<PAGE>
As filed with the Securities and Exchange Commission on February 19, 1998
Registration No. 333_______
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM SB-2
REGISTRATION STATEMENT
Under the Securities Act of 1933
FIBERCHEM, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<CAPTION>
Delaware 2834 84-1063897
- ----------------------------------------------------------------------------------------
<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
1181 Grier Drive, Suite B
Las Vegas, Nevada 89119
(702) 361-9873
- ------------------------------------------------------------------------------
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Melvin W. Pelley
1181 Grier Drive, Suite B
Las Vegas, Nevada 89119
(702) 361-9873
- ------------------------------------------------------------------------------
(Address, including zip code, and telephone number, including
area code, of agent for service)
-------------
Copies to:
Elliot H. Lutzker, Esq.
Snow Becker Krauss P.C.
605 Third Avenue
New York, N.Y. 10158-0125
Telephone (212) 687-3860
Telecopier (212) 949-7052
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
<PAGE>
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================
Proposed Proposed
Maximum Maximum
Title of Class Offering Aggregate Amount of
of Securities to Amount to be Price Offering Registration
be Registered Registered Per Unit (1) Price (1) Fee
- ---------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Rights (2) 8,776,587 --- --- (3)
Units (2) 8,776,587 $0.22 $1,930,849.14 $585.11
Common Stock,
$.0001 par value (4) 8,776,587 --- --- (3)
Class E Warrants (4) 8,776,587 --- --- --
Common Stock,
$.0001 par value (5) 8,776,587 (6) $0.22 $1,930,849.14 585.11
Total Registration Fee ........................................... $1,170.22
=========
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457, promulgated under the Securities Act of 1933, as
amended.
(2) The Registrant is offering its securityholders rights ("Rights") to
purchase Units, consisting of one share of its Common Stock and one Class E
Warrant. Holders of Common Stock will receive one Right for every four
shares of Common Stock owned of record, at the close of business on
______________, 1998 (the "Record Date"). Holders of Convertible Preferred
Stock and warrants to purchase Common Stock will receive one Right for
every four shares of Common Stock issuable upon conversion of the
Convertible Preferred Stock or exercise of the Warrants owned at the close
of business on the Record Date.
(3) Pursuant to Rule 457(g), no additional registration fee is required for
these securities.
(4) Included in the Units.
(5) Issuable upon exercise of the Class E Warrants.
(6) Pursuant to Rule 416, this Registration Statement also covers such
indeterminable additional shares as may become issuable as a result of
anti-dilution adjustments in accordance with the terms of the Class E
Warrants.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
i
<PAGE>
The information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
PRELIMINARY PROSPECTUS DATED FEBRUARY 19, 1998
SUBJECT TO COMPLETION
FIBERCHEM, INC.
RIGHTS TO PURCHASE 8,776,587 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK, $.0001 PAR VALUE,
AND ONE CLASS E WARRANT
----------------
FiberChem, Inc., a Delaware corporation ("FiberChem" or the "Company"),
is offering to the holders (collectively, the "Securityholders") of its
outstanding shares of common stock, $.0001 par value (the "Common Stock"),
Convertible Preferred Stock, $.001 par value (the "Preferred Stock"), and
warrants to purchase Common Stock (the "Warrants") transferable rights (the
"Rights") to subscribe for units (the "Units"). Each holder of Common Stock
will receive one Right for every four shares of Common Stock owned of record
at the close of business on ___________, 1998 (the "Record Date"). Each
holder of Preferred Stock or Warrants will receive one Right for every four
shares of Common Stock issuable upon conversion of the Preferred Stock or
exercise of the Warrants owned of record at the close of business on the
Record Date.
Each Right entitles the holder thereof to purchase a Unit, comprised of
one share of Common Stock and one Class E Warrant, at a subscription price
(the "Subscription Price") of $.22 per Unit, at any time prior to 5:00 p.m.,
Mountain Standard Time, on _______, 1998 (the "Expiration Date"). The shares
of Common Stock and Class E Warrants will be transferable separately after
issuance. Each Class E Warrant entitles the holder thereof to purchase one
share of Common Stock at any time, commencing one year from the date hereof
and prior to ______, 2003 at an exercise price of $.22 per share, subject to
adjustment in certain events. See "The Rights Offering".
The Common Stock is quoted on The Nasdaq SmallCap Market ("Nasdaq/SCM")
under the symbol "FOCS". On February 18, 1998, the last reported bid price
for the Common Stock on the Nasdaq/SCM was $0.18. Prior to this offering
(the "Rights Offering"), there has been no market for the Rights, the Units
and /or the Class E Warrants and it is unlikely that a market for the
Rights, Units and/or the Class E Warrants will develop. The Nasdaq Stock
Market, Inc. ("Nasdaq") requires, among other criteria, a minimum bid price
of $1.00 per share for continued listing of the Common Stock on Nasdaq/SCM.
By letter dated September 16, 1997, Nasdaq advised the Company that the
Common Stock would be delisted from Nasdaq/SCM unless prior to December 16,
1997, the Company demonstrates compliance with the minimum bid price
requirements, or alternative criteria. The Company has responded to Nasdaq
with a plan to meet each requirement. A hearing is scheduled for February 19,
1998 whereby Nasdaq will determine if an extension will be granted to
FiberChem to meet the listing requirements. No assurance can be given that
the Common Stock will continue to be listed on Nasdaq/SCM. If the Common
Stock no longer qualifies for quotation on Nasdaq/SCM, trading thereafter
will be in the over-the-counter market through the OTC Electronic Bulletin
Board. See "Risk Factors - Possible Delisting from Nasdaq/SCM and "Risk
Factors" - Disclosure Relating to Low-Priced Stocks".
Subscriptions received by the Company will be accepted subject to the
Company's right to reject any subscription. The Company will accept
subscriptions without regard to any minimum number of Units to be sold in the
Rights Offering, and thereby may only sell a small portion of the Units
offered and thereby realize a minimal amount of proceeds from this Rights
Offering. Securityholders also will be offered an opportunity to purchase
unsubscribed Rights. Members of management of the Company have made a
written commitment to subscribe for 171,867 Rights, representing the number
of Rights to which they are entitled based upon their ownership of the
Company's outstanding securities, and to act as standby purchasers and
subscribe for an additional 1,136,363 unsubscribed Rights.
The terms of the Rights Offering, including the number of Rights to be
reissued to Securityholders, the Subscription Price of the Units and the
exercise price of the Class E Warrants have been arbitrarily determined by the
Company and are not necessarily related to the Company's assets, net worth,
results of operations or other recognized criteria of value.
----------------------
<PAGE>
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SHOULD ONLY BE
PURCHASED BY THOSE WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. SEE RISK
FACTORS." BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN RISKS OF AN
INVESTMENT IN THE COMMON STOCK.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Subscription Proceeds to
Price Company (1)
------------ -----------
<S> <C> <C>
Per Unit............................... $.22 $.22
Total.................................. $1,930,849 $1,930,849
</TABLE>
(1) Before deducting offering expenses payable by the Company estimated at
$55,000 and assuming all of the Rights (but none of the Class E Warrants
included therein) offered hereby are exercised. A Securityholder need not
exercise any minimum number of Rights. There are no underwriting
arrangements with any underwriter or broker-dealer with respect to any of
the Rights, shares of Common Stock or Class E Warrants offered hereby.
There is no agreement or understanding regarding the distribution of Rights
and/or the exercise of Warrants by management and no assurance can be given
that any of such Warrants will be exercised.
The Company intends to issue certificates evidencing the Shares of Common
Stock and the Class E Warrants comprising the Units to subscribers as soon as
possible after the exercise of Rights.
The date of this Prospectus is February 19, 1998.
-2-
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements incorporated by reference or appearing
elsewhere in this Prospectus. This Prospectus contains, in addition to
historical information, forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from the
results discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, the
Company's need to manage its growth, lack of profitability, intense
competition in the industry, and the other risks discussed in "Risk Factors,"
as well as those discussed elsewhere in this Prospectus.
THE COMPANY
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. The Company also is commercializing
a range of sensors based on its Sensor-on-a-Chip-Registered Trademark-
technology for a wide variety of environmental and industrial applications.
Since its inception in 1987, FiberChem has invested in excess of $25
million in research and development relating to a wide range of technologies,
and has now focused on products for environmental monitoring and industry.
During the last several years, a de-emphasis of environmental issues in
Congress has resulted in delays in enactment and enforcement of the
regulatory climate upon which the Company's future prospects were dependent.
Several federal and state programs were not re-authorized or funded. Just
like companies in the electric vehicle or alternative fuels arenas, FiberChem
found that many of its expected opportunities had evaporated, at least for
the foreseeable future. Consequently, FiberChem's management identified
market segments that were driven by other forces. Notwithstanding the slow
down at the Federal level, the Company recognized that the State of Florida
represented a short-term opportunity for aboveground tank leak detection and
set about getting its sensor products certified. At the same time, the phase
out of Freon presented the Company with an opportunity to establish its
technology as the preferred replacement for the existing Freon/Infrared
method for measurement of total petroleum hydrocarbons (TPH) in process water
streams.
During this refocusing process the Company has substantially enhanced
the value of its development initiatives with Texas Instruments, Inc. ("TI")
for its Sensor-on-a Chip-Registered Trademark-. By working together with the
Optoelectronics Group within TI's Semiconductor Group, the Company has
expanded the scope of the joint marketing activity in the billion dollar
chemical sensor marketplace. The short term result from this process has
been the development of eight major products with, the Company believes, very
substantial revenue potential.
-3-
<PAGE>
THE RIGHTS OFFERING
RIGHTS OFFERED......................... 8,776,587 Rights to purchase an
aggregate of 8,776,587 Units. Each
Unit consists of one share of Common
Stock and one Class E Warrant. The
shares of Common Stock and Class E
Warrants will be transferable
separately immediately upon issuance.
TERMS OF RIGHTS: Holders of the Company's Common Stock,
Preferred Stock and Warrants at the
close of business on ________ 1998 (the
"Record Date") will receive Rights to
purchase Units at $.22 per Unit (the
"Subscription Price"). Holders of
Common Stock will receive one Right for
every four shares of Common Stock owned
of record at the close of business on
the Record Date. Holders of Preferred
Stock or Warrants will receive one
Right for every four shares of Common
Stock issuable upon conversion of
Preferred Stock or exercise of Warrants
owned of record at the close of
business on the Record Date. No
fractional Rights to purchase Units
will be issued by the Company. Rights
will be evidenced by subscription
rights certificates ("Rights
Certificates"). See "Rights Offering".
SUBSCRIPTION PRICE............... $.22 per Unit.
TRANSFERABILITY OF RIGHTS........ The Rights are transferrable; however,
it is unlikely that an active trading
market will develop and/or be
maintained for the Rights. See "Risk
Factors".
EXPIRATION DATE.................. 5:00 p.m., Mountain Standard Time, on
___________, 1998 (the "Rights
Expiration Date"), unless extended in
the sole discretion of the Company.
-4-
<PAGE>
MANNER OF SUBSCRIPTION AND Rights may be exercised by executing
METHOD OF PAYMENT.................... the Rights Certificate and by tendering
the Subscription Price in full to the
Company by bank, cashier's or certified
check or by wire transfer. No cash
will be accepted.
TERMS OF SERIES E WARRANTS: Each Class E Warrant will entitle the
holder thereof to purchase one share of
Common Stock, commencing _____________,
1999 (the first anniversary of the date
of this Prospectus).
EXERCISE PRICE: $.22 per share, subject to adjustment
in certain events.
EXPIRATION DATE: 5:00 p.m. Mountain Standard Time on
___________, __ 2003.
RISK FACTORS: This Rights Offering involves a high
degree of risk. See. "Risk Factors."
USE OF PROCEEDS: Working capital and development of
sensors and sensor applications. See
"Use of Proceeds."
NASDAQ/SCM COMMON STOCK SYMBOL(1)(2) FOCS-Registered Trademark-
FEDERAL INCOME TAX CONSEQUENCES Generally, stockholders will not
recognize any gain or loss upon receipt
or exercise of the Rights. See "Certain
Federal Income Tax Consequences"
NUMBER OF SHARES OF COMMON STOCK OUT- 25,639,707 Shares(3)
STANDING BEFORE THE RIGHTS OFFERING
NUMBER OF SHARES OF COMMON STOCK 34,416,294 Shares(3) (4)
OUTSTANDING AFTER THE RIGHTS OFFERING
(1) By letter dated September 16, 1997, the Company was advised by Nasdaq
that the Common Stock would be delisted from the Nasdaq/SCM unless the
Company demonstrates compliance with the minimum bid price requirements
or alternative maintenance criteria. There can be no assurance that the
Common Stock will continue to be listed on Nasdaq/SCM. See "Risk
Factors -- Possible Delisting from Nasdaq/SCM."
(2) Prior to this Rights Offering, there has been no public market for the
Rights, Units and/or Class E Warrants, and it is unlikely that an active
market for any of such securities will develop after this Rights
Offering, and with respect to the Rights, prior to the Expiration Date.
-5-
<PAGE>
(3) Does not include 7,276,661 shares issuable upon exercise of outstanding
warrants, 3,241,556 shares issuable upon the exercise of options
granted and to be granted pursuant to the Company's existing stock
option and stock purchase plans, 2,189,980 shares issuable upon
conversion of the Preferred Stock and 3,984,796 shares issuable upon
conversion of certain outstanding notes.
(4) Assumes Rights to purchase 8,776,587 Units are exercised. Does not include
8,776,587 shares issuable upon exercise of the Class E Warrants.
SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial information set forth below is
derived from and should be read in conjunction with the Company's
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
YEAR ENDED THREE MONTHS
SEPTEMBER 30, ENDED DECEMBER 31,
------------- ------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues ................... $ 908,700 $ 1,523,994 $ 115,574 $ 225,179
Gross Profit ............... 540,921 578,560 51,652 132,337
Operating Loss ............. (3,292,102) (2,820, 802) (835,584) (448,294)
Net Loss ................... (3,274,629) (3,226,958) (833,162) (506,627)
Net Loss per Share Common
Stock ...................... ($0.15) ($.013) ($0.03) ($0.02)
Shares of Common Stock
used in computing Net
Loss per Share ............. 22,274,226 25,623,614 25,710,323 25,546,214
</TABLE>
BALANCE SHEET DATA:
<TABLE>
DECEMBER 31, 1997
-----------------
ACTUAL MAXIMUM UNITS (1) MINIMUM UNITS (2)
------ ----------------- -----------------
<S> <C> <C> <C>
Working Capital .......... 1,607,740 3,483,589 2,518,164
-6-
<PAGE>
Total Assets ............. 2,638,649 4,514,498 3,549,073
Total Liabilities ........ 2,237,078 2,237,078 2,237,078
Accumulated Deficit ...... (30,103,136) (30,103,136) (30,103,136)
Total Stockholders'
Equity .................. $401,571 2,277,420 1,311,995
</TABLE>
- -----------------------
(1) Assumes exercise of all of the Rights for net proceeds of
approximately $1,875,849.
(2) Assumes exercise of 50% of the Rights for net proceeds of
approximately $910,424.
RIGHTS OFFERING
General
The Company, pursuant to this Prospectus, is offering to holders of its
Common Stock, Preferred Stock and Warrants, Rights to subscribe for Units at
a Subscription Price of $.22 per Unit. Each Unit consists of one share of
Common Stock and one Class E Warrant. Each holder of Common Stock will
receive one Right for every four shares of Common Stock owned of record on
the Record Date. Each holder of Preferred Stock or Warrants will receive one
Right for every four shares of Common Stock issuable upon conversion of
Preferred Stock or upon exercise of Warrants owned of record on the Record
Date. No fractional Rights to purchase Units will be issued by the Company.
The Rights will be evidenced by transferable Rights Certificates to be issued
by the Company to Securityholders of record as of the Record Date. A
Securityholder need not exercise any minimum number of Rights.
Securityholders may purchase the Units through the exercise of their
Rights privately, sell or purchase Rights, or allow their Rights to expire
unexercised. To the extent Securityholders do not exercise their Rights,
their equity ownership in the Company may be diluted to the extent other
Securityholders determine to exercise the Rights and/or the Class E Warrants.
See "Capitalization" for the effects of the Rights Offering on the Company's
capitalization, assuming the proceeds are used as indicated herein under the
caption, "Use of Proceeds."
The terms of the Rights Offering, including the number of Rights to be
issued to Securityholders based upon their ownership of Common Stock,
Preferred Stock or Warrants as of the Record Date, the Subscription Price and
the exercise price of the Class E Warrants have been arbitrarily determined
by the Company and are not necessarily related to the Company's assets, net
worth, results of operations or other recognized criteria of value.
EXPIRATION DATE
The Rights Offering will expire at 5:00 p.m., Mountain Standard Time,
___________, 1998 (the "Expiration Date"), unless otherwise extended by the
Company.
-7-
<PAGE>
RIGHT TO SUBSCRIBE FOR ADDITIONAL UNITS
Securityholders will have the right to subscribe for Units not
subscribed for by other Securityholders by specifying the number of
additional Units they desire to purchase in the Form of Election at the end
of the Rights Certificate to be distributed to Securityholders in connection
with the Rights Offering (the "Additional Subscription Privilege"). If the
number of Units subscribed for by Securityholders exercising the Additional
Subscription Privilege exceeds the number of unsubscribed Units available for
purchase, unsubscribed Rights will be allocated amongst Securityholders
selecting the Additional Subscription Privilege based upon their PRO RATA
ownership of Common Stock on a fully diluted basis (i.e., assuming the
conversion or exercise of all of the Preferred Stock and Warrants owned by
Securityholders exercising the Additional Subscription Privilege.
RIGHTS--TRANSFERABILITY
Rights to subscribe for the Units will be evidenced by Rights
Certificates issued in the name of the registered holders of shares of Common
Stock, Preferred Stock and Warrants as of the close of business on the Record
Date. The Rights Certificates are being mailed to Securityholders in all
states, except to holders of record in states where the Rights Offering has
not been qualified or where the Rights Offering is not exempt from
registration or where in the judgment of the Company the Rights Offering may
not otherwise lawfully be made. The Rights may be bought and sold in private
transactions. No trading market currently exists for the Rights and it is
unlikely that any market for the Rights will develop or, if developed, that
it will be sustained. The Rights evidenced by a Rights Certificate may be
split up or combined and transferred at the principal office of the Company's
transfer agent, but a Rights Certificate may not be divided in such a way as
to result in a fractional Right. A Securityholder who after the Record Date
sells shares of Common Stock held before the Record Date will still be
entitled to the grant of Rights since such sale will not constitute a
transfer of the Rights relating thereto.
METHOD OF EXERCISING RIGHTS AND PAYMENT OF SUBSCRIPTION PRICE
Rights may be exercised by the holders thereof by delivering to the
Company a fully completed and duly executed Rights Certificate, together with
payment in full, by certified, bank or cashier's check, or wire transfer for
the number of Units subscribed for, to the Company at 1181 Grier Drive, Suite
B, Las Vegas, Nevada 89119. The risk of delivery of such documents and
payment will be borne by the holder and not by the Company. If the mail is
used to deliver the documents described above, it is recommended that
insured, registered mail be used.
Except in the case of guaranteed delivery, Rights Certificates and
payment must arrive before the close of business on the Expiration Date, and
any subscriptions received thereafter will not be honored. All questions with
respect to the validity, form, eligibility and acceptance of any exercise of
Rights will be determined solely by the Company. The Company may waive any
defect or irregularity, permit a defect or irregularity to be corrected
within such time as it may determine or
-8-
<PAGE>
reject the exercise of any Right with respect to the validity, form or
eligibility or acceptance thereof. Once a holder has exercised a Right, that
exercise is irrevocable.
GUARANTEED DELIVERY
If delivery of an executed Rights Certificate to the Company is not made
before the close of business on the Expiration Date, but prior thereto the
Company receives full payment for the Units subscribed for and a letter or
telegram from a commercial bank, a trust company having an office in the
United States, or a member firm of any registered United States securities
exchange, which contains (i) the serial number of the Rights Certificate
relating to the Units, (ii) the name and address of the subscriber, (iii)
Rights represented by the Rights certificates, (iv) the number of Units
subscribed for and (v) a guaranty by the bank or member firm that a properly
completed and duly executed Rights Certificate will promptly be delivered to
the Company, the Company will treat this offer to subscribe for Units as an
exercise of Rights by the holder, subject to the receipt of the properly
completed and duly executed Rights Certificate within five business days
after the Expiration Date.
ISSUANCE OF UNITS
The securities comprising the Units to be purchased upon exercise of
Rights will be issued by the Company as soon as practicable after exercise.
Delivery of the certificates representing the shares of Common Stock and
Class E Warrants comprising the Units will be made as soon as practicable.
Until the issuance of the Units, no holder electing to exercise its Rights
shall be, or have any rights of, a stockholder with respect to the shares of
Common Stock comprising the Units issuable upon exercise of such Rights, nor
shall such shares of Common Stock be deemed to have been held of record for
purposes of voting or receiving dividends or any other purposes.
STANDBY ARRANGEMENTS
There are no underwriting arrangements with any underwriter or
broker-dealer with respect to any of the Rights, shares of Common Stock or
Warrants offered hereby. However, members of management of the Company have
made a written commitment to exercise all of their Rights to purchase 171,867
Units (for an aggregate of $37,811) and to act as standby purchasers and
subscribe for at least 1,136,363 unsubscribed Rights (for an additional
$250,000 which they have loaned to the Company on an interim basis). There
is no agreement or understanding regarding the exercise of Warrants by
management and no assurance can be given that any of such Warrants will be
exercised.
-9-
<PAGE>
RISK FACTORS
The securities offered hereby are speculative and involve a high degree
of risk. Accordingly, prospective investors should carefully consider the
following factors, among others, relating to an investment in the Company.
DEPENDENCE ON SUCCESS OF SECOND GENERATION SYSTEMS. The Company has had
limited revenues to date. The Company decided in March 1993, to develop and
market second generation systems to replace first generation systems.
Initial shipments of second generation systems commenced in December 1993,
for field testing and regulatory approval. The Company had revenues of
approximately $1,149,000, $909,000 and $1,524,000 during the fiscal years
ended September 30, 1995, 1996 and 1997 respectively and $225,179 for the
quarter ended December 31, 1997. While Management believes that increased
sales of the Company's systems reflect initial market acceptance, until such
time, if ever, as the Company's products gain widespread acceptance, there
can be no assurance that the Company will achieve profitability.
HISTORICAL OPERATING LOSSES AND ACCUMULATED DEFICIT. For the fiscal
years ended September 30, 1995, 1996 and 1997, the Company had net losses of
approximately $2,829,000, $3,275,000, and $3,227,000, respectively. The
Company had an accumulated deficit of approximately $30,103,000 at December
31, 1997. There can be no assurance that the Company will derive sufficient
revenues from operations to offset its level of fixed and planned
expenditures, or that losses will not continue.
WORKING CAPITAL REQUIREMENTS. The Company had working capital at
December 31, 1997 of $1,607,740 and September 30, 1997, of approximately
$1,884,000, as compared with working capital of $4,385,000 at September 30,
1996, representing a decrease of $2,501,000. This decrease was primarily a
result of the Company's net cash used in operating activities of $2,715,000,
offset in part by net cash provided by financing activities of $216,000.
Management believes, but cannot assure, that the net proceeds from the
Offering, will be sufficient to enable the Company to carry out its planned
expansion. However, as long as the Company continues to utilize working
capital to support operations, or if the expansion is more costly than
anticipated, the Company may require additional capital. There can be no
assurance that additional capital, if required, will be available on terms
acceptable to the Company.
ABILITY TO CONTINUE AS A "GOING CONCERN"; QUALIFIED REPORT OF
INDEPENDENT ACCOUNTANTS. The Company's consolidated financial statements for
the year ended September 30, 1997, indicated there is substantial doubt about
the Company's ability to continue as a going concern due to the Company's
need to generate cash from operations and obtain additional financing.
RISKS OF EXPANSION. The Company intends to use a substantial portion of
the net proceeds from this Offering to produce and market its products on a
commercial basis. The Company has had only limited sales of its products to
customers, and there is no assurance that it will obtain new customers or
that the Company will not require more funds than its has allocated for such
purposes. The Company must also be able to attract and retain skilled
management and qualified personnel at
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<PAGE>
all levels as it attempts to expand its operations. In addition, to manage
growth effectively, the Company will need to implement and improve
operational, financial and management information systems, procedures and
controls. Unless the Company is able to manage such proposed expanded
operations in an efficient manner, the Company's operations may be adversely
affected. There can be no assurance that the Company will successfully
commercialize its products or expand its operations. The Company also
intends to use a portion of the proceeds to accelerate the development of
sensor products and Sensor-on-a-Chip-Registered Trademark- applications.
TECHNOLOGICAL OBSOLESCENCE OF EXISTING TECHNOLOGY. To date, the Company
has been dependent on the marketing and sale of its fiber optic chemical
sensors ("FOCS-Registered Trademark-"). Other technologies exist that
compete with the FOCS-Registered Trademark- technology. Although the Company
is also developing a range of sensor products based on its
Sensor-on-a-chip-Registered Trademark-technology, there can be no assurance
that any or all of the Company's products will not be rendered superfluous or
obsolete by research efforts and technological advances made by others.
FiberChem's failure to successfully market the products incorporating the
technologies would have a material adverse effect on the Company's
operations. The Company is also dependent on the successful development and
marketing by other entities of products incorporating the Company's sensors.
COMPETITION. Competition in the field of diagnostic sensor and
environmental technology is intense. Competition in the underground storage
tanks ("UST") detection market has intensified since the promulgation of the
EPA regulations. Federal laws do not require leak detection for above ground
storage tanks ("AST"), resulting in less intense competition in that area.
The Company is aware of leak detection devices in the market or being
developed, some of which involve fiber optics. The Company anticipates that
its other sensor products under development will face less intense
competition than its current products.
Most of the Company's actual and potential competitors have greater
financial resources, more extensive business experience and larger
organizations than the company possesses. Even if the Company is able to
successfully market its FOCS-Registered Trademark- products, there is no
assurance that larger or better financed companies will not develop effective
competitive products. Accordingly, there can be no assurance that the Company
will be able to operate profitably at any time in the future.
GOVERNMENT REGULATION. The EPA regulations regulate the installation,
testing, manufacture and maintenance of USTs. The EPA regulations establish
a timetable for the installation of leak detection equipment in USTs and
pipings and are subject to interpretation and subsequent changes. There can
be no assurance that the PetroSense-Registered Trademark- Continuous
Monitoring System will meet future regulatory requirements. These
regulations are the minimum federal requirements; state and local regulators
are permitted to enact more stringent standards. The EPA also regulates the
monitoring, management and cleanup of stormwater-generated pollution and
hazardous wastes. There can be no assurance that other sensor products under
development will meet future federal or state regulatory requirements.
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PATENTS. The Company's FOCS-Registered Trademark- technology, which is
proprietary and patented, is the Company's most critical asset. The Company
owns 20 United States patents and four additional patent applications are
pending with the United States Patent and Trademark Office. The Company also
has 12 foreign patents and 15 foreign patent applications pending for its
various sensor technologies and devices. There can be no assurance that such
patents will protect the Company from other persons who develop products that
infringe the Company's proprietary rights. Many patents involving fiber
optic technology have been issued to others. To the Company's best
knowledge, its technologies do not infringe patent or other proprietary
rights of others; however, there can be no assurance that such infringement
has not occurred or will not occur in the future.
If it were determined that the Company's products infringed any claims
of an issued patent, the Company could be enjoined from making or selling
such products or be forced to obtain a license in order to continue the
manufacture or sale of the product involved, requiring payment of a licensing
fee or royalties of unknown magnitude on sales of the product. In addition,
the Company could be liable for substantial damages, and even the defense of
patent litigation can be extremely expensive. There can be no assurance that
if any such license were required, it would be available or available on
terms acceptable to the Company. Any inability to obtain required licenses
on favorable terms, or at all, would adversely affect the Company's business.
There can be no assurance that the Company's pending patent applications
will be allowed, that any issued patents would be upheld, that any issued
patents will provide the Company with significant competitive advantages, or
that challenges will not be instituted against the validity or enforceability
of any patents owned by the Company and, if instituted, that such challenges
will not be successful. The cost of litigation to uphold the validity of a
patent and prevent infringement can be substantial even if the Company
prevails. Furthermore, there can be no assurance that others will not
independently develop similar technologies, duplicate the Company's
technology or design around the patented aspects of the Company's technology.
If patents do not issue from present or future patent applications, the
Company may be subject to greater competition. In addition, the Company's
technology might be subject to reverse engineering, allowing competitors to
obtain the company's proprietary technology.
PRODUCTS LIABILITY AND UNINSURED RISKS. FiberChem has products
liability insurance in the amount of $5 million. When the Company sells any
products it may become subject to substantial claims and liabilities from
users of such products in excess of insurance. Even though the Company
maintains products liability insurance, in the amount of $5 million dollars,
there can be no assurance that the Company will be able to retain such
insurance or that such insurance would be sufficient to protect the Company
in the event of a major defect in its products or from any claims made based
on the performance of its products. In the event of an uninsured or
inadequately insured products liability claim in the future based on the
performance of any of the Company's products, the Company's business and
financial condition could be materially adversely affected.
NEED FOR MANUFACTURING FACILITIES AND DEPENDENCE ON THIRD PARTIES FOR
MANUFACTURING AND SUPPLY. The Company's facilities in Las Vegas, Nevada are
capable of manufacturing its
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FOCS-Registered Trademark-and Sensor-on-a-chip-Registered Trademark- products
for its current sales volumes. Although alternative assembly operations are
currently available, there can be no assurance that such operations will be
available in the future or will be available on terms acceptable to the
Company.
The Company does not manufacture the components of its products,
although it currently assembles the products itself. The Company has not
entered into any formal arrangement with any supplier. Although the Company
believes that there are several potential suppliers for substantially all
required components, the Company might incur delays in meeting delivery
deadlines in the event a particular supplier is unable or unwilling to meet
the Company's requirements. Suppliers of custom designed components would be
more difficult to replace. No assurance can be given that the cost of third
party manufacturing of components or of the Company's products will not
exceed current estimates. In addition, the Company is largely dependent on
its suppliers for quality control.
DEPENDENCE UPON KEY PERSONNEL. The Company is dependent upon Geoffrey
Hewitt, Chief Executive Officer, Thomas Collins, President, and Melvin
Pelley, Chief Financial Officer, of FCI Environmental, the Company's
wholly-owned subsidiary. Messrs. Hewitt, Collins and Pelley's employment
agreements are terminable for cause by the Company. To the extent that any
of their services become unavailable to the Company, the Company's business
or prospects may be adversely affected. There is no assurance that the
Company would be able to employ qualified persons to replace these key
individuals. The Company carries key man life insurance policies of $3
million, $2 million and $1 million, respectively, on the lives of Messrs.
Hewitt, Collins and Pelley. There is no assurance that the key man life
insurance policies will continue to be carried by the Company.
DEPENDENCE ON TECHNICAL AND PROFESSIONAL PERSONNEL. The Company's
ability to produce and market its FOCS-Registered Trademark- products and
develop new products is dependent upon the availability and technical
abilities of the Company's in-house staff and facilities and/or agreements to
be negotiated with third parties. Competition for qualified technical
personnel is intense. No assurance can be given that the Company will be
able to retain those independent persons presently employed and be able to
attract qualified individuals in the future to satisfy the Company's
requirements for technical expertise.
DIVIDEND AND INTEREST PAYMENTS. Pursuant to the terms of the Company's
Convertible Preferred Stock, dividends are payable annually on November 1st.
The holders of the Convertible Preferred Stock may elect to receive their
dividend payments in cash at a rate of 11% of the liquidation value, or in
additional shares at the rate of 8% the number of shares of Convertible
Preferred Stock held by such holder on the date of declaration. In September
1997, the Company's Board of Directors determined that, in view of the recent
trading price of the Company's Common Stock and in view of the Company's
current cash position, it would not be appropriate to declare the annual
dividend payable on the Convertible Preferred Stock on November 1, 1997. As
a result, that dividend will accumulate in accordance with the terms of the
Convertible Preferred Stock. No assurance can be given that the Company will
be able to make dividend distributions in the future if the holders of the
Convertible Preferred Stock request cash.
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The Company has not paid any dividends on its Common Stock and no
assurance can be given that there will be any such dividends in the future.
See "Common Stock Price Range" and "Dividend Policy."
Pursuant to the terms of the Company's 8% Senior Convertible Notes due
February 15, 1999, interest payments in the amount of $65,000 are due each
August and February. There can be no assurance, if the notes are not
converted, that the Company will be able to pay the $1,625,000 principal of
the notes which remains outstanding.
POSSIBLE VOLATILITY OF COMMON STOCK PRICES. The market price of the
Company's Common Stock may be significantly affected by various factors,
including but not limited to, general economic conditions and those specific
to the environmental testing industry, future acquisitions, if any, and the
Company's financial condition. Moreover, the price of the Company's Common
Stock may be affected by the significant number of shares of Common Stock
outstanding, and the shares underlying outstanding warrants and/or options to
purchase shares of the Company's Common Stock. In addition, the 8,776,587
Units being registered hereunder, including the 8,776,587 shares of Common
Stock comprising the Units, and the additional 8,776,587 shares of Common
Stock which would be issuable upon the exercise of the Class E Warrants being
registered hereunder, may have a depressive effect on the market price of the
Common Stock. See "Price Range of Common Stock" and "Plan of Distribution."
NO ASSURANCE OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE. Prior
to the Rights Offering, there has been no public trading market for the
Rights, the Units and/or the Class E Warrants. In addition, it is unlikely
that a regular trading market for the Rights, Units and/or the Class E
Warrants will develop after this Rights Offering, or if developed, that it
will be sustained. With respect to the Rights, no trading market, if
developed, would be sustained after the Expiration Date. In addition, the
Units are immediately separable upon issuance. The Subscription Price and
the exercise price of the Class E Warrants have been arbitrarily determined
by the Company and are not necessarily related to the Company's assets, net
worth, results of operations or other recognized criteria of value.
BROAD DISCRETION IN APPLICATION OF PROCEEDS. Assuming all of the Rights
are subscribed for by the Company's shareholders, approximately 100% of the
estimated net proceeds of this Rights Offering have been allocated for
working capital purposes. Such amounts so allocated may be expended at the
discretion of the Company's Management. Also, the Company has afforded
itself broad discretion with respect to redirecting the application and
allocation of the net proceeds of this Rights Offering, in light of changes
in circumstances and the availability of business opportunities. Therefore,
no assurance can be given that Management's discretionary use of any of the
proceeds raised in the Rights Offering would result in an enhancement of the
Company's share valuation. Pending the use for the purposes described above,
the net proceeds of the Rights Offering may be invested by the Company in
short-term, interest-bearing obligations or marketable securities. See "Use
of Proceeds."
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INABILITY TO EXERCISE RIGHTS AND/OR CLASS E WARRANTS. The Company
intends to qualify the sale of Units offered hereby in a limited number of
states. Although certain exemptions in the securities ("blue sky") laws of
certain states might permit Rights and/or Class E Warrants to be transferred
to purchasers in states other than in which the Units were initially
qualified, the Company will be prevented from issuing Units and/or Common
Stock in such states upon the exercise of the Rights and/or Class E Warrants,
respectively, unless an exemption from qualification is available or unless
the issuance of the Units or the Common Stock upon exercise of the Rights or
Class E Warrants, respectively, is qualified. The Company may decide not to
seek or may not be able to obtain qualification of the issuance of such Units
or Common Stock in all of the states in which the ultimate purchasers of the
Units or Class E Warrants reside. In such a case, the rights or the Class E
Warrants held by purchasers will expire and have no value if such rights or
Class E Warrants cannot be sold. Accordingly, the market for the Rights
and/or Class E Warrants may be limited because of these restrictions.
Further, a current prospectus covering the Common Stock issuable upon
exercise of the Class E Warrants must be in effect before the Company may
accept Class E Warrant exercises. There can be no assurance the Company will
be able to have a prospectus in effect when this Prospectus is no longer
current, notwithstanding the Company's commitment to use its best efforts to
do so. See "The Rights Offering--Class E Warrants."
SHARES ELIGIBLE FOR FUTURE SALES AND POTENTIAL FUTURE DILUTION.
Approximately 2,238,187 of the 25,639,707 shares of Common Stock outstanding
as of February 1, 1998 are "restricted securities" as such term is defined in
Rule 144 promulgated under the Securities Act. Restricted securities may
only be publicly sold pursuant to an effective registration statement under
the Securities Act or in accordance with applicable exemptions from the
registration requirements of the Securities Act. Rule 144 provides for the
public sale of limited quantities of restricted securities without
registration under the Securities Act.
The Company is unable to predict the effect that sales made pursuant to
this Prospectus, Rule 144 or otherwise may have on the then prevailing market
price of the Company's securities, although sales of substantial amounts of
shares by existing stockholders, or even potential of such sales, may be
expected to have an adverse effect on the trading price and market for the
Company's securities.
In the event that the Company's stock price increases, holders of
outstanding options and warrants may elect to exercise, and holders of
outstanding notes may elect to convert, resulting in dilution of other
stockholders' interests. As of February 1, 1998, the Company had outstanding
1,895,175 Class D Warrants. Each Class D Warrant is currently exercisable by
the holder thereof to purchase one share of Common Stock at an exercise price
of $1.15 per share, until September 15, 1998, an exercise price of $1.20
through September 15, 1999 and $1.25 through the expiration date of September
15, 2000. There are an additional 1,280,411 Warrants outstanding, each
exercisable at $.2343; 692,742 Warrants each exercisable at $.4078; 75,000
Warrants each exercisable at $.90 and 3,333,333 Warrants each exercisable at
$1.00 (collectively with the Class D Warrants, the "Outstanding Warrants")
outstanding, which are exercisable. The Company's Board of Directors has
agreed that the Company will not call the Outstanding Warrants prior to their
expiration. The Convertible Preferred Stockholders have the right to convert
the 218,998 shares of Convertible
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Preferred Stock outstanding into 2,189,980 shares of Common Stock, subject to
adjustment and redemption under certain circumstances. The holders of the 8%
Senior Convertible Notes (the "Notes") have the right to convert their notes
into an aggregate of 3,984,796 shares of Common Stock, assuming a conversion
price of $.4078, subject to adjustment and redemption under certain
circumstances. In addition, the Company has previously registered an
additional 2,991,556 shares of Common Stock underlying a like number of
options (the "Options") (2,116,556 options outstanding; 875,000 options
authorized, but not granted) and 250,000 shares of Common Stock issuable
pursuant to an Employee Stock Purchase Plan pursuant to registration
statements on Forms S-8. See "Description of Securities."
During the respective terms of the Company's Warrants, Options,
Convertible Preferred Stock and Notes, the holders thereof may be able to
purchase shares of Common Stock at prices substantially below the then
current market price of the Company's Common Stock, with a resultant dilution
in the interests in the existing common stockholders. The holders of the
Warrants, Options, Convertible Preferred Stock and Notes may be expected to
exercise their rights to acquire shares of Common Stock at times when the
Company might be able to obtain needed capital through a new offering of
securities on terms more favorable than those provided by these outstanding
securities. Thus, exercise of the Warrants, and Options and/or the
conversion of Convertible Preferred Stock and Notes may be expected to have a
depressive effect on the market price for the Common Stock and might
adversely affect the terms on which the Company may be able to obtain
additional financing or additional capital. In addition, the exercise or
conversion of the Warrants, Options, Convertible Preferred Stock or Notes and
the subsequent sales of shares of Common Stock by holders of such securities
pursuant to a registration statement, under Rule 144, or otherwise, could
have an adverse effect upon the market for the Company's securities.
Moreover, Warrant holders who fail to exercise their Warrants will experience
a corresponding decrease in their interest held in the Company relative to
the ownership interest held by exercising Warrant holders.
CONTROL BY INSIDERS. Of the 25,639,707 shares of Common stock
outstanding as of February 1, 1998, approximately 2,238,187 shares, or 8.7%,
are held by officers, directors, principal stockholders and their affiliates.
On a fully diluted basis, as of February 1, 1998 (assuming conversion of all
the Convertible Preferred Stock and Notes and exercise of all Outstanding
Warrants and Options before the Offering) there would be approximately
41,207,700 shares of Common Stock outstanding, of which approximately 16%
would be held by officers, directors, principal stockholders and their
affiliates. Stockholders of the Company are not allowed to cumulate their
votes in electing directors. Therefore, the existing stockholders may be in a
position to control the affairs of the Company.
CLASSIFIED BOARD OF DIRECTORS. The Company's By-Laws provide for a
classified Board of Directors. The Board has three classes of directors
serving for three-year terms, with one class of directors to be elected at
each annual meeting of stockholders. The classification of Directors has the
effect of making it more difficult to change the composition of the Board of
Directors. At least two stockholder meetings, instead of one, would be
required to effect a change in the majority control of the Board (except in
the event of vacancies resulting from removal or other reasons).
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The classification of Directors applies to every election of Directors
and is not triggered by (i) the occurrence of a particular event such as a
hostile takeover, (ii) whether or not a change in the Board would be
beneficial to the Company and its stockholders, or (iii) whether or not a
majority of the Company's stockholders believes that such change would be
desirable. Thus, a classified Board makes it more difficult for stockholders
to change the majority of Directors even when the only reason for the change
may be performance of the present Directors.
PREFERRED STOCK AUTHORIZATION. The Company's Certificate of
Incorporation authorizes the issuance of a maximum of 10,000,000 shares of
"blank check" preferred stock, $.001 par value (the "Preferred Stock") with
such designations, rights and preferences as may be determined from time to
time by the Company's Board of Directors. An aggregate of 437,017 shares of
"Convertible Preferred Stock" were issued in the August and December 1993
Private Placements, of which 218,998 shares are currently outstanding and
convertible into Common Stock on a one for ten basis. Even though the
Company does not plan to issue any additional shares of Preferred Stock in
the foreseeable future, there can be no assurance that the company will not
do so in the near future. If issued, the terms of a series of additional
Preferred Stock could operate to the significant disadvantage of holders of
outstanding Convertible Preferred Stock and /or Common Stock. The Board of
Directors is authorized to issue Preferred Stock with dividend, liquidation,
conversion, voting or other rights without stockholder approval, which could
adversely affect the voting power or other rights of the Company's Common and
Convertible Preferred Stockholders. In addition, in the event of a proposed
attempt to gain control of the Company of which the Board of Directors does
not approve, the Board could authorize the issuance of Preferred Stock as an
anti-takeover device, which could prevent the completion of such a
transaction to the detriment of public stockholders.
POSSIBLE DELISTING FROM NASDAQ/SCM. The Company's Common Stock is
quoted on the Nasdaq/SCM. By letter dated September 16, 1997, Nasdaq advised
the Company that the Common Stock would be delisted from Nasdaq/SCM unless
prior to December 16, 1997, the Company demonstrates compliance with the
minimum bid price requirements or alternative criteria. In order to remain
quoted on Nasdaq/SCM, under recently amended maintenance criteria, a company
must have net tangible assets (I.E. total assets, excluding goodwill, minus
total liabilities) of $2 million (or alternatively, net income of $500,000 in
two of the most recent three fiscal years, or a market capitalization of $35
million). In addition, continued inclusion requires that the listed security
have a minimum bid price of $1.00 per share, public float (I.E. shares not
held directly or indirectly by any officer or director or any person who is
the beneficial owner of more than 10% of the total outstanding shares) of at
least 500,000 shares and that the market value of such shares be at least
$4,000,000. The Company has been informed by Nasdaq that it has until
February 23, 1998 before the Company is required to meet the new maintenance
criteria. Members of Management have made a written commitment to fully
subscribe for all Rights to which they are entitled, based upon their
ownership of the Company's outstanding securities, and to act as standby
purchasers and subscribe for an additional $250,000. Although the proceeds
of this Rights Offering, assuming the sale of all Units, would be sufficient
to satisfy Nasdaq's net tangible assets maintenance criteria, there can be no
assurance that either all or substantially all Units will be sold or that the
Common Stock will continue to be listed on Nasdaq/SCM. The Company advised
Nasdaq of its efforts to maintain the
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Company's Nasdaq listing, and a hearing is scheduled for February 19, 1998
whereby Nasdaq will determine if an extension will be granted to the Company
to meet the listing requirements. There is no assurance the Company will be
able to maintain its Nasdaq listing. Even assuming Nasdaq eligibility, there
can be no assurance that an active trading market will continue for the
Company's securities. If for any reason the Common Stock is not eligible for
quotation or does not remain qualified for quotation on Nasdaq, then in such
case the Common Stock is expected to be traded in the over-the-counter market
through the OTC Electronic Bulletin Board or the National Quotation Bureau
("Pink Sheets"). As a result, an investor may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, the
Company's securities.
DISCLOSURE RELATING TO LOW-PRICED STOCKS. If the Company's Common Stock
were delisted from NASDAQ, the Company would be subject to Rule 15g-9
promulgated under the Securities Exchange Act of 1934, as amended, which
imposes various sales practice requirements on broker-dealers who sell
securities governed by Rule 15g-9 to persons other than established customers
and accredited investors (generally institutions with assets in excess of
$5,000,000 or individuals with a net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 jointly with their spouse). For
transactions covered by Rule 15g-9, the broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, Rule 15g-9
may have an adverse effect on the ability of broker-dealers to sell the
Company's securities and may affect the ability of purchasers in this
Offering to sell the Company's securities in the secondary market and
otherwise affect the trading market in the Common Stock.
The Commission has adopted rules that regulate broker-dealer practices
in connection with transactions in "penny stocks." If the Company's
securities become subject to the penny stock rules, investors in the Offering
may find it more difficult to sell their shares. Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
system, provided that current price and volume information with respect to
transactions in that security is provided by the exchange or system). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document prepared by the Commission that provides information
about penny stocks and the nature and level of risks in the penny stock
market. The broker-dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the
customer's account. The bid and offer quotations, and the broker dealer
salesperson compensation information, must be given to the customer orally or
in writing before or with the customer's confirmation. These disclosure
requirements may have the effect of reducing the level of trading activity in
the secondary market for a stock that becomes subject to the penny stock
rules.
LACK OF SUFFICIENT AUTHORIZED SHARES. The Company's Certificate of
Incorporation, as amended, authorizes the issuance of 50,000,000 shares of
Common Stock. As of February 1, 1998, the Company had outstanding 25,639,707
shares of Common Stock, and an additional 15,567,993 shares reserved for
issuance upon conversion of the Preferred Stock, conversion of Notes and the
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exercise of Warrants and options. Accordingly, only 8,792,330 shares remain
available for issuance. However, if all 8,776,587 Units are subscribed for
in the Rights Offering, 8,776,587 shares of Common Stock would be issued as
part of the Units and an additional 8,776,587 shares would be issuable upon
exercise of the Class E Warrants. Therefore, the number of authorized shares
of Common Stock unissued and unreserved for a specific purpose is not
sufficient to cover the shares of Common Stock that would be issued as part
of the Units and upon exercise of the Class E Warrants included in the Units
if Rights to subscribe for more than 4,396,150 Units are exercised in the
Rights Offering. The Class E Warrants are not exercisable prior to the first
anniversary of the commencement of the Rights Offering. The Board of
Directors of the Company has agreed to amend the Certificate of Incorporation
to increase the number of authorized shares of Common Stock and to submit
that amendment to stockholders for approval at the next Annual Meeting of
Stockholders, scheduled for April, 1998. In the event stockholders do not
approve that amendment prior to the first anniversary of the Rights Offering,
when the Class E Warrants become exercisable, members of management of the
Company have agreed not to exercise options to purchase that number of shares
of Common Stock in excess of the number of authorized shares unissued but
reserved for issuance upon exercise of the Series E Warrants sold in the
Rights Offering until such time as sufficient shares are available for the
issuance of shares of Common Stock upon exercise of all outstanding Series E
Warrants (the "Lock-Up Agreement"). No assurance can be given that the
stockholders will approve the proposed Amendment, or that members of
Management will enter into the Lock-Up Agreement.
FOR ALL OF THE AFORESAID REASONS AND OTHERS SET FORTH HEREIN, THE
PURCHASE OF SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. ANY
PERSON CONSIDERING AN INVESTMENT IN THE SECURITIES OFFERED HEREBY SHOULD BE
AWARE OF THESE AND OTHER FACTORS SET FORTH IN THIS OFFERING MEMORANDUM. THE
SECURITIES SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO ABSORB A
TOTAL LOSS OF THEIR INVESTMENT IN THE COMPANY AND HAVE NO NEED FOR A RETURN
ON THEIR INVESTMENT.
USE OF PROCEEDS
Assuming all of the Units are subscribed for in accordance with this
Rights Offering, of which no assurance can be given, the Company will realize
gross proceeds of approximately $1,930,849. Assuming all the Units are sold,
the Company anticipates using the net proceeds therefrom of approximately
$1,875,849 (after deductions of approximately $55,000 of offering expenses)
for working capital purposes, including general corporate expenses.
Furthermore, if all the Class E Warrants are exercised at a price of $.22 per
share, of which no assurance can be given, the Company will realize
additional gross proceeds of $1,930,849. See "The Rights Offering". Any
funds received by the Company from the exercise of the Class E Warrants are
anticipated to be applied by the Company for working capital purposes.
Proceeds, if any, to be received by the Company from the exercise of the
Class E Warrants will occur from time to time.
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None of the expenditures described above constitutes a binding
commitment by the Company. Projected expenditures are estimates or
approximations only. Future events, including changes in the economic climate
or the Company's planned business operations, including the success or lack
of success of the Company's intended business activities, may make shifts in
the allocation of funds necessary or desirable. Any such shifts will be at
the discretion of the Board of Directors of the Company. Prior to
expenditure, the net proceeds will be invested in short-term interest bearing
securities or money market funds. See "Risk Factors -- Broad Discretion in
Application of Proceeds" and "Management".
MARKET FOR COMMON STOCK AND
RELATED STOCKHOLDERS MATTERS
The Company's Common Stock is traded on the Nasdaq/SCM under the symbol
"FOCS". The following table sets forth, the high and low trade prices of the
Common Stock for the periods shown as reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH BID LOW BID
-------- -------
<S> <C> <C>
FISCAL YEAR ENDED SEPTEMBER 30, 1996
First Quarter $ 1.53 $ 0.75
Second Quarter 1.31 0.75
Third Quarter 1.59 0.97
Fourth Quarter 1.22 0.75
FISCAL YEAR ENDED SEPTEMBER 30, 1997
First Quarter $ 0.94 $ 0.50
Second Quarter 0.63 0.28
Third Quarter 0.50 0.16
Fourth Quarter 0.34 0.16
FISCAL YEAR ENDED SEPTEMBER 30, 1998
First Quarter $ 0.28 $ 0.12
Second Quarter 0.21 0.12
(January 1, 1998 - February 9, 1998)
</TABLE>
On February 18, 1998, the closing bid price of the Common Stock on the
Nasdaq/SCM was $0.18.
At February 1, 1998, there were approximately 475 holders of record of
Common Stock. The Company estimates that it has approximately 2,500
beneficial holders of its Common Stock.
CAPITALIZATION
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<PAGE>
The following table sets forth the capitalization of the Company at
September 30, 1997 and as adjusted to give effect to the issuance and sale of
8,776,587 Units assuming the exercise of 100% of the 8,776,587 Rights and 50%
or 4,388,293 Units, respectively, issued in the Rights Offering (but without
giving effect to the exercise of the 8,776,587 Class E Warrants included in
the Units):
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------
Actual As Adjusted(1)(2) As Adjusted(1)(2)
------ ----------------- -----------------
<S> <C> <C> <C>
Long Term Debt:
Senior convertible notes 1,625,000 1,625,000 1,625,000
Notes payable to officers and
directors 125,000 -0-(4) -0-(4)
Notes payable, net of current
installments 5,420 5,420 5,420
----------- ----------- -----------
1,755,420 1,630,420 1,630,420
Stockholders' Equity:
Preferred Stock, $.001 par
value, 10,000,000 shares
authorized, 218,998 shares
issued and outstanding at
December 31, 1997 and as
adjusted 3,284,970 3,284,970 3,284,970
Common Stock, $.0001 par
value, 50,000,000 shares
authorized, 25,639,707 shares
issued and outstanding at
December 31, 1997; or
34,416,294(2) and
30,028,000(3) issued and
outstanding as adjusted 2,564 3,442 3,003
Additional Paid-in-Capital 27,217,173 29,092,144 28,127,158
Accumulated Deficit (30,103,136) (30,103,136) (30,103,136)
----------- ----------- -----------
Total Stockholders' Equity 401,571 2,277,420 1,311,995
----------- ----------- -----------
Total Capitalization $ 2,156,991 $ 3,907,840 $ 2,942,415
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
______________
(1) Does not include 7,276,661 shares issuable upon exercise of outstanding
warrants, 3,246,556 shares of issuable upon the exercise of options
granted and to be granted pursuant to the Company's existing stock option
and stock purchase plans, 2,189,980 shares issuable upon conversion of the
Preferred Stock and 4,046,102 shares issuable upon conversion of certain
outstanding notes.
(2) Assumes exercise of all of the Rights for gross proceeds of $1,930,849
(3) Assumes exercise of 50% of the Rights for gross proceeds of $965,424.
(4) Reflects conversion of the notes into rights to purchase common stock upon
the effective date of this registration statement.
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<PAGE>
DILUTION
At December 31, 1997, the Company had a total net tangible book value
(deficit) of $4,658 or $.02 per share (after deducting patent, technology and
financing costs of $406,229 based on 25,639,707 shares issued and
outstanding. Net tangible book value per share of Common Stock represents
the amount of its total assets less its intangible assets and liabilities
divided by the number of shares of Common Stock deemed to be outstanding.
Following the completion of the Rights Offering, and receipt of the net
proceeds of approximately $1,875,849 (if fully subscribed) or $910,424 (if
50% subscribed) (the "Net Proceeds") from the assumed subscription for all
8,776,587 Rights offered hereby, and the purchase of 8,776,587 shares of
Common Stock at $0.22 per share (but not the exercise of the Class E Purchase
Warrants), the 34,416,294 shares of Common Stock then outstanding (if fully
subscribed) or 30,028,000 shares (if 50% subscribed) would have a pro forma
net tangible book value of $1,871,191 or $.05 per share (if fully subscribed,
or $905,766 or $.03 per share if 50% subscribed). Therefore, the holders of
the Company's Rights being offered hereby will incur an immediate dilution of
approximately $.17 per share, (or $.19 per share if 50% subscribed).
Dilution represents the difference between the Subscription Price of $.22 per
share and the pro forma net tangible book value per share after giving effect
to the Rights Offering, but giving no effect to the exercise of the Class E
Purchase Warrants.
The following table, which incorporates the foregoing assumptions,
illustrates this per share dilution, if one hundred percent and fifty percent
of the Rights are exercised:
<TABLE>
<CAPTION>
100% Subscribed 50% Subscribed
--------------- --------------
<S> <C> <C>
Subscription price per Unit $.22 $.22
---- ----
Pro forma net tangible book value per
share of Common Stock before Rights Offering $.00 $.00
---- ----
Increase per share attributable to sale of
Units offered hereby $.05 $.03
---- ----
Pro forma net tangible book value per
share of Common Stock after offering $.05 $.03
---- ----
Dilution per share to Investor $.17 $.19
---- ----
---- ----
</TABLE>
The following table, which incorporates the foregoing assumptions, as
well as the receipt of net proceeds of $1,875,849, if fully subscribed or
$910,424 if 50% subscribed, pursuant to the Rights Offering reflecting
the purchase of 8,776,587 shares if fully subscribed (or 4,388,293 if 50%
subscribed) under the Rights Offering by and summarizing the relative
investment of existing Common Stockholders and Unit Purchasers.
-22-
<PAGE>
<TABLE>
<CAPTION>
Fully Subscribed
-----------------------------------------------
Shares Purchased Total Consideration Average
---------------------- ----------------------- Price
Number Percent Amount Percent Per Share
----------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Common
Stockholders(1) 25,639,707 74% $27,219,737 93% $1.06
Unit Purchasers 8,776,587 26% 1,930,849 7% $ .22
---------- ---- ----------- ----
Total 34,416,294 100% $29,150,586 100%
---------- ---- ----------- ----
---------- ---- ----------- ----
<CAPTION>
50% Subscribed
-----------------------------------------------
Shares Purchased Total Consideration Average
---------------------- ----------------------- Price
Number Percent Amount Percent Per Share
----------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Common
Stockholders(1) 25,639,707 85% $27,219,737 7% $1.06
Unit Purchasers 4,388,293 15% 965,424 3% $ .22
---------- ---- ----------- ----
Total 30,022,000 100% $28,185,161 100%
---------- ---- ----------- ----
---------- ---- ----------- ----
</TABLE>
- ----------
( 1) Does not include an aggregate of 16,692,993 shares of Common Stock
issuable on a fully diluted basis as set forth in note (1) under
"Capitalization."
DIVIDEND POLICY
The payment of dividends by the Company is within the discretion of its
Board of Directors and depends in part upon the Company's earnings, capital
requirements and financial condition. Since its inception, the Company has
not paid any dividends on its Common Stock and does not anticipate paying
such dividends in the foreseeable future. The Company intends to retain
earnings, if any, to finance its operations.
Pursuant to the terms of the Company's Convertible Preferred Stock,
dividends are payable annually on November 1st. The holders of the
Convertible Preferred Stock may elect to receive their dividend payments in
cash at a rate of 11% of the liquidation value, or in additional shares at
the rate of 8% the number of shares of Convertible Preferred Stock held by
such holder on the date of declaration. In September 1997, the Company's
Board of Directors determined that, in view of the recent trading price of
the Company's Common Stock and in view of the Company's
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<PAGE>
current cash position, it would not be appropriate to declare the annual
dividend payable on the Convertible Preferred Stock on November 1, 1997. As
a result, that dividend will accumulate in accordance with the terms of the
Convertible Preferred Stock. No assurance can be given that the Company will
be able to make dividend distributions in the future if the holders of the
Convertible Preferred Stock request cash. See "Risk Factors - Dividend and
Interest Payments."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1996
The Company's total revenues for the fiscal year ended September 30,
1997 ("Fiscal 1997") were $1,523,994 as compared to total revenues of
$908,700 for Fiscal 1996. Revenues for Fiscal 1997 include sales of
approximately $985,000 to Whessoe Varec. See Description of Business.
Revenues from a second customer during 1997 amounted to $171,100.
Revenues during 1996 from three different customers were $189,700,
$99,786, and$92,838.
During Fiscal 1997, the Company had cost of revenues of $945,434, or a
gross profit of 38% of sales, as compared to cost of revenues of $367,779, or
a gross profit of 60%, during Fiscal 1996. The decrease in gross profit
margin resulted primarily from excess manufacturing capacity. A slightly
lower margin mix of sales also reduced gross profit margins during 1997.
The Company's research, development and engineering expenditures
increased by 2% to $1,257,324 during Fiscal 1997 from $1,233,054 during
Fiscal 1996. The Company has focused its 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, Gilbarco, ASI, Bechtel
Nevada and others. See "Business - Research and Development".
The Company incurred general and administrative expenses of $1,101,781
during Fiscal 1997 as compared to $1,109,456 for Fiscal 1996, a decrease of
$7,675, or 1%. During Fiscal 1996, one of the Company's distributors failed
to meet certain minimum contractual purchase and payment commitments, and the
collection of certain other receivables from Fiscal 1995 sales to
distributors and representatives became contingent upon subsequent sale and
collection by those distributors. Accordingly, the Company has provided an
estimated reserve against these and other receivables amounting to $201,225.
During Fiscal 1997, similar provisions amounted to $36,085.
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<PAGE>
Also during Fiscal 1996, the Company developed substantial improvements
to its manufacturing processes and products, including a process which
improved the already substantial resistance of its probes to potential leaks
and other damage from prolonged exposure to water and water vapor and to
strong solvents and other chemicals which may be present in water.
Accordingly, the Company provided a reserve of approximately $130,000 against
finished products. In addition, the Company provided approximately $150,000
as a reserve against other finished goods, including products shipped to or
segregated for Whessoe Varec, Autronica and other distributors. During
Fiscal 1997, no similar provisions were charged to general and administrative
expense.
Sales and marketing expenses during Fiscal 1997 and Fiscal 1996 were
$1,004,172 and $1,007,975, respectively. Sales and marketing expenditures
actually increased during the second half of Fiscal 1996 and the first half
of fiscal 1997, but were reduced during the second half of fiscal 1997.
Expenditures are focused on sales and support activities in the offshore
produced water market, and the support of Whessoe Varec in the AST market.
Interest income during Fiscal 1997 was $81,787, as compared to $201,268
during Fiscal 1996, a decrease of $119,481, or 59%. 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. Interest income
from cash and short-term investments during Fiscal 1997 was $54,802, compared
to $85,640 during Fiscal 1996, reflecting the decrease in cash and
investments. Interest income from notes receivable for the exercise of
options was $26,985 during Fiscal 1997 and $115,628 during Fiscal 1996. These
notes were extinguished in May 1997 and did not accrue interest after
December 1996.
Interest expense during Fiscal 1997 was $223,161 as compared to $183,795
during Fiscal 1996. During 1997, the Company paid approximately $134,000 of
interest on its senior convertible debt and amortized as additional interest
expense $82,620 of the costs of placement of the debt. During Fiscal 1996,
the Company paid $93,500 and accrued an additional $18,016 of interest and
amortized $65,778 of the placement costs. Other interest expense during 1997
and 1996 consisted primarily of interest on insurance premium installment
payments and the December 1994 loan from Bank of America Nevada (see Note 6
of the Notes to the Company's Consolidated Financial Statements).
As a result of the foregoing, during Fiscal 1997, the Company incurred a
net loss of $3,226,958, or $0.13 per share as compared with a net loss of
$3,274,629, or $0.15 per share, for Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
On February 15, 1996, the Company completed an offering under Regulation
S, promulgated under the Securities Act of 1933, as amended (the "Regulation
S Offering"), of 8% Senior Convertible Notes due February 15, 1999 (the
"Notes"), for $2,825,000. Interest on the Notes is to be paid semi-annually,
commencing August 15, 1996, at a rate of 8% per annum. The Notes are
convertible into shares of Common Stock of the Company at a conversion price
(the "Conversion
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<PAGE>
Price") of, initially, $0.80 per share which has been adjusted to $0.4078, a
price representing a 10% discount from the average closing bid price of the
Common Stock for the 30 business days prior to February 15, 1997. As of
September 30, 1997, an aggregate face amount of $1,175,000 of the Notes had
been converted to Common Stock resulting in the issuance of 1,498,804 shares
of Common Stock.
The Company paid fees and expenses associated with the offering
amounting to $428,204, which is being amortized as interest expense over the
three-year term of the Notes or until conversion, if earlier, when the
proportionate unamortized amount is charged to additional paid-in capital.
As of September 30, 1997 approximately $160,281 of unamortized deferred
financing cost has been recorded as reduction in additional paid-in capital
associated with the $1,175,000 of the Notes converted to Common Stock. Also
in connection with the Offering, the Company issued to the Placement Agent
for the Offering, for nominal consideration, warrants to purchase up to
353,125 shares of Common Stock, at an initial exercise price of $0.80 per
share (the "Exercise Price") which has been adjusted to $0.4078 per share.
Also in accordance with the terms of the warrants, the number of shares
exercisable has been adjusted, based on the adjusted Exercise Price, to
692,742 shares of Common Stock. These warrants are exercisable at any time
on or after August 15, 1996 through February 14, 2001, and contain certain
piggyback registration rights.
On May 31, 1996 the Company completed an offering under Regulation S of
3,333,333 Units, at a price of $0.90 per Unit for total gross proceeds of
$3,000,000 before costs and expenses of the offering. The Company paid fees
and expenses associated with the Unit offering amounting to $345,783. Each
Unit consisted of one share of Common Stock and one warrant to purchase one
share of Common Stock (the "Unit Warrants"), the shares and warrants being
immediately separable. The Unit Warrants are each exercisable at $1.00 at
any time from May 31, 1996 through May 30, 2001. Also in connection with the
Unit offering, the Company issued to the Placement Agent for the offering,
for nominal consideration, warrants to purchase up to 333,333 shares of
Common Stock (the "Placement Agent Warrants"), at an exercise price of $0.90
per share which has been adjusted to $0.2343 per share, and the number of
shares issuable upon exercise has been adjusted to 1,280,411. These
Placement Agent Warrants are exercisable at any time from November 30, 1996
through May 30, 2001.
Primarily in order to provide a means to raise additional cash through
existing outstanding options, warrants and promissory notes receivable, on
April 4, 1997, the per share exercise price of all employee stock options,
all Unit and other Warrants (except Class D Warrants) were decreased as
follows: to $0.32 from April 4 through April 11, 1997, and thereafter
adjusted weekly to the average closing bid price for the five prior trading
days less a discount of 10% (but never to a price less than $0.30) through
May 16, 1997, when the prices reverted to the original prices. As a result,
the Company received $39,943 for the exercise of 131,453 options at prices
ranging from $0.30 to $0.32 per share. Effective April 17, 1997 the per
share exercise price of Class D Warrants was decreased to $0.30 through May
16, 1997 when the exercise price reverted to its prior $1.10 per share. As a
result, the Company received approximately $30,954 for the exercise of
103,179 Class D Warrants exercised at $0.30 per share.
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<PAGE>
In conjunction with the temporary reduction of the exercise prices of
the options and warrants effective April 4, 1997 and Class D Warrants
effective April 17, 1997, as described above, the remaining unpaid principal
on promissory notes (which were executed in March 1994 by employees and
directors for the exercise of options) could be fully paid in an amount
determined by multiplying the unpaid balance by a fraction, the numerator of
which was the revised exercise price, and the denominator of which was $1.50
(the original exercise price). If the unpaid principal was not so paid by
May 16, 1997 the underlying collateral shares would be forfeited and all
unpaid principal and accrued interest would be extinguished. The Company did
not want to penalize the employees and directors by requiring payment of the
promissory notes therefore the Board of Directors and employees agreed to
extinguish the promissory notes. The Company believes that it must provide an
incentive when it is compensating employees and directors for services
rendered to the Company in the form of non-cash compensation.
As a result, the Company received $160,875 in payment for 520,252
escrowed shares at prices ranging from $0.30 to $0.32 per share, which amount
liquidated $780,379 of original note principal. The remaining $756,804 of
unpaid note principal was extinguished and the underlying collateral of
504,535 shares were forfeited to the Company and immediately canceled,
thereby reducing the total number of shares outstanding. Unpaid accrued
interest receivable aggregating $248,212 was expensed.
The Company had working capital of $1,883,551 at September 30, 1997, as
compared with working capital of $4,384,841 at September 30, 1996, a
decrease of $2,501,290. The Company had a decrease in cash and cash
equivalents of $2,638,084 and a decrease in stockholders' equity of
$2,996,747 during Fiscal 1997. These decreases resulted primarily from the
Company's net cash used in operating activities of $2,715,012 offset by only
$216,412 net cash provided by financing activities. During Fiscal 1996, net
cash provided by financing activities was $5,282,651 and was reduced by net
cash used in operating activities during Fiscal 1996 of $2,953,916.
The net cash used in operating activities of $2,715,012 during Fiscal
1997 considered changes in current assets and liabilities, as well as
non-cash transactions including the write-down of accrued interest on notes
receivable for the exercise of stock options in the amount $248,212;
amortization expense of $356,587; depreciation expense of $69,853; and
provisions for obsolete inventory and loss on uncollectible accounts
receivable totaling $72,375.
The net cash used in operating activities of $2,953,916 during Fiscal
1996 considered changes in current assets and liabilities, as well as
non-cash transactions including the write-down of accounts receivable and
inventories totaling $482,538, amortization expense of $331,825, depreciation
expense of $50,542, accrued interest receivable of $107,367, Common Stock
issued for services of $15,417 reduction of notes receivable for the exercise
of options in exchange for services of $42,263, and recognition of deferred
compensation of $5,596.
The Company's inventories increased during Fiscal 1996 by $465,833 or
75% and increased a further $105,426 during Fiscal 1997. These increases are
primarily attributable to the production of products which were called for in
agreements with the Company's distributors and strategic
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<PAGE>
alliances including Whessoe Varec, Autronica, and QED. Manufacturing
capacity was reduced during Fiscal 1997 and inventories are expected to
decrease as these products are shipped.
During Fiscal 1997, the net cash used in investing activities was
$139,484, including the purchase of $83,505 in equipment and payments of
$55,979 in patent fees. During Fiscal 1996, the net cash used in investing
activities was $174,349. This included payments of $128,873 in fees for the
filing, processing and maintenance of patents and patent applications,
primarily in foreign countries, and the purchase of $45,476 in equipment.
During Fiscal 1997, the Company received net cash from financing
activities of $216,412, which included (i) $174,406 in interest and principal
payments on notes receivable for the exercise of options; (ii) $55,086
received from the exercise of options; (iii) $30,954 received from the
exercise of Class D Warrants; and (iv) the release of $18,456 in restricted
cash serving as security for a note payable to a bank, less (i) $16,319 in
payments on notes payable; and (ii) $46,171 in cash dividends paid to
preferred stockholders; . During Fiscal 1996, the Company received net cash
from financing activities of $5,282,651, which included (i) $3,000,000 in
proceeds from Common Stock and warrant Units, (ii) $2,825,000 in proceeds
from senior convertible notes payable, (iii) $773,987 used for the payment of
financing costs, (iv) $6,832 in payments on the note payable to a bank, (v)
$241,595 received from the exercise of options, (vi) $1,031 from the exercise
of Class D Warrants, (vii) $19,489 received as payments on notes receivable
for the exercise of options, and (viii) $23,645 in cash dividends paid to
preferred stockholders.
See Management - Executive Compensation and Note 8 to the Company's
Consolidated Financial Statements for information concerning the Company's
material contracts for compensation and rent.
As discussed in Note 1 to the Consolidated Financial Statements, the
Company continues to incur substantial losses and may need additional
financing to continue its operations. The Company is reviewing alternatives
for raising additional capital. On October 2, 1997, the Company entered into
an agreement with entrenet Group, LLC ("entrenet") for advice and assistance
in developing and executing business plans, financing strategies and business
partnerships, acquisition and mergers. For its services, entrenet will
receive a cash fee of $5,000 per month for twelve months; $60,000 in the form
of a 10% convertible note, payable on the earlier of (a) a financial
transaction (as defined in the Agreement) or (b) two years; 5% of the value
of any financial transaction (as defined in the Agreement); and 5% of any
financing provided by or introduced directly by entrenet.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1997 the FASB issued Statement No. 129 ("SFAS 129"). Disclosure
of Information about Capital Structure and in June 1997 the FASB issued
Statement No. 130, Reporting Comprehensive Income ("SFAS 130") and Statement
No. 131, Disclosure about Segments of an Enterprise and Related Information
("SFAS 131"). The Company is required to adopt SFAS 129 in fiscal 1998 and
SFAS's 130 and 131 in fiscal 1999. SFAS 129 establishes new standards for
reporting and disclosing the pertinent rights and privileges of the various
securities outstanding.
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<PAGE>
SFAS 130 establishes new standards for reporting and displaying comprehensive
income and its components. SFAS 131 requires disclosure of certain
information regarding operating segments, products and services, geographic
areas of operation and major customers. Adoption of these Statements is
expected to have no impact on the Company's consolidated financial position,
results of operations or cash flows.
BUSINESS
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. The Company also is commercializing a range of
sensors based on its Sensor-on-a-Chip-Registered Trademark- technology for a
wide variety of environmental and industrial applications.
Since its inception in 1987, FiberChem has invested in excess of $25
million in research and development relating to a wide range of technologies,
and has now focused on products for environmental monitoring and industry.
During the last several years, a de-emphasis of environmental issues in
Congress has resulted in delays in enactment and enforcement of the
regulatory climate upon which the Company's future prospects were dependent.
Several federal and state programs were not re-authorized or funded. Just
like companies in the electric vehicle or alternative fuels arenas, FiberChem
found that many of its expected opportunities had evaporated, at least for
the foreseeable future. Consequently, FiberChem's management identified
market segments that were driven by other forces. Notwithstanding the slow
down at the Federal level, the Company recognized that the State of Florida
represented a short-term lucrative opportunity for aboveground tank leak
detection and set about getting its sensor products specified. At the same
time, the phase out of Freon presented the Company with an opportunity to
establish its technology as the preferred replacement for the existing
Freon/Infrared method for measurement of total petroleum hydrocarbons (TPH)
in process water streams.
During this refocusing process the Company has substantially enhanced
the value of its development initiatives with Texas Instruments, Inc. ("TI")
for its Sensor-on-a Chip-Registered Trademark-. By working together with the
Optoelectronics Group within TI's Semiconductor Group, the Company has
expanded the scope of the joint marketing activity in the billion dollar
chemical sensor marketplace. The short term result from this process has
been the development of eight major projects with very substantial revenue
potential.
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
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<PAGE>
("UST") sites, monitoring of soil and water remediation processes and fence
line monitoring at contaminated sites. A CMS system typically sells for
between $15,000 and $50,000.
The CMS-4000 can be used to monitor hydrocarbon levels in applications
such as storm water and waste water around industrial facilities. The
CMS-4000 is available with analog outputs for use in industrial applications
where some control functions need to be performed.
The use of on-board modems allows both versions of the CMS to warn of
alarm conditions through remote communication. 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 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 OilSense-4000-TM- is a new product specifically developed to address
the produced and process water market, both offshore and onshore. It is a
version of the CMS-4000 specially developed for highly contaminated streams
where there is a need for automatic cleaning of the sensor based on
preprogrammed parameters. It incorporates modems for remote communication
and has a 4-20 mA output for control loop purposes. The OilSense-4000-TM-
sells for $25,000 to $35,000 depending upon its hazardous area certification.
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 or 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 for the PHA-100 down to the parts per billion ("ppb") range (in water)
for benzene, toluene, ethyl benzene and 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 and pipelines, the detection of contamination levels of soil and
general environmental monitoring.
A version of the PHA-100, known as the PHA-100W, has been developed for
applications where hydrocarbons need to be monitored in water alone. The
unit sells for $6,250. It is designed for applications such as breakthrough
from remediation processes, monitoring of bodies of water, and process water,
waste water and storm water monitoring.
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<PAGE>
A third version of the PHA-100 is the PHA-100WL. It is specifically
designed for measuring total petroleum hydrocarbons ("TPH") in produced water
at offshore petroleum production platforms and is designed to imitate the
operation of the infrared analyzer used in the existing Freon/Infrared
method. It typically sells for $6,375.
The PetroSense-Registered Trademark- Field Kit is a product that is an
integral part of each of the CMS, 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 and
accessories such as cleaning solutions, computer and power adapters, and
disposable calibration vials and tubes for the customer's convenience. A
vapor calibration procedure has been developed for soil gas applications. A
field kit for the CMS-5000 contains a few months' worth of supplies and the
field kit for the DHP probes contains 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 went into 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-tank product detectors. KWA also certified that the data produced by
the Company's products was 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 that its
products meet the requirements of 47 states. Certain states rely on the EPA
list and certain others have no specific requirements.
The Company has also had the CMS-5000 product line third-party certified
for use for AST leak detection in Florida. As a result, FCI Environmental is
the only company at this time to have an AST leak detection product approved
for use at both contaminated and uncontaminated sites by the Florida
Department of Environmental Protection ("DEP").
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 method involves periodic sampling of the sea water output
and analysis of the samples in the oil production platform's laboratory. The
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Company's products can be used to monitor the sea water output continuously,
thereby achieving a significant reduction in cost for the operator, both by
eliminating the use of Freon-Registered Trademark- gas and by optimizing the
usage of chemical agents used to facilitate removal of oil from produced
water.
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 TI to produce Sensor-on-a-Chip-Registered
Trademark-, a new generation of semiconductor-based sensor products. The
market for these chip-based sensors is potentially very large (forecasted to
be over $1 billion by 1999) and is represented by clients and products in the
consumer, medical and durable goods fields. Often development costs are
partially covered by the client in exchange for some level of exclusivity.
The Company has eight such projects ongoing, varying from feasibility studies
to final stages of development.
The Company believes that its patents and patent applications, coupled
with the trade secrets, proprietary information and experience in development
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 five additional patents. All of the United States
patents are valid for 20 years from their respective dates of applications,
the oldest of which was applied for in 1987. 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
important potential customers. Other important markets and customers include
remediation companies, environmental consultants, shipping ports, airports
and military bases. The markets for sensors transcend the petroleum
hydrocarbon market place, are very diverse and are addressed directly by
Company personnel.
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CUSTOMERS AND DISTRIBUTORS
The Company entered into an OEM Strategic Alliance Agreement (the
"Alliance" or the "Agreement") as of June 30, 1996, as amended, with Whessoe
Varec, Inc. ("Whessoe Varec") whereby Whessoe Varec was granted exclusive
worldwide right to market the Company's products in the aboveground storage
tank (AST) market. The Agreement was accompanied by firm orders for
approximately $1.7 million of the Company's products. At the request of
Whessoe Varec in order to avoid unnecessary duplicate shipping costs,
substantially all of the equipment was segregated in the Company's warehouse.
Terms of payment were 180 days and 90 days for $500,000 of orders to be
shipped in June and an additional $500,000 of orders to be shipped in
September 1996. During early January 1997, Whessoe Varec requested that the
Company consider a revised payment schedule acceptable to both parties. As
of February 25, 1997, Whessoe Varec had paid for approximately $59,000 of
items actually shipped by that date, and during April 1997, paid an
additional $250,000 for items shipped in March 1997. In August 1997 the
Company received one half of the outstanding amount and shipped the remaining
products. The last payment was received in September 1997. Both payments
are irrevocable and the products shipped are not subject to return except
under normal warranty conditions.
The Alliance, combined with the acquisition of Whessoe p.l.c. (Whessoe
Varec's parent company) by Endress + Hauser of Switzerland, has positioned
both Alliance partners to take advantage of the new Florida regulations
regarding the requirements for AST leak detection. Internal liners and leak
detection is by far the lowest cost option for compliance with the Florida
mandates and as of today, the Company's PetroSense-Registered Trademark- line
is the only product certified for use in both contaminated and uncontaminated
sites in Florida. Approximately 1,000 tanks have been identified which are
already lined and as such are immediate targets for leak detection. Each
tank represents an average of $35,000 in potential revenue for the Alliance.
It is anticipated that this number will grow in the period before December
1999 when installations must be completed. The impact of these regulations
has been that about $8,000,000 of projects have been identified and proposals
generated. It is anticipated that these projects will accelerate from 1997
to 1999. Many companies have already indicated that they intend to stagger
installations over the period. Based on this level of activity, Whessoe
Varec has substantially expanded its sales and service capabilities in
Florida, and management believes that significant business will be generated
by the Alliance although there can be no assurance that this will occur.
Florida Power Company recently placed an order with Whessoe Varec to
upgrade all of its tanks to include leak detection. Other large orders are
believed to be pending. Citgo, Dreyfus, and Hess among others, are awaiting
final approval from the Florida DEP to install the Company's products.
In November 1996, the Company was advised that its proposed joint
venture in Finland had received funding authorization from the Finnish
government. A new company, Senveco Oy ("Senveco"), has been formed, owned
75% by Finnish interests including the Company's existing distributor, and
25% by the Company. Senveco offers sales, service, technical support and
consulting services for FCI's products and for complementary products from
other manufacturers.
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Senveco's region consists of Finland, the Baltic States, and Northwest Russia
including the key areas of the Kola Peninsula where substantial cleanups of
soil and water are expected in the next year or so, funded from European
Union ("EU") sources. Senveco also provides technical support to the
Company's European distribution network and in the Middle East.
In October 1997, the Company was advised that Senveco had been selected
for an EU Baltic Intereg contract to provide consulting and monitoring
services to locate "hot spots" of pollution in the Kola Peninsula region of
Russia. The contract is expected to provide revenues for Senveco and the
Company from sales of the Company's products.
OFFSHORE PRODUCED WATER MARKET
The offshore produced water market exists due to the restrictions on the
manufacture and distribution of certain Freons which destroy the Earth's
ozone layer. For the past 15 or so years, tests to determine the TPH content
of certain process water streams returned to the ocean from offshore
platforms ("produced water") have been carried out by extracting water
samples with Freon and analyzing the resultant extract by infrared
spectroscopy ("IR"). As the price and availability of Freon have become less
and less attractive, alternatives to the Freon/IR method have attracted
increasing attention.
Of the various other methods currently offered, the Company believes
that its FOCS-Registered Trademark- technology offers the best alternative in
terms of correlation with the IR method, ease of use, features/benefits and
cost. The Company offers two different products to this marketplace. The
OilSense-4000-TM- is a continuous unit which can operate unattended. It
offers a 4-20 mA output and can be interrogated and programmed remotely via
modem. It operates for 30 days between maintenance. At $25,000 to $35,000,
it offers good value where manpower is at a premium. The OilSense-4000-TM-
can also be integrated into the process of treating the produced water stream
to automatically optimize the use of water treatment chemicals and can
continue operating where platforms are currently shut down due to adverse
weather conditions. The PHA-100WL is a single measurement analyzer which
directly replaces the Freon/IR method. Its FOCS-Registered Trademark- sensor
directly measures TPH in water samples, according to a simple procedure. At
$6,375 it offers a direct replacement for the Freon/IR method without the use
of Freon or other chemicals.
There are about 3,500 platforms in the Gulf of Mexico and a similar
number in the rest of the world, mainly in the North Sea, Middle East, South
China Sea and offshore West Africa. It appears that each of these regions
conforms to similar regulations. This market represents a window of
opportunity that will remain open until the IRs are replaced over the next
two years or so. Recent interest in the Company's products from North Sea
operators indicate that there is a demand for a continuous system to fill
both a process control and regulatory compliance role in a region where being
seen to be "green" is of greater importance.
Amoco, Exxon, Marathon, Chevron, Unocal and others are evaluating the
Company's replacement for the existing Freon/IR technology. Each of these
companies represents a large opportunity, operating a significant number of
platforms in the Gulf of Mexico and elsewhere, and
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each already has purchased multiple units from the Company. Norsk Hydro has
leased a unit for evaluation for its North Sea operations. In addition, a
unit was recently sold to Clyde Petroleum in Indonesia, the first sale for
use in the South China Sea.
FRAME AGREEMENT WITH AUTRONICA AS
On October 1, 1996, the Company entered into a frame agreement with
Autronica AS ("Autronica"), a Norwegian company within the Whessoe PLC group,
for Autronica to exclusively distribute certain FCI products for offshore
applications in regions of the world where there is oil and gas production
offshore, including certain countries in the North Sea, West Africa, the
Middle East and the Southeast Asia areas. The Endress + Hauser acquisition
of Whessoe Varec was accompanied by the spinning off of Autronica to Navia, a
Norwegian company. Their marketing was refocused and as a result did not
include any third party distribution activity. The Agreement was
consequently terminated without prejudice to either party.
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. FCI expects to renew the agreement for another two years.
Projects with China Petroleum and the ROC military are ongoing and other
projects are pending.
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 products. In general, the Company supplied
the products and MINDECO demonstrated, marketed and sold 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. The agreement was automatically renewed.
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,
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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 and has made initial sales to
indigenous oil companies.
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 shares of Common 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.
AmerAsia is currently involved with introduction of FCI into the People's
Republic of China where there is a large potential project for underground
storage tank leak detection. The award of this project is expected to occur
in Fiscal 1998.
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. The advent of both the
Autronica and Whessoe Varec alliances and changes in market focus at Lobbe
resulted in a reduced role for Lobbe group. At the same time Lobbe
restructured its operations. The companies have reverted to a non-exclusive
relationship with no prejudice to either party.
SALES AND DISTRIBUTION AGREEMENT WITH QED ENVIRONMENTAL SYSTEMS, INC.
On March 30, 1996, the Company, through FCI Environmental, entered into
an agreement with QED Environmental Systems, Inc. ("QED"), pursuant to which
the Company granted QED the exclusive right to acquire the PHA-100 Portable
Hydrocarbon Analyzer for Direct Analysis of Hydrocarbons in Water and Vapor
(the "PHA-100") in a private label configuration for resale into the ground
water monitoring and remediation market in all 50 states. QED agreed to
purchase the PHA-100 and other products at specified prices and in certain
minimum amounts. QED failed to purchase the minimum amount of products, and
the Company has terminated the agreement effective January 7, 1997. The
Company has commenced legal action against QED seeking payment for unpaid
invoices and other damages. QED has filed counterclaims, and the matter is
scheduled for arbitration in January 1998. See "Legal Proceedings."
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SIPPICAN
The Company has had a licensing agreement with Sippican Corporation of
Marion, MA, a defense contracting company which had planned to move into the
environmental market but reversed its course. The Company and Sippican
negotiated a position allowing Sippican to transfer its rights to a third
party, while minimizing the potential for competition to the Company from
Sippican or others. Those rights have been recently transferred to Osmonics,
Inc., a leading supplier of potable water equipment to the beverage industry
and the water utility market. It is believed that this new relationship
between Osmonics and the Company will generate significantly higher royalty
revenue than previously through Sippican.
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. In particular, the wide dynamic range of the
measuring technology allows the detection of new leaks on top of old
contamination. The Company's Florida certification is a direct result of
this capability.
Most tank leak detection methods currently in use are periodic tests.
The early warning and early detection of leaks provided by the Company's
continuous monitoring systems 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 tanks to be evaluated without being taken out of service,
whereas, many competing methods require that tanks be taken out of service
for a period of time.
Many competing methods used to detect and quantify 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 products provide IN SITU, real-time results with
accuracy closely correlating with laboratory results. Additionally, the
products' analog outputs offer the capability to provide feedback loops for
process control.
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 Comprehensive Environmental Response Conservation and Liability
("Superfund") Act, the Clean Air Act, the Clean
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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 of
hydrocarbons and numerous other substances including heavy metals, toxic
gases, chlorinated solvents and fertilizer and pesticide residues.
During the last several years, a de-emphasis of environmental issues in
Congress has resulted in delays in enactment and enforcement of the
regulatory climate upon which the Company's future prospects were dependent.
Several federal and state programs were not re-authorized or funded. Just
like companies in the electric vehicle or alternative fuels arenas, FiberChem
found that many of its expected opportunities had evaporated, at least for
the foreseeable future. Consequently, FiberChem's management identified
market segments that were driven by other forces. Notwithstanding the slow
down at the federal level, the Company recognized that the State of Florida
represented a short-term opportunity for aboveground tank leak detection and
set about getting its sensor products specified. At the same time, the phase
out of Freon presented the Company with an opportunity to establish its
technology as the preferred replacement for the existing Freon/Infrared
method for measurement of total petroleum hydrocarbons (TPH) in process water
streams.
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. Two pieces of legislation are pending
before Congress and the EPA has proposed a collaboration with the American
Petroleum Institute ("API") on voluntary AST programs in which leak detection
is a significant factor. As part of this collaboration, API is conducting a
test of leak detection equipment at an operating tank farm. The Company's
products and those of two other companies were selected for this evaluation.
The State of Florida has perhaps the most stringent regulations and FCI is
believed to be the only company to have certification for both uncontaminated
and contaminated sites in Florida. The Company believes that similar
regulations are being finalized in Virginia, Wisconsin, Pennsylvania and
other jurisdictions.
INTERNATIONAL REGULATORY ACTIVITY
Several countries have environmental laws or regulations in place or
being implemented that affect the market for the Company's products. Belgium
has a new environmental law that regulates retail gas stations. Canada's
Ontario Province has an AST regulation in process. The Republic of South
Korea has a UST law which is currently being implemented. Taiwan has
committed to significant expenditure for environmental clean up. Finland has
proposed leak detection for retail gasoline stations and has recently
promulgated clean up regulations backed by government funding for the clean
up of contaminated retail sites in the country. The Company is working with
its international distributors and others to promote the Company's products
and enhance its name recognition in these countries so that the Company's
products are taken into consideration when legislation and regulations are
promulgated.
MANUFACTURING
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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 directly by the Company. The data logging
and control instruments incorporated in the CMS systems are 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.
The Company is in the process of undergoing certification under the ISO
9000 quality standards. This certification is expected to be completed
during Fiscal 1998.
RESEARCH AND DEVELOPMENT
The Company shifted its emphasis in 1996 and 1997 to applications
development of the petroleum hydrocarbons product line, particularly in the
areas of produced water and waste water. Peripherals were developed to allow
the FOCS-Registered Trademark- technology to function in highly contaminated
flowing water streams by automatically rinsing the probe on demand. This led
to the development of the OilSense-4000-Registered Trademark- a completely
integrated system for use on offshore platforms.
The Company also put significant effort into developing both methodology
and software for the use of the water-only versions of the portable unit
(PHA-100W and PHA-100WL) in the storm and waste water and offshore produced
water markets.
SENSORS
The sensors market represents the Company's largest potential market,
primarily because applications for sensors are much wider than those for the
Company's environmental products. Developed in cooperation with Texas
Instruments with the technology patented by FCI, sensors have the potential
to revolutionize a wide range of consumer, industrial, monitoring and medical
products.
This new concept, based on an optical platform that is essentially a
double beam spectrometer on a plug-in base in a standard 20-pin integrated
circuit package, utilizes standard TI components for ease of design
compatibility. These devices incorporate waveguides onto which a chemical
matrix may be coated. The presence of a chemical analyte which causes a
change in the refractive index, absorption or fluorescence of the waveguide
material results in a change which can be detected, measured and related to
concentration of the analyte, whether in the aqueous or gaseous phase.
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While these sensors can be used in hardware currently under development
at the Company, e.g., portable dosimeter devices as well as continuous
monitoring probes and associated hardware, the primary application for these
Sensors-on-a-Chip-Registered Trademark- lies in the OEM marketplace. This
market is characterized by clients who have needs or wants for sensors that
give their products an advantage in their marketplace.
Examples of ongoing developments include:
- a fail-safe flammable gas sensor for a household appliance control system
with a one million units per year potential
- a breath alcohol sensor for an ignition interlock device for automotive
use with a three million unit potential over 5 years
- a fuel/air ratio sensor for an automotive client which could result in
two sensors per automobile
- a gasoline vapor sensor for a gasoline retailing application with a one
million unit potential
- a carbon monoxide sensor for residential and commercial with a
multi-million unit potential an ammonia sensor for refrigerant levels in
food processing facilities
- Sensors for detection of breakthrough of toxic gasses from personal
protective equipment.
These applications represent sensors with selling prices anticipated to
be in the $5.00 to $150.00 range depending upon application and volume.
The Company also has invented a proprietary method of analysis for
chemical and biological molecules which is essentially a solid state version
of the well-known immunoassay technology. This technology was borrowed from
the medical community and applied to environmental monitoring. The
Company's invention (patents pending) has the potential to revolutionize
sensor development in areas previously relegated to expensive and slow
laboratory analysis. When applied to the Sensor-on-a-Chip-Registered
Trademark- this technology could provide a range of sensors and hardware
products which could revolutionize the biomedical and biological analysis
marketplace. As an example, the Company recently demonstrated an immunoassay
for cocaine and other drugs of abuse that reached a detection limit of 400
parts per trillion.
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. The
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License Agreement and Cooperative Development Agreement replace similar
agreements 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-Registered Trademark-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 in general and has
applied for a patent on a chip-based toxic gas sensor.
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 use. The first chip-based sensor has been developed for
carbon monoxide (CO). Chemistry development is essentially completed.
Recent changes in the UL Standard for residential CO detectors and
significant changes in market dynamics have impacted on the introduction of
this product by TI.
Since the Company developed a working relationship with the
Optoelectronics Development Group within TI's Semiconductor Group, the
Company has identified and pursued a number of opportunities in the sensor
area, some introduced by TI, others directly by the Company. It is expected
that an expanded marketing activity on the part of TI will result in
additional opportunities in the near future. Robertshaw Controls, Alcohol
Sensors International, Gilbarco, Amoco, Horiba, Bechtel Nevada and Manning
Systems are examples of current development partnerships in various stages of
completion.
AGREEMENT WITH ALCOHOL SENSORS INTERNATIONAL, LTD.
The Company with the assistance of and pursuant to specifications and
know-how of Alcohol Sensors International, Ltd. ("ASI"), has developed
chemical sensors for the breath alcohol (ethanol) testing industry and
market. On November 8, 1996, the Company, through FCI Environmental, entered
into an agreement with ASI pursuant to which the Company granted ASI
exclusive right, title and interest (including sales and marketing rights) to
such alcohol sensors for the breath alcohol testing industry and market. In
consideration therefor, ASI agreed to market, promote and sell instruments
employing such alcohol sensors on a worldwide basis and to pay the Company
development and licensing fees over the term of the agreement. The term of
the agreement is for five years and may automatically be renewed by ASI for
successive five-year terms upon written notice to the Company not less than
sixty days prior to the expiration of the prior term. Development is
continuing.
JOINT DEVELOPMENT AGREEMENT WITH GILBARCO, INC.
The Company, through FCI Environmental, completed the development for
Gilbarco of a low-cost sensor for the detection of gasoline vapor in Phase II
vapor recovery systems for gasoline dispensing equipment. The introduction
of the equipment is pending the promulgation of regulations by the California
Air Resources Board (CARB) prior to the introduction of 1998 model year cars
which have onboard vapor recovery. Delays have occurred in the promulgation
of the regulations; however, once regulations are promulgated, there would be
a phase-in period of as yet undetermined
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duration. Recently, Gilbarco has begun a program of cold weather testing of
a gasoline dispenser equipped with the sensor in anticipation of action by
CARB.
BECHTEL NEVADA
In June 1995, the Company entered into a Cooperative Research and
Development Agreement ("CRADA") with the U. S. Department of Energy ("DOE")
through its operating entity Bechtel Nevada, Inc.'s Remote Sensing Laboratory
in Las Vegas, Nevada to develop low-cost, rugged demountable probes suitable
for use with the Sensor-on-a-Chip-Registered Trademark- platform. This
development resulted in the production of a prototype probe to carry up to
three chips. New development has focused on a dosimeter device for hand held
use and is ongoing.
In March 1996, the Company entered into a contract with DOE through
Bechtel Nevada, to develop a chip-based sensor for trichloroethylene at the
ppb level in water. The first phase of the contract, the selection,
evaluation and verification of an appropriate chemistry, was completed in
September 1996. The second phase of this contract, development of prototype
chip sensors, has not been funded.
OTHER SENSOR DEVELOPMENT
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 Company has the resources to finalize
the design of the chip-based platform for that specific application. Other
sensors are still in the chemistry development stage. The current status of
the Company's sensor development is outlined in the table below, showing
analytes measured, their stage of development, targeted sensitivity
(capability of measurement) and the particular media monitored:
<TABLE>
Stage of Targeted
Type Development Sensitivity/Media
- -------------------------- ----------- -----------------------------------------
<S> <C> <C>
Petroleum Hydrocarbons Commercial < 1 ppm in water; < 10 ppm in air, soil
Trichloroethylene ("TCE") Commercial < 10 ppm in water, remediation
Tetrachloroethylene Commercial < 10 ppm in water, remediation
Oxygen Prototype < 1 ppm in air, water, soil
Carbon Dioxide Prototype < 5 ppm in air, water, soil
Carbon Monoxide Prototype < 5 ppm in air
Illegal Narcotics Prototype < 400 pptrillion in air, water
pH Prototype 2-12 in water
Trichloroethylene ("TCE") Development ppb in water (1)
</TABLE>
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<PAGE>
<TABLE>
Stage of Targeted
Type Development Sensitivity/Media
- -------------------------- ----------- ---------------------------
<S> <C> <C>
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)
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. The development
target is to meet the regulatory compliance requirements.
The Company also believes that its technology may be adapted for use in
sub-sea modules under development by Asea Brown Boveri for Norsk Hydro.
These developments are intended to replace the current platform operations at
the surface with unmanned operations on the ocean floor. The Company has
also had preliminary discussions with a Norwegian Company Sea team to
incorporate its sensors into remote operating vehicles for undersea pipeline
leak detection.
The Port of Rotterdam has proposed to remediate its facility through
state-of-the-art bioremediation and the operating consortium has selected the
Company to be the technology vendor for monitoring systems.
The Company's spending on research and development activities during
Fiscal 1997 and 1996 was $1,257,324 and $1,233,054, respectively and for the
three month period ended December 31, 1996 and December 31, 1997 was $340,806
and $191,892, respectively.
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 September 30, 1997, the Company and its subsidiaries employed 19
persons on a full-time basis. These include Geoffrey F. Hewitt, President
and Chief Executive Officer; Melvin W. Pelley, Chief Financial Officer and
Thomas A. Collins, President of FCI Environmental. These three persons
devote substantially all of their business time to the Company's affairs. The
Company also employed three administrative persons; one scientist; five
laboratory and manufacturing technicians; one manager of manufacturing; one
materials, production control, shipping and receiving specialist; two
engineers; one sales applications specialist; and two strategic business unit
sales managers.
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<PAGE>
FACILITIES
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 1996 and 1997 was $172,492 and $172,551, respectively and for
the three month periods ended December 31, 1996 and December 31, 1997 was
$42,973 and $43,760, respectively. The Company is pursuing alternatives
including a renewal of the current lease at approximately the current base
monthly rental charge.
LEGAL PROCEEDINGS
On February 20, 1997, FCI Environmental, Inc. ("FCIE") commenced a
lawsuit in the State Court of Nevada (No. A370091) (the "State Action")
against QED Environmental, Inc. ("QED"). FCIE alleged a breach of a Sales
and Distribution contract dated March 29, 1996 between FCIE and QED. FCIE is
seeking $123,800 in direct damages and $297,075 in consequential damages.
QED filed a motion to remove the State Action to the United States District
Court, District of Nevada. On April 10, 1997, the State Action was removed to
Federal Court and was assigned the Docket No. CU-S-97-00406 (DWH). QED filed
a counterclaim against the Company and brought a third-party complaint
against certain officers and employees and former employees of the Company,
seeking reimbursement of $62,223 paid by QED pursuant to the subject
contract. The Company has responded to the counterclaim denying all of QED's
counterclaims. Upon QED's motion which was unopposed, the Court ordered the
parties to proceed to early neutral evaluation in January 1998. FCIE and QED
reach a full and final settlement in this action in January 1998.
A former distributor has filed an action in French national courts
claiming improper termination by FCI Environmental, Inc. The Company has
responded that the distribution agreement provides for arbitration, in
Nevada, of any disputes and that therefore, the French courts do not have
jurisdiction, and further that the claims are without merit. An
administrative hearing is scheduled in January 1998. The Company does not
expect an adverse outcome and believes that even in the event of an adverse
outcome, such an outcome would not have a material effect on its financial
position or results of operations.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICER
The names, ages and respective positions of the Executive Officers and
Directors of the Company are as follows:
Name Age Position
---- --- ---------
Geoffrey F. Hewitt 54 Chairman of the Board, President, Chief
Executive Officer and Class A Director
Dale W. Conrad 57 Class A Director
Byron A. Denenberg 63 Class C Director
Irwin J. Gruverman 64 Class A Director
Walter Haemmerli 68 Class B Director
Scott J. Loomis 49 Class B Director
Gerald T. Owens 70 Class C Director
Melvin W. Pelley 53 Chief Financial Officer and Secretary
The names, ages and respective positions of the Executive Officers and
Directors of FCI Environmental are as follows:
Name Age Position
---- --- ---------
Dale W. Conrad 57 Chairman of the Board and Director
Geoffrey F. Hewitt 54 Chief Executive Officer and Director
Scott J. Loomis 49 Director
Melvin W. Pelley 53 Chief Financial Officer, Secretary and
Director
Thomas A. Collins 51 President
-45-
<PAGE>
GEOFFREY F. HEWITT has served as Chairman of the Board since November
14, 1997 and as President and Chief Executive Officer of the Company, as well
as Chief Executive Officer of FCI Environmental since August 1995. Mr.
Hewitt was appointed as a Director of the Company on September 11, 1996. He
has also served as a Director of FCI Environmental since April 1994 and as
its President from April 1994 to November 1996. 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.
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. 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., and Microsensor
Technologies, GmbH.
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.
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.
-46-
<PAGE>
SCOTT J. LOOMIS has served as a Director of the Company since June 1989
and as Chairman of the Board of Directors from August 1995 until November 14,
1997. 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.
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.
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.
THOMAS A. COLLINS has served as President of FCI Environmental since
November 1996 and as Vice President of International Marketing and Product
Development from March 1996 to November 1996. Prior thereto, from 1992 he
was Director of International Sales and Product Marketing of Arizona
Instrument Corporation, a manufacturer of environmental and control
instrumentation; from 1990 to 1992 he was Director of Marketing of Wayne
Division, Dresser Industries, Inc., a manufacturer of dispensing equipment
for the gasoline industry; from 1986 to 1989 he was Manager of Domestic
Retail Marketing for Diebold, Inc., a manufacturer of transaction terminals
in the petroleum retailing market; and from 1968 to 1986 he held marketing
and engineering positions at ARCO Petroleum Products Co.
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. Gruverman, Mr. Conrad and Mr. Hewitt were
elected to three-year terms as Directors at the
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<PAGE>
Company's June 1997 Annual Meeting of Shareholders. Mr. Loomis and Mr.
Haemmerli were elected to three-year terms as Directors at the Company's May
1996 Annual Meeting of Stockholders. Mr. Owens was elected to a three-year
term as Director at the Company's May 1995 Annual Meeting of Stockholders and
Mr. Denenberg was appointed to the Board of Directors in August 1995.
In January 1993, the Company established a Stock Option Committee. The
Stock Option Committee is responsible for the granting of stock options under
the Company's Stock Option Plans. The Company also established a
Compensation Review Committee, which is responsible for reviewing the
compensation of the Company's executives and 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. Mr. Gruverman was added to
the Audit Committee on November 14, 1997. The Board of Directors did not
have a standing nomination committee or committee performing similar
functions during the fiscal year ended September 30, 1997.
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 $100,000, for services rendered to the
Company during the three fiscal years ended September 30, 1997, was as
follows:
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------------
Annual Compensation Awards Long-Term
--------------------------------------- -------------------------- Other
Other Restricted Securities Incentive All
Name of Individual Fiscal Annual Stock Underlying Plan Other
and Principal Position Year Salary($) Bonus($) Compensation($) Awards($) Options/SARs(#) Payouts($) Compensation($)
- ----------------------- ------ ----------- -------- ---------------- ---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Geoffrey F. Hewitt 1997 $205,000(1) $ -- $ -- -- 125,000 $ -- $ --
President and CEO of 1996 $195,768 $ -- $ -- -- 100,000 $ -- $ --
FiberChem, Inc. and CEO 1995 $177,596 $ -- $ -- -- 75,000 $ -- $ --
of FCI Environmental,
Inc.
Dale W. Conrad 1997 $ -- $ -- $ 2,709(2) -- 25,000 $ -- $ --
Chairman of the Board 1996 $ 18,730 $ -- $13,594(2) -- 35,000 $ -- $ --
of FCI Environmental, 1995 $112,535 $ -- $ -- -- 60,000 $ -- $ --
Inc.
Melvin W. Pelley 1997 $136,708(3) $ -- $ -- -- 75,000 $ -- $ --
Chief Financial Officer 1996 $126,461 $ -- $ -- -- 50,000 $ -- $ --
of FiberChem, Inc. and 1995 $113,346 $ -- $ -- -- 25,000(2) $ -- $ --
of FCI Environmental,
Inc.
David R. LeBlanc 1997 $ 5,288 $ -- $ -- -- 0 $ -- $ --
Vice President - Sales 1996 $125,000 $ -- $ -- -- 5,000 $ -- $ --
and Marketing of 1995 $123,588 $ -- $ -- -- 5,000 $ -- $ --
FCI Environmental,
Inc.
Thomas A. Collins 1997 $129,708(4) $ -- $ -- -- 75,000 $ -- $ --
President of 1996 $ 70,192 $ -- $ -- -- 100,000 $ -- $ --
FCI Environmental, 1995 $ -- $ -- $ -- -- -- $ -- $ --
Inc.
</TABLE>
_____________
(1) Includes $14,808 in accrued but unpaid salary, earned during the period
from June 15 through September 30, 1997. Payment has been deferred until
after January 1, 1998 at the Company's discretion.
(2) Consulting fees of $2,709 paid during Fiscal 1997; Directors' compensation
of $11,194 and consulting fees of $2,400 paid during Fiscal 1996. Amounts
earned, net of applicable taxes, reduced the promissory notes issued by Mr.
Conrad to the Company for the exercise of options.
(3) Includes $8,615 in accrued but unpaid salary, earned during the period from
June 15 through September 30, 1997. Payment has been deferred until after
January 1, 1998 at the Company's discretion.
(4) Hired March 1, 1996 as Vice President of International Marketing and
Product Development; President of FCI Environmental since November 1996.
Includes $6,730 in accrued but unpaid salary, earned during the period from
June 15 through September 30, 1997. Payment has been deferred until after
January 1, 1998 at the Company's discretion.
(5) Resigned July 1996; compensated at the rate of $125,000 annually through
October 5, 1996.
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<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options/SARs
Underlying Granted Exercise
Options/SARs to Employees or Base Expiration
Name of Individual Granted In Fiscal Year Price($/Share) Date
- ----------------------- --------------------- --------------------- ------------------ -------------------------
<S> <C> <C> <C> <C>
Geoffrey F. Hewitt 125,000 27.8% $ 0.25 September 12, 2007
Dale W. Conrad 25,000 5.6% $ 0.22 May 29, 2007
Melvin W. Pelley 75,000 16.7% $ 0.25 September 12, 2007
David R. LeBlanc -- -- --
Thomas A. Collins 75,000 16.7% $ 0.25 September 12, 2007
</TABLE>
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 18,961 $(3,262)(1) 486,247 / 0 $(255,740) (2) / $0
Dale W. Conrad -- $ 120,000 / 0 $ (20,781) (2) / $0
Melvin W. Pelley 74,712 $(9,068)(1) 75,000 / 0 $ 2,344 / $0
David R. LeBlanc 0 $ 0 98,350 / 0 $ (21,514) (2) / $0
Thomas A. Collins 0 $ 0 175,000 / 0 $ (69,531) (2) / $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) The options' exercise price exceeded their fair market value as of
September 30, 1997, resulting in negative "Value of Unexercised In-
The-Money Options."
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 50% of the employee's contribution up to
a maximum of 2% 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.
-50-
<PAGE>
DIRECTORS COMPENSATION
In September 1996, the existing base compensation fee of $10,000 per
year for non-management directors was eliminated, replaced by the granting of
options to purchase 25,000 shares of Common Stock of the Company. Fees for
attendance at Board meetings were suspended. Fees for service as Chairman
and fees for committee service were also eliminated and replaced by the
granting of options to purchase from 4,000 to 12,500 shares of Common Stock
of the Company.
During Fiscal 1996, the Company expensed an aggregate of $99,000 in
Directors' compensation for the Company's six non-management Directors,
applying $42,451 to the payment of promissory notes and interest, $35,272 to
the exercise of 35,272 stock options and $21,277 of payroll taxes. In
addition, on April 8, 1996, the Company granted to each of its six
non-management Directors options to purchase 10,000 shares of Common Stock at
$1.00 per share, which was the market value of Common Stock on that date and
on September 11, 1996, the Company granted to each of its six non-management
Directors options to purchase 25,000 shares of Common Stock at $0.93 per
share, which was the market value of the Common Stock on that date. On May
29, 1997, the Company granted to each of its six non-management Directors
options to purchase 25,000 shares of Common Stock at $0.22 per share, which
was the market value of the Common Stock on that date. In addition, the
Company granted options to purchase an aggregate of 36,500 shares of the
Common Stock to three of its non-management directors for service as Chairman
and members of its Audit Committee and Compensation and Stock Options
Committee.
EMPLOYMENT CONTRACTS
Geoffrey F. Hewitt serves under an employment agreement with the
Company, effective October 1, 1997. Mr. Hewitt is currently compensated at a
rate of $205,000 per annum and is entitled to receive bonuses, if any, at the
discretion of the Board of Directors. The employment contract is terminable
for cause. Since June 15, 1997, payment of approximately 27% (or $55,000) of
Mr. Hewitt's salary has been deferred. Payment of the earned but unpaid
amount is at the discretion of the Company and is expected to be paid during
calendar 1998.
Melvin W. Pelley serves under an employment agreement with the Company,
effective October 1, 1997. Mr. Pelley is currently compensated at a rate of
$132,000 per annum, and is entitled to receive bonuses, if any, at the
discretion of the Board of Directors. The employment contract is terminable
for cause. Since June 15, 1997, payment of approximately 24% (or $32,000)
of Mr. Pelley's salary has been deferred. Payment of the earned but unpaid
amount is at the discretion of the Company and is expected to be paid during
calendar 1998.
Thomas A. Collins serves under an employment agreement with the Company,
effective October 1, 1997. Mr. Collins is currently 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
for cause. Since June 15, 1997, payment of approximately 20% (or $25,000)
-51-
<PAGE>
of Mr. Collins' salary has been deferred. Payment of the earned but unpaid
amount is at the discretion of the Company and is expected to be paid during
calendar 1998.
David R. LeBlanc served until October 5, 1996 under an employment
agreement with FCI Environmental, effective July 18, 1994. Mr. LeBlanc was
compensated at a rate of $125,000 per annum and was entitled to receive
bonuses, if any, at the discretion of the Board of Directors. The employment
contract was terminable without cause with 90 days notice.
CONSULTING AGREEMENTS
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 September,
1995, the Company paid Mr. Conrad $8,394 under this agreement, all of which
was applied to promissory notes executed by Mr. Conrad in connection with the
exercise of stock options, and to the exercise of additional stock options.
From October 1995 through September 1996, the Company paid Mr. Conrad $18,730
under this agreement, all of which was applied to the promissory notes, the
exercise of stock options and payment for group insurance benefits paid by
the Company. From October 1996 through September 1997, the Company paid Mr.
Conrad $2,709 under this agreement, all of which was applied to promissory
notes, the exercise of stock options and payment for group insurance benefits
paid by the Company. The agreement is terminable by either party upon
written notice.
On February 14, 1996, the Company entered into an agreement, superseding
earlier verbal and letter agreements, with European Capital Advisors, Ltd.
("ECA") pursuant to which ECA would be compensated for marketing strategy and
business and financial planning services for the Company. In consideration
for these services, ECA was paid $30,000 in cash and was granted warrants to
purchase 75,000 shares of Common Stock of the Company at $0.90 per share,
exercisable until February 13, 2001.
STOCK OPTIONS
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,
as of April, 7, 1995 would 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.
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, 1997, the Company has issued
761,547 stock options, net of forfeitures, (with initial and current exercise
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<PAGE>
prices ranging from $0.93 per share to $1.38 per share) under the 1995 Plan
to employees of FCI Environmental and Directors of the Company.
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 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. During Fiscal 1996, the
Company received $1,031 for the exercise of 1,031 Class D Warrants. On August
21, 1996, the Board of Directors extended the expiration date of the Class D
Warrants from their original expiration date of September 15, 1996, to
September 15, 2000, and changed the exercise price from $1.00 to $1.10 from
September 16, 1996 through September 15, 1997; then $1.15 through September
15, 1998; then $1.20 through September 15, 1999; then $1.25 through September
15, 2000.
Primarily in order to provide a means to raise additional cash through
existing outstanding options, warrants and promissory notes receivable, on
April 4, 1997, the per share exercise price of all employee stock options,
all Unit and other Warrants (except Class D Warrants) were decreased as
follows: to $0.32 from April 4 through April 11, 1997, and thereafter
adjusted weekly to the average closing bid price for the five prior trading
days less a discount of 10% (but never to a price less than $0.30) through
May 16, 1997, when the prices reverted to the original prices. As a result,
the Company received $39,943 for the exercise of 131,453 options at prices
ranging from $0.30 to $0.32 per share. Effective April 17, 1997 the per
share exercise price of Class D Warrants was decreased to $0.30 through May
16, 1997 when the exercise price reverted to its prior $1.10 per share. As a
result, the Company received approximately $30,954 for the exercise of
103,179 Class D Warrants exercised at $0.30 per share.
As of April 4, 1997 an aggregate of $277,916 had been paid on the
promissory notes receivable (issued in 1994 for the early exercise of stock
options), an aggregate of $47,999 of interest had been paid, and an
additional $248,212 of interest had been accrued (through December 31, 1996)
but remained unpaid.
In conjunction with the temporary reduction of the exercise prices of
the options and warrants effective April 4, 1997 and Class D Warrants
effective April 17, 1997, as described above, the remaining unpaid principal
on the promissory notes could be fully paid in an amount determined by
multiplying the unpaid balance by a fraction, the numerator of which was the
revised exercise price, and the denominator of which was $1.50 (the original
exercise price). If the unpaid principal was not so paid by May 16, 1997 the
underlying collateral shares would be forfeited and all unpaid principal and
accrued interest would be extinguished.
As a result, the Company received $160,875 in payment for 520,252
escrowed shares at prices ranging from $0.30 to $0.32 per share, which amount
liquidated $780,379 of original note principal. The remaining $756,804 of
unpaid note principal was extinguished and the underlying collateral of
504,535 shares were forfeited to the Company and immediately canceled,
thereby
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<PAGE>
reducing the total number of shares outstanding. Unpaid accrued interest
receivable aggregating $248,212 was expensed.
In January 1997 the Company's Board of Directors adopted a 1997 Employee
Stock Option Plan ("1997 Plan"), approved by the stockholders at the June 23,
1997 Annual Stockholders Meeting, covering an aggregate of 1,500,000 shares
of Common Stock and restricting the granting of options to purchase
approximately 675,000 shares of Common Stock authorized under previous stock
option plans. As of September 30, 1997 the Company has issued options to
purchase 636,500 shares of Common Stock at prices ranging from $0.22 to $0.25
under the 1997 Plan to employees of FCI Environmental and Directors of the
Company.
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, 1996, all 143,000 shares of Common Stock
were issued to and vested by employees. For the fiscal years ended September
30, 1996 and 1997, 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 September 30,
1997, 8,500 Discretionary Bonus Plan shares have been issued to employees of
the Company. For the fiscal years ended September 30, 1996 and 1997, no
shares of Common Stock under the Discretionary Bonus Plan were granted to any
executive officers nor to any other employee.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides for indemnification
of directors in conformity with Section 145 of the Delaware General
Corporation Law, as amended (the "DGCL"), which authorizes the Company to
indemnify any director under certain prescribed circumstances and subject to
certain limitations against certain costs and expenses, including attorneys'
fees actually and reasonably incurred in connection with any action, suit or
proceeding, whether civil, criminal, administrative or investigative, to
which such person is a party by reason of being a director of the Company if
it is determined that such person acted in accordance with the applicable
standard of conduct set forth in such statutory provisions.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions
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or otherwise, the Company has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
CERTAIN TRANSACTIONS
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 former 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 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 September
30, 1996, the entire principal and accrued interest had been paid in full.
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. 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 September 15, 1995. On April 7, 1995, the Board of
Directors extended the due date of the notes to March 15, 1998. As of April
4, 1997 an aggregate of $277,916 had been paid on these notes, an aggregate
of $47,999 of interest had been paid, and an additional $248,212 of interest
had been accrued (through December 31, 1996) but remained unpaid.
In conjunction with the temporary reduction of the exercise prices of
the options and warrants effective April 4, 1997 and Class D Warrants
effective April 17, 1997, as described above, the remaining unpaid principal
on the promissory notes could be fully paid in an amount determined by
multiplying the unpaid balance by a fraction, the numerator of which was the
revised exercise price, and the denominator of which was $1.50 (the original
exercise price). If the unpaid principal was not so paid by May 16, 1997 the
underlying collateral shares would be forfeited and all unpaid principal and
accrued interest would be extinguished. The Company did not want to penalize
the employees and directors by requiring payment of the promissory notes.
The Company believes that it must provide an incentive when it is
compensating employees and directors for services rendered to the Company in
the form of non-cash compensation.
As a result, the Company received $160,875 in payment for 520,252
escrowed shares at prices ranging from $0.30 to $0.32 per share, which amount
liquidated $780,379 of original note principal. The remaining $756,804 of
unpaid note principal was extinguished and the underlying collateral of
504,535 shares were forfeited to the Company and immediately canceled,
thereby reducing the total number of shares outstanding. Unpaid accrued
interest receivable aggregating $248,212 was expensed.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 1, 1998, 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 Directors and
officers as a group:
<TABLE>
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership (1) Percentage of Class (2)
-------------------------- ------------------------ -----------------------
<S> <C> <C>
Geoffrey F. Hewitt (3) 574,329 (5) 2.2%
Dale W. Conrad 415,840 (6) 1.6%
7204 Wellington Point Road
McKinney, TX 75070
Byron A. Denenberg 190,000 (7) (4)
RCT Systems, Inc.
327 Messner Drive
Wheeling, IL 60090
Irwin J. Gruverman 300,470 (8) 1.2%
30 Ossipee Road
Newton, MA 02164
Walter Haemmerli 3,749,844 (9) 13.2%
Manport AG
Basteiplatz 3, CH 8001
Zurich, Switzerland
Scott J. Loomis 852,649 (10) 3.3%
P.O. Box 35238
Tucson, AZ 85740
Gerald T. Owens 226,823 (11) (4)
147 Paddington Way
San Antonio, TX 78209
Melvin W. Pelley (3) 293,863 (12) 1.2%
</TABLE>
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<TABLE>
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership (1) Percentage of Class (2)
-------------------------- ------------------------ -----------------------
<S> <C> <C>
Thomas A. Collins (3) 175,000 (13) (4)
All Directors and Officers as 6,778,818 22.5%
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 25,639,707 shares issued and outstanding as of February 1, 1998.
(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 an aggregate of 486,247 shares of Common Stock issuable upon
exercise of a like number of options.
(6) Includes an aggregate of 120,000 shares of Common Stock issuable upon
exercise of a like number of options.
(7) Includes an aggregate of 58,142 shares of Common Stock issuable upon
exercise of a like member of options.
(8) Includes 66,880 shares of Common Stock issuable upon exercise of a like
number of options. Also includes 67,500 shares of Common Stock held by G&G
Diagnostics, L.P. I, 48,200 shares of Common Stock held by G&G Diagnostics,
L.P. II, and 8,161 shares of Convertible Preferred Stock convertible into
81,610 shares of Common Stock held by G&G Diagnostics, L.P. III, all of
which Mr. Gruverman is a principal.
(9) 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 29,000 shares of Common Stock issuable upon exercise of
a like number of options. Also includes 704,000 shares of Common Stock,
863,800 Class D Common Stock Purchase Warrants, and 165,286 shares of
Convertible Preferred Stock convertible into 1,652,860 shares of Common
Stock, all held by Privatbank Vermag A.G., Chur, Switzerland, as custodian
for certain customers, of which company Mr. Haemmerli is Vice-Chairman.
Also includes $150,000 of Senior Convertible 8% notes convertible into
367,824 shares of Common Stock held by Manport AG, of which company Mr.
Haemmerli is Chief Executive Officer.
(10) Includes 32,353 Class D Common Stock Purchase Warrants and an aggregate of
90,500 shares of Common Stock issuable upon exercise of a like number of
options. Also includes 486,668 shares of Common Stock, and 151,590 Class D
Common Stock Purchase Warrants held by AgriResearch and Development, Inc.,
of which Mr. Loomis is a Director and principal stockholder.
(11) Includes 39,965 Class D Common Stock Purchase Warrants and an aggregate of
82,000 shares of Common Stock issuable upon exercise of a like number of
options.
(12) Includes an aggregate of 75,000 shares of Common Stock issuable upon
exercise of a like number of options.
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(13) Includes an aggregate of 175,000 shares of Common Stock issuable upon
exercise of a like number of options.
DESCRIPTION OF SECURITIES
UNITS
The Company will offer 8,776,587 Units to owners of its Common Stock,
Preferred Stock and Warrants as of the close of business on the Record Date,
at a purchase price of U.S.$.22 per Unit. Each Unit offered will consist of
one share of Common Stock and one Class Warrant to purchase an additional
share of Common Stock. The Class E Warrants shall be immediately
transferable separately from the shares of Common Stock.
The following summary descriptions of the Company's securities are
qualified in their entirety by reference to the Company's Certificate of
Incorporation and By-Laws, copies of which are available upon request of the
Company.
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock,
$.0001 par value, of which 25,639,707 shares of Common Stock are issued and
outstanding. As of February 1, 1998, there were approximately 489 record
holders of Common Stock. All of the outstanding shares of Common Stock are
duly and validly issued, fully paid and non-assessable, and the shares of
Common Stock included in the Units and the shares of Common Stock issuable
upon exercise of the Class E Warrants, upon payment of the purchase price for
the Units and the exercise price of the Class E Warrants, as the case may be,
will be duly and validly issued, fully paid and non-assessable.
Subject to the rights of the holders of Preferred Stock, holders of
Common Stock are entitled to receive, pro rata, such dividends and
distributions as may, from time to time, be declared by the Board of
Directors, from funds legally available therefor. The Company has not paid
any cash dividends on its Common Stock and does not anticipate paying cash
dividends in the foreseeable future. See "Dividend Policy". In the event of
liquidation, dissolution or winding up of the Company, holders of Common
Stock are entitled to share ratably in all assets of the Company available
for distribution to holders of Common Stock, subject to the rights of
creditors and holders of Preferred Stock. The holders of Common Stock are
not subject to redemption, further calls or assessments by the Company.
Holders of Common Stock have no preemptive, subscription or conversion rights.
Holders of Common Stock are entitled to one vote per share on all
matters submitted to the stockholders, and the holders of the majority of the
outstanding shares of Common Stock currently constitute a quorum at any
meeting of stockholders.
Since the Common Stock does not have cumulative voting rights, holders
of more than 50% of the outstanding shares can elect the Directors of the
Company. However, the Company's Board
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of Directors is divided into three classes, each of which is to be elected
for three-year terms. As the term of each class expires, Directors of that
class are elected for full three-year terms. The Company's Board of
Directors currently has six Directors.
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of Preferred Stock,
$.001 par value. The Preferred Stock may be issued by the Company's Board of
Directors from time to time in one or more series. The Board of Directors is
authorized to determine the rights, preferences, privileges and restrictions,
including the dividend rights, conversion rights, voting rights, terms of
redemption (including sinking fund provisions, if any) and liquidation
preferences, of any series of Preferred Stock and to fix the number of shares
of any such series without any further vote or action by stockholders.
An aggregate of 437,017 shares of Convertible Preferred Stock were
issued in connection with the August and December 1993 private placements of
Convertible Preferred Stock by the Company, of which 218,998 shares are
currently outstanding. The Company has no present plans, proposals,
commitments or arrangements to issue any other shares of Preferred Stock.
Although the Company has no present intention to issue Preferred Stock to
discourage or defeat efforts to acquire control of the Company through the
acquisition of shares of its Common Stock, it has the ability to do so
through the issuance of Preferred Stock. See "Risk Factors - Preferred Stock
Authorized."
Each share of the Convertible Preferred Stock is convertible into ten
shares of the Company's Common Stock. The conversion ratio is subject to
customary anti-dilution provisions including, but not limited to, new
issuances of Common Stock below $1.50 per share and is, therefore, expected
to be adjusted upon the completion of the Offering. Holders of Convertible
Preferred Stock vote together with the holders of Common Stock as one class
on all matters submitted to a vote of stockholders, except where a class vote
of preferred stock may be required by law. Holders of Convertible Preferred
Stock have ten votes per share on all matters presented to the stockholders
for action. Dividends are cumulative and are payable annually on November
1st, in cash (11%) or additional shares of Convertible Preferred Stock (8% on
the number of shares owned at date of declaration) at the sole discretion of
the holders. 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 the Company'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.
DIVIDEND POLICY
Pursuant to the terms of the Company's Convertible Preferred Stock,
dividends are payable annually on November 1st. The holders of the
Convertible Preferred Stock may elect to receive their dividend payments in
cash at a rate of 11% of the liquidation value, or in additional shares at
the rate of 8% the number of shares of Convertible Preferred Stock held by
such holder on the date of
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<PAGE>
declaration. In September 1997, the Company's Board of Directors determined
that, in view of the recent trading price of the Company's Common Stock and
in view of the Company's current cash position, it would not be appropriate
to declare the annual dividend payable on the Convertible Preferred Stock on
November 1, 1997. As a result, that dividend will accumulate in accordance
with the terms of the Convertible Preferred Stock. No assurance can be given
that the Company will be able to make dividend distributions in the future if
the holders of the Convertible Preferred Stock request cash.
The payment of dividends by the Company is within the discretion of its
Board of Directors and depends in part upon the Company's earnings, capital
requirements and financial condition. Since its inception, the Company has
not paid any dividends on its Common Stock and does not anticipate paying
such dividends in the foreseeable future. The Company intends to retain
earnings, if any, to finance its operations.
CLASS E WARRANTS
Each Class E Warrant entitles the holder thereof to purchase one share
of the Company's Common Stock from _______, 1999 through _______, 2003 at an
exercise price of $.22 per share.
The Class E Warrants contain provisions that protect the holders thereof
against dilution. The exercise price and the number of shares of Common Stock
or other securities issuable on exercise of the Class E Warrants are subject
to adjustment in the event of stock, splits, stock dividends,
reclassifications, recapitalizations, reorganizations, mergers or
consolidations of the Company.
The Class E Warrants may be exercised upon surrender of the Class E
Warrant certificate on or prior to the expiration date at the offices of the
Company, with the exercise form on the reverse side of the Class E Warrant
certificate completed and executed as indicated, accompanied by full payment
of the exercise price (by check payable to the Company) for the number of
Class E Warrants being exercised. The Class E Warrant holders do not have the
right or privileges of holders of Common Stock.
The Company is required to have a current registration statement on file
with the Securities and Exchange Commission and to effect appropriate
qualifications under the laws and regulations of the states in which the
holders of Class E Warrants reside in order to comply with applicable laws in
connection with the exercise of the Class E Warrants and the resale of the
shares of Common Stock issuable upon such exercise. The Company will be
required to file post-effective amendments or supplements to its registration
statement when subsequent events require such amendments or supplements in
order to continue the registration of the Class E Warrants, and the shares
issuable upon exercise of the Class E Warrants and to take appropriate action
under state securities laws. There can be no assurance that the Company will
be able to keep its registration statement current or to effect appropriate
action under applicable state securities laws, the failure of which may
prevent the sale of the Class E Warrants and the exercise of the Class E
Warrants and resale or other disposition of the underlying shares to be
effected.
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<PAGE>
Corporate Stock Transfer located in Denver Colorado, will act as the
Warrant Agent with respect to the Class E Warrants.
CLASS D AND OTHER WARRANTS
There are 2,664,103 Class D Warrants authorized, 1,895,175 of which are
currently outstanding. Each Class D Warrant entitles the holder thereof to
purchase one share of Common Stock at $1.15 per share through September 15,
1998, $1.20 per share though September 15, 1999 and $1.25 per share through
the expiration date of September 15, 2000. The Class D Warrants contain
provisions that protect the holders thereof against dilution by adjustment of
the exercise price and the number of Class D Warrants in certain events
including, but not limited to, stock dividends, stock splits,
reclassifications, mergers and similar transactions. Upon the issuance of
any shares at a price lower than the then current exercise price of the Class
D Warrants, but not for the exercise of any outstanding options, warrants or
bonds, the exercise price of the Class D Warrants will be reduced
proportionately. Holders of Class D Warrants do not possess any rights as a
stockholder of the Company. The Company's Board of Directors has agreed that
the Company will not redeem any of such Class D Warrants prior to their
expiration.
REG S WARRANTS
The Reg S Warrants were issued as part of a foreign offering in May
1996. Each Warrant entitles the holder thereof to purchase one share of
Common Stock at an exercise price of $1.00, subject to adjustment in certain
events, at any time on or before May 30, 2001 (the "Warrant Expiration
Date"). The Exercise Price is subject to adjustment upon the occurrence of
certain events, including but not limited to: (i) stock dividends and certain
other distributions; (ii) the subdivision, combination or reclassification of
outstanding shares of Common Stock; (iii) issuances to all shareholders of
the Company of rights or warrants to acquire shares of Common Stock at a
price less than the then current market price for the Common Stock; (iv)
issuances of Common Stock at a price less than the then fair market value,
and (v) the distribution to all holders of Common Stock of debt securities of
the Company or options or rights or warrants to purchase securities of the
Company (excluding those rights and warrants referred to above and cash
dividends or distributions from current or retained earnings). The Company
may at any time or from time to time reduce the Exercise Price temporarily or
permanently. Holders of Reg S Warrants do not have any of the rights or
privileges of stockholders of the Company.
The Reg S Warrants are subject to redemption at a price of $.05 per
warrant (the "Redemption") at any time after May 13, 1997, if the average
closing market price for the Common Stock as quoted on NASDAQ, or any
subsequent exchange or market system on which the Common Stock is traded, has
been at least two hundred percent (200%) of the Exercise Price for thirty
(30) consecutive days.
In September 1995, the Company authorized the issuance of warrants to
purchase an aggregate of 75,000 shares of Common Stock at an exercise price
of $.90 per share to two entities for consulting services.
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On February 15, 1996, for nominal consideration, the Company issued
warrants to purchase at initially $0.80 per share an aggregate of 353,125
shares (subsequently adjusted to $.4078 per share and warrants to purchase
692,742 shares) of Common Stock to Rauscher Pierce & Clark Limited in partial
consideration for its services as placement agent in connection with the
offering of 8% Senior Convertible Notes.
On May 31, 1996, the Company issued warrants to purchase an aggregate of
333,333 shares of Common Stock at an exercise price of initially $.90 per
share (subsequently adjusted in accordance with the terms of warrants to
purchase 1,280,411 shares at an exercise price of $0.2343 per share) to
Rauscher Pierce & Clark, Inc. and Rauscher Pierce & Clark Limited in partial
consideration for their services as placement agent in connection with the
May Regulation S Offering.
NOTES
On February 15, 1996, the Company completed an offering under Regulation
S, promulgated under the Securities Act of 1933, as amended (the "Offering"),
of 8% Senior Convertible Notes due February 15, 1999 (the "Notes"), for
$2,825,000. Interest on the Notes is to be paid semi-annually, commencing
August 15, 1996, at a rate of 8% per annum. The Notes are convertible into
shares of common stock of the Company (the "Common Stock") at a conversion
price (the "Conversion Price") of, initially, $0.80 per share at any time
after March 26, 1996 and before the close of business on February 14, 1999.
The Conversion Price was to be adjusted if the average closing bid price of
the Common Stock during the 30 business days prior to February 15, 1997 was
less than the Conversion Price. Accordingly, the Conversion Price has been
adjusted to $0.4078, a price representing a 10% discount from the thirty-day
average closing bid price of the Common Stock for the 30 business days prior
to February 15, 1997. As of December 31, 1997, an aggregate face amount of
$1,200,000 of the Notes had been converted to Common Stock resulting in the
issuance of 1,617,851 shares of Common Stock. Based on the adjusted
Conversion Price of $0.4078, an aggregate of 3,984,796 shares of Common Stock
would be issuable if the remaining $1,625,000 face amount of Notes were
converted.
REPORTS TO STOCKHOLDERS
The Company distributes to its stockholders annual reports containing
financial statements audited and reported upon by its independent certified
public accountants after the end of each fiscal year, and makes available
such other periodic reports as the Company may deem to be appropriate or as
may be required by law or by the rules or regulations of any stock exchange
on which the Company's Common Stock is listed. The Company's fiscal year end
is September 30.
LEGAL MATTERS
The legality of the Units and underlying securities offered hereby will
be passed upon by Snow Becker Krauss P.C., 605 Third Avenue, New York, New
York 10158. Snow Becker Krauss
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P.C. owns 50,000 shares of Common Stock and SBK Investment Partners, an
investment nominee of Snow Becker Krauss P.C. owns 6,250 Class D Warrants.
TAX CONSEQUENCES RELATING TO THE RIGHTS OFFERING
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain material federal income tax
considerations to the Company and the stockholders relating to the Rights
Offering and the acquisition, ownership and disposition of the Units, the
Common Stock and the Class E Warrants.
This summary is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), applicable Treasury Regulations (the "Regulations"), and
judicial and administrative interpretations of the Code and Regulations, all
as in effect on the date of this Prospectus. It should be noted that the
Code, the Regulations, and any interpretations thereof are subject to change
and that any such change may be applied retroactively. Moreover, the summary
does not discuss all aspects of federal income taxation that may be relevant
to a particular stockholder in light of his, her or its personal investment
circumstances or to certain types of stockholders subject to special
treatment under the federal income tax laws (for example, banks, life
insurance companies, tax-exempt organizations and foreign taxpayers), and
does not discuss any aspects of state, local or foreign tax laws. This
discussion is limited to stockholders who hold the Common Stock upon which
the Rights are to be distributed (the "Old Common Stock"), the Rights, the
Units, the Common Stock and the Class E Warrants as capital assets.
FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY
No gain or loss will be recognized by the Company by reason of (1) the
distribution of the Rights, (2) the expiration of the Rights or Class E
Warrants without exercise, (3) the exercise of the Rights or Class E
Warrants, or (4) the receipt of cash for shares of Common Stock or Class E
Warrants pursuant to the exercise of the Rights or Class E Warrants.
FEDERAL INCOME TAX CONSEQUENCES TO THE STOCKHOLDERS
RECEIPT OF THE RIGHTS. No gain or loss will be recognized by a
stockholder upon receipt of the Rights.
TAX BASIS OF THE RIGHTS. The tax basis of the Rights will be determined
by allocating the tax basis of the Old Common Stock between the Old Common
Stock and the Rights in proportion to their respective fair market values on
the date of distribution. If the fair market value of the Rights on the date
of distribution is less than fifteen percent (15%) of the fair market value
of the Old Common Stock on such date, however, no such allocation will be
made (and thus, the basis of the Rights will be zero) unless the stockholder
makes an irrevocable election to do so. The election to allocate basis is to
be made by attaching a statement to the stockholder's federal income tax
return
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filed for the taxable year in which the Rights are received. The election, if
made, will apply to all of the Rights received by a stockholder pursuant to
the Rights Offering. If the Rights expire without exercise, as described
below, the amount of basis allocated to the Rights shall be reallocated to
the Old Common Stock.
SALE OF THE RIGHTS. A stockholder will recognize gain or loss upon the
sale of the Rights in an amount equal to the difference between the amount
realized upon the sale and the stockholder's tax basis in the Rights. Such
gain or loss will be a capital gain or loss and will be considered long-term
capital gain or loss if the stockholder's holding period in the Rights is
more than one year. The holding period of the Rights will include the period
during which the stockholder held the Old Common Stock.
EXPIRATION OF UNEXERCISED RIGHTS. If a stockholder allows the Rights to
expire without exercise, such stockholder's tax basis in the Old Common Stock
will be the same as it was prior to the distribution of the Rights and no
gain or loss will be recognized by such stockholder on the expiration of such
Rights.
EXERCISE OF THE RIGHTS AND ACQUISITION OF THE UNITS. No gain or loss
will be recognized by a stockholder upon the purchase of the Units pursuant
to the exercise of the Rights. However, a holder of a Right, who exercises
same by the cancellation of the principal amount and accrued interest on
outstanding debentures of the Company owned by the holder, will recognize
ordinary income to the extent of any such accrued interest which was not
previously reported as income by the holder.
TAX BASIS OF THE CLASS E WARRANTS AND COMMON STOCK. If the Rights are
exercised, the tax basis of the Units purchased thereby will be equal to the
sum of the price for the Units and the amount, if any, allocated to the tax
basis of the Rights as described above. The tax basis of the Units (each
consisting of one share of Common Stock and one Class E Warrant) will be
allocated between the shares of Common Stock and the Class E Warrants in
proportion to their respective fair market values on the date of issuance.
SALE OF THE CLASS E WARRANTS OR COMMON STOCK. Gain or loss will be
recognized by a stockholder upon the sale of the Class E Warrants or shares
of Common Stock in an amount equal to the difference between the amount
realized on the sale and the tax basis of the Class E Warrants or shares of
Common Stock sold. Such gain or loss will be a capital gain or loss and will
be considered long-term capital gain or loss if the holder's holding period
in the Class E Warrants or shares of Common Stock is more than one year. The
holding period of the Class E Warrants or shares of Common Stock will begin
on the date of exercise of the Rights.
EXERCISE OF THE CLASS E WARRANTS. No gain or loss will be recognized by
a holder of Class E Warrants upon the exercise thereof. If the Class E
Warrants are exercised, the holder's tax basis in the shares of Common Stock
received pursuant to such exercise will be equal to the sum of the tax basis
of the Class E Warrants exercised and the exercise price thereof. The holding
period for the shares of Common Stock received pursuant to such exercise will
begin on the date the Class E Warrants are exercised.
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REDEMPTION OF CLASS E WARRANTS. If the Class E Warrants are redeemed by
the Company, gain or loss will be recognized by a holder in an amount equal
to the difference between the amount realized upon the redemption and the
holder's tax basis in the Class E Warrants. Such gain or loss will be a
capital gain or loss and will be considered long-term capital gain or loss if
the holder's holding period in the Class E Warrants is more than one year.
The holding period of the Class E Warrants will begin on the date of exercise
of the Rights.
LAPSE OF THE CLASS E WARRANTS. If the Class E Warrants are allowed to
expire without exercise, loss will be recognized by the holder thereof in an
amount equal to such holder's tax basis in the Class E Warrants, as described
above. Such loss will be a capital loss and will be considered long-term
capital loss if the holder's holding period in the Class E Warrants is more
than one year. The holding period of the Class E Warrants will begin on the
date of exercise of the Rights.
Stockholders should consult their own tax advisers concerning the tax
consequences of the acquisition, holding or disposition of the Rights, Units,
Common Stock and Class E Warrants under applicable state and local laws.
Foreign stockholders should also consult their tax advisors regarding the
foreign tax consequences of the acquisition, holding or disposition of the
Rights, Units, Common Stock and Class E Warrants
EXPERTS
The consolidated financial statements of FiberChem, Inc. and
subsidiaries as of September 30, 1997 and for the years in the two-year
period ended September 30, 1997 appearing in this Prospectus and Registration
Statement have been audited by Goldstein Golub Kessler & Company, P.C.,
independent certified public accountants, as set forth in their report
therein appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of said firm as experts in accounting and
auditing.
CHANGE IN ACCOUNTANTS
On January 24, 1997, KPMG Peat Marwick LLP (the "Former Accountant")
resigned as the Company's principal accountants.
The Former Accountant did not state any reason for resigning in its
resignation letter to the Company. However, in its letter to the Audit
Committee and its Material Weakness letter both dated January 10, 1997 and
delivered January 23, 1997, the Former Accountant reported "Disagreements
with Management" on financial accounting and reporting matters and auditing
scope concerning revenue recognition that, if not satisfactorily resolved
(all of which were) would have caused a modification of their report on the
fiscal 1996 consolidated financial statements. The disagreements,
aggregating approximately $1,800,000, concerned certain transactions termed
"consignments" by the Former Accountant, products warehoused for customers,
and a research and development effort, none of which met the requirements for
revenue recognition under generally accepted accounting principles.
-65-
<PAGE>
The Audit Committee of the Board of Directors met with and discussed the
subject matter of the disagreements with the Former Accountant.
The Former Accountant's report on the consolidated financial statements
for the fiscal years ended September 30, 1995 and 1996 contained an
explanatory paragraph concerning the Company's ability to continue as a going
concern. Management plans in regard to these matters are described in Note l
to the Consolidated Financial Statements for September 30, 1996. The
consolidated financial statements do not include any adjustment that might
result from the ultimate outcome of these uncertainties.
The Company has authorized the Former Accountant to respond fully to
inquiries of the successor accountant concerning the subject matter of such
disagreements.
On April 9, 1997, the Board of Directors appointed Goldstein Golub
Kessler & Company, P.C., certified public accountants, as the Company's
successor accountant and to audit the books of account and other records of
the Company for the fiscal year ending September 30, 1997.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended (the "Act"), with respect to the securities offered
hereby. This Prospectus does not contain all information set forth in the
Registration Statement, part of which has been omitted in accordance with the
rules and regulations of the Commission. For further information about the
Company and the securities offered hereby, reference is made to the
Registration Statement, copies of which are available for inspection from the
Commission, including the exhibits filed as a part thereof and otherwise
incorporated therein. Statements made in this Prospectus as to the contents
of any document referred to are not necessarily complete, and in each
instance reference is made to such exhibit for a more complete description
and each such statement is qualified in its entirety by such reference.
The Company is subject to the informational reporting requirements (File
No. 0-17569) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and in accordance therewith files reports and other
information with the Commission. Such reports, proxies and other information
can be inspected and copied at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street, N.W., Washington D.C. 20549
and the Regional Offices of the Commission at 7 World Trade Center, Suite
1300, New York, New York 10048, and Citicorp Center, 500 West Madison, Suite
1400, Chicago, Illinois 60661. Copies of such material can be obtained at
prescribed rates by writing to the Securities and Exchange Commission, Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a web site (http// www.sec.gov.) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
-66-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FIBERCHEM, INC.
YEARS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<S> <C>
Explanatory Note . . . . . . . . . . . . . . . . . . . . . . . . F-1
Independent Auditor's Report . . . . . . . . . . . . . . . . . . F-1A
Audited Financial Statements:
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . F-2
Statement of Operations . . . . . . . . . . . . . . . . . . F-4
Statement of Shareholders' Equity . . . . . . . . . . . . . F-5
Statement of Cash Flows . . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . F-8
Three Months Ended December 31, 1997 and 1996
(unaudited)
Balance Sheets - December 31, 1997 and September 30, 1997
(audited). . . . . . . . . . . . . . . . . . . . . . . . . F-17
Statement of Operations. . . . . . . . . . . . . . . . . . . . . F-19
Statement of Stockholders' Equity. . . . . . . . . . . . . . . . F-20
Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . F-21
Notes to Financial Statements. . . . . . . . . . . . . . . . . . F-23
</TABLE>
<PAGE>
EXPLANATORY NOTE
The Auditor's Report which appears on page F-1A has not been reissued or
withdrawn by KPMG Peat Marwick LLP as of January 20, 1998.
The Company's Annual Report on Form 10-KSB for the year ended September 30,
1997 has been filed without the reissuance by KPMG Peat Marwick LLP of their
report dated January 10, 1997 on the Company's financial statements for the
year ended September 30, 1996 ("Fiscal 1996"). The Company's Fiscal 1996
financial statements have been included as they were published on January 10,
1997.
During November and December 1997 and until January 7, 1998, KPMG
specifically led the Company to believe that KPMG would reissue their report,
as well as consent to the use of their report for the purposes of existing
S-8 Registration Statements and a new SB-2 Registration Statement the Company
expected to file shortly after filing the Form 10-KSB in order to effect a
rights offering to the Company's Stockholders. On January 5, 1998 KPMG
requested payment for their current services prior to physical delivery of
their consent and reissuance of their report. However on January 7,1998 KPMG
verbally informed the Company that KPMG had "decided not to accept an
engagement to reissue or consent." KPMG has specifically declined to give any
reason for its decision. There can be no assurance that KPMG would have
reissued their report in its original form and without qualification if it
completed the Fiscal 1997 audit and the required procedures for reissuance
were performed.
The Company's current auditors, Goldstein Golub Kessler & Company, P.C.
("GGK"), provided letters to KPMG at the latter's specific request confirming
that nothing had come to GGK's attention that would have a material effect on
the financial statements of the Company for any period prior to October 1,
1996, including Fiscal 1996.
GGK, the Company's current auditors, have indicated that they will not, at
this time, change or withdraw their report dated November 21, 1997 or their
consent dated January 5, 1998, simply because of KPMG's failure to reissue
its report.
Because of KPMG's belated notice to the Company, the Company's filing of any
registration, including the rights offering, will be delayed until the
Company's current auditors can audit Fiscal 1996. The Company anticipates
that such audit will be completed by the end of February 1998; however, there
can be no assurance that it will be completed nor even if completed that the
Company's current auditors will issue a report or consent to the use of their
report. Because of the delay caused by KPMG, the Company is pursuing various
alternatives for interim financing, including "bridge" financing and standby
commitments to the rights offering. There can be no assurance that forecasted
sales levels will be realized to achieve profitable operations, or that
additional financing, if needed can be obtained on terms satisfactory to the
Company, if at all, or in an amount sufficient to enable the Company to
continue its operations.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
FiberChem, Inc.
We have audited the accompanying consolidated balance sheet of FiberChem,
Inc. and Subsidiaries as of September 30, 1997 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides 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 as of September 30, 1997, and the results of
its operations and its cash flows for the year then ended 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 1 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 1. The consolidated financial
statements do not include any adjustments that might result from the outcome
of these uncertainties.
/s/ GOLDSTEIN GOLUB KESSLER & COMPANY, LLP
New York, New York
November 21, 1997
F-1A
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, September 30,
1996 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $3,065,572 $427,488
Accounts receivable, net of allowance for doubtful
accounts of $204,711 and $240,796 in 1996 and 1997,
respectively 305,473 263,947
Inventories (Note 3) 1,457,135 1,563,191
Prepaid expenses and other 59,060 56,941
------------- -------------
Total current assets 4,887,240 2,311,567
------------- -------------
Equipment 616,192 716,465
Less accumulated depreciation (483,827) (549,175)
------------- -------------
Net equipment 132,365 167,290
------------- -------------
Other assets:
Patent costs, net of accumulated amortization of
$1,436,309 at September 30, 1996 and
$1,678,845 at September 30, 1997 (note 5) 474,462 287,905
Technology costs, net of accumulated amortization
and $354,942 at September 30, 1996 and 114,764 83,333
and $386,373 at September 30, 1997 (note 4)
Financing costs, net of accumulated amortization of
$65,678 at September 30, 1996 and
$148,298 at September 30, 1997 (note 6) 204,245 119,625
Other 247,383 0
------------- -------------
Total other assets 1,040,854 490,863
------------- -------------
Total assets $6,060,459 $2,969,720
------------- -------------
------------- -------------
</TABLE>
The accompanying notes and independent auditor's reports should
be read in conjunction with the consolidated financial statements.
F-2
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, September 30,
1996 1997
------------- -------------
<S> <C> <C>
Current liabilities:
Current installments of note payable (note 6) $7,315 $6,878
Accounts payable 270,503 95,469
Accrued expenses 206,565 307,891
Interest payable 18,016 17,778
------------- -------------
Total current liabilities 502,399 428,016
Senior convertible notes payable (note 6) 1,675,000 1,650,000
Note payable, net of current installments (note 6) 2,551 7,942
------------- -------------
Total liabilities 2,179,950 2,085,958
------------- -------------
Stockholders' equity (notes 4, 6 and 7):
Preferred stock, $.001 par value. Authorized
10,000,000 shares; 205,089 and 218,998 convertible
shares issued and outstanding at September 30,
1996 and September 30, 1997, respectively;
at liquidation value of $15 per share 3,076,335 3,284,970
Common stock, $.0001 par value. Authorized
40,000,000 shares at September 30, 1996, and
50,000,000 shares at September 30, 1997;
25,705,216 and 25,515,660 shares issued and
outstanding at September 30, 1996, and
September 30, 1997, respectively 2,571 2,552
Additional paid-in capital 28,714,804 27,192,749
Deficit (26,369,551) (29,596,509)
------------- -------------
5,424,159 883,762
Notes receivable for exercise of options (1,543,650) --
------------- -------------
Total stockholders' equity 3,880,509 883,762
Commitments and contingencies (notes 6, 7 and 8)
------------- -------------
Total liabilities and stockholders' equity $6,060,459 $2,969,720
------------- -------------
------------- -------------
</TABLE>
The accompanying notes and independent auditor's reports should
be read in conjunction with the consolidated financial statements.
F-3
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------
1996 1997
------------- -------------
<S> <C> <C>
Revenues $908,700 $1,523,994
Cost of revenues 367,779 945,434
------------- -------------
Gross profit 540,921 578,560
------------- -------------
Operating expenses:
Research, development and engineering 1,233,054 1,257,324
General and administrative 1,109,456 1,101,781
Sales and marketing 1,007,975 1,004,172
Provision for loss on accounts receivable 201,225 36,085
Write down of obsolete inventory 281,313 --
------------- -------------
Total operating expenses 3,833,023 3,399,362
------------- -------------
Loss from operations (3,292,102) (2,820,802)
------------- -------------
Other income (expense):
Interest expense (183,795) (223,161)
Interest income 201,268 81,787
Other, net -- (264,782)
------------- -------------
Total other income (expense) 17,473 (406,156)
------------- -------------
Net loss ($3,274,629) ($3,226,958)
------------- -------------
------------- -------------
Shares of common stock used in computing loss per share 22,274,226 25,623,614
------------- -------------
------------- -------------
Net loss per share ($0.15) ($0.13)
------------- -------------
------------- -------------
</TABLE>
The accompanying notes and independent auditor's reports should
be read in conjunction with the consolidated financial statements.
F-4
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------------- ------------------------ Paid-In
Shares Amount Shares Amount Capital
------- ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995 214,462 $3,216,930 20,532,033 $2,053 24,844,392
Preferred stock dividend:
In stock (note 7) 15,214 228,210 -- -- (228,210)
In cash (note 7) -- -- -- -- (23,645)
Common stock issued:
For cash -- -- 3,333,333 333 2,653,884
For services -- -- 13,954 1 15,416
Conversion of senior
convertible notes payable (note 6) -- -- 1,437,500 144 991,576
Conversion of preferred stock (note 7) (14,587) (218,805) 145,870 15 218,790
Exercise of warrants -- -- 1,031 1 1,030
Exercise of options -- -- 241,495 24 241,571
Treasury stock retired (10,000) (150,000) -- -- --
Payments received on notes receivable for
exercise of options -- -- -- -- --
Deferred compensation earned -- -- -- -- --
Net loss -- -- -- -- --
------- ---------- ---------- ------ ----------
Balance at September 30, 1996 205,089 $3,076,335 25,705,216 $2,571 28,714,804
Preferred stock dividend:
In stock (note 7) 13,909 208,635 -- -- (208,635)
In cash (note 7) -- -- -- -- (46,171)
Common stock issued:
Exercise of options -- -- 150,496 15 55,071
Exercise of warrants -- -- 103,179 10 30,944
Conversion of senior
convertible notes payable (note 6) -- -- 61,304 6 22,994
Write down of notes receivable for
exercise of options -- -- -- -- (619,504)
Shares forfeited upon cancellation of notes
receivable for exercise of options -- -- (504,535) (50) (756,754)
Payments received on notes receivable for
exercise of options -- -- -- -- --
Net loss -- -- -- -- --
------- ---------- ---------- ------ ----------
Balance at September 30, 1997 218,998 3,284,970 25,515,660 2,552 27,192,749
------- ---------- ---------- ------ ----------
------- ---------- ---------- ------ ----------
</TABLE>
<TABLE>
<CAPTION>
Treasury Notes
Stock - Receivable
Preferred for Exercise Deferred
Stock Deficit of Options Compensation Total
--------- ------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995 (150,000) (23,094,922) (1,597,837) (5,596) 3,215,020
Preferred stock dividend:
In stock (note 7) -- -- -- -- --
In cash (note 7) -- -- -- -- (23,645)
Common stock issued:
For cash -- -- -- -- 2,654,217
For services -- -- -- -- 15,417
Conversion of senior
convertible notes payable (note 6) -- -- -- -- 991,720
Conversion of preferred stock (note 7) -- -- -- -- --
Exercise of warrants -- -- -- -- 1,031
Exercise of options -- -- -- -- 241,595
Treasury stock retired 150,000 -- -- -- --
Payments received on notes receivable for
exercise of options -- -- 54,187 -- 54,187
Deferred compensation earned -- -- -- 5,596 5,596
Net loss -- (3,274,629) -- -- (3,274,629)
--------- ------------- ----------- ------------ ----------
Balance at September 30, 1996 0 (26,369,551) (1,543,650) 0 3,880,509
Preferred stock dividend:
In stock (note 7) -- -- -- -- --
In cash (note 7) -- -- -- -- (46,171)
Common stock issued:
Exercise of options -- -- -- -- 55,086
Exercise of warrants -- -- -- -- 30,954
Conversion of senior
convertible notes payable (note 6) -- -- -- -- 23,000
Write down of notes receivable for
exercise of options -- -- 619,504 -- --
Shares forfeited upon cancellation of notes
receivable for exercise of options -- -- 756,804 -- --
Payments received on notes receivable for
exercise of options -- -- 167,342 -- 167,342
Net loss -- (3,226,958) -- -- (3,226,958)
------- ----------- ---------- ----- ----------
Balance at September 30, 1997 0 (29,596,509) 0 0 883,762
--------- ------------- ----------- ------------ ----------
--------- ------------- ----------- ------------ ----------
</TABLE>
The accompanying notes and independent auditor's reports should
be read in conjunction with the consolidated financial statements.
F-5
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($3,274,629) ($3,226,958)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 50,542 69,853
Amortization of patent and technology costs 266,147 273,967
Amortization of financing costs 65,678 82,620
Accrued interest on notes receivable for exercise of options (107,367) (26,985)
Write off of accrued interest on notes receivable
for exercise of options -- 248,212
Common stock issued for services 15,417 --
Reduction in notes receivable for the exercise
of options in exchange for services 42,263 636
Deferred compensation recognized 5,596 --
Provision for loss on accounts receivable 201,225 36,085
Write down of obsolete inventory 281,313 36,290
Changes in assets and liabilities:
Decrease in note receivable from sale of subsidiary 106,390 --
Decrease in accounts receivable 59,068 5,441
(Increase) in inventories (747,146) (142,346)
Decrease in prepaid expenses and
other current assets 50,784 2,119
Increase (decrease) in accounts payable 93,729 (175,034)
Increase (decrease) in accrued expenses (80,942) 101,326
Increase (decrease) in interest payable 18,016 (238)
----------- -----------
Net cash used in operating activities (2,953,916) (2,715,012)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (45,476) (83,505)
Payments for patents (128,873) (55,979)
----------- -----------
Net cash used in investing activities (174,349) (139,484)
----------- -----------
</TABLE>
The accompanying notes and independent auditor's reports should be read in
conjunction with the consolidated financial statements.
(continued)
F-6
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from common stock and warrant Units $3,000,000 $ --
Proceeds from senior convertible notes payable 2,825,000 --
Payment of financing costs (773,987) --
Payments on note payable to bank and others (6,832) (16,319)
Cash restricted as security for note payable -- 18,456
Proceeds from the exercise of options and warrants 242,626 86,040
Proceeds from interest and notes receivable for exercise of options 19,489 174,406
Payment of dividend on preferred stock (23,645) (46,171)
----------- -----------
Net cash provided by financing activities 5,282,651 216,412
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,154,386 (2,638,084)
Cash and cash equivalents at beginning of period 911,186 3,065,572
----------- -----------
Cash and cash equivalents at end of period $3,065,572 $427,488
----------- -----------
----------- -----------
Supplemental Cash Flow Information
Noncash investing and financing activities:
Senior convertible notes payable converted to common stock $1,150,000 $25,000
Reduction in additional paid-in capital due to
write down of notes receivable for exercise of options -- 619,504
Reduction in common stock and additional paid-in capital
upon cancellation of shares held as collateral for
notes receivable for the exercise of options -- 756,804
Unamortized deferred financing costs associated with senior
convertible notes payable converted to common stock 158,281 2,000
Preferred stock converted to common stock 218,805 --
Preferred stock issued as dividends 228,210 208,635
Equipment purchased through capital lease -- 21,273
Reduction in notes receivable for exercise of options
in exchange for services 42,263 636
Retirement of treasury stock - preferred 150,000 --
----------- -----------
----------- -----------
Interest paid $100,101 $140,785
----------- -----------
----------- -----------
</TABLE>
The accompanying notes and independent auditor's reports should be read in
conjunction with the consolidated financial statements.
F-7
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1997
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(1) NATURE OF BUSINESS AND LIQUIDITY
FiberChem, Inc. and its subsidiaries (collectively the "Company" or
"FCI") develops, produces, markets and licenses fiber optic chemical sensors
(FOCS) for environmental monitoring in the air, water and soil. The
Company's primary markets and potential customers are the petroleum
production, refinery and distribution chains. Other important markets and
customers include remediation companies, environmental consultants, shipping
ports, airports and military bases. The Company markets its products
world-wide using strategic alliances, distribution agreements and direct
sales activities.
The Company's consolidated financial statements for the years ended
September 30, 1996 and 1997 have been prepared on a going concern basis which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The Company incurred a net
loss of $3,274,629 and $3,226,958 for the years ended September 30, 1996 and
1997, respectively and as of September 30, 1997 had an accumulated deficit of
$29,596,509.
Management recognizes that the Company must generate additional revenues
or reductions in operating costs and may need additional financing to enable
it to continue its operations. The Company is reviewing alternatives for
raising additional capital including an offering (subject to, among other
things, approval by the SEC) of rights to purchase shares and warrants, to be
offered to holders of the Company's Common and Preferred Stock, Class D and
all other Warrants. The Company has engaged consultants to assist in raising
additional capital. (See Note 12.) However, no assurance can be given that
forcasted sales will be realized to achieve profitable operations, nor that
additional financing, if needed, can be obtained on terms satisfactory to the
Company, if at all, nor in an amount sufficient to enable the Company to
continue operations.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All inter-company
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.
(d) EQUIPMENT
Equipment is stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets,
generally five years.
(e) TECHNOLOGY COSTS
Technology costs represent values assigned to proven technologies
acquired for cash and in exchange for issuance of common stock (Note
4). Patents on certain technologies are
F-8
<PAGE>
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 generally recognizes revenue when title passes, which is
normally upon shipment of product to the customer. There is
generally no right of return except for normal warranties.
(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 at the time of sale.
(i) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
(j) PER SHARE DATA
Loss per common share has been computed based upon weighted average
shares outstanding during the periods presented. Contingently
issuable shares have been excluded because of their anti-dilutive
effect.
In March 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share ("SFAS 128"), which modifies
existing guidance for computing earnings per share and requires the
disclosure of basic and diluted earnings per share. Under the new
standard, basic earnings per share is computed as earnings available
to common stockholders divided by weighted average shares outstanding
excluding the dilutive effects of stock options and other potentially
dilutive securities. Diluted earnings per share includes the
dilutive effect of these securities. The effective date of SFAS 128
is December 15, 1997 and early adoption is not permitted. The
Company intends to adopt SFAS 128 during the quarter ending December
31, 1997. Had the provisions of SFAS 128 been applied to the
Company's results of operations for each of the two years in the
period ended September 30, 1997, the Company's basic loss per share
would have been $0.15 and $0.13 per share.
(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 assets 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 carry forwards. 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
F-9
<PAGE>
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) STOCK-BASED EMPLOYEE COMPENSATION AWARDS
In Fiscal 1996 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
In accordance with the provisions of SFAS No. 123, the Company has
elected to apply APB Opinion 25 and related interpretations in
accounting for its stock options issued to employees and,
accordingly, does not recognize additional compensation cost as
required by the new principle. The Company, however, has provided
the pro forma disclosures as if the Company had adopted the cost
recognition requirements (see Note 7).
(m) ESTIMATES
Preparing financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that may affect the reported amounts of assets,
liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities. Examples include provision for bad debts;
inventory obsolescence; and the useful lives of patents, technologies
and equipment. Actual results may differ from these estimates.
(n) Certain reclassifications have been made in the 1996 presentation to
conform to the 1997 presentation.
(o) Recent accounting pronouncements.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, Reporting Comprehensive Income ("SFAS 130"), and
Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information ("SFAS 131"). The Company is required to adopt
these Statements in fiscal 1999. SFAS 130 establishes new standards
for reporting and displaying comprehensive income and its components.
SFAS 131 requires disclosure of certain information regarding
operating segments, products and services, geographic areas of
operation and major customers. Adoption of these Statements is
expected to have no impact on the Company's consolidated financial
position, results of operations or cash flows.
(3) INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or
market and consist of:
<TABLE>
<CAPTION>
September 30,
-------------
1996 1997
---- ----
<S> <C> <C>
Raw materials $ 439,392 $ 551,832
Work in process 21,305 24,643
Finished goods 1,534,542 1,312,804
---------- ---------
Subtotal 1,995,239 1,889,279
Valuation and obsolescence reserves,
primarily against finished goods (538,104) (326,088)
---------- ---------
Net inventories $1,457,135 $1,563,191
---------- ---------
---------- ---------
</TABLE>
F-10
<PAGE>
(4) 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.
(5) 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.
(6) NOTES 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 required 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. During August 1997 the remaining balance of the note
was extinguished using a portion of the proceeds of the CD, which was
liquidated at the same time.
On February 15, 1996, the Company completed an offering under Regulation
S, promulgated under the Securities Act of 1933, as amended (the "Offering"),
of 8% Senior Convertible Notes due February 15, 1999 (the "Notes"), for
$2,825,000. Interest on the Notes is to be paid semi-annually, commencing
August 15, 1996, at a rate of 8% per annum. The Notes are convertible into
shares of Common Stock of the Company at a conversion price (the "Conversion
Price") of, initially, $0.80 per share at any time after March 26, 1996 and
before the close of business on February 14, 1999. The Conversion Price was
adjusted to $0.4078, a price representing a 10% discount from the average
closing bid price of the Common Stock for the 30 business days prior to
February 15, 1997. As of September 30, 1997, an aggregate face amount of
$1,175,000 of the Notes had been converted to Common Stock resulting in the
issuance of 1,498,804 shares of Common Stock.
The Company paid fees and expenses associated with the offering
amounting to $428,204, which is being amortized as interest expense over the
three-year term of the Notes or until conversion, if earlier, when the
proportionate unamortized amount is charged to additional paid in capital.
As of September 30, 1997 approximately $160,281 of unamortized deferred
financing cost has been recorded as a reduction in additional paid-in capital
associated with the $1,175,000 of the Notes converted to Common Stock. Also
in connection with the Offering, the Company issued to the Placement Agent
for the Offering, for nominal consideration, warrants to purchase up to
353,125 shares of Common Stock, at an exercise price of $0.80 per share (the
"Exercise Price"), which has been adjusted to $0.4078 per share. Also in
accordance with the terms of the warrants, the number of shares exercisable
has been adjusted, based on the adjusted Exercise Price, to 692,742 shares of
Common Stock. These warrants are exercisable at any time on or after August
15, 1996 through February 14, 2001 and contain certain piggyback registration
rights.
In November 1996, the Company acquired $21,273 in equipment through a
36-month capital lease with monthly payments of approximately $715 and an
implicit interest rate of approximately 14.5% per annum.
F-11
<PAGE>
The maturities of the notes payable are as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1996 1997
------------- -------------
<S> <C> <C>
Fiscal 1997 $ 7,315 $ 6,878
Fiscal 1998 2,551 7,942
Fiscal 1999 1,675,000 1,650,000
---------- ---------
$1,684,866 $1,664,820
---------- ---------
---------- ---------
</TABLE>
(7) STOCKHOLDERS' EQUITY
During Fiscal 1993 and Fiscal 1994, the Company conducted a private
placement of convertible preferred stock ("Convertible Preferred Stock").
Each share of the Convertible Preferred Stock is convertible into ten shares
of FCI Common Stock, initially at $1.50 per share. 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% of the number of shares
owned at date of declaration). In November 1995, the Company paid cash
dividends of $23,645 and issued 15,214 shares of Convertible Preferred Stock
dividends. In November 1996, the Company paid cash dividends of $46,171 and
issued 13,909 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. During Fiscal 1996, 14,587 shares of Convertible Preferred
Stock were converted to 145,870 shares of Common Stock. As of September 30,
1997, the Company had 218,998 shares of Convertible Preferred Stock
outstanding. On September 12, 1997, the Board of Directors determined that,
in view of the recent trading price of the Company's Common Stock and in view
of the Company's current cash position, it would not be appropriate to
declare the annual dividend payable on the Convertible Preferred Stock on
November 1, 1997. As a result, the dividend amounting to $361,347 (if elected
entirely in cash, or 17,520 additional shares of Convertible Preferred Stock
if elected wholly in additional shares) will accumulate in accordance with
the terms of the Convertible Preferred Stock.
On May 31, 1996 the Company completed an offering under Regulation S, of
3,333,333 Units, at a price of $0.90 per Unit for total gross proceeds of
$3,000,000 before costs and expenses of the offering. The Company paid fees
and expenses associated with the Unit offering amounting to $345,683. Each
Unit consisted of one share of Common Stock and one warrant to purchase one
share of Common Stock (the "Unit Warrants") the shares and warrants being
immediately separable. The Unit Warrants are each exercisable at $1.00 at
any time from May 31, 1996 through May 30, 2001. Also in connection with the
Unit offering, the Company issued to the Placement Agent for the offering,
for nominal consideration, warrants to purchase up to 333,333 shares of
Common Stock ("the Placement Agent Warrants"), at an exercise price of $0.90
per share which has been adjusted to $0.2343 per share, and the number of
shares issuable upon exercise has been adjusted to 1,280,411. These
Placement Agent Warrants are exercisable at any time from November 30, 1996
through May 30, 2001.
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 15, 1996, an aggregate of 1,681,519
options had been exercised and 274,641 options forfeited (of which 171,822
had been regranted) under the 1993 Plan. The remaining 515,662 options
expired on September 15, 1996.
Primarily in order to provide a means to raise additional cash through
existing outstanding options, warrants and promissory notes receivable, on
April 4, 1997, the per share exercise price of all employee stock options,
all Unit and other Warrants (except Class D Warrants) were decreased as
follows: to $0.32
F-12
<PAGE>
from April 4 through April 11, 1997, and thereafter adjusted weekly to the
average closing bid price for the five prior trading days less a discount of
10% (but never to a price less than $0.30) through May 16, 1997, when the
prices reverted to the original prices. As a result, the Company received
$39,943 for the exercise of 131,453 options at prices ranging from $0.30 to
$0.32 per share. Effective April 17, 1997 the per share exercise price of
Class D Warrants was decreased to $0.30 through May 16, 1997 when the
exercise price reverted to its prior $1.10 per share. As a result, the
Company received approximately $30,954 for the exercise of 103,179 Class D
Warrants exercised at $0.30 per share.
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 certain eligible stock options under an early
incentive plan 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
7%, and were initially due on or before September 15, 1995. On April 7, 1995,
the Board of Directors extended the due date of the notes to March 15, 1998.
The underlying FCI Common Stock was held in escrow, as collateral, until
payment was made on the promissory notes. As of September 30, 1996, an
aggregate of $271,449 had been paid on these notes in addition to $43,467,
respectively, in interest. The remaining accrued interest of $228,927 at
September 30, 1996 is included in other long-term assets in accordance with
the April 1995 extension of the due date of the notes. The outstanding
principal at September 30, 1996 of $1,543,650 is included as a reduction of
stockholders' equity. In conjunction with the temporary reduction of the
exercise prices of the options and warrants effective April 4, 1997 and Class
D Warrants effective April 17, 1997, as described above, the remaining unpaid
principal on the promissory notes could be fully paid in an amount determined
by multiplying the unpaid balance by a fraction, the numerator of which was
the revised exercise price, and the denominator of which was $1.50 (the
original exercise price). If the unpaid principal was not so paid by May 16,
1997 the underlying collateral shares would be forfeited and all unpaid
principal and accrued interest would be extinguished.
As a result, the Company received $160,875 in payment for 520,252
escrowed shares at prices ranging from $0.30 to $0.32 per share, which amount
liquidated $780,379 of original note principal. The remaining $756,804 of
unpaid note principal was extinguished and the underlying collateral of
504,535 shares were forfeited to the Company and immediately canceled,
thereby reducing the total number of shares outstanding. Unpaid accrued
interest receivable aggregating $248,212 was expensed.
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, 1997, the Company has issued 984,885
stock options, net of forfeitures and regrants, (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"). An
aggregate of 821,114 options remain exercisable under the 1994 Plan.
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 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, 1997, the Company has issued
761,547 stock options, net of forfeitures, (with initial and current exercise
prices ranging from $0.93 per share to $1.38 per share) under the 1995 Plan
to employees of Environmental and Directors of the Company. An aggregate of
643,942 options remain exercisable under the 1995 Plan.
F-13
<PAGE>
In January 1997 the Company's Board of Directors adopted a 1997 Employee
Stock Option Plan ("1997 Plan"), approved by the stockholders at the June 23,
1997 Annual Stockholders Meeting, covering an aggregate of 1,500,000 shares
of Common Stock and restricting the granting of options to purchase
approximately 675,000 shares of Common Stock authorized under previous stock
option plans. As of September 30, 1997 the Company has issued options to
purchase 636,500 shares of Common Stock at prices ranging from $0.22 to $0.25
under the 1997 Plan to employees of Environmental and Directors of the
Company. An aggregate of 631,500 options remain exercisable under the 1997
Plan.
During Fiscal 1996, the Company has expensed an aggregate of $99,000 in
directors' compensation for the Company's non-management directors, applying
$63,728 to the payment of promissory notes, interest and payroll taxes, and
$35,272 to the exercise of 35,272 stock options. Effective October 1, 1996,
director compensation was eliminated and replaced by the granting of stock
options for service as a director and for service on standing committees.
During Fiscal 1997, the Company granted to its six non-management directors
options to purchase an aggregate of 186,500 shares of Common Stock at $0.22
per share, which was the fair market value of the Common Stock as of the date
of the grants.
During Fiscal 1996, the Company issued to two individuals a total of
13,954 shares of Common Stock of the Company, valued at $15,417 for services
performed for the Company.
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 the fair market value of the
Common Stock as of the last quoted market trade on August 1, 1995. An
aggregate of 1,031 Class D Warrants were exercised during Fiscal 1996; no
Class D Warrants were exercised during Fiscal 1995. On August 21, 1996, the
Board of Directors extended the expiration date of the Class D Warrants from
their original expiration date of September 15, 1996, to September 15, 2000,
and changed the exercise price from $1.00 to $1.10 from September 16, 1996
through September 15, 1997; then $1.15 through September 15, 1998; then $1.20
through September 15, 1999; then $1.25 through September 15, 2000.
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. A summary of the
status of the Company's stock option plans as of September 30, 1996 and 1997
and changes during those years are as follows:
<TABLE>
<CAPTION>
1996 1997
---------------------------- ---------------------------
Weighted Weighted
Average Average
Fixed Options Options Exercise Options Exercise
Price Price
- --------------------------- ----------- -------- --------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning 2,457,023 $1.00 1,670,552 $0.99
of year
Granted during year 784,504 .99 676,500 .28
Exercised (246,282) 1.00 (150,496) .37
Forfeited (1,324,693) 1.00 (100,000) 1.00
----------- ----- --------- -------
Outstanding at end of year 1,670,552 $0.99 2,096,556 $0.76
----------- ---------
----------- ---------
</TABLE>
The following table summarizes information about stock options
outstanding and exercisable at September 30, 1996 and 1997.
F-14
<PAGE>
<TABLE>
<CAPTION>
Weighted Average Weighted
Range of Exercise Number Outstanding Remaining Average
September 30 Prices and Exercisable Contractual Life Exercise Price
- ---------------------------------- ---------------------- -------------------- ------------------
<S> <C> <C> <C> <C>
1996 $0.93 - 1.00 1,670,552 3.75 years $0.99
1997 $0.22 - 1.00 2,096,556 4.80 years $0.76
</TABLE>
If the Company had elected to recognize compensation cost based on the
fair value of the options granted at grant date as prescribed by SFAS No.123,
net loss and loss per share would have been adjusted to the pro forma amounts
indicated in the table below:
<TABLE>
<CAPTION>
As Reported Pro Forma
---------------------------- ----------------------------
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Loss $(3,274,629) $(3,226,958) $(3,490,698) $(3,501,930)
Loss per share $(0.15) $(0.13) $(0.16) $(0.14)
</TABLE>
No tax effect was applied in computing loss per share under SFAS No.
123. The Company's assumptions used to calculate the fair values of options
issued was (i) risk-free interest rate of 6.0%, (ii) expected life of five
years, (iii) expected volatility of 172%, and (iv) expected dividends of zero.
(8) COMMITMENTS AND CONTINGENCIES
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 1996 and 1997 was $172,492 and $172,551,
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 50% of the employee's contribution up to
a maximum of 2% 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, 1996 and 1997 totaled
$18,508 and $21,263, respectively.
The Company is involved in litigation incidental to its business. In
the opinion of the Company's management, the expected outcome of such
litigation will not have a material effect on the financial position of the
Company.
(9) INCOME TAXES
Income tax benefit attributable to losses from continuing operations for
the year ended September 30, 1996 and 1997 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:
F-15
<PAGE>
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Computed "expected" tax benefit $(1,113,374) $(1,097,166)
Reduction in income tax benefit resulting from:
Non-deductible expenses 38,374 28,166
Increase in valuation allowance 1,075,000 1,069,000
----------- -----------
Net tax benefit $ -- $ --
----------- -----------
----------- -----------
Components of net deferred tax assets as of September 30, 1996 and 1997
are as follows:
1996 Change 1997
---- ------ ----
Deferred tax assets $7,889,000 $1,063,000 $8,952,000
Less valuation allowance (7,873,000) (1,069,000 (8,942,000)
----------- ---------- -----------
Total net deferred tax assets 16,000 (6,000) 10,000
Deferred tax liabilities (16,000) 6,000 (10,000)
----------- ---------- -----------
Net deferred tax assets $ -- $ -- $ --
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
Deferred tax assets are comprised primarily of the tax effects of the
net operating loss carryforwards, reserve for inventory obsolescence and
allowance for doubtful accounts 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, 1997, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $25,449,000 which are
available to offset future taxable income, if any, through 2012. 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.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments was made in accordance with Statement of Financial Accounting
Standards No. 107 ("SFAS No. 107"), DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS. Accordingly, the aggregate fair value amounts presented are not
intended to represent the underlying value of the net assets of the Company.
The carrying amounts at September 30, 1997 for cash, receivables,
accounts payable and accrued liabilities approximate their fair values due to
the short maturity of these instruments. In addition the estimated fair
value of notes payable approximates the related carrying value at September
30, 1997.
(11) MAJOR CUSTOMERS
During Fiscal 1997, the Company had sales to one customer of
approximately $985,000. During Fiscal 1996, the Company had sales to three
customers of $190,000, $100,000 and $93,000.
F-16
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
(UNAUDITED)
September 30, December 31,
1997 1997
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 427,488 $ 168,609
Accounts receivable, net of allowance for doubtful
accounts of $240,796 at September 30, 1997
and $62,422 at December 31, 1997 263,947 298,081
Inventories 1,563,191 1,563,222
Other 56,941 59,486
---------- ----------
Total current assets 2,311,567 2,089,398
---------- ----------
Equipment 716,465 706,464
Less accumulated depreciation (549,175) (563,442)
---------- ----------
Net equipment 167,290 143,022
---------- ----------
Other assets:
Patent costs, net of accumulated amortization of
$1,678,845 at September 30, 1997 and
$1,740,311 at December 31, 1997 287,905 233,797
Technology costs, net of accumulated amortization of
$386,373 at September 30, 1997 and
$394,185 at December 31, 1997 83,333 75,521
Financing costs, net of accumulated amortization of
$148,298 at September 30, 1997 and
$169,348 at December 31, 1997 119,625 96,911
---------- ----------
Total other assets 490,863 406,229
---------- ----------
$2,969,720 $2,638,649
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
F-17
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
(UNAUDITED)
September 30, December 31,
1997 1997
------------- ------------
<S> <C> <C>
Current liabilities:
Current installments of notes payable $ 6,878 $ 7,752
Accounts payable 95,469 66,286
Accrued expenses 307,891 357,220
Interest payable 17,778 50,400
----------- -----------
Total current liabilities 428,016 481,658
Senior convertible notes payable 1,650,000 1,625,000
Notes payable to officers and directors -- 125,000
Notes payable, net of current installments 7,942 5,420
----------- -----------
Total liabilities 2,085,958 2,237,078
----------- -----------
Stockholders' equity:
Preferred stock, $.001 par value. Authorized
10,000,000 shares; 218,998 convertible
shares issued and outstanding at
September 30, 1997 and December 31, 1997;
at liquidation value 3,284,970 3,284,970
Common stock, $.0001 par value. Authorized
50,000,000 shares; 25,515,660 and 25,639,707
shares issued and outstanding at September 30
1997 and December 31, 1997, respectively 2,552 2,564
Additional paid-in capital 27,192,749 27,217,173
Deficit (29,596,509) (30,103,136)
----------- -----------
883,762 401,571
----------- -----------
Total stockholders' equity 883,762 401,571
----------- -----------
$ 2,969,720 $ 2,638,649
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
F-18
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three month period ended
----------------------------------
December 31, December 31,
1996 1997
------------- ---------------
<S> <C> <C>
Revenues $115,574 $225,179
Cost of revenues 63,922 92,842
----------- ----------
Gross profit 51,652 132,337
----------- ----------
Operating expenses:
Research, development and engineering 340,806 191,892
General and administrative 301,258 239,817
Sales and marketing 245,172 148,922
----------- ----------
Total operating expenses 887,236 580,631
----------- ----------
Loss from operations (835,584) (448,294)
----------- ----------
Other income (expense):
Interest expense (55,349) (60,125)
Interest and other income 57,771 1,792
----------- ----------
Total other income (expense) 2,422 (58,333)
----------- ----------
Net loss ($833,162) ($506,627)
----------- ----------
----------- ----------
Shares of common stock used in computing loss per share 25,710,323 25,546,214
----------- ----------
----------- ----------
Basic loss per share ($0.03) ($0.02)
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
F-19
<PAGE>
FIBERCHECM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------------ --------------------- Paid-In
Shares Amount Shares Amount Capital Deficit Total
--------- ----------- ---------- -------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 218,998 $3,284,970 25,515,660 $2,552 $27,192,749 ($29,596,509) 883,762
Common stock issued:
Exercise of options -- -- 5,000 1 1,099 -- 1,100
Conversion of senior
convertible notes payable -- -- 119,047 11 23,325 -- 23,336
Net loss -- -- -- -- -- (506,627) (506,627)
-------- ---------- ---------- ------ ---------- ----------- --------
Balance at December 31, 1997 218,998 $3,284,970 25,639,707 $2,564 27,217,173 (30,103,136) 401,571
-------- ---------- ---------- ------ ---------- ----------- --------
-------- ---------- ---------- ------ ---------- ----------- --------
</TABLE>
F-20
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three month period ended
-------------------------------------
December 31, December 31,
1996 1997
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($833,162) ($506,627)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 15,363 15,933
Amortization of patent and technology costs 67,814 69,278
Amortization of financing costs 20,284 21,050
Accrued interest on notes receivable for exercise of options (26,854) --
Reduction in notes receivable for the exercise
of options in exchange for services 560 --
Gain on sale of fixed assets -- (1,790)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 177,707 (34,134)
Increase in inventories (428,798) (31)
Increase in other current assets (15,714) (2,545)
Increase (decrease) in accounts payable 51,498 (29,183)
Increase in accrued expenses 4,237 49,329
Increase in interest payable 33,500 32,622
---------- --------
Net cash used in operating activities (933,565) (386,098)
---------- --------
Cash flows from investing activities:
(Purchase) sale of equipment (73,764) 10,125
Payments for patents (23,478) (7,358)
---------- --------
Net cash provided by (used in) investing activities (97,242) 2,767
---------- --------
</TABLE>
See accompanying notes to consolidated financial statements
(continued
F-21
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three month period ended
-------------------------------------
December 31, December 31,
1996 1997
------------- --------------
<S> <C> <C>
Cash flows from financing activities:
Payments on notes payable (3,212) (1,648)
Proceeds from the exercise of options and warrants 9,618 1,100
Proceeds from interest and notes receivable for exercise of options 9,910 --
Payment of dividend on preferred stock (46,171) --
Proceeds from notes payable to officers and directors -- 125,000
---------- ---------
Net cash provided by (used in) financing activities (29,855) 124,452
---------- ---------
Net decrease in cash and cash equivalents (1,060,662) (258,879)
Cash and cash equivalents at beginning of period 3,065,572 427,488
---------- ---------
Cash and cash equivalents at end of period $2,004,910 $168,609
---------- ---------
---------- ---------
Supplemental Cash Flow Information
Noncash investing and financing activities:
Preferred stock issued as dividends $208,635 $ --
Senior convertible notes payable converted to common stock -- 25,000
Unamortized deferred financing costs associated with senior
senior convertible notes payable converted to common stock -- 1,664
Equipment purchased through capital lease 21,273 --
Reduction in notes receivable for exercise
of options in exchange for services 560 --
---------- ---------
---------- ---------
$6,453
Interest paid $1,565 $0
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
F-22
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
- ------------------------------------------------------------------------------
(1) PRESENTATION OF UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements include
the accounts of FiberChem, Inc. ("FCI" or the "Company") and its
subsidiaries. All inter-company accounts and transactions have been
eliminated.
The unaudited consolidated financial statements have been prepared in
accordance with Item 310 of Regulation S-B and, therefore, do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows of the Company, in conformity
with generally accepted accounting principles. The information furnished, in
the opinion of management, reflects all adjustments (consisting primarily of
normal recurring accruals) necessary to present fairly the financial position
as of December 31, 1997 and September 30, 1997, and the results of operations
and cash flows of the Company for the three-month periods ended December 31,
1996 and 1997. The results of operations are not necessarily indicative of
results which may be expected for any other interim period or for the year as
a whole. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-KSB for
the year ended September 30, 1997.
Certain Fiscal 1997 Financial Statement amounts have been reclassified
to conform with the presentation in the Fiscal 1998 Financial Statements.
(2) CONVERTIBLE DEBT
On February 15, 1996, the Company completed an offering under
Regulation S, promulgated under the Securities Act of 1933, as amended (the
"Offering"), of 8% Senior Convertible Notes due February 15, 1999 (the
"Notes"), for $2,825,000. Interest on the Notes is to be paid semi-annually,
commencing August 15, 1996, at a rate of 8% per annum. The Notes are
convertible into shares of common stock of the Company (the "Common Stock")
at a conversion price (the "Conversion Price") of, initially, $0.80 per which
has been adjusted to $0.4078, a price representing a 10% discount from the
thirty-day average closing bid price of the Common Stock for the 30 business
days prior to February 15, 1997. During the three-month period ended
December 31, 1997, (the "First Quarter 1998") the Company received an
unsolicited offer to convert $25,000 of the Notes at a conversion price of
$0.21 per share, and accordingly issued 119,047 shares for the conversion.
All other Note holders were offered the same temporary conversion price. As
of December 31, 1997, an aggregate face amount of $1,200,000 of the Notes had
been converted to Common Stock resulting in the issuance of 1,617,851 shares
of Common Stock. Based on the adjusted Conversion Price of $0.4078, an
aggregate of 3,984,796 shares of Common Stock would be issuable if the
remaining $1,625,000 face amount of Notes were converted.
The Company paid fees and expenses associated with the offering
amounting to $428,204, which is being amortized as interest expense over the
three-year term of the Notes or until conversion, if earlier, when the
proportionate unamortized amount is charged to additional paid-in capital.
Also in connection with the Offering, the Company issued to the Placement
Agent for the Offering, for nominal consideration, warrants to purchase
353,125 shares of Common Stock, at an exercise price of $0.80 per share (the
"Exercise Price") which has been adjusted to $0.4078 per share. Also, in
accordance with the terms of the warrants, the number of shares exercisable
has been adjusted, based on the adjusted Exercise Price, to 692,742 shares of
Common Stock. These warrants are exercisable at any time on or after August
15, 1996 through February 14, 2001, and contain certain piggyback
registration rights.
In November 1997, certain of the Company's officers and directors
committed to provide an aggregate of $250,000 in the form of 5-year 8% notes,
convertible into rights to purchase common stock upon registration of an
offering to all stockholders and warrant holders of rights to purchase common
F-23
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- ------------------------------------------------------------------------------
stock. As of December 31, 1997, one-half of these commitments ($125,000) had
been received by the Company, and the remaining one-half was received during
January and February 1998.
(3) CAPITAL STOCK
During Fiscal 1993 and Fiscal 1994, the Company conducted a private
placement of convertible preferred stock ("Convertible Preferred Stock").
Each share of the Convertible Preferred Stock is convertible into ten shares
of FCI Common Stock, initially at $1.50 per share. 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% of the number of shares
owned at date of declaration. In November 1996, the Company paid cash
dividends of $46,171 and issued 13,909 shares of Convertible Preferred Stock
dividends. On September 12, 1997, the Board of Directors determined that, in
view of the recent trading price of the Company's Common Stock and in view of
the Company's current cash position, it would not be appropriate to declare
the annual dividend payable on the Convertible Preferred Stock on November 1,
1997. As a result, that dividend will accumulate in accordance with the
terms of the Convertible Preferred Stock. 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.
As of December 31, 1997, the Company had 218,998 shares of Convertible
Preferred Stock outstanding.
On May 31, 1996 the Company completed an offering under Regulation S,
of 3,333,333 Units, at a price of $0.90 per Unit for total gross proceeds of
$3,000,000 before costs and expenses of the offering. Each Unit consisted of
one share of Common Stock and one warrant to purchase one share of Common
Stock (the "Unit Warrants"). The Unit Warrants are each exercisable at $1.00
at any time from May 31, 1996 through May 30, 2001. The Company paid fees
and expenses associated with the Unit offering amounting to $345,683. Also
in connection with the Unit offering, the Company issued to the Placement
Agent for the offering, for nominal consideration, warrants to purchase
333,333 shares of Common Stock ("the Placement Agent Warrants"), at an
exercise price of $0.90 per share which has been adjusted to $0.2343 per
share, and the number of shares issuable upon exercise has been adjusted to
1,280,411. These Placement Agent Warrants are exercisable at any time from
November 30, 1996 through May 30, 2001.
During the three-month period ended December 31, 1997 (the "First
Quarter 1998"), the Company received $1,100 from the exercise of 5,000
options to purchase Common Stock at an exercise price of $0.22 per share.
Also during the First Quarter 1998, the Company issued options to
purchase an aggregate of 25,000 shares of its Common Stock at an exercise
price of $0.25 per share. These options were granted to an employee of the
Company under its Employee Stock Option Plans and are exercisable at any time
for a period ending five years from the date of grant.
(4) REVENUES
The Company continues to incur substantial losses and Management
recognizes that the Company must generate additional revenues or reductions
in operating costs and may need additional financing to continue its
operations. The Company expects significant revenues during the second half
of Fiscal 1998 from its alliance with Whessoe Varec, Inc. in the aboveground
storage tank leak detection market, as well as from initial sales of
Sensor-on-a-Chip-Registered Trademark- products, and sales in the offshore
oil production platform market, although there can be no assurance when or if
this will occur. During the
F-24
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- ------------------------------------------------------------------------------
last quarter of fiscal 1997, the Company implemented significant reduction in
personnel and other spending, and, to further conserve cash, continues to
defer payment of a significant portion of management salaries. The Company
borrowed $125,000 from certain officers and directors during the First
Quarter 1998 and has received commitments for an additional $125,000. The
Company is reviewing alternatives for raising additional capital, and on
October 2, 1997, entered into an agreement with entrenet Group, LLC
("entrenet") for advice and assistance in developing and executing business
plans, financing strategies and business partnerships, acquisitions and
mergers. For its services, entrenet will receive a cash fee of $5,000 per
month for twelve months; $60,000 in the form of a 10% convertible note; 5% of
the value of any financial transaction (as defined in the Agreement); and 5%
of any financing provided by or introduced directly by entrenet.
The Company is currently planning an offering of rights to purchase
shares and warrants, to be offered to holders of its Common and Preferred
Stock, and to holders of Class D Purchase Warrants and all other outstanding
Warrants. Notwithstanding the foregoing, there can be no assurance that
forecasted sales levels will be realized to achieve profitable operations, or
that additional financing can be obtained on terms satisfactory to the
Company, if at all, or in an amount sufficient to enable the Company to
continue its operations.
-------------------------------------------------------
F-25
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section l45 of the Delaware General Corporation Law ("DGCL") permits a
corporation organized thereunder to indemnify its directors and officers for
certain of their acts. The Articles of Incorporation of FiberChem are framed
so as to conform to the DGCL.
The laws of Delaware provide for indemnification of officers and
directors who are totally successful in defending themselves, by placing a
restrictive provision in the Articles of Incorporation.
Delaware law provides that a director who is found to be liable for
negligence or misconduct in the performance of his duty to FiberChem, is
indemnified if a court, upon application, finds that despite the adjudication
of liability, but in view of all circumstances of the case, such person is
fairly and reasonably entitled to indemnification for such expenses which the
court deems proper.
FiberChem's By-Laws provide for indemnification of officers and
directors, except in relation to matters as to which they are finally
adjudged to be liable for negligence or misconduct, but only if the
corporation is advised in writing by its counsel that in his opinion the
person indemnified did not commit such negligence or misconduct. The DGCL
provides that an officer or director may be indemnified if he (a) conducted
himself in good faith, (2) reasonably believed, in his official capacity with
the corporation, that his conduct was in the corporation's best interest, or
(3) in all other cases, his conduct was at least not opposed to the
corporation's best interest; however, if in connection with a proceeding by
or in the right of the corporation in which he was adjudged liable to the
corporation or in connection with any proceeding charging improper personal
benefit to the director, whether or not involving action in his official
capacity, in which he was adjudged liable on the basis that personal benefit
was improperly received by him, Delaware law provides that indemnification is
not available.
ITEM 25. OTHER EXPENSES OF ISSUANCE OF DISTRIBUTION
The expenses payable by the Registrant in connection with this offering
are estimated as follows:
SEC Filing Fee 1,170
Printing and Engraving Mailing & Solicitation Expenses 30,000
Legal Fees and Expenses 15,000
State Securities Qualification
Fees and Expenses --
Accounting Fees and Expenses 8,000
Miscellaneous 830
-------
TOTAL $55,000
-------
-------
II-1
<PAGE>
ITEM 26 RECENT SALE OF UNREGISTERED SECURITIES
ITEM 27. EXHIBITS
<TABLE>
<S> <C>
3.1 Articles of Incorporation of Registrant, as amended. (1)
3.2 By-Laws of Registrant. (2)
*4.1 Form of Rights Certificate.
*4.2 Form of Class E Warrant.
*4.3 Specimen of Common Stock Certificate.
*4.4 Specimen of Warrant Certificate.
*4.5 Lock-up Agreement between management of the Company and the Company
dated December ___, 1997.
4.6 Class D Warrant Agreement of the Registrant with form of Warrant
Certificate. (3)
4.7 Form of 8% Senior Convertible Note Due 1999 issued in the Company's
February 1996 private placement. (4)
4.8 Form of Warrant to purchase Common Stock on or before May 31, 2001. (5)
4.9 Form of Warrant to purchase Common Stock on or before May 30, 2001,
issued in the Company's May 1996 private placement. (20)
*5.1 Opinion of Snow Becker Krauss P.C.
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 Amendment dated May 6, 1991 and September 26, 1991 to the Industrial
Real Estate Lease (Exhibit 10.10) for the Company's facilities. (8)
10.3 Employee Stock Bonus Plan. (3)
10.4 Amendments dated October 23, 1990 and February 21, 1991 to the
Industrial Real Estate Lease (Exhibit 10.10) for the Company's
facilities. (5)
10.5 Non-qualified stock option plan. (9)
10.6 Agreement dated December 10, 1992 by and between the Company and
Tanknology Environmental, Inc. (10)
10.7 Qualified Stock Option Plan. (11)
10.8 Consulting agreement by and between the Company and with Irv J.
Gruverman, dated November 4, 1993.(12)
10.9 Qualified Stock Option Plan. (13)
II-2
<PAGE>
10.10 Termination of Distributor Agreement with Sippican, Inc. dated February
24, 1994. (14)
10.11 Employment contract with David R. LeBlanc dated June 8, 1994. (14)
10.12 FCI FiberChem, Inc. and FCI Environmental, Inc. 401(k) Profit Sharing
Plan. (14)
10.13 Qualified Stock Option Plan (15)
10.14 License Agreement with Texas Instruments, Incorporated, dated June 15,
1995. (23)
10.15 Cooperative Development Agreement with Texas Instruments, Incorporated,
dated June 15, 1995. (23)
10.16 Form of Distribution Agreement. (18)
10.17 Form of agreement for services with Gordon Werner and others dated as of
September 15, 1995. (18)
10.18 Agreement dated November 8, 1996 by and between FCI Environmental, Inc.
and Alcohol Sensors International, Ltd. CERTAIN INFORMATION IN THIS
EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SEC PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.(19)
10.19 Agreement dated October 1, 1996 by and between FCI Environmental, Inc.
and Autronica AS.(19)
10.20 OEM Strategic Alliance Agreement dated June 30, 1996 by and between
Whessoe Varec, Inc. and FCI Environmental, Inc.(19)
10.21 1997 Employee Stock Option Plan.(21)
10.22 Employment contract with Melvin W. Pelley dated October 1, 1997.(24)
10.23 Employment contract with Thomas A. Collins dated October 1, 1997.(24)
10.24 Employment contract with Geoffrey F. Hewitt dated October 1, 1997. (24)
21.1 Subsidiaries of the Registrant.
23.1 Consent of Goldstein Golub Kessler & Company, P.C.
</TABLE>
- -------------------------------
* to be filed by Amendment.
(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 Current Report on Form 8-K
for February 15, 1996.
(5) Incorporated by reference from the Company's Current Report on Form 8-K
on July 15, 1996.
(6) Incorporated by reference from the Company's Registration Statement No.
33-29338.
(7) Incorporated by reference from the Company's Annual Report on Form 10-K
for September 30, 1991.
(8) 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.
II-3
<PAGE>
(9) Incorporated by reference from the Company's Registration Statement on
Form S-8 for April 28, 1992. (No. 33-47518).
(10) Incorporated by reference from the Company's Current Report on Form 8-K
for May 26, 1992.
(11) Incorporated by reference from the Company's Proxy Statement dated May 3,
1993.
(12) Incorporated by reference from the Company's Report on Form 10-K for
September 30, 1993.
(13) Incorporated by reference from the Company's Proxy Statement dated May
23, 1994.
(14) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1994.
(15) Incorporated by reference from the Company's Report on Form 8-K for June
15, 1995.
(16) Incorporated by reference from the Company's Report on Form S-8 for
August 1, 1995.
(17) Incorporated by reference from the Company's Report on Form 8-K/A for
August 30, 1995.
(18) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1995.
(19) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1996.
(20) Incorporated by reference from the Company's Report on Form 8-K for May
31, 1996.
(21) Incorporated by reference from the Company's Proxy statement dated May
20, 1997.
(23) Incorporated by reference from the Company's Report on Form 8-K/A for
August 30, 1995.
(24) Incorporated by reference from the Company's Report on Form 8-KSB for
September 30, 1997.
- --------------------------------
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the first quarter
ended December 31, 1997.
- --------------------------------
ITEM 28. UNDERTAKINGS
(a) RULE 415 OFFERING
The Registrant hereby undertakes:
(1) To file, during any period in which if offers or sells
securities, a post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information
set forth in the registrant statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was registered) and
any deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) Include any additional or changed material information on
the plan of distribution.
II-4
<PAGE>
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new registration statement relating to the
securities offered, and the offering of such securities at that time to be
the initial bona fide offering thereof.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(e) REQUEST FOR ACCELERATION OF EFFECTIVE DATE
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers
and controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the small
business issuer of the expenses incurred or paid by a director, officer, or
controlling person of the small business issuer in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(f) RULE 430A OFFERING
For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this registration statement as of
the time the Commission declared it effective.
II-5
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Las Vegas, State of Nevada, on
February 19, 1998
FIBERCHEM, INC.
By: /s/ GEOFFREY F. HEWITT By: /s/ MELVIN W. PELLEY
---------------------------- ------------------------------
Geoffrey F. Hewitt Melvin W. Pelley
Chief Executive Officer Chief Financial Officer
(Principal Executive (Principal Financial and
Officer) Accounting Officer)
POWER OF ATTORNEY
Each of the undersigned hereby authorizes Geoffrey F. Hewitt or Melvin
W. Pelley as his attorney-in-fact to execute in the name of each such person
and to file such amendments (including post-effective amendments) to this
registration statement as the Registrant deems appropriate and appoints such
person as attorney-in-fact to sign on his behalf individually and in each
capacity stated below and to file all amendments, exhibits, supplements and
post-effective amendments to this registration statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on February
19, 1998 in the capacities indicated.
/s/ GEOFFREY F. HEWITT Chief Financial Officer
- --------------------------
Geoffrey F. Hewitt
/s/ MELVIN W. PELLEY Chief Financial Officer
- --------------------------
Melvin W. Pelley
/s/ SCOTT J. LOOMIS Director
- --------------------------
Scott J. Loomis
II-6
<PAGE>
/s/ WALTER HAEMMERLI Director
- --------------------------
Walter Haemmerli
/s/ IRWIN J. GRUVERMAN Director
- --------------------------
Irwin J. Gruverman
/s/ DALE W. CONRAD Director
- --------------------------
Dale W. Conrad
/s/ BYRON A. DENENBERG Director
- --------------------------
Byron A. Denenberg
/s/ GERALD T. OWENS Director
- --------------------------
Gerald T. Owens
II-7
<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. (inactive) Nevada
PetroTester, Inc. (inactive) New Mexico
<PAGE>
EXHIBIT 23.1
CONSENT OF GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
The Board of Directors
FiberChem, Inc.
We consent to the use of our report dated January 10, 1997 relating to the
consolidated balance sheets of FiberChem, Inc. and subsidiaries as of
September 30, 1996 and 1995 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
two-year period ended September 30, 1996 incorporated in the annual report
filed on Form 10-KSB of FiberChem, Inc.
Our report dated January 10, 1997, 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.
/s/ GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
- ------------------------------------------------
Las Vegas, Nevada
January 22, 1997
