<PAGE>
As filed with the Securities and Exchange Commission on October 15, 1998
Registration No. 333-46555
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
AMENDMENT NO. 5 TO
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>
(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/
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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C>
Proposed Proposed
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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) 8,976,962 --- --- (3)
Units (2) 5,129,692 $0.22 $1,128,532.24 $332.91
Units (2) 3,847,270 $0.22 $ 846,399.40 $249.69
Common Stock,
$.0001 par value (4) 8,976,962 --- --- (3)
Class E Warrants (4) 8,976,962 --- --- - (3)
Common Stock,
$.0001 par value (5) 5,129,692(6) $0.22 $1,128,532.24 $332.91
Common Stock,
$.0001 par value (5) 3,847,270(6) $0.22 $ 846,399.40 $249.69
Units(7) 90,000 $0.22 $19,800 $5.84
Units(7) 40,000 $0.22 $ 8,800 $2.60
Common Stock
$.0001 par value(7) 130,000 ____ _____ (3)
Class E Warrants(7) 130,000 (3)
Common Stock
$.0001 par value(5) 90,000(6) $0.22 $19,800 $5.84
Common Stock,
$.0001 par value (5) 40,000(6) $0.22 $ 8,800 $2.60
Total Registration Fee ........................................... $1,182.08(8)
---------
---------
</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 granting for no consideration to 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 October 16, 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. Certain officers and
directors of the Company have agreed to subscribe for 1,136,363 Units in
exchange for $250,000 in promissory notes of the Company held by the
officers and directors ($.22 principal amount of promissory note per unit),
in the event such number of Units remain unsubscribed after the expiration
of the Subscription Period. This Registration Statement also covers
re-sales of such Units, the Common Stock and Class E Warrants underlying
such Units, and the Common Stock underlying such Class E Warrants
(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.
(7) Represents an aggregate of 130,000 Units issued to Privatbank Vermag
AG ("Privatbank") as additional consideration pursuant to a bridge loan
agreement dated March 24, 1998, as amended and a bridge loan agreement
dated August 25, 1998, between the Company and Privatbank, 130,000
shares of Common Stock and Class E Warrants and 130,000 shares of common
stock issuable upon exercise of such warrants. The securities included
in these units are being offered by Privatbank.
(8) Of the total $1,182.09 registration fee $1,170.22 was previously paid on
February 19, 1998, and $24.50 was previously paid on June 11, 1998.
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.
(iii)
<PAGE>
FIBERCHEM, INC.
RIGHTS TO PURCHASE AN AGGREGATE OF 8,976,962 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK, $.0001 PAR VALUE,
AND ONE REDEEMABLE CLASS E WARRANT
----------------
FiberChem, Inc., a Delaware corporation ("FiberChem" or the "Company"),
is granting for no consideration, 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")
comprised of one share of Common Stock and one Redeemable Class E Warrant
(the "Class E Warrant"). 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 October 16, 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. The
Offering by the Company consists of the Rights, the Units issued by the
Company upon exercise of the Rights, the Common Stock and Class E Warrants
included in such Units and the Common Stock underlying the Class E Warrants.
The Prospectus also covers re-sales by members of management of the
Common Stock, Class E Warrants (and Common Stock issuable upon exercise of
the Class E Warrants) included in (i) 171,867 Units subject to Rights
distributable to them as securityholders of the Company which they have
agreed to exercise and (ii) up to an additional 1,136,363 Units which they
have agreed to subscribe for as standby purchasers if such number of Units
remain unsubscribed. See "Plan of Distribution."
In addition, this Prospectus covers the offering by Privatbank Vermag AG
("Privatbank") of the securities included in an additional 130,000 Units,
which were issued to Privatbank as additional consideration pursuant to
bridge loan agreements dated March 24, 1998 and August 25, 1998, between the
Company and Privatbank. See "Plan of Distribution."
The Company will not receive any proceeds from the sale of Units, Common
Stock or Class E Warrants by the Selling Securityholders.
Each Right entitles the holder thereof to subscribe for, and purchase
one Unit at a subscription price (the "Subscription Price") of $.22 per Unit.
The shares of Common Stock and Class E Warrants included in the Units will be
transferable separately after issuance. Each Class E Warrant entitles the
holder thereof to purchase one share of Common Stock at any time prior to
______, 2003 at an initial exercise price of $.25 per share through October
__, 1999; $.35 per share from October __, 1999 through October __, 2000; $.50
per share from October __, 2000 through October __, 2001; $.70 per share from
October __, 2001 through October __, 2002; and $.90 per share from October
__, 2002 through October __, 2003, subject to adjustment in certain events.
The Class E Warrants may be redeemed by the Company for $.05 per warrant if
for any period of thirty (30) consecutive trading days the last reported
sales price of the Company's Common Stock for each trading day during such
period is at least 200% of the then current exercise price. Rights will be
mailed to each Securityholder as soon as possible after the effective date of
this registration statement and may be exercised for a period of twenty (20)
days (the "Initial Subscription Period") beginning on the effective date of
this registration statement and expiring at 5:00 p.m., Mountain Standard
Time, on _______, 1998 (the "Expiration Date"). See "The Rights Offering".
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 Common Stock is quoted on the Over-The-Counter Electronic Bulletin Board
("OTCBB") under the symbol "FOCS". On October 12, 1998, the last reported
bid and asked prices for the Common Stock on the OTCBB were $.20 and $.21 per
share, respectively. FiberChem was delisted from the Nasdaq SmallCap Market
on February 25, 1998 because the Company failed to meet listing requirements
for net assets. The Company has appealed Nasdaq's decision. Unless the
Company is successful in its appeal, of which there can be no assurance, the
Common Stock will continue to be listed in the over-the-counter market
through the OTCBB. See "Risk Factors - Delisting from Nasdaq/SCM" and "Risk
Factors - Disclosure Relating to Low-Priced Stocks".
Subscriptions for Units 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 to whom Rights are granted will also have the right to
subscribe for unpurchased Units by completing the additional subscription form
and enclosing payment in full for the additional Units with the form. If there
are insufficient Units to fill over subscriptions, the Units which are
available will be allocated to the subscribing Securityholders on a pro rata
<PAGE>
basis in proportion to the total number of additional Units subscribed for by
all Securityholders. Any excess funds tendered for unsubscribed Units which
are not available will be promptly returned to the appropriate
securityholders. Members of Management of the Company have made a written
commitment to subscribe for 171,867 Units, representing the number of Units
subject to Rights to which they are entitled based upon their ownership of
the Company's outstanding securities and to act as standby purchasers of up
to an additional 1,136,363 unsubscribed Units. The Company has agreed to
accept as payment for such unsubscribed Units which may be purchased by
Management up to $250,000 in promissory notes (the "Promissory Notes") of the
Company held by such persons at a price of $.22 face amount of Promissory
Notes per Unit. This Prospectus also includes the resale by members of
Management and their assignees of the Common Stock, Class E Warrants and
Common Stock underlying the Class E Warrants issuable to such persons
included in (i) 171,867 Units subject to Rights distributable to them as
securityholders of the Company which they have agreed to exercise and (ii) up
to an additional 1,136,363 Units which they have agreed to subscribe for as
standby purchasers if such number of Units remain unsubscribed. See "Plan of
Distribution" and "Principal Stockholders." The Promissory Notes were issued
after members of Management loaned the Company $250,000 on an interim basis.
Members of Management may be deemed to be statutory underwriters with
respect to the securities they have committed to purchase and Privatbank may
also be deemed to be a statutory underwriter with respect to the 130,000
Units. A person deemed to be a statutory underwriter under the Securities
Act may be subject to certain liabilities in connection with the Registration
Statement of which this Prospectus forms a part, including liabilities under
the Securities Act. Such members of Management and Privatbank may from time
to time re-offer the securities underlying their Units through ordinary
brokerage transactions on the OTCBB, in negotiated transactions or otherwise,
at market prices prevailing at the time of sale or at negotiated prices.
The terms of the Rights Offering, including the number of Rights to
be issued 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, although
the Company considered the current and recent trading price of the Common
Stock when determining the Subscription Price of the Units and the exercise
price of the Class E Warrants.
----------------------
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)(2)(3)
------------ -----------------
<S> <C> <C>
Per Unit.......................... $.22 $.22
Total Minimum..................... $287,810 $287,810
Total Maximum..................... $1,974,932 $1,974,932
</TABLE>
(1) The Units are being offered directly by the Company on a "best efforts" no
minimum basis. Accordingly, there can be no assurance the Company will
receive any net proceeds from the offering, except for an aggregate of
1,308,230 Units which members of Management have agreed to purchase.
(2) Before deducting offering expenses payable by the Company estimated at
$60,000 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 or other person with
respect to any of the Rights, shares of Common Stock or Class E Warrants
offered hereby. Members of Management have made a written commitment to
exercise Rights distributable to them to purchase 171,867 Units and to
subscribe for up to an additional 1,136,363 unsubscribed Units. There are
no other agreements or understandings 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.
<PAGE>
(3) Proceeds include the amount received by the Company pursuant to Promissory
Notes issued by officers and directors of the Company, which aggregate
$250,000 and which may be canceled in payment for unsubscribed Units which
are purchased by members of Management. Such funds have been loaned to the
Company on an interim basis by certain members of Management in
anticipation of their commitment to subscribe for Units and will represent
payment for at least 1,136,363 of unsubscribed Rights. 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 October ,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 lack of profitability, ability to continue as a going concern,
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. Products based on its FOCS-Registered
Trademark-technology currently being marketed by the Company include the
PetroSense-Registered Trademark- PHA-100 series of portable analyzers, the
CMS-4000 and 5000 Continuous Monitoring Systems and the
OilSense-4000-TM-System. These products detect and measure petroleum
hydrocarbon concentrations in a variety of applications, including
groundwater, waste water, storm water and process water streams on offshore
platforms. The Company is also developing for commercial use a range of
chemical sensors based on its Sensor-on-a-Chip-Registered Trademark-
technology for a wide variety of environmental, consumer, commercial,
industrial, automotive and military applications. See "Business - Products."
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 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.
Other markets including groundwater monitoring and waste water monitoring
survived the de-emphasis process due to the presence of existing regulations.
Consequently, the Company found applications for the Company's products in
these areas for detection of leaks from underground storage tanks, pipelines
and processes.
During this refocusing process the Company has worked with the
Optoelectronics Group within Texas Instrument's ("TI") Semiconductor Group,
to expand the scope of the joint marketing activity in environmental,
consumer, commercial, industrial, automotive and military applications for
chemical sensors. The products under development are intended to expand the
markets for which the Company may sell its products, and include:
- a fail-safe flammable gas sensor for a household appliance control system
- a breath alcohol sensor for an ignition interlock device for automotive
use
- a fuel/air ratio sensor for automotive use
- a gasoline vapor sensor for a gasoline retailing application
- a carbon monoxide sensor for residential and commercial use
- an ammonia sensor for refrigerant levels in food processing facilities
- Sensors for detection of breakthrough of toxic gasses from personal
protective equipment.
See "Business- Sensors." Previously, the Company marketed its products in
contractually specified areas with technical support from TI, while TI's
marketing efforts were limited to certain areas of internal interest to TI's
Measurement and Control Group. TI's Semiconductor Group is now soliciting
business from its broad base of customers and presenting opportunities to the
Company to supply TI's customers with custom designed sensors, developed by the
Company on the jointly developed platform. Two of the larger of the
projects ongoing have resulted from TI's introduction. These sensors are
developed on an OEM basis for specific applications where they are usually part
of a new product development activity, and where the sensor provides the end
user with a significant market advantage for the final product.
Since the decision to market the end product is made by TI, the Company
generally has no direct control over the process. Most of the projects with
TI make use of the Company's technology in consumer, commercial,
industrial, automotive and military applications, a more varied group of
markets than the environmental markets for most of the Company's existing
products. The ongoing projects are at varying stages of development and there
can be no assurance any of these products will achieve commercial acceptance.
See "Business-Sensors."
-3-
<PAGE>
THE RIGHTS OFFERING
RIGHTS OFFERED....................... Rights to purchase an aggregate of
8,976,962 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. Members of Management
of the Company have made a written
commitment to subscribe for 171,867
Units, representing the number of Units
subject to Rights to which they are
entitled based upon their ownership of
the Company's outstanding securities and
to act as standby purchasers for an
additional 1,136,363 unsubscribed
Units.
TERMS OF RIGHTS: Holders of the Company's Common Stock,
Preferred Stock and Warrants at the
close of business on October 16, 1998
(the "Record Date") will receive, for no
consideration, 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. If
the Expiration Date is extended
Securityholders of record will be
notified by mail by the Company's
Warrant and Transfer Agent.
-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 and may be
redeemed by the Company at a price of
$.05 per Warrant if for any period of
30 consecutive trading days the last
reported sales price for the Common
Stock is at least 200% of the then
current exercise price, subject to
adjustments in certain circumstances.
See "Description of Securities --
Class E Warrant".
EXERCISE PRICE: $.25 per share through October __,
1999; $.35 per share from October __,
1999 through October __, 2000; $.50
per share from October __, 2000
through October __, 2001; $.70 per
share from October __, 2001 through
October __, 2002; and $.90 per share
from October __, 2002 through October
__, 2003, subject to adjustment in
certain events.
EXPIRATION DATE OF WARRANTS: 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: The development and marketing of
products for commercial use and for
working capital purposes. See "Use of
Proceeds."
OTCBB COMMON STOCK SYMBOL(1) FOCS
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- 26,441,207 Shares(2)(3)
STANDING BEFORE THE RIGHTS OFFERING
NUMBER OF SHARES OF COMMON STOCK 35,548,169 Shares(2)(3)(4)
OUTSTANDING AFTER THE RIGHTS OFFERING
(1) 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.
The Company has appealed a decision by the Nasdaq Stock Market
delisting its Common Stock from the Nasdaq/SCM. There can be no assurance
that the Company will be successful in its appeal or that the Common Stock
will be re-listed on Nasdaq/SCM. See "Risk Factors -- Delisting from
Nasdaq/SCM."
-5-
<PAGE>
(2) Based on shares outstanding on September 17, 1998.
(3) Does not include 7,276,661 shares issuable upon exercise of outstanding
warrants, 3,310,056 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 3,923,456 shares issuable upon
conversion of certain outstanding notes.
(4) Assumes Rights to purchase 8,976,962 Units are exercised and the
issuance of 130,000 Units to Privatbank. Does not include 9,106,962
shares issuable upon exercise of the Class E Warrants.
The Rights are being granted to Securityholders for no consideration.
The Units are being offered directly by the Company on a best efforts no
minimum basis, except that certain members of Management have agreed to
purchase 171,867 Units and to act as standby purchasers for up to 1,136,363
unsubscribed Units.
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>
<CAPTION>
YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
------------- ------------------
1996 1997 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues ................... $ 908,700 $ 1,523,994 $ 1,138,300 $ 1,004,889
Gross Profit ............... 540,921 578,560 465,931 553,300
Operating Loss ............. (3,292,102) (2,820,802) (2,144,179) (1,416,212)
Net Loss ................... (3,274,629) (3,226,958) (2,475,068) (1,619,259)
Net Loss per Share Common
Stock ...................... ($0.15) ($.013) ($0.10) ($0.06)
Shares of Common Stock
used in computing Net
Loss per Share ............. 22,274,226 25,623,614 25,748,517 25,752,189
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1998
------------------ -------------
<S> <C> <C>
Working Capital
(Deficit) .......... $ 1,883,551 $ (219,929)
</TABLE>
-6-
<PAGE>
<TABLE>
<S> <C>
Total Assets ............. 2,969,720 $ 2,646,636
Total Liabilities ........ 2,085,958 3,212,518
Accumulated Deficit ...... 29,596,509 31,215,768
Total Stockholders'
Equity (Deficit)......... $ 883,762 (565,882)
</TABLE>
RIGHTS OFFERING
General
The Company, pursuant to this Prospectus, is granting 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 expiring ___________, 2003, to purchase
one share of Common Stock for an initial purchase price of $.25 per share
through October __, 1999; $.35 per share from October __, 1999 through
October __, 2000; $.50 per share from October __, 2000 through October __,
2001; $.70 per share from October __, 2001 through October __, 2002; and $.90
per share from October __, 2002 through October __, 2003. The Class E
Warrants may be redeemed by the Company at a price of $.05 per Warrant if for
any period of 30 consecutive trading days the last reported sales price of
the Company's Common Stock for each trading day during such period is at
least 200% of the then current exercise price, subject to adjustment. 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. Any Rights offeree who would be entitled to
purchase a fractional Unit will be given the right to purchase a full Unit.
The Rights will be evidenced by transferable Rights Certificates to be issued
by the Company to Securityholders of record as of the Record Date. The
rights certificates shall be mailed to each Securityholder of record as of
the Record Date, as soon as possible after the effective date of this
Prospectus. A Securityholder need not exercise any minimum number of Rights.
Securityholders may purchase the Units through the exercise of their
Rights, 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.
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, although
the Company considered the current and recent trading prices of the Common
Stock in determining the subscription price for the Units and the exercise
price for the Class E Warrants.
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.
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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 and by completing 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") and submitting payment in full for the additional
subscriptions. If the number of Units subscribed for by Securityholders
exercising the Additional Subscription Privilege exceeds the number of
unsubscribed Units available for purchase, unsubscribed Units will be
allocated to the Subscribing Securityholders on a pro rata basis in proportion
to the total number of additional Units subscribed for by all
Securityholders. Payments for the additional subscriptions will be held by
the Subscription Agent and refunds will be made, without interest, to the
extent additional subscriptions are not honored, as promptly as possible
after the expiration of the rights offering.
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
Corporate Stock Transfer, Inc. (the "Subscription Agent"), 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, at 370 17th Street, Republic Plaza, Suite 2350, Denver,
Colorado 80202. 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.
Any funds received by the Subscription Agent as payment in connection
with the Subscriptions for the Units pursuant to the Rights Offering
(including the Additional Subscription Privilege) shall be held in escrow by
the Subscription Agent (and shall be invested in a non-interest-bearing bank
account or other investment acceptable to the Company). Funds received for
the purchase of Units subject to Rights held by the tendering securityholders
will be released to the Company upon receipt by the Subscription Agent of
written disbursement instruction from the Company. Funds received by the
Subscription Agent for the exercise of the Additional Subscription Privilege
will be held in escrow until the expiration of the Rights Offering and then
applied in whole or in part to the purchase of unsubscribed Units and any
remaining balance will be returned promptly to the subscribing
securityholders without interest. The Subscription Agent is directed to
endorse, negotiate and deposit all subscription payments into the
subscription escrow account to be maintained by the Subscription Agent.
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
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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 $37,810) and to act as standby purchasers and
subscribe for up to 1,136,363 Units (for an additional $250,000 which they
have loaned to the Company on an interim basis) which remain unsubscribed
after the expiration of the Rights Offering including the Additional
Subscription Privilege. There is no other agreement or understanding regarding
the exercise of Warrants by management and no assurance can be given that any
of such Warrants will be exercised.
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RISK FACTORS
The securities offered hereby are speculative and involve a high degree
of risk. Accordingly, prospective investors should carefully consider the
following factors 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 $1,138,300 and $1,004,889 for the
nine-month periods ended June 30, 1997 and 1998, respectively. Until such
time, if ever, as the Company's second generation 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, and for
the nine-month periods ended June 30, 1997 and l998 the Company had net
losses of $2,475,068 and $1,619,259, respectively, with an accumulated
deficit of approximately $31,215,768 at June 30, 1998. 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 negative working capital
at June 30, 1998 of approximately $220,000 as compared with working capital
of approximately $1,884,000, at September 30, 1997, a decrease of
approximately $2,104,000. This decrease is primarily attributable to the
reclassification of $1,600,000 of the Company's 8% Senior Convertible Notes
payable due February l5, 1999 from long-term to current liabilities and to
the net cash used in operating activities of approximately $1,032,000, offset,
in part, by the receipt of $638,000 in proceeds from notes payable to
officers, directors and affiliates. The Company had working capital of
approximately $1,884,000, at September 30, 1997, and $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 during Fiscal
1997 of $2,715,000. Management believes, but cannot assure, that the net
proceeds from the Offering will be sufficient to enable the Company to
satisfy its working capital requirements. However, as long as the Company
continues to utilize working capital to support operations, or if the
development of its products for commercial use 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 or on any terms and the inability of the Company to
obtain substantial proceeds from the offering or other financing could result
in the inability of the Company to continue as a going concern. See "Ability
to Continue as a Going Concern; Qualified Report of Independent Accountants"
below.
ABILITY TO CONTINUE AS A "GOING CONCERN"; MODIFIED 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.
Unless a substantial amount of proceeds is raised from this Offering, of
which there is no assurance, the Company will need additional financing and/or
be required to make permanent certain reductions in expenses and/or implement
further cost reductions. There can be no assurance that the Company will be able
to obtain additional funding when it is needed, or that such funding, if
available, will be obtainable on terms favorable to or affordable by the Company
or on any terms. Accordingly, the Company's ability to continue as a going
concern on a short-term or long-term basis, is in substantial doubt without such
permanent funding. In the event the Company is not able to continue as a going
concern, the Company may have to curtail operations, sell assets or seek
protection under the bankruptcy laws. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Financial Statements.
In the event the Company is unable to obtain sufficient financing and is
unable to continue as a going concern, the Company may be required to liquidate
or sell certain assets. Intangible assets constitute 15% of the Company's net
assets. These intangible assets may be difficult to value and the Company may
be unable to obtain their full value.
RISKS OF COMMERCIALIZATION. The Company has been engaged in the
development of new products representing applications of its chemical sensor
technology and has had only limited sales of these products to date. Before
the Company can achieve profitable operations it must complete product
development, develop adequate manufacturing capacity for these products and
must be able to sell its products to purchasers in adequate volumes and
prices to cover its costs and expenses.
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In addition, in order to conduct more extensive manufacturing, marketing and
sales activities, the Company will need to implement and improve operational,
financial and management information systems, procedures and controls. There
can be no assurance that there will be adequate demand at commercial
quantities for the Company's products, that the Company will be able to
manufacture its products at costs that would allow for profitable sales or
that, in general, the Company will be able to develop the operational,
financial and management information systems, procedures and controls
necessary to operate profitably on a larger scale than at present.
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 storm water-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 21 United States patents and three 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% of 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. The holders of the Convertible
Preferred Stock are not entitled to receive dividends until the dividends are
declared by the Board of Directors, and the Preferred Stockholders have no
additional rights when the Company fails to declare dividends.
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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. If the Company fails to make an interest payment, the
Company will be in default and the Note Holders may declare the entire
principal and all interest accrued on the Notes to be due and payable and
pursue all remedies available at law to enforce collection of the Notes.
There can be no assurance, if the notes are not converted, that the Company
will be able to pay the $1,600,000 principal of the notes which remains
outstanding.
Pursuant to the terms of a bridge loan agreement (the "March Bridge
Loan") dated March 24, 1998, between the Company and Privatbank Vermag AG
("Privatbank") in the amount of $300,000, payment is due in two installments
of $150,000, the first on June 27, 1998 and the second on July 23, 1998.
Privatbank has extended the maturity of these two installments until October
28 and October 23, 1998, respectively. Upon maturity of the Bridge Loan,
Privatbank will have the right to commence legal proceedings to enforce the
repayment of the loan. An additional bridge loan agreement between the
Company and Privatbank in the amount of $133,000 requires repayment on
October 25, 1998.
A director and an officer have made advances to the Company in the
amount of $125,000 in anticipation of the receipt of proceeds from the Rights
Offering. These advances bear interest at 8% per annum and mature upon the
expiration of the Rights Offering. See "CERTAIN TRANSACTIONS."
In general, the inability of the Company to pay the Bridge Loan, the 8%
Convertible Notes and other obligations as they mature may result in the
cessation of the Company's business, which could result in a loss of the
entire investment of the Securityholders in the Company.
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 9,106,962
Units being registered hereunder, including the 9,106,962 shares of Common
Stock comprising the Units, and the additional 9,106,962 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, although
the Company considered the current and recent trading price of the Common
Stock when determining the Subscription Price of the Units and the exercise
price of the Class E Warrants.
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 1,888,841 of the 26,441,207 shares of Common Stock outstanding
as of October 15, 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 October 15, 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").
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 3,923,456 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 3,060,056 shares of Common Stock underlying a like number of
options (the "Options") (2,994,206 options outstanding; 65,850 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 26,441,207 shares of Common Stock
outstanding as of October 15, 1998, approximately 1,462,341 shares, or
5.5%, (2,770,571 or 10.5% assuming members of Management subscribe for all
171,867 Units for which they are entitled based on their ownership of the
Company's securities and the subscription of 1,136,363 Rights as standby
purchasers) are held by officers, directors, principal stockholders and their
affiliates. On a fully diluted basis, as of September 17, 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 42,825,510 shares of Common Stock outstanding, of which
approximately 14.5% (or 17.5% if members of Management subscribe for
1,308,230 Units) 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 officers, directors and
principal stockholders of the Company 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).
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.
-16-
<PAGE>
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. Although the Company
has been engaged in preliminary discussions to convert certain outstanding
debt into Preferred Stock, no arrangements, agreements or understandings have
been reached. There can be no assurance that the Company will not issue
additional Preferred Stock 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.
DELISTING FROM NASDAQ/SCM. Following a hearing held on February 19,
1998, the Company's Common Stock was delisted from Nasdaq/SCM on February 25,
1998, for the failure to comply with the minimum bid price requirements and
net tangible assets (i.e., total assets, excluding goodwill, minus total
liabilities) of $2 million. The Company has appealed the decision, however,
there can be no assurance that the Company will be successful in its appeal.
The Company's Common Stock is currently traded in the over-the-counter market
through the OTC Electronic Bulletin Board (OTCBB) 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.
-17-
<PAGE>
DISCLOSURE RELATING TO LOW-PRICED STOCKS. The Company's Common Stock on
the OTCBB is 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.
-18-
<PAGE>
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
The Rights are being offered on a "best efforts" basis and there is no
minimum number of Rights which must be exercised other than the commitment of
certain Members of Management to exercise their Rights to purchase 171,867
Units and to purchase up to an additional 1,136,363 unsubscribed Units.
Assuming only that Units which management has committed to purchase are
subscribed for the Company will realize gross proceeds of approximately
$287,810, including the $250,000 which was loaned to the Company on an
interim basis by the Members of Management who have committed to subscribe
for Units. If only these Units are subscribed, then the resulting net
proceeds of $37,810 (gross proceeds of $287,810 less $250,000 already
advanced to the Company) would be used to pay legal, accounting, printing and
other costs related to the offering.
Assuming all the Units offered by the Company are sold, the Company
anticipates using the net proceeds therefrom of approximately $1,914,932
(after deductions of approximately $60,000 of offering expenses) for the
following purposes in the order of priority indicated:
<TABLE>
<S> <C>
Repayment of Privatbank loan(1)............... $ 433,000
Repayment of director and officer advances
in anticipation of offering(2).............. 125,000
Working capital requirements to continue
operations(3)............................... 606,932
Product development costs...................... $ 300,000
Marketing expenses for new products........... $ 200,000
Repayment of Notes of Management members
acting as standby purchasers for
unsubscribed Units(4)....................... 250,000
----------
Total......................................... $1,914,932
----------
----------
</TABLE>
- ------------
(1) The March Bridge Loan bears interest at the rate of 8.4% and is due
in two installment payments on October 23 and 28, 1998. The August Bridge Loan
bears interest at the rate of 8.0% and is due on October 25, 1998.
(2) Represents advances to the Company made by a director and an officer
of the Company bearing interest at the rate of 8% per annum and due upon
completion of the Rights Offering. See "CERTAIN TRANSACTIONS."
(3) 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. See "RISK FACTORS -
Ability to Continue as a 'Going Concern'; Modified Report of Independent
Accountants" and "RISK FACTORS - Working Capital Requirements."
(4) The $250,000 amount of Notes represents a like amount advanced to the
Company by members of Management who have agreed to act as standby
purchasers of the Units. The Notes, which bear interest at the rate of 8%
per annum and are due December 14, 2002 - February 4, 2003, will be repaid
only if Rights holders subscribe for substantially all Units. Otherwise, the
Notes or a portion thereof will be exchanged for any Units remaining
unsubscribed at the completion of the Rights Offering at a price of $.22 per
Unit.
The $433,000 proceeds of the Privatbank loans, the $125,000 advanced to
the Company by a director and an officer and the $250,000 proceeds of the
Notes acquired by members of management who are acting as standby purchasers
of Units were all applied to meet the Company's immediate working capital
requirements, consisting principally of making past due payments to the
Company's vendors. See "RISK FACTORS - Working Capital Requirements."
The Class E Warrants are exercisable to purchase shares of Common Stock
at a price of $.25 per share through October __, 1999; $.35 per share from
October __, 1999 through October __, 2000; $.50 per share from October __,
2000 through October __, 2001; $.70 per share from October __, 2001 through
October __, 2002; and $.90 per share from October __, 2002 through October
__, 2003. The Class E Warrants expire five years after the date of this
prospectus. There can be no assurance any of the Class E Warrants will be
exercised nor, if any of the Class E Warrants are exercised, can there be any
assurance as to the timing or amount of proceeds. Accordingly, any proceeds
realized from the exercise of the Class E Warrants will be applied as
determined by the Company's Board of Directors from time to time when and as
any such proceeds are realized.
The Company will not receive any proceeds of the sale of Units or the
Common Stock or Class E Warrants included therein being offered for sale by
Privatbank.
-19-
<PAGE>
The Board of Directors of the Company will have the discretion to
allocate the use of proceeds in case of unforseen business developments such
as unanticipated changes in the results being achieved by the Company,
unanticipated demand or lack thereof for a particular product, new business
opportunities available to the Company, changes in sensor technology or
changes in government regulation. 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 was traded on the Nasdaq/SCM under the symbol
"FOCS" until February 25, 1998, when it was delisted from Nasdaq/SCM. Since
then it has been traded on the OTCBB. The following table sets forth the
high and low trade prices of the Common Stock for the periods shown as
reported by Nasdaq and the high and low bid prices as reported by the
National Quotation Bureau. The bid prices quoted on the OTCBB reflect
inter-dealer prices without retail mark-up, mark-down or commission and may
not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<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 0.22 0.12
Third Quarter 0.24 0.16
Fourth Quarter 0.15 0.11
FISCAL YEAR ENDED SEPTEMBER 30, 1999
First Quarter $ 0.23 $ 0.15
(October 1, 1998 - October 14, 1998)
</TABLE>
On October 14, 1998, the closing bid price of the Common Stock on the
OTCBB was $0.20.
At October 14, 1998, there were approximately 464 holders of record of
Common Stock. The Company estimates that it has approximately 2,500
beneficial holders of its Common Stock.
-20-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
June 30, 1998:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
<S> <C>
Long Term Debt:
Notes payable to officers,
directors and affiliates 650,000
Notes payable, net of current
installments 2,093
------------
652,093
Stockholders' Equity:
Preferred Stock, $.001 par
value, 10,000,000 shares
authorized, 218,998 shares
issued and outstanding at
June 30, 1998 3,284,970
Common Stock, $.0001 par
value, 50,000,000 shares
authorized, 26,0l4,707 shares
issued and outstanding at
June 30, 1998 2,644
Additional Paid-in-Capital 27,362,272
Accumulated Deficit (31,215,768)
------------
Total Stockholders' Deficiency (565,882)
------------
Total Capitalization $ 86,211
------------
------------
</TABLE>
-21-
<PAGE>
DILUTION
At June 30, 1998, the Company had a total net tangible book value
(deficit) of $(757,683) or ($.03) per share (after deducting patent,
technology and financing costs of $191,801) based on 26,441,207 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 $1,914,932 (if fully subscribed), $927,466 (if 50%
subscribed) or $433,733 (if 25% subscribed) (the "Net Proceeds") from the
assumed subscription for all 8,976,962 Units offered hereby, and the purchase
of 8,976,962 shares of Common Stock at $0.22 per share (but not the exercise
of the Class E Purchase Warrants), the 35,418,169 shares of Common Stock then
outstanding (if fully subscribed), 30,929,688 shares (if 50% subscribed) or
28,685,447 shares (if 25% subscribed) would have a pro forma net tangible
book value of $1,157,249 or $.03 per share (if fully subscribed), $169,783 or
$.01 per share (if 50% subscribed) or ($323,950) or ($.01) per share (if 25%
subscribed). Therefore, the holders of the Company's Rights being offered
hereby will incur an immediate dilution of approximately $.19 per share,
($.21 per share if 50% or $.23 per share if 25% 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 , fifty percent
and twenty-five percent of the Rights are exercised:
<TABLE>
<CAPTION>
100% Subscribed 50% Subscribed 25% Subscribed
--------------- -------------- --------------
<S> <C> <C> <C>
Subscription price per Unit $.22 $.22 $.22
---- ---- ----
Pro forma net tangible book value per
share of Common Stock before Rights Offering ($.03) ($.03) ($.03)
---- ---- ----
Increase per share attributable to sale of
Units offered hereby $.06 $.04 $.02
---- ---- ----
Pro forma net tangible book value per
share of Common Stock after offering $.03 $.01 ($.01)
---- ---- ----
Dilution per share to Investor $.19 $.21 $.23
---- ---- ----
---- ---- ----
</TABLE>
The following table, which incorporates the foregoing assumptions, as
well as the receipt of net proceeds of $1,914,932, if fully subscribed,
$927,466 if 50% subscribed or $433,733 if 25% subscribed, pursuant to the
Rights Offering reflecting the purchase of 8,976,962 shares if fully
subscribed (4,488,481 if 50% subscribed or 2,244,240 if 25% 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) 26,441,207 75% $27,364,916 93% $1.03
Unit Purchasers 8,976,962 25% 1,974,932 7% $ .22 (2)
----------- ---- ----------- ---- -----
-----
Total 35,418,169 100% $29,339,848 100%
----------- ---- ----------- ----
----------- ---- ----------- ----
50% Subscribed
---------------------------------------------------
Shares Purchased Total Consideration Average
----------------------- ------------------------- Price
Number Percent Amount Percent Per Share
----------- --------- ------------- --------- ---------
Common
Stockholders(1) 26,441,207 85% $27,364,916 97% $1.03
Unit Purchasers 4,488,481 15% 987,466 3% $ .22 (2)
----------- ---- ----------- ---- -----
-----
Total 30,929,688 100% $28,352,382 100%
----------- ---- ----------- ----
----------- ---- ----------- ----
25% Subscribed
---------------------------------------------------
Shares Purchased Total Consideration Average
----------------------- ------------------------- Price
Number Percent Amount Percent Per Share
----------- --------- ------------- --------- ---------
Common
Stockholders(1) 26,441,207 92% $27,364,916 98% $1.03
Unit Purchasers 2,244,240 8% 493,733 2% $ .22 (2)
----------- ---- ----------- ---- -----
-----
Total 28,685,447 100% $27,858,649 100%
----------- ---- ----------- ----
----------- ---- ----------- ----
</TABLE>
- ----------
(1) Does not include (i) 7,276,661 shares issuable upon exercise of
outstanding Warrants, 3,310,056 shares issuable upon the exercise of options
granted and to be granted pursuant to the Company's existing stock option and
stock purchase plans, (ii) 2,189,980 shares issuable upon conversion of the
Preferred Stock and 3,923,456 shares issuable upon conversion of certain
outstanding notes, and (iii) 130,000 shares of Common Stock and Class E
Warrants and 130,000 shares issuable upon exercise of such Warrants by
Privatbank.
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
-23-
<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 Prospectus.
The discussions in this Prospectus include forward looking statements that
involve risks and uncertainties, including the timely development and
acceptance of the Company's products, the timely acceptance of existing
products, the impact of competitive products and pricing, the impact of
governmental regulations or lack thereof with respect to the Company's
markets, timely funding of customers' projects, customer payments to the
Company, and other risks detailed from time to time in the Company's SEC
reports.
RESULTS OF OPERATIONS
QUARTERS ENDED JUNE 30, 1998 AND 1997
During the Third Quarter 1998, the State of Florida Department of
Environmental Protection (FLDEP) placed an order for 64 PHA-100PLUS portable
PetroSense-Registered Trademark- units for its underground storage tank (UST)
inspection program. FLDEP chose the PetroSense-Registered Trademark- unit
after a field evaluation showed it provided more capability than other
portable instruments. The order was valued at $497,000, of which $385,000
was recognized as revenue for the quarter. This order results from the
Company's direct selling efforts in the UST market, as distinguished from its
alliance with Whessoe Varec in the aboveground storage tank (AST) market.
Revenues for the Nine-Month Period 1998 were $1,004,889 compared with
revenues of $1,138,300 for the Nine-Month Period 1997. Revenues for the
Third Quarter 1998 were $538,017 compared with revenues of $403,117 for the
Third Quarter 1997. Revenues for the Third Quarter 1998 consisted primarily
of the order from Florida DEP which constituted $385,000. Other revenues
were from a number of smaller orders including probes from Whessoe Varec for a
second system in the California BFCUST marketplace, orders from offshore from
Cetco and Spirit Energy, orders from Taiwan and Mexico, and development
contracts from Bechtel Nevada for DoE, Horiba and IWACO. The gross profit
for the nine-month period 1998 was $553,300 or 55% of revenues compared to
$465,931 or 41% of revenues for the nine-month period 1997. Gross profit for
the Third Quarter 1998 was $293,996 or 55% of revenues compared with $117,850
or 29% for the Third Quarter 1997. These higher gross margins reflected
direct sales to end users and development revenues compared with primarily
discounted sales to distributors in the same period for 1997. Except for
sales to distributors, the Company's revenues have been from a number of
different customers and generally have not been from repeat transactions from
the same customers.
The Company has a Strategic Alliance (the "Alliance") for the AST market
with Whessoe Varec, Inc. as of June 30, 1996 as amended. The primary target
for the Alliance has been the Florida AST market. On July 13, 1998, after a
four year process, the State of Florida passed into law its new storage tank
regulations. Under the law, the regulated community has various options for
compliance. The lowest cost option is believed to be an internal tank liner
with an external, certified, continuous leak detection device. Currently,
the Company's PetroSense-Registered Trademark- product line is the only
continuous leak detection device certified for use at such sites.
The Florida target population of tanks includes 677 sites with at least
one internally lined tank and 892 multi-tank facilities including coastal
bulk storage, inland jobbers and industry. There is some duplication between
the two populations. In addition, there is a population of military tanks,
as well as those for airports and power generation facilities. Each tank for
which Whessoe Varec and FCI receive an order is worth about $10,000 in
revenue to FCI. The Florida regulations require compliance by December 1999
for alternative methods including the Company's leak detection equipment.
Some facilities have already applied for approval to FLDEP specifying the
Company's equipment. As applications are approved, there is an assumption
that there will be a stream of orders to the Alliance, although there can be
no assurance that this will be the case.
-24-
<PAGE>
Shell Oil and Florida Power Company have already purchased and installed
the Company's equipment; and Jacksonville Electric Company, Reedy Creek
Energy and Shell Oil have placed orders with Whessoe Varec for installations
scheduled for August 1998.
Other States are expected to follow Florida and promulgate AST
regulations. Virginia promulgated its own regulations this spring.
Pennsylvania, Wisconsin and the Province of Ontario are believed to be
developing regulations similar to Florida's.
The Alliance is also pursuing business with the Department of Defense
(DoD). Whessoe Varec's sister company Whessoe Coggins has a significant
presence in the military fuel depot market. Recently, the State of
California has advised that military facilities in California must be in
compliance with the state and federal underground storage tank ("UST")
regulation by December 22, 1998. As a result, there is an opportunity to
provide leak detection equipment to this market. The Company's products meet
all relevant state and federal standards and are compatible with the Whessoe
Coggins equipment proposed for the total military's system upgrade. A system
incorporating both Whessoe Coggins and Whessoe Varec/FCI products was
successfully demonstrated to the military during April 1998. The data
generated at this test was submitted to the local regulatory authority and met
their criteria. Revenues from sales to this market are expected to occur
prior to the deadline for compliance in December 1998, although there can be
no assurance that this will actually happen. The Company has received DoD
orders through Whessoe Varec for PetroSense-Registered Trademark- probes for
two systems so far. Other orders are believed to be pending. There are
approximately 160 DoD tanks in California; however, the exact size of the
opportunity for the Company is not yet clear, since there is more than one
option available for the DoD to achieve compliance.
The development of the offshore market for the Company's
OilSense-4000-TM- and PHA-100WL continues to be slower than originally
anticipated. The combination of the availability of Freon and the low price of
oil is mitigating against a wholesale switch from the Freon/IR method.
Notwithstanding the above, Spirit Energy 76 and others purchased units during
the Third Quarter 1998. Cetco Environmental purchased six units for its
offshore technicians.
The Company is continuing its marketing efforts in other major offshore
production areas such as the North Sea and the Persian Gulf.
The Company's sensor development project with Gilbarco has moved on to a
pre-manufacturing mode driven by the expectation that the California Air
Resources Board (CARB) will require suppliers of refueling equipment to
certify their products to meet ORVRII by late 1998. Provided that certain
key steps are completed by CARB on the original schedule, Gilbarco should
commence manufacturing products incorporating the Company's
Sensor-on-a-Chip-Registered Trademark- in order to meet the CARB
requirements. Revenues from this project are expected to begin in Fiscal
1999, if the time schedule is met, but there can be no assurance that this
will actually occur.
The Company's project with IWACO is ongoing. Preliminary results of a
test installation at the Port of Rotterdam site were sufficiently encouraging
for IWACO to invite the Company to become an equal partner in a second
program focussing mainly on bioremediation technologies. The Company would
benefit from access to data, technology, resources and personnel of the
Consortium's member companies which include Shell International Products and
Solvay S.A.
The Company also recently successfully completed the first milestone in
its project with Horiba, the Japanese instrument company, to develop a sensor
probe for Horiba's Multi-Parameter Water Quality Instrument product line.
Research, development and engineering expenditures decreased by
$379,099, or 39%, during the Nine-Month Period 1998 from the Nine-Month Period
1997, and by $120,652, or 39%, during the Third Quarter 1998 from the Third
Quarter 1997. The decrease is primarily attributable to the reduction,
implemented during the second half of Fiscal 1997, of applications and
development personnel and associated expenses.
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General and administrative expenditures decreased by $25,570, or 3%,
during the Nine-Month Period 1998 from the Nine-Month Period 1997, and
increased by $6,572, or 2%, during the Third Quarter 1998 over the Third
Quarter 1997. Expenditures for the 1998 periods include $74,637 representing
the market value of Common Stock issued for public relations and investor
relations services. The Company continues to operate with the reductions in
personnel and other expenses and cash expenditures, including the deferral of
administrative, as well as other salaries, implemented during the second half
of 1997. Since June 1997, the Company has deferred the payment of over
$160,000 in salaries, although these have been accrued and recorded as
expense during that period. During the Nine-Month Period 1998, approximately
$140,000 of accounts receivable were offset against previously recorded
reserves for specific doubtful accounts, resulting in a reduction of both
gross accounts receivable and reserves with no effect on net receivables or
results of operations. During the Nine-Month Period 1997, $25,000 was added
to the reserve and charged to expense.
Sales and marketing expenditures decreased by $235,929, or 32%, during
the Nine-Month Period 1998 from the Nine-Month Period 1997, and by $51,449,
or 22%, during the Third Quarter 1998 from the Third Quarter 1997, reflecting
reductions in personnel and in other spending as well.
The Company's interest income decreased to a minimal amount during the
Nine-Month Period 1998 and the Third Quarter 1998 from $83,591 during the
Nine-Month Period 1997 and $8,768 during the Third Quarter 1997, reflecting
the difference in cash and cash equivalents during the periods. Interest
expense increased by $39,330, or 24%, during the Nine-Month Period 1998 over
the Nine-Month Period 1997, and by $29,643, or 54% during the Third Quarter
1998 over the Third Quarter 1997, reflecting interest expense on $650,000
advanced to the Company by officers and directors and their affiliates.
As a result of the foregoing, the Company incurred a net loss of
$1,619,259, or a net loss of $0.06 per share, for the Nine-Month Period 1998
as compared to a net loss of $2,475,068, or a net loss of $0.10 per share,
for the Nine-Month Period 1997. Net loss for the Third Quarter 1998 was
$455,197, or a net loss of $0.02 per share, as compared to a net loss of
$758,861, or a net loss of $0.03 per share for the Third Quarter 1997.
Management does not consider that inflation has had a significant effect on
the Company's operations to date, nor is inflation expected to have a material
impact over the next year.
The Company continues to review the cost and operating impacts of
addressing the Year-2000 issue. Management conducted an assessment of the
potential costs associated with its internal operations, products shipped to
its customers, and material and services provided by its suppliers. Upon
review, the Year-2000 issue is not expected to have a material impact on the
Company's current financial position, liquidity or results of operations.
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of customers' projects, customer payments to the Company, and other risks
detailed from time to time in the Company's SEC reports.
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 Amoco Production Company during 1997 amounted to $171,100.
Revenues during 1996 included $189,700 from QED Environmental Systems,
Inc.; $92,838 from Autronica AS; and $99,786 from Bechtel Nevada Corporation.
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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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. During Fiscal 1997 the Company physically disposed of approximately
$250,000 of fully reserved inventory items, resulting in reductions of gross
inventory and inventory reserves, with no effect on net inventories or
results of operations.
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
QUARTERS ENDED JUNE 30, 1998 AND 1997
The Company's 8% senior convertible notes payable become due on February
15, 1999. The unpaid balance of $1,600,000 is therefore classified in the
financial statements as a current liability, and the associated unamortized
financing costs as a current asset. The Company had negative working capital
of $219,929 at June 30, 1998, compared with positive working capital of
$1,883,551 at September 30, 1997, a decrease of $2,103,480. Also the Company
had decreases in cash and cash equivalents of $418,921 and in stockholders'
equity of $1,449,644. In addition to the reclassification of the notes
payable from long term to current liabilities, these decreases are primarily
a result of the Company's net loss for the Nine-Month Period ended June 30,
1998 (the "Nine-Month Period 1998") of $1,619,259, offset in part by the
receipt of $638,000 in proceeds from notes payable to officers, directors and
affiliates.
The Company had net cash used in operating activities of $1,032,178
during the Nine-Month Period 1998 as compared with net cash used in operating
activities of $2,730,922 during the nine-month period ended June 30, 1997
(the "Nine-Month Period 1997"). The deficit during the Nine-Month Period
1998 is primarily a result of the Company's net loss of $1,619,259, and
adjustments to reconcile net loss to net cash used in operating activities,
including increases in accounts receivable of $408,413, other current assets
of $63,829, accounts payable of $216,713, accrued expenses of $270,902 and
interest payable of $56,100, and a decrease in inventories of $77,872. In
addition, these adjustments include depreciation of $44,616, amortization of
patent and technology costs of $210,250, amortization of financing costs of
$63,148, and the issuance of 676,500 shares of Common Stock, valued at market
value of $121,512, in exchange for services.
The deficit during the Nine-Month Period 1997 is primarily a result of
the Company's net loss of $2,475,068, increased by adjustments to reconcile
net loss to net cash used in operating activities, including increases in
accounts receivable of $337,225, inventories of $416,625, accrued expenses of
$92,980 and interest payable of $33,500, and decreases in accounts payable of
$220,425 and other current assets of $6,192. In addition, these adjustments
include accrued interest of $26,985 on notes receivable for the exercise of
options, amortization of patent and technology costs of $204,963,
amortization of financing costs of $56,301, depreciation of $52,622, and
provisions for loss on accounts receivable of $25,000 and inventory valuation
allowance of $25,000. Also the Company expensed $248,212 in accrued interest
receivable on notes receivable, originated in March 1994, for the exercise of
stock options.
The Company had net cash provided by financing activities of $633,945
during the Nine-Month Period 1998 as compared with net cash provided by
financing activities of $197,467 during the Nine-Month Period 1997. During
the Nine-Month Period 1998 the Company borrowed $350,000 from certain of its
officers and directors, and received net proceeds of $288,000 from a
promissory note payable to a bank of which a director is vice chairman.
During the Nine-Month Period 1997, the Company received $84,940 from the
exercise of 248,675 options and warrants to purchase Common Stock and
$173,488 in cash payments on interest and notes receivable for the exercise
of options, paid $46,171 in cash dividends on Convertible Preferred Stock and
made payments of $14,790 on its notes payable to a bank and on its capital
lease.
The Company had net cash used in investing activities of $20,688 during
the Nine-Month Period 1998 as compared to net cash used in investing
activities of $129,853 during the Nine-Month Period 1997. During the
Nine-Month Period 1998, the Company sold unused equipment for $10,125 and
made payments in the amount of $30,813 for United States and foreign patent
applications. During the Nine-Month Period 1997, the Company made payments
of $46,349 for patent applications and $83,504 for the purchase of equipment.
FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1996
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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Price") of, initially, $0.80 per share which has been adjusted in accordance
with the original Note Agreement 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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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 amount of $619,504 was
charged to additional paid-in capital. 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 (and resulting in a
charge to common stock of the par value of $50). 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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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 (excluding the Rights Offering) or (b) two years; 5% of the value
of any financial transaction (excluding the Rights Offering); and 5% of any
financing provided by or introduced directly by entrenet.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1997, the Financial Accounting Standards Board ("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 standards for reporting and disclosing the
pertinent rights and privileges of the various securities outstanding.
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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 developing a range of sensor
products based on its Sensor-on-a-Chip-Registered Trademark- technology for a
wide variety of environmental, consumer, commercial, industrial, automotive
and military 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 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. Similar
to 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 chemical sensor
marketplace. The short term result from this process has been development
work on a number of new products, including:
- a fail-safe flammable gas sensor for a household appliance control system
- a breath alcohol sensor for an ignition interlock device for automotive
use
- a fuel/air ratio sensor for automotive use
- a gasoline vapor sensor for a gasoline retailing application
- a carbon monoxide sensor for residential and commercial use
- an ammonia sensor for refrigerant levels in food processing facilities
- Sensors for detection of breakthrough of toxic gasses from personal
protective equipment.
See "Business- Sensors."
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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("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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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 continuous leak detection
product approved 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
parts per million 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 represented by customers in the
consumer, commercial, industrial, automotive and military fields. Often
development costs are partially covered by a customer in exchange for some
level of exclusivity. See "Business - Sensors" for a description of chip
based sensor products.
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 21 United States patents covering sensor technologies
and has applications pending for three 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 marketplace, are very diverse and are addressed directly by
Company personnel. The Company is not dependent on any one major customer.
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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
($10,000 for FCI). 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. Citgo, Dreyfus, Hess,
and GATX among others, have applications pending at the Florida Department of
Environmental Protection ("DEP") to install the Company's products. Although
these applicants are not contractually bound to the Company to purchase its
products, if an application is approved and not subsequently modified,
amended or withdrawn, the applicant is required to install the equipment
specified in an application by December 31, 1999. On May 1, 1998, the final
review opportunity for input into the Storage Tank Regulations was held. In
the absence of any dissenting opinion, the Regulations were passed on to the
Attorney General of Florida for incorporation into law and became effective
on July 13, 1998 thereby implementing the Florida AST regulation. There can
be no assurance that when, or even if, the DEP gives final approval that
these or any other companies will purchase the Company's products, nor when
such purchases may occur.
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
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"). With the diminution of its availability and increase in
its price, coupled with wide spread concern as to its threat to the Earth's
ozone layer, Freon and the Freon/IR method are now viewed as requiring
replacement.
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.
Amoco, Exxon, Marathon, Chevron, Unocal and others are evaluating the
Company's replacement for the existing Freon/IR technology. Each of these
companies has
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already purchased multiple units from the Company. Norsk Hydro
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 agreement was accompanied by
an order for approximately $93,000 of the Company's products. 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. The agreement automatically renewed for another two years.
Projects with China Petroleum and the ROC military are ongoing and other
projects are pending. UECI has purchased in excess of $100,000 of the Company's
products.
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. As of the end of the initial term,
unless the Company and MINDECO agree to convert the market development
agreement into a distributorship agreement or terminate it, the market
development agreement automatically renews itself for one year on a
non-exclusive basis. The agreement was automatically renewed as of the end of
its original term. To date, the agreement has not resulted in material
revenues for the Company.
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, which agreement was
automatically extended for an additional two year period ending February 9,
1999. 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. To date, the agreement has not
resulted in material revenues for the Company.
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. The agreement has not
resulted in material revenues for the Company since Lobbe's initial $90,000
purchase in June 1995.
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 terminated the agreement effective January 7, 1997. The
Company commenced legal action against QED seeking payment for unpaid
invoices and other damages. QED filed counterclaims, and the matter was
scheduled for early neutral evaluation. The Company and QED reached a full and
final settlement in this action 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. Sippican is a $30 million defense
naval warfare company which had aspirations in the environmental market.
Osmonics is a $200 million water quality company, entirely dependent on
revenues from that market. Neither agreement has resulted in significant
revenues for the Company to date.
COMPETITION
In the opinion of Management, the primary bases of competition in the
markets for the Company's products are the distinctive and special qualities of
the products, their reliability and ease of use and price.
Management believes that the distinctive 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. The AST leak detection market requires regulations to
be enforced to exist. End users usually do not purchase leak detection
equipment except for regulatory compliance. However, when regulations are
promulgated, and when deadlines are set and enforced, the result can be a
significant opportunity to supply products to the regulated community in a
readily definable period of time. This is, in fact, the situation in the
Florida AST market. Companies have to be in compliance by December 1999. Of
the three options, continuous leak detection, double bottomed tanks and dike
liners, continuous leak detection is by far the lowest cost. Further, to be
a supplier for each of the three options, products have to be certified or
approved. In the case of leak detection, a stringent third-party testing
process is required prior to acceptance. Only certified products from
suppliers who have passed acceptance are considered when compliance plans are
reviewed by Florida DEP. To date, only the Company's PetroSense-Registered
Trademark- product line has been approved for continuous detection of leaks
from ASTs although there can be no assurance that other products will not be
approved.
Competitors such as Tracer Research, Inc. (Tucson, AZ) and Arizona
Instruments, Inc. (Phoenix, AZ) offer products which provide competition in
certain situations. Tracer Research, Inc. has received approval by Florida
DEP for its periodic leak detection system for ASTs. The approval is
conditional in that it specifies certain operating conditions which must be
met. There is a specified inoculation period during which the tank is
essentially out of service. This is followed by sampling vapor wells and the
site for presence of the tracer. These samples are analyzed off site. Use
of this technique is conditional upon maintaining the specified inoculation
time and testing only when ground water levels allow. The test has to be
performed every thirty days. The Company believes these conditions of use
provide a competitive advantage to continuous PetroSense-Registered
Trademark- products, since groundwater levels often reach the tank bottom
during rainy periods in low lying coastal areas such as Florida.
Arizona Instrument Corporation markets a competitive leak detection
product line mainly to the military marketplace. Its acceptance in the
commercial arena has been limited by its use of a pumping system to draw
samples of vapor to the sensor device. High groundwater levels can fill the
sample tubes with water and shut down the system. The sensor device is
limited to detection of lower levels of hydrocarbons than competing
technologies and has not been approved for use in Florida for contaminated
sites. As a result, it is not a competitor for the Florida AST market.
The Company's PetroSense-Registered Trademark- product line monitors
continuously and detects the level of petroleum hydrocarbons whether the
sensor is in a wet or dry environment.
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. Other companies offer competing technologies in most of the
application areas that the Company has targeted. Turner Designs (Sunnyvale,
CA), Filco (Lafayette, LA) and Wilks (Norwalk, CT) offer alternatives to the
Freon IR method. In each instance, these are small companies with limited
resources. In each case, the technology used has limits and in each case these
competitors do not provide the full line of both portable and continuous
monitoring products offered by the Company.
The offshore produced water market exists because Freon is no longer
manufactured under the Montreal Protocol. The acceptance of a replacement
technology is dependent on the increasing cost and lack of availability of
Freon, together with economic conditions such as the price of oil.
In each market, the competition to the Company's products utilizes direct
selling through its own sales force and through manufacturers representatives.
The Company has established an alliance with a leader in the AST instrumentation
field, Whessoe Varec. In its other markets, the Company utilizes the same
direct sales approach.
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.
Many of the Company's sales projections were made with the assumption
that, at the Federal level, there would be a strong regulatory climate on
matters involving the environment. In recent years, however, with the
Congressional de-emphasis of environmental matters, and the accompanying
delays in enactment and/or enforcement of environmental mandates, these
projections turned out to be optimistic, at least in their timetable.
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 ISO 9001,
the international standard for the maintenance and improvement of product
quality. 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, commercial,
automotive, military 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
- a breath alcohol sensor for an ignition interlock device for automotive
use
- a fuel/air ratio sensor for automotive use
- a gasoline vapor sensor for a gasoline retailing application
- a carbon monoxide sensor for residential and commercial use
- 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 has potential application to 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 substitute for laboratory
analysis in 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 Optoelectronics 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.
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 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) establishing a compliance date for new dispensers,
followed by an as yet undetermined phase in period for retrofitting of
existing dispensers.
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<PAGE>
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>
<CAPTION>
Stage of Targeted
Type Development Sensitivity/Media
- -------------------------- ----------- -----------------------------------------
<S> <C> <C>
pH Prototype 2-12 in water
Trichloroethylene ("TCE") Development ppb in water (1)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
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 periods ended December 31, 1996 and 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 18, 1998, 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. 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 nine month periods ended June 30, 1997 and June 30, 1998 was $129,891 and
$129,039, 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
reached a full and final settlement in this action in January 1998. In
accordance with the settlement agreement, the terms of the settlement are
confidential, and had no material effect on the financial position of the
Company or the results of its operations.
A former distributor, D2E, filed an action in the Commercial Court of
Nanterre, France on June 4, 1997 claiming improper termination of an
exclusive distribution agreement by FCI Environmental, Inc. The action seeks
monetary damages of approximately $200,000 at current exchange rates. A
hearing on the merits of the dispute originally scheduled for June 23, 1998
has been adjourned until September 22, 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.
On September 23, 1998, OCS, Inc., a Texas corporation and customer of
the Company's subsidiary, FCI Environmental, Inc. ("FCIE"), filed a lawsuit
against FCIE in the District Court of Harris County, Texas, 165th Judicial
District. The lawsuit is based on an alleged breach of warranty for goods
purchased from FCIE. The plaintiff seeks incidental and consequential damages
of $750,000 plus other fees and expenses. The Company believes the lawsuit is
without merit and intends to seek to have it dismissed.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and respective positions of the Executive Officers and
Directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- ---------
<S> <C> <C>
Geoffrey F. Hewitt 55 Chairman of the Board, President, Chief
Executive Officer and Class A Director
Byron A. Denenberg 63 Class C Director
Irwin J. Gruverman 64 Class A Director
Walter Haemmerli 68 Class B Director
Gerald T. Owens 71 Class C Director
Melvin W. Pelley 53 Chief Financial Officer and Secretary
</TABLE>
The names, ages and respective positions of the Executive Officers and
Directors of FCI Environmental are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- ---------
<S> <C> <C>
Geoffrey F. Hewitt 55 Chief Executive Officer and Director
Melvin W. Pelley 53 Chief Financial Officer, Secretary and
Director
Thomas A. Collins 51 President
</TABLE>
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<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.
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.
-49-
<PAGE>
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. Conrad resigned on
April 8, 1998. Mr. Loomis and Mr. Haemmerli were elected to three-year terms as
Directors at the Company's May 1996 Annual Meeting of Stockholders. Mr. Loomis
resigned on December 23, 1997. 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 and Mr. Loomis resigned on December
23, 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 $ --(3) $ -- $ 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(4) $ -- $ -- -- 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(6) $ -- $ -- -- 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(5) $ -- $ -- -- 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. From June 15, 1997
through August 1, 1998, a total of $61,346 has been deferred.
(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) Resigned April 8, 1998.
(4) 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. From June 15, 1997 through
August 1, 1998 a total of $35,692 has been deferred.
(5) 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. From June 15, 1997 through
August 1, 1998, a total of $27,885 has been deferred.
(6) 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(3) 27.8% $ 0.25 September 12, 2007
Dale W. Conrad 25,000(4) 5.6% $ 0.22 May 29, 2007
Melvin W. Pelley 75,000(3) 16.7% $ 0.25 September 12, 2007
David R. LeBlanc -- -- --
Thomas A. Collins 75,000(3) 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."
(3) Exercisable upon grant on September 12, 1997 and until September 12, 2007
at $0.25 per share.
(4) Exercisable upon grant on May 29, 1997 and until May 29, 2007 at $0.22 per
share.
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.
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<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
(12,500 shares) and members of its Audit Committee (8,000 shares to each of its
two members) and Compensation and Stock Options Committee (4,000 shares to each
of its two members).
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 when the
Company's financial position allows.
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 when the
Company's financial position allows.
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)
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<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 when the
Company's financial position allows.
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 was terminated upon Mr. Conrad's
resignation on April 8, 1998.
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
-56-
<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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<PAGE>
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.
Walter Haemmerli, a director of the Company, advanced the Company
$75,000 on February 24, 1998, and Melvin W. Pelley, the Company's Chief
Financial Officer, advanced the Company $25,000 on February 27, 1998, and an
additional $25,000 on July 1, 1998. Each of these advances is evidenced by a
separate promissory note bearing interest at the rate of 8% per annum and due
on or before August 31, 1998. Messrs. Haemmerli and Pelley have each agreed
to extend the due dates of their respective promissory notes until the
completion of the Rights Offering.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 16, 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>
<CAPTION>
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership (1) Percentage of Class (2)
-------------------------- ------------------------ -----------------------
<S> <C> <C>
Geoffrey F. Hewitt (3) 814,329 (5) 3.0%
Byron A. Denenberg 220,000 (6) (4)
RCT Systems, Inc.
327 Messner Drive
Wheeling, IL 60090
Irwin J. Gruverman 339,470 (7) 1.3%
30 Ossipee Road
Newton, MA 02164
Walter Haemmerli 3,785,844 (8) 12.9%
Manport AG
Basteiplatz 3, CH 8001
Zurich, Switzerland
Gerald T. Owens 271,823 (9) 1.0%
147 Paddington Way
San Antonio, TX 78209
Melvin W. Pelley (3) 473,863 (10) 1.8%
</TABLE>
-59-
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership (1) Percentage of Class (2)
-------------------------- ------------------------ -----------------------
<S> <C> <C>
Thomas A. Collins (3) 295,000 (11) 1.1%
All Directors and Officers as 6,200,329 19.9%
a Group (7 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 26,441,207 shares issued and outstanding as of September 16, 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 726,247 shares of Common Stock issuable upon
exercise of a like number of options of which 261,247 expire on
September 30, 1998.
(6) Includes an aggregate of 88,142 shares of Common Stock issuable upon
exercise of a like member of options.
(7) Includes 107,680 shares of Common Stock issuable upon exercise of a like
number of options of which 8,680 expire on September 30, 1998. 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.
(8) 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 65,000 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.
(9) Includes 39,965 Class D Common Stock Purchase Warrants and an aggregate of
127,000 shares of Common Stock issuable upon exercise of a like number of
options of which 10,000 expire on September 30, 1998.
(10) Includes an aggregate of 255,000 shares of Common Stock issuable upon
exercise of a like number of options.
(11) Includes an aggregate of 295,000 shares of Common Stock issuable upon
exercise of a like number of options.
PLAN OF DISTRIBUTION
The Rights are being granted by the Company to Securityholders for no
consideration and the Units being offered by the Company are being offered
for sale at a price of $.22 per Unit on a best efforts, no minimum, basis,
except that certain members of the Company's Management have agreed to
exercise Rights being granted to them pursuant to the offering to purchase
171,867 Units and have also agreed to purchase up to an additional 1,136,363
Units which remain unsubscribed for by Rights holders.
The Units, shares of Common Stock and Class E Warrants (and shares of
Common Stock issuable upon exercise of the Class E Warrants) offered by the
Selling Securityholders ("Selling Securityholders Securities") named below may
be sold by them in one or more transactions in the over-the-counter market,
in negotiated transactions or a combination of such methods of sale, are
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. The position or office with
the Company held by each Selling Securityholder (other than Privatbank, which
holds no position or office), and any other material relationship between a
Selling Securityholder and the Company or any of its affiliates during the
three years prior to the date of this Prospectus are set forth under the
captions "Management" and "Certain Transaction" elsewhere in this Prospectus.
The Selling Securityholder Securities may be sold from time to time by
the Selling Securityholders and/or by their respective assignees,
transferees, pledgees or other successors for their respective accounts.
Alternatively, the Selling Securityholder Securities may be offered through
underwriters, dealers or agents. The distribution of the Selling
Securityholder Securities by them may be effected from time to time in one or
more transactions that may take place in the over-the-counter market
including (a) ordinary broker's transactions and transactions in which the
broker solicits purchasers; (b) privately negotiated transactions or pledges;
(c) through sales to one or more broker-dealers for re-sale of such
securities for their own account as principals, pursuant to this Prospectus;
(d) in a block trade (which may involve crosses) in which the broker or
dealer so engaged will attempt to sell the securities as agent, but may
position and resell a portion of the block as principal to facilitate the
transaction; or (e) in exchange distributions and/or secondary distributions,
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by these
holders in connection with such sales.
The Selling Securityholders, their respective transferees,
intermediaries, donees, pledgees or other successors in interest through whom
the Selling Securityholders Securities are sold may be deemed "underwriters"
within the meaning or Section 2(11) of the Securities Act, with respect to
the securities offered and any profits realized or commissions received may
be deemed to be underwriting compensation. Any broker-dealers that
participate in the distribution of the Selling Securityholder Securities may
be deemed to be "underwriters," as defined in the Securities Act, and any
commissions, discounts, concessions or other payments made to them, or any
profits realized by them upon the resale of any Selling Securityholder
Securities purchased by them as principals, may be deemed to be underwriting
commissions or discounts under the Securities Act.
The Company will pay all expenses incident to the offering and sale of
the Selling Securityholder Securities to the public except as described
hereinafter. The Company will not pay, among other expenses, commissions and
discounts of underwriters, dealers or agents.
There can be no assurance that any of the Selling Securityholders will
sell any or all of the Selling Securityholder Securities by them hereunder.
The sale of the Shares is subject to the Prospectus delivery and other
requirements of the Securities Act. To the extent required, the Company will
use its best efforts to file and distribute, during any period in which
offers or sales are being made, one or more amendments or supplements to this
Prospectus of a new registration statement to describe any material
information with respect to the plan of distribution not previously disclosed
in this Prospectus, including, but not limited to, the number of securities
being offered and the terms of the offering, including the name or names of
any underwriters, dealers or agents, if any, the purchase price paid by the
underwriter for securities purchased from a Selling Securityholder, any any
discounts, commissions or concessions allowed or reallowed or paid to dealers
and the proposed selling price to the public.
Under the Exchange Act and the regulations thereunder, any person
engaged in a distribution of the securities of the Company offered by this
Prospectus may not simultaneously engage in market-making activities with
respect to the Common Stock of the Company during the applicable "cooling
off" period five business days prior to the commencement of such
distribution, in addition, and without limiting the foregoing, the Selling
Securityholders will be subject to applicable provisions of the Exchange Act
and the rules and regulations thereunder, including without limitation,
Regulation M, in connection with transactions in the securities, which
provisions may limit the timing of purchases and sales of securities by the
Selling Securityholders.
SELLING SECURITYHOLDERS
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock by each
Selling Securityholder before the offering, the number of Units (each
consisting of one share of Common Stock and one Class E Warrant) to be offered
and the beneficial ownership of Common Stock immediately after the offering
assuming the securities to be offered by them are sold, in which case none of
the Selling Securityholders would beneficially own any Units or Class E
Warrants after the offering:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Number of Units,
Number of Units (equal Common Stock,
to number of Class E Class E Warrants
Selling Shares of Common Stock warrants) Beneficially and Underlying Shares of Common Stock
Security- Beneficially Owned Prior Owned Immediately Prior Common Stock Beneficially Owned After
holder to Offering (1)(2) to the Offering Being Registered the Offering (3)
- -----------------------------------------------------------------------------------------------------------------------------------
Number % Number % Number %
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Geoffrey F. Hewitt(4) 814,329(5) 3.0 249,293 2.7 249,293 Units 814,329 2.2
249,293 Shs.
249,293 War.
249,293 Shs.
- -----------------------------------------------------------------------------------------------------------------------------------
Byron A. Denenberg(4) 220,000(6) (7) 235,240 2.6 235,240 Units 220,000 (7)
235,240 Shs.
235,240 War.
235,240 Shs.
- -----------------------------------------------------------------------------------------------------------------------------------
Irwin J. Gruverman(4) 339,470(8) 1.3 235,892 2.6 235,892 Units 339,470 (7)
235,892 Shs.
235,892 War.
235,892 Shs.
- -----------------------------------------------------------------------------------------------------------------------------------
Walter Haemmerli(4) 3,785,844(9) 12.9 260,362 2.9 260,362 Units 3,785,844 9.8
260,362 Shs.
260,362 War.
260,362 Shs.
- -----------------------------------------------------------------------------------------------------------------------------------
Melvin W. Pelley(4) 473,863(10) 1.8 281,988 3.1 281,988 Unit 473,863 1.3
281,988 Shs.
281,988 War.
281,988 Shs.
- -----------------------------------------------------------------------------------------------------------------------------------
Dale W. Conrad(4) 415,840(11) 1.6 45,455 (7) 45,455 Units 415,840 1.2
45,455 Shs.
45,455 War.
45,455 Shs.
- -----------------------------------------------------------------------------------------------------------------------------------
Privatbank Vermag AG 3,220,660(12) 11.1 130,000 1.4 130,000 Units 3,220,660 8.4
Postfach CH-7001 Chur, 130,000 Shs.
Switzerland(4) 130,000 War.
130,000 Shs.
- -----------------------------------------------------------------------------------------------------------------------------------
Total 9,270,006 1,438,230 1,438,230 Units 9,270,006
1,438,230 Shs.
1,438,230 War.
1,438,230 Shs.
- -----------------------------------------------------------------------------------------------------------------------------------
</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 26,441,207 shares issued and outstanding as of September 17, 1998.
(3) Based on 35,548,169 shares to be outstanding following this offering.
(4) Geoffrey F. Hewitt is Chairman of the Board of Directors, Chief
Executive Officer and President of the Company, as well as Chief
Executive Officer of FCI Environmental, Inc.; Byron A. Denenberg is a
director of the Company; Irwin J. Gruverman is a director of the
Company; Walter Hammerli is a director of the Company and is a director
and Vice-Chairman of Privatbank Vermag AG; Melvin W. Pelley is Chief
Financial Officer and Secretary of the Company and Chief Financial
Officer of FCI Environmental, Inc.; Dale W. Conrad was a Director of the
Company and Chairman of the Board of FCI Environmental, Inc. until his
resignation on April 8, 1998. See "Certain Transactions" and
"Management" for other material relationships of Selling Securityholders.
(5) Includes an aggregate of 726,247 shares of Common Stock issuable upon
exercise of a like number of options of which 261,247 expire on
September 30, 1998.
(6) Includes an aggregate of 88,142 shares of Common Stock issuable upon
exercise of a like member of options.
(7) Represents less than one percent ownership.
(8) Includes 107,680 shares of Common Stock issuable upon exercise of a like
number of options of which 8,680 expire on September 30, 1998. Also
includes 675,000 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 65,000 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 $150,000 of Senior Convertible
8% notes convertible into 367,824 shares of Common Stock held by Manport
AG, of which company Mr. Haemmerli is Chief Executive Officer.
(10) Includes an aggregate of 255,000 shares of Common Stock issuable upon
exercise of a like number of options.
(11) Includes an aggregate of 120,000 shares of Common Stock issuable upon
exercise of a like number of options.
(12) Includes shares beneficially owned by Walter Haemmerli. See Note (9).
-60-
<PAGE>
DESCRIPTION OF SECURITIES
UNITS
The Company will offer 8,976,962 Units to owners of its Common Stock,
Preferred Stock and Warrants as of the close of business on the Record Date,
at a purchase price of U.S.$.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 150,000,000 shares of Common Stock,
$.0001 par value, of which 26,441,207 shares of Common Stock are issued and
outstanding. As of September 16, 1998, there were approximately 464 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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<PAGE>
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 five 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 been engaged in preliminary
discussions to convert certain debt into Preferred Stock, although no
understandings, commitments or arrangements to issue any other shares of
Preferred Stock have been reached. 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
-62-
<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 October , 1998 through October ,
2003 at an exercise price of $.25 per share through October __, 1999; $.35
per share from October __, 1999 through October __, 2000; $.50 per share from
October __, 2000 through October __, 2001; $.70 per share from October __,
2001 through October __, 2002; and $.90 per share from October __, 2002
through October __, 2003.
The Class E Warrant may be redeemed by the Company, if for any period
of 30 consecutive trading days the last reported sales price for each trading
day during such period is at least 200% of the then current exercise price,
subject to adjustment. The Company may then, upon notice to the registered
holders, redeem the Class E Warrants at a price of $.05 per warrant.
The Class E Warrants contain provisions that protect the holders thereof
against dilution. The exercise price is subject to adjustment in the event
of stock splits, stock dividends, reclassifications, recapitalizations,
reorganizations, mergers or consolidations of the Company and certain other
events.
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.
-63-
<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.
-64-
<PAGE>
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 June 30, 1998, an aggregate face amount of
$1,225,000 of the Notes had been converted to Common Stock resulting in the
issuance of 1,742,851 shares of Common Stock. Based on the adjusted
Conversion Price of $0.4078, an aggregate of 3,923,456 shares of Common Stock
would be issuable if the remaining $1,600,000 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 P.C. owns 300,000 shares of Common Stock and
6,250 Class D Warrants.
-65-
<PAGE>
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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<PAGE>
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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<PAGE>
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 two years in the period
ended September 30, 1997 have been included herein and in the Registration
Statement in reliance upon the report of Goldstein Golub Kessler LLP,
independent certified public accountants, appearing elsewhere herein,
and 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.
-68-
<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 January 7, 1998, the Former Accountant informed the Company
that they had "decided not to accept an engagement to reissue or consent " to
the use of their report dated January 10, 1997 on the Company's financial
statements for the fiscal year ended September 30, 1996, notwithstanding their
having led the Company to believe that they would reissue their report. The
Former Accountant specifically declined to give any reason for its decision.
On April 9, 1997, the Board of Directors appointed Goldstein Golub
Kessler LLP, 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 ended September 30, 1997. The Company
subsequently retained Goldstein Golub Kessler LLP to re-audit the
Company's financial statements for the year ended September 30, 1996.
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.
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FIBERCHEM, INC.
YEARS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<S> <C>
Independent Auditor's Report . . . . . . . . . . . . . . . . . . F-1
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
<CAPTION>
Nine Months Ended June 30, 1998 and 1997
(unaudited)
Balance Sheets - June 30, 1998 and September 30, 1997. . . . . . 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>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
FiberChem, Inc.
We have audited the accompanying consolidated balance sheets of FiberChem,
Inc. and Subsidiaries as of September 30, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
FiberChem, Inc. and Subsidiaries as of September 30, 1997 and 1996, and the
results of their operations and their cash flows for the years 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 LLP
----------------------------------------
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
February 13, 1998
F-1
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
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
and $386,373 at September 30, 1997 (note 4) 114,764 83,333
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
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
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
forecasted 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 accounts
for its 25% ownership in a Finnish company using the equity method of
accounting. 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 recognizes revenue from product sales when title
passes, which is upon shipment of product to the customer. There is
generally no right of return except for normal warranties.
Additionally, the Company performs research and testing services
for others under short term contracts. Revenue on these contracts is
recorded when services are performed.
(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 based on
estimated future costs for product warranty, which is charged to
cost of sales 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 amount of $619,504 was
charged to additional paid in capital. 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 (and resulting in a
charge to common stock of the par value of $50). 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, its results of operations or its liquidity.
(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 $ -- $ --
----------- -----------
----------- -----------
</TABLE>
Components of net deferred tax assets as of September 30, 1996 and 1997
are as follows:
<TABLE>
<CAPTION>
1996 Change 1997
---- ------ ----
<S> <C> <C> <C>
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.
(12) SUBSEQUENT EVENTS
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, 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,
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.
F-16
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(UNAUDITED)
September 30, June 30,
1997 1998
------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 427,488 $ 88,567
Accounts receivable, net of allowance for doubtful
accounts of $240,796 at September 30, 1997
and $104,206 at June 30, 1998 263,947 672,360
Inventories 1,563,191 1,485,319
Financing costs, net of accumulated amortization of $211,445 211,445 53,480
Other 56,941 120,770
---------- ----------
Total current assets 2,311,567 2,340,496
---------- ----------
Equipment 716,465 706,464
Less accumulated depreciation (549,175) (592,125)
---------- ----------
Net equipment 167,290 114,339
---------- ----------
Other assets:
Patent costs, net of accumulated amortization of
$1,678,845 at September 30, 1997 and
$1,865,658 at June 30, 1998 287,905 131,906
Technology costs, net of accumulated amortization of
$386,373 at September 30, 1997 and
$409,810 at June 30, 1998 83,333 59,895
Financing costs, net of accumulated amortization of $148,298 119,625 --
---------- ----------
Total other assets 490,863 191,801
---------- ----------
Total assets $2,969,720 $2,646,636
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
F-17
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
September 30, June 30,
1997 1998
------------ -----------
<S> <C> <C>
Current liabilities:
Senior convertible notes payable $ -- $ 1,600,000
Current installments of notes payable 6,878 7,572
Accounts payable 95,469 312,182
Accrued expenses 307,891 578,793
Interest payable 17,778 61,878
------------- -----------
Total current liabilities 428,016 2,560,425
Senior convertible notes payable 1,650,000 --
Notes payable to officers, directors and affiliates -- 650,000
Notes payable, net of current installments 7,942 2,093
------------- -----------
Total liabilities 2,085,958 3,212,518
------------- -----------
Stockholders' equity:
Preferred stock, $.001 par value. Authorized
10,000,000 shares; 218,998 convertible
shares issued and outstanding at
September 30, 1997 and June 30, 1998;
at liquidation value 3,284,970 3,284,970
Common stock, $.0001 par value. Authorized
50,000,000 shares; 25,515,660 and 26,441,207
shares issued and outstanding at September 30
1997 and June 30, 1998, respectively 2,552 2,644
Additional paid-in capital 27,192,749 27,362,272
Deficit (29,596,509) (31,215,768)
------------- -----------
Total stockholders' equity 883,762 (565,882)
------------- -----------
Total liabilities and stockholders' equity $ 2,969,720 $ 2,646,636
------------- -----------
------------- -----------
</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 Nine-month period ended
--------------------------- ---------------------------
June 30, June 30, June 30, June 30,
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $403,117 $538,017 $1,138,300 $1,004,889
Cost of revenues 285,267 224,021 672,369 451,589
------------ ------------ ------------ ------------
Gross profit 117,850 293,996 465,931 553,300
------------ ------------ ------------ ------------
Operating expenses:
Research, development and engineering 308,186 187,534 962,947 583,848
General and administrative 287,547 294,119 900,053 874,483
Sales and marketing 234,582 183,133 747,110 511,181
------------ ------------ ------------ ------------
Total operating expenses 830,315 664,786 2,610,110 1,969,512
------------ ------------ ------------ ------------
Loss from operations (712,465) (370,790) (2,144,179) (1,416,212)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (55,164) (84,807) (166,268) (205,598)
Interest income 8,768 400 83,591 761
Other, net 0 0 (248,212) 1,790
------------ ------------ ------------ ------------
Total other income (expense) (46,396) (84,407) (330,889) (203,047)
------------ ------------ ------------ ------------
Net loss ($758,861) ($455,197) ($2,475,068) ($1,619,259)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares of common stock used in
computing net loss per share 25,816,895 26,042,828 25,748,517 25,752,189
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share ($0.03) ($0.02) ($0.10) ($0.06)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-19
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT 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
For services -- -- 676,500 67 121,445 -- 121,512
Conversion of senior
convertible notes payable -- -- 244,047 24 46,979 -- 47,003
Net loss -- -- -- -- -- (1,619,259) (1,619,259)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 218,998 $3,284,970 26,441,207 $2,644 27,362,272 (31,215,768) (565,882)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
F-20
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine month period ended
--------------------------
June 30 June 30
1997 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($2,475,068) ($1,619,259)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 52,627 44,616
Amortization of patent and technology costs 204,963 210,250
Amortization of financing costs 56,301 63,148
Accrued interest on notes receivable for exercise of options (26,985) --
Write off of accrued interest on notes receivable
for exercise of options 248,212 --
Reduction in notes receivable for the exercise
of options in exchange for services 636 --
Common stock issued for services -- 121,512
Gain on sale of fixed assets -- (1,790)
Provision for loss on accounts receivable 25,000 --
Inventory valuation allowance 25,000 --
Changes in assets and liabilities:
Increase in accounts receivable (337,225) (408,413)
Increase (decrease) in inventories (416,625) 77,872
Increase (decrease) in other current assets 6,192 (63,829)
Increase (decrease) in accounts payable (220,425) 216,713
Increase in accrued expenses 92,980 270,902
Increase in interest payable 33,500 56,100
----------- -----------
Net cash used in operating activities (2,730,922) (1,032,178)
----------- -----------
Cash flows from investing activities:
(Purchase) sale of equipment (83,504) 10,125
Payments for patents (46,349) (30,813)
----------- -----------
Net cash used in investing activities (129,853) (20,688)
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
(continued)
F-21
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine month period ended
--------------------------
June 30 June 30
1997 1998
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Payments on notes payable (14,790) (5,155)
Proceeds from the exercise of options and warrants 84,940 1,100
Proceeds from interest and notes receivable for exercise of options 173,488 --
Payment of dividend on preferred stock (46,171) --
Proceeds from note payable to Privatbank -- 288,000
Proceeds from notes payable to officers and directors -- 350,000
----------- -----------
Net cash provided by (used in) financing activities 197,467 633,945
----------- -----------
Net decrease in cash and cash equivalents (2,663,308) (418,921)
Cash and cash equivalents at beginning of period 3,065,572 427,488
----------- -----------
Cash and cash equivalents at end of period $402,264 $8,567
----------- -----------
----------- -----------
Supplemental Cash Flow Information
Noncash investing and financing activities:
Reduction in additional paid-in capital due to
write down of notes receivable for exercise of options $1,376,308 $ --
Preferred stock issued as dividends 208,635 --
Senior convertible notes payable converted to common stock -- 50,000
Unamortized deferred financing costs associated with senior
senior convertible notes payable converted to common stock -- 2,997
Deferred financing costs associated with Privatbank note -- 12,000
Equipment purchased through capital lease 21,273 --
Reduction in notes receivable for exercise
of options in exchange for services 636 --
----------- -----------
----------- -----------
Interest paid $76,467 $74,020
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
(continued)
F-22
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(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 June 30, 1998 and September 30, 1997, and the results of operations and cash
flows of the Company for the three-month and nine-month periods ended June 30,
1998 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, in accordance with the
original Note agreement, 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 nine-month period ended June 30,
1998 (the "Nine Month Period 1998"), the Company received an unsolicited
offer to convert $25,000 of the Notes at a conversion price of $0.21 per
share, and another offer to convert $25,000 of the Notes at a conversion
price of $0.20 per share, which were approximately the then current market
values of the Common Stock. Accordingly, the Company issued 244,047 shares
for the conversions. All other Note holders were offered the same temporary
conversion price. As of June 30, 1998, an aggregate face amount of
$1,225,000 of the Notes had been converted to Common Stock resulting in the
issuance of 1,742,851 shares of Common Stock. Based on the adjusted
Conversion Price of $0.4078, an aggregate of 3,923,456 shares of Common Stock
would be issuable if the remaining $1,600,000 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.
During the Nine Month Period 1998, certain of the Company's officers and
directors provided an aggregate of $250,000 in the form of 5-year 8% notes,
convertible into rights to purchase common stock
F-23
<PAGE>
upon registration of an offering to all stockholders and warrant holders of
rights to purchase common stock. In addition, certain officers and directors
loaned the Company an additional $100,000, which is to be repaid with
interest at 8% of the rights offering. Also during the Nine Month Period
1998, the Company entered into an agreement with Privatbank Vermag (of which
a director of the Company is vice chairman) under which the Company borrowed
$150,000, with interest at 8% originally due on June 27, 1998. An additional
$150,000 was advanced to the Company on April 27, 1998, with interest at 8%
originally due on July 27, 1998. The due dates have subsequently been
extended, at the same rate of interest, to September 23 and September 27,
1998, respectively. In accordance with the agreement, Privatbank Vermag will
receive 90,000 units, each unit consisting of one share of Common Stock and
one warrant to purchase a share of Common Stock exercisable at $0.22 per
warrant. The units are valued at $0.22 and the Warrants become exercisable
one year from the date of issuance and expire in September 2003.
(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 June 30, 1998, 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 Nine Month Period 1998 the Company issued 250,000 shares of
its Common Stock, valued at the then current market value of $0.1875 per
share, in exchange for legal services rendered by its attorneys in connection
with litigation against a former distributor. The Company also issued
426,500 shares of its Common Stock, valued at the then current market value
of $0.175 per share, to its public and investor relations firm for services.
During the Nine Month Period 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 Nine Month Period 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
F-24
<PAGE>
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 calendar 1998 from its alliance with Whessoe Varec, Inc. in the
aboveground storage tank leak detection market and the California military
fuel storage 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 last quarter of fiscal 1997, the Company
implemented significant reductions in personnel and other spending, and, to
further conserve cash, continues to defer payment of a significant portion of
management salaries. The Company borrowed $650,000 from certain officers,
directors and affiliates during the Nine Month Period 1998 and borrowed an
additional $25,000 in July 1998.
In July 1998, Silicon Valley Bank granted the Company a $1,000,000 line
of credit, secured by receivables, inventory and equipment. Advances bear
interest at1.25% per month, and as of August 12, 1998, the Company had
borrowed $380,557 against the line of credit.
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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY, BY ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES, IMPLY THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF
BY ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
---------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary...................................3
Summary of Consolidated Financial
Information.........................................6
Risk Factors........................................10
Use of Proceeds.....................................19
Market for Common Equity
and Related Shareholders Matters...................20
Capitalization......................................21
Dilution............................................22
Dividend Policy.....................................23
Management's Discussion and
Analysis Of Financial Condition
and Results of Operations..........................24
Business............................................32
Management..........................................48
Indemnification of Directors
and Officers.......................................57
Certain Transactions................................58
Security Ownership of Certain
Beneficial Owners and Management...................59
Plan of Distribution................................60
Selling Securityholders.............................60
Description of Securities...........................61
Legal Matters.......................................65
Tax Consequences Relating to
the Rights Offering................................66
Experts.............................................68
Available Information...............................69
Index to Consolidated Financial
Statements.........................................69
---------------------------
9,106,962 UNITS, EACH UNIT
CONSISTING OF ONE COMMON SHARE,
ONE CLASS E WARRANT
FIBERCHEM, INC.
-----------
PROSPECTUS
-----------
October __, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 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:
<TABLE>
<S> <C>
SEC Filing Fee 2,000
Printing and Engraving Mailing & Solicitation Expenses 30,000
Legal Fees and Expenses 15,000
State Securities Qualification
Fees and Expenses 5,000
Accounting Fees and Expenses 8,000
Miscellaneous
-------
TOTAL $60,000
-------
-------
</TABLE>
II-1
<PAGE>
ITEM 26 RECENT SALE OF UNREGISTERED SECURITIES
On February 15, 1996, the Company completed an offering under
Regulation S, promulgated under the Securities Act of 1933, as amended
("Regulation S") of 8% Senior Convertible Notes due February 15, 1999 (the
"Notes") for gross proceeds of $2,825,000. The Notes were purchased by
non-United States residents. The placement agent received a commission of
$226,000 in cash plus 692,742 placement agent warrants which consist of a
Common Stock purchase warrant currently exercisable at a price of $.4078.
In May 1996, the Company completed a Regulation S offering of 3,333,333
Units, each Unit consisted of one share of Common Stock and one Common Stock
purchase warrant for gross proceeds of $3,000,000. The Units were purchased
by non-United States residents. The placement agent received a commission of
$240,000 in cash plus 1,280,411 placement agent warrants consisting of one
Common Stock purchase warrant currently exercisable at a price of $.2343.
In February 1998, the Company completed an offering under Section 4(2)
of the Securities Act of 1933, as amended, of 8% Subordinated Convertible
Notes ("8% Notes") for gross proceeds of $250,000. The 8% Notes were
purchased by members of management of the Company, who have committed to
acting as standby purchasers and exchanging the 8% Notes for Units. The
following five members of Management each purchased $50,000 of the 8% Notes:
Geoffrey F. Hewitt, Chairman of the Board, President and Chief Executive
Officer of the Company; Byron A. Denenberg, a director of the Company; Irwin
J. Gruverman, a director of the Company purchased the 8% Notes as General
Partner of G&G Diagnostics Funds; Walter Haemmerli, a director of the
Company; and Melvin W. Pelley, Chief Financial Officer and Secretary of the
Company and Chief Financial Officer of FCI Environmental, Inc.
In March, 1998, Snow Becker Krauss P.C. acquired 250,000 shares of the
Company's common stock in consideration of services rendered to the Company.
The offer and sale were exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933, as amended.
In June, 1998, Makenna Delaney & Sullivan Incorporated acquired 426,500
shares of common stock in consideration of services rendered to the Company.
The offer and sale were exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933, as amended.
ITEM 27. EXHIBITS
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 Form of Lock-up Agreement between Members of Management of the Company
and the Company.
4.4 Class D Warrant Agreement of the Registrant with form of Warrant
Certificate. (3)
4.5 Form of 8% Senior Convertible Note Due 1999 issued in the Company's
February 1996 private placement. (4)
4.6 Form of Warrant to purchase Common Stock on or before May 31, 2001. (5)
4.7 Form of Warrant to purchase Common Stock on or before May 30, 2001,
issued in the Company's May 1996 private placement. (17)
*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 Qualified Stock Option Plan. (10)
10.7 Consulting agreement by and between the Company and with Irv J.
Gruverman, dated November 4, 1993.(11)
10.8 Qualified Stock Option Plan. (12)
II-2
<PAGE>
10.9 Termination of Distributor Agreement with Sippican, Inc. dated
February 24, 1994. (13)
10.10 Employment contract with David R. LeBlanc dated June 8, 1994. (13)
10.11 FCI FiberChem, Inc. and FCI Environmental, Inc. 401(k) Profit Sharing
Plan. (13)
10.12 Qualified Stock Option Plan (14)
10.13 License Agreement with Texas Instruments, Incorporated, dated June 15,
1995. (19)
10.14 Cooperative Development Agreement with Texas Instruments, Incorporated,
dated June 15, 1995. (19)
10.15 Form of Distribution Agreement. (15)
10.16 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.(16)
10.17 Agreement dated October 1, 1996 by and between FCI Environmental, Inc.
and Autronica AS.(16)
10.18 OEM Strategic Alliance Agreement dated June 30, 1996 by and between
Whessoe Varec, Inc. and FCI Environmental, Inc.(16)
10.19 1997 Employee Stock Option Plan.(18)
10.20 Employment contract with Melvin W. Pelley dated October 1, 1997.(20)
10.21 Employment contract with Thomas A. Collins dated October 1, 1997.(20)
10.22 Employment contract with Geoffrey F. Hewitt dated October 1, 1997. (20)
*10.23 Form of Warrant Agreement
*10.24 Form of Subscription Agent Agreement
#21.1 Subsidiaries of the Registrant.
*23.1 Consent of Goldstein Golub Kessler LLP.
- -------------------------------
# Previously filed.
* Filed herewith.
(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 Proxy Statement dated May 3,
1993.
(11) Incorporated by reference from the Company's Report on Form 10-K for
September 30, 1993.
(12) Incorporated by reference from the Company's Proxy Statement dated May
23, 1994.
(13) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1994.
(14) Incorporated by reference from the Company's Report on Form 8-K for June
15, 1995.
(15) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1995.
(16) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1996.
(17) Incorporated by reference from the Company's Report on Form 8-K for May
31, 1996.
(18) Incorporated by reference from the Company's Proxy statement dated May
20, 1997.
(19) Incorporated by reference from the Company's Report on Form 8-K/A for
August 30, 1995.
(20) Incorporated by reference from the Company's Report on Form 8-KSB for
September 30, 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.
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
October 15, 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)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on October
15, 1998 in the capacities indicated.
FIBERCHEM, INC.
/s/ GEOFFREY F. HEWITT Chief Executive Officer
- --------------------------
Geoffrey F. Hewitt
/s/ MELVIN W. PELLEY Chief Financial Officer
- --------------------------
Melvin W. Pelley
II-6
<PAGE>
/s/ * Director
- --------------------------
Walter Haemmerli
/s/ * Director
- --------------------------
Irwin J. Gruverman
/s/ * Director
- --------------------------
Byron A. Denenberg
/s/ * Director
- --------------------------
Gerald T. Owens
* By /s/ Geoffrey F. Hewitt Chief Executive Officer
--------------------------
Geoffrey F. Hewitt
(Attorney-In-Fact for each
of the above named persons)
II-7
<PAGE>
EXHIBIT INDEX
4.1 Form of Rights Certificate
4.2 Form of Class E Warrant
5.1 Opinion of Snow Becker Krauss P.C.
10.23 Form of Warrant Agreement
10.24 Form of Subscription Agent Agreement
23.1 Consent of Goldstein Golub Kessler LLP
<PAGE>
EXHIBIT 4.1
[FORM OF FACE OF RIGHTS CERTIFICATE]
CUSIP _________
No. R - ______ Rights
VOID AFTER ___________, 1998
SUBSCRIPTION RIGHTS CERTIFICATE
FIBERCHEM, INC.
This Certifies that FOR VALUE RECEIVED ________________ or registered assigns
(the "Registered Holder") is the owner of the number of Non-transferable
Subscription Rights ("Rights") set forth above, each one (1) full Right
entitling the owner thereof, subject to the Prospectus dated _______ __, 1998
(the "Prospectus") of FiberChem, Inc. (the "Company"), a Delaware
corporation, to purchase from the Company at any time prior to ___________,
1998 (the "Expiration Date"), at the office of Corporate Stock Transfer,
Inc., 370 17th Street, Republic Plaza, Suite 2350, Denver, Colorado 80202.
(the "Rights Agent") or its successors, as Rights Agent, one (1) Unit,
consisting of one (1) fully paid non-assessable share of Common Stock and one
(1) fully paid and non-assessable Redeemable Class E Common Stock Purchase
Warrant ("Warrant") of the Company, at a purchase price of $.22 per Unit (the
"Purchase Price") upon presentation of this Rights Certificate with the form
of election on the reverse side hereof properly completed and duly executed
with signatures guaranteed, accompanied by payment in full of the Purchase
Price for the Units subscribed by unendorsed personal, certified, bank or
cashiers check, and any other required documents to be received by the Rights
Agent. The Registered Holder may also subscribe for additional Units
pursuant to the Additional Subscription Privilege described in the
Prospectus, by completing the separate Additional Subscription Form and
presenting it to the Rights Agent along with payment of the purchase price
for the Additional Subscribed Units as therein provided.
No fractional Units will be issued by the Company. A Rights Certificate
may not be divided in such a manner as would permit the Registered Holder to
subscribe for a greater number of Units than the number for which they would
be entitled to subscribe under the original Rights Certificate.
This Rights Certificate, and the Rights represented hereby, are subject
to all of the terms, conditions and provisions of the Prospectus, which
terms, conditions and provisions are hereby incorporated by reference and
made a part hereof and to which Prospectus reference is hereby made to a full
description of the rights, obligations, duties and indemnities hereunder of
the Company and the holders of the Right Certificates. Copies of the
Prospectus are available without charge upon written request to the Company.
Prior to the exercise of any Rights represented hereby and the
underlying securities, the Registered Holder shall not be entitled to any
rights of a stockholder of the Company, including,
<PAGE>
without limitation, the right to vote or to receive dividends or other
distributions, and shall not be entitled to receive any notice of any
proceedings of the Company or to receive any notice except as provided in the
Prospectus.
This Rights Certificate shall not be valid or obligatory until it shall
have been countersigned by the Rights Agent.
IN WITNESS WHEREOF, the Company has caused this Rights Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
FIBERCHEM, INC.
Dated: , 1998 By:
------------- --------------------------------
[SEAL]
By:
---------------------------------
Countersigned and Registered:
Corporate Stock Transfer, Inc.,
Rights Agent
By:
-------------------------------
Authorized Officer
-2-
<PAGE>
FORM OF ELECTION
(To be executed if holder desires
to exercise the Rights Certificate)
TO FIBERCHEM, INC.
The undersigned hereby elects to exercise Rights represented by this
Rights Certificate and irrevocably subscribes to purchase ________________
Units, each Unit consisting of one share of Common Stock and one Redeemable
Class E Common Stock Purchase Warrant of FiberChem, Inc. upon the exercise of
the Rights.
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
- -----------------------------
- -----------------------------
(Please print name and address)
Dated 1998
------------------
-----------------------
Signature
Signature Guaranteed
- --------------------
NOTICE: The signature to the foregoing Form of Election must correspond to the
name as written upon the face of this Rights Certificate in every particular
without alteration or enlargement or any change whatsoever.
THIS FORM OF ELECTION MUST BE ACCOMPANIED BY A PERSONAL, CERTIFIED, BANK OR
CASHIER'S CHECK PAYABLE TO "CORPORATE STOCK TRANSFER, INC., SUBSCRIPTION
AGENT -FIBERCHEM, INC.," FOR THE NUMBER OF UNITS SUBSCRIBED MULTIPLIED BY
$.22 (SUBSCRIPTION PRICE PER UNIT). A SEPARATE CHECK MUST BE PROVIDED FOR
THE PAYMENT FOR THE SUBSCRIPTION (FORM OF ELECTION) AND FOR THE PAYMENT OF
THE ADDITIONAL SUBSCRIPTION (ADDITIONAL SUBSCRIPTION FORM), IF ANY.
-3-
<PAGE>
ADDITIONAL SUBSCRIPTION FORM
(To be executed if holder desires to
subscribe for additional warrants)
TO FIBERCHEM, INC.
The undersigned hereby irrevocably subscribes to purchase _____________
additional Units, each Unit consisting of one share of Common Stock and one
Redeemable Class E Common Stock Purchase Warrant of FiberChem, Inc. pursuant
to the additional subscription privilege described in the Prospectus.
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
- -----------------------------
- -----------------------------
(Please print name and address)
Dated 1998
-----------------------
------------------------
Signature
Signature Guaranteed
- --------------------
NOTICE: The signature to the foregoing Additional Subscription Form must
correspond to the name as written upon the face of the Rights Certificate in
every particular without alteration or enlargement or any change whatsoever.
THIS ADDITIONAL SUBSCRIPTION FORM MUST BE ACCOMPANIED BY A PERSONAL,
CERTIFIED, BANK OR CASHIER'S CHECK PAYABLE TO "CORPORATE STOCK TRANSFER,
INC., SUBSCRIPTION AGENT - FIBERCHEM, INC.," FOR THE NUMBER OF UNITS
ADDITIONALLY SUBSCRIBED MULTIPLIED BY $.22 (SUBSCRIPTION PRICE PER UNIT). A
SEPARATE CHECK MUST BE PROVIDED FOR THE PAYMENT FOR THE SUBSCRIPTION (FORM OF
ELECTION) AND FOR THE PAYMENT OF THE ADDITIONAL SUBSCRIPTION (ADDITIONAL
SUBSCRIPTION FORM).
-4-
<PAGE>
EXHIBIT 4.2
[FORM OF WARRANT CERTIFICATE]
CUSIP __________
________ WARRANTS
VOID AFTER __________, 2003
CLASS E STOCK PURCHASE WARRANT CERTIFICATE
FOR PURCHASE OF COMMON STOCK
FIBERCHEM, INC.
WE-
This certifies that FOR VALUE RECEIVED____________________
Or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Class E Common Stock Purchase Warrants ("Class E Warrants")
specified above. Each Warrant initially entitles the Registered Holder to
purchase, subject to the terms and conditions set forth in this Certificate
and the Warrant Agreement (as hereinafter defined), one fully paid and
nonassessable share of Common Stock, par value $.0001 per share ("Common
Stock") of FiberChem, Inc., a Delaware corporation (the "Company") at any
time prior to the Expiration Date (as hereinafter defined), upon the
presentation and surrender of this Warrant Certificate with the Subscription
Form on the reverse hereof duly executed, at the corporate offices of
Corporate Stock Transfer, Inc. as Warrant Agent, or its successor (the
"Warrant Agent"), accompanied by payment of $.25 per share through October__,
1999; $.35 per share from October __, 1999 through October__, 2000; $.50 per
share from October __, 2000 through October__, 2001; $.70 per share from
October __, 2001 through October__, 2002; and $.90 per share from October __,
2002 through October__, 2003 (the "Purchase Price") in lawful money of the
United States of America in cash or by official bank or certified check made
payable to FiberChem, Inc. The Company may, at its election reduce the
Purchase Price.
This Warrant Certificate and each Class E Warrant represented hereby are
issued pursuant to and are subject in all respects to the terms and
conditions set forth in the Warrant Agreement (the "Warrant Agreement"),
dated October __, 1998, by and between the Company and Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price of the number of shares of Common Stock subject
to purchase upon the exercise of each Class E Warrant represented hereby are
subject to modification or adjustment.
Each Class E Warrant represented hereby is exercisable at the option of
the Registered Holder, but no fractional shares of Common Stock will be
issued. In the case of the exercise of less than all the Class E Warrants
represented hereby, the Warrant Agent shall cancel this Warrant Certificate
upon the surrender hereof and shall execute and deliver a new Warrant
Certificate or Warrant Certificates of like tenor, which the Warrant Agent
shall countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (M.S.T.) on October__,
2003. If such
1
<PAGE>
date shall in the State of Colorado be a holiday or a day on which the banks
are authorized to close, then the Expiration Date shall mean 5:00 p.m.
(M.S.T.) the next following day which in the State of Colorado is not a
holiday or a day on which banks are authorized to close.
The Company shall have the right at any time to extend the Expiration
Date, or any extension thereof, of the Warrants without notice to the Warrant
holders, as provided in the Warrant Agreement.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Class E Warrant unless a registration statement under
the Securities Act of 1933, as amended, with respect to such securities is
effective. The Company has covenanted and agreed that it will file a
registration statement and will use its best efforts to cause the same to
become effective and to keep such registration statement current while any of
the Warrants are outstanding. This Class E Warrant shall not be exercisable
by a Registered Holder in any state where such exercise would be unlawful.
Subject to the provisions of the Warrant Agreement this Warrant
Certificate is exchangeable, upon the surrender hereof by the Registered
Holder at the corporate office of the Warrant Agent, for a new Warrant
Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Class E Warrants, each of such new Warrant Certificates
to represent such number of Class E Warrants as shall be designated by such
Registered Holder at the time of such surrender. Upon due presentment,
together with any tax or other governmental charge imposed in connection
therewith, for registration of transfer of this Warrant Certificate at such
office, a new Warrant Certificate or Warrant Certificates representing an
equal aggregate number of Class E Warrants will be issued to the transferee
in exchange therefor, subject to the limitations provided in the Warrant
Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company or to receive any notice except as provided in the
Warrant Agreement.
Prior to due presentment for registration or transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Class E Warrant represented hereby
(notwithstanding any notations of ownership or writing hereon made by anyone
other than a duly authorized officer of the Company or Warrant Agent) for all
purposes and shall not be affected by any notice or knowledge to the
contrary.
As provided in the Warrant Agreement, this Class E Warrant may be
redeemed by the Company for $.05 per warrant if for any period of thirty (30)
consecutive trading days during such period the last reported sales price of
the Company's Common Stock for each such trading day during such period is at
least 200% of the then current exercise price.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of Nevada.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto
duly authorized and a
2
<PAGE>
facsimile of its corporate seal to be imprinted hereon.
FIBERCHEM, INC.
Dated By
-------------------------- -----------------------------
Geoffrey F. Hewitt, President
By
------------------------------
Melvin W. Pelley, Secretary
Countersigned:
Corporate Stock Transfer, Inc.
370 17th Street, Suite 2350
Denver, CO 80202-4614
By
----------------------------
3
<PAGE>
FIBERCHEM, INC.
Subscription Form
To Be Executed by the Registered Holder
in Order to Exercise Class E Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise____
Class E Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Class E Warrants, and requests
that certificates for such securities shall be issued in the name
of______________________
PLEASE INSERT SOCIAL SECURITY OR TAX
IDENTIFICATION NUMBER
and be delivered to
_______________________________________ ______________________________________
_______________________________________ ______________________________________
_______________________________________ ______________________________________
_______________________________________ ______________________________________
[please print or type name and address] [please print or type name and address]
and if such number of class E Warrants shall not be all the Warrants
evidenced by this Warrant Certificate, that a new Warrant Certificate for the
balance of such Class E Warrants be registered in the name of, and delivered
to, the Registered Holder at the address stated below.
The undersigned represents that the exercise of the within Class E
Warrant was solicited by a member of the National Association of Securities
Dealers, Inc. If not solicited by a NASD member, please write "unsolicited"
in the space below.
__________________________________
(Name of NASD Member)
Dated: ________________________________ x _______________________________
_______________________________
_______________________________
Address
4
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___________________________________ _________________________________
Taxpayer identification Number Signature Guaranteed
_____________________
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Class E Warrants
FOR VALUE RECEIVED,___________________________________________________________
PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER
hereby sells, assigns and transfers unto ______________________________________
[print or type name and address]
of the Class E Warrants represented by this Warrant Certificate, and hereby
irrevocably constitutes and appoints _______________________________ Attorney to
transfer this Warrant Certificate on the books of the Company, with full power
of substitution in the premises.
Dated:________________ x ___________________________
Signature Guaranteed
___________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO
THE NAME AS WRITTEN UPON THE FACE OF THIS CLASS E WARRANT CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER,
AND MUST BE GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM
OF THE AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE
OR MIDWEST STOCK EXCHANGE.
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Exhibit 5.1
October 15, 1998
FiberChem, Inc.
1181 Grier Drive, Suite B
Las Vegas, Nevada 89119
Ladies and Gentlemen:
You have requested our opinion with respect to the offer and sale by the
FiberChem Inc., a Delaware corporation (the "Company"), pursuant to a
Registration Statement (the "Registration Statement") on Form SB-2 under the
Securities Act of 1933, as amended (the "Act"), of up to 9,106,962 units (the
"Units") each consisting of one share of common stock, par value $.0001 per
share (the "Common Stock"), of the Company, and one Redeemable Class E Common
Stock Purchase Warrant (the "Class E Warrants").
We have examined originals, or copies certified or otherwise identified to
our satisfaction, of such documents and corporate and public records as we deem
necessary as a basis for the opinion hereinafter expressed. With respect to such
examination, we have assumed the genuineness of all signatures appearing on all
documents presented to us as originals, and the conformity to the originals of
all documents presented to us as conformed or reproduced copies. Where factual
matters relevant to such opinion were not independently established, we have
relied upon certificates of executive officers and responsible employees and
agents of the Company.
Based on the foregoing, it is our opinion that the 9,106,962 Units
included in the Registration Statement have been duly authorized and when
issued and delivered as described in the Registration Statement will be duly
and validly issued by the Company; the 9,106,962 shares of Common Stock
included in the Units referred to in the Registration have been duly
authorized and when paid for and issued as contemplated by the Registration
Statement will be duly and validly issued and fully paid and nonassessable;
the Class E Warrants and the shares of common stock issuable upon exercise of
the Class E Warrants have been duly authorized; the Class E Warrants when
issued and delivered as described in the Registration Statement will be duly
and validly issued and delivered and the 9,106,962 shares of Common Stock
issuable upon exercise of the Class E Warrants when issued and paid for upon
exercise of the Class E Warrants, will be duly and validly issued and fully
paid and nonassessable.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement, and to the use of our name as your counsel in connection
with the Registration Statement and in the Prospectus forming a part thereof. In
giving this consent, we do not hereby admit that we come within the categories
of persons whose consent is required by the Act or the General Rules and
Regulations promulgated thereunder.
Very truly yours,
/s/ SNOW BECKER KRAUSS P.C.
---------------------------
SNOW BECKER KRAUSS P.C.
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WARRANT AGREEMENT
AGREEMENT, dated as of this ___th day of _________ 1998, by and between
FIBERCHEM, INC., a Delaware corporation (the "Company"), and CORPORATE STOCK
TRANSFER, INC., as Warrant Agent (the "Warrant Agent").
W I T N E S S E T H:
WHEREAS, in connection with (i) an offering of up to 8,976,962 rights
("Rights"), each Right entitling the holder thereof to purchase for $.22 a
Unit consisting of one share of Common Stock and one Class E Common Stock
Purchase Warrant (the "Warrants") exercisable at $.25 per share through
October __, 1999; $.35 per share from October __, 1999 through October __,
2000; $.50 per share from October __, 2000 through October __, 2001; $.70 per
share from October __, 2001 through October __, 2002; and $.90 per share from
October __, 2002 through October __, 2003 and (ii) the issuance to
Privatbank Vermag AG ("Privatbank") of an additional 130,000 Units in
consideration of credit extended by it; the Company is issuing up to an
aggregate of 9,106,962 Units; and
WHEREAS, THE Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the holders thereof.
NOW THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows.
SECTION 1. DEFINITIONS. As used herein, the following terms shall have
the following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean stock of the Company of any class, whether
now or hereafter authorized, which has the right to participate in the
distribution of earnings and assets of the Company without limit as to amount or
percentage, which at the date hereof consists of 150,000,000 shares of Common
Stock, $.0001 par value, authorized.
(b) "Corporate Office" shall mean the office of the Warrant Agent (or
its successor) at which at any particular time its principal business shall be
administered, which office is located at the date hereof at 370 17th Street,
Republic Plaza, Suite 2350, Denver, Colorado 80202.
(c) "Exercise Date" shall mean the date of which the Warrant Agent shall
have received both (a) the Warrant Certificate representing such Warrant, with
the exercise form thereon duly executed by the Registered Holder thereof or his
attorney duly authorized in writing, and (b) payment in cash, or by official
bank or certified check made payable to the Company, of an amount in lawful
money of the United States of America equal to the applicable Purchase Price.
(d) "Initial Warrant Exercise Date" shall mean the effective date of
the registration statement registering the Warrants.
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(e) "Purchase Price" shall mean the purchase price to be paid upon
exercise of each Warrant in accordance with the terms hereof, which price
shall be $.25 per share through October __, 1999; $.35 per share from October
__, 1999 through October __, 2000; $.50 per share from October __, 2000
through October __, 2001; $.70 per share from October __, 2001 through
October __, 2002; and $.90 per share from October __, 2002 through October
__, 2003, subject to adjustment from time to time pursuant to the provisions
of Section 8 hereof.
(f) "Registered Holder" shall mean the person in whose name any
certificate representing Warrants shall be registered on the books maintained by
the Warrant Agent pursuant to Section 6.
(g) "Transfer Agent" shall mean Corporate Stock Transfer, Inc., as the
Company's transfer agent, or its authorized successor, as such.
(h) "Warrant Expiration Date" shall mean 5:00 P.M. (Denver, Colorado
time) on October __, 2003, provided that if such date shall in the State of
Colorado be a holiday or a day on which banks are authorized to close, then 5:00
P.M. (Denver, Colorado time) on the next following day which in the State of
Colorado is not a holiday or a day on which banks are authorized to close. Upon
notice to the warrantholders, the Company shall have the right to extend the
warrant expiration date of the Warrants.
SECTION 2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES.
(a) A Warrant shall initially entitle the Registered Holder of the Warrant
Certificate representing such Warrant to purchase one share of Common Stock upon
the exercise thereof, in accordance with the terms hereof, subject to
modification and adjustment as provided in Section 8.
(b) Upon execution of this Agreement, Warrant Certificates representing
the number of Warrants sold shall be executed by the Company and delivered to
the Warrant Agent. Upon written order of the Company signed by its President or
Chairman or a Vice President and by its Secretary or an Assistant Secretary, the
Warrant Certificates shall be countersigned, issued and delivered by the Warrant
Agent pursuant to this Agreement.
(c) From time to time, up to the Warrant Expiration Dates, the Transfer
Agent shall countersign and deliver stock certificates in required whole number
denominations representing up to an aggregate of 9,106,962 shares of Common
Stock, subject to adjustment as described herein, upon the exercise of the
Warrants in accordance with this Agreement.
(d) From time to time, up to the applicable Warrant Expiration Date, the
Warrant Agent shall countersign and deliver Warrant Certificates in required
whole number denominations to the persons entitled thereto in connection with
any transfer or exchange permitted under this Agreement; provided that no
Warrant Certificates shall be issued except (i) those initially issued
hereunder, (ii) those issued on or after the Initial Warrant Exercise Date,
upon the exercise of fewer than all Warrants represented by the respective
Warrant Certificate, to evidence any unexercised Warrants held by the exercising
Registered Holder, (iii) those issued upon any transfer or exchange pursuant to
Section 6; (iv) those issued in replacement of lost, stolen, destroyed or
mutilated Warrant Certificates pursuant to Section 7; and (v) at the option of
the Company, in such form as may be
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approved by its Board of Directors, to reflect any adjustment or change in the
Purchase Price, or the number of shares of Common Stock purchasable upon
exercise of the Warrants.
SECTION 3. FORM AND EXECUTION OF WARRANT CERTIFICATES.
(a) The Warrant Certificates shall be substantially in the form annexed
hereto as Exhibit A (the provisions of which are hereby incorporated herein) and
may have such letters, numbers or other marks of identification or designation
and such legends, summaries or endorsements printed, lithographed or engraved
thereon as the Company may deem appropriate and as are not inconsistent with the
provisions of this Agreement, or as may be required to comply with any law or
with any rule or regulation made pursuant thereto or with any rule or regulation
of any stock exchange on which the Warrants may be listed, or to conform to
usage. The Warrant Certificates shall be dated the date of issuance thereof
(whether upon initial issuance, transfer, exchange or in lieu of mutilated,
lost, stolen, or destroyed Warrant Certificates) and issued in registered form.
Warrants shall be numbered serially with the letters WE.
(b) Warrant Certificates shall be executed on behalf of the Company by
its Chairman of the Board, President or any Vice President and by its
Secretary or an Assistant Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a facsimile of
the Company's seal. Warrant Certificates shall be manually countersigned by
the Warrant Agent and shall not be valid for any purpose unless so
countersigned. In case any officer of the Company who shall have signed any
of the Warrant Certificates shall cease to be such officer of the Company
before the date of issuance of the Warrant Certificates or before
countersignature by the Warrant Agent, such Warrant Certificate may be issued
and delivered with the same force and effect as though the person who signed
such Warrant Certificates had not ceased to be such officer of the Company.
After countersignature by the Warrant Agent, Warrant Certificates shall be
delivered by the Warrant Agent to the Registered Holder without further
action by the Company, except as otherwise provided by Section 4 hereof.
SECTION 4. EXERCISE.
Each Warrant may be exercised by the Registered Holder thereof at any time
on or after the Initial Exercise Date, but not after the Warrant Expiration
Date, upon the terms and subject to the conditions set forth herein and in the
Warrant Certificate. A Warrant shall be deemed to have been exercised
immediately prior to the close of business on the Exercise Date and the person
entitled to receive the securities deliverable upon such exercise shall be
treated for all purposes as the holder upon exercise thereof as of the close of
business on the Exercise Date. As soon as practicable on or after the Exercise
Date, the Warrant Agent shall deposit the proceeds received from the exercise of
a Warrant and shall notify the Company in writing, by mail or by telecopy of the
exercise of the Warrants. Promptly following, and in any event within five days
after the date of such notice from the Warrant Agent, the Warrant Agent, on
behalf of the Company, shall cause to be issued and delivered by the Transfer
Agent, to the person or persons entitled to receive the same, a certificate or
certificates for the securities deliverable upon such exercise, (plus a
certificate for any remaining unexercised Warrants of the Registered Holder)
unless within 24 hours of the receipt of the notice, the Company shall instruct
the Warrant Agent by telecopy to refrain from causing such issuance
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of certificates pending clearance of checks received in payment of the Purchase
Price pursuant to such Warrants. Upon the exercise of any Warrant and clearance
of the funds received, the Warrant Agent shall promptly remit the payment
received for the Warrant to the Company or as the Company may direct in writing.
SECTION 5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES; ETC.
(a) The Company's Certificate of Incorporation, as amended, authorizes
the issuance of 150,000,000 shares of Common Stock. As of October 12, 1998,
the Company had outstanding 26,441,207 shares of Common Stock and an
additional 12,776,697 shares reserved for issuance upon conversion of the
Preferred Stock and the exercise of Warrants and options. The Company
covenants that it will at all times reserve and keep available out of its
authorized Common Stock, solely for the purpose of issue upon exercise of
Warrants, such number of shares of Common Stock as shall be issuable upon the
exercise of all outstanding Warrants. The Company covenants that all shares
of Common Stock which shall be issuable upon exercise of the Warrants shall,
at the time of delivery, be duly and validly issued, fully paid,
nonassessable and free from all taxes, liens and charges with respect to the
issue thereof (other than those which the Company shall promptly pay or
discharge); and that upon issuance, such shares shall be listed on each
national securities exchange, if any, on which the other shares of
outstanding Common Stock of the Company are then listed.
(b) The Company covenants that if any securities to be reserved for the
purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any Federal securities law
before such securities may be validly issued or delivered upon such exercise,
then the Company will in good faith and as expeditiously as reasonably
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possible, endeavor to secure such registration or approval. The Company will
use reasonable efforts to obtain appropriate approvals or registrations under
state "blue sky" securities laws. With respect to any such securities
however, Warrants may not be exercised by, or shares of Common Stock issued
to, any Registered Holder in any state in which such exercise would be
unlawful. The Warrant Agent will not have any duty or responsibility for
determining if the registration would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance of
Warrants, or the issuance, or delivery of any shares upon exercise of the
Warrants; provided, however, that if the shares of Common Stock are to be
delivered in a name other than the name of the Registered Holder of the Warrant
Certificate representing any Warrant being exercised, then no such delivery
shall be made unless the person requesting the same has paid to the Warrant
Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized to requisition the
Company's Transfer Agent from time to time for certificates representing shares
of Common Stock required upon exercise of the Warrants, and the Company will
authorize the Transfer Agent to comply with all such proper requisitions. The
Company will file with the Warrant Agent a statement setting forth the name and
address of the Transfer Agent of the Company for shares of Common Stock issuable
upon exercise of the Warrants.
SECTION 6. EXCHANGE AND REGISTRATION OF TRANSFER.
(a) Warrant Certificates may be exchanged for other Warrant Certificates
representing an equal aggregate number of Warrants of the same class or may be
transferred in whole or in part. Warrant Certificates to be exchanged shall be
surrendered to the Warrant Agent at its corporate office, and upon satisfaction
of the terms and provisions hereof, the Company shall execute and the Warrant
Agent shall countersign, issue and deliver in exchange therefor the Warrant
Certificate or Certificates which the Registered Holder making the exchange
shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which, subject to
such reasonable regulations as it may prescribe, it shall register Warrant
Certificates and the transfer thereof in accordance with its regular practice.
Upon due presentment for registration or transfer of any Warrant Certificate at
such office, the Company shall execute and the Warrant Agent shall issue and
deliver to the transferee or transferees a new Warrant Certificate or
Certificates representing an equal aggregate number of Warrants of the same
class.
(c) With respect to all Warrant Certificates presented for registration or
transfer, or for exchange or exercise, the subscription form on the reverse
thereof shall be duly endorsed, or be accompanied by a written instrument or
instruments of transfer and subscription, in form satisfactory to the Company
and the Warrant Agent, duly executed by the Registered Holder or his
attorney-in-fact duly authorized in writing.
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(d) A service charge may be imposed by the Warrant Agent for
registration or transfer or for exchange of Warrant Certificates. In
addition, the Company may require payment by such holder of a sum
sufficient to cover any tax or other governmental charge that may be
imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for
exchange in case of mutilated Warrant Certificates shall be promptly
canceled by the Warrant Agent and thereafter retained by the Warrant
Agent until termination of this Agreement or resignation as Warrant
Agent, or, disposed of or destroyed, at the direction of the Company,
within the retention guidelines prescribed by any Federal, State or
banking regulatory authority.
(f) Prior to due presentment for registration or transfer thereof,
the Company and the Warrant Agent may deem and treat the Registered
Holder of any Warrant Certificate as the absolute owner thereof and of
each Warrant represented thereby (notwithstanding any notations of
ownership or writing thereon made by anyone other than a duly authorized
officer of the Company or the Warrant Agent) for all purposes and shall
not be affected by any notice to the contrary.
SECTION 7. LOSS OR MUTILATION. Upon receipt by the Company and
the Warrant Agent of evidence satisfactory to them of the ownership of
and loss, theft, destruction or mutilation of any Warrant Certificate
and (in case of loss, theft or destruction) of indemnity satisfactory to
them, and (in the case of mutilation) upon surrender and cancellation
thereof, the Company shall execute and the Warrant Agent shall (in the
absence of notice to the Company and/or Warrant Agent that the Warrant
Certificate has been acquired by a bonafide purchaser) countersign and
deliver to the Registered Holder in lieu thereof a new Warrant
Certificate of like tenor representing an equal aggregate number of
Warrants of that same Class. Applicants for a substitute Warrant
Certificate shall comply with such other reasonable regulations and pay
such other reasonable charges as the Warrant Agent may prescribe.
SECTION 8. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES OF
COMMON STOCK OR WARRANTS.
(a) Subject to the exceptions referred to in Section 8(g) below,
in the event the Company shall, at any time or from time to time after
the date hereof, sell any shares of Common Stock for a consideration
consisting solely of cash in an amount per share less than the lesser of
the "Market Price" (as defined in this Section 8) or the Purchase
Price or issue any shares of Common Stock as a stock dividend to the
holders of Common Stock, or subdivide or combine the outstanding shares
of Common Stock into a greater or lesser number of shares (any such
sale, issuance, subdivision or combination being herein called a
"Change of Shares"), then, and thereafter upon each further Change of
Shares, the Purchase Price in effect immediately prior to such Change of
Shares shall be changed to a price (including any applicable fraction of
a cent) determined by dividing (i) the sum of (a) the total number of
shares of Common Stock outstanding immediately prior to such Change of
Shares, multiplied by the Purchase Price in effect immediately prior to
such Change of Shares, and (b) the consideration, if any, received by
the Company upon such sale, issuance, subdivision or combination by (ii)
the total number of shares of Common Stock outstanding immediately after
such Change of Shares.
(i) As used herein, the phrase "Market Price" at any date shall
be deemed to be the average of the last reported sale price, or, in case
no such reported sale takes place on such day, the average of the last
reported sale prices for the last three trading days, in either case as
officially reported by the principal securities exchange on which the
Common Stock is listed or admitted to trading or as reported by the
Nasdaq Stock Market, Inc. ("Nasdaq") or, if the Common Stock is not
listed or admitted to trading on any national securities exchange or
quoted on the Nasdaq National Market, but is quoted on The Nasdaq
SmallCap Market or the NASD's Electronic Bulletin Board, the closing bid
quotation as reported by Nasdaq or the National Quotation Bureau
Incorporated or a similar organization, or if the Common Stock is not
quoted on Nasdaq or the Electronic Bulletin Board, as determined in good
faith by resolution of the Board of Directors of the Company, based on
the best information available to it for the day immediately preceding
such issuance or sale, the day of such issuance or sale and the day
immediately after such issuance or sale. If the Common Stock is listed
or admitted to trading on a national securities exchange and also quoted
on the Nasdaq National Market, the Market Price shall be determined as
hereinabove provided by reference to the prices reported in the Nasdaq
National Market; provided that if the Common Stock is listed or admitted
to trading on the New York Stock Exchange, the Market Price shall be
determined as hereinabove provided by reference to the prices reported
by such exchange.
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(b) The Company may elect, upon any adjustment of the Purchase
Price hereunder, to adjust the number of Warrants of each or any Class
outstanding, in lieu of the adjustment in the number of shares of Common
Stock purchasable upon the exercise of each Warrant as hereinabove
provided, so that each Warrant outstanding after such adjustment shall
represent the right to purchase one share of Common Stock. Each Warrant
held of record prior to such adjustment of the number of Warrants of
each or any Class shall become that number of Warrants (calculated to
the nearest tenth) determined by multiplying the number one by a
fraction, the numerator of which shall be the Purchase Price in effect
immediately prior to such adjustment and the denominator of which shall
be the Purchase Price in effect immediately after such adjustment. Upon
each adjustment of the number of Warrants pursuant to this Section 8,
the Company shall, as promptly as practicable, cause to be distributed
to each Registered Holder of Warrant Certificates on the date of such
adjustment Warrant Certificates evidencing, subject to Section 9 hereof,
the number of additional Warrants of each Class to which such Holder
shall be entitled as a result of such adjustment or, at the option of
the Company, cause to be distributed to such Holder in substitution and
replacement for the Warrant Certificates held by him prior to the date
of adjustment (and upon surrender thereof, if required by the Company)
new Warrant Certificates evidencing the number of Warrants of each Class
to which such Holder shall be entitled after such adjustment.
(c) In case of any reclassification, capital reorganization or
other change of outstanding shares of Common Stock, or in case of any
consolidation or merger of the Company with or into another corporation
(other than a consolidation or merger in which the Company is the
continuing corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding
shares of Common Stock), or in case of any sale or conveyance to another
corporation of the property of the Company as, or substantially as, an
entirety (other than a sale/leaseback, mortgage or other financing
transaction), the Company shall cause effective provision to be made so
that:
(i) each holder of a Warrant then outstanding shall have the right
thereafter, by exercising such Warrant, to purchase the kind and number
of shares of stock or other securities or property (including cash)
receivable upon such reclassification, capital reorganization or other
change, consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock that might have been purchased upon
exercise of such Warrant immediately prior to such reclassification,
capital reorganization or other change, consolidation, merger, sale or
conveyance. Any such provision shall include provision for adjustments
that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 8; and
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(ii) new Management of the Company will be obligated to maintain a
current prospectus with respect to the Warrants until the Warrant
Expiration Date.
The foregoing provisions shall similarly apply to successive
reclassifications, capital reorganizations and other changes of
outstanding shares of Common Stock and to successive consolidations,
mergers, sales or conveyances.
(d) Irrespective of any adjustments or changes in the Purchase
Price or the number of shares of Common Stock purchasable upon exercise
of the Warrants, the Warrant Certificates theretofore and thereafter
issued shall, unless the Company shall exercise its option to issue new
Warrant Certificates pursuant to Section 2(d) hereof, continue to
express the Purchase Price per share, and the number of shares
purchasable thereunder in the Warrant Certificates when the same were
originally issued.
(e) After each adjustment of the Purchase Price pursuant to this
Section 8, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary, of the Company setting forth:
(i) the Purchase Price as so adjusted, (ii) the number of shares of
Common Stock purchasable upon exercise of each Warrant after such
adjustment, and, if the Company shall have elected to adjust the number
of Warrants, the number of Warrants to which the Registered Holder of
each Warrant shall then be entitled, and (iii) a brief statement of the
facts accounting for such adjustment. The Company will promptly file
such certificate with the Warrant Agent and cause a brief summary
thereof to be sent by ordinary first class mail to each registered
holder of Warrants at his last address as it shall appear on the
registry books of the Warrant Agent. No failure to mail such notice nor
any defect therein or in the mailing thereof shall affect the validity
thereof except as to the holder to whom the Company failed to mail such
notice, or except as to the holder whose notice was defective. The
affidavit of an officer of the Warrant Agent or the Secretary or an
Assistant Secretary of the Company that such notice has been mailed
shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(f) For purposes of Section 8(a) hereof, the following provisions (A)
to (E) shall also be applicable:
(A) The number of shares of Common Stock outstanding at any
given time shall include shares of Common Stock owned or held by or for
the account of the Company and the sale or issuance of such treasury
shares or the distribution of any such treasury shares shall not be
considered a Change of Shares for purposes of said sections.
(B) In case of (1) the sale by the Company solely for cash of
any rights or warrants to subscribe for or purchase, or any options for
the purchase of, Common Stock or any securities convertible into or
exchangeable for Common Stock without the payment of any further
consideration other than cash, if any (such convertible or exchangeable
securities being herein called "Convertible Securities"), or (2) the
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issuance by the Company, without the receipt by the Company of any
consideration therefor, of any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or
Convertible Securities, in each case, if (and only if) the consideration
payable to the Company upon the exercise of such rights, warrants or
options shall consist solely of cash, whether or not such rights,
warrants or options, or the right to convert or exchange such
Convertible Securities, are immediately exercisable, and the price per
share for which Common Stock is issuable upon the exercise of such
rights, warrants or options or upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the minimum aggregate
consideration payable to the Company upon the exercise of such rights,
warrants or options, plus the consideration received by the Company for
the issuance or sale of such rights, warrants or options, plus, in the
case of such Convertible Securities, the minimum aggregate amount of
additional consideration, if any, other than such Convertible Securities
payable upon the conversion or exchange thereof, by (y) the total
maximum number of shares of Common Stock issuable upon the exercise of
such rights, warrants or options or upon the conversion or exchange of
such Convertible Securities issuable upon the exercise of such rights,
warrants or options) is less than the Purchase Price in effect
immediately prior to the date of the issuance or sale of such rights,
warrants or options, then the total maximum number of shares of Common
Stock issuable upon the exercise of such rights, warrants or options or
upon the conversion or exchange of such Convertible Securities (as of
the date of the issuance or sale of such rights, warrants or options)
shall be deemed to be outstanding shares of Common Stock for purposes of
Section 8 hereof and shall be deemed to have been sold for cash in an
amount equal to such price per share.
(C) In case of the sale by the Company solely for cash of any
Convertible Securities, whether or not the right of conversion or
exchange thereunder is immediately exercisable, and the price per share
for which Common Stock is issuable upon the conversion or exchange of
such Convertible Securities (determined by dividing (x) the total amount
of consideration received by the Company for the sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, other than such Convertible Securities, payable
upon the conversion or exchange thereof, by (y) the total maximum number
of shares of Common Stock issuable upon the conversion or exchange of
such Convertible Securities) is less than the Purchase Price in effect
immediately prior to the date of the sale of such Convertible
Securities, then the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of such Convertible Securities
(as of the date of the sale of such Convertible Securities) shall be
deemed to be outstanding shares of Common Stock for purposes of Sections
8(a) and 8(b) hereof and shall be deemed to have been sold for cash in
an amount equal to such price per share.
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(D) If the exercise or purchase price provided for in any right,
warrant or option referred to in (B) above, or that rate at which any
Convertible Securities referred to in (C) above are convertible into or
exchangeable for Common Stock, shall change at any time (other than under
or by reason of provisions designed to protect against dilution),
the Purchase Price then in effect hereunder shall forthwith be
readjusted to such Purchase Price as would have obtained (1) had the
adjustments made upon the issuance or sale of such rights, warrants,
options or Convertible Securities been made upon the basis of the
issuance of only the number of shares of Common Stock theretofore
actually delivered (and the total consideration received therefor) upon
the exercise of such rights, warrants or options or upon the conversion
or exchange of such Convertible Securities, (2) had adjustments been
made on the basis of the Purchase Price as adjusted under clause (1) for
all transactions (which would have affected such adjusted Purchase
Price) made after the issuance or sale of such rights, warrants, options
or Convertible Securities, and (3) had any such rights, warrants,
options or Convertible Securities then still outstanding been originally
issued or sold at the time of such change. On the expiration of any
such right, warrant or option or the termination of any such right to
convert or exchange any such Convertible Securities, the Purchase Price
then in effect hereunder shall forthwith be readjusted to such Purchase
Price as would have obtained (a) had the adjustments made upon the
issuance or sale of such rights, warrants, options or Convertible
Securities been made upon the basis of the issuance of only the number
of shares of Common Stock theretofore actually delivered (and the total
consideration received therefor) upon the exercise of such rights,
warrants or options or upon the conversion or exchange of such
Convertible Securities and (b) had adjustments been made on the basis of
the Purchase Price as adjusted under clause (a) for all transactions
(which would have affected such adjusted Purchase Price) made after the
issuance or sale of such rights, warrants, options or Convertible
Securities.
(E) In case of the sale for cash of any shares of Common Stock,
any Convertible Securities, any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or
Convertible Securities, the consideration received by the Company
therefore shall be deemed to be the gross sales price therefor without
deducting therefrom any expense paid or incurred by the Company or any
underwriting discounts or commissions or concessions paid or allowed
by the Company in connection therewith.
(g) No adjustment to the Purchase Price of the Warrants or to the
number of shares of Common Stock purchasable upon the exercise of each
Warrant will be made, however,
(i) upon the exercise of any of the options presently outstanding under
any stock option plan (the "Plan") for officers, directors and certain other
key personnel of the Company; or
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(ii) upon the grant or exercise of any other options which may
hereafter be granted or exercised under the Plan or under any other employee
benefit plan of the Company; or
(iii) upon the sale or exercise of the Warrants; or
(iv) upon the issuance or sale of Common Stock upon conversion or
exchange of any Convertible Securities, whether or not any adjustment in the
Purchase Price was made or required to be made upon the issuance or sale of such
Convertible Securities and whether or not such Convertible Securities were
outstanding on the date of the original sale of the Warrants or were thereafter
issued or sold; or
(v) upon any amendment to or change in the terms of any rights or
warrants to subscribe for or purchase, or options for the purchase of, Common
Stock or Convertible Securities or in the terms of any Convertible Securities,
including, but not limited to, any extension of any expiration date of any such
right, warrant or option, any change in any exercise or purchase price provided
for in any such right, warrant or option, any extension of any date through
which any Convertible Securities are convertible into or exchangeable for Common
Stock or any change in the rate at which any Convertible Securities are
convertible into or exchangeable for Common Stock (other than rights, warrants,
options or Convertible Securities issued or sold after the close of business on
the date of the original issuance of the Units (i) for which an adjustment in
the Purchase Price then in effect was theretofore made or required to be made,
upon the issuance or sale thereof, or (ii) for which such an adjustment would
have been required had the exercise or purchase price of such rights, warrants
or options at the time of the issuance or sale thereof or the rate of conversion
or exchange of such Convertible Securities, at the time of the sale of such
Convertible Securities, or the issuance or sale of rights or warrants to
subscribe for or purchase, or options for the purchase of, such Convertible
Securities, been the price or rate as changed, in which case the provisions of
Sections 8(f)(E) hereof shall be applicable if, but only if, the exercise or
purchase price thereof, as changed, or the rate of conversion or exchange
thereof, as changed, if any, consists solely of cash or requires the payment of
additional consideration, if any, consisting solely of cash and the Company did
not receive any consideration other than cash, if any, in connection with such
change).
(h) As used in this Section 8, the term "Common Stock" shall
mean and include the Company's Common Stock authorized on the date of the
original issue of the Rights and shall also include any capital stock of any
class of the Company thereafter authorized which shall not be limited to a
fixed sum or percentage in respect of the rights of the holders thereof to
participate in dividends and in the distribution of assets upon the voluntary
liquidation, dissolution or winding up of the Company; provided, however,
that the shares issuable upon exercise of the Warrants shall include only
shares of such class designated in the Company's Certificate of Incorporation
as Common Stock on the date of the original issue of the Rights or (i), in
the case of any reclassification, change, consolidation, merger, sale or
conveyance of the character referred to in Section 8(c) hereof, the stock,
securities or property provided for in such section or (ii), in the case of
any reclassification or change in the outstanding shares of Common Stock
issuable upon exercise of the Warrants as a result of a subdivision or
combination or consisting of a change in par value,
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or from par value to no par value, or from no par value to par value, such
shares of Common Stock as so reclassified or changed.
(i) Any determination as to whether an adjustment in the
Purchase Price in effect hereunder is required pursuant to Section 8, or as
to the amount of any such adjustment, if required, shall be binding upon the
holders of the Warrants and the Company if made in good faith by the Board of
Directors of the Company.
(j) If and whenever the Company shall grant to the holders of
Common Stock, as such, rights or warrants to subscribe for or to purchase, or
any options for the purchase of, Common Stock or securities convertible into
or exchangeable for or carrying a right, warrant or option to purchase Common
Stock, the Company shall concurrently therewith grant to each of the then
Registered Holders of the Warrants all of such rights, warrants or options to
which each such holder would have been entitled if, on the date of
determination of stockholders entitled to the rights, warrants or options
being granted by the Company, such holder were the holder of record of the
number of whole shares of Common Stock then issuable upon exercise (assuming,
for purposes of this Section 8(j), that exercise of Warrants is permissible
during periods prior to the Initial Warrant Exercise Date) of his Warrants.
Such grant by the Company to the holders of the Warrants shall be in lieu of
any adjustment which otherwise might be called for pursuant to this Section 8.
(k) The Warrant Agent assumes no responsibility for any
determination under this Section and will act only in accordance with the
written directions of the Company and its counsel.
SECTION 9. FRACTIONAL WARRANTS AND FRACTIONAL SHARES.
(a) If the number of shares of Common Stock purchasable upon
the exercise of each Warrant is adjusted pursuant to Section 8 hereof, the
Company shall nevertheless not be required to issue fractions of shares, upon
exercise of the Warrants or otherwise, or to distribute certificates that
evidence fractional shares. With respect to any fraction of a share called
for upon any exercise hereof, the Company shall pay to the Holder an amount
in cash equal to such fraction multiplied by the current market value of such
fractional share, determined as follows:
(1) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such
exchange or listed for trading on the NASDAQ Stock Market, the
current value shall be the last reported sale price of the Common
Stock on such exchange on the last business day prior to the date
of exercise of this Warrant or if no such sale is made on such day,
the average closing bid and asked prices for such day on such
exchange; or
(2) If the Common Stock is not listed or admitted to
unlisted trading privileges, the current value shall be the mean
of the last reported bid and asked prices reported by the
National Quotation Bureau, Inc. on the last business day prior to
the date of the exercise of this Warrant; or
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(3) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so
reported, the current value shall be an amount determined in such
reasonable manner as may be prescribed by the Board of Directors
of the Company.
SECTION 10. REDEMPTION OF WARRANTS. The Warrants are redeemable
by the Company, in whole or in part, on not less than thirty (30) days' prior
written notice at a redemption price of $.05 per Warrant, provided the last
reported sale price of the Common Stock as reported on the Over-The-Counter
Electronic Bulletin Board ("OTCBB"), if traded thereon, or if not traded
thereon, the closing sale price if listed on a national securities exchange or
the Nasdaq SmallCap Market or National Market (or other reporting system that
provides last sale prices), has been at least 200% of the then current
Warrant exercise price for 30 trading days ending 15 days prior to the date
on which the Company gives notice of redemption, subject to the right of the
holder to exercise such Warrants prior to redemption. Any redemption in part
shall be made pro rata to all Warrant holders. The redemption notice shall
be mailed to the holders of the Warrants at their respective addresses
appearing in the Warrant register. Any such notice mailed in the manner
provided herein shall be conclusively presumed to have been duly given in
accordance with this Agreement whether or not the registered holder receives
such notice. No failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity of the proceedings for such
redemption except as to a registered holder of a Warrant (i) to whom notice
was not mailed or (ii) whose notice was defective. An affidavit of the
Warrant Agent or the Secretary or Assistant Secretary of the Company that
notice of redemption has been mailed shall, in the absence of fraud, be prima
facie evidence of the facts stated therein. Holders of the Warrants will
have exercise rights until the close of business on the day immediately
preceding the date fixed for redemption.
SECTION 11. WARRANT HOLDERS NOT DEEMED STOCKHOLDERS. No holder
of Warrants shall, as such, be entitled to vote or to receive dividends or be
deemed the holder of Common Stock that may at any time be issuable upon
exercise of such Warrants for any purpose whatsoever, nor shall anything
contained herein be construed to confer upon the holder of Warrants, as such,
any of the rights of a stockholder of the Company or any right to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action
(whether upon any recapitalization, issue or reclassification of stock, change
of par value or change of stock to no par value, consolidation, merger or
conveyance or otherwise), or to receive notice of meetings, or to receive
dividends or subscription rights, until such Holder shall have exercised such
Warrants and been issued shares of Common Stock in accordance with the
provisions hereof.
SECTION 12. RIGHTS OF ACTION. All rights of action with respect
to this Agreement are vested in the respective Registered Holders of the
Warrants, and any Registered Holder of a Warrant, without consent of the
Warrant Agent or of the holder of any other Warrant, may, in his own behalf
and for his own benefit, enforce against the Company his right to exercise
his Warrants for the purchase of shares of Common Stock in the manner
provided in the Warrant Certificate and this Agreement.
SECTION 13. AGREEMENT OF WARRANT HOLDERS. Every holder of a
Warrant, by his acceptance thereof, consents and agrees with the Company, the
Warrant Agent and every other holder of a Warrant that:
(a) The Warrants are transferable only on the registry books of
the Warrant Agent by the Registered Holder thereof in person or by his
attorney duly authorized in writing and only if the Warrant Certificates
representing such Warrants are surrendered at the office of the Warrant
Agent, duly endorsed or accompanied by a proper instrument of transfer
satisfactory to the Warrant Agent and the Company in their sole discretion,
together with payment of any applicable transfer taxes; and
(b) The Company and the Warrant Agent may deem and treat the
person in whose name the Warrant Certificate is registered as the holder and
as the absolute, true and lawful owner of the Warrants represented thereby
for all purposes, and neither the Company nor the Warrant Agent shall be
affected by any notice or knowledge to the contrary, except as otherwise
expressly provided in Section 6 hereof.
SECTION 14. CANCELLATION OF WARRANT CERTIFICATES. If the Company
shall purchase or acquire any Warrant or Warrants, the Warrant Certificate or
Warrant Certificates evidencing the
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same shall thereupon be delivered to the Warrant Agent and canceled by it
and retired. The Warrant Agent shall also cancel Common Stock following
exercise of any or all of the Warrants represented thereby or delivered to it
for transfer, split-up, combination or exchange.
SECTION 15. CONCERNING THE WARRANT AGENT. The Warrant Agent
shall act hereunder as agent and in a ministerial capacity for the Company,
and its duties shall be determined solely by the provisions hereof. The
Warrant Agent shall not, by issuing and delivering Warrant Certificates or by
any other act hereunder be deemed to make any representations as to the
validity, value or authorization of the Warrant Certificates or the Warrants
represented thereby or of any securities or other property delivered upon
exercise of any Warrant or whether any stock issued upon exercise of any
Warrant is fully paid and nonassessable.
The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be
made any adjustment of the Purchase Price provided in this Agreement, or to
determine whether any fact exists which may require any such adjustments, or
with respect to the nature or extent of any such adjustment, when made, or
with respect to the method employed in making the same. It shall not (i) be
liable for any recital or statement of facts contained herein or for any
action taken, suffered or omitted by it in reliance on any Warrant
Certificate or other document or instrument believed by it in good faith to
be genuine and to have been signed or presented by the proper party or
parties, (ii) be responsible for any failure on the part of the Company to
comply with any of its covenants and obligations contained in this Agreement
or in any Warrant Certificate, or (iii) be liable for any act or omission in
connection with this Agreement except for its own negligence or wilful
misconduct.
The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it
in good faith in accordance with the opinion or advice of such counsel.
Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument signed
by the Chairman of the Board, President, any Vice President, its Secretary,
or Assistant Secretary (unless other evidence in respect thereof is herein
specifically prescribed). The Warrant Agent shall not be liable for any
action taken, suffered or omitted by it in accordance with such notice,
statement, instruction, request, direction, order or demand believed by it to
be genuine.
The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its
reasonable expenses hereunder; it further agrees to indemnify the Warrant
Agent and save it harmless against any and all losses, expenses and
liabilities, including judgments, costs and counsel fees, for anything done
or omitted by the Warrant Agent in the execution of its duties and powers
hereunder except losses, expenses and liabilities arising as a result of the
Warrant Agent's negligence or wilful misconduct.
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<PAGE>
The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own negligence or wilful misconduct), after
giving 30 days' prior written notice to the Company. At least 15 days prior
to the date such resignation is to become effective, the Warrant Agent shall
cause a copy of such notice of resignation to be mailed to the Registered
Holder of each Warrant Certificate at the Company's expense. Upon such
resignation, or any inability of the Warrant Agent to act as such hereunder,
the Company shall appoint a new warrant agent in writing. If the Company
shall fail to make such appointment within a period of 15 days after it has
been notified in writing of such resignation by the resigning Warrant Agent,
then the Registered Holder of any Warrant Certificate may apply to any court
of competent jurisdiction for the appointment of a new warrant agent. Any
new Warrant Agent, whether appointed by the Company or by such a court, shall
be a bank or trust company having a capital and surplus, as shown by its last
published report to its stockholders, of not less than $10,000,000 or a stock
transfer company. After acceptance in writing of such appointment by the
new warrant agent is received by the Company, such new warrant agent shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named herein as the Warrant Agent, without any further
assurance, conveyance, act or deed; but if for any reason it shall be
necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning
Warrant Agent. Not later than the effective date of any such appointment the
Company shall file notice thereof with the resigning Warrant Agent and shall
forthwith cause a copy of such notice to be mailed to the Registered Holder
of each Warrant Certificate.
Any corporation into which the Warrant Agent or any new warrant
agent may be converted or merged or any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party or any corporation succeeding to the trust business of the Warrant
Agent shall be a successor warrant agent under this Agreement without any
further act, provided that such corporation is eligible for appointment as
successor to the Warrant Agent under the provisions of the preceding
paragraph. Any such successor warrant agent shall promptly cause notice of
its succession as warrant agent to be mailed to the Company and to the
Registered Holder of each Warrant Certificate.
The Warrant Agent, its subsidiaries and affiliates, and any of its
or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like effects as though it were not
Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting
in any other capacity for the Company or for any other legal entity.
SECTION 16. MODIFICATION OF AGREEMENT. The Warrant Agent and the
Company may by supplemental agreement make any changes or corrections in this
Agreement (i) that they shall deem it appropriate to cure any ambiguity or to
correct any defective or inconsistent provision or manifest mistake or error
herein contained; or (ii) that they may deem necessary or desirable and which
shall not adversely affect the interests of
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<PAGE>
the holders of Warrant Certificates; PROVIDED, HOWEVER, that this Agreement
shall not otherwise be modified, supplemented or altered in any respect
except with the consent in writing of the Registered Holders of Warrant
Certificates representing not less than 50% of the Warrants of each Class
then outstanding; and PROVIDED, FURTHER, that no change in the number or
nature of the securities purchasable upon the exercise of any Warrant, or the
Purchase Price therefor, or the acceleration of the Warrant Expiration Date,
shall be made without the consent in writing of the Registered Holder of the
Warrant Certificate representing such Warrant, other than such changes as are
specifically prescribed by this Agreement as originally executed.
SECTION 17. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made when delivered or mailed first class registered or certified mail,
postage prepaid as follows: if to the Registered Holder of a Warrant
Certificate, at the address of such holder as shown on the registry books
maintained by the Warrant Agent; if to the Company, at 1181 Grier Drive,
Suite B, Las Vegas, Nevada 89119, attention: Melvin W. Pelley, or at such
other address as may have been furnished to the Warrant Agent in writing by
the Company; if to the Warrant Agent, at its corporate office.
SECTION 18. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of Nevada, without
reference to principles of conflict of laws.
SECTION 19. BINDING EFFECT. This Agreement shall be binding upon
and inure to the benefit of the Company and, the Warrant Agent and their
respective successors and assigns, and the holders from time to time of
Warrant Certificates. Nothing in this Agreement is intended or shall be
construed to confer upon any other person any right, remedy or claim, in
equity or at law, or to impose upon any other person any duty, liability or
obligation.
SECTION 20. TERMINATION. This Agreement shall terminate at the
close of business on the Expiration Date of the Warrant or such earlier date
upon which all Warrants have been exercised, except that the Warrant Agent
shall account to the Company for cash held by it and the provisions of
Section 14 hereof shall survive such termination.
SECTION 21. COUNTERPARTS. This Agreement may be executed in
several counterparts, which taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the date first above written.
FIBERCHEM, INC.
By:
--------------------------
Geoffrey Hewitt, President
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CORPORATE STOCK TRANSFER, INC.
By:
--------------------------
Authorized Officer
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<PAGE>
SUBSCRIPTION AGENT AGREEMENT
This Subscription Agent Agreement, made and entered into as of this
day of _________ 1998, by and between FiberChem, Inc., a Delaware corporation
(the "Company"), and Corporate Stock Transfer, Inc. (the "Subscription
Agent").
W I T N E S S E T H:
WHEREAS, the Company has filed a Registration Statement on Form SB-2
(Registration No. 333-46555) with the Securities and Exchange Commission (the
"Registration Statement") in connection with the proposed offering (the
"Rights Offering") of up to 8,976,962 Units, each consisting of one share of
Common Stock and one Class E Warrant (the "E Warrants"), for sale to holders
of nontransferable subscription rights (the "Rights"), which are to be issued
to holders (the "Common Stockholders") of outstanding shares of the Company's
Common Stock, $.0001 par value per share (the "Common Stock"), holders of the
Company's Convertible Preferred Stock ("Preferred Stock"), and holders (the
"Warrantholders") of the Company's Class D Common Stock Purchase Warrants
(the "Warrants"); and other Warrants. The Registration Statement also covers
the resale of an additional 130,000 Units which have been issued to
Privatbank Vermag AG ("Privatbank") in consideration of credit extended to
the Company by Privatbank.
WHEREAS, the Subscription Agent presently serves as transfer agent and
registrar of the Company's Common Stock and Warrants and will also serve as
transfer agent and registrar for the Rights and the E Warrants;
WHEREAS, the Company intends to issue one Right for each four shares of
Common Stock owned or issuable upon conversion held of record as of October
16, 1998 (the "Record Date"), and intends that the Rights will be exercisable
at the rate of one Right for each Unit purchased thereunder at a price of
$.22 per Unit (the "Subscription Price"), that any Rights holder may subscribe
for additional Units pursuant to a limited Additional Subscription Privilege
(as defined herein), and that the Rights will be evidenced by transferable
certificates (the "Rights Certificates") in form satisfactory to the
Subscription Agent and the Company; and
WHEREAS, the Company desires to employ the Subscription Agent to act as
a subscription agent in connection with the Rights Offering, including, but
not limited to, the issuance and delivery of the Rights Certificates, and the
Subscription Agent is willing to act in such capacity:
NOW, THEREFORE, the parties hereto agree, in consideration of the mutual
covenants and promises herein contained, as follows:
1. APPOINTMENT OF SUBSCRIPTION AGENT. The Rights Offering will be
conducted in the manner and upon the terms as set forth in the Prospectus
constituting a part of the Registration Statement as declared effective by
the Securities and Exchange Commission and as amended (the "Prospectus"),
which is incorporated herein by reference and made a part hereof as if set
forth in full herein. The Subscription Agent is hereby appointed as
subscription agent to effect the Rights Offering in accordance with the
Prospectus, and the Subscription Agent hereby accepts such appointment. Each
reference to the Subscription Agent in this Agreement is to the Subscription
<PAGE>
Agent in its capacity as subscription agent unless the context indicates
otherwise.
2. DELIVERY OF DOCUMENTS BY COMPANY.
(a) The Company will cause to be timely delivered to the Subscription
Agent sufficient copies of the following documents for delivery to all
intended recipients of the Rights (the "Rights Offerees"):
(i) the Prospectus;
(ii) blank Subscription Rights Certificates which includes
instructions for completion;
(iii) transmittal letter to Rights Offerees (the "Rights Letter"); and
(iv) separate instructions for Rights Offerees who are nominees (the
"Nominee Instructions") as contained in the Rights Letter.
(b) The Company will also deliver to the Subscription Agent (i)
resolutions adopted by the Board of Directors of the Company in connection
with the Rights Offering, certified by the Secretary or Assistant Secretary
of the Company, and (ii) on or promptly following the Rights Expiration Date
(as defined in the Prospectus), sufficient blank forms for the issuance of
the E Warrants.
3. DETERMINATION OF RIGHTS OFFEREES AND RIGHTS.
(a) On or about the Record Date, the Subscription Agent shall create
and maintain, from the stock and warrant ledgers and registers it maintains
in its capacities as transfer agent and registrar for the Common Stock and
the Warrants and from a list of Preferred Stockholders provided to it by the
Company, a list of the names, addresses and taxpayer identification numbers
of the Rights Offerees and the number of Rights each such Rights Offeree is
entitled to receive in the Rights Offering in accordance with the terms of
the Prospectus (the "Rights Ledger"). With respect to the Common Stock held
of record by stock depositary trust companies (such as Cede & Co.), the
Subscription Agent and the Company shall timely solicit and obtain a list
containing similar information with respect to the broker/dealers or banks
for whom such companies hold such stock as nominee and merge such information
with and into the Rights Ledger. The Rights Offerees shall be established as
of the close of business on the Record Date.
(b) Each Rights Offeree shall receive one Right for each four shares of
Common Stock owned or issuable upon exercise of the Warrants or conversion of
the Preferred Stock held of record as of the Record Date. Fractional Rights
will not be issued by the Company.
4. MAILING OF DOCUMENTS BY SUBSCRIPTION AGENT. Except as provided in
Paragraph
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8 below, on or before six (6) business days after the date of effectiveness
of the Registration Statement, the Subscription Agent shall mail or cause to
be mailed, via first class mail, to each Rights Offeree a Rights Certificate
evidencing the number of Rights to which such Rights Offeree is entitled, a
Prospectus, an envelope addressed to the Subscription Agent and a Rights
Letter. Prior to mailing, the Subscription Agent, as transfer agent and
registrar for the Rights, will cause to be issued Rights Certificates in the
names of the Rights Offerees and for the number of Rights to which they are
each entitled, as determined in accordance with Paragraph 3 above. The
Subscription Agent shall make reasonable efforts to identify which of the
Rights Offerees are likely to be nominee holders and to include the Nominee
Instructions with such mailing to such Rights Offerees. The Subscription
Agent shall either manually sign or affix a duly authorized facsimile
signature on all Rights Certificates. The signatures of the officers of the
Company on the Rights Certificates shall be facsimile signatures.
Immediately after the Rights Certificates are mailed, the Subscription Agent
shall execute and deliver to the Company a certificate in the form of EXHIBIT
A hereto.
5. SUBSCRIPTION PROCEDURE.
(a) For a valid exercise of Rights to occur, the Subscription Agent
must receive, by mail, hand delivery, and otherwise, prior to 5:00 p.m.,
Denver, Colorado time, on the Expiration Date (as defined in the Prospectus),
the Rights Certificate pertaining to such Rights, which has been properly
completed and endorsed for exercise, as provided in the instructions on the
reverse side of the Rights Certificate, and payment in full of the
Subscription Price for the number of Units subscribed by personal check, bank
certified or cashier's check, money order or wire transfer for good funds
payable to the order of "Corporate Stock Transfer, Inc., as Subscription
Agent."
(b) Within five (5) business days after the Expiration Date, the
Subscription Agent shall prepare a preliminary list of the names, addresses
and taxpayer identification numbers of subscribers pursuant to the valid
exercise of Rights, which list shall be finalized by the Subscription Agent
as soon as practicable thereafter. The shares of Common Stock and E Warrants
comprising the Units validly subscribed for pursuant to the Rights shall be
issued by the Subscription Agent, acting in its role as transfer agent and
registrar for the Common Stock and E Warrants, upon receipt of written
instructions from the Company. The Subscription Agent acknowledges that in
its role as the Transfer Agent and Warrant Agent it has prior to the date of
this Prospectus issued to Privatbank, at the request of the Company, the
shares of Common Stock and Class E Warrants comprising 130,000 Units due to
Privatbank.
(c) Within five (5) business days after receipt of written instructions
from the Company to mail the shares of Common Stock and E Warrants comprising
the Units subscribed for pursuant to the Rights, the Subscription Agent shall
mail certificates representing the E Warrants and Common Stock subscribed for
by the holders of the Rights. The certificates shall be mailed via first
class mail to the subscribers' addressee as shown on the reverse side of the
Rights Certificate or, if none, then as listed on the Subscription Agent's
register (except that the Subscription Agent shall comply with any ancillary
written delivery instructions provided by any subscriber). The Subscription
Agent shall maintain a mail loss surety bond protecting the Company and the
Subscription Agent from loss or liability arising out of non-receipt or
non-delivery of such certificates.
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<PAGE>
(d) No fractional Units will be issued by the Company. Any Rights
Offeree who would be entitled to purchase a fractional Unit will be given the
right to purchase a full Unit. A Rights Certificate may not be divided in
such a manner as would permit the holders to subscribe for a greater number
of Units than the number for which they would be entitled to subscribe under
the original Rights Certificate. Rights Offerees, such as banks, securities
dealers and brokers, who receive Rights as nominees for one or more
beneficial owners shall be given the right to purchase a full Unit when
entitled to purchase a fractional Unit and shall be entitled to exercise
their Rights Certificates on behalf of the beneficial owners.
(e) Rights Offerees shall have the right to subscribe for Unsubscribed
Rights on a pro rata basis in proportion to the total number of additional
Units subscribed for by all Securityholders (the "Additional Subscription
Privilege") at the Subscription Price. The Subscription Agent shall determine
the number of Units subscribed for pursuant to the exercise of the Additional
Subscription Privilege. If sufficient Units in excess of all Units
subscribed for pursuant to the regular exercise of Rights are available to
satisfy all exercised Additional Subscription Privileges, the Subscription
Agent shall fill all such exercised Additional Subscription Privileges as and
to the same extent as if pursuant to the regular exercise of Rights. To the
extent, however, that sufficient Units are not available to fill all such
exercised Additional Subscription Privileges, the Units which are available
will be allocated among those electing to additionally subscribe pro rata to
the proportion of the total number of additional Units subscribed for by all
Securityholders. Unsubscribed Rights as of the Expiration Date may be
subscribed for by those electing to exercise the Additional Subscription
Privilege. To exercise the Additional Subscription Privilege, the
appropriate block on the Additional Subscription form must be completed and
payment in full for additional Units must accompany the form and be submitted
to the Subscription Agent prior to the Expiration Date. In the event any
holder who exercises his Subscription Privilege does not receive the Units
subscribed therefor, the Subscription Agent shall refund the Subscription
Price paid for the Units not received, without interest, to such holder
promptly after the Expiration Date.
6. DEFECTIVE EXERCISE OF RIGHTS; LOST RIGHTS CERTIFICATES. The Company
shall have the right to reject any defective exercise of Rights or to waive any
defect in exercise. If the Company advises the Subscription Agent that the
Company rejects any defective exercise of Rights (except a failure to pay the
full Subscription Price with respect to such exercise), the Subscription Agent
shall as soon as practicable either (i) telephone the holder of such Rights (at
the telephone number on the reverse side of the Rights Certificate) to explain
the nature of the defect if the defect and the necessary correction can be
adequately explained by telephone and the holder can correct the defect without
possession of the Rights Certificates, or (ii) mail the Rights Certificate,
together with a letter explaining the nature of the defect in exercise and how
to correct the defect. If an exercise is not defective except that there is a
partial payment of the Subscription Price, the Subscription Agent should issue
only the number of Units for which sufficient payment has been made and seek
additional payment for the remaining number of Units for which the exercise of
the underlying Rights had been attempted. Any Rights Certificate with respect
to which defects in exercise are not corrected prior to 5:00 p.m., Denver,
Colorado time, on the Expiration Date, shall be returned with any applicable
tendered funds to the holder of such Rights Certificate. If any Rights
Certificate is alleged to have been lost, stolen or destroyed, the Subscription
Agent should
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follow the same procedures followed for lost stock certificates representing
shares of Common Stock of the Company that the Company and the Subscription
Agent in its capacity as transfer agent for the Common Stock use, provided
that such procedure must be completed prior to the Expiration Date in order
to be effective.
7. LATE DELIVERY. If prior to 5:00 p.m., Denver, Colorado time, on the
Expiration Date the Subscription Agent receives a written, telegraphic or
telecopy guarantee from a commercial bank, a trust company having an office
in the United States, or a member firm of the New York Stock Exchange,
another registered national securities exchange or the National Association
of Securities Dealers, Inc., stating the name of the subscriber, the number
of Rights represented by the Rights Certificate and the number of Units
subscribed for, and guaranteeing that the Rights Certificate and the
Subscription Price will promptly be delivered to the Subscription Agent, such
subscription may be accepted subject to receipt, within five (5) calendar
days after the Expiration Date, of the duly completed and executed Rights
Certificate and payment of the Subscription Price. In addition, the
Subscription Agent shall extend the deadline for acceptance of subscriptions
as provided in Paragraph 5 above by up to five (5) calendar days upon receipt
of a request for such extension from the Company.
8. FOREIGN STOCKHOLDERS. If requested by the Company, the Subscription
Agent shall airmail or courier the documents required by Paragraph 4 hereof
to Rights Offerees whose addresses are outside the United States or Canada
and take other reasonable action requested by the Company to cause the timely
delivery of such documents to such Offerees.
9. PROOF OF AUTHORITY TO SIGN. The Subscription Agent need not procure
supporting legal papers, and is authorized to dispense with proof of
authority to sign (including any proof of appointment or authority to sign of
any fiduciary, custodian for a minor, or other person acting in a
representative capacity), and to dispense with the signatures of
co-fiduciaries, in connection with exercise of the Rights in the following
cases:
(a) where the Rights Certificate is registered in the name of an
executor, administrator, trustee, custodian for a minor or other fiduciary,
and the subscription form thereof is executed by such executor,
administrator, trustee, custodian for a minor or other fiduciary, and the
shares of Common Stock and E Warrants comprising the Units subscribed for are
to be issued in the name of the registered holder of the Rights Certificate,
as appropriate;
(b) where the Rights Certificate is in the name of a corporation and
the subscription form thereof is executed by an officer of such corporation
and the shares of Common Stock and E Warrants comprising the Units subscribed
for are to be issued in the name of such corporation;
(c) where the Rights Certificate is executed by a bank or broker as
agent for the registered holder of the Rights Certificate; provided that, the
shares of Common Stock and E Warrants subscribed for are to be issued in the
name of the registered holder of the Rights
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<PAGE>
Certificate; and
(d) where the Rights Certificate is registered in the name of a
decedent and the subscription form thereof is executed by a subscriber who
purports to act as the executor or administrator of the estate, provided (i)
the subscription is for not more than $1,000, and (ii) the shares of Common
Stock and E Warrants subscribed for are to be registered in the name of the
subscriber as executor or administrator of such estate of the deceased
registered holder.
In all of the cases set forth in this Paragraph 9 and notwithstanding
anything contained in this Agreement to the contrary, the check tendered in
payment of the applicable subscription must be drawn for the proper amount,
to the order of the Subscription Agent and otherwise be in proper form, and
there must be no evidence indicating that the subscriber is not the duly
authorized representative he purports to be. In cases other than those set
forth above, the Subscription Agent should procure the necessary legal
documents. However, in the event that all legal requirements for proper
exercise of the Rights have not been met at the Expiration Date, the
Subscription Agent may accept approval from the Company as to whether such
Rights Certificates may be accepted and the shares of Common Stock and E
Warrants subscribed for thereunder issued.
10. ESCROW OF FUNDS. Any funds received by the Subscription Agent as
payments in connection with subscriptions for Units pursuant to the Rights
Offering shall be held in trust and escrow by the Subscription Agent (and
shall be invested in a non-interest-bearing bank account or other investment
acceptable to the Company) pending receipt of written disbursement
instructions from the Company, at which time the funds shall be disbursed in
accordance with such written instructions from the Company. The Subscription
Agent is hereby authorized and directed to endorse, negotiate and deposit all
subscription payments into the subscription trust and escrow account to be
maintained by the Subscription Agent. All interest on any funds received by
the Subscription Agent shall inure to the benefit of and belong to the
Company, including interest on any funds returned by the Subscription Agent
to subscribers. All interest shall be disbursed or invested in accordance
with written instructions from the Company. The Subscription Agent shall
account on a weekly basis to the Company for all escrowed funds and on a more
frequent basis, if requested by the Company.
11. REPORTS. If requested by the Company, the Subscription Agent shall
notify Mr. Melvin E. Pelley at the Company (702-361-9873) or his designee by
telephone on or before 4:00 p.m., Las Vegas, Nevada time, on each business
day during the period commencing with mailing of the Rights Certificates and
ending at the Expiration Date (and in the case of guaranteed delivering,
ending five (5) calendar days after the Expiration Date), which notice shall
thereafter be confirmed in writing, of (i) the number of Units validly
subscribed for, (ii) the number of Units subject to guaranteed delivery,
(iii) the number of Units for which defective subscriptions have been
received and the nature of such defects, (iv) the number of Units validly
subscribed for pursuant to the Additional Subscription Privilege, and (v) the
amounts of collected and uncollected funds in the subscription escrow account
established under this Agreement. At or before 5:00 p.m., Denver, Colorado
time, on the first business day following the Expiration Date, or upon the
request from the
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<PAGE>
Company from time to time thereafter, the Subscription Agent shall certify in
writing to the Company the cumulative totals through the Expiration Date of
all the information set forth in clauses (i) through (v) above. At or before
12:00 noon, Denver, Colorado time, on the fifth (5th) calendar day following
receipt from the Company of written instructions to mail the Units subscribed
for pursuant to the Rights, the Subscription Agent will execute and deliver
to the Company a certificate in the form of EXHIBIT B hereto. The
Subscription Agent shall also maintain and update a listing of holders who
have fully or partially exercised their Rights and holders who have not
exercised their Rights. The Subscription Agent shall provide the Company or
their designees with such information compiled by the Subscription Agent
pursuant to this Paragraph 11 as any of them shall request from time to time
by telephone or telecopy.
12. FUTURE INSTRUCTIONS. With respect to notices or instructions to be
provided by the Company hereunder, the Subscription Agent may rely and act on
any written instruction signed by any one or more of the following authorized
officers or employees of the Company: Geoffrey Hewitt or Melvin Pelley.
13. PAYMENT OF EXPENSES. The Company will pay the Subscription Agent for
its services under this Agreement in accordance with the fees listed on Schedule
I attached hereto, and will reimburse the Subscription Agent for all reasonable
and necessary expenses incurred by it in so acting.
14. COUNSEL. The Subscription Agent may consult with counsel satisfactory
to it, which may be counsel to the Company, and the written advice or opinion of
such counsel shall be full and complete authorization and protection in respect
of any action taken, suffered or omitted by the Subscription Agent hereunder in
good faith and in accordance with such advice or opinion of such counsel.
15. INDEMNIFICATION. The Company covenants and agrees to indemnify and
hold the Subscription Agent harmless against any costs, expenses (including
reasonable fees for legal counsel), losses or damages, which may be paid,
incurred or suffered by or to which the Subscription Agent may become subject,
arising from or out of, directly or indirectly, any claim or liability resulting
from its actions pursuant to this Agreement and for which the Subscription Agent
is not otherwise reimbursed under the mail loss surety bond; provided that such
covenant and agreement does not extend to such costs, expenses, losses and
damages incurred or suffered by the Subscription Agent as a result of, or
arising out of, any negligence, misconduct or bad faith of the Subscription
Agent or of any employees, agents or independent contractors used by the
Subscription Agent in connection with performance of its duties hereunder.
16. NOTICES. Unless otherwise provided herein, all reports, notices
and other communications required or permitted to be given hereunder shall be
in writing and delivered by hand or telecopy or by first class mail, postage
prepaid, as follows:
(a) If to the Company, to:
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<PAGE>
FiberChem, Inc.
1181 Grier Drive, Suite B
Las Vegas, Nevada 89119
Attention: Geoffrey Hewitt
Telecopy No. (702) 361-9652
(b) If to the Subscription Agent, to:
Corporate Stock Transfer, Inc.
370 17th Street, Suite 2350
Republic Plaza
Denver, Colorado 80202
Attention: Ms. Sally Rogers
Telecopy No. (303)592-8821
17. AMENDMENTS AND WAIVERS. This Agreement may not be amended or
modified except by a written instrument or document which has been executed by
all of the parties hereto. Any party hereto may waive any of its rights arising
under this Agreement only by a written instrument or document executed by such
party, and any such waiver shall not be construed as a waiver of any subsequent,
or other, right of such party.
18. INVALIDITY. If one or more of the terms of this Agreement shall
for any reason be held invalid, illegal or unenforceable in any respect, such
invalidity, illegality be unenforceability shall not affect the remaining terms
of this Agreement and this Agreement shall be construed as if such invalid,
illegal or unenforceable term or terms had never been contained herein.
19. BINDING EFFECT AND ASSIGNMENTS. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective legal
representatives, successors and permitted assigns; provided, however, that,
without the prior written consent of the Company, the Subscription Agent may not
assign any of its interests, rights or obligations arising out of this
Agreement.
20. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Nevada.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have hereto set their hands as of
the date first written above.
FIBERCHEM, INC.
By:________________________________
Name:______________________________
Its:_______________________________
CORPORATE STOCK TRANSFER, INC.
By:________________________________
Name:______________________________
Its:_______________________________
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<PAGE>
SCHEDULE I
SUBSCRIPTION AGENT AGREEMENT
FEES AS SUBSCRIPTION AGENT:
1. Administration and acceptance. $ N/C
2. Calculation of each Offeree's Rights,
issuance of each Rights Certificate
and mailing of Rights Certificates
with Prospectus and literature, per
Offeree (person entitled to receive a
Right). $ for
mailing and
$ per item
3. Receipt of exercised Rights
Certificates, deposit, clearing and
reconciliation of funds received and
computation, contacting subscribers to
obtain additional information or
corrections, issuing and mailing of
certificates for shares of Common Stock
and E Warrants, per subscriber. $ per item
4. The Company pays all out-of-
pocket expenses, such as postage
and envelopes, at cost.
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<PAGE>
EXHIBIT A
CERTIFICATE OF SUBSCRIPTION AGENT
FOR RIGHTS TO SUBSCRIBE FOR
UNITS OF FIBERCHEM, INC.
The Corporate Stock Transfer, Inc. (the "Agent") does hereby certify that:
1. The Agent has been duly appointed and authorized to act as
Subscription Agent in connection with the issuance of rights (the "Rights") to
subscribe for the purchase of Units, each Unit consisting of one share of Common
Stock and one Class E Warrants of FiberChem, Inc., a Delaware corporation (the
"Company"), pursuant to the Company's Prospectus, dated _________, 1998.
2. As of the close of business on _________, 1998, there were issued and
outstanding shares of the Company's Common Stock, $.0001 par value
per share, _____ shares of Convertible Preferred Stock and ___ Class D
Warrants and ________ other Warrants.
3. As such Subscription Agent, the Agent has as of this date issued,
countersigned and mailed Rights Certificates evidencing the right to purchase
______ shares of Common Stock and ________ Class E Warrants, together with
accompanying Prospectus and other materials, in accordance with the obligations
of the Agent set forth in the Subscription Agent Agreement, dated _________,
1998, between the Company and the Agent.
4. Said certificates contain facsimile signatures of officers of the
Company and were countersigned on behalf of the Agent, as Subscription Agent, by
authorized officers of the Agent who were at the time of affixing their
signatures and still are duly authorized to countersign such certificates.
Dated: ____________________, 1998.
CORPORATE STOCK TRANSFER, INC.
By:________________________________
Name:______________________________
Title:_____________________________
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<PAGE>
EXHIBIT B
CERTIFICATE OF SUBSCRIPTION AGENT
FOR RIGHTS TO SUBSCRIBE FOR
UNITS OF FIBERCHEM, INC.
The Corporate Stock Transfer, Inc. (the "Agent") does hereby certify that:
1. The Agent is the duly appointed and authorized Transfer Agent and
Registrar for FiberChem, Inc., a Delaware corporation (the "Company"), with
respect to the Company's Common Stock and Class E Warrants.
2. As such Transfer Agent and Registrar, it has as of this date issued
and countersigned certificates for _________ shares of Common Stock and Class
E Warrants as an original issue pursuant to the written order of the Company, in
accordance with the obligations of the Agent set forth in the Subscription Agent
Agreement (the "Agreement"), dated _________, 1998, between the Company and
the Agent.
3. Said certificates contain facsimile signatures of officers of the
Company and were countersigned or authenticated, as the case may be, on behalf
of the Agent, as Transfer Agent and Registrar, by authorized officers of the
Agent who were at the time of affixing their signatures and still are duly
authorized to countersign or authenticate such certificates.
4. In its role as Subscription Agent pursuant to the Agreement, the Agent
has mailed to the parties entitled thereto, in accordance with the Agreement,
the shares of Common Stock and Class E Warrants described in paragraph 2 above
of this Certificate.
Dated:________________________, 1998.
CORPORATE STOCK TRANSFER, INC.
By:________________________________
Name:______________________________
Title:_____________________________
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<PAGE>
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
To the Board of Directors
FiberChem, Inc.
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form SB-2 of our report dated February 13, 1998 on
the consolidated financial statements of FiberChem Inc. and Subsidiaries as
of September 30, 1997 and 1996 for the years then ended which appear in this
Prospectus. We also consent to the reference to our Firm under the caption
"Experts" in such Prospectus.
/s/ GOLDSTEIN GOLUB KESSLER LLP
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GOLDSTEIN GOLUB KESSLER LLP
New York, New York
October 15, 1998
