<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: OCTOBER 6, 2000
----------------
DATE OF EARLIEST EVENT REPORTED: JULY 27, 2000
--------------
FIBERCHEM, INC.
---------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COMMISSION FILE NUMBER 1-17569
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) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (702) 361-9873
N.A.
-------------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
================================================================================
<PAGE>
FIBERCHEM, INC.
This Current Report on Form 8-K/A, Amendment No. 1 amends the Current Report on
Form 8-K filed by FiberChem, Inc. ("FiberChem") on August 11, 2000 solely to add
the financial statements of the businesses acquired required by Item 7(a) and
the pro forma financial information required by Item 7(b).
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
1. The consolidated financial statements of Intrex Data
Communications Corp. ("Intrex"), an acquired business.
2. The financial statements of Pandel Instruments, Inc. ("Panel"),
an acquired business.
3. The consolidated financial statements of FiberChem, the
accounting acquiree.
(b) Pro Forma Financial Information
The pro forma condensed, combined balance sheet and statements of
operations, with notes thereto.
(c) Exhibits:
None.
1
<PAGE>
FIBERCHEM, INC.
INDEX TO FINANCIAL STATEMENTS AND PRO FORMA INFORMATION
<TABLE>
<S> <C>
INTREX DATA COMMUNICATIONS CORP
CONSOLIDATED FINANCIAL STATEMENTS..........................3
AUDITORS' REPORT TO THE SHAREHOLDERS..............4
PANDEL INSTRUMENTS, INC
FINANCIAL STATEMENTS.......................................14
INDEPENDENT AUDITOR'S REPORT......................15
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS..........................23
INDEPENDENT AUDITORS' REPORT......................24
FIBERCHEM, INC
PRO FORMA FINANCIAL STATEMENTS.............................43
</TABLE>
2
<PAGE>
INTREX DATA COMMUNICATIONS CORP.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
3
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheet of Intrex Data Communications
Corp. as at December 31, 1999 and the consolidated statements of operations and
deficit and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1999
and the results of its operations and its cash flows for the year then ended in
accordance with Canadian generally accepted accounting principles. As required
by the Company Act (British Columbia), we report that, in our opinion, these
principles have been applied on a consistent basis.
Chartered Accountants
Vancouver, Canada
June 2, 2000
4
<PAGE>
INTREX DATA COMMUNICATIONS CORP.
Consolidated Balance Sheet
December 31, 1999, with comparative figures for 1998
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 93,236 $ 4,033
Accounts receivable -- 1,689
Inventory -- 36,037
Deposits 1,915 1,387
------------------------------------------------------------------------------------------------
95,151 43,146
Capital assets (note 4) 134,626 106,518
Deferred financing costs -- 52,361
Deferred acquisition costs 227,241 --
Intellectual property (note 5) 240,000 480,000
------------------------------------------------------------------------------------------------
$ 697,018 $ 682,025
------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity (Deficiency)
Current liabilities:
Accounts payable and accrued liabilities $ 673,405 $ 286,749
Advances on contracts -- 24,073
Lease obligations (note 6) 10,975 10,975
Current portion of notes payable (notes 7 and 11(c)) 55,000 --
Due to related parties (note 8) 360,985 --
------------------------------------------------------------------------------------------------
1,100,365 321,797
Notes payable (notes 7and 11(c)) 60,000 --
Due to related parties (note 8) -- 190,193
------------------------------------------------------------------------------------------------
1,160,365 511,990
Shareholders' equity (deficiency):
Share capital (note 9(b)) 2,693,217 2,137,886
Deficit (3,156,564) (1,967,851)
------------------------------------------------------------------------------------------------
(463,347) 170,035
Future operations (note 2)
Subsequent events (note 11)
------------------------------------------------------------------------------------------------
$ 697,018 $ 682,025
------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
"D.S. Peachey" Director
----------------------------------
"P. Lagergren" Director
----------------------------------
5
<PAGE>
INTREX DATA COMMUNICATIONS CORP.
Consolidated Statement of Operations and Deficit
Year ended December 31, 1999, with comparative figures for 1998
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Monitoring system sales $ -- $ 47,014
Cost of sales -- 30,703
----------------------------------------------------------------------------
Gross margin -- 16,311
Expenses:
Research and development 637,762 70,554
Depreciation and amortization 297,471 284,215
Sales and marketing 69,263 46,665
Communication and field operations -- 5,754
Administration 211,841 136,943
----------------------------------------------------------------------------
1,216,337 544,131
----------------------------------------------------------------------------
Loss before undernoted 1,216,337 527,820
Foreign exchange loss (gain) (27,624) 23,568
----------------------------------------------------------------------------
Loss for the year 1,188,713 551,388
Deficit, beginning of year 1,967,851 1,416,463
----------------------------------------------------------------------------
Deficit, end of year $ 3,156,564 $ 1,967,851
----------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
INTREX DATA COMMUNICATIONS CORP.
Consolidated Statement of Cash Flows
Year ended December 31, 1999, with comparative figures for 1998
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by (used in):
Operations:
Loss for the year $(1,188,713) $ (551,388)
Items not involving cash:
Depreciation and amortization 297,471 284,215
Changes in non-cash operating working capital 399,781 173,647
----------------------------------------------------------------------------------------------------
(491,461) (93,526)
Financing:
Issuance of common shares 598,000 139,948
Share issuance costs (83,294) --
Deferred acquisition costs (112,241) --
Repayment of lease obligations -- (2,206)
Due to related parties 211,417 5,670
Proceeds from issuance of special warrants -- 15,010
Deferred financing cost 52,361 (52,361)
----------------------------------------------------------------------------------------------------
666,243 106,061
Investments:
Purchase of capital assets (85,579) (13,171)
----------------------------------------------------------------------------------------------------
Increase (decrease) in cash 89,203 (636)
Cash, beginning of year 4,033 4,669
----------------------------------------------------------------------------------------------------
Cash, end of year $ 93,236 $ 4,033
----------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash financing and investing activities:
Notes payable issued for deferred acquisition costs $ 115,000 $ --
Shares issued for settlement of debt due to related parties 40,625 48,600
Cash paid during year to:
Interest payments -- --
Income taxes -- --
----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
INTREX DATA COMMUNICATIONS CORP.
Notes to Consolidated Financial Statements
Year ended December 31, 1999
--------------------------------------------------------------------------------
1. Organization:
Intrex Data Communications Corp. (the "Company") was incorporated on
October 26, 1994 under the Company Act (British Columbia).
The Company is in the business of providing its customers with data from
mobile or remote sites using satellite or other wireless communications and
distributes this data to the customer using the Internet or other means. It
provides this data on a fee-for-service basis or sells the equipment and
software necessary for transmission, reception, display, and analysis of
transmitted data. The Company develops the software necessary for providing
this data to its customers and, in some cases, develops the hardware and
other communication devices.
The Company began limited commercial operations in 1998 when it began
charging customers for data obtained from beta site units and from the sale
of the Company's fuel monitoring equipment.
2. Future operations:
The Company has incurred significant operating losses in 1999 and 1998 and
has a working capital deficiency at December 31, 1999. These consolidated
financial statements are based on the assumption that the Company will be
able to continue as a going concern and will realize its assets and
discharge its liabilities in the normal course of business. Future
operations, and the related recoverability of intellectual property, are
dependent upon the continued successful development and sale of its
software and hardware, obtaining additional financing and the establishment
of profitable commercial operations.
3. Significant accounting policies:
(a) Basis of presentation:
These consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles.
These financial statements include the accounts of Intrex Data
Communications Corp. and its wholly-owned subsidiary, Firebird Data
Communications Inc., a Texas corporation. All significant intercompany
accounts and transactions have been eliminated.
(b) Research and development costs:
Research costs are expensed as incurred. Development costs are
expensed as incurred unless they meet specific criteria for deferral
and amortization. The Company assesses whether it has met the relevant
criteria for deferral and amortization at each reporting date. No
development costs have been deferred in the current year as the
criteria for deferral were not met.
(c) Investment tax credits:
Investment tax credits are recognized as a reduction to the related
expenditure.
(d) Intellectual property:
Intellectual property acquired in 1995 is being amortized on the
straight-line basis at 20% per annum.
8
<PAGE>
3. Significant accounting policies (continued):
(e) Capital assets:
Capital assets are recorded at cost less investment tax credits and
accumulated amortization. Amortization is provided on the
straight-line basis at 20% per annum.
(f) Revenue recognition:
Software and equipment revenue is recognized when product delivery has
occurred and all material risks and rewards related to ownership have
passed on to the purchaser. Revenue from providing operational data to
customers is recognized in the month the service is provided.
(g) Foreign currency translation:
The functional currency for the Company is the Canadian dollar.
Monetary items denominated in foreign currency are translated into
Canadian dollars at exchange rates in effect at the balance sheet date
and non-monetary items are translated at exchange rates in effect when
the assets were acquired or obligations occurred. Revenues and
expenses are translated using average exchange rates prevailing during
the year. The resulting foreign exchange gains and losses are included
in income for the year.
(h) Share issue costs:
The costs of issuing shares are applied to reduce the value of
consideration assigned to such shares.
(i) Adoption of new accounting standard:
The Company retroactively adopted CICA Handbook 1540, Cash Flow
Statements, for the year ended December 31, 1999. Under Section 1540,
non-cash investing and financing activities are excluded from the
Statement of Cash Flows and are disclosed as supplementary
information.
(j) Use of estimates:
The preparation of these consolidated financial statements in
conformity with Canadian generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent
liabilities, and the reported amounts of expenses during the year.
Significant areas requiring the use of estimates are the useful life
of intellectual property. Actual results could differ from estimates
used in the preparation of these financial statements.
(k) Financial instruments:
The carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable and accrued liabilities, and lease
obligation approximate fair values, due to the short term to maturity
of these instruments.
(l) Comparative figures:
Certain of the comparative figures have been restated to conform with
the presentation adopted in the current year.
9
<PAGE>
4. Capital assets:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------------------------------
Accumulated Net Net
Cost amortization book value book value
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Communication equipment $264,448 $143,128 $ 121,320 $ 91,904
Computer and office equipment 54,151 40,845 13,306 14,614
-----------------------------------------------------------------------------------------------
$318,599 $183,973 $ 134,626 $ 106,518
-----------------------------------------------------------------------------------------------
</TABLE>
5. Intellectual property:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Cost $1,200,000 $1,200,000
Less accumulated amortization (960,000) (720,000)
-----------------------------------------------------------------------------------------------
$ 240,000 $ 480,000
-----------------------------------------------------------------------------------------------
</TABLE>
Intellectual property comprises the core development of data,
communications and monitoring technologies.
6. Lease obligations:
At year end, the Company has lease obligations to Laidlaw CybecLeasing LLC
("Laidlaw"), a Texas limited partnership controlled by a principal of the
Company. The leases expired in May, 1998.
7. Notes payable:
During the year, the Company entered into an agreement ("Entrenet
Agreement") with Entrenet Group, LLC ("Entrenet") dated April 12, 1999,
pursuant to which Entrenet is to provide certain corporate services for a
total of $120,000. The Company paid $5,000 in cash upon execution of the
Agreement and the remaining balance of $115,000 is payable as follows:
<TABLE>
<S> <C>
Balance unsecured, bearing interest at 10% per annum, not repayable in
whole or in part prior to maturity date of March 31, 2001 $ 60,000
Balance unsecured, bearing interest at 10% per annum commencing April 1,
1999, principal and accrued interest repayable upon the earlier of March
31, 2000 or the closing of $1,000,000 in financing (note 8 (a)) 55,000
-----------------------------------------------------------------------------------------------
115,000
Less current portion 55,000
-----------------------------------------------------------------------------------------------
$ 60,000
-----------------------------------------------------------------------------------------------
</TABLE>
Accrued interest of $8,242 is included in accounts payable and accrued
liabilities at year end. The notes payable, including its accrued interest,
is convertible into common shares of the Company, at the option of the
Company, at a price equal to the lower of $0.50 per share or the lowest
fair market value of the shares during the term of the note.
10
<PAGE>
8. Due to related parties:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------
<S> <C> <C>
Trevor Nelson, Officer $ 3,000 $ 3,000
David Peachey, Officer 86,324 --
Pandel Instruments, Inc. 87,872 68,998
Peter Lagergren, Officer 126,289 --
Estero Capital Corp. -- 23,622
Vanley Agencies Ltd. -- 37,073
Harwood Ventures Ltd. 57,500 57,500
-------------------------------------------------------------------------
$ 360,985 $ 190,193
-------------------------------------------------------------------------
</TABLE>
(a) Pandel Instruments, Inc. is controlled by an officer and director of
the Company.
(b) Intrex Data Services, Inc. is controlled by the family of a director
of the Company.
(c) Estero Capital Corp. is controlled by a director and officer of the
Company.
(d) Harwood Ventures Ltd. is controlled by a director and officer of the
Company.
The amounts owing are in connection with loans made to the Company, operational
expenses paid on behalf of the Company, management services, and other corporate
expenses and are unsecured, payable on demand and bear no interest.
9. Share capital:
(a) Authorized:
100,000,000 common shares without par value
50,000,000 preferred shares with a par value of $1 and issuable in
series
(b) Issued and unissued:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Number
of shares Amount
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Issued:
Balance at December 31, 1997 6,370,598 $ 1,832,100
Shares issued for cash 239,896 119,948
Shares issued on settlement of debt to related parties 97,200 48,600
Shares issued on conversion of warrants 201,750 117,238
---------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 6,909,444 2,117,886
Unissued:
Shares subscribed for, not issued at December 31, 1998 -- 20,000
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Balance issued and unissued at December 31, 1998 6,909,444 2,137,886
Shares issued for shares subscribed in the prior year (note 8(c)) 40,000 --
Shares issued for cash 1,196,000 598,000
Shares issued on settlement of debt to a related party (note 8(d)) 81,250 40,625
Less: share issue costs -- (83,294)
---------------------------------------------------------------------------------------------------------
Balance issued at December 31, 1999 8,226,694 $ 2,693,217
</TABLE>
11
<PAGE>
9. Share capital (continued):
(c) The Company received $20,000 in cash in 1998 for 40,000 shares which
were issued in 1999.
(d) During the year, the Company issued 81,250 shares at $0.50 per share
as payment for services rendered by a related party.
10. Related party transactions:
During the year, a total of $293,741 (1998 - $115,833) was incurred for
management fees, directors' fees and engineering fees, to three companies
controlled by three senior officers and directors of the Company.
11. Subsequent events:
(a) Arrangement Agreement:
Subsequent to year end, the Company has amended an Arrangement
Agreement entered into on December 6, 1999, subject to shareholder
approval, with FibreChem, Inc. ("FiberChem"). Under the proposed
Arrangement, one of the shareholders of the Company, owning 2,089,000
common shares of the Company, will merge with a subsidiary of
FibreChem, which will acquire the shares owned in the Company through
the merger. The Company will create new exchangeable Class B shares,
which will be exchangeable into common shares of FibreChem. These
Class B shares will have a par value of $.00001, are non-voting and
are redeemable and exchangeable into 1 common share of FibreChem.
FibreChem will designate a series of its authorized preferred shares
as Special Shares carrying voting rights equivalent to FibreChem
common shares. All outstanding common shares of the Company, except
those held by FibreChem, will be exchanged into 27.801925 Class B
shares and 0.27801925 FibreChem Special Shares. Pursuant to the
Arrangement, Compensation Agreement has been entered into with one
individual who is a director and officer of the Company entitling that
individual to 9,450,000 Class B shares of the Company and 94,500
Special Shares of FibreChem for services rendered in facilitating
Arrangement and certain other agreements, contingent upon the
completion of such agreements.
(b) Bridge financing:
On February 11, 2000, the Company entered into a financing agreement
with FiberChem as part of the Arrangement Agreement whereby FiberChem
will provide advances from time to time to the Company in
consideration of a convertible subordinated promissory note at a rate
of 9% per annum due on or before December 31, 2001. The promissory
note is convertible into common shares of the Company at the option of
either FiberChem or the Company in the event the Arrangement Agreement
is not concluded.
On May 19, 2000, the Company entered into a term loan facility to
borrow $600,000 (US) payable on or before July 7, 2000 or under
certain conditions by July 26, 2000 at a rate of 18% per annum for
which the Company will pay an arrangement fee of $60,000 (US).
12
<PAGE>
11. Subsequent events (continued):
(c) Release and Settlement Agreement:
Subsequent to year end, Entrenet, FiberChem and the Company, entered
into a Release and Settlement Agreement with respect to the Entrenet
Agreement (note 7). Under the Release and Settlement Agreement, the
entire amount due to Entrenet will include:
(d) $3,557 in cash;
(e) 3,000,000 FiberChem common shares;
(f) a 10% subordinated convertible note of $126,500 ($115,000 principal
plus accrued interest) convertible into FiberChem common shares at a
conversion price of $0.185 per share; and
(g) a four year warrant to purchase 960,000 FiberChem common shares at a
price of $0.185 per share.
The Release and Settlement Agreement will become effective only upon the
completion of the proposed merger between FiberChem and the Company (note
11(a)).
(h) Lease commitment:
Subsequent to year end, the Company entered into a two-year office
lease agreement for its U.S. subsidiary, effective May 1, 2000. The
Company is committed to annual base rental payments of $69,000 (US).
13
<PAGE>
PANDEL INSTRUMENTS, INC.
FINANCIAL STATEMENTS
AT AND FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998
14
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and
Stockholder's of Pandel Instruments, Inc.
In my opinion, the accompanying balance sheets and the related statements of
operations, of changes in stockholder's equity and of cash flows present fairly,
in all material respects, the financial position of Pandel Instruments, Inc. at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; my responsibility is to express an opinion on these financial
statements based on my audits. I conducted my audits of these statements in
accordance with generally accepted auditing standards which require that I plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audits provide a reasonable basis for
the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note I to the
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 I. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Darrel Schneider, CPA
Dallas, Texas
October 5, 2000
15
<PAGE>
PANDEL INSTRUMENTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................................ $ 2,592 $ --
Accounts receivable.............................................. -- 10,177
Due from related party........................................... 60,888 60,888
Inventory........................................................ -- 5,241
--------------- --------------
Total current assets.......................................... 63,480 76,306
Investments (Note C)................................................... -- --
--------------- ------------
Total assets.................................................. 63,480 76,306
=============== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable........................................... 5,635 3,929
Accrued liabilities.............................................. 23,000 23,000
Due to related parties........................................... 37,888 37,888
--------------- ------------
Total current liabilities..................................... 66,523 64,817
Commitments and contingencies (Note E)................................. -- --
--------------- ------------
Total liabilities............................................. 66,523 64,817
--------------- ------------
Stockholder's equity:
Common stock; no par value; 5,000,000 shares authorized;
4,766,100 and 3,414,360 shares outstanding at
12/31/99 and 12/31/98, respectively........................... -- --
Additional paid-in capital....................................... 526,275 526,275
Retained deficit................................................. (529,318) (514,786)
--------------- --------------
Total stockholder's equity.................................... (3,043) 11,489
--------------- --------------
Total liabilities and stockholder's equity.................... $ 63,480 $ 76,306
=============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
16
<PAGE>
PANDEL INSTRUMENTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
------------ ------------
<S> <C> <C>
Revenues .............................................. $ 147,516 $ 94,770
Cost of revenues ...................................... 133,315 74,225
------------ ------------
Gross profit .......................................... 14,201 20,545
------------ ------------
Operating expenses:
Administrative ................................. 24,931 24,618
Travel ......................................... -- 11,750
Utilities ...................................... 2,364 1,774
Rent ........................................... 1,438 1,582
------------ ------------
Total operating expenses ....................... 28,733 39,724
------------ ------------
Net income (loss) .............................. (14,532) (19,179)
============ ============
Basic earnings (loss) per common share .......... (0.0035) (0.0063)
Diluted earnings (loss) per common share ........ $ (0.0035) $ (0.0063)
Weighted average common shares outstanding ...... 4,173,557 3,059,456
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
17
<PAGE>
PANDEL INSTRUMENTS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Total
--------------------------------- Paid Accumulated Stockholder's
Shares Amount Capital Deficit Equity
--------------- ---------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 1,509,360 - - $ 526,275 $ (495,607) $ 30,668
Shares issued at
$0.00 per share 1,905,000 - - - - - - - -
Net loss - - - - - - (19,179) (19,179)
--------------- ---------------- --------------- --------------- ------------------
Balance at
December 31, 1998 3,414,360 - - 526,275 (514,786) 11,489
=============== ================ =============== =============== =================
Shares issued at
$0.00 per share 1,351,740 - - - - - - - -
Net income (loss) - - - - - - (14,532) (14,532)
--------------- ---------------- --------------- -------------- -----------------
Balance at
December 31, 1999 4,766,100 - - $ 526,275 $ (529,318) $ (3,043)
=============== ================ =============== =============== =================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
18
<PAGE>
PANDEL INSTRUMENTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss..................................................... $ (14,532) $ (19,179)
Adjustments to reconcile loss to net
cash provided by (used in) operating activities:
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable............... 10,177 2,200
(Increase) decrease in due from related parties.......... - - - -
(Increase) decrease in inventory......................... 5,241 - -
Increase (decrease) in accounts payable.................. 1,706 12,907
Increase (decrease) in accrued liabilities............... - - - -
Increase (decrease) in due to related parties............ - - - -
------------------ -------------------
Net cash provided by (used in) operating activities................ 2,592 (4,072)
------------------ ------------------
Cash at beginning of year.......................................... - - 4,072
------------------ ------------------
Cash at end of year................................................ $ 2,592 $ - -
================== ==================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
19
<PAGE>
PANDEL INSTRUMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Pandel Instruments, Inc. ("Pandel or the Company") was incorporated in the
State of Texas on April 15, 1982 to develop, produce, market and license
flowmeters for monitoring and evaluating engine performance. Pandel's primary
customers are petroleum production and shipping companies.
Pandel's financial statements for the years ended December 31, 1999 and
1998 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. At December 31, 1999, Pandel had an accumulated
deficit of $529,318.
Management recognizes that Pandel must generate additional revenues or
reductions in operating expenses and may need additional financing to continue
its operations. On December 6, 1999, Pandel was party to an agreement providing
for the combination of its business with FiberChem, Inc. ("FiberChem") and
Intrex Data Communications Corp., a British Columbia corporation ("Intrex")
(Note H). However, no assurance can be given that the effect of this business
combination or any additional financing can be obtained on terms satisfactory to
the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH
Cash consist of cash in Pandel's bank account.
ACCOUNTS RECEIVABLE
Accounts receivable represents amounts due for products sold and shipped.
INVENTORY
Inventory is stated at the lower of cost (first-in, first out) or market.
REVENUE RECOGNITION
Pandel recognizes revenue from product sales when title passes, which is
upon shipment of product to the customer. There is generally no right of return.
20
<PAGE>
INCOME TAXES
Pandel utilizes Statement of Financial Accounting 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
basis 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.
LOSS PER SHARE
In February 1997, Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE was issued requiring companies to present on the face of the
income statement, basic earnings per share (EPS) and diluted EPS, instead of the
primary and fully diluted EPS that was previously required. Companies with
complex capital structures are required to reconcile the numerator and
denominator used in the basic EPS computation to the numerator and denominator
used in the diluted EPS computation. Pandel's capital structure is comprised
solely of common stock. There were no dilutive common share equivalents
outstanding during each period. As such, for each of the periods presented,
basic and diluted EPS calculations are based on the weighted-average number of
common shares outstanding during the period.
B. RELATED PARTY TRANSACTIONS
Due from related party represents amounts due for services provided to a
company in which Pandel has a 24.89% ownership interest.
Due to related parties is comprised of: (a) $23,000 owed to a shareholder
of Pandel for legal services provided to Pandel, and (b) $14,888 owed to the
President of Pandel for reimbursement of working capital advances.
C. INVESTMENTS
During 1992, Pandel obtained common stock representing a 24.89% ownership
interest in Intrex. For this common stock, Pandel exchanged its ownership
interest in Firebird Data Communications, Inc. ("Firebird"), a Texas
corporation, which was acquired by Intrex. At the exchange date, no value was
ascribed by Pandel to the Intrex common stock due to the lack of a market for
Intrex's common stock. Subsequent to the exchange date, the value of Pandel's
investment in Intrex has not been increased, as would be required under the
equity method of accounting for investments, as Intrex has not generated
earnings.
D. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1999 and 1998 relate to past legal
services rendered to Pandel.
E. COMMITMENTS AND CONTINGENCIES
There are no commitments and/or contingencies.
21
<PAGE>
F. CONCENTRATIONS OF MARKET AND CREDIT RISK
Financial instruments which potentially subject Pandel to concentrations of
credit risk are primarily trade accounts receivable with one customer and
amounts due from a related party. Pandel does not require collateral or other
security to support such amounts due. Pandel does not expect its customer or
related party to fail to meet their obligations and, as such, considers the
credit risk associated with these assets to be minimal. All of Pandel's revenues
have been generated from a single customer.
G. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1999 and 1998, the fair value of Pandel's cash, accounts
receivable, due from related party, accounts payable, accrued expenses and due
to related parties approximated their carrying value because of the short
maturities of those financial instruments.
H. SUBSEQUENT EVENTS
On July 27, 2000, in order to acquire Pandel's 24.89% ownership interest in
Intrex (Note C), Pandel Mergerco, Inc., a wholly-owned subsidiary of FiberChem,
acquired 100% of the common stock of Pandel in exchange for 580,782.22 shares of
FiberChem preferred stock convertible into 58,078,222 shares of FiberChem common
stock. Pandel shareholders deposited 423,393.22 of these FiberChem preferred
shares into escrow pursuant to the terms of the contingent consideration
agreement by and between FiberChem and Intrex. Shares in escrow will be released
in installments if certain milestones related to Intrex's business are met by
July 27, 2002. This transaction is intended to qualify as a tax free
reorganization under Section 368 of the United States Internal Revenue Code of
1986, as amended.
I. GOING CONCERN
Pandel 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 regards to these matters include: (a) Pandel has
reduced fixed expenses to a bare minimum, (b) salary expense has been reduced
and will only be incurred to the extent that the Company generates sales, and
(c) management intends to explore and leverage potential cross selling
opportunities with FiberChem and Intrex.
There can be no assurance that any of these strategies can be effected on
satisfactory terms. Any failure with respect to the foregoing plan will more
likely than not have a material adverse effect on the Company. Should management
determine that the existing plan is inadequate and/or that additional working
capital cannot be raised, additional steps may be required which may include the
termination of operations.
22
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999
23
<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
24
<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
25
<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 contingencies (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.
26
<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.
27
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998 AND 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------------------- ---------------------------- Paid-In
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1997 218,998 $ 3,284,970 25,515,660 $ 2,552 27,192,749
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 --
------------ ------------ ------------ ------------ ------------
Balance at September 30, 1998 218,998 3,284,970 26,441,207 2,644 27,362,272
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 -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at September 30, 1999 207,848 $ 3,117,720 39,831,038 $ 3,983 $ 29,979,833
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Receivable
Deferred for Exercise
Deficit Costs of Rights Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 (29,596,509) 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) -- (2,392,225)
------------ ------------ ------------ ------------
Balance at September 30, 1998 (31,988,734) 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) -- -- (2,221,742)
------------ ------------ ------------ ------------
Balance at September 30, 1999 (34,210,476) (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.
28
<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. (continued)
29
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<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.
30
<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 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
31
<PAGE>
$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).
32
<PAGE>
(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.
33
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999
================================================================================
(3) INVENTORIES
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-Registered Trademark- 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 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
34
<PAGE>
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 (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.
35
<PAGE>
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:
<TABLE>
<S> <C>
Fiscal 2000 $ 671,949
Fiscal 2001 --
Fiscal 2002 1,836,000
Fiscal 2003 50,000
----------
$2,557,949
==========
</TABLE>
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.
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 totaling $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.
36
<PAGE>
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
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
37
<PAGE>
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.
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:
38
<PAGE>
<TABLE>
<CAPTION>
1998 1999
---------------------------- ----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Fixed Options Options Price Options 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
Range of Exercise Number Outstanding and Remaining Weighted Average
September 30 Prices 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.
(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
39
<PAGE>
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 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:
40
<PAGE>
<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 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.
41
<PAGE>
(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.
42
<PAGE>
FIBERCHEM, INC.
PRO FORMA CONDENSED COMBINED UNAUDITED:
BALANCE SHEET AT JUNE 30, 2000,
STATEMENTS OF OPERATIONS FOR THE SIX AND NINE MONTHS ENDED JUNE 30, 2000, AND
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30 1999
AND DECEMBER 31, 1999
43
<PAGE>
FIBERCHEM, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
JUNE 30, 2000
<TABLE>
<CAPTION>
Historical (1) Pro Forma
------------------------------------------ Pro Forma Financial
FiberChem Intrex Pandel Adjustments Statements
------------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents ...................... 1,206,662 95,723 1,322 1,303,707
Cash in escrow as security for bridge loan ..... 675,000 675,000
Accounts receivable, net ....................... 231,381 5,568 236,949
Inventory, net ................................. 1,175,218 1,175,218
Prepaid expenses and other assets .............. 34,033 51,999 86,032
------------ --------- ---------- -----------
Total current assets ......................... 3,322,294 147,722 6,890 3,476,906
Equipment, net .................................... 36,798 120,446 157,244
Patent costs, net ................................. 38,642 38,642
Technology costs, net ............................. 83,143 83,143
Other deferred costs .............................. 150,271 150,271
Deferred acquisition costs ........................ 176,928 269,548 446,476
Excess of cost over net assets acquired ........... 19,761,880C 19,761,880
Intercompany ...................................... 800,193 60,888 (861,081)G
------------ --------- ---------- -----------
Total assets ................................. 4,525,126 620,859 67,778 24,114,562
============ ========= ========== ===========
Current liabilities:
Bridge loan payable ............................ 600,000 600,000
Other notes payable ............................ 250,000 38,107 288,107
Accounts payable ............................... 499,556 463,020 1,104 963,680
Accrued liabilities ............................ 619,483 41,214 23,000 683,697
Due to related parties ......................... 289,810 37,888 327,698
------------ --------- ---------- -----------
Total current liabilities .................... 1,969,039 832,151 61,992 2,863,182
Intercompany ...................................... 861,081 (861,081)G
Notes payable ..................................... 172,000 41,571 213,571
Notes payable to related parties .................. 395,000 395,000
------------ --------- ---------- -----------
Total liabilities ............................ 2,536,039 1,734,803 61,992 3,471,753
------------ --------- ---------- -----------
Minority interest ................................. 1,415,437C,F 1,415,437
------------ --------- ---------- -----------
Stockholder's equity (deficiency):
Preferred stock-liquidation value .............. 3,117,720 3,117,720
Common stock, par .............................. 5,873 25,222B 31,095
Additional paid-in capital ..................... 34,870,145 1,979,286 526,275 (12,615,461)D 24,760,245
Foreign currency translation adjustments ....... (47,677) (47,677)
Retained deficit ............................... (35,916,193) (3,045,553) (520,489) 30,936,682E (8,545,553)
Stock subscription receivable .................. (88,458) (88,458)
------------ --------- ---------- -----------
Total stockholder's equity (deficiency)....... 1,989,087 (1,113,944) 5,786 19,227,372
------------ --------- ---------- -----------
Total liabilities, minority interest
and stockholder's equity (deficiency) .......... 4,525,126 620,859 67,778 24,114,562
============ ========= ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
44
<PAGE>
FIBERCHEM, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX AND NINE MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Historical (1) Pro Forma
--------------------------------------------- Pro Forma Financial
FiberChem Intrex Pandel Adjustments Statements
-------------- ---------------- ----------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues 1,127,533 22,925 29,200 1,179,658
Cost of revenues 710,399 9,530 719,929
---------- ----------- --------- ----------
Gross profit 417,134 22,925 19,670 459,729
---------- ----------- --------- ----------
Operating expenses:
General and administrative 1,053,780 352,508 7,841 658,729C 2,072,858
Sales and marketing 545,029 54,631 599,660
Research, development and engineering 312,941 469,572 3,000 785,513
---------- ----------- --------- ----------
1,911,750 876,711 10,814 3,458,031
---------- ----------- --------- ----------
Profit (loss) from operations (1,494,616) (853,786) 8,829 (2,998,302)
Other income (expenses):
Interest expense (213,597) (213,597)
Interest and other income 2,496 2,496
Foreign exchange gain (loss) (4,721) (4,721)
---------- ----------- --------- ----------
Total other income (expense) (211,101) (4,721) (215,822)
---------- ----------- --------- ----------
Minority interest in FiberChem @ 18.9% 322,381C,F 322,381
---------- ----------- --------- ----------
Net profit (loss) (1,705,717) (858,507) 8,829 (2,891,743)
========== =========== ========= ==========
Net loss per share (0.04) (0.01)
Shares of common stock used in computing
net loss per share 45,102,244 300,138,160
</TABLE>
The accompanying notes are an integral part of these financial statements
45
<PAGE>
FIBERCHEM, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------ --------------- Pro Forma Financial
FiberChem Intrex Pandel Adjustments Statements
-------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues 1,957,110 147,516 2,104,626
Cost of revenues 985,444 133,315 1,118,759
-------------- --------------- --------------- ---------------
Gross profit 971,666 0 14,201 985,867
-------------- --------------- --------------- ---------------
Operating expenses:
General and administrative 1,347,684 342,810 28,733 1,317,459C 3,036,686
Sales and marketing 661,544 46,620 708,164
Research, development and engineering 546,398 429,267 975,665
Disposal of inventory 94,150 94,150
-------------- --------------- --------------- ---------------
2,649,776 818,697 28,733 4,814,665
-------------- --------------- --------------- ---------------
Profit (loss) from operations (1,678,110) (818,697) (14,532) (3,828,798)
Other income (expenses):
Interest expense (366,666) (366,666)
Interest and other income 2,821 2,821
Foreign exchange gain (loss) 18,593 18,593
Other expense (179,787) (5,500,000)C (5,679,787)
-------------- --------------- --------------- ---------------
Total other income (expense) (543,632) 18,593 (6,025,039)
-------------- --------------- --------------- ---------------
Minority interest in FiberChem @ 18.9% 419,909C,F 419,909
-------------- --------------- --------------- ---------------
Net profit (loss) (2,221,742) (800,104) (14,532) (9,433,928)
============== =============== =============== ===============
Net loss per share (0.07) (0.03)
Shares of common stock used in computing
net loss per share 34,113,758 289,983,024
</TABLE>
The accompanying notes are an integral part of these financial statements
46
<PAGE>
FIBERCHEM, INC.
NOTES TO THE CONDENSED COMBINED PRO FORMA FINANCIAL STATEMENTS
(1) Basis of Accounting:
On July 27, 2000 (the "Reverse Acquisition Date"), FiberChem and Intrex
completed the combination of their businesses pursuant to an Amended Arrangement
Agreement dated as of May 26, 2000 (the "Arrangement Agreement"). The
Arrangement Agreement provides that, at the option of each Intrex shareholder,
each Intrex voting common share, except for those shares held by Pandel
Instruments, Inc. ("Pandel"), be exchanged into: (i) 27.801925 non-voting Intrex
Class B shares and 0.27801925 FiberChem Special Series preferred shares with
each Special Series preferred share entitled to one hundred votes, or (ii)
27.801925 FiberChem common shares. In conjunction with the Arrangement
Agreement, Pandel, which owned 24.89% of Intrex's common shares, was merged into
Pandel Mergerco, Inc., ("Mergerco") a wholly-owned FiberChem subsidiary, in
exchange for FiberChem mandatorily convertible Pandel Series preferred shares
with each Pandel Series preferred share entitled to one hundred votes and
mandatorily convertible into one hundred FiberChem common shares.
That number of Intrex Class B shares and Pandel Series preferred shares
representing a percentage in excess of an approximate 51.8% ownership interest
in FiberChem (collectively the "Pooled Shares") were deposited by the Intrex
shareholders into escrow pursuant to the terms of the Intrex Pooling Agreement
(see note 2.B.). This agreement provides that Pooled Shares be issued to the
Intrex shareholders if certain milestones related to the Intrex business are met
during a two-year period following the closing. Accordingly, the consideration
issuable in the combination provides former Intrex shareholders with an initial
approximate 51.8% ownership interest and the potential to acquire up to an
approximate 81.1% ownership interest of the combined entity upon distribution,
if any, of the Pooled Shares. For accounting purposes, the combination of Intrex
and FiberChem is treated as a reverse acquisition of FiberChem by Intrex.
The reverse acquisition of FiberChem by Intrex and the merger of Pandel into
Mergerco have both been accounted for using purchase accounting as a
simultaneous transaction. The carrying values of assets and liabilities have
been estimated to approximate fair market value. Accordingly, no pro forma
adjustments to these amounts were made to reflect the allocation and amount of
the ultimate purchase price with the exception of the allocation made to
FiberChem's in-process research and development. Final allocations, if any, will
be made on the basis of valuations giving effect to various market factors
including most significantly the ultimate distribution of Pooled Shares in the
resulting effect on goodwill, goodwill amortization and minority interest.
Purchase price adjustments, if any, will be made within one year from the
Reverse Acquisition Date. These adjustments may be material to the pro forma
financial information taken as a whole.
The pro forma unaudited condensed combined balance sheet is presented using the
interim consolidated balance sheets of Intrex and Pandel at June 30, 2000
combined with the interim consolidated balance sheet of FiberChem at June 30,
2000. Pro forma adjustments related to the unaudited condensed combined balance
sheet were computed assuming the reverse acquisition of FiberChem by Intrex and
the merger of Pandel into Mergerco were consummated on June 30, 2000.
The pro forma unaudited condensed combined statements of operations are
presented using the consolidated statement of operations of Intrex and Pandel
for the six months ended June 30, 2000 and for the twelve months ended December
31, 1999 combined with the consolidated statement of operations of FiberChem for
the nine months ended June 30, 2000 and for the twelve months ended September
30, 1999. Pro forma adjustments related to the unaudited combined statements of
operations have been computed assuming the reverse acquisition of FiberChem by
Intrex and the merger of Pandel into Mergerco were consummated on January 1,
1999.
The pro forma condensed combined financial statements should be read in
conjunction with the audited financial statements and notes thereto of Intrex
and Pandel for the year ended December 31, 1999 and with the audited financial
statements and notes thereto of FiberChem for the year ended September 30, 1999
included in this Form 8-K/A, Amendment No. 1.
47
<PAGE>
The pro forma unaudited financial information is not necessarily indicative of
the results of operations or the financial position which would have been
attained had the reverse acquisition of FiberChem by Intrex and the merger of
Pandel into Mergerco been consummated at either of the foregoing dates or which
may be attained in the future. The pro forma unaudited results are not intended
to be a projection of future results.
(2) The accompanying pro forma adjustments, among other things, assume the
ultimate distribution of all Pooled Shares resulting in an approximate
81.1% ownership interest of FiberChem by former Intrex shareholders.
However, any significant variance from this assumption may have a material
affect on these pro forma financial statements. As such, additional pro
forma presentations have been made in the following notes giving effect to
the range of possible results and iterations thereto:
(A) All historical financial statements included in the pro forma
financial information were prepared in accordance with U.S. generally
accepted accounting principles. The historical financial statements of
Intrex, which were prepared in accordance with Canadian generally
accepted accounting principles using the Canadian dollar as the
functional currency, were translated into U.S. dollars using the
exchange rate at June 30, 2000 for the balance sheet and using an
average rate for the periods presented in the statements of
operations. Translation adjustments are reflected as foreign currency
translation adjustments in Stockholder's equity and accordingly have
no effect on net loss.
(B) The following table sets forth the allocation of the value of the
total consideration (see Note (1)):
<TABLE>
<CAPTION>
Shares
--------------------------------------------- Consideration
Non Pooled Pooled Total Value ($)
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Intrex Class B Shares 47,482,527 137,208,403 184,690,930 19,409,412
FiberChem Pandel Series 15,738,973 51,791,597 67,530,570 6,431,904
---------- ----------- ----------- -------------
Total issued 63,221,500 189,000,000 252,221,500 25,841,316
========== =========== =========== =============
</TABLE>
None of the consideration has been separately allocated to the Special
Shares. The effect of the various percentages of Intrex's interest in
the acquired net assets of FiberChem depending on the ultimate
distribution of Pooled Shares, assuming: (a) FiberChem's authorized
shares are increased to 500,000,000 at the November 29, 2000 annual
meeting, (b) each Intrex Class B Share is exchanged for one share of
FiberChem common stock, and (c) each share of Pandel Series preferred
stock is converted into 100 shares of FiberChem common stock, is as
follows:
<TABLE>
<CAPTION>
FiberChem Common Shares
Issued and Outstanding Upon Exchange - Change to
Ultimate ---------------------------------------------- FiberChem Common
Percent Intrex Minority ----------------------------------
Acquired Interest Interest Total Par Value ($) Paid-in Capital ($)
-------- ----------- ---------- ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
51.8 63,221,500 58,730,263 121,951,763 6,322 25,834,994
68.3 126,221,500 58,730,263 184,951,763 12,622 25,828,694
76.3 189,221,500 58,730,263 247,951,763 18,922 25,822,394
81.1 252,221,500 58,730,263 310,951,763 25,222 25,816,094
</TABLE>
(C) The value of the consideration given by Intrex, including those shares
held by Pandel, to FiberChem was determined as FiberChem common shares
of 58,730,263 at $0.44 per share (100% of FiberChem issued and
outstanding common shares and the closing price of such shares,
respectively, the day prior to the Reverse Acquisition Date), or
$25,841,316. Per the terms of the reverse acquisition, consideration
of 75.11% and 24.89% is from exchange of stock with Intrex and Pandel,
respectively.
48
<PAGE>
The excess of the value of the consideration given over the net assets
acquired, assuming an 81.1% ownership interest, created goodwill of
approximately $19,761,880 computed as:
<TABLE>
<S> <C>
Stock purchase price............................................................. $ 25,841,316
Less: FiberChem net assets at June 30, 2000............ 1,989,087
Interest acquired................................. 81.1% 1,613,150
---------
Pandel net assets at June 30, 2000.......................................... 5,786
---------------
Excess of purchase price over net assets acquired
before allocation to identifiable assets...................................... 24,222,380
Less: Undervaluation of in-process research and development (5,500,000 x 81.1%...) 4,460,500
---------------
Excess of purchase price allocated to goodwill................................... $ 19,761,880
===============
</TABLE>
Goodwill is amortized over the estimated life of 15 years. The pro
forma amortization expense for the six months ended June 30, 2000 and
the year ended December 31, 1999 was $658,729 and $1,317,459,
respectively.
The acquired in-process research and development totaling $5,500,000
was expensed on January 1, 1999 and is included in retained deficit at
June 30, 2000.
The effect of various percentages of Intrex's interest in the acquired
net assets of FiberChem depending on the ultimate distribution of
Pooled Shares is as follows:
<TABLE>
<CAPTION>
Six Month Twelve Month
Ultimate Six Month Twelve Month Minority Minority Minority
Percent Amortization Amortization Equity Loss Loss
Acquired Goodwill ($) Expense ($) Expense ($) Interest($) Interest($) Interest($)
-------- ------------ ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
51.8 21,956,183 731,873 1,463,746 3,609,740 822,156 1,070,880
68.3 20,720,483 690,683 1,381,366 2,374,041 540,712 704,292
76.3 20,121,356 670,712 1,341,424 1,774,914 404,255 526,553
81.1 19,761,880 658,729 1,317,459 1,415,437 322,381 419,909
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
(D) Calculated as: (34,870,145) to eliminate FiberChem additional paid-in capital
(526,275) to eliminate Pandel additional paid-in capital
25,816,094 exchange of acquisition shares (Note B)
(3,117,720) FiberChem preferred stock, Series A liquidation value, not eliminated
(5,873) FiberChem common stock, par value, not eliminated
88,458 FiberChem stock subscription receivable, not eliminated
-----------
(12,615,461) Additional paid-in capital, pro forma adjustment
(E) Calculated as: 35,916,193 FiberChem retained deficit, eliminated
520,489 Pandel retained deficit, eliminated
(5,500,000) In-process research and development write-off (Note C)
30,936,682 Retained deficit, pro forma adjustment
</TABLE>
(F) Represents minority interest.
(G) Represents elimination of intercompany accounts.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIBERCHEM, INC.
(Registrant)
By: /s/ GEOFFREY F. HEWITT Date: October 6, 2000
------------------------------- ---------------
Geoffrey F. Hewitt
50
