<PAGE>
Pursuant to Rule 424b4
Registration Number 333-46555
FIBERCHEM, INC.
RIGHTS TO PURCHASE AN AGGREGATE OF 8,976,962 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK, $.0001 PAR VALUE, AND ONE
REDEEMABLE CLASS E WARRANT
FiberChem, Inc., a Delaware corporation ("FiberChem" or the "Company"), is
granting for no consideration, to the holders (collectively, the
"Securityholders") of its outstanding shares of common stock, $.0001 par value
(the "Common Stock"), Convertible Preferred Stock, $.001 par value (the
"Preferred Stock"), and warrants to purchase Common Stock (the "Warrants")
transferable rights (the "Rights") to subscribe for units (the "Units")
comprised of one share of Common Stock and one Redeemable Class E Warrant (the
"Class E Warrant"). Each holder of Common Stock will receive one Right for every
four shares of Common Stock owned of record at the close of business on October
16, 1998 (the "Record Date"). Each holder of Preferred Stock or Warrants will
receive one Right for every four shares of Common Stock issuable upon conversion
of the Preferred Stock or exercise of the Warrants owned of record at the close
of business on the Record Date. The Offering by the Company consists of the
Rights, the Units issued by the Company upon exercise of the Rights, the Common
Stock and Class E Warrants included in such Units and the Common Stock
underlying the Class E Warrants.
The Prospectus also covers re-sales by members of management of the Common
Stock, Class E Warrants (and Common Stock issuable upon exercise of the Class E
Warrants) included in (i) 171,867 Units subject to Rights distributable to them
as securityholders of the Company which they have agreed to exercise and (ii) up
to an additional 1,136,363 Units which they have agreed to subscribe for as
standby purchasers if such number of Units remain unsubscribed. See "Plan of
Distribution."
In addition, this Prospectus covers the offering by Privatbank Vermag AG
("Privatbank") of the securities included in an additional 130,000 Units, which
were issued to Privatbank as additional consideration pursuant to bridge loan
agreements dated March 24, 1998 and August 25, 1998, between the Company and
Privatbank. See "Plan of Distribution."
(CONTINUED ON NEXT PAGE)
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SHOULD ONLY
BE PURCHASED BY THOSE WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. SEE "RISK
FACTORS." BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN RISKS OF AN
INVESTMENT IN THE COMMON STOCK.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
SUBSCRIPTION PROCEEDS TO
PRICE COMPANY(1)(2)(3)
<S> <C> <C>
Per Unit...................................................................................... $.22 $.22
Total Minimum................................................................................. $287,810 $287,810
Total Maximum................................................................................. $ 1,974,932 $ 1,974,932
</TABLE>
(1) The Units are being offered directly by the Company on a "best efforts" no
minimum basis. Accordingly, there can be no assurance the Company will
receive any net proceeds from the offering, except for an aggregate of
1,308,230 Units which members of Management have agreed to purchase.
(2) Before deducting offering expenses payable by the Company estimated at
$60,000 and assuming all of the Rights (but none of the Class E Warrants
included therein) offered hereby are exercised. A Securityholder need not
exercise any minimum number of Rights. There are no underwriting
arrangements with any underwriter or broker-dealer or other person with
respect to any of the Rights, shares of Common Stock or Class E Warrants
offered hereby. Members of Management have made a written commitment to
exercise Rights distributable to them to purchase 171,867 Units and to
subscribe for up to an additional 1,136,363 unsubscribed Units. There are no
other agreements or understandings regarding the distribution of Rights
and/or the exercise of Warrants by Management and no assurance can be given
that any of such Warrants will be exercised.
(3) Proceeds include the amount received by the Company pursuant to Promissory
Notes issued by officers and directors of the Company, which aggregate
$250,000 and which may be canceled in payment for unsubscribed Units which
are purchased by members of Management. Such funds have been loaned to the
Company on an interim basis by certain members of Management in anticipation
of their commitment to subscribe for Units and will represent payment for at
least 1,136,363 of unsubscribed Rights. The Company intends to issue
certificates evidencing the Shares of Common Stock and the Class E Warrants
comprising the Units to subscribers as soon as possible after the exercise
of Rights.
THE DATE OF THIS PROSPECTUS IS OCTOBER 23, 1998.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Company will not receive any proceeds from the sale of Units, Common
Stock or Class E Warrants by the Selling Securityholders.
Each Right entitles the holder thereof to subscribe for, and purchase one
Unit at a subscription price (the "Subscription Price") of $.22 per Unit. The
shares of Common Stock and Class E Warrants included in the Units will be
transferable separately after issuance. Each Class E Warrant entitles the holder
thereof to purchase one share of Common Stock at any time through October 23,
2003 at an initial exercise price of $.25 per share through October 23, 1999;
$.35 per share from October 24, 1999 through October 23, 2000; $.50 per share
from October 24, 2000 through October 23, 2001; $.70 per share from October 24,
2001 through October 23, 2002; and $.90 per share from October 24, 2002 through
October 23, 2003, subject to adjustment in certain events. The Class E Warrants
may be redeemed by the Company for $.05 per warrant if for any period of thirty
(30) consecutive trading days the last reported sales price of the Company's
Common Stock for each trading day during such period is at least 200% of the
then current exercise price. Rights will be mailed to each Securityholder as
soon as possible after the effective date of this registration statement and may
be exercised for a period of twenty (20) days (the "Initial Subscription
Period") beginning on the effective date of this registration statement and
expiring at 5:00 p.m., Mountain Standard Time, on November 23, 1998 (the
"Expiration Date"). See "The Rights Offering".
Prior to this offering (the "Rights Offering"), there has been no market for
the Rights, the Units and/or the Class E Warrants and it is unlikely that a
market for the Rights, Units and/or the Class E Warrants will develop. The
Common Stock is quoted on the Over-The-Counter Electronic Bulletin Board
("OTCBB") under the symbol "FOCS". On October 22, 1998, the last reported bid
and asked prices for the Common Stock on the OTCBB were $.20 and $.22 per share,
respectively. FiberChem was delisted from the Nasdaq SmallCap Market on February
25, 1998 because the Company failed to meet listing requirements for net assets.
The Company has appealed Nasdaq's decision. Unless the Company is successful in
its appeal, of which there can be no assurance, the Common Stock will continue
to be listed in the over-the-counter market through the OTCBB. See "Risk
Factors--Delisting from Nasdaq/SCM" and "Risk Factors--Disclosure Relating to
Low-Priced Stocks".
Subscriptions for Units received by the Company will be accepted subject to
the Company's right to reject any subscription. The Company will accept
subscriptions without regard to any minimum number of Units to be sold in the
Rights Offering, and thereby may only sell a small portion of the Units offered
and thereby realize a minimal amount of proceeds from this Rights Offering.
Securityholders to whom Rights are granted will also have the right to subscribe
for unpurchased Units by completing the additional subscription form and
enclosing payment in full for the additional Units with the form. If there are
insufficient Units to fill over subscriptions, the Units which are available
will be allocated to the subscribing Securityholders on a pro rata basis in
proportion to the total number of additional Units subscribed for by all
Securityholders. Any excess funds tendered for unsubscribed Units which are not
available will be promptly returned to the appropriate securityholders. Members
of Management of the Company have made a written commitment to subscribe for
171,867 Units, representing the number of Units subject to Rights to which they
are entitled based upon their ownership of the Company's outstanding securities
and to act as standby purchasers of up to an additional 1,136,363 unsubscribed
Units. The Company has agreed to accept as payment for such unsubscribed Units
which may be purchased by Management up to $250,000 in promissory notes (the
"Promissory Notes") of the Company held by such persons at a price of $.22 face
amount of Promissory Notes per Unit. This Prospectus also includes the resale by
members of Management and their assignees of the Common Stock, Class E Warrants
and Common Stock underlying the Class E Warrants issuable to such persons
included in (i) 171,867 Units subject to Rights distributable to them as
securityholders of the Company which they have agreed to exercise and (ii) up to
an additional 1,136,363 Units which they have agreed to subscribe for as standby
purchasers if such number of Units remain unsubscribed. See "Plan of
Distribution" and "Principal Stockholders." The Promissory Notes were issued
after members of Management loaned the Company $250,000 on an interim basis.
Members of Management may be deemed to be statutory underwriters with
respect to the securities they have committed to purchase and Privatbank may
also be deemed to be a statutory underwriter with respect to the 130,000 Units.
A person deemed to be a statutory underwriter under the Securities Act may be
subject to certain liabilities in connection with the Registration Statement of
which this Prospectus forms a part, including liabilities under the Securities
Act. Such members of Management and Privatbank may from time to time re-offer
the securities underlying their Units through ordinary brokerage transactions on
the OTCBB, in negotiated transactions or otherwise, at market prices prevailing
at the time of sale or at negotiated prices.
The terms of the Rights Offering, including the number of Rights to be
issued to Securityholders, the Subscription Price of the Units and the exercise
price of the Class E Warrants have been arbitrarily determined by the Company
and are not necessarily related to the Company's assets, net worth, results of
operations or other recognized criteria of value, although the Company
considered the current and recent trading price of the Common Stock when
determining the Subscription Price of the Units and the exercise price of the
Class E Warrants.
ii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements incorporated by reference or appearing
elsewhere in this Prospectus. This Prospectus contains, in addition to
historical information, forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, the Company's
lack of profitability, ability to continue as a going concern, intense
competition in the industry, and the other risks discussed in "Risk Factors," as
well as those discussed elsewhere in this Prospectus.
THE COMPANY
FiberChem develops, produces, markets and licenses its patented fiber optic
chemical sensor ("FOCS-Registered Trademark-") technology which detects and
monitors hydrocarbon pollution in the air, water and soil. The Company has
developed a range of products and systems based on FOCS-Registered Trademark-,
which provide IN SITU and continuous monitoring capabilities with real-time
information. Products based on its FOCS-Registered Trademark- technology
currently being marketed by the Company include the
PetroSense-Registered Trademark- PHA-100 series of portable analyzers, the
CMS-4000 and 5000 Continuous Monitoring Systems and the OilSense-4000-TM-
System. These products detect and measure petroleum hydrocarbon concentrations
in a variety of applications, including groundwater, waste water, storm water
and process water streams on offshore platforms. The Company is also developing
for commercial use a range of chemical sensors based on its
Sensor-on-a-Chip-Registered Trademark- technology for a wide variety of
environmental, consumer, commercial, industrial, automotive and military
applications. See "Business--Products."
Since its inception in 1987, FiberChem has invested in excess of $25 million
in research and development relating to a wide range of technologies, and has
focused on products for environmental monitoring and industry. During the last
several years, a de-emphasis of environmental issues in Congress has resulted in
delays in enactment and enforcement of the regulatory climate upon which the
Company's future prospects were dependent. Several federal and state programs
were not re-authorized or funded. Just like companies in the electric vehicle or
alternative fuels arenas, FiberChem found that many of its expected
opportunities had evaporated, at least for the foreseeable future. Consequently,
FiberChem's Management identified market segments that were driven by other
forces. Notwithstanding the slow down at the Federal level, the Company
recognized that the State of Florida represented a short-term opportunity for
aboveground tank leak detection and set about getting its sensor products
certified. At the same time, the phase out of Freon presented the Company with
an opportunity to establish its technology as the preferred replacement for the
existing Freon/Infrared method for measurement of total petroleum hydrocarbons
(TPH) in process water streams. Other markets including groundwater monitoring
and waste water monitoring survived the de-emphasis process due to the presence
of existing regulations. Consequently, the Company found applications for the
Company's products in these areas for detection of leaks from underground
storage tanks, pipelines and processes.
During this refocusing process the Company has worked with the
Optoelectronics Group within Texas Instrument's ("TI") Semiconductor Group, to
expand the scope of the joint marketing activity in environmental, consumer,
commercial, industrial, automotive and military applications for chemical
sensors. The products under development are intended to expand the markets for
which the Company may sell its products, and include:
- a fail-safe flammable gas sensor for a household appliance control system
- a breath alcohol sensor for an ignition interlock device for automotive
use
- a fuel/air ratio sensor for automotive use
- a gasoline vapor sensor for a gasoline retailing application
1
<PAGE>
- a carbon monoxide sensor for residential and commercial use
- an ammonia sensor for refrigerant levels in food processing facilities
- Sensors for detection of breakthrough of toxic gasses from personal
protective equipment.
See "Business--Sensors." Previously, the Company marketed its products in
contractually specified areas with technical support from TI, while TI's
marketing efforts were limited to certain areas of internal interest to TI's
Measurement and Control Group. TI's Semiconductor Group is now soliciting
business from its broad base of customers and presenting opportunities to the
Company to supply TI's customers with custom designed sensors, developed by the
Company on the jointly developed platform. Two of the larger of the projects
ongoing have resulted from TI's introduction. These sensors are developed on an
OEM basis for specific applications where they are usually part of a new product
development activity, and where the sensor provides the end user with a
significant market advantage for the final product.
Since the decision to market the end product is made by TI, the Company
generally has no direct control over the process. Most of the projects with TI
make use of the Company's technology in consumer, commercial, industrial,
automotive and military applications, a more varied group of markets than the
environmental markets for most of the Company's existing products. The ongoing
projects are at varying stages of development and there can be no assurance any
of these products will achieve commercial acceptance. See "Business--Sensors."
THE RIGHTS OFFERING
<TABLE>
<S> <C>
RIGHTS OFFERED.................. Rights to purchase an aggregate of 8,976,962 Units. Each
Unit consists of one share of Common Stock and one Class E
Warrant. The shares of Common Stock and Class E Warrants
will be transferable separately immediately upon issuance.
Members of Management of the Company have made a written
commitment to subscribe for 171,867 Units, representing
the number of Units subject to Rights to which they are
entitled based upon their ownership of the Company's
outstanding securities and to act as standby purchasers
for an additional 1,136,363 unsubscribed Units.
TERMS OF RIGHTS:................ Holders of the Company's Common Stock, Preferred Stock and
Warrants at the close of business on October 16, 1998 (the
"Record Date") will receive, for no consideration, Rights
to purchase Units at $.22 per Unit (the "Subscription
Price"). Holders of Common Stock will receive one Right
for every four shares of Common Stock owned of record at
the close of business on the Record Date. Holders of
Preferred Stock or Warrants will receive one Right for
every four shares of Common Stock issuable upon conversion
of Preferred Stock or exercise of Warrants owned of record
at the close of business on the Record Date. No fractional
Rights to purchase Units will be issued by the Company.
Rights will be evidenced by subscription rights
certificates ("Rights Certificates"). See "Rights
Offering".
SUBSCRIPTION PRICE.............. $.22 per Unit.
TRANSFERABILITY OF RIGHTS....... The Rights are transferrable; however, it is unlikely that
an active trading market will develop and/or be maintained
for the Rights. See "Risk Factors".
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
EXPIRATION DATE................. 5:00 p.m., Mountain Standard Time, on November 23, 1998
(the "Rights Expiration Date"), unless extended in the
sole discretion of the Company. If the Expiration Date is
extended Securityholders of record will be notified by
mail by the Company's Warrant and Transfer Agent.
MANNER OF SUBSCRIPTION AND
METHOD OF PAYMENT............. Rights may be exercised by executing the Rights
Certificate and by tendering the Subscription Price in
full to the Company by bank, cashier's or certified check
or by wire transfer. No cash will be accepted.
TERMS OF SERIES E WARRANTS:..... Each Class E Warrant will entitle the holder thereof to
purchase one share of Common Stock and may be redeemed by
the Company at a price of $.05 per Warrant if for any
period of 30 consecutive trading days the last reported
sales price for the Common Stock is at least 200% of the
then current exercise price, subject to adjustments in
certain circumstances. See "Description of
Securities--Class E Warrant".
EXERCISE PRICE:................. $.25 per share through October 23, 1999; $.35 per share
from October 24, 1999 through October 23, 2000; $.50 per
share from October 24, 2000 through October 23, 2001; $.70
per share from October 24, 2001 through October 23, 2002;
and $.90 per share from October 24, 2002 through October
23, 2003, subject to adjustment in certain events.
EXPIRATION DATE OF WARRANTS:.... 5:00 p.m. Mountain Standard Time on October 23, 2003.
RISK FACTORS:................... This Rights Offering involves a high degree of risk. See
"Risk Factors."
USE OF PROCEEDS:................ The development and marketing of products for commercial
use and for working capital purposes. See "Use of
Proceeds."
OTCBB COMMON STOCK SYMBOL(1).... FOCS
FEDERAL INCOME TAX
CONSEQUENCES.................. Generally, stockholders will not recognize any gain or
loss upon receipt or exercise of the Rights. See "Certain
Federal Income Tax Consequences"
NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING BEFORE THE RIGHTS
OFFERING...................... 26,441,207 Shares(2)(3)
NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING AFTER THE RIGHTS
OFFERING...................... 35,548,169 Shares(2)(3)(4)
</TABLE>
- ------------------------
(1) Prior to this Rights Offering, there has been no public market for the
Rights, Units and/or Class E Warrants, and it is unlikely that an active
market for any of such securities will develop after this Rights Offering,
and with respect to the Rights, prior to the Expiration Date. The Company
has appealed a decision by the Nasdaq Stock Market delisting its Common
Stock from the Nasdaq/SCM. There can be no assurance that the Company will
be successful in its appeal or that the Common Stock will be re-listed on
Nasdaq/SCM. See "Risk Factors--Delisting from Nasdaq/SCM."
3
<PAGE>
(2) Based on shares outstanding on September 17, 1998.
(3) Does not include 7,276,661 shares issuable upon exercise of outstanding
warrants, 3,310,056 shares issuable upon the exercise of options granted and
to be granted pursuant to the Company's existing stock option and stock
purchase plans, 2,189,980 shares issuable upon conversion of the Preferred
Stock and 3,923,456 shares issuable upon conversion of certain outstanding
notes.
(4) Assumes Rights to purchase 8,976,962 Units are exercised and the issuance of
130,000 Units to Privatbank. Does not include 9,106,962 shares issuable upon
exercise of the Class E Warrants.
The Rights are being granted to Securityholders for no consideration. The
Units are being offered directly by the Company on a best efforts no minimum
basis, except that certain members of Management have agreed to purchase 171,867
Units and to act as standby purchasers for up to 1,136,363 unsubscribed Units.
SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial information set forth below is derived
from and should be read in conjunction with the Company's consolidated financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
1996 1997 1997 1998
------------- ------------- ------------- -------------
Revenues............................................ $ 908,700 $ 1,523,994 $ 1,138,300 $ 1,004,889
Gross Profit........................................ 540,921 578,560 465,931 553,300
Operating Loss...................................... (3,292,102) (2,820,802) (2,144,179) (1,416,212)
Net Loss............................................ (3,274,629) (3,226,958) (2,475,068) (1,619,259)
Net Loss per Share Common Stock..................... $ (0.15) $ (.013) $ (0.10) $ (0.06)
Shares of Common Stock used in computing Net Loss
per Share......................................... 22,274,226 25,623,614 25,748,517 25,752,189
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1998
------------------ -------------
<S> <C> <C>
Working Capital (Deficit)...................................................... $ 1,883,551 $ (219,929)
Total Assets................................................................... 2,969,720 $ 2,646,636
Total Liabilities.............................................................. 2,085,958 3,212,518
Accumulated Deficit............................................................ 29,596,509 31,215,768
Total Stockholders' Equity (Deficit)........................................... $ 883,762 (565,882)
</TABLE>
4
<PAGE>
RIGHTS OFFERING
GENERAL
The Company, pursuant to this Prospectus, is granting to holders of its
Common Stock, Preferred Stock and Warrants, Rights to subscribe for Units at a
Subscription Price of $.22 per Unit. Each Unit consists of one share of Common
Stock and one Class E Warrant expiring October 23, 2003, to purchase one share
of Common Stock for an initial purchase price of $.25 per share through October
23, 1999; $.35 per share from October 24, 1999 through October 23, 2000; $.50
per share from October 24, 2000 through October 23, 2001; $.70 per share from
October 24, 2001 through October 23, 2002; and $.90 per share from October 24,
2002 through October 23, 2003. The Class E Warrants may be redeemed by the
Company at a price of $.05 per Warrant if for any period of 30 consecutive
trading days the last reported sales price of the Company's Common Stock for
each trading day during such period is at least 200% of the then current
exercise price, subject to adjustment. Each holder of Common Stock will receive
one Right for every four shares of Common Stock owned of record on the Record
Date. Each holder of Preferred Stock or Warrants will receive one Right for
every four shares of Common Stock issuable upon conversion of Preferred Stock or
upon exercise of Warrants owned of record on the Record Date. No fractional
Rights to purchase Units will be issued by the Company. Any Rights offeree who
would be entitled to purchase a fractional Unit will be given the right to
purchase a full Unit. The Rights will be evidenced by transferable Rights
Certificates to be issued by the Company to Securityholders of record as of the
Record Date. The rights certificates shall be mailed to each Securityholder of
record as of the Record Date, as soon as possible after the effective date of
this Prospectus. A Securityholder need not exercise any minimum number of
Rights.
Securityholders may purchase the Units through the exercise of their Rights,
sell or purchase Rights, or allow their Rights to expire unexercised. To the
extent Securityholders do not exercise their Rights, their equity ownership in
the Company may be diluted to the extent other Securityholders determine to
exercise the Rights and/or the Class E Warrants.
The terms of the Rights Offering, including the number of Rights to be
issued to Securityholders based upon their ownership of Common Stock, Preferred
Stock or Warrants as of the Record Date, the Subscription Price and the exercise
price of the Class E Warrants have been arbitrarily determined by the Company
and are not necessarily related to the Company's assets, net worth, results of
operations or other recognized criteria of value, although the Company
considered the current and recent trading prices of the Common Stock in
determining the subscription price for the Units and the exercise price for the
Class E Warrants.
EXPIRATION DATE
The Rights Offering will expire at 5:00 p.m., Mountain Standard Time,
November 23, 1998 (the "Expiration Date"), unless otherwise extended by the
Company.
RIGHT TO SUBSCRIBE FOR ADDITIONAL UNITS
Securityholders will have the right to subscribe for Units not subscribed
for by other Securityholders by specifying the number of additional Units they
desire to purchase and by completing the Form of Election at the end of the
Rights Certificate to be distributed to Securityholders in connection with the
Rights Offering (the "Additional Subscription Privilege") and submitting payment
in full for the additional subscriptions. If the number of Units subscribed for
by Securityholders exercising the Additional Subscription Privilege exceeds the
number of unsubscribed Units available for purchase, unsubscribed Units will be
allocated to the Subscribing Securityholders on a pro rata basis in proportion
to the total number of additional Units subscribed for by all Securityholders.
Payments for the additional subscriptions will be held by the Subscription Agent
and refunds will be made, without interest, to the extent additional
subscriptions are not honored, as promptly as possible after the expiration of
the rights offering.
5
<PAGE>
RIGHTS--TRANSFERABILITY
Rights to subscribe for the Units will be evidenced by Rights Certificates
issued in the name of the registered holders of shares of Common Stock,
Preferred Stock and Warrants as of the close of business on the Record Date. The
Rights Certificates are being mailed to Securityholders in all states, except to
holders of record in states where the Rights Offering has not been qualified or
where the Rights Offering is not exempt from registration or where in the
judgment of the Company the Rights Offering may not otherwise lawfully be made.
The Rights may be bought and sold in private transactions. No trading market
currently exists for the Rights and it is unlikely that any market for the
Rights will develop or, if developed, that it will be sustained. The Rights
evidenced by a Rights Certificate may be split up or combined and transferred at
the principal office of the Company's transfer agent, but a Rights Certificate
may not be divided in such a way as to result in a fractional Right. A
Securityholder who after the Record Date sells shares of Common Stock held
before the Record Date will still be entitled to the grant of Rights since such
sale will not constitute a transfer of the Rights relating thereto.
METHOD OF EXERCISING RIGHTS AND PAYMENT OF SUBSCRIPTION PRICE
Rights may be exercised by the holders thereof by delivering to Corporate
Stock Transfer, Inc. (the "Subscription Agent"), a fully completed and duly
executed Rights Certificate, together with payment in full, by certified, bank
or cashier's check, or wire transfer for the number of Units subscribed for, at
370 17th Street, Republic Plaza, Suite 2350, Denver, Colorado 80202. The risk of
delivery of such documents and payment will be borne by the holder and not by
the Company. If the mail is used to deliver the documents described above, it is
recommended that insured, registered mail be used.
Any funds received by the Subscription Agent as payment in connection with
the Subscriptions for the Units pursuant to the Rights Offering (including the
Additional Subscription Privilege) shall be held in escrow by the Subscription
Agent (and shall be invested in a non-interest-bearing bank account or other
investment acceptable to the Company). Funds received for the purchase of Units
subject to Rights held by the tendering securityholders will be released to the
Company upon receipt by the Subscription Agent of written disbursement
instruction from the Company. Funds received by the Subscription Agent for the
exercise of the Additional Subscription Privilege will be held in escrow until
the expiration of the Rights Offering and then applied in whole or in part to
the purchase of unsubscribed Units and any remaining balance will be returned
promptly to the subscribing securityholders without interest. The Subscription
Agent is directed to endorse, negotiate and deposit all subscription payments
into the subscription escrow account to be maintained by the Subscription Agent.
Except in the case of guaranteed delivery, Rights Certificates and payment
must arrive before the close of business on the Expiration Date, and any
subscriptions received thereafter will not be honored. All questions with
respect to the validity, form, eligibility and acceptance of any exercise of
Rights will be determined solely by the Company. The Company may waive any
defect or irregularity, permit a defect or irregularity to be corrected within
such time as it may determine or reject the exercise of any Right with respect
to the validity, form or eligibility or acceptance thereof. Once a holder has
exercised a Right, that exercise is irrevocable.
GUARANTEED DELIVERY
If delivery of an executed Rights Certificate to the Company is not made
before the close of business on the Expiration Date, but prior thereto the
Company receives full payment for the Units subscribed for and a letter or
telegram from a commercial bank, a trust company having an office in the United
States, or a member firm of any registered United States securities exchange,
which contains (i) the serial number of the Rights Certificate relating to the
Units, (ii) the name and address of the subscriber, (iii) Rights represented by
the Rights certificates, (iv) the number of Units subscribed for and (v) a
guaranty by the bank or member firm that a properly completed and duly executed
Rights Certificate will promptly be
6
<PAGE>
delivered to the Company, the Company will treat this offer to subscribe for
Units as an exercise of Rights by the holder, subject to the receipt of the
properly completed and duly executed Rights Certificate within five business
days after the Expiration Date.
ISSUANCE OF UNITS
The securities comprising the Units to be purchased upon exercise of Rights
will be issued by the Company as soon as practicable after exercise. Delivery of
the certificates representing the shares of Common Stock and Class E Warrants
comprising the Units will be made as soon as practicable. Until the issuance of
the Units, no holder electing to exercise its Rights shall be, or have any
rights of, a stockholder with respect to the shares of Common Stock comprising
the Units issuable upon exercise of such Rights, nor shall such shares of Common
Stock be deemed to have been held of record for purposes of voting or receiving
dividends or any other purposes.
STANDBY ARRANGEMENTS
There are no underwriting arrangements with any underwriter or broker-dealer
with respect to any of the Rights, shares of Common Stock or Warrants offered
hereby. However, members of Management of the Company have made a written
commitment to exercise all of their Rights to purchase 171,867 Units (for an
aggregate of $37,810) and to act as standby purchasers and subscribe for up to
1,136,363 Units (for an additional $250,000 which they have loaned to the
Company on an interim basis) which remain unsubscribed after the expiration of
the Rights Offering including the Additional Subscription Privilege. There is no
other agreement or understanding regarding the exercise of Warrants by
management and no assurance can be given that any of such Warrants will be
exercised.
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk. Accordingly, prospective investors should carefully consider the following
factors relating to an investment in the Company.
DEPENDENCE ON SUCCESS OF SECOND GENERATION SYSTEMS. The Company has had
limited revenues to date. The Company decided in March 1993, to develop and
market second generation systems to replace first generation systems. Initial
shipments of second generation systems commenced in December 1993, for field
testing and regulatory approval. The Company had revenues of approximately
$1,149,000, $909,000 and $1,524,000 during the fiscal years ended September 30,
1995, 1996 and 1997, respectively, and $1,138,300 and $1,004,889 for the
nine-month periods ended June 30, 1997 and 1998, respectively. Until such time,
if ever, as the Company's second generation products gain widespread acceptance,
there can be no assurance that the Company will achieve profitability.
HISTORICAL OPERATING LOSSES AND ACCUMULATED DEFICIT. For the fiscal years
ended September 30, 1995, 1996 and 1997, the Company had net losses of
approximately $2,829,000, $3,275,000, and $3,227,000, respectively, and for the
nine-month periods ended June 30, 1997 and l998 the Company had net losses of
$2,475,068 and $1,619,259, respectively, with an accumulated deficit of
approximately $31,215,768 at June 30, 1998. There can be no assurance that the
Company will derive sufficient revenues from operations to offset its level of
fixed and planned expenditures, or that losses will not continue.
WORKING CAPITAL REQUIREMENTS. The Company had negative working capital at
June 30, 1998 of approximately $220,000 as compared with working capital of
approximately $1,884,000, at September 30, 1997, a decrease of approximately
$2,104,000. This decrease is primarily attributable to the reclassification of
$1,600,000 of the Company's 8% Senior Convertible Notes payable due February l5,
1999 from long-term to current liabilities and to the net cash used in operating
activities of approximately $1,032,000, offset, in part, by the receipt of
$638,000 in proceeds from notes payable to officers, directors and affiliates.
The Company had working capital of approximately $1,884,000, at September 30,
1997, and $4,385,000 at
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September 30, 1996, representing a decrease of $2,501,000. This decrease was
primarily a result of the Company's net cash used in operating activities during
Fiscal 1997 of $2,715,000. Management believes, but cannot assure, that the net
proceeds from the Offering will be sufficient to enable the Company to satisfy
its working capital requirements. However, as long as the Company continues to
utilize working capital to support operations, or if the development of its
products for commercial use is more costly than anticipated, the Company may
require additional capital. There can be no assurance that additional capital,
if required, will be available on terms acceptable to the Company or on any
terms and the inability of the Company to obtain substantial proceeds from the
offering or other financing could result in the inability of the Company to
continue as a going concern. See "Ability to Continue as a Going Concern;
Qualified Report of Independent Accountants" below.
ABILITY TO CONTINUE AS A "GOING CONCERN"; MODIFIED REPORT OF INDEPENDENT
ACCOUNTANTS. The Company's consolidated financial statements for the year ended
September 30, 1997, indicated there is substantial doubt about the Company's
ability to continue as a going concern due to the Company's need to generate
cash from operations and obtain additional financing.
Unless a substantial amount of proceeds is raised from this Offering, of
which there is no assurance, the Company will need additional financing and/or
be required to make permanent certain reductions in expenses and/or implement
further cost reductions. There can be no assurance that the Company will be able
to obtain additional funding when it is needed, or that such funding, if
available, will be obtainable on terms favorable to or affordable by the Company
or on any terms. Accordingly, the Company's ability to continue as a going
concern on a short-term or long-term basis, is in substantial doubt without such
permanent funding. In the event the Company is not able to continue as a going
concern, the Company may have to curtail operations, sell assets or seek
protection under the bankruptcy laws. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Financial Statements.
In the event the Company is unable to obtain sufficient financing and is
unable to continue as a going concern, the Company may be required to liquidate
or sell certain assets. Intangible assets constitute 15% of the Company's net
assets. These intangible assets may be difficult to value and the Company may be
unable to obtain their full value.
RISKS OF COMMERCIALIZATION. The Company has been engaged in the development
of new products representing applications of its chemical sensor technology and
has had only limited sales of these products to date. Before the Company can
achieve profitable operations it must complete product development, develop
adequate manufacturing capacity for these products and must be able to sell its
products to purchasers in adequate volumes and prices to cover its costs and
expenses.
In addition, in order to conduct more extensive manufacturing, marketing and
sales activities, the Company will need to implement and improve operational,
financial and management information systems, procedures and controls. There can
be no assurance that there will be adequate demand at commercial quantities for
the Company's products, that the Company will be able to manufacture its
products at costs that would allow for profitable sales or that, in general, the
Company will be able to develop the operational, financial and management
information systems, procedures and controls necessary to operate profitably on
a larger scale than at present.
TECHNOLOGICAL OBSOLESCENCE OF EXISTING TECHNOLOGY. To date, the Company has
been dependent on the marketing and sale of its fiber optic chemical sensors
("FOCS-Registered Trademark-"). Other technologies exist that compete with the
FOCS-Registered Trademark- technology. Although the Company is also developing a
range of sensor products based on its Sensor-on-a-chip-Registered Trademark-
technology, there can be no assurance that any or all of the Company's products
will not be rendered superfluous or obsolete by research efforts and
technological advances made by others. FiberChem's failure to successfully
market the products incorporating the technologies would have
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a material adverse effect on the Company's operations. The Company is also
dependent on the successful development and marketing by other entities of
products incorporating the Company's sensors.
COMPETITION. Competition in the field of diagnostic sensor and
environmental technology is intense. Competition in the underground storage
tanks ("UST") detection market has intensified since the promulgation of the EPA
regulations. Federal laws do not require leak detection for above ground storage
tanks ("AST"), resulting in less intense competition in that area. The Company
is aware of leak detection devices in the market or being developed, some of
which involve fiber optics. The Company anticipates that its other sensor
products under development will face less intense competition than its current
products.
Most of the Company's actual and potential competitors have greater
financial resources, more extensive business experience and larger organizations
than the company possesses. Even if the Company is able to successfully market
its FOCS-Registered Trademark- products, there is no assurance that larger or
better financed companies will not develop effective competitive products.
Accordingly, there can be no assurance that the Company will be able to operate
profitably at any time in the future.
GOVERNMENT REGULATION. The EPA regulations regulate the installation,
testing, manufacture and maintenance of USTs. The EPA regulations establish a
timetable for the installation of leak detection equipment in USTs and pipings
and are subject to interpretation and subsequent changes. There can be no
assurance that the PetroSense-Registered Trademark- Continuous Monitoring System
will meet future regulatory requirements. These regulations are the minimum
federal requirements; state and local regulators are permitted to enact more
stringent standards. The EPA also regulates the monitoring, management and
cleanup of storm water-generated pollution and hazardous wastes. There can be no
assurance that other sensor products under development will meet future federal
or state regulatory requirements.
PATENTS. The Company's FOCS-Registered Trademark- technology, which is
proprietary and patented, is the Company's most critical asset. The Company owns
21 United States patents and three additional patent applications are pending
with the United States Patent and Trademark Office. The Company also has 12
foreign patents and 15 foreign patent applications pending for its various
sensor technologies and devices. There can be no assurance that such patents
will protect the Company from other persons who develop products that infringe
the Company's proprietary rights. Many patents involving fiber optic technology
have been issued to others. To the Company's best knowledge, its technologies do
not infringe patent or other proprietary rights of others; however, there can be
no assurance that such infringement has not occurred or will not occur in the
future.
If it were determined that the Company's products infringed any claims of an
issued patent, the Company could be enjoined from making or selling such
products or be forced to obtain a license in order to continue the manufacture
or sale of the product involved, requiring payment of a licensing fee or
royalties of unknown magnitude on sales of the product. In addition, the Company
could be liable for substantial damages, and even the defense of patent
litigation can be extremely expensive. There can be no assurance that if any
such license were required, it would be available or available on terms
acceptable to the Company. Any inability to obtain required licenses on
favorable terms, or at all, would adversely affect the Company's business.
There can be no assurance that the Company's pending patent applications
will be allowed, that any issued patents would be upheld, that any issued
patents will provide the Company with significant competitive advantages, or
that challenges will not be instituted against the validity or enforceability of
any patents owned by the Company and, if instituted, that such challenges will
not be successful. The cost of litigation to uphold the validity of a patent and
prevent infringement can be substantial even if the Company prevails.
Furthermore, there can be no assurance that others will not independently
develop similar technologies, duplicate the Company's technology or design
around the patented aspects of the Company's technology. If patents do not issue
from present or future patent applications, the Company
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may be subject to greater competition. In addition, the Company's technology
might be subject to reverse engineering, allowing competitors to obtain the
Company's proprietary technology.
PRODUCTS LIABILITY AND UNINSURED RISKS. FiberChem has products liability
insurance in the amount of $5 million. When the Company sells any products it
may become subject to substantial claims and liabilities from users of such
products in excess of insurance. Even though the Company maintains products
liability insurance, in the amount of $5 million dollars, there can be no
assurance that the Company will be able to retain such insurance or that such
insurance would be sufficient to protect the Company in the event of a major
defect in its products or from any claims made based on the performance of its
products. In the event of an uninsured or inadequately insured products
liability claim in the future based on the performance of any of the Company's
products, the Company's business and financial condition could be materially
adversely affected.
NEED FOR MANUFACTURING FACILITIES AND DEPENDENCE ON THIRD PARTIES FOR
MANUFACTURING AND SUPPLY. The Company's facilities in Las Vegas, Nevada are
capable of manufacturing its FOCS-Registered Trademark- and
Sensor-on-a-chip-Registered Trademark- products for its current sales volumes.
Although alternative assembly operations are currently available, there can be
no assurance that such operations will be available in the future or will be
available on terms acceptable to the Company.
The Company does not manufacture the components of its products, although it
currently assembles the products itself. The Company has not entered into any
formal arrangement with any supplier. Although the Company believes that there
are several potential suppliers for substantially all required components, the
Company might incur delays in meeting delivery deadlines in the event a
particular supplier is unable or unwilling to meet the Company's requirements.
Suppliers of custom designed components would be more difficult to replace. No
assurance can be given that the cost of third party manufacturing of components
or of the Company's products will not exceed current estimates. In addition, the
Company is largely dependent on its suppliers for quality control.
DEPENDENCE UPON KEY PERSONNEL. The Company is dependent upon Geoffrey
Hewitt, Chief Executive Officer, Thomas Collins, President, and Melvin Pelley,
Chief Financial Officer, of FCI Environmental, the Company's wholly-owned
subsidiary. Messrs. Hewitt, Collins and Pelley's employment agreements are
terminable for cause by the Company. To the extent that any of their services
become unavailable to the Company, the Company's business or prospects may be
adversely affected. There is no assurance that the Company would be able to
employ qualified persons to replace these key individuals. The Company carries
key man life insurance policies of $3 million, $2 million and $1 million,
respectively, on the lives of Messrs. Hewitt, Collins and Pelley. There is no
assurance that the key man life insurance policies will continue to be carried
by the Company.
DEPENDENCE ON TECHNICAL AND PROFESSIONAL PERSONNEL. The Company's ability
to produce and market its FOCS-Registered Trademark- products and develop new
products is dependent upon the availability and technical abilities of the
Company's in-house staff and facilities and/or agreements to be negotiated with
third parties. Competition for qualified technical personnel is intense. No
assurance can be given that the Company will be able to retain those independent
persons presently employed and be able to attract qualified individuals in the
future to satisfy the Company's requirements for technical expertise.
DIVIDEND AND INTEREST PAYMENTS. Pursuant to the terms of the Company's
Convertible Preferred Stock, dividends are payable annually on November 1st. The
holders of the Convertible Preferred Stock may elect to receive their dividend
payments in cash at a rate of 11% of the liquidation value, or in additional
shares at the rate of 8% of the number of shares of Convertible Preferred Stock
held by such holder on the date of declaration. In September 1997, the Company's
Board of Directors determined that, in view of the recent trading price of the
Company's Common Stock and in view of the Company's current cash position, it
would not be appropriate to declare the annual dividend payable on the
Convertible Preferred Stock on November 1, 1997. As a result, that dividend will
accumulate in accordance with the
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terms of the Convertible Preferred Stock. No assurance can be given that the
Company will be able to make dividend distributions in the future if the holders
of the Convertible Preferred Stock request cash. The holders of the Convertible
Preferred Stock are not entitled to receive dividends until the dividends are
declared by the Board of Directors, and the Preferred Stockholders have no
additional rights when the Company fails to declare dividends.
The Company has not paid any dividends on its Common Stock and no assurance
can be given that there will be any such dividends in the future. See "Common
Stock Price Range" and "Dividend Policy."
Pursuant to the terms of the Company's 8% Senior Convertible Notes due
February 15, 1999, interest payments in the amount of $65,000 are due each
August and February. If the Company fails to make an interest payment, the
Company will be in default and the Note Holders may declare the entire principal
and all interest accrued on the Notes to be due and payable and pursue all
remedies available at law to enforce collection of the Notes. There can be no
assurance, if the notes are not converted, that the Company will be able to pay
the $1,600,000 principal of the notes which remains outstanding.
Pursuant to the terms of a bridge loan agreement (the "March Bridge Loan")
dated March 24, 1998, between the Company and Privatbank Vermag AG
("Privatbank") in the amount of $300,000, payment is due in two installments of
$150,000, the first on June 27, 1998 and the second on July 23, 1998. Privatbank
has extended the maturity of these two installments until October 28 and October
23, 1998, respectively. Upon maturity of the Bridge Loan, Privatbank will have
the right to commence legal proceedings to enforce the repayment of the loan. An
additional bridge loan agreement between the Company and Privatbank in the
amount of $133,000 requires repayment on October 25, 1998.
A director and an officer have made advances to the Company in the amount of
$125,000 in anticipation of the receipt of proceeds from the Rights Offering.
These advances bear interest at 8% per annum and mature upon the expiration of
the Rights Offering. See "CERTAIN TRANSACTIONS."
In general, the inability of the Company to pay the Bridge Loan, the 8%
Convertible Notes and other obligations as they mature may result in the
cessation of the Company's business, which could result in a loss of the entire
investment of the Securityholders in the Company.
POSSIBLE VOLATILITY OF COMMON STOCK PRICES. The market price of the
Company's Common Stock may be significantly affected by various factors,
including, but not limited to, general economic conditions and those specific to
the environmental testing industry, future acquisitions, if any, and the
Company's financial condition. Moreover, the price of the Company's Common Stock
may be affected by the significant number of shares of Common Stock outstanding,
and the shares underlying outstanding warrants and/or options to purchase shares
of the Company's Common Stock. In addition, the 9,106,962 Units being registered
hereunder, including the 9,106,962 shares of Common Stock comprising the Units,
and the additional 9,106,962 shares of Common Stock which would be issuable upon
the exercise of the Class E Warrants being registered hereunder, may have a
depressive effect on the market price of the Common Stock. See "Price Range of
Common Stock" and "Plan of Distribution."
NO ASSURANCE OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE. Prior to
the Rights Offering, there has been no public trading market for the Rights, the
Units and/or the Class E Warrants. In addition, it is unlikely that a regular
trading market for the Rights, Units and/or the Class E Warrants will develop
after this Rights Offering, or if developed, that it will be sustained. With
respect to the Rights, no trading market, if developed, would be sustained after
the Expiration Date. In addition, the Units are immediately separable upon
issuance. The Subscription Price and the exercise price of the Class E Warrants
have been arbitrarily determined by the Company and are not necessarily related
to the Company's assets, net worth, results of operations or other recognized
criteria of value, although the Company considered the current and recent
trading price of the Common Stock when determining the Subscription Price of the
Units and the exercise price of the Class E Warrants.
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BROAD DISCRETION IN APPLICATION OF PROCEEDS. Assuming all of the Rights are
subscribed for by the Company's shareholders, approximately 100% of the
estimated net proceeds of this Rights Offering have been allocated for working
capital purposes. Such amounts so allocated may be expended at the discretion of
the Company's Management. Also, the Company has afforded itself broad discretion
with respect to redirecting the application and allocation of the net proceeds
of this Rights Offering, in light of changes in circumstances and the
availability of business opportunities. Therefore, no assurance can be given
that Management's discretionary use of any of the proceeds raised in the Rights
Offering would result in an enhancement of the Company's share valuation.
Pending the use for the purposes described above, the net proceeds of the Rights
Offering may be invested by the Company in short-term, interest-bearing
obligations or marketable securities. See "Use of Proceeds."
INABILITY TO EXERCISE RIGHTS AND/OR CLASS E WARRANTS. The Company intends
to qualify the sale of Units offered hereby in a limited number of states.
Although certain exemptions in the securities ("blue sky") laws of certain
states might permit Rights and/or Class E Warrants to be transferred to
purchasers in states other than in which the Units were initially qualified, the
Company will be prevented from issuing Units and/or Common Stock in such states
upon the exercise of the Rights and/or Class E Warrants, respectively, unless an
exemption from qualification is available or unless the issuance of the Units or
the Common Stock upon exercise of the Rights or Class E Warrants, respectively,
is qualified. The Company may decide not to seek or may not be able to obtain
qualification of the issuance of such Units or Common Stock in all of the states
in which the ultimate purchasers of the Units or Class E Warrants reside. In
such a case, the rights or the Class E Warrants held by purchasers will expire
and have no value if such rights or Class E Warrants cannot be sold.
Accordingly, the market for the Rights and/or Class E Warrants may be limited
because of these restrictions. Further, a current prospectus covering the Common
Stock issuable upon exercise of the Class E Warrants must be in effect before
the Company may accept Class E Warrant exercises. There can be no assurance the
Company will be able to have a prospectus in effect when this Prospectus is no
longer current, notwithstanding the Company's commitment to use its best efforts
to do so. See "The Rights Offering--Class E Warrants."
SHARES ELIGIBLE FOR FUTURE SALES AND POTENTIAL FUTURE
DILUTION. Approximately 1,888,841 of the 26,441,207 shares of Common Stock
outstanding as of October 15, 1998 are "restricted securities" as such term is
defined in Rule 144 promulgated under the Securities Act. Restricted securities
may only be publicly sold pursuant to an effective registration statement under
the Securities Act or in accordance with applicable exemptions from the
registration requirements of the Securities Act. Rule 144 provides for the
public sale of limited quantities of restricted securities without registration
under the Securities Act.
The Company is unable to predict the effect that sales made pursuant to this
Prospectus, Rule 144 or otherwise may have on the then prevailing market price
of the Company's securities, although sales of substantial amounts of shares by
existing stockholders, or even potential of such sales, may be expected to have
an adverse effect on the trading price and market for the Company's securities.
In the event that the Company's stock price increases, holders of
outstanding options and warrants may elect to exercise, and holders of
outstanding notes may elect to convert, resulting in dilution of other
stockholders' interests. As of October 15, 1998, the Company had outstanding
1,895,175 Class D Warrants. Each Class D Warrant is currently exercisable by the
holder thereof to purchase one share of Common Stock at an exercise price of
$1.15 per share, until September 15, 1998, an exercise price of $1.20 through
September 15, 1999 and $1.25 through the expiration date of September 15, 2000.
There are an additional 1,280,411 Warrants outstanding, each exercisable at
$.2343; 692,742 Warrants each exercisable at $.4078; 75,000 Warrants each
exercisable at $.90 and 3,333,333 Warrants each exercisable at $1.00
(collectively with the Class D Warrants, the "Outstanding Warrants"). The
Company's Board of Directors has agreed that the Company will not call the
Outstanding Warrants prior to their expiration. The Convertible Preferred
Stockholders have the right to convert the 218,998 shares of Convertible
Preferred Stock outstanding into 2,189,980 shares of Common Stock, subject to
adjustment and redemption under certain circumstances. The holders of the 8%
Senior Convertible Notes (the "Notes") have the right to convert their notes
into an
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aggregate of 3,923,456 shares of Common Stock, assuming a conversion price of
$.4078, subject to adjustment and redemption under certain circumstances. In
addition, the Company has previously registered an additional 3,060,056 shares
of Common Stock underlying a like number of options (the "Options") (2,994,206
options outstanding; 65,850 options authorized, but not granted) and 250,000
shares of Common Stock issuable pursuant to an Employee Stock Purchase Plan
pursuant to registration statements on Forms S-8. See "Description of
Securities."
During the respective terms of the Company's Warrants, Options, Convertible
Preferred Stock and Notes, the holders thereof may be able to purchase shares of
Common Stock at prices substantially below the then current market price of the
Company's Common Stock, with a resultant dilution in the interests in the
existing common stockholders. The holders of the Warrants, Options, Convertible
Preferred Stock and Notes may be expected to exercise their rights to acquire
shares of Common Stock at times when the Company might be able to obtain needed
capital through a new offering of securities on terms more favorable than those
provided by these outstanding securities. Thus, exercise of the Warrants, and
Options and/or the conversion of Convertible Preferred Stock and Notes may be
expected to have a depressive effect on the market price for the Common Stock
and might adversely affect the terms on which the Company may be able to obtain
additional financing or additional capital. In addition, the exercise or
conversion of the Warrants, Options, Convertible Preferred Stock or Notes and
the subsequent sales of shares of Common Stock by holders of such securities
pursuant to a registration statement, under Rule 144, or otherwise, could have
an adverse effect upon the market for the Company's securities. Moreover,
Warrant holders who fail to exercise their Warrants will experience a
corresponding decrease in their interest held in the Company relative to the
ownership interest held by exercising Warrant holders.
CONTROL BY INSIDERS. Of the 26,441,207 shares of Common Stock outstanding
as of October 15, 1998, approximately 1,462,341 shares, or 5.5%, (2,770,571 or
10.5% assuming members of Management subscribe for all 171,867 Units for which
they are entitled based on their ownership of the Company's securities and the
subscription of 1,136,363 Rights as standby purchasers) are held by officers,
directors, principal stockholders and their affiliates. On a fully diluted
basis, as of September 17, 1998 (assuming conversion of all the Convertible
Preferred Stock and Notes and exercise of all Outstanding Warrants and Options
before the Offering) there would be approximately 42,825,510 shares of Common
Stock outstanding, of which approximately 14.5% (or 17.5% if members of
Management subscribe for 1,308,230 Units) would be held by officers, directors,
principal stockholders and their affiliates. Stockholders of the Company are not
allowed to cumulate their votes in electing directors. Therefore, the officers,
directors and principal stockholders of the Company may be in a position to
control the affairs of the Company.
CLASSIFIED BOARD OF DIRECTORS. The Company's By-Laws provide for a
classified Board of Directors. The Board has three classes of directors serving
for three-year terms, with one class of directors to be elected at each annual
meeting of stockholders. The classification of Directors has the effect of
making it more difficult to change the composition of the Board of Directors. At
least two stockholder meetings, instead of one, would be required to effect a
change in the majority control of the Board (except in the event of vacancies
resulting from removal or other reasons).
The classification of Directors applies to every election of Directors and
is not triggered by (i) the occurrence of a particular event such as a hostile
takeover, (ii) whether or not a change in the Board would be beneficial to the
Company and its stockholders, or (iii) whether or not a majority of the
Company's stockholders believes that such change would be desirable. Thus, a
classified Board makes it more difficult for stockholders to change the majority
of Directors even when the only reason for the change may be performance of the
present Directors.
PREFERRED STOCK AUTHORIZATION. The Company's Certificate of Incorporation
authorizes the issuance of a maximum of 10,000,000 shares of "blank check"
preferred stock, $.001 par value (the "Preferred Stock") with such designations,
rights and preferences as may be determined from time to time by the Company's
Board of Directors. An aggregate of 437,017 shares of "Convertible Preferred
Stock" were issued in the
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August and December 1993 Private Placements, of which 218,998 shares are
currently outstanding and convertible into Common Stock on a one for ten basis.
Although the Company has been engaged in preliminary discussions to convert
certain outstanding debt into Preferred Stock, no arrangements, agreements or
understandings have been reached. There can be no assurance that the Company
will not issue additional Preferred Stock in the near future. If issued, the
terms of a series of additional Preferred Stock could operate to the significant
disadvantage of holders of outstanding Convertible Preferred Stock and/or Common
Stock. The Board of Directors is authorized to issue Preferred Stock with
dividend, liquidation, conversion, voting or other rights without stockholder
approval, which could adversely affect the voting power or other rights of the
Company's Common and Convertible Preferred Stockholders. In addition, in the
event of a proposed attempt to gain control of the Company of which the Board of
Directors does not approve, the Board could authorize the issuance of Preferred
Stock as an anti-takeover device, which could prevent the completion of such a
transaction to the detriment of public stockholders.
DELISTING FROM NASDAQ/SCM. Following a hearing held on February 19, 1998,
the Company's Common Stock was delisted from Nasdaq/SCM on February 25, 1998,
for the failure to comply with the minimum bid price requirements and net
tangible assets (i.e., total assets, excluding goodwill, minus total
liabilities) of $2 million. The Company has appealed the decision, however,
there can be no assurance that the Company will be successful in its appeal. The
Company's Common Stock is currently traded in the over-the-counter market
through the OTC Electronic Bulletin Board (OTCBB) or the National Quotation
Bureau ("Pink Sheets"). As a result, an investor may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, the
Company's securities.
DISCLOSURE RELATING TO LOW-PRICED STOCKS. The Company's Common Stock on the
OTCBB is subject to Rule 15g-9 promulgated under the Securities Exchange Act of
1934, as amended, which imposes various sales practice requirements on
broker-dealers who sell securities governed by Rule 15g-9 to persons other than
established customers and accredited investors (generally institutions with
assets in excess of $5,000,000 or individuals with a net worth in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their
spouse). For transactions covered by Rule 15g-9, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, Rule
15g-9 may have an adverse effect on the ability of broker-dealers to sell the
Company's securities and may affect the ability of purchasers in this Offering
to sell the Company's securities in the secondary market and otherwise affect
the trading market in the Common Stock.
The Commission has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." If the Company's securities
become subject to the penny stock rules, investors in the Offering may find it
more difficult to sell their shares. Penny stocks generally are equity
securities with a price of less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on the NASDAQ system, provided
that current price and volume information with respect to transactions in that
security is provided by the exchange or system). The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document prepared by the
Commission that provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker dealer
salesperson compensation information, must be given to the customer orally or in
writing before or with the customer's confirmation. These disclosure
requirements may have the effect of reducing the level of trading activity in
the secondary market for a stock that becomes subject to the penny stock rules.
FOR ALL OF THE AFORESAID REASONS AND OTHERS SET FORTH HEREIN, THE PURCHASE
OF SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. ANY PERSON
CONSIDERING AN INVESTMENT IN THE SECURITIES OFFERED HEREBY
14
<PAGE>
SHOULD BE AWARE OF THESE AND OTHER FACTORS SET FORTH IN THIS OFFERING
MEMORANDUM. THE SECURITIES SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO
ABSORB A TOTAL LOSS OF THEIR INVESTMENT IN THE COMPANY AND HAVE NO NEED FOR A
RETURN ON THEIR INVESTMENT.
USE OF PROCEEDS
The Rights are being offered on a "best efforts" basis and there is no
minimum number of Rights which must be exercised other than the commitment of
certain Members of Management to exercise their Rights to purchase 171,867 Units
and to purchase up to an additional 1,136,363 unsubscribed Units. Assuming only
that Units which management has committed to purchase are subscribed for the
Company will realize gross proceeds of approximately $287,810, including the
$250,000 which was loaned to the Company on an interim basis by the Members of
Management who have committed to subscribe for Units. If only these Units are
subscribed, then the resulting net proceeds of $37,810 (gross proceeds of
$287,810 less $250,000 already advanced to the Company) would be used to pay
legal, accounting, printing and other costs related to the offering.
Assuming all the Units offered by the Company are sold, the Company
anticipates using the net proceeds therefrom of approximately $1,914,932 (after
deductions of approximately $60,000 of offering expenses) for the following
purposes in the order of priority indicated:
<TABLE>
<S> <C>
Repayment of Privatbank loan(1)................................. $ 433,000
Repayment of director and officer advances in anticipation of
offering(2)................................................... 125,000
Working capital requirements to continue operations(3).......... 606,932
Product development costs....................................... $ 300,000
Marketing expenses for new products............................. $ 200,000
Repayment of Notes of Management members acting as standby
purchasers for unsubscribed Units(4).......................... 250,000
---------
Total......................................................... $1,914,932
---------
---------
</TABLE>
- ------------------------
(1) The March Bridge Loan bears interest at the rate of 8.4% and is due in two
installment payments on October 23 and 28, 1998. The August Bridge Loan
bears interest at the rate of 8.0% and is due on October 25, 1998.
(2) Represents advances to the Company made by a director and an officer of the
Company bearing interest at the rate of 8% per annum and due upon completion
of the Rights Offering. See "CERTAIN TRANSACTIONS."
(3) The Company's consolidated financial statements for the year ended September
30, 1997, indicated there is substantial doubt about the Company's ability
to continue as a going concern due to the Company's need to generate cash
from operations and obtain additional financing. See "RISK FACTORS--Ability
to Continue as a "Going Concern"; Modified Report of Independent
Accountants" and "RISK FACTORS--Working Capital Requirements."
(4) The $250,000 amount of Notes represents a like amount advanced to the
Company by members of Management who have agreed to act as standby
purchasers of the Units. The Notes, which bear interest at the rate of 8%
per annum and are due December 14, 2002--February 4, 2003, will be repaid
only if Rights holders subscribe for substantially all Units. Otherwise, the
Notes or a portion thereof will be exchanged for any Units remaining
unsubscribed at the completion of the Rights Offering at a price of $.22 per
Unit.
15
<PAGE>
The $433,000 proceeds of the Privatbank loans, the $125,000 advanced to the
Company by a director and an officer and the $250,000 proceeds of the Notes
acquired by members of management who are acting as standby purchasers of Units
were all applied to meet the Company's immediate working capital requirements,
consisting principally of making past due payments to the Company's vendors. See
"RISK FACTORS--Working Capital Requirements."
The Class E Warrants are exercisable to purchase shares of Common Stock at a
price of $.25 per share through October 23, 1999; $.35 per share from October
24, 1999 through October 23, 2000; $.50 per share from October 24, 2000 through
October 23, 2001; $.70 per share from October 24, 2001 through October 23, 2002;
and $.90 per share from October 24, 2002 through October 23, 2003. The Class E
Warrants expire five years after the date of this prospectus. There can be no
assurance any of the Class E Warrants will be exercised nor, if any of the Class
E Warrants are exercised, can there be any assurance as to the timing or amount
of proceeds. Accordingly, any proceeds realized from the exercise of the Class E
Warrants will be applied as determined by the Company's Board of Directors from
time to time when and as any such proceeds are realized.
The Company will not receive any proceeds of the sale of Units or the Common
Stock or Class E Warrants included therein being offered for sale by Privatbank.
The Board of Directors of the Company will have the discretion to allocate
the use of proceeds in case of unforseen business developments such as
unanticipated changes in the results being achieved by the Company,
unanticipated demand or lack thereof for a particular product, new business
opportunities available to the Company, changes in sensor technology or changes
in government regulation. Prior to expenditure, the net proceeds will be
invested in short-term interest bearing securities or money market funds. See
"Risk Factors--Broad Discretion in Application of Proceeds" and "Management".
16
<PAGE>
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDERS MATTERS
The Company's Common Stock was traded on the Nasdaq/SCM under the symbol
"FOCS" until February 25, 1998, when it was delisted from Nasdaq/SCM. Since then
it has been traded on the OTCBB. The following table sets forth the high and low
trade prices of the Common Stock for the periods shown as reported by Nasdaq and
the high and low bid prices as reported by the National Quotation Bureau. The
bid prices quoted on the OTCBB reflect inter-dealer prices without retail
mark-up, mark-down or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDED SEPTEMBER 30, 1996
First Quarter................................................................ $ 1.53 $ 0.75
Second Quarter............................................................... 1.31 0.75
Third Quarter................................................................ 1.59 0.97
Fourth Quarter............................................................... 1.22 0.75
FISCAL YEAR ENDED SEPTEMBER 30, 1997
First Quarter................................................................ $ 0.94 $ 0.50
Second Quarter............................................................... 0.63 0.28
Third Quarter................................................................ 0.50 0.16
Fourth Quarter............................................................... 0.34 0.16
FISCAL YEAR ENDED SEPTEMBER 30, 1998
First Quarter................................................................ $ 0.28 $ 0.12
Second Quarter............................................................... 0.22 0.12
Third Quarter................................................................ 0.24 0.16
Fourth Quarter............................................................... 0.15 0.11
FISCAL YEAR ENDED SEPTEMBER 30, 1999
First Quarter................................................................ $ 0.23 $ 0.15
(October 1, 1998--October 14, 1998)
</TABLE>
On October 14, 1998, the closing bid price of the Common Stock on the OTCBB
was $0.20.
At October 14, 1998, there were approximately 464 holders of record of
Common Stock. The Company estimates that it has approximately 2,500 beneficial
holders of its Common Stock.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1998:
<TABLE>
<S> <C>
Long Term Debt:
Notes payable to officers, directors and affiliates............ $ 650,000
Notes payable, net of current installments..................... 2,093
-----------
652,093
Stockholders' Equity:
Preferred Stock, $.001 par value, 10,000,000 shares authorized,
218,998 shares issued and outstanding at June 30, 1998....... 3,284,970
Common Stock, $.0001 par value, 50,000,000 shares authorized,
26,014,707 shares issued and outstanding at June 30, 1998.... 2,644
Additional Paid-in-Capital..................................... 27,362,272
Accumulated Deficit............................................ (31,215,768)
-----------
Total Stockholders' Deficiency............................... (565,882)
-----------
Total Capitalization..................................... $ 86,211
-----------
-----------
</TABLE>
DILUTION
At June 30, 1998, the Company had a total net tangible book value (deficit)
of ($757,683) or ($.03) per share (after deducting patent, technology and
financing costs of $191,801) based on 26,441,207 shares issued and outstanding.
Net tangible book value per share of Common Stock represents the amount of its
total assets less its intangible assets and liabilities divided by the number of
shares of Common Stock deemed to be outstanding.
Following the completion of the Rights Offering, and receipt of the net
proceeds of approximately $1,914,932 (if fully subscribed), $927,466 (if 50%
subscribed) or $433,733 (if 25% subscribed) (the "Net Proceeds") from the
assumed subscription for all 8,976,962 Units offered hereby, and the purchase of
8,976,962 shares of Common Stock at $0.22 per share (but not the exercise of the
Class E Purchase Warrants), the 35,418,169 shares of Common Stock then
outstanding (if fully subscribed), 30,929,688 shares (if 50% subscribed) or
28,685,447 shares (if 25% subscribed) would have a pro forma net tangible book
value of $1,157,249 or $.03 per share (if fully subscribed), $169,783 or $.01
per share (if 50% subscribed) or ($323,950) or ($.01) per share (if 25%
subscribed). Therefore, the holders of the Company's Rights being offered hereby
will incur an immediate dilution of approximately $.19 per share, ($.21 per
share if 50% or $.23 per share if 25% subscribed).
Dilution represents the difference between the Subscription Price of $.22
per share and the pro forma net tangible book value per share after giving
effect to the Rights Offering, but giving no effect to the exercise of the Class
E Purchase Warrants.
18
<PAGE>
The following table, which incorporates the foregoing assumptions,
illustrates this per share dilution, if one hundred percent, fifty percent and
twenty-five percent of the Rights are exercised:
<TABLE>
<CAPTION>
100% SUBSCRIBED 50% SUBSCRIBED 25% SUBSCRIBED
----------------- ----------------- -----------------
<S> <C> <C> <C>
Subscription price per Unit.................................... $ .22 $ .22 $ .22
----- ----- -----
Pro forma net tangible book value per share of Common Stock
before Rights Offering....................................... $ (.03) $ (.03) $ (.03)
----- ----- -----
Increase per share attributable to sale of Units offered
hereby....................................................... $ .06 $ .04 $ .02
----- ----- -----
Pro forma net tangible book value per share of Common Stock
after offering............................................... $ .03 $ .01 $ (.01)
----- ----- -----
Dilution per share to Investor................................. $ .19 $ .21 $ .23
----- ----- -----
----- ----- -----
</TABLE>
The following table, which incorporates the foregoing assumptions, as well
as the receipt of net proceeds of $1,914,932, if fully subscribed, $927,466 if
50% subscribed or $433,733 if 25% subscribed, pursuant to the Rights Offering
reflecting the purchase of 8,976,962 shares if fully subscribed (4,488,481 if
50% subscribed or 2,244,240 if 25% subscribed) under the Rights Offering by and
summarizing the relative investment of existing Common Stockholders and Unit
Purchasers.
<TABLE>
<CAPTION>
FULLY SUBSCRIBED
-----------------------------------------------------
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Common Stockholders(1)................................ 26,441,207 75% $ 27,364,916 93% $ 1.03
Unit Purchasers....................................... 8,976,962 25% 1,974,932 7% $ .22(2)
------------ --- ------------- --- -----
-----
Total................................................. 35,418,169 100% $ 29,339,848 100%
------------ --- ------------- ---
------------ --- ------------- ---
<CAPTION>
50% SUBSCRIBED
-----------------------------------------------------
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Common Stockholders(1)................................ 26,441,207 85% $ 27,364,916 97% $ 1.03
Unit Purchasers....................................... 4,488,481 15% 987,466 3% $ .22(2)
------------ --- ------------- --- -----
-----
Total................................................. 30,929,688 100% $ 28,352,382 100%
------------ --- ------------- ---
------------ --- ------------- ---
<CAPTION>
25% SUBSCRIBED
-----------------------------------------------------
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Common Stockholders(1)................................ 26,441,207 92% $ 27,364,916 98% $ 1.03
Unit Purchasers....................................... 2,244,240 8% 493,733 2% $ .22(2)
------------ --- ------------- --- -----
-----
Total................................................. 28,685,447 100% $ 27,858,649 100%
------------ --- ------------- ---
------------ --- ------------- ---
</TABLE>
- ------------------------
(1) Does not include (i) 7,276,661 shares issuable upon exercise of outstanding
Warrants, 3,310,056 shares issuable upon the exercise of options granted and
to be granted pursuant to the Company's existing stock option and stock
purchase plans, (ii) 2,189,980 shares issuable upon conversion of the
Preferred Stock and 3,923,456 shares issuable upon conversion of certain
outstanding notes, and (iii) 130,000 shares of Common Stock and Class E
Warrants and 130,000 shares issuable upon exercise of such Warrants by
Privatbank.
(2) Does not include 130,000 units issued to Privatbank. The average price per
share including these 130,000 units if 100%, 50% and 25% subscribed would be
$.22, $.22 and $.21, respectively.
19
<PAGE>
DIVIDEND POLICY
The payment of dividends by the Company is within the discretion of its
Board of Directors and depends in part upon the Company's earnings, capital
requirements and financial condition. Since its inception, the Company has not
paid any dividends on its Common Stock and does not anticipate paying such
dividends in the foreseeable future. The Company intends to retain earnings, if
any, to finance its operations.
Pursuant to the terms of the Company's Convertible Preferred Stock,
dividends are payable annually on November 1st. The holders of the Convertible
Preferred Stock may elect to receive their dividend payments in cash at a rate
of 11% of the liquidation value, or in additional shares at the rate of 8% the
number of shares of Convertible Preferred Stock held by such holder on the date
of declaration. In September 1997, the Company's Board of Directors determined
that, in view of the recent trading price of the Company's Common Stock and in
view of the Company's current cash position, it would not be appropriate to
declare the annual dividend payable on the Convertible Preferred Stock on
November 1, 1997. As a result, that dividend will accumulate in accordance with
the terms of the Convertible Preferred Stock. No assurance can be given that the
Company will be able to make dividend distributions in the future if the holders
of the Convertible Preferred Stock request cash. See "Risk Factors--Dividend and
Interest Payments."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and notes thereto of the Company appearing
elsewhere in this Prospectus.
The discussions in this Prospectus include forward looking statements that
involve risks and uncertainties, including the timely development and acceptance
of the Company's products, the timely acceptance of existing products, the
impact of competitive products and pricing, the impact of governmental
regulations or lack thereof with respect to the Company's markets, timely
funding of customers' projects, customer payments to the Company, and other
risks detailed from time to time in the Company's SEC reports.
RESULTS OF OPERATIONS
QUARTERS ENDED JUNE 30, 1998 AND 1997
During the Third Quarter 1998, the State of Florida Department of
Environmental Protection (FLDEP) placed an order for 64 PHA-100PLUS portable
PetroSense-Registered Trademark- units for its underground storage tank (UST)
inspection program. FLDEP chose the PetroSense-Registered Trademark- unit after
a field evaluation showed it provided more capability than other portable
instruments. The order was valued at $497,000, of which $385,000 was recognized
as revenue for the quarter. This order results from the Company's direct selling
efforts in the UST market, as distinguished from its alliance with Whessoe Varec
in the aboveground storage tank (AST) market.
Revenues for the Nine-Month Period 1998 were $1,004,889 compared with
revenues of $1,138,300 for the Nine-Month Period 1997. Revenues for the Third
Quarter 1998 were $538,017 compared with revenues of $403,117 for the Third
Quarter 1997. Revenues for the Third Quarter 1998 consisted primarily of the
order from Florida DEP which constituted $385,000. Other revenues were from a
number of smaller orders including probes from Whessoe Varec for a second system
in the California BFCUST marketplace, orders from offshore from Cetco and Spirit
Energy, orders from Taiwan and Mexico, and development contracts from Bechtel
Nevada for DoE, Horiba and IWACO. The gross profit for the nine-month period
1998 was $553,300 or 55% of revenues compared to $465,931 or 41% of revenues for
the nine-month period 1997. Gross profit for the Third Quarter 1998 was $293,996
or 55% of revenues compared with $117,850 or 29% for the Third Quarter 1997.
These higher gross margins reflected direct sales to end users
20
<PAGE>
and development revenues compared with primarily discounted sales to
distributors in the same period for 1997. Except for sales to distributors, the
Company's revenues have been from a number of different customers and generally
have not been from repeat transactions from the same customers.
The Company has a Strategic Alliance (the "Alliance") for the AST market
with Whessoe Varec, Inc. as of June 30, 1996 as amended. The primary target for
the Alliance has been the Florida AST market. On July 13, 1998, after a four
year process, the State of Florida passed into law its new storage tank
regulations. Under the law, the regulated community has various options for
compliance. The lowest cost option is believed to be an internal tank liner with
an external, certified, continuous leak detection device. Currently, the
Company's PetroSense-Registered Trademark- product line is the only continuous
leak detection device certified for use at such sites.
The Florida target population of tanks includes 677 sites with at least one
internally lined tank and 892 multi-tank facilities including coastal bulk
storage, inland jobbers and industry. There is some duplication between the two
populations. In addition, there is a population of military tanks, as well as
those for airports and power generation facilities. Each tank for which Whessoe
Varec and FCI receive an order is worth about $10,000 in revenue to FCI. The
Florida regulations require compliance by December 1999 for alternative methods
including the Company's leak detection equipment. Some facilities have already
applied for approval to FLDEP specifying the Company's equipment. As
applications are approved, there is an assumption that there will be a stream of
orders to the Alliance, although there can be no assurance that this will be the
case.
Shell Oil and Florida Power Company have already purchased and installed the
Company's equipment; and Jacksonville Electric Company, Reedy Creek Energy and
Shell Oil have placed orders with Whessoe Varec for installations scheduled for
August 1998.
Other States are expected to follow Florida and promulgate AST regulations.
Virginia promulgated its own regulations this spring. Pennsylvania, Wisconsin
and the Province of Ontario are believed to be developing regulations similar to
Florida's.
The Alliance is also pursuing business with the Department of Defense (DoD).
Whessoe Varec's sister company Whessoe Coggins has a significant presence in the
military fuel depot market. Recently, the State of California has advised that
military facilities in California must be in compliance with the state and
federal underground storage tank ("UST") regulation by December 22, 1998. As a
result, there is an opportunity to provide leak detection equipment to this
market. The Company's products meet all relevant state and federal standards and
are compatible with the Whessoe Coggins equipment proposed for the total
military's system upgrade. A system incorporating both Whessoe Coggins and
Whessoe Varec/FCI products was successfully demonstrated to the military during
April 1998. The data generated at this test was submitted to the local
regulatory authority and met their criteria. Revenues from sales to this market
are expected to occur prior to the deadline for compliance in December 1998,
although there can be no assurance that this will actually happen. The Company
has received DoD orders through Whessoe Varec for
PetroSense-Registered Trademark- probes for two systems so far. Other orders are
believed to be pending. There are approximately 160 DoD tanks in California;
however, the exact size of the opportunity for the Company is not yet clear,
since there is more than one option available for the DoD to achieve compliance.
The development of the offshore market for the Company's
OilSense-4000-TM-and PHA-100WL continues to be slower than originally
anticipated. The combination of the availability of Freon and the low price of
oil is mitigating against a wholesale switch from the Freon/IR method.
Notwithstanding the above, Spirit Energy 76 and others purchased units during
the Third Quarter 1998. Cetco Environmental purchased six units for its offshore
technicians.
The Company is continuing its marketing efforts in other major offshore
production areas such as the North Sea and the Persian Gulf.
21
<PAGE>
The Company's sensor development project with Gilbarco has moved on to a
pre-manufacturing mode driven by the expectation that the California Air
Resources Board (CARB) will require suppliers of refueling equipment to certify
their products to meet ORVRII by late 1998. Provided that certain key steps are
completed by CARB on the original schedule, Gilbarco should commence
manufacturing products incorporating the Company's
Sensor-on-a-Chip-Registered Trademark- in order to meet the CARB requirements.
Revenues from this project are expected to begin in Fiscal 1999, if the time
schedule is met, but there can be no assurance that this will actually occur.
The Company's project with IWACO is ongoing. Preliminary results of a test
installation at the Port of Rotterdam site were sufficiently encouraging for
IWACO to invite the Company to become an equal partner in a second program
focussing mainly on bioremediation technologies. The Company would benefit from
access to data, technology, resources and personnel of the Consortium's member
companies which include Shell International Products and Solvay S.A.
The Company also recently successfully completed the first milestone in its
project with Horiba, the Japanese instrument company, to develop a sensor probe
for Horiba's Multi-Parameter Water Quality Instrument product line.
Research, development and engineering expenditures decreased by $379,099, or
39%, during the Nine-Month Period 1998 from the Nine-Month Period 1997, and by
$120,652, or 39%, during the Third Quarter 1998 from the Third Quarter 1997. The
decrease is primarily attributable to the reduction, implemented during the
second half of Fiscal 1997, of applications and development personnel and
associated expenses.
General and administrative expenditures decreased by $25,570, or 3%, during
the Nine-Month Period 1998 from the Nine-Month Period 1997, and increased by
$6,572, or 2%, during the Third Quarter 1998 over the Third Quarter 1997.
Expenditures for the 1998 periods include $74,637 representing the market value
of Common Stock issued for public relations and investor relations services. The
Company continues to operate with the reductions in personnel and other expenses
and cash expenditures, including the deferral of administrative, as well as
other salaries, implemented during the second half of 1997. Since June 1997, the
Company has deferred the payment of over $160,000 in salaries, although these
have been accrued and recorded as expense during that period. During the
Nine-Month Period 1998, approximately $140,000 of accounts receivable were
offset against previously recorded reserves for specific doubtful accounts,
resulting in a reduction of both gross accounts receivable and reserves with no
effect on net receivables or results of operations. During the Nine-Month Period
1997, $25,000 was added to the reserve and charged to expense.
Sales and marketing expenditures decreased by $235,929, or 32%, during the
Nine-Month Period 1998 from the Nine-Month Period 1997, and by $51,449, or 22%,
during the Third Quarter 1998 from the Third Quarter 1997, reflecting reductions
in personnel and in other spending as well.
The Company's interest income decreased to a minimal amount during the
Nine-Month Period 1998 and the Third Quarter 1998 from $83,591 during the
Nine-Month Period 1997 and $8,768 during the Third Quarter 1997, reflecting the
difference in cash and cash equivalents during the periods. Interest expense
increased by $39,330, or 24%, during the Nine-Month Period 1998 over the
Nine-Month Period 1997, and by $29,643, or 54% during the Third Quarter 1998
over the Third Quarter 1997, reflecting interest expense on $650,000 advanced to
the Company by officers and directors and their affiliates.
As a result of the foregoing, the Company incurred a net loss of $1,619,259,
or a net loss of $0.06 per share, for the Nine-Month Period 1998 as compared to
a net loss of $2,475,068, or a net loss of $0.10 per share, for the Nine-Month
Period 1997. Net loss for the Third Quarter 1998 was $455,197, or a net loss of
$0.02 per share, as compared to a net loss of $758,861, or a net loss of $0.03
per share for the Third Quarter 1997.
22
<PAGE>
Management does not consider that inflation has had a significant effect on
the Company's operations to date, nor is inflation expected to have a material
impact over the next year.
The Company continues to review the cost and operating impacts of addressing
the Year-2000 issue. Management conducted an assessment of the potential costs
associated with its internal operations, products shipped to its customers, and
material and services provided by its suppliers. Upon review, the Year-2000
issue is not expected to have a material impact on the Company's current
financial position, liquidity or results of operations.
FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1996
The Company's total revenues for the fiscal year ended September 30, 1997
("Fiscal 1997") were $1,523,994 as compared to total revenues of $908,700 for
Fiscal 1996. Revenues for Fiscal 1997 include sales of approximately $985,000 to
Whessoe Varec. See Description of Business. Revenues from Amoco Production
Company during 1997 amounted to $171,100.
Revenues during 1996 included $189,700 from QED Environmental Systems, Inc.;
$92,838 from Autronica AS; and $99,786 from Bechtel Nevada Corporation.
During Fiscal 1997, the Company had cost of revenues of $945,434, or a gross
profit of 38% of sales, as compared to cost of revenues of $367,779, or a gross
profit of 60%, during Fiscal 1996. The decrease in gross profit margin resulted
primarily from excess manufacturing capacity. A slightly lower margin mix of
sales also reduced gross profit margins during 1997.
The Company's research, development and engineering expenditures increased
by 2% to $1,257,324 during Fiscal 1997 from $1,233,054 during Fiscal 1996. The
Company has focused its development and engineering efforts on its hydrocarbon
sensors and systems and has also maintained its aggressive Sensor-on-a-Chip-TM-
development program with TI, Gilbarco, ASI, Bechtel Nevada and others. See
"Business--Research and Development".
The Company incurred general and administrative expenses of $1,101,781
during Fiscal 1997 as compared to $1,109,456 for Fiscal 1996, a decrease of
$7,675, or 1%. During Fiscal 1996, one of the Company's distributors failed to
meet certain minimum contractual purchase and payment commitments, and the
collection of certain other receivables from Fiscal 1995 sales to distributors
and representatives became contingent upon subsequent sale and collection by
those distributors. Accordingly, the Company has provided an estimated reserve
against these and other receivables amounting to $201,225. During Fiscal 1997,
similar provisions amounted to $36,085.
Also during Fiscal 1996, the Company developed substantial improvements to
its manufacturing processes and products, including a process which improved the
already substantial resistance of its probes to potential leaks and other damage
from prolonged exposure to water and water vapor and to strong solvents and
other chemicals which may be present in water. Accordingly, the Company provided
a reserve of approximately $130,000 against finished products. In addition, the
Company provided approximately $150,000 as a reserve against other finished
goods, including products shipped to or segregated for Whessoe Varec, Autronica
and other distributors. During Fiscal 1997, no similar provisions were charged
to general and administrative expense. During Fiscal 1997 the Company physically
disposed of approximately $250,000 of fully reserved inventory items, resulting
in reductions of gross inventory and inventory reserves, with no effect on net
inventories or results of operations.
Sales and marketing expenses during Fiscal 1997 and Fiscal 1996 were
$1,004,172 and $1,007,975, respectively. Sales and marketing expenditures
actually increased during the second half of Fiscal 1996 and the first half of
fiscal 1997, but were reduced during the second half of fiscal 1997.
Expenditures are focused on sales and support activities in the offshore
produced water market, and the support of Whessoe Varec in the AST market.
23
<PAGE>
Interest income during Fiscal 1997 was $81,787, as compared to $201,268
during Fiscal 1996, a decrease of $119,481, or 59%. Interest income consists
primarily of interest earned on the Company's cash and short-term investments
and on notes receivable for the exercise of stock options. Interest income from
cash and short-term investments during Fiscal 1997 was $54,802, compared to
$85,640 during Fiscal 1996, reflecting the decrease in cash and investments.
Interest income from notes receivable for the exercise of options was $26,985
during Fiscal 1997 and $115,628 during Fiscal 1996. These notes were
extinguished in May 1997 and did not accrue interest after December 1996.
Interest expense during Fiscal 1997 was $223,161 as compared to $183,795
during Fiscal 1996. During 1997, the Company paid approximately $134,000 of
interest on its senior convertible debt and amortized as additional interest
expense $82,620 of the costs of placement of the debt. During Fiscal 1996, the
Company paid $93,500 and accrued an additional $18,016 of interest and amortized
$65,778 of the placement costs. Other interest expense during 1997 and 1996
consisted primarily of interest on insurance premium installment payments and
the December 1994 loan from Bank of America Nevada (see Note 6 of the Notes to
the Company's Consolidated Financial Statements).
As a result of the foregoing, during Fiscal 1997, the Company incurred a net
loss of $3,226,958, or $0.13 per share as compared with a net loss of
$3,274,629, or $0.15 per share, for Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
QUARTERS ENDED JUNE 30, 1998 AND 1997
The Company's 8% senior convertible notes payable become due on February 15,
1999. The unpaid balance of $1,600,000 is therefore classified in the financial
statements as a current liability, and the associated unamortized financing
costs as a current asset. The Company had negative working capital of $219,929
at June 30, 1998, compared with positive working capital of $1,883,551 at
September 30, 1997, a decrease of $2,103,480. Also the Company had decreases in
cash and cash equivalents of $418,921 and in stockholders' equity of $1,449,644.
In addition to the reclassification of the notes payable from long term to
current liabilities, these decreases are primarily a result of the Company's net
loss for the Nine-Month Period ended June 30, 1998 (the "Nine-Month Period
1998") of $1,619,259, offset in part by the receipt of $638,000 in proceeds from
notes payable to officers, directors and affiliates.
The Company had net cash used in operating activities of $1,032,178 during
the Nine-Month Period 1998 as compared with net cash used in operating
activities of $2,730,922 during the nine-month period ended June 30, 1997 (the
"Nine-Month Period 1997"). The deficit during the Nine-Month Period 1998 is
primarily a result of the Company's net loss of $1,619,259, and adjustments to
reconcile net loss to net cash used in operating activities, including increases
in accounts receivable of $408,413, other current assets of $63,829, accounts
payable of $216,713, accrued expenses of $270,902 and interest payable of
$56,100, and a decrease in inventories of $77,872. In addition, these
adjustments include depreciation of $44,616, amortization of patent and
technology costs of $210,250, amortization of financing costs of $63,148, and
the issuance of 676,500 shares of Common Stock, valued at market value of
$121,512, in exchange for services.
The deficit during the Nine-Month Period 1997 is primarily a result of the
Company's net loss of $2,475,068, increased by adjustments to reconcile net loss
to net cash used in operating activities, including increases in accounts
receivable of $337,225, inventories of $416,625, accrued expenses of $92,980 and
interest payable of $33,500, and decreases in accounts payable of $220,425 and
other current assets of $6,192. In addition, these adjustments include accrued
interest of $26,985 on notes receivable for the exercise of options,
amortization of patent and technology costs of $204,963, amortization of
financing costs of $56,301, depreciation of $52,622, and provisions for loss on
accounts receivable of $25,000 and inventory valuation allowance of $25,000.
Also the Company expensed $248,212 in accrued interest receivable on notes
receivable, originated in March 1994, for the exercise of stock options.
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The Company had net cash provided by financing activities of $633,945 during
the Nine-Month Period 1998 as compared with net cash provided by financing
activities of $197,467 during the Nine-Month Period 1997. During the Nine-Month
Period 1998 the Company borrowed $350,000 from certain of its officers and
directors, and received net proceeds of $288,000 from a promissory note payable
to a bank of which a director is vice chairman. During the Nine-Month Period
1997, the Company received $84,940 from the exercise of 248,675 options and
warrants to purchase Common Stock and $173,488 in cash payments on interest and
notes receivable for the exercise of options, paid $46,171 in cash dividends on
Convertible Preferred Stock and made payments of $14,790 on its notes payable to
a bank and on its capital lease.
The Company had net cash used in investing activities of $20,688 during the
Nine-Month Period 1998 as compared to net cash used in investing activities of
$129,853 during the Nine-Month Period 1997. During the Nine-Month Period 1998,
the Company sold unused equipment for $10,125 and made payments in the amount of
$30,813 for United States and foreign patent applications. During the Nine-Month
Period 1997, the Company made payments of $46,349 for patent applications and
$83,504 for the purchase of equipment.
FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1996
On February 15, 1996, the Company completed an offering under Regulation S,
promulgated under the Securities Act of 1933, as amended (the "Regulation S
Offering"), of 8% Senior Convertible Notes due February 15, 1999 (the "Notes"),
for $2,825,000. Interest on the Notes is to be paid semi-annually, commencing
August 15, 1996, at a rate of 8% per annum. The Notes are convertible into
shares of Common Stock of the Company at a conversion price (the "Conversion
Price") of, initially, $0.80 per share which has been adjusted in accordance
with the original Note Agreement to $0.4078, a price representing a 10% discount
from the average closing bid price of the Common Stock for the 30 business days
prior to February 15, 1997. As of September 30, 1997, an aggregate face amount
of $1,175,000 of the Notes had been converted to Common Stock resulting in the
issuance of 1,498,804 shares of Common Stock.
The Company paid fees and expenses associated with the offering amounting to
$428,204, which is being amortized as interest expense over the three-year term
of the Notes or until conversion, if earlier, when the proportionate unamortized
amount is charged to additional paid-in capital. As of September 30, 1997
approximately $160,281 of unamortized deferred financing cost has been recorded
as reduction in additional paid-in capital associated with the $1,175,000 of the
Notes converted to Common Stock. Also in connection with the Offering, the
Company issued to the Placement Agent for the Offering, for nominal
consideration, warrants to purchase up to 353,125 shares of Common Stock, at an
initial exercise price of $0.80 per share (the "Exercise Price") which has been
adjusted to $0.4078 per share. Also in accordance with the terms of the
warrants, the number of shares exercisable has been adjusted, based on the
adjusted Exercise Price, to 692,742 shares of Common Stock. These warrants are
exercisable at any time on or after August 15, 1996 through February 14, 2001,
and contain certain piggyback registration rights.
On May 31, 1996 the Company completed an offering under Regulation S of
3,333,333 Units, at a price of $0.90 per Unit for total gross proceeds of
$3,000,000 before costs and expenses of the offering. The Company paid fees and
expenses associated with the Unit offering amounting to $345,783. Each Unit
consisted of one share of Common Stock and one warrant to purchase one share of
Common Stock (the "Unit Warrants"), the shares and warrants being immediately
separable. The Unit Warrants are each exercisable at $1.00 at any time from May
31, 1996 through May 30, 2001. Also in connection with the Unit offering, the
Company issued to the Placement Agent for the offering, for nominal
consideration, warrants to purchase up to 333,333 shares of Common Stock (the
"Placement Agent Warrants"), at an exercise price of $0.90 per share which has
been adjusted to $0.2343 per share, and the number of shares issuable upon
exercise has been adjusted to 1,280,411. These Placement Agent Warrants are
exercisable at any time from November 30, 1996 through May 30, 2001.
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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 unpaid principal on Promissory
Notes (which were executed in March 1994 by employees and directors for the
exercise of options) could be fully paid in an amount determined by multiplying
the unpaid balance by a fraction, the numerator of which was the revised
exercise price, and the denominator of which was $1.50 (the original exercise
price). If the unpaid principal was not so paid by May 16, 1997 the underlying
collateral shares would be forfeited and all unpaid principal and accrued
interest would be extinguished. The Company did not want to penalize the
employees and directors by requiring payment of the Promissory Notes therefore
the Board of Directors and employees agreed to extinguish the Promissory Notes.
The Company believes that it must provide an incentive when it is compensating
employees and directors for services rendered to the Company in the form of
non-cash compensation.
As a result, the Company received $160,875 in payment for 520,252 escrowed
shares at prices ranging from $0.30 to $0.32 per share, which amount liquidated
$780,379 of original note principal. The amount of $619,504 was charged to
additional paid-in capital. The remaining $756,804 of unpaid note principal was
extinguished and the underlying collateral of 504,535 shares were forfeited to
the Company and immediately canceled, thereby reducing the total number of
shares outstanding (and resulting in a charge to common stock of the par value
of $50). Unpaid accrued interest receivable aggregating $248,212 was expensed.
The Company had working capital of $1,883,551 at September 30, 1997, as
compared with working capital of $4,384,841 at September 30, 1996, a decrease of
$2,501,290. The Company had a decrease in cash and cash equivalents of
$2,638,084 and a decrease in stockholders' equity of $2,996,747 during Fiscal
1997. These decreases resulted primarily from the Company's net cash used in
operating activities of $2,715,012 offset by only $216,412 net cash provided by
financing activities. During Fiscal 1996, net cash provided by financing
activities was $5,282,651 and was reduced by net cash used in operating
activities during Fiscal 1996 of $2,953,916.
The net cash used in operating activities of $2,715,012 during Fiscal 1997
considered changes in current assets and liabilities, as well as non-cash
transactions including the write-down of accrued interest on notes receivable
for the exercise of stock options in the amount $248,212; amortization expense
of $356,587; depreciation expense of $69,853; and provisions for obsolete
inventory and loss on uncollectible accounts receivable totaling $72,375.
The net cash used in operating activities of $2,953,916 during Fiscal 1996
considered changes in current assets and liabilities, as well as non-cash
transactions including the write-down of accounts receivable and inventories
totaling $482,538, amortization expense of $331,825, depreciation expense of
$50,542, accrued interest receivable of $107,367, Common Stock issued for
services of $15,417 reduction of notes receivable for the exercise of options in
exchange for services of $42,263, and recognition of deferred compensation of
$5,596.
The Company's inventories increased during Fiscal 1996 by $465,833 or 75%
and increased a further $105,426 during Fiscal 1997. These increases are
primarily attributable to the production of products which
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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; and (iv) the release of $18,456 in restricted cash serving as security
for a note payable to a bank, less (i) $16,319 in payments on notes payable; and
(ii) $46,171 in cash dividends paid to preferred stockholders; . During Fiscal
1996, the Company received net cash from financing activities of $5,282,651,
which included (i) $3,000,000 in proceeds from Common Stock and warrant Units,
(ii) $2,825,000 in proceeds from senior convertible notes payable, (iii)
$773,987 used for the payment of financing costs, (iv) $6,832 in payments on the
note payable to a bank, (v) $241,595 received from the exercise of options, (vi)
$1,031 from the exercise of Class D Warrants, (vii) $19,489 received as payments
on notes receivable for the exercise of options, and (viii) $23,645 in cash
dividends paid to preferred stockholders.
See Management--Executive Compensation and Note 8 to the Company's
Consolidated Financial Statements for information concerning the Company's
material contracts for compensation and rent.
As discussed in Note 1 to the Consolidated Financial Statements, the Company
continues to incur substantial losses and may need additional financing to
continue its operations. The Company is reviewing alternatives for raising
additional capital. On October 2, 1997, the Company entered into an agreement
with entrenet Group, LLC ("entrenet") for advice and assistance in developing
and executing business plans, financing strategies and business partnerships,
acquisition and mergers. For its services, entrenet will receive a cash fee of
$5,000 per month for twelve months; $60,000 in the form of a 10% convertible
note, payable on the earlier of (a) a financial transaction (excluding the
Rights Offering) or (b) two years; 5% of the value of any financial transaction
(excluding the Rights Offering); and 5% of any financing provided by or
introduced directly by entrenet.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 129 ("SFAS 129"). Disclosure of Information about Capital
Structure and in June 1997 the FASB issued Statement No. 130, Reporting
Comprehensive Income ("SFAS 130") and Statement No. 131, Disclosure about
Segments of an Enterprise and Related Information ("SFAS 131"). The Company is
required to adopt SFAS 129 in fiscal 1998 and SFAS's 130 and 131 in fiscal 1999.
SFAS 129 establishes standards for reporting and disclosing the pertinent rights
and privileges of the various securities outstanding.
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.
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BUSINESS
FiberChem develops, produces, markets and licenses its patented fiber optic
chemical sensor ("FOCS-Registered Trademark-") technology which detects and
monitors hydrocarbon pollution in the air, water and soil. The Company has
developed a range of products and systems based on FOCS-Registered Trademark-,
which provide IN SITU and continuous monitoring capabilities with real-time
information. The Company also is developing a range of sensor products based on
its Sensor-on-a-Chip-Registered Trademark- technology for a wide variety of
environmental, consumer, commercial, industrial, automotive and military
applications.
Since its inception in 1987, FiberChem has invested in excess of $25 million
in research and development relating to a wide range of technologies, and has
focused on products for environmental monitoring and industry. During the last
several years, a de-emphasis of environmental issues in Congress has resulted in
delays in enactment and enforcement of the regulatory climate upon which the
Company's future prospects were dependent. Several federal and state programs
were not re-authorized or funded. Similar to companies in the electric vehicle
or alternative fuels arenas, FiberChem found that many of its expected
opportunities had evaporated, at least for the foreseeable future. Consequently,
FiberChem's Management identified market segments that were driven by other
forces. Notwithstanding the slow down at the Federal level, the Company
recognized that the State of Florida represented a short-term lucrative
opportunity for aboveground tank leak detection and set about getting its sensor
products specified. At the same time, the phase out of Freon presented the
Company with an opportunity to establish its technology as the preferred
replacement for the existing Freon/Infrared method for measurement of total
petroleum hydrocarbons (TPH) in process water streams.
During this refocusing process the Company has substantially enhanced the
value of its development initiatives with Texas Instruments, Inc. ("TI") for its
Sensor-on-a Chip-Registered Trademark-. By working together with the
Optoelectronics Group within TI's Semiconductor Group, the Company has expanded
the scope of the joint marketing activity in the chemical sensor marketplace.
The short term result from this process has been development work on a number of
new products, including:
- a fail-safe flammable gas sensor for a household appliance control system
- a breath alcohol sensor for an ignition interlock device for automotive
use
- a fuel/air ratio sensor for automotive use
- a gasoline vapor sensor for a gasoline retailing application
- a carbon monoxide sensor for residential and commercial use
- an ammonia sensor for refrigerant levels in food processing facilities
- Sensors for detection of breakthrough of toxic gasses from personal
protective equipment.
See "Business--Sensors."
PRODUCTS AND APPLICATIONS
The PetroSense-Registered Trademark- product line includes a continuous
monitoring system ("CMS-5000") designed for IN-SITU measurement of petroleum
hydrocarbons in a wide variety of applications including leak detection at above
ground storage tank ("AST") and underground storage tank ("UST") sites,
monitoring of soil and water remediation processes and fence line monitoring at
contaminated sites. A CMS system typically sells for between $15,000 and
$50,000.
The CMS-4000 can be used to monitor hydrocarbon levels in applications such
as storm water and waste water around industrial facilities. The CMS-4000 is
available with analog outputs for use in industrial applications where some
control functions need to be performed.
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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.
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
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been designed and tested to meet European Union CE Mark standards which went
into effect January 1, 1996 for the European Community.
Both the Company's PHA-100 and DHP have been extensively tested by Ken
Wilcox Associates, Inc. ("KWA"), an independent testing laboratory, in
accordance with EPA protocols. These evaluations meet the requirements of the
EPA for external vapor-phase leak detection systems and liquid-phase out-of-tank
product detectors. KWA also certified that the data produced by the Company's
products was equivalent to the EPA's standard method for groundwater analysis.
The Company's products were included in the EPA's Office of Underground
Storage Tanks list of products meeting certain minimum third-party certification
guidelines, both for vapor and liquid product detection. In addition, the
Company has received written or verbal assurance that its products meet the
requirements of 47 states. Certain states rely on the EPA list and certain
others have no specific requirements.
The Company has also had the CMS-5000 product line third-party certified for
use for AST leak detection in Florida. As a result, FCI Environmental is the
only company at this time to have an AST continuous leak detection product
approved by the Florida Department of Environmental Protection ("DEP").
Recently developed applications of FOCS-Registered Trademark- include the
use of the technology to replace a Freon-Registered Trademark- extraction method
of analysis currently used on offshore oil production platforms. EPA regulations
require oil companies to monitor the hydrocarbon content in sea water returned
to the ocean during the oil production process. The conventional Freon method
involves periodic sampling of the sea water output and analysis of the samples
in the oil production platform's laboratory. The Company's products can be used
to monitor the sea water output continuously, thereby achieving a significant
reduction in cost for the operator, both by eliminating the use of
Freon-Registered Trademark- gas and by optimizing the usage of chemical agents
used to facilitate removal of oil from produced water.
THE TECHNOLOGY
The Company's FOCS-Registered Trademark- technology, which is proprietary
and patented, is at the center of the Company's products. FiberChem manufactures
a probe which contains a short length (approximately 5 cm) of fiber optic cable.
Commercially produced fiber optic cable is coated to keep all wavelengths of
light contained. The Company treats the fiber optic cable with the
FOCS-Registered Trademark- technology, modifying the cable's coating to permit a
certain amount of light to be lost when it comes into contact with hydrocarbon
molecules. The resulting change in light transmission is then recorded and
transmitted by the probe either to one of the Company's monitoring devices (see
"Products and Applications" above) or to other industry standard devices. The
Company's devices measure changes in parts per million or, in some instances, in
lesser concentrations. Up to 16 probes can be linked together to provide a
continuous monitoring system for various types of sites, including USTs, ASTs,
remediation sites, pipelines and offshore oil production platforms.
The FOCS-Registered Trademark- technology has been further developed through
a joint venture with TI to produce Sensor-on-a-Chip-Registered Trademark-, a new
generation of semiconductor-based sensor products. The market for these chip-
based sensors is represented by customers in the consumer, commercial,
industrial, automotive and military fields. Often development costs are
partially covered by a customer in exchange for some level of exclusivity. See
"Business--Sensors" for a description of chip based sensor products.
The Company believes that its patents and patent applications, coupled with
the trade secrets, proprietary information and experience in development provide
the Company with a competitive advantage. It is the Company's policy to apply
for international patent rights in addition to United States patent rights.
FiberChem holds 21 United States patents covering sensor technologies and has
applications pending for three additional patents. All of the United States
patents are valid for 20 years from their
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respective dates of applications, the oldest of which was applied for in 1987.
The Company holds nine international patents, and has a total of 15
international patent applications pending in Canada, Taiwan, Japan, South Korea,
the People's Republic of China and most Western European countries. The sensor
technologies are also protected in the United States by registered trademarks.
THE MARKET
FiberChem's primary markets and potential markets are the petroleum
production, refinery and distribution chain. Major oil companies, distributors
and retailers of gasoline, diesel and aircraft fuel are important potential
customers. Other important markets and customers include remediation companies,
environmental consultants, shipping ports, airports and military bases. The
markets for sensors transcend the petroleum hydrocarbon marketplace, are very
diverse and are addressed directly by Company personnel. The Company is not
dependent on any one major customer.
CUSTOMERS AND DISTRIBUTORS
The Company entered into an OEM Strategic Alliance Agreement (the "Alliance"
or the "Agreement") as of June 30, 1996, as amended, with Whessoe Varec, Inc.
("Whessoe Varec") whereby Whessoe Varec was granted exclusive worldwide right to
market the Company's products in the aboveground storage tank (AST) market. The
Agreement was accompanied by firm orders for approximately $1.7 million of the
Company's products. At the request of Whessoe Varec in order to avoid
unnecessary duplicate shipping costs, substantially all of the equipment was
segregated in the Company's warehouse. Terms of payment were 180 days and 90
days for $500,000 of orders to be shipped in June and an additional $500,000 of
orders to be shipped in September 1996. During early January 1997, Whessoe Varec
requested that the Company consider a revised payment schedule acceptable to
both parties. As of February 25, 1997, Whessoe Varec had paid for approximately
$59,000 of items actually shipped by that date, and during April 1997, paid an
additional $250,000 for items shipped in March 1997. In August 1997 the Company
received one half of the outstanding amount and shipped the remaining products.
The last payment was received in September 1997. Both payments are irrevocable
and the products shipped are not subject to return except under normal warranty
conditions.
The Alliance, combined with the acquisition of Whessoe p.l.c. (Whessoe
Varec's parent company) by Endress + Hauser of Switzerland, has positioned both
Alliance partners to take advantage of the new Florida regulations regarding the
requirements for AST leak detection. Internal liners and leak detection is by
far the lowest cost option for compliance with the Florida mandates and as of
today, the Company's PetroSense-Registered Trademark- line is the only product
certified for use in both contaminated and uncontaminated sites in Florida.
Approximately 1,000 tanks have been identified which are already lined and as
such are immediate targets for leak detection. Each tank represents an average
of $35,000 in potential revenue for the Alliance ($10,000 for FCI). It is
anticipated that this number will grow in the period before December 1999 when
installations must be completed. The impact of these regulations has been that
about $8,000,000 of projects have been identified and proposals generated. It is
anticipated that these projects will accelerate from 1997 to 1999. Many
companies have already indicated that they intend to stagger installations over
the period. Based on this level of activity, Whessoe Varec has substantially
expanded its sales and service capabilities in Florida, and management believes
that significant business will be generated by the Alliance although there can
be no assurance that this will occur.
Florida Power Company recently placed an order with Whessoe Varec to upgrade
all of its tanks to include leak detection. Citgo, Dreyfus, Hess, and GATX among
others, have applications pending at the Florida Department of Environmental
Protection ("DEP") to install the Company's products. Although these applicants
are not contractually bound to the Company to purchase its products, if an
application is approved and not subsequently modified, amended or withdrawn, the
applicant is required to install the equipment specified in an application by
December 31, 1999. On May 1, 1998, the final review opportunity for input into
the Storage Tank Regulations was held. In the absence of any dissenting opinion,
the
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Regulations were passed on to the Attorney General of Florida for incorporation
into law and became effective on July 13, 1998 thereby implementing the Florida
AST regulation. There can be no assurance that when, or even if, the DEP gives
final approval that these or any other companies will purchase the Company's
products, nor when such purchases may occur.
In November 1996, the Company was advised that its proposed joint venture in
Finland had received funding authorization from the Finnish government. A new
company, Senveco Oy ("Senveco"), has been formed, owned 75% by Finnish interests
including the Company's existing distributor, and 25% by the Company. Senveco
offers sales, service, technical support and consulting services for FCI's
products and for complementary products from other manufacturers.
Senveco's region consists of Finland, the Baltic States, and Northwest
Russia including the key areas of the Kola Peninsula where substantial cleanups
of soil and water are expected in the next year or so, funded from European
Union ("EU") sources. Senveco also provides technical support to the Company's
European distribution network and in the Middle East.
In October 1997, the Company was advised that Senveco had been selected for
an EU Baltic Intereg contract to provide consulting and monitoring services to
locate "hot spots" of pollution in the Kola Peninsula region of Russia. The
contract is expected to provide revenues for Senveco and the Company from sales
of the Company's products.
OFFSHORE PRODUCED WATER MARKET. For the past 15 or so years, tests to
determine the TPH content of certain process water streams returned to the ocean
from offshore platforms ("produced water") have been carried out by extracting
water samples with Freon and analyzing the resultant extract by infrared
spectroscopy ("IR"). With the diminution of its availability and increase in its
price, coupled with wide spread concern as to its threat to the Earth's ozone
layer, Freon and the Freon/IR method are now viewed as requiring replacement.
Of the various other methods currently offered, the Company believes that
its FOCS-Registered Trademark- technology offers the best alternative in terms
of correlation with the IR method, ease of use, features/benefits and cost. The
Company offers two different products to this marketplace. The OilSense-4000-TM-
is a continuous unit which can operate unattended. It offers a 4-20 mA output
and can be interrogated and programmed remotely via modem. It operates for 30
days between maintenance. At $25,000 to $35,000, it offers good value where
manpower is at a premium. The OilSense-4000-TM- can also be integrated into the
process of treating the produced water stream to automatically optimize the use
of water treatment chemicals and can continue operating where platforms are
currently shut down due to adverse weather conditions. The PHA-100WL is a single
measurement analyzer which directly replaces the Freon/IR method. Its
FOCS-Registered Trademark- sensor directly measures TPH in water samples,
according to a simple procedure. At $6,375 it offers a direct replacement for
the Freon/IR method without the use of Freon or other chemicals.
There are about 3,500 platforms in the Gulf of Mexico and a similar number
in the rest of the world, mainly in the North Sea, Middle East, South China Sea
and offshore West Africa. It appears that each of these regions conforms to
similar regulations. This market represents a window of opportunity that will
remain open until the IRs are replaced over the next two years or so.
Amoco, Exxon, Marathon, Chevron, Unocal and others are evaluating the
Company's replacement for the existing Freon/IR technology. Each of these
companies has already purchased multiple units from the Company. Norsk Hydro
leased a unit for evaluation for its North Sea operations. In addition, a unit
was recently sold to Clyde Petroleum in Indonesia, the first sale for use in the
South China Sea.
FRAME AGREEMENT WITH AUTRONICA AS
On October 1, 1996, the Company entered into a frame agreement with
Autronica AS ("Autronica"), a Norwegian company within the Whessoe PLC group,
for Autronica to exclusively distribute certain FCI products for offshore
applications in regions of the world where there is oil and gas production
offshore,
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including certain countries in the North Sea, West Africa, the Middle East and
the Southeast Asia areas. The agreement was accompanied by an order for
approximately $93,000 of the Company's products. The Endress + Hauser
acquisition of Whessoe Varec was accompanied by the spinning off of Autronica to
Navia, a Norwegian company. Their marketing was refocused and as a result did
not include any third party distribution activity. The Agreement was
consequently terminated without prejudice to either party.
EXCLUSIVE DISTRIBUTION AGREEMENT WITH UNIVERSAL ELECTRONICS & COMPUTERS,
INC.
On February 7, 1995, FCI Environmental entered into a two-year exclusive
distribution agreement with Universal Electronics & Computers, Inc. ("UECI"), a
corporation of the Republic of China. Pursuant to the agreement, FCI
Environmental agreed to provide UECI with certain environmental products,
accessories and parts, and UECI agreed to act as an independent contractor of
FCI Environmental to promote and sell such products exclusively in the Republic
of China. The agreement automatically renewed for another two years. Projects
with China Petroleum and the ROC military are ongoing and other projects are
pending. UECI has purchased in excess of $100,000 of the Company's products.
MARKET DEVELOPMENT AGREEMENT WITH MITSUI MINERAL DEVELOPMENT ENGINEERING
CO., LTD.
On May 31, 1995, the Company, through FCI Environmental, entered into a
two-year joint market development agreement with Mitsui Mineral Development
Engineering Co., Ltd. ("MINDECO") pursuant to which the Company and MINDECO are
developing the Japanese market for the Company's products, initially limited to
petroleum hydrocarbon products. In general, the Company supplied the products
and MINDECO demonstrated, marketed and sold them. In addition, the Company and
MINDECO have agreed to use their best efforts to achieve a minimum sales target
of $1,000,000. As of the end of the initial term, unless the Company and MINDECO
agree to convert the market development agreement into a distributorship
agreement or terminate it, the market development agreement automatically renews
itself for one year on a non-exclusive basis. The agreement was automatically
renewed as of the end of its original term. To date, the agreement has not
resulted in material revenues for the Company.
EXCLUSIVE REPRESENTATIVE AGREEMENT WITH SHINHAN SCIENTIFIC CO., LTD.
On February 9, 1995, FCI Environmental entered into a two-year exclusive
representative agreement with Shinhan Scientific Co., Ltd. ("Shinhan"), a
corporation of the Republic of Korea, which agreement was automatically extended
for an additional two year period ending February 9, 1999. Pursuant to the
agreement, FCI Environmental agreed to provide environmental products,
accessories and parts to Shinhan, and Shinhan agreed to act as an independent
contractor of FCI Environmental to promote and sell such products exclusively in
the Republic of Korea. Shinhan is actively involved in the developing UST
regulatory process in the Republic of Korea and has made initial sales to
indigenous oil companies. To date, the agreement has not resulted in material
revenues for the Company.
LETTER OF INTENT WITH AMERASIA CONSULTING, LTD.
On November 1, 1994, the Company entered into a letter of intent with
AmerAsia Consulting, Ltd. ("AmerAsia"), pursuant to which AmerAsia agreed to
develop, on a non-exclusive basis, marketing and joint venture opportunities for
the Company in Asia and Europe and to introduce the Company to parties in those
areas interested in marketing the Company's technology and products. In
consideration for its consulting services, AmerAsia receives compensation
specific to each opportunity identified by it as mutually agreed upon by the
Company and AmerAsia. FiberChem has, to date, granted to AmerAsia options to
purchase 125,000 shares of Common Stock exercisable at $1.00 per share, which
was at or above the fair market value on the dates such options were granted.
Shinhan, UECI and MINDECO, with which the Company has entered into the
agreements described above, were all introduced to the Company by AmerAsia.
AmerAsia is currently involved with introduction of FCI into the People's
Republic of China
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where there is a large potential project for underground storage tank leak
detection. The award of this project is expected to occur in Fiscal 1998.
LETTER OF INTENT WITH THE LOBBE GROUP
On June 7, 1995, FCI Environmental signed a letter of intent with the Lobbe
Group ("Lobbe") to develop certain European markets for FCI Environmental's
petroleum hydrocarbon products. The advent of both the Autronica and Whessoe
Varec alliances and changes in market focus at Lobbe resulted in a reduced role
for Lobbe group. At the same time Lobbe restructured its operations. The
companies have reverted to a non-exclusive relationship with no prejudice to
either party. The agreement has not resulted in material revenues for the
Company since Lobbe's initial $90,000 purchase in June 1995.
SALES AND DISTRIBUTION AGREEMENT WITH QED ENVIRONMENTAL SYSTEMS, INC.
On March 30, 1996, the Company, through FCI Environmental, entered into an
agreement with QED Environmental Systems, Inc. ("QED"), pursuant to which the
Company granted QED the exclusive right to acquire the PHA-100 Portable
Hydrocarbon Analyzer for Direct Analysis of Hydrocarbons in Water and Vapor (the
"PHA-100") in a private label configuration for resale into the ground water
monitoring and remediation market in all 50 states. QED agreed to purchase the
PHA-100 and other products at specified prices and in certain minimum amounts.
QED failed to purchase the minimum amount of products, and the Company
terminated the agreement effective January 7, 1997. The Company commenced legal
action against QED seeking payment for unpaid invoices and other damages. QED
filed counterclaims, and the matter was scheduled for early neutral evaluation.
The Company and QED reached a full and final settlement in this action in
January 1998. See "Legal Proceedings."
SIPPICAN
The Company has had a licensing agreement with Sippican Corporation of
Marion, MA, a defense contracting company which had planned to move into the
environmental market but reversed its course. The Company and Sippican
negotiated a position allowing Sippican to transfer its rights to a third party,
while minimizing the potential for competition to the Company from Sippican or
others. Those rights have been recently transferred to Osmonics, Inc., a leading
supplier of potable water equipment to the beverage industry and the water
utility market. It is believed that this new relationship between Osmonics and
the Company will generate significantly higher royalty revenue than previously
through Sippican. Sippican is a $30 million defense naval warfare company which
had aspirations in the environmental market. Osmonics is a $200 million water
quality company, entirely dependent on revenues from that market. Neither
agreement has resulted in significant revenues for the Company to date.
COMPETITION
In the opinion of Management, the primary bases of competition in the
markets for the Company's products are the distinctive and special qualities of
the products, their reliability and ease of use and price.
Management believes that the distinctive capabilities of the Company's
FOCS-Registered Trademark- technology provide competitive advantages in its
markets. The Company is unaware of any other product in the marketplace, that
can monitor petroleum hydrocarbons at all three desired monitoring points, i.e.,
the vapor area above the water body, the floating hydrocarbons at the water/air
interface and the hydrocarbons dissolved in the water. Management believes that
this capability, coupled with the FOCS-Registered Trademark-'s rapid response
time and reversibility (the ability to measure both increasing and decreasing
levels of pollutants), together with its response to a wide variety of petroleum
hydrocarbons, provide the Company with a competitive advantage. In particular,
the wide dynamic range of the measuring technology allows the detection of new
leaks on top of old contamination. The Company's Florida certification is a
direct result of this capability.
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Most tank leak detection methods currently in use are periodic tests. The
early warning and early detection of leaks provided by the Company's continuous
monitoring systems enable users to minimize environmental damage, liability and
cleanup costs relating to leaks that might otherwise occur and remain undetected
between periodic tests. In addition, the Company's products permit tanks to be
evaluated without being taken out of service, whereas, many competing methods
require that tanks be taken out of service for a period of time. The AST leak
detection market requires regulations to be enforced to exist. End users usually
do not purchase leak detection equipment except for regulatory compliance.
However, when regulations are promulgated, and when deadlines are set and
enforced, the result can be a significant opportunity to supply products to the
regulated community in a readily definable period of time. This is, in fact, the
situation in the Florida AST market. Companies have to be in compliance by
December 1999. Of the three options, continuous leak detection, double bottomed
tanks and dike liners, continuous leak detection is by far the lowest cost.
Further, to be a supplier for each of the three options, products have to be
certified or approved. In the case of leak detection, a stringent third-party
testing process is required prior to acceptance. Only certified products from
suppliers who have passed acceptance are considered when compliance plans are
reviewed by Florida DEP. To date, only the Company's
PetroSense-Registered Trademark- product line has been approved for continuous
detection of leaks from ASTs although there can be no assurance that other
products will not be approved.
Competitors such as Tracer Research, Inc. (Tucson, AZ) and Arizona
Instruments, Inc. (Phoenix, AZ) offer products which provide competition in
certain situations. Tracer Research, Inc. has received approval by Florida DEP
for its periodic leak detection system for ASTs. The approval is conditional in
that it specifies certain operating conditions which must be met. There is a
specified inoculation period during which the tank is essentially out of
service. This is followed by sampling vapor wells and the site for presence of
the tracer. These samples are analyzed off site. Use of this technique is
conditional upon maintaining the specified inoculation time and testing only
when ground water levels allow. The test has to be performed every thirty days.
The Company believes these conditions of use provide a competitive advantage to
continuous PetroSense-Registered Trademark- products, since groundwater levels
often reach the tank bottom during rainy periods in low lying coastal areas such
as Florida.
Arizona Instrument Corporation markets a competitive leak detection product
line mainly to the military marketplace. Its acceptance in the commercial arena
has been limited by its use of a pumping system to draw samples of vapor to the
sensor device. High groundwater levels can fill the sample tubes with water and
shut down the system. The sensor device is limited to detection of lower levels
of hydrocarbons than competing technologies and has not been approved for use in
Florida for contaminated sites. As a result, it is not a competitor for the
Florida AST market.
The Company's PetroSense-Registered Trademark- product line monitors
continuously and detects the level of petroleum hydrocarbons whether the sensor
is in a wet or dry environment.
Many competing methods used to detect and quantify the presence of petroleum
hydrocarbons in the field (e.g., for groundwater monitoring wells, soil
remediation sites, process streams and waste water streams) consist of
extracting a sample, then analyzing the sample using field or laboratory
analytic instruments such as gas chromatographs. This process may take several
days. The Company's products provide IN SITU, real-time results with accuracy
closely correlating with laboratory results. Additionally, the products' analog
outputs offer the capability to provide feedback loops for process control.
Other companies offer competing technologies in most of the application areas
that the Company has targeted. Turner Designs (Sunnyvale, CA), Filco (Lafayette,
LA) and Wilks (Norwalk, CT) offer alternatives to the Freon IR method. In each
instance, these are small companies with limited resources. In each case, the
technology used has limits and in each case these competitors do not provide the
full line of both portable and continuous monitoring products offered by the
Company.
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The offshore produced water market exists because Freon is no longer
manufactured under the Montreal Protocol. The acceptance of a replacement
technology is dependent on the increasing cost and lack of availability of
Freon, together with economic conditions such as the price of oil.
In each market, the competition to the Company's products utilizes direct
selling through its own sales force and through manufacturers representatives.
The Company has established an alliance with a leader in the AST instrumentation
field, Whessoe Varec. In its other markets, the Company utilizes the same direct
sales approach.
GOVERNMENT REGULATION
In the United States, numerous environmental laws have been enacted over the
last three decades. These include the Resource Conservation and Recovery Act,
the Comprehensive Environmental Response Conservation and Liability
("Superfund") Act, the Clean Air Act, the Clean Water Act, the National
Environmental Policy Act which established the EPA and others. The Clean Air and
Clean Water Acts require measurement, monitoring and control of municipal,
industrial and other discharges of hydrocarbons and numerous other substances
including heavy metals, toxic gases, chlorinated solvents and fertilizer and
pesticide residues.
Many of the Company's sales projections were made with the assumption that,
at the Federal level, there would be a strong regulatory climate on matters
involving the environment. In recent years, however, with the Congressional
de-emphasis of environmental matters, and the accompanying delays in enactment
and/or enforcement of environmental mandates, these projections turned out to be
optimistic, at least in their timetable. Consequently, FiberChem's management
identified market segments that were driven by other forces. Notwithstanding the
slow down at the federal level, the Company recognized that the State of Florida
represented a short-term opportunity for aboveground tank leak detection and set
about getting its sensor products specified. At the same time, the phase out of
Freon presented the Company with an opportunity to establish its technology as
the preferred replacement for the existing Freon/Infrared method for measurement
of total petroleum hydrocarbons (TPH) in process water streams.
Although present federal laws do not require leak detection for ASTs, many
state and local governments have enacted or are considering regulations
requiring leak detection for ASTs. Two pieces of legislation are pending before
Congress and the EPA has proposed a collaboration with the American Petroleum
Institute ("API") on voluntary AST programs in which leak detection is a
significant factor. As part of this collaboration, API is conducting a test of
leak detection equipment at an operating tank farm. The Company's products and
those of two other companies were selected for this evaluation. The State of
Florida has perhaps the most stringent regulations and FCI is believed to be the
only company to have certification for both uncontaminated and contaminated
sites in Florida. The Company believes that similar regulations are being
finalized in Virginia, Wisconsin, Pennsylvania and other jurisdictions.
INTERNATIONAL REGULATORY ACTIVITY
Several countries have environmental laws or regulations in place or being
implemented that affect the market for the Company's products. Belgium has a new
environmental law that regulates retail gas stations. Canada's Ontario Province
has an AST regulation in process. The Republic of South Korea has a UST law
which is currently being implemented. Taiwan has committed to significant
expenditure for environmental clean up. Finland has proposed leak detection for
retail gasoline stations and has recently promulgated clean up regulations
backed by government funding for the clean up of contaminated retail sites in
the country. The Company is working with its international distributors and
others to promote the Company's products and enhance its name recognition in
these countries so that the Company's products are taken into consideration when
legislation and regulations are promulgated.
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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 the Company's DHP, operating and control
software, personal computers and peripheral devices such as alarms. Accessory
kits are configured by the Company using both commercially available and
specially manufactured components.
The Company is in the process of undergoing certification under ISO 9001,
the international standard for the maintenance and improvement of product
quality. This certification is expected to be completed during Fiscal 1998.
RESEARCH AND DEVELOPMENT
The Company shifted its emphasis in 1996 and 1997 to applications
development of the petroleum hydrocarbons product line, particularly in the
areas of produced water and waste water. Peripherals were developed to allow the
FOCS-Registered Trademark- technology to function in highly contaminated flowing
water streams by automatically rinsing the probe on demand. This led to the
development of the OilSense-4000-Registered Trademark- a completely integrated
system for use on offshore platforms.
The Company also put significant effort into developing both methodology and
software for the use of the water-only versions of the portable unit (PHA-100W
and PHA-100WL) in the storm and waste water and offshore produced water markets.
SENSORS
The sensors market represents the Company's largest potential market,
primarily because applications for sensors are much wider than those for the
Company's environmental products. Developed in cooperation with Texas
Instruments with the technology patented by FCI, sensors have the potential to
revolutionize a wide range of consumer, industrial, commercial, automotive,
military and medical products.
This new concept, based on an optical platform that is essentially a double
beam spectrometer on a plug-in base in a standard 20-pin integrated circuit
package, utilizes standard TI components for ease of design compatibility. These
devices incorporate waveguides onto which a chemical matrix may be coated. The
presence of a chemical analyte which causes a change in the refractive index,
absorption or fluorescence of the waveguide material results in a change which
can be detected, measured and related to concentration of the analyte, whether
in the aqueous or gaseous phase.
While these sensors can be used in hardware currently under development at
the Company, e.g., portable dosimeter devices as well as continuous monitoring
probes and associated hardware, the primary application for these
Sensors-on-a-Chip-Registered Trademark- lies in the OEM marketplace. This market
is characterized by clients who have needs or wants for sensors that give their
products an advantage in their marketplace.
Examples of ongoing developments include:
- a fail-safe flammable gas sensor for a household appliance control system
- a breath alcohol sensor for an ignition interlock device for automotive
use
- a fuel/air ratio sensor for automotive use
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- a gasoline vapor sensor for a gasoline retailing application
- a carbon monoxide sensor for residential and commercial use
- an ammonia sensor for refrigerant levels in food processing facilities
- Sensors for detection of breakthrough of toxic gasses from personal
protective equipment.
These applications represent sensors with selling prices anticipated to be
in the $5.00 to $150.00 range depending upon application and volume.
The Company also has invented a proprietary method of analysis for chemical
and biological molecules which is essentially a solid state version of the
well-known immunoassay technology. This technology was borrowed from the medical
community and applied to environmental monitoring. The Company's invention has
potential application to sensor development in areas previously relegated to
expensive and slow laboratory analysis. When applied to the
Sensor-on-a-Chip-Registered Trademark- this technology could provide a range of
sensors and hardware products which could substitute for laboratory analysis in
the biomedical and biological analysis marketplace. As an example, the Company
recently demonstrated an immunoassay for cocaine and other drugs of abuse that
reached a detection limit of 400 parts per trillion.
TEXAS INSTRUMENTS, INC. ("TI")
On June 15, 1995, the Company entered into an intellectual property license
agreement and a cooperative development agreement with TI. Under the License
Agreement, TI licensed the Company's patented FOCS-Registered Trademark- for use
with TI's Optoelectronics technology. The Company granted TI an exclusive
worldwide royalty-bearing license to develop, produce and market chip-based
chemical sensors for specific applications. In exchange, TI granted the Company
a non-exclusive worldwide royalty-bearing license to certain TI technology. The
license agreement terminates when the last Company or TI patent concerning the
technology under the license agreement expires. The License Agreement and
Cooperative Development Agreement replace similar agreements between the Company
and TI, entered into in January 1992, with a goal of miniaturizing the Company's
FOCS-Registered Trademark- technologies into microchip sensors. This development
work with TI is also the basis for the Sensor-on-a-Chip-Registered Trademark-
product which is the subject of the joint development agreement with Gilbarco
described below. The Company has been granted a United States patent on
chip-based sensors in general and has applied for a patent on a chip-based toxic
gas sensor.
Under the cooperative development agreement, the Company and TI agreed to
design and develop certain custom FOCS-Registered Trademark- based sensors for
TI's exclusive use. The first chip-based sensor has been developed for carbon
monoxide (CO). Chemistry development is essentially completed. Recent changes in
the UL Standard for residential CO detectors and significant changes in market
dynamics have impacted on the introduction of this product by TI.
Since the Company developed a working relationship with the Optoelectronics
Development Group within TI's Semiconductor Group, the Company has identified
and pursued a number of opportunities in the sensor area, some introduced by TI,
others directly by the Company. It is expected that an expanded marketing
activity on the part of TI will result in additional opportunities in the near
future.
AGREEMENT WITH ALCOHOL SENSORS INTERNATIONAL, LTD.
The Company with the assistance of and pursuant to specifications and
know-how of Alcohol Sensors International, Ltd. ("ASI"), has developed chemical
sensors for the breath alcohol (ethanol) testing industry and market. On
November 8, 1996, the Company, through FCI Environmental, entered into an
agreement with ASI pursuant to which the Company granted ASI exclusive right,
title and interest (including sales and marketing rights) to such alcohol
sensors for the breath alcohol testing industry and market. In consideration
therefor, ASI agreed to market, promote and sell instruments employing such
alcohol sensors on a worldwide basis and to pay the Company development and
licensing fees over the
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term of the agreement. The term of the agreement is for five years and may be
renewed by ASI for successive five-year terms upon written notice to the Company
not less than sixty days prior to the expiration of the prior term. Development
is continuing.
JOINT DEVELOPMENT AGREEMENT WITH GILBARCO, INC.
The Company, through FCI Environmental, completed the development for
Gilbarco of a low-cost sensor for the detection of gasoline vapor in Phase II
vapor recovery systems for gasoline dispensing equipment. The introduction of
the equipment is pending the promulgation of regulations by the California Air
Resources Board (CARB) establishing a compliance date for new dispensers,
followed by an as yet undetermined phase in period for retrofitting of existing
dispensers.
Recently, Gilbarco has begun a program of cold weather testing of a gasoline
dispenser equipped with the sensor in anticipation of action by CARB.
BECHTEL NEVADA
In June 1995, the Company entered into a Cooperative Research and
Development Agreement ("CRADA") with the U. S. Department of Energy ("DOE")
through its operating entity Bechtel Nevada, Inc.'s Remote Sensing Laboratory in
Las Vegas, Nevada to develop low-cost, rugged demountable probes suitable for
use with the Sensor-on-a-Chip-Registered Trademark- platform. This development
resulted in the production of a prototype probe to carry up to three chips. New
development has focused on a dosimeter device for hand held use and is ongoing.
In March 1996, the Company entered into a contract with DOE through Bechtel
Nevada, to develop a chip-based sensor for trichloroethylene at the ppb level in
water. The first phase of the contract, the selection, evaluation and
verification of an appropriate chemistry, was completed in September 1996. The
second phase of this contract, development of prototype chip sensors, has not
been funded.
OTHER SENSOR DEVELOPMENT
The Company is further developing numerous other sensors for specific
contaminants and properties. Certain sensors are completed, but will not be
introduced into manufacturing until the Company has the resources to finalize
the design of the chip-based platform for that specific application. Other
sensors are still in the chemistry development stage. The current status of the
Company's sensor development is outlined in the table below, showing analytes
measured, their stage of development, targeted sensitivity (capability of
measurement) and the particular media monitored:
<TABLE>
<CAPTION>
STAGE OF TARGETED
TYPE DEVELOPMENT SENSITIVITY/MEDIA
- ------------------------------------- --------------- -------------------------------------
<S> <C> <C>
pH Prototype 2-12 in water
Trichloroethylene (TCE) Development ppb in water(1)
Heavy Metals (total of 7) Development ppb in water(1)
Phosphates Development ppm in water, soil(1)
Sulfates Development ppm in water, soil(1)
Hydrazine Development ppb in air, water, soil(1)
Total Organic Carbon (TOC) Research ppb in water(1)
Total Organic Chloride (TOCl) Research ppb in water(1)
</TABLE>
- ------------------------
(1) Targeted sensitivity for sensors in the development and research stage will
be established as they enter into the prototype stage. The development
target is to meet the regulatory compliance requirements.
The Company also believes that its technology may be adapted for use in
sub-sea modules under development by Asea Brown Boveri for Norsk Hydro. These
developments are intended to replace the
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current platform operations at the surface with unmanned operations on the ocean
floor. The Company has also had preliminary discussions with a Norwegian Company
Sea team to incorporate its sensors into remote operating vehicles for undersea
pipeline leak detection.
The Port of Rotterdam has proposed to remediate its facility through
state-of-the-art bioremediation and the operating consortium has selected the
Company to be the technology vendor for monitoring systems.
The Company's spending on research and development activities during Fiscal
1997 and 1996 was $1,257,324 and $1,233,054, respectively, and for the
three-month periods ended December 31, 1996 and 1997 was $340,806 and $191,892,
respectively.
COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company has determined the costs and effects of compliance with federal,
state and local environmental laws to be minimal in amount and exposure. The
Company spends less than 1% of its total expenditures to comply with the various
environmental laws.
EMPLOYEES
As of September 18, 1998, the Company and its subsidiaries employed 19
persons on a full-time basis. These include Geoffrey F. Hewitt, President and
Chief Executive Officer; Melvin W. Pelley, Chief Financial Officer and Thomas A.
Collins, President of FCI Environmental. The Company also employed three
administrative persons; one scientist; five laboratory and manufacturing
technicians; one manager of manufacturing; one materials, production control,
shipping and receiving specialist; two engineers; one sales applications
specialist; and two strategic business unit sales managers.
FACILITIES
In September 1989, the Company leased approximately 15,000 square feet of
space in a new multi-tenant showroom/warehouse/distribution facility within
Hughes Airport Center, 1181 Grier Drive, Suite B, Las Vegas, Nevada. The Company
is currently using approximately 8,000 square feet of its facility for
production, 4,000 square feet for research, development and engineering and the
remaining 3,000 square feet for marketing and administrative purposes. The lease
was for five years and expired on February 28, 1995. The Company and the lessor
have agreed to a month-to-month lease which is terminable by either party upon
30 days' notice. Current base monthly payments under the month-to-month lease
are $12,786. Rent expense during Fiscal 1996 and 1997 was $172,492 and $172,551,
respectively, and for the nine month periods ended June 30, 1997 and June 30,
1998 was $129,891 and $129,039, respectively. The Company is pursuing
alternatives including a renewal of the current lease at approximately the
current base monthly rental charge.
LEGAL PROCEEDINGS
On February 20, 1997, FCI Environmental, Inc. ("FCIE") commenced a lawsuit
in the State Court of Nevada (No. A370091) (the "State Action") against QED
Environmental, Inc. ("QED"). FCIE alleged a breach of a Sales and Distribution
contract dated March 29, 1996 between FCIE and QED. FCIE is seeking $123,800 in
direct damages and $297,075 in consequential damages. QED filed a motion to
remove the State Action to the United States District Court, District of Nevada.
On April 10, 1997, the State Action was removed to Federal Court and was
assigned the Docket No. CU-S-97-00406 (DWH). QED filed a counterclaim against
the Company and brought a third-party complaint against certain officers and
employees and former employees of the Company, seeking reimbursement of $62,223
paid by QED pursuant to the subject contract. The Company has responded to the
counterclaim denying all of QED's counterclaims. Upon QED's motion which was
unopposed, the Court ordered the parties to proceed to early neutral evaluation
in January 1998. FCIE and QED reached a full and final settlement in this action
40
<PAGE>
in January 1998. In accordance with the settlement agreement, the terms of the
settlement are confidential, and had no material effect on the financial
position of the Company or the results of its operations.
A former distributor, D2E, filed an action in the Commercial Court of
Nanterre, France on June 4, 1997 claiming improper termination of an exclusive
distribution agreement by FCI Environmental, Inc. The action seeks monetary
damages of approximately $200,000 at current exchange rates. A hearing on the
merits of the dispute originally scheduled for June 23, 1998 has been adjourned
until September 22, 1998. The Company does not expect an adverse outcome and
believes that even in the event of an adverse outcome, such an outcome would not
have a material effect on its financial position or results of operations.
On September 23, 1998, OCS, Inc., a Texas corporation and customer of the
Company's subsidiary, FCI Environmental, Inc. ("FCIE"), filed a lawsuit against
FCIE in the District Court of Harris County, Texas, 165th Judicial District. The
lawsuit is based on an alleged breach of warranty for goods purchased from FCIE.
The plaintiff seeks incidental and consequential damages of $750,000 plus other
fees and expenses. The Company intends to seek to have it dismissed.
MANAGEMENT, DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and respective positions of the Executive Officers and
Directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Geoffrey F. Hewitt................ 55 Chairman of the Board, President, Chief Executive
Officer and Class A Director
Byron A. Denenberg................ 63 Class C Director
Irwin J. Gruverman................ 64 Class A Director
Walter Haemmerli.................. 68 Class B Director
Gerald T. Owens................... 71 Class C Director
Melvin W. Pelley.................. 53 Chief Financial Officer and Secretary
</TABLE>
The names, ages and respective positions of the Executive Officers and
Directors of FCI Environmental are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Geoffrey F. Hewitt................ 55 Chief Executive Officer and Director
Melvin W. Pelley.................. 53 Chief Financial Officer, Secretary and Director
Thomas A. Collins................. 51 President
</TABLE>
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.
41
<PAGE>
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.
GERALD T. OWENS has served as a Director of the Company since December 1987.
Mr. Owens served with Mobil Oil from 1962 to 1983 when he retired. At
retirement, he was President of Mobil Sales and Supply Corporation, a
wholly-owned subsidiary of Mobil Oil, and he was a Vice President of Mobil Oil.
From 1951 to 1961, Mr. Owens practiced law with the law firm of Andrews and
Kurth in Houston, Texas. Mr. Owens received an L.L.B. degree from the University
of Texas in 1950 and a B.A. degree in history in 1948 from the University of
Texas. He serves as Chairman of the Board of Trustees for the Kenny Stout
Memorial Golf Foundation, and as a member of the Board of Trustees for the
Monterey Institute of International Studies.
MELVIN W. PELLEY has been the Chief Financial Officer and Secretary of the
Company since April 1994 and has been Chief Financial Officer and Secretary of
FCI Environmental since June 1993. Prior thereto, from 1988 he was Vice
President of Finance and Administration of Acoustic Imaging Technologies
Corporation, Phoenix, Arizona, a manufacturer of diagnostic ultrasound medical
equipment. From 1983 to 1988 he was Director of Costs, Financial Planning and
Analysis of ATL. From 1977 to 1983, Mr. Pelley was Chief Financial and
Administrative Officer for ADR.
THOMAS A. COLLINS has served as President of FCI Environmental since
November 1996 and as Vice President of International Marketing and Product
Development from March 1996 to November 1996. Prior thereto, from 1992 he was
Director of International Sales and Product Marketing of Arizona Instrument
Corporation, a manufacturer of environmental and control instrumentation; from
1990 to 1992 he was Director of Marketing of Wayne Division, Dresser Industries,
Inc., a manufacturer of dispensing equipment for the gasoline industry; from
1986 to 1989 he was Manager of Domestic Retail Marketing for Diebold, Inc., a
manufacturer of transaction terminals in the petroleum retailing market; and
from 1968 to 1986 he held marketing and engineering positions at ARCO Petroleum
Products Co.
Officers serve at the discretion of the Board of Directors. All Directors
hold office until the expiration of their terms and the election and
qualification of their successors. The Company's Board of Directors is divided
into three classes of approximately equal size with the members of each class
elected, after an initial phase-in-period, to three-year terms expiring in
consecutive years. Mr. Gruverman, Mr. Conrad and Mr. Hewitt were elected to
three-year terms as Directors at the Company's June 1997 Annual Meeting of
Shareholders. Mr. Conrad resigned on April 8, 1998. Mr. Loomis and Mr. Haemmerli
were elected to three-year terms as Directors at the Company's May 1996 Annual
Meeting of Stockholders. Mr. Loomis
42
<PAGE>
resigned on December 23, 1997. Mr. Owens was elected to a three-year term as
Director at the Company's May 1995 Annual Meeting of Stockholders and Mr.
Denenberg was appointed to the Board of Directors in August 1995.
In January 1993, the Company established a Stock Option Committee. The Stock
Option Committee is responsible for the granting of stock options under the
Company's Stock Option Plans. The Company also established a Compensation Review
Committee, which is responsible for reviewing the compensation of the Company's
executives and employees. In August 1995, Mr. Owens and Mr. Haemmerli were
appointed to a single Compensation Review and Stock Option Committee. Also, in
August 1995, Mr. Loomis and Mr. Owens were appointed to a newly established
Audit Committee. Mr. Gruverman was added to the Audit Committee on November 14,
1997 and Mr. Loomis resigned on December 23, 1997. The Board of Directors did
not have a standing nomination committee or committee performing similar
functions during the fiscal year ended September 30, 1997.
EXECUTIVE COMPENSATION
The compensation paid and/or accrued to each of the executive officers of
the Company and its subsidiaries and of all executive officers as a group, whose
annual compensation exceeds $100,000, for services rendered to the Company
during the three fiscal years ended September 30, 1997, was as follows:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------
AWARDS
ANNUAL COMPENSATION -----------------------------
---------------------------------------- RESTRICTED SECURITIES
NAME OF INDIVIDUAL OTHER ANNUAL STOCK UNDERLYING
AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS($) OPTIONS/SARS(#)
- ---------------------------------- ----------- --------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Geoffrey F. Hewitt ............... 1997 $ 205,000(1) $ -- $ -- -- 125,000
President and CEO of FiberChem, 1996 $ 195,768 $ -- $ -- -- 100,000
Inc. and CEO of FCI 1995 $ 177,596 $ -- $ -- -- 75,000
Environmental, Inc.
Dale W. Conrad ................... 1997 $ --(3) $ -- $ 2,709(2) -- 25,000
Chairman of the Board of FCI 1996 $ 18,730 $ -- $ 13,594(2) -- 35,000
Environmental, Inc. 1995 $ 112,535 $ -- $ -- -- 60,000
Melvin W. Pelley ................. 1997 $ 136,708(4) $ -- $ -- -- 75,000
Chief Financial Officer of 1996 $ 126,461 $ -- $ -- -- 50,000
FiberChem, Inc. and of FCI 1995 $ 113,346 $ -- $ -- -- 25,000(2)
Environmental, Inc.
David R. LeBlanc ................. 1997 $ 5,288(6) $ -- $ -- -- 0
Vice President--Sales and 1996 $ 125,000 $ -- $ -- -- 5,000
Marketing of FCI Environmental, 1995 $ 123,588 $ -- $ -- -- 5,000
Inc.
Thomas A. Collins ................ 1997 $ 129,708(5) $ -- $ -- -- 75,000
President of FCI Environmental, 1996 $ 70,192 $ -- $ -- -- 100,000
Inc. 1995 $ -- $ -- $ -- -- --
<CAPTION>
LONG-TERM
OTHER
INCENTIVE
NAME OF INDIVIDUAL PLAN ALL OTHER
AND PRINCIPAL POSITION PAYOUTS($) COMPENSATION($)
- ---------------------------------- ----------- ----------------
<S> <C> <C>
Geoffrey F. Hewitt ............... $ -- $ --
President and CEO of FiberChem, $ -- $ --
Inc. and CEO of FCI $ -- $ --
Environmental, Inc.
Dale W. Conrad ................... $ -- $ --
Chairman of the Board of FCI $ -- $ --
Environmental, Inc. $ -- $ --
Melvin W. Pelley ................. $ -- $ --
Chief Financial Officer of $ -- $ --
FiberChem, Inc. and of FCI $ -- $ --
Environmental, Inc.
David R. LeBlanc ................. $ -- $ --
Vice President--Sales and $ -- $ --
Marketing of FCI Environmental, $ -- $ --
Inc.
Thomas A. Collins ................ $ -- $ --
President of FCI Environmental, $ -- $ --
Inc. $ -- $ --
</TABLE>
- ------------------------------
(1) Includes $14,808 in accrued but unpaid salary, earned during the period from
June 15 through September 30, 1997. Payment has been deferred until after
January 1, 1998 at the Company's discretion. From June 15, 1997 through
August 1, 1998, a total of $61,346 has been deferred.
(2) Consulting fees of $2,709 paid during Fiscal 1997; Directors' compensation
of $11,194 and consulting fees of $2,400 paid during Fiscal 1996. Amounts
earned, net of applicable taxes, reduced the Promissory Notes issued by Mr.
Conrad to the Company for the exercise of options.
(3) Resigned April 8, 1998.
43
<PAGE>
(4) Includes $8,615 in accrued but unpaid salary, earned during the period from
June 15 through September 30, 1997. Payment has been deferred until after
January 1, 1998 at the Company's discretion. From June 15, 1997 through
August 1, 1998 a total of $35,692 has been deferred.
(5) Hired March 1, 1996 as Vice President of International Marketing and Product
Development; President of FCI Environmental since November 1996. Includes
$6,730 in accrued but unpaid salary, earned during the period from June 15
through September 30, 1997. Payment has been deferred until after January 1,
1998 at the Company's discretion. From June 15, 1997 through August 1, 1998,
a total of $27,885 has been deferred.
(6) Resigned July 1996; compensated at the rate of $125,000 annually through
October 5, 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE
NAME OF INDIVIDUAL GRANTED FISCAL YEAR ($/SHARE) EXPIRATION DATE
- ------------------------------------------ ------------- ----------------- --------------- ----------------------
<S> <C> <C> <C> <C>
Geoffrey F. Hewitt........................ 125,000(3) 27.8% $ 0.25 September 12, 2007
Dale W. Conrad............................ 25,000(4) 5.6% $ 0.22 May 29, 2007
Melvin W. Pelley.......................... 75,000(3) 16.7% $ 0.25 September 12, 2007
David R. LeBlanc.......................... -- -- --
Thomas A. Collins......................... 75,000(3) 16.7% $ 0.25 September 12, 2007
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES VALUE OPTIONS/SARS OPTIONS/SARS
ACQUIRED ON REALIZED AT FISCAL YEAR END (#) AT FISCAL YEAR END ($)
NAME OF INDIVIDUAL EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------ ------------- ----------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Geoffrey F. Hewitt.................. 18,961 $ (3,262)(1) 486,247/0 $(255,740)(2)/$0
Dale W. Conrad...................... -- $ 120,000/0 $(20,781)(2)/$0
Melvin W. Pelley.................... 74,712 $ (9,068)(1) 75,000/0 $2,344/$0
David R. LeBlanc.................... 0 $ 0 98,350/0 $(21,514)(2)/$0
Thomas A. Collins................... 0 $ 0 175,000/0 $(69,531)(2)/$0
</TABLE>
- ------------------------
(1) Certain options were exercised at exercise prices which exceeded fair market
value at the time of exercise, resulting in negative "Value Realized."
(2) The options' exercise price exceeded their fair market value as of September
30, 1997, resulting in negative "Value of Unexercised In-The-Money Options."
(3) Exercisable upon grant on September 12, 1997 and until September 12, 2007 at
$0.25 per share.
(4) Exercisable upon grant on May 29, 1997 and until May 29, 2007 at $0.22 per
share.
LONG-TERM INCENTIVE PLANS
Effective January 1, 1994, the Company implemented an Internal Revenue Code
Section 401(k) Profit Sharing Plan (the "Plan"). The Plan provides for voluntary
contributions by employees into the Plan subject to the limitations imposed by
Internal Revenue Code Section 401(k). The Company will match employee
contributions at a rate of 50% of the employee's contribution up to a maximum of
2% of the employee's compensation. The Company matching funds are determined at
the discretion of management and are subject to a five-year vesting schedule
from the date of original employment.
44
<PAGE>
DIRECTORS COMPENSATION
In September 1996, the existing base compensation fee of $10,000 per year
for non-management directors was eliminated, replaced by the granting of options
to purchase 25,000 shares of Common Stock of the Company. Fees for attendance at
Board meetings were suspended. Fees for service as Chairman and fees for
committee service were also eliminated and replaced by the granting of options
to purchase from 4,000 to 12,500 shares of Common Stock of the Company.
During Fiscal 1996, the Company expensed an aggregate of $99,000 in
Directors' compensation for the Company's six non-management Directors, applying
$42,451 to the payment of Promissory Notes and interest, $35,272 to the exercise
of 35,272 stock options and $21,277 of payroll taxes. In addition, on April 8,
1996, the Company granted to each of its six non-management Directors options to
purchase 10,000 shares of Common Stock at $1.00 per share, which was the market
value of Common Stock on that date and on September 11, 1996, the Company
granted to each of its six non-management Directors options to purchase 25,000
shares of Common Stock at $0.93 per share, which was the market value of the
Common Stock on that date. On May 29, 1997, the Company granted to each of its
six non-management Directors options to purchase 25,000 shares of Common Stock
at $0.22 per share, which was the market value of the Common Stock on that date.
In addition, the Company granted options to purchase an aggregate of 36,500
shares of the Common Stock to three of its non-management directors for service
as Chairman (12,500 shares) and members of its Audit Committee (8,000 shares to
each of its two members) and Compensation and Stock Options Committee (4,000
shares to each of its two members).
EMPLOYMENT CONTRACTS
Geoffrey F. Hewitt serves under an employment agreement with the Company,
effective October 1, 1997. Mr. Hewitt is currently compensated at a rate of
$205,000 per annum and is entitled to receive bonuses, if any, at the discretion
of the Board of Directors. The employment contract is terminable for cause.
Since June 15, 1997, payment of approximately 27% (or $55,000) of Mr. Hewitt's
salary has been deferred. Payment of the earned but unpaid amount is at the
discretion of the Company and is expected to be paid when the Company's
financial position allows.
Melvin W. Pelley serves under an employment agreement with the Company,
effective October 1, 1997. Mr. Pelley is currently compensated at a rate of
$132,000 per annum, and is entitled to receive bonuses, if any, at the
discretion of the Board of Directors. The employment contract is terminable for
cause. Since June 15, 1997, payment of approximately 24% (or $32,000) of Mr.
Pelley's salary has been deferred. Payment of the earned but unpaid amount is at
the discretion of the Company and is expected to be paid when the Company's
financial position allows.
Thomas A. Collins serves under an employment agreement with the Company,
effective October 1, 1997. Mr. Collins is currently compensated at a rate of
$125,000 per annum, and is entitled to receive bonuses, if any, at the
discretion of the Board of Directors. The employment contract is terminable for
cause. Since June 15, 1997, payment of approximately 20% (or $25,000) of Mr.
Collins' salary has been deferred. Payment of the earned but unpaid amount is at
the discretion of the Company and is expected to be paid when the Company's
financial position allows.
David R. LeBlanc served until October 5, 1996 under an employment agreement
with FCI Environmental, effective July 18, 1994. Mr. LeBlanc was compensated at
a rate of $125,000 per annum and was entitled to receive bonuses, if any, at the
discretion of the Board of Directors. The employment contract was terminable
without cause with 90 days notice.
CONSULTING AGREEMENTS
In August 1995, the Company entered into an agreement with Dale W. Conrad to
provide consulting services to the Company on an as requested basis at an hourly
rate. The services include advice and
45
<PAGE>
assistance in technical, operational, and administrative matters. From August
through September, 1995, the Company paid Mr. Conrad $8,394 under this
agreement, all of which was applied to Promissory Notes executed by Mr. Conrad
in connection with the exercise of stock options, and to the exercise of
additional stock options. From October 1995 through September 1996, the Company
paid Mr. Conrad $18,730 under this agreement, all of which was applied to the
promissory notes, the exercise of stock options and payment for group insurance
benefits paid by the Company. From October 1996 through September 1997, the
Company paid Mr. Conrad $2,709 under this agreement, all of which was applied to
promissory notes, the exercise of stock options and payment for group insurance
benefits paid by the Company. The agreement was terminated upon Mr. Conrad's
resignation on April 8, 1998.
On February 14, 1996, the Company entered into an agreement, superseding
earlier verbal and letter agreements, with European Capital Advisors, Ltd.
("ECA") pursuant to which ECA would be compensated for marketing strategy and
business and financial planning services for the Company. In consideration for
these services, ECA was paid $30,000 in cash and was granted warrants to
purchase 75,000 shares of Common Stock of the Company at $0.90 per share,
exercisable until February 13, 2001.
STOCK OPTIONS
On April 7, 1995, the Company's Board of Directors resolved that all options
to purchase shares of the Company's Common Stock granted prior to April 7, 1995,
and which had an exercise price in excess of $1.00 per share, as of April, 7,
1995 would have an exercise price of $1.00 per share, which price was above the
fair market value of the Common Stock as of the last quoted market trade on
April 7, 1995. Options to purchase an aggregate of 2,309,479 shares at prices
ranging from $1.125 to $2.15 per share were accordingly changed to $1.00 per
share.
In April 1995, the Company's Board of Directors adopted a 1995 Employee
Stock Option Plan ("1995 Plan"), approved by the stockholders at the May 8, 1995
Annual Stockholders Meeting, covering an aggregate of 1,000,000 shares of FCI
Common Stock. As of September 30, 1997, the Company has issued 761,547 stock
options, net of forfeitures, (with initial and current exercise prices ranging
from $0.93 per share to $1.38 per share) under the 1995 Plan to employees of FCI
Environmental and Directors of the Company.
On August 1, 1995, the Company's Board of Directors resolved that the
exercise price of all outstanding Class D Warrants be changed from $1.50 per
share to $1.00 per share, which price was above the fair market value of the
Common Stock as of the last quoted market trade on August 1, 1995. During Fiscal
1995, no Class D Warrants were exercised. During Fiscal 1996, the Company
received $1,031 for the exercise of 1,031 Class D Warrants. On August 21, 1996,
the Board of Directors extended the expiration date of the Class D Warrants from
their original expiration date of September 15, 1996, to September 15, 2000, and
changed the exercise price from $1.00 to $1.10 from September 16, 1996 through
September 15, 1997; then $1.15 through September 15, 1998; then $1.20 through
September 15, 1999; then $1.25 through September 15, 2000.
Primarily in order to provide a means to raise additional cash through
existing outstanding options, warrants and promissory notes receivable, on April
4, 1997, the per share exercise price of all employee stock options, all Unit
and other Warrants (except Class D Warrants) were decreased as follows: to $0.32
from April 4 through April 11, 1997, and thereafter adjusted weekly to the
average closing bid price for the five prior trading days less a discount of 10%
(but never to a price less than $0.30) through May 16, 1997, when the prices
reverted to the original prices. As a result, the Company received $39,943 for
the exercise of 131,453 options at prices ranging from $0.30 to $0.32 per share.
Effective April 17, 1997 the per share exercise price of Class D Warrants was
decreased to $0.30 through May 16, 1997 when the exercise price reverted to its
prior $1.10 per share. As a result, the Company received approximately $30,954
for the exercise of 103,179 Class D Warrants exercised at $0.30 per share.
46
<PAGE>
As of April 4, 1997 an aggregate of $277,916 had been paid on the promissory
notes receivable (issued in 1994 for the early exercise of stock options), an
aggregate of $47,999 of interest had been paid, and an additional $248,212 of
interest had been accrued (through December 31, 1996) but remained unpaid.
In conjunction with the temporary reduction of the exercise prices of the
options and warrants effective April 4, 1997 and Class D Warrants effective
April 17, 1997, as described above, the remaining unpaid principal on the
promissory notes could be fully paid in an amount determined by multiplying the
unpaid balance by a fraction, the numerator of which was the revised exercise
price, and the denominator of which was $1.50 (the original exercise price). If
the unpaid principal was not so paid by May 16, 1997 the underlying collateral
shares would be forfeited and all unpaid principal and accrued interest would be
extinguished.
As a result, the Company received $160,875 in payment for 520,252 escrowed
shares at prices ranging from $0.30 to $0.32 per share, which amount liquidated
$780,379 of original note principal. The remaining $756,804 of unpaid note
principal was extinguished and the underlying collateral of 504,535 shares were
forfeited to the Company and immediately canceled, thereby reducing the total
number of shares outstanding. Unpaid accrued interest receivable aggregating
$248,212 was expensed.
In January 1997 the Company's Board of Directors adopted a 1997 Employee
Stock Option Plan ("1997 Plan"), approved by the stockholders at the June 23,
1997 Annual Stockholders Meeting, covering an aggregate of 1,500,000 shares of
Common Stock and restricting the granting of options to purchase approximately
675,000 shares of Common Stock authorized under previous stock option plans. As
of September 30, 1997 the Company has issued options to purchase 636,500 shares
of Common Stock at prices ranging from $0.22 to $0.25 under the 1997 Plan to
employees of FCI Environmental and Directors of the Company.
STOCK BONUS PLANS
On February 20, 1990, the Company's stockholders authorized the Board of
Directors to design and implement a stock bonus plan providing for the issuance
of up to 143,000 shares of Common Stock which have been registered and reserved
for issuance. In May 1990, the Board of Directors adopted the Company's Employee
Stock Bonus Plan ("Bonus Plan"). Pursuant to the Bonus Plan, full-time employees
of the Company will be granted a stock bonus equivalent to 15% of their annual
salary. The stock granted under the Bonus Plan is vested at a rate of 20% per
year. However, an employee must work 12 consecutive months before any stock is
vested. All employees of the Company, including, but not limited to, its
executive officers, received shares under the Bonus Plan. As of September 30,
1996, all 143,000 shares of Common Stock were issued to and vested by employees.
For the fiscal years ended September 30, 1996 and 1997, no executive officer
received any shares of Common Stock under the Bonus Plan. In addition, an
aggregate of 15,000 shares of Common Stock are available to be granted as bonus
compensation at the discretion of the Managing Committee ("Discretionary Bonus
Plan"). As of September 30, 1997, 8,500 Discretionary Bonus Plan shares have
been issued to employees of the Company. For the fiscal years ended September
30, 1996 and 1997, no shares of Common Stock under the Discretionary Bonus Plan
were granted to any executive officers nor to any other employee.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides for indemnification of
directors in conformity with Section 145 of the Delaware General Corporation
Law, as amended (the "DGCL"), which authorizes the Company to indemnify any
director under certain prescribed circumstances and subject to certain
limitations against certain costs and expenses, including attorneys' fees
actually and reasonably incurred in connection with any action, suit or
proceeding, whether civil, criminal, administrative or investigative, to which
such person is a party by reason of being a director of the Company if it is
determined that such person acted in accordance with the applicable standard of
conduct set forth in such statutory provisions.
47
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
CERTAIN TRANSACTIONS
The Company entered into an agreement effective June 30, 1992, to sell its
wholly-owned subsidiary, AgriBioTech, Inc. ("ABT"), to the Company's former
President, its former Vice-President, its former Chairman of the Board and a
fourth individual (collectively, the "Purchaser"). The Purchaser agreed to
purchase all of the issued and outstanding shares of common stock of ABT, which
were all owned by the Company, for the approximate book value of ABT. The net
sales price of $425,559 was payable in four equal installments of principal plus
interest at a rate of 8% per annum, commencing on July 1, 1993 and annually
thereafter until paid in full. As of September 30, 1996, the entire principal
and accrued interest had been paid in full.
In March 1994, the Company's Board of Directors approved a plan by which
employees and directors of the Company and its subsidiaries would be given an
opportunity to exercise stock options eligible under the Company's early
incentive plan through the execution of promissory notes. As of March 15, 1994,
the Company received promissory notes aggregating $1,815,099 for the exercise of
1,210,066 stock options. The promissory notes bear interest at 5% per annum
until September 15, 1994, and at 7% per annum thereafter, and were initially due
on September 15, 1995. On April 7, 1995, the Board of Directors extended the due
date of the notes to March 15, 1998. As of April 4, 1997 an aggregate of
$277,916 had been paid on these notes, an aggregate of $47,999 of interest had
been paid, and an additional $248,212 of interest had been accrued (through
December 31, 1996) but remained unpaid.
In conjunction with the temporary reduction of the exercise prices of the
options and warrants effective April 4, 1997 and Class D Warrants effective
April 17, 1997, as described above, the remaining unpaid principal on the
promissory notes could be fully paid in an amount determined by multiplying the
unpaid balance by a fraction, the numerator of which was the revised exercise
price, and the denominator of which was $1.50 (the original exercise price). If
the unpaid principal was not so paid by May 16, 1997 the underlying collateral
shares would be forfeited and all unpaid principal and accrued interest would be
extinguished. The Company did not want to penalize the employees and directors
by requiring payment of the promissory notes. The Company believes that it must
provide an incentive when it is compensating employees and directors for
services rendered to the Company in the form of non-cash compensation.
As a result, the Company received $160,875 in payment for 520,252 escrowed
shares at prices ranging from $0.30 to $0.32 per share, which amount liquidated
$780,379 of original note principal. The remaining $756,804 of unpaid note
principal was extinguished and the underlying collateral of 504,535 shares were
forfeited to the Company and immediately canceled, thereby reducing the total
number of shares outstanding. Unpaid accrued interest receivable aggregating
$248,212 was expensed.
Walter Haemmerli, a director of the Company, advanced the Company $75,000 on
February 24, 1998, and Melvin W. Pelley, the Company's Chief Financial Officer,
advanced the Company $25,000 on February 27, 1998, and an additional $25,000 on
July 1, 1998. Each of these advances is evidenced by a separate promissory note
bearing interest at the rate of 8% per annum and due on or before August 31,
1998. Messrs. Haemmerli and Pelley have each agreed to extend the due dates of
their respective promissory notes until the completion of the Rights Offering.
48
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 16, 1998, certain
information concerning those persons known to the Company, based on information
obtained from such persons, with respect to the beneficial ownership (as such
term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) of
shares of Common Stock, $.0001 par value, of the Company by (i) each person
known by the Company to be the owner of more than 5% of the outstanding shares
of Common Stock, (ii) each Director and executive officer of the Company and its
subsidiaries, (iii) each executive officer named in the Summary Compensation
Table and (iv) all Directors and officers as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) OF CLASS(2)
- --------------------------------------------------------- ---------------------- -------------
<S> <C> <C>
Geoffrey F. Hewitt(3).................................... 814,329(5) 3.0%
Byron A. Denenberg ...................................... 220,000(6) (4)
RCT Systems, Inc.
327 Messner Drive
Wheeling, IL 60090
Irwin J. Gruverman ...................................... 339,470(7) 1.3%
30 Ossipee Road
Newton, MA 02164
Walter Haemmerli ........................................ 3,785,844(8) 12.9%
Manport AG
Basteiplatz 3, CH 8001
Zurich, Switzerland
Gerald T. Owens ......................................... 271,823(9) 1.0%
147 Paddington Way
San Antonio, TX 78209
Melvin W. Pelley(3)...................................... 473,863(10) 1.8%
Thomas A. Collins(3)..................................... 295,000(11) 1.1%
All Directors and Officers as a Group (7 persons)........ 6,200,329 19.9%
</TABLE>
- ------------------------
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole investment power with respect to all shares of Common Stock
beneficially owned by them. A person is deemed to be the beneficial owner
of securities that can be acquired by such person within 60 days from the
date hereof upon the exercise of warrants or options or upon the conversion
of convertible securities. Each beneficial owner's percentage ownership is
determined by assuming that options or warrants or shares of Convertible
Preferred Stock that are held by such person (but not those held by any
other person) and which are exercisable or convertible within 60 days from
the date hereof have been exercised or converted.
(2) Based on 26,441,207 shares issued and outstanding as of September 16, 1998.
(3) The address of this person is c/o FCI Environmental, Inc., 1181 Grier
Drive, Suite B, Las Vegas, Nevada 89119.
(4) Represents less than one percent ownership.
(5) Includes an aggregate of 726,247 shares of Common Stock issuable upon
exercise of a like number of options of which 261,247 expire on September
30, 1998.
(6) Includes an aggregate of 88,142 shares of Common Stock issuable upon
exercise of a like member of options.
49
<PAGE>
(7) Includes 107,680 shares of Common Stock issuable upon exercise of a like
number of options of which 8,680 expire on September 30, 1998. Also
includes 67,500 shares of Common Stock held by G&G Diagnostics, L.P. I,
48,200 shares of Common Stock held by G&G Diagnostics, L.P. II, and 8,161
shares of Convertible Preferred Stock convertible into 81,610 shares of
Common Stock held by G&G Diagnostics, L.P. III, all of which Mr. Gruverman
is a principal.
(8) Includes 32,000 Class D Common Stock Purchase Warrants, 3,586 shares of
Convertible Preferred Stock convertible into 35,860 shares of Common Stock,
and an aggregate of 65,000 shares of Common Stock issuable upon exercise of
a like number of options. Also includes 704,000 shares of Common Stock,
863,800 Class D Common Stock Purchase Warrants, and 165,286 shares of
Convertible Preferred Stock convertible into 1,652,860 shares of Common
Stock, all held by Privatbank Vermag A.G., Chur, Switzerland, as custodian
for certain customers, of which company Mr. Haemmerli is Vice-Chairman.
Also includes $150,000 of Senior Convertible 8% notes convertible into
367,824 shares of Common Stock held by Manport AG, of which company Mr.
Haemmerli is Chief Executive Officer.
(9) Includes 39,965 Class D Common Stock Purchase Warrants and an aggregate of
127,000 shares of Common Stock issuable upon exercise of a like number of
options of which 10,000 expire on September 30, 1998.
(10) Includes an aggregate of 255,000 shares of Common Stock issuable upon
exercise of a like number of options.
(11) Includes an aggregate of 295,000 shares of Common Stock issuable upon
exercise of a like number of options.
PLAN OF DISTRIBUTION
The Rights are being granted by the Company to Securityholders for no
consideration and the Units being offered by the Company are being offered for
sale at a price of $.22 per Unit on a best efforts, no minimum, basis, except
that certain members of the Company's Management have agreed to exercise Rights
being granted to them pursuant to the offering to purchase 171,867 Units and
have also agreed to purchase up to an additional 1,136,363 Units which remain
unsubscribed for by Rights holders.
The Units, shares of Common Stock and Class E Warrants (and shares of Common
Stock issuable upon exercise of the Class E Warrants) offered by the Selling
Securityholders ("Selling Securityholders' Securities") named below may be sold
by them in one or more transactions in the over-the-counter market, in
negotiated transactions or a combination of such methods of sale, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. The position or office with the Company
held by each Selling Securityholder (other than Privatbank, which holds no
position or office), and any other material relationship between a Selling
Securityholder and the Company or any of its affiliates during the three years
prior to the date of this Prospectus are set forth under the captions
"Management" and "Certain Transaction" elsewhere in this Prospectus.
The Selling Securityholders' Securities may be sold from time to time by the
Selling Securityholders and/or by their respective assignees, transferees,
pledgees or other successors for their respective accounts. Alternatively, the
Selling Securityholders' Securities may be offered through underwriters, dealers
or agents. The distribution of the Selling Securityholders' Securities by them
may be effected from time to time in one or more transactions that may take
place in the over-the-counter market including (a) ordinary broker's
transactions and transactions in which the broker solicits purchasers; (b)
privately negotiated transactions or pledges; (c) through sales to one or more
broker-dealers for re-sale of such securities for their own account as
principals, pursuant to this Prospectus; (d) in a block trade (which may involve
crosses) in which the broker or dealer so engaged will attempt to sell the
securities as agent, but may position and resell a portion of the block as
principal to facilitate the transaction; or (e) in exchange
50
<PAGE>
distributions and/or secondary distributions, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage fees
or commissions may be paid by these holders in connection with such sales.
The Selling Securityholders, their respective transferees, intermediaries,
donees, pledgees or other successors in interest through whom the Selling
Securityholders' Securities are sold may be deemed "underwriters" within the
meaning or Section 2(11) of the Securities Act, with respect to the securities
offered and any profits realized or commissions received may be deemed to be
underwriting compensation. Any broker-dealers that participate in the
distribution of the Selling Securityholders' Securities may be deemed to be
"underwriters," as defined in the Securities Act, and any commissions,
discounts, concessions or other payments made to them, or any profits realized
by them upon the resale of any Selling Securityholders' Securities purchased by
them as principals, may be deemed to be underwriting commissions or discounts
under the Securities Act.
The Company will pay all expenses incident to the offering and sale of the
Selling Securityholders' Securities to the public except as described
hereinafter. The Company will not pay, among other expenses, commissions and
discounts of underwriters, dealers or agents.
There can be no assurance that any of the Selling Securityholders will sell
any or all of the Selling Securityholders' Securities offered by them hereunder.
The sale of the Shares is subject to the Prospectus delivery and other
requirements of the Securities Act. To the extent required, the Company will use
its best efforts to file and distribute, during any period in which offers or
sales are being made, one or more amendments or supplements to this Prospectus
of a new registration statement to describe any material information with
respect to the plan of distribution not previously disclosed in this Prospectus,
including, but not limited to, the number of securities being offered and the
terms of the offering, including the name or names of any underwriters, dealers
or agents, if any, the purchase price paid by the underwriter for securities
purchased from a Selling Securityholder, any discounts, commissions or
concessions allowed or reallowed or paid to dealers and the proposed selling
price to the public.
Under the Exchange Act and the regulations thereunder, any person engaged in
a distribution of the securities of the Company offered by this Prospectus may
not simultaneously engage in market-making activities with respect to the Common
Stock of the Company during the applicable "cooling off" period five business
days prior to the commencement of such distribution, in addition, and without
limiting the foregoing, the Selling Securityholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation, Regulation M, in connection with
transactions in the securities, which provisions may limit the timing of
purchases and sales of securities by the Selling Securityholders.
SELLING SECURITYHOLDERS
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock by each Selling
Securityholder before the offering, the number of Units (each consisting of one
share of Common Stock and one Class E Warrant) to be offered and the beneficial
ownership of Common Stock immediately after the offering assuming the securities
to
51
<PAGE>
be offered by them are sold, in which case none of the Selling Securityholders
would beneficially own any Units or Class E Warrants after the offering:
<TABLE>
<CAPTION>
NUMBER OF UNITS
(EQUAL TO NUMBER OF
CLASS E WARRANTS) SHARES OF COMMON
SHARES OF COMMON NUMBER OF UNITS, STOCK
STOCK BENEFICIALLY BENEFICIALLY OWNED COMMON STOCK, BENEFICIALLY OWNED
OWNED PRIOR TO IMMEDIATELY PRIOR TO CLASS E WARRANTS AFTER
OFFERING(1)(2) THE OFFERING AND UNDERLYING THE OFFERING(3)
--------------------- --------------------- COMMON STOCK ---------------------
SELLING SECURITYHOLDER NUMBER % NUMBER % BEING REGISTERED NUMBER %
- -------------------------------- ---------- --------- ---------- --- ----------------- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Geoffrey F. Hewitt(4)........... 814,329(5) 3.0 249,293 2.7 249,293 Units 814,329 2.2
249,293 Shs.
249,293 War.
249,293 Shs.
- ------------------------------------------------------------------------------------------------------------------------
Byron A. Denenberg(4)........... 220,000(6) (7) 235,240 2.6 235,240 Units 220,000 (7)
235,240 Shs.
235,240 War.
235,240 Shs.
- ------------------------------------------------------------------------------------------------------------------------
Irwin J. Gruverman(4)........... 339,470(8) 1.3 235,892 2.6 235,892 Units 339,470 (7)
235,892 Shs.
235,892 War.
235,892 Shs.
- ------------------------------------------------------------------------------------------------------------------------
Walter Haemmerli(4)............. 3,785,844(9) 12.9 260,362 2.9 260,362 Units 3,785,844 9.8
260,362 Shs.
260,362 War.
260,362 Shs.
- ------------------------------------------------------------------------------------------------------------------------
Melvin W. Pelley(4)............. 473,863 10) 1.8 281,988 3.1 281,988 Unit 473,863 1.3
281,988 Shs.
281,988 War.
281,988 Shs.
- ------------------------------------------------------------------------------------------------------------------------
Dale W. Conrad(4)............... 415,840 11) 1.6 45,455 (7) 45,455 Units 415,840 1.2
45,455 Shs.
45,455 War.
45,455 Shs.
- ------------------------------------------------------------------------------------------------------------------------
Privatbank Vermag AG ........... 3,220,660 12) 11.1 130,000 1.4 130,000 Units 3,220,660 8.4
Postfach CH-7001 Chur, 130,000 Shs.
Switzerland(4) 130,000 War.
130,000 Shs.
- ------------------------------------------------------------------------------------------------------------------------
Total........................... 9,270,006 1,438,230 1,438,230 Units 9,270,006
1,438,230 Shs.
1,438,230 War.
1,438,230 Shs.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole investment power with respect to all shares of Common Stock
beneficially owned by them. A person is deemed to be the beneficial owner
of securities that can be acquired by such person within 60 days from the
date hereof upon the exercise of warrants or options or upon the conversion
of convertible securities. Each beneficial owner's percentage ownership is
determined by assuming that options or warrants or shares of Convertible
Preferred Stock that are held by such person (but not those held by
52
<PAGE>
any other person) and which are exercisable or convertible within 60 days
from the date hereof have been exercised or converted.
(2) Based on 26,441,207 shares issued and outstanding as of September 17, 1998.
(3) Based on 35,548,169 shares to be outstanding following this offering.
(4) Geoffrey F. Hewitt is Chairman of the Board of Directors, Chief Executive
Officer and President of the Company, as well as Chief Executive Officer of
FCI Environmental, Inc.; Byron A. Denenberg is a director of the Company;
Irwin J. Gruverman is a director of the Company; Walter Hammerli is a
director of the Company and is a director and Vice-Chairman of Privatbank
Vermag AG; Melvin W. Pelley is Chief Financial Officer and Secretary of the
Company and Chief Financial Officer of FCI Environmental, Inc.; Dale W.
Conrad was a Director of the Company and Chairman of the Board of FCI
Environmental, Inc. until his resignation on April 8, 1998. See "Certain
Transactions" and "Management" for other material relationships of Selling
Securityholders.
(5) Includes an aggregate of 726,247 shares of Common Stock issuable upon
exercise of a like number of options of which 261,247 expire on September
30, 1998.
(6) Includes an aggregate of 88,142 shares of Common Stock issuable upon
exercise of a like member of options.
(7) Represents less than one percent ownership.
(8) Includes 107,680 shares of Common Stock issuable upon exercise of a like
number of options of which 8,680 expire on September 30, 1998. Also
includes 675,000 shares of Common Stock held by G&G Diagnostics, L.P. I,
48,200 shares of Common Stock held by G&G Diagnostics, L.P. II, and 8,161
shares of Convertible Preferred Stock convertible into 81,610 shares of
Common Stock held by G&G Diagnostics, L.P. III, all of which Mr. Gruverman
is a principal.
(9) Includes 32,000 Class D Common Stock Purchase Warrants, 3,586 shares of
Convertible Preferred Stock convertible into 35,860 shares of Common Stock,
and an aggregate of 65,000 shares of Common Stock issuable upon exercise of
a like number of options. Also includes 704,000 shares of Common Stock,
863,800 Class D Common Stock Purchase Warrants, and 165,286 shares of
Convertible Preferred Stock convertible into 1,652,860 shares of Common
Stock, all held by Privatbank Vermag A.G., Chur Switzerland, as custodian
for certain customers, of which company Mr. Haemmerli is Vice-Chairman.
Also includes $150,000 of Senior Convertible 8% notes convertible into
367,824 shares of Common Stock held by Manport AG, of which company Mr.
Haemmerli is Chief Executive Officer.
(10) Includes an aggregate of 255,000 shares of Common Stock issuable upon
exercise of a like number of options.
(11) Includes an aggregate of 120,000 shares of Common Stock issuable upon
exercise of a like number of options.
(12) Includes shares beneficially owned by Walter Haemmerli. See Note (9).
53
<PAGE>
DESCRIPTION OF SECURITIES
UNITS
The Company will offer 8,976,962 Units to owners of its Common Stock,
Preferred Stock and Warrants as of the close of business on the Record Date, at
a purchase price of U.S.$.22 per Unit. Each Unit offered will consist of one
share of Common Stock and one Class Warrant to purchase an additional share of
Common Stock. The Class E Warrants shall be immediately transferable separately
from the shares of Common Stock.
The following summary descriptions of the Company's securities are qualified
in their entirety by reference to the Company's Certificate of Incorporation and
By-Laws, copies of which are available upon request of the Company.
COMMON STOCK
The Company is authorized to issue 150,000,000 shares of Common Stock,
$.0001 par value, of which 26,441,207 shares of Common Stock are issued and
outstanding. As of September 16, 1998, there were approximately 464 record
holders of Common Stock. All of the outstanding shares of Common Stock are duly
and validly issued, fully paid and non-assessable, and the shares of Common
Stock included in the Units and the shares of Common Stock issuable upon
exercise of the Class E Warrants, upon payment of the purchase price for the
Units and the exercise price of the Class E Warrants, as the case may be, will
be duly and validly issued, fully paid and non-assessable.
Subject to the rights of the holders of Preferred Stock, holders of Common
Stock are entitled to receive, pro rata, such dividends and distributions as
may, from time to time, be declared by the Board of Directors, from funds
legally available therefor. The Company has not paid any cash dividends on its
Common Stock and does not anticipate paying cash dividends in the foreseeable
future. See "Dividend Policy". In the event of liquidation, dissolution or
winding up of the Company, holders of Common Stock are entitled to share ratably
in all assets of the Company available for distribution to holders of Common
Stock, subject to the rights of creditors and holders of Preferred Stock. The
holders of Common Stock are not subject to redemption, further calls or
assessments by the Company. Holders of Common Stock have no preemptive,
subscription or conversion rights.
Holders of Common Stock are entitled to one vote per share on all matters
submitted to the stockholders, and the holders of the majority of the
outstanding shares of Common Stock currently constitute a quorum at any meeting
of stockholders.
Since the Common Stock does not have cumulative voting rights, holders of
more than 50% of the outstanding shares can elect the Directors of the Company.
However, the Company's Board of Directors is divided into three classes, each of
which is to be elected for three-year terms. As the term of each class expires,
Directors of that class are elected for full three-year terms. The Company's
Board of Directors currently has five Directors.
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of Preferred Stock,
$.001 par value. The Preferred Stock may be issued by the Company's Board of
Directors from time to time in one or more series. The Board of Directors is
authorized to determine the rights, preferences, privileges and restrictions,
including the dividend rights, conversion rights, voting rights, terms of
redemption (including sinking fund provisions, if any) and liquidation
preferences, of any series of Preferred Stock and to fix the number of shares of
any such series without any further vote or action by stockholders.
An aggregate of 437,017 shares of Convertible Preferred Stock were issued in
connection with the August and December 1993 private placements of Convertible
Preferred Stock by the Company, of which
54
<PAGE>
218,998 shares are currently outstanding. The Company has been engaged in
preliminary discussions to convert certain debt into Preferred Stock, although
no understandings, commitments or arrangements to issue any other shares of
Preferred Stock have been reached. Although the Company has no present intention
to issue Preferred Stock to discourage or defeat efforts to acquire control of
the Company through the acquisition of shares of its Common Stock, it has the
ability to do so through the issuance of Preferred Stock. See "Risk
Factors--Preferred Stock Authorized."
Each share of the Convertible Preferred Stock is convertible into ten shares
of the Company's Common Stock. The conversion ratio is subject to customary
anti-dilution provisions including, but not limited to, new issuances of Common
Stock below $1.50 per share and is, therefore, expected to be adjusted upon the
completion of the Offering. Holders of Convertible Preferred Stock vote together
with the holders of Common Stock as one class on all matters submitted to a vote
of stockholders, except where a class vote of preferred stock may be required by
law. Holders of Convertible Preferred Stock have ten votes per share on all
matters presented to the stockholders for action. Dividends are cumulative and
are payable annually on November 1st, in cash (11%) or additional shares of
Convertible Preferred Stock (8% on the number of shares owned at date of
declaration) at the sole discretion of the holders. The Convertible Preferred
Stock entitles the holder to a liquidation preference of $15 per share upon
liquidation, dissolution or winding up of the Company. The Convertible Preferred
Stock is redeemable by the Company when and if the closing bid price of the
Company's Common Stock is at least 200% of the Conversion Price for twenty
consecutive trading days. Upon redemption, the Company would issue ten shares of
its Common Stock for each share of Convertible Preferred Stock.
DIVIDEND POLICY
Pursuant to the terms of the Company's Convertible Preferred Stock,
dividends are payable annually on November 1st. The holders of the Convertible
Preferred Stock may elect to receive their dividend payments in cash at a rate
of 11% of the liquidation value, or in additional shares at the rate of 8% the
number of shares of Convertible Preferred Stock held by such holder on the date
of declaration. In September 1997, the Company's Board of Directors determined
that, in view of the recent trading price of the Company's Common Stock and in
view of the Company's current cash position, it would not be appropriate to
declare the annual dividend payable on the Convertible Preferred Stock on
November 1, 1997. As a result, that dividend will accumulate in accordance with
the terms of the Convertible Preferred Stock. No assurance can be given that the
Company will be able to make dividend distributions in the future if the holders
of the Convertible Preferred Stock request cash.
The payment of dividends by the Company is within the discretion of its
Board of Directors and depends in part upon the Company's earnings, capital
requirements and financial condition. Since its inception, the Company has not
paid any dividends on its Common Stock and does not anticipate paying such
dividends in the foreseeable future. The Company intends to retain earnings, if
any, to finance its operations.
CLASS E WARRANTS
Each Class E Warrant entitles the holder thereof to purchase one share of
the Company's Common Stock from October 23, 1998 through October 23, 2003 at an
exercise price of $.25 per share through October 23, 1999; $.35 per share from
October 24, 1999 through October 23, 2000; $.50 per share from October 24, 2000
through October 23, 2001; $.70 per share from October 24, 2001 through October
23, 2002; and $.90 per share from October 24, 2002 through October 23, 2003.
The Class E Warrant may be redeemed by the Company, if for any period of 30
consecutive trading days the last reported sales price for each trading day
during such period is at least 200% of the then current exercise price, subject
to adjustment. The Company may then, upon notice to the registered holders,
redeem the Class E Warrants at a price of $.05 per warrant.
55
<PAGE>
The Class E Warrants contain provisions that protect the holders thereof
against dilution. The exercise price is subject to adjustment in the event of
stock splits, stock dividends, reclassifications, recapitalizations,
reorganizations, mergers or consolidations of the Company and certain other
events.
The Class E Warrants may be exercised upon surrender of the Class E Warrant
certificate on or prior to the expiration date at the offices of the Company,
with the exercise form on the reverse side of the Class E Warrant certificate
completed and executed as indicated, accompanied by full payment of the exercise
price (by check payable to the Company) for the number of Class E Warrants being
exercised. The Class E Warrant holders do not have the right or privileges of
holders of Common Stock.
The Company is required to have a current registration statement on file
with the Securities and Exchange Commission and to effect appropriate
qualifications under the laws and regulations of the states in which the holders
of Class E Warrants reside in order to comply with applicable laws in connection
with the exercise of the Class E Warrants and the resale of the shares of Common
Stock issuable upon such exercise. The Company will be required to file
post-effective amendments or supplements to its registration statement when
subsequent events require such amendments or supplements in order to continue
the registration of the Class E Warrants, and the shares issuable upon exercise
of the Class E Warrants and to take appropriate action under state securities
laws. There can be no assurance that the Company will be able to keep its
registration statement current or to effect appropriate action under applicable
state securities laws, the failure of which may prevent the sale of the Class E
Warrants and the exercise of the Class E Warrants and resale or other
disposition of the underlying shares to be effected.
Corporate Stock Transfer located in Denver Colorado, will act as the Warrant
Agent with respect to the Class E Warrants.
CLASS D AND OTHER WARRANTS
There are 2,664,103 Class D Warrants authorized, 1,895,175 of which are
currently outstanding. Each Class D Warrant entitles the holder thereof to
purchase one share of Common Stock at $1.15 per share through September 15,
1998, $1.20 per share though September 15, 1999 and $1.25 per share through the
expiration date of September 15, 2000. The Class D Warrants contain provisions
that protect the holders thereof against dilution by adjustment of the exercise
price and the number of Class D Warrants in certain events including, but not
limited to, stock dividends, stock splits, reclassifications, mergers and
similar transactions. Upon the issuance of any shares at a price lower than the
then current exercise price of the Class D Warrants, but not for the exercise of
any outstanding options, warrants or bonds, the exercise price of the Class D
Warrants will be reduced proportionately. Holders of Class D Warrants do not
possess any rights as a stockholder of the Company. The Company's Board of
Directors has agreed that the Company will not redeem any of such Class D
Warrants prior to their expiration.
REG S WARRANTS
The Reg S Warrants were issued as part of a foreign offering in May 1996.
Each Warrant entitles the holder thereof to purchase one share of Common Stock
at an exercise price of $1.00, subject to adjustment in certain events, at any
time on or before May 30, 2001 (the "Warrant Expiration Date"). The Exercise
Price is subject to adjustment upon the occurrence of certain events, including
but not limited to: (i) stock dividends and certain other distributions; (ii)
the subdivision, combination or reclassification of outstanding shares of Common
Stock; (iii) issuances to all shareholders of the Company of rights or warrants
to acquire shares of Common Stock at a price less than the then current market
price for the Common Stock; (iv) issuances of Common Stock at a price less than
the then fair market value, and (v) the distribution to all holders of Common
Stock of debt securities of the Company or options or rights or warrants to
purchase securities of the Company (excluding those rights and warrants referred
to above and cash dividends or distributions from current or retained earnings).
The Company may at any time or from time
56
<PAGE>
to time reduce the Exercise Price temporarily or permanently. Holders of Reg S
Warrants do not have any of the rights or privileges of stockholders of the
Company.
The Reg S Warrants are subject to redemption at a price of $.05 per warrant
(the "Redemption") at any time after May 13, 1997, if the average closing market
price for the Common Stock as quoted on NASDAQ, or any subsequent exchange or
market system on which the Common Stock is traded, has been at least two hundred
percent (200%) of the Exercise Price for thirty (30) consecutive days.
In September 1995, the Company authorized the issuance of warrants to
purchase an aggregate of 75,000 shares of Common Stock at an exercise price of
$.90 per share to two entities for consulting services.
On February 15, 1996, for nominal consideration, the Company issued warrants
to purchase at initially $0.80 per share an aggregate of 353,125 shares
(subsequently adjusted to $.4078 per share and warrants to purchase 692,742
shares) of Common Stock to Rauscher Pierce & Clark Limited in partial
consideration for its services as placement agent in connection with the
offering of 8% Senior Convertible Notes.
On May 31, 1996, the Company issued warrants to purchase an aggregate of
333,333 shares of Common Stock at an exercise price of initially $.90 per share
(subsequently adjusted in accordance with the terms of warrants to purchase
1,280,411 shares at an exercise price of $0.2343 per share) to Rauscher Pierce &
Clark, Inc. and Rauscher Pierce & Clark Limited in partial consideration for
their services as placement agent in connection with the May Regulation S
Offering.
NOTES
On February 15, 1996, the Company completed an offering under Regulation S,
promulgated under the Securities Act of 1933, as amended (the "Offering"), of 8%
Senior Convertible Notes due February 15, 1999 (the "Notes"), for $2,825,000.
Interest on the Notes is to be paid semi-annually, commencing August 15, 1996,
at a rate of 8% per annum. The Notes are convertible into shares of common stock
of the Company (the "Common Stock") at a conversion price (the "Conversion
Price") of, initially, $0.80 per share at any time after March 26, 1996 and
before the close of business on February 14, 1999. The Conversion Price was to
be adjusted if the average closing bid price of the Common Stock during the 30
business days prior to February 15, 1997 was less than the Conversion Price.
Accordingly, the Conversion Price has been adjusted to $0.4078, a price
representing a 10% discount from the thirty-day average closing bid price of the
Common Stock for the 30 business days prior to February 15, 1997. As of June 30,
1998, an aggregate face amount of $1,225,000 of the Notes had been converted to
Common Stock resulting in the issuance of 1,742,851 shares of Common Stock.
Based on the adjusted Conversion Price of $0.4078, an aggregate of 3,923,456
shares of Common Stock would be issuable if the remaining $1,600,000 face amount
of Notes were converted.
REPORTS TO STOCKHOLDERS
The Company distributes to its stockholders annual reports containing
financial statements audited and reported upon by its independent certified
public accountants after the end of each fiscal year, and makes available such
other periodic reports as the Company may deem to be appropriate or as may be
required by law or by the rules or regulations of any stock exchange on which
the Company's Common Stock is listed. The Company's fiscal year end is September
30.
LEGAL MATTERS
The legality of the Units and underlying securities offered hereby will be
passed upon by Snow Becker Krauss P.C., 605 Third Avenue, New York, New York
10158. Snow Becker Krauss P.C. owns 300,000 shares of Common Stock and 6,250
Class D Warrants.
57
<PAGE>
TAX CONSEQUENCES RELATING TO THE RIGHTS OFFERING
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain material federal income tax
considerations to the Company and the stockholders relating to the Rights
Offering and the acquisition, ownership and disposition of the Units, the Common
Stock and the Class E Warrants.
This summary is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), applicable Treasury Regulations (the "Regulations"), and judicial
and administrative interpretations of the Code and Regulations, all as in effect
on the date of this Prospectus. It should be noted that the Code, the
Regulations, and any interpretations thereof are subject to change and that any
such change may be applied retroactively. Moreover, the summary does not discuss
all aspects of federal income taxation that may be relevant to a particular
stockholder in light of his, her or its personal investment circumstances or to
certain types of stockholders subject to special treatment under the federal
income tax laws (for example, banks, life insurance companies, tax-exempt
organizations and foreign taxpayers), and does not discuss any aspects of state,
local or foreign tax laws. This discussion is limited to stockholders who hold
the Common Stock upon which the Rights are to be distributed (the "Old Common
Stock"), the Rights, the Units, the Common Stock and the Class E Warrants as
capital assets.
FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY
No gain or loss will be recognized by the Company by reason of (1) the
distribution of the Rights, (2) the expiration of the Rights or Class E Warrants
without exercise, (3) the exercise of the Rights or Class E Warrants, or (4) the
receipt of cash for shares of Common Stock or Class E Warrants pursuant to the
exercise of the Rights or Class E Warrants.
FEDERAL INCOME TAX CONSEQUENCES TO THE STOCKHOLDERS
RECEIPT OF THE RIGHTS. No gain or loss will be recognized by a stockholder
upon receipt of the Rights.
TAX BASIS OF THE RIGHTS. The tax basis of the Rights will be determined by
allocating the tax basis of the Old Common Stock between the Old Common Stock
and the Rights in proportion to their respective fair market values on the date
of distribution. If the fair market value of the Rights on the date of
distribution is less than fifteen percent (15%) of the fair market value of the
Old Common Stock on such date, however, no such allocation will be made (and
thus, the basis of the Rights will be zero) unless the stockholder makes an
irrevocable election to do so. The election to allocate basis is to be made by
attaching a statement to the stockholder's federal income tax return filed for
the taxable year in which the Rights are received. The election, if made, will
apply to all of the Rights received by a stockholder pursuant to the Rights
Offering. If the Rights expire without exercise, as described below, the amount
of basis allocated to the Rights shall be reallocated to the Old Common Stock.
SALE OF THE RIGHTS. A stockholder will recognize gain or loss upon the sale
of the Rights in an amount equal to the difference between the amount realized
upon the sale and the stockholder's tax basis in the Rights. Such gain or loss
will be a capital gain or loss and will be considered long-term capital gain or
loss if the stockholder's holding period in the Rights is more than one year.
The holding period of the Rights will include the period during which the
stockholder held the Old Common Stock.
EXPIRATION OF UNEXERCISED RIGHTS. If a stockholder allows the Rights to
expire without exercise, such stockholder's tax basis in the Old Common Stock
will be the same as it was prior to the distribution of the Rights and no gain
or loss will be recognized by such stockholder on the expiration of such Rights.
EXERCISE OF THE RIGHTS AND ACQUISITION OF THE UNITS. No gain or loss will
be recognized by a stockholder upon the purchase of the Units pursuant to the
exercise of the Rights. However, a holder of a Right, who exercises same by the
cancellation of the principal amount and accrued interest on outstanding
debentures
58
<PAGE>
of the Company owned by the holder, will recognize ordinary income to the extent
of any such accrued interest which was not previously reported as income by the
holder.
TAX BASIS OF THE CLASS E WARRANTS AND COMMON STOCK. If the Rights are
exercised, the tax basis of the Units purchased thereby will be equal to the sum
of the price for the Units and the amount, if any, allocated to the tax basis of
the Rights as described above. The tax basis of the Units (each consisting of
one share of Common Stock and one Class E Warrant) will be allocated between the
shares of Common Stock and the Class E Warrants in proportion to their
respective fair market values on the date of issuance.
SALE OF THE CLASS E WARRANTS OR COMMON STOCK. Gain or loss will be
recognized by a stockholder upon the sale of the Class E Warrants or shares of
Common Stock in an amount equal to the difference between the amount realized on
the sale and the tax basis of the Class E Warrants or shares of Common Stock
sold. Such gain or loss will be a capital gain or loss and will be considered
long-term capital gain or loss if the holder's holding period in the Class E
Warrants or shares of Common Stock is more than one year. The holding period of
the Class E Warrants or shares of Common Stock will begin on the date of
exercise of the Rights.
EXERCISE OF THE CLASS E WARRANTS. No gain or loss will be recognized by a
holder of Class E Warrants upon the exercise thereof. If the Class E Warrants
are exercised, the holder's tax basis in the shares of Common Stock received
pursuant to such exercise will be equal to the sum of the tax basis of the Class
E Warrants exercised and the exercise price thereof. The holding period for the
shares of Common Stock received pursuant to such exercise will begin on the date
the Class E Warrants are exercised.
REDEMPTION OF CLASS E WARRANTS. If the Class E Warrants are redeemed by the
Company, gain or loss will be recognized by a holder in an amount equal to the
difference between the amount realized upon the redemption and the holder's tax
basis in the Class E Warrants. Such gain or loss will be a capital gain or loss
and will be considered long-term capital gain or loss if the holder's holding
period in the Class E Warrants is more than one year. The holding period of the
Class E Warrants will begin on the date of exercise of the Rights.
LAPSE OF THE CLASS E WARRANTS. If the Class E Warrants are allowed to
expire without exercise, loss will be recognized by the holder thereof in an
amount equal to such holder's tax basis in the Class E Warrants, as described
above. Such loss will be a capital loss and will be considered long-term capital
loss if the holder's holding period in the Class E Warrants is more than one
year. The holding period of the Class E Warrants will begin on the date of
exercise of the Rights.
Stockholders should consult their own tax advisers concerning the tax
consequences of the acquisition, holding or disposition of the Rights, Units,
Common Stock and Class E Warrants under applicable state and local laws. Foreign
stockholders should also consult their tax advisors regarding the foreign tax
consequences of the acquisition, holding or disposition of the Rights, Units,
Common Stock and Class E Warrants
EXPERTS
The consolidated financial statements of FiberChem, Inc. and subsidiaries as
of September 30, 1997 and for the two years in the period ended September 30,
1997 have been included herein and in the Registration Statement in reliance
upon the report of Goldstein Golub Kessler LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
On January 24, 1997, KPMG Peat Marwick LLP (the "Former Accountant")
resigned as the Company's principal accountants.
59
<PAGE>
The Former Accountant did not state any reason for resigning in its
resignation letter to the Company. However, in its letter to the Audit Committee
and its Material Weakness letter both dated January 10, 1997 and delivered
January 23, 1997, the Former Accountant reported "Disagreements with Management"
on financial accounting and reporting matters and auditing scope concerning
revenue recognition that, if not satisfactorily resolved (all of which were)
would have caused a modification of their report on the fiscal 1996 consolidated
financial statements. The disagreements, aggregating approximately $1,800,000,
concerned certain transactions termed "consignments" by the Former Accountant,
products warehoused for customers, and a research and development effort, none
of which met the requirements for revenue recognition under generally accepted
accounting principles.
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 January 7, 1998, the Former Accountant informed the Company
that they had "decided not to accept an engagement to reissue or consent " to
the use of their report dated January 10, 1997 on the Company's financial
statements for the fiscal year ended September 30, 1996, notwithstanding their
having led the Company to believe that they would reissue their report. The
Former Accountant specifically declined to give any reason for its decision.
On April 9, 1997, the Board of Directors appointed Goldstein Golub Kessler
LLP, certified public accountants, as the Company's successor accountant and to
audit the books of account and other records of the Company for the fiscal year
ended September 30, 1997. The Company subsequently retained Goldstein Golub
Kessler LLP to re-audit the Company's financial statements for the year ended
September 30, 1996.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form SB-2 under the Securities Act of
1933, as amended (the "Act"), with respect to the securities offered hereby.
This Prospectus does not contain all information set forth in the Registration
Statement, part of which has been omitted in accordance with the rules and
regulations of the Commission. For further information about the Company and the
securities offered hereby, reference is made to the Registration Statement,
copies of which are available for inspection from the Commission, including the
exhibits filed as a part thereof and otherwise incorporated therein. Statements
made in this Prospectus as to the contents of any document referred to are not
necessarily complete, and in each instance reference is made to such exhibit for
a more complete description and each such statement is qualified in its entirety
by such reference.
The Company is subject to the informational reporting requirements (File No.
0-17569) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports and other information with the
Commission. Such reports, proxies and other information can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington D.C. 20549 and the Regional Offices of
the Commission at 7 World Trade Center, Suite 1300, New York, New York 10048,
and Citicorp Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained at prescribed rates by writing to the
Securities and Exchange Commission, Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549. The Commission maintains a web site (http//
www.sec.gov.) that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
60
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FIBERCHEM, INC.
YEARS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<S> <C>
Independent Auditor's Report......................................................... F-1
Audited Financial Statements:
Balance Sheets..................................................................... F-2
Statement of Operations............................................................ F-3
Statement of Shareholders' Equity.................................................. F-4
Statement of Cash Flows............................................................ F-6
Notes to Financial Statements...................................................... F-8
NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
Balance Sheets--June 30, 1998 and September 30, 1997................................. F-19
Statement of Operations.............................................................. F-20
Statement of Stockholders' Equity.................................................... F-21
Statement of Cash Flows.............................................................. F-22
Notes to Financial Statements........................................................ F-24
</TABLE>
61
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors FiberChem, Inc.
We have audited the accompanying consolidated balance sheets of FiberChem,
Inc. and Subsidiaries as of September 30, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FiberChem,
Inc. and Subsidiaries as of September 30, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
losses from operations which raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
/s/ GOLDSTEIN GOLUB KESSLER LLP
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
February 13, 1998
F-1
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 3,065,572 $ 427,488
Accounts receivable, net of allowance for doubtful accounts of $204,711 and
$240,796 in 1996 and 1997, respectively......................................... 305,473 263,947
Inventories (Note 3).............................................................. 1,457,135 1,563,191
Prepaid expenses and other........................................................ 59,060 56,941
-------------- --------------
Total current assets.......................................................... 4,887,240 2,311,567
-------------- --------------
Equipment......................................................................... 616,192 716,465
Less accumulated depreciation..................................................... (483,827) (549,175)
-------------- --------------
Net equipment................................................................. 132,365 167,290
-------------- --------------
Other assets:
Patent costs, net of accumulated amortization of $1,436,309 at September 30, 1996
and $1,678,845 at September 30, 1997 (note 5)................................... 474,462 287,905
Technology costs, net of accumulated amortization and $354,942 at September 30,
1996 and and $386,373 at September 30, 1997 (note 4)............................ 114,764 83,333
Financing costs, net of accumulated amortization of $65,678 at September 30, 1996
and $148,298 at September 30, 1997 (note 6)..................................... 204,245 119,625
Other............................................................................. 247,383 0
-------------- --------------
Total other assets............................................................ 1,040,854 490,863
-------------- --------------
Total assets...................................................................... $ 6,060,459 $ 2,969,720
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
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-2
<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-3
<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>
F-4
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
NOTES
TREASURY RECEIVABLE
STOCK FOR
PREFERRED EXERCISE OF DEFERRED
STOCK DEFICIT 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.
F-6
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------
1996 1997
------------ -------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from common stock and warrant Units....................................... $ 3,000,000 $ --
Proceeds from senior convertible notes payable..................................... 2,825,000 --
Payment of financing costs......................................................... (773,987) --
Payments on note payable to bank and others........................................ (6,832) (16,319)
Cash restricted as security for note payable....................................... -- 18,456
Proceeds from the exercise of options and warrants................................. 242,626 86,040
Proceeds from interest and notes receivable for exercise of options................ 19,489 174,406
Payment of dividend on preferred stock............................................. (23,645) (46,171)
------------ -------------
Net cash provided by financing activities........................................ 5,282,651 216,412
------------ -------------
Net increase (decrease) in cash and cash equivalents................................. 2,154,386 (2,638,084)
Cash and cash equivalents at beginning of period..................................... 911,186 3,065,572
------------ -------------
Cash and cash equivalents at end of period........................................... $ 3,065,572 $ 427,488
------------ -------------
------------ -------------
Supplemental Cash Flow Information
Noncash investing and financing activities:
Senior convertible notes payable converted to common stock......................... $ 1,150,000 $ 25,000
Reduction in additional paid-in capital due to write down of notes receivable for
exercise of options.............................................................. -- 619,504
Reduction in common stock and additional paid-in capital upon cancellation of
shares held as collateral for notes receivable for the exercise of options....... -- 756,804
Unamortized deferred financing costs associated with senior convertible notes
payable converted to common stock................................................ 158,281 2,000
Preferred stock converted to common stock.......................................... 218,805 --
Preferred stock issued as dividends................................................ 228,210 208,635
Equipment purchased through capital lease.......................................... -- 21,273
Reduction in notes receivable for exercise of options in exchange for services..... 42,263 636
Retirement of treasury stock--preferred............................................ 150,000 --
------------ -------------
------------ -------------
Interest paid........................................................................ $ 100,101 $ 140,785
------------ -------------
------------ -------------
</TABLE>
The accompanying notes and independent auditor's reports should be read
in conjunction with the consolidated financial statements.
F-7
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1997
(1) NATURE OF BUSINESS AND LIQUIDITY
FiberChem, Inc. and its subsidiaries (collectively the "Company" or "FCI")
develops, produces, markets and licenses fiber optic chemical sensors (FOCS) for
environmental monitoring in the air, water and soil. The Company's primary
markets and potential customers are the petroleum production, refinery and
distribution chains. Other important markets and customers include remediation
companies, environmental consultants, shipping ports, airports and military
bases. The Company markets its products world-wide using strategic alliances,
distribution agreements and direct sales activities.
The Company's consolidated financial statements for the years ended
September 30, 1996 and 1997 have been prepared on a going concern basis which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The Company incurred a net loss of
$3,274,629 and $3,226,958 for the years ended September 30, 1996 and 1997,
respectively and as of September 30, 1997 had an accumulated deficit of
$29,596,509.
Management recognizes that the Company must generate additional revenues or
reductions in operating costs and may need additional financing to enable it to
continue its operations. The Company is reviewing alternatives for raising
additional capital including an offering (subject to, among other things,
approval by the SEC) of rights to purchase shares and warrants, to be offered to
holders of the Company's Common and Preferred Stock, Class D and all other
Warrants. The Company has engaged consultants to assist in raising additional
capital. (See Note 12.) However, no assurance can be given that forecasted sales
will be realized to achieve profitable operations, nor that additional
financing, if needed, can be obtained on terms satisfactory to the Company, if
at all, nor in an amount sufficient to enable the Company to continue
operations.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All inter-company
accounts and transactions have been eliminated. The Company accounts
for its 25% ownership in a Finnish company using the equity method of
accounting. The Company develops, produces, markets and licenses
fiber optic chemical sensors ("FOCS-TM-") 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.
F-8
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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 pending. Proven technologies
are amortized using the straight-line method over an eight year
period.
(f) Patent Costs
Costs incurred in acquiring, filing and prosecuting patents are
capitalized and amortized using the straight-line method over the
shorter of economic or legal life. All existing patents are being
amortized over eight years.
(g) Revenue Recognition
The Company recognizes revenue from product sales when title passes,
which is upon shipment of product to the customer. There is generally
no right of return except for normal warranties. Additionally, the
Company performs research and testing services for others under short
term contracts. Revenue on these contracts is recorded when services
are performed.
(h) Warranty
The Company warrants its products for a period of one year from the
date of delivery, provided the products are used under normal
operating conditions. The Company accrues a reserve based on
estimated future costs for product warranty, which is charged to cost
of sales at the time of sale.
(i) Research and Development
Research and development costs are expensed as incurred.
(j) Per Share Data
Loss per common share has been computed based upon weighted average
shares outstanding during the periods presented. Contingently
issuable shares have been excluded because of their anti-dilutive
effect.
In March 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share ("SFAS 128"), which modifies
existing guidance for computing earnings per share and requires the
disclosure of basic and diluted earnings per share. Under the new
standard, basic earnings per share is computed as earnings available
to common stockholders divided by weighted average shares outstanding
excluding the dilutive effects of stock options and other potentially
dilutive securities. Diluted earnings per share includes the dilutive
effect of these securities. The effective date of SFAS 128 is
December 15, 1997 and early adoption is not permitted. The Company
intends to adopt SFAS 128 during the quarter ending December 31,
1997. Had the provisions of SFAS 128 been applied to the Company's
results of operations for each of the two years in the period ended
September 30, 1997, the Company's basic loss per share would have
been $0.15 and $0.13 per share.
F-9
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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 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.
F-10
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(3) INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or market
and consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 439,392 $ 551,832
Work in process................................................... 21,305 24,643
Finished goods.................................................... 1,534,542 1,312,804
------------ ------------
Subtotal........................................................ 1,995,239 1,889,279
Valuation and obsolescence reserves, primarily against finished
goods........................................................... (538,104) (326,088)
------------ ------------
Net inventories $ 1,457,135 $ 1,563,191
------------ ------------
------------ ------------
</TABLE>
(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
F-11
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(6) NOTES PAYABLE (CONTINUED)
$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.
The maturities of the notes payable are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
Fiscal 1997..................................................... $ 7,315 $ 6,878
Fiscal 1998..................................................... 2,551 7,942
Fiscal 1999..................................................... 1,675,000 1,650,000
------------- -------------
$ 1,684,866 $ 1,664,820
------------- -------------
------------- -------------
</TABLE>
(7) STOCKHOLDERS' EQUITY
During Fiscal 1993 and Fiscal 1994, the Company conducted a private
placement of convertible preferred stock ("Convertible Preferred Stock"). Each
share of the Convertible Preferred Stock is convertible into ten shares of FCI
Common Stock, initially at $1.50 per share. The conversion ratio is subject to
customary anti-dilution provisions. Dividends are cumulative and are payable
annually, at the sole discretion of the holders, in cash (11%) or additional
shares of Convertible Preferred Stock (8% of the number of shares owned at date
of declaration). In November 1995, the Company paid cash dividends of $23,645
and issued 15,214 shares of Convertible Preferred Stock dividends. In November
1996, the Company paid cash dividends of $46,171 and issued 13,909 shares of
Convertible Preferred Stock dividends. The Convertible Preferred Stock entitles
the holder to a liquidation preference of $15 per share upon liquidation,
dissolution or winding up of the Company. The Convertible Preferred Stock is
redeemable by the Company when and if the closing bid price of FCI's Common
Stock is at least 200% of the conversion price for twenty consecutive trading
days. Upon redemption, the Company would issue ten shares of its Common Stock
for each share of Convertible Preferred Stock. During Fiscal 1996, 14,587 shares
of Convertible Preferred Stock were converted to 145,870 shares of Common Stock.
As of September 30, 1997, the Company had 218,998 shares of Convertible
Preferred Stock outstanding. On
F-12
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(7) STOCKHOLDERS' EQUITY (CONTINUED)
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
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,
F-13
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(7) STOCKHOLDERS' EQUITY (CONTINUED)
respectively, in interest. The remaining accrued interest of $228,927 at
September 30, 1996 is included in other long-term assets in accordance with the
April 1995 extension of the due date of the notes. The outstanding principal at
September 30, 1996 of $1,543,650 is included as a reduction of stockholders'
equity. In conjunction with the temporary reduction of the exercise prices of
the options and warrants effective April 4, 1997 and Class D Warrants effective
April 17, 1997, as described above, the remaining unpaid principal on the
Promissory Notes could be fully paid in an amount determined by multiplying the
unpaid balance by a fraction, the numerator of which was the revised exercise
price, and the denominator of which was $1.50 (the original exercise price). If
the unpaid principal was not so paid by May 16, 1997 the underlying collateral
shares would be forfeited and all unpaid principal and accrued interest would be
extinguished.
As a result, the Company received $160,875 in payment for 520,252 escrowed
shares at prices ranging from $0.30 to $0.32 per share, which amount liquidated
$780,379 of original note principal. The amount of $619,504 was charged to
additional paid in capital. The remaining $756,804 of unpaid note principal was
extinguished and the underlying collateral of 504,535 shares were forfeited to
the Company and immediately canceled, thereby reducing the total number of
shares outstanding (and resulting in a charge to common stock of the par value
of $50). Unpaid accrued interest receivable aggregating $248,212 was expensed.
In March 1994, the Company's Board of Directors adopted a 1994 Employee
Stock Option Plan ("1994 Plan"), approved by stockholders at the May 23, 1994
Annual Shareholders meeting, covering an aggregate of 1,000,000 shares of FCI
Common Stock. As of September 30, 1997, the Company has issued 984,885 stock
options, net of forfeitures and regrants, (with initial exercise prices ranging
from $1.00 per share to $2.125 per share and current exercise prices of $1.00
per share) under the 1994 Plan to employees of the Company's wholly-owned
subsidiary, FCI Environmental, Inc. ("Environmental"). An aggregate of 821,114
options remain exercisable under the 1994 Plan.
On April 7, 1995, the Company's Board of Directors resolved that all options
to purchase shares of the Company's Common Stock granted prior to April 7, 1995,
and which had an exercise price in excess of $1.00 per share, would as of April
7, 1995 have an exercise price of $1.00 per share, which price was above the
fair market value of the Common Stock as of the last quoted market trade on
April 7, 1995. Options to purchase an aggregate of 2,309,479 shares at prices
ranging from $1.125 to $2.125 per share were accordingly changed to $1.00 per
share.
In April 1995, the Company's Board of Directors adopted a 1995 Employee
Stock Option Plan ("1995 Plan"), approved by the stockholders at the May 8, 1995
Annual Shareholders meeting, covering an aggregate of 1,000,000 shares of FCI
Common Stock. As of September 30, 1997, the Company has issued 761,547 stock
options, net of forfeitures, (with initial and current exercise prices ranging
from $0.93 per share to $1.38 per share) under the 1995 Plan to employees of
Environmental and Directors of the Company. An aggregate of 643,942 options
remain exercisable under the 1995 Plan.
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
F-14
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(7) STOCKHOLDERS' EQUITY (CONTINUED)
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
EXERCISE EXERCISE
FIXED OPTIONS OPTIONS PRICE OPTIONS PRICE
- ---------------------------------------------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.............. 2,457,023 $ 1.00 1,670,552 $ 0.99
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>
F-15
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(7) STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at September 30, 1996 and 1997.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING WEIGHTED
RANGE OF NUMBER OUTSTANDING CONTRACTUAL AVERAGE
SEPTEMBER 30 EXERCISE PRICES AND EXERCISABLE LIFE EXERCISE PRICE
- --------------------- ---------------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
1996................. $ 0.93 - 1.00 1,670,552 3.75 years $ 0.99
1997................. $ 0.22 - 1.00 2,096,556 4.80 years $ 0.76
</TABLE>
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS No.123, net
loss and loss per share would have been adjusted to the pro forma amounts
indicated in the table below:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
---------------------------- ----------------------------
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Loss.......................... $ (3,274,629) $ (3,226,958) $ (3,490,698) $ (3,501,930)
Loss per share.................... $ (0.15) $ (0.13) $ (0.16) $ (0.14)
</TABLE>
No tax effect was applied in computing loss per share under SFAS No. 123.
The Company's assumptions used to calculate the fair values of options issued
was (i) risk-free interest rate of 6.0%, (ii) expected life of five years, (iii)
expected volatility of 172%, and (iv) expected dividends of zero.
(8) COMMITMENTS AND CONTINGENCIES
The Company entered into an agreement to lease office space for a five-year
period beginning in January 1990, which expired in January 1995. The Company and
the lessor have agreed to a month-to-month lease which is terminable by either
party upon 30 days notice. Monthly payments under the lease were originally
$8,807 and escalated approximately $1,300 every twelve months. Current base
monthly payments under the month-to-month lease are $12,786. Rent expense during
Fiscal 1996 and 1997 was $172,492 and $172,551, respectively. The Company is
pursuing alternatives, including a renewal of the month-to-month lease at
approximately the current base monthly rental charge.
Effective January 1, 1994, the Company implemented an Internal Revenue Code
Section 401(k) Profit Sharing Plan (the "Plan"). The Plan provides for voluntary
contributions by employees into the Plan subject to the limitations imposed by
Internal Revenue Code Section 401(k). The Company will match employee
contributions at a rate of 50% of the employee's contribution up to a maximum of
2% of the employee's compensation. The Company matching funds are determined at
the discretion of management and are subject to a five-year vesting schedule
from the date of original employment. The Company's 401(k) matching expense for
the years ended September 30, 1996 and 1997 totaled $18,508 and $21,263,
respectively.
The Company is involved in litigation incidental to its business. In the
opinion of the Company's management, the expected outcome of such litigation
will not have a material effect on the financial position of the Company, its
results of operations or its liquidity.
F-16
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(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:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Computed expected tax benefit................................... $ (1,113,374) $ (1,097,166)
Reduction in income tax benefit resulting from:
Non-deductible expenses....................................... 38,374 28,166
Increase in valuation allowance............................... 1,075,000 1,069,000
------------- -------------
Net tax benefit................................................. $ -- $ --
------------- -------------
</TABLE>
Components of net deferred tax assets as of September 30, 1996 and 1997 are
as follows:
<TABLE>
<CAPTION>
1996 CHANGE 1997
------------- ------------- -------------
<S> <C> <C> <C>
Deferred tax assets.............................. $ 7,889,000 $ 1,063,000 $ 8,952,000
Less valuation allowance......................... (7,873,000) (1,069,000) (8,942,000)
------------- ------------- -------------
Total net deferred tax assets.................... 16,000 (6,000) 10,000
Deferred tax liabilities......................... (16,000) 6,000 (10,000)
------------- ------------- -------------
Net deferred tax assets.......................... $ -- $ -- $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Deferred tax assets are comprised primarily of the tax effects of the net
operating loss carryforwards, reserve for inventory obsolescence and allowance
for doubtful accounts recorded for financial reporting purposes. Deferred tax
liabilities primarily represent the tax effect of the difference between
depreciation recorded for financial statement and income tax reporting purposes.
The Company has recorded a valuation allowance in accordance with the
provisions of Statement 109 to reflect the estimated amount of deferred tax
assets which may not be realized. In assessing the realizability of deferred tax
assets, Management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible.
At September 30, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $25,449,000 which are available to
offset future taxable income, if any, through 2012. However, carryforwards to
offset future taxable income is dependent upon having taxable income in the
legal entity originally incurring the loss and will be further limited in each
year to an amount equal to the Federal long-term tax exempt interest rate times
the entity's market value at the time a significant change in ownership
occurred. The Company cannot determine the effect of these limitations.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments was made in accordance with Statement of Financial Accounting
Standards No. 107 ("SFAS No. 107"), DISCLOSURE ABOUT FAIR VALUE
F-17
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OF FINANCIAL INSTRUMENTS. Accordingly, the aggregate fair value amounts
presented are not intended to represent the underlying value of the net assets
of the Company.
The carrying amounts at September 30, 1997 for cash, receivables, accounts
payable and accrued liabilities approximate their fair values due to the short
maturity of these instruments. In addition the estimated fair value of notes
payable approximates the related carrying value at September 30, 1997.
(11) MAJOR CUSTOMERS
During Fiscal 1997, the Company had sales to one customer of approximately
$985,000. During Fiscal 1996, the Company had sales to three customers of
$190,000, $100,000 and $93,000.
(12) SUBSEQUENT EVENTS
On October 2, 1997, the Company entered into an agreement with entrenet
Group, LLC ("entrenet") for advice and assistance in developing and executing
business plans, financing strategies and business partnerships, acquisitions and
mergers. For its services, entrenet will receive a cash fee of $5,000 per month
for twelve months; $60,000 in the form of a 10% convertible note, payable on the
earlier of (a) a financial transaction (as defined in the agreement) or (b) two
years; 5% of the value of any financial transaction (as defined in the
agreement); and 5% of any financing provided by or introduced directly by
entrenet.
F-18
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, JUNE 30,
1997 1998
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 427,488 $ 88,567
Accounts receivable, net of allowance for doubtful accounts of $240,796 at
September 30, 1997 and $104,206 at June 30, 1998.............................. 263,947 672,360
Inventories..................................................................... 1,563,191 1,485,319
Financing costs, net of accumulated amortization of $211,445.................... 211,445 53,480
Other........................................................................... 56,941 120,770
-------------- --------------
Total current assets.......................................................... 2,311,567 2,340,496
-------------- --------------
Equipment......................................................................... 716,465 706,464
Less accumulated depreciation..................................................... (549,175) (592,125)
-------------- --------------
Net equipment................................................................. 167,290 114,339
-------------- --------------
Other assets:
Patent costs, net of accumulated amortization of $1,678,845 at September 30,
1997 and $1,865,658 at June 30, 1998.......................................... 287,905 131,906
Technology costs, net of accumulated amortization of $386,373 at September 30,
1997 and $409,810 at June 30, 1998............................................ 83,333 59,895
Financing costs, net of accumulated amortization of $148,298.................... 119,625 --
-------------- --------------
Total other assets............................................................ 490,863 191,801
-------------- --------------
Total assets.................................................................. $ 2,969,720 $ 2,646,636
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Senior convertible notes payable................................................ $ -- $ 1,600,000
Current installments of notes payable........................................... 6,878 7,572
Accounts payable................................................................ 95,469 312,182
Accrued expenses................................................................ 307,891 578,793
Interest payable................................................................ 17,778 61,878
-------------- --------------
Total current liabilities..................................................... 428,016 2,560,425
Senior convertible notes payable.................................................. 1,650,000 --
Notes payable to officers, directors and affiliates............................... -- 650,000
Notes payable, net of current installments........................................ 7,942 2,093
-------------- --------------
Total liabilities............................................................. 2,085,958 3,212,518
-------------- --------------
Stockholders' equity:
Preferred stock, $.001 par value. Authorized 10,000,000 shares; 218,998
convertible shares issued and outstanding at September 30, 1997 and June 30,
1998; at liquidation value.................................................... 3,284,970 3,284,970
Common stock, $.0001 par value. Authorized 50,000,000 shares; 25,515,660 and
26,441,207 shares issued and outstanding at September 30 1997 and June 30,
1998, respectively............................................................ 2,552 2,644
Additional paid-in capital...................................................... 27,192,749 27,362,272
Deficit......................................................................... (29,596,509) (31,215,768)
-------------- --------------
Total stockholders' equity.................................................... 883,762 (565,882)
-------------- --------------
Total liabilities and stockholders' equity.................................... $ 2,969,720 $ 2,646,636
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements
F-19
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED NINE-MONTH PERIOD ENDED
---------------------------- ----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues............................................ $ 403,117 $ 538,017 $ 1,138,300 $ 1,004,889
Cost of revenues.................................... 285,267 224,021 672,369 451,589
------------- ------------- ------------- -------------
Gross profit...................................... 117,850 293,996 465,931 553,300
------------- ------------- ------------- -------------
Operating expenses:
Research, development and engineering............. 308,186 187,534 962,947 583,848
General and administrative........................ 287,547 294,119 900,053 874,483
Sales and marketing............................... 234,582 183,133 747,110 511,181
------------- ------------- ------------- -------------
Total operating expenses........................ 830,315 664,786 2,610,110 1,969,512
------------- ------------- ------------- -------------
Loss from operations............................ (712,465) (370,790) (2,144,179) (1,416,212)
------------- ------------- ------------- -------------
Other income (expense):
Interest expense.................................. (55,164) (84,807) (166,268) (205,598)
Interest income................................... 8,768 400 83,591 761
Other, net........................................ 0 0 (248,212) 1,790
------------- ------------- ------------- -------------
Total other income (expense).................... (46,396) (84,407) (330,889) (203,047)
------------- ------------- ------------- -------------
Net loss........................................ $ (758,861) $ (455,197) $ (2,475,068) $ (1,619,259)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Shares of common stock used in computing net loss
per share......................................... 25,816,895 26,042,828 25,748,517 25,752,189
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss per share.............................. $ (0.03) $ (0.02) $ (0.10) $ (0.06)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
F-20
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ----------- ----------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997....... 218,998 $ 3,284,970 25,515,660 $ 2,552 $ 27,192,749 ($ 29,596,509) 883,762
Common stock issued:
Exercise of options............. -- -- 5,000 1 1,099 -- 1,100
For services.................... -- -- 676,500 67 121,445 -- 121,512
Conversion of senior convertible
notes payable................. -- -- 244,047 24 46,979 -- 47,003
Net loss.......................... -- -- -- -- -- (1,619,259) (1,619,259)
--------- ----------- ----------- --------- ------------ ------------- -------------
Balance at June 30, 1998............ 218,998 $ 3,284,970 26,441,207 $ 2,644 27,362,272 (31,215,768) (565,882)
--------- ----------- ----------- --------- ------------ ------------- -------------
--------- ----------- ----------- --------- ------------ ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
F-21
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
----------------------------
JUNE 30 JUNE 30
1997 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................................................... $ (2,475,068) $ (1,619,259)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation.................................................................. 52,627 44,616
Amortization of patent and technology costs................................... 204,963 210,250
Amortization of financing costs............................................... 56,301 63,148
Accrued interest on notes receivable for exercise of options.................. (26,985) --
Write off of accrued interest on notes receivable for exercise of options..... 248,212 --
Reduction in notes receivable for the exercise of options in exchange for
services.................................................................... 636 --
Common stock issued for services.............................................. -- 121,512
Gain on sale of fixed assets.................................................. -- (1,790)
Provision for loss on accounts receivable..................................... 25,000 --
Inventory valuation allowance................................................. 25,000 --
Changes in assets and liabilities:
Increase in accounts receivable............................................. (337,225) (408,413)
Increase (decrease) in inventories.......................................... (416,625) 77,872
Increase (decrease) in other current assets................................. 6,192 (63,829)
Increase (decrease) in accounts payable..................................... (220,425) 216,713
Increase in accrued expenses................................................ 92,980 270,902
Increase in interest payable................................................ 33,500 56,100
------------- -------------
Net cash used in operating activities......................................... (2,730,922) (1,032,178)
------------- -------------
Cash flows from investing activities:
(Purchase) sale of equipment...................................................... (83,504) 10,125
Payments for patents.............................................................. (46,349) (30,813)
------------- -------------
Net cash used in investing activities....................................... (129,853) (20,688)
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
F-22
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
--------------------------
JUNE 30 JUNE 30
1997 1998
------------- -----------
<S> <C> <C>
Cash flows from financing activities:
Payments on notes payable........................................................... (14,790) (5,155)
Proceeds from the exercise of options and warrants.................................. 84,940 1,100
Proceeds from interest and notes receivable for exercise of options................. 173,488 --
Payment of dividend on preferred stock.............................................. (46,171) --
Proceeds from note payable to Privatbank............................................ -- 288,000
Proceeds from notes payable to officers and directors............................... -- 350,000
------------- -----------
Net cash provided by (used in) financing activities............................. 197,467 633,945
------------- -----------
Net decrease in cash and cash equivalents............................................. (2,663,308) (418,921)
Cash and cash equivalents at beginning of period...................................... 3,065,572 427,488
------------- -----------
Cash and cash equivalents at end of period............................................ $ 402,264 $ 8,567
------------- -----------
------------- -----------
Supplemental Cash Flow Information
Noncash investing and financing activities:
Reduction in additional paid-in capital due to write down of notes receivable for
exercise of options............................................................... $ 1,376,308 $ --
Preferred stock issued as dividends................................................. 208,635 --
Senior convertible notes payable converted to common stock.......................... -- 50,000
Unamortized deferred financing costs associated with senior senior convertible notes
payable converted to common stock................................................. -- 2,997
Deferred financing costs associated with Privatbank note............................ -- 12,000
Equipment purchased through capital lease........................................... 21,273 --
Reduction in notes receivable for exercise of options in exchange for services...... 636 --
------------- -----------
------------- -----------
Interest paid......................................................................... $ 76,467 $ 74,020
------------- -----------
------------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
F-23
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
(1) PRESENTATION OF UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements include the
accounts of FiberChem, Inc. ("FCI" or the "Company") and its subsidiaries. All
inter-company accounts and transactions have been eliminated.
The unaudited consolidated financial statements have been prepared in
accordance with Item 310 of Regulation S-B and, therefore, do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows of the Company, in conformity
with generally accepted accounting principles. The information furnished, in the
opinion of management, reflects all adjustments (consisting primarily of normal
recurring accruals) necessary to present fairly the financial position as of
June 30, 1998 and September 30, 1997, and the results of operations and cash
flows of the Company for the three-month and nine-month periods ended June 30,
1998 and 1997. The results of operations are not necessarily indicative of
results which may be expected for any other interim period or for the year as a
whole. For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the year
ended September 30, 1997.
Certain Fiscal 1997 Financial Statement amounts have been reclassified to
conform with the presentation in the Fiscal 1998 Financial Statements.
(2) CONVERTIBLE DEBT
On February 15, 1996, the Company completed an offering under Regulation S,
promulgated under the Securities Act of 1933, as amended (the "Offering"), of 8%
Senior Convertible Notes due February 15, 1999 (the "Notes"), for $2,825,000.
Interest on the Notes is to be paid semi-annually, commencing August 15, 1996,
at a rate of 8% per annum. The Notes are convertible into shares of common stock
of the Company (the "Common Stock") at a conversion price (the "Conversion
Price") of, initially, $0.80 per share, which has been adjusted, in accordance
with the original Note agreement, to $0.4078, a price representing a 10%
discount from the thirty-day average closing bid price of the Common Stock for
the 30 business days prior to February 15, 1997. During the nine-month period
ended June 30, 1998 (the "Nine Month Period 1998"), the Company received an
unsolicited offer to convert $25,000 of the Notes at a conversion price of $0.21
per share, and another offer to convert $25,000 of the Notes at a conversion
price of $0.20 per share, which were approximately the then current market
values of the Common Stock. Accordingly, the Company issued 244,047 shares for
the conversions. All other Note holders were offered the same temporary
conversion price. As of June 30, 1998, an aggregate face amount of $1,225,000 of
the Notes had been converted to Common Stock resulting in the issuance of
1,742,851 shares of Common Stock. Based on the adjusted Conversion Price of
$0.4078, an aggregate of 3,923,456 shares of Common Stock would be issuable if
the remaining $1,600,000 face amount of Notes were converted.
The Company paid fees and expenses associated with the offering amounting to
$428,204, which is being amortized as interest expense over the three-year term
of the Notes or until conversion, if earlier, when the proportionate unamortized
amount is charged to additional paid-in capital. Also in connection with the
Offering, the Company issued to the Placement Agent for the Offering, for
nominal consideration, warrants to purchase 353,125 shares of Common Stock, at
an exercise price of $0.80 per share (the "Exercise Price") which has been
adjusted to $0.4078 per share. Also, in accordance with the terms of the
warrants, the number of shares exercisable has been adjusted, based on the
adjusted Exercise Price, to
F-24
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
(2) CONVERTIBLE DEBT (CONTINUED)
692,742 shares of Common Stock. These warrants are exercisable at any time on or
after August 15, 1996 through February 14, 2001, and contain certain piggyback
registration rights.
During the Nine Month Period 1998, certain of the Company's officers and
directors provided an aggregate of $250,000 in the form of 5-year 8% notes,
convertible into rights to purchase common stock upon registration of an
offering to all stockholders and warrant holders of rights to purchase common
stock. In addition, certain officers and directors loaned the Company an
additional $100,000, which is to be repaid with interest at 8% of the rights
offering. Also during the Nine Month Period 1998, the Company entered into an
agreement with Privatbank Vermag (of which a director of the Company is vice
chairman) under which the Company borrowed $150,000, with interest at 8%
originally due on June 27, 1998. An additional $150,000 was advanced to the
Company on April 27, 1998, with interest at 8% originally due on July 27, 1998.
The due dates have subsequently been extended, at the same rate of interest, to
September 23 and September 27, 1998, respectively. In accordance with the
agreement, Privatbank Vermag will receive 90,000 units, each unit consisting of
one share of Common Stock and one warrant to purchase a share of Common Stock
exercisable at $0.22 per warrant. The units are valued at $0.22 and the Warrants
become exercisable one year from the date of issuance and expire in September
2003.
(3) CAPITAL STOCK
During Fiscal 1993 and Fiscal 1994, the Company conducted a private
placement of convertible preferred stock ("Convertible Preferred Stock"). Each
share of the Convertible Preferred Stock is convertible into ten shares of FCI
Common Stock, initially at $1.50 per share. The conversion ratio is subject to
customary anti-dilution provisions. Dividends are cumulative and are payable
annually, at the sole discretion of the holders, in cash (11%) or additional
shares of Convertible Preferred Stock (8% of the number of shares owned at date
of declaration). In November 1996, the Company paid cash dividends of $46,171
and issued 13,909 shares of Convertible Preferred Stock dividends. On September
12, 1997, the Board of Directors determined that, in view of the recent trading
price of the Company's Common Stock and in view of the Company's current cash
position, it would not be appropriate to declare the annual dividend payable on
the Convertible Preferred Stock on November 1, 1997. As a result, that dividend
will accumulate in accordance with the terms of the Convertible Preferred Stock.
The Convertible Preferred Stock entitles the holder to a liquidation preference
of $15 per share upon liquidation, dissolution or winding up of the Company. The
Convertible Preferred Stock is redeemable by the Company when and if the closing
bid price of FCI's Common Stock is at least 200% of the conversion price for
twenty consecutive trading days. Upon redemption, the Company would issue ten
shares of its Common Stock for each share of Convertible Preferred Stock. As of
June 30, 1998, the Company had 218,998 shares of Convertible Preferred Stock
outstanding.
On May 31, 1996 the Company completed an offering under Regulation S, of
3,333,333 Units, at a price of $0.90 per Unit for total gross proceeds of
$3,000,000 before costs and expenses of the offering. Each Unit consisted of one
share of Common Stock and one warrant to purchase one share of Common Stock (the
"Unit Warrants"). The Unit Warrants are each exercisable at $1.00 at any time
from May 31, 1996 through May 30, 2001. The Company paid fees and expenses
associated with the Unit offering amounting to $345,683. Also in connection with
the Unit offering, the Company issued to the Placement Agent for the offering,
for nominal consideration, warrants to purchase 333,333 shares of Common Stock
F-25
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
(3) CAPITAL STOCK (CONTINUED)
("the Placement Agent Warrants"), at an exercise price of $0.90 per share which
has been adjusted to $0.2343 per share, and the number of shares issuable upon
exercise has been adjusted to 1,280,411. These Placement Agent Warrants are
exercisable at any time from November 30, 1996 through May 30, 2001.
During the Nine Month Period 1998 the Company issued 250,000 shares of its
Common Stock, valued at the then current market value of $0.1875 per share, in
exchange for legal services rendered by its attorneys in connection with
litigation against a former distributor. The Company also issued 426,500 shares
of its Common Stock, valued at the then current market value of $0.175 per
share, to its public and investor relations firm for services.
During the Nine Month Period 1998, the Company received $1,100 from the
exercise of 5,000 options to purchase Common Stock at an exercise price of $0.22
per share.
Also during the Nine Month Period 1998, the Company issued options to
purchase an aggregate of 25,000 shares of its Common Stock at an exercise price
of $0.25 per share. These options were granted to an employee of the Company
under its Employee Stock Option Plans and are exercisable at any time for a
period ending five years from the date of grant.
(4) REVENUES
The Company continues to incur substantial losses and Management recognizes
that the Company must generate additional revenues or reductions in operating
costs and may need additional financing to continue its operations. The Company
expects significant revenues during the second half of calendar 1998 from its
alliance with Whessoe Varec, Inc. in the aboveground storage tank leak detection
market and the California military fuel storage market, as well as from initial
sales of Sensor-on-a-Chip-TM- products, and sales in the offshore oil production
platform market, although there can be no assurance when or if this will occur.
During the last quarter of fiscal 1997, the Company implemented significant
reductions in personnel and other spending, and, to further conserve cash,
continues to defer payment of a significant portion of management salaries. The
Company borrowed $650,000 from certain officers, directors and affiliates during
the Nine Month Period 1998 and borrowed an additional $25,000 in July 1998.
In July 1998, Silicon Valley Bank granted the Company a $1,000,000 line of
credit, secured by receivables, inventory and equipment. Advances bear interest
at 1.25% per month, and as of August 12, 1998, the Company had borrowed $380,557
against the line of credit.
The Company is currently planning an offering of rights to purchase shares
and warrants, to be offered to holders of its Common and Preferred Stock, and to
holders of Class D Purchase Warrants and all other outstanding Warrants.
Notwithstanding the foregoing, there can be no assurance that forecasted sales
levels will be realized to achieve profitable operations, or that additional
financing can be obtained on terms satisfactory to the Company, if at all, or in
an amount sufficient to enable the Company to continue its operations.
F-26
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY, BY ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES, IMPLY THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF BY
ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Summary of Consolidated Financial Information............................. 4
Rights Offering........................................................... 5
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 15
Market for Common Equity and Related Shareholders Matters................. 17
Capitalization............................................................ 18
Dilution.................................................................. 18
Dividend Policy........................................................... 20
Management's Discussion and Analysis Of Financial Condition and Results of
Operations.............................................................. 20
Business.................................................................. 28
Management, Directors and Executive Officers.............................. 41
Indemnification of Directors and Officers................................. 47
Certain Transactions...................................................... 48
Security Ownership of Certain Beneficial Owners and Management............ 49
Plan of Distribution...................................................... 50
Selling Securityholders................................................... 51
Description of Securities................................................. 54
Legal Matters............................................................. 57
Tax Consequences Relating to the Rights Offering.......................... 58
Experts................................................................... 59
Available Information..................................................... 60
Index to Consolidated Financial Statements................................ 61
</TABLE>
9,106,962 UNITS,
EACH UNIT CONSISTING OF
ONE COMMON SHARE,
ONE CLASS E WARRANT
FIBERCHEM, INC.
---------------------
PROSPECTUS
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OCTOBER 23, 1998
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