-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AiIVXxAVTC24yN480j6H+8tmKmByrmMAOcnWqwCEamX8aTJScPg+cEsfTDObMJnT WdzzUZATy+LisdFjf7t2CA== 0001047469-98-001656.txt : 19980122 0001047469-98-001656.hdr.sgml : 19980122 ACCESSION NUMBER: 0001047469-98-001656 CONFORMED SUBMISSION TYPE: 10KSB40/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19980121 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIBERCHEM INC CENTRAL INDEX KEY: 0000811014 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 841063897 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB40/A SEC ACT: SEC FILE NUMBER: 000-17569 FILM NUMBER: 98510440 BUSINESS ADDRESS: STREET 1: 1181 GRIER DR STE B CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 702-361-9873 MAIL ADDRESS: STREET 2: 1181 GRIER DRIVE, SUITE B CITY: LAS VEGAS STATE: NV ZIP: 89119 FORMER COMPANY: FORMER CONFORMED NAME: TIPTON INDUSTRIES INC /IA/ DATE OF NAME CHANGE: 19880401 10KSB40/A 1 10KSB40/A U. S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-KSB/A AMENDMENT NO. 1 (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1997 -------------------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ Commission file number 0-17569 ----------------------- FIBERCHEM, INC. (Name of small business issuer in its charter) Delaware 84-1063897 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1181 Grier Drive, Suite B, Las Vegas, Nevada 89119 (address of principal executive offices) (Zip Code) Issuer's telephone number: (702) 361-9873 Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock, $.0001 Par Value -------------------------------------------------------- (Title of class) Indicate by check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Issuer's revenues for its most recent fiscal year: $1,523,994 The aggregate market value of the voting stock held by non-affiliates computed by reference to the last sale price of such stock on December 19, 1997 of $0.19 was $4,591,995 As of December 19, 1997, the Issuer had 25,520,660 shares of Common Stock, par value $.0001 per share, outstanding. EXPLANATORY NOTE The Auditor's Report which appears on page F-1A has not been reissued or withdrawn by KPMG Peat Marwick LLP as of January 20, 1998. The Company's Annual Report on Form 10-KSB for the year ended September 30, 1997 has been filed without the reissuance by KPMG Peat Marwick LLP of their report dated January 10, 1997 on the Company's financial statements for the year ended September 30, 1996 ("Fiscal 1996"). The Company's Fiscal 1996 financial statements have been included as they were published on January 10, 1997. During November and December 1997 and until January 7, 1998, KPMG specifically led the Company to believe that KPMG would reissue their report, as well as consent to the use of their report for the purposes of existing S-8 Registration Statements and a new SB-2 Registration Statement the Company expected to file shortly after filing the Form 10-KSB in order to effect a rights offering to the Company's Stockholders. On January 5, 1998 KPMG requested payment for their current services prior to physical delivery of their consent and reissuance of their report. However on January 7,1998 KPMG verbally informed the Company that KPMG had "decided not to accept an engagement to reissue or consent." KPMG has specifically declined to give any reason for its decision. There can be no assurance that KPMG would have reissued their report in its original form and without qualification if it completed the Fiscal 1997 audit and the required procedures for reissuance were performed. The Company's current auditors, Goldstein Golub Kessler & Company, P.C. ("GGK"), provided letters to KPMG at the latter's specific request confirming that nothing had come to GGK's attention that would have a material effect on the financial statements of the Company for any period prior to October 1, 1996, including Fiscal 1996. GGK, the Company's current auditors, have indicated that they will not, at this time, change or withdraw their report dated November 21, 1997 or their consent dated January 5, 1998, simply because of KPMG's failure to reissue its report. Because of KPMG's belated notice to the Company, the Company's filing of any registration, including the rights offering, will be delayed until the Company's current auditors can audit Fiscal 1996. The Company anticipates that such audit will be completed by the end of February 1998; however, there can be no assurance that it will be completed nor even if completed that the Company's current auditors will issue a report or consent to the use of their report. Because of the delay caused by KPMG, the Company is pursuing various alternatives for interim financing, including "bridge" financing and standby commitments to the rights offering. There can be no assurance that forecasted sales levels will be realized to achieve profitable operations, or that additional financing, if needed can be obtained on terms satisfactory to the Company, if at all, or in an amount sufficient to enable the Company to continue its operations. 2 INDEPENDENT AUDITORS' REPORT To the Board of Directors FiberChem, Inc. We have audited the accompanying consolidated balance sheet of FiberChem, Inc. and Subsidiaries as of September 30, 1997 and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FiberChem, Inc. and Subsidiaries as of September 30, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. /s/ GOLDSTEIN GOLUB KESSLER & COMPANY, LLP New York, New York November 21, 1997 F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders FiberChem, Inc.: We have audited the accompanying consolidated balance sheets of FiberChem, Inc. and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended September 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FiberChem, Inc. and subsidiaries at September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the two year period ended September 30, 1996, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. Las Vegas, Nevada January 10, 1997 /s/ KPMG Peat Marwick LLP F-1A FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
September 30, September 30, 1996 1997 ------------- ------------- Current assets: Cash and cash equivalents $3,065,572 $427,488 Accounts receivable, net of allowance for doubtful accounts of $204,711 and $240,796 in 1996 and 1997, respectively 305,473 263,947 Inventories (Note 3) 1,457,135 1,563,191 Prepaid expenses and other 59,060 56,941 ------------- ------------- Total current assets 4,887,240 2,311,567 ------------- ------------- Equipment 616,192 716,465 Less accumulated depreciation (483,827) (549,175) ------------- ------------- Net equipment 132,365 167,290 ------------- ------------- Other assets: Patent costs, net of accumulated amortization of $1,436,309 at September 30, 1996 and $1,678,845 at September 30, 1997 (note 5) 474,462 287,905 Technology costs, net of accumulated amortization and $354,942 at September 30, 1996 and 114,764 83,333 and $386,373 at September 30, 1997 (note 4) Financing costs, net of accumulated amortization of $65,678 at September 30, 1996 and $148,298 at September 30, 1997 (note 6) 204,245 119,625 Other 247,383 0 ------------- ------------- Total other assets 1,040,854 490,863 ------------- ------------- Total assets $6,060,459 $2,969,720 ------------- ------------- ------------- -------------
The accompanying notes and independent auditor's reports should be read in conjunction with the consolidated financial statements. F-2 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, September 30, 1996 1997 ------------- ------------- Current liabilities: Current installments of note payable (note 6) $7,315 $6,878 Accounts payable 270,503 95,469 Accrued expenses 206,565 307,891 Interest payable 18,016 17,778 ------------- ------------- Total current liabilities 502,399 428,016 Senior convertible notes payable (note 6) 1,675,000 1,650,000 Note payable, net of current installments (note 6) 2,551 7,942 ------------- ------------- Total liabilities 2,179,950 2,085,958 ------------- ------------- Stockholders' equity (notes 4, 6 and 7): Preferred stock, $.001 par value. Authorized 10,000,000 shares; 205,089 and 218,998 convertible shares issued and outstanding at September 30, 1996 and September 30, 1997, respectively; at liquidation value of $15 per share 3,076,335 3,284,970 Common stock, $.0001 par value. Authorized 40,000,000 shares at September 30, 1996, and 50,000,000 shares at September 30, 1997; 25,705,216 and 25,515,660 shares issued and outstanding at September 30, 1996, and September 30, 1997, respectively 2,571 2,552 Additional paid-in capital 28,714,804 27,192,749 Deficit (26,369,551) (29,596,509) ------------- ------------- 5,424,159 883,762 Notes receivable for exercise of options (1,543,650) -- ------------- ------------- Total stockholders' equity 3,880,509 883,762 Commitments and contingencies (notes 6, 7 and 8) ------------- ------------- Total liabilities and stockholders' equity $6,060,459 $2,969,720 ------------- ------------- ------------- -------------
The accompanying notes and independent auditor's reports should be read in conjunction with the consolidated financial statements. F-3 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30, -------------------------------- 1996 1997 ------------- ------------- Revenues $908,700 $1,523,994 Cost of revenues 367,779 945,434 ------------- ------------- Gross profit 540,921 578,560 ------------- ------------- Operating expenses: Research, development and engineering 1,233,054 1,257,324 General and administrative 1,109,456 1,101,781 Sales and marketing 1,007,975 1,004,172 Provision for loss on accounts receivable 201,225 36,085 Write down of obsolete inventory 281,313 -- ------------- ------------- Total operating expenses 3,833,023 3,399,362 ------------- ------------- Loss from operations (3,292,102) (2,820,802) ------------- ------------- Other income (expense): Interest expense (183,795) (223,161) Interest income 201,268 81,787 Other, net -- (264,782) ------------- ------------- Total other income (expense) 17,473 (406,156) ------------- ------------- Net loss ($3,274,629) ($3,226,958) ------------- ------------- ------------- ------------- Shares of common stock used in computing loss per share 22,274,226 25,623,614 ------------- ------------- ------------- ------------- Net loss per share ($0.15) ($0.13) ------------- ------------- ------------- -------------
The accompanying notes and independent auditor's reports should be read in conjunction with the consolidated financial statements. F-4 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1996 AND 1997
Preferred Stock Common Stock Additional ---------------------- ------------------------ Paid-In Shares Amount Shares Amount Capital ------- ---------- ---------- ------ ---------- Balance at September 30, 1995 214,462 $3,216,930 20,532,033 $2,053 24,844,392 Preferred stock dividend: In stock (note 7) 15,214 228,210 -- -- (228,210) In cash (note 7) -- -- -- -- (23,645) Common stock issued: For cash -- -- 3,333,333 333 2,653,884 For services -- -- 13,954 1 15,416 Conversion of senior convertible notes payable (note 6) -- -- 1,437,500 144 991,576 Conversion of preferred stock (note 7) (14,587) (218,805) 145,870 15 218,790 Exercise of warrants -- -- 1,031 1 1,030 Exercise of options -- -- 241,495 24 241,571 Treasury stock retired (10,000) (150,000) -- -- -- Payments received on notes receivable for exercise of options -- -- -- -- -- Deferred compensation earned -- -- -- -- -- Net loss -- -- -- -- -- ------- ---------- ---------- ------ ---------- Balance at September 30, 1996 205,089 $3,076,335 25,705,216 $2,571 28,714,804 Preferred stock dividend: In stock (note 7) 13,909 208,635 -- -- (208,635) In cash (note 7) -- -- -- -- (46,171) Common stock issued: Exercise of options -- -- 150,496 15 55,071 Exercise of warrants -- -- 103,179 10 30,944 Conversion of senior convertible notes payable (note 6) -- -- 61,304 6 22,994 Write down of notes receivable for exercise of options -- -- -- -- (619,504) Shares forfeited upon cancellation of notes receivable for exercise of options -- -- (504,535) (50) (756,754) Payments received on notes receivable for exercise of options -- -- -- -- -- Net loss -- -- -- -- -- ------- ---------- ---------- ------ ---------- Balance at September 30, 1997 218,998 3,284,970 25,515,660 2,552 27,192,749 ------- ---------- ---------- ------ ---------- ------- ---------- ---------- ------ ----------
Treasury Notes Stock - Receivable Preferred for Exercise Deferred Stock Deficit of Options Compensation Total --------- ------------- ------------ ------------- ---------- Balance at September 30, 1995 (150,000) (23,094,922) (1,597,837) (5,596) 3,215,020 Preferred stock dividend: In stock (note 7) -- -- -- -- -- In cash (note 7) -- -- -- -- (23,645) Common stock issued: For cash -- -- -- -- 2,654,217 For services -- -- -- -- 15,417 Conversion of senior convertible notes payable (note 6) -- -- -- -- 991,720 Conversion of preferred stock (note 7) -- -- -- -- -- Exercise of warrants -- -- -- -- 1,031 Exercise of options -- -- -- -- 241,595 Treasury stock retired 150,000 -- -- -- -- Payments received on notes receivable for exercise of options -- -- 54,187 -- 54,187 Deferred compensation earned -- -- -- 5,596 5,596 Net loss -- (3,274,629) -- -- (3,274,629) --------- ------------- ----------- ------------ ---------- Balance at September 30, 1996 0 (26,369,551) (1,543,650) 0 3,880,509 Preferred stock dividend: In stock (note 7) -- -- -- -- -- In cash (note 7) -- -- -- -- (46,171) Common stock issued: Exercise of options -- -- -- -- 55,086 Exercise of warrants -- -- -- -- 30,954 Conversion of senior convertible notes payable (note 6) -- -- -- -- 23,000 Write down of notes receivable for exercise of options -- -- 619,504 -- -- Shares forfeited upon cancellation of notes receivable for exercise of options -- -- 756,804 -- -- Payments received on notes receivable for exercise of options -- -- 167,342 -- 167,342 Net loss -- (3,226,958) -- -- (3,226,958) ------- ----------- ---------- ----- ---------- Balance at September 30, 1997 0 (29,596,509) 0 0 883,762 --------- ------------- ----------- ------------ ---------- --------- ------------- ----------- ------------ ----------
The accompanying notes and independent auditor's reports should be read in conjunction with the consolidated financial statements. F-5 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, ---------------------------- 1996 1997 ----------- ----------- Cash flows from operating activities: Net loss ($3,274,629) ($3,226,958) Adjustments to reconcile net loss to net cash flows used in operating activities: Depreciation 50,542 69,853 Amortization of patent and technology costs 266,147 273,967 Amortization of financing costs 65,678 82,620 Accrued interest on notes receivable for exercise of options (107,367) (26,985) Write off of accrued interest on notes receivable for exercise of options -- 248,212 Common stock issued for services 15,417 -- Reduction in notes receivable for the exercise of options in exchange for services 42,263 636 Deferred compensation recognized 5,596 -- Provision for loss on accounts receivable 201,225 36,085 Write down of obsolete inventory 281,313 36,290 Changes in assets and liabilities: Decrease in note receivable from sale of subsidiary 106,390 -- Decrease in accounts receivable 59,068 5,441 (Increase) in inventories (747,146) (142,346) Decrease in prepaid expenses and other current assets 50,784 2,119 Increase (decrease) in accounts payable 93,729 (175,034) Increase (decrease) in accrued expenses (80,942) 101,326 Increase (decrease) in interest payable 18,016 (238) ----------- ----------- Net cash used in operating activities (2,953,916) (2,715,012) ----------- ----------- Cash flows from investing activities: Purchase of equipment (45,476) (83,505) Payments for patents (128,873) (55,979) ----------- ----------- Net cash used in investing activities (174,349) (139,484) ----------- -----------
The accompanying notes and independent auditor's reports should be read in conjunction with the consolidated financial statements. (continued) F-6 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, ---------------------------- 1996 1997 ----------- ----------- Cash flows from financing activities: Proceeds from common stock and warrant Units $3,000,000 $ -- Proceeds from senior convertible notes payable 2,825,000 -- Payment of financing costs (773,987) -- Payments on note payable to bank and others (6,832) (16,319) Cash restricted as security for note payable -- 18,456 Proceeds from the exercise of options and warrants 242,626 86,040 Proceeds from interest and notes receivable for exercise of options 19,489 174,406 Payment of dividend on preferred stock (23,645) (46,171) ----------- ----------- Net cash provided by financing activities 5,282,651 216,412 ----------- ----------- Net increase (decrease) in cash and cash equivalents 2,154,386 (2,638,084) Cash and cash equivalents at beginning of period 911,186 3,065,572 ----------- ----------- Cash and cash equivalents at end of period $3,065,572 $427,488 ----------- ----------- ----------- ----------- Supplemental Cash Flow Information Noncash investing and financing activities: Senior convertible notes payable converted to common stock $1,150,000 $25,000 Reduction in additional paid-in capital due to write down of notes receivable for exercise of options -- 619,504 Reduction in common stock and additional paid-in capital upon cancellation of shares held as collateral for notes receivable for the exercise of options -- 756,804 Unamortized deferred financing costs associated with senior convertible notes payable converted to common stock 158,281 2,000 Preferred stock converted to common stock 218,805 -- Preferred stock issued as dividends 228,210 208,635 Equipment purchased through capital lease -- 21,273 Reduction in notes receivable for exercise of options in exchange for services 42,263 636 Retirement of treasury stock - preferred 150,000 -- ----------- ----------- ----------- ----------- Interest paid $100,101 $140,785 ----------- ----------- ----------- -----------
The accompanying notes and independent auditor's reports should be read in conjunction with the consolidated financial statements. F-7 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 and 1997 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ (1) NATURE OF BUSINESS AND LIQUIDITY FiberChem, Inc. and its subsidiaries (collectively the "Company" or "FCI") develops, produces, markets and licenses fiber optic chemical sensors (FOCS) for environmental monitoring in the air, water and soil. The Company's primary markets and potential customers are the petroleum production, refinery and distribution chains. Other important markets and customers include remediation companies, environmental consultants, shipping ports, airports and military bases. The Company markets its products world-wide using strategic alliances, distribution agreements and direct sales activities. The Company's consolidated financial statements for the years ended September 30, 1996 and 1997 have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company incurred a net loss of $3,274,629 and $3,226,958 for the years ended September 30, 1996 and 1997, respectively and as of September 30, 1997 had an accumulated deficit of $29,596,509. Management recognizes that the Company must generate additional revenues or reductions in operating costs and may need additional financing to enable it to continue its operations. The Company is reviewing alternatives for raising additional capital including an offering (subject to, among other things, approval by the SEC) of rights to purchase shares and warrants, to be offered to holders of the Company's Common and Preferred Stock, Class D and all other Warrants. The Company has engaged consultants to assist in raising additional capital. (See Note 12.) However, no assurance can be given that forcasted sales will be realized to achieve profitable operations, nor that additional financing, if needed, can be obtained on terms satisfactory to the Company, if at all, nor in an amount sufficient to enable the Company to continue operations. (2) SIGNIFICANT ACCOUNTING POLICIES (a) PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated. The Company develops, produces, markets and licenses fiber optic chemical sensors ("FOCS-Registered Trademark-") for environmental monitoring in the air, water and soil. (b) CASH AND CASH EQUIVALENTS Cash equivalents consist of financial instruments with original maturities of no more than 90 days. (c) INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. (d) EQUIPMENT Equipment is stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, generally five years. (e) TECHNOLOGY COSTS Technology costs represent values assigned to proven technologies acquired for cash and in exchange for issuance of common stock (Note 4). Patents on certain technologies are F-8 pending. Proven technologies are amortized using the straight-line method over an eight year period. (f) PATENT COSTS Costs incurred in acquiring, filing and prosecuting patents are capitalized and amortized using the straight-line method over the shorter of economic or legal life. All existing patents are being amortized over eight years. (g) REVENUE RECOGNITION The Company generally recognizes revenue when title passes, which is normally upon shipment of product to the customer. There is generally no right of return except for normal warranties. (h) WARRANTY The Company warrants its products for a period of one year from the date of delivery, provided the products are used under normal operating conditions. The Company accrues a reserve for product warranty at the time of sale. (i) RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. (j) PER SHARE DATA Loss per common share has been computed based upon weighted average shares outstanding during the periods presented. Contingently issuable shares have been excluded because of their anti-dilutive effect. In March 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share ("SFAS 128"), which modifies existing guidance for computing earnings per share and requires the disclosure of basic and diluted earnings per share. Under the new standard, basic earnings per share is computed as earnings available to common stockholders divided by weighted average shares outstanding excluding the dilutive effects of stock options and other potentially dilutive securities. Diluted earnings per share includes the dilutive effect of these securities. The effective date of SFAS 128 is December 15, 1997 and early adoption is not permitted. The Company intends to adopt SFAS 128 during the quarter ending December 31, 1997. Had the provisions of SFAS 128 been applied to the Company's results of operations for each of the two years in the period ended September 30, 1997, the Company's basic loss per share would have been $0.15 and $0.13 per share. (k) INCOME TAXES The Company utilizes Statement of Financial Standards No. 109, ACCOUNTING FOR INCOME TAXES ("Statement 109"). Under this asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or F-9 settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (l) STOCK-BASED EMPLOYEE COMPENSATION AWARDS In Fiscal 1996 the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. In accordance with the provisions of SFAS No. 123, the Company has elected to apply APB Opinion 25 and related interpretations in accounting for its stock options issued to employees and, accordingly, does not recognize additional compensation cost as required by the new principle. The Company, however, has provided the pro forma disclosures as if the Company had adopted the cost recognition requirements (see Note 7). (m) ESTIMATES Preparing financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Examples include provision for bad debts; inventory obsolescence; and the useful lives of patents, technologies and equipment. Actual results may differ from these estimates. (n) Certain reclassifications have been made in the 1996 presentation to conform to the 1997 presentation. (o) Recent accounting pronouncements. In June 1997, the Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income ("SFAS 130"), and Statement No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). The Company is required to adopt these Statements in fiscal 1999. SFAS 130 establishes new standards for reporting and displaying comprehensive income and its components. SFAS 131 requires disclosure of certain information regarding operating segments, products and services, geographic areas of operation and major customers. Adoption of these Statements is expected to have no impact on the Company's consolidated financial position, results of operations or cash flows. (3) INVENTORIES Inventories are stated at the lower of cost (first in, first out) or market and consist of: September 30, ------------- 1996 1997 ---- ---- Raw materials $ 439,392 $ 551,832 Work in process 21,305 24,643 Finished goods 1,534,542 1,312,804 ---------- --------- Subtotal 1,995,239 1,889,279 Valuation and obsolescence reserves, primarily against finished goods (538,104) (326,088) ---------- --------- Net inventories $1,457,135 $1,563,191 ---------- --------- ---------- --------- F-10 (4) TECHNOLOGY COSTS Technology costs include proven technologies acquired by the Companies to be utilized for various environmental and medical purposes. These technologies include FOCS-Registered Trademark- which are capable of detecting and monitoring various chemical conditions to be used in environmental, medical and process control applications. The technologies were acquired by the issuance of Common Stock of the Company valued at $349,830 and cash of $187,876. (5) PATENT COSTS Patent costs include costs incurred in acquiring, filing and prosecuting patents and patent applications. The Company's policy in general is to apply for patents in major European and Asian countries as well as in the United States. (6) NOTES PAYABLE In December 1994 the Company borrowed $21,000 from Bank of America Nevada ("Bank") at an interest rate of 7.25% per annum. Principal and interest payments of $647 are payable monthly until maturity in January 1998. As part of the terms of the loan agreement, the Bank required that a certificate of deposit ("CD") be maintained as collateral for the note. The CD is reduced periodically as the note is paid down and accrues interest at a rate of 5% per annum. During August 1997 the remaining balance of the note was extinguished using a portion of the proceeds of the CD, which was liquidated at the same time. On February 15, 1996, the Company completed an offering under Regulation S, promulgated under the Securities Act of 1933, as amended (the "Offering"), of 8% Senior Convertible Notes due February 15, 1999 (the "Notes"), for $2,825,000. Interest on the Notes is to be paid semi-annually, commencing August 15, 1996, at a rate of 8% per annum. The Notes are convertible into shares of Common Stock of the Company at a conversion price (the "Conversion Price") of, initially, $0.80 per share at any time after March 26, 1996 and before the close of business on February 14, 1999. The Conversion Price was adjusted to $0.4078, a price representing a 10% discount from the average closing bid price of the Common Stock for the 30 business days prior to February 15, 1997. As of September 30, 1997, an aggregate face amount of $1,175,000 of the Notes had been converted to Common Stock resulting in the issuance of 1,498,804 shares of Common Stock. The Company paid fees and expenses associated with the offering amounting to $428,204, which is being amortized as interest expense over the three-year term of the Notes or until conversion, if earlier, when the proportionate unamortized amount is charged to additional paid in capital. As of September 30, 1997 approximately $160,281 of unamortized deferred financing cost has been recorded as a reduction in additional paid-in capital associated with the $1,175,000 of the Notes converted to Common Stock. Also in connection with the Offering, the Company issued to the Placement Agent for the Offering, for nominal consideration, warrants to purchase up to 353,125 shares of Common Stock, at an exercise price of $0.80 per share (the "Exercise Price"), which has been adjusted to $0.4078 per share. Also in accordance with the terms of the warrants, the number of shares exercisable has been adjusted, based on the adjusted Exercise Price, to 692,742 shares of Common Stock. These warrants are exercisable at any time on or after August 15, 1996 through February 14, 2001 and contain certain piggyback registration rights. In November 1996, the Company acquired $21,273 in equipment through a 36-month capital lease with monthly payments of approximately $715 and an implicit interest rate of approximately 14.5% per annum. F-11 The maturities of the notes payable are as follows: September 30, September 30, 1996 1997 ------------- ------------- Fiscal 1997 $ 7,315 $ 6,878 Fiscal 1998 2,551 7,942 Fiscal 1999 1,675,000 1,650,000 ---------- --------- $1,684,866 $1,664,820 ---------- --------- ---------- --------- (7) STOCKHOLDERS' EQUITY During Fiscal 1993 and Fiscal 1994, the Company conducted a private placement of convertible preferred stock ("Convertible Preferred Stock"). Each share of the Convertible Preferred Stock is convertible into ten shares of FCI Common Stock, initially at $1.50 per share. The conversion ratio is subject to customary anti-dilution provisions. Dividends are cumulative and are payable annually, at the sole discretion of the holders, in cash (11%) or additional shares of Convertible Preferred Stock (8% of the number of shares owned at date of declaration). In November 1995, the Company paid cash dividends of $23,645 and issued 15,214 shares of Convertible Preferred Stock dividends. In November 1996, the Company paid cash dividends of $46,171 and issued 13,909 shares of Convertible Preferred Stock dividends. The Convertible Preferred Stock entitles the holder to a liquidation preference of $15 per share upon liquidation, dissolution or winding up of the Company. The Convertible Preferred Stock is redeemable by the Company when and if the closing bid price of FCI's Common Stock is at least 200% of the conversion price for twenty consecutive trading days. Upon redemption, the Company would issue ten shares of its Common Stock for each share of Convertible Preferred Stock. During Fiscal 1996, 14,587 shares of Convertible Preferred Stock were converted to 145,870 shares of Common Stock. As of September 30, 1997, the Company had 218,998 shares of Convertible Preferred Stock outstanding. On September 12, 1997, the Board of Directors determined that, in view of the recent trading price of the Company's Common Stock and in view of the Company's current cash position, it would not be appropriate to declare the annual dividend payable on the Convertible Preferred Stock on November 1, 1997. As a result, the dividend amounting to $361,347 (if elected entirely in cash, or 17,520 additional shares of Convertible Preferred Stock if elected wholly in additional shares) will accumulate in accordance with the terms of the Convertible Preferred Stock. On May 31, 1996 the Company completed an offering under Regulation S, of 3,333,333 Units, at a price of $0.90 per Unit for total gross proceeds of $3,000,000 before costs and expenses of the offering. The Company paid fees and expenses associated with the Unit offering amounting to $345,683. Each Unit consisted of one share of Common Stock and one warrant to purchase one share of Common Stock (the "Unit Warrants") the shares and warrants being immediately separable. The Unit Warrants are each exercisable at $1.00 at any time from May 31, 1996 through May 30, 2001. Also in connection with the Unit offering, the Company issued to the Placement Agent for the offering, for nominal consideration, warrants to purchase up to 333,333 shares of Common Stock ("the Placement Agent Warrants"), at an exercise price of $0.90 per share which has been adjusted to $0.2343 per share, and the number of shares issuable upon exercise has been adjusted to 1,280,411. These Placement Agent Warrants are exercisable at any time from November 30, 1996 through May 30, 2001. In January 1993, the Company's Board of Directors adopted a 1993 Employee Stock Option Plan ("1993 Plan"), approved by stockholders at the May 1993 Annual Shareholders meeting, covering an aggregate of 2,300,000 shares of FCI Common Stock. As of September 15, 1996, an aggregate of 1,681,519 options had been exercised and 274,641 options forfeited (of which 171,822 had been regranted) under the 1993 Plan. The remaining 515,662 options expired on September 15, 1996. Primarily in order to provide a means to raise additional cash through existing outstanding options, warrants and promissory notes receivable, on April 4, 1997, the per share exercise price of all employee stock options, all Unit and other Warrants (except Class D Warrants) were decreased as follows: to $0.32 F-12 from April 4 through April 11, 1997, and thereafter adjusted weekly to the average closing bid price for the five prior trading days less a discount of 10% (but never to a price less than $0.30) through May 16, 1997, when the prices reverted to the original prices. As a result, the Company received $39,943 for the exercise of 131,453 options at prices ranging from $0.30 to $0.32 per share. Effective April 17, 1997 the per share exercise price of Class D Warrants was decreased to $0.30 through May 16, 1997 when the exercise price reverted to its prior $1.10 per share. As a result, the Company received approximately $30,954 for the exercise of 103,179 Class D Warrants exercised at $0.30 per share. In March 1994, the Company's Board of Directors approved a plan by which employees and directors of the Company and its subsidiaries would be given an opportunity to exercise certain eligible stock options under an early incentive plan through the execution of promissory notes. As of March 15, 1994, the Company received promissory notes aggregating $1,815,099 for the exercise of 1,210,066 stock options. The promissory notes bear interest at 7%, and were initially due on or before September 15, 1995. On April 7, 1995, the Board of Directors extended the due date of the notes to March 15, 1998. The underlying FCI Common Stock was held in escrow, as collateral, until payment was made on the promissory notes. As of September 30, 1996, an aggregate of $271,449 had been paid on these notes in addition to $43,467, respectively, in interest. The remaining accrued interest of $228,927 at September 30, 1996 is included in other long-term assets in accordance with the April 1995 extension of the due date of the notes. The outstanding principal at September 30, 1996 of $1,543,650 is included as a reduction of stockholders' equity. In conjunction with the temporary reduction of the exercise prices of the options and warrants effective April 4, 1997 and Class D Warrants effective April 17, 1997, as described above, the remaining unpaid principal on the promissory notes could be fully paid in an amount determined by multiplying the unpaid balance by a fraction, the numerator of which was the revised exercise price, and the denominator of which was $1.50 (the original exercise price). If the unpaid principal was not so paid by May 16, 1997 the underlying collateral shares would be forfeited and all unpaid principal and accrued interest would be extinguished. As a result, the Company received $160,875 in payment for 520,252 escrowed shares at prices ranging from $0.30 to $0.32 per share, which amount liquidated $780,379 of original note principal. The remaining $756,804 of unpaid note principal was extinguished and the underlying collateral of 504,535 shares were forfeited to the Company and immediately canceled, thereby reducing the total number of shares outstanding. Unpaid accrued interest receivable aggregating $248,212 was expensed. In March 1994, the Company's Board of Directors adopted a 1994 Employee Stock Option Plan ("1994 Plan"), approved by stockholders at the May 23, 1994 Annual Shareholders meeting, covering an aggregate of 1,000,000 shares of FCI Common Stock. As of September 30, 1997, the Company has issued 984,885 stock options, net of forfeitures and regrants, (with initial exercise prices ranging from $1.00 per share to $2.125 per share and current exercise prices of $1.00 per share) under the 1994 Plan to employees of the Company's wholly-owned subsidiary, FCI Environmental, Inc. ("Environmental"). An aggregate of 821,114 options remain exercisable under the 1994 Plan. On April 7, 1995, the Company's Board of Directors resolved that all options to purchase shares of the Company's Common Stock granted prior to April 7, 1995, and which had an exercise price in excess of $1.00 per share, would as of April 7, 1995 have an exercise price of $1.00 per share, which price was above the fair market value of the Common Stock as of the last quoted market trade on April 7, 1995. Options to purchase an aggregate of 2,309,479 shares at prices ranging from $1.125 to $2.125 per share were accordingly changed to $1.00 per share. In April 1995, the Company's Board of Directors adopted a 1995 Employee Stock Option Plan ("1995 Plan"), approved by the stockholders at the May 8, 1995 Annual Shareholders meeting, covering an aggregate of 1,000,000 shares of FCI Common Stock. As of September 30, 1997, the Company has issued 761,547 stock options, net of forfeitures, (with initial and current exercise prices ranging from $0.93 per share to $1.38 per share) under the 1995 Plan to employees of Environmental and Directors of the Company. An aggregate of 643,942 options remain exercisable under the 1995 Plan. F-13 In January 1997 the Company's Board of Directors adopted a 1997 Employee Stock Option Plan ("1997 Plan"), approved by the stockholders at the June 23, 1997 Annual Stockholders Meeting, covering an aggregate of 1,500,000 shares of Common Stock and restricting the granting of options to purchase approximately 675,000 shares of Common Stock authorized under previous stock option plans. As of September 30, 1997 the Company has issued options to purchase 636,500 shares of Common Stock at prices ranging from $0.22 to $0.25 under the 1997 Plan to employees of Environmental and Directors of the Company. An aggregate of 631,500 options remain exercisable under the 1997 Plan. During Fiscal 1996, the Company has expensed an aggregate of $99,000 in directors' compensation for the Company's non-management directors, applying $63,728 to the payment of promissory notes, interest and payroll taxes, and $35,272 to the exercise of 35,272 stock options. Effective October 1, 1996, director compensation was eliminated and replaced by the granting of stock options for service as a director and for service on standing committees. During Fiscal 1997, the Company granted to its six non-management directors options to purchase an aggregate of 186,500 shares of Common Stock at $0.22 per share, which was the fair market value of the Common Stock as of the date of the grants. During Fiscal 1996, the Company issued to two individuals a total of 13,954 shares of Common Stock of the Company, valued at $15,417 for services performed for the Company. On August 1, 1995, the Company's Board of Directors resolved that the exercise price of all outstanding Class D Warrants be changed from $1.50 per share to $1.00 per share, which price was above the fair market value of the Common Stock as of the last quoted market trade on August 1, 1995. An aggregate of 1,031 Class D Warrants were exercised during Fiscal 1996; no Class D Warrants were exercised during Fiscal 1995. On August 21, 1996, the Board of Directors extended the expiration date of the Class D Warrants from their original expiration date of September 15, 1996, to September 15, 2000, and changed the exercise price from $1.00 to $1.10 from September 16, 1996 through September 15, 1997; then $1.15 through September 15, 1998; then $1.20 through September 15, 1999; then $1.25 through September 15, 2000. The Company has granted options under qualified stock option plans as well as other option plans to employees, directors, officers, consultants and other persons associated with the Company who are not employees of, but are involved in the continuing development of the Company. A summary of the status of the Company's stock option plans as of September 30, 1996 and 1997 and changes during those years are as follows:
1996 1997 ---------------------------- --------------------------- Weighted Weighted Average Average Fixed Options Options Exercise Options Exercise Price Price - --------------------------- ----------- -------- --------- ---------- Outstanding at beginning 2,457,023 $1.00 1,670,552 $0.99 of year Granted during year 784,504 .99 676,500 .28 Exercised (246,282) 1.00 (150,496) .37 Forfeited (1,324,693) 1.00 (100,000) 1.00 ----------- ----- --------- ------- Outstanding at end of year 1,670,552 $0.99 2,096,556 $0.76 ----------- --------- ----------- ---------
The following table summarizes information about stock options outstanding and exercisable at September 30, 1996 and 1997. F-14
Weighted Average Weighted Range of Exercise Number Outstanding Remaining Average September 30 Prices and Exercisable Contractual Life Exercise Price - ---------------------------------- ---------------------- -------------------- ------------------ 1996 $0.93 - 1.00 1,670,552 3.75 years $0.99 1997 $0.22 - 1.00 2,096,556 4.80 years $0.76
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:
As Reported Pro Forma ---------------------------- ---------------------------- 1996 1997 1996 1997 ------------- ------------- ------------- ------------- Net Loss $(3,274,629) $(3,226,958) $(3,490,698) $(3,501,930) Loss per share $(0.15) $(0.13) $(0.16) $(0.14)
No tax effect was applied in computing loss per share under SFAS No. 123. The Company's assumptions used to calculate the fair values of options issued was (i) risk-free interest rate of 6.0%, (ii) expected life of five years, (iii) expected volatility of 172%, and (iv) expected dividends of zero. (8) COMMITMENTS AND CONTINGENCIES The Company entered into an agreement to lease office space for a five-year period beginning in January 1990, which expired in January 1995. The Company and the lessor have agreed to a month-to-month lease which is terminable by either party upon 30 days notice. Monthly payments under the lease were originally $8,807 and escalated approximately $1,300 every twelve months. Current base monthly payments under the month-to-month lease are $12,786. Rent expense during Fiscal 1996 and 1997 was $172,492 and $172,551, respectively. The Company is pursuing alternatives, including a renewal of the month-to-month lease at approximately the current base monthly rental charge. Effective January 1, 1994, the Company implemented an Internal Revenue Code Section 401(k) Profit Sharing Plan (the "Plan"). The Plan provides for voluntary contributions by employees into the Plan subject to the limitations imposed by Internal Revenue Code Section 401(k). The Company will match employee contributions at a rate of 50% of the employee's contribution up to a maximum of 2% of the employee's compensation. The Company matching funds are determined at the discretion of management and are subject to a five-year vesting schedule from the date of original employment. The Company's 401(k) matching expense for the years ended September 30, 1996 and 1997 totaled $18,508 and $21,263, respectively. The Company is involved in litigation incidental to its business. In the opinion of the Company's management, the expected outcome of such litigation will not have a material effect on the financial position of the Company. (9) INCOME TAXES Income tax benefit attributable to losses from continuing operations for the year ended September 30, 1996 and 1997 differed from the amount computed by applying the federal income tax rate of 34% to pretax loss from operations as a result of the following: F-15 1996 1997 ---- ---- Computed "expected" tax benefit $(1,113,374) $(1,097,166) Reduction in income tax benefit resulting from: Non-deductible expenses 38,374 28,166 Increase in valuation allowance 1,075,000 1,069,000 ----------- ----------- Net tax benefit $ -- $ -- ----------- ----------- ----------- ----------- Components of net deferred tax assets as of September 30, 1996 and 1997 are as follows: 1996 Change 1997 ---- ------ ---- Deferred tax assets $7,889,000 $1,063,000 $8,952,000 Less valuation allowance (7,873,000) (1,069,000 (8,942,000) ----------- ---------- ----------- Total net deferred tax assets 16,000 (6,000) 10,000 Deferred tax liabilities (16,000) 6,000 (10,000) ----------- ---------- ----------- Net deferred tax assets $ -- $ -- $ -- ----------- ---------- ----------- ----------- ---------- ----------- Deferred tax assets are comprised primarily of the tax effects of the net operating loss carryforwards, reserve for inventory obsolescence and allowance for doubtful accounts recorded for financial reporting purposes. Deferred tax liabilities primarily represent the tax effect of the difference between depreciation recorded for financial statement and income tax reporting purposes. The Company has recorded a valuation allowance in accordance with the provisions of Statement 109 to reflect the estimated amount of deferred tax assets which may not be realized. In assessing the realizability of deferred tax assets, Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. At September 30, 1997, the Company has net operating loss carryforwards for federal income tax purposes of approximately $25,449,000 which are available to offset future taxable income, if any, through 2012. However, carryforwards to offset future taxable income is dependent upon having taxable income in the legal entity originally incurring the loss and will be further limited in each year to an amount equal to the Federal long-term tax exempt interest rate times the entity's market value at the time a significant change in ownership occurred. The Company cannot determine the effect of these limitations. (10) FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments was made in accordance with Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"), DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. Accordingly, the aggregate fair value amounts presented are not intended to represent the underlying value of the net assets of the Company. The carrying amounts at September 30, 1997 for cash, receivables, accounts payable and accrued liabilities approximate their fair values due to the short maturity of these instruments. In addition the estimated fair value of notes payable approximates the related carrying value at September 30, 1997. (11) MAJOR CUSTOMERS During Fiscal 1997, the Company had sales to one customer of approximately $985,000. During Fiscal 1996, the Company had sales to three customers of $190,000, $100,000 and $93,000. F-16 (12) SUBSEQUENT EVENTS On October 2, 1997, the Company entered into an agreement with entrenet Group, LLC ("entrenet") for advice and assistance in developing and executing business plans, financing strategies and business partnerships, acquisitions and mergers. For its services, entrenet will receive a cash fee of $5,000 per month for twelve months; $60,000 in the form of a 10% convertible note, payable on the earlier of (a) a financial transaction (as defined in the agreement) or (b) two years; 5% of the value of any financial transaction (as defined in the agreement); and 5% of any financing provided by or introduced directly by entrenet. F-17 SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: January 20, 1998 FIBERCHEM, INC. By: /s/ Geoffrey F. Hewitt ------------------------------------- President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Geoffrey F. Hewitt Chairman, President and Chief Executive January 20, 1998 - -------------------------- Officer (Principal Executive Officer) Geoffrey F. Hewitt /s/ Melvin W. Pelley Chief Financial Officer January 20, 1998 - -------------------------- (Principal Accounting Officer) Melvin W. Pelley /s/ Scott J. Loomis Director January 20, 1998 - -------------------------- Scott J. Loomis /s/ Walter Haemmerli Director January 20, 1998 - -------------------------- Walter Haemmerli /s/ Gerald T. Owens Director January 20, 1998 - -------------------------- Gerald T. Owens /s/ Irwin J. Gruverman Director January 20, 1998 - -------------------------- Irwin J. Gruverman /s/ Dale W. Conrad Director January 20, 1998 - -------------------------- Dale W. Conrad /s/ Byron A. Denenberg Director January 20, 1998 - -------------------------- Byron A. Denenberg
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