<PAGE>
As filed with the Securities and Exchange Commission on March 24, 2000
Registration No. 333-78319
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1
to
Registration Statement on Form S-2
Under the Securities Act of 1933
FIBERCHEM, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 2834 84-1063897
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification No.)
Organization) Code Number)
1181 Grier Drive, Suite B
Las Vegas, Nevada 89119
(702) 361-9873
(Address and Telephone Number of Principal Executive Offices and Principal
Place of Business)
Mr. Melvin Pelley
Chief Financial Officer
FiberChem, Inc.
1181 Grier Drive, Suite B
Las Vegas, Nevada 89119
Copies to:
Elliot H. Lutzker, Esq.
Snow Becker Krauss P.C.
605 Third Avenue
New York, NY 10158
Tel: (212) 687-3860
Fax: (212) 949-7052
Approximate Date of Proposed Sale to the Public: As soon as
practicable after this post-effective amendment to the registration statement
becomes effective.
<PAGE>
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this form, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
* * * * *
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF PROPOSED PROPOSED
EACH CLASS MAXIMUM MAXIMUM
OF SECURITIES AMOUNT OFFERING AGGREGATE AMOUNT OF
TO BE TO BE PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED UNIT(1) PRICE FEE
--------------- ------------ ----------- ----------- --------------
<S> <C> <C> <C> <C>
Common Stock, 1,425,500 shares (2) $0.14(3) $199,570 $55.48
$.0001 par value
Class E Common Stock 300,000 wts. (4) $ .90(5) $270,000 $75.06
Purchase Warrants
Common Stock, 300,000 shares(6)(7) (8) (8) (8)
$.0001 par value
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
TITLE OF PROPOSED PROPOSED
EACH CLASS MAXIMUM MAXIMUM
OF SECURITIES AMOUNT OFFERING AGGREGATE AMOUNT OF
TO BE TO BE PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED UNIT(1) PRICE FEE
- -------------- --------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Common Stock, 692,742 shares (7)(9) $ .23 $ 159,330 $ 44.29
$.0001 par value
Common Stock, 1,280,411 shares(7)(10) $ .23 $ 294,495 $ 81.87
$.0001 par value
Common Stock, 3,333,333 shares(7)(11) $ 1.00 $3,333,333 $ 926.67
$.001 par value
Common Stock, 75,000 shares(7)(12) $ .90 $ 67,500 $ 18.77
$.0001 par value
Class E Common 3,408,333 wts.(13) $ .90 (5) $3,067,500 $ 852.77
Stock Purchase
Warrants
Common Stock, 3,408,333 shares(6)(7) (8) (8) (8)
$.0001 par value
Common Stock, 200,000 shares (14) $ .18 $ 36,000 $ 10.00
$.0001 par value
Common Stock, 200,000 shares (14) $ .50 $ 100,000 $ 27.80
$.001 par value
Common Stock, 200,000 shares (14) $ 1.00 $ 200,000 $ 55.60
$.0001 par value
Total 11,115,319 shares $7,727,728 $2,148.31
(15)
</TABLE>
- ----------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 promulgated under the Securities Act of 1933, as
amended.
(2) Consists of outstanding shares of outstanding common stock being
offered by selling securityholders.
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<PAGE>
(3) Pursuant to Rule 457(c) under the Act, the registration fee has been
calculated based upon the $.14 per share closing price of the common
stock on May 7, 1999, as reported by the National Quotation Bureau,
Inc.
(4) Consists of Class E common stock purchase warrants offered by the
selling securityholder("Class E Warrants").
(5) Pursuant to Rule 457(g) under the Act, the registration fee has been
calculated on the basis of the highest price at which the warrants may
be exercised.
(6) Consists of shares of common stock issuable upon exercise of the
warrants being offered by the selling securityholders.
(7) Pursuant to Rule 416, this registration statement also covers such
indeterminable additional shares as may become issuable as a result of
anti-dilution adjustments in accordance with the terms of the warrants.
(8) Pursuant to Rule 457(i) under the Act, no additional registration fee
is required for the securities.
(9) Consists of shares of common stock issuable upon exercise of warrants
issued as partial consideration for the services of a placement agent
in connection with the offering of 8% Senior Convertible Notes in
February 1996 (the "Note Warrants").
(10) Consists of shares of common stock issuable pursuant to warrants
issued as partial consideration for the services of a placement agent
in connection with the Regulation S offering in May 1996 (the "May
1996 Warrants").
(11) Consists of shares of common stock issuable upon exercise of warrants
issued as part of a foreign offering in May 1996 ("Reg S Warrants").
(12) Consists of shares of common stock issuable upon exercise of warrants
issued as partial consideration for consulting services (the
"Consultant Warrants")
(13) The Registrant is offering to exchange to the holders of the Reg S
Warrants and Consultant Warrants, on a one-for-one basis, Class E
Warrants (the "Exchange Warrants").
(14) Consists of shares of common stock issuable upon the exercise of
options.
(15) The fee of $2,148.31 was paid on May 12, 1999.
===============================================================================
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically
-iv-
<PAGE>
states that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until this
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
===============================================================================
In accordance with Rule 429, the prospectus included in this
Registration Statement also relates to the offering of securities included in
Registration Statement No. 333-46555, declared effective October 23, 1998, and
Registration Statement No. 33-73782, declared effective February 2, 1994.
-v-
<PAGE>
EXPLANATORY NOTE
In accordance with Rule 429, the prospectus included in this
Amendment No. 1 to Registration Statement on Form S-2 relates to the offering
of 16,664,240 shares of common stock, 935,765 class D warrants and 2,722,199
class E warrants, of which (i) 5,607,333 shares are included in this
Registration Statement (ii)1,895,175 shares of common stock and 935,765 class
D warrants are included in Registration Statement No. 33-73782 declared
effective by the Securities Exchange Commission February 2, 1994 (iii)
9,161,732 shares and 2,722,199 class E warrants are included in Registration
Statement 333-46555, declared effective by the Securities and Exchange
Commission October 23, 1998.
-vi-
<PAGE>
The information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION - DATED MARCH 24, 2000
FIBERCHEM, INC.
16,664,240 SHARES OF COMMON STOCK, $.0001 PAR VALUE
935,765 CLASS D COMMON STOCK PURCHASE WARRANTS
2,722,199 CLASS E COMMON STOCK PURCHASE WARRANTS
-----------------------
This prospectus covers 16,664,240 shares of common stock, consisting of
- 13,712,187 shares offered by FiberChem on exercise of
outstanding warrants and options and the re-sale by
selling securityholders of 3,657,964 of those shares
- 2,952,053 outstanding shares offered by selling
securityholders.
The prospectus also covers 935,765 class D warrants and 2,722,199
class E warrants of FiberChem being offered by selling securityholders.
The common stock, class D and class E warrants are speculative
investments and involve a high degree of risk. You should read the description
of certain risks under the caption "Risk Factors" beginning on page 3 before
purchasing the common stock or warrants.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
The common stock and class E warrants are quoted on the
Over-The-Counter Electronic Bulletin Board ("OTCBB") under the symbol "FOCS"
and "FOCSZ". On March 22, 2000, the closing price per share of common stock on
the OTCBB was $1.09 and the closing price per class E warrant was $.50. The
class D warrants have traded only sporadically and have not been quoted on any
market for more than the past two years.
Our executive offices are located at 1181 Grier Drive, Suite B, Las
Vegas, Nevada 89119, and our telephone number is (702) 361-9873.
THE DATE OF THIS PROSPECTUS IS ___________, 2000.
<PAGE>
2
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. FiberChem'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, FiberChem'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.
INFORMATION ABOUT 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. FiberChem has
developed a range of products and systems based on FOCS-Registered Trademark-,
which provide IN SITU and continuous real-time information reporting. Products
based on its FOCS-Registered Trademark- technology currently being marketed by
FiberChem 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. FiberChem 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.
On December 6, 1999, FiberChem and Intrex Data Communications Corp.
agreed to a business combination of FiberChem and Intrex. The agreement
provides for the issuance to Intrex shareholders of approximately 63 million
shares of FiberChem common stock, which would result in the shareholders of
each company having an approximately equal interest in the combined enterprise
to be renamed DecisionLink, Incorporated. The transaction is subject to usual
closing conditions and a requirement that FiberChem have available $5,000,000
in new financing proceeds. We cannot assure you that we will be able to raise
these additional funds or otherwise complete the transaction.
Intrex is a private company which provides proprietary Internet and
communications technology for communicating data to or from remote or mobile
assets on a real time basis using wireless, satellite and cellular data
systems. Data is routed through Intrex's global data network which acts as a
data gateway and applications service provider allowing customers to monitor
and control remote or mobile assets such as gas wells, pipelines, compressors,
storage tanks, offshore platforms, or service vehicles directly from a desktop
PC. If the transaction is consummated FiberChem believes Intrex's markets will
open new business opportunities for FiberChem's sensor technology.
We file reports, proxy statements and other information with the SEC.
You may read and copy any document we file at the Public Reference Room of the
SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Regional Offices of the SEC at Seven World Trade Center, Suite 1300, New
York, New York 10048 and at 500 West Madison Street, Suite 1400,
<PAGE>
3
Chicago, Illinois 60661-2511. Please call 1-800-SEC-0330 for further
information concerning the Public Reference Room. Our filings also are
available to the public from the SEC's website at www.sec.gov. We distribute
to our stockholders annual reports containing audited financial statements.
Information Incorporated by Reference
The SEC allows us to "incorporate by reference" the information we
file with it, which means that we can disclose important information to you by
referring to those documents. The information incorporated by reference is
considered to be part of this prospectus. This prospectus is accompanied by
and incorporates by reference the documents listed below.
1. Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1999, and
2. Quarterly Report on Form 10-QSB for the fiscal quarter ended
December 31, 1999.
3. Current Report on form 8-K (Date of Earliest Event Reported
December 6, 1999).
THE OFFERING
SECURITIES OFFERED:
- 13,712,187 shares of common stock issuable upon exercise of
warrants and options, and the re-sale of 3,657,964 of those
shares by selling securityholders
- 2,952,053 shares of common stock held by selling
securityholders
- 935,765 class D warrants held by selling securityholders
- 2,722,199 class E warrants held by selling securityholders
OTCBB COMMON STOCK SYMBOL:........................................ FOCS
OTCBB CLASS E WARRANT SYMBOL:.....................................FOCSZ
NUMBER OF SHARES OF COMMON
STOCK OUTSTANDING AS
OF MARCH 17, 2000 ..................................46,618,524
The Class D Warrants have not been quoted on any market for more than the past
two years, and no quotations for the Class D Warrants are available.
RISK FACTORS
The securities offered hereby are speculative and involve a high
degree of risk. Accordingly, you as a prospective investor, should carefully
consider the following factors relating to an investment in FiberChem.
<PAGE>
4
WE HAVE HAD HISTORICAL OPERATING LOSSES AND HAVE AN ACCUMULATED DEFICIT OF
APPROXIMATELY $34.7 MILLION. For the fiscal years ended September 30, 1997,
1998 and 1999, we had net losses of approximately $3,227,000, $2,392,000 and
$2,222,000, respectively, and for the three-month periods ended December 31,
1998 and l999 we had net losses of approximately $620,000 and $484,000,
respectively, with an accumulated deficit of approximately $34,694,000 at
December 31, 1999. We do not expect to obtain sufficient revenues from
operations to offset our level of fixed and planned expenditures, and expect
that losses will continue for the immediate future.
WE LACK WORKING CAPITAL AND WILL REQUIRE ADDITIONAL CAPITAL. We had working
capital at December 31, 1999 of approximately $32,000, as compared with
negative working capital of approximately $334,000, at December 31, 1998, an
increase in working capital of approximately $366,000. We had working capital
of approximately $394,000, at September 30, 1999, and negative working capital
of $919,000 at September 30, 1998, representing an increase of working capital
of approximately $1,313,000. As long as we continue to lose money and utilize
capital to support operations, we will require additional capital. We don't
know whether we 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 to us or on any terms. If we are unable to obtain other
financing we may be unable to continue in business. See "Ability to Continue
as a Going Concern; Modified Report of Independent Accountants" below.
ABILITY TO CONTINUE AS A "GOING CONCERN"; MODIFIED REPORT OF INDEPENDENT
ACCOUNTANTS. Our consolidated financial statements for the year ended
September 30, 1999, indicated there is substantial doubt about our ability to
continue as a going concern due to our need to generate cash from operations
and obtain additional financing. We are seeking at least $5 million in new
funds to complete our business combination with Intrex plus additional
financing for our operating needs. Accordingly, our ability to continue as a
going concern on a short-term or long-term basis is in substantial doubt
without permanent funding. In the event we are not able to continue as a going
concern, we may have to curtail operations, sell assets or seek protection
under the bankruptcy laws.
WE MAY NOT BE ABLE TO PROFITABLY MARKET NEW PRODUCTS UNDER DEVELOPMENT. We
have been engaged in the development of new products representing applications
of our chemical sensor technology and have had only limited sales of these
products to date. Before we can achieve profitable operations we must complete
our product development, develop adequate manufacturing capacity for these
products and must be able to sell our products to purchasers in adequate
volumes and prices to cover our costs and expenses.
In addition, in order to conduct more extensive manufacturing, marketing and
sales activities, we will need to implement and improve operational, financial
and management information systems, procedures and controls. We do not know
whether there will be adequate demand for our products in commercial
quantities, that we will be able to manufacture our products at costs that
would allow for profitable sales or that, in general, we 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.
<PAGE>
5
OUR FOCS-Registered Trademark- TECHNOLOGY MAY BECOME OBSOLETE. To date, we
have been dependent on the marketing and sale of our fiber optic chemical
sensors ("FOCS -Registered Trademark-"). Other technologies exist that compete
with the FOCS -Registered Trademark- technology. Although we are also
developing a range of sensor products based on our Sensor-on-a-chip
- -Registered Trademark- technology, we do not know whether any or all of our
products will be rendered superfluous or obsolete by research efforts and
technological advances made by others. Our failure to successfully market the
products incorporating the technologies would have a material adverse effect
on our operations. We are also dependent on the successful development and
marketing by other entities of products incorporating our sensors.
WE MUST COMPETE WITH LARGER AND FINANCIALLY STRONGER COMPETITORS. Competition
in the field of diagnostic sensor and environmental technology is intense.
Competition in the underground and aboveground storage tank detection markets
have intensified since the promulgation of various state and EPA regulations.
Most of our actual and potential competitors have greater financial resources,
more extensive business experience and larger organizations than we possess.
Even if we are able to successfully market our FOCS -Registered Trademark-
products, we do not know whether larger or better financed companies will
develop effective competitive products.
We believe that we will be able to compete favorably. However increased
competition could materially adversely affect our business, financial
condition and results of operations. Our success in the wireless electronics
market will depend heavily upon our ability to provide high quality products
and services in select target markets. While we will offer an end to end
problem solving system, we will be competing against others offering
competitive products and services. Other factors that will affect our success
in these markets include our continued ability to attract additional
experienced engineering, marketing, sales and management talent.
We believe that we will be able to compete on the basis of price and service.
Our success will depend on the ability to anticipate and respond to rapid
changes in customer preferences and the introduction of new services. We do
not know whether we will be able to compete successfully in our markets.
The wireless communications industry is characterized by frequent introduction
of new products and services, and is subject to changing consumer preferences
and industry trends, which may adversely affect our ability to plan for future
design, development and marketing of our products and services. The markets
for micro-electronic products, components and related services are also
characterized by rapidly changing technology and evolving industry standards,
often resulting in product obsolescence or short product life cycles. We will
constantly be required to expend more sums in research and development of new
technologies.
EXTENSIVE EFFECT OF GOVERNMENT REGULATION IN ENVIRONMENTAL MONITORING AREA.
The EPA regulations regulate the installation, testing, manufacture and
maintenance of underground storage tanks. There can be no assurance that our
PetroSense-Registered Trademark-Continuous Monitoring System will meet future
regulatory requirements. The state and EPA regulations establish timetables
for the installation of leak detection equipment in aboveground and
underground storage tanks and pipings and are subject to interpretation and
subsequent changes. These regulations are the minimum federal
<PAGE>
6
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. We do not know whether
other sensor products under development will meet future federal or state
regulatory requirements.
WE ARE DEPENDENT ON PATENT PROTECTION OF OUR TECHNOLOGIES. Our FOCS
- -Registered Trademark- technology, which is proprietary and patented, is our
most critical asset. We own numerous United States patents and have additional
patent applications pending with the United States Patent and Trademark
Office. We also have numerous foreign patents and foreign patent applications
pending for our various sensor technologies and devices. We do not know
whether such patents will protect us from other persons who develop products
that infringe our proprietary rights. Many patents involving fiber optic
technology have been issued to others. To our best knowledge, our technologies
do not infringe patent or other proprietary rights of others; however, we do
not know that such infringement has not occurred or will not occur in the
future.
If it were determined that our products infringed the claims of someone else's
issued patent, we 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, we could be liable for
substantial damages, and even the defense of patent litigation can be
extremely expensive. We do not know whether, if any such license were
required, it would be available or available on terms acceptable to us. Any
inability to obtain required licenses on favorable terms, or at all, would
adversely affect our business.
We do not know whether our pending patent applications will be allowed,
whether any of our issued patents would be upheld, whether any issued patents
will provide us with significant competitive advantages, or whether challenges
will not be instituted against the validity or enforceability of any patents
owned by us and, if instituted, whether 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 we prevail. Furthermore, we do
not know whether others will independently develop similar technologies,
duplicate our technology or design around the patented aspects of our
technology. If patents do not issue from present or future patent
applications, we may be subject to greater competition. In addition, our
technology might be subject to reverse engineering, allowing competitors to
obtain our proprietary technology.
WE HAVE LIMITED PRODUCTS LIABILITY INSURANCE AND EXPOSURE TO UNINSURED RISKS.
We have products liability insurance in the amount of $5 million. When we sell
any product it may become subject to substantial claims and liabilities from
users of such products in excess of our insurance. In the event of an
uninsured claim or one in excess of our coverage, our business and financial
condition could be materially adversely affected.
WE HAVE LIMITED MANUFACTURING FACILITIES. Our facilities in Las Vegas, Nevada
are capable of manufacturing our FOCS -Registered Trademark- and
Sensor-on-a-chip -Registered Trademark- products for our current sales
volumes. Although alternative assembly operations are currently available, we
do not know whether such operations will be available in the future or will be
available on terms acceptable to us.
<PAGE>
7
WE ARE DEPENDENT ON THIRD PARTIES FOR MANUFACTURING AND SUPPLY. We currently
manufacture only one of the components of our products, although we currently
assemble the products ourselves. We have not entered into any formal
arrangement with any supplier. Although we believe that there are several
potential suppliers for substantially all required components, we might incur
delays in meeting delivery deadlines in the event a particular supplier is
unable or unwilling to meet our requirements. Suppliers of custom designed
components would be more difficult to replace. We do not know whether the cost
of third party manufacturing of components or of our products will exceed
current estimates. In addition, we are largely dependent on our suppliers to
maintain quality control.
WE ARE DEPENDENT UPON KEY PERSONNEL. We are dependent upon the services of
Geoffrey Hewitt, Chief Executive Officer, Thomas Collins, President, and
Melvin Pelley, Chief Financial Officer, of FCI Environmental, our wholly-owned
subsidiary. To the extent that any of their services become unavailable, our
business or prospects may be adversely affected. Each is employed pursuant to
employment agreements which automatically renew for a one year term unless
terminated by either party to the agreements. We do not know whether we would
be able to employ qualified persons to replace these key individuals. We carry
key man life insurance policies of $3 million, $2 million and $1 million on
the lives of Messrs. Hewitt, Collins and Pelley, respectively. We do not know
whether we will continue to carry the key man life insurance policies.
WE ARE DEPENDENT ON TECHNICAL AND PROFESSIONAL PERSONNEL. Our ability to
produce and market our FOCS -Registered Trademark- products and develop new
products is dependent upon the availability and technical abilities of our
in-house staff and facilities and/or agreements to be negotiated with third
parties. Competition for qualified technical personnel is intense. We do not
know whether we will be able to retain independent persons presently employed
and be able to attract qualified individuals in the future to satisfy our
requirements for technical expertise.
CERTAIN RISKS SPECIFICALLY RELATED TO WIRELESS TECHNOLOGY. Some specific risks
facing our wireless technology operations are concentrated on our ability to
maintain its technological advantage:
- The time frame required to marketable products using wireless related
technologies - The window of opportunity on these products is estimated
to be, at most, 36 months before being made obsolete by improvements in
technology.
- Copiers of the technology - Although our wireless technology will be
protected by patents wherever practical, people have attempted and may
attempt to replicate our present products. New technology is being
developed daily which might allow a competitor to duplicate, through
"reverse engineering" or otherwise, our products' functionality.
- Undeveloped technologies - As new technological developments arise it
is possible that one could render present product(s) obsolete. Although
unlikely, such a development could draw customers away from wireless
related technology until our products are able to match or surpass
them.
COMPLIANCE WITH GOVERNMENT REGULATIONS CAN INCREASE COSTS AND SLOW GROWTH.
Telecommun-ication and wireless transmissions services are subject to
regulation by the Federal Communications
<PAGE>
8
Commission (the "FCC") and sometimes by state regulatory authorities as well.
Among other things, these regulatory authorities impose regulations governing
the rates, terms and conditions for interstate and intrastate
telecommunication services. The federal law governing regulation of interstate
telecommunications are the Communications Acts of 1934 and 1996 (the
"Communications Acts").
We believe that we are in substantial compliance with all material
laws, rules and regulations governing our operations and have obtained or are
in the process of obtaining all licenses, tariffs and approvals necessary for
the conduct of its business. In the future, legislation enacted by Congress,
court decisions relating to the telecommunications industry, or regulatory
actions taken by the FCC or the states in which we operate could have a
negative impact on our business. Changes in existing laws and regulations,
particularly relaxation of existing regulations resulting in significantly
increased price competition, may have a significant impact on our activities
and operating results. Adoption of new statutes and regulations and our
expansion into new geographic markets could require us to alter our methods of
operations, at costs which could be substantial, or otherwise limit the types
of services we offer. We cannot assure you that we will be able to comply with
additional applicable laws, regulations and licensing requirements.
WE MAY BE ADVERSELY AFFECTED BY A DOWNTURN IN OUR INDUSTRY. Our industry is
cyclical and as a result is subject to downturns in general economic
conditions and changes in client business and marketing budgets. A downturn in
general economic conditions in one or more markets or changes in client
business and marketing budgets could have a material adverse affect on our
business, financial condition and results of operations of either FiberChem or
Intrex.
REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS. Several industries
in which we operate are subject to varying degrees of governmental regulation.
Generally, compliance with these regulations is the responsibility of our
clients. However, we could be subject to a variety of enforcement or private
actions for our failure or the failure of our clients to comply with these
regulations. These actions could have a material adverse affect on our
business.
From time to time state and federal legislation is proposed with
regard to the use of proprietary databases of consumer groups. The fact that
we generate and receive data from many sources increases the uncertainty of
the regulatory environment. As a result, there are many ways both domestic and
foreign governments might attempt to regulate our use of our data. Any such
restrictions could have a material adverse affect on our business.
The services we offer both within and outside the United States may
be subject to United States and foreign regulations including:
- advertising content;
- activities requiring customers to send money with mail orders;
and
- the maintenance and use of customer data held on databases.
<PAGE>
9
RISK FACTORS RELATING TO INTERNET OPERATIONS
INTERNET OPERATIONS' LIMITED HISTORY OF OPERATIONS MAY NOT BE A RELIABLE BASIS
FOR EVALUATING OUR PROSPECTS. Because the Internet operations is in a
development stage, we have limited operating and financial data to give to you
to evaluate our future performance and prospects concerning these entities.
Our prospects must be considered in light of the risks, expenses, delays,
problems and difficulties frequently encountered in the establishment of a new
business in the Internet industry, which is an evolving industry characterized
by intense competition. You must consider the risks, expenses and
uncertainties that an early stage business like ours faces. These risks
include our ability to:
- establish awareness of our services to businesses in emerging
Internet economies;
- expand business-to-business services;
- respond effectively to competitive pressures; and
- continue to develop and upgrade our technology and distribute
any future joint venture partner's technology.
If we are unsuccessful in addressing these risks, our business,
financial condition and results of operations will be materially and adversely
affected.
OUR INTERNET RELATED BUSINESS MAY HAVE DIFFICULTY COMPETING. Our businesses,
insofar as they relate to the Internet, compete in the Internet market which
is characterized by increasing competition from "brand-named" entities and the
rapid adoption of new technologies. We might in the future face competition
from a wide range of companies including, but not limited to, Internet service
providers (ISP's) and Internet portals such as Yahoo!, America On Line and
Earthlink, and from applications service providers (ASP's) such as SAP, J.D.
Edwards and PeopleSoft. In addition, we could encounter competition from new
sources as the Internet and wireless technology markets continue to evolve.
Our competitors may have capabilities and resources equal to or
greater than we do. In addition, there are relatively few barriers preventing
competitors from entering the Internet industries in which we compete. As a
result, new companies may enter into the market at any time and threaten the
business of our Internet operations. Existing or future competitors may
develop or offer comparable or superior services at a lower price, which could
have a material adverse effect on the business, financial condition and
results of operations of our Internet business.
SIGNIFICANT COMPETITION IN PROVIDING INTERNET SERVICES AND WIRELESS SERVICES
COULD REDUCE THE DEMAND FOR AND PROFITABILITY OF OUR SERVICES. Though our
focus is predominately upon business-to-business e-commerce in emerging
Internet economies, wherein there presently is little competition, the
wireless component sector is very COMPETITIVE. For example, we may compete
with cellular communications companies such as CellNet; other satellite
communications companies, such as Globalstar, and even other licensed
resellers for Orbcomm. In addition, a number of multinational
<PAGE>
10
corporations, including giant communications carriers, such as Qualcomm and
Worldcom and some of the regional operating companies, are offering, or have
announced plans to offer wireless remote asset communications.
In the future, our competitors in the business-to-business e-commerce
realm, as opposed to the wireless and Internet communications arena, may even
include prospective customers such as major multinational oil companies and
automobile manufacturers. We believe that new competitors, which may include
computer software and services, telephone, energy, environmental and other
companies, are likely to enter the services market. Competition for electronic
commerce partners is intense and is expected to increase significantly in the
future because there are no substantial barriers to entry in our market.
In addition, we believe that the Internet service and on-line service
businesses will further consolidate in the future. We believe this could
result in increased price and other competition in the industry and adversely
impact us. This may cause us to lower our fees in order to compete in an
already limited market space.
Many of our Internet and wireless technology competitors possess
financial resources significantly greater than what we might expect to have
and, accordingly, could initiate and support prolonged price competition to
gain market share. Many competitive products and services are marketed by
companies which:
- are well established;
- have reputations for success in the development and sale of
products and services; and
- have significantly greater financial, marketing, distribution,
personnel and other resources, thereby permitting them to
implement extensive advertising and promotional campaigns,
both general and in response to efforts by additional
competitors to enter into new markets and introduce new
products and services.
We believe we will be able to compete favorably in these areas.
However increased competition in any one of these areas could materially
adversely affect our business, financial condition and results of operations.
Other factors that will affect our success in these markets include our
continued ability to attract additional experienced marketing, sales and
management talent, in the communications, energy and related industries, and
in the area of government environment regulations, and the expansion of
support, training and field service capabilities.
The Internet and the technology industries are characterized by
frequent introduction of new products and services, and are subject to
changing consumer preferences and industry trends, which may adversely affect
our ability to plan for future design, development and marketing of our
products and services. The markets for our products and services are also
characterized by rapidly changing technology and evolving industry standards,
often resulting in product obsolescence or short product life cycles.
<PAGE>
11
WE ARE UNCERTAIN OF OUR PRODUCTS BEING ACCEPTED BY THE MARKET. Achieving
market acceptance for our products and services requires substantial marketing
efforts and the expenditure of significant funds, which we don't currently
have, to create both awareness and demand.
Because demand by our customers may be interrelated, any lack or
lessening of demand could have a negative affect on overall market acceptance
of our products and services. Markets may not develop for our Internet related
business, and we may not be able to meet our current marketing objectives or
succeed in positioning ourselves as a key player in the Internet industry.
RELIANCE ON NEW PRODUCTS. Intrex's business and financial plan focuses on a
product line which is relatively new. We do not know whether sales levels
sufficient to run our business profitably (or sufficient to continue Intrex's
operations at all) can be achieved and, if achieved, maintained. Internal cash
generated by operations may not permit the level of research and development
spending required to further new product improvements and outside financing
may not be available.
PRODUCT OBSOLESCENCE. Intrex's business is at risk if it does not continue to
upgrade and improve its products. Typically, the communications industry is
characterized by a consistent flow of new improved products which render
existing products obsolete. The market may not consider our products to be
superior or equivalent to existing or future competitive products and we may
not be able to adapt to evolving markets and technologies, develop new
products, achieve and maintain technological advantages or maintain prices
competitive with other products.
SMALL CUSTOMER BASE: Intrex has recently completed beta testing of its
products and is now beginning its marketing efforts. Intrex has not yet built
a significant customer base and may be unable to do so.
RELIANCE ON SATELLITE SERVICE-PROVIDERS: Intrex, by relying on Orbcomm's
satellites becoming and remaining fully operational or by relying on any other
satellite provider, takes on the risks inherent to the satellite
communications industry (for instance, the risks of damage to satellites
caused by collisions in space with such things as meteor showers or space
debris or the risk of damage from solar flares). Our ability to provide
services, whether using the Orbcomm satellites or any other satellite, is
dependent on the continued operation of those satellites and on our continued
access to those satellites. We may not continue to have access to satellites
or sufficient access to enable us to operate our business.
TECHNOLOGICAL RISKS: The Orbcomm satellites and any other satellite that may
be used by Intrex is exposed to the risks inherent in a large-scale complex
communications system employing advanced technology. Even if our system is
built to specifications, the Orbcomm satellites or any other satellite that we
may use will not always function as expected in a timely and cost-effective
manner. Performance degradation in any satellite which we use may occur in the
future.
DELAYS IN THE ORBCOMM LAUNCH SCHEDULE. Intrex's business plan assumes full
deployment of the Orbcomm satellite network by mid-2000, to provide the
intended 24 hours per day coverage. Although monitoring of stationary assets,
such as gas wells, can be achieved without full satellite deployment, new and
additional services requiring real time and mobile communication will be
delayed. The Orbcomm satellite launches may not be successful. Satellite
launches are subject to
<PAGE>
12
significant risks, including failure of the launch vehicle, which may result
in disabling damage to or loss of the satellites, or failure of the
satellites to achieve their proper orbit.
LIMITED LIFE OF SATELLITES. We may not be able to rely on Orbcomm, or any
other satellite service provider, being able to finance its next generation of
satellites. Our management understands that the first-generation satellites
are designed to operate for the next five years.
REGULATORY RISKS: Our ability to expand into foreign markets may be affected
by our ability to receive any necessary licences to operate. There is no
assurance that we will be successful in gaining any required foreign
regulatory authorizations. If we are not successful, services relying on the
Orbcomm satellites will not be available in such countries. Some countries
continue to require that a communications service is provided by a
government-owned entity and in those countries we may be unable to provide
service using the Orbcomm satellite.
IF WE DO NOT EFFECTIVELY IMPLEMENT OUR MARKETING STRATEGY AND EFFECTIVELY
MANAGE OUR OPERATIONS, OUR BUSINESS COULD SUFFER. Implementation of our
business plan will depend on, among other things, the following:
- our ability to establish contractual arrangements targeting
several market segments for our Internet business; and
- hire and retain skilled management, financial, marketing,
sales and other personnel.
Our marketing strategy and plans are subject to change as a result of a number
of factors, including, but not limited to, progress or delays in:
- our marketing efforts;
- changes in market conditions, including the emergence of
significant supplementary markets;
- the nature of possible strategic alliances which may become
available to us in the future; and
- competitive factors.
WE MAY NOT BE ABLE TO IMPLEMENT SUCCESSFULLY OUR BUSINESS PLAN FOR OUR
INTERNET RELATED BUSINESS OR OTHERWISE CONTINUE OUR OPERATIONS. In order to
implement our business plan for our Internet and wireless technology business,
we will be required to:
- improve our operating systems;
- attract and retain skilled executive, management and technical
personnel; and
- successfully manage growth, including monitoring operations,
controlling costs and maintaining effective quality, and
service controls.
<PAGE>
13
JOINT VENTURES, ACQUISITIONS OR STRATEGIC ALLIANCES MAY NOT BE AVAILABLE. We
do not know if we will be able to identify any future joint ventures,
acquisitions or strategic alliances or that we will be able to successfully
finance these transactions. A failure to identify or finance future
transactions may impair our growth. In addition, to finance these
transactions, it may be necessary for us to raise additional funds through
public or private financings. Any equity or debt financings, if available at
all, may impact our operations and, in the case of equity financings, may
result in substantial dilution to existing stockholders.
IN THE FUTURE WE WILL DEPEND ON THE DEVELOPING MARKET OF THE INTERNET. Our
ability to derive revenues by providing online commerce and Internet and/or
wireless technology related services will depend, in part, upon a developed
and robust industry and the infrastructure for providing Internet access and
carrying Internet traffic. The necessary infrastructure, such as a reliable
network backbone, or complementary products, such as lower cost high speed
cable modems, may not be developed or the Internet may not become a viable
commercial marketplace in those segments we target. Critical issues concerning
the commercial use of the Internet, including:
- security
- ease of use and access
- reliability
- quality of service
- cost
remain unresolved and may impact the growth of Internet use. In the event that
the necessary infrastructure or complementary products are not developed or
the Internet does not become a viable commercial marketplace, our future
business, operating results and financial condition could be negatively
affected if we were to expend significant resources for the development of
Internet services.
CONCERNS ABOUT SECURITY OF ELECTRONIC COMMERCE TRANSACTIONS AND
CONFIDENTIALITY OF INFORMATION ON THE INTERNET MAY REDUCE THE OVERALL INTERNET
USE AND IMPEDE OUR GROWTH. A significant barrier to electronic commerce and
confidential communications and transmissions over the Internet has been the
need for security and reliability. Internet usage could decline if any
well-publicized compromise of security occurred. We may incur significant
costs to protect against the threat of security breaches or to alleviate
problems caused by these breaches or other problems with the general integrity
of our system. Unauthorized persons could attempt to penetrate our network
security. If successful, they could misappropriate proprietary information or
cause interruptions in our services. As a result, we may be required to expend
capital and resources to protect against or to alleviate these problems.
Security breaches could have a material adverse effect on our business,
financial condition and results of operations.
COMPUTER VIRUSES MAY CAUSE OUR SYSTEMS TO INCUR DELAYS OR INTERRUPTIONS AND
MAY ADVERSELY AFFECT OUR BUSINESS. Computer viruses may cause our systems to
incur delays or other service interruptions. In addition, the inadvertent
transmission of computer viruses could expose us to a material risk of loss or
litigation and possible liability. Moreover, if a computer virus affecting our
system is highly publicized, our reputation could be materially damaged.
<PAGE>
14
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATIONS AND LEGAL
UNCERTAINTIES AFFECTING THE INTERNET WHICH COULD ADVERSELY AFFECT OUR
BUSINESS. To date, governmental regulations have not materially restricted use
of the Internet in our markets, except in so far as our business relates to
environmental matters. However, the legal and regulatory environment that
pertains to the Internet is uncertain and may change. Uncertainty and new
regulations could increase our costs of doing business and prevent us from
delivering our products and services over the Internet. The growth of the
Internet may also be significantly slowed. This could delay growth in demand
for our network and limit the growth of our revenues.
In addition to new laws and regulations being adopted, existing laws
may be applied to the Internet. New and existing laws may cover issues which
include:
- sales and other taxes;
- user privacy;
- pricing controls;
- data security and integrity issues;
- characteristics and quality of products and services;
- consumer protection;
- cross-border commerce;
- libel and defamation;
- copyright, trademark and patent infringement; and
- other claims based on the nature and content of Internet
materials.
UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY ADVERSELY
AFFECT OUR BUSINESS. We regard our copyrights, service marks, trademarks,
trade secrets and other intellectual property as important to our success.
Unauthorized use of our intellectual property by third parties may adversely
affect our business and our reputation. We rely on trademark and copyright
law, trade secret protection and confidentiality and/or license agreements
with our employees, customers, partners and others to protect our intellectual
property rights. Despite our precautions, it may be possible for third parties
to obtain and use our intellectual property without authorization.
Furthermore, the validity, enforceability and scope of protection of
intellectual property in Internet-related industries is uncertain and still
evolving. The laws of some foreign countries are uncertain or do not protect
intellectual property rights to the same extent as do the laws of the United
States.
<PAGE>
15
WE MAY BE SUBJECT TO CLAIMS BASED ON THE CONTENT WE PROVIDE OVER OUR NETWORK.
The laws in the United States and in other countries relating to the liability
of companies which provide online services, like ours, for activities of their
customers are currently unsettled. Claims have been made against online
service providers and networks in the past for defamation, negligence,
copyright or trademark infringement, obscenity, personal injury or other
theories based on the nature and content of information. We could be subject
to similar claims and incur significant costs in their defense.
RISKS RELATING TO OUR SECURITIES
POSSIBLE VOLATILITY OF COMMON STOCK PRICES. The market price of our common
stock may be significantly affected by various factors, including, but not
limited to, general economic conditions and those specific to our business,
future acquisitions, if any, and our financial condition. Moreover, the price
of our 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 our common stock. See "Market for Common
Stock and Related Stockholder Matters."
SHARES ELIGIBLE FOR FUTURE SALES BY OUR CURRENT STOCKHOLDERS MAY AFFECT OUR
STOCK PRICE AND POTENTIAL FUTURE DILUTION. Approximately 6.4 million of the
approximately 46.6 million shares of common stock outstanding as of March 17,
2000 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 by affiliates and non-affiliates of limited quantities of
restricted securities without registration under the Securities Act when the
securities are held over one year. Non-affiliates that hold the restricted
securities over two years may sell an unlimited quantity of the restricted
securities. Currently, approximately 3.0 million shares of restricted
securities are held by non-affiliates for over two years and approximately
200,000 are held by non-affiliates for less than one year.
We are 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 our securities, although sales of substantial amounts of shares by existing
stockholders, or even the potential of such sales, may be expected to have an
adverse effect on the trading price and market for our securities.
YOUR OWNERSHIP INTEREST MAY BECOME DILUTED. In the event that our stock price
increases, holders of outstanding options and warrants may elect to exercise
them, and holders of outstanding notes may elect to convert them, resulting in
dilution of other stockholders' interests. As of March 17, 2000, we had
outstanding 9,732,512 Class E warrants and 1,895,175 Class D warrants. Each
Class E Warrant is currently exercisable by the holder thereof to purchase one
share of common stock at an exercise price of $.35 per share through October
23, 2000, increasing gradually to $.90 per share through October 23, 2003.
Each Class D Warrant is currently exercisable by the holder thereof to
purchase one share of common stock at an exercise price of $1.25 through the
expiration date of September 15, 2000. There are an additional 37,500 warrants
each exercisable at $.90, 1,637,000 warrants each exercisable at $1.00 and
75,000 warrants each exercisable at $0.35 (collectively with the Class E
warrants and Class D warrants, the "Outstanding Warrants"). The convertible
preferred stockholders currently have the right to convert the 207,848 shares
of convertible preferred stock outstanding into
<PAGE>
16
2,078,480 shares of common stock, as adjusted, and redemption under certain
circumstances. The holders of the 8% Senior Convertible Notes have the right
to convert their notes into an aggregate of 3,517,391 shares of common stock,
assuming a conversion price of $.23, subject to adjustment and redemption
under certain circumstances. The holders of the notes will also receive upon
conversion, warrants to purchase 3,517,391 shares of common stock (in addition
to 3,530,435 warrants issuable for notes recently converted), exercisable at
$.23 for approximately two years from issuance. In addition, we have
previously registered an additional 2,113,942 shares of common stock and
intend to register 5,000,000 shares of common stock underlying a like number
of options (3,723,942 options outstanding; 3,390,000 options authorized, but
not granted) and 250,000 shares of common stock issuable pursuant to an
Employee Stock Purchase Plan pursuant to registration statements on Forms S-8.
In addition, 600,000 shares of common stock are issuable upon exercise of
options to purchase 200,000 shares exercisable at $0.18 per share; 200,000
shares at $.50 per share; and 200,000 shares at $1.00 per share granted
pursuant to a Consulting Agreement dated May 10, 1999.
During the terms of our warrants, options, convertible preferred stock and
notes, the holders may be able to purchase shares of common stock at prices
substantially below the then current market price of our 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 we 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 we 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 our securities. Moreover, warrant holders who fail to exercise
their warrants will experience a corresponding decrease in their interest held
in us relative to the ownership interest held by exercising warrant holders.
CLASSIFIED BOARD OF DIRECTORS. Our by-laws provide for a classified Board of
Directors with board members serving staggered three-year terms. 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 and more difficult for a
third-party to acquire us.
PREFERRED STOCK AUTHORIZATION. Our Certificate of Incorporation authorizes the
issuance of a maximum of 10,000,000 shares of "blank check" preferred stock,
$.001 par value with such designations, rights and preferences as may be
determined from time to time by our Board of Directors. As of March 17, 2000,
we had 207,848 shares of Preferred Stock outstanding currently convertible
into 2,078,840 shares of common stock. We cannot assure you that we 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. In addition, in the event of a proposed attempt to gain control
of us where the Board of Directors does not approve, the Board could authorize
the issuance of preferred stock as
<PAGE>
17
an anti-takeover device, which could prevent the completion of such a
transaction to the detriment of public stockholders.
DISCLOSURE RELATING TO LOW-PRICED STOCKS. Our common stock, which is traded 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 our securities and may affect the ability of purchasers
in this offering to sell our 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 our 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.
YEAR 2000. We have not experienced any disruptions in our operations, nor have
there been reports of customer disruptions, as a result of Year 2000 issues.
This prospectus contains certain forward-looking statements that are subject
to significant risks and uncertainties. There are a number of important
factors that could cause actual results to differ materially from historical
results and results anticipated by the forward looking statements contained in
the following discussion. Such factors and risks include, but are not limited
to, intense competition, price cutting, dependence on key personnel, the
economic environment, the ability to develop, market, and support new products
and the ability of FiberChem to manage its growth.
For all of the aforesaid reasons and others set forth herein, the purchase of
securities offered hereby involves a high degree of risk. Any person
considering an investment in the securities offered hereby should be aware of
these and other factors set forth in this prospectus. The securities should be
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18
purchased only by persons who can afford to absorb a total loss of their
investment in us and have no need for a return on their investment.
<PAGE>
19
USE OF PROCEEDS
FiberChem will not receive the proceeds from the sales of common
stock or warrants by the selling securityholders. However, FiberChem may
receive up to $7,782,097 from the sale of up to 13,712,187 shares of common
stock offered by FiberChem upon exercise of the warrants and options.
FiberChem intends to use these funds for working capital and other general
corporate purposes.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDERS MATTERS
FiberChem's common stock was traded on the Nasdaq/SCM under the
symbol "FOCS" until February 25, 1998, when it was delisted. 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 through February 25,
1998 as reported by Nasdaq and as reported by the National Quotation Bureau
thereafter. The class E warrants commenced trading on the OTCBB on December 7,
1998. The 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>
COMMON STOCK
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
Second Quarter 0.28 0.13
Third Quarter 0.23 0.125
Fourth Quarter 0.21 0.12
FISCAL YEAR ENDING SEPTEMBER 30, 2000
First Quarter $0.30 $0.11
Second Quarter (through March 22, 2000) 2.03125 0.15
</TABLE>
<PAGE>
20
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
CLASS E WARRANTS
FISCAL YEAR ENDED SEPTEMBER 30, 1999
First Quarter (December 7, 1998-December 31, 1998) $0.01 $0.01
Second Quarter 0.12 0.03
Third Quarter 0.02 0.001
Fourth Quarter 0.035 0.007
FISCAL YEAR ENDED SEPTEMBER 30, 2000
First Quarter 0.11 .0001
Second Quarter (through March 22, 2000) 1.187 0.03
</TABLE>
On March 22 , 2000, the closing sales price of the common stock and
Class E Warrants on the OTCBB were $1.09 and $.50, respectively.
At March 21, 2000, there were approximately 534 holders of record of
common stock, 48 holders of record of class D warrants and 65 holders of
record of Class E Warrants. We estimate that we have approximately 3,500
beneficial holders of our common stock.
The class D warrants have traded only sporadically and have not been
quoted on any market for more than the past two years.
DIVIDEND POLICY
The payment of dividends by FiberChem is within the discretion of its
Board of Directors and depends in part upon our earnings, capital requirements
and financial condition. Since our inception, we have not paid any dividends
on our common stock and do not anticipate paying such dividends in the
foreseeable future. FiberChem intends to retain earnings, if any, to finance
our operations.
Pursuant to the terms of the FiberChem'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 of convertible
preferred stock at the rate of 8% the number of shares of convertible
preferred stock held by such holder on the date of declaration. In September,
1999, FiberChem's Board of Directors determined that, in view of the recent
trading price of FiberChem's common stock and in view of FiberChem's current
cash position, it would not be appropriate to declare the annual dividend
payable on the convertible preferred stock on November 1, 1999. As a result,
that dividend will accumulate in accordance with the terms of the convertible
preferred stock. The undeclared dividends in arrears as of March 17, 2000 are
$1,028,848 if elected entirely in cash or 53,981 additional shares of
convertible
<PAGE>
21
preferred stock if elected solely in shares. No assurance can be given that
FiberChem will be able to make dividend distributions in the future if the
holders of the convertible preferred stock request cash.
SELLING SECURITYHOLDERS
The following table sets forth certain information known to FiberChem
with respect to beneficial ownership as of March 17, 2000, of the common stock
by each selling securityholder before the offering, the number of shares of
Common Stock and the number of class D warrants and class E warrants to be
offered and the beneficial ownership of common stock immediately after the
offering assuming the securities to be offered by them are sold, in which case
none of the selling securityholders would beneficially own any class D or
class E warrants after the offering:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Number of Shares of
Common Stock,
Shares of Common Number of Class D Warrants,
Stock Beneficially Class D and Class E Class E Warrants Shares of Common
Owned Prior to the Warrants Beneficially and Common Stock Stock Beneficially
Offering (1)(2) Owned Immediately Underlying Class D Owned After the
Prior to the Offering and Class E Offering (3)
Warrants
Being Offered
- -----------------------------------------------------------------------------------------------------------------------------
Selling Securityholder Number % Number % Number %
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Geoffrey F. Hewitt (4) 2,165,819 4.5 532,528 4.6 285,628 Shs. 1,347,663 2.3
(5) E Wrnts 532,528 E Wrnts.
532,528 Underlying Shs.
- -----------------------------------------------------------------------------------------------------------------------------
Byron A. Dennenberg (4) 1,760,476 3.7 360,238 3.7 132,965 Shs. 1,267,273 2.2
(6) E Wrnts. 360,238 E Wrnts.
360,238 Underlying Shs.
- -----------------------------------------------------------------------------------------------------------------------------
Irwin J. Gruverman (4) 1,460,815 3.0 302,705 3.1 8,620 Shs. 855,405 1.5
(7) E Wrnts. 8,620 E Wrnts.
8,620 Underlying Shs.
- -----------------------------------------------------------------------------------------------------------------------------
G&G Diagnostics, L.P. II(4) 1,170,095 2.5 294,085 3.0 294,085 Shs. 581,925 1.0
(8) E Wrnts. 294,085 E Wrnts.
294,085 Underlying Shs.
- -----------------------------------------------------------------------------------------------------------------------------
Walter Haemmerli 6,877,674 13.4 895,800 610,000 Shs. 4,029,874 6.6
(9) D Wrnts. 47.3 32,000 D Wrnts.
976,000 610,000 E Wrnts.
E Wrnts. 10.0 642,000 Underlying Shs.
- -----------------------------------------------------------------------------------------------------------------------------
<PAGE>
22
- -----------------------------------------------------------------------------------------------------------------------------
Privatbank Vermag AG (4) 4,169,160 8.4 863,800 D 366,000 Shs. 2,573,360 4.3
(10) Wrnts. 45.5 863,800 D Wrnts.
366,000 E 366,000 E Wrnts.
Wrnts. 3.8 1,229,800 Shs.
- -----------------------------------------------------------------------------------------------------------------------------
Melvin W. Pelley (4) 2,387,901 5.0 482,040 5.0 187,040 Shs. 1,718,821 2.9
(11) E Wrnts. 482,040 E Wrnts.
482,040 Underlying Shs.
- -----------------------------------------------------------------------------------------------------------------------------
Thomas A. Collins (4) 509,962 1.1 32,481 * 32,481 Shs. 445,000 *
(12) E Wrnts. 32,481 E Wrnts.
32,481 Underlying Shs.
- -----------------------------------------------------------------------------------------------------------------------------
Gerald T. Owens (4) 409,237 1.0 39,965 36,207 Shs. 296,858 *
(13) D Wrnts. 2.1 39,965 D Wrnts.
36,207 36,207 E Wrnts.
E Wrnts. * 76,172 Underlying Shs.
- -----------------------------------------------------------------------------------------------------------------------------
Continental Capital & 1,599,000 3.4 - - 999,000 Shs. 600,000 1.0
Equity Corp. (14)
- -----------------------------------------------------------------------------------------------------------------------------
Totals (15) 17,170,884 30.4 935,765 2,952,053 Shs. 11,790,694 18.3
D Wrnts. 49.4% 935,765 D Wrnts.
2,722,199 2,722,199 E Wrnts.
E Wrnts. 28.0% 3,657,964 Underlying Shs.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Less than 1% of the total number of shares issued and outstanding.
(1) Unless otherwise noted, FiberChem believes that all persons named in
the table have sole voting and investment power with respect to the
shares 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.
(2) Based on 46,618,524 common stock outstanding as of March 17, 2000.
(3) Based on 58,246,211 shares to be outstanding following this offering.
(4) Geoffrey F. Hewitt is Chairman of the Board of Directors, Chief
Executive Officer and President of FiberChem, as well as Chief
Executive Officer of our subsidiary FCI Environmental, Inc.; Byron A.
Denenberg is a director of FiberChem; Irwin J. Gruverman is a director
of FiberChem; Walter Haemmerli is a director of FiberChem and is a
director and Vice-Chairman of Privatbank Vermag AG; Melvin W. Pelley is
Chief Financial Officer and Secretary of FiberChem and Chief Financial
Officer of FCI Environmental, Inc.; Thomas A. Collins is President of
FCI Environmental, Inc.; Gerald T. Owens is a Director of FiberChem.
<PAGE>
23
G&G Diagnostics, L.P. II is a limited partnership of which Irwin J.
Gruverman is a general partner;
(5) Includes 532,502 Class E Common Stock Purchase Warrants and an
aggregate of 765,000 shares of Common Stock issuable upon exercise of a
like number of options. Also includes 132 shares of Common Stock and 27
Class E Common Stock Purchase Warrants held by Mr. Hewitt's minor
child.
(6) Includes 360,238 Class E Common Stock Purchase Warrants and an
aggregate of 138,142 shares of Common Stock issuable upon exercise of a
like number of options.
(7) Includes 8,620 Class E Common Stock Purchase Warrants and an aggregate
of 164,000 shares of Common Stock issuable upon exercise of a like
number of options. Also includes 409,785 shares of Common Stock, 8,161
shares of Convertible Preferred Stock, convertible into 81,610 shares
of common stock, 294,085 Class E Common Stock Purchase Warrants, and a
$50,000 note convertible into 384,615 shares of Common Stock held by
G&G Diagnostics, L.P. II, of which Mr. Gruverman is a principal.
(8) Includes 8,161 shares of Convertible Preferred Stock convertible into
81,610 shares of Common Stock, 294,085 Class E Common Stock Purchase
Warrants, and a $50,000 note convertible into 384,615 shares of Common
Stock.
(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, 610,000 Class E Common Stock Purchase Warrants, an aggregate of
125,000 shares of Common Stock issuable upon exercise of a like number
of options, $156,000 of Senior Convertible 8% notes convertible into
678,261 shares of Common Stock held by Manport AG, of which company Mr.
Haemmerli is Chief Executive Officer, and a $50,000 9% note convertible
into 384,615 shares of Common Stock. Also includes 1,286,500 shares of
Common Stock, 863,800 Class D Common Stock Purchase Warrants, 366,000
Class E 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.
(10) Includes 863,800 Class D Common Stock Purchase Warrants, 366,000 Class
E Common Stock Purchase Warrants, and 165,286 shares of Convertible
Preferred Stock convertible into 1,652,860 shares of Common Stock.
(11) Includes 482,040 Class E Common Stock Purchase Warrants, an aggregate
of 530,000 shares of Common Stock issuable upon exercise of a like
number of option, and $65,000 in Convertible 9% Notes, convertible into
555,958 shares of Common Stock.
(12) Includes 32,481 Class E Common Stock Purchase Warrants and an aggregate
of 395,000 shares of Common Stock issuable upon exercise of a like
number of options.
<PAGE>
24
(13) Includes 39,965 Class D Common Stock Purchase Warrants, 36,207 Class E
Common Stock Purchase Warrants and an aggregate of 192,000 shares of
Common Stock issuable upon exercise of a like number of options.
(14) Shares and warrants issued as compensation for financial consulting
services. Includes 600,000 Warrants to purchase Common Stock.
(15) Shares which are deemed beneficially owned by more than one selling
securityholder have been included in the totals only once.
PLAN OF DISTRIBUTION
The shares of common stock issuable upon exercise of the class D and
class E warrants are being offered by FiberChem directly to securityholders
without an underwriter.
The shares of common stock issuable upon exercise of the balance of
warrants and options covered by this prospectus also are being offered by
FiberChem directly to the securityholders, without an underwriter.
The 965,765 outstanding class D warrants being offered pursuant to
this prospectus are part of an authorized class of 2,664,103 identical
warrants, of which 1,895,175 warrants were outstanding at March 17, 2000. The
class D warrants have traded only sporadically and are not quoted on any
securities market. They are being offered by the holders thereof and may be
sold in the over-the-counter market, or privately, through broker-dealers
selected by the holders thereof, or as principals.
Holders of the class D warrants offered by this prospectus who
exercise the warrants may sell the common stock purchased upon their exercise
in the over-the-counter market, or privately, through broker dealers selected
by the holders thereof, or as principals.
The 2,722,199 outstanding class E warrants being offered pursuant to
this prospectus, are part of a class of 9,542,512 originally issued identical
warrants that are publicly traded. They are being offered by the holders
thereof and may be sold in the over-the-counter market, or privately, through
broker-dealers selected by the holders thereof, or as principals.
Holders of the class E warrants offered by this prospectus who
exercise the warrants may sell the common stock purchased upon their exercise
in the over-the-counter market, or privately, through broker dealers selected
by the holders thereof, or as principals.
There are 2,952,053 shares of outstanding common stock covered by
this prospectus offered by the holders thereof for their own account and not
that of FiberChem. Such shares may be sold in the over-the-counter market
through brokers, or otherwise.
Usual and customary or negotiated brokerage fees or commissions may
be paid by the holders in connection with such sales.
<PAGE>
25
The selling securityholders, their respective transferees,
intermediaries, donees, pledgees or other successors in interest through whom
the selling securityholders' common stock and warrants are sold may be deemed
"underwriters" within the meaning of 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.
FiberChem will pay all expenses incident to the registration of the
securities covered by this prospectus. FiberChem will not pay, among other
expenses, commissions and discounts of brokers, dealers or agents.
The sale of the common stock and warrants are subject to the
prospectus delivery and other requirements of the Securities Act. To the
extent required, FiberChem 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 or 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 FiberChem offered by this
prospectus may not simultaneously engage in market-making activities with
respect to the common stock of FiberChem during the applicable "cooling off"
period five business days prior to the commencement of such distribution. The
selling securityholders will also be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, 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.
DESCRIPTION OF SECURITIES
The following summary descriptions of FiberChem's securities are
qualified in their entirety by reference to FiberChem's Certificate of
Incorporation and By-Laws, copies of which are available upon request.
COMMON STOCK
FiberChem is authorized to issue 150,000,000 shares of common stock,
$.0001 par value, of which 46,618,524 shares of common stock were issued and
outstanding as of March 17, 2000. As of March 17, 2000, there were
approximately 534 record holders of common stock. All of the outstanding
shares of common stock are duly and validly issued, fully paid and
non-assessable.
<PAGE>
26
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. FiberChem 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 FiberChem, holders of common stock
are entitled to share ratably in all assets of FiberChem 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 FiberChem. 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
FiberChem. However, FiberChem'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. FiberChem's Board of Directors currently has five Directors.
CLASS D WARRANTS
In 1990, FiberChem issued 2,205,871 class D warrants in connection
with a rights offering. Each class D warrant entitles the holder thereof to
purchase one share of FiberChem's common stock at an exercise price of $1.25
per share through September 15, 2000. The class D warrants are not subject to
redemption.
The class D 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 FiberChem and certain other
events.
The class D warrants may be exercised upon surrender of the class E
warrant certificate on or prior to the expiration date at the offices of
FiberChem, with the exercise form on the reverse side of the class D warrant
certificate completed and executed as indicated, accompanied by full payment
of the exercise price (by check payable to FiberChem) for the number of Class
D warrants being exercised. The class D warrant holders do not have the right
or privileges of holders of common stock.
Corporate Stock Transfer located in Denver, Colorado, is the Warrant
Agent with respect to the class D warrants.
There are 1,895,175 shares of common stock issuable upon exercise of
the class D warrants covered by this prospectus.
CLASS E WARRANTS
<PAGE>
27
In 1998 and 1999, FiberChem issued 9,842,512 class E warrants in
connection with a rights offering and in exchange for other outstanding
warrants. Each class E warrant entitles the holder thereof to purchase one
share of FiberChem's common stock at an exercise price of $.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 FiberChem, if for any period
of 30 consecutive trading days the last reported sales price for its common
stock for each trading day during such period is at least 200% of the then
current exercise price, subject to adjustment. FiberChem may then, upon
notice to the registered holders, redeem the Class E Warrants at a price of
$.05 per warrant.
The Class E Warrants contain provisions that protect the holders
thereof against dilution. The exercise price is subject to adjustment in the
event of stock splits, stock dividends, reclassifications, recapitalizations,
reorganizations, mergers or consolidations of FiberChem 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
FiberChem, 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 FiberChem) for the number of Class
E Warrants being exercised. The Class E Warrant holders do not have the
rights or privileges of holders of common stock.
Corporate Stock Transfer located in Denver Colorado is the Warrant
Agent with respect to the Class E Warrants.
There are 9,732,512 shares of common stock issuable upon exercise of
the Class E warrants covered by this prospectus.
FiberChem 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 D and Class E Warrants reside in order to comply with
applicable laws in connection with the exercise of the Class D and Class E
Warrants and the resale of the shares of common stock issuable upon such
exercise. FiberChem 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
D and Class E Warrants, and the shares issuable upon exercise of the Class D
and Class E Warrants and to take appropriate action under state securities
laws. There can be no assurance that FiberChem 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 D and Class E Warrants and the exercise of the Class E Warrants
and resale or other disposition of the underlying shares to be effected.
OTHER WARRANTS
<PAGE>
28
FiberChem sold 3,333,333 warrants to non U.S. persons in May 1996,
of which 1,637,000 warrants are outstanding. 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 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
FiberChem 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 FiberChem
or options or rights or warrants to purchase securities of FiberChem
(excluding those rights and warrants referred to above and cash dividends or
distributions from current or retained earnings). FiberChem may at any time
or from time to time reduce the exercise price temporarily or permanently.
Holders of these warrants do not have any of the rights or privileges of
stockholders of FiberChem.
These 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. The 1,637,000 shares of common stock issuable upon
exercise of the outstanding warrants are covered by this prospectus.
In September 1995, FiberChem issued 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. Warrants to purchase 37,500
shares remain outstanding. The 37,500 shares of common stock issuable upon
exercise of the outstanding warrants are covered by this prospectus.
REPORTS TO STOCKHOLDERS
FiberChem 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 FiberChem may deem to be appropriate or as may
be required by law or by the rules or regulations of any stock exchange on
which FiberChem's common stock is listed. FiberChem's fiscal year end is
September 30.
LEGAL MATTERS
The legality of the securities offered by this prospectus will be
passed upon for FiberChem by Snow Becker Krauss P.C., New York, New York.
Snow Becker Krauss P.C. owns 330,775 shares of common stock and 302,275 Class
E warrants. SBK Investment Partners, an investment entity of members of Snow
Becker Krauss P.C. owns 100,000 shares of common stock and 6,250 Class D
warrants.
EXPERTS
<PAGE>
29
The consolidated balance sheet of FiberChem, Inc. and subsidiaries
as of September 30, 1999 and the related consolidated statements of
operations, stockholders' deficiency and cash flows for each of the two years
in the period ended September 30, 1999 have been incorporated by reference
and incorporated in the Registration Statement in reliance upon the report of
Goldstein Golub Kessler LLP, independent certified public accountants, and
upon the authority of said firm as experts in accounting and auditing.
<PAGE>
30
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Prospectus Summary
Risk Factors
Use of Proceeds
Market for Common Equity and Related Shareholders Matters
Selling Securityholders
Plan of Distribution
Description of Securities
Legal Matters
Experts
</TABLE>
16,664,240 Shares of
Common Stock,
935,765 Class D
Common Stock
Purchase Warrants,
2,722,199 Class E
Common Stock
Purchase Warrants
of
FiberChem, Inc.
-----------
PROSPECTUS
-----------
, 2000
-------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses payable by FiberChem in connection with the issuance and
distribution of the securities being registered are estimated as follows:
<TABLE>
<S> <C>
SEC Registration Fee.................................................................. $ 2,148.31
--------
Printing ............................................................................ 11,000.00
---------
Legal Fees and Expenses............................................................... 15,000.00
---------
Accounting and Auditing Fees
and Expenses......................................................................... 5,000.00
--------
Miscellaneous......................................................................... 1,851.69
--------
Total............................................................................ $ 35,000.00
===========
</TABLE>
- ----------------------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") permits
a corporation organized thereunder to indemnify its directors and officers
for certain of their acts. The Articles of Incorporation of FiberChem are
framed so as to conform to the DGCL.
The laws of Delaware provide for indemnification of officers and
directors who are totally successful in defending themselves, by placing a
restrictive provision in the Articles of Incorporation.
Delaware law provides that a director who is found to be liable for
negligence or misconduct in the performance of his duty to FiberChem, is
indemnified if a court, upon application, finds that despite the adjudication
of liability, but in view of all circumstances of the case, such person is
fairly and reasonably entitled to indemnification for such expenses which the
court deems proper.
FiberChem's By-Laws provide for indemnification of officers and
directors, except in relation to matters as to which they are finally
adjudged to be liable for negligence or misconduct, but only if the
corporation is advised in writing by its counsel that in his opinion the
person indemnified did not commit such negligence or misconduct. The DGCL
provides that an officer or director may be indemnified if he (a) conducted
himself in good faith, (2) reasonably believed, in his official capacity with
the corporation, that his conduct was in the corporation's best interest, or
(3) in all other cases, his conduct was at least not opposed to the
corporation's best interest; however, if in connection with a proceeding by
or in the right of the corporation in which he was adjudged liable to the
corporation or in connection with any proceeding charging improper personal
benefit to the director, whether or not involving action in his official
capacity, in which he was adjudged liable on the basis that personal benefit
was improperly received by him, Delaware law provides that indemnification is
not available.
II-2
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
3.1 Articles of Incorporation of Registrant, as amended. (1)
3.2 By-Laws of Registrant. (2)
4.1 Class D Warrant Agreement of the Registrant with form of Warrant
Certificate. (3)
4.2 Form of 8% Senior Convertible Note Due 1999 issued in the Company's
February 1996 private placement. (4)
4.3 Form of Warrant to purchase Common Stock on or before May 31, 2001. (5)
4.4 Form of Class E Common Stock Purchase Warrant. (6)
*5.1 Opinion of Snow Becker Krauss P.C.
10.1 Lease Agreement and Reimbursement Agreement dated July 27, 1989 by and
between the Company and Howard Hughes Properties for Hughes Airport
Center, 1181 Grier Drive, Suite B, Las Vegas, Nevada. (7)
10.2 Amendment dated May 6, 1991 and September 26, 1991 to the Industrial
Real Estate Lease (Exhibit 10.10) for the Company's facilities. (8)
10.3 Employee Stock Bonus Plan. (3)
10.4 Amendments dated October 23, 1990 and February 21, 1991 to the
Industrial Real Estate Lease (Exhibit 10.10) for the Company's
facilities. (9)
10.5 Non-qualified stock option plan. (10)
10.6 Qualified Stock Option Plan. (11)
10.7 Consulting agreement by and between the Company and with Irwin J.
Gruverman, dated November 4, 1993. (12)
10.8 Qualified Stock Option Plan. (13)
</TABLE>
- ----------------------
(1) Incorporated by reference from the Company's January 13, 1988 Post
Effective Amendment to the Registration Statement on Form S-18 (File
No. 33-12097-C) as declared effective on March 3, 1988.
(2) Incorporated by reference from the Company's April 15, 1987 Amendment
to the Registration Statement on Form S-18 (File No. 33-12097-C) as
declared effective on March 3, 1988.
(3) Incorporated by reference from the Company's Registration Statement No.
33-35985
(4) Incorporated by reference from the Company's Current Report on Form
8-K for February 15, 1996.
(5) Incorporated by reference from the Company's Current Report on Form
8-K on July 15, 1996.
(6) Incorporated by reference from the Company's Registration Statement on
Form SB-2 for October 23, 1998 (File No. 333-46555).
(7) Incorporated by reference from the Company's Registration Statement No
33-29338.
(8) Incorporated by reference from the Company's Annual Report on Form
10-K for September 30, 1991.
(9) Incorporated by reference from the Company's April 24, 1991 Post
Effective Amendment to the Registration Statement on Form S-18 (File
No. 33-35985) as declared effective on April 30, 1991.
(10) Incorporated by reference from the Company's Registration Statement on
Form S-8 for April 28, 1992. (No. 33-47518).
(11) Incorporated by reference from the Company's Proxy Statement dated
May 3, 1993.
(12) Incorporated by reference from the Company's Report on Form 10-K for
September 30, 1993.
(13) Incorporated by reference from the Company's Proxy Statement dated
May 23, 1994.
(14) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1994.
II-3
<PAGE>
<TABLE>
<C> <S>
10.9 FCI FiberChem, Inc. and FCI Environmental, Inc. 401(k) Profit Sharing
Plan. (14)
10.10 Qualified Stock Option Plan (15)
10.11 License Agreement with Texas Instruments, Incorporated, dated June 15,
1995. (16)
10.12 Cooperative Development Agreement with Texas Instruments, Incorporated,
dated June 15, 1995. (16)
10.13 Form of Distribution Agreement. (17)
10.14 Form of agreement for services with Gordon Werner and others dated as
of September 15, 1995. (17)
10.15 Agreement dated November 8, 1996 by and between FCI Environmental, Inc.
and Alcohol Sensors International, Ltd. CERTAIN INFORMATION IN THIS
EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SEC PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT. (18)
10.16 Agreement dated October 1, 1996 by and between FCI Environmental, Inc.
and Autronica AS. (18)
10.17 OEM Strategic Alliance Agreement dated June 30, 1996 by and between
Whessoe Varec, Inc. and FCI Environmental, Inc. (18)
10.18 1997 Employee Stock Plan (19)
10.19 Employment agreement with Geoffrey F. Hewitt dated October 1, 1997.
(20)
10.20 Employment agreement with Melvin W. Pelley dated October 1, 1997.
(20)
10.21 Employment Agreement with Thomas A. Collins dated October 1, 1997.
(20)
10.22 Amendment to Whessoe Varec, Inc. OEM Strategic Alliance Agreement
dated August 13, 1997. (20)
10.23 Agreement dated October 2, 1997 between the Company and entrenet
Group, L.L.C. (20)
*10.24 Agreement dated May 10, 1999 between the Company and Continental
Capital & Equity Corporation 10.25 1999 Employee Stock Option Plan (21)
**13.1 Annual Report on Form 10-KSB for the fiscal year ended September 30,
1999.
**13.2 Quarterly Report on Form 10-QSB for the fiscal quarter ended December
31, 1999.
**13.3 Current Report Form 8-K (Date of Earliest Event Reported December 6,
1999)
*21.1 Subsidiaries of the Registrant.
*23.1 The consent of Snow Becker Krauss P.C. is included in Exhibit 5.1
**23.2 Consent of Goldstein Golub Kessler LLP.
*24.1 Powers of Attorney
</TABLE>
- -----------------------------------------
(15) Incorporated by reference from the Company's Report on Form S-8 for
August 1, 1995.
(16) Incorporated by reference from the Company's Report on Form 8-K/A for
August 30, 1995.
(17) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1995.
(18) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1996.
(19) Incorporated by reference from the Company's Proxy Statement dated May
20, 1997.
(20) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1997.
(21) Incorporated by reference from the Company's registration statement on
form S-8 filed March 1, 2000 (File No. 333-31412).
* Previously filed.
** Filed herewith.
II-4
<PAGE>
Item 17. UNDERTAKINGS
RULE 415 OFFERING
FiberChem hereby undertakes:
(a)(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended (the "Act");
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information
in the registration statement;
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(e) REQUEST FOR ACCELERATION OF EFFECTIVE DATE. Insofar as
indemnification for liabilities arising under the Act may be permitted to
directors, officers and controlling persons of the small business issuer
pursuant to the foregoing provisions, or otherwise, the small business issuer
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by FiberChem
of expenses incurred or paid by a director, officer or controlling person of
FiberChem in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, FiberChem will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Las Vegas, State of Nevada, on
March 24, 2000
FIBERCHEM, INC.
By:
/s/ GEOFFREY F. HEWITT
------------------------------
Geoffrey F. Hewitt
CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
By:
/s/ MELVIN W. PELLEY
------------------------------
Melvin W. Pelley
CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on
March 24, 2000 in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<S> <C>
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
/s/ GEOFFREY F. HEWITT OF THE BOARD (PRINCIPAL EXECUTIVE
- ------------------------------ OFFICER)
GEOFFREY F. HEWITT CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
/s/ MELVIN W. PELLEY OFFICER)
- ------------------------------
MELVIN W. PELLEY
*/s/ WALTER HAEMMERLI DIRECTOR
- ------------------------------
WALTER HAEMMERLI
II-6
<PAGE>
*/s/ IRWIN J. GRUVERMAN DIRECTOR
- -------------------------------
IRWIN J. GRUVERMAN
*/s/ BYRON A. DENENBERG DIRECTOR
- --------------------------------
BYRON A. DENENBERG
*/s/ GERALD T. OWENS DIRECTOR
- --------------------------------
GERALD T. OWENS
*/s/ Geoffrey F. Hewitt
- --------------------------------
GEOFFREY F. HEWITT, as attorney-in-fact
for each of the above persons.
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Name
<S> <C>
13.1 Annual Report on Form 10-KSB for the fiscal year ended September
30, 1999.
13.2 Quarterly Report on Form 10-QSB for the fiscal quarter ended
December 31, 1999.
13.3 Current Report on Form 8-K (Date of Earliest Event Reported
December 6, 1999).
23.2 Consent of Goldstein Golub Kessler LLP.
</TABLE>
II-8
<PAGE>
U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
-------- --------
Commission file number 0-17569
-------------------
FIBERCHEM, INC.
(Name of small business issuer in its charter)
Delaware 84-1063897
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1181 Grier Drive, Suite B, Las Vegas, Nevada 89119
(address of principal executive offices) (Zip Code)
Issuer's telephone number: (702) 361-9873
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.0001 Par Value
-----------------------------------------
(Title of class)
Indicate by check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. YES X
NO__
Indicate by check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $1,957,110
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the last sale price of such stock on December 23, 1999
of $0.19 was $6,451,593.
As of December 23, 1999, the Issuer had 40,126,538 shares of Common Stock,
par value $.0001 per share, outstanding.
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
(a) BUSINESS DEVELOPMENT
FiberChem, Inc. ("FiberChem," the "Company" or "FCI") was formed on April
6, 1987, under the name Tipton Industries, Inc. ("Tipton"). On December 18,
1987, Tipton acquired all of the issued and outstanding stock of FiberChem,
Inc., a New Mexico corporation, for approximately 79% of Tipton's Common Shares.
The transaction was accounted for as a reverse purchase of Tipton by the
Company. Pursuant to stockholder approval on December 21, 1988, Tipton and
FiberChem (New Mexico) were merged into the Company, a newly formed Delaware
corporation, which changed its name to FiberChem, Inc.
From inception through the period ended September 30, 1999, the Company
and its wholly-owned subsidiary FCI Environmental, Inc. ("FCI Environmental")
have operated in the same industry segment.
The Company announced on December 6, 1999 that it has executed a definitive
Agreement with Intrex Data Communications Corp. ("Intrex") of Vancouver, British
Columbia, to combine the businesses of FiberChem and Intrex. Under the terms of
the Agreement, the shareholders of each company will own an equal share of the
combined company, to be renamed DecisionLink, Incorporated.
Intrex is a private company and its proprietary Internet and communications
technology provides customers with a real-time system for communicating data to
or from remote or mobile assets using wireless, satellite or cellular data
systems. A report on Form 8-K describing the Agreement was filed on December 27,
1999.
This report includes forward-looking statements relating to the Company's
operations that are based on Management's and third parties' current
expectations, estimates and projections. These statements are not guarantees of
future performances and actual results could differ materially. The statements
in this report regarding FCI's proposed business combination with Intrex, the
combined entity's delivery of services over the Internet and the size of the
market for the combined company's services, are forward-looking statements that
involve risks and uncertainties. These risks and uncertainties include, FCI's
ability to complete the combination, the combined entity's ability to market its
services using the two companies' technologies, the timely development and
acceptance of new products, final promulgation and enforcement of regulations,
the impact of competitive products and pricing, the timely funding of customer's
projects, customer payments to the Company and other risks detailed from time to
time in the Company's SEC reports.
(b) BUSINESS OF ISSUER
FiberChem develops, produces, markets and licenses its patented fiber optic
chemical sensor ("FOCS-Registered Trademark-") technology which detects and
monitors hydrocarbon pollution in the air, water and soil. The Company has
developed a range of products and systems based on FOCS-Registered Trademark-,
which provide IN SITU and continuous monitoring capabilities with real-time
information. The Company also is 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 at least partially 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 slowdown at the
Federal level, the Company recognized that certain States represented
opportunities for aboveground tank leak detection and set about getting its
sensor products specified. At the same time, the phase-out of Freon-Registered
Trademark- presented the Company with an opportunity to establish its technology
as the preferred
2
<PAGE>
replacement for the existing Freon-Registered Trademark-/Infrared method for
measurement of total petroleum hydrocarbons (TPH) in process water streams.
During this refocusing process the Company also 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
Optoelectronic Group within TI's Semiconductor Group, then with its successor
company, Texas Advanced Optoelectronic Solutions, 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 gasoline vapor sensor, a carbon monoxide sensor, a
flammable gas sensor, a breath alcohol sensor and sensors for the detection of
toxic gasses.
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
aboveground 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 continuously monitor hydrocarbon levels in
applications such as storm water and waste water around industrial facilities.
The CMS-4000 is available with analog outputs for use in industrial applications
where some control functions need to be performed.
The use of on-board modems allows both versions of the CMS to warn of alarm
conditions through remote communication. Conversely, the unit itself can be
interrogated remotely to provide retrieval of logged data, status and service
information. This is particularly important for unmanned sites.
Up to sixteen of the Company's Digital Hydrocarbon Probes ("DHPs") can be
interfaced to the CMS-5000 to allow monitoring at several different locations
within a site. The DHP typically sells for about $4,000. The DHP can also be
used as a standalone product to interface with existing data loggers that use
the environmental industry standard communications protocol (referred to as
Standard Digital Interface ("SDI-12")). A second version of the DHP has been
developed by the Company. This product uses the RS-485 communications protocol,
allowing direct interface with computers and programmable logic controllers for
other industrial applications.
The OilSense-Registered Trademark--4000 was 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-Registered
Trademark--4000 sells for $20,000 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, process water, waste water
and storm water.
3
<PAGE>
A third version of the PHA-100 is the PHA-100WL. It is specifically
designed for measuring total petroleum hydrocarbons ("TPH") in produced water at
offshore petroleum production platforms and is designed to imitate the operation
of the infrared analyzer used in the existing Freon/Infrared method. It
typically sells for $6,375.
The PetroSense-Registered Trademark- Field Kit is a product that is an
integral part of each of the CMS, PHA-100 and DHP. The field kits contain
pre-mixed calibration solutions, manufactured to ISO 9001 standards and
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. The pre-mixed standards are available at
three hydrocarbon concentrations and represent continuing revenue potential for
the Company. A vapor calibration procedure has been developed for soil gas
applications. A field kit for the CMS-5000 contains a few months' worth of
supplies and the field kit for the DHP probes contains a 30-day supply. In
addition, refill kits are available to replenish each field kit on an "as
needed" basis.
The Company has pursued federal, state and local approvals for its
products. In November 1994, the Company received Underwriters Laboratories
approval for its product line in the United States and Canada. In April 1995,
the Company received notification from KEMA, an authorized certification body
for Europe, that its products had met their highest standard for intrinsic
safety (CENELEC), and, as such, were approved for use in all hazardous
environments including offshore platforms. The products have also been designed
and tested to meet European Union CE Mark standards which went into effect
January 1, 1996 for the European Community.
Both the Company's PHA-100 and DHP have been extensively tested by Ken
Wilcox Associates, Inc. ("KWA"), an independent testing laboratory, in
accordance with EPA protocols. These evaluations meet the requirements of the
EPA for external vapor-phase leak detection systems and liquid-phase out-of-tank
product detectors. KWA also certified that the data produced by the Company's
products was equivalent to the EPA's standard method for groundwater analysis.
The Company's products are 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's CMS-5000 product line has been 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
for all types of sites by the Florida Department of Environmental Protection
("DEP").
An application of the FOCS-Registered Trademark- technology has been
introduced 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 water returned to
the ocean during the oil production process. The conventional Freon-Registered
Trademark- method involves periodic sampling of produced water output and
analysis of the samples in the oil production platform's laboratory. The
Company's products can be used to monitor the water output continuously, thereby
achieving a significant reduction in cost for the operator, both by eliminating
the use of Freon-Registered Trademark- and by optimizing the usage of chemical
agents used to facilitate removal of oil from produced water. Some operators see
the opportunity to minimize downtime in bad weather by continuously monitoring
the produced water even when the platform has been evacuated.
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
4
<PAGE>
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. The Company applies for certain
international patent rights in addition to United States patent rights as deemed
appropriate. 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 together
with regulatory agencies. 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
ABOVEGROUND STORAGE TANK MARKET
The Company had a Strategic Alliance (the "Alliance") for the Aboveground
Storage Tank (AST) market with Whessoe Varec, Inc. from June 30, 1996 until July
26, 1999, when the agreement was mutually terminated, as described below. The
primary target for the Alliance had 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 for larger tanks 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 all such
sites. Compliance is required by December 31, 1999.
In February 1999, Whessoe Varec and FCI targeted customer sites with over
700 tanks. These sites include coastal bulk storage, inland jobbers, industrial,
military, airports, power generation and government facilities. In addition to
these targeted accounts, there is a secondary market of unlined tanks which is
yet to be qualified. Florida DEP held its annual conference during May 1999 in
Tampa and Daytona Beach to update the tank community about its requirements for
compliance by December 31, 1999 and its commitment to that compliance date. Some
companies have been operating on the assumption that there would be a delay in
the enforcement process, but Florida DEP remained firm in its commitment, while
redefining compliance as having placed orders for approved equipment by December
31, 1999. Marathon/Ashland, Miami International Airport, Tampa Airport, Orlando
Airport, West Palm Beach Airport, City of Lakeland, and Motiva (Texaco) have
recently purchased FCI's PetroSense-Registered Trademark- equipment. Florida
Power, GATX and Motiva (Shell) have added tanks or locations to their installed
base. These orders and commitments represented over $1,000,000 in revenue to
FCI. There is usually about a six to eight week delay between order and
installation, and therefore full revenue recognition. Management believes that
through the compliance date of December 31, 1999, (compliance now being defined
as having placed orders for approved equipment by the deadline), the majority
population of the regulated community which has not yet taken action to achieve
compliance will be motivated to comply, with the result being significant
revenues to the Company from this market through at least the third fiscal
quarter of 2000. Other companies including Coastal Fuels, Petroleum Fuels
(Jacksonville) and Air Kaman (Jacksonville) have also placed new orders for the
Company's products.
5
<PAGE>
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-Registered
Trademark- 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-Registered Trademark- and the Freon-Registered Trademark-/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 and
freedom from solvent use. The Company offers two different products to this
marketplace. The OilSense-Registered Trademark--4000 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 at least 30 days between routine
service. At $20,000 to $35,000, it offers good value where manpower is at a
premium. The OilSense-Registered Trademark--4000 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-Registered Trademark-/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-Registered Trademark-/IR method without the use of
Freon-Registered Trademark- 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.
While the development of the offshore market for the Company's
OilSense-Registered Trademark--4000 and PHA-100WL continued to be slower than
originally anticipated, by the end of the reporting period there were
indications that the situation was improving. The combination of the lack of
availability of Freon-Registered Trademark- and higher oil prices generated new
orders for the Company. CNG Producing Company has placed a blanket order for
portable units for twelve of its Gulf of Mexico platforms. This brings the
number of customers to seventeen and the number of units to well over 60. Amoco,
Spirit Energy 76 (Unocal) and Pennzoil have committed to the use of the
Company's products on their platforms in the Gulf of Mexico. Spirit Energy has
installed 19 PHA-100WLs and Amoco has installed the Company's
OilSense-Registered Trademark--4000 and PHA-100WLs at 9 of its more than 25
sites. During December 1998, Pennzoil placed its first order for the Company's
PHA-100WLs for 2 of its 15 sites. The recently reported potential link between
the chemical n-hexane and the incidence of brain cancer at a now closed research
laboratory in Naperville, Illinois, has brought into question the adoption by
some operators of the EPA's standard reference method which proposed the use of
n-hexane as a replacement for Freon-Registered Trademark- for use in reference
lab environments. This would eliminate the one serious competitor to the
Company's portable unit and would impact on some of the larger operators in the
Gulf and elsewhere. Merger activity among the major oil companies continues to
slow installations, but is not believed to have significantly affected the size
of the opportunity.
After the end of the reporting period, new orders were received from Amoco,
Spirit Energy 76, (4 units), Murphy Oil, (4 units) and Santa Fe Resources.
The Company is continuing its marketing efforts in other major offshore
production areas such as the North Sea and the Persian Gulf. During January
1999, the Company received its first order from Oman.
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 (Taiwan). 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
6
<PAGE>
ROC military are ongoing and other projects are pending. UECI has purchased in
excess of $200,000 of the Company's products. UECI is currently involved with
introduction of FCI products into the People's Republic of China where there is
a large potential project for underground storage tank leak detection. UECI was
successful in introducing the Company's products to China Petroleum Corp, which
bought 14 portable units and to Formosa Plastics which purchased 3 units, during
the reporting period.
AGREEMENT WITH SENVECO OY, FINLAND
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"), was 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 existing pollution
appears to warrant substantial cleanups of soil and water. 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 European Union Baltic Intereg contract to provide consulting and monitoring
services to locate "hot spots" of pollution in the Kola Peninsula region of
Russia. The contract has not yet been funded and recent events in Russia bring
into doubt whether these contracts will actually become effective. As a result,
the Company divested itself of its interest in Senveco, which remains an
authorized distributor.
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 were
developing the Japanese market for the Company's products, initially limited to
petroleum hydrocarbon products. The agreement lapsed during Fiscal 1999.
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. The slowdown in the Asian economies may further delay
significant revenues, although recently, activity has picked up with a sale made
to a key regulatory agency.
SIPPICAN
The Company 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 transferred to Osmonics, Inc., a leading supplier
of potable water equipment to the beverage industry and the water utility
market. Neither agreement has resulted in significant revenues for the Company
to date.
COMPETITION
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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, 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 including gasoline, diesel and jet fuel, 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.
Management believes that the Company's Florida certification is a direct result
of this capability.
Most tank leak detection methods currently in use are periodic tests. The
early warning and early detection of leaks provided by the Company's continuous
monitoring systems enable users to minimize environmental damage, liability and
cleanup costs relating to leaks that might otherwise occur and remain undetected
between periodic tests. In addition, the Company's products permit tanks to be
evaluated without being taken out of service, whereas, many competing methods
require that tanks be taken out of service for a period of time. The AST leak
detection market requires regulations to be enforced to exist. End users usually
do not purchase leak detection equipment except for regulatory compliance.
However, when regulations are promulgated, and when deadlines are set and
enforced, the result can be a significant opportunity to supply products to the
regulated community in a readily definable period of time. This is, in fact, the
situation in the Florida AST market. Companies have to be in compliance by
December 1999. Of the three options - continuous leak detection, double bottomed
tanks and dike liners - continuous leak detection is by far the lowest cost.
Further, to be a supplier for each of the three options, products have to be
certified or approved. In the case of leak detection, a stringent third-party
testing process is required prior to acceptance. Only certified products from
suppliers who have passed acceptance are considered when compliance plans are
reviewed by Florida DEP. To date, only the Company's PetroSense-Registered
Trademark- product line has been approved for continuous detection of leaks from
ASTs at all sites, although there can be no assurance that other products will
not be approved.
Competitors such as Tracer Research, Inc. (Tucson, AZ) and NESCO, Inc.
(Tulsa, OK) 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.
This is also true of Sensorcomm, of Bartlett, TN, which recently received
conditional approval for relatively clean sites. Their approval is based on
specific site conditions, including tank foundation materials, groundwater
level, and prior contamination limits.
NESCO, Inc. 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 and has not been approved for use in Florida for contaminated sites
where higher levels of hydrocarbons already exist. 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
8
<PAGE>
correlating with laboratory results. Additionally, the products' analog outputs
offer the capability to provide feedback loops for process control. Turner
Designs (Sunnyvale, CA), Filco (Lafayette, LA) and Wilks (Norwalk, CT) also
offer alternatives to the Freon-Registered Trademark-/IR method, sometimes by
the use of hexane or other solvents as an extrant. Management believes that the
technology of each is limited and in each case these competitors do not provide
the full line of both portable and continuous monitoring products offered by the
Company.
The offshore produced water market exists because Freon-Registered
Trademark- 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-Registered Trademark-, 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.
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 early 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 slowdown at the federal level, the Company
recognized that the States 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-Registered Trademark- presented the Company
with an opportunity to establish its technology as the preferred replacement for
the existing Freon-Registered Trademark-/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 conducted 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 results are
scheduled to be released within the next few months. The State of Florida has
perhaps the most stringent regulations and FCI is the only company to have
certification for the continuous monitoring of all uncontaminated and
contaminated sites in Florida. Other states are expected to follow Florida and
promulgate AST regulations. Virginia promulgated its own similar regulations
during 1998. Pennsylvania, New Jersey, Minnesota, and Wisconsin have also
promulgated regulations.
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. The slowdown in the Asian and
Russian economies has delayed some of these projects.
9
<PAGE>
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 component parts and subassemblies are purchased by the Company, and
final assembly and testing is also performed in house. 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.
During 1998 the Company began a certification process for ISO 9001, the
international standard for the maintenance and improvement of product quality.
Due to reductions in personnel during Fiscal 1998 and 1999, the certification
process has been delayed. Certification is expected to be completed during
Fiscal 2000.
RESEARCH AND DEVELOPMENT
DEVELOPMENT AGREEMENTS WITH IWACO (HOLLAND)
The Company's Port of Rotterdam projects with the Dutch engineering firm
IWACO are ongoing. The Company has become an equal partner in both IWACO
programs relating to bioremediation and monitoring technologies. The Company
benefits from access to data, technology, resources and personnel of the
programs' member companies which include TNO, the Dutch national research
organization, Shell International Products and Solvay S.A. In the event one of
the bioremediation technologies is selected for use, there would be a
significant need for monitoring instrumentation to ensure long-term satisfactory
operation. Evaluation of the various bioremediation technologies will continue
into calendar 2000. The technology development program is aimed at improving the
selectivity and sensitivity of the Company's products, and could open up large
new markets if successful.
DEVELOPMENT AGREEMENT WITH TNO
The Company has been invited to enter into a development agreement with
the Dutch government research agency TNO to cooperatively develop sensors based
on its FOCS technology for certain chemical compounds that cause off-taste in
some foods and beverages. The Company, TNO, the Dutch government and Coca Cola
(Holland) are to be co-funders of this project.
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
exploit 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
chemical matrix is usually developed by the Company. 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
10
<PAGE>
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 gasoline vapor sensor for a gasoline retailing application
- a carbon monoxide sensor for residential, medical and
automotive use
- sensors for the detection of toxic gasses and chemical warfare
agents
- a fuel/air ratio sensor for automotive use
- a fail-safe flammable gas sensor for a household appliance
control system
- a breath alcohol sensor for an ignition interlock device for
automotive use
These applications represent sensors with selling prices anticipated to be
in the $5 to $150 range depending upon application and volume.
The Company has sold 10,000 of the Sensor-on-a-Chip devices to
Industrial Scientific Corp. for use with its own proprietary coating for a
health and safety application.
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 of a
single-step immunoassay 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 replaced 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 was developed for carbon
monoxide (CO). Changes in the UL Standard for residential CO detectors and
significant changes in market dynamics adversely impacted on the introduction of
this product by TI. However, the Company is pursuing medical, security and
automotive applications for prospective OEM customers.
11
<PAGE>
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. Recently, TI licensed certain optoelectronic
technology to Texas Advanced Optoelectronic Solutions (TAOS), a group consisting
primarily of the same former TI employees. The Company continues to have a cross
license agreement with TI and a marketing agreement with TAOS.
AGREEMENT WITH ALCOHOL SENSORS INTERNATIONAL, LTD.
On November 8, 1996, the Company entered into an agreement with Alcohol
Sensors International, Ltd. (ASI) pursuant to which the Company granted ASI
exclusive right, title and interest (including sales and marketing rights) to
chemical sensors developed for breath alcohol (alcohol). In consideration
therefor, ASI agreed to market, promote and sell instruments employing such
alcohol sensors on a worldwide basis and to pay the Company development and
licensing fees over the term of the agreement. The term of the agreement is for
five years and may be renewed by ASI for successive five-year terms upon written
notice to the Company not less than sixty days prior to the expiration of the
prior term. Through September 30, 1999, ASI had not reported any sales of the
device subject to the licensing agreement, and during Fiscal 1999, ASI filed for
Chapter 11 bankruptcy.
JOINT DEVELOPMENT AGREEMENT WITH GILBARCO, INC.
The Company, through FCI Environmental, completed the development for
Gilbarco, Inc. ("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.
The Company's sensor development project with Gilbarco then moved on to a
pre-manufacturing mode driven by the expectation that CARB will require
suppliers of refueling equipment to certify their products to meet Onboard
Refueling Vapor Recovery Phase II ("ORVRII") requirements. FCI is in the process
of providing Gilbarco with a limited number of preproduction devices for use in
the certification process. Provided that certain key steps are completed by
CARB, Gilbarco should commence manufacturing products incorporating the
Company's Sensor-on-a-Chip-Registered Trademark- in order to meet the CARB
requirements. Gilbarco and FCI recently signed a support contract whereby
Gilbarco provides ongoing financial support to FCI through the approval process.
Revenues from this project are now expected to begin in Fiscal 2000, if the time
schedule is met, but there can be no assurance that this will actually occur.
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.
The Company built five prototypes for Bechtel under the contract during Fiscal
1998 and has received an order for ten more units which will be completed in the
first fiscal quarter of 2000.
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 Company's spending on research and development activities during Fiscal
1998 and 1999 was $752,892 and $546,398, respectively.
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<PAGE>
COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company has determined the costs and effects of compliance with
federal, state and local environmental laws to be minimal in amount and
exposure. The Company spends less than 1% of its total expenditures to comply
with the various environmental laws.
EMPLOYEES
As of September 30, 1999, 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; two scientists; six laboratory and manufacturing
technicians; one manager of manufacturing; one materials, production control,
shipping and receiving specialist; one sales applications specialist; and two
strategic business unit sales managers. The Company also employed two laboratory
and manufacturing technicians on a part-time basis.
ITEM 2. DESCRIPTION OF PROPERTIES
In September 1989, the Company leased approximately 15,000 square feet
of space in a new multi-tenant showroom/warehouse/distribution facility within
Hughes Airport Center, 1181 Grier Drive, Suite B, Las Vegas, Nevada. The Company
is currently using approximately 8,000 square feet of its facility for
production, 4,000 square feet for research, development and engineering and the
remaining 3,000 square feet for marketing and administrative purposes. The lease
was for five years and expired on February 28, 1995. The Company and the lessor
have agreed to a month-to-month lease which is terminable by either party upon
30 days' notice. Current base monthly payments under the month-to-month lease
are $12,786. Rent expense during Fiscal 1998 and 1999 was $170,869 and $172,015,
respectively. The Company is pursuing alternatives including a renewal of the
current lease at approximately the current base monthly rental charge.
ITEM 3. LEGAL PROCEEDINGS
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. The Company has
responded that the distribution agreement provides for arbitration, in Nevada,
and that, therefore, the French courts do not have jurisdiction, and further
that the claims are without merit. Rulings by the French court are scheduled for
January 20, 2000. 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., filed a lawsuit against FCIE in
the District Court of Harris County, Texas, 165th Judicial District. The lawsuit
was based on an alleged breach of warranty for goods purchased from FCIE. The
lawsuit was dismissed without prejudice to either party on January 19, 1999. On
February 18, 1999, the Company filed an action in Nevada against OCS to collect
amounts due from OCS for products sold to OCS, fees, expenses and damages
totaling approximately $200,000. The action was subsequently removed to the U.S.
District Court of Nevada, and OCS filed counter claims including an alleged
breach of warranty and claims for incidental and consequential damages for
$750,000. OCS has failed to file verified pleadings and has failed to engage
Nevada counsel as required by the Rules of the U. S. District Court. The Company
believes that its motion to dismiss the counterclaims is meritorious and should
be granted. The Court is expected to rule on the Company's motion to dismiss
OCS' counterclaims in January 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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There were no matters submitted to a vote of security holders during
the fourth quarter of the year ended September 30, 1999. The Company's 1998
Annual Meeting of Stockholders has been deferred until early 2000 to be held in
conjunction with the 1999 Annual Meeting.
14
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PART II
ITEM 5. MARKET FOR COMMON EQUITY 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>
Trading Period High Low
- ------------------------- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK 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
Second Quarter 0.28 0.13
Third Quarter 0.23 0.13
Fourth Quarter 0.21 0.12
FISCAL YEAR ENDING SEPTEMBER 30, 2000
First Quarter $0.23 $0.15
(October 9, 1999-December 23, 1999) $0.30 $0.11
</TABLE>
On December 23, 1999, the closing bid price of a share of the Company's
Common Stock was $0.19.
On December 23, 1999, the Company had approximately 445 holders of
record and had in excess of 3,500 beneficial holders of its Common Stock.
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% of
the number of shares of Convertible Preferred Stock held by such holder on the
date of declaration. In September 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.
Likewise, in September 1998 and September 1999, the Board of Directors
determined not to declare the annual dividends payable on November 1, 1998 and
1999. As a result, the undeclared dividends aggregating $1,028,848 (if elected
entirely in cash, or 53,981 additional shares of Convertible Preferred Stock if
elected wholly in additional shares) will accumulate in accordance with the
terms of the Convertible Preferred Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and notes thereto of the Company
appearing elsewhere in this Report.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On October 23, 1998, the Company granted, for no consideration to holders
of its Common Stock, Preferred Stock and warrants, transferable rights (the
"Rights") to subscribe for units (the "Units") at a subscription price of $0.22
per Unit. Each Unit consists of one share of Common Stock and one redeemable
Class E Warrant exercisable for one share of Common Stock at an exercise price
for one year (through October 23, 1999) at $0.25 per share; then through October
23, 2000 at $0.35; then through October 23, 2001 at $0.50 per share; then
through October 23, 2002 at $0.70 per share; then through October 23, 2003 (at
which time the Class E Warrants expire) at $0.90 per share. Each holder of
record as of October 16, 1998, of Common Stock and Warrants received one Right
for every four shares of Common Stock or Warrants held, and each holder of
Preferred Stock received 2.5 Rights for each share of Preferred Stock held. An
aggregate of 8,976,962 Rights were issued. An aggregate of 7,678,679 Rights were
exercised as of the close of the offering on December 22, 1998, resulting in
gross proceeds to the Company of $1,689,309 and the issuance of 7,678,679 shares
of Common Stock and a like number of Class E Warrants.
Of the total 7,678,679 Rights exercised, 4,195,209 were exercised for cash
of $922,946; 1,805,677 were exercised in exchange for the payment of advances
(and accrued interest thereon) from officers, directors and affiliates
aggregating $397,249; 272,727 were exercised in payment of a $60,000 note
payable to others; 489,347 were exercised in payment of $107,656 of deferred
salaries due to members of management of the Company; and 915,719 were exercised
in payment for legal, consulting and other services totalling $201,458.
The Company incurred $286,474 in legal, accounting, distribution and other
costs associated with the Rights Offering, resulting in net proceeds of
$1,402,835.
The Company's 8% senior convertible notes payable, convertible into Common
Stock at $0.4078 per share, became due on February 15, 1999. On February 2,
1999, the Company offered to exchange the Notes at their maturity for new Notes
(the "New Notes") with a conversion price of $0.23, which was established by
using the ten-day average closing price of the Common Stock prior to February
15, 1999. The New Notes provide for semi-annual interest payments at 8% per
annum in cash or at 12% per annum in stock (at the Company's option) and are due
February 15, 2002. The Company may require conversion if the closing bid price
of the Common Stock exceeds 200% of the conversion price for 20 consecutive
trading days. In all other material respects, the New Notes have terms similar
to those of the old Notes. In order to encourage exchange of the Notes for New
Notes, the Company offered a bonus, payable in Common Stock valued at
approximately current market, of 8% of the face amount of Notes exchanged for
New Notes. The Company offered an additional Common Stock bonus equal to 4% of
the face amount of notes exchanged if the holder agreed to accept additional New
Notes in payment for the semi-annual interest payment due February 15, 1999. All
of the $1,600,000 principal amount of old Notes were exchanged for New Notes,
and an additional $21,000 of New Notes were issued as payment of interest due on
$525,000 of old Notes. An aggregate of 556,544 shares of Common Stock (valued at
$0.23 per share, or a total of $128,005) were issued as the exchange bonus. The
exchange bonus of $128,005 and legal and other costs of $30,011 associated are
being amortized to interest expense over the three-year term of the New Notes.
An aggregate of 91,308 shares of Common Stock (valued at $0.23 per share, or a
total of $21,001) was issued as the interest bonus, and charged to interest
expense in the current period.
The Company had working capital of $394,424 at September 30, 1999, as
compared with negative working capital of $918,624 at September 30, 1998, an
increase in working capital of $1,313,048. The Company had a decrease in
stockholders' deficiency of $137,050. These changes are primarily a result of
the Company's rights offering and the exchange of Notes discussed above, offset
in part by the Company's net loss for the year ended September 30, 1999
("Fiscal 1999") of $2,221,742.
Net cash used in operating activities during Fiscal 1999 was $1,563,989
compared to net cash used in operating activities during the year ended
September 30, 1998 ("Fiscal 1998") of $1,059,466. The deficit during Fiscal 1999
is primarily a result of the Company's net loss of $2,221,742, and adjustments
to reconcile net loss to net cash used in operating activities. These
adjustments consider changes in current assets and liabilities, as well as
non-cash transactions including depreciation and amortization expense of
$230,921 and common stock issued in exchange for services valued at $282,538.
Members of management of the Company agreed to accept 763,847 shares of
16
<PAGE>
Common Stock and 489,347 warrants for the payment of $231,279 in salaries, less
approximately $87,938 in withholding taxes which the Company remitted in cash.
Management had deferred the payment of a substantial portion of their salaries
since June 1997, and continue to do so. Common Stock and warrants were also
issued in payment for approximately $238,450 in consulting and other services.
In addition, the Company recorded non-cash charges of $162,934 related to the
reduction of exercise prices of warrants and the exchange of Unit Warrants for
Class E Warrants (see Notes to Financial Statements) and provisions for obsolete
inventory and loss on uncollectible accounts receivable totaling $201,541.
Net cash used in operating activities during Fiscal 1998 of $1,059,466 was
primarily a result of the Company's net loss of $2,392,225, and adjustments for
changes in current assets and liabilities and non-cash transactions including
depreciation and amortization expense of $380,379; Common Stock issued for
services of $121,512; and provisions for obsolete inventory and loss on
uncollectible accounts receivable totaling $84,627.
Net cash used in investing activities during Fiscal 1999 was $22,980, as
compared to net cash used in investing activities of $23,237 during Fiscal 1998.
During Fiscal 1999, the Company sold unused, fully depreciated equipment for
$750 and paid $23,730 for United States and foreign patent applications. During
Fiscal 1998, the Company sold unused equipment for $10,125 and paid $33,362 for
patent applications.
Net cash provided by financing activities during Fiscal 1999 was $1,517,375
as compared to net cash provided by financing activities during Fiscal 1998 of
$746,569. During Fiscal 1999 cash proceeds of $922,946 were received for the
exercise of Rights issued to shareholders resulting in the issuance of 4,195,209
shares and warrants. Costs associated with the Rights offering and Note exchange
paid during the period were $119,716. Officers and directors of the Company
purchased 1,087,500 shares of Common Stock for cash of $141,703, and the Company
received $10,000 (less registration costs of $1,201) from an unrelated third
party for Class E Warrants to purchase 300,000 shares of Common Stock. The
Company also received $4,900 for the exercise of options to purchase 28,000
shares of its Common Stock. Payments on advances against the Company's line of
credit with Silicon Valley Bank and other notes were $529,901 and the Company
borrowed an additional $911,590 against the line of credit.
During Fiscal 1998, the Company borrowed $375,000 from certain of its
officers and directors, and received proceeds of $433,000 from promissory notes
payable to a bank of which a director is vice chairman. The Company also
incurred an aggregate of $147,970 in legal, accounting, and distribution costs
pertaining to the rights offering The Company borrowed approximately $413,000
against its line of credit with Silicon Valley Bank and repaid approximately
$381,000.
See Item 10. Management - Executive Compensation and Note 8 to the
Company's Consolidated Financial Statements for information concerning the
Company's material contracts for compensation and rent.
As discussed in Note 1 to the Consolidated Financial Statements, the
Company continues to incur substantial losses and may need additional financing
to continue its operations. 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. On December 6, 1999, the
Company entered into an agreement providing for the combination of its business
with that of Intrex Data Communications Corp. The Company is pursuing several
potential sources for $5,000,000 in new financing associated with the business
combination. However, no assurance can be given that this or any additional
financing can be obtained on terms satisfactory to the Company, nor that
forecasted sales will be realized to achieve profitable operations.
RESULTS OF OPERATIONS
The Company's total revenues for Fiscal 1999 were $1,957,110 as compared to
total revenues of $1,317,600 for Fiscal 1998, an increase of $639,510 or 49%.
Revenues for Fiscal 1999 include sales to Whessoe Varec, Inc. of approximately
$782,000, compared to approximately $147,000 for Fiscal 1998, primarily for the
military fuel storage tank market. Revenues recognized from direct sales to the
aboveground storage tank market during Fiscal 1999 were over $400,000. There
were minimal such direct sales during Fiscal 1998. Revenues for Fiscal 1998
17
<PAGE>
include sales to the Florida Department of Environmental Protection ("FLDEP") of
approximately $387,000 for 64 PHA-100PLUS portable units for its underground
storage tank inspection program. FLDEP chose the Company's unit after a field
evaluation showed it provided more capability than other portable instruments.
The Company had a Strategic Alliance (the "Alliance") for the Aboveground
Storage Tank (AST) market with Whessoe Varec, Inc. from June 30, 1996 until July
26, 1999, when the agreement was ended by mutual agreement of the parties, as
described below. 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 for most
sites 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 all such sites. Compliance is required by December 31, 1999.
In February 1999, Whessoe Varec and FCI targeted customer sites with over
700 tanks. These sites include coastal bulk storage, inland jobbers, industrial,
military, airports, power generation and government facilities. In addition to
these targeted accounts, there is a secondary market of unlined tanks which is
yet to be qualified. Florida DEP held its annual conference during May 1999 in
Tampa and Daytona Beach to update the tank community about its requirements for
compliance by December 31, 1999 and its commitment to that compliance date. Some
companies have been operating on the assumption that there would be a delay in
the enforcement process, but Florida DEP remained firm in its commitment, while
redefining compliance as having placed orders for approved equipment by December
31, 1999.
The weeks following the Florida DEP meeting were set aside for intensive
joint sales activity by FCI and Whessoe direct sales personnel. However, during
the period, Endress+Hauser (E+H), which had acquired Whessoe Varec, announced
that it had restructured Whessoe Varec and in that process FCI lost its access
to the existing Whessoe sales and marketing organization. (It was recently
reported to have sold that group.) Subsequently, FCI and Whessoe Varec came to
an agreement whereby FCI took back the rights to the commercial AST leak
detection market while Whessoe Varec would continue to serve the US Department
of Defense (DoD) military tank market. The net result to FCI was to regain
direct control over the Florida market at a critical time in its development. In
addition, gross revenues from projects in Florida now accrue to the Company, in
contrast to the net revenues previously. However, this process took several
weeks to resolve and until an agreement was reached the result was that customer
orders were delayed until it was clear with whom they should place their orders.
Once the agreement was reached in mid July, FCI focussed all of its available
resources on the Florida market. There followed a significant shift from a
passive "wait and see" posture to a more aggressive and proactive "we need to do
something". Marathon/Ashland, Miami International Airport, Tampa Airport,
Orlando Airport, West Palm Beach Airport, City of Lakeland, and Motiva (Texaco)
have recently purchased FCI's PetroSense-Registered Trademark- equipment.
Florida Power, GATX and Motiva (Shell) are adding the Company's equipment to
additional tanks or locations. These orders and commitments represented over
$1,000,000 in revenue to FCI. There is usually about a six to eight week delay
between order and installation, and therefore full revenue recognition.
Management believes that through the compliance date of December 31, 1999,
(compliance now being defined as having placed orders for approved equipment by
the deadline), the majority population of the regulated community which has not
yet taken action to achieve compliance will be motivated to comply, with the
result being significant revenues to the Company from this market through at
least the second quarter of Fiscal 2000. Other companies including Coastal
Fuels, Petroleum Fuels (Jacksonville) and Air Kaman (Jacksonville) have also
placed new orders for the Company's products.
Shell Oil, Texaco, Florida Power Company, Reedy Creek Energy, Jacksonville
Electric and GATX had already purchased and installed the Company's equipment.
These orders reduced the Whessoe Varec inventory originally purchased as part of
their contractual obligations under the Alliance agreement and subsequent
purchases to meet market requirements. As part of the process of taking back the
rights to the commercial market, FCI re-acquired the inventory from Whessoe
Varec in order to be in a position to supply the commercial market in a timely
fashion. This inventory has already been partially allocated to fill the recent
orders. Revenues per tank are now about $25,000 compared with about $10,000 per
tank under the Whessoe Agreement. Once the Company has addressed the lined tank
population, it plans to address the next set of prospects, the population of
large unlined tanks which is as yet unqualified.
18
<PAGE>
As occurred with the Federal UST regulations which had a mandatory
compliance date of December 22, 1998, following a ten-year compliance period,
some companies are expected to act later than others, impacting on the timing of
revenues for the Company.
Other states are following Florida in promulgating AST regulations, giving
the Company an opportunity for further growth, although there can be no
assurance such regulations will be promulgated. Virginia promulgated its own
similar regulations during 1998. Pennsylvania, New Jersey, Minnesota and
Wisconsin have also promulgated regulations, and Alaska is developing its own
regulations.
Under the new agreement, FCI and E+H Systems and Gauging Division (formerly
Whessoe Coggins) continue to pursue business with the DoD in California, Florida
and elsewhere. E+H Systems and Gauging has a significant presence in the
military fuel depot 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 in California during April 1998. The data generated at this test was
submitted to the local regulatory authority and met their criteria. During 1998
and through June 30, 1999, the Company's revenues from sales to Whessoe Varec
for this market have been approximately $950,000. Whessoe Varec has completed
the installation of PetroSense-Registered Trademark- probes at approximately 30
DoD tanks. Another 30-40 tanks are expected to be so equipped sometime in
calendar 2000. Equipment will initially come from inventories purchased by
Whessoe Varec. These installations would complete this phase of the California
compliance effort. There is a similar number of military tanks in Florida where
regulations provide for fewer alternatives to the Company's products. There are
estimated to be in excess of 5,000 military tanks in the United States.
In the UST marketplace, the Company has identified that certain large
diesel tanks located at truck stops may present an opportunity for the Company's
leak detection equipment. The size and throughput of these tanks is problematic
for conventional compliance technologies. The Company is investigating the size
of this opportunity. The E+H subsidiary in Japan, Sakura, has identified an
opportunity in the retail gasoline marketplace for leak detection equipment
potentially for a large number of installations. The Company is pursuing this
opportunity with Sakura. The State of California has proposed regulations to
upgrade leak detection requirements for certain USTs. The regulations would
require compliance by November, 2000. The size of this opportunity has not yet
been identified. The State of Florida Department of Environmental Protection
purchased 64 of the Company's PHA-100 PLUS units for its storage tank inspection
program in Fiscal 1998. The program began in January, 1999. Other states are
potential prospects for this application.
While the development of the offshore market for the Company's
OilSense-Registered Trademark--4000 and PHA-100WL continued to be slower than
originally anticipated, by the end of the reporting period there were
indications that the situation was improving. The combination of the lack of
availability of Freon-Registered Trademark- and higher oil prices generated new
orders for the Company. CNG Producing Company has placed a blanket order for
portable units for twelve of its Gulf of Mexico platforms. Amoco, Spirit Energy
76 (5 units), Murphy Oil (4 units) and Santa Fe Resources placed new orders.
This brings the number of customers to 17 and the number of units to well over
60. Amoco, Spirit Energy 76 (Unocal) and Pennzoil have committed to the use of
the Company's products on their platforms in the Gulf of Mexico. Spirit Energy
has installed 19 PHA-100WLs and Amoco has installed the Company's
OilSense-Registered Trademark--4000 and PHA-100WLs at 9 of their more than 25
sites. During December 1998, Pennzoil placed their first order for the Company's
PHA-100WLs for 2 of their 15 sites. The recently reported potential link between
the chemical n-hexane and the incidence of brain cancer at a now closed research
laboratory in Naperville, Illinois, has brought into question the adoption by
some operators of the EPA's standard reference method which proposed the use of
n-hexane as a replacement for Freon for use in reference lab environments. This
would eliminate the one serious competitor to the Company's portable unit and
would impact on some of the larger operators in the Gulf and elsewhere. Merger
activity among the major oil companies continues to slow installations, but is
not believed to have significantly affected the size of the opportunity.
The Company is continuing its marketing efforts in other major offshore
production areas such as the North Sea and the Persian Gulf. During January
1999, the Company received its first order from Oman.
19
<PAGE>
During Fiscal 1999, the Company had cost of revenues of $985,444, or a
gross margin of 50% of sales, as compared to cost of revenues of $617,690, or a
gross profit of 53%, during Fiscal 1998. The decrease in gross margin as a
percent of revenues resulted primarily from the increased sales during Fiscal
1999 to Whessoe Varec at the more highly discounted distributor pricing.
The Company has signed a five-year agreement with Bosch Telecom ("Bosch")
whereby the two companies cross license certain of each others proprietary
sensor technologies for certain specified markets. Bosch gets access to
proprietary chemistry technologies owned by FCI which it can use in the areas of
security systems, automotive and other markets. The Company gets access to
certain sensor technologies and has access to these technologies in certain
regulated and non-regulated markets. These allow the Company to branch out into
certain non-regulated markets of interest such as the medical sensor market.
This is part of the Company's strategy to lessen its dependence on regulated
markets.
In conjunction with the Bosch agreement, the Company entered into
discussions with a medical instrument manufacturing company to supply certain
gas sensor technology for a neonatal application. This company requires a
low-cost, disposable sensor package to replace its existing sensing technology.
The size of the opportunity is estimated by the manufacturer to be 2,000,000
units per year in the U.S. alone. A study is ongoing to determine the
feasibility of the project.
Research, development and engineering expenditures decreased by $206,494,
or 27%, to $546,398 during Fiscal 1999 from Fiscal 1998. The Company has
continued to reduce personnel and other expenditures wherever possible,
focussing its resources on its most critical projects. Sales and marketing
expenditures decreased by $62,478, or 9%, to $661,544 during Fiscal 1999 from
Fiscal 1998.
General and administrative expenditures increased by $194,385, or 17%, to
$1,347,684 during Fiscal 1999 from Fiscal 1998, primarily as a result of
increased consulting and public relations costs, most of which were compensated
by the issuance of common stock and warrants as opposed to cash. 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 Fiscal 1997.
Interest expense increased by $59,335 to $366,666 during Fiscal 1999 from
Fiscal 1998. The increase resulted primarily from increased borrowing against
the Company's line of credit, and extra bonus interest paid to holders of the 8%
Senior Convertible Notes as an inducement to the holders to exchange the Notes
due February 15, 1999 for new Notes due February 15, 2001.
The Company recorded non-cash, non-operating costs of $162,934 related to
the reduction of exercise prices of warrants and the exchange of Unit Warrants
for Class E Warrants. The Company reduced the exercise prices and offered the
exchange in order to encourage exercise of the warrants.
As a result of the foregoing, the Company incurred a net loss of
$2,221,742, or a net loss of $0.07 per share, for Fiscal 1999 as compared to a
net loss of $2,392,225, or a net loss of $0.09 per share, for Fiscal 1998.
On December 6, 1999, the Company announced it had signed a definitive
agreement to merge with Intrex Data Communications Group of Vancouver, British
Columbia, with the expressed intent of addressing the burgeoning remote asset
management market, where the combined strength of FCI's sensor technology
together with Intrex's communications and Internet expertise are expected to
make a powerful team. The merger would be structured as an Arrangement Agreement
and conducted as a Plan of Arrangement, in order to accommodate Canadian tax and
legal issues. FiberChem, renamed DecisionLink Incorporated, would be the
surviving public entity. Intrex would be acquired in a stock transaction. The
company would address the oil and gas; tank, pipeline and utility;
transportation; environmental monitoring; marine and other markets on a
fee-for-service basis. A condition to closing is to obtain financing for the
merged entity and to position it for readmission to NASDAQ Small Cap Market.
DecisionLink would be headquartered in Las Vegas, with operations also in
Dallas, Texas and Vancouver, British Columbia.
20
<PAGE>
The Company continues to review the cost and operating impacts of
addressing the Year-2000 issue. Management has conducted assessments of the
potential costs associated with its internal operations, products shipped to its
customers, and material and services provided by its suppliers. The Company has
conducted tests of its products and based on such testing, believes that its
current products are Year-2000 compliant, in accordance with the Year-2000
Information and Disclosure Act. It has provided upgrades to older products, and
believes that all its products are Year-2000 compliant. The Company has not
incurred, and does not expect to incur, material costs relative to its products
and Year-2000 compliance.
The Company has incurred less than $10,000 and expects to incur
additional costs of approximately $10,000 during calendar 1999 to upgrade its
internal hardware and software systems which are critical to and support its
manufacturing, engineering, financial and other operations. Testing of critical
systems has been completed. Based on the results of its tests, Management
believes its critical systems will continue to operate properly on and after
January 1, 2000. The risks of disruptions in the business community in general,
as well as with respect to the Company's customers and suppliers, are difficult
to discern. Management continues to review these risks with respect to its
operations, and does not expect that the Year-2000 issue will have a material
impact on the Company's current financial position, liquidity or results of
operations. Alternative suppliers of certain materials and services as well as
methods of supply have been developed. In the event that public utilities and
services are disrupted, the Company expects to curtail or suspend operations or
implement manual or alternative processes for brief intervals of time, if
necessary.
Management does not consider that inflation has had a significant effect on
the Company's operations to date, nor is inflation expected to have a material
impact over the next year.
RECENTLY ISSUED ACCOUNTING STANDARDS
During Fiscal 1999 the Company adopted Statement of Financial Standards No.
130, Reporting Comprehensive Income ("SFAS 130"), which establishes new
standards for reporting and displaying comprehensive income and its components.
The adoption of SFAS 130 had no impact on the Company's consolidated financial
position, results of operations or cash flows.
Also during Fiscal 1999, the Company adopted Statement of Financial
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"), which requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. The adoption of SFAS 131 had no impact on the
Company's consolidated financial position, results of operations or cash flows.
In March 1998 the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1
provides guidance on the accounting for costs of computer software used
internally, including identifying the characteristics of internal-use software
and providing examples to assist in determining when computer software is for
internal use. The Company is required to adopt this Statement in Fiscal 2000.
The adoption of SOP 98-1 is expected to have no impact on the Company's
consolidated financial position, results of operations or cash flows.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of
Start-Up Activities. SOP 98-5 requires that all start-up costs related to new
operations must be expensed as incurred and that all start-up costs that were
capitalized in the past must be written off when SOP 98-5 is adopted. The
Company is required to implement SOP 98-5 in Fiscal 2000. The Company expects
that the adoption of SOP 98-5 will not have a material impact on its financial
position, results of operations or cash flows.
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"). SFAS 133 establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other
21
<PAGE>
hedging activities. The Company is required to implement SFAS 133 in Fiscal
2001. Adoption of SFAS 133 is expected to have no impact on the Company's
consolidated financial position, results of operations or cash flows.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are contained in a separate
section of this Form 10-KSB which follows Part III.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names, ages and respective positions of the Executive Officers and
Directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Geoffrey F. Hewitt 56 Chairman of the Board,
President, Chief Executive
Officer and Class A Director
Byron A. Denenberg 65 Class C Director
Irwin J. Gruverman 66 Class A Director
Walter Haemmerli 70 Class B Director
Gerald T. Owens 72 Class C Director
Melvin W. Pelley 55 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 56 Chairman of the Board, Chief
Executive Officer and Director
Melvin W. Pelley 55 Chief Financial Officer,
Secretary and Director
Thomas A. Collins 53 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
Chairman of the Board and Chief Executive Officer of FCI Environmental since
April 1998 and August 1995, respectively. Mr. Hewitt was appointed as a Director
of the Company on September 11, 1996. He has also served as a Director of FCI
Environmental since April 1994 and as its President from April 1994 to November
1996. He served as Chief Operating Officer of FCI Environmental from April 1994
to August 1995. Prior thereto, from 1977 until March 1994, Mr. Hewitt served as
Vice President of worldwide sales and marketing for H.N.U. Systems, Inc., a
manufacturer of environmental and material analysis instrumentation.
BYRON A. DENENBERG has served as a Director of the Company since August
1995. Mr. Denenberg is a Managing Partner of K B Partners, LLC, a venture
capital firm specializing in early-stage technology investments. 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 Zellweger 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., and Orbit Commerce, Inc. Mr. Denenberg was Chairman of MST
Analytics, Inc. until its merger with ATMI, Inc. in November 1999.
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.
23
<PAGE>
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, Basel and Zurich
from 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 Advanced Technology Laboratories, Inc., Bothell, Washington, which
manufactures and markets real-time ultrasound medical diagnostic equipment. From
1977 to 1983, Mr. Pelley was Chief Financial and Administrative Officer for
Advanced Diagnostic Research Corporation, Tempe, Arizona, a designer,
manufacturer and marketer of diagnostic ultrasound scanners.
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, to three-year terms expiring in consecutive years. Mr. Owens and Mr.
Denenberg were elected to three-year terms as Directors at the Company's August
1998 Annual Meeting of Stockholders. Mr. Gruverman and Mr. Hewitt were elected
to three-year terms as Directors at the Company's June 1997 Annual Meeting of
Stockholders. Mr. Haemmerli was elected to a three-year term as Director at the
Company's May 1996 Annual Meeting of Stockholders.
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. Owens was appointed to a newly established Audit Committee.
Mr. Gruverman was added to the Audit Committee on November 14, 1997. The Board
of Directors did not have a standing nomination committee or committee
performing similar functions during the fiscal year ended September 30, 1999.
COMPLIANCE WITH 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, Directors and persons who own more than ten percent of a registered
class of the Company's equity securities, to file reports of
24
<PAGE>
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, Directors and ten percent shareholders are required by regulation to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on the Company's copies of such forms received or written representations
from certain reporting persons that no such forms were required for those
persons, the Company believes that, during the time period from October 1, 1998
to September 30, 1999, all filing requirements applicable to its officers,
Directors and greater than ten percent beneficial owners were complied with
except as set forth below.
Melvin W. Pelley, Chief Financial Officer of the Company, filed a late
report in which a sale of 10,000 shares of common stock was reported.
ITEM 10. EXECUTIVE COMPENSATION
The compensation paid and/or accrued to each of the executive officers of
the Company and its subsidiaries and of all executive officers as a group, whose
annual compensation exceeds $100,000, for services rendered to the Company
during the three fiscal years ended September 30, 1999, was as follows:
(a) SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------------------
Annual Compensation Awards Payouts
-------------------------------------- ------------------------------ ------------------
Long-Term
Other Restricted Securities Incentive All
Name of Individual Fiscal Annual Stock Underlying Plan Other
and Principal Position Year Salary($) Bonus($) Compensation($) Awards($) Options/SARs(#) Payouts($) Compensation($)
- ----------------------- -------- ----------- --------- ---------------- ------------ --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Geoffrey F. Hewitt 1999 $217,134(1) $ -- $ -- -- 300,000 $ -- $ --
President and CEO 1998 $211,932(1) $ -- $ -- -- 240,000 $ -- $ --
1997 $205,000 (2) $ -- $ -- -- 125,000 $ -- $ --
Melvin W. Pelley 1999 $139,479(3) $ -- $ -- -- 275,000 $ -- $ --
Chief Financial Officer 1998 $139,200 (3) $ -- $ -- -- 180,000 $ -- $ --
1997 $136,708 (4) $ -- $ -- -- 75,000 $ -- $ --
Thomas A. Collins 1999 $132,479 (5) $ -- $ -- -- 200,000 $ -- $ --
President of 1998 $132,200 (5) $ -- $ -- -- 120,000 $ -- $ --
FCI Environmental, Inc. 1997 $129,708 (6) $ -- $ -- -- 75,000 $ -- $ --
</TABLE>
(1) Includes accrued but unpaid salary earned during Fiscal 1998 of
$55,000 and during Fiscal 1999 of $55,000.
(2) Includes $14,808 in accrued but unpaid salary, earned during the
period from June 15 through September 30, 1997.
(3) Includes accrued but unpaid salary earned during Fiscal 1998 of
$32,000 and during Fiscal 1999 of $36,123.
(4) Includes $8,615 in accrued but unpaid salary, earned during the period
from June 15 through September 30, 1997.
(5) Includes accrued but unpaid salary earned in Fiscal 1998 of $25,000
and during Fiscal 1999 of $25,000.
(6) Includes $6,730 in accrued but unpaid salary, earned during the period
from June 15 through September 30, 1997.
25
<PAGE>
(b) OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options/SARs
Underlying Granted Exercise
Options/SARs to Employees or Base Expiration
Name of Individual Granted In Fiscal Year Price($/Share) Date
- ----------------------- ------------------------------------------------------------ -------------------------
<S> <C> <C> <C> <C>
Geoffrey F. Hewitt 300,000 18.6% $ 0.125 July 19, 2009
Melvin W. Pelley 275,000 17.1% $ 0.125 July 19, 2009
Thomas A. Collins 200,000 12.4% $ 0.125 July 19, 2009
</TABLE>
(c) AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Shares Options/SARs Options/SARs
Acquired on Value at Fiscal Year End (#) at Fiscal Year End ($)
Name of Individual Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ----------------------- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Geoffrey F. Hewitt -- -- 765,000 / 0 $ 1,500 / $0
Melvin W. Pelley -- -- 534,000 / 0 $ 1,375 / $0
Thomas A. Collins -- -- 395,000 / 0 $ 1,000 / $0
</TABLE>
(d) LONG-TERM INCENTIVE PLANS
Effective January 1, 1994, the Company implemented an Internal Revenue
Code Section 401(k) Profit Sharing Plan (the "Plan"). The Plan provides for
voluntary contributions by employees into the Plan subject to the limitations
imposed by Internal Revenue Code Section 401(k). The Company will match employee
contributions at a rate of 50% of the employee's contribution up to a maximum of
2% of the employee's compensation. The Company matching funds are determined at
the discretion of management and are subject to a five-year vesting schedule
from the date of original employment.
(e) DIRECTORS COMPENSATION
Non-management directors receive options to purchase shares of Common
Stock of the Company for serving on the Board of Directors and for service on
official committees of the Board.
On July 19, 1999, the Company granted options to purchase 50,000 shares
of Common Stock at $0.125 per share, which was the market value of the Common
Stock on that date, to each of its four non-management Directors. In addition
the Company granted options to purchase an aggregate of 50,000 shares of Common
Stock to three of its non-management directors for service as members of the
Audit Committee ($15,000 shares to each of its two members) and Compensation and
Stock Options Committee (10,000 shares to each of its two members).
(f) EMPLOYMENT CONTRACTS
Geoffrey F. Hewitt serves under an employment agreement with the
Company, effective October 1, 1997. Mr. Hewitt is currently compensated at a
rate of $205,000 per annum and is entitled to receive bonuses, if any, at the
discretion of the Board of Directors. The employment contract is terminable for
cause. Since June 15, 1997, payment of approximately 27% (or $55,000 per annum)
of Mr. Hewitt's salary has been deferred. In December 1998, Mr. Hewitt applied
his total unpaid salary from June 1997 through December 1998 of $84,615 to the
purchase of unsubscribed Units in the Company's Rights Offering ($50,501 after
taxes). In July 1999, Mr. Hewitt applied his total unpaid salary from January
1999 through June 1999 of $27,500 (less taxes of $10,860) to the purchase of
26
<PAGE>
restricted shares of the Company's common stock. The same proportion of Mr.
Hewitt's salary continues to be deferred, and may be paid during calendar 2000
if the Company's operations and financial position allow.
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 per annum)
of Mr. Pelley's salary has been deferred. In December 1998, Mr. Pelley applied
his total unpaid salary from June 1997 through December 1998 of $49,230 to the
purchase of unsubscribed Units in the Company's Rights Offering ($29,395 after
taxes).In July 1999, Mr. Pelley applied his total unpaid salary from January
1999 through June 1999 of $16,000 (less taxes of $7,030) to the purchase of
restricted shares of the Company's Common Stock. The same proportion of Mr.
Pelley's salary continues to be deferred, and may be paid during calendar 2000
if the Company's operations and financial position allow.
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 per annum)
of Mr. Collins' salary has been deferred. In December 1998, Mr. Collins applied
$12,000 (approximately one-third) of his total unpaid salary from June 1997
through December 1998 to the purchase of unsubscribed Units in the Company's
Rights Offering ($7,146 after taxes). In July 1999, Mr. Collins applied $10,000
of his unpaid salary (less taxes of $3,500) to the purchase of restricted shares
of the Company's Common Stock. The same proportion of Mr. Collins' salary
continues to be deferred, and may be paid during calendar 2000 if the Company's
operations and financial position allow.
(g) CONSULTING AGREEMENTS
None.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 23, 1999, 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:
27
<PAGE>
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address of Beneficial Percentage of
Beneficial Owner Ownership (1) Class (2)
- ------------------------------------ ------------------------ ----------------------
<S> <C> <C>
Geoffrey F. Hewitt (3) 2,165,819 (4) 5.2%
Byron A. Denenberg 1,760,476 (5) 4.3%
RCT Systems, Inc.
327 Messner Drive
Wheeling, IL 60090
Irwin J. Gruverman 1,426,335 (6) 3.5%
30 Ossipee Road
Newton, MA 02164
Walter Haemmerli (3) 6,842,674 (7) 15.2%
Gerald T. Owens (3) 409,237 (8) 1.0%
Melvin W. Pelley (3) 2,387,901 (9) 5.8%
Thomas A. Collins (3) 509,962 (10) 1.3%
All Directors and Officers as 14,946,446 30.3%
a Group (7 persons)
</TABLE>
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole investment power with respect to all shares of Common Stock
beneficially owned by them. A person is deemed to be the beneficial owner
of securities that can be acquired by such person within 60 days from the
date hereof upon the exercise of warrants or options or upon the conversion
of convertible securities. Each beneficial owner's percentage ownership is
determined by assuming that options or warrants or shares of Convertible
Preferred Stock or Senior Convertible 8% Notes 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 40,126,538 shares issued and outstanding as of December 23, 1999.
(3) The address of this person is c/o FCI Environmental, Inc., 1181 Grier
Drive, Suite B, Las Vegas, Nevada 89119.
(4) Includes 532,501 Class E Common Stock Purchase Warrants and an aggregate of
765,000 shares of Common Stock issuable upon exercise of a like number of
options. Also includes 132 shares of Common Stock and 27 Class E Common
Stock Purchase Warrants held by Mr. Hewitt's minor child, as to which Mr.
Hewitt disclaims beneficial ownership.
(5) Includes 360,238 Class E Common Stock Purchase Warrants and an aggregate of
138,142 shares of Common Stock issuable upon exercise of a like number of
options.
28
<PAGE>
(6) Includes 8,620 Class E Common Stock Purchase Warrants and an aggregate of
164,000 shares of Common Stock issuable upon exercise of a like number of
options. Also includes 67,500 shares of Common Stock held by G&G
Diagnostics, L.P. I, 246,270 Class E Common Stock Purchase Warrants,
294,470 shares of Common Stock and a $50,000 Convertible 9% Note
convertible into 384,615 shares of Common Stock held by G&G Diagnostics,
L.P. II, and 47,815 shares of Common Stock, 47,815 Class E Common Stock
Purchase Warrants 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.
(7) Includes 610,000 Class E Common Stock Purchase Warrants, 32,000 Class D
Common Stock Purchase Warrants, 3,586 shares of Convertible Preferred Stock
convertible into 35,860 shares of Common Stock, an aggregate of 125,000
shares of Common Stock issuable upon exercise of a like number of options
and a $50,000 Convertible 9% Note convertible into 384,615 shares of Common
Stock. Also includes 1,251,500 shares of Common Stock, 863,800 Class D
Common Stock Purchase Warrants, 366,000 Class E 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 AG, Chur,
Switzerland, as custodian for certain customers, of which company Mr.
Haemmerli is Vice-Chairman. Also includes $156,000 of Senior Convertible 8%
notes convertible into 678,261 shares of Common Stock held by Manport AG,
of which company Mr. Haemmerli is Chief Executive Officer.
(8) Includes 39,965 Class D Common Stock Purchase Warrants, 36,207 Class E
Common Stock Purchase Warrants and an aggregate of 192,000 shares of Common
Stock issuable upon exercise of a like number of options.
(9) Includes 482,040 Class E Common Stock Purchase Warrants, an aggregate of
530,000 shares of Common Stock issuable upon exercise of a like number of
options, and $65,000 in Convertible 9% Notes, convertible into 555,958
shares of Common Stock.
(10) Includes 32,481 Class E Common Stock Purchase Warrants and an aggregate of
395,000 shares of Common Stock issuable upon exercise of a like number of
options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 10. Executive Compensation, for information concerning stock
options granted and employment agreements entered into during Fiscal 1998 and
Fiscal 1999 with officers and Directors of the Company.
In December 1997 and January and February 1998, four directors
(Geoffrey Hewitt, Byron Denenberg, Irwin Gruverman and Walter Haemmerli) and an
officer (Melvin Pelley) of the Company each advanced the Company $50,000 and Mr.
Haemmerli advanced an additional $75,000. These advances, aggregating $325,000
were evidenced by convertible promissory notes bearing interest at the rate of
8% per annum due five years from issuance. Each note and unpaid accrued interest
aggregating $20,275 was cancelled on December 22, 1998 in payment for
unsubscribed Units of the Rights Offering resulting in the issuance to the
directors and officer of 1,569,431 shares of Common Stock and a like number of
Class E Common Stock Purchase Warrants.
Mr. Pelley 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 were
originally due on or before August 31, 1998. Mr. Pelley has agreed to extend the
due dates of the promissory notes. Mr. Pelley advanced the Company $25,000 on
June 2, 1999 and $25,000 on June 3, 1999 evidenced by promissory notes bearing
interest at the rate of 9% per annum and due three years from issuance. Mr.
Pelley advanced $25,000 on July 27, 1999 and $40,000 on September 29,1999, Mr.
Haemmerli advanced $50,000 on August 30, 1999 and Mr. Gruverman advanced $50,000
on July 26, 1999. Each of these advances are evidenced by convertible promissory
notes bearing interest at the rate of 9% per annum and due 3 years from the date
of issuance.
In March and August 1998, the Company obtained loans aggregating
$433,000 from Privatbank Vermag AG, a private investment bank with which Mr.
Haemmerli is associated. These loans (the "Bridge Loans") were provided as
interim financing until the Company completed its Rights Offering. The Bridge
Loans bear interest at approximately 8.5% per annum. In addition, the Company
agreed to issue to Privatbank, as additional consideration, 130,000 Units
(consisting of 130,000 shares of Common Stock and Class E Warrants to purchase
130,000 shares of Common Stock). The Units were issued in October 1998 as part
of the Rights Offering. Also,
29
<PAGE>
$50,000 of the Bridge Loans and $1,920 in accrued interest were converted to
Common Stock and Warrants as part of the Rights Offering. The remaining $383,000
of Bridge Loans were due on July 15, 1999, when principal of $133,000 and
accrued interest of $14,680 were converted to 1,136,000 shares of Common Stock.
The due date of the remaining $250,000 principal amount was extended to October
15, 1999 and subsequently to January 15, 2000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
The following is a complete list of exhibits which are incorporated herein as
part of this Report.
3.1 Articles of Incorporation of Registrant, as amended. (1)
3.2 By-Laws of Registrant. (2)
4.1 Class D Warrant Agreement of the Registrant with form of Warrant
Certificate. (3)
4.2 Form of 8% Senior Convertible Note Due 1999 issued in the Company's
February 1996 private placement. (4)
4.3 Form of Warrant to purchase Common Stock on or before May 31, 2001. (5)
4.4 Form of Class E Common Stock Purchase Warrant. (6)
10.1 Lease Agreement and Reimbursement Agreement dated July 27, 1989 by and
between the Company and Howard Hughes Properties for Hughes Airport
Center, 1181 Grier Drive, Suite B, Las Vegas, Nevada. (7)
10.2 Amendment dated May 6, 1991 and September 26, 1991 to the Industrial
Real Estate Lease (Exhibit 10.10) for the Company's facilities. (8)
10.3 Employee Stock Bonus Plan. (3)
10.4 Amendments dated October 23, 1990 and February 21, 1991 to the
Industrial Real Estate Lease (Exhibit 10.10) for the Company's
facilities. (9)
- ------------------------------
(1) Incorporated by reference from the Company's January 13, 1988 Post
Effective Amendment to the Registration Statement on Form S-18 (File No.
33-12097-C) as declared effective on March 3, 1988.
(2) Incorporated by reference from the Company's April 15, 1987 Amendment to
the Registration Statement on Form S-18 (File No. 33-12097-C) as declared
effective on March 3, 1988.
(3) Incorporated by reference from the Company's Registration Statement No.
33-35985
(4) Incorporated by reference from the Company's Current Report on Form 8-K for
February 15, 1996.
(5) Incorporated by reference from the Company's Current Report on Form 8-K on
July 15, 1996.
(6) Incorporated by reference from the Company's Registration Statement on Form
SB-2 for October 23, 1998 (File No. 333-46555).
(7) Incorporated by reference from the Company's Registration Statement No.
33-29338.
(8) Incorporated by reference from the Company's Annual Report on Form 10-K
for September 30, 1991.
(9) Incorporated by reference from the Company's April 24, 1991 Post
Effective Amendment to the Registration Statement on Form S-18 (File
No. 33-35985) as declared effective on April 30, 1991.
30
<PAGE>
10.5 Non-qualified stock option plan. (10)
10.6 Qualified Stock Option Plan. (11)
10.7 Qualified Stock Option Plan. (12)
10.8 FCI FiberChem, Inc. and FCI Environmental, Inc. 401(k) Profit Sharing
Plan. (13)
10.9 Qualified Stock Option Plan (14)
10.10 License Agreement with Texas Instruments, Incorporated, dated June 15,
1995. (15)
10.11 Cooperative Development Agreement with Texas Instruments, Incorporated,
dated June 15, 1995. (15)
10.12 Form of Distribution Agreement. (16)
10.13 Agreement dated November 8, 1996 by and between FCI Environmental, Inc.
and Alcohol Sensors International, Ltd. CERTAIN INFORMATION IN THIS
EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SEC PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT. (17)
10.14 OEM Strategic Alliance Agreement dated June 30, 1996 by and between
Whessoe Varec, Inc. and FCI Environmental, Inc. (17)
10.15 1997 Employee Stock Plan (18)
10.16 Employment agreement with Geoffrey F. Hewitt dated October 1, 1997.
(19)
10.17 Employment agreement with Melvin W. Pelley dated October 1, 1997. (19)
10.18 Employment Agreement with Thomas A. Collins dated October 1, 1997. (19)
10.19 Amendment to Whessoe Varec, Inc. OEM Strategic Alliance Agreement dated
August 13, 1997. (19)
10.20 Agreement dated October 2, 1997 between the Company and entrenet Group,
L.L.C. (19)
- ---------------------------------
(10) Incorporated by reference from the Company's Registration Statement on
Form S-8 for April 28, 1992. (No. 33-47518).
(11) Incorporated by reference from the Company's Proxy Statement dated May
3, 1993.
(12) Incorporated by reference from the Company's Proxy Statement dated May
23, 1994.
(13) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1994.
(14) Incorporated by reference from the Company's Report on Form S-8 for
August 1, 1995.
(15) Incorporated by reference from the Company's Report on Form 8-K/A for
August 30, 1995.
(16) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1995.
(17) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1996.
(18) Incorporated by reference from the Company's Proxy Statement dated May
20, 1997.
(19) Incorporated by reference from the Company's Report on Form 10-KSB for
September 30, 1997.
31
<PAGE>
10.21 Arrangement Agreement between FiberChem, Inc. and Intrex Data
Communications Corp., dated December 6, 1999. (20)
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of Goldstein Golub Kessler & Company, P.C.
- ---------------------------------------
* filed with this Report.
(20) Incorporated by reference from the Company's Current Report on Form 8-K
for December 6, 1999.
- ---------------------------------------
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter ended September 30, 1999. A report on Form 8-K was filed by the Company
for December 6, 1999, reporting under "Item 5. Other Events" that the Company
had entered into an agreement providing for the combination of its business with
that of Intrex Data Communications Corp.
- ---------------------------------------
32
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: December 28, 1999
FIBERCHEM, INC.
By: /s/ Geoffrey F. Hewitt
---------------------------------
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
/s/ Geoffrey F. Hewitt Chairman, President and December 28, 1999
- ------------------------- Chief Executive Officer
Geoffrey F. Hewitt (Principal Executive
Officer)
/s/ Melvin W. Pelley Chief Financial Officer December 28, 1999
- ------------------------- (Principal Accounting
Melvin W. Pelley Officer)
/s/ Walter Haemmerli Director December 28, 1999
- -------------------------
Walter Haemmerli
/s/ Gerald T. Owens Director December 28, 1999
- -------------------------
Gerald T. Owens
/s/ Irwin J. Gruverman Director December 28, 1999
- -------------------------
Irwin J. Gruverman
/s/ Byron A. Denenberg Director December 28, 1999
- -------------------------
Byron A. Denenberg
33
<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, 1999 and 1998 and the related consolidated
statements of operations, stockholders' deficiency, 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, 1999 and 1998, 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 and has a net capital deficiency that 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
this uncertainty.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
November 16, 1999, except for the third paragraph
of Note 1 and Note 12, as to which the date is
December 6, 1999
F-1
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, September 30,
1998 1999
--------------------- -------------------
<S> <C> <C>
Current assets:
Cash $91,354 $21,760
Accounts receivable, net of allowance for doubtful
accounts of $60,505 and $92,423 in 1998 and 1999,
respectively 432,302 647,402
Inventories (note 3) 1,248,007 1,261,437
Prepaid expenses and other 86,261 122,153
--------------------- -------------------
Total current assets 1,857,924 2,052,752
--------------------- -------------------
Equipment 706,465 704,964
Less accumulated depreciation (605,167) (645,163)
--------------------- -------------------
Net equipment 101,298 59,801
--------------------- -------------------
Other assets:
Patent costs, net of accumulated amortization of
$1,885,838 at September 30, 1998 and
$1,958,108 at September 30, 1999 (note 5) 114,274 65,734
Technology costs, net of accumulated amortization
of $417,623 at September 30, 1998 52,083 ---
and $469,706 at September 30, 1999 (note 4)
Note financing costs, net of accumulated amortization of
$232,775 at September 30, 1998 and
$264,926 at September 30, 1999 (note 6) 32,151 ---
Note refinancing costs, net of accumulated amortization of
$32,920 at September 30, 1999 (note 6) --- 125,096
Prepaid financing costs - Rights Offering (note 7) 147,970 ---
Other deferred costs --- 39,147
--------------------- -------------------
Total other assets 346,478 229,977
--------------------- -------------------
Total assets $2,305,700 $2,342,530
--------------------- -------------------
--------------------- -------------------
</TABLE>
The accompanying notes and independent auditor's reports should be
read in conjunction with the consolidated financial statements.
F-2
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, September 30,
1998 1999
--------------------- -------------------
<S> <C> <C>
Current liabilities:
Senior convertible notes payable (note 6) $ 1,600,000 ---
Bank loan payable (note 6) 32,452 421,949
Other current notes payable --- 250,000
Current installments of note payable (note 6) 7,808 ---
Accounts payable 396,164 272,906
Deferred salaries 179,806 76,353
Accrued salaries and benefits 157,365 199,221
Accrued warranty 113,767 146,282
Accrued legal, accounting and consulting 112,320 70,600
Accrued commissions 41,929 33,799
Other accrued expenses 84,872 93,856
Customer deposits --- 37,775
Interest payable 50,065 55,587
--------------------- -------------------
Total current liabilities 2,776,548 1,658,328
Senior convertible notes payable (note 6) --- 1,621,000
Notes payable to officers, directors and affiliates (note 6) 808,000 265,000
Note payable, net of current installments (note 6) 60,000 ---
--------------------- -------------------
Total liabilities 3,644,548 3,544,328
--------------------- -------------------
Stockholders' equity (deficiency) (notes 6 and 7):
Preferred stock, $.001 par value. Authorized
10,000,000 shares; 218,998 and 207,848 convertible
shares issued and outstanding at September 30,
1998 and September 30, 1999, respectively;
at liquidation value of $15 per share 3,284,970 3,117,720
Common stock, $.0001 par value. Authorized
150,000,000 shares; 26,441,407
and 39,831,038 shares issued and
outstanding at September 30, 1998, and
September 30, 1999, respectively 2,644 3,983
Additional paid-in capital 27,362,272 29,979,833
Deficit (31,988,734) (34,210,476)
Deferred costs --- (69,400)
Stock subscrition receivable (23,458)
--------------------- -------------------
Stockholders' equity (deficiency) (1,338,848) (1,201,798)
Commitments and contigencies (notes 6,7 and 8)
--------------------- -------------------
Total liabilities and stockholders' equity $ 2,305,700 $ 2,342,530
--------------------- -------------------
--------------------- -------------------
</TABLE>
The accompanying notes and independent auditor's reports should be
read in conjunction with the consolidated financial statements.
F-3
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------------------
1998 1999
-------------------- --------------------
<S> <C> <C>
Revenues $1,317,600 $1,957,110
Cost of revenues 617,690 985,444
-------------------- --------------------
Gross profit 699,910 971,666
-------------------- --------------------
Operating expenses:
Research, development and engineering 752,892 546,398
General and administrative 1,153,299 1,347,684
Sales and marketing 724,022 661,544
Disposal of inventory 160,000 94,150
-------------------- --------------------
Total operating expenses 2,790,213 2,649,776
-------------------- --------------------
Loss from operations (2,090,303) (1,678,110)
-------------------- --------------------
Other income (expense):
Interest expense (307,331) (366,666)
Interest income 3,617 2,821
Other, net 1,792 (179,787)
-------------------- --------------------
Total other income (expense) (301,922) (543,632)
-------------------- --------------------
Net loss ($2,392,225) ($2,221,742)
-------------------- --------------------
-------------------- --------------------
Shares of common stock used in computing
loss per common share 25,925,859 34,113,758
-------------------- --------------------
-------------------- --------------------
Net loss per common share (Note 1) ($0.09) ($0.07)
-------------------- --------------------
-------------------- --------------------
</TABLE>
The accompanying notes and independent auditor's reports should
be read in conjunction with the consolidated financial statements.
F-4
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED SEPTEMBER 30, 1998 AND 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
-------------------------- ---------------------------- Paid-In
Shares Amount Shares Amount Capital Deficit
----------- -------------- ------------- ------------- ------------ -------------
<S> <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)
Common stock issued:
Exercise of options -- -- 5,000 1 1,099
For services -- -- 676,500 67 121,445
Conversion of senior
convertible notes payable (note 6) -- -- 244,047 24 46,979
Net loss (2,392,225)
----------- -------------- ------------- ------------- ------------ -------------
Balance at September 30, 1998 218,998 3,284,970 26,441,207 2,644 27,362,272 (31,988,734)
Common stock issued:
For conversion of preferred stock (11,150) (167,250) 111,500 11 167,239 --
For cash -- 5,282,709 528 827,649 --
For subscription receivable -- 106,625 10 23,448 --
In connection with exchange of senior
convertible notes payable and
partial interest thereon -- 647,852 65 148,941 --
For payment of interest on senior
convertible notes payable -- 1,296,800 130 194,390 --
For conversion of notes and interest
payable to officers, directors and
affiliates -- 3,071,677 307 568,360 --
For conversion of other notes payable -- 272,727 27 59,973 --
For services -- 1,808,094 181 277,668 --
For payment of deferred salaries -- 763,847 77 143,264 --
For exercise of options -- 28,000 3 4,897 --
Class E warrants issued for cash -- -- -- 8,799 --
Warrants issued for services -- -- -- 30,000 --
Deferred costs recognized -- -- -- -- --
From warrant exercise price reduction -- -- -- 41,565 --
From E warrant exchange -- -- -- 121,368 --
Net loss -- -- -- -- (2,221,742)
----------- -------------- ------------- ------------- ------------ -------------
Balance at September 30, 1999 207,848 $ 3,117,720 39,831,038 $ 3,983 $ 29,979,833 ($34,210,476)
----------- -------------- ------------- ------------- ------------ -------------
----------- -------------- ------------- ------------- ------------ -------------
<CAPTION>
Receivable
Deferred for Exercise
Costs of Rights Total
------------- ------------ -----------
<S> <S> <C> <C>
Balance at September 30, 1997 0 0 883,762
Common stock issued:
Exercise of options -- 1,100
For services -- 121,512
Conversion of senior
convertible notes payable (note 6) -- 47,003
Net loss -- (2,392,225)
------------- ------------ -----------
Balance at September 30, 1998 0 0 (1,338,848)
Common stock issued:
For conversion of preferred stock -- -- --
For cash -- -- 828,177
For subscription receivable -- (23,458) --
In connection with exchange of senior
convertible notes payable and
partial interest thereon -- -- 149,006
For payment of interest on senior
convertible notes payable -- -- 194,520
For conversion of notes and interest
payable to officers, directors and
affiliates -- -- 568,667
For conversion of other notes payable -- -- 60,000
For services (156,152) -- 121,697
For payment of deferred salaries -- -- 143,341
For exercise of options -- -- 4,900
Class E warrants issued for cash -- -- 8,799
Warrants issued for services -- -- 30,000
Deferred costs recognized 86,752 -- 86,752
From warrant exercise price reduction -- -- 41,565
From E warrant exchange -- -- 121,368
Net loss -- -- (2,221,742)
------------- ------------ -----------
Balance at September 30, 1999 (69,400) (23,458) (1,201,798)
------------- ------------ -----------
------------- ------------ -----------
</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,
--------------------------------------
1998 1999
------------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($2,392,225) ($2,221,742)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 57,659 41,497
Amortization of patent and technology costs 238,243 124,353
Amortization of financing costs 84,477 65,071
Common stock issued for services 121,512 282,538
Exchange of warrants and changes in exercise
price of warrants -- 162,934
Common stock issued for interest expense -- 21,001
Gain on sale of fixed assets (1,791) (750)
Provision for loss on accounts receivable 50,542 56,516
Write down of obsolete inventory 193,725 145,025
Changes in current assets and liabilities:
Increase in accounts receivable (218,897) (271,616)
(Increase) Decrease in inventories 121,459 (158,455)
(Increase) Decrease in prepaid expenses and
other current assets (29,320) 37,053
Increase (decrease) in accounts payable 300,695 (123,258)
Increase in accrued expenses 382,168 90,818
Increase in interest payable 32,287 185,026
------------------- -----------------
Net cash used in operating activities (1,059,466) (1,563,989)
------------------- -----------------
Cash flows from investing activities:
Sale of equipment 10,125 750
Payments for patents (33,362) (23,730)
------------------- -----------------
Net cash used in investing activities (23,237) (22,980)
------------------- -----------------
</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
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------------
1998 1999
------------------- -----------------
<S> <C> <C>
Cash flows from financing activities:
Net proceeds from bank loan $32,452 $389,497
Proceeds from notes payable, officers, directors and affiliates 808,000 215,000
Proceeds from other notes payable 60,000 --
Proceeds from issuance of common stock and warrants -- 1,074,649
Payment of financing costs (147,970) (119,716)
Payments on note payable to bank and others (7,013) (7,808)
Payments of merger costs -- (39,147)
Proceeds from the exercise of options 1,100 4,900
------------------- -----------------
Net cash provided by financing activities 746,569 1,517,375
------------------- -----------------
Net decrease in cash (336,134) (69,594)
Cash at beginning of period 427,488 91,354
------------------- -----------------
Cash at end of period $91,354 $21,760
------------------- -----------------
------------------- -----------------
Supplemental Cash Flow Information
Noncash investing and financing activities:
Senior convertible notes payable converted to common stock $50,000 $ --
Exchange of senior convertible notes payable due
February 15, 1999 for notes due February 15, 2002 -- 1,600,000
Senior convertible note interest paid with common stock -- 194,520
Notes and interest payable to officers, directors and
affiliates converted to common stock and warrants -- 568,667
Notes payable to others converted to common stock
and warrants -- 60,000
Payment of financing costs with common stock and warrants -- 178,005
Payment of other liabilities with common stock and warrants -- 99,253
Issuance of senior convertible notes in payment of accrued interest -- 21,000
Unamortized deferred financing costs associated with senior
convertible notes payable converted to common stock $2,997 $ --
------------------- -----------------
------------------- -----------------
Interest paid $158,085 $75,596
------------------- -----------------
------------------- -----------------
</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, 1998 and 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(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, 1998 and 1999 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 net losses of
$2,392,225 and $2,221,742 for the years ended September 30, 1998 and 1999,
respectively, and as of September 30, 1999 had an accumulated deficit of
$34,210,476 and a stockholders' deficiency of $1,201,798.
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. On December 6, 1999, the Company entered
into an agreement providing for the combination of its business with that of
Intrex Data Communications Corp. (See Note 12.) The Company is pursuing several
potential sources for $5,000,000 in new financing associated with the business
combination. However, no assurance can be given that this or any additional
financing can be obtained on terms satisfactory to the Company, nor that
forecasted sales will be realized to achieve profitable 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.
(b) INVENTORIES
Inventories are stated at the lower of cost (first-in,
first-out) or market.
(c) 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.
(d) 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.
(e) PATENT COSTS
Costs incurred in acquiring and filing patents are capitalized
and amortized using the straight-line method over the shorter
of economic or legal life. All existing patents are
F-8
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
being amortized over four years. In 1998 the Company
reassessed the expected economic life of new patents and
changed the period of amortization from 8 years to 4 years due
to the shorter expected economic life of such patents in the
current technological environment. The Company incurred
approximately $88,000 of additional amortization expense for
the year ended September 30, 1998 for this change in estimate.
(f) 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.
(g) 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.
(h) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
(i) PER SHARE DATA
In 1998 the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share. Shares issuable on the
exercise of stock options and warrants have been excluded
because of their anti-dilutive effect on loss per share. Net
loss per common share is computed using the weighted-average
number of shares outstanding.
(j) 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.
(k) STOCK-BASED EMPLOYEE COMPENSATION AWARDS
In accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, 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 SFAS No.
123. The Company has, however, provided the pro forma
disclosures as if the Company had adopted the cost recognition
requirements (see Note 7).
F-9
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(l) 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.
(m) Certain reclassifications have been made in the 1998
presentation to conform to the 1999 presentation.
(n) Recent accounting pronouncements.
During Fiscal 1999 the Company adopted Statement of Financial
Standards No. 130, Reporting Comprehensive Income ("SFAS
130"), which establishes new standards for reporting and
displaying comprehensive income and its components. The
adoption of SFAS 130 had no impact on the Company's
consolidated financial position, results of operations or cash
flows.
Also during Fiscal 1999, the Company adopted Statement of
Financial Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"), which
requires disclosure of certain information regarding operating
segments, products and services, geographic areas of operation
and major customers. The adoption of SFAS 131 had no impact on
the Company's consolidated financial position, results of
operations or cash flows.
In March 1998 the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides
guidance on the accounting for costs of computer software used
internally, including identifying the characteristics of
internal-use software and providing examples to assist in
determining when computer software is for internal use. The
Company is required to adopt this Statement in Fiscal 2000.
The adoption of SOP 98-1 is expected to have no impact on the
Company's consolidated financial position, results of
operations or cash flows.
In April 1998, the AICPA issued SOP 98-5, Reporting on the
Costs of Start-Up Activities. SOP 98-5 requires that all
start-up costs related to new operations must be expensed as
incurred and that all start-up costs that were capitalized in
the past must be written off when SOP 98-5 is adopted. The
Company is required to implement SOP 98- 5 in Fiscal 2000. The
Company expects that the adoption of SOP 98-5 will not have a
material impact on its financial position, results of
operations or cash flows.
In June 1998 the Financial Accounting Standards Board issued
Statement of Financial Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133").
SFAS 133 establishes methods of accounting for derivative
financial instruments and hedging activities related to those
instruments as well as other hedging activities. The Company
is required to implement SFAS 133 in Fiscal 2001. Adoption of
SFAS 133 is expected to have no impact on the Company's
consolidated financial position, results of operations or cash
flows.
(3) Inventories
F-10
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Inventories consist of:
<TABLE>
<CAPTION>
September 30,
-------------
1998 1999
---- ----
<S> <C> <C>
Raw materials $446,284 $362,536
Work in process 8,271 4,869
Finished goods 978,928 1,201,035
------- ---------
Subtotal 1,433,483 1,568,440
Valuation and obsolescence reserves, primarily
against finished goods (185,476) (307,003)
--------- ---------
Net inventories $1,248,007 $1,261,437
---------- ----------
---------- ----------
</TABLE>
(4) TECHNOLOGY COSTS
Technology costs include proven technologies acquired by the Company to
be utilized for various environmental and medical purposes. These technologies
include FOCS(R) which are capable of detecting and monitoring various chemical
conditions to be used in environmental, medical and process control
applications.
(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
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, 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. During Fiscal 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 February 15, 1999, 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.
On February 2, 1999, the Company offered to exchange the Notes at their
maturity on February 15, 1999 for new Notes (the "New Notes") with a conversion
price of $0.23, which was established by using the ten-day average closing price
of the Common Stock prior to February 15, 1999. The New Notes provide for
semi-annual interest payments at 8% per annum in cash or at 12% per annum in
stock (at the Company's option) and are due February 15, 2002. The Company may
require conversion if the closing bid price of the Common Stock exceeds 200% of
the conversion price for 20 consecutive trading days. In
F-11
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
all other material respects, the New Notes have terms similar to those of the
old Notes. In order to encourage exchange of the Notes for New Notes, the
Company offered a bonus, payable in Common Stock valued at approximately current
market, of 8% of the face amount of Notes exchanged for New Notes. The Company
offered an additional Common Stock bonus equal to 4% of the face amount of notes
exchanged if the holder agreed to accept additional New Notes in payment of the
semi-annual interest payment due February 15, 1999. All of the $1,600,000
principal amount of old Notes were exchanged for New Notes, and an additional
$21,000 of New Notes were issued as payment of interest due on $525,000 of old
Notes. An aggregate of 556,544 shares of Common Stock (valued at $0.23 per
share, or a total of $128,005) were issued as the exchange bonus. The exchange
bonus of $128,005 and legal and other associated costs of $30,011 are being
amortized to interest expense over the three-year term of the New Notes. An
aggregate of 91,308 shares of Common Stock (valued at $0.23 per share, or a
total of $21,001) was issued as the interest bonus, and charged to interest
expense during Fiscal 1999.
During August 1999, the Company exercised its option to pay interest on
the New Notes in shares of Common Stock. In accordance with the provisions of
the New Notes, 1,296,800 shares of Common Stock were issued, valued at $194,520
($0.15 per share), representing interest at 12% per annum for the period
February 16, 1999 through February 15, 2000.
The Company paid fees and expenses associated with the offering
amounting to $428,204, which has been 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
February 15, 1999 approximately $163,278 of unamortized deferred financing cost
had been recorded as a reduction in additional paid-in capital associated with
the $1,225,000 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 had
been adjusted to $0.4078 per share in accordance with the original Placement
Agent Agreement and has been further adjusted to $0.23 per share (See Note 7).
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 July 7, 1998, the Company arranged a line of credit with Silicon
Valley Bank. The agreement provides for maximum loans of $1 million, and is
secured by accounts receivable, inventories, equipment and intellectual
property. The agreement provides for advances against specific sales invoices at
an annualized interest rate of approximately 19.75%. During Fiscal 1998, the
Company borrowed approximately $413,000 against the line of credit and repaid
approximately $381,000. During Fiscal 1999, the Company borrowed approximately
$912,000 against the line of credit and repaid approximately $522,000. As of
September 30, 1999, the Company owed $421,949 against the line of credit.
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. As amended in July, 1998, the agreement provides that for its services,
entrenet will receive a cash fee of $40,000 in eight installments of $5,000 each
(as defined in the agreement); $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. In conjunction with the Rights Offering (See Note 7)
concluded on December 22, 1998, the principal, accrued interest and unpaid fees
were converted to 400,000 shares of Common Stock and 400,000 Class E Common
Stock Purchase Warrants.
In March and August 1998, the Company obtained loans aggregating
$433,000 from Privatbank Vermag AG, a private investment bank with which a
director of the Company is associated. These loans
F-12
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(the "Bridge Loans") were provided as interim financing until the Company
completed its Rights Offering (See Capital Stock below). The Bridge Loans bear
interest at approximately 8.5% per annum. In addition, the Company agreed to
issue to Privatbank, as additional consideration, 130,000 Units (consisting of
130,000 shares of Common Stock and Class E Warrants to purchase 130,000 shares
of Common Stock). The Units were issued in October 1998 as part of the Rights
Offering. Also, $50,000 of the Bridge Loans and $1,920 in accrued interest were
converted to Common Stock and Warrants as part of the Rights Offering. The
remaining $383,000 of Bridge Loans were due on July 15, 1999, when principal of
$133,000 and accrued interest of $14,680 were converted to 1,136,000 shares of
Common Stock. The due date of the remaining $250,000 principal amount was
extended to October 15, 1999 and subsequently to January 15, 2000.
During Fiscal 1998, directors and officers of the Company advanced an
aggregate of $375,000 to the Company. These advances bear interest at the rate
of 8% per annum and are due at various dates between December 14, 2002 and
February 4, 2003 unless converted into Common Stock prior to maturity. An
aggregate of $325,000 of these advances and $20,329 in accrued interest was
converted to Common Stock and Warrants in conjunction with the Rights Offering.
During June 1999, an officer advanced an additional $50,000 due in June 2002
with interest of 9% per annum. During July and August 1999 officers and
directors advanced an additional $125,000 in exchange for three year 9% notes
convertible into common stock at $0.13 per share, the then market value of the
Common Stock. During September 1999, an officer advanced an additional $40,000
in exchange for a three year 9% note convertible into Common Stock at $0.11 per
share, the then market value of the Common Stock.
The maturities of the notes and bank loans payable are as follows:
Fiscal 2000 $671,949
Fiscal 2001 ---
Fiscal 2002 1,836,000
Fiscal 2003 50,000
----------
$2,557,949
----------
----------
Related party interest expense incurred during the years ended September 30,
1998 and 1999 amounted to $39,235 and $56,111, respectively.
(7) STOCKHOLDERS' EQUITY
On October 23, 1998, the Company granted, for no consideration to
holders of its Common Stock, Preferred Stock and warrants, transferable rights
(the "Rights") to subscribe for units (the "Units") at a subscription price of
$0.22 per Unit. Each Unit consists of one share of Common Stock and one
redeemable Class E Warrant exercisable for one share of Common Stock at an
exercise price for one year (through October 23, 1999) of $0.25 per share; then
through October 23, 2000 at $0.35; then through October 23, 2001 at $0.50 per
share; then through October 23, 2002 at $0.70 per share; then through October
23, 2003 (at which time the Class E Warrants expire) at $0.90 per share. Each
holder of record as of October 16, 1998, of Common Stock and Warrants received
one Right for every four shares of Common Stock or Warrants held, and each
holder of Preferred Stock received 2.5 Rights for each share of Preferred Stock
held. An aggregate of 8,976,962 Rights were issued. An aggregate of 7,678,679
Rights were exercised as of the close of the offering on December 22, 1998,
resulting in gross proceeds to the Company of $1,689,309 and the issuance of
7,678,679 shares of Common Stock and a like number of Class E Warrants.
F-13
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Of the total 7,678,679 Rights exercised, 4,195,209 were exercised for
cash of $922,946; 1,805,677 were exercised in exchange for the payment of
advances (and accrued interest thereon) from officers, directors and affiliates
aggregating $397,249; 272,727 were exercised in payment of a $60,000 note
payable to others; 489,347 were exercised in payment of $107,656 of deferred
salaries due to members of management of the Company; and 915,719 were exercised
in payment for legal, consulting and other services totalling $201,458.
The Company incurred $286,474 in legal, accounting, distribution and
other costs associated with the Rights Offering, resulting in net proceeds of
$1,402,835.
During Fiscal 1999, directors and officers of the Company purchased an
aggregate of 1,087,500 restricted shares of Common Stock for $141,703 in cash.
The Company also issued 274,500 restricted shares of Common Stock to members of
management of the Company in return for the cancellation of deferred salaries
aggregating $35,685, net of taxes of $23,065.
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). 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 1999, 11,150 shares of Convertible Preferred
Stock were converted to 111,500 shares of Common Stock. As of September 30,
1999, the Company had 207,848 shares of Convertible Preferred Stock outstanding.
On September 12, 1997, the Board of Directors determined that, in view of the
recent trading price of the Company's Common Stock and in view of the Company's
current cash position, it would not be appropriate to declare the annual
dividend payable on the Convertible Preferred Stock on November 1, 1997.
Likewise, in September 1998 and September 1999, the Board of Directors
determined not to declare the annual dividend payable on November 1, 1998 and
1999, respectively. As a result, the undeclared dividends, aggregating
$1,028,848 (if elected entirely in cash, or 53,981 additional shares of
Convertible Preferred Stock if elected wholly in additional shares), will
accumulate in accordance with the terms of the Convertible Preferred Stock. Had
the Company declared a preferred stock dividend, net loss per common share in
Fiscal 1999 would be as follows:
<TABLE>
<S> <C>
Net loss $(2,221,742)
Preferred stock dividend (1,028,848)
---------------
Net loss available to common stockholders $(3,250,590)
---------------
---------------
Shares of common stock used in computing loss
per common share 34,113,758
---------------
---------------
Net loss per common share ($0.10)
---------------
---------------
</TABLE>
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. On April 23, 1999, as an inducement to encourage
exercise of warrants, the Company offered to exchange Unit Warrants for Class E
F-14
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Warrants on a one-for-one basis. As of September 30, 1999, 1,696,333 Unit
Warrants had been exchanged for E Warrants, resulting in a charge to income of
$118,743, reflecting the higher valuation of the E Warrants over the Unit
Warrants of $0.07 per warrant. The respective values of Unit Warrants and E
Warrants were determined using Black-Scholes estimates of market values. In
connection with the 1996 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 in
accordance with the Placement Agent Agreement, 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 May 1999 the Company issued 300,000 Class E Warrants for cash of
$10,000 and issued 999,000 shares of Common Stock, valued at $0.15 per share,
and warrants to purchase 600,000 shares of Common Stock in exchange for investor
relations and other services through January 2000. These warrants are
exercisable for 3 years at exercise prices of $0.18 per share for 200,000
shares, $0.50 for 200,000 shares and $1.00 for 200,000 shares. The Common Stock
and warrants were valued at a total of $203,850, which is being amortized to
expense monthly over the nine months of the agreement for services.
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 Stockholders Meeting, covering an aggregate of 1,000,000 shares of FCI
Common Stock. As of September 30, 1999, 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"). During Fiscal 1998 and
Fiscal 1999, 934,385 options expired unexercised and at September 30, 1999 an
aggregate of 50,500 options remain exercisable under the 1994 Plan.
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, 1999, the Company has issued 948,047 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. During the year ended September 30,
1999, 100,000 options expired unexercised. An aggregate of 660,442 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, 1999 the Company has issued options to
purchase 1,441,000 shares of Common Stock at prices ranging from $0.15 to $0.25
under the 1997 Plan to employees and consultants of Environmental and Directors
of the Company. An aggregate of 1,403,000 options remain exercisable under the
1997 Plan.
In May 1999, the Company's Board of Directors adopted a 1999 Employee
Stock Option Plan ("1999 Plan"), which is to be submitted for approval by the
stockholders at the next Annual Stockholders Meeting, covering an aggregate of
5,000,000 shares of Common Stock. As of September 30, 1999, the Company has
issued restricted options to purchase 1,610,000 shares of Common Stock at an
exercise price of $0.125 under the 1999 Plan to employees of Environmental and
Directors of the Company. An aggregate of 1,610,000 options remain exercisable
under the 1999 Plan.
F-15
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Effective October 1, 1996, cash compensation to directors was
eliminated and replaced by the granting of stock options for service as a
director and for service on standing committees. During Fiscal 1998, the Company
granted to its four non-management directors options to purchase an aggregate of
150,000 shares of Common Stock at $0.15 per share, which was the fair market
value of the Common Stock as of the date of the grants. During Fiscal 1999, the
Company granted to its four non-management directors options to purchase an
aggregate of 250,000 shares of Common Stock at $0.125 per share, which was the
fair market value of the Common Stock on the date of the grants.
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, 1998 and 1999 and
changes during those years are as follows:
<TABLE>
<CAPTION>
1998 1999
------------------------------ ------------------------------
Weighted Weighted
Average Average
Fixed Options Options Exercise Options Exercise
Price Price
- ------------------------------ -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year 2,096,556 $0.76 2,443,649 $0.470
Granted during year 991,000 .15 1,610,000 0.125
Exercised (5,000) .22 (28,000) 0.175
Forfeited (638,907) 1.01 (301,707) 1.120
-------------- ------------ ------------- -------------
Outstanding at end of year
2,443,649 $0.47 3,723,942 $0.27
========= =========
</TABLE>
The following table summarizes information about stock options
outstanding and exercisable at September 30, 1998 and 1999.
<TABLE>
<CAPTION>
Weighted Average Weighted
Range of Exercise Number Outstanding Remaining Average
September 30 Prices and Exercisable Contractual Life Exercise Price
- ------------------ -------------------- ------------------------- --------------------- -----------------
<S> <C> <C> <C> <C>
1998 $0.15-1.25 2,443,649 7.15 years $0.47
1999 $0.125-1.00 3,723,942 8.22 years $0.27
</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
------------------------------------ ----------------------------------
1998 1999 1998 1999
----------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Loss $(2,392,225) $(2,221,742) $(2,530,965) $(2,427,706)
Loss per share $(0.09) $(0.07) $(0.10) $(0.07)
</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 were (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.
F-16
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(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 1998 and 1999 was $170,869 and $172,015, respectively. The
Company is pursuing alternatives, including a renewal of the month-to-month
lease at approximately the current base monthly rental charge.
The Company has 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, 1998 and 1999 totaled $15,888 and $15,325,
respectively.
The Company is involved in litigation incidental to its business. In
the opinion of the Company's management, the expected outcome of such litigation
will not have a material effect on the financial position of the Company.
(9) INCOME TAXES
Income tax benefit attributable to losses from continuing operations
for the year ended September 30, 1998 and 1999 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>
1998 1999
---- ----
<S> <C> <C>
Computed "expected" tax benefit $(813,000) $(755,000)
Reduction in income tax benefit resulting from:
Non-deductible expenses 66,000 147,000
Increase in valuation allowance 747,000 608,000
------- -------
Net tax benefit $ --- $ ---
======= =======
</TABLE>
Components of the net deferred tax asset as of September 30, 1998 and
1999 are as follows:
<TABLE>
<CAPTION>
1998 Change 1999
---- ------ ----
<S> <C> <C> <C>
Deferred tax asset 9,667,000 608,000 10,275,000
Less valuation allowance (9,689,000) (608,000) (10,297,000)
----------- --------- ------------
Total net deferred tax asset (22,000) (22,000)
Deferred tax liability 22,000 22,000
------ ------
Net deferred tax asset $ --- $ --- $ ---
======== ======== ========
</TABLE>
The deferred tax asset is 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. The
deferred tax liability primarily represents 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
F-17
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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, 1999, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $29,821,000 which are available
to offset future taxable income, if any, through 2019. The following table
summarizes the dates of generation and expiration of the Company's federal net
operating loss carryforward:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Year Ended NOL NOL Expiration
September 30, Generated Utilized Carryover September 30,
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1987 128,307 (128,307) 0
1988 445,230 (180,406) 264,824 2003
1989 (308,713) 308,713 0
1990 1,769,184 1,769,184 2005
1991 2,678,702 2,678,702 2006
1992 2,396,528 2,396,528 2007
1993 4,140,886 4,140,886 2008
1994 5,784,715 5,784,715 2009
1995 2,368,650 2,368,650 2010
1996 2,559,055 2,559,055 2011
1997 3,253,739 3,253,739 2012
1998 2,484,229 2,484,229 2013
1999 2,120,000 2,120,000 2019
--------- ---------
Total 29,820,512 0 29,820,512
------------------------------------------------------------------------------------------------
</TABLE>
However, the use of 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 is made in accordance with Statement of Financial Accounting
Standards No. 107 ("SFAS No. 107"), DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS. Accordingly, the aggregate fair value amounts presented are not
intended to represent the underlying value of the net assets of the Company.
The carrying amounts at September 30, 1999 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, 1999.
(11) MAJOR CUSTOMERS
During Fiscal 1998, the Company had sales to one customer of
approximately $387,000 (29% of revenues) and a second customer of approximately
$147,000 (11% of revenues). During Fiscal 1999, the Company had sales to the
same second customer of approximately $782,000 (40% of revenues) and to a third
customer of approximately $218,000. During Fiscal 1998 and Fiscal 1999,
approximately 80% of revenues were from customers in the United States. Revenues
from the Company's distributor in the
F-18
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Republic of China (Taiwan) were approximately 7% and 5% of total revenues in
Fiscal 1998 and Fiscal 1999, respectively. Other sources of revenue during
Fiscal 1998 included customers and distributors in the Netherlands (4%), the
United Kingdom (3%), Canada, Mexico, Japan and others. During Fiscal 1999 other
sources of revenues included customers and distributors in Germany (5%), Canada
(3%), the United Kingdom (2%), Mexico, Japan, the Netherlands and others.
(12) SUBSEQUENT EVENTS
On December 6, 1999 the Company and Intrex Data Communications Corp., a
British Columbia company ("Intrex") entered into an Arrangement Agreement
providing for a business combination of FiberChem and Intrex. The agreement
provides that all of Intrex's outstanding common shares will be exchanged for
62,904,152 FiberChem common shares, representing the number of FiberChem common
shares and certain equivalents outstanding on November 9, 1999. Accordingly, the
shareholders of each company will have an approximately equal interest in the
combined enterprise. Upon completion of the transaction, FiberChem is to be
renamed DecisionLink, Incorporated and will continue to be traded on the
electronic over-the-counter bulletin board.
The completion of the transaction is subject to the satisfaction or
waiver of certain conditions, including, among others: (i) the approval of the
arrangement by Intrex common shareholders and the Supreme Court of British
Columbia, (ii) the accuracy of representations and warranties and other usual
closing conditions and (iii) $5,000,000 in new financing proceeds being
available to FiberChem immediately following the combination on terms and
conditions satisfactory to FiberChem and Intrex.
The Arrangement Agreement also provides that certain outstanding Intrex
warrants and convertible securities will be exchanged for similar FiberChem
securities on the basis of the common share exchange ratio for the transaction.
Under the agreement, Intrex shareholders will have the option initially to
exchange their Intrex voting common shares for a combination of non-voting
Intrex shares and special non-participating voting FiberChem shares (the
"deferral shares"). Shareholders who elect to receive deferral shares can at any
time elect to exchange them for the number of FiberChem common shares the holder
was initially entitled to receive. On or after December 6, 2009, holders of
deferral shares can be required to make the exchange.
Intrex is a private company which provides proprietary Internet and
communications technology for communicating data to or from remote or mobile
assets on a real-time basis using wireless, satellite and cellular data systems.
Data is routed through Intrex's global network which acts as a data gateway and
applications service provider allowing customers to monitor and control remote
or mobile assets such as gas wells, pipelines, compressors, storage tanks,
offshore platforms, or service vehicles directly from a desktop PC.
Intrex is a licensed reseller of the Orbcomm Global LP low earth orbit
or LEO satellite data and messaging communications services. Orbcomm is a
partnership owned by Orbital Sciences Corporation and Teleglobe, Inc. of Canada.
Intrex also has communications agreements that provide satellite services
through Norcom, Inc. as well as digital cellular services.
FiberChem will continue to pursue its existing aboveground storage
tank, offshore and sensor markets and intends, upon completion of the
transaction, to incorporate Intrex's technology where appropriate. FiberChem
also intends to pursue new business in Intrex markets that can incorporate
FiberChem technology.
F-19
<PAGE>
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 0-17569
FIBERCHEM, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 84-1063897
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1181 Grier Drive, Suite B, Las Vegas, Nevada 89119
(Address of principal executive offices)
(702) 361-9873
(Issuer's telephone number)
Indicate by check mark whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES___X___ NO_______
As of February 10, 2000, the issuer had 41,253,159 shares of Common
Stock, par value $.0001 per share, issued and outstanding.
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, December 31,
1999 1999
----------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,760 $ 8,329
Accounts receivable, net of allowance for doubtful
accounts of $92,423 at September 30 and
December 31, 1999 647,402 611,609
Inventories 1,261,437 1,195,255
Prepaid expenses and other 122,153 79,686
----------------- --------------
Total current assets 2,052,752 1,894,879
----------------- --------------
Equipment 704,964 704,964
Less accumulated depreciation (645,163) (653,338)
----------------- --------------
Net equipment 59,801 51,626
----------------- --------------
Other assets:
Patent costs, net of accumulated amortization of
$1,958,108 at September 30, 1999 and
$1,972,821 at December 31, 1999 65,734 55,811
Technology costs, net of accumulated amortization
of $469,706 at September 30 and December 31, 1999 -- --
Note refinancing costs, net of accumulated amortization of
$32,920 at September 30, 1999 and
$46,088 at December 31, 1999 125,096 111,928
Other deferred costs 39,147 59,767
----------------- --------------
Total other assets 229,977 227,506
----------------- --------------
Total assets $ 2,342,530 $ 2,174,011
================= ==============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, December 31,
1999 1999
-------------------- ------------------
<S> <C> <C>
Current liabilities:
Bank loan payable 421,949 456,001
Other current notes payable 250,000 250,000
Accounts payable 272,906 437,205
Deferred salaries 76,353 111,757
Accrued salaries and benefits 199,221 148,862
Accrued warranty 146,282 140,728
Accrued legal, accounting and consulting 70,600 79,001
Accrued commissions 33,799 40,699
Other accrued expenses 93,856 124,956
Customer deposits 37,775 37,775
Interest payable 55,587 35,977
-------------------- ------------------
Total current liabilities 1,658,328 1,862,961
Senior convertible notes payable $1,621,000 $1,621,000
Notes payable to officers, directors and affiliates 265,000 265,000
-------------------- ------------------
Total liabilities 3,544,328 3,748,961
-------------------- ------------------
Stockholders' equity (deficiency):
Preferred stock, $.001 par value. Authorized 10,000,000
shares; 207,848 convertible shares issued and
outstanding at September 30, and December 31, 1999;
at liquidation value of $15 per share 3,117,720 3,117,720
Common stock, $.0001 par value. Authorized
150,000,000 shares; 39,831,038 and 40,121,538
shares issued and outstanding at September 30
and December 31, 1999, respectively 3,983 4,012
Additional paid-in capital 29,979,833 30,038,404
Deficit (34,210,476) (34,694,278)
Deferred costs (69,400) (17,350)
Stock subscription receivable (23,458) (23,458)
-------------------- ------------------
Stockholders' equity (deficiency) (1,201,798) (1,574,950)
-------------------- ------------------
Total liabilities and stockholders' equity $2,342,530 $2,174,011
==================== ==================
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three month period ended
------------------------------
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Revenues $ 328,895 $ 596,484
Cost of revenues 183,594 381,422
------------ ------------
Gross profit 145,301 215,062
------------ ------------
Operating expenses:
Research, development and engineering 154,797 117,619
General and administrative 371,935 319,291
Sales and marketing 164,185 156,110
------------ ------------
Total operating expenses 690,917 593,020
------------ ------------
Loss from operations (545,616) (377,958)
------------ ------------
Other income (expense):
Interest expense (81,169) (106,415)
Interest and other income 6,489 571
------------ ------------
Total other expense (74,680) (105,844)
------------ ------------
Net loss $ (620,296) $ (483,802)
============ ============
Shares of common stock used in computing loss per share 27,642,715 39,970,701
============ ============
Basic loss per share $ (0.02) $ (0.01)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCIES
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Receivable
------------------------------------------ Paid-In Deferred for Exercise
Shares Amount Shares Amount Capital Deficit Costs of Rights Total
--------- ---------- ----------- --------- --------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1999 207,848 $3,117,720 39,831,038 $3,983 29,979,833 (34,210,476) (69,400) (23,458) (1,201,798)
Common stock issued:
For cash -- -- 245,000 24 35,571 -- -- -- 35,595
Conversion of interest payable
to officers, directors and
affiliates -- -- 45,500 5 5,000 -- -- -- 5,005
Deferred costs recognized -- -- -- -- -- -- 52,050 -- 52,050
Warrants issued for services -- -- -- -- 18,000 -- -- -- 18,000
Net loss -- -- -- -- -- (483,802) -- -- (483,802)
--------- ---------- ----------- --------- --------- ----------- ------- -------- ----------
Balance at December 31, 1999 207,848 $3,117,720 40,121,538 $4,012 30,038,404 (34,694,278) (17,350) (23,458) (1,574,950)
========= ========== =========== ========= ========= =========== ======= ======== ==========
</TABLE>
5
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three-month period ended December 31
------------------------------------
1998 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(620,296) $(483,802)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 11,267 8,175
Amortization of patent and technology costs 33,050 14,713
Amortization of financing costs 21,624 13,168
Common stock and warrants issued for services 121,361 70,050
Common stock issued for payment of accrued interest -- 5,005
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable (34,946) 35,793
Decrease in inventories 70,394 66,182
Decrease in prepaid expenses and
other current assets 3,474 42,467
Increase (decrease) in accounts payable (65,414) 164,299
Increase (decrease) in accrued expenses (98,739) 25,892
Increase (decrease) in interest payable 42,441 (19,610)
--------- ---------
Net cash used in operating activities (515,784) (57,668)
--------- ---------
Cash flows from investing activities:
Payments for patents (2,927) (4,790)
--------- ---------
(2,927) (4,790)
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
<TABLE>
<CAPTION>
Three-month period ended December 31
------------------------------------
1998 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net proceeds from bank loan $ 8,791 $ 34,052
Proceeds from issuance of common stock and warrants 922,946 35,595
Payment of financing costs (88,504) --
Payment of merger costs -- (20,620)
Payments on note payable to bank and others (34,362) --
Proceeds from the exercise of options 2,200 --
--------- ---------
Net cash provided by financing activities 811,071 49,027
--------- ---------
Net increase (decrease) in cash and cash equivalents $ 292,360 $ (13,431)
Cash and cash equivalents at beginning of period 91,354 21,760
--------- ---------
Cash and cash equivalents at end of period $ 383,714 $ 8,329
========= =========
Supplemental Cash Flow Information
Noncash investing and financing activities:
Senior convertible notes payable converted to common stock $ -- $ --
Notes and interest payable to officers, directors and
affiliates converted to common stock and warrants 420,987 5,005
Notes payable to others converted to common stock
and warrants 60,000 --
Payment of financing costs with common stock and warrants 50,000 --
========= =========
Interest paid $ 60,615 $ 59,222
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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 September 30, 1999 and December 31, 1999, and the results of operations
and cash flows of the Company for the three-month periods ended December 31,
1998 and 1999. 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, 1999.
Certain Fiscal 1999 Financial Statement amounts have been
reclassified to conform with the presentation in the Fiscal 2000 Financial
Statements.
(2) NOTES PAYABLE
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 was to be paid semi-annually,
commencing August 15, 1996, at a rate of 8% per annum. The Notes were
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, 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 February 15, 1999, 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.
On February 2, 1999, the Company offered to exchange the Notes at
their maturity on February 15, 1999 for new Notes (the "New Notes") with a
conversion price of $0.23, which was established by using the ten-day average
closing price of the Common Stock prior to February 15, 1999. The New Notes
provide for semi-annual interest payments at 8% per annum in cash or at 12%
per annum in stock (at the Company's option) and are due February 15, 2002.
The Company may require conversion if the closing bid price of the Common
Stock exceeds 200% of the conversion price for 20 consecutive trading days.
In all other material respects, the New Notes have terms similar to those of
the old Notes. In order to encourage exchange of the Notes for New Notes, the
Company offered a bonus, payable in Common Stock valued at approximately
current market, of 8% of the face amount of Notes exchanged for New Notes.
The Company offered an additional Common Stock bonus equal to 4% of the face
amount of notes exchanged if the holder agreed to accept additional New Notes
in payment of the semi-annual interest payment due February 15, 1999. All of
the $1,600,000 principal amount of old Notes were exchanged for New Notes,
and an additional $21,000 of New Notes were issued as payment of interest due
on $525,000 of old Notes. An aggregate of 556,544 shares of Common Stock
(valued at $0.23 per share, or a total of $128,005) were issued as the
exchange bonus. The exchange bonus of $128,005 and legal and other associated
costs of $30,011 are being amortized to interest expense over the three-year
term of the New Notes.
During August 1999, the Company exercised its option to pay interest
on the New Notes in shares of Common Stock. In accordance with the provisions
of the New Notes, 1,296,800 shares of Common Stock were issued, valued at
$194,520 ($0.15 per share), representing interest at 12% per annum for the
period February 16, 1999 through February 15, 2000.
In connection with the 1996 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 had been adjusted to $0.4078 per
share in accordance with the original
8
<PAGE>
Placement Agent Agreement and has been further adjusted to $0.23 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 July 7, 1998, the Company arranged a line of credit with Silicon
Valley Bank. The agreement provides for maximum loans of $1 million, and is
secured by accounts receivable, inventories, equipment and intellectual
property. The agreement provides for advances against specific sales invoices
at an annualized interest rate of approximately 19.75%. As of December 31,
1999, the Company owed $456,001 against the line of credit.
In March and August 1998, the Company obtained loans aggregating
$433,000 from Privatbank Vermag AG, a private investment bank with which a
director of the Company is associated. These loans (the "Bridge Loans") were
provided as interim financing until the Company completed its Rights Offering
(See Capital Stock below). The Bridge Loans bear interest at approximately
8.5% per annum. Also, $50,000 of the Bridge Loans and $1,920 in accrued
interest were converted to Common Stock and Warrants as part of the Rights
Offering. The remaining $383,000 of Bridge Loans were due on July 15, 1999,
when principal of $133,000 and accrued interest of $14,680 were converted to
1,136,000 shares of Common Stock. The due date of the remaining $250,000
principal amount has been extended to April 15, 2000.
During Fiscal 1998 and Fiscal 1999, directors and officers of the
Company advanced an aggregate of $265,000 to the Company. These advances bear
interest at rates of 8% and 9% per annum and are due at various dates between
December 14, 2002 and February 4, 2003 unless converted into Common Stock
prior to maturity. Of the total advances, $125,000 is convertible into Common
Stock at $0.13 per share; $40,000 at $0.11 per share, and $100,000 is not
convertible.
(3) CAPITAL STOCK
On October 23, 1998, the Company granted, for no consideration to
holders of its Common Stock, Preferred Stock and warrants, transferable
rights (the "Rights") to subscribe for units (the "Units") at a subscription
price of $0.22 per Unit. Each Unit consisted of one share of Common Stock and
one redeemable Class E Warrant exercisable for one share of Common Stock at
an exercise price for one year (through October 23, 1999) of $0.25 per share;
then through October 23, 2000 at $0.35; then through October 23, 2001 at
$0.50 per share; then through October 23, 2002 at $0.70 per share; then
through October 23, 2003 (at which time the Class E Warrants expire) at $0.90
per share. Each holder of record as of October 16, 1998, of Common Stock and
Warrants received one Right for every four shares of Common Stock or Warrants
held, and each holder of Preferred Stock received 2.5 Rights for each share
of Preferred Stock held. An aggregate of 8,976,962 Rights were issued. An
aggregate of 7,678,679 Rights were exercised as of the close of the offering
on December 22, 1998, resulting in gross proceeds to the Company of
$1,689,309 and the issuance of 7,678,679 shares of Common Stock and a like
number of Class E Warrants.
Of the total 7,678,679 Rights exercised, 4,195,209 were exercised
for cash of $922,946; 1,805,677 were exercised in exchange for the payment of
advances (and accrued interest thereon) from officers, directors and
affiliates aggregating $397,249; 272,727 were exercised in payment of a
$60,000 note payable to others; 489,347 were exercised in payment of $107,656
of deferred salaries due to members of management of the Company; and 915,719
were exercised in payment for legal, consulting and other services totalling
$201,458.
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). 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
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<PAGE>
trading days. Upon redemption, the Company would issue ten shares of its
Common Stock for each share of Convertible Preferred Stock. As of December
31, 1999, the Company had 207,848 shares of Convertible Preferred Stock
outstanding. On September 12, 1997, the Board of Directors determined that,
in view of the recent trading price of the Company's Common Stock and in view
of the Company's current cash position, it would not be appropriate to
declare the annual dividend payable on the Convertible Preferred Stock on
November 1, 1997. Likewise, in September 1998 and September 1999, the Board
of Directors determined not to declare the annual dividend payable on
November 1, 1998 and 1999, respectively. As a result, the undeclared
dividends, aggregating $1,028,848 (if elected entirely in cash, or 53,981
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. On April 23, 1999, as an
inducement to encourage exercise of warrants, the Company offered to exchange
Unit Warrants for Class E Warrants on a one-for-one basis. As of the closing
of the offer and as of December 31, 1999, 1,696,333 Unit Warrants had been
exchanged for E Warrants. In connection with the 1996 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 in accordance with the Placement
Agent Agreement, 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 May 1999 the Company issued 300,000 Class E Warrants for cash of
$10,000 and issued 999,000 shares of Common Stock, valued at $0.15 per share,
and warrants to purchase 600,000 shares of Common Stock in exchange for
investor relations and other services through January 2000. These warrants
are exercisable for 3 years at exercise prices of $0.18 per share for 200,000
shares, $0.50 for 200,000 shares and $1.00 for 200,000 shares. The Common
Stock and warrants were valued at a total of $203,850, which is being
amortized to expense monthly over the nine months of the agreement for
services.
(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 needs immediate additional financing to continue its
operations. On December 6, 1999, the Company entered into an agreement
providing for the combination of its business with that of Intrex Data
Communications Corp. The Company is pursuing several potential sources for
$5,000,000 in new financing required as a condition to completion of with the
business combination. However, no assurance can be given that this or any
bridge financing can be obtained on terms satisfactory to the Company,
nor that forecasted sales will be realized to achieve profitable operations.
------------------------------------------------------------
10
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction
with the Unaudited Consolidated Financial Statements and notes thereto.
MATERIAL CHANGES IN FINANCIAL CONDITION
The Company had working capital of $31,918 at December 31, 1999,
compared with working capital of $394,424 at September 30, 1999, a decrease
in working capital of $362,506. Also the Company had an increase in
stockholders' deficit of $373,152. These changes are primarily a result of
the Company's net loss for the three month period ended December 31, 1999
(the "First Quarter 2000") of $483,802.
Net cash used in operating activities during the First Quarter 2000
was $57,668 compared to net cash used in operating activities during the
First Quarter 1999 of $515,784. The deficit during the First Quarter 2000 is
primarily the result of the Company's net loss of $483,802, and adjustments
to reconcile net loss to net cash used in operating activities. These
adjustments consider changes in current assets and liabilities, as well as
non-cash transactions including depreciation and amortization expense of
$36,056, and common stock and warrants issued for services of $70,050. The
deficit during the First Quarter 1999 was primarily a result of the Company's
net loss of $620,296, and adjustments to reconcile net loss to net cash used
in operating activities. These adjustments include depreciation and
amortization expense of $65,941 and common stock issued in exchange for
services of $121,361. Members of management of the Company agreed to accept
489,347 shares of Common Stock and 489,347 warrants for the payment of
$173,529 in salaries, less approximately $65,000 in withholding taxes which
the Company remitted in cash. Management had deferred the payment of a
substantial portion of their salaries since June 1997, and continue to do so.
Net cash used in investing activities during the First Quarter 2000
was $4,790, as compared to net cash used in investing activities of $2,927
during the First Quarter 1999. During the First Quarter 2000, the Company
paid $4,790 for United States and foreign patent applications, and during the
First Quarter 1999, the Company paid $2,927 for patent applications.
Net cash provided by financing activities during the First Quarter
2000 was $49,027 as compared to net cash provided by financing activities
during the First Quarter 1999 of $811,071. During the 1999 quarter, cash
proceeds of $922,946 were received for the exercise of Rights issued to
shareholders resulting in the issuance of 4,195,209 shares and warrants.
Costs associated with the Rights offering paid during the quarter were
$88,504. Payments on advances against the Company's line of credit with
Silicon Valley Bank and other notes were $34,362 and the Company borrowed an
additional $8,791 against the line of credit. During the First Quarter 2000,
the Company received cash of $35,595 from an officer of the Company for
245,000 shares of restricted Common Stock, and borrowed an additional $34,052
against the line of credit.
As discussed in Note 4 to the Consolidated Financial Statements, the
Company continues to incur substantial losses and needs immediate additional
financing to continue its operations. On December 6, 1999, the Company
entered into an agreement providing for the combination of its business with
that of Intrex Data Communications Corp. The Company is pursuing several
potential sources for $5,000,000 in new financing required as a condition of
completion of the business combination. However, no assurance can be given
that this or any bridge financing can be obtained on terms satisfactory to
the Company, nor that forecasted sales will be realized to achieve profitable
operations.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The primary target for the Company's products 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 had various options for compliance. The lowest cost
option is believed to be an internal tank liner with
11
<PAGE>
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 all sites.
Marathon/Ashland, Miami International Airport, Tampa Airport,
Orlando Airport, West Palm Beach Airport, City of Lakeland, Coastal Fuels,
Petroleum Fuels and Air Kaman have recently purchased FCI's
PetroSense-Registered Trademark- equipment. Florida Power, GATX and Shell
added additional tanks or locations to their installed base. These orders and
commitments represented over $1.1million in revenue to FCI, spread over the
September and December 1999 quarters. Shell Oil, Texaco, Florida Power
Company, Reedy Creek Energy, Jacksonville Electric and GATX had already
purchased and installed the Company's equipment. Revenue per tank is about
$25,000.
After discussions with Florida DEP, Management believes that through
the compliance date of December 31, 1999, a significant population of the
regulated community had not yet taken action to achieve compliance. An
aggressive inspection program on the part of Florida DEP to inspect every
tank once a year is expected to be the motivating factor for them to comply,
with the result being significant revenues to the Company from this market
through Fiscal 2000. The Company is also aware that certain potential
customers are waiting to identify whether their sites are characterized as
contaminated or uncontaminated prior to a final decision on a compliance
strategy. The US EPA reports that 85% of all AST sites are contaminated.
As occurred with the Federal UST regulations which had a mandatory
compliance date of December 22, 1998, following a ten-year compliance period,
some companies are expected to act later than others, impacting on the timing
of revenues for the Company.
Other States are expected to follow Florida in promulgating AST
regulations, giving the Company an opportunity for further growth, although
there can be no assurance such regulations will be promulgated. Virginia
promulgated its own similar regulations during 1998. New Jersey, New York,
Minnesota and Wisconsin are the leaders of many states which have promulgated
AST regulations of some kind.
Recently the Company received certification from Florida DEP for its
PetroSense-Registered Trademark- product line for use as a leak detection
strategy for pipe lines at airports and military bases, when used in
conjunction with an approved liner. This is expected to open up a new market
with an as yet undetermined size potential for the Company's products.
FCI and E+H Systems and Gauging Division continue to pursue business
with the US Department of Defense (DoD) in California, Florida and elsewhere.
E+H Systems and Gauging (formerly Whessoe Coggins) has a significant presence
in the military fuel depot market. The Company's products meet all relevant
state and federal standards. A system incorporating FCI products was
successfully demonstrated to the military in California during April 1998.
The data generated at this test was submitted to the local regulatory
authority and met their criteria. During 1998 and through June 30, 1999, the
Company's revenues from sales to this market were approximately $950,000 from
the installation of PetroSense-Registered Trademark- probes at approximately
30 DoD tanks. Another 30-40 tanks are expected to be so equipped sometime in
calendar 2000. Equipment will initially come from inventories originally
purchased by Whessoe Varec. These installations would complete this phase of
the California compliance effort. There are a similar number of military
tanks in Florida where regulations provide for fewer alternatives to the
Company's products. The military has been allowed a variance for compliance
with the Florida regulations. There are estimated to be in excess of 5,000
military tanks in the United States.
In the UST marketplace, the Company has identified that certain
large diesel tanks located at truck stops may present an opportunity for the
Company's leak detection equipment. The size and throughput of these tanks is
problematic for conventional compliance technologies. The Company is
investigating the size of this opportunity. The E+H subsidiary in Japan,
Sakura, has identified an opportunity in the retail gasoline marketplace for
leak detection equipment potentially for a large number of installations. The
Company is pursuing this opportunity with Sakura.
While the development of the offshore market for the Company's
OilSense-Registered Trademark- -4000 and PHA-100WL continued to be slower
than originally anticipated, there are indications that the situation is
improving. The combination of the lack of availability of Freon-Registered
Trademark- and higher oil prices generated new orders for the Company. In
August 1999, CNG Producing Company placed a blanket order for portable units
for twelve of its Gulf of Mexico platforms and took delivery of six units. An
additional four were delivered during the First Quarter 2000. This
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<PAGE>
brings the number of customers to seventeen and the number of units to well
over 60. Also during the First Quarter 2000, Amoco, Spirit Energy 76 (4
units), Murphy Exploration (4 units) and Santa Fe Resources purchased
additional units for their platforms in the Gulf of Mexico. Spirit Energy has
now installed 19 PHA-100WLs and Amoco has installed the Company's
OilSense-Registered Trademark--4000 and PHA-100WLs at 9 of their more than 25
sites. The recently reported potential link between the chemical n-hexane and
the incidence of brain cancer at a now closed research facility in
Naperville, Illinois, has brought into question the adoption by some
operators of the EPA's standard reference method which proposed the use of
n-hexane as a replacement for Freon for use in reference lab environments.
This would eliminate the one serious competitor to the Company's portable
unit and would impact on some of the larger operators in the Gulf and
elsewhere. Merger activity among the major oil companies continues to slow
installations, but is not believed to have significantly affected the size of
the opportunity.
The Company is continuing its marketing efforts in other major
offshore production areas including the North Sea and the Persian Gulf.
Total revenues for the First Quarter 2000 were $596,484 as compared
to $328,895 for the First Quarter 1999. Revenues for the First Quarter 2000
included approximately $360,000 for the installation of the Company's leak
detection products in Florida and approximately $87,000 in sales of equipment
for additional such installations. Sales of such products to the Company's
then alliance partner in the First Quarter 1999 were approximately $230,000.
Revenue also included sales to Spirit Energy, Murphy Exploration, BP
Amoco and other operators of offshore oil and gas production platforms.
Gross profit for the First Quarter 2000 was $215,062 or 36% of
sales, compared to $145,301 or 44% of sales for the First Quarter 1999. The
decrease in gross margin percentage is primarily a result of the high
proportion of revenues from the relatively lower margin installation revenues.
The Company's sensor development project with Gilbarco has moved to
the stage where Gilbarco is expected to submit, by spring of 2000, products
incorporating the Company's sensor to the California Air Resources Board
(CARB) for certification to meet anticipated Onboard Refueling and Vapor
Recovery (ORVR) requirements. Acceptance by CARB is expected to lead to
introduction by Gilbarco of a product line that offers its customers a full
range of products to meet present and future national regulations and for the
Company to start the process to manufacture sensors to meet Gilbarco's needs.
Gilbarco and the Company recently signed a support agreement where Gilbarco
provides financial and other support through this period.
During Fiscal 1999, the Company signed a five-year agreement with
Bosch Telecom ("Bosch") whereby the two companies cross license certain of
each others proprietary sensor technologies for certain specified markets.
Bosch gets access to proprietary chemistry technologies owned by FCI which it
can use in the areas of security systems, automotive and other markets. The
Company gets access to certain sensor technologies and has access to these
technologies in certain regulated and non-regulated markets. These allow the
Company to branch out into certain non-regulated markets of interest such as
the medical sensor market. This is part of the Company's strategy to lessen
its dependence on regulated markets.
In conjunction with the Bosch agreement, the Company entered into
discussions with a medical instrument manufacturing company to supply certain
gas sensor technology for a neonatal application. This company requires a
low-cost, disposable sensor package to replace its existing sensing
technology. The size of the opportunity is estimated by the manufacturer to
be 2,000,000 units per year in the U.S. alone. A study is ongoing to
determine the feasibility of the project.
The Company's Port of Rotterdam projects with the Dutch engineering
firm IWACO are ongoing. The Company has become an equal partner in two IWACO
programs relating to bioremediation and monitoring technologies. The Company
benefits from access to data, technology, resources and personnel of the
programs' member companies that include Shell International Products, Solvay
S.A. and TNO, the Dutch government research organization. In the event one of
the bioremediation technologies is selected for use, there would be a
significant need
13
<PAGE>
for monitoring instrumentation to ensure long-term satisfactory operation.
Evaluation of the various bioremediation technologies will continue into 2000.
The Company also entered into an agreement whereby TNO, Coca-Cola
Enterprises - NL and FCI will cooperate in the development of certain sensors
of interest to the food and beverage industry.
Research, development and engineering expenditures decreased by
$37,178, or 24%, to $117,619 during the First Quarter 2000 from the First
Quarter 1999, primarily as a result of lower technology amortization expense.
General and administrative expenses decreased by $52,644, or 14%,
during the First Quarter 2000 from the First Quarter 1999, primarily as a
result of unusually high expenditures during the 1999 quarter related to
financial planning including travel and legal and consulting fees.
Sales and marketing expenditures decreased by $8,075, or 5%, during
the First Quarter 2000 from the First Quarter 1999.
Interest expense increased by $25,246, or 31%, during the First
Quarter 2000 over the First Quarter 1999 reflecting the payment of interest
on the Company's senior convertible notes at 12% (in Common Stock) rather
than at 8% (in cash).
As a result of the foregoing, the Company incurred a net loss of
$483,802, or a net loss of $0.01 per share for the First Quarter 2000 as
compared to a net loss of $620,296, or a net loss of $0.02 per share, for the
First Quarter 1999.
The Company announced on December 6, 1999 that it had reached an
agreement to combine FiberChem with Intrex Data Communications Group of
Vancouver, British Columbia. FiberChem, the surviving entity, will be renamed
DecisionLink Incorporated.
Intrex is a private company which provides proprietary Internet and
communications technology for communicating data to or from remote or mobile
assets on a real-time basis using wireless, satellite and cellular data
systems. Data is routed through Intrex's global network which acts as a data
gateway and applications service provider allowing customers to monitor and
control remote or mobile assets such as gas wells, pipelines, compressors,
storage tanks, offshore platforms, or service vehicles directly from a
desktop PC.
Intrex is a licensed reseller of the Orbcomm Global LP low earth
orbit or LEO satellite data and messaging communications services. Orbcomm is
a partnership owned by Orbital Sciences Corporation and Teleglobe, Inc. of
Canada. Intrex also has communications agreements that provide satellite
services through Norcom, Inc. as well as digital cellular services.
FiberChem will continue to pursue its existing aboveground storage
tank, offshore and sensor markets and intends, upon completion of the
transaction, to incorporate Intrex's technology where appropriate. FiberChem
also intends to pursue new business in Intrex markets that can incorporate
FiberChem technology.
The completion of the transaction is subject to the satisfaction or
waiver of certain conditions, including, among others: (i) the approval of
the arrangement by Intrex common shareholders and the Supreme Court of
British Columbia, (ii) the accuracy of representations and warranties and
other usual closing conditions and (iii) $5,000,000 in new financing proceeds
being available to FiberChem immediately following the combination on terms
and conditions satisfactory to FiberChem and Intrex.
The Company experienced no disruptions in its operations as a result
of Year 2000 issues.
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.
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<PAGE>
This report includes forward-looking statements relating to the
Company's operations that are based on Management's and third parties'
current expectations, estimates and projections. These statements are not
guarantees of future performances and actual results could differ materially.
The statements in this report regarding FCI's proposed business combination
with Intrex, the combined entity's delivery of services over the Internet and
the size of the market for the combined company's services, are
forward-looking statements that involve risks and uncertainties. These risks
and uncertainties include, FCI's ability to complete the combination, the
combined entity's ability to market its services using the two companies'
technologies, the timely development and acceptance of new products, final
promulgation and enforcement of regulations, the impact of competitive
products and pricing, the timely funding of customer's projects, customer
payments to the Company and other risks detailed from time to time in the
Company's SEC reports.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A former distributor has filed an action in French national courts
claiming improper termination by FCI Environmental, Inc. The Company has
responded that the distribution agreement provides for arbitration, in
Nevada, of any disputes and that therefore, the French courts do not have
jurisdiction, and further that the claims are without merit. The French Court
has ruled that the former distributor may be entitled to approximately
$80,000 (approximately one-half of the original claim); however, either party
may appeal the decision. The Company does intend to appeal the decision.
On September 23, 1998, OCS, Inc., a Texas corporation and customer
of the Company's subsidiary, FCI Environmental, Inc., filed a lawsuit against
FCIE in the District Court of Harris County, Texas, 165th Judicial District.
The lawsuit was based on an alleged breach of warranty for goods purchased
from FCIE. The lawsuit was dismissed without prejudice to either party on
January 19, 1999. On February 18, 1999, the Company filed an action in Nevada
against OCS to collect amounts due from OCS for products sold to OCS, fees,
expenses and damages totaling approximately $200,000. The action was
subsequently removed to the U.S. District Court of Nevada, and OCS filed
counter claims including an alleged breach of warranty and claims for
incidental and consequential damages for $750,000. OCS has failed to file
verified pleadings and has failed to engage Nevada counsel as required by the
Rules of the U. S. District Court. The Company's motion to dismiss OCS's
counter claims and pleadings has been granted by the Count. The Company
expects to file for a default judgment against OCS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the three-month period ended December 31, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K.
A report on Form 8-K was filed by the Company on December
27, 1999 reporting under "Item 5. Other Events" that the Company had entered
into a definitive agreement dated December 6, 1999 providing for the
combination of its business with that of Intrex Data Communications
Corporation.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIBERCHEM, INC.
February 12, 2000 By: /s/ Geoffrey F. Hewitt
- ----------------- -----------------------
Date Geoffrey F. Hewitt
President and Chief Executive Officer
February 12, 2000 By: /s/ Melvin W. Pelley
- ----------------- ---------------------
Date Melvin W. Pelley
Chief Financial Officer and Secretary
16
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 6, 1999
----------------
FIBERCHEM, INC.
---------------
(Exact name of Registrant as specified in its charter)
Delaware 0-17569 84-1063897
-------- ------- ----------
(State or Other (Commission File (IRS Employer
Jurisdiction of Number) Identification Number)
Incorporation)
1181 Grier Drive, Suite B, Las Vegas, Nevada 89119
--------------------------------------------------
(Address of principal executive offices)(Zip Code)
(702) 361-9873
---------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE>
Item 5. Other Events.
On December 6, 1999, FiberChem, Inc., a Delaware corporation
("FiberChem") and Intrex Data Communications Corp., a British Columbia
company ("Intrex") entered into an Arrangement Agreement providing for a
business combination of FiberChem and Intrex. The agreement provides that
all of Intrex's outstanding common shares will be exchanged for 62,904,152
FiberChem common shares, representing the number of FiberChem common shares
and certain equivalents outstanding on November 9, 1999. Accordingly, the
shareholders of each company will have an approximately equal interest in the
combined enterprise. Upon completion of the transaction, FiberChem is to be
renamed DecisionLink, Incorporated and will continue to be traded on the
electronic over-the-counter bulletin board. A copy of the Arrangement
Agreement is included as an exhibit to this report.
The completion of the transaction is subject to the satisfaction or waiver
of certain conditions, including, among others: (i) the approval of the
arrangement by Intrex common shareholders and the Supreme Court of British
Columbia, (ii) the accuracy of representations and warranties and other usual
closing conditions and (iii) $5,000,000 in new financing proceeds being
available to FiberChem immediately following the combination on terms and
conditions satisfactory to FiberChem and Intrex.
The Arrangement Agreement also provides that certain outstanding Intrex
warrants and convertible securities will be exchanged for similar FiberChem
securities on the basis of the common share exchange ratio for the transaction.
Under the agreement, Intrex shareholders will have the option initially to
exchange their Intrex voting common shares for a combination of non-voting
Intrex shares and special non-participating voting FiberChem shares (the
"deferral shares"). Shareholders who elect to receive deferral shares can at
any time elect to exchange them for the number of FiberChem common shares the
holder was initially entitled to receive. On or after December 6, 2009, holders
of deferral shares can be required to make the exchange.
Intrex is a private company which provides proprietary Internet and
communications technology for communicating data to or from remote or mobile
assets on a real time basis using wireless, satellite and cellular data systems.
Data is routed through Intrex's global data network which acts as a data gateway
and applications service provider allowing customers to monitor and control
remote or mobile assets such as gas wells, pipelines, compressors, storage
tanks, offshore platforms, or service vehicles directly from a desktop PC.
Intrex is a licensed reseller of the Orbcomm Global LP low earth orbit or
LEO satellite data and messaging communications services. Orbcomm is a
partnership owned by Orbital Sciences Corporation and Teleglobe, Inc. of Canada.
Intrex also has communications agreements that provide satellite services
through Norcom, Inc. as well as digital cellular services.
FiberChem will continue to pursue its existing aboveground storage tank,
offshore and sensor markets and intends, upon completion of the transaction, to
incorporate Intrex 's technology where appropriate. FiberChem also intends to
pursue new business in Intrex markets that can incorporate FiberChem technology.
<PAGE>
Item 7 FINANCIAL STATEMENTS.
Financial Statements for this report and relating to Intrex will be filed
following completion of the transaction.
(c) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
3.1 Arrangement Agreement, dated as of December 6, 1999, between
FiberChem, Inc., a Delaware corporation, and Intrex Data
Communications Corp., a British Columbia company.
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
FiberChem has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIBERCHEM, INC.
Registrant
Dated: December 27, 1999 By: /s/ Geoffrey F. Hewitt
------------------------------------
Geoffrey F. Hewitt
President and Chief Executive Officer
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITOR'S CONSENT
To the Board Of Directors and Stockholders
FiberChem, Inc.
We hereby consent to the incorporation by reference in the
Prospectus constituting part of the Registration Statement on Form S-2 of our
report dated November 16, 1999, except for the third paragraph of Note 1 and
Note 12, as to which the date is December 6, 1999, on the consolidated
balance sheet of FiberChem, Inc. and Subsidiaries as of September 30, 1999,
and the related consolidated statements of operations, stockholders'
deficiency, and cash flows for each of the two years then ended, which report
appears in the September 30, 1999 annual report on Form 10-KSB of FiberChem,
Inc. We also consent to the reference to our firm under the caption "Experts"
in such prospectus.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
March 24, 2000
