------------------------
Scott J. Loomis
/s/ Walter Haemmerli Director December 26, 1995
- ----------------------------
Walter Haemmerli
/s/ Gerald T. Owens Director December 26, 1995
- ----------------------------
Gerald T. Owens
/s/ Irwin J. Gruverman Director December 26, 1995
- ----------------------------
Irwin J. Gruverman
/s/ Dale W. Conrad Director December 26, 1995
- ----------------------------
Dale W. Conrad
/s/ Byron A. Denenberg Director December 26, 1995
- ----------------------------
Byron A. Denenberg
</TABLE>
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
FiberChem, Inc.:
We have audited the accompanying consolidated balance sheets of FiberChem, Inc.
and subsidiaries as of September 30, 1995 and 1994, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the years in the two-year period ended September 30, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FiberChem, Inc. and
subsidiaries at September 30, 1995 and 1994, and the results of their operations
and their cash flows for each of the years in the two-year period ended
September 30, 1995, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 6 to
the consolidated financial statements, the Company has suffered recurring losses
from operations which raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 6. The consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
Las Vegas, Nevada
December 7, 1995 /s/ KPMG Peat Marwick LLP
F-1
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, September 30,
1995 1994
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $911,186 $3,477,103
Note receivable from sale of subsidiary (note 9) 106,390 106,390
Accounts receivable, net of allowance for doubtful
accounts of $111,716 and $0 in 1995 and 1994,
respectively 565,766 223,393
Inventories 991,302 715,664
Other 109,844 93,206
------------- -------------
Total current assets 2,684,488 4,615,756
------------- -------------
Equipment 570,716 546,187
Less accumulated depreciation (433,285) (378,984)
------------- -------------
Net equipment 137,431 167,203
------------- -------------
Other assets:
Interest receivable on notes receivable
for exercise of options (note 5) 129,580 48,270
Note receivable from sale of subsidiary (note 9) -- 106,389
Certificate of deposit -- security for note payable (note 4) 18,000 --
Technology costs, net of accumulated
amortization of $317,942 at September 30, 1995
and $328,591 at September 30, 1994 (notes 2 and 5) 151,764 209,115
Patent costs, net of accumulated amortization of
$1,207,163 at September 30, 1995 and
$1,017,032 at September 30, 1994 (note 3) 574,736 781,265
------------- -------------
Total other assets 874,080 1,145,039
------------- -------------
$3,695,999 $5,927,998
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, September 30,
1995 1994
------------- -------------
<S> <C> <C>
Current liabilities:
Current installments of note payable (note 4) $6,832 --
Accounts payable 176,774 114,876
Accrued expenses 287,507 161,978
------------- -------------
Total current liabilities 471,113 276,854
Note payable, net of current installments (note 4) 9,866 --
------------- -------------
Total liabilities 480,979 276,854
------------- -------------
Stockholders' equity (notes 2 and 5):
Preferred stock, $.001 par value. Authorized
10,000,000 shares; 214,462 and 210,240 convertible
shares issued and outstanding at September 30,
1995 and September 30, 1994, respectively;
at liquidation value 3,216,930 3,153,600
Common stock, $.0001 par value. Authorized 40,000,000
and 30,000,000 shares at September 30, 1995 and
September 30, 1994, respectively; 20,532,033 and
20,109,354 shares issued and outstanding at
September 30, 1995 and September 30, 1994, respectively 2,053 2,011
Additional paid-in capital 24,844,392 24,629,452
Treasury stock -- preferred, 10,000 shares at cost (150,000) --
Deficit (23,094,922) (20,265,615)
------------- -------------
4,818,453 7,519,448
Notes receivable for exercise of options (1,597,837) (1,664,699)
Deferred compensation (5,596) (203,605)
------------- -------------
Total stockholders' equity 3,215,020 5,651,144
Commitments and contingencies (notes 5, 6 and 7)
------------- -------------
$3,695,999 $5,927,998
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30,
-----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Revenues (note 6) $1,149,122 $239,382
Cost of revenues 519,226 123,972
------------- -------------
Gross profit 629,896 115,410
------------- -------------
Operating expenses:
Research and development 1,184,415 2,320,065
General and administrative 1,483,339 1,699,542
Financial consulting services (note 5) 157,225 2,137,974
Marketing expenses 681,775 212,863
Write off of obsolete inventories 70,489 --
Write off of patent and
technology costs (notes 2 and 3) 89,148 --
Fees and grants -- (57,848)
------------- -------------
Net operating expenses 3,666,391 6,312,596
------------- -------------
Loss from operations (3,036,495) (6,197,186)
------------- -------------
Other income (expense):
Interest expense (7,433) (3,168)
Interest income 211,853 190,901
Other, net 2,768 3,940
------------- -------------
Total other income (expense) 207,188 191,673
------------- -------------
Net loss ($2,829,307) ($6,005,513)
------------- -------------
------------- -------------
Shares of common stock used in computing loss per share 20,228,375 17,276,392
------------- -------------
------------- -------------
Net loss per share ($0.14) ($0.35)
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Additional
-------------------------- -------------------------- Paid-In
Shares Amount Shares Amount Capital
---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1993 166,317 $ 2,494,755 11,652,781 $ 1,165 14,312,484
Preferred stock issued:
For cash (note 5) 270,700 4,060,500 -- -- (734,326)
Common stock issued:
Conversion of preferred stock (note 5) (226,777) (3,401,655) 2,267,770 227 3,401,428
For services -- -- 2,032,500 203 2,233,510
Exercise of options -- -- 3,722,403 372 4,765,550
Exercise of warrants -- -- 433,900 44 650,806
Payments received on notes receivable for
exercise of options -- -- -- -- --
Deferred compensation earned -- -- -- -- --
Net loss -- -- -- -- --
---------- ------------ ----------- ----------- -----------
Balance at September 30, 1994 210,240 $ 3,153,600 20,109,354 $ 2,011 24,629,452
Preferred stock dividend:
In stock (note 5) 14,362 215,430 -- -- (215,430)
In cash (note 5) -- -- -- -- (53,340)
Stock purchased by the Company (note 5) -- -- -- -- --
Common stock issued:
Conversion of preferred stock (note 5) (10,140) (152,100) 101,400 10 152,090
For services -- -- 7,543 1 9,999
Exercise of options -- -- 313,736 31 321,621
Payments received on notes receivable for
exercise of options -- -- -- -- --
Deferred compensation earned -- -- -- -- --
Net loss -- -- -- -- --
---------- ------------ ----------- ----------- -----------
Balance at September 30, 1995 214,462 $ 3,216,930 20,532,033 $ 2,053 24,844,392
---------- ------------ ----------- ----------- -----------
---------- ------------ ----------- ----------- -----------
<CAPTION>
Treasury Notes
Stock - Receivable
Preferred for Exercise Deferred
Stock Deficit of Options Compensation Total
---------- ------------ ----------- ----------- -----------
Balance at September 30, 1993 -- (14,260,102) -- (23,124) 2,525,178
Preferred stock issued:
For cash (note 5) -- -- -- -- 3,326,174
Common stock issued:
Conversion of preferred stock (note 5) -- -- -- -- --
For services -- -- -- (114,439) 2,119,274
Exercise of options -- -- (1,815,099) (203,305) 2,747,518
Exercise of warrants -- -- -- -- 650,850
Payments received on notes receivable for
exercise of options -- -- 150,400 -- 150,400
Deferred compensation earned -- -- -- 137,263 137,263
Net loss -- (6,005,513) -- -- (6,005,513)
---------- ------------ ----------- ----------- -----------
Balance at September 30, 1994 0 (20,265,615) (1,664,699) (203,605) 5,651,144
Preferred stock dividend:
In stock (note 5) -- -- -- -- --
In cash (note 5) -- -- -- -- (53,340)
Stock purchased by the Company (note 5) (150,000) -- -- -- (150,000)
Common stock issued:
Conversion of preferred stock (note 5) -- -- -- -- --
For services -- -- -- -- 10,000
Exercise of options -- -- -- -- 321,652
Payments received on notes receivable for
exercise of options -- -- 66,862 -- 66,862
Deferred compensation earned -- -- -- 198,009 198,009
Net loss -- (2,829,307) -- -- (2,829,307)
---------- ------------ ----------- ----------- -----------
Balance at September 30, 1995 (150,000) (23,094,922) (1,597,837) (5,596) 3,215,020
---------- ------------ ----------- ----------- -----------
---------- ------------ ----------- ----------- -----------
</TABLE>
See accompaning notes to consolidate financial statements
F-5
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($2,829,307) ($6,005,513)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 54,301 79,747
Amortization 282,718 271,370
Accrued interest on notes receivable for exercise of options (81,310) --
Common stock issued for:
Financial consulting services 57,225 2,137,974
Other services 198,450 277,214
Provision for loss on accounts receivable 111,716 --
Write off of obsolete inventories 70,489 --
Write off of obsolete technology costs and patents 89,148 --
Changes in assets and liabilities:
Increase in accounts receivable (454,089) (108,494)
Increase in inventories (346,127) (298,667)
Increase in other current assets (16,638) (84,710)
Increase (decrease) in accounts payable 61,898 (164,884)
Increase (decrease) in accrued expenses 125,529 (35,523)
------------ ------------
Net cash used in operating activities (2,675,997) (3,931,486)
------------ ------------
Cash flows from investing activities:
Purchase of equipment (24,529) (60,559)
Payments for patents (107,986) (115,580)
Proceeds from sale of property 1,500
------------ ------------
Net cash used in investing activities (132,515) (174,639)
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
(continued)
F-6
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from note payable 21,000 --
Payments on note payable (4,302) --
Certificate of deposit restricted as security for note payable (18,000) --
Proceeds from the issuance of preferred stock -- 3,692,745
Purchase of treasury stock - preferred (150,000) --
Payment of dividend on preferred stock (53,340) --
Cost of issuance of preferred stock -- (366,571)
Proceeds from the exercise of options 321,652 --
Proceeds from issuance of common stock -- 3,309,154
Proceeds from notes receivable for exercise of options 19,196 31,832
Proceeds from note receivable from sale of subsidiary 106,389 106,390
------------ ------------
Net cash provided by financing activities 242,595 6,773,550
------------ ------------
Net (decrease) increase in cash and cash equivalents (2,565,917) 2,667,425
Cash and cash equivalents at beginning of period 3,477,103 809,678
------------ ------------
Cash and cash equivalents at end of period $ 911,186 $ 3,477,103
------------ ------------
------------ ------------
Supplemental Cash Flow Information
Noncash investing and financing activities:
Preferred stock converted to common stock $ 152,100 --
Preferred stock issued as dividends 215,430 --
Preferred stock issued as expenses of offering -- 367,755
Common stock issued for repayment of debt -- 47,631
Common stock issued for notes -- 1,815,099
Reduction in interest and notes receivable for
exercise of options in exchange for services 48,113 118,568
------------ ------------
------------ ------------
Interest paid $ 6,906 $ 5,587
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995 and 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES
(a) CORPORATE ORGANIZATION
The accompanying consolidated financial statements include the
accounts of FiberChem, Inc. ("FCI" or the "Company") and its
subsidiaries, (collectively "the Companies"). All intercompany
accounts and transactions have been eliminated. The Company develops,
produces, markets and licenses fiber optic chemical sensors ("FOCS-
Registered Trademark-") for environmental monitoring in the air, water
and soil.
(b) CASH AND CASH EQUIVALENTS
Cash equivalents consist of financial instruments with original
maturities of no more than 90 days.
(c) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of:
September 30,
---------------------------
1995 1994
------------ -----------
Raw materials $233,367 $333,967
Work in process 29,472 223,161
Finished goods 728,463 158,536
-------- --------
$991,302 $715,664
-------- --------
-------- --------
(d) EQUIPMENT
Equipment is stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets,
currently five years.
(e) TECHNOLOGY COSTS
Technology costs represent values assigned to proven technologies
acquired for cash and in exchange for issuance of common stock (Notes
2 and 5). Patents on certain technologies are pending. Proven
technologies are amortized using the straight-line method over an
eight year period.
(f) PATENT COSTS
Costs incurred in acquiring, filing and prosecuting patents are
capitalized and amortized using the straight-line method over the
shorter of economic or legal life. All existing patents are being
amortized over eight years.
(g) REVENUE RECOGNITION
The Company recognizes revenue when title passes, which is upon
shipment of the product to the customer. There is generally no right
of return except for normal warranties.
F-8
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(h) WARRANTY
The Company warrants its products for a period of one year from the
date of delivery, provided the products are used under normal
operating conditions. The Company accrues a reserve for product
warranty as each unit is shipped to customers.
(i) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Fees and
grants received in connection with contracts for the development of
FCI's technology are recorded as a reduction of operating expenses.
(j) LOSS PER COMMON SHARE
Loss per common share has been computed based upon average shares
outstanding during the periods presented. Contingently issuable
shares have been excluded because of their anti-dilutive effect.
(k) INCOME TAXES
The Company utilizes Statement of Financial Standards No. 109,
ACCOUNTING FOR INCOME TAXES ("Statement 109"). Under this asset and
liability method, deferred tax asset and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are
measured using the enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
to be recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(l) ACCOUNTING FOR STOCK-BASED TRANSACTIONS WITH EMPLOYEES AND WITH OTHER
THAN EMPLOYEES
The Company accounts for transactions with employees and with other
than employees in which goods or services are the considerations for
the issuance of equity instruments utilizing the intrinsic value
method, wherein the Company values the equity securities at their
intrinsic value (the amount by which the market price exceeds the
exercise price).
(m) ESTIMATES
The accompanying consolidated financial statements of necessity
include amounts which are management's estimates.
(2) TECHNOLOGY COSTS
Technology costs include proven technologies acquired by the Companies to
be utilized for various environmental and medical purposes. These technologies
include FOCS-Registered Trademark- which are capable of detecting and monitoring
various chemical conditions to be used in environmental, medical and process
control applications. The technologies were acquired by the issuance of Common
Stock of the Company valued at $349,830 and cash of $187,876. During Fiscal
1995, the Company determined that further development or licensing of certain
technologies related to potential medical applications would be unlikely in the
short term and therefore expensed their acquisition costs of $68,000 less
accumulated amortization of $62,841.
F-9
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(3) PATENT COSTS
Patent costs include costs incurred in acquiring, filing and prosecuting
patents and patent applications. The Company's policy in general is to apply
for patents in major European and Asian countries as well as in the United
States. During Fiscal 1995, the Company discontinued certain foreign patent
applications on certain limited technologies, and therefore expensed application
and prosecution costs incurred to date of $124,384 less accumulated amortization
of $40,395. The U. S. and certain issued foreign patents applicable to such
technology are being maintained.
(4) NOTE PAYABLE
In December 1994 the Company borrowed $21,000 from Bank of America Nevada
("Bank") at an interest rate of 7.25% per annum. Principal and interest
payments of $647 are payable monthly until maturity in January 1998. As part of
the terms of the loan agreement, the Bank requires that a certificate of deposit
("CD") be maintained as collateral for the note. The CD is reduced periodically
as the note is paid down and accrues interest at a rate of 5% per annum. As of
September 30, 1995 the required CD is $18,000 and is classified as a long-term
asset due to its maturity date of January 1998. As of September 30, 1995 there
is no accrued interest.
The maturities of the note payable are as follows:
September 30,
----------------------------------
1995 1994
-------------- --------------
Fiscal 1996 $ 6,832 $ --
Fiscal 1997 7,314 --
Fiscal 1998 2,552 --
---------- ----------
$ 16,698 $ --
---------- ----------
---------- ----------
(5) STOCKHOLDERS' EQUITY
During Fiscal 1990, FCI reserved 143,000 shares of its Common Stock for a
stock compensation plan under which employees were eligible to receive an
additional 15% of their base salary payable with FCI's Common Stock. As of
September 30, 1992, the Company had issued all 143,000 shares under this plan.
During the fiscal years ended September 30, 1995 and 1994, $8,784 and $18,812,
respectively, was recognized as compensation expense representing an aggregate
of 142,497 shares of Common Stock which have vested. The remaining 503 shares,
valued at $834, have been included in deferred compensation in the accompanying
consolidated financial statements as of September 30, 1995.
During Fiscal 1992, the Company entered into an agreement with the owner of
fully-developed proprietary rights, trade secrets, chemical sensors and other
technology relating to fiber optic and other chemical sensors. The Company
purchased the sensor technology from the owner by issuing 100,000 shares of
Common Stock (valued at $2.50 per share) and granting options to purchase
150,000 shares of FCI Common Stock at $2.50 per share on or before September 30,
1994. These options have not been exercised as of September 30, 1994 and thus
have expired. In 1992, this individual was hired to continue development of
sensors including biosensors. The development work on these sensors with this
individual is essentially complete, and accordingly, in December 1994, the
Company and this individual terminated the development agreement. The Company
retains the rights to the proprietary information, trade secrets
F-10
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
and other technology and to patents applied for or to be applied for covering
these technologies. Also, in December 1994, the Company granted to this
individual, for services rendered to the Company, options to purchase 150,000
shares of FCI Common Stock at $1.50 per share on or before June 30, 1995. The
exercise price was changed to $1.00 per share on April 7, 1995 (on which date
the market value of the Common Stock was $1.00) and the expiration date was
extended to September 30, 1995. As of September 30, 1995, all options had been
exercised at a total exercise price of $150,000.
In December 1991 and January 1992, the Company entered into a private
placement equity agreement with Medit Mediterranea G.P.L. s.r.l. ("Medit"),
wherein Medit agreed to invest an aggregate of $3,600,000 for the purchase of an
aggregate of 3,000,000 shares of the Company's Common Stock. In addition, the
Company granted Medit an option to purchase an additional 1,500,000 shares FCI
Common Stock (at the lower of $1.50 per share or $.50 per share below the NASDAQ
bid price on the date of option exercise). The initial $3,600,000, which was
evidenced by notes receivable, was to be paid over five dates between February
20, 1992 and June 30, 1994. Medit authorized the Company's Management to
negotiate the assignment to third parties of its notes payable to the Company
and its options in financing transactions deemed to be of value to the Company.
Payments on the notes payable of $1,099,786 were received as of September 30,
1992 and the remaining $2,500,214 was received by January 1993. Medit assigned
or sold all of its options to purchase FCI Common Stock of the Company. As of
September 30, 1994, the Company had received an aggregate of $1,203,203 for the
exercise of all the 1,500,000 options.
During Fiscal 1993, the Company conducted a private placement of
convertible preferred stock ("Convertible Preferred Stock"). Each share of the
Preferred Stock is convertible into ten shares of FCI Common Stock. The
conversion ratio is subject to customary anti-dilution provisions. Dividends
are cumulative and are payable annually, at the sole discretion of the holders,
in cash (11%) or additional shares of Convertible Preferred Stock (8% on the
number of shares owned at date of declaration). In November 1994, the Company
paid cash dividends of $53,340 and issued 14,362 shares of Convertible Preferred
Stock dividends. Upon the issuance of the Convertible Preferred Stock dividend,
the Company reacquired 10,000 shares of the Convertible Preferred Stock dividend
for $15 per share from a Director and other related parties. In November 1995,
the Company paid cash dividends of $23,645 and issued 15,214 shares of
Convertible Preferred Stock dividends. The Convertible Preferred Stock entitles
the holder to a liquidation preference of $15 per share upon liquidation,
dissolution or winding up of the Company. The Convertible Preferred Stock is
redeemable by the Company when and if the closing bid price of FCI's Common
Stock is at least 200% of the conversion price for twenty consecutive trading
days. Upon redemption, the Company would issue ten shares of its Common Stock
for each share of Convertible Preferred Stock. In August 1993, the Company
issued 166,317 shares of Convertible Preferred Stock at $15 per share in
exchange for cash proceeds of $711,530 (net of offering expenses of $457,225)
and the conversion of all of the Company's zero coupon bonds amounting to
$1,326,000. The recipients of the Convertible Preferred Stock also received 2.5
Class D Common Stock Purchase Warrants (the "Class D Warrants") for each share
of Convertible Preferred Stock, except for 12,500 shares of Convertible
Preferred Stock issued as commissions. From October 1993 through January 1994,
the Company conducted a second offering of the Convertible Preferred Stock under
the same terms as the first offering, except that no Class D Warrants were
offered to purchasers of the Convertible Preferred Stock. As a result of the
second offering, the Company issued an aggregate of 270,700 shares of
Convertible Preferred Stock at $15 per share in exchange for cash proceeds of
$3,326,174 (net of offering expenses of $734,326). In addition, during Fiscal
1994, an aggregate of 226,777 shares of Convertible Preferred Stock were
voluntarily converted by holders of such shares into 2,266,770 shares of FCI
Common Stock. During Fiscal 1995, an aggregate of 10,140 shares of Convertible
Preferred Stock were voluntarily converted by holders of such shares into
101,400 shares of Common Stock.
Effective October 22, 1993, the Company entered into a Consulting Agreement
with Liviakis Financial Communications, Inc. ("Liviakis"). Liviakis was to
provide consulting services to the Company for a 24 month period. These
services are in connection with financial public relations, and investment
markets and other matters relating to corporate finance. Liviakis received
1,730,000 restricted shares of
F-11
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FCI's Common Stock (valued at $1.09 per share) in consideration of the
foregoing. In addition, the Company also agreed to pay to Liviakis a fee during
the aforementioned period of 4,375 shares of FCI's Common Stock per month. Of
the aggregate consideration for these agreements, the portion attributable to
services to be provided in the future has been included in deferred compensation
in the accompanying consolidated financial statements as of September 30, 1995
and 1994 and is being amortized over the term of the agreement. The Liviakis
agreement provided that Liviakis would provide a significant portion of the
services required under the agreement in the first 30-60 days of the agreement.
These activities included significant and immediate direct communications with
existing shareholders, stockbrokers and others to maintain and enhance
visibility of the Company in the financial and investment community; the
identification, discussion and analysis of candidates for possible mergers and
acquisitions; introductions to corporate financial and technical consultants;
and other financial and corporate matters. Since these activities were not
directly attributable to capital raising activities, they have been expensed by
the Company. Further, in October 1993, the Company paid an individual
associated with the Liviakis agreement 183,500 shares of the FCI's Common Stock,
valued at $1.09 per share, which was equal to 10% of the fee paid to Liviakis.
During Fiscal 1995 and 1994, the Company expensed an aggregate of $57,225 and
$2,137,974, respectively, related to these agreements. As of December 1, 1995,
at the Company's request, Liviakis agreed not to sell any of the Company's stock
held by Liviakis for a period of six months.
In October 1993, the Board of Directors approved a plan to encourage early
exercise of stock options held by employees and directors and all holders of
Class D Warrants in order to raise additional capital to fund the Company's
operations. Forty holders who owned an aggregate of 3,028,954 options were
granted one new option to purchase one share of FCI's Common Stock at $1.50 per
share until September 15, 1996 for each two options then owned. These new
options became exercisable, pro-rata, when existing options were exercised;
however, 50% of the new options expired March 15, 1994 for the pro-rata portion
of old options that were not exercised by that date, and the remaining 50% of
the new options expired on May 27, 1994 for the pro-rata portion of the old
options that were not exercised by that date. As of May 27, 1994, 174,071 new
options had expired. All owners of Class D Warrants were granted a right to
receive one new Class D Warrant to purchase one share of FCI's Common Stock at
$1.50 per share until September 15, 1996 for each four Class D Warrants then
owned. These new warrant rights became exercisable, pro-rata, when existing
Class D Warrants were exercised; however, the new warrant rights expired March
15, 1994 if the existing Class D Warrants were not exercised by March 15, 1994.
As of March 15, 1994, 104,203 new Class D Warrants were issued and 477,047
rights to purchase Class D Warrants expired.
In November 1993, the Company entered into an agreement with an
individual to provide consulting services to the Company and its subsidiaries
for a two-year period. These services include, but are not limited to,
medical applications of FCI's FOCS-Registered Trademark- technology, funding
and business relationships, personnel recommendations, technology review and
financial consulting. The individual was granted 150,000 options to purchase
FCI's Common Stock at $2.00 per share, exercisable until September 15, 1996.
In April 1994, this individual was granted 20,000 options to purchase FCI's
Common Stock under the same terms for agreeing to serve on the Board of
Directors of the Company.
In January 1993, the Company's Board of Directors adopted a 1993 Employee
Stock Option Plan ("1993 Plan"), approved by stockholders at the May 1993 Annual
Shareholders meeting, covering an aggregate of 2,300,000 shares of FCI Common
Stock. As of September 30, 1995, all shares in connection with this plan have
been issued (with initial exercise prices ranging from $1.28 per share to $2.25
per share and current exercise prices of $1.00 per share). As of September 30,
1995, an aggregate of 1,545,438 options have been exercised and 274,641 options
forfeited (of which 171,822 have been regranted) under the 1993 Plan. An
aggregate of 651,743 options remain exercisable under the 1993 Plan.
In March 1994, the Company's Board of Directors approved a plan by which
employees and directors of the Company and its subsidiaries would be given an
opportunity to exercise stock options eligible under the early incentive plan
described above through the execution of promissory notes. As of
F-12
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
March 15, 1994, the Company received promissory notes aggregating $1,815,099 for
the exercise of 1,210,066 stock options. The promissory notes bear interest at
5% until September 15, 1994, and at 7% thereafter, and were initially due on or
before September 15, 1995. Employees have agreed to apply 5% or more of their
net paycheck toward payment of their respective note each pay period until the
note is paid in full. On April 7, 1995, the Board of Directors extended the due
date of the notes to March 15, 1998. The underlying FCI Common Stock is being
held in escrow, as collateral, until payment is made on the promissory notes.
As of September 30, 1995 and 1994, an aggregate of $217,262 and $150,400,
respectively has been paid on these notes in addition to $32,859 in interest.
The remaining accrued interest of $129,580 at September 30, 1995 and $48,270 at
September 30, 1994 has been reclassified to long-term receivables in accordance
with the April 1995 extension of the due date of the notes.
In addition, in March 1994, the Company received promissory notes
aggregating $198,000 for the exercise of 139,333 common stock options eligible
under the early incentive plan described above under the terms of consulting
agreements with the Company's former President and Vice-President. These former
officers of the Company resigned effective April 1, 1994 from their positions
and entered into non-cancelable consulting agreements from April 1, 1994 through
September 30, 1995. The promissory notes do not have a stated interest rate.
During Fiscal 1995 and 1994, the Company has reduced these promissory notes by
$132,000 and $66,000, respectively, for services rendered under the terms of the
consulting agreements.
Also, in March 1994, the Company's Board of Directors adopted a 1994
Employee Stock Option Plan ("1994 Plan"), approved by stockholders at the May
23, 1994 Annual Shareholders meeting, covering an aggregate of 1,000,000 shares
of FCI Common Stock. As of September 30, 1995, the Company has issued 975,578
stock options (with initial exercise prices ranging from $1.00 per share to
$2.125 per share and current exercise prices of $1.00 per share) under the 1994
Plan to employees of the Company's wholly-owned subsidiary, FCI Environmental,
Inc. ("Environmental").
In April 1995, the Company's Board of Directors adopted a 1995 Employee
Stock Option Plan ("1995 Plan"), approved by the stockholders at the May 8, 1995
Annual Shareholders meeting, covering an aggregate of 1,000,000 shares of FCI
Common Stock. As of September 30, 1995, the Company has issued 87,543 stock
options (with initial and current exercise prices ranging from $1.00 per share
to $1.38 per share) under the 1995 Plan to employees of Environmental and
directors of FCI.
On April 7, 1995, the Company's Board of Directors resolved that all
options to purchase shares of the Company's Common Stock granted prior to April
7, 1995, and which had an exercise price in excess of $1.00 per share, would as
of April 7, 1995 have an exercise price of $1.00 per share, which price was
above the fair market value of the Common Stock as of the last quoted market
trade on April 7, 1995. Options to purchase an aggregate of 2,309,479 shares at
prices ranging from $1.125 to $2.125 per share were accordingly changed to $1.00
per share.
In March 1994, the Board of Directors approved directors' compensation for
non-management directors. The payment of compensation was made by the Company
through the reduction of promissory notes received for the exercise of stock
options or for the exercise of stock options or Class D Warrants if no
promissory note had been received. During Fiscal 1995, the Company has expensed
an aggregate of $104,833 in directors' compensation for the Company's non-
management directors, applying $72,514 to the payment of promissory notes,
interest and payroll taxes, and $32,318 to the exercise of 32,318 stock options.
During Fiscal 1995, the Company issued to an individual 7,543 shares of
Common Stock of the Company, valued at $10,000, for services performed on behalf
of Environmental.
On August 1, 1995, the Company's Board of Directors resolved that the
exercise price of all outstanding Class D Warrants be changed from $1.50 per
share to $1.00 per share, which price was above
F-13
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
the fair market value of the Common Stock as of the last quoted market trade on
August 1, 1995. During Fiscal 1995, no Class D Warrants were exercised. The
Company received cash proceeds of $650,850 for the exercise of 433,900 Class D
Warrants during Fiscal 1994. As of September 30, 1995, the Company has
outstanding Class D Warrants for the purchase of 1,999,385 shares of Common
Stock at $1.00 per share. All Class D Warrants are currently exercisable and
expire on September 15, 1996.
The Company has granted options under qualified stock option plans as well
as other option plans to employees, directors, officers, consultants and other
persons associated with the Company who are not employees of, but are involved
in the continuing development of the Company. The following table provides
stock option activities during the two-year period ending September 30, 1995,
including stock option activities described above:
Exercise Price Number of Options
------------------ -----------------
Options outstanding September 30, 1993 $1.00(a)-$1.625 3,926,809
Options granted $1.00-$2.125 2,448,024
Options exercised $.4375-$1.625 (3,722,403)
Options forfeited or canceled $1.50 (554,071)
Options canceled and reissued (a)-$1.875 (2,623,223)
Options canceled and reissued $1.50 2,623,223
----------
Options outstanding September 30, 1994 $1.00(a)-$1.625 2,098,359
Options granted $1.00-$1.38 829,943
Options exercised $1.00-$1.625 (321,279)
Options forfeited or canceled $1.50( 150,000)
Options canceled and reissued $1.125-$2.125 (2,309,479)
Options canceled and reissued $1.00 2,309,479
----------
Options outstanding September 30, 1995 $1.00-$1.38 2,457,023
----------
----------
(all exercisable)
(a) Certain options are exercisable at the lower of $1.50 per share or $.50
below the NASDAQ bid price on the date of option exercise.
(6) REVENUE
Revenues from one customer were $213,100 and $43,215 during Fiscal 1995 and
Fiscal 1994, respectively. Revenues from another customer amounted to $74,400
and $32,250 during Fiscal 1995 and Fiscal 1994, respectively.
As of September 30, 1992, the Company completed development of its four
first-generation products and commenced marketing of those products resulting
in revenue of $507,661 in the three-month period ended December 31, 1992.
Subsequent to December 31, 1992, in connection with certain management
changes, the Company re-evaluated its first generation products and
determined to make major modifications to certain products and to discontinue
others. This required significant additional product development efforts and
accordingly no new product sales were made from January 1993 to March 1994.
At that time, the Company introduced the PetroSense-Registered Trademark-
Portable Hydrocarbon Analyzer. The PetroSense-Registered Trademark-
Continuous Monitoring System was introduced in May 1994 and completed
successful field testing in November 1994.
Subsequent to the introduction of these products, sales volume has
increased throughout Fiscal 1994 and Fiscal 1995; however, sales volume has not
reached a level to sustain profitable operations as of
F-14
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
September 30, 1995. During Fiscal 1995, the Company recruited and trained a
domestic United States sales organization consisting of independent
manufacturer's representatives and entered into agreements with European, Asian
and other foreign companies for the marketing and distribution of its products
in the respective international territories.
During Fiscal 1995 the Company determined that sales to many of its major
potential customers, including major petroleum production, storage and
distribution companies, would require significant direct selling efforts, and
would in many cases be subject to these potential customers' evaluation,
budgeting, funding and approval processes. Management believes that most such
potential customers' budgeting cycles begin in the second half of a calendar
year for approval and funding during the following calendar year or years. The
Company and its distributors have made significant numbers of product
demonstrations and provided a substantial number of price quotes to existing and
potential customers for these customers' budgetary purposes. Consequently, the
Company expects that a substantial portion of such quotes will result in a
significant increase in revenues during Fiscal 1996, although there can be no
assurances that such will be the case.
In October 1995, the Company entered into an agreement with Rauscher Pierce
& Clark, Inc. ("RPC") wherein RPC, acting as financial advisor and placement
agent, would assist the Company in a private placement. The Company and RPC are
offering up to $4,700,000 in 8%, 3-year convertible promissory notes and
$2,300,000 in common stock, with detachable warrants. The Company believes that
it will be able to place all or a substantial portion of these securities,
during January 1996, resulting in net proceeds to the Company, after associated
expenses, of between $4,000,000 and $6,000,000; however, there can be no
assurance that such will be the case.
The Company has incurred substantial losses and is in need of additional
financing to continue as a going concern. Based on the Company's anticipated
equity and debt funding efforts and the Company's product sales and expected
sales, Management believes that it will have adequate capital resources to
continue its operations into the foreseeable future; however, there can be no
assurance that forecasted sales levels will be realized to achieve profitable
operations, nor that the anticipated financing will occur, nor that it will be
in an amount sufficient to enable the Company to continue its operations.
(7) COMMITMENTS
The Company entered into an agreement to lease office space for a five-year
period beginning in January 1990, which expired in January 1995. The Company
and the lessor have agreed to a month-to-month lease which is terminable by
either party upon 30 days notice. Monthly payments under the lease were
originally $8,807 and escalated approximately $1,300 every twelve months.
Current base monthly payments under the month-to-month lease are $12,786. Rent
expense during Fiscal 1995 and 1994 was $168,572 and $165,004, respectively. The
Company is pursuing alternatives, including a renewal of the month-to-month
lease, at approximately the current base monthly rental charge.
Effective January 1, 1994, the Company implemented an Internal Revenue Code
Section 401(k) Profit Sharing Plan (the "Plan"). The Plan provides for
voluntary contributions by employees into the Plan subject to the limitations
imposed by Internal Revenue Code Section 401(k). The Company will match
employee contributions at a rate of 25% of the employee's contribution up to a
maximum of 1% of the employee's compensation. The Company matching funds are
determined at the discretion of management and are subject to a five-year
vesting schedule from the date of original employment. The Company's 401(k)
matching expense for the years ended September 30, 1995 and 1994 totaled $12,522
and $0, respectively.
(8) INCOME TAXES
F-15
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income tax benefit attributable to losses from continuing operations for
the year ended September 30, 1995 and 1994 differed from the amount computed by
applying the federal income tax rate of 34% to pretax loss from operations as a
result of the following:
1995 1994
-------------- --------------
Computed "expected" tax benefit $ (961,964) (2,041,875)
Reduction in income tax benefit resulting from:
Increase in valuation allowance 961,964 2,041,875
---------- ----------
$ - -
---------- ----------
---------- ----------
Components of net deferred tax assets as of September
30, 1995 and 1994 are as follows:
1994 Change 1995
------------- ------------- -------------
Deferred tax assets $ 5,853,000 967,000 6,820,000
Less valuation allowance 5,836,000 962,000 6,798,000
--------- ------- ---------
Total net deferred tax assets 17,000 5,000 22,000
Deferred tax liabilities (17,000) (5,000) (22,000)
--------- ------- ---------
Net deferred tax assets $ - - -
--------- ------- ---------
--------- ------- ---------
Deferred tax assets are comprised primarily of the tax effects of the net
operating loss carryforwards and the reserve for inventory obsolescence recorded
for financial reporting purposes. Deferred tax liabilities primarily represent
the tax effect of the difference between depreciation recorded for financial
statement and income tax reporting purposes.
The Company has recorded a valuation allowance in accordance with the
provisions of Statement 109 to reflect the estimated amount of deferred tax
assets which may not be realized. In assessing the realizability of deferred
tax assets, Management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible.
At September 30, 1995, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $19,500,000 which are available to
offset future taxable income, if any, through 2010. However, carryforwards to
offset future taxable income is dependent upon having taxable income in the
legal entity originally incurring the loss and will be further limited in each
year to an amount equal to the Federal long-term tax exempt interest rate times
the entity's market value at the time a significant change in ownership
occurred. The Company cannot determine the effect of these limitations.
(9) DISPOSITION OF SUBSIDIARY
The Company entered into an agreement effective June 30, 1992, to sell its
wholly-owned subsidiary, AgriBioTech, Inc. ("ABT"), to the Company's former
President, its former Vice-President, its current Chairman of the Board and a
fourth individual (collectively, the "Purchaser"). The Purchaser agreed to
purchase all of the issued and outstanding shares of Common Stock of ABT, which
were all owned by the Company, for the approximate book value of ABT. The net
sales price of $425,559 was
F-16
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
payable in four equal installments of principal plus interest at a rate of 8%
per annum, commencing on July 1, 1993 and annually thereafter until paid in
full.
On July 1, 1992, the Purchaser and ABT entered into an agreement whereby
ABT agreed to assume the obligation of the Purchaser with respect to the note
payable. However, the Purchaser remains primarily liable for this debt, the
balance of which at September 30, 1995 is $106,390.
F-17
<PAGE>
EXHIBIT INDEX
Exhibit No. Name
----------- ----
10.38 Form of Distribution Agreement
10.39 Form of agreement for services with Gordon Werner and others
dated as of September 15, 1995.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
<PAGE>
EXHIBIT 10.38
FCI ENVIRONMENTAL, INC.
EXCLUSIVE DISTRIBUTOR AGREEMENT
(EXPORT)
THIS AGREEMENT, made and entered into this the ____ day of ____________, 1995 by
and between FCI Environmental, Inc., a corporation organized and existing under
the laws of the State of Nevada, having its principal place of business at 1181
Grier Drive, Suite B, Las Vegas, Nevada 89119, USA (hereinafter referred to as
the "Company") and _____________________________, a _______________ organized
and existing under the laws of ________________, and having its principal place
of business at ____________________________________________________________
__________________________________ (hereinafter referred to as the
"Distributor").
W I T N E S S E T H
WHEREAS, the Company is engaged in the design, manufacture, sale, license
and distribution of certain products listed in Exhibit A attached hereto and
made a part hereof (hereinafter referred to as the "Products"); and
WHEREAS, the Company desires to arrange for the purchase of the Products by
the Distributor; and
WHEREAS, the Distributor desires to purchase and resell the Company's
Products;
NOW, THEREFORE, in consideration of the promises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. DEFINITIONS
1.1 "Effective Date", shall mean the date of this Agreement as written above.
1.2 "Products", shall mean the Environmental products manufactured by the
Company and also the accessories and parts, all of which are described more
specifically in Exhibit A attached to this Agreement.
1.3 "Territory" shall be as specified in Exhibit B.
2. APPOINTMENT
2.1 The Company hereby appoints the Distributor and the Distributor hereby
accepts appointment as the Company's exclusive authorized Distributor for
the Products listed in Exhibit A (hereinafter referred to as the
"Products"), in the Territory set forth in Exhibit B (hereinafter referred
to as the "Territory").
2.2 During the term of this Agreement, the Distributor shall not offer, deliver
or sell the Products to any persons for use, directly or indirectly,
outside of the Territory. The Distributor will promptly forward to the
company all inquiries from outside the Territory for Products and the
Distributor shall not be entitled to any compensation therefor.
<PAGE>
2.3 The relationship of the Distributor to the Company is that of an
independent contractor and under no circumstances shall the distributor be
deemed to be a partner or employee of the Company.
2.4 The Distributor has no authority to commit the Company in any matter
whatsoever without the prior written consent of the Company.
2.5 The Distributor has no authority to enter into, vary, alter, enlarge or
limit orders or agreements of sale, to make representations, warrantees or
guarantees or adjustments in accounts or to authorize the return of
products, unless specifically agreed in writing with the Company.
2.6 The Distributor shall obtain no ownership rights to any of the Company, or
its parent, FiberChem, Inc.'s technology or proprietary information, as set
forth in Section 8 herein.
3. RESPONSIBILITIES OF THE COMPANY
3.1 To provide the Distributor with Quality Products listed in Exhibit A in a
timely manner.
3.2 To provide the Distributor with sales and technical information and
material regarding the Products, including available sales promotion
literature or brochures.
3.3 To provide reasonable sales and technical assistance, as determined by the
Company, including personnel representation at major trade shows in the
Territory attended by the Distributor and problem solving.
3.4 To inform the Distributors of specification or design changes.
3.5 To provide warranty parts for instruments still in warranty in the
Territory. Such parts are billed to the Distributor until the defective
part is returned to the Company when a credit will be issued.
3.6 To provide reasonable group training at the Company's premises for the
Distributor's personnel at no cost to the Distributor. Travel and
accommodation expenses to be paid by the Distributor.
4. RESPONSIBILITY OF THE DISTRIBUTOR
4.1 To actively promote the sale of the Products within the Territory. Such
promotions shall include, but not be limited to sales calls,
demonstrations, seminars and exhibitions.
4.2 To solicit orders for and sell the Products in the Territory.
4.3 To meet or exceed any annual sales volume targets that are mutually agreed
upon between the Company and the Distributor.
4.4 The Distributor will purchase and maintain demonstration inventory
appropriate to achieving the annual sales targets mutually agreed upon
excepting that the minimum demonstration inventory shall be as specified in
Exhibit E.
4.5 To provide the Company an updated, quarterly forecast of potential
customers for Products, due during the first week of each calendar quarter.
In addition, an annual forecast is due during the first week of July.
Failure by the Distributor to furnish an acceptable Performance Plan shall
be deemed to be a material breach of this Agreement.
4.6 To properly install Products and provide warranty service and user paid
services for the Products sold.
<PAGE>
4.7 To send qualified sales and service engineers to the Company for product
and service training at least once in the first year of this Agreement, and
then at intervals necessary to maintain the promotion and reputation of the
Company in the Territory.
4.8 The Distributor will not make any modifications to the Products without the
written approval of the Company.
4.9 Refer to the Company all inquiries received by the Distributor for the sale
of the Products outside the Territory and further, refer to the Company
inquiries received by the Distributor from others than customers for the
sale of the Products in the Territory.
4.10 Not to sell the Products to any party known or reasonably believed to have
the aim to export Products after delivery to an area outside the Territory
unless the Distributor has received the prior written consent of the
Company.
4.11 Keep the Distributor's account with the Company current at all times.
4.12 Sell the Products solely under the Company's name, and the Distributor
shall not remove, cover or destroy any Company names or labels.
4.13 Devote its Best Efforts to assist the Company in obtaining any
certification of the Products within the Territory by any government agency
or other certifying body within the Territory. The Distributor shall
provide this assistance at no cost to the Company. Any certification
granted shall be solely in the name of the Company, and the Distributor
shall use its Best Efforts to protect the Company's sole and unencumbered
claim to the certification.
5. PURCHASE OF PRODUCTS
5.1 The Distributor shall purchase the Products for its own account and risk.
5.2 The Distributor shall not sell, market, distribute or promote any products
which are similar to, or in competition with the Company's Products,
without the prior written agreement of the Company.
5.3 The Company reserves the right, without prior notice and without liability,
to modify, alter, improve, change the design and/or specifications as well
as to discontinue the manufacture or sale of any product or products.
However the Company will do everything possible to give the Distributor the
maximum feasible amount of notice concerning any change.
6. WARRANTY
6.1 The Company shall warranty that the Products under normal use and service
are free from defects in workmanship and materials and meet the Products'
specifications set forth by the Company.
6.2 The Company shall warrant the Products as set forth in Section 6.1 for one
(1) year from the date of delivery of the Products to the Distributor's end
users, but not longer than fifteen (15) months after the date of the
Company's shipping invoice to the Distributor, whichever applies first,
with the exceptions listed in Exhibit C. In the event the Distributor
finds any defective Products which do not meet the aforesaid warranty, it
shall give immediate written notice to that effect to the Company.
<PAGE>
6.3 The Company shall maintain or cause to make available a reasonable amount
of inventory of spare parts for Products sold to the Distributor for a
minimum of five (5) years after the Company ceases to manufacture such
Products so that the Company may provide the Distributor with such parts
when the Distributor places its purchase orders for such spare parts.
6.4 The Company's sole obligation and liability hereunder shall be limited to
repair or replacement, at the Company's option, of any article found to be
defective during the warranty period. The Distributor will be responsible
for all labor.
6.5 Immediately upon receipt of a Product from the Company, the Distributor
shall notify the Company in writing of the existence of any defect(s) in
such Product. Upon receipt of a Product containing a defect covered by the
foregoing warranty or receipt of customer notice of a defect covered by the
foregoing warranty, the Distributor shall notify the Company in writing.
Products shall not be returned to the Company unless and until the Company
has authorized such return and has provided shipping instructions. If such
authorization is given, transportation costs shall be paid by the Company.
The failure to obtain such authorization prior to return shall render the
Distributor liable for all such transportation costs and any additional
expenses incurred by the Company in connection with the handling of such
returned Product.
6.6 THIS WARRANTY IS EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, EXPRESSED
OR IMPLIED, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE, WHICH ARE HEREBY EXPRESSLY DISCLAIMED. THE
COMPANY'S LIABILITY UNDER THIS WARRANTY IS EXPRESSLY LIMITED TO THE
OBLIGATIONS EXPRESSLY ASSUMED BY THE COMPANY HEREIN, AND SPECIFIED IN THE
SAID COMPANY'S TERMS AND CONDITIONS OF SALE. IN NO EVENT SHALL THE COMPANY
BE LIABLE FOR SPECIFIC, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES.
THE COMPANY MAKES NO WARRANTY AND SHALL HAVE NO LIABILITY IN CONNECTION
WITH THE INCORPORATION OF THE PRODUCTS INTO OR WITH PRODUCTS OR EQUIPMENT
SOLD BY OTHERS. THE COMPANY'S LIABILITY SHALL NOT IN ANY CASE EXCEED THE
PRICE PAID BY DISTRIBUTOR FOR THE PRODUCTS.
7. TRADEMARKS
7.1 The Distributor shall not during the term of this Agreement or thereafter,
acquire through performance of its duties under this Agreement the
ownership of the trademarks (the "Trademarks") of the Company, whether or
not such Trademarks be registered, nor shall it dispute the validity
thereof. Furthermore, the Distributor shall not use for its own account
any of the Trademarks or trademarks confusingly similar thereto.
7.2 The Distributor shall not at any time register, or cause to be registered,
in its name or in the name of another, or use, or employ any of the
Trademarks of the Company during and after the term of this Agreement. The
Distributor shall report to the Company any infringement against or
imitations of the Trademarks which comes to its attention and shall assist
in protecting the Company's rights in and to the Trademarks.
7.3 The Distributor shall not use or publish any Company trade name, product
name, or model number or trademark, except in association with the
solicitation of orders or promotion of sales of the Products, and then only
on signage, letterheads, business cards, price lists, catalogs,
advertising, telephone listings and vehicles used exclusively by the
Distributor. Any such use or publication shall be in accordance with the
standards, as may be set forth by the Company from time to time, and shall
be discontinued upon termination or expiration of this Agreement.
<PAGE>
7.4 Upon termination or expiration of this Agreement, Distributor shall
immediately cease representing itself as a Distributor of the Company,
shall cease all use of the aforesaid trade name or trademarks, shall not
thereafter use the aforesaid trademarks, product names, model numbers and
any trademark word, expression, design or symbol which is confusingly
similar thereto, and shall not thereafter act in any way which might
indicate, directly or by inference, that any relationship exists between
the Company and the Distributor. Upon termination or expiration of this
Agreement, the Distributor shall not take any action reflecting discredit
upon the Company or Products manufactured or sold by the Company. Nothing
herein shall abrogate or invalidate any other trademark or trade name
agreements in effect between the Company and the Distributor. This clause
shall survive the expiration, cancellation or termination of this
Agreement.
8. INTELLECTUAL PROPERTY RIGHTS
8.1 The Distributor acknowledges that the patents, technology and know-how use
that are embodied in the Products remain the sole property of the Company.
8.2 Any improvement, know-how, technology, patents, utility models, designs,
techniques, inventions, data, trade secrets, or other industrial
intellectual property rights in relation to the Products developed by the
Company shall respectively remain the property of the Company.
8.3 The Distributor will not infringe or dispute any of the Company's patents
or claims therein.
8.4 In the event that the Distributor finds that any third party infringes the
Company's patents, the Distributor will assist in protecting the Company's
right to its patents.
9. PRICE AND PAYMENT
9.1 The price of Products shall be Ex-factory or F.O.B. Las Vegas, Nevada and
the currency adopted shall be in the U.S. Dollar. The Distributor discount
rate shall be as listed in Exhibit A.
9.2 The prices of the Products are subject to change by the Company with three
(3) months advance notice in writing to the Distributor.
9.3 The Distributor shall be responsible at its own account for freight, import
duty, customs clearance, delivery charges and insurance to end user's
premises.
9.4 All sales to the Distributor shall require payment to the Company in U.S.
Dollars under the terms (the "Terms") listed in Exhibit D. These Terms may
be temporarily modified by mutual agreement between the Distributor and the
Company at any time and may become the Terms.
9.5 Failure of the Distributor to comply with the Terms or amended terms shall
be deemed a material breach of contract which may be cause for immediate
termination of this Agreement.
10. PURCHASE ORDERS
10.1 Distributor will submit purchase orders on separate Purchase Order forms.
Each Purchase Order shall specify the quantity, items and the requested
delivery dates. Purchase Orders may include end-user information and
additional terms relating to the purchase, shipment and other conditions if
previously agreed upon between Distributor and the Company.
10.2 The Company shall acknowledge Purchase Orders within one (1) week after
receipt by issuing Purchase Order confirmation. Purchase Orders so
confirmed shall be binding on Distributor and
<PAGE>
the Company and may be canceled by Distributor if the Company defaults in its
execution thereof.
10.3 The Company shall, subject to the provisions of this Agreement, unless
otherwise agreed in writing, sell and ship to Distributor any of Products
in Exhibit A for which orders have been accepted by the Company.
10.4 Orders may be issued by the Distributor using the Distributor's standard
purchase order form, which may be acknowledged by the Company, using the
Company's standard sales order acknowledgment form. However, it is
understood and agreed that such forms of Purchase Orders and sales order
acknowledgments are used solely for the convenience of the parties in
setting the quantity of Products to be purchased under the terms of this
Agreement and the delivery schedule thereof. Any provision, term or
condition of such purchase orders or sales order acknowledgments which is
inconsistent with or different from any provision, term or condition
contained herein, including all Exhibits hereof, shall be of no legal
effect whatsoever and shall not be binding upon the parties hereto, unless
such provision, term or condition is specifically accepted or approved in
writing by the parties hereto.
10.5 In the event of a conflict or inconsistency between these terms and
conditions and the terms and conditions set forth in the Company's General
Terms and Conditions, then such conflict or inconsistency shall be resolved
by giving preference to the terms and conditions set forth herein.
10.6 No provision of this Agreement shall be interpreted as obligating the
Company to accept any order received from Distributor. The Company may, in
its sole discretion, accept or reject any order. No order shall be binding
upon the Company unless and until accepted by the Company in writing.
10.7 The Distributor shall have no authority to accept orders on behalf of the
Company or to commit the Company to any undertaking including, but not
limited to, the sale or delivery of any Product.
11. CONFIDENTIALITY OF PROPRIETARY INFORMATION.
All information relating to Propriety information (including, but not
limited to, methods of manufacture, trade secrets, processes, formulas,
software, firmware, designs, schematics, drawings, marketing and sales data,
price data, cost data, licenses, distribution contracts, performance data,
customer lists, vendor lists, principal lists, patent applications, test data,
financial data, or any other information of the business affairs of the Company)
referred to in this Agreement as "Know-How", supplied to the Distributor
verbally, in writing, by model, or in any other form by the Company, is solely
for the use of the Distributor under this Agreement and remains the property of
the Company. Know-How may or may not be marked with a legend stating it is
proprietary Know-How and such method of disclosure shall not limit in any way
Distributor's obligation to protect the Company's Know-How, nor shall the method
of disclosure diminish in any way, the Company's ability and right to enforce
the terms of this Agreement. The Distributor shall use its "Best Efforts" to
protect the Proprietary information and Know-How of the Company. After
termination, expiration or cancellation of this Agreement, the Distributor
shall, if the Company so requests in writing, promptly return to the Company or
its designee all Proprietary information and Know-How, including all copies.
The Distributor agrees: 1) not to use or permit the use of such Proprietary
information and Know-How, except in accordance with the terms of this Agreement;
2) not to disclose such Proprietary information and Know-How to others
(including affiliates of the Distributor); 3) not to use, permit the use of, or
disclose to others (including affiliates of the Distributor) such Proprietary
information and Know-How after termination of the Agreement; 4) not to disclose
Proprietary information or Know-How to Distributor's employees or agents, except
on a "need to know" basis and only after said employee or agent has agreed in
writing not to disclose said Proprietary information and Know-How to others in
any fashion whatsoever or for any reason whatsoever. This clause shall survive
the expiration, termination or cancellation of this Agreement.
<PAGE>
12. FORCE MAJEURE
No liability under this agreement shall result to either party from any
delay in performance when caused by circumstances reasonably beyond the control
and without the fault or negligence of such party including, but not limited to,
acts of God, fire, flood, war, riots, governmental regulations, labor disputes,
vendor delays, embargoes or other acts by any government, or shortage of, or
inability to, obtain materials, equipment or transportation. In the event of a
shortage of Products, the Company reserves the right to allocate its production
among its customers, including Distributors, on such basis as the Company deems
equitable or desirable.
13. TERM AND TERMINATION
13.1 This Agreement shall become effective on the date first above written and
shall remain in full force and effect for a period of two years.
13.2 This Agreement shall be automatically renewed for another one (1) year
period and thereafter, unless either party gives to the other party a
notice of such party's desire not to renew this Agreement at least ninety
(90) days before the end of the initial term and any extended term then in
effect.
13.3 This Agreement shall automatically terminate upon occurrence of the
following events.
a. If at any time either party files a petition for insolvency, bankruptcy
or is adjudicated bankrupt, or takes advantage of any insolvency acts or
assignments for the benefit of creditors, or undergoes a substantial or
significant change in ownership, the other party shall have the right to
terminate this Agreement immediately without notice. At no time or for
any reason should this Agreement be considered an asset of the insolvent
party.
b. Any breach by the Distributor of its obligations under Article 4 of this
Agreement.
13.4 Both parties have the right to terminate this Agreement upon ninety (90)
days advance notice in writing properly served in the event that the other
party cannot or does not fulfill any of its obligations under this
Agreement.
13.5 Upon termination of this Agreement for any cause, the Distributor shall
immediately cease to sell, distribute or promote the Products with the
exception of then existing inventory, and shall transfer and hand over to
the Company in accordance with the Company's instructions, confidential
information, and any and all other property of the Company in the
possession or control of the Distributor and immediately pay to the Company
all outstanding monies.
13.6 Following the termination of this Agreement the Distributor shall not,
directly or indirectly, sell or otherwise distribute competing products
with trademarks similar to or apt to be confused with the Trademarks.
13.7 Upon termination of this Agreement the Distributor shall not be entitled to
any damages or compensation of any type whatsoever.
14. NOTICES
14.1 All notifications, reports, request for changes or additions to this
Agreement shall be in writing and addressed as follows:
THE COMPANY: FCI Environmental, Inc.
<PAGE>
1181 Grier Drive, Suite B
Las Vegas, Nevada 89119
ATTENTION: _________________
THE DISTRIBUTOR:___________________________
___________________________
___________________________
ATTENTION: ________________
14.2 Addresses may be modified at any time by written notification from one
party to the other party.
14.3 Any such notice or other communication shall be deemed given and effective
when delivered personally or by telex or telecopier, two (2) days after
mailing, if sent by express courier service, or five (5) days after the
postmark date if mailed by certified or registered airmail, postage
prepaid, return receipt requested, addressed to a party as stated above.
15. ARBITRATION
15.1 Any controversy or claim arising out of or relating to this Agreement, or
the breach thereof, will be finally settled by arbitration in Las Vegas,
Nevada, U.S.A., in accordance with the then current rules of the American
Arbitration Association. Any award shall be final, binding and conclusive
upon the parties and a judgment upon the award rendered thereon may be
entered in any court of competent jurisdiction. Unless otherwise ordered
by the arbitrators, each party to such arbitration shall bear its own costs
and expenses of such arbitration, including its experts, evidence and legal
fees and expenses.
16. INSPECTION AND CONSULTATION
16.1 The Company reserves the right to visit the Territory for the purposes of
inspection and consultation to which end the Distributor agrees to place at
the disposal of the Company full information with regard to the
Distributor's activities on behalf of the Company, and full access to the
Distributor's facilities and sales offices during regular business hours.
17. GENERAL
17.1 SEVERABILITY. If any provision herein shall be held to be invalid or
unenforceable for any reason, such provisions shall, to the extent of such
invalidity or unenforceability, be severed, but without in any way
affecting the remainder of such provision contained herein, all of which
shall continue in full force and effect.
17.2 ASSIGNMENT. Neither party shall assign any of its obligations under this
Agreement without the prior written consent of the other, and any attempted
assignment by such party in contravention hereof shall be void. This
Agreement shall be binding upon and shall inure for the benefit of the
successors of the parties hereto.
17.3 GOVERNING LAW. This Agreement and all disputes and suits related thereto
shall be governed by and construed and interpreted in accordance with the
internal domestic laws of the State of Nevada, U.S.A., applicable to
contracts entered into and to be performed within said State.
17.4 COMPLETE AGREEMENT; AMENDMENT. This Agreement is intended to be the sole
and complete statement of the obligations of the parties as to its subject
matter and supersedes all prior oral and written and all contemporaneous
oral understandings, negotiations, commitments and proposals
<PAGE>
of the parties as to its subject matter . Any changes hereto must be made
in writing and signed by both parties.
17.5 NO WAIVER. No delay or failure by either party to exercise or enforce at
any time any right or provision of this Agreement shall be considered a
waiver thereof or of such party's right thereafter to exercise or enforce
each and every right and provision of this Agreement. A waiver to be valid
shall be in writing, but need not be supported by consideration.
17.6 COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which shall
constitute but one and the same instrument.
17.7 RELATIONSHIP OF THE PARTIES. The relationship between the parties shall be
that of owner and contractor; neither party hereto, its agents and
employees, shall under no circumstances, be deemed agents or
representatives of the other party hereto and neither party shall have any
right to enter into any contracts or commitments in the name of or on
behalf of the other party hereto in any respect whatsoever.
17.8 MISCELLANEOUS. Time and due payments shall be of the essence of this
Agreement and of each and every part hereof.
17.9 PUBLIC ANNOUNCEMENT. Upon signing of this Agreement, the parties
shall jointly draft, approve and issue any public announcement of this
Agreement which the parties may, by mutual consent, deem appropriate.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their dully authorized representatives as of the date first above
written.
FCI ENVIRONMENTAL, INC. ________________________________
_______________________ _____ ________________________________
Title:_______________________ Title:____________________________
Date:_______________________ Date:____________________________
EXHIBIT A
PRODUCTS, PRICES AND DISCOUNT RATES
U.S. LIST
---------
FCI ENVIRONMENTAL PETROSENSE-Registered Trademark- PORTABLE PHA-100 $6900.00
FCI ENVIRONMENTAL CONTINUOUS MONITORING SYSTEM CMS-5000
(LOGGER AND ALARM - requires 1 to 16 DHP-200 probes) 9000.00
DIGITAL HYDROCARBON PROBE DHP-200 4000.00
CALIBRATION REFILL KITS 250.00
PHA-100 AND CMS-5000 ACCESSORIES AND SUPPLIES per published
price lists
<PAGE>
EXHIBIT B
THE "TERRITORY" IS: ____________________________
EXHIBIT C
EXCEPTIONS TO WARRANTY
The Warranty described in Section 6 of this Agreement applies to Products
except:
Consumables, calibration standards, batteries, syringes, vials, tubes, septa and
the like are specifically excluded.
Misuse, abuse, neglect, accident, negligence, improper handling are specifically
excluded and will void the Warranty.
Use of other than approved calibration standards will void the Warranty.
Failure to clean, calibrate and otherwise maintain the Products in accordance
with the Specifications will void the Warranty.
Use of the Products for other than the intended purposes will void the Warranty.
Service by other than authorized personnel will void the Warranty.
EXHIBIT D
PAYMENT TERMS
Irrevocable Letter of Credit confirmed by a well known U.S. bank; drafts payable
60 days from presentation of proof of shipment, F.O.B. Las Vegas, Nevada, U.S.A.
EXHIBIT E
MINIMUM PURCHASE ORDERS
Initial demonstration purchase (minimum):
___ PHA-100
___ CMS-5000 with alarm and 4 probes
___ DHP-200 probe
<PAGE>
EXHIBIT 10.39
Mr. Gordon Werner
c/o Montecito Inn
1295 Coast Village Road
Montecito, CA 93108 November 28, 1995
Dear Gordon:
This letter will confirm the discussions and understandings between you (and
others) and FiberChem, Inc. over the past several months.
You and Jerry Benezra of AmerAsia Consulting, Ltd. offered, following
FiberChem's Board meeting on April 7, 1995, to provide your advice, services,
facilities and personnel to assist FiberChem in formulating business, marketing
and financial plans and strategies, and in preparing a business plan document
reflecting those plans and strategies.
Most of that assistance was provided during several meetings of our respective
personnel, both in the Las Vegas and Boston areas between April and August 1995.
During early September, you and I had personal and telephone conversations
during which we agreed that you and your associates (Jerry Benezra, AmerAsia and
perhaps others) would receive for those services, cash in the amount of
$100,000 (which would be paid when and as determined by FiberChem) and warrants
to purchase up to 200,000 shares of FiberChem, Inc. common stock exercisable at
the current market price which was approximately $1.50 per share.
I would appreciate your reviewing this letter, and if you agree that it sets
forth our understandings, please acknowledge our agreements by signing and
returning a copy to me and retaining one copy for your records. I will then
prepare documents evidencing the warrants.
If you have any questions or wish to discuss any of the items, please let me
know.
Thank you for your advice and assistance, and your contributions to and interest
in FiberChem.
Very truly yours,
Mel Pelley
Chief Financial Officer
Acknowledged and agreed to, as of September 15, 1995
___________________________________ ___________________________________
Gordon Werner Mel Pelley, CFO/Secretary
Date: ___________________ Date: ____________________
<PAGE>
EXHIBIT NO. 21.1
SUBSIDIARIES OF FIBERCHEM, INC.
Name State of Incorporation
---- ----------------------
FCI Environmental, Inc. (formerly FCI Instruments, Inc.) Nevada
Fiberoptic Medical Systems, Inc., Nevada
PetroTester, Inc. New Mexico
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
FiberChem, Inc.:
We consent to the use of our report dated December 7, 1995 relating to the
consolidated balance sheets of FiberChem, Inc. and subsidiaries as of
September 30, 1995 and 1994 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the
years in the two-year period ended September 30, 1995 incorporated in the
annual report filed on Form 10-KSB of FiberChem, Inc.
Our report dated December 7, 1995, contains an explanatory paragraph that
states that the Company has suffered recurring losses from operations which
raise substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
Las Vegas, Nevada
December 28, 1995 /s/ KPMG Peat Marwick LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1995 AND 1994 AND FOR EACH
OF THE YEARS IN THE TWO-YEAR PERIOD ENDED SEPTEMBER 30, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 911,186
<SECURITIES> 0
<RECEIVABLES> 783,872
<ALLOWANCES> (111,716)
<INVENTORY> 991,302
<CURRENT-ASSETS> 2,684,488
<PP&E> 570,716
<DEPRECIATION> (433,285)
<TOTAL-ASSETS> 3,695,999
<CURRENT-LIABILITIES> 471,113
<BONDS> 9,866
<COMMON> 2,053
0
3,216,930
<OTHER-SE> 1,599,470
<TOTAL-LIABILITY-AND-EQUITY> 3,695,999
<SALES> 1,149,122
<TOTAL-REVENUES> 1,149,122
<CGS> 519,226
<TOTAL-COSTS> 4,185,617
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 111,716
<INTEREST-EXPENSE> 7,433
<INCOME-PRETAX> (2,829,307)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,829,307)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,829,307)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> 0<F1>
<FN>
<F1>OMITTED BECAUSE OF ANTIDILUTIVE EFFECT OF NET LOSS.
</FN>
</TABLE>
