<PAGE>
U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended September 30, 1997
--------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
------------ ------------
Commission file number 0-17569
-----------------------
FIBERCHEM, INC.
(Name of small business issuer in its charter)
Delaware 84-1063897
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1181 Grier Drive, Suite B, Las Vegas, Nevada 89119
(address of principal executive offices) (Zip Code)
Issuer's telephone number: (702) 361-9873
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.0001 Par Value
--------------------------------------------------------
(Title of class)
Indicate by check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. YES X NO
--- ---
Indicate by check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-KSB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $1,523,994
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the last sale price of such stock on December 19,
1997 of $0.19 was $4,591,995
As of December 19, 1997, the Issuer had 25,520,660 shares of Common
Stock, par value $.0001 per share, outstanding.
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
(a) BUSINESS DEVELOPMENT
FiberChem, Inc. ("FiberChem," the "Company" or "FCI") was formed on
April 6, 1987, under the name Tipton Industries, Inc. ("Tipton"). On
December 18, 1987, Tipton acquired all of the issued and outstanding stock of
FiberChem, Inc., a New Mexico corporation, for approximately 79% of Tipton's
Common Shares. The transaction was accounted for as a reverse purchase of
Tipton by the Company. Pursuant to stockholder approval on December 21,
1988, Tipton and FiberChem (New Mexico) were merged into the Company, a newly
formed Delaware corporation, which changed its name to FiberChem, Inc.
From inception through the period ended September 30, 1997, the Company
and its wholly-owned subsidiary FCI Environmental, Inc. ("FCI Environmental")
have operated in the same industry segment.
This report includes forward-looking statements that involve risks and
uncertainties, including the timely development and acceptance of new
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, the timely funding of
customers' projects, customer payments to the Company and the other risks
detailed from time to time in the Company's SEC reports.
(b) BUSINESS OF ISSUER
FiberChem develops, produces, markets and licenses its patented fiber
optic chemical sensor ("FOCS-Registered Trademark-") technology which detects
and monitors hydrocarbon pollution in the air, water and soil. The Company
has developed a range of products and systems based on FOCS-Registered
Trademark-, which provide IN SITU and continuous monitoring capabilities with
real-time information. The Company also is commercializing a range of
sensors based on its Sensor-on-a-Chip-Registered Trademark- technology for a
wide variety of environmental and industrial applications.
Since its inception in 1987, FiberChem has invested in excess of $25
million in research and development relating to a wide range of technologies,
and has now focused on products for environmental monitoring and industry.
During the last several years, a de-emphasis of environmental issues in
Congress has resulted in delays in enactment and enforcement of the
regulatory climate upon which the Company's future prospects were dependent.
Several federal and state programs were not re-authorized or funded. Just
like companies in the electric vehicle or alternative fuels arenas, FiberChem
found that many of its expected opportunities had evaporated, at least for
the foreseeable future. Consequently, FiberChem's management identified
market segments that were driven by other forces. Notwithstanding the slow
down at the Federal level, the Company recognized that the State of Florida
represented a short-term opportunity for aboveground tank leak detection and
set about getting its sensor products specified. At the same time, the phase
out of Freon presented the Company with an opportunity to establish its
technology as the preferred replacement for the existing Freon/Infrared
method for measurement of total petroleum hydrocarbons (TPH) in process water
streams.
During this refocusing process the Company has substantially enhanced
the value of its development initiatives with Texas Instruments, Inc. ("TI")
for its Sensor-on-a Chip-Registered Trademark-. By working together with the
Optoelectronics Group within TI's Semiconductor Group, the Company has
expanded the scope of the joint marketing activity in the billion dollar
chemical sensor marketplace. The short term result from this process has
been the development of eight major projects with very substantial revenue
potential.
PRODUCTS AND APPLICATIONS
The PetroSense-Registered Trademark- product line includes a continuous
monitoring system ("CMS-5000") designed for IN-SITU measurement of petroleum
hydrocarbons in a wide variety of applications including leak detection at
above ground storage tank ("AST") and underground storage tank ("UST") sites,
monitoring of
2
<PAGE>
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.
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.
3
<PAGE>
The Company has pursued federal, state and local approvals for its
products. In November 1994, the Company received Underwriters Laboratories
approval for its product line in the United States and Canada. In April
1995, the Company received notification from KEMA, an authorized
certification body for Europe, that its products had met their highest
standard for intrinsic safety (CENELEC), and, as such, were approved for use
in all hazardous environments including offshore platforms. The products
have also been designed and tested to meet European Union CE Mark standards
which went into effect January 1, 1996 for the European Community.
Both the Company's PHA-100 and DHP have been extensively tested by Ken
Wilcox Associates, Inc. ("KWA"), an independent testing laboratory, in
accordance with EPA protocols. These evaluations meet the requirements of
the EPA for external vapor-phase leak detection systems and liquid-phase
out-of-tank product detectors. KWA also certified that the data produced by
the Company's products was equivalent to the EPA's standard method for
groundwater analysis.
The Company's products were included in the EPA's Office of Underground
Storage Tanks list of products meeting certain minimum third-party
certification guidelines, both for vapor and liquid product detection. In
addition, the Company has received written or verbal assurance that its
products meet the requirements of 47 states. Certain states rely on the EPA
list and certain others have no specific requirements.
The Company has also had the CMS-5000 product line third-party certified
for use for AST leak detection in Florida. As a result, FCI Environmental is
the only company at this time to have an AST leak detection product approved
for use at both contaminated and uncontaminated sites by the Florida
Department of Environmental Protection ("DEP").
Recently developed applications of FOCS-Registered Trademark- include
the use of the technology to replace a Freon-Registered Trademark- extraction
method of analysis currently used on offshore oil production platforms. EPA
regulations require oil companies to monitor the hydrocarbon content in sea
water returned to the ocean during the oil production process. The
conventional Freon method involves periodic sampling of the sea water output
and analysis of the samples in the oil production platform's laboratory. The
Company's products can be used to monitor the sea water output continuously,
thereby achieving a significant reduction in cost for the operator, both by
eliminating the use of Freon-Registered Trademark- gas and by optimizing the
usage of chemical agents used to facilitate removal of oil from produced
water.
THE TECHNOLOGY
The Company's FOCS-Registered Trademark- technology, which is
proprietary and patented, is at the center of the Company's products.
FiberChem manufactures a probe which contains a short length (approximately 5
cm) of fiber optic cable. Commercially produced fiber optic cable is coated
to keep all wavelengths of light contained. The Company treats the fiber
optic cable with the FOCS-Registered Trademark- technology, modifying the
cable's coating to permit a certain amount of light to be lost when it comes
into contact with hydrocarbon molecules. The resulting change in light
transmission is then recorded and transmitted by the probe either to one of
the Company's monitoring devices (see "Products and Applications" above) or
to other industry standard devices. The Company's devices measure changes in
ppm or, in some instances, in lesser concentrations. Up to 16 probes can be
linked together to provide a continuous monitoring system for various types
of sites, including USTs, ASTs, remediation sites, pipelines and offshore oil
production platforms.
The FOCS-Registered Trademark- technology has been further developed
through a joint venture with TI to produce Sensor-on-a-Chip-Registered
Trademark-, a new generation of semiconductor-based sensor products. The
market for these chip-based sensors is potentially very large (forecasted to
be over $1 billion by 1999) and is represented by clients and products in the
consumer, medical and durable goods fields. Often development costs are
partially covered by the client in exchange for some level of exclusivity.
The Company has eight such projects ongoing, varying from feasibility studies
to final stages of development.
4
<PAGE>
The Company believes that its patents and patent applications, coupled
with the trade secrets, proprietary information and experience in development
provide the Company with a competitive advantage. It is the Company's policy
to apply for international patent rights in addition to United States patent
rights. FiberChem holds 20 United States patents covering sensor technologies
and has applied for five additional patents. All of the United States
patents are valid for 20 years from their respective dates of applications,
the oldest of which was applied for in 1987. The Company holds nine
international patents, and has a total of 15 international patent
applications pending in Canada, Taiwan, Japan, South Korea, the People's
Republic of China and most Western European countries. The sensor
technologies are also protected in the United States by registered trademarks.
THE MARKET
FiberChem's primary markets and potential markets are the petroleum
production, refinery and distribution chain. Major oil companies,
distributors and retailers of gasoline, diesel and aircraft fuel are
important potential customers. Other important markets and customers include
remediation companies, environmental consultants, shipping ports, airports
and military bases. The markets for sensors transcend the petroleum
hydrocarbon market place, are very diverse and are addressed directly by
Company personnel.
CUSTOMERS AND DISTRIBUTORS
The Company entered into an OEM Strategic Alliance Agreement (the
"Alliance" or the "Agreement") as of June 30, 1996, as amended, with Whessoe
Varec, Inc. ("Whessoe Varec") whereby Whessoe Varec was granted exclusive
worldwide right to market the Company's products in the aboveground storage
tank (AST) market. The Agreement was accompanied by firm orders for
approximately $1.7 million of the Company's products. At the request of
Whessoe Varec in order to avoid unnecessary duplicate shipping costs,
substantially all of the equipment was segregated in the Company's warehouse.
Terms of payment were 180 days and 90 days for $500,000 of orders to be
shipped in June and an additional $500,000 of orders to be shipped in
September 1996. During early January 1997, Whessoe Varec requested that the
Company consider a revised payment schedule acceptable to both parties. As
of February 25, 1997, Whessoe Varec had paid for approximately $59,000 of
items actually shipped by that date, and during April 1997, paid an
additional $250,000 for items shipped in March 1997. In August 1997 the
Company received one half of the outstanding amount and shipped the remaining
products. The last payment was received in September 1997. Both payments
are irrevocable and the products shipped are not subject to return except
under normal warranty conditions.
The Alliance, combined with the acquisition of Whessoe p.l.c. (Whessoe
Varec's parent company) by Endress + Hauser of Switzerland, has positioned
both Alliance partners to take advantage of the new Florida regulations
regarding the requirements for AST leak detection. Internal liners and leak
detection is by far the lowest cost option for compliance with the Florida
mandates and as of today, the Company's PetroSense-Registered Trademark- line
is the only product certified for use in both contaminated and uncontaminated
sites in Florida. Approximately 1,000 tanks have been identified which are
already lined and as such are immediate targets for leak detection. Each
tank represents an average of $35,000 in potential revenue for the Alliance.
It is anticipated that this number will grow in the period before December
1999 when installations must be completed. The impact of these regulations
has been that about $8,000,000 of projects have been identified and proposals
generated. It is anticipated that these projects will accelerate from 1997
to 1999. Many companies have already indicated that they intend to stagger
installations over the period. Based on this level of activity, Whessoe
Varec has substantially expanded its sales and service capabilities in
Florida, and management believes that significant business will be generated
by the Alliance although there can be no assurance that this will occur.
Florida Power Company recently placed an order with Whessoe Varec to
upgrade all of its tanks to include leak detection. Other large orders are
believed to be pending. Citgo, Dreyfus, and Hess among others, are awaiting
final approval from the Florida DEP to install the Company's products.
5
<PAGE>
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. 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 Barents Intereg contract to provide consulting and monitoring
services to locate "hot spots" of pollution in the Kola Peninsula region of
Russia. The contract is expected to provide revenues for Senveco and the
Company from sales of the Company's products.
OFFSHORE PRODUCED WATER MARKET
The offshore produced water market exists due to the restrictions on the
manufacture and distribution of certain Freons which destroy the Earth's
ozone layer. For the past 15 or so years, tests to determine the TPH content
of certain process water streams returned to the ocean from offshore
platforms ("produced water") have been carried out by extracting water
samples with Freon and analyzing the resultant extract by infrared
spectroscopy ("IR"). As the price and availability of Freon have become less
and less attractive, alternatives to the Freon/IR method have attracted
increasing attention.
Of the various other methods currently offered, the Company believes
that its FOCS-Registered Trademark- technology offers the best alternative in
terms of correlation with the IR method, ease of use, features/benefits and
cost. The Company offers two different products to this marketplace. The
OilSense-4000-TM- is a continuous unit which can operate unattended. It
offers a 4-20 mA output and can be interrogated and programmed remotely via
modem. It operates for 30 days between maintenance. At $25,000 to $35,000,
it offers good value where manpower is at a premium. The OilSense-4000-TM-
can also be integrated into the process of treating the produced water stream
to automatically optimize the use of water treatment chemicals and can
continue operating where platforms are currently shut down due to adverse
weather conditions. The PHA-100WL is a single measurement analyzer which
directly replaces the Freon/IR method. Its FOCS-Registered Trademark- sensor
directly measures TPH in water samples, according to a simple procedure. At
$6,375 it offers a direct replacement for the Freon/IR method without the use
of Freon or other chemicals.
There are about 3,500 platforms in the Gulf of Mexico and a similar
number in the rest of the world, mainly in the North Sea, Middle East, South
China Sea and offshore West Africa. It appears that each of these regions
conforms to similar regulations. This market represents a window of
opportunity that will remain open until the IRs are replaced over the next
two years or so.
Amoco, Exxon, Marathon, Chevron, Unocal and others are evaluating the
Company's replacement for the existing Freon/IR technology. Each of these
companies represents a large opportunity, operating a significant number of
platforms in the Gulf of Mexico and elsewhere, and each already has purchased
multiple units from the Company. Norsk Hydro has leased a unit for
evaluation for its North Sea operations. In addition, a unit was recently
sold to Clyde Petroleum in Indonesia, the first sale for use in the South
China Sea.
FRAME AGREEMENT WITH AUTRONICA AS
On October 1, 1996, the Company entered into a frame agreement with
Autronica AS ("Autronica"), a Norwegian company within the Whessoe PLC group,
for Autronica to exclusively distribute certain FCI products for offshore
applications in regions of the world where there is oil and gas production
offshore, including certain countries in the North Sea, West Africa, the
Middle East and the Southeast Asia areas. The Endress + Hauser acquisition
of Whessoe Varec was accompanied by the
6
<PAGE>
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. Projects with China Petroleum and the ROC military are
ongoing and other projects are pending. The agreement has been renewed for
an additional two years.
MARKET DEVELOPMENT AGREEMENT WITH MITSUI MINERAL DEVELOPMENT ENGINEERING
CO., LTD.
On May 31, 1995, the Company, through FCI Environmental, entered into a
two-year joint market development agreement with Mitsui Mineral Development
Engineering Co., Ltd. ("MINDECO") pursuant to which the Company and MINDECO
are developing the Japanese market for the Company's products, initially
limited to petroleum hydrocarbon products. In general, the Company supplied
the products and MINDECO demonstrated, marketed and sold them. In addition,
the Company and MINDECO have agreed to use their best efforts to achieve a
minimum sales target of $1,000,000. At the end of the term, the Company and
MINDECO have the right to either 1) convert the market development agreement
into a distributorship agreement, 2) terminate the market development
agreement, or 3) automatically renew the market development agreement for one
year on a non-exclusive basis. The agreement was automatically renewed.
EXCLUSIVE REPRESENTATIVE AGREEMENT WITH SHINHAN SCIENTIFIC CO., LTD.
On February 9, 1995, FCI Environmental entered into a two-year exclusive
representative agreement with Shinhan Scientific Co., Ltd. ("Shinhan"), a
corporation of the Republic of Korea. Pursuant to the agreement, FCI
Environmental agreed to provide environmental products, 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. The agreement renewed automatically for two additional years.
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
7
<PAGE>
of both the Autronica and Whessoe Varec alliances and changes in market focus
at Lobbe resulted in a reduced role for Lobbe group. At the same time Lobbe
restructured its operations. The companies have reverted to a non-exclusive
relationship with no prejudice to either party.
SALES AND DISTRIBUTION AGREEMENT WITH QED ENVIRONMENTAL SYSTEMS, INC.
On March 30, 1996, the Company, through FCI Environmental, entered into
an agreement with QED Environmental Systems, Inc. ("QED"), pursuant to which
the Company granted QED the exclusive right to acquire the PHA-100 Portable
Hydrocarbon Analyzer for Direct Analysis of Hydrocarbons in Water and Vapor
(the "PHA-100") in a private label configuration for resale into the ground
water monitoring and remediation market in all 50 states. QED agreed to
purchase the PHA-100 and other products at specified prices and in certain
minimum amounts. QED failed to purchase the minimum amount of products, and
the Company has terminated the agreement effective January 7, 1997. The
Company has commenced legal action against QED seeking payment for unpaid
invoices and other damages. QED has filed counterclaims, and the matter is
scheduled for arbitration in January 1998.
SIPPICAN
The Company has had a licensing agreement with Sippican Corporation of
Marion, MA, a defense contracting company which had planned to move into the
environmental market but reversed its course. The Company and Sippican
negotiated a position allowing Sippican to transfer its rights to a third
party, while minimizing the potential for competition to the Company from
Sippican or others. Those rights have been recently transferred to Osmonics,
Inc., a leading supplier of potable water equipment to the beverage industry
and the water utility market. It is believed that this new relationship
between Osmonics and the Company will generate significantly higher royalty
revenue than previously through Sippican.
COMPETITION
Management believes that the unique capabilities of the Company's
FOCS-Registered Trademark- technology provide competitive advantages in its
markets. The Company is unaware of any other product in the marketplace, that
can monitor petroleum hydrocarbons at all three desired monitoring points,
i.e., the vapor area above the water body, the floating hydrocarbons at the
water/air interface and the hydrocarbons dissolved in the water. Management
believes that this capability, coupled with the FOCS-Registered Trademark-'s
rapid response time and reversibility (the ability to measure both increasing
and decreasing levels of pollutants), together with its response to a wide
variety of petroleum hydrocarbons, provide the Company with a competitive
advantage. In particular, the wide dynamic range of the measuring technology
allows the detection of new leaks on top of old contamination. The Company's
Florida certification is a direct result of this capability.
Most tank leak detection methods currently in use are periodic tests.
The early warning and early detection of leaks provided by the Company's
continuous monitoring systems enable users to minimize environmental damage,
liability and cleanup costs relating to leaks that might otherwise occur and
remain undetected between periodic tests. In addition, the Company's
products permit tanks to be evaluated without being taken out of service,
whereas, many competing methods require that tanks be taken out of service
for a period of time.
Many competing methods used to detect and quantify the presence of
petroleum hydrocarbons in the field (e.g., for groundwater monitoring wells,
soil remediation sites, process streams and waste water streams) consist of
extracting a sample, then analyzing the sample using field or laboratory
analytic instruments such as gas chromatographs. This process may take
several days. The Company's products provide IN SITU, real-time results with
accuracy closely correlating with laboratory results. Additionally, the
products' analog outputs offer the capability to provide feedback loops for
process control.
8
<PAGE>
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 Water Act, the National
Environmental Policy Act which established the EPA and others. The Clean Air
and Clean Water Acts require measurement, monitoring and control of
municipal, industrial and other discharges of hydrocarbons and numerous other
substances including heavy metals, toxic gases, chlorinated solvents and
fertilizer and pesticide residues.
During the last several years, a de-emphasis of environmental issues in
Congress has resulted in delays in enactment and enforcement of the
regulatory climate upon which the Company's future prospects were dependent.
Several federal and state programs were not re-authorized or funded. Just
like companies in the electric vehicle or alternative fuels arenas, FiberChem
found that many of its expected opportunities had evaporated, at least for
the foreseeable future. Consequently, FiberChem's management identified
market segments that were driven by other forces. Notwithstanding the slow
down at the federal level, the Company recognized that the State of Florida
represented a short-term opportunity for aboveground tank leak detection and
set about getting its sensor products specified. At the same time, the phase
out of Freon presented the Company with an opportunity to establish its
technology as the preferred replacement for the existing Freon/Infrared
method for measurement of total petroleum hydrocarbons (TPH) in process water
streams.
Although present federal laws do not require leak detection for ASTs,
many state and local governments have enacted or are considering regulations
requiring leak detection for ASTs. Two pieces of legislation are pending
before Congress and the EPA has proposed a collaboration with the American
Petroleum Institute ("API") on voluntary AST programs in which leak detection
is a significant factor. As part of this collaboration, API is conducting a
test of leak detection equipment at an operating tank farm. The Company's
products and those of two other companies were selected for this evaluation.
The State of Florida has perhaps the most stringent regulations and FCI is
believed to be the only company to have certification for both uncontaminated
and contaminated sites in Florida. The Company believes that similar
regulations are being finalized in Virginia, Wisconsin, Pennsylvania and
other jurisdictions.
INTERNATIONAL REGULATORY ACTIVITY
Several countries have environmental laws or regulations in place or
being implemented that affect the market for the Company's products. Belgium
has a new environmental law that regulates retail gas stations. Canada's
Ontario Province has an AST regulation in process. The Republic of South
Korea has a UST law which is currently being implemented. Taiwan has
committed to significant expenditure for environmental clean up. Finland has
proposed leak detection for retail gasoline stations and has recently
promulgated clean up regulations backed by government funding for the clean
up of contaminated retail sites in the country. The Company is working with
its international distributors and others to promote the Company's products
and enhance its name recognition in these countries so that the Company's
products are taken into consideration when legislation and regulations are
promulgated.
MANUFACTURING
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
9
<PAGE>
the Company's DHP, operating and control software, personal computers and
peripheral devices such as alarms. Accessory kits are configured by the
Company using both commercially available and specially manufactured
components.
The Company is in the process of undergoing certification under the ISO
9000 quality standards. This certification is expected to be completed
during Fiscal 1998.
RESEARCH AND DEVELOPMENT
The Company shifted its emphasis in 1996 and 1997 to applications
development of the petroleum hydrocarbons product line, particularly in the
areas of produced water and waste water. Peripherals were developed to allow
the FOCS-Registered Trademark- technology to function in highly contaminated
flowing water streams by automatically rinsing the probe on demand. This led
to the development of the OilSense-4000-Registered Trademark- a completely
integrated system for use on offshore platforms.
The Company also put significant effort into developing both methodology
and software for the use of the water-only versions of the portable unit
(PHA-100W and PHA-100WL) in the storm and waste water and offshore produced
water markets.
SENSORS
The sensors market represents the Company's largest potential market,
primarily because applications for sensors are much wider than those for the
Company's environmental products. Developed in cooperation with Texas
Instruments, the Sensor-on-a-Chip-Registered Trademark- technology, patented
by FCI, has the potential to revolutionize a wide range of consumer,
industrial, monitoring and medical products.
This new concept, based on an optical platform that is essentially a
double beam spectrometer on a plug-in base in a standard 20-pin integrated
circuit package, utilizes standard TI components for ease of design
compatibility. These devices incorporate waveguides onto which a chemical
matrix may be coated. The presence of a chemical analyte which causes a
change in the refractive index, absorption or fluorescence of the waveguide
material results in a change which can be detected, measured and related to
concentration of the analyte, whether in the aqueous or gaseous phase.
While these sensors can be used in hardware currently under development
at the Company, e.g., portable dosimeter devices as well as continuous
monitoring probes and associated hardware, the primary application for these
Sensors-on-a-Chip-Registered Trademark- lies in the OEM marketplace. This
market is characterized by clients who have needs or wants for sensors that
give their products an advantage in their marketplace.
Examples of ongoing developments include:
- a fail-safe flammable gas sensor for a household appliance control
system with a one million units per year potential
- a breath alcohol sensor for an ignition interlock device for automotive
use with a three million unit potential over 5 years
- a fuel/air ratio sensor for an automotive client which could result in
two sensors per automobile
- a gasoline vapor sensor for a gasoline retailing application with a one
million unit potential
- a carbon monoxide sensor for residential and commercial with a multi-
million unit potential
- an ammonia sensor for refrigerant levels in food processing facilities
10
<PAGE>
These applications represent sensors with selling prices anticipated to
be in the $5.00 to $150.00 range depending upon application and volume.
The Company also has invented a proprietary method of analysis for
chemical and biological molecules which is essentially a solid state version
of the well-known immunoassay technology. This technology was borrowed from
the medical community and applied to environmental monitoring. The
Company's invention (patents pending) has the potential to revolutionize
sensor development in areas previously relegated to expensive and slow
laboratory analysis. When applied to the Sensor-on-a-Chip-Registered
Trademark- this technology could provide a range of sensors and hardware
products which could revolutionize the biomedical and biological analysis
marketplace. As an example, the Company recently demonstrated an immunoassay
for cocaine and other drugs of abuse that reached a detection limit of 400
parts per trillion.
TEXAS INSTRUMENTS, INC. ("TI")
On June 15, 1995, the Company entered into an intellectual property
license agreement and a cooperative development agreement with TI. Under the
License Agreement, TI licensed the Company's patented FOCS-Registered
Trademark- for use with TI's optoelectronic technology. The Company granted
TI an exclusive worldwide royalty-bearing license to develop, produce and
market chip-based chemical sensors for specific applications. In exchange,
TI granted the Company a non-exclusive worldwide royalty-bearing license to
certain TI technology. The license agreement terminates when the last
Company or TI patent concerning the technology under the license agreement
expires. The License Agreement and Cooperative Development Agreement replace
similar agreements between the Company and TI, entered into in January 1992,
with a goal of miniaturizing the Company's FOCS-Registered Trademark-
technologies into microchip sensors. This development work with TI is also
the basis for the Sensor-on-a-Chip-Registered Trademark-product which is the
subject of the joint development agreement with Gilbarco described below.
The Company has been granted a United States patent on chip-based sensors in
general and has applied for a patent on a chip-based toxic gas sensor.
Under the cooperative development agreement, the Company and TI agreed
to design and develop certain custom FOCS-Registered Trademark- based sensors
for TI's exclusive use. The first chip-based sensor has been developed for
carbon monoxide (CO). Chemistry development is essentially completed.
Recent changes in the UL Standard for residential CO detectors and
significant changes in market dynamics have impacted on the introduction of
this product by TI.
Since the Company developed a working relationship with the
Optoelectronics Development Group within TI's Semiconductor Group, the
Company has identified and pursued a number of opportunities in the sensor
area, some introduced by TI, others directly by the Company. It is expected
that an expanded marketing activity on the part of TI will result in
additional opportunities in the near future. Robertshaw Controls, Alcohol
Sensors International, Gilbarco, Amoco, Horiba, Bechtel Nevada and Manning
Systems are examples of current development partnerships in various stages of
completion.
AGREEMENT WITH ALCOHOL SENSORS INTERNATIONAL, LTD.
The Company with the assistance of and pursuant to specifications
and know-how of Alcohol Sensors International, Ltd. ("ASI"), has developed
chemical sensors for the breath alcohol (ethanol) testing industry and
market. On November 8, 1996, the Company, through FCI Environmental, entered
into an agreement with ASI pursuant to which the Company granted ASI
exclusive right, title and interest (including sales and marketing rights) to
such alcohol sensors for the breath alcohol testing industry and market. In
consideration therefor, ASI agreed to market, promote and sell instruments
employing such alcohol sensors on a worldwide basis and to pay the Company
development and licensing fees over the term of the agreement. The term of
the agreement is for five years and may automatically be renewed by ASI for
successive five-year terms upon written notice to the Company not less than
sixty days prior to the expiration of the prior term. Development is
continuing.
11
<PAGE>
JOINT DEVELOPMENT AGREEMENT WITH GILBARCO, INC.
The Company, through FCI Environmental, completed the development for
Gilbarco of a low-cost sensor for the detection of gasoline vapor in Phase II
vapor recovery systems for gasoline dispensing equipment. The introduction
of the equipment is pending the promulgation of regulations by the California
Air Resources Board (CARB) prior to the introduction of 1998 model year cars
which have onboard vapor recovery. Delays have occurred in the promulgation
of the regulations; however, once regulations are promulgated, there would be
a phase-in period of as yet undetermined duration. Recently, Gilbarco has
begun a program of cold weather testing of a gasoline dispenser equipped with
the sensor in anticipation of action by CARB.
BECHTEL NEVADA
In June 1995, the Company entered into a Cooperative Research and
Development Agreement ("CRADA") with the U. S. Department of Energy ("DOE")
through its operating entity Bechtel Nevada, Inc.'s Remote Sensing Laboratory
in Las Vegas, Nevada to develop low-cost, rugged demountable probes suitable
for use with the Sensor-on-a-Chip-Registered Trademark- platform. This
development resulted in the production of a prototype probe to carry up to
three chips. New development has focused on a dosimeter device for hand held
use and is ongoing.
In March 1996, the Company entered into a contract with DOE through
Bechtel Nevada, to develop a chip-based sensor for trichloroethylene at the
ppb level in water. The first phase of the contract, the selection,
evaluation and verification of an appropriate chemistry, was completed in
September 1996. The second phase of this contract, development of prototype
chip sensors, has not been funded.
OTHER SENSOR DEVELOPMENT
The Company is further developing numerous other sensors for specific
contaminants and properties. Certain sensors are completed, but will not be
introduced into manufacturing until the Company has the resources to finalize
the design of the chip-based platform for that specific application. Other
sensors are still in the chemistry development stage. The current status of
the Company's sensor development is outlined in the table below, showing
analytes measured, their stage of development, targeted sensitivity
(capability of measurement) and the particular media monitored:
<TABLE>
<CAPTION>
Stage of Targeted
Type Development Sensitivity/Media
- ---------------------------------------- ------------ -------------------------------------------------------
<S> <C> <C>
Petroleum Hydrocarbons Commercial LESS THAN 1 ppm in water; LESS THAN 10 ppm in air, soil
Trichloroethylene ("TCE") Commercial LESS THAN 10 ppm in water, remediation
Tetrachloroethylene Commercial LESS THAN 10 ppm in water, remediation
Oxygen Prototype LESS THAN 1 ppm in air, water, soil
Carbon Dioxide Prototype LESS THAN 5 ppm in air, water, soil
Carbon Monoxide Prototype LESS THAN 5 ppm in air
Illegal Narcotics Prototype LESS THAN 400 pptrillion in air, water
pH Prototype 2-12 in water
Trichloroethylene ("TCE") Development ppb in water (1)
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.
12
<PAGE>
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 Seateam 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.
COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company has determined the costs and effects of compliance with
federal, state and local environmental laws to be minimal in amount and
exposure. The Company spends less than 1% of its total expenditures to
comply with the various environmental laws.
EMPLOYEES
As of September 30, 1997, the Company and its subsidiaries employed 19
persons on a full-time basis. These include Geoffrey F. Hewitt, President
and Chief Executive Officer; Melvin W. Pelley, Chief Financial Officer and
Thomas A. Collins, President of FCI Environmental. These three persons
devote substantially all of their business time to the Company's affairs. The
Company also employed three administrative persons; one scientist; five
laboratory and manufacturing technicians; one manager of manufacturing; one
materials, production control, shipping and receiving specialist; two
engineers; one sales applications specialist; and two strategic business unit
sales managers.
ITEM 2. DESCRIPTION OF PROPERTIES
In September 1989, the Company leased approximately 15,000 square feet
of space in a new multi-tenant showroom/warehouse/distribution facility
within Hughes Airport Center, 1181 Grier Drive, Suite B, Las Vegas, Nevada.
The Company is currently using approximately 8,000 square feet of its
facility for production, 4,000 square feet for research, development and
engineering and the remaining 3,000 square feet for marketing and
administrative purposes. The lease was for five years and expired on
February 28, 1995. The Company and the lessor have agreed to a month-to-month
lease which is terminable by either party upon 30 days' notice. Current base
monthly payments under the month-to-month lease are $12,786. Rent expense
during Fiscal 1996 and 1997 was $172,492 and $172,551, respectively. The
Company is pursuing alternatives including a renewal of the current lease at
approximately the current base monthly rental charge.
ITEM 3. LEGAL PROCEEDINGS
On February 20, 1997 FCI Environmental, Inc. ("FCIE") commenced a
lawsuit in the State Court of Nevada (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, and on April 10, 1997 the State Action was removed
to Federal Court. 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 which is scheduled for January 1998.
13
<PAGE>
A former distributor has filed an action in French national courts
claiming improper termination by FCI Environmental, Inc. The Company has
responded that the distribution agreement provides for arbitration, in
Nevada, of any disputes and that therefore, the French courts do not have
jurisdiction, and further that the claims are without merit. An
administrative hearing is scheduled in January 1998. The Company does not
expect an adverse outcome and believes that even in the event of an adverse
outcome, such an outcome would not have a material effect on its financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year ended September 30, 1997.
14
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Common Stock of FiberChem is traded in the over-the-counter market
and is quoted on the National Association of Securities Dealers Automated
Quotation System, Inc. ("NASDAQ") under the symbol "FOCS."
The following table sets forth for the periods indicated the high and
low trade prices of the Company's Common Stock as reported by NASDAQ.
<TABLE>
<CAPTION>
Trading Period High Low
- ------------ ---------------------------------------- ----------- ----------
<S> <C> <C> <C>
COMMON STOCK 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 ENDING SEPTEMBER 30, 1998
----------------------------------------
FIRST QUARTER $0.28 $0.19
October 1, 1997 - December 19, 1997
</TABLE>
On December 19, 1997, the closing bid price of a share of the Company's
Common Stock was $0.19.
On December 19, 1997, the Company had approximately 475 holders of
record and had in excess of 2,500 beneficial holders of its Common Stock.
The Company has not paid any cash dividends on its Common Stock to date
and does not anticipate paying any in the foreseeable future. The Board of
Directors intends to retain any earnings to support the growth of the
Company's business. On October 1, 1995, the Company declared dividends on its
Convertible Preferred Stock to holders of record as of that date. The
dividends are cumulative and are payable, at the discretion of the holders,
in cash (11%) or additional shares of Convertible Preferred Stock (8%). In
November, 1995, the Company paid cash dividends of $23,645 and issued 15,214
shares of Convertible Preferred Stock dividends.
On October 1, 1996, the Company declared dividends on Convertible
Preferred Stock to holders of record as of that date. 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.
15
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and notes thereto of the Company
appearing elsewhere in this Report.
LIQUIDITY AND CAPITAL RESOURCES
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 which has been adjusted to $0.4078, a
price representing a 10% discount from the average closing bid price of the
Common Stock for the 30 business days prior to February 15, 1997. As of
September 30, 1997 and December 2, 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 $345,683. 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.
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.
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
16
<PAGE>
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. The Company believes
that it must provide an incentive when it is compensating employees and
directors for services rendered to the Company in the form of non-cash
compensation.
As a result, the Company received $160,875 in payment for 520,252
escrowed shares at prices ranging from $0.30 to $0.32 per share, which amount
liquidated $780,379 of original note principal. The remaining $756,804 of
unpaid note principal was extinguished and the underlying collateral of
504,535 shares were forfeited to the Company and immediately canceled,
thereby reducing the total number of shares outstanding. Unpaid accrued
interest receivable aggregating $248,212 was expensed.
The Company had working capital of $1,883,551 at September 30, 1997, as
compared with working capital of $4,384,841 at September 30, 1996, a
decrease of $2,501,290. The Company had a decrease in cash and cash
equivalents of $2,638,084 and a decrease in stockholders' equity of
$2,996,747 during the fiscal year ended September 30, 1997 ("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 $747,146 or
75% and increased a further $142,346 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 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; (iv) $46,171 in cash dividends issued to
preferred stockholders; and (v) the release of $18,456 in restricted cash
serving as security for a note payable to a bank, less $16,319 in payments on
notes payable. 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
17
<PAGE>
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 Item 10. Management - Executive Compensation and Note 8 to the
Company's Consolidated Financial Statements for information concerning the
Company's material contracts for compensation and rent.
As discussed in Note 1 to the Consolidated Financial Statements, the
Company continues to incur substantial losses and may need additional
financing to continue its operations. The Company is reviewing alternatives
for raising additional capital. On October 2, 1997, the Company entered into
an agreement with entrenet Group, LLC ("entrenet") for advice and assistance
in developing and executing business plans, financing strategies and business
partnerships, acquisition and mergers. For its services, entrenet will
receive a cash fee of $5,000 per month for twelve months; $60,000 in the form
of a 10% convertible note, payable on the earlier of (a) a financial
transaction (as defined in the Agreement) or (b) two years; 5% of the value
of any financial transaction (as defined in the Agreement); and 5% of any
financing provided by or introduced directly by entrenet.
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 as soon as reasonably possible following the filing of this Report
and upon the effectiveness of a registration statement with the SEC.
Notwithstanding the foregoing, there can be no assurance that forecasted
sales levels will be realized to achieve profitable operations, or that
additional financing, if needed can be obtained on terms satisfactory to the
Company, if at all, or in an amount sufficient to enable the Company to
continue its operations.
RESULTS OF OPERATIONS
The Company's total revenues for 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 Item 1.
Description of Business. Revenues from a second customer during 1997
amounted to $171,100.
Revenues during 1996 from three different customers were $189,700,
$99,786, and$92,838.
During Fiscal 1997, the Company had cost of revenues of $945,434, or a
gross profit of 38% of sales, as compared to cost of revenues of $367,779, or
a gross profit of 60%, during Fiscal 1996. The decrease in gross profit
margin resulted primarily from excess manufacturing capacity. A slightly
lower margin mix of sales also reduced gross profit margins during 1997.
The Company's research, development and engineering expenditures
increased by 2% to $1,257,324 during Fiscal 1997 from $1,233,054 during
Fiscal 1996. The Company has focused its development and engineering efforts
on its hydrocarbon sensors and systems and has also maintained its aggressive
Sensor-on-a-Chip-TM-development program with TI, Gilbarco, ASI, Bechtel
Nevada and others. See Item 1. Description of 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.
18
<PAGE>
Also during Fiscal 1996, the Company developed substantial improvements
to its manufacturing processes and products, including a process which
improved the already substantial resistance of its probes to potential leaks
and other damage from prolonged exposure to water and water vapor and to
strong solvents and other chemicals which may be present in water.
Accordingly, the Company provided a reserve of approximately $130,000 against
finished products. In addition, the Company provided approximately $150,000
as a reserve against other finished goods, including products shipped to or
segregated for Whessoe Varec, Autronica and other distributors. During
Fiscal 1997, no similar provisions were charged to general and administrative
expense.
Sales and marketing expenses during Fiscal 1997 and Fiscal 1996 were
$1,007,975 and $1,004,172, 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.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, Earnings per Share ("SFAS 128"), which modified existing
guidance for computing earnings per share and requires the disclosure of
basic 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 ended 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.
In March 1997 the FASB issued Statement No. 129 ("SFAS 129"), Disclosure of
Information about Capital Structure and in June 1997 the FASB issued
Statement No. 130, Reporting Comprehensive Income ("SFAS 130") and Statement
No. 131, Disclosure about Segments of an Enterprise and Related Information
("SFAS 131"). The Company is required to adopt SFAS 129 in fiscal 1998 and
SFAS's 130 and 131 in fiscal 1999. SFAS 129 establishes new standards for
reporting and disclosing the pertinent rights and privileges of the various
securities outstanding. 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.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements of the Company are contained in a
separate section of this Form 10-KSB which follows Part III.
PAGE NO.
--------
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
19
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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
(which all 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.
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 1
to the Consolidated Financial Statements for September 30, 1996. The
consolidated financial statements do not include any adjustment that might
result from the ultimate outcome of these uncertainties.
The Company has authorized the Former Accountant to respond fully to
inquiries of the successor accountant concerning the subject matter of such
disagreements.
On April 9, 1997, the Board of Directors appointed Goldstein Golub
Kessler & Company, P.C., certified public accountants, as the Company's
successor accountant and to audit the books of account and other records of
the Company for the fiscal year ending September 30, 1997.
20
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names, ages and respective positions of the Executive Officers and
Directors of the Company are as follows:
Name Age Position
- ---- --- --------
Geoffrey F. Hewitt 54 Chairman of the Board, President, Chief
Executive Officer and Class A Director
Dale W. Conrad 57 Class A Director
Byron A. Denenberg 63 Class C Director
Irwin J. Gruverman 64 Class A Director
Walter Haemmerli 68 Class B Director
Scott J. Loomis 49 Class B Director
Gerald T. Owens 70 Class C Director
Melvin W. Pelley 53 Chief Financial Officer and Secretary
The names, ages and respective positions of the Executive Officers and
Directors of FCI Environmental are as follows:
Name Age Position
- ---- --- --------
Dale W. Conrad 57 Chairman of the Board and Director
Geoffrey F. Hewitt 54 Chief Executive Officer and Director
Scott J. Loomis 49 Director
Melvin W. Pelley 53 Chief Financial Officer, Secretary and
Director
Thomas A. Collins 51 President
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.
21
<PAGE>
DALE W. CONRAD has served as a Director of the Company since August
1995. He has also served as Chairman of the Board of Directors of FCI
Environmental since March 1993, as President of Environmental from March 1993
until April 1994, and as Chief Executive Officer of FCI Environmental from
March 1993 until August 1995. Prior thereto, from 1988 to 1991, he was
President and Chief Executive Officer of Biotope, Inc., Redmond, Washington,
a defunct company engaged in the design and manufacturing of blood diagnostic
equipment. From 1983 to 1988 he was President of Advanced Technology
Laboratories, Inc. ("ATL"), Bothell, Washington, which manufactures and
markets real-time ultrasound medical diagnostic equipment. From 1981 to 1983
Mr. Conrad was Executive Vice President and General Manager for Advanced
Diagnostic Research Corporation ("ADR"), Tempe, Arizona, a designer,
manufacturer and marketer of diagnostic ultrasound scanners. From 1965 to
1981, he held various positions at Texas Instruments, Inc., including Site
Manager for the College Station, Texas plant from 1979 to 1981.
BYRON A. DENENBERG has served as a Director of the Company since August
1995. Mr. Denenberg has been a private investor since 1991. Mr. Denenberg
was co-founder in 1969 of MDA Scientific, Inc. ("MDA"), a manufacturer and
marketer of toxic gas monitoring systems, where he was CEO from inception
until 1991. MDA was purchased by Zwellweger Uster AG in 1988. Mr. Denenberg
received a B.S. degree in Mechanical Engineering from Bucknell University,
Lewisburg, Pennsylvania. He currently serves as a Director of RCT Systems,
Inc., MST Measurement Systems, Inc., FPM Analytics, Inc., and Microsensor
Technologies, GmbH.
IRWIN J. GRUVERMAN has served as a Director of the Company since May
1994. Since 1990, Mr. Gruverman has served as the General Partner for G&G
Diagnostics Funds, a venture capital business, and in 1982 founded and
currently serves as Chairman of the Board of Directors and Chief Executive
Officer of Microfluidics Corporation, an equipment manufacturer and process
research and development company.
WALTER HAEMMERLI has served as a Director of the Company since February
1990. Mr. Haemmerli has been the Chief Executive Officer since 1978 of
Manport AG, Zurich, Switzerland, an investment management company owned by
him. Mr. Haemmerli was employed by Union Bank of Switzerland, Geneva, Basle
and Zurich form 1960 to 1978, holding the position of Vice President from
1970. Mr. Haemmerli serves on the Board of Directors and is Vice-Chairman of
Privatbank Vermag AG, Chur, Switzerland, and is a Member of the Board of
Directors for American Cold Storage, Inc., Louisville, Kentucky.
SCOTT J. LOOMIS has served as a Director of the Company since June 1989
and as Chairman of the Board of Directors from August 1995 until November 14,
1997. He served as President of the Company from April 1994 to August 1995.
Mr. Loomis has served as a Director of FCI Environmental since January 1990.
Mr. Loomis has served as a Director of AgriBioTech, Inc. ("ABT"), formerly a
subsidiary of the Company, since January 1988, as Vice President of ABT since
April 1994 and as President from June 1992 until March 1994. Mr. Loomis
spends a small percentage of his business time on the Company's affairs.
Since 1985, Mr. Loomis has been President of AgriResearch and Development,
Inc. From 1979 until July 1986, Mr. Loomis was President of MLM Properties
Ltd., engaged in real estate investments. Mr. Loomis has been a licensed
attorney in the State of Arizona since 1974.
GERALD T. OWENS has served as a Director of the Company since December
1987. Mr. Owens served with Mobil Oil from 1962 to 1983 when he retired. At
retirement, he was President of Mobil Sales and Supply Corporation, a
wholly-owned subsidiary of Mobil Oil, and he was a Vice President of Mobil
Oil. From 1951 to 1961, Mr. Owens practiced law with the law firm of Andrews
and Kurth in Houston, Texas. Mr. Owens received an L.L.B. degree from the
University of Texas in 1950 and a B.A. degree in history in 1948 from the
University of Texas. He serves as Chairman of the Board of Trustees for the
Kenny Stout Memorial Golf Foundation, and as a member of the Board of
Trustees for the Monterey Institute of International Studies.
22
<PAGE>
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 Company's June 1997 Annual
Meeting of Shareholders. Mr. Loomis and Mr. Haemmerli were elected to
three-year terms as Directors at the Company's May 1996 Annual Meeting of
Stockholders. Mr. Owens was elected to a three-year term as Director at the
Company's May 1995 Annual Meeting of Stockholders and Mr. Denenberg was
appointed to the Board of Directors in August 1995.
In January 1993, the Company established a Stock Option Committee. The
Stock Option Committee is responsible for the granting of stock options under
the Company's Stock Option Plans. The Company also established a
Compensation Review Committee, which is responsible for reviewing the
compensation of the Company's executives and employees. In August 1995, Mr.
Owens and Mr. Haemmerli were appointed to a single Compensation Review and
Stock Option Committee. Also, in August 1995, Mr. Loomis and Mr. Owens were
appointed to a newly established Audit Committee. Mr. Gruverman was added to
the Audit Committee on November 14, 1997. The Board of Directors did not
have a standing nomination committee or committee performing similar
functions during the fiscal year ended September 30, 1997.
COMPLIANCE WITH 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, Directors and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission. Officers, Directors and ten percent shareholders are required by
regulation to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on the Company's copies of such forms received or written
representations from certain reporting persons that no Form 5's were required
for those persons, the Company believes that, during the time period from
October 1, 1996 to September 30, 1997, all filing requirements applicable to
its officers, Directors and greater than ten percent beneficial owners were
complied with.
23
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The compensation paid and/or accrued to each of the executive officers
of the Company and its subsidiaries and of all executive officers as a group,
whose annual compensation exceeds $100,000, for services rendered to the
Company during the three fiscal years ended September 30, 1997, was as
follows:
(a) SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------------------
Annual Compensation Awards Payouts
--------------------------------------- ---------------------------- ----------
Long-Term
Other Restricted Securities Incentive All
Name of Individual Fiscal Annual Stock Underlying Plan Other
and Principal Position Year Salary($) Bonus($) Compensation($) Awards($) Options/SARs(#) Payouts($) Compensation($)
- ----------------------- ---- ------------ -------- --------------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Geoffrey F. Hewitt 1997 $205,000 (1) $ -- $ -- -- 125,000 $ -- $ --
President and CEO of 1996 $195,768 $ -- $ -- -- 100,000 $ -- $ --
FiberChem, Inc. and 1995 $177,596 $ -- $ -- -- 75,000 $ -- $ --
CEO of FCI
Environmental, Inc.
Dale W. Conrad 1997 $ -- $ -- $ 2,709 (2) -- 25,000 $ -- $ --
Chairman of the 1996 $ 18,730 $ -- $ 13,594 (2) -- 35,000 $ -- $ --
Board of FCI 1995 $112,535 $ -- $ -- -- 60,000 $ -- $ --
Environmental, Inc.
Melvin W. Pelley 1997 $136,708 (3) $ -- $ -- -- 75,000 $ -- $ --
Chief Financial 1996 $126,461 $ -- $ -- -- 50,000 $ -- $ --
Officer of FiberChem, 1995 $113,346 $ -- $ -- -- 25,000 (2) $ -- $ --
Inc. and of FCI
Environmental, Inc.
David R. LeBlanc 1997 $ 5,288 (5) $ -- $ -- -- 0 $ -- $ --
Vice President - Sales 1996 $125,000 $ -- $ -- -- 5,000 $ -- $ --
and Marketing of 1995 $123,588 $ -- $ -- -- 5,000 $ -- $ --
FCI Environmental, Inc.
Thomas A. Collins 1997 $129,708 (4) $ -- $ -- -- 75,000 $ -- $ --
President of 1996 $ 70,192 $ -- $ -- -- 100,000 $ -- $ --
FCI Environmental, Inc. 1995 $ -- $ -- $ -- -- -- $ -- $ --
</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 anuary 1, 1998 at the Company's discretion.
(2) Consulting fees of $2,709 paid during Fiscal 1997; Directors'
compensation of $11,194 and consulting fees of $2,400 paid during Fiscal
1996. Amounts earned, net of applicable taxes, reduced the promissory
notes issued by Mr. Conrad to the Company for the exercise of options.
(3) Includes $8,615 in accrued but unpaid salary, earned during the period
from June 15 through September 30, 1997. Payment has been deferred until
after January 1, 1998 at the Company's discretion.
(4) Hired March 1, 1996 as Vice President of International Marketing and
Product Development; President of FCI Environmental since November 1996.
Includes $6,730 in accrued but unpaid salary, earned during the period
from June 15 through September 30, 1997. Payment has been deferred
until after January 1, 1998 at the Company's discretion.
(5) Resigned July 1996; compensated at the rate of $125,000 annually through
October 5, 1996.
24
<PAGE>
(b) OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options/SARs
Underlying Granted Exercise
Options/SARs to Employees or Base Expiration
Name of Individual Granted In Fiscal Year Price($/Share) Date
- ------------------ ------------- ---------------- -------------- ------------------
<S> <C> <C> <C> <C>
Geoffrey F. Hewitt 125,000 27.8% $ 0.25 September 12, 2007
Dale W. Conrad 25,000 5.6% $ 0.22 May 29, 2007
Melvin W. Pelley 75,000 16.7% $ 0.25 September 12, 2007
David R. LeBlanc -- -- --
Thomas A. Collins 75,000 16.7% $ 0.25 September 12, 2007
</TABLE>
(c) AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Shares Options/SARs Options/SARs
Acquired on Value at Fiscal Year End (#) at Fiscal Year End ($)
Name of Individual Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------ ------------ ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Geoffrey F. Hewitt 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."
(d) LONG-TERM INCENTIVE PLANS
Effective January 1, 1994, the Company implemented an Internal Revenue
Code Section 401(k) Profit Sharing Plan (the "Plan"). The Plan provides for
voluntary contributions by employees into the Plan subject to the limitations
imposed by Internal Revenue Code Section 401(k). The Company will match
employee contributions at a rate of 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.
(e) 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.
25
<PAGE>
During Fiscal 1996, the Company expensed an aggregate of $99,000 in
Directors' compensation for the Company's six non-management Directors,
applying $42,451 to the payment of promissory notes and interest, $35,272 to
the exercise of 35,272 stock options and $21,277 of payroll taxes. In
addition, on April 8, 1996, the Company granted to each of its six
non-management Directors options to purchase 10,000 shares of Common Stock at
$1.00 per share, which was the market value of Common Stock on that date and
on September 11, 1996, the Company granted to each of its six non-management
Directors options to purchase 25,000 shares of Common Stock at $0.93 per
share, which was the market value of the Common Stock on that date. On May
29, 1997, the Company granted to each of its six non-management Directors
options to purchase 25,000 shares of Common Stock at $0.22 per share, which
was the market value of the Common Stock on that date. In addition, the
Company granted options to purchase an aggregate of 36,500 shares of the
Common Stock to three of its non-management directors for service as Chairman
and members of its Audit Committee and Compensation and Stock Options
Committee.
(f) EMPLOYMENT CONTRACTS
Geoffrey F. Hewitt serves under an employment agreement with the
Company, effective October 1, 1997. Mr. Hewitt is currently compensated at a
rate of $205,000 per annum and is entitled to receive bonuses, if any, at the
discretion of the Board of Directors. The employment contract is terminable
for cause. Since June 15, 1997, payment of approximately 27% (or $55,000) of
Mr. Hewitt's salary has been deferred. Payment of the earned but unpaid
amount is at the discretion of the Company and is expected to be paid during
calendar 1998.
Melvin W. Pelley serves under an employment agreement with the Company,
effective October 1, 1997. Mr. Pelley is currently compensated at a rate of
$132,000 per annum, and is entitled to receive bonuses, if any, at the
discretion of the Board of Directors. The employment contract is terminable
for cause. Since June 15, 1997, payment of approximately 24% (or $32,000)
of Mr. Pelley's salary has been deferred. Payment of the earned but unpaid
amount is at the discretion of the Company and is expected to be paid during
calendar 1998.
Thomas A. Collins serves under an employment agreement with the Company,
effective October 1, 1997. Mr. Collins is currently compensated at a rate of
$125,000 per annum, and is entitled to receive bonuses, if any, at the
discretion of the Board of Directors. The employment contract is terminable
for cause. Since June 15, 1997, payment of approximately 20% (or $25,000)
of Mr. Collins' salary has been deferred. Payment of the earned but unpaid
amount is at the discretion of the Company and is expected to be paid during
calendar 1998.
David R. LeBlanc served until October 5, 1996 under an employment
agreement with FCI Environmental, effective July 18, 1994. Mr. LeBlanc was
compensated at a rate of $125,000 per annum and was entitled to receive
bonuses, if any, at the discretion of the Board of Directors. The employment
contract was terminable without cause with 90 days notice.
(g) CONSULTING AGREEMENTS
In August 1995, the Company entered into an agreement with Dale W.
Conrad to provide consulting services to the Company on an as requested basis
at an hourly rate. The services include advice and assistance in technical,
operational, and administrative matters. From August through September,
1995, the Company paid Mr. Conrad $8,394 under this agreement, all of which
was applied to promissory notes executed by Mr. Conrad in connection with the
exercise of stock options, and to the exercise of additional stock options.
From October 1995 through September 1996, the Company paid Mr. Conrad $18,730
under this agreement, all of which was applied to the promissory notes, the
exercise of stock options and payment for group insurance benefits paid by
the Company. From October 1996 through September 1997, the Company paid Mr.
Conrad $2,709 under this agreement, all of which was applied to promissory
notes, the exercise of stock options and payment for group insurance benefits
paid by the Company. The agreement is terminable by either party upon
written notice.
26
<PAGE>
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.
(h) 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,
would as of April, 7, 1995 have an exercise price of $1.00 per share, which
price was above the fair market value of the Common Stock as of the last
quoted market trade on April 7, 1995. Options to purchase an aggregate of
2,309,479 shares at prices ranging from $1.125 to $2.15 per share were
accordingly changed to $1.00 per share.
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
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.
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.
27
<PAGE>
As a result, the Company received $160,875 in payment for 520,252
escrowed shares at prices ranging from $0.30 to $0.32 per share, which amount
liquidated $780,379 of original note principal. The remaining $756,804 of
unpaid note principal was extinguished and the underlying collateral of
504,535 shares were forfeited to the Company and immediately canceled,
thereby reducing the total number of shares outstanding. Unpaid accrued
interest receivable aggregating $248,212 was expensed.
In 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.
(i) STOCK BONUS PLANS
On February 20, 1990, the Company's stockholders authorized the Board of
Directors to design and implement a stock bonus plan providing for the
issuance of up to 143,000 shares of Common Stock which have been registered
and reserved for issuance. In May 1990, the Board of Directors adopted the
Company's Employee Stock Bonus Plan ("Bonus Plan"). Pursuant to the Bonus
Plan, full-time employees of the Company will be granted a stock bonus
equivalent to 15% of their annual salary. The stock granted under the Bonus
Plan is vested at a rate of 20% per year. However, an employee must work 12
consecutive months before any stock is vested. All employees of the Company,
including, but not limited to, its executive officers, received shares under
the Bonus Plan. As of September 30, 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 19, 1997, 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:
28
<PAGE>
Amount and
Nature of
Name and Address of Beneficial Percentage of
Beneficial Owner Ownership (1) Class (2)
- ----------------------------- ----------------- -------------
Geoffrey F. Hewitt (3) 574,329 (5) 2.2%
Dale W. Conrad 415,840 (6) 1.6%
7204 Wellington Point Road
McKinney, TX 75070
Byron A. Denenberg 190,000 (7) (4)
RCT Systems, Inc.
327 Messner Drive
Wheeling, IL 60090
Irwin J. Gruverman 300,470 (8) 1.2%
30 Ossipee Road
Newton, MA 02164
Walter Haemmerli 3,749,844 (9) 13.2%
Manport AG
Basteiplatz 3, CH 8001
Zurich, Switzerland
Scott J. Loomis 852,649 (10) 3.3%
P.O. Box 35238
Tucson, AZ 85740
Gerald T. Owens 226,823 (11) (4)
147 Paddington Way
San Antonio, TX 78209
Melvin W. Pelley (3) 293,863 (12) 1.2%
Thomas A. Collins (3) 175,000 (13) (4)
All Directors and Officers as 6,778,818 22.6%
a Group (9 persons)
(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)
29
<PAGE>
and which are exercisable or convertible within 60 days from the date
hereof have been exercised or converted.
(2) Based on 25,520,660 shares issued and outstanding as of December 19,
1997.
(3) The address of this person is c/o FCI Environmental, Inc., 1181 Grier
Drive, Suite B, Las Vegas, Nevada 89119.
(4) Represents less than one percent ownership.
(5) Includes an aggregate of 486,247 shares of Common Stock issuable upon
exercise of a like number of options.
(6) Includes an aggregate of 120,000 shares of Common Stock issuable upon
exercise of a like number of options.
(7) Includes an aggregate of 58,142 shares of Common Stock issuable upon
exercise of a like member of options.
(8) Includes 66,880 shares of Common Stock issuable upon exercise of a like
number of options. Also includes 67,500 shares of Common Stock held by
G&G Diagnostics, L.P. I, 48,200 shares of Common Stock held by G&G
Diagnostics, L.P. II, and 8,161 shares of Convertible Preferred Stock
convertible into 81,610 shares of Common Stock held by G&G Diagnostics,
L.P. III, all of which Mr. Gruverman is a principal.
(9) Includes 32,000 Class D Common Stock Purchase Warrants, 3,586 shares of
Convertible Preferred Stock convertible into 35,860 shares of Common
Stock, and an aggregate of 29,000 shares of Common Stock issuable upon
exercise of a like number of options. Also includes 704,000 shares of
Common Stock, 963,800 Class D Common Stock Purchase Warrants, and
165,286 shares of Convertible Preferred Stock convertible into 1,652,860
shares of Common Stock, all held by Privatbank Vermag A.G., Chur,
Switzerland, as custodian for certain customers, of which company Mr.
Haemmerli is Vice-Chairman. Also includes $150,000 of Senior
Convertible 8% notes convertible into 367,824 shares of Common Stock
held by Manport AG, of which company Mr. Haemmerli is Chief Executive
Officer.
(10) Includes 32,353 Class D Common Stock Purchase Warrants and an aggregate
of 90,500 shares of Common Stock issuable upon exercise of a like number
of options. Also includes 486,668 shares of Common Stock, and 151,590
Class D Common Stock Purchase Warrants held by Agri Research and
Development, Inc., of which Mr. Loomis is a Director and principal
stockholder.
(11) Includes 39,965 Class D Common Stock Purchase Warrants and an aggregate
of 82,000 shares of Common Stock issuable upon exercise of a like number
of options.
(12) Includes an aggregate of 75,000 shares of Common Stock issuable upon
exercise of a like number of options.
(13) Includes an aggregate of 175,000 shares of Common Stock issuable upon
exercise of a like number of options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 10. Executive Compensation, for information concerning stock
options granted and employment and consulting agreements entered into during
Fiscal 1996 and Fiscal 1997 with officers and Directors of the Company.
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, 1995, the principal balance due the Company was $106,390, and 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
30
<PAGE>
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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
The following is a complete list of exhibits which are incorporated herein as
part of this Report.
3.1 Articles of Incorporation of Registrant, as amended. (1)
31 By-Laws of Registrant. (2)
4.1 Class D Warrant Agreement of the Registrant with form of Warrant
Certificate. (3)
4.2 Form of 8% Senior Convertible Note Due 1999 issued in the Company's
February 1996 private placement. (4)
4.3 Form of Warrant to purchase Common Stock on or before May 31, 2001. (5)
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)
- -------------------------
(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.
31
<PAGE>
10.2 Amendment dated May 6, 1991 and September 26, 1991 to the Industrial
Real Estate Lease (Exhibit 10.10) for the Company's facilities. (8)
10.3 Employee Stock Bonus Plan. (3)
10.4 Amendments dated October 23, 1990 and February 21, 1991 to the
Industrial Real Estate Lease (Exhibit 10.10) for the Company's
facilities. (5)
10.5 Non-qualified stock option plan. (9)
10.6 Agreement dated December 10, 1992 by and between the Company and
Tanknology Environmental, Inc. (10)
10.7 Qualified Stock Option Plan. (11)
10.8 Consulting agreement by and between the Company and with Irv J.
Gruverman, dated November 4, 1993. (12)
10.9 Qualified Stock Option Plan. (13)
10.10 Termination of Distributor Agreement with Sippican, Inc. dated
February 24, 1994. (14)
10.11 Employment contract with David R. LeBlanc dated June 8, 1994. (14)
10.12 FCI FiberChem, Inc. and FCI Environmental, Inc. 401(k) Profit Sharing
Plan. (14)
10.13 Qualified Stock Option Plan (15)
10.14 License Agreement with Texas Instruments, Incorporated, dated June 15,
1995. (16)
10.15 Cooperative Development Agreement with Texas Instruments,
Incorporated, dated June 15, 1995. (16)
10.16 Form of Distribution Agreement. (17)
10.17 Form of agreement for services with Gordon Werner and others dated as
of September 15, 1995. (17)
- -------------------------
(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.
(9) Incorporated by reference from the Company's Registration Statement on Form
S-8 for April 28, 1992. (No. 33-47518).
(10) Incorporated by reference from the Company's Current Report on Form 8-K for
May 26, 1992.
(11) Incorporated by reference from the Company's Proxy Statement dated May
3, 1993.
(12) Incorporated by reference from the Company's Report on Form 10-K for
September 30, 1993.
(13) Incorporated by reference from the Company's Proxy Statement dated May
23, 1994.
(14) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1994.
(15) Incorporated by reference from the Company's Report on Form S-8 for
August 1, 1995.
(16) Incorporated by reference from the Company's Report on Form 8-K/A for
August 30, 1995.
(17) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1995.
32
<PAGE>
10.18 Agreement dated November 8, 1996 by and between FCI Environmental,
Inc. and Alcohol Sensors International, Ltd. CERTAIN INFORMATION IN
THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SEC
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. (18)
10.19 Agreement dated October 1, 1996 by and between FCI Environmental, Inc.
and Autronica AS. (18)
10.20 OEM Strategic Alliance Agreement dated June 30, 1996 by and between
Whessoe Varec, Inc. and FCI Environmental, Inc. (18)
10.21 1997 Employee Stock Plan (19)
*10.22 Employment agreement with Geoffrey F. Hewitt dated October 1, 1997.
*10.23 Employment agreement with Melvin W. Pelley dated October 1, 1997.
*10.24 Employment Agreement with Thomas A. Collins dated October 1, 1997.
*10.25 Amendment to Whessoe Varec, Inc. OEM Strategic Alliance Agreement
dated August 13, 1997.
*10.26 Agreement dated October 2, 1997 between the Company and entrenet
Group, L.L.C.
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of Goldstein Golub Kessler & Company, P.C.
- -------------------------
* filed with this Report.
(18) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1996.
(19) Incorporated by reference from the Company's Proxy Statement dated May
20, 1997.
- -------------------------
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter ended September 30, 1997.
- -------------------------
33
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: January 6, 1998
FIBERCHEM, INC.
By: /s/ Geoffrey F. Hewitt
-------------------------------------
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Geoffrey F. Hewitt Chairman, President and Chief Executive January 6, 1998
- -------------------------- Officer (Principal Executive Officer)
Geoffrey F. Hewitt
/s/ Melvin W. Pelley Chief Financial Officer January 6, 1998
- -------------------------- (Principal Accounting Officer)
Melvin W. Pelley
/s/ Scott J. Loomis Director January 6, 1998
- --------------------------
Scott J. Loomis
/s/ Walter Haemmerli Director January 6, 1998
- --------------------------
Walter Haemmerli
/s/ Gerald T. Owens Director January 6, 1998
- --------------------------
Gerald T. Owens
/s/ Irwin J. Gruverman Director January 6, 1998
- --------------------------
Irwin J. Gruverman
/s/ Dale W. Conrad Director January 6, 1998
- --------------------------
Dale W. Conrad
/s/ Byron A. Denenberg Director January 6, 1998
- --------------------------
Byron A. Denenberg
</TABLE>
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
FiberChem, Inc.
We have audited the accompanying consolidated balance sheet of FiberChem,
Inc. and Subsidiaries as of September 30, 1997 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
FiberChem, Inc. and Subsidiaries as of September 30, 1997, and the results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has suffered
recurring losses from operations which raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome
of these uncertainties.
/s/ GOLDSTEIN GOLUB KESSLER & COMPANY, LLP
New York, New York
November 21, 1997
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
FiberChem, Inc.:
We have audited the accompanying consolidated balance sheets of FiberChem,
Inc. and subsidiaries as of September 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the years in the two-year period ended September 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
FiberChem, Inc. and subsidiaries at September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
two year period ended September 30, 1996, 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.
Las Vegas, Nevada
January 10, 1997 /s/ KPMG Peat Marwick LLP
F-1A
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, September 30,
1996 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $3,065,572 $427,488
Accounts receivable, net of allowance for doubtful
accounts of $204,711 and $240,796 in 1996 and 1997,
respectively 305,473 263,947
Inventories (Note 3) 1,457,135 1,563,191
Prepaid expenses and other 59,060 56,941
------------- -------------
Total current assets 4,887,240 2,311,567
------------- -------------
Equipment 616,192 716,465
Less accumulated depreciation (483,827) (549,175)
------------- -------------
Net equipment 132,365 167,290
------------- -------------
Other assets:
Patent costs, net of accumulated amortization of
$1,436,309 at September 30, 1996 and
$1,678,845 at September 30, 1997 (note 5) 474,462 287,905
Technology costs, net of accumulated amortization
and $354,942 at September 30, 1996 and 114,764 83,333
and $386,373 at September 30, 1997 (note 4)
Financing costs, net of accumulated amortization of
$65,678 at September 30, 1996 and
$148,298 at September 30, 1997 (note 6) 204,245 119,625
Other 247,383 0
------------- -------------
Total other assets 1,040,854 490,863
------------- -------------
Total assets $6,060,459 $2,969,720
------------- -------------
------------- -------------
</TABLE>
The accompanying notes and independent auditor's reports should
be read in conjunction with the consolidated financial statements.
F-2
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, September 30,
1996 1997
------------- -------------
<S> <C> <C>
Current liabilities:
Current installments of note payable (note 6) $7,315 $6,878
Accounts payable 270,503 95,469
Accrued expenses 206,565 307,891
Interest payable 18,016 17,778
------------- -------------
Total current liabilities 502,399 428,016
Senior convertible notes payable (note 6) 1,675,000 1,650,000
Note payable, net of current installments (note 6) 2,551 7,942
------------- -------------
Total liabilities 2,179,950 2,085,958
------------- -------------
Stockholders' equity (notes 4, 6 and 7):
Preferred stock, $.001 par value. Authorized
10,000,000 shares; 205,089 and 218,998 convertible
shares issued and outstanding at September 30,
1996 and September 30, 1997, respectively;
at liquidation value of $15 per share 3,076,335 3,284,970
Common stock, $.0001 par value. Authorized
40,000,000 shares at September 30, 1996, and
50,000,000 shares at September 30, 1997;
25,705,216 and 25,515,660 shares issued and
outstanding at September 30, 1996, and
September 30, 1997, respectively 2,571 2,552
Additional paid-in capital 28,714,804 27,192,749
Deficit (26,369,551) (29,596,509)
------------- -------------
5,424,159 883,762
Notes receivable for exercise of options (1,543,650) --
------------- -------------
Total stockholders' equity 3,880,509 883,762
Commitments and contingencies (notes 6, 7 and 8)
------------- -------------
Total liabilities and stockholders' equity $6,060,459 $2,969,720
------------- -------------
------------- -------------
</TABLE>
The accompanying notes and independent auditor's reports should
be read in conjunction with the consolidated financial statements.
F-3
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------
1996 1997
------------- -------------
<S> <C> <C>
Revenues $908,700 $1,523,994
Cost of revenues 367,779 945,434
------------- -------------
Gross profit 540,921 578,560
------------- -------------
Operating expenses:
Research, development and engineering 1,233,054 1,257,324
General and administrative 1,109,456 1,101,781
Sales and marketing 1,007,975 1,004,172
Provision for loss on accounts receivable 201,225 36,085
Write down of obsolete inventory 281,313 --
------------- -------------
Total operating expenses 3,833,023 3,399,362
------------- -------------
Loss from operations (3,292,102) (2,820,802)
------------- -------------
Other income (expense):
Interest expense (183,795) (223,161)
Interest income 201,268 81,787
Other, net -- (264,782)
------------- -------------
Total other income (expense) 17,473 (406,156)
------------- -------------
Net loss ($3,274,629) ($3,226,958)
------------- -------------
------------- -------------
Shares of common stock used in computing loss per share 22,274,226 25,623,614
------------- -------------
------------- -------------
Net loss per share ($0.15) ($0.13)
------------- -------------
------------- -------------
</TABLE>
The accompanying notes and independent auditor's reports should
be read in conjunction with the consolidated financial statements.
F-4
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------------- ------------------------ Paid-In
Shares Amount Shares Amount Capital
------- ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995 214,462 $3,216,930 20,532,033 $2,053 24,844,392
Preferred stock dividend:
In stock (note 7) 15,214 228,210 -- -- (228,210)
In cash (note 7) -- -- -- -- (23,645)
Common stock issued:
For cash -- -- 3,333,333 333 2,653,884
For services -- -- 13,954 1 15,416
Conversion of senior
convertible notes payable (note 6) -- -- 1,437,500 144 991,576
Conversion of preferred stock (note 7) (14,587) (218,805) 145,870 15 218,790
Exercise of warrants -- -- 1,031 1 1,030
Exercise of options -- -- 241,495 24 241,571
Treasury stock retired (10,000) (150,000) -- -- --
Payments received on notes receivable for
exercise of options -- -- -- -- --
Deferred compensation earned -- -- -- -- --
Net loss -- -- -- -- --
------- ---------- ---------- ------ ----------
Balance at September 30, 1996 205,089 $3,076,335 25,705,216 $2,571 28,714,804
Preferred stock dividend:
In stock (note 7) 13,909 208,635 -- -- (208,635)
In cash (note 7) -- -- -- -- (46,171)
Common stock issued:
Exercise of options -- -- 150,496 15 55,071
Exercise of warrants -- -- 103,179 10 30,944
Conversion of senior
convertible notes payable (note 6) -- -- 61,304 6 22,994
Write down of notes receivable for
exercise of options -- -- -- -- (619,504)
Shares forfeited upon cancellation of notes
receivable for exercise of options -- -- (504,535) (50) (756,754)
Payments received on notes receivable for
exercise of options -- -- -- -- --
Net loss -- -- -- -- --
------- ---------- ---------- ------ ----------
Balance at September 30, 1997 218,998 3,284,970 25,515,660 2,552 27,192,749
------- ---------- ---------- ------ ----------
------- ---------- ---------- ------ ----------
</TABLE>
<TABLE>
<CAPTION>
Treasury Notes
Stock - Receivable
Preferred for Exercise Deferred
Stock Deficit of Options Compensation Total
--------- ------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995 (150,000) (23,094,922) (1,597,837) (5,596) 3,215,020
Preferred stock dividend:
In stock (note 7) -- -- -- -- --
In cash (note 7) -- -- -- -- (23,645)
Common stock issued:
For cash -- -- -- -- 2,654,217
For services -- -- -- -- 15,417
Conversion of senior
convertible notes payable (note 6) -- -- -- -- 991,720
Conversion of preferred stock (note 7) -- -- -- -- --
Exercise of warrants -- -- -- -- 1,031
Exercise of options -- -- -- -- 241,595
Treasury stock retired 150,000 -- -- -- --
Payments received on notes receivable for
exercise of options -- -- 54,187 -- 54,187
Deferred compensation earned -- -- -- 5,596 5,596
Net loss -- (3,274,629) -- -- (3,274,629)
--------- ------------- ----------- ------------ ----------
Balance at September 30, 1996 0 (26,369,551) (1,543,650) 0 3,880,509
Preferred stock dividend:
In stock (note 7) -- -- -- -- --
In cash (note 7) -- -- -- -- (46,171)
Common stock issued:
Exercise of options -- -- -- -- 55,086
Exercise of warrants -- -- -- -- 30,954
Conversion of senior
convertible notes payable (note 6) -- -- -- -- 23,000
Write down of notes receivable for
exercise of options -- -- 619,504 -- --
Shares forfeited upon cancellation of notes
receivable for exercise of options -- -- 756,804 -- --
Payments received on notes receivable for
exercise of options -- -- 167,342 -- 167,342
Net loss -- (3,226,958) -- -- (3,226,958)
------- ----------- ---------- ----- ----------
Balance at September 30, 1997 0 (29,596,509) 0 0 883,762
--------- ------------- ----------- ------------ ----------
--------- ------------- ----------- ------------ ----------
</TABLE>
The accompanying notes and independent auditor's reports should
be read in conjunction with the consolidated financial statements.
F-5
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($3,274,629) ($3,226,958)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 50,542 69,853
Amortization of patent and technology costs 266,147 273,967
Amortization of financing costs 65,678 82,620
Accrued interest on notes receivable for exercise of options (107,367) (26,985)
Write off of accrued interest on notes receivable
for exercise of options -- 248,212
Common stock issued for services 15,417 --
Reduction in notes receivable for the exercise
of options in exchange for services 42,263 636
Deferred compensation recognized 5,596 --
Provision for loss on accounts receivable 201,225 36,085
Write down of obsolete inventory 281,313 36,290
Changes in assets and liabilities:
Decrease in note receivable from sale of subsidiary 106,390 --
Decrease in accounts receivable 59,068 5,441
(Increase) in inventories (747,146) (142,346)
Decrease in prepaid expenses and
other current assets 50,784 2,119
Increase (decrease) in accounts payable 93,729 (175,034)
Increase (decrease) in accrued expenses (80,942) 101,326
Increase (decrease) in interest payable 18,016 (238)
----------- -----------
Net cash used in operating activities (2,953,916) (2,715,012)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (45,476) (83,505)
Payments for patents (128,873) (55,979)
----------- -----------
Net cash used in investing activities (174,349) (139,484)
----------- -----------
</TABLE>
The accompanying notes and independent auditor's reports should be read in
conjunction with the consolidated financial statements.
(continued)
F-6
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from common stock and warrant Units $3,000,000 $ --
Proceeds from senior convertible notes payable 2,825,000 --
Payment of financing costs (773,987) --
Payments on note payable to bank and others (6,832) (16,319)
Cash restricted as security for note payable -- 18,456
Proceeds from the exercise of options and warrants 242,626 86,040
Proceeds from interest and notes receivable for exercise of options 19,489 174,406
Payment of dividend on preferred stock (23,645) (46,171)
----------- -----------
Net cash provided by financing activities 5,282,651 216,412
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,154,386 (2,638,084)
Cash and cash equivalents at beginning of period 911,186 3,065,572
----------- -----------
Cash and cash equivalents at end of period $3,065,572 $427,488
----------- -----------
----------- -----------
Supplemental Cash Flow Information
Noncash investing and financing activities:
Senior convertible notes payable converted to common stock $1,150,000 $25,000
Reduction in additional paid-in capital due to
write down of notes receivable for exercise of options -- 619,504
Reduction in common stock and additional paid-in capital
upon cancellation of shares held as collateral for
notes receivable for the exercise of options -- 756,804
Unamortized deferred financing costs associated with senior
convertible notes payable converted to common stock 158,281 2,000
Preferred stock converted to common stock 218,805 --
Preferred stock issued as dividends 228,210 208,635
Equipment purchased through capital lease -- 21,273
Reduction in notes receivable for exercise of options
in exchange for services 42,263 636
Retirement of treasury stock - preferred 150,000 --
----------- -----------
----------- -----------
Interest paid $100,101 $140,785
----------- -----------
----------- -----------
</TABLE>
The accompanying notes and independent auditor's reports should be read in
conjunction with the consolidated financial statements.
F-7
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1997
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(1) NATURE OF BUSINESS AND LIQUIDITY
FiberChem, Inc. and its subsidiaries (collectively the "Company" or
"FCI") develops, produces, markets and licenses fiber optic chemical sensors
(FOCS) for environmental monitoring in the air, water and soil. The
Company's primary markets and potential customers are the petroleum
production, refinery and distribution chains. Other important markets and
customers include remediation companies, environmental consultants, shipping
ports, airports and military bases. The Company markets its products
world-wide using strategic alliances, distribution agreements and direct
sales activities.
The Company's consolidated financial statements for the years ended
September 30, 1996 and 1997 have been prepared on a going concern basis which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The Company incurred a net
loss of $3,274,629 and $3,226,958 for the years ended September 30, 1996 and
1997, respectively and as of September 30, 1997 had an accumulated deficit of
$29,596,509.
Management recognizes that the Company must generate additional revenues
or reductions in operating costs and may need additional financing to enable
it to continue its operations. The Company is reviewing alternatives for
raising additional capital including an offering (subject to, among other
things, approval by the SEC) of rights to purchase shares and warrants, to be
offered to holders of the Company's Common and Preferred Stock, Class D and
all other Warrants. The Company has engaged consultants to assist in raising
additional capital. (See Note 12.) However, no assurance can be given that
forcasted sales will be realized to achieve profitable operations, nor that
additional financing, if needed, can be obtained on terms satisfactory to the
Company, if at all, nor in an amount sufficient to enable the Company to
continue operations.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All inter-company
accounts and transactions have been eliminated. The Company
develops, produces, markets and licenses fiber optic chemical sensors
("FOCS-Registered Trademark-") for environmental monitoring in
the air, water and soil.
(b) CASH AND CASH EQUIVALENTS
Cash equivalents consist of financial instruments with original
maturities of no more than 90 days.
(c) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market.
(d) EQUIPMENT
Equipment is stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets,
generally five years.
(e) TECHNOLOGY COSTS
Technology costs represent values assigned to proven technologies
acquired for cash and in exchange for issuance of common stock (Note
4). Patents on certain technologies are
F-8
<PAGE>
pending. Proven technologies are amortized using the straight-line
method over an eight year period.
(f) PATENT COSTS
Costs incurred in acquiring, filing and prosecuting patents are
capitalized and amortized using the straight-line method over the
shorter of economic or legal life. All existing patents are being
amortized over eight years.
(g) REVENUE RECOGNITION
The Company generally recognizes revenue when title passes, which is
normally upon shipment of product to the customer. There is
generally no right of return except for normal warranties.
(h) WARRANTY
The Company warrants its products for a period of one year from the
date of delivery, provided the products are used under normal
operating conditions. The Company accrues a reserve for product
warranty at the time of sale.
(i) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
(j) PER SHARE DATA
Loss per common share has been computed based upon weighted average
shares outstanding during the periods presented. Contingently
issuable shares have been excluded because of their anti-dilutive
effect.
In March 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share ("SFAS 128"), which modifies
existing guidance for computing earnings per share and requires the
disclosure of basic and diluted earnings per share. Under the new
standard, basic earnings per share is computed as earnings available
to common stockholders divided by weighted average shares outstanding
excluding the dilutive effects of stock options and other potentially
dilutive securities. Diluted earnings per share includes the
dilutive effect of these securities. The effective date of SFAS 128
is December 15, 1997 and early adoption is not permitted. The
Company intends to adopt SFAS 128 during the quarter ending December
31, 1997. Had the provisions of SFAS 128 been applied to the
Company's results of operations for each of the two years in the
period ended September 30, 1997, the Company's basic loss per share
would have been $0.15 and $0.13 per share.
(k) INCOME TAXES
The Company utilizes Statement of Financial Standards No. 109,
ACCOUNTING FOR INCOME TAXES ("Statement 109"). Under this asset and
liability method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carry forwards. Deferred tax assets and liabilities are
measured using the enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
to be recovered or
F-9
<PAGE>
settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(l) STOCK-BASED EMPLOYEE COMPENSATION AWARDS
In Fiscal 1996 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
In accordance with the provisions of SFAS No. 123, the Company has
elected to apply APB Opinion 25 and related interpretations in
accounting for its stock options issued to employees and,
accordingly, does not recognize additional compensation cost as
required by the new principle. The Company, however, has provided
the pro forma disclosures as if the Company had adopted the cost
recognition requirements (see Note 7).
(m) ESTIMATES
Preparing financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that may affect the reported amounts of assets,
liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities. Examples include provision for bad debts;
inventory obsolescence; and the useful lives of patents, technologies
and equipment. Actual results may differ from these estimates.
(n) Certain reclassifications have been made in the 1996 presentation to
conform to the 1997 presentation.
(o) Recent accounting pronouncements.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, Reporting Comprehensive Income ("SFAS 130"), and
Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information ("SFAS 131"). The Company is required to adopt
these Statements in fiscal 1999. SFAS 130 establishes new standards
for reporting and displaying comprehensive income and its components.
SFAS 131 requires disclosure of certain information regarding
operating segments, products and services, geographic areas of
operation and major customers. Adoption of these Statements is
expected to have no impact on the Company's consolidated financial
position, results of operations or cash flows.
(3) INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or
market and consist of:
September 30,
-------------
1996 1997
---- ----
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
---------- ---------
---------- ---------
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:
September 30, September 30,
1996 1997
------------- -------------
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
---------- ---------
---------- ---------
(7) STOCKHOLDERS' EQUITY
During Fiscal 1993 and Fiscal 1994, the Company conducted a private
placement of convertible preferred stock ("Convertible Preferred Stock").
Each share of the Convertible Preferred Stock is convertible into ten shares
of FCI Common Stock, initially at $1.50 per share. The conversion ratio is
subject to customary anti-dilution provisions. Dividends are cumulative and
are payable annually, at the sole discretion of the holders, in cash (11%) or
additional shares of Convertible Preferred Stock (8% of the number of shares
owned at date of declaration). In November 1995, the Company paid cash
dividends of $23,645 and issued 15,214 shares of Convertible Preferred Stock
dividends. In November 1996, the Company paid cash dividends of $46,171 and
issued 13,909 shares of Convertible Preferred Stock dividends. The
Convertible Preferred Stock entitles the holder to a liquidation preference
of $15 per share upon liquidation, dissolution or winding up of the Company.
The Convertible Preferred Stock is redeemable by the Company when and if the
closing bid price of FCI's Common Stock is at least 200% of the conversion
price for twenty consecutive trading days. Upon redemption, the Company
would issue ten shares of its Common Stock for each share of Convertible
Preferred Stock. During Fiscal 1996, 14,587 shares of Convertible Preferred
Stock were converted to 145,870 shares of Common Stock. As of September 30,
1997, the Company had 218,998 shares of Convertible Preferred Stock
outstanding. On September 12, 1997, the Board of Directors determined that,
in view of the recent trading price of the Company's Common Stock and in view
of the Company's current cash position, it would not be appropriate to
declare the annual dividend payable on the Convertible Preferred Stock on
November 1, 1997. As a result, the dividend amounting to $361,347 (if elected
entirely in cash, or 17,520 additional shares of Convertible Preferred Stock
if elected wholly in additional shares) will accumulate in accordance with
the terms of the Convertible Preferred Stock.
On May 31, 1996 the Company completed an offering under Regulation S, of
3,333,333 Units, at a price of $0.90 per Unit for total gross proceeds of
$3,000,000 before costs and expenses of the offering. The Company paid fees
and expenses associated with the Unit offering amounting to $345,683. Each
Unit consisted of one share of Common Stock and one warrant to purchase one
share of Common Stock (the "Unit Warrants") the shares and warrants being
immediately separable. The Unit Warrants are each exercisable at $1.00 at
any time from May 31, 1996 through May 30, 2001. Also in connection with the
Unit offering, the Company issued to the Placement Agent for the offering,
for nominal consideration, warrants to purchase up to 333,333 shares of
Common Stock ("the Placement Agent Warrants"), at an exercise price of $0.90
per share which has been adjusted to $0.2343 per share, and the number of
shares issuable upon exercise has been adjusted to 1,280,411. These
Placement Agent Warrants are exercisable at any time from November 30, 1996
through May 30, 2001.
In January 1993, the Company's Board of Directors adopted a 1993
Employee Stock Option Plan ("1993 Plan"), approved by stockholders at the May
1993 Annual Shareholders meeting, covering an aggregate of 2,300,000 shares
of FCI Common Stock. As of September 15, 1996, an aggregate of 1,681,519
options had been exercised and 274,641 options forfeited (of which 171,822
had been regranted) under the 1993 Plan. The remaining 515,662 options
expired on September 15, 1996.
Primarily in order to provide a means to raise additional cash through
existing outstanding options, warrants and promissory notes receivable, on
April 4, 1997, the per share exercise price of all employee stock options,
all Unit and other Warrants (except Class D Warrants) were decreased as
follows: to $0.32
F-12
<PAGE>
from April 4 through April 11, 1997, and thereafter adjusted weekly to the
average closing bid price for the five prior trading days less a discount of
10% (but never to a price less than $0.30) through May 16, 1997, when the
prices reverted to the original prices. As a result, the Company received
$39,943 for the exercise of 131,453 options at prices ranging from $0.30 to
$0.32 per share. Effective April 17, 1997 the per share exercise price of
Class D Warrants was decreased to $0.30 through May 16, 1997 when the
exercise price reverted to its prior $1.10 per share. As a result, the
Company received approximately $30,954 for the exercise of 103,179 Class D
Warrants exercised at $0.30 per share.
In March 1994, the Company's Board of Directors approved a plan by which
employees and directors of the Company and its subsidiaries would be given an
opportunity to exercise certain eligible stock options under an early
incentive plan through the execution of promissory notes. As of March 15,
1994, the Company received promissory notes aggregating $1,815,099 for the
exercise of 1,210,066 stock options. The promissory notes bear interest at
7%, and were initially due on or before September 15, 1995. On April 7, 1995,
the Board of Directors extended the due date of the notes to March 15, 1998.
The underlying FCI Common Stock was held in escrow, as collateral, until
payment was made on the promissory notes. As of September 30, 1996, an
aggregate of $271,449 had been paid on these notes in addition to $43,467,
respectively, in interest. The remaining accrued interest of $228,927 at
September 30, 1996 is included in other long-term assets in accordance with
the April 1995 extension of the due date of the notes. The outstanding
principal at September 30, 1996 of $1,543,650 is included as a reduction of
stockholders' equity. In conjunction with the temporary reduction of the
exercise prices of the options and warrants effective April 4, 1997 and Class
D Warrants effective April 17, 1997, as described above, the remaining unpaid
principal on the promissory notes could be fully paid in an amount determined
by multiplying the unpaid balance by a fraction, the numerator of which was
the revised exercise price, and the denominator of which was $1.50 (the
original exercise price). If the unpaid principal was not so paid by May 16,
1997 the underlying collateral shares would be forfeited and all unpaid
principal and accrued interest would be extinguished.
As a result, the Company received $160,875 in payment for 520,252
escrowed shares at prices ranging from $0.30 to $0.32 per share, which amount
liquidated $780,379 of original note principal. The remaining $756,804 of
unpaid note principal was extinguished and the underlying collateral of
504,535 shares were forfeited to the Company and immediately canceled,
thereby reducing the total number of shares outstanding. Unpaid accrued
interest receivable aggregating $248,212 was expensed.
In March 1994, the Company's Board of Directors adopted a 1994 Employee
Stock Option Plan ("1994 Plan"), approved by stockholders at the May 23, 1994
Annual Shareholders meeting, covering an aggregate of 1,000,000 shares of
FCI Common Stock. As of September 30, 1997, the Company has issued 984,885
stock options, net of forfeitures and regrants, (with initial exercise prices
ranging from $1.00 per share to $2.125 per share and current exercise prices
of $1.00 per share) under the 1994 Plan to employees of the Company's
wholly-owned subsidiary, FCI Environmental, Inc. ("Environmental"). An
aggregate of 821,114 options remain exercisable under the 1994 Plan.
On April 7, 1995, the Company's Board of Directors resolved that all
options to purchase shares of the Company's Common Stock granted prior to
April 7, 1995, and which had an exercise price in excess of $1.00 per share,
would as of April 7, 1995 have an exercise price of $1.00 per share, which
price was above the fair market value of the Common Stock as of the last
quoted market trade on April 7, 1995. Options to purchase an aggregate of
2,309,479 shares at prices ranging from $1.125 to $2.125 per share were
accordingly changed to $1.00 per share.
In April 1995, the Company's Board of Directors adopted a 1995 Employee
Stock Option Plan ("1995 Plan"), approved by the stockholders at the May 8,
1995 Annual Shareholders meeting, covering an aggregate of 1,000,000 shares
of FCI Common Stock. As of September 30, 1997, the Company has issued
761,547 stock options, net of forfeitures, (with initial and current exercise
prices ranging from $0.93 per share to $1.38 per share) under the 1995 Plan
to employees of Environmental and Directors of the Company. An aggregate of
643,942 options remain exercisable under the 1995 Plan.
F-13
<PAGE>
In January 1997 the Company's Board of Directors adopted a 1997 Employee
Stock Option Plan ("1997 Plan"), approved by the stockholders at the June 23,
1997 Annual Stockholders Meeting, covering an aggregate of 1,500,000 shares
of Common Stock and restricting the granting of options to purchase
approximately 675,000 shares of Common Stock authorized under previous stock
option plans. As of September 30, 1997 the Company has issued options to
purchase 636,500 shares of Common Stock at prices ranging from $0.22 to $0.25
under the 1997 Plan to employees of Environmental and Directors of the
Company. An aggregate of 631,500 options remain exercisable under the 1997
Plan.
During Fiscal 1996, the Company has expensed an aggregate of $99,000 in
directors' compensation for the Company's non-management directors, applying
$63,728 to the payment of promissory notes, interest and payroll taxes, and
$35,272 to the exercise of 35,272 stock options. Effective October 1, 1996,
director compensation was eliminated and replaced by the granting of stock
options for service as a director and for service on standing committees.
During Fiscal 1997, the Company granted to its six non-management directors
options to purchase an aggregate of 186,500 shares of Common Stock at $0.22
per share, which was the fair market value of the Common Stock as of the date
of the grants.
During Fiscal 1996, the Company issued to two individuals a total of
13,954 shares of Common Stock of the Company, valued at $15,417 for services
performed for the Company.
On August 1, 1995, the Company's Board of Directors resolved that the
exercise price of all outstanding Class D Warrants be changed from $1.50 per
share to $1.00 per share, which price was above the fair market value of the
Common Stock as of the last quoted market trade on August 1, 1995. An
aggregate of 1,031 Class D Warrants were exercised during Fiscal 1996; no
Class D Warrants were exercised during Fiscal 1995. On August 21, 1996, the
Board of Directors extended the expiration date of the Class D Warrants from
their original expiration date of September 15, 1996, to September 15, 2000,
and changed the exercise price from $1.00 to $1.10 from September 16, 1996
through September 15, 1997; then $1.15 through September 15, 1998; then $1.20
through September 15, 1999; then $1.25 through September 15, 2000.
The Company has granted options under qualified stock option plans as
well as other option plans to employees, directors, officers, consultants and
other persons associated with the Company who are not employees of, but are
involved in the continuing development of the Company. A summary of the
status of the Company's stock option plans as of September 30, 1996 and 1997
and changes during those years are as follows:
<TABLE>
<CAPTION>
1996 1997
---------------------------- ---------------------------
Weighted Weighted
Average Average
Fixed Options Options Exercise Options Exercise
Price Price
- --------------------------- ----------- -------- --------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning 2,457,023 $1.00 1,670,552 $0.99
of year
Granted during year 784,504 .99 676,500 .28
Exercised (246,282) 1.00 (150,496) .37
Forfeited (1,324,693) 1.00 (100,000) 1.00
----------- ----- --------- -------
Outstanding at end of year 1,670,552 $0.99 2,096,556 $0.76
----------- ---------
----------- ---------
</TABLE>
The following table summarizes information about stock options
outstanding and exercisable at September 30, 1996 and 1997.
F-14
<PAGE>
<TABLE>
<CAPTION>
Weighted Average Weighted
Range of Exercise Number Outstanding Remaining Average
September 30 Prices and Exercisable Contractual Life Exercise Price
- ---------------------------------- ---------------------- -------------------- ------------------
<S> <C> <C> <C> <C>
1996 $0.93 - 1.00 1,670,552 3.75 years $0.99
1997 $0.22 - 1.00 2,096,556 4.80 years $0.76
</TABLE>
If the Company had elected to recognize compensation cost based on the
fair value of the options granted at grant date as prescribed by SFAS No.123,
net loss and loss per share would have been adjusted to the pro forma amounts
indicated in the table below:
<TABLE>
<CAPTION>
As Reported Pro Forma
---------------------------- ----------------------------
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Loss $(3,274,629) $(3,226,958) $(3,490,698) $(3,501,930)
Loss per share $(0.15) $(0.13) $(0.16) $(0.14)
</TABLE>
No tax effect was applied in computing loss per share under SFAS No.
123. The Company's assumptions used to calculate the fair values of options
issued was (i) risk-free interest rate of 6.0%, (ii) expected life of five
years, (iii) expected volatility of 172%, and (iv) expected dividends of zero.
(8) COMMITMENTS AND CONTINGENCIES
The Company entered into an agreement to lease office space for a
five-year period beginning in January 1990, which expired in January 1995.
The Company and the lessor have agreed to a month-to-month lease which is
terminable by either party upon 30 days notice. Monthly payments under the
lease were originally $8,807 and escalated approximately $1,300 every twelve
months. Current base monthly payments under the month-to-month lease are
$12,786. Rent expense during Fiscal 1996 and 1997 was $172,492 and $172,551,
respectively. The Company is pursuing alternatives, including a renewal of
the month-to-month lease at approximately the current base monthly rental
charge.
Effective January 1, 1994, the Company implemented an Internal Revenue
Code Section 401(k) Profit Sharing Plan (the "Plan"). The Plan provides for
voluntary contributions by employees into the Plan subject to the limitations
imposed by Internal Revenue Code Section 401(k). The Company will match
employee contributions at a rate of 50% of the employee's contribution up to
a maximum of 2% of the employee's compensation. The Company matching funds
are determined at the discretion of management and are subject to a five-year
vesting schedule from the date of original employment. The Company's 401(k)
matching expense for the years ended September 30, 1996 and 1997 totaled
$18,508 and $21,263, respectively.
The Company is involved in litigation incidental to its business. In
the opinion of the Company's management, the expected outcome of such
litigation will not have a material effect on the financial position of the
Company.
(9) INCOME TAXES
Income tax benefit attributable to losses from continuing operations for
the year ended September 30, 1996 and 1997 differed from the amount computed
by applying the federal income tax rate of 34% to pretax loss from operations
as a result of the following:
F-15
<PAGE>
1996 1997
---- ----
Computed "expected" tax benefit $(1,113,374) $(1,097,166)
Reduction in income tax benefit resulting from:
Non-deductible expenses 38,374 28,166
Increase in valuation allowance 1,075,000 1,069,000
----------- -----------
Net tax benefit $ -- $ --
----------- -----------
----------- -----------
Components of net deferred tax assets as of September 30, 1996 and 1997
are as follows:
1996 Change 1997
---- ------ ----
Deferred tax assets $7,889,000 $1,063,000 $8,952,000
Less valuation allowance (7,873,000) (1,069,000 (8,942,000)
----------- ---------- -----------
Total net deferred tax assets 16,000 (6,000) 10,000
Deferred tax liabilities (16,000) 6,000 (10,000)
----------- ---------- -----------
Net deferred tax assets $ -- $ -- $ --
----------- ---------- -----------
----------- ---------- -----------
Deferred tax assets are comprised primarily of the tax effects of the
net operating loss carryforwards, reserve for inventory obsolescence and
allowance for doubtful accounts recorded for financial reporting purposes.
Deferred tax liabilities primarily represent the tax effect of the difference
between depreciation recorded for financial statement and income tax
reporting purposes.
The Company has recorded a valuation allowance in accordance with the
provisions of Statement 109 to reflect the estimated amount of deferred tax
assets which may not be realized. In assessing the realizability of deferred
tax assets, Management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible.
At September 30, 1997, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $25,449,000 which are
available to offset future taxable income, if any, through 2012. However,
carryforwards to offset future taxable income is dependent upon having
taxable income in the legal entity originally incurring the loss and will be
further limited in each year to an amount equal to the Federal long-term tax
exempt interest rate times the entity's market value at the time a
significant change in ownership occurred. The Company cannot determine the
effect of these limitations.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments was made in accordance with Statement of Financial Accounting
Standards No. 107 ("SFAS No. 107"), DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS. Accordingly, the aggregate fair value amounts presented are not
intended to represent the underlying value of the net assets of the Company.
The carrying amounts at September 30, 1997 for cash, receivables,
accounts payable and accrued liabilities approximate their fair values due to
the short maturity of these instruments. In addition the estimated fair
value of notes payable approximates the related carrying value at September
30, 1997.
(11) MAJOR CUSTOMERS
During Fiscal 1997, the Company had sales to one customer of
approximately $985,000. During Fiscal 1996, the Company had sales to three
customers of $190,000, $100,000 and $93,000.
F-16
<PAGE>
(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-17
<PAGE>
EXHIBIT INDEX
Exhibit No. Name
- ----------- ----
10.22 Employment Agreement with Geoffrey F. Hewitt dated October 1,
1997.
10.23 Employment Agreement with Melvin W. Pelley dated October 1,
1997.
10.24 Employment Agreement with Thomas A. Collins dated October 1,
1997.
10.25 Amendment to Whessoe Varec, Inc. OEM Strategic Alliance dated
August 13, 1997.
10.26 Agreement dated October 2, 1997 between the Company and entrenet
Group, LLC.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Goldstein Golub Kessler & Company, PC.
<PAGE>
EXHIBIT 10.22
EMPLOYMENT AGREEMENT
AGREEMENT entered into this 1st day of October 1997, by and between
FiberChem, Inc., a Delaware corporation, with its principal place of business
at 1181 Grier Drive, Las Vegas, Nevada 89119 (the "Company") Geoffrey F.
Hewitt, residing at 285 Willowgrove Circle, Henderson, Nevada 89014 (the
"Executive").
W I T N E S S E T H :
WHEREAS, the Company wishes to continue to employ the Executive in the
principal capacity of President and Chief Executive Officer upon the terms
and conditions contained herein;
WHEREAS, the Executive is desirous of continuing employment with the
Company and is willing to accept such employment for the inducements and upon
the terms and conditions contained herein; and
WHEREAS, the Company has bargained for a covenant by the Executive not
to compete with the Company's business.
NOW, THEREFORE, in consideration of the mutual premises and agreements
contained herein and for other good and valuable consideration by each of the
parties, the parties hereby agree as follows:
1. EMPLOYMENT. The Company hereby employs the Executive and the
Executive hereby accepts employment upon the terms and conditions set forth
herein.
2. TERM. The term of this Agreement shall commence on the date hereof
and shall continue for an initial term of one (1) year; provided, however,
that the term of this Agreement shall be automatically continued and
extended, on the same terms and conditions as then in effect hereunder, for
additional consecutive twelve month periods commencing upon such termination
date, unless at least thirty (30) days before that date of termination of the
initial term of this Agreement or of any such extended term, the Company
shall give the Executive, or the Executive shall give the Company, notice in
writing electing to terminate this agreement as of such termination date.
3. DUTIES.
(a) During the term of this Agreement, the Executive shall serve
the Company in an executive capacity and shall perform such duties as are
determined from time to time by the Company's Board of Directors. Unless
prevented by death or disability, the Executive shall devote his full
business time, allowing for vacations and national holidays, as set forth in
Sections 5(a) and (e) hereof, and illnesses, exclusively to
1
<PAGE>
the business and affairs of the Company, and shall use his best efforts,
skill and abilities to promote its interests. Nothing herein contained shall
be construed as preventing the Executive from purchasing securities in any
publicly held entity, if such purchases shall not result in his owning
beneficially 2% or more of the equity securities of such company, provided
such investment is not made in a company in competition with the Company.
(b) It is hereby acknowledged that the Board of Directors of the
Company has elected the Executive to serve as President and Chief Executive
Officer, and the Company hereby agrees to use its best efforts to have the
Executive continue to serve as President and Chief Executive Officer during
the term of this Agreement. The precise services of the Executive may be
extended or curtailed from time to time at the direction of the Company's
Board of Directors.
4. COMPENSATION. For the services rendered by the Executive
hereunder, the Company shall pay and the Executive shall accept the following
compensation:
(a) From the commencement of the term hereof through September 30,
1998, the Executive shall receive a base annual salary of two hundred five
thousand dollars ($205,000) ( the "Base Salary") which Base Salary shall be
earned and shall be payable at such intervals not less frequently than
monthly, in equal installments, and otherwise in such manner as is consistent
with the Company's normal practice for remuneration of executives;
(b) The Board of Directors shall review the Executive's base
salary on each of the anniversary dates of the execution of this Agreement in
order to determine whether the Executive's salary should receive an upward
adjustment;
(c) The Executive shall be entitled to bonus compensation during
the term hereof, as determined at the discretion of the Board of Directors of
the Company;
(d) The Executive's salary shall be payable subject to such
deductions as are then required by law and such further deductions as may be
agreed to by the Executive, in accordance with the Company's prevailing
salary payroll practices.
5. BENEFITS AND EXPENSES. During the term of this Agreement, the
Executive shall be entitled to the following benefits and expense
reimbursement:
(a) The Executive shall be entitled to up to four (4) weeks of
paid vacation per calendar year, in accordance with the Company's policy from
time to time in effect as determined by the Board;
(b) The Executive shall be entitled to participate in and/or
receive all fringe benefits such as medical, disability, hospital and health
insurance plans, and profit
2
<PAGE>
sharing, pension plan, life insurance and other plans, if any, which the
Company may generally make available to its executives. The Executive shall
also be included in the Directors and Officers' indemnification insurance
policy, if obtained;
(c) The Company shall also issue to the Executive a corporate
credit card to be utilized by the Executive in connection with any additional
out-of-pocket expenses which he may incur in connection with the performance
of his duties. During the term of this Agreement, the Company shall, upon
presentation of proper vouchers, also reimburse the Executive for all
reasonable expenses incurred by him directly in connection with his
performance of services as an officer and Executive of the Company;
(d) The Corporation shall maintain on behalf of the Executive, a
one million dollar ($1,000,000) key man life insurance policy, which shall
name the Company as beneficiary;
(e) The Executive shall receive as paid days off all national
holidays that the Company, pursuant to established policy, recognizes and
observes.
6. DISABILITY AND DEATH.
(a) DISABILITY - If, during the term of this Agreement, the
Executive becomes so disabled or incapacitated by reason of any physical or
mental illness so as to be unable to perform the services required of him
pursuant to this Agreement for a continuous period of four (4) months, or for
an aggregate of six (6) months during any consecutive twelve (12) month
period, then the Company may, upon 30 days' written notice to the Executive,
terminate this Agreement. Notwithstanding the termination of the Agreement
hereunder by reason of disability, the Company shall pay the Executive his
Base Salary then in effect along with all other fringe benefits (including,
without limitation, family medical benefits) for a period of one (1) year
following the date of such termination, such payment to be made in one lump
sum, no later than 3 months following the date of termination. The Company
shall purchase temporary and permanent disability insurance on the Executive.
Payments made hereunder shall not affect any other payments made to the
Executive.
(b) DEATH - This Agreement shall automatically terminate upon and
as of the date of death of the Executive at any time during the term of this
Agreement. Notwithstanding the termination of this Agreement by reason of
the Executive's death, the Company will pay to the Executive's estate his
Base Salary, and shall continue family medical benefits coverage for the
Executive's family, then in effect for a period of one (1) year following the
date of such termination, such payment to be made in one lump sum no later
than 3 months following the date of death.
7. COVENANTS AND RESTRICTIONS.
3
<PAGE>
(a) For a period of one (1) year following the termination of this
Agreement (the "Non-Compete Period"), the Executive shall not, directly or
indirectly, engage in, own, manage, operate, assist, join or control, or
participate in the ownership, management, operation or control of any
Restricted Enterprise (other than the Company or its affiliates), which
engages or plans to engage in a Restricted Enterprise anywhere in the United
States, whether as a director, officer, executive, agent, consultant,
shareholder, partner, owner, independent contractor or otherwise.
Notwithstanding the foregoing, these restrictions shall not prevent the
Executive from earning his livelihood during the Non-Compete Period. As used
herein, a "Restricted Enterprise" shall be any activity that competes with
the business of the Company as constituted or as realistically contemplated
to be conducted by the Company during the term of this Agreement in the
Southwest United States. Notwithstanding the foregoing, the provisions of
this Section 7(a) shall not apply if Executive's employment is terminated
pursuant to Section 11(b) or Section 12 of this Agreement.
(b) The Executive agrees that he shall not divulge to others, nor
shall he use to the detriment of the Company or in any business competitive
with or similar to any business engaged in by the Company or any of its
subsidiary or affiliated companies, at any time during his employment with
the Company or thereafter, any Confidential Information obtained by him
during the course of his employment with the Company. For the purpose of
this Agreement, "Confidential Information" means any and all information
developed by or for or processed by the Company or its affiliates of which
the Executive has knowledge during the term of his employment that is (1) not
generally known in any industry in which the Company or its affiliates does
business during the Non-Compete Period or (2) not publicly available and
treated as confidential.
(c) During the Non-Compete Period, the Executive will neither
solicit, hire or seek to solicit or hire any of the Company's personnel in
any capacity whatsoever nor shall Executive induce or attempt to induce any
of the Company's personnel to leave the employ of the Company to work for
Executive or otherwise.
8. REMEDIES. The Executive acknowledges that his breach of any of the
restrictive covenants contained in Section 7 herein may cause irreparable
damage to the Company for which remedies at law would be inadequate.
Accordingly, if Executive breaches or threatens to breach any of the
provisions of Section 7, the Company shall be entitled to appropriate
injunctive relief, including, without limitation, preliminary or permanent
injunctions, in any court of competent jurisdiction, restraining Executive
from taking any action prohibited hereby. This remedy shall be in addition
to all other remedies available to the Company at law or equity. If any
portion of Section 7 is adjudicated to be invalid or unenforceable, Section 7
shall be deemed amended to delete therefrom the points so adjudicated, such
deletion to apply only with respect to the operation of Section 7 in the
jurisdiction in which the adjudication is made.
4
<PAGE>
9. INDEMNIFICATION. The Company hereby indemnifies and holds the
Executive harmless from any and all expenses (including legal fees) or losses
incurred by him in connection with the performance of his duties under this
Agreement.
10. PRIOR AGREEMENTS. The Executive represents that he is not now
under any written agreement, nor has he previously, at any time, entered into
any written agreement with any person, firm or corporation, which would or
could in any manner preclude or prevent him from giving freely and the
Company receiving the exclusive benefit of his services.
11. TERMINATION PROVISIONS.
(a) In addition to, and not in lieu of, the termination provisions
set forth in Section 6 herein, the employment of the Executive hereunder may
be terminated by the Company prior to the termination date of the initial
term or any renewal term thereafter (as set forth in Section 2 hereof) for
sufficient "cause," which cause is defined specifically in the event that the
Executive is guilty of (i) a willful and reckless disregard to perform his
duties as set forth in Section 3 herein, or (ii) willful misfeasance for
which the Company is directly and adversely affected, or (iii) any act of
dishonesty by the Executive bearing directly upon the Company. Termination
of the Executive's employment by the Company for reckless disregard of his
duties to the Company, willful misfeasance or any act of dishonesty with
respect to the Company hereunder shall constitute, and is referred to
elsewhere herein, as termination for "Cause." Such termination of the
Executive's employment hereunder for Cause shall be effective upon delivery
of written notice to the Executive which notice shall be sworn affidavit from
at least two non-interested parties, setting forth with specificity the exact
nature of the "cause" for which the Executive is being terminated. Upon the
termination of this Agreement for "cause" as set forth in this subparagraph,
the Company shall not be obligated to make any further payments hereunder to
the Executive.
(b) Notwithstanding any provisions in this Agreement to the
contrary, the Company may terminate the employment of the Executive without
Cause, but in such event the Company shall be obligated to pay the Executive
any and all amounts payable to the Executive pursuant to Section 4 above for
the greater of (i) the remainder of the initial term or the extended term, as
the case may be, of the Agreement in effect immediately prior to such
termination, or (ii) one (1) year (the "Remainder Term"), and the Company
shall also continue for the Remainder Term to permit the Executive to receive
or participate in all fringe benefits available to him pursuant to Section 5
above; provided, however, that during the Remainder Term any amounts payable
to the Executive pursuant to this Section 11(b), and any fringe benefits
which he receives or in which he participates
5
<PAGE>
pursuant to this Section 11(b), shall be reduced by any payments or fringe
benefits the Executive shall receive during the Remainder Term from any other
source of employment which is unaffiliated with the Company.
12. CHANGE OF CONTROL.
(a) A "change of control" shall be deemed to occur when
(i) the Executive is not elected as an officer of the Company
(or one of its subsidiaries or affiliates);
(ii) the Company's shareholders approve (x) a merger or
consolidation in which the Company is not the surviving corporation and/or
which results in any reclassification or reorganization of the then
outstanding Common Stock, (y) a sale of all or substantially all of the
Company's assets or capital stock or (z) a plan of liquidation or dissolution
of the Company;
(iii) the Common Stock is first purchased pursuant to a tender
or exchange offer (other than a tender or exchange offer made by the Company)
affecting at least 25% of the Common Stock or any other sale of at least 25%
of the Common Stock to a person or group of persons who are not officers,
directors or 5% shareholders of the Company on the date hereof; or
(iv) there is any other material change in ownership or
management of the Company after which (x) the Executive is terminated or (y)
in the sole determination of the Executive, there is a significant change in
the Executive's duties, responsibilities, principal location of employment,
or compensation.
(b) In the event a change of control occurs at any time during the
term of this Agreement:
(i) the Executive may, by written notice to the Company
within sixty (60) days after the date of such change of control, elect to
terminate his employment with the Company within sixty (60) days after such
notice (the "Termination Date"). If the Executive elects to terminate his
employment pursuant to Section 12, the Company shall pay the Executive, in
addition to the remainder of his annual compensation, a "parachute payment,"
as said term is defined in Section 280G of the Internal Revenue Code of 1986,
as amended, (the "Code") in an amount equal to 2.99 times the Executive's
annual compensation (or such other amount then permitted by the Code),
including the Base Salary, bonus compensation or other remuneration and
fringe benefits, if any. This amount shall be payable by the Company to the
Executive in one lump sum payment within sixty (60) days of the Termination
Date. The Executive shall be responsible for payment of all income or excise
taxes which may become due as a result of the company's
6
<PAGE>
payment to him of any "excess parachute payments," as such phrase is defined
in Section 280G of the Code, and
(ii) any options beneficially owned by the Executive at the
time of such change in control shall immediately vest in full and shall be
exercisable by the Executive at any time prior to the expiration date of the
respective options.
13. ARBITRATION OF DISPUTES. All controversies, claims and disputes
arising out of or relating to this Agreement, or the breach thereof, shall be
settled by arbitration conducted by the American Arbitration Association, in
accordance with the commercial Arbitration Rules of said Association in
effect at the time of the controversy, claim or dispute. Judgment upon the
award rendered by the Arbitrator (or Arbitrators) may be entered in any court
having jurisdiction thereof.
14. SUCCESSORS AND ASSIGN. This Agreement shall inure to the benefit
of and be binding upon the Company, its successors and assigns, and upon the
Executive, his heirs, executors, administrators, legatees and legal
representatives.
15. NOTICE. Any notice, statement, report, request or demand required
or permitted to be given by this Agreement shall be in writing, and shall be
sufficient if delivered in person or if addressed and sent by certified mail,
return receipt requested, to the parties at the addresses set forth above, or
at such other place that either party may designate by notice in the
foregoing manner to the other.
16. WAIVER. The failure of either party to insist upon the strict
performance of any of the terms, conditions and provisions of this Agreement
shall not be construed as a waiver or relinquishment of future compliance
therewith, and said terms, conditions and provisions shall remain in full
force and effect. No waiver of any term or any condition of this Agreement
on the part of either party shall be effective for any purpose whatsoever
unless such waiver is in writing and signed by such party.
17. MISCELLANEOUS.
(a) Should any part of this Agreement, for any reason whatsoever,
be declared invalid, illegal, or incapable of being enforced in whole or in
part, such decision shall not affect the validity of any remaining portion,
which remaining portion shall remain in full force and effect as if this
Agreement had been executed with the invalid portion thereof eliminated, and
it is hereby declared the intention of the parties hereto that they would
have executed the remaining portion of this Agreement without including
therein any portion which may for any reason be declared invalid.
7
<PAGE>
(b) This Agreement shall be construed and enforced in accordance
with the laws of the State of Nevada applicable to agreements made and
performed in such State without application to the principles or conflicts of
laws.
(c) This Agreement and all rights hereunder are personal to the
Executive and shall not be assignable, and any purported assignment in
violation thereof shall be null and void. Any person, firm or corporation
succeeding to the business of the Company by merger, consolidation, purchase
of assets or otherwise, shall assume by contract or operation of law the
obligations of the Company hereunder; provided, however, that the Company
shall, notwithstanding such assumption and/or assignment, remain liable and
responsible for the fulfillment of the terms and conditions of the Agreement
on the part of the Company.
(d) This Agreement constitutes the entire agreement between the
parties hereto with respect to the terms and conditions of the Executive's
employment by the Company, as distinguished from any other contractual
arrangements between the parties pertaining to or arising out of their
relationship, and this Agreement supersedes and renders null and void any and
all other prior oral or written agreements, understandings, or commitments
pertaining to the Executive's employment by the Company. No variation hereof
shall be deemed valid unless in writing and signed by the parties hereto. No
waiver by either party of any provision or condition of this Agreement by him
or it to be performed shall be deemed a waiver of similar or dissimilar
provisions and conditions at the same time or any prior or subsequent time.
(e) The heading of the paragraphs herein are inserted for
convenience and shall not affect any interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first written above.
"EXECUTIVE" "COMPANY"
FIBERCHEM, INC.
/s/ Geoffrey F. Hewitt By: /s/ Scott J. Loomis
- -------------------------- ---------------------------
Name: Geoffrey F. Hewitt Name: Scott J. Loomis
Title: Chairman of the Board
8
<PAGE>
EXHIIBIT 10.23
EMPLOYMENT AGREEMENT
AGREEMENT entered into this 1st day of October 1997, by and between
FiberChem, Inc., a Delaware corporation, with its principal place of business
at 1181 Grier Drive, Las Vegas, Nevada 89119 (the "Company") and Melvin W.
Pelley, residing at 2271 Trafalgar Court, Henderson, Nevada 890114(the
"Executive").
WITNESSETH:
WHEREAS, the Company wishes to continue to employ the Executive in the
principal capacity of Chief Financial Officer upon the terms and conditions
contained herein;
WHEREAS, the Executive is desirous of continuing employment with the
Company and is willing to accept such employment for the inducements and upon
the terms and conditions contained herein; and
WHEREAS, the Company has bargained for a covenant by the Executive not to
compete with the Company's business.
NOW, THEREFORE, in consideration of the mutual premises and agreements
contained herein and for other good and valuable consideration by each of the
parties, the parties hereby agree as follows:
1. EMPLOYMENT. The Company hereby employs the Executive and the
Executive hereby accepts employment upon the terms and conditions set forth
herein.
2. TERM. The term of this Agreement shall commence on the date hereof
and shall continue for an initial term of one (1) year; provided, however, that
the term of this Agreement shall be automatically continued and extended, on
the same terms and conditions as then in effect hereunder, for additional
consecutive twelve month periods commencing upon such termination date, unless
at least thirty (30) days before that date of termination of the initial term
of this Agreement or of any such extended term, the Company shall give the
Executive, or the Executive shall give the Company, notice in writing electing
to terminate this agreement as of such termination date.
3. DUTIES.
(a) During the term of this Agreement, the Executive shall serve
the Company in an executive capacity and shall perform such duties as are
determined from time to time by the Company's Board of Directors. Unless
prevented by death or disability, the Executive shall devote his full
business time, allowing for vacations and national holidays, as set forth in
Sections 5(a) and (e) hereof, and illnesses, exclusively to
1
<PAGE>
the business and affairs of the Company, and shall use his best efforts,
skill and abilities to promote its interests. Nothing herein contained shall
be construed as preventing the Executive from purchasing securities in any
publicly held entity, if such purchases shall not result in his owning
beneficially 2% or more of the equity securities of such company, provided
such investment is not made in a company in competition with the Company.
(b) It is hereby acknowledged that the Board of Directors of the
Company has elected the Executive to serve as Chief Financial Officer, and the
Company hereby agrees to use its best efforts to have the Executive continue to
serve as Chief Financial Officer during the term of this Agreement. The
precise services of the Executive may be extended or curtailed from time to
time at the direction of the Company's Board of Directors.
4. COMPENSATION. For the services rendered by the Executive hereunder,
the Company shall pay and the Executive shall accept the following
compensation:
(a) From the commencement of the term hereof through September 30,
1998, the Executive shall receive a base annual salary of one hundred thirty-
two thousand dollars ($132,000) ( the "Base Salary") which Base Salary shall be
earned and shall be payable at such intervals not less frequently than monthly,
in equal installments, and otherwise in such manner as is consistent with the
Company's normal practice for remuneration of executives;
(b) The Board of Directors shall review the Executive's base salary
on each of the anniversary dates of the execution of this Agreement in order to
determine whether the Executive's salary should receive an upward adjustment;
(c) The Executive shall be entitled to bonus compensation during the
term hereof, as determined at the discretion of the Board of Directors of the
Company;
(d) The Executive's salary shall be payable subject to such
deductions as are then required by law and such further deductions as may be
agreed to by the Executive, in accordance with the Company's prevailing salary
payroll practices.
5. BENEFITS AND EXPENSES. During the term of this Agreement, the
Executive shall be entitled to the following benefits and expense
reimbursement:
(a) The Executive shall be entitled to up to four (4) weeks of paid
vacation per calendar year, in accordance with the Company's policy from time
to time in effect as determined by the Board;
(b) The Executive shall be entitled to participate in and/or receive
all fringe benefits such as medical, disability, hospital and health insurance
plans, and profit
2
<PAGE>
sharing, pension plan, life insurance and other plans, if any, which the
Company may generally make available to its executives. The Executive shall
also be included in the Directors and Officers' indemnification insurance
policy, if obtained;
(c) The Company shall also issue to the Executive a corporate credit
card to be utilized by the Executive in connection with any additional out-of-
pocket expenses which he may incur in connection with the performance of his
duties. During the term of this Agreement, the Company shall, upon
presentation of proper vouchers, also reimburse the Executive for all
reasonable expenses incurred by him directly in connection with his performance
of services as an officer and Executive of the Company;
(d) The Corporation shall maintain on behalf of the Executive, a one
million dollar ($1,000,000) key man life insurance policy, which shall name the
Company as beneficiary;
(e) The Executive shall receive as paid days off all national
holidays that the Company, pursuant to established policy, recognizes and
observes.
6. DISABILITY AND DEATH.
(a) DISABILITY - If, during the term of this Agreement, the
Executive becomes so disabled or incapacitated by reason of any physical or
mental illness so as to be unable to perform the services required of him
pursuant to this Agreement for a continuous period of four (4) months, or for
an aggregate of six (6) months during any consecutive twelve (12) month period,
then the Company may, upon 30 days' written notice to the Executive, terminate
this Agreement. Notwithstanding the termination of the Agreement hereunder by
reason of disability, the Company shall pay the Executive his Base Salary then
in effect along with all other fringe benefits (including, without limitation,
family medical benefits) for a period of one (1) year following the date of
such termination, such payment to be made in one lump sum, no later than 3
months following the date of termination. The Company shall purchase temporary
and permanent disability insurance on the Executive. Payments made hereunder
shall not affect any other payments made to the Executive.
(b) DEATH - This Agreement shall automatically terminate upon and as
of the date of death of the Executive at any time during the term of this
Agreement. Notwithstanding the termination of this Agreement by reason of the
Executive's death, the Company will pay to the Executive's estate his Base
Salary, and shall continue family medical benefits coverage for the Executive's
family, then in effect for a period of one (1) year following the date of such
termination, such payment to be made in one lump sum no later than 3 months
following the date of death.
3
<PAGE>
7. COVENANTS AND RESTRICTIONS.
(a) For a period of one (1) year following the termination of this
Agreement (the "Non-Compete Period"), the Executive shall not, directly or
indirectly, engage in, own, manage, operate, assist, join or control, or
participate in the ownership, management, operation or control of any
Restricted Enterprise (other than the Company or its affiliates), which
engages or plans to engage in a Restricted Enterprise anywhere in the United
States, whether as a director, officer, executive, agent, consultant,
shareholder, partner, owner, independent contractor or otherwise.
Notwithstanding the foregoing, these restrictions shall not prevent the
Executive from earning his livelihood during the Non-Compete Period. As used
herein, a "Restricted Enterprise" shall be any activity that competes with
the business of the Company as constituted or as realistically contemplated
to be conducted by the Company during the term of this Agreement in the
Southwest United States. Notwithstanding the foregoing, the provisions of
this Section 7(a) shall not apply if Executive's employment is terminated
pursuant to Section 11(b) or Section 12 of this Agreement.
(b) The Executive agrees that he shall not divulge to others, nor
shall he use to the detriment of the Company or in any business competitive
with or similar to any business engaged in by the Company or any of its
subsidiary or affiliated companies, at any time during his employment with the
Company or thereafter, any Confidential Information obtained by him during the
course of his employment with the Company. For the purpose of this Agreement,
"Confidential Information" means any and all information developed by or for or
processed by the Company or its affiliates of which the Executive has knowledge
during the term of his employment that is (1) not generally known in any
industry in which the Company or its affiliates does business during the Non-
Compete Period or (2) not publicly available and treated as confidential.
(c) During the Non-Compete Period, the Executive will neither
solicit, hire or seek to solicit or hire any of the Company's personnel in any
capacity whatsoever nor shall Executive induce or attempt to induce any of the
Company's personnel to leave the employ of the Company to work for Executive or
otherwise.
8. REMEDIES. The Executive acknowledges that his breach of any of the
restrictive covenants contained in Section 7 herein may cause irreparable
damage to the Company for which remedies at law would be inadequate.
Accordingly, if Executive breaches or threatens to breach any of the provisions
of Section 7, the Company shall be entitled to appropriate injunctive relief,
including, without limitation, preliminary or permanent injunctions, in any
court of competent jurisdiction, restraining Executive from taking any action
prohibited hereby. This remedy shall be in addition to all other remedies
available to the Company at law or equity. If any portion of Section 7 is
adjudicated to be invalid or unenforceable, Section 7 shall be deemed amended
to delete therefrom the
4
<PAGE>
points so adjudicated, such deletion to apply only with respect to the
operation of Section 7 in the jurisdiction in which the adjudication is made.
9. INDEMNIFICATION. The Company hereby indemnifies and holds the
Executive harmless from any and all expenses (including legal fees) or losses
incurred by him in connection with the performance of his duties under this
Agreement.
10. PRIOR AGREEMENTS. The Executive represents that he is not now under
any written agreement, nor has he previously, at any time, entered into any
written agreement with any person, firm or corporation, which would or could in
any manner preclude or prevent him from giving freely and the Company receiving
the exclusive benefit of his services.
11. TERMINATION PROVISIONS.
(a) In addition to, and not in lieu of, the termination provisions
set forth in Section 6 herein, the employment of the Executive hereunder may be
terminated by the Company prior to the termination date of the initial term or
any renewal term thereafter (as set forth in Section 2 hereof) for sufficient
"cause," which cause is defined specifically in the event that the Executive is
guilty of (i) a willful and reckless disregard to perform his duties as set
forth in Section 3 herein, or (ii) willful misfeasance for which the Company is
directly and adversely affected, or (iii) any act of dishonesty by the
Executive bearing directly upon the Company. Termination of the Executive's
employment by the Company for reckless disregard of his duties to the Company,
willful misfeasance or any act of dishonesty with respect to the Company
hereunder shall constitute, and is referred to elsewhere herein, as termination
for "Cause." Such termination of the Executive's employment hereunder for
Cause shall be effective upon delivery of written notice to the Executive which
notice shall be sworn affidavit from at least two non-interested parties,
setting forth with specificity the exact nature of the "cause" for which the
Executive is being terminated. Upon the termination of this Agreement for
"cause" as set forth in this subparagraph, the Company shall not be obligated
to make any further payments hereunder to the Executive.
(b) Notwithstanding any provisions in this Agreement to the
contrary, the Company may terminate the employment of the Executive without
Cause, but in such event the Company shall be obligated to pay the Executive
any and all amounts payable to the Executive pursuant to Section 4 above for
the greater of (i) the remainder of the initial term or the extended term, as
the case may be, of the Agreement in effect immediately prior to such
termination, or (ii) one (1) year (the "Remainder Term"), and the Company shall
also continue for the Remainder Term to permit the Executive to receive or
participate in all fringe benefits available to him pursuant to Section 5
above; provided, however, that during the Remainder Term any amounts payable to
the Executive pursuant to this Section 11(b), and any fringe benefits which he
receives or in which he participates pursuant to this Section 11(b), shall be
reduced by any payments or fringe benefits the
5
<PAGE>
Executive shall receive during the Remainder Term from any other source of
employment which is unaffiliated with the Company.
12. CHANGE OF CONTROL.
(a) A "change of control" shall be deemed to occur when
(i) the Executive is not elected as an officer of the Company
(or one of its subsidiaries or affiliates);
(ii) the Company's shareholders approve (x) a merger or
consolidation in which the Company is not the surviving corporation and/or
which results in any reclassification or reorganization of the then outstanding
Common Stock, (y) a sale of all or substantially all of the Company's assets or
capital stock or (z) a plan of liquidation or dissolution of the Company;
(iii) the Common Stock is first purchased pursuant to a
tender or exchange offer (other than a tender or exchange offer made by the
Company) affecting at least 25% of the Common Stock or any other sale of at
least 25% of the Common Stock to a person or group of persons who are not
officers, directors or 5% shareholders of the Company on the date hereof; or
(iv) there is any other material change in ownership or
management of the Company after which (x) the Executive is terminated or (y) in
the sole determination of the Executive, there is a significant change in the
Executive's duties, responsibilities, principal location of employment, or
compensation.
(b) In the event a change of control occurs at any time during the
term of this Agreement:
(i) the Executive may, by written notice to the Company within
sixty (60) days after the date of such change of control, elect to terminate
his employment with the Company within sixty (60) days after such notice (the
"Termination Date"). If the Executive elects to terminate his employment
pursuant to Section 12, the Company shall pay the Executive, in addition to the
remainder of his annual compensation, a "parachute payment," as said term is
defined in Section 280G of the Internal Revenue Code of 1986, as amended, (the
"Code") in an amount equal to 2.99 times the Executive's annual compensation
(or such other amount then permitted by the Code), including the Base Salary,
bonus compensation or other remuneration and fringe benefits, if any. This
amount shall be payable by the Company to the Executive in one lump sum payment
within sixty (60) days of the Termination Date. The Executive shall be
responsible for payment of all income or excise taxes which may become due as a
result of the company's
6
<PAGE>
payment to him of any "excess parachute payments," as such phrase is defined
in Section 280G of the Code, and
(ii) any options beneficially owned by the Executive at the time
of such change in control shall immediately vest in full and shall be
exercisable by the Executive at any time prior to the expiration date of the
respective options.
13. ARBITRATION OF DISPUTES. All controversies, claims and disputes
arising out of or relating to this Agreement, or the breach thereof, shall be
settled by arbitration conducted by the American Arbitration Association, in
accordance with the commercial Arbitration Rules of said Association in effect
at the time of the controversy, claim or dispute. Judgment upon the award
rendered by the Arbitrator (or Arbitrators) may be entered in any court having
jurisdiction thereof.
14. SUCCESSORS AND ASSIGN. This Agreement shall inure to the benefit of
and be binding upon the Company, its successors and assigns, and upon the
Executive, his heirs, executors, administrators, legatees and legal
representatives.
15. NOTICE. Any notice, statement, report, request or demand required or
permitted to be given by this Agreement shall be in writing, and shall be
sufficient if delivered in person or if addressed and sent by certified mail,
return receipt requested, to the parties at the addresses set forth above, or
at such other place that either party may designate by notice in the foregoing
manner to the other.
16. WAIVER. The failure of either party to insist upon the strict
performance of any of the terms, conditions and provisions of this Agreement
shall not be construed as a waiver or relinquishment of future compliance
therewith, and said terms, conditions and provisions shall remain in full force
and effect. No waiver of any term or any condition of this Agreement on the
part of either party shall be effective for any purpose whatsoever unless such
waiver is in writing and signed by such party.
17. MISCELLANEOUS.
(a) Should any part of this Agreement, for any reason whatsoever, be
declared invalid, illegal, or incapable of being enforced in whole or in part,
such decision shall not affect the validity of any remaining portion, which
remaining portion shall remain in full force and effect as if this Agreement
had been executed with the invalid portion thereof eliminated, and it is hereby
declared the intention of the parties hereto that they would have executed the
remaining portion of this Agreement without including therein any portion which
may for any reason be declared invalid.
7
<PAGE>
(b) This Agreement shall be construed and enforced in accordance with
the laws of the State of Nevada applicable to agreements made and performed in
such State without application to the principles or conflicts of laws.
(c) This Agreement and all rights hereunder are personal to the
Executive and shall not be assignable, and any purported assignment in
violation thereof shall be null and void. Any person, firm or corporation
succeeding to the business of the Company by merger, consolidation, purchase of
assets or otherwise, shall assume by contract or operation of law the
obligations of the Company hereunder; provided, however, that the Company
shall, notwithstanding such assumption and/or assignment, remain liable and
responsible for the fulfillment of the terms and conditions of the Agreement on
the part of the Company.
(d) This Agreement constitutes the entire agreement between the
parties hereto with respect to the terms and conditions of the Executive's
employment by the Company, as distinguished from any other contractual
arrangements between the parties pertaining to or arising out of their
relationship, and this Agreement supersedes and renders null and void any and
all other prior oral or written agreements, understandings, or commitments
pertaining to the Executive's employment by the Company. No variation hereof
shall be deemed valid unless in writing and signed by the parties hereto. No
waiver by either party of any provision or condition of this Agreement by him
or it to be performed shall be deemed a waiver of similar or dissimilar
provisions and conditions at the same time or any prior or subsequent time.
(e) The heading of the paragraphs herein are inserted for
convenience and shall not affect any interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first written above.
"EXECUTIVE" "COMPANY"
FIBERCHEM, INC.
/s/ Melvin W. Pelley By: /s/ Scott J. Loomis
- -------------------------- --------------------------------
Name: Melvin W. Pelley Name: Scott J. Loomis
Title: Chairman of the Board
8
<PAGE>
EXHIBIT 10.24
EMPLOYMENT AGREEMENT
AGREEMENT entered into this 1st day of October 1997, by and between
FiberChem, Inc., a Delaware corporation, with its principal place of business
at 1181 Grier Drive, Las Vegas, Nevada 89119 (the "Company") and Thomas A.
Collins, residing at 1426 N. Coronado Drive, Chandler, Arizona 85224 (the
"Executive").
W I T N E S S E T H :
WHEREAS, the Company wishes to continue to employ the Executive in the
principal capacity of President of FCI Environmental, Inc. upon the terms and
conditions contained herein;
WHEREAS, the Executive is desirous of continuing employment with the
Company and is willing to accept such employment for the inducements and upon
the terms and conditions contained herein; and
WHEREAS, the Company has bargained for a covenant by the Executive not to
compete with the Company's business.
NOW, THEREFORE, in consideration of the mutual premises and agreements
contained herein and for other good and valuable consideration by each of the
parties, the parties hereby agree as follows:
1. EMPLOYMENT. The Company hereby employs the Executive and the
Executive hereby accepts employment upon the terms and conditions set forth
herein.
2. TERM. The term of this Agreement shall commence on the date hereof
and shall continue for an initial term of one (1) year; provided, however, that
the term of this Agreement shall be automatically continued and extended, on
the same terms and conditions as then in effect hereunder, for additional
consecutive twelve month periods commencing upon such termination date, unless
at least thirty (30) days before that date of termination of the initial term
of this Agreement or of any such extended term, the Company shall give the
Executive, or the Executive shall give the Company, notice in writing electing
to terminate this agreement as of such termination date.
3. DUTIES.
(a) During the term of this Agreement, the Executive shall serve the
Company in an executive capacity and shall perform such duties as are
determined from time to time by the Company's Board of Directors. Unless
prevented by death or disability, the Executive shall devote his full business
time, allowing for vacations and national holidays, as set forth in Sections
5(a) and (e) hereof, and illnesses, exclusively to
1
<PAGE>
the business and affairs of the Company, and shall use his best efforts,
skill and abilities to promote its interests. Nothing herein contained shall
be construed as preventing the Executive from purchasing securities in any
publicly held entity, if such purchases shall not result in his owning
beneficially 2% or more of the equity securities of such company, provided
such investment is not made in a company in competition with the Company.
(b) It is hereby acknowledged that the Board of Directors of the
Company has elected the Executive to serve as President of FCI Environmental,
Inc., and the Company hereby agrees to use its best efforts to have the
Executive continue to serve as President of FCI Environmental, Inc. during the
term of this Agreement. The precise services of the Executive may be extended
or curtailed from time to time at the direction of the Company's Board of
Directors.
4. COMPENSATION. For the services rendered by the Executive hereunder,
the Company shall pay and the Executive shall accept the following
compensation:
(a) From the commencement of the term hereof through September 30,
1998, the Executive shall receive a base annual salary of one hundred twenty-
five thousand dollars ($125,000) ( the "Base Salary") which Base Salary shall
be earned and shall be payable at such intervals not less frequently than
monthly, in equal installments, and otherwise in such manner as is consistent
with the Company's normal practice for remuneration of executives;
(b) The Board of Directors shall review the Executive's base salary
on each of the anniversary dates of the execution of this Agreement in order to
determine whether the Executive's salary should receive an upward adjustment;
(c) The Executive shall be entitled to bonus compensation during the
term hereof, as determined at the discretion of the Board of Directors of the
Company;
(d) The Executive's salary shall be payable subject to such
deductions as are then required by law and such further deductions as may be
agreed to by the Executive, in accordance with the Company's prevailing salary
payroll practices.
5. BENEFITS AND EXPENSES. During the term of this Agreement, the
Executive shall be entitled to the following benefits and expense
reimbursement:
(a) The Executive shall be entitled to up to four (4) weeks of paid
vacation per calendar year, in accordance with the Company's policy from time
to time in effect as determined by the Board;
(b) The Executive shall be entitled to participate in and/or receive
all fringe benefits such as medical, disability, hospital and health insurance
plans, and profit
2
<PAGE>
sharing, pension plan, life insurance and other plans, if any, which the
Company may generally make available to its executives. The Executive shall
also be included in the Directors and Officers' indemnification insurance
policy, if obtained;
(c) The Company shall also issue to the Executive a corporate credit
card to be utilized by the Executive in connection with any additional out-of-
pocket expenses which he may incur in connection with the performance of his
duties. During the term of this Agreement, the Company shall, upon
presentation of proper vouchers, also reimburse the Executive for all
reasonable expenses incurred by him directly in connection with his performance
of services as an officer and Executive of the Company;
(d) The Corporation shall maintain on behalf of the Executive, a one
million dollar ($1,000,000) key man life insurance policy, which shall name the
Company as beneficiary;
(e) The Executive shall receive as paid days off all national
holidays that the Company, pursuant to established policy, recognizes and
observes.
6. DISABILITY AND DEATH.
(a) DISABILITY - If, during the term of this Agreement, the
Executive becomes so disabled or incapacitated by reason of any physical or
mental illness so as to be unable to perform the services required of him
pursuant to this Agreement for a continuous period of four (4) months, or for
an aggregate of six (6) months during any consecutive twelve (12) month period,
then the Company may, upon 30 days' written notice to the Executive, terminate
this Agreement. Notwithstanding the termination of the Agreement hereunder by
reason of disability, the Company shall pay the Executive his Base Salary then
in effect along with all other fringe benefits (including, without limitation,
family medical benefits) for a period of one (1) year following the date of
such termination, such payment to be made in one lump sum, no later than 3
months following the date of termination. The Company shall purchase temporary
and permanent disability insurance on the Executive. Payments made hereunder
shall not affect any other payments made to the Executive.
(b) DEATH - This Agreement shall automatically terminate upon and as
of the date of death of the Executive at any time during the term of this
Agreement. Notwithstanding the termination of this Agreement by reason of the
Executive's death, the Company will pay to the Executive's estate his Base
Salary, and shall continue family medical benefits coverage for the Executive's
family, then in effect for a period of one (1) year following the date of such
termination, such payment to be made in one lump sum no later than 3 months
following the date of death.
3
<PAGE>
7. COVENANTS AND RESTRICTIONS.
(a) For a period of one (1) year following the termination of this
Agreement (the "Non-Compete Period"), the Executive shall not, directly or
indirectly, engage in, own, manage, operate, assist, join or control, or
participate in the ownership, management, operation or control of any
Restricted Enterprise (other than the Company or its affiliates), which engages
or plans to engage in a Restricted Enterprise anywhere in the United States,
whether as a director, officer, executive, agent, consultant, shareholder,
partner, owner, independent contractor or otherwise. Notwithstanding the
foregoing, these restrictions shall not prevent the Executive from earning his
livelihood during the Non-Compete Period. As used herein, a "Restricted
Enterprise" shall be any activity that competes with the business of the
Company as constituted or as realistically contemplated to be conducted by the
Company during the term of this Agreement in the Southwest United States.
Notwithstanding the foregoing, the provisions of this Section 7(a) shall not
apply if Executive's employment is terminated pursuant to Section 11(b) or
Section 12 of this Agreement.
(b) The Executive agrees that he shall not divulge to others, nor
shall he use to the detriment of the Company or in any business competitive
with or similar to any business engaged in by the Company or any of its
subsidiary or affiliated companies, at any time during his employment with the
Company or thereafter, any Confidential Information obtained by him during the
course of his employment with the Company. For the purpose of this Agreement,
"Confidential Information" means any and all information developed by or for or
processed by the Company or its affiliates of which the Executive has knowledge
during the term of his employment that is (1) not generally known in any
industry in which the Company or its affiliates does business during the Non-
Compete Period or (2) not publicly available and treated as confidential.
(c) During the Non-Compete Period, the Executive will neither
solicit, hire or seek to solicit or hire any of the Company's personnel in any
capacity whatsoever nor shall Executive induce or attempt to induce any of the
Company's personnel to leave the employ of the Company to work for Executive or
otherwise.
8. REMEDIES. The Executive acknowledges that his breach of any of the
restrictive covenants contained in Section 7 herein may cause irreparable
damage to the Company for which remedies at law would be inadequate.
Accordingly, if Executive breaches or threatens to breach any of the provisions
of Section 7, the Company shall be entitled to appropriate injunctive relief,
including, without limitation, preliminary or permanent injunctions, in any
court of competent jurisdiction, restraining Executive from taking any action
prohibited hereby. This remedy shall be in addition to all other remedies
available to the Company at law or equity. If any portion of Section 7 is
adjudicated to be invalid or unenforceable, Section 7 shall be deemed amended
to delete therefrom the
4
<PAGE>
points so adjudicated, such deletion to apply only with respect to the
operation of Section 7 in the jurisdiction in which the adjudication is made.
9. INDEMNIFICATION. The Company hereby indemnifies and holds the
Executive harmless from any and all expenses (including legal fees) or losses
incurred by him in connection with the performance of his duties under this
Agreement.
10. PRIOR AGREEMENTS. The Executive represents that he is not now under
any written agreement, nor has he previously, at any time, entered into any
written agreement with any person, firm or corporation, which would or could in
any manner preclude or prevent him from giving freely and the Company receiving
the exclusive benefit of his services.
11. TERMINATION PROVISIONS.
(a) In addition to, and not in lieu of, the termination provisions
set forth in Section 6 herein, the employment of the Executive hereunder may be
terminated by the Company prior to the termination date of the initial term or
any renewal term thereafter (as set forth in Section 2 hereof) for sufficient
"cause," which cause is defined specifically in the event that the Executive is
guilty of (i) a willful and reckless disregard to perform his duties as set
forth in Section 3 herein, or (ii) willful misfeasance for which the Company is
directly and adversely affected, or (iii) any act of dishonesty by the
Executive bearing directly upon the Company. Termination of the Executive's
employment by the Company for reckless disregard of his duties to the Company,
willful misfeasance or any act of dishonesty with respect to the Company
hereunder shall constitute, and is referred to elsewhere herein, as termination
for "Cause." Such termination of the Executive's employment hereunder for
Cause shall be effective upon delivery of written notice to the Executive which
notice shall be sworn affidavit from at least two non-interested parties,
setting forth with specificity the exact nature of the "cause" for which the
Executive is being terminated. Upon the termination of this Agreement for
"cause" as set forth in this subparagraph, the Company shall not be obligated
to make any further payments hereunder to the Executive.
(b) Notwithstanding any provisions in this Agreement to the
contrary, the Company may terminate the employment of the Executive without
Cause, but in such event the Company shall be obligated to pay the Executive
any and all amounts payable to the Executive pursuant to Section 4 above for
the greater of (i) the remainder of the initial term or the extended term, as
the case may be, of the Agreement in effect immediately prior to such
termination, or (ii) one (1) year (the "Remainder Term"), and the Company shall
also continue for the Remainder Term to permit the Executive to receive or
participate in all fringe benefits available to him pursuant to Section 5
above; provided, however, that during the Remainder Term any amounts payable to
the Executive pursuant to this Section 11(b), and any fringe benefits which he
receives or in which he participates
5
<PAGE>
pursuant to this Section 11(b), shall be reduced by any payments or fringe
benefits the Executive shall receive during the Remainder Term from any other
source of employment which is unaffiliated with the Company.
12. CHANGE OF CONTROL.
(a) A "change of control" shall be deemed to occur when
(i) the Executive is not elected as an officer of the Company
(or one of its subsidiaries or affiliates);
(ii) the Company's shareholders approve (x) a merger or
consolidation in which the Company is not the surviving corporation and/or
which results in any reclassification or reorganization of the then outstanding
Common Stock, (y) a sale of all or substantially all of the Company's assets or
capital stock or (z) a plan of liquidation or dissolution of the Company;
(iii) the Common Stock is first purchased pursuant to a
tender or exchange offer (other than a tender or exchange offer made by the
Company) affecting at least 25% of the Common Stock or any other sale of at
least 25% of the Common Stock to a person or group of persons who are not
officers, directors or 5% shareholders of the Company on the date hereof; or
(iv) there is any other material change in ownership or
management of the Company after which (x) the Executive is terminated or (y) in
the sole determination of the Executive, there is a significant change in the
Executive's duties, responsibilities, principal location of employment, or
compensation.
(b) In the event a change of control occurs at any time during the
term of this Agreement:
(i) the Executive may, by written notice to the Company within
sixty (60) days after the date of such change of control, elect to terminate
his employment with the Company within sixty (60) days after such notice (the
"Termination Date"). If the Executive elects to terminate his employment
pursuant to Section 12, the Company shall pay the Executive, in addition to the
remainder of his annual compensation, a "parachute payment," as said term is
defined in Section 280G of the Internal Revenue Code of 1986, as amended, (the
"Code") in an amount equal to 2.99 times the Executive's annual compensation
(or such other amount then permitted by the Code), including the Base Salary,
bonus compensation or other remuneration and fringe benefits, if any. This
amount shall be payable by the Company to the Executive in one lump sum payment
within sixty (60) days of the Termination Date. The Executive shall be
responsible for payment of all income or excise taxes which may become due as a
result of the company's
6
<PAGE>
payment to him of any "excess parachute payments," as such phrase is defined
in Section 280G of the Code, and
(ii) any options beneficially owned by the Executive at the time
of such change in control shall immediately vest in full and shall be
exercisable by the Executive at any time prior to the expiration date of the
respective options.
13. ARBITRATION OF DISPUTES. All controversies, claims and disputes
arising out of or relating to this Agreement, or the breach thereof, shall be
settled by arbitration conducted by the American Arbitration Association, in
accordance with the commercial Arbitration Rules of said Association in effect
at the time of the controversy, claim or dispute. Judgment upon the award
rendered by the Arbitrator (or Arbitrators) may be entered in any court having
jurisdiction thereof.
14. SUCCESSORS AND ASSIGN. This Agreement shall inure to the benefit of
and be binding upon the Company, its successors and assigns, and upon the
Executive, his heirs, executors, administrators, legatees and legal
representatives.
15. NOTICE. Any notice, statement, report, request or demand required or
permitted to be given by this Agreement shall be in writing, and shall be
sufficient if delivered in person or if addressed and sent by certified mail,
return receipt requested, to the parties at the addresses set forth above, or
at such other place that either party may designate by notice in the foregoing
manner to the other.
16. WAIVER. The failure of either party to insist upon the strict
performance of any of the terms, conditions and provisions of this Agreement
shall not be construed as a waiver or relinquishment of future compliance
therewith, and said terms, conditions and provisions shall remain in full force
and effect. No waiver of any term or any condition of this Agreement on the
part of either party shall be effective for any purpose whatsoever unless such
waiver is in writing and signed by such party.
17. MISCELLANEOUS.
(a) Should any part of this Agreement, for any reason whatsoever, be
declared invalid, illegal, or incapable of being enforced in whole or in part,
such decision shall not affect the validity of any remaining portion, which
remaining portion shall remain in full force and effect as if this Agreement
had been executed with the invalid portion thereof eliminated, and it is hereby
declared the intention of the parties hereto that they would have executed the
remaining portion of this Agreement without including therein any portion which
may for any reason be declared invalid.
7
<PAGE>
(b) This Agreement shall be construed and enforced in accordance with
the laws of the State of Nevada applicable to agreements made and performed in
such State without application to the principles or conflicts of laws.
(c) This Agreement and all rights hereunder are personal to the
Executive and shall not be assignable, and any purported assignment in
violation thereof shall be null and void. Any person, firm or corporation
succeeding to the business of the Company by merger, consolidation, purchase of
assets or otherwise, shall assume by contract or operation of law the
obligations of the Company hereunder; provided, however, that the Company
shall, notwithstanding such assumption and/or assignment, remain liable and
responsible for the fulfillment of the terms and conditions of the Agreement on
the part of the Company.
(d) This Agreement constitutes the entire agreement between the
parties hereto with respect to the terms and conditions of the Executive's
employment by the Company, as distinguished from any other contractual
arrangements between the parties pertaining to or arising out of their
relationship, and this Agreement supersedes and renders null and void any and
all other prior oral or written agreements, understandings, or commitments
pertaining to the Executive's employment by the Company. No variation hereof
shall be deemed valid unless in writing and signed by the parties hereto. No
waiver by either party of any provision or condition of this Agreement by him
or it to be performed shall be deemed a waiver of similar or dissimilar
provisions and conditions at the same time or any prior or subsequent time.
(e) The heading of the paragraphs herein are inserted for
convenience and shall not affect any interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first written above.
"EXECUTIVE" "COMPANY"
FIBERCHEM, INC.
/s/ Thomas A. Collins By: /s/ Scott J. Loomis
- ------------------------ ----------------------------
Name: Thomas A. Collins Name: Scott J. Loomis
Title: Chairman of the Board
8
<PAGE>
EXHIBIT 10.25
FIRST AMENNDMENT TO
OEM STRATEGIC ALLIANCE AGREEMENT
THIS FIRST AMENDMENT TO OEM STRATEGIC ALLIANCE AGREEMENT (this
"Amendment") is entered into this 13th day of August 1997 by and between FCI
ENVIRONMENTAL, INC., a Nevada corporation ("FCI") and WHESSOE VAREC, INC., a
Delaware corporation ("Whessoe"). All capitalized terms not defined herein
shall have the meanings assigned to them in the OEM Strategic Alliance
Agreement dated 11 July 1996 (the "Agreement").
WHEREAS, the parties hereto are parties to the Agreement; and
WHEREAS, on March 8, 1997, FCI delivered to Whessoe a termination notice
under the Agreement, which notice did not become effective because the
parties resolved any differences shortly thereafter (prior to notice becoming
effective) and reached an agreement on the material terms of this First
Amendment to the Agreement;
WHEREAS, the parties have carefully reviewed their activities and
discussions pursuant to the Agreement since March of this year;
WHEREAS, FCI has manufactured Products with an aggregate purchase price
of Six Hundred Seventy-Five Thousand United States Dollars ($675,000.00) that
Whessoe wishes to purchase pursuant to the Agreement.
WHEREAS, the parties desire to amend the Agreement so as to enable
Whessoe, in the event that FCI is unable to continue supplying the Products
to Whessoe, either to manufacture the Products itself or to have the Products
manufactured by a third-party; and
WHEREAS, the parties desire to amend certain other terms of the
Agreement.
Now, THEREFORE, in consideration of the premises of the mutual covenants
and agreements set forth in this Amendment, the parties agree as follows:
1. A. Whessoe agrees to pay FCI Three Hundred Thirty-Seven Thousand Five
Hundred United States Dollars ($337,500.00) immediately upon execution of
this Amendment, and FCI agrees to ship to Whessoe Products with an
aggregate purchase price of that amount (final schedule containing the
type and quantity of Products to be shipped hereunder will be determined
by Whessoe, with pricing to be based on the first quotation number 6199601
contained in Exhibit B to the Agreement) as soon as practicable
thereafter.
B. On or before September 30, 1997, FCI agrees to ship to Whessoe
additional Products with an aggregate price of Three Hundred Thirty-
<PAGE>
Seven Thousand Five Hundred United States Dollars ($337,500.00) (final
schedule containing the type and quantity of Products to be shipped
hereunder will be determined by Whessoe, with pricing to be based on the
first quotation number 6199601 contained in Exhibit B to the Agreement),
and Whessoe agrees to pay FCI that amount immediately against presentation
of documents evidencing such shipment.
C. The parties acknowledge that, upon Whessoe's payment of the sums
required by paragraphs A and B. Whessoe shall have satisfied in full its
obligations pursuant to the Purchase Orders for the initial and second
releases described in Section 8 of the Agreement to pay FCI an aggregate
amount of One Million United States Dollars ($1,000,000.00).
D. Shipment of Products pursuant to paragraphs A and B shall be final
and irrevocable, subject to Whessoe's rights under the warranty terms of
the Agreement.
2. Section 7 of the Agreement is deleted and a new Section 7 is inserted and
shall read as follows:
7. EXCLUSIVITY AND MARKETS
A. The Seller hereby grants the Buyer exclusive sales and marketing
rights for Products: (1) to any facilities with above ground storage
tanks (AST) including but not limited to the oil, gas, storage,
transportation, refinery, chemical, petrochemical, power generation,
water, waste water treatment, and pharmaceutical industries
worldwide; and (2) to United States Department of Defense facilities,
wherever located. The parties also acknowledge that there are some
underground storage potentials that are addressable by the Buyer
which are included within the scope of this Agreement.
B. The Buyer agrees to exclusively market, promote and sell
Products on a world wide basis.
C. The Seller shall inform the Buyer of any pending new
partnerships/alliances that could have an impact on current or
potential business for the Buyer. If the parties determine that such
a new partnership/alliance would have a material negative impact on
the Buyer's potential business, the Seller will not enter into said
partnership/alliance.
3. Section 17(A) is deleted and a new Section 17(A) is inserted and shall
read as follows:
-2-
<PAGE>
A. Subsequent to the execution of this Amendment and prior to the
shipment of Products required by paragraph 1(B) hereof, Seller shall
deliver to a mutually agreed third party sufficient documentation and
information (the "Product Information") in the detail necessary to
allow a reasonably well-trained person in the instrumentation
business to understand and manufacture the Products without FCI's
assistance. Whessoe shall be entitled to receive the Product
Information from said third party pursuant to the terms of Section 34
of the Agreement, as amended by paragraph 7 of this Amendment. The
Product Information shall include, but is not limited to, the
following information for each Product:
i. technical description of Product technology and theory of
operation,
ii. bill of materials,
iii. list of vendors,
iv. parts drawings,
v. inspection information for procured parts,
vi. any test jigs, fixtures, etc. for procured parts,
vii. manufacturing process flow designs,
viii. manufacturing and assembly procedures,
ix. assembly drawings,
x. assembly/sub-assembly test procedures,
xi. drawings and procedures for fixtures and test equipment,
xii. final test procedure and test specifications, and
xiii. final test equipment drawings and specifications.
Seller shall periodically update the Product Information to encompass
new Products and changes to existing Products. Buyer agrees not to
use any of the Product Information to manufacture the Products except
as provided in Section 34. All Product information shall constitute
Confidential Information for purposes of Section 19.
4. The introductory sentence of Section 33 shall be deleted.
5. A new Section 33(C) is added as follows:
C. Buyer shall have the right to terminate this Agreement in
accordance with the provisions of Section 8(D).
6. Current Section 34 of the Agreement is renumbered Section 35.
-3-
<PAGE>
7. A new Section 34 is added and shall read as follows:
34. RIGHTS UPON TERMINATION
In the event that this Agreement is terminated pursuant to
Section 33(C), or pursuant to Section 33(A) and Seller is unwilling
or unable to continue to supply Products to Buyer under the terms
hereof:
A. Seller agrees to grant Buyer a limited, non-exclusive
license, unlimited in duration, to use any and all intellectual
property rights in the Products, and to use the Product Information,
to manufacture Products, or to sub-license a third party of Buyer's
choosing to manufacture Products, and to market and sell Products
anywhere in the world, on such royalty terms as the parties may
reasonably agree. In the event that the parties are unable to agree
on such royalty terms, the parties agree to submit the amount of such
royalty to arbitration before a single arbitrator in an arbitration
to be held in the city of Las Vegas pursuant to the Commercial
Arbitration Rules of the American Arbitration Association.
B. Whessoe shall be entitled to receive the Product Information
held by a third party pursuant to paragraph 3 of this Amendment.
8. Except as expressly amended hereby, the Agreement remains in full
force and effect without modification. References to the Agreement
after the date hereof shall be references to the Agreement after
giving effect to the Amendment.
9. This amendment may be executed in any number of counterparts which,
taken together, shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto execute this Amendment as of
the date first above written.
FCI ENVIRONMENTAL, INC.
BY: /s/ GEOFFREY F. HEWITT
-----------------------------
Name: Geoffrey F. Hewitt
---------------------------
Title: Chief Executive Officer
--------------------------
WHESSOE VAREC, INC.
By: /s/ WILLIAM H. SWEENEY
-----------------------------
Name: William H. Sweeney
---------------------------
Title: Vice President, Finance
--------------------------
-4-
<PAGE>
ENGAGEMENT AGREEMENT
This Agreement is effective as of the date of execution, by and between
FiberChem, Inc. 1181 Grier Drive, Bldg B., Las Vegas, NV 89119 (referred to
as "Company"), and entrenet Group, LLC, 5213 El Mercado Parkway, Suite D,
Santa Rosa, California 95403 (referred to as "entrenet").
In this Agreement, the party who is contracting to receive services shall be
referred to as "Company," and the party who will be providing the services
shall be referred to as "entrenet".
Company desires to have services provided by entrenet.
Therefore, the parties agree as follows:
1. DESCRIPTION OF SERVICES. Beginning on the Effective Date, entrenet will
provide the services, (collectively, the "Services") as described in
Exhibit A attached hereto and incorporated herein by reference.
2. PERFORMANCE OF SERVICES. The manner in which the Services are to be
performed and the specific hours to be worked by entrenet shall be
determined by entrenet. entrenet shall, and the Company will rely on
entrenet's promise to work as many hours as may be reasonably necessary
to fulfill entrenet's obligations under this Agreement.
3. PAYMENT. Company will pay a fee to entrenet for the Services in an
amount and under terms and conditions as described in Exhibit A.
4. TRANSACTION. For purposes of this agreement, the term "Transaction"
shall mean, whether in one or a series of transactions: Any capital
financing, including without limitation, any financing for debt, equity,
capital stock (common or preferred), convertible instruments, lines of
credit and secured and/or unsecured debt; Any merger/acquisition activity
including without limitation, (i) the acquisition, directly or indirectly,
through purchases, sales, or otherwise, of any or all portions of the
securities of the Company by an investor or (ii) any merger,
consolidation, reorganization, recapitalization, restructuring or other
business combination involving the Company and an investor.
5. CONSIDERATION. For purposes of this agreement, the term "Consideration"
means the total proceeds and other consideration paid and to be paid or
contributed directly or indirectly, in connection with a Transaction
(which consideration shall be deemed to include amounts paid or to be
paid into escrow) to the Company and its shareholders, including,
without limitation: (i) cash; (ii) notes, securities, and other property
(including all options, warrants or other instruments or arrangements
convertible into or exercisable for any of the foregoing) at the fair
market value thereof; (iii) liabilities assumed; (iv) payments to be made
in installments; (v) amounts paid or payable under management, consulting,
supply, service, distribution, technology transfer or licensing
agreements, and real property or equipment lease agreements, and
agreements not to compete, and other similar arrangements (including such
payments to management), entered into other than in the ordinary course
of business; and (vi) contingent payments (whether or not related to
future earnings or operations). The fair market value of non-cash
consideration consisting of securities shall be determined based upon
(A) the closing sale price for such securities on the registered national
securities exchange providing the primary market therein on the last
trading day prior to the date of receipt thereof by the Company or its
shareholders, (B) if such securities are not so traded, the average of
the closing bid and asked prices, as reported by the National Association
of Securities Dealers Automated Quotation System on the last trading day
prior to the date of receipt thereof by the Company or its shareholders,
or (C) if such securities are not so traded or reported, agreement
between the Company and entrenet. The fair market value of any non-cash
Consideration other than securities shall be determined by agreement of
the Company and entrenet. If all or any portion of the Consideration is
to be paid over time, then that portion of the Transaction Fee
attributable thereto shall be
<PAGE>
payable, in the sole discretion of entrenet, either (i) as and when such
payments are made or (ii) upon consummation of a Transaction, calculated
based on the present value of such Consideration utilizing a discount
rate of 7% per annum.
6. ACCOUNTING AND INSPECTION RIGHTS. For all compensation referred to in
Exhibit A, it is further agreed that Company shall maintain written
records in sufficient detail for purposes of determining the amount of
Fees due entrenet. Company shall provide to entrenet a written accounting
that sets forth the manner in which Fee payments were calculated. Upon
15 days notice, entrenet or entrenet's agent shall have the right to
inspect Company's records for the limited purpose of verifying the
calculation of Fee payments, subject to such restrictions as Company
may reasonably impose to protect the confidentiality of the records.
Such inspections shall be made at the company's principal place of
business during regular business hours as may be set by the Company.
7. EXPENSE REIMBURSEMENT. entrenet shall be entitled to reimbursement from
Company for the following pre-approved "out-of-pocket" expenses: travel
expenses, airfare, hotel, meals, postage and delivery, copying,
long-distance telephone calls, or other expenses as shall be mutually
agreed upon.
8. TERM/TERMINATION. This Agreement shall be effective upon signing and
shall have an initial term and such renewal terms as shall be described
in Exhibit A. The termination of this engagement is also defined in
Exhibit A.
9. RELATIONSHIP OF PARTIES. It is understood by the parties that entrenet
is an independent contractor with respect to Company, and not an employee
of Company. Company will not provide fringe benefits, such as health
insurance benefits, paid vacation, or any other employee benefit, for
the benefit of entrenet.
10. INDEMNIFICATION AND CONTRIBUTION. (a) If, in connection with the
services or matters that are the subject of this agreement, entrenet
becomes involved in any capacity in any action or legal proceeding,
the Company agrees to reimburse entrenet, its affiliates and their
respective directors, officers, employees, representatives and
controlling persons (each an "Indemnified Person") promptly upon request
for all expenses (including without limitation, fees and disbursements of
legal counsel and the cost of investigation and preparation) as they are
incurred. In the event a determination is made to the effect set forth
below holding that entrenet is not entitled to indemnification hereunder,
entrenet shall promptly refund to the Company all amounts advanced under
this Section in respect of reimbursement of expenses. The Company also
agrees to indemnify and hold each Indemnified Person harmless against all
losses, claims damages or liabilities, joint or several (collectively,
"Damages"), to which such Indemnified Person may become subject
(i) arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in any offering materials or any
other written or oral communication provided to any investor of securities
of the Company or arising out of or based upon the omission or alleged
omission to state in any such document or communication a material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading; or (ii) in connection with the services or matters
which are the subject of this agreement, provided that the Company
shall not be liable under the foregoing indemnity in respect of any
Damages to the extent that a court having jurisdiction shall have
determined by a final judgment (not subject to further appeal) that
such damages resulted directly and primarily from the gross negligence
or willful misconduct of entrenet or any other Indemnified Person. The
Company also agrees that no Indemnified Person shall have any liability
to the Company for or in connection with this engagement, except for
any liability which results directly and primarily from the gross
negligence or willful misconduct of the Indemnified Person. (b) The
Company and entrenet agree that if, for any reason, any indemnification
sought pursuant to this Section is unavailable or is insufficient to
hold any Indemnified Person Harmless, then, whether or not entrenet is
the person entitled to indemnification, the Company and entrenet shall
each contribute to amounts paid or payable in respect of the Damages for
which such indemnification is unavailable or insufficient in such
proportion as if appropriate to reflect (i) the relative benefits to the
Company, on the one hand, and entrenet, on the other and (ii) their
relative fault, in connection with the matters as to which such Damages
relate, as well as any relevant equitable considerations; provided that
in no event shall the amount to
2
<PAGE>
be contributed by entrenet exceed the amount of fees actually received by
entrenet hereunder (excluding any amounts received by entrenet as a
reimbursement of expenses). The Company and entrenet agree to consult in
advance with one another with respect to the terms of any proposed
waiver, release or settlement of any claim, action or proceeding to which
entrenet or an Indemnified Person may be subject as a result of the
matters contemplated by this agreement and further agree not to enter
into any such waiver, release or settlement without the prior written
consent of one another (which consent shall not be unreasonably
withheld), unless such waiver, release or settlement includes an
unconditional release of entrenet or such indemnified Person, as the case
may be, from all liability arising out of such claim, action or
proceeding. (c) The agreements of the Company under this Section shall be
in addition to any liabilities the Company may otherwise have and shall
apply whether or not entrenet or any other Indemnified Person is a formal
party to any claim, action or legal proceedings. ANY RIGHT TO A TRIAL BY
JURY WITH RESPECT TO ANY CLAIM FOR INDEMNIFICATION OR CONTRIBUTION
HEREUNDER OR IN RESPECT OF ANY CLAIM, ACTION OR LEGAL PROCEEDING ARISING
OUT OF OR RELATED TO THE SERVICES OF entrenet HEREUNDER OR IN ANY OTHER
MANNER IS HEREBY WAIVED BY EACH INDEMNIFIED PARTY AND BY THE COMPANY.
11. COOPERATION, CONFIDENTIALITY, ETC. (a) The Company shall furnish
entrenet with all information and data which entrenet shall reasonably
deem appropriate in connection with its activities on the Company's
behalf, and shall provide entrenet full access to the Company's officers,
directors, employees and professional advisors. Further, the Company
shall involve entrenet in all discussions between the Company and
potential investors and shall make available to entrenet all information
regarding potential investors which the Company receives from any source
whatsoever. The Company recognizes and confirms that entrenet in acting
pursuant to this engagement will be using information in public reports
and other information provided by others, including information provided
by the Company, and that entrenet does not assume responsibility for, and
may rely without independent verification upon, the accuracy or
completeness of any such information. (b) the Company agrees that
entrenet's advice is for the use and information of the Company's
management and Board of Directors only and the Company will not disclose
such advice to others (except the Company's professional advisors and
except as required by law) or summarize or refer to such advice without,
in each case, entrenet's prior written consent. Notwithstanding anything
to the contrary contained in the foregoing, in the event the Company is
required by law to make any filings with any governmental authority
(including without limitation the Securities and Exchange Commission)
which mention entrenet or any disclosure to the holder of its securities
concerning entrenet, the Company shall afford entrenet the opportunity to
review such disclosure in advance and to approve the form thereof, such
approval not to be unreasonably withheld or delayed. entrenet agrees that
it will not, without the prior written consent of the Company, disclose,
to any third party any confidential information provided by the Company
to entrenet in connection with this engagement, except to the extent (i)
such disclosure is required by applicable law, regulation or legal
process, (ii) such information becomes publicly known other than as a
result of the breach by entrenet of its obligations set forth in this
sentence, and (iii) such disclosure is requested or required by any bank
regulatory authority having jurisdiction over entrenet.
12. OTHER TRANSACTIONS. The Company acknowledges that entrenet and its
affiliates may have and may in the future have investment and commercial
banking, trust and other relationships with parties other than the
Company, which parties may have interests with respect to a Transaction.
Although entrenet in the course of such other relationships may acquire
information about the Transaction, potential investors or such other
parties, entrenet shall have no obligation to disclose such information
to the Company or to use such information on the Company's behalf.
Furthermore, the Company acknowledges that entrenet may have fiduciary or
other relationships whereby entrenet may exercise voting power over
securities of various persons, which securities may from time to time
include securities of the Company, potential investors or to others with
interests with respect to a Transaction. The Company acknowledges that
entrenet may exercise such powers and otherwise perform its functions in
connection with such fiduciary or other relationships without regard to
its relationship to the Company hereunder.
3
<PAGE>
13. ACKNOWLEDGMENT OF SERVICES PROVIDED. entrenet may include descriptions
of services provided by entrenet to the Company in entrenet's promotional
materials. entrenet shall also have the right to place notices
("Tombstones") in financial or other newspapers and journals at entrenet's
own expense describing its services to Company under this Agreement. The
Company may not otherwise be publicly referred to by entrenet without
Company's prior consent.
14. NOTICES. All notices required or permitted under this Agreement shall
be in writing and shall be deemed delivered when delivered in person or
deposited in the United States mail, first class postage prepaid,
addressed as follows:
IF FOR COMPANY: IF FOR entrenet:
--------------- ----------------
FiberChem, Inc. entrenet Group, LLC
Geoff F. Hewitt Timothy F. Jaeger
President/CEO Chief Financial Officer
1181 Grier Drive, Bldg. B. 5213 El Mercado Parkway, Suite D
Las Vegas, NV 89119 Santa Rosa, CA 95403
Such addresses may be changed from time to time by either party by
providing written notice to the other in the manner set forth above.
15. ARBITRATION AND CONSENT TO JURISDICTION. Any dispute and/or
controversy relating to or arising from the interpretation and/or
application of this Agreement shall be submitted at the request of the
Company or entrenet to a neutral arbitrator selected by the parties from
the J.A.M.S/Endispute panel of arbitrators for a determination which
shall be final and binding as to the parties thereto. Arbitration shall
take place in Santa Rosa, located in the county of Sonoma, state of
California for a determination which shall be final and binding as to the
parties thereto. The decision and award of the arbitrator may include the
cost of the arbitration proceedings and may include reasonable attorney
fees for the successful party. The arbitration shall be conducted in
accordance with California Arbitration Act (CCP Section 1280 et seq.)
and not by court action except as provided by California law for the
judicial review of arbitration proceedings. Nothing herein contained
shall be deemed to affect the rights of any Party to serve process in any
manner other than as permitted by law.
16. ENTIRE AGREEMENT. This Agreement, along with any Exhibits attached
hereto, contains the entire agreement of the parties with respect to the
subject matter and supersedes any other agreement whether oral or written
which are not fully expressed herein, except for carryover provisions of
any previous executed agreements between entrenet and Company.
17. AMENDMENT. This Agreement may be modified or amended if the amendment
is made in writing and is signed by both parties.
18. SEVERABILITY. If any provision of this Agreement shall be held to be
invalid or unenforceable for any reason, the remaining provisions shall
continue to be valid and enforceable. If a court finds that any provision
of this Agreement is invalid or unenforceable, but that by limiting such
provision it would become valid and enforceable, then such provision
shall be deemed to be written, construed, and enforced as so limited.
19. WAIVER OF CONTRACTUAL RIGHT. The failure of either party to enforce
any provision of this Agreement shall not be construed as a waiver or
limitation of that party's right to subsequently enforce and compel
strict compliance with every provision of this Agreement.
20. APPLICABLE LAW. This Agreement shall be governed by the laws of the
State of California, excluding that body of law known as conflict of laws.
4
<PAGE>
COMPANY entrenet GROUP, LLC
By: /s/ Geoff F. Hewitt By: /s/ John Billington
------------------------------ ----------------------------
Geoff F. Hewitt John Billington
President/CEO Vice President
Date Executed: 10/2/97 Date Executed: 10/2/97
------------------- -----------------
5
<PAGE>
Exhibit A
ADVISORY SERVICES PROVIDED BY ENTRENET
As a corporate advisor, entrenet will use its best efforts to assist in
achieving a successful Transaction. Such Transaction, as defined in
paragraph four (4) of this agreement, includes without limitation any
capital financing, debt financing, and/or merger/acquisition
transactions.
entrenet may act as exclusive corporate advisor in providing services to
the management of the Company. Services shall include ADVICE and COUNSEL
in the following areas:
- Financing strategies.
- Strategic partnerships, acquisition and merger strategies.
- Securing placement agents.
- Corporate positioning.
- Business plan development.
- Executive Placement.
- Preparation for, and participation in Financial Meetings ("Road
Show").
entrenet will not act as a broker, but will assist in locating brokerage
services if required. entrenet will not participate in general
advertising of solicitation of the Company. Investors brought to the
Company will be accredited investors to the best of entrenet's knowledge.
entrenet may provide additional direct consulting services to the
Company beyond its role as corporate advisor (egs. business plan
preparation, corporate presentation development, financial pro-forma
preparation, private-placement or public offering administrative/
contractual/financial services, interim management, etc.) at the Company's
request. Such additional direct consulting services would be charged at
entrenet's prevailing consulting rates at the time of the assignment(s) or
as agreed to separately in the future.
entrenet COMPENSATION.
TRANSACTIONS. Upon the successful completion of a Transaction, as
defined in paragraph four (4) of this agreement, initiated at any time
prior to the termination of the contract, the fees paid to entrenet
shall be five percent (5%) (payable in cash) of gross Consideration as
defined in paragraph five (5) of this agreement. Compensation is due
entrenet regardless of the origination of the Transaction source. This
paragraph shall apply to all transactions except for the Rights Offering
currently being prepared by the Company to be presented to the current
share holders of the Company. However, the Company has offered entrenet
the opportunity to participate on a standby basis in the Rights
Offering and should entrenet agree to participate, the Company agrees
to include the Rights offering as a transaction under this paragraph.
ADVISORY SERVICES. At signing of this engagement agreement, entrenet
shall earn compensation of $120,000 for the twelve-month term. Form of
payment shall be fifty percent (50%) payable in cash and fifty percent
(50%) payable in convertible notes (as defined below). Payments due
entrenet as follows: $5,000 cash and $60,000 note payable upon signing
of this agreement. The balance of $55,000 cash is payable upon completion
of a transaction, or at the rate of $5,000 per month for 11 additional
months, whichever comes first.
DIRECT INTRODUCTION OF FINANCING SOURCES. In addition to fees for
successful Transactions and advisory services, entrenet's fees for
direct introduction of a financing source or referral of principal
parties, shall be five percent (5%) (payable in cash) of the gross
consideration provided by such source. This paragraph shall
6
<PAGE>
apply to all introductions except for financing directly related to the
consummation of any merger or acquisition transaction and, additionally,
shall not apply to the transactions already in progress by the Company
as listed on Exhibit B.
EXECUTIVE PLACEMENT. In addition to other applicable fees, if entrenet
introduces an executive-level candidate for management, who is
subsequently hired by Company during the term of this Agreement (or
within one year from introduction), then entrenet's fee shall be fifteen
percent (15%) (payable in cash) of the candidate's total first year
Consideration.
WARRANTS. For all successful Transactions and Direct Introduction of
Financing Sources, the Company shall grant to entrenet a five-year
warrant to purchase shares of Company's stock valued at the exercising
price as defined in the following sentence equal to the total of all
fees paid to entrenet in conjunction with all such transactions. These
warrants shall contain all standard provisions, as well as stock split
adjustments and piggy-back registration provisions and shall have an
exercise price equal to the lower of market or the purchase price of the
stock issued in conjunction with any such transaction.
FORM OF NOTES PAYABLE. Notes shall take the form of non-transferable 2
year subordinated convertible Note with 10% interest rate, with interest
and principal due upon maturity. The note and accumulated interest is
convertible by entrenet into common shares. The conversion price for
publicly traded companies shall be a 20% (30% if trading of underlining
shares is restricted under rule 144 of the Securities and Exchange
Commission) discount of the moving 21-day average for the immediate
period preceding the signing of this agreement. The conversion price for
non-publicly traded companies shall be a 35% discount from the price of
the most recent financing completed. Any notes associated with renewals
will be in the same form as the notes for the initial term. The Company
agrees to provide piggy-back registration rights to register
aforementioned common shares underlying the conversion of the notes in
the Company's next registration statement filed with the Securities and
Exchange Commission, for which the shares can be registered.
ESCROW. All Fees, Common Stock Warrants, or other consideration earned
in conjunction with Advisory Services and Direct Introduction of
Financing Sources are to be paid through the escrow account at time of
funding.
NON-ACCOUNTABLE EXPENSE ADVANCE. To offset local auto travel, long-distance
telephone calls, postage, delivery, copying, faxing and other office
costs, entrenet shall be advanced a non-accountable $1500 for the
six-month term. Form of payment shall be $750 payable in cash upon
signing of this agreement. The balance of $750 is payable in cash upon
completion of a Transaction, or in 90 days, whichever comes first.
TERM
The term of the Agreement shall be twelve (12) months from the date of
signing. The Agreement shall automatically renew for successive twelve
(12) month terms, unless either party provides 60 days written notice to
the other party prior to either the termination of the applicable
initial term or any renewal terms.
Upon termination of this Agreement, payments under this paragraph shall
cease; provided, however, that entrenet shall be entitled to payments
for periods or partial periods that occurred prior to the date of
termination and for which entrenet has not yet been paid.
For any sources introduced to the Company prior to termination, the
above entrenet compensation schedule will remain in effect for one (1)
year following the termination date of this agreement.
7
<PAGE>
EXHIBIT B
LIST OF EXCLUSIONS FROM COMPENSATION FOR DIRECT INTERODUCTION OF FINANCING
SOURCES
8
<PAGE>
EXHIBIT B -- ENTRENET EXCEPTIONS
Whessoe Varec/Endress+Hauser
Siebe, plc
Hoechst Celanese
AIG
Danaher Corp.
ABB
Texas Instruments
Thermo Electron
Halma Corp.
Shell Oil (Pipeline) Co.
Osmonics, Inc.
Great Britain Petroleum
Horiba Corp.
William Blair & Company
Rauscher Pierce & Clark, Ltd., et. al.
<PAGE>
EXHIBIT NO. 21.1
SUBSIDIARIES OF FIBERCHEM, INC.
<TABLE>
<CAPTION>
Name State of Incorporation
---- ----------------------
<S> <C>
FCI Environmental, Inc. (formerly FCI Instruments, Inc.) Nevada
Fiberoptic Medical Systems, Inc. (inactive) Nevada
PetroTester, Inc. (inactive) New Mexico
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS'
The Board of Directors and Shareholders
FiberChem, Inc.
We hereby consent to incorporation by reference in Registration Statements
No. 33-61479 and 33-82330 on Form S-8 of our report dated November 21, 1997
related to the consolidated balance sheet of FiberChem Inc. and Subsidiaries
as of September 30, 1997, and the related statements of operations,
shareholders' equity, and cash flows for the year ended September 30, 1997,
which report appears in the September 30, 1997 annual report on Form 10-KSB of
FiberChem, Inc. and Subsidiaries.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
January 6, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1996 AND 1997 AND FOR EACH OF THE YEARS
IN THE TWO YEAR PERIOD ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 427,488
<SECURITIES> 0
<RECEIVABLES> 504,743
<ALLOWANCES> (240,796)
<INVENTORY> 1,563,191
<CURRENT-ASSETS> 2,311,567
<PP&E> 716,465
<DEPRECIATION> (549,175)
<TOTAL-ASSETS> 2,969,720
<CURRENT-LIABILITIES> 428,016
<BONDS> 1,657,942
0
3,284,970
<COMMON> 2,552
<OTHER-SE> (2,403,760)
<TOTAL-LIABILITY-AND-EQUITY> 2,969,720
<SALES> 1,523,994
<TOTAL-REVENUES> 1,523,994
<CGS> 945,434
<TOTAL-COSTS> 4,344,796
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 223,161
<INCOME-PRETAX> (3,226,958)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,226,958)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,226,958)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> 0<F1>
<FN>
<F1>OMITTED BECAUSE OF ANTIDILUTIVE EFFECT ON NET LOSS
</FN>
</TABLE>
