-----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, VHRrn3FwbNqFSw1n+5dd3e24DD8RJFrMiTnpCAeRK5NKsnEPEhGOAcWr+pPo04CS uq5VgUvLUbRYbG6JMndqtw== /in/edgar/work/0000912057-00-048379/0000912057-00-048379.txt : 20001114 0000912057-00-048379.hdr.sgml : 20001114 ACCESSION NUMBER: 0000912057-00-048379 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIBERCHEM INC CENTRAL INDEX KEY: 0000811014 STANDARD INDUSTRIAL CLASSIFICATION: [3829 ] IRS NUMBER: 841063897 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-2 SEC ACT: SEC FILE NUMBER: 333-49706 FILM NUMBER: 757986 BUSINESS ADDRESS: STREET 1: 1181 GRIER DR STE B CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 7023619873 MAIL ADDRESS: STREET 1: 1181 GRIER DR STE B CITY: LAS VEGAS STATE: NV ZIP: 89119 FORMER COMPANY: FORMER CONFORMED NAME: TIPTON INDUSTRIES INC /IA/ DATE OF NAME CHANGE: 19880401 S-2 1 a2028934zs-2.txt S-2 As filed with the Securities and Exchange Commission on November , 2000 Registration No. 333- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Registration Statement on Form S-2 Under the Securities Act of 1933 FIBERCHEM, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 2834 84-1063897 - ---------------------------- ------------------------- -------------------- (State or Other Jurisdiction (Primary Standard (I.R.S. Employer of Incorporation or Industrial Classification Identification No.) Organization) Code Number) 1181 Grier Drive, Suite B Las Vegas, Nevada 89119 (702) 361-9873 (Address and Telephone Number of Principal Executive Offices and Principal Place of Business) Mr. Melvin Pelley Chief Financial Officer FiberChem, Inc. 1181 Grier Drive, Suite B Las Vegas, Nevada 89119 Copies to: Elliot H. Lutzker, Esq. Snow Becker Krauss P.C. 605 Third Avenue New York, NY 10158 Tel: (212) 687-3860 Fax: (212) 949-7052 Approximate Date of Proposed Sale to the Public: As soon as practicable after this registration statement becomes effective. REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this form, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] * * * * * * * * * * * * * * * CALCULATION OF REGISTRATION FEE
Title of Proposed Proposed Each Class Maximum Maximum of Securities Amount Offering Aggregate Amount of to be to be Price Per Offering Registration Registered Registered Unit(1) Price Fee ---------- ---------- ------- ----- --- Common Stock, 14,124,622 shares (2)(3) $0.20 (4) $2,824,924.40 $745.78 $.0001 par value - -------------------------------------------------------------------------------------------------------------------- Common Stock, 10,462,683 shares (5)(3) $0.20 (4) $2,092,536.60 $552.43 $.0001 par value - -------------------------------------------------------------------------------------------------------------------- Common Stock, 8,711,864 shares (6)(3) $0.20 (4) $1,742,372.80 $459.99 $.0001 par value - -------------------------------------------------------------------------------------------------------------------- Common Stock, 1,422,593 shares (7)(3) $0.20 (4) $284,518.60 $75.11 $.0001 par value - --------------------------------------------------------------------------------------------------------------------
-ii- - -------------------------------------------------------------------------------------------------------------------- Common Stock, 60,000 shares (8)(3) $0.20 (4) $12,000.00 $3.17 $.0001 par value - -------------------------------------------------------------------------------------------------------------------- Common Stock, 10,000 shares (9)(3) $0.20 (4) $2,000.00 $0.53 $.0001 par value - -------------------------------------------------------------------------------------------------------------------- Common Stock, 960,000 shares (10)(3) $0.20 (4) $192,000.00 $50.69 $.0001 par value - -------------------------------------------------------------------------------------------------------------------- Common Stock, 683,704 shares (11)(3) $0.20 (4) $136,740.80 $36.10 $.0001 par value - -------------------------------------------------------------------------------------------------------------------- Common Stock, 3,000,000 shares (12)(3) $0.20 (4) $600,000.00 $158.40 $.0001 par value - -------------------------------------------------------------------------------------------------------------------- Common Stock, 58,078,222 shares (13)(3) $0.20 (4) $11,615,644.40 $3,066.53 $.0001 par value - -------------------------------------------------------------------------------------------------------------------- Common Stock, 9,450,000 shares (14)(3) $0.20 (4) $1,890,000.00 $498.96 $.0001 par value - -------------------------------------------------------------------------------------------------------------------- Common Stock, 9,450,000 shares (15)(3) $0.20 (4) $1,890,000.00 $498.96 $.0001 par value - -------------------------------------------------------------------------------------------------------------------- Common Stock, 75,000 shares (16)(3) $0.20 (4) $15,000.00 $3.96 $.0001 par value - -------------------------------------------------------------------------------------------------------------------- Common Stock, 100,000 shares (17)(3) $0.20 (4) $20,000.00 $5.28 $.0001 par value - -------------------------------------------------------------------------------------------------------------------- Common Stock, 600,000 shares (18)(3) $0.20 (4) $120,000.00 $31.68 $.0001 par value - -------------------------------------------------------------------------------------------------------------------- Common Stock, 7,047,826 shares (19)(3) $0.20 (4) $1,409,565.20 $372.13 $.0001 par value - -------------------------------------------------------------------------------------------------------------------- Common Stock, 100,000 shares (20)(3) $0.20 (4) $20,000.00 $5.28 $.0001 par value - -------------------------------------------------------------------------------------------------------------------- Common Stock, 180,000 shares (21)(3) $0.20 (4) $36,000.00 $9.50 $.0001 par value - -------------------------------------------------------------------------------------------------------------------- Common Stock, 15,000 shares (22)(3) $0.20 (4) $3,000.00 $0.79 $.0001 par value - ------------------------------------------------------------------------------------------------------------------- Total 124,531,514 shares $24,906,302.80 $6,575.27
- ---------------------------- (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 promulgated under the Securities Act of 1933, as amended (the "Act"). (2) Consists of 14,124,622 shares or approximately 200% of the common stock currently issuable to certain selling security holders upon conversion of $1,350,000 aggregate -iii- principal amount of 12% Senior Convertible Debentures due July 26, 2002 issued pursuant to Regulation S of the Act, held by such selling security holders. (3) Pursuant to Rule 416(a) under the Act, this registration statement also relates to such number of shares of common stock as may become issuable as a result of anti-dilution adjustment in accordance with the terms of convertible securities, options or warrants. (4) Pursuant to Rule 457(c) under the Act, the registration fee has been calculated on the average of the high and low prices per share of common stock reported on the Over-the Counter Bulletin Board maintained by NASDAQ, which was $0.20 on November 3, 2000. (5) Consists of 10,462,683 shares or approximately 200% of the common stock currently issuable to a selling security holder upon conversion of $1,000,000 aggregate principal amount of Senior Convertible Notes of the registrant issued pursuant to the exemption under Section 4(2) of the Act, held by such selling security holder. (6) Consists of 8,711,864 shares or approximately 200% of the common stock currently issuable to certain selling securityholders upon conversion of 257,000 shares of Series B Convertible Preferred Stock of the registrant issued pursuant to Regulation S of the Act, held by such selling securityholders. (7) Consists of shares of common stock issuable upon exercise of warrants issued as partial consideration for the services of a placement agent in connection with the offering of the registrant's convertible notes and debentures due July 26, 2002 and its Series B Convertible Preferred Stock. (8) Consists of shares of common stock issuable upon exercise of warrants issued as part of a Bridge Loan. (9) Consists of shares of common stock issuable upon exercise of warrants issued as partial consideration for the services of a placement agent in connection with a Bridge Loan. (10) Consists of shares of common stock issuable upon exercise of warrants issued as partial consideration for consulting services. (11) Consists of shares of Common Stock issuable upon conversion of a convertible note due April 11, 2002. (12) Consists of outstanding shares of Common Stock issued by the registrant pursuant to Section 4(2) of the Securities Act as partial compensation for services. (13) Consists of shares of Common Stock issuable upon conversion of shares of the registrant's Pandel Series Convertible Preferred Stock issued by the registrant pursuant to Section 4(2) -iv- of the Securities Act as consideration for the merger of a subsidiary of registrant with Pandel Instruments, Inc. which became effective July 27, 2000. (14) Consists of shares of Common Stock issuable upon conversion of Pandel Series Convertible Preferred Stock issued to a selling stockholder pursuant to Section 4(2) of the Securities Act in connection with a compensation agreement entered into in connection with the merger of a subsidiary of registrant with Pandel which became effective July 27, 2000. (15) Consists of shares of common stock issuable to a selling securityholder upon exchange of Intrex Data Communications Corp. Class B Shares issued to such selling securityholder pursuant to a compensation agreement entered into in connection with the business combination between the registrant and Intrex which became effective July 27, 2000. (16) Consists of shares of common stock issuable upon exercise of warrants issued to a selling securityholder pursuant to Regulation S. (17) Consists of shares of common stock issuable upon exercise of warrants issued as partial consideration for consulting services. (18) Consists of 400,000 shares of common stock and 200,000 shares of common stock issuable upon exercise of warrants issued pursuant to a consulting agreement. (19) Consists of shares of common stock issuable upon exercise of warrants to be issued on conversion of $1,621,000 convertible notes. (20) Consists of shares of Common Stock issued as consideration for consulting services rendered by a selling securityholder. (21) Consists of shares of common stock issued pursuant to regulation S in settlement of litigation with the selling securityholder. (22) Consists of shares of Common Stock issued as consideration for services rendered by a selling securityholder. (23) The fee of $6,575.27 is being paid herewith. ================================================================================ The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. -v- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ In accordance with Rule 429, the prospectus included in this Registration Statement also relates to the offering of securities included in Post-Effective Amendment No. 1 to Registration Statement 333-78319, declared effective March 29, 2000; Registration Statement No. 333-46555, declared effective October 23, 1998; and Registration Statement No. 33-73782, declared effective February 2, 1994. -vi- The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION - DATED NOVEMBER , 2000 FIBERCHEM, INC. 107,881,220 SHARES OF COMMON STOCK, $.0001 PAR VALUE ----------------------- The selling securityholders are offering to the public up to 107,881,220 shares of common stock which they can acquire upon conversion of convertible securities and the exercise of warrants and options issued by us. The common stock is a speculative investment and involves a high degree of risk. You should read the description of certain risks under the caption "Risk Factors" beginning on page 5 before purchasing the common stock. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The common stock is quoted on the Over-The-Counter Electronic Bulletin Board ("OTCBB") under the symbol "FOCS." On November 3, 2000, the closing price per share of common stock on the OTCBB was $.20. Our executive offices are located at 1181 Grier Drive, Suite B, Las Vegas, Nevada 89119, and our telephone number is (702) 361-9873. THE DATE OF THIS PROSPECTUS IS NOVEMBER__, 2000. PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements incorporated by reference or appearing elsewhere in this prospectus. This prospectus contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. FiberChem's actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, FiberChem's lack of profitability, the ability of the combined entity resulting from FiberChem's business combination with Intrex Data Communications Corp. to market its products and services using the two companies' technologies, the timely development and acceptance of new products, FiberChem's ability to continue as a going concern, intense competition in the industry, and the other risks discussed in "Risk Factors," as well as those discussed elsewhere in this prospectus. INFORMATION ABOUT THE COMPANY FiberChem, through its sensor division, develops, produces, markets and licenses its patented fiber optic chemical sensor ("FOCS-Registered Trademark-") technology which detects and monitors hydrocarbon pollution in the air, water and soil. On July 27, 2000, we completed a business combination with Intrex Data Communications Corp., 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. The consideration issued in the combination provides Intrex shareholders with a minimum of approximately 50% of the equity interest in the combined company and up to 80% of the equity interest if certain milestones related to the Intrex business are met during a two year period following the closing. For accounting purposes, the combination will be treated as a reverse acquisition of FiberChem by Intrex. Management of the combined companies believes that the new enterprise, to be re-named DecisionLink, Inc. following stockholder approval, can establish itself as a leading provider of corporate remote asset monitoring and control systems, combining Intrex's satellite and wireless communication technology with FiberChem's sensor technology, to greatly reduce the cost of transmitting and monitoring data acquired from remote, mobile or difficult to service multiple locations. These large potential cost savings are expected to open opportunities for the combined company in markets such as residential and commercial propane gas tanks, oil wells, oil and gas pipelines and vehicle fleets. FiberChem has developed a range of sensor products and systems based on FOCS-Registered Trademark- technology, which provide IN SITU and continuous real-time information reporting. Products based on its FOCS-Registered Trademark- technology currently being marketed by FiberChem include the PetroSense-Registered Trademark- PHA-100 series of portable analyzers, the CMS-4000 and 5000 Continuous Monitoring Systems and the OilSense-4000-TM- System. These products detect and measure petroleum hydrocarbon concentrations in a variety of applications, including groundwater, waste water, storm water and process water streams on offshore platforms. FiberChem is also developing for commercial use a range of chemical sensors based on its Sensor-on-a-Chip-Registered Trademark-. 2 technology for a wide variety of environmental, consumer, commercial, industrial, automotive and military applications. FiberChem will continue to pursue these products and markets and intends to incorporate Intrex's technology where appropriate. FiberChem also intends to pursue new business opportunities in Intrex markets that can incorporate FiberChem technology. Intrex routes data through its global data network which acts as a data gateway and applications service provider that allows customers to monitor and control remote, mobile or difficult to service multiple locations such as gas wells, pipelines, compressors, storage tanks, offshore platforms or service vehicle fleets directly from a desktop PC. The Intrex technology can greatly reduce costs by eliminating the need to hard wire remote locations and by allowing real time monitoring of mobile and difficult to service multiple locations. 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 and digital cellular services through Norcom, Inc. In connection with the business combination, FiberChem obtained cash financing proceeds of $3,635,000 and certain securities of nominal value from the sale of $2,350,000 principal amount of 12% convertible debentures and notes due July 26, 2002 and 257,000 shares of its Series B Convertible Preferred Stock, with a stated value of $10 per share. The debentures and notes are convertible into shares of common stock at a conversion price per share equal to the lesser of $.30 or 92% of the average of the market price for the common stock for the 20 consecutive trading days ending two trading days prior to the conversion. Each share of Series B Convertible Preferred Stock is convertible into a number of shares of common stock equal to its stated value divided by the initial stated conversion price of $.59 per share, subject to a reduction of $.07 per share on August 25 in each year commencing 2001, and certain other adjustments in the conversion price. We file reports, proxy statements and other information with the SEC. You may read and copy any document we file at the Public Reference Room of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional Offices of the SEC at Seven World Trade Center, Suite 1300, New York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Please call 1-800-SEC-0330 for further information concerning the Public Reference Room. Our filings also are available to the public from the SEC's website at www.sec.gov. We distribute to our stockholders annual reports containing audited financial statements. Information Incorporated by Reference The SEC allows us to "incorporate by reference" the information we file with it, which means that we can disclose important information to you by referring to those documents. The information incorporated by reference is considered to be part of this prospectus. This prospectus is accompanied by and incorporates by reference the documents listed below. 3 1. Annual Report on Form 10-KSB for the fiscal year ended September 30, 1999. 2. Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 2000. 3. Current Report on Form 8-K (Date of Earliest Event Reported July 27, 2000). 4. Amendment No. 1 to Current Report on Form 8-K (Date of Earliest Event Reported June 27, 2000). THE OFFERING SECURITIES OFFERED: - 107,881,220 shares of Common Stock offered by Selling Securityholders
OTCBB COMMON STOCK SYMBOL:...............................................................FOCS NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF OCTOBER 16, 2000...........................................66,446,350
4 RISK FACTORS The securities offered hereby are speculative and involve a high degree of risk. Accordingly, you as a prospective investor, should carefully consider the following factors relating to an investment in FiberChem. WE HAVE HAD HISTORICAL OPERATING LOSSES AND HAVE AN ACCUMULATED DEFICIT OF APPROXIMATELY $35,916,000. For the fiscal years ended September 30, 1997, 1998 and 1999, we had net losses of approximately $3,227,000, $2,392,000 and $2,222,000, respectively, and for the nine-month periods ended June 30, l999 and 2000 we had net losses of approximately $1,609,000 and $1,706,000, respectively, with an accumulated deficit of approximately $35,916,000 at June 30, 2000. We do not expect to obtain sufficient revenues from operations to offset our level of fixed and planned expenditures, and expect that losses will continue for the immediate future. WE LACK WORKING CAPITAL AND WILL REQUIRE ADDITIONAL CAPITAL. We had working capital at June 30, 2000 of approximately $2,153,000, as compared with working capital of approximately $394,000, at September 30, 1999, an increase in working capital of approximately $1,759,000. We had working capital of approximately $394,000, at September 30, 1999, and negative working capital of $919,000 at September 30, 1998, representing an increase of working capital of approximately $1,313,000. The improvement in our working capital has been due primarily to financing activities. As long as we continue to lose money and utilize capital to support operations, we will require additional capital. We don't know whether we will be able to obtain additional funding when it is needed, or that such funding, if available, will be obtainable on terms favorable to or affordable to us or on any terms. If we are unable to obtain other financing we may be unable to continue in business. See "Ability to Continue as a Going Concern; Modified Report of Independent Accountants" below. ABILITY TO CONTINUE AS A "GOING CONCERN"; MODIFIED REPORT OF INDEPENDENT ACCOUNTANTS. Our consolidated financial statements for the year ended September 30, 1999, indicated there is substantial doubt about our ability to continue as a going concern due to our need to generate cash from operations and obtain additional financing. We recently obtained cash financing proceeds of $3,635,000 and completed our business combination with Intrex. We are continuing to seek additional financing for our operating needs and to provide funding to develop business opportunities for the combined companies. Accordingly, our ability to continue as a going concern on a short-term or long-term basis remains in substantial doubt without permanent funding. In the event we are not able to continue as a going concern, we may have to curtail operations, sell assets or seek protection under the bankruptcy laws. WE MAY NOT BE ABLE TO PROFITABLY MARKET NEW PRODUCTS UNDER DEVELOPMENT. We have been engaged in the development of new products representing applications of our chemical sensor technology and have had only limited sales of these products to date. Before we can achieve profitable operations we must complete our product development, develop adequate manufacturing capacity for these products and must be able to sell our products to purchasers in adequate volumes and prices to cover our costs and expenses. 5 In addition, in order to conduct more extensive manufacturing, marketing and sales activities, we will need to implement and improve operational, financial and management information systems, procedures and controls. We do not know whether there will be adequate demand for our products in commercial quantities, that we will be able to manufacture our products at costs that would allow for profitable sales or that, in general, we will be able to develop the operational, financial and management information systems, procedures and controls necessary to operate profitably on a larger scale than at present. OUR FOCS-Registered Trademark- TECHNOLOGY MAY BECOME OBSOLETE. To date, we have been dependent on the marketing and sale of our fiber optic chemical sensors ("FOCS-Registered Trademark-"). Other technologies exist that compete with the FOCS-Registered Trademark- technology. Although we are also developing a range of sensor products based on our Sensor-on-a-chip-Registered Trademark- technology, we do not know whether any or all of our products will be rendered superfluous or obsolete by research efforts and technological advances made by others. Our failure to successfully market the products incorporating the technologies would have a material adverse effect on our operations. We are also dependent on the successful development and marketing by other entities of products incorporating our sensors. WE MUST COMPETE WITH LARGER AND FINANCIALLY STRONGER COMPETITORS. Competition in the field of diagnostic sensor and environmental technology is intense. Competition in the underground and aboveground storage tank detection markets have intensified since the promulgation of various state and EPA regulations. Most of our actual and potential competitors have greater financial resources, more extensive business experience and larger organizations than we possess. Even if we are able to successfully market our FOCS-Registered Trademark- products, we do not know whether larger or better financed companies will develop effective competitive products. We believe that we will be able to compete favorably. However increased competition could materially adversely affect our business, financial condition and results of operations. Our success in the wireless electronics market will depend heavily upon our ability to provide high quality products and services in select target markets. While we will offer an end to end problem solving system, we will be competing against others offering competitive products and services. Other factors that will affect our success in these markets include our continued ability to attract additional experienced engineering, marketing, sales and management talent. We believe that we will be able to compete on the basis of price and service. Our success will depend on the ability to anticipate and respond to rapid changes in customer preferences and the introduction of new services. We do not know whether we will be able to compete successfully in our markets. The wireless communications industry is characterized by frequent introduction of new products and services, and is subject to changing consumer preferences and industry trends, which may adversely affect our ability to plan for future design, development and marketing of our products and services. The markets for micro-electronic products, components and related services are 6 also characterized by rapidly changing technology and evolving industry standards, often resulting in product obsolescence or short product life cycles. We will constantly be required to expend more sums in research and development of new technologies. EXTENSIVE EFFECT OF GOVERNMENT REGULATION IN ENVIRONMENTAL MONITORING AREA. The EPA regulations regulate the installation, testing, manufacture and maintenance of underground storage tanks. There can be no assurance that our PetroSense-Registered Trademark- Continuous Monitoring System will meet future regulatory requirements. The state and EPA regulations establish timetables for the installation of leak detection equipment in aboveground and underground storage tanks and pipings and are subject to interpretation and subsequent changes. These regulations are the minimum federal requirements; state and local regulators are permitted to enact more stringent standards. The EPA also regulates the monitoring, management and cleanup of storm water-generated pollution and hazardous wastes. We do not know whether other sensor products under development will meet future federal or state regulatory requirements. WE ARE DEPENDENT ON PATENT PROTECTION OF OUR TECHNOLOGIES. Our FOCS-Registered Trademark- technology, which is proprietary and patented, is our most critical asset. We own numerous United States patents and have additional patent applications pending with the United States Patent and Trademark Office. We also have numerous foreign patents and foreign patent applications pending for our various sensor technologies and devices. We do not know whether such patents will protect us from other persons who develop products that infringe our proprietary rights. Many patents involving fiber optic technology have been issued to others. To our best knowledge, our technologies do not infringe patent or other proprietary rights of others; however, we do not know that such infringement has not occurred or will not occur in the future. If it were determined that our products infringed the claims of someone else's issued patent, we could be enjoined from making or selling such products or be forced to obtain a license in order to continue the manufacture or sale of the product involved, requiring payment of a licensing fee or royalties of unknown magnitude on sales of the product. In addition, we could be liable for substantial damages, and even the defense of patent litigation can be extremely expensive. We do not know whether, if any such license were required, it would be available or available on terms acceptable to us. Any inability to obtain required licenses on favorable terms, or at all, would adversely affect our business. We do not know whether our pending patent applications will be allowed, whether any of our issued patents would be upheld, whether any issued patents will provide us with significant competitive advantages, or whether challenges will not be instituted against the validity or enforceability of any patents owned by us and, if instituted, whether such challenges will not be successful. The cost of litigation to uphold the validity of a patent and prevent infringement can be substantial even if we prevail. Furthermore, we do not know whether others will independently develop similar technologies, duplicate our technology or design around the patented aspects of our technology. If patents do not issue from present or future patent applications, we may be subject to greater competition. In addition, our technology might be subject to reverse engineering, allowing competitors to obtain our proprietary technology. 7 WE HAVE LIMITED PRODUCTS LIABILITY INSURANCE AND EXPOSURE TO UNINSURED RISKS. We have products liability insurance in the amount of $5 million. When we sell any product it may become subject to substantial claims and liabilities from users of such products in excess of our insurance. In the event of an uninsured claim or one in excess of our coverage, our business and financial condition could be materially adversely affected. WE HAVE LIMITED MANUFACTURING FACILITIES. Our facilities in Las Vegas, Nevada are capable of manufacturing our FOCS-Registered Trademark- and Sensor-on-a-chip-Registered Trademark- products for our current sales volumes. Although alternative assembly operations are currently available, we do not know whether such operations will be available in the future or will be available on terms acceptable to us. WE ARE DEPENDENT ON THIRD PARTIES FOR MANUFACTURING AND SUPPLY. We currently manufacture only one of the components of our FiberChem products, although we currently assemble the products ourselves. We have not entered into any formal arrangement with any supplier. Although we believe that there are several potential suppliers for substantially all required components, we might incur delays in meeting delivery deadlines in the event a particular supplier is unable or unwilling to meet our requirements. Suppliers of custom designed components would be more difficult to replace. We do not know whether the cost of third party manufacturing of components or of our products will exceed current estimates. In addition, we are largely dependent on our suppliers to maintain quality control. WE ARE DEPENDENT UPON KEY PERSONNEL. We are dependent upon the services of Geoffrey Hewitt, our Chairman and Chief Executive Officer; David S. Peachey, our President and Chief Operating Officer; Peter J. Lagergren, President - Communications Division; Thomas Collins, President-Sensor Division, and Melvin Pelley, our Chief Financial Officer. To the extent that any of their services become unavailable, our business or prospects may be adversely affected. Each is employed pursuant to employment agreements which automatically renew for a one year term unless terminated by either party to the agreements. We do not know whether we would be able, or how long it would take, to employ qualified persons to replace these key individuals. We carry key man life insurance policies of $3 million, $2 million and $1 million on the lives of Messrs. Hewitt, Collins and Pelley, respectively, and we intend to purchase insurance on the lives of Messrs. Peachey and Lagergren. WE ARE DEPENDENT ON TECHNICAL AND PROFESSIONAL PERSONNEL. Our ability to produce and market our FOCS-Registered Trademark- products and develop new products is dependent upon the availability and technical abilities of our in-house staff and facilities and/or agreements to be negotiated with third parties. Competition for qualified technical personnel is intense. We do not know whether we will be able to retain independent persons presently employed and be able to attract qualified individuals in the future to satisfy our requirements for technical expertise. CERTAIN RISKS SPECIFICALLY RELATED TO WIRELESS TECHNOLOGY. Some specific risks facing our wireless technology operations are concentrated on our ability to maintain its technological advantage: 8 - The time frame required to marketable products using wireless related technologies - The window of opportunity on these products is estimated to be, at most, 36 months before being made obsolete by improvements in technology. - Copiers of the technology - Although our wireless technology will be protected by patents wherever practical, people have attempted and may attempt to replicate our present products. New technology is being developed daily which might allow a competitor to duplicate, through "reverse engineering" or otherwise, our products' functionality. - Undeveloped technologies - As new technological developments arise it is possible that one could render present product(s) obsolete. Although unlikely, such a development could draw customers away from wireless related technology until our products are able to match or surpass them. COMPLIANCE WITH GOVERNMENT REGULATIONS CAN INCREASE COSTS AND SLOW GROWTH. Telecommun-ication and wireless transmissions services are subject to regulation by the Federal Communications Commission (the "FCC") and sometimes by state regulatory authorities as well. Among other things, these regulatory authorities impose regulations governing the rates, terms and conditions for interstate and intrastate telecommunication services. The federal law governing regulation of interstate telecommunications are the Communications Acts of 1934 and 1996 (the "Communications Acts"). We believe that we are in substantial compliance with all material laws, rules and regulations governing our operations and have obtained or are in the process of obtaining all licenses, tariffs and approvals necessary for the conduct of its business. In the future, legislation enacted by Congress, court decisions relating to the telecommunications industry, or regulatory actions taken by the FCC or the states in which we operate could have a negative impact on our business. Changes in existing laws and regulations, particularly relaxation of existing regulations resulting in significantly increased price competition, may have a significant impact on our activities and operating results. Adoption of new statutes and regulations and our expansion into new geographic markets could require us to alter our methods of operations, at costs which could be substantial, or otherwise limit the types of services we offer. We cannot assure you that we will be able to comply with additional applicable laws, regulations and licensing requirements. WE MAY BE ADVERSELY AFFECTED BY A DOWNTURN IN OUR INDUSTRY. Our industry is cyclical and as a result is subject to downturns in general economic conditions and changes in client business and marketing budgets. A downturn in general economic conditions in one or more markets or changes in client business and marketing budgets could have a material adverse effect on our business, financial condition and results of operations. REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS. Several industries in which we operate are subject to varying degrees of governmental regulation. Generally, compliance with these regulations is the responsibility of our customers. However, we could be subject to a 9 variety of enforcement or private actions for our failure or the failure of our clients to comply with these regulations. These actions could have a material adverse effect on our business. From time to time, state and federal legislation is proposed with regard to the use of proprietary databases of consumer groups. The fact that we generate and receive data from many sources increases the uncertainty of the regulatory environment. As a result, there are many ways both domestic and foreign governments might attempt to regulate our use of our data. Any such restrictions could have a material adverse affect on our business. The services we offer both within and outside the United States may be subject to United States and foreign regulations including: - advertising content; - activities requiring customers to send money with mail orders; and - the maintenance and use of customer data held on databases. RISK FACTORS RELATING TO INTERNET OPERATIONS INTERNET OPERATIONS' LIMITED HISTORY OF OPERATIONS MAY NOT BE A RELIABLE BASIS FOR EVALUATING OUR PROSPECTS. Because our Internet operations are in a development stage, we have limited operating and financial data to give to you to evaluate our future performance and prospects concerning these entities. Our prospects must be considered in light of the risks, expenses, delays, problems and difficulties frequently encountered in the establishment of a new business in the Internet industry, which is an evolving industry characterized by intense competition. You must consider the risks, expenses and uncertainties that an early stage business like our Internet communications business faces. These risks include our ability to: - establish awareness of our services to businesses in emerging Internet economies; - expand business-to-business services; - respond effectively to competitive pressures; and - continue to develop and upgrade our technology and distribute any future joint venture partner's technology. If we are unsuccessful in addressing these risks, our business, financial condition and results of operations will be materially and adversely affected. WE ARE DEPENDENT ON OUR PLANS TO FORM A JOINT VENTURE WITH CORNERSTONE PROPANE PARTNERS, L.P. Intrex has entered into a memorandum of understanding with Cornerstone Propane Partners, L.P., the fourth largest propane distributor in the United States, to form a joint venture to market 10 a system for monitoring gas levels in propane tanks, transmitting the data on a real time basis through Intrex's wireless communications technology and using the data to schedule and route deliveries of propane gas. We are dependent on the formation of the joint venture with Cornerstone in order to generate additional revenues in the near term. Moreover, the joint venture would require us to seek additional financing to fund capital expenditures, which would result in substantial dilution to existing shareholders. In addition, if the joint venture is formed, securities convertible into or exchangeable for approximately 126,000,000 FiberChem common shares would be released to former Intrex and Pandel stockholders pursuant to escrow arrangements established in connection with the Intrex business combination. The release of these securities to former Intrex and Pandel securityholders could also dilute the equity interest of other stockholders. OUR INTERNET RELATED BUSINESS MAY HAVE DIFFICULTY COMPETING. Our businesses, insofar as they relate to the Internet, compete in the Internet market which is characterized by increasing competition from "brand-named" entities and the rapid adoption of new technologies. We might in the future face competition from a wide range of companies including, but not limited to, Internet service providers (ISP's) and Internet portals such as Yahoo!, America On Line and Earthlink, and from applications service providers (ASP's) such as SAP, J.D. Edwards and PeopleSoft. In addition, we could encounter competition from new sources as the Internet and wireless technology markets continue to evolve. Our competitors may have capabilities and resources equal to or greater than we do. In addition, there are relatively few barriers preventing competitors from entering the Internet industries in which we compete. As a result, new companies may enter into the market at any time and threaten the business of our Internet operations. Existing or future competitors may develop or offer comparable or superior services at a lower price, which could have a material adverse effect on the business, financial condition and results of operations of our Internet business. SIGNIFICANT COMPETITION IN PROVIDING INTERNET SERVICES AND WIRELESS SERVICES COULD REDUCE THE DEMAND FOR AND PROFITABILITY OF OUR SERVICES. Though our focus is predominately upon business-to-business e-commerce in emerging Internet economies, wherein there presently is little competition, the wireless component sector is very competitive. For example, we may compete with cellular communications companies such as CellNet; other satellite communications companies, such as Globalstar, and even other licensed resellers for Orbcomm. In addition, a number of multinational corporations, including giant communications carriers, such as Qualcomm and Worldcom and some of the regional operating companies, are offering, or have announced plans to offer wireless remote asset communications. In the future, our competitors in the business-to-business e-commerce realm, as opposed to the wireless and Internet communications arena, may even include prospective customers such as major multinational oil companies and automobile manufacturers. We believe that new competitors, which may include computer software and services, telephone, energy, environmental and other companies, are likely to enter the services market. Competition for 11 electronic commerce partners is intense and is expected to increase significantly in the future because there are no substantial barriers to entry in our market. In addition, we believe that the Internet service and on-line service businesses will further consolidate in the future. We believe this could result in increased price and other competition in the industry and adversely impact us. This may cause us to lower our fees in order to compete in an already limited market space. Many of our Internet and wireless technology competitors possess financial resources significantly greater than what we might expect to have and, accordingly, could initiate and support prolonged price competition to gain market share. Many competitive products and services are marketed by companies which: - are well established; - have reputations for success in the development and sale of products and services; and - have significantly greater financial, marketing, distribution, personnel and other resources, thereby permitting them to implement extensive advertising and promotional campaigns, both general and in response to efforts by additional competitors to enter into new markets and introduce new products and services. We believe we will be able to compete favorably in these areas. However increased competition in any one of these areas could materially adversely affect our business, financial condition and results of operations. Other factors that will affect our success in these markets include our continued ability to attract additional experienced marketing, sales and management talent, in the communications, energy and related industries, and in the area of government environment regulations, and the expansion of support, training and field service capabilities. The Internet and the technology industries are characterized by frequent introduction of new products and services, and are subject to changing consumer preferences and industry trends, which may adversely affect our ability to plan for future design, development and marketing of our products and services. The markets for our products and services are also characterized by rapidly changing technology and evolving industry standards, often resulting in product obsolescence or short product life cycles. WE ARE UNCERTAIN OF OUR PRODUCTS BEING ACCEPTED BY THE MARKET. Achieving market acceptance for our products and services requires substantial marketing efforts and the expenditure of significant funds, which we don't currently have, to create both awareness and demand. Because demand by our customers may be interrelated, any lack or lessening of demand could have a negative affect on overall market acceptance of our products and services. Markets 12 may not develop for our Internet related business, and we may not be able to meet our current marketing objectives or succeed in positioning ourselves as a key player in the Internet industry. RELIANCE ON NEW PRODUCTS. A substantial part of our business and financial plan focuses on a product line which is relatively new. We do not know whether sales levels sufficient to run our business profitably (or sufficient to continue Intrex's operations at all) can be achieved and, if achieved, maintained. Internal cash generated by operations may not permit the level of research and development spending required to further new product improvements and outside financing may not be available. PRODUCT OBSOLESCENCE. Our business is at risk if we do not continue to upgrade and improve our products. Typically, the communications industry is characterized by a consistent flow of new improved products which render existing products obsolete. The market may not consider our products to be superior or equivalent to existing or future competitive products and we may not be able to adapt to evolving markets and technologies, develop new products, achieve and maintain technological advantages or maintain prices competitive with other products. SMALL CUSTOMER BASE: We have recently completed beta testing of remote data communications products and are now beginning our marketing efforts. We have not yet built a significant customer base and may be unable to do so. RELIANCE ON SATELLITE SERVICE-PROVIDERS: By relying on communications satellites operated by Orbcomm or other satellite providers becoming and remaining fully operational, we take on the risks inherent to the satellite communications industry (for instance, the risks of damage to satellites caused by collisions in space with such things as meteor showers or space debris or the risk of damage from solar flares). In addition, the satellite industry has very high fixed costs and satellite service providers may experience financial difficulties if they are unable to achieve profitability. Our ability to provide services, whether using the Orbcomm satellites or any other satellite, is dependent on the continued operation of those satellites and on our continued access to those satellites. We may not continue to have access to satellites or sufficient access to enable us to operate our business. FINANCIAL RISK IN RELIANCE ON ORBCOMM AS A SATELLITE SERVICE PROVIDER: Orbcomm, the exclusive provider of satellite communications services for our proposed joint venture with Cornerstone Propane Partners, L.P., has experienced financial difficulties and filed a petition in the United States Bankruptcy Court for reorganization under Chapter 11 of the United States Bankruptcy Act on September 15, 2000. Orbcomm's management has advised us that it intends to continue to provide satellite communications services to us and that it believes its reorganization will be successful. However, under Chapter 11, Orbcomm, subject to court approval, can reject its agreements with us and can also discontinue its operations generally if a successful reorganization cannot be achieved. The loss of the services provided to us by Orbcomm, or the mere possibility of the loss of those services, could have a material adverse effect on our business and could have the effect of delaying the implementation of the proposed joint venture with Cornerstone or increasing the cost of wireless communications services to the joint venture if 13 those services must be obtained from another provider. The loss of the services of Orbcomm would also jeopardize our present and any future investment in hardware and software that is specific to the Orbcomm satellite communication system. TECHNOLOGICAL RISKS: The Orbcomm satellites and any other satellites that we may be use are exposed to the risks inherent in a large-scale complex communications system employing advanced technology. Even if our system is built to specifications, the Orbcomm satellites or any other satellite that we may use will not always function as expected in a timely and cost-effective manner. Performance degradation in any satellite which we use may occur in the future. LIMITED LIFE OF SATELLITES. We may not be able to rely on Orbcomm, or any other satellite service provider, being able to finance its next generation of satellites. Our management understands that the first-generation satellites are designed to operate for the next five years. REGULATORY RISKS: Our ability to expand into foreign markets may be affected by our ability to receive any necessary licences to operate. There is no assurance that we will be successful in gaining any required foreign regulatory authorizations. If we are not successful, services relying on the Orbcomm satellites will not be available in such countries. Some countries continue to require that a communications service is provided by a government-owned entity and in those countries we may be unable to provide service using the Orbcomm satellite. IF WE DO NOT EFFECTIVELY IMPLEMENT OUR MARKETING STRATEGY AND EFFECTIVELY MANAGE OUR OPERATIONS, OUR BUSINESS COULD SUFFER. Implementation of our business plan will depend on, among other things, the following: - our ability to establish contractual arrangements targeting several market segments for our Internet business; and - hire and retain skilled management, financial, marketing, sales and other personnel. Our marketing strategy and plans are subject to change as a result of a number of factors, including, but not limited to, progress or delays in: - our marketing efforts; - changes in market conditions, including the emergence of significant supplementary markets; - the nature of possible strategic alliances which may become available to us in the future; and - competitive factors. 14 WE MAY NOT BE ABLE TO IMPLEMENT SUCCESSFULLY OUR BUSINESS PLAN FOR OUR INTERNET RELATED BUSINESS OR OTHERWISE CONTINUE OUR OPERATIONS. In order to implement our business plan for our Internet and wireless technology business, we will be required to: - improve our operating systems; - attract and retain skilled executive, management and technical personnel; and - successfully manage growth, including monitoring operations, controlling costs and maintaining effective quality, and service controls. JOINT VENTURES, ACQUISITIONS OR STRATEGIC ALLIANCES MAY NOT BE AVAILABLE. We do not know if we will be able to identify any future joint ventures, acquisitions or strategic alliances or that we will be able to successfully finance these transactions. A failure to identify or finance future transactions may impair our growth. In addition, to finance these transactions, it may be necessary for us to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may impact our operations and, in the case of equity financings, may result in substantial dilution to existing stockholders. IN THE FUTURE WE WILL DEPEND ON THE DEVELOPING MARKET OF THE INTERNET. Our ability to derive revenues by providing online commerce and Internet and/or wireless technology related services will depend, in part, upon a developed and robust industry and the infrastructure for providing Internet access and carrying Internet traffic. The necessary infrastructure, such as a reliable network backbone, or complementary products, such as lower cost high speed cable modems, may not be developed or the Internet may not become a viable commercial marketplace in those segments we target. Critical issues concerning the commercial use of the Internet, including: - security - ease of use and access - reliability - quality of service - cost remain unresolved and may impact the growth of Internet use. In the event that the necessary infrastructure or complementary products are not developed or the Internet does not become a viable commercial marketplace, our future business, operating results and financial condition could be negatively affected if we were to expend significant resources for the development of Internet services. CONCERNS ABOUT SECURITY OF ELECTRONIC COMMERCE TRANSACTIONS AND CONFIDENTIALITY OF INFORMATION ON THE INTERNET MAY REDUCE OVERALL INTERNET USE AND IMPEDE OUR GROWTH. A significant barrier to electronic commerce and confidential communications and transmissions over the Internet has been the need for security and reliability. Internet usage could decline if any well-publicized compromise of security occurred. We may incur significant costs to protect against the threat of 15 security breaches or to alleviate problems caused by these breaches or other problems with the general integrity of our system. Unauthorized persons could attempt to penetrate our network security. If successful, they could misappropriate proprietary information or cause interruptions in our services. As a result, we may be required to expend capital and resources to protect against or to alleviate these problems. Security breaches could have a material adverse effect on our business, financial condition and results of operations. COMPUTER VIRUSES MAY CAUSE OUR SYSTEMS TO INCUR DELAYS OR INTERRUPTIONS AND MAY ADVERSELY AFFECT OUR BUSINESS. Computer viruses may cause our systems to incur delays or other service interruptions. In addition, the inadvertent transmission of computer viruses could expose us to a material risk of loss or litigation and possible liability. Moreover, if a computer virus affecting our system is highly publicized, our reputation could be materially damaged. WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES AFFECTING THE INTERNET WHICH COULD ADVERSELY AFFECT OUR BUSINESS. To date, governmental regulations have not materially restricted use of the Internet in our markets, except in so far as our business relates to environmental matters. However, the legal and regulatory environment that pertains to the Internet is uncertain and may change. Uncertainty and new regulations could increase our costs of doing business and prevent us from delivering our products and services over the Internet. The growth of the Internet may also be significantly slowed. This could delay growth in demand for our network and limit the growth of our revenues. In addition to new laws and regulations being adopted, existing laws may be applied to the Internet. New and existing laws may cover issues which include: - sales and other taxes; - user privacy; - pricing controls; - data security and integrity issues; - characteristics and quality of products and services; - consumer protection; - cross-border commerce; - libel and defamation; - copyright, trademark and patent infringement; and - other claims based on the nature and content of Internet materials. 16 UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY ADVERSELY AFFECT OUR BUSINESS. We regard our copyrights, service marks, trademarks, trade secrets and other intellectual property as important to our success. Unauthorized use of our intellectual property by third parties may adversely affect our business and our reputation. We rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without authorization. Furthermore, the validity, enforceability and scope of protection of intellectual property in Internet-related industries is uncertain and still evolving. The laws of some foreign countries are uncertain or do not protect intellectual property rights to the same extent as do the laws of the United States. WE MAY BE SUBJECT TO CLAIMS BASED ON THE CONTENT WE PROVIDE OVER OUR NETWORK. The laws in the United States and in other countries relating to the liability of companies which provide online services, like ours, for activities of their customers are currently unsettled. Claims have been made against online service providers and networks in the past for defamation, negligence, copyright or trademark infringement, obscenity, personal injury or other theories based on the nature and content of information. We could be subject to similar claims and incur significant costs in their defense. RISKS RELATING TO OUR SECURITIES POSSIBLE VOLATILITY OF COMMON STOCK PRICES. The market price of our common stock may be significantly affected by various factors, including, but not limited to, general economic conditions and those specific to our business, future acquisitions, if any, and our financial condition. Moreover, the price of our common stock may be affected by the significant number of shares of common stock outstanding, and the shares underlying outstanding warrants and/or options to purchase shares of our common stock. See "Market for Common Stock and Related Stockholder Matters." SHARES ELIGIBLE FOR FUTURE SALES BY OUR CURRENT STOCKHOLDERS MAY AFFECT OUR STOCK PRICE AND POTENTIAL FUTURE DILUTION. Approximately 6.4 million of the 66,446,350 shares of common stock outstanding as of October 16, 2000 are "restricted securities" as such term is defined in Rule 144 promulgated under the Securities Act. Restricted securities may only be publicly sold pursuant to an effective registration statement under the Securities Act or in accordance with applicable exemptions from the registration requirements of the Securities Act. Rule 144 provides for the public sale by affiliates and non-affiliates of limited quantities of restricted securities without registration under the Securities Act when the securities are held over one year. Non-affiliates that hold the restricted securities over two years may sell an unlimited quantity of the restricted securities. Currently, approximately 345,849 shares of restricted securities are held by non-affiliates for over two years and approximately 518,000 are held by non-affiliates for less than one year. 17 We are unable to predict the effect that sales made pursuant to this prospectus, Rule 144 or otherwise may have on the then prevailing market price of our securities, although sales of substantial amounts of shares by existing stockholders, or even the potential of such sales, may be expected to have an adverse effect on the trading price and market for our securities. YOUR OWNERSHIP INTEREST MAY BECOME DILUTED. In the event that our stock price increases, holders of outstanding options and warrants may elect to exercise them, and holders of outstanding convertible securities may elect to convert them, resulting in dilution of other stockholders' interests. As of October 16, 2000, we had outstanding 1,895,175 Class D warrants. Each Class D Warrant is currently exercisable by the holder thereof to purchase one share of common stock at an exercise price of $1.25 through the expiration date of September 17, 2001. There are an additional 37,500 warrants each exercisable at $.90, 1,637,000 warrants each exercisable at $1.00 and 75,000 warrants each exercisable at $0.35 (collectively with the Class D warrants, the "Outstanding Warrants"). The holders of Series A Convertible Preferred Stock currently have the right to convert the 207,848 shares of convertible preferred stock outstanding into 2,078,480 shares of common stock (to be increased to 15,588,600 shares in satisfaction of anti-dilution adjustments and dividends in arrears) and redemption under certain circumstances. The holders of the 8% Senior Convertible Notes have the right to convert their notes into an aggregate of 743,478 shares of common stock, assuming a conversion price of $.23, subject to adjustment and redemption under certain circumstances. We have agreed to issue to the holders of the outstanding 8% Senior Convertible Notes upon conversion of their notes and to holders who have already converted their 8% Senior Convertible Notes, warrants to purchase 7,047,826 shares of common stock, exercisable at $.23 for approximately two years from issuance. In addition, we have previously registered an additional 2,113,942 shares of common stock and intend to register 5,000,000 shares of common stock underlying a like number of options (3,723,942 options outstanding; 3,390,000 options authorized, but not granted) and 250,000 shares of common stock issuable pursuant to an Employee Stock Purchase Plan pursuant to registration statements on Forms S-8. In addition, 400,000 shares of Common Stock are issuable upon exercise of options (at prices ranging from $.50 to $1.00 per share) granted pursuant to consulting agreements. The holders of our 12% convertible debentures and notes issued to obtain financing in connection with the recent business combination with Intrex have the right to convert their notes into 12,293,653 shares of common stock, assuming an effective conversion price of $.1912 per share, subject to adjustment. The holders of our Series B Convertible Preferred Stock have the right to convert their shares into 4,355,932 shares of common stock, subject to adjustment. As consideration for a bridge loan of $600,000 which was re-financed with 12% convertible debentures, the bridge lenders received warrants expiring May 19, 2005 to purchase 60,000 shares of common stock at an exercise price equal to the lesser of $.50 per share or 75% of the closing market price the day before the conversion. The placing agent for the bridge loan, the 12% convertible debentures and notes and the Series B Preferred Stock received, for nominal consideration, a warrant expiring May 19, 2005, to purchase 10,000 shares of common stock at an exercise price of $.50 per share and warrants expiring July-September 2005, to purchase 18 1,422,593 shares of common stock at a currently effective exercise price of $.24 per share, subject to adjustment. As consideration for the business combination with Intrex we have agreed to issue, subject only to the authorization by FiberChem shareholders of a sufficient number of shares of Common Stock, 252,218,952 shares of our common stock upon conversion of convertible securities issued by us and in exchange for Intrex Class B Shares, of which 189,164,214 shares will be held in escrow and will be released only if certain milestones related to the Intrex business are met by July 27, 2002. As part of the fee for advisory services rendered in connection with the business combination, we also issued a promissory note due April 11, 2002, which is convertible into 683,704 shares of Common Stock, representing a conversion price of $.185 per share and a warrant expiring April 11, 2004, to purchase 960,000 shares of common stock at an exercise price of $.185 per share. During the terms of our warrants, options, convertible preferred stock, debentures, notes and the exchangeable securities issued in connection with the Intrex business combination the holders may be able to purchase shares of common stock at prices substantially below the then current market price of our common stock, with a resultant dilution in the interests in the existing common stockholders. The holders of the warrants, options, convertible preferred stock, notes and exchangeable securities may be expected to exercise their rights to acquire shares of common stock at times when we might be able to obtain needed capital through a new offering of securities on terms more favorable than those provided by these outstanding securities. Thus, exercise of the warrants, and options and/or the conversion of convertible preferred stock, notes and exchangeable securities may be expected to have a depressive effect on the market price for the common stock and might adversely affect the terms on which we may be able to obtain additional financing or additional capital. In addition, the exercise or conversion or exchange of the warrants, options, convertible preferred stock, notes and exchangeable securities and the subsequent sales of shares of common stock by holders of such securities pursuant to a registration statement, under Rule 144, or otherwise, could have an adverse effect upon the market for our securities. Moreover, warrant holders who fail to exercise their warrants will experience a corresponding decrease in their interest held in us relative to the ownership interest held by exercising warrant holders. In connection with the Intrex business combination, former shareholders of Intrex and shareholders of FiberChem who own or have the right to acquire a total of 192,944,645 shares of FiberChem Common Stock have agreed that until July 27, 2001, each of them will not sell any FiberChem common stock owned by them or ownership of which may be acquired in an amount which exceeds, together with other sales for the account of such stockholder during the preceding three months, the greater of (1) one percent of the shares of Common Stock outstanding as shown on FiberChem's most recently published Annual Report on Form 10-KSB or Quarterly Report on Form 10-QSB, (2) the average weekly reported trading volume during the four weeks preceding the filing of any required notice of sale pursuant to Rule 144 or, if no such notice is required, the date of receipt of the order to execute the transaction by the broker or the date of execution of the transaction directly with a market maker. 19 CLASSIFIED BOARD OF DIRECTORS. Our by-laws provide for a classified Board of Directors with board members serving staggered three-year terms. The Board has three classes of directors serving for three-year terms, with one class of directors to be elected at each annual meeting of stockholders. The classification of Directors has the effect of making it more difficult to change the composition of the Board of Directors and more difficult for a third-party to acquire us. PREFERRED STOCK AUTHORIZATION. Our Certificate of Incorporation authorizes the issuance of a maximum of 10,000,000 shares of "blank check" preferred stock, $.001 par value with such designations, rights and preferences as may be determined from time to time by our Board of Directors. As of October 16, 2000, we had outstanding (i) 207,848 shares of Series A Preferred Stock currently convertible into 2,078,848 shares of Common Stock (expected to be increased to 15,588,6000 shares in satisfaction of anti-dilution adjustments and dividends in arrears), (ii) 675,282.22 shares of Participating Convertible Preferred Stock, Pandel Series, convertible into 67,528,222 shares of Common Stock, (iii) 1,752,409 shares of a series of preferred stock designated as Special Shares which is not convertible into common stock and (iv) 257,000 share of Series B Convertible Preferred Stock, initially convertible into 4,355,932 shares of common stock. We cannot assure you that we will not issue additional preferred stock in the near future. If issued, the terms of a series of additional preferred stock could operate to the significant disadvantage of holders of outstanding convertible preferred stock and/or common stock. In addition, in the event of a proposed attempt to gain control of us where the Board of Directors does not approve, the Board could authorize the issuance of preferred stock as an anti-takeover device, which could prevent the completion of such a transaction to the detriment of public stockholders. DISCLOSURE RELATING TO LOW-PRICED STOCKS. Our common stock, which is traded on the OTCBB, is subject to Rule 15g-9 promulgated under the Securities Exchange Act of 1934, as amended, which imposes various sales practice requirements on broker-dealers who sell securities governed by Rule 15g-9 to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse). For transactions covered by Rule 15g-9, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, Rule 15g-9 may have an adverse effect on the ability of broker-dealers to sell our securities and may affect the ability of purchasers in this offering to sell our securities in the secondary market and otherwise affect the trading market in the common stock. The Commission has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Investors in the offering may find it more difficult to sell their shares because our securities have become subject to the penny stock rules. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASD's automated quotation system, provided that current price and volume information with respect to transactions in that security is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a 20 transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker dealer salesperson compensation information, must be given to the customer orally or in writing before or with the customer's confirmation. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock such as ours which has become subject to the penny stock rules. YEAR 2000. We have not experienced any disruptions in our operations, nor have there been reports of customer disruptions, as a result of Year 2000 issues. For all of the aforesaid reasons and others set forth herein, the purchase of securities offered hereby involves a high degree of risk. Any person considering an investment in the securities offered hereby should be aware of these and other factors set forth in this prospectus. The securities should be purchased only by persons who can afford to absorb a total loss of their investment in us and have no need for a return on their investment. USE OF PROCEEDS FiberChem will not receive the proceeds from the sales of common stock by the selling securityholders. However, FiberChem may receive up to $2,459,628 from the exercise of warrants and options by the selling securityholders which it intends to use for working capital and other general corporate purposes. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDERS MATTERS FiberChem's common stock was traded on the Nasdaq/SCM under the symbol "FOCS" until February 25, 1998, when it was delisted. Since then it has been traded on the OTCBB. The following table sets forth the high and low trade prices of the common stock for the periods shown through February 25, 1998 as reported by Nasdaq and as reported by the National Quotation Bureau thereafter. The prices quoted on the OTCBB reflect inter-dealer prices without retail mark-up, mark-down or commission and may not represent actual transactions.
HIGH LOW ------- ------- COMMON STOCK FISCAL YEAR ENDED SEPTEMBER 30, 1998 First Quarter $0.28 $0.12 Second Quarter 0.22 0.12 Third Quarter 0.24 0.16
21
HIGH LOW ------- ------- Fourth Quarter 0.15 0.11 FISCAL YEAR ENDED SEPTEMBER 30, 1999 First Quarter $0.23 $0.15 Second Quarter 0.28 0.13 Third Quarter 0.23 0.13 Fourth Quarter 0.21 0.12 FISCAL YEAR ENDING SEPTEMBER 30, 2000 First Quarter $0.30 $0.11 Second Quarter 2.03 0.16 Third Quarter 1.02 0.48 Fourth Quarter 0.59 0.23 OCTOBER 1 - NOVEMBER 3, 2000 0.31 0.17
On November 3, 2000, the closing sales price of the common stock on the OTCBB was $0.20. At November 3, 2000, there were approximately 534 holders of record of common stock. We estimate that we have approximately 9,000 beneficial holders of our common stock. DIVIDEND POLICY The payment of dividends by FiberChem is within the discretion of its Board of Directors and depends in part upon our earnings, capital requirements and financial condition. Since our inception, we have not paid any dividends on our common stock and do not anticipate paying such dividends in the foreseeable future. FiberChem intends to retain earnings, if any, to finance our operations. Pursuant to the terms of the FiberChem's Series A convertible preferred stock, dividends are payable annually on November 1st. The holders of the convertible preferred stock may elect to receive their dividend payments in cash at a rate of 11% of the liquidation value, or in additional shares of convertible preferred stock at the rate of 8% of the number of shares of convertible preferred stock held by such holder on the date of declaration. In September, 1999, FiberChem's Board of Directors determined that, in view of the recent trading price of FiberChem's common stock and in view of FiberChem's current cash position, it would not be appropriate to declare the annual dividend payable on the convertible preferred stock on November 1, 1999. As a result, that dividend will accumulate in accordance with the terms of the convertible preferred stock. The undeclared dividends in arrears as of September 30, 2000 are $1,028,848 if elected entirely in cash or 53,981 additional shares of convertible preferred stock if 22 elected solely in shares. No assurance can be given that FiberChem will be able to make dividend distributions in the future if the holders of the convertible preferred stock request cash. SELLING SECURITYHOLDERS The following table sets forth certain information known to FiberChem with respect to beneficial ownership as of October 16, 2000, of the common stock by each selling securityholder before the offering, the number of shares of Common Stock to be offered and the beneficial ownership of common stock immediately after the offering assuming the securities to be offered by them are sold.
- ---------------------------------------------- ---------------------------- -------------- -------------------------- Shares of Common Stock Shares of Shares of Common Stock Beneficially Owned Prior Common Stock Beneficially Owned After to the Offering (1)(2) Offered the Offering (3) - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Selling Securityholder Number % Number % - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Sreedeswar Holdings Inc., Panama(4) 3,613,705 5.16% 3,613,705 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- JO Hambro Capital Management Ltd. for Acct. 1,307,835 1.93% 1,307,835 -0- * of American Opportunities Trust(5) - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- James Ladner(6) 653,455 * 653,455 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Dr. Roland Hartmann(5) 523,134 * 523,134 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Heinz Bertsch(5) 523,134 * 523,134 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Miriam Bertsch(5) 261,567 * 261,567 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Renato Schaeppi(5) 261,567 * 261,567 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Franz Grob(5) 261,567 * 261,567 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- E.F.G. Private Bank SA(7) 787,932 1.17% 787,932 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Coutts Bank(8) 391,296 * 391,296 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- RP&C International Limited(9) 2,952,169 4.25% 2,952,169 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- RemoteDataPartners(5) 5,231,341 7.30% 5,231,341 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Lawewa International Limited(10) 84,746 * 84,746 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Tranec Anstalt(10) 338,983 * 338,983 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- JS Cresvale Securities Asia Limited(11) 3,397,936 4.87% 3,397,936 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Global Convertible Megatrend Ltd.(10) 847,458 1.26% 847,458 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- entrenet Group, LLC(12) 4,643,000 6.53% 4,643,000 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- David Peachey(13) 56,018,224 45.74% 9,450,000 46,568,224 21.09% - ---------------------------------------------- ----------------- ---------- -------------- --------------- ----------
23
- ---------------------------------------------- ---------------------------- -------------- -------------------------- Shares of Common Stock Shares of Shares of Common Stock Beneficially Owned Prior Common Stock Beneficially Owned After to the Offering (1)(2) Offered the Offering (3) - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Selling Securityholder Number % Number % - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Peter J. Lagergren(14) 59,493,463 47.24% 59,493,463 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Stig Lagergren(15) 1,340,426 1.98% 1,340,426 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- C. Cameron Allen(15) 1,218,569 1.80% 1,218,569 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Alpha Harrison(15) 121,857 * 121,857 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Michael J. McCune(15) 121,857 * 121,857 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- L. Lacey Lance(15) 121,857 * 121,857 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- C.E. Daniels(15) 121,857 * 121,857 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Robert L. Ballinger(15) 121,857 * 121,857 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- MSI Capital Corporation(15) 121,857 * 121,857 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Concorde 1987 Venture Investors(15) 544,457 * 544,457 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Profit Sharing Trust for Employees of Taber 136,114 * 136,114 -0- * Corporation(15) - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Lyda Hill(15) 272,228 * 272,228 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Lewis T. Sweet, Jr.(15) 2,132,496 3.11% 2,132,496 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Mary Catherine Sweet(15) 1,659,326 2.44% 1,659,326 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Royal Bank of Scotland(16) 75,000 * 75,000 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Bert Siegel(17) 100,000 * 100,000 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Banca del Gottardo(18) 669,566 1.00% 669,566 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Bank Leu AG Credit Suisse Group(18) 1,304,348 1.93% 1,304,348 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Brown Brothers Harriman(18) 326,087 * 326,087 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Manport AG(18)(19) 678,261 1.01% 678,261 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Medig Placements S.A.(18) 217,391 * 217,391 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Valux S.A.(18) 217,391 * 217,391 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Lloyds TSB Bank plc, Geneva(18) 339,130 * 339,130 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Continental Capital & Equity Corporation (20) 600,000 * 600,000 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ----------
24
- ---------------------------------------------- ---------------------------- -------------- -------------------------- Shares of Common Stock Shares of Shares of Common Stock Beneficially Owned Prior Common Stock Beneficially Owned After to the Offering (1)(2) Offered the Offering (3) - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Selling Securityholder Number % Number % - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- D2E (21) 180,000 * 180,000 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- SBK Investment Partners (22) 688,182 * 100,000 588,182 * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Daniel Spethman (23) 15,000 * 15,000 -0- * - ---------------------------------------------- ----------------- ---------- -------------- --------------- ---------- Total 155,037,626 107,881,220 - ----- ----------- ----------- - ---------------------------------------------- ----------------- ---------- -------------- --------------- ----------
* Less than 1% of the total number of shares issued and outstanding. The table includes shares of our common stock issuable upon conversion of our 12% senior convertible debentures and senior convertible notes due 2000 based on the current effective conversion price of $.19 per share. The actual number of shares issuable upon conversion of the debentures and notes is equal to the product of (A) their principal amount divided by a conversion price equal to the lesser of (i) $.30 per share and (ii) 92% of the average of the closing bid price for the common stock on the Over-the-Counter Bulletin Board for the twenty consecutive trading days ending two trading days prior to the conversion date and (B) 1.26. The table also includes shares of our common stock issuable upon conversion of shares of our Series B Convertible Preferred Stock at the initial conversion price of $.59 per share. The actual number of common shares issuable upon conversion of the Series B Convertible Preferred Stock is equal to the conversion value of the preferred stock of $10 per share divided by the applicable conversion price at the time of conversion. The conversion price for the Series B Convertible Preferred Stock is equal to $.59 per share, subject to a reduction of $.07 per share on August 25 in each year commencing 2001 and certain other customary adjustments. (1) Unless otherwise noted, FiberChem believes that all persons named in the table have sole voting and investment power with respect to the shares beneficially owned by them. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date hereof upon the exercise of warrants or options or upon the conversion of convertible securities. (2) Based on 66,446,350 shares of common stock outstanding as of October 16, 2000. (3) Based on 147,254,977 shares to be outstanding following this offering. 25 (4) Includes 2,694,140 shares issuable upon conversion of 12% senior convertible debentures due 2002 and warrants to purchase 919,565 shares owned by the selling securityholder. (5) Represents shares issuable upon conversion of our 12% senior convertible debentures and notes due 2002. (6) Includes 643,455 shares issuable upon conversion of our 12% senior convertible debentures and 10,000 shares issuable upon exercise of warrants. (7) Consists of 366,193 shares of common stock issuable upon conversion of 12% senior convertible debentures due 2002 and 421,739 shares of common stock issuable upon exercise of warrants. (8) Consists of 52,513 shares of common stock issuable upon conversion of 12% senior convertible debentures due 2002 and 338,983 shares of common stock issuable upon conversion of shares of our Series B Convertible Preferred Stock. (9) Consists of (i) 167,402 shares issuable upon conversion of our 12% senior convertible debentures due 2002, (ii) 1,432,593 shares issuable upon exercise of warrants issued as partial consideration for services rendered as placement agent by RP&C International Limited for the 12% senior convertible debentures and notes, the Series B Convertible Preferred Stock and a bridge loan and (iii) 1,352,174 shares issuable upon exercise of other warrants owned by RP&C International (Guernsey) Limited, an affiliate of RP&C International Limited. (10) Represents shares of common stock issuable upon conversion of shares of our Series B Convertible Preferred Stock owned by the selling securityholder. (11) Includes 2,745,762 shares of common stock issuable upon conversion of shares of our Series B Convertible Preferred Stock and 652,174 shares issuable upon exercise of warrants owned by the selling securityholder. (12) Represents 3,000,000 outstanding shares, 960,000 shares issuable upon exercise of a warrant and 683,704 shares issuable upon conversion of a convertible note, all of which were issued to the selling securityholder in consideration for advisory and consulting services. (13) Includes 9,450,000 shares which may be issuable to David S. Peachey in exchange for Intrex Class B Shares upon satisfaction of certain milestones specified in a compensation agreement among Mr. Peachey, FiberChem and Intrex Data Communications Corp. Mr. Peachey is our President and Chief Operating Officer. The shares of common stock owned beneficially by Mr. Peachey prior to the offering include 46,568,224 shares not offered hereby which may be issued in exchange for Intrex Class B Shares owned by him. 26 (14) Represents (i) 9,450,000 shares issuable to Peter J. Lagergren upon conversion of Pandel Series Preferred Stock, subject to release upon satisfaction of certain milestones specified in a compensation agreement between Mr. Lagergren and FiberChem, and (ii) 50,043,464 shares issuable to Mr. Lagergren upon conversion of shares of Pandel Series Convertible Preferred Stock, including shares which are subject to release upon satisfaction of certain milestones related to the business of Intrex. Mr. Lagergren is President of our Communications Division. (15) Represents shares issuable to the selling stockholder upon conversion of Pandel Series Preferred Stock, including shares which are subject to release upon satisfaction of certain milestones related to the business of Intrex. (16) Represents shares issuable upon exercise of warrants issued to the selling securityholder pursuant to Regulation S. (17) Represents shares issuable upon exercise of a warrant issued as partial consideration for consulting services. (18) Represents shares issuable to the selling stockholder upon exercise of warrants. (19) Walter Haemmerli, the Chief Executive Officer of Manport AG, is a member of our board of directors. (20) Represents 400,000 shares issued and an additional 200,000 shares issuable upon exercise of warrants issued as compensation for consulting services. (21) Represents shares issuable pursuant to a settlement agreement of certain claims made against us. (22) The 100,000 shares of our common stock being offered by SBK Investment Partners represent shares issued in consideration of consulting services rendered to us. SBK Investment Partners is an investment entity of members of Snow Becker Krauss P.C., which regularly provides legal services to us. The number of shares of common stock owned beneficially by SBK Investment Partners prior to the offering but not being offered hereby includes 6,250 shares which Snow Becker Krauss P.C. can acquire upon exercise of Class D Warrants owned by it and 579,693 outstanding shares owned by Snow Becker Krauss P.C. (23) Represents shares issued in consideration of services rendered to us. 27 PLAN OF DISTRIBUTION The shares of common stock being offered by the selling securityholders can be acquired by them upon conversion or exercise of outstanding convertible securities, warrants and options and upon exercise of rights to exchange Class B shares of FiberChem's subsidiary Intrex Data Communications Corp. for shares of FiberChem common stock. These shares are being offered by the selling securityholders for their own accounts and not for the account of FiberChem. The selling securityholders may sell the common stock being offered by them in the over-the-counter market, or privately, through broker dealers selected by them, or as principals. Usual and customary or negotiated brokerage fees or commissions may be paid by the holders in connection with such sales. The selling securityholders, their respective transferees, intermediaries, donees, pledgees or other successors in interest through whom the selling securityholders' common stock is sold may be deemed "underwriters" within the meaning of Section 2(11) of the Securities Act, with respect to the securities offered and any profits realized or commissions received may be deemed to be underwriting compensation. Any broker-dealers that participate in the distribution of the selling securityholders' securities may be deemed to be "underwriters," as defined in the Securities Act, and any commissions, discounts, concessions or other payments made to them, or any profits realized by them upon the resale of any selling securityholders' securities purchased by them as principals, may be deemed to be underwriting commissions or discounts under the Securities Act. FiberChem will pay all expenses incident to the registration of the securities covered by this prospectus. FiberChem will not pay, among other expenses, commissions and discounts of brokers, dealers or agents. The sale of the common stock is subject to the prospectus delivery and other requirements of the Securities Act. To the extent required, FiberChem will use its best efforts to file and distribute, during any period in which offers or sales are being made, one or more amendments or supplements to this prospectus or a new registration statement to describe any material information with respect to the plan of distribution not previously disclosed in this prospectus, including, but not limited to, the number of securities being offered and the terms of the offering, including the name or names of any underwriters, dealers or agents, if any, the purchase price paid by the underwriter for securities purchased from a selling securityholder, any discounts, commissions or concessions allowed or reallowed or paid to dealers and the proposed selling price to the public. Under the Exchange Act and the regulations thereunder, any person engaged in a distribution of the securities of FiberChem offered by this prospectus may not simultaneously engage in market-making activities with respect to the common stock of FiberChem during the applicable "cooling off" period five business days prior to the commencement of such distribution. The selling securityholders will also be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, Regulation M, in connection with transactions in the securities, which provisions may limit the timing of purchases and sales of securities by the selling securityholders. 28 In connection with the Intrex business combination, former shareholders of Intrex and Pandel and shareholders of FiberChem who own or have the right to acquire a total of 192,944,645 shares of FiberChem Common Stock have agreed that until July 27, 2001, each of them will not sell any FiberChem common stock owned by them or ownership of which may be acquired in an amount which exceeds, together with other sales for the account of such stockholder during the preceding three months, the greater of (1) one percent of the shares of Common Stock outstanding as shown on FiberChem's most recently published Annual Report on Form 10-KSB or Quarterly Report on Form 10-QSB, (2) the average weekly reported trading volume during the four weeks preceding the filing of any required notice of sale pursuant to Rule 144 or, if no such notice is required, the date of receipt of the order to execute the transaction by the broker or the date of execution of the transaction directly with a market maker DESCRIPTION OF SECURITIES The following summary description of FiberChem's common stock offered hereby is qualified in its entirety by reference to FiberChem's Certificate of Incorporation and By-Laws, copies of which are available upon request. COMMON STOCK FiberChem is authorized to issue 150,000,000 shares of common stock, $.0001 par value, of which 66,446,350 shares of common stock were issued and outstanding as of October 16, 2000. All of the outstanding shares of common stock are duly and validly issued, fully paid and non-assessable. In connection with the business combination with Intrex, the board of directors of FiberChem has agreed to call and hold a meeting of stockholders at which the board will submit to stockholders a proposal to increase FiberChem's authorized common stock from 150,000,000 shares to 500,000,000 shares. Subject to the rights of the holders of preferred stock, holders of common stock are entitled to receive, pro rata, such dividends and distributions as may, from time to time, be declared by the Board of Directors, from funds legally available therefor. FiberChem has not paid any cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. See "Dividend Policy". In the event of liquidation, dissolution or winding up of FiberChem, holders of common stock are entitled to share ratably in all assets of FiberChem available for distribution to holders of common stock, subject to the rights of creditors and holders of preferred stock. The holders of common stock are not subject to redemption, further calls or assessments by FiberChem. Holders of common stock have no preemptive, subscription or conversion rights. Holders of common stock are entitled to one vote per share on all matters submitted to the stockholders, and the holders of the majority of the outstanding shares of common stock currently constitute a quorum at any meeting of stockholders. 29 Since the common stock does not have cumulative voting rights, holders of more than 50% of the outstanding shares can elect the Directors of FiberChem. However, FiberChem's Board of Directors is divided into three classes, each of which is to be elected for three-year terms. As the term of each class expires, Directors of that class are elected for full three-year terms. FiberChem's Board of Directors currently has eight Directors. PREFERRED STOCK. The Company is authorized to issue 10,000,000 shares of Preferred Stock, $.01 par value. The Preferred Stock may be issued by the Company's Board of Directors from time to time in one or more series. The Board of Directors is authorized to determine the rights, preferences, privileges and restrictions, including the dividend rights, conversion rights, voting rights, terms of redemption (including sinking fund provisions, if any) and liquidation preferences, of any series of Preferred Stock and to fix the number of shares of any such series without any further vote or action by stockholders. Although the Company has no present intention to issue Preferred Stock to discourage or defeat efforts to acquire control of the Company through the acquisition of shares of its Common Stock, it has the ability to do so through the issuance of Preferred Stock. See "Risk Factors - Preferred Stock Authorized." SERIES A PREFERRED STOCK. An aggregate of 207,848 shares of Series A Convertible Preferred Stock are currently outstanding. Each share of the Series A Convertible Preferred Stock is convertible into ten shares of the Company's Common Stock, subject to customary anti-dilution provisions. The conversion ratio is expected to be changed from ten common shares for each preferred share to seventy-five shares in satisfaction of the anti-dilution provisions of the Series A Convertible Preferred Stock and dividends in arrears. Holders of Series A Convertible Preferred Stock vote together with the holders of Common Stock as one class on all matters submitted to a vote of stockholders, except where a class vote may be required by law. Holders of Series A Convertible Preferred Stock are entitled to the number of votes into which the shares of Series A Convertible preferred Stock are convertible on all matters presented to the stockholders for action. Dividends are cumulative and are payable annually on November 1st, in cash (11%) or additional shares of Convertible Preferred Stock (8% on the number of shares owned at date of declaration) at the sole discretion of the holders. The Series A Convertible Preferred Stock entitles the holder to a liquidation preference of $15 per share upon liquidation, dissolution or winding up of the Company. The Series A Convertible Preferred Stock is redeemable by the Company when and if the closing bid price of the Company's Common Stock is at least 200% of the Conversion Price for twenty consecutive trading days. Upon redemption, the Company would issue the number of shares of its Common Stock into which the Series A Convertible Preferred Stock is then convertible. SERIES B CONVERTIBLE PREFERRED STOCK. An aggregate of 257,000 shares of Series B Convertible Preferred Stock, all of which remain outstanding, were issued on August 25, 2000, for cash proceeds of $1,285,000 and certain securities of nominal value. Each share of Series B Preferred Stock is convertible into a number of shares of common stock equal to the stated or 30 redemption value of the Series B Preferred Stock divided by the conversion price, initially $.59 per share, subject to reduction by $.07 per share on August 25 in each year commencing 2001 and for certain dilutive events. Holders of Series B Preferred Stock are not entitled to any voting rights except where a class vote or other vote may be required by law. The Series B Preferred Stock is not entitled to payment of any dividends or any preference or priority over the commence stock or any other class of preferred stock with respect to the payment of dividends. The Series B Preferred Stock entitles the holder to a liquidation preference of $10 per share upon liquidation, dissolution or winding up of the Company. The Series B Preferred Stock is redeemable by the Company when and if the closing bid price of the Company's Common Stock is at least 200% of the Conversion Price for twenty consecutive trading days. We have the right to cause the Series B Preferred Stock to be converted at the then applicable conversion price if (i) the common stock continues to be eligible for quotation on the NASDAQ OTC bulletin board or another national stock exchange or quotation service and we have complied with our agreement to register under the Securities Act the shares of common stock issuable upon conversion of the Series B Preferred Stock and (ii) the average closing bid price for the common stock during any 20 consecutive trading days and on the date notice of conversion is given equals or exceeds 130% of the then applicable conversion price. We also have the right to redeem any shares of Class B Preferred Stock for cash on thirty days notice at a price equal to the redemption price. If the common stock continues to be eligible for quotation on the NASDAQ OTC bulletin board or another national stock exchange or quotation service, we also have the right on like notice, at any time and from time to time on or after June 1, 2004, to redeem during any 180 day period up to 50% of the number of outstanding shares of Series B Preferred Stock at a redemption price payable in freely tradeable shares of common stock valued at a price per share related to then recent market prices equal to (i) if the market capitalization of our common stock is less than $300 million, 110% of the redemption value of the shares being redeemed and (ii) if the market capitalization of our outstanding common stock is $300 million or more, 105% of the redemption value of the shares being redeemed. PREFERRED SPECIAL SHARES. In connection with our business combination with Intrex Data Communications Corp. we issued preferred stock designated as Special Shares. We issued one one-hundredth of a Special Share together with each Intrex Class B Share issued to Intrex common shareholders in connection with the business combination with Intrex, or a total of 1,846,909 Special Shares. The Special Shares are entitled to a liquidation preference of $0.10 per share upon any liquidation or dissolution and can be redeemed by us for nominal consideration when a holder of Special Shares exchanges such holder's Intrex Class B Shares for shares of our common stock. The purpose of issuing Intrex Class B Shares and Special Shares to Intrex stockholders was to allow them to defer what might otherwise be considered a taxable event under Canadian law arising from the business combination. PANDEL SERIES PREFERRED STOCK. In connection with our business combination with Intrex, we also issued shares of a class of preferred stock designated as Pandel Series Preferred Stock. Holders of Pandel Series Preferred Stock are entitled to one hundred votes per share, voting 31 together with the holders of common stock as one class on all matters submitted to a vote of stockholders, except where a class vote may be required by law. The Pandel Series Preferred Stock participates equally with the common stock as to payment of dividends and other distributions based on the number of shares of common stock into which the Pandel Series Preferred Stock is convertible and also has a liquidation preference of $.10 per share prior to any distribution to the holders of common stock. Provided we have a sufficient number of authorized shares of common stock, each share of Pandel Series preferred Stock will be automatically converted into one share of our common stock on December 31, 2000, or prior thereto at our option. REPORTS TO STOCKHOLDERS FiberChem distributes to its stockholders annual reports containing financial statements audited and reported upon by its independent certified public accountants after the end of each fiscal year, and makes available such other periodic reports as FiberChem may deem to be appropriate or as may be required by law or by the rules or regulations of any stock exchange on which FiberChem's common stock is listed. FiberChem's fiscal year end is September 30. LEGAL MATTERS The legality of the securities offered by this prospectus will be passed upon for FiberChem by Snow Becker Krauss P.C., New York, New York. Snow Becker Krauss P.C. owns 579,623 shares of common stock. SBK Investment Partners, an investment entity of members of Snow Becker Krauss P.C. owns 102,309 shares of common stock and 6,250 Class D warrants. EXPERTS The consolidated balance sheet of FiberChem, Inc. and subsidiaries as of September 30, 1999 and the related consolidated statements of operations, stockholders' deficiency and cash flows for each of the two years in the period ended September 30, 1999 have been incorporated by reference and incorporated in the Registration Statement in reliance upon the report of Goldstein Golub Kessler LLP, independent certified public accountants, and upon the authority of said firm as experts in accounting and auditing. 32 TABLE OF CONTENTS Prospectus Summary Risk Factors Use of Proceeds Market for Common Equity and Related Shareholders Matters Selling Securityholders Plan of Distribution Description of Securities Legal Matters Experts 107,881,220 Shares of Common Stock of FiberChem, Inc. ----------- PROSPECTUS ----------- ,2000 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses payable by FiberChem in connection with the issuance and distribution of the securities being registered are estimated as follows: SEC Registration Fee.................................................................. $ 6,575,27 ---------- Printing ............................................................................ 11,000.00 ---------- Legal Fees and Expenses............................................................... 15,000.00 ---------- Accounting and Auditing Fees and Expenses......................................................................... 5,000.00 ---------- Miscellaneous......................................................................... 2,424.73 ---------- Total............................................................................ $40,000.00 ==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law ("DGCL") permits a corporation organized thereunder to indemnify its directors and officers for certain of their acts. The Articles of Incorporation of FiberChem are framed so as to conform to the DGCL. The laws of Delaware provide for indemnification of officers and directors who are totally successful in defending themselves, by placing a restrictive provision in the Articles of Incorporation. Delaware law provides that a director who is found to be liable for negligence or misconduct in the performance of his duty to FiberChem, is indemnified if a court, upon application, finds that despite the adjudication of liability, but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnification for such expenses which the court deems proper. FiberChem's By-Laws provide for indemnification of officers and directors, except in relation to matters as to which they are finally adjudged to be liable for negligence or misconduct, but only if the corporation is advised in writing by its counsel that in his opinion the person indemnified did not commit such negligence or misconduct. The DGCL provides that an officer or director may be indemnified if he (a) conducted himself in good faith, (2) reasonably believed, in his official capacity with the corporation, that his conduct was in the corporation's best interest, or (3) in all other cases, his conduct was at least not opposed to the corporation's best interest; however, if in connection with a proceeding by or in the right of the corporation in which he was II-1 adjudged liable to the corporation or in connection with any proceeding charging improper personal benefit to the director, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him, Delaware law provides that indemnification is not available. ITEM 16. EXHIBITS 2.1 Amended Arrangement Agreement, dated as of May 26, 2000, entered into on June 2, 2000, between FiberChem, Inc., a Delaware corporation and Intrex Data Communications Corp., a British Columbia company. (1) 2.2 Agreement and Plan of Merger by and Among FiberChem, Inc., Pandel Instruments, Inc., Pandel Mergerco, Inc. and Peter J. Lagergren. (1) 3.1 Articles of Incorporation of Registrant, as amended. (2) 3.2 By-Laws of Registrant. (3) 3.3 Certificate of Merger of Pandel Instruments, Inc. and Pandel Mergerco, Inc. dated July 27, 2000. (4) 3.4 Certificate of Designation of Special Series Preferred Stock of FiberChem, Inc. dated July 27, 2000. (4) 3.5 Certificate of Designation of Pandel Series Convertible Preferred Stock of FiberChem, Inc. dated July 27, 2000. (4) 4.1 Trust Indenture Agreement dated as of July 28, 2000, between FiberChem and The Bank of New York, as Trustee. (4) 4.2 U.S. $1,350,000 Global Bearer Debenture without interest coupons issued by FiberChem on July 28, 2000. (4) 4.3 Form of 12% Senior Convertible Promissory Note due 2002. (4) 4.4 Class D Warrant Agreement of the Registrant with form of Warrant Certificate. (5) 4.5 Form of 8% Senior Convertible Note Due 1999 issued in the Company's February 1996 private placement. (6) 4.6 Form of Warrant to purchase Common Stock on or before May 31, 2001. (7) 5.1* Opinion of Snow Becker Krauss P.C. 10.1 Lease Agreement and Reimbursement Agreement dated July 27, 1989 by and between the Company and Howard Hughes Properties for Hughes Airport Center, 1181 Grier Drive, Suite B, Las Vegas, Nevada. (8) II-2 10.2 Amendment dated May 6, 1991 and September 26, 1991 to the Industrial Real Estate Lease (Exhibit 10.10) for the Company's facilities. (9) 10.3 Employee Stock Bonus Plan. (5) 10.4 Amendments dated October 23, 1990 and February 21, 1991 to the Industrial Real Estate Lease (Exhibit 10.10) for the Company's facilities. (10) 10.5 Non-qualified stock option plan. (11) 10.6 Qualified Stock Option Plan. (12) 10.7 Consulting agreement by and between the Company and with Irwin J. Gruverman, dated November 4, 1993. (13) 10.8 Qualified Stock Option Plan. (14) 10.9 FCI FiberChem, Inc. and FCI Environmental, Inc. 401(k) Profit Sharing Plan. (15) 10.10 Qualified Stock Option Plan (16) 10.11 License Agreement with Texas Instruments, Incorporated, dated June 15, 1995. (17) 10.12 Cooperative Development Agreement with Texas Instruments, Incorporated, dated June 15, 1995. (17) 10.13 Form of Distribution Agreement. (18) 10.14 Form of agreement for services with Gordon Werner and others dated as of September 15, 1995. (18) 10.15 Agreement dated November 8, 1996 by and between FCI Environmental, Inc. and Alcohol Sensors International, Ltd. CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SEC PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. (19) 10.16 Agreement dated October 1, 1996 by and between FCI Environmental, Inc. and Autronica AS. (19) 10.17 OEM Strategic Alliance Agreement dated June 30, 1996 by and between Whessoe Varec, Inc. and FCI Environmental, Inc. (19) 10.18 1997 Employee Stock Plan (20) 10.19* Employment and Non-Competition Agreement with Geoffrey F. Hewitt dated July 27, 2000. 10.20* Employment and Non-Competition Agreement with Melvin W. Pelley dated July 27, 2000. 10.21* Employment and Non-Competition Agreement with Thomas A. Collins dated July 27, 2000. 10.22* Employment and Non-Competition Agreement with David S. Peachey dated July 27, 2000. 10.23* Employment and Non-Competition Agreement with Peter J. Lagergren dated July 27, 2000. 10.24* Employment and Non-Competition Agreement with Brian O'Neil dated July 27, 2000. 10.25 Amendment to Whessoe Varec, Inc. OEM Strategic Alliance Agreement dated August 13, 1997. (21) 10.26* Release and Settlement Agreement dated as of April 12, 2000 between the Company and entrenet Group, L.L.C. 10.27* Agreement dated October 4, 2000 between the Company and Continental Capital & Equity Corporation. II-3 10.28 1999 Employee Stock Option Plan (23) 13.1* Annual Report on Form 10-KSB for the fiscal year ended September 30, 1999. 13.2* Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 2000. 13.3* Current Report on Form 8-K (Date of Earliest Event Reported July 27, 2000). 13.4* Amendment No. 1 to Current Report on Form 8-K (Date of Earliest Event Reported July 27, 2000). 21.1* Subsidiaries of the Registrant. 23.1 The consent of Snow Becker Krauss P.C. is included in Exhibit 5.1 23.2* Consent of Goldstein Golub Kessler LLP. 24.1 Powers of Attorney are included on the signature page. - --------------------------- (24) Incorporated by reference from the Company's Current Report on Form 8K (Date of Earliest Event Reported June 2, 2000). (25) Incorporated by reference from the Company's January 13, 1988 Post Effective Amendment to the Registration Statement on Form S-18 (File No. 33-12097-C) as declared effective on March 3, 1988. (26) Incorporated by reference from the Company's April 15, 1987 Amendment to the Registration Statement on Form S-18 (File No. 33-12097-C) as declared effective on March 3, 1988. (27) Incorporated by reference from the Company's Current Report on Form 8K (Date of Earliest Event Reported July 27, 2000). (28) Incorporated by reference from the Company's Registration Statement No. 33-35985 (29) Incorporated by reference from the Company's Current Report on Form 8-K for February 15, 1996. (30) Incorporated by reference from the Company's Current Report on Form 8-K on July 15, 1996. (31) Incorporated by reference from the Company's Registration Statement No. 33-29338. (32) Incorporated by reference from the Company's Annual Report on Form 10-K for September 30, 1991. (33) Incorporated by reference from the Company's April 24, 1991 Post Effective Amendment to the Registration Statement on Form S-18 (File No. 33-35985) as declared effective on April 30, 1991. (34) Incorporated by reference from the Company's Registration Statement on Form S-8 for April 28, 1992. (No. 33-47518). (35) Incorporated by reference from the Company's Proxy Statement dated May 3, 1993. (36) Incorporated by reference from the Company's Report on Form 10-K for September 30, 1993. (37) Incorporated by reference from the Company's Proxy Statement dated May 23, 1994. (38) Incorporated by reference from the Company's Report on Form 10-KSB for September 30, 1994. (39) Incorporated by reference from the Company's Report on Form S-8 for August 1, 1995. II-4 (40) Incorporated by reference from the Company's Report on Form 8-K/A for August 30, 1995. (41) Incorporated by reference from the Company's Report on Form 10-KSB for September 30, 1995. (42) Incorporated by reference from the Company's Report on Form 10-KSB for September 30, 1996. (43) Incorporated by reference from the Company's Proxy Statement dated May 20, 1997. (44) Incorporated by reference from the Company's Report on Form 10-KSB for September 30, 1997. (45) Incorporated by reference from the Company's registration statement on Form S-2 filed May 12, 1999 (registration no. 333-78319) (46) Incorporated by reference from the Company's registration statement on form S-8 filed March 1, 2000 (File No. 333-31412). * Filed herewith. II-5 ITEM 17. UNDERTAKINGS RULE 415 OFFERING FiberChem hereby undertakes: (a)(1) To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the "Act"); (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Act, to treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) To file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (e) REQUEST FOR ACCELERATION OF EFFECTIVE DATE. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by FiberChem of expenses incurred or paid by a director, officer or controlling person of FiberChem in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, FiberChem will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Las Vegas, State of Nevada, on November 9, 2000. FIBERCHEM, INC. By: /s/ GEOFFREY F. HEWITT ------------------------------------------ Geoffrey F. Hewitt CHIEF EXECUTIVE OFFICER (Principal Executive Officer) By: /s/ MELVIN W. PELLEY ------------------------------------------ Melvin W. Pelley CHIEF FINANCIAL OFFICER (Principal Financial and Accounting Officer) POWER OF ATTORNEY Each of the undersigned hereby authorizes Geoffrey F. Hewitt or Melvin W. Pelley as his attorney-in-fact to execute in the name of each such person and to file such amendments (including post-effective amendments) to this registration statement as the Registrant deems appropriate and appoints such person as attorney-in-fact to sign on his behalf individually and in each capacity stated below and to file all amendments, exhibits, supplements and post-effective amendments to this registration statement. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons on November , 2000 in the capacities indicated. NAME TITLE /s/ GEOFFREY F. HEWITT CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF ---------------------- THE BOARD GEOFFREY F. HEWITT (PRINCIPAL EXECUTIVE OFFICER) /s/ DAVID S. PEACHEY DIRECTOR, PRESIDENT AND CHIEF OPERATING -------------------- OFFICER DAVID S. PEACHEY /s/ PETER J. LAGERGREN DIRECTOR, PRESIDENT - COMMUNICATIONS ---------------------- DIVISION PETER J. LAGERGREN II-7 /s/ MELVIN W. PELLEY CHIEF FINANCIAL OFFICER -------------------- (PRINCIPAL FINANCIAL AND ACCOUNTING MELVIN W. PELLEY OFFICER) /s/ BRIAN A. O'NEIL ------------------- DIRECTOR, VICE PRESIDENT - OPERATIONS BRIAN A. O'NEILL /s/ WALTER HAEMMERLI -------------------- DIRECTOR WALTER HAEMMERLI /s/ IRWIN J. GRUVERMAN ---------------------- DIRECTOR IRWIN J. GRUVERMAN /s/ BYRON A. DENENBERG ---------------------- DIRECTOR BYRON A. DENENBERG */s/ TREVOR S. NELSON --------------------- DIRECTOR TREVOR S. NELSON II-8 EXHIBIT INDEX Exhibit No. Name 5.1 Opinion of Snow Becker Krauss P.C. 10.19 Employment and Non-Competition Agreement with Geoffrey F. Hewitt dated July 27, 2000. 10.20 Employment and Non-Competition Agreement with Melvin W. Pelley dated July 27, 2000. 10.21 Employment and Non-Competition Agreement with Thomas A. Collins dated July 27, 2000. 10.22 Employment and Non-Competition Agreement with David S. Peachey dated July 27, 2000. 10.23 Employment and Non-Competition Agreement with Peter J. Lagergren dated July 27, 2000. 10.24 Employment and Non-Competition Agreement with Brian O'Neil dated July 27, 2000. 10.26 Release and Settlement Agreement dated as of April 12, 2000 between the Company and entrenet Group, L.L.C. 10.27 Agreement dated October 4, 2000 between the Company and Continental Capital & Equity Corporation. 13.1 Annual Report on Form 10-KSB for the fiscal year ended September 30, 1999. 13.2 Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 2000. 13.3 Current Report on Form 8-K (Date of Earliest Event Reported July 27, 2000). 13.4 Amendment No. 1 to Current Report on Form 8-K (Date of Earliest Event Reported July 27, 2000). 21.1 SUBSIDIARIES OF THE REGISTRANT. 23.1 THE CONSENT OF SNOW BECKER KRAUSS P.C. IS INCLUDED IN EXHIBIT 5.1. 23.2 Consent of Goldstein Golub Kessler LLP. EX-5.1 2 a2028934zex-5_1.txt EXHIBIT 5.1 EXHIBIT 5.1 SNOW BECKER KRAUSS P.C. 605 THIRD AVENUE NEW YORK, NEW YORK 10158-0125 November__, 2000 FiberChem, Inc. 1181 Grier Drive, Suite B Las Vegas, Nevada 89119 Ladies and Gentlemen: You have requested our opinion with respect to the offer and sale by the selling securityholders of FiberChem, Inc., a Delaware corporation (the "Company"), pursuant to a Registration Statement (the "Registration Statement") on Form S-2 under the Securities Act of 1933, as amended (the "Act"), of up to 107,881,220 shares (the "Shares") of common stock, par value $.001 per share of FiberChem, Inc., a Delaware corporation ("FiberChem"). We have examined originals, or copies certified or otherwise identified to our satisfaction, of such documents and corporate and public records as we deem necessary as a basis for the opinion hereinafter expressed. With respect to such examination, we have assumed the genuineness of all signatures appearing on all documents presented to us as originals, and the conformity to the originals of all documents presented to us as conformed or reproduced copies. Where factual matters relevant to such opinion were not independently established, we have relied upon certificates of executive officers and responsible employees and agents of FiberChem. Based on the foregoing, it is our opinion that the 107,881,220 Shares included in the Registration Statement, when paid for and issued as contemplated by the convertible securities, warrants, options and other rights to acquire common stock pursuant to which the Shares are issuable, will be duly and validly authorized, issued and fully paid and nonassessable. The instruments under which certain of the Shares are issuable contemplate that the shareholders of FiberChem will approve an amendment to the certificate of incorporation of FiberChem increasing the authorized number of shares of common stock of FiberChem from 150,000,000 shares to 500,000,000 shares and our opinion with respect to such Shares assumes that the certificate of incorporation shall have been so amended prior to the issuance of such Shares. We hereby consent to the use of this opinion as Exhibit 5.1 to the Registration Statement, and to the use of our name as your counsel in connection with the Registration Statement and in the prospectus forming a part thereof. In giving this consent, we do not thereby concede that we come within the categories of persons whose consent is required by the Act or the General Rules and Regulations promulgated thereunder. Very truly yours, /s/ SNOW BECKER KRAUSS P.C. ---------------------------------- Snow Becker Krauss P.C. EX-10.19 3 a2028934zex-10_19.txt EXHIBIT 10.19 EXHIBIT 10.19 EMPLOYMENT AND NON-COMPETITION AGREEMENT AGREEMENT entered into this 27th day of JULY 2000, by and between FiberChem, Inc., a Delaware corporation, with its principal place of business at 1181 Grier Drive, Suite B, Las Vegas, Nevada 89119 (the "Company") and GEOFFREY F. HEWITT, residing at 285 WILLOWGROVE CIRCLE, HENDERSON, NV 89014 (the "Executive"). WITNESSETH: WHEREAS, the Company wishes to employ the Executive in the principal capacity of CHAIRMAN AND CHIEF EXECUTIVE OFFICER of FIBERCHEM, INC. upon the terms and conditions contained herein; WHEREAS, the Executive is desirous of employment with the Company and is willing to accept such employment for the inducements and upon the terms and conditions contained herein; and WHEREAS, the Company has bargained, in connection with Executive's employment and in connection with the transactions contemplated by the Amended Arrangement Agreement dated as of May 26, 2000, between the Company and Intrex Data Communications Corp. ("Intrex"), of which Executive is a principal shareholder, for a covenant by the Executive not to compete with the Company's business. NOW, THEREFORE, in consideration of the mutual premises and agreements contained herein and for other good and valuable consideration by each of the parties, the parties hereby agree as follows: 1. EMPLOYMENT. The Company hereby employs the Executive and the Executive hereby accepts employment upon the terms and conditions set forth herein. 2. TERM. The term of this Agreement shall commence on the date hereof and shall continue for an initial term of one (1) year; provided, however, that the term of this Agreement shall be automatically continued and extended, on the same terms and conditions as then in effect hereunder, for additional consecutive twelve month periods commencing upon such termination date, unless at least thirty (30) days before the date of termination of the initial term of this Agreement or of any such extended term, the Company shall give the Executive, or the Executive shall give the Company, notice in writing electing to terminate this Agreement as of such termination date. 3. DUTIES. (a) During the term of this Agreement, the Executive shall serve the Company in an executive capacity and shall perform such duties as are determined from time to time by the Company's Board of Directors. Unless prevented by death or disability, the Executive shall devote his full business time, allowing for vacations and national holidays, as set forth in Sections 5(a) and (e) hereof, and illnesses, exclusively to the business and affairs of the Company, and shall use his best efforts, skill and abilities to promote its interests. Nothing herein contained shall be construed as preventing the Executive from purchasing securities in any publicly held entity, if such purchases 1 shall not result in his owning beneficially 2% or more of the equity securities of such company, provided such investment is not made in a company in competition with the Company. (b) It is hereby acknowledged that the Board of Directors of the Company has elected the Executive to serve as Chairman and Chief Executive Officer of FiberChem, Inc., and the Company hereby agrees to use its best efforts to have the Executive continue to serve as Chairman and Chief Executive Officer of FiberChem, Inc. during the term of this Agreement. The precise services of the Executive may be extended or curtailed from time to time at the direction of the Company's Board of Directors. 4. COMPENSATION. For the services rendered by the Executive hereunder, the Company shall pay and the Executive shall accept the following compensation: (a) From the commencement of the term hereof through September 30, 2000, the Executive shall receive a base annual salary of Two hundred Five Thousand dollars ($205,000) (the "Base Salary") which Base Salary shall be earned and shall be payable at such intervals not less frequently than monthly, in equal installments, and otherwise in such manner as is consistent with the Company's normal practice for remuneration of executives; (b) The Board of Directors shall review the Executive's base salary on each of the anniversary dates of the execution of this agreement in order to determine whether the Executive's salary should receive an upward adjustment; (c) The Executive shall be entitled to bonus compensation during the term hereof, as determined at the discretion of the Board of Directors of the Company; (d) The Executive's salary shall be payable subject to such deductions as are then required by law and such further deductions as may be agreed to by the Executive, in accordance with the Company's prevailing salary payroll practices. 5. BENEFITS AND EXPENSES. During the term of this Agreement, the Executive shall be entitled to the following benefits and expense reimbursement: (a) The Executive shall be entitled to up to four (4) weeks of paid vacation per calendar year, in accordance with the Company's policy from time to time in effect as determined by the Board; (b) The Executive shall be entitled to participate in and/or receive all fringe benefits such as medical, disability, hospital and health insurance plans, and profit sharing, pension plan, life insurance and other plans, if any, which the Company may generally make available to its executives. The Executive shall also be included in the Directors and Officers' indemnification insurance policy, if obtained; (c) The Company shall also issue to the Executive a corporate credit card to be utilized by the Executive in connection with any additional out-of-pocket expenses which he may incur in connection with the performance of his duties. During the term of this Agreement, the Company shall, upon presentation of proper vouchers, also reimburse the Executive for all 2 reasonable expenses incurred by him directly in connection with his performance of services as an officer and Executive of the Company; (d) The Corporation shall maintain a ______ million dollar ($__,000,000) key man policy insuring against the loss of Executive's life, which shall name the Company as beneficiary; (e) The Executive shall receive as paid days off all national holidays that the Company, pursuant to established policy, recognizes and observes. (f) The Executive shall receive a car allowance of $7,200.00 per year. All other expenses of maintaining a vehicle will be born by the Executive except to the extent that mileage shall be reimbursed for business trips of greater than 25 miles per trip. 6. DISABILITY AND DEATH. (a) DISABILITY - If, during the term of this Agreement, the Executive becomes so disabled or incapacitated by reason of any physical or mental illness so as to be unable to perform the services required of him pursuant to this Agreement for a continuous period of four (4) months, or for an aggregate of six (6) months during any consecutive twelve (12) month period, then the Company may, upon 30 days' written notice to the Executive, terminate this Agreement. The Company shall purchase temporary and permanent disability insurance on the Executive. Payments made under such disability policy or policies shall not affect any other payments made to the Executive. (b) DEATH - This Agreement shall automatically terminate upon and as of the date of death of the Executive at any time during the term of this Agreement. Notwithstanding the termination of this Agreement by reason of the Executive's death, the Company shall pay to the Executive's estate his Base Salary, and shall continue family medical benefits coverage for the Executive's family, then in effect for a period of one (1) year following the date of such termination, such payment to be made in one lump sum no later than 3 months following the date of death. 7. COVENANTS AND RESTRICTIONS. (a) For a period of one (1) year following the termination of this Agreement (the "Non-Compete Period"), the Executive shall not, directly or indirectly, engage in, own, manage, operate, assist, join or control, or participate in the ownership, management, operation or control of any Restricted Enterprise (other than the Company or its affiliates), which engages or plans to engage in a Restricted Enterprise anywhere in the United States, whether as a director, officer, executive, agent, consultant, shareholder, partner, owner, independent contractor or otherwise. Notwithstanding the foregoing, these restrictions shall not prevent the Executive from earning his livelihood during the Non-Compete Period. As used herein, a "Restricted Enterprise" shall be any activity that competes with the business of the Company, including the business of Intrex, in any line of business that constitutes 5% or more of the net sales of the Company or Intrex on the date of termination of this Agreement. Notwithstanding the foregoing, the provisions of this Section 7(a) shall not apply if Executive's employment is terminated pursuant to Section 11(b) or Section 12 of this Agreement. 3 (b) The Executive agrees that he shall not divulge to others, nor shall he use to the detriment of the Company or in any business competitive with or similar to any business engaged in by the Company or any of its subsidiary or affiliated companies, at any time during his employment with the Company or thereafter, any Confidential Information obtained by him during the course of his employment with the Company. For the purpose of this Agreement, "Confidential Information" means any and all information developed by or for or processed by the Company or its affiliates of which the Executive has knowledge during the term of his employment that is (1) not generally known in any industry in which the Company or its affiliates does business during the Non-Compete Period or (2) not publicly available and treated as confidential. (c) During the Non-Compete Period, the Executive will neither solicit, hire or seek to solicit or hire any of the Company's personnel in any capacity whatsoever nor shall Executive induce or attempt to induce any of the Company's personnel to leave the employ of the Company to work for Executive or otherwise. 8. REMEDIES. The Executive acknowledges that his breach of any of the restrictive covenants contained in Section 7 herein may cause irreparable damage to the Company for which remedies of law would be inadequate. Accordingly, the Executive breaches or threatens to breach any of the provisions of Section 7, the Company shall be entitled to appropriate injunctive relief, including, without limitation, preliminary and permanent injunctions, in any court of competent jurisdiction, restraining Executive from taking any action prohibited hereby. This remedy shall be in addition to all other remedies available to the Company at law or equity. If any portion of Section 7 is adjudicated to be invalid or unenforceable, Section 7 shall be deemed amended to delete therefrom the points so adjudicated, such deletion to apply only with respect to the operation of Section 7 in the jurisdiction in which the adjudication is made. 9. INDEMNIFICATION. The Company hereby indemnifies and holds the Executive harmless for any and all expenses (including legal fees) or losses incurred by him in connection with the performance of his duties under this Agreement. 10. PRIOR AGREEMENTS. The Executive represents that he is not now under any written agreement, nor has he previously, at any time, entered into any written agreement with any person, firm or corporation, which would or could in any manner preclude or prevent him from giving freely and the Company receiving the exclusive benefit of his services. 11. TERMINATION PROVISIONS. (a) In addition to, and not in lieu of, the termination provisions set forth in Section 6 herein, the employment of the Executive hereunder may be terminated by the Company prior to the termination date of the initial term or any renewal term thereafter (as set forth in Section 2 hereof) for sufficient "cause," which cause is defined specifically in the event that the Executive is guilty of (i) a willful and reckless disregard to perform his duties as set forth in Section 3 herein, or (ii) willful misfeasance for which the Company is directly and adversely affected, or (iii) any act of dishonesty by the Executive bearing directly upon the Company. Termination of the Executive's employment by the Company for reckless disregard of his duties to the Company, willful misfeasance or an act of dishonesty with respect to the Company hereunder shall constitute, and is referred to elsewhere herein, as termination for "Cause." Such termination of the Executive's 4 employment hereunder for Cause shall be effective upon delivery of written notice to the Executive which notice shall be a sworn affidavit from at least two non-interested parties, setting forth with specificity the exact nature of the "cause" for which the Executive is being terminated. Upon the termination of this Agreement for "cause" as set forth in this subparagraph, the Company shall not be obligated to make any further payments hereunder to the executive. (b) Notwithstanding any provisions in this Agreement to the contrary, the Company may terminate the employment of the Executive without Cause, but in such event the Company shall be obligated to pay the Executive any and all amounts payable to the Executive pursuant to Section 4 above for the greater of (i) the remainder of the initial term or the extended term, as the case may be, of the Agreement in effect immediately prior to such termination, or (ii) one (1) year (the "Remainder Term"), and the Company shall also continue for the Remainder Term to permit the Executive to receive or participate in all fringe benefits available to him pursuant to Section 5 above; provided, however, that during the Remainder Term any amounts payable to the Executive pursuant to this Section 11(b), and any fringe benefits which he receives or in which he participates pursuant to this Section 11(b), shall be reduced by any payments or fringe benefits the Executive shall receive during the Remainder Term from any other source of employment which is unaffiliated with the Company. 12. CHANGE OF CONTROL. (a) A "change of control" shall be deemed to occur when (i) the Executive is not elected as an officer of the Company (or one of its subsidiaries or affiliates); (ii) the Company's shareholders approve (x) a merger or consolidation in which the Company is not the surviving corporation and/or which results in any reclassification or reorganization of the then outstanding Common Stock, (y) a sale of all or substantially all of the Company's assets or capital stock or (z) a plan of liquidation or dissolution of Company; (iii) the Common Stock is first purchased pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company) affecting at least 25% of the Common Stock or any other sale of at least 25% of the Common Stock to a person or group of persons who are not officers, directors or 5% shareholders of the Company on the date hereof; or (iv) there is any other material change in ownership or management of the Company after which (x) the Executive is terminated or (y) in the sole determination of the Executive, there is a significant change in the Executive's duties, responsibilities, principal location of employment, or compensation. (b) In the event a change of control occurs at any time during the term of this Agreement: (i) the Executive may, by written notice to the Company within sixty (60) days after the date of such change of control, elect to terminate his employment with the Company within sixty (60) days after such notice (the "Termination Date"). If the Executive elects to terminate 5 his employment pursuant to this Section 12, the Company shall pay the Executive, in addition to the remainder of his annual compensation, a "parachute payment," as said term is defined in Section 280G of the Internal Revenue Code of 1986, as amended, (the "Code") in an amount equal to 2.99 times the Executive's annual compensation (or such other amount then permitted by the Code), including the Base Salary, bonus compensation or other remuneration and fringe benefits, if any. This amount shall be payable by the Company to the Executive in one lump sum payment within sixty (60) days of the Termination Date. The Executive shall be responsible for payment of all income or excise taxes which may become due as a result of the Company's payment to him of any "excess parachute payments," as such phrase is defined in Section 280G of the code, and (ii) any options beneficially owned by the Executive at the time of such change in control shall immediately vest in full and shall be exercisable by the Executive at any time prior to the expiration date of the respective options. 13. ARBITRATION OF DISPUTES. All controversies, claims and disputes arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration conducted by the American Arbitration Association, in accordance with the Commercial Arbitration Rules of said Association in effect at the time of the controversy, claim or dispute. Judgment upon the award rendered by the Arbitrator (or Arbitrators) may be entered in any court having jurisdiction thereof. 14. SUCCESSORS AND ASSIGN. This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns, and upon the Executive, his heirs, executors, administrators, legatees and legal representatives. 15. NOTICE. Any notice, statement, report, request or demand required or permitted to be given by this Agreement shall be in writing, and shall be sufficient if delivered in person or if addressed and sent by certified mail, return receipt requested, to the parties of the addresses set forth above, or at such other place that either party may designate by notice in the foregoing manner to the other. 16. WAIVER. The failure of either party to insist upon the strict performance of any of the terms, conditions and provisions of this Agreement shall not be construed as a waiver or relinquishment of future compliance therewith, and said terms, conditions and provisions shall remain in full force and effect. No waiver of any term or any condition of this Agreement on the part of either party shall be effective for any purpose whatsoever unless such waiver is in writing and signed by such party. 17. MISCELLANEOUS. (a) Should any part of this Agreement, for any reason whatsoever, be declared invalid, illegal, or incapable of being enforced in whole or in part, such decision shall not affect the validity of any remaining portion, which remaining portion shall remain in full force and effect as if this Agreement had been executed with the invalid portion thereof eliminated, and it is hereby declared the intention of the parties hereto that they would have executed the remaining portion of this Agreement without including therein any portion which may for any reason be declared invalid. (b) This Agreement shall be construed and enforced in accordance with the laws 6 of the State of Nevada applicable to agreements made and performed in such State without application to the principles or conflicts of laws. (c) This Agreement and all rights hereunder are personal to the Executive and shall not be assignable, and any purported assignment in violation thereof shall be null and void. Any person, firm or corporation succeeding to the business of the Company by merger, consolidation, purchase of assets or otherwise, shall assume by contract or operation of law the obligations of the Company hereunder; provided, however, that the Company shall, notwithstanding such assumption and/or assignment, remain liable and responsible for the fulfillment of the terms and conditions of the Agreement on the part of the Company. (d) This Agreement constitutes the entire agreement between the parties hereto with respect to the terms and conditions of the Executive's employment by the Company, as distinguished from any other contractual arrangements between the parties pertaining to or arising out of their relationship, and this Agreement supersedes and renders null and void any and all other prior oral or written agreements, understandings, or commitments pertaining to the Executive's employment by the Company. No variation hereof shall be deemed valid unless in writing and signed by the parties hereto, and no discharge of terms hereof shall be deemed valid unless by full performance by the parties hereto or by a writing signed by the parties hereto. No waiver by either party of any provision or condition of this Agreement by him or it to be performed shall be deemed a waiver of similar or dissimilar provisions and conditions at the same time or any prior or subsequent time. (e) The heading of the paragraphs herein are inserted for convenience and shall not affect any interpretation of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first written above. "EXECUTIVE" "COMPANY" FIBERCHEM, INC. /s/ GEOFFREY F. HEWITT By: /s/ MELVIN W. PELLEY - ----------------------------- ------------------------------- Name: GEOFFREY F. HEWITT Name: Melvin W. Pelley Title: CFO 7 EX-10.20 4 a2028934zex-10_20.txt EXHIBIT 10.20 EXHIBIT 10.20 EMPLOYMENT AND NON-COMPETITION AGREEMENT AGREEMENT entered into this 27th day of JULY 2000, by and between FiberChem, Inc., a Delaware corporation, with its principal place of business at 1181 Grier Drive, Suite B, Las Vegas, Nevada 89119 (the "Company") and MELVIN W. PELLEY, residing at 2271 TRAFALGAR COURT, HENDERSON, NV 89014 (the "Executive"). WITNESSETH: WHEREAS, the Company wishes to employ the Executive in the principal capacity of CHIEF FINANCIAL OFFICER of FIBERCHEM, INC. upon the terms and conditions contained herein; WHEREAS, the Executive is desirous of employment with the Company and is willing to accept such employment for the inducements and upon the terms and conditions contained herein; and WHEREAS, the Company has bargained, in connection with Executive's employment and in connection with the transactions contemplated by the Amended Arrangement Agreement dated as of May 26, 2000, between the Company and Intrex Data Communications Corp. ("Intrex"), of which Executive is a principal shareholder, for a covenant by the Executive not to compete with the Company's business. NOW, THEREFORE, in consideration of the mutual premises and agreements contained herein and for other good and valuable consideration by each of the parties, the parties hereby agree as follows: 1. EMPLOYMENT. The Company hereby employs the Executive and the Executive hereby accepts employment upon the terms and conditions set forth herein. 2. TERM. The term of this Agreement shall commence on the date hereof and shall continue for an initial term of one (1) year; provided, however, that the term of this Agreement shall be automatically continued and extended, on the same terms and conditions as then in effect hereunder, for additional consecutive twelve month periods commencing upon such termination date, unless at least thirty (30) days before the date of termination of the initial term of this Agreement or of any such extended term, the Company shall give the Executive, or the Executive shall give the Company, notice in writing electing to terminate this Agreement as of such termination date. 3. DUTIES. (a) During the term of this Agreement, the Executive shall serve the Company in an executive capacity and shall perform such duties as are determined from time to time by the Company's Board of Directors. Unless prevented by death or disability, the Executive shall devote his full business time, allowing for vacations and national holidays, as set forth in Sections 5(a) and (e) hereof, and illnesses, exclusively to the business and affairs of the Company, and shall use his best efforts, skill and abilities to promote its interests. Nothing herein contained shall be construed 1 as preventing the Executive from purchasing securities in any publicly held entity, if such purchases shall not result in his owning beneficially 2% or more of the equity securities of such company, provided such investment is not made in a company in competition with the Company. (b) It is hereby acknowledged that the Board of Directors of the Company has elected the Executive to serve as Chief Financial Officer of FiberChem, Inc. and the Company hereby agrees to use its best efforts to have the Executive continue to serve as Chief Financial Officer of FiberChem, Inc. during the term of this Agreement. The precise services of the Executive may be extended or curtailed from time to time at the direction of the Company's Board of Directors. 4. COMPENSATION. For the services rendered by the Executive hereunder, the Company shall pay and the Executive shall accept the following compensation: (a) From the commencement of the term hereof through September 30, 2000, the Executive shall receive a base annual salary of One Hundred Thirty-Two Thousand dollars ($132,000) (the "Base Salary") which Base Salary shall be earned and shall be payable at such intervals not less frequently than monthly, in equal installments, and otherwise in such manner as is consistent with the Company's normal practice for remuneration of executives; (b) The Board of Directors shall review the Executive's base salary on each of the anniversary dates of the execution of this agreement in order to determine whether the Executive's salary should receive an upward adjustment; (c) The Executive shall be entitled to bonus compensation during the term hereof, as determined at the discretion of the Board of Directors of the Company; (d) The Executive's salary shall be payable subject to such deductions as are then required by law and such further deductions as may be agreed to by the Executive, in accordance with the Company's prevailing salary payroll practices. 5. BENEFITS AND EXPENSES. During the term of this Agreement, the Executive shall be entitled to the following benefits and expense reimbursement: (a) The Executive shall be entitled to up to four (4) weeks of paid vacation per calendar year, in accordance with the Company's policy from time to time in effect as determined by the Board; (b) The Executive shall be entitled to participate in and/or receive all fringe benefits such as medical, disability, hospital and health insurance plans, and profit sharing, pension plan, life insurance and other plans, if any, which the Company may generally make available to its executives. The Executive shall also be included in the Directors and Officers' indemnification insurance policy, if obtained; (c) The Company shall also issue to the Executive a corporate credit card to be utilized by the Executive in connection with any additional out-of-pocket expenses which he may incur in connection with the performance of his duties. During the term of this Agreement, the Company shall, upon presentation of proper vouchers, also reimburse the Executive for all 2 reasonable expenses incurred by him directly in connection with his performance of services as an officer and Executive of the Company; (d) The Corporation shall maintain a ______ million dollar ($__,000,000) key man policy insuring against the loss of Executive's life, which shall name the Company as beneficiary; (e) The Executive shall receive as paid days off all national holidays that the Company, pursuant to established policy, recognizes and observes. (f) The Executive shall receive a car allowance of $7,200.00 per year. All other expenses of maintaining a vehicle will be born by the Executive except to the extent that mileage shall be reimbursed for business trips of greater than 25 miles per trip. 6. DISABILITY AND DEATH. (a) DISABILITY - If, during the term of this Agreement, the Executive becomes so disabled or incapacitated by reason of any physical or mental illness so as to be unable to perform the services required of him pursuant to this Agreement for a continuous period of four (4) months, or for an aggregate of six (6) months during any consecutive twelve (12) month period, then the Company may, upon 30 days' written notice to the Executive, terminate this Agreement. The Company shall purchase temporary and permanent disability insurance on the Executive. Payments made under such disability policy or policies shall not affect any other payments made to the Executive. (b) DEATH - This Agreement shall automatically terminate upon and as of the date of death of the Executive at any time during the term of this Agreement. Notwithstanding the termination of this Agreement by reason of the Executive's death, the Company shall pay to the Executive's estate his Base Salary, and shall continue family medical benefits coverage for the Executive's family, then in effect for a period of one (1) year following the date of such termination, such payment to be made in one lump sum no later than 3 months following the date of death. 7. COVENANTS AND RESTRICTIONS. (a) For a period of one (1) year following the termination of this Agreement (the "Non-Compete Period"), the Executive shall not, directly or indirectly, engage in, own, manage, operate, assist, join or control, or participate in the ownership, management, operation or control of any Restricted Enterprise (other than the Company or its affiliates), which engages or plans to engage in a Restricted Enterprise anywhere in the United States, whether as a director, officer, executive, agent, consultant, shareholder, partner, owner, independent contractor or otherwise. Notwithstanding the foregoing, these restrictions shall not prevent the Executive from earning his livelihood during the Non-Compete Period. As used herein, a "Restricted Enterprise" shall be any activity that competes with the business of the Company, including the business of Intrex, in any line of business that constitutes 5% or more of the net sales of the Company or Intrex on the date of termination of this Agreement. Notwithstanding the foregoing, the provisions of this Section 7(a) shall not apply if Executive's employment is terminated pursuant to Section 11(b) or Section 12 of this Agreement. 3 (b) The Executive agrees that he shall not divulge to others, nor shall he use to the detriment of the Company or in any business competitive with or similar to any business engaged in by the Company or any of its subsidiary or affiliated companies, at any time during his employment with the Company or thereafter, any Confidential Information obtained by him during the course of his employment with the Company. For the purpose of this Agreement, "Confidential Information" means any and all information developed by or for or processed by the Company or its affiliates of which the Executive has knowledge during the term of his employment that is (1) not generally known in any industry in which the Company or its affiliates does business during the Non-Compete Period or (2) not publicly available and treated as confidential. (c) During the Non-Compete Period, the Executive will neither solicit, hire or seek to solicit or hire any of the Company's personnel in any capacity whatsoever nor shall Executive induce or attempt to induce any of the Company's personnel to leave the employ of the Company to work for Executive or otherwise. 8. REMEDIES. The Executive acknowledges that his breach of any of the restrictive covenants contained in Section 7 herein may cause irreparable damage to the Company for which remedies of law would be inadequate. Accordingly, the Executive breaches or threatens to breach any of the provisions of Section 7, the Company shall be entitled to appropriate injunctive relief, including, without limitation, preliminary and permanent injunctions, in any court of competent jurisdiction, restraining Executive from taking any action prohibited hereby. This remedy shall be in addition to all other remedies available to the Company at law or equity. If any portion of Section 7 is adjudicated to be invalid or unenforceable, Section 7 shall be deemed amended to delete therefrom the points so adjudicated, such deletion to apply only with respect to the operation of Section 7 in the jurisdiction in which the adjudication is made. 9. INDEMNIFICATION. The Company hereby indemnifies and holds the Executive harmless for any and all expenses (including legal fees) or losses incurred by him in connection with the performance of his duties under this Agreement. 10. PRIOR AGREEMENTS. The Executive represents that he is not now under any written agreement, nor has he previously, at any time, entered into any written agreement with any person, firm or corporation, which would or could in any manner preclude or prevent him from giving freely and the Company receiving the exclusive benefit of his services. 11. TERMINATION PROVISIONS. (a) In addition to, and not in lieu of, the termination provisions set forth in Section 6 herein, the employment of the Executive hereunder may be terminated by the Company prior to the termination date of the initial term or any renewal term thereafter (as set forth in Section 2 hereof) for sufficient "cause," which cause is defined specifically in the event that the Executive is guilty of (i) a willful and reckless disregard to perform his duties as set forth in Section 3 herein, or (ii) willful misfeasance for which the Company is directly and adversely affected, or (iii) any act of dishonesty by the Executive bearing directly upon the Company. Termination of the Executive's employment by the Company for reckless disregard of his duties to the Company, willful misfeasance or an act of dishonesty with respect to the Company hereunder shall constitute, and is referred to elsewhere herein, as termination for "Cause." Such termination of the Executive's 4 employment hereunder for Cause shall be effective upon delivery of written notice to the Executive which notice shall be a sworn affidavit from at least two non-interested parties, setting forth with specificity the exact nature of the "cause" for which the Executive is being terminated. Upon the termination of this Agreement for "cause" as set forth in this subparagraph, the Company shall not be obligated to make any further payments hereunder to the executive. (b) Notwithstanding any provisions in this Agreement to the contrary, the Company may terminate the employment of the Executive without Cause, but in such event the Company shall be obligated to pay the Executive any and all amounts payable to the Executive pursuant to Section 4 above for the greater of (i) the remainder of the initial term or the extended term, as the case may be, of the Agreement in effect immediately prior to such termination, or (ii) one (1) year (the "Remainder Term"), and the Company shall also continue for the Remainder Term to permit the Executive to receive or participate in all fringe benefits available to him pursuant to Section 5 above; provided, however, that during the Remainder Term any amounts payable to the Executive pursuant to this Section 11(b), and any fringe benefits which he receives or in which he participates pursuant to this Section 11(b), shall be reduced by any payments or fringe benefits the Executive shall receive during the Remainder Term from any other source of employment which is unaffiliated with the Company. 12. CHANGE OF CONTROL. (a) A "change of control" shall be deemed to occur when (i) the Executive is not elected as an officer of the Company (or one of its subsidiaries or affiliates); (ii) the Company's shareholders approve (x) a merger or consolidation in which the Company is not the surviving corporation and/or which results in any reclassification or reorganization of the then outstanding Common Stock, (y) a sale of all or substantially all of the Company's assets or capital stock or (z) a plan of liquidation or dissolution of Company; (iii) the Common Stock is first purchased pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company) affecting at least 25% of the Common Stock or any other sale of at least 25% of the Common Stock to a person or group of persons who are not officers, directors or 5% shareholders of the Company on the date hereof; or (iv) there is any other material change in ownership or management of the Company after which (x) the Executive is terminated or (y) in the sole determination of the Executive, there is a significant change in the Executive's duties, responsibilities, principal location of employment, or compensation. (b) In the event a change of control occurs at any time during the term of this Agreement: (i) the Executive may, by written notice to the Company within sixty (60) days after the date of such change of control, elect to terminate his employment with the Company within sixty (60) days after such notice (the "Termination Date"). If the Executive elects to terminate 5 his employment pursuant to this Section 12, the Company shall pay the Executive, in addition to the remainder of his annual compensation, a "parachute payment," as said term is defined in Section 280G of the Internal Revenue Code of 1986, as amended, (the "Code") in an amount equal to 2.99 times the Executive's annual compensation (or such other amount then permitted by the Code), including the Base Salary, bonus compensation or other remuneration and fringe benefits, if any. This amount shall be payable by the Company to the Executive in one lump sum payment within sixty (60) days of the Termination Date. The Executive shall be responsible for payment of all income or excise taxes which may become due as a result of the Company's payment to him of any "excess parachute payments," as such phrase is defined in Section 280G of the code, and (ii) any options beneficially owned by the Executive at the time of such change in control shall immediately vest in full and shall be exercisable by the Executive at any time prior to the expiration date of the respective options. 13. ARBITRATION OF DISPUTES. All controversies, claims and disputes arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration conducted by the American Arbitration Association, in accordance with the Commercial Arbitration Rules of said Association in effect at the time of the controversy, claim or dispute. Judgment upon the award rendered by the Arbitrator (or Arbitrators) may be entered in any court having jurisdiction thereof. 14. SUCCESSORS AND ASSIGN. This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns, and upon the Executive, his heirs, executors, administrators, legatees and legal representatives. 15. NOTICE. Any notice, statement, report, request or demand required or permitted to be given by this Agreement shall be in writing, and shall be sufficient if delivered in person or if addressed and sent by certified mail, return receipt requested, to the parties of the addresses set forth above, or at such other place that either party may designate by notice in the foregoing manner to the other. 16. WAIVER. The failure of either party to insist upon the strict performance of any of the terms, conditions and provisions of this Agreement shall not be construed as a waiver or relinquishment of future compliance therewith, and said terms, conditions and provisions shall remain in full force and effect. No waiver of any term or any condition of this Agreement on the part of either party shall be effective for any purpose whatsoever unless such waiver is in writing and signed by such party. 17. MISCELLANEOUS. (a) Should any part of this Agreement, for any reason whatsoever, be declared invalid, illegal, or incapable of being enforced in whole or in part, such decision shall not affect the validity of any remaining portion, which remaining portion shall remain in full force and effect as if this Agreement had been executed with the invalid portion thereof eliminated, and it is hereby declared the intention of the parties hereto that they would have executed the remaining portion of this Agreement without including therein any portion which may for any reason be declared invalid. (b) This Agreement shall be construed and enforced in accordance with the laws 6 of the State of Nevada applicable to agreements made and performed in such State without application to the principles or conflicts of laws. (c) This Agreement and all rights hereunder are personal to the Executive and shall not be assignable, and any purported assignment in violation thereof shall be null and void. Any person, firm or corporation succeeding to the business of the Company by merger, consolidation, purchase of assets or otherwise, shall assume by contract or operation of law the obligations of the Company hereunder; provided, however, that the Company shall, notwithstanding such assumption and/or assignment, remain liable and responsible for the fulfillment of the terms and conditions of the Agreement on the part of the Company. (d) This Agreement constitutes the entire agreement between the parties hereto with respect to the terms and conditions of the Executive's employment by the Company, as distinguished from any other contractual arrangements between the parties pertaining to or arising out of their relationship, and this Agreement supersedes and renders null and void any and all other prior oral or written agreements, understandings, or commitments pertaining to the Executive's employment by the Company. No variation hereof shall be deemed valid unless in writing and signed by the parties hereto, and no discharge of terms hereof shall be deemed valid unless by full performance by the parties hereto or by a writing signed by the parties hereto. No waiver by either party of any provision or condition of this Agreement by him or it to be performed shall be deemed a waiver of similar or dissimilar provisions and conditions at the same time or any prior or subsequent time. (e) The heading of the paragraphs herein are inserted for convenience and shall not affect any interpretation of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first written above. "EXECUTIVE" "COMPANY" FIBERCHEM, INC. /s/ MELVIN W. PELLEY By: /s/ GEOFF HEWITT - ----------------------------- -------------------------------- Name: Melvin W. Pelley Name: Geoff Hewitt Title: CEO 7 EX-10.21 5 a2028934zex-10_21.txt EXHIBIT 10.21 EXHIBIT 10.21 EMPLOYMENT AND NON-COMPETITION AGREEMENT AGREEMENT entered into this 27th day of JULY 2000, by and between FiberChem, Inc., a Delaware corporation, with its principal place of business at 1181 Grier Drive, Suite B, Las Vegas, Nevada 89119 (the "Company") and THOMAS A. COLLINS, residing at 1705 E. LA VIEVE, TEMPE, ARIZONA 85284 (the "Executive"). WITNESSETH: WHEREAS, the Company wishes to employ the Executive in the principal capacity of PRESIDENT - SENSOR DIVISION of FIBERCHEM, INC. upon the terms and conditions contained herein; WHEREAS, the Executive is desirous of employment with the Company and is willing to accept such employment for the inducements and upon the terms and conditions contained herein; and WHEREAS, the Company has bargained, in connection with Executive's employment and in connection with the transactions contemplated by the Amended Arrangement Agreement dated as of May 26, 2000, between the Company and Intrex Data Communications Corp. ("Intrex"), of which Executive is a principal shareholder, for a covenant by the Executive not to compete with the Company's business. NOW, THEREFORE, in consideration of the mutual premises and agreements contained herein and for other good and valuable consideration by each of the parties, the parties hereby agree as follows: 1. EMPLOYMENT. The Company hereby employs the Executive and the Executive hereby accepts employment upon the terms and conditions set forth herein. 2. TERM. The term of this Agreement shall commence on the date hereof and shall continue for an initial term of one (1) year; provided, however, that the term of this Agreement shall be automatically continued and extended, on the same terms and conditions as then in effect hereunder, for additional consecutive twelve month periods commencing upon such termination date, unless at least thirty (30) days before the date of termination of the initial term of this Agreement or of any such extended term, the Company shall give the Executive, or the Executive shall give the Company, notice in writing electing to terminate this Agreement as of such termination date. 3. DUTIES. (a) During the term of this Agreement, the Executive shall serve the Company in an executive capacity and shall perform such duties as are determined from time to time by the Company's Board of Directors. Unless prevented by death or disability, the Executive shall devote his full business time, allowing for vacations and national holidays, as set forth in Sections 5(a) and (e) hereof, and illnesses, exclusively to the business and affairs of the Company, and shall use his best efforts, skill and abilities to promote its interests. Nothing herein contained shall be construed as preventing the Executive from purchasing securities in any publicly held entity, if such purchases shall not result in his owning beneficially 2% or more of the equity securities of such company, 1 provided such investment is not made in a company in competition with the Company. (b) It is hereby acknowledged that the Board of Directors of the Company has elected the Executive to serve as PRESIDENT - SENSOR DIVISION of FiberChem, Inc. and the Company hereby agrees to use its best efforts to have the Executive continue to serve as PRESIDENT - SENSOR DIVISION of FiberChem, Inc. during the term of this Agreement. The precise services of the Executive may be extended or curtailed from time to time at the direction of the Company's Board of Directors. 4. COMPENSATION. For the services rendered by the Executive hereunder, the Company shall pay and the Executive shall accept the following compensation: (a) From the commencement of the term hereof through September 30, 2000, the Executive shall receive a base annual salary of One Hundred Twenty-Five Thousand dollars ($125,000) (the "Base Salary") which Base Salary shall be earned and shall be payable at such intervals not less frequently than monthly, in equal installments, and otherwise in such manner as is consistent with the Company's normal practice for remuneration of executives; (b) The Board of Directors shall review the Executive's base salary on each of the anniversary dates of the execution of this agreement in order to determine whether the Executive's salary should receive an upward adjustment; (c) The Executive shall be entitled to bonus compensation during the term hereof, as determined at the discretion of the Board of Directors of the Company; (d) The Executive's salary shall be payable subject to such deductions as are then required by law and such further deductions as may be agreed to by the Executive, in accordance with the Company's prevailing salary payroll practices. 5. BENEFITS AND EXPENSES. During the term of this Agreement, the Executive shall be entitled to the following benefits and expense reimbursement: (a) The Executive shall be entitled to up to four (4) weeks of paid vacation per calendar year, in accordance with the Company's policy from time to time in effect as determined by the Board; (b) The Executive shall be entitled to participate in and/or receive all fringe benefits such as medical, disability, hospital and health insurance plans, and profit sharing, pension plan, life insurance and other plans, if any, which the Company may generally make available to its executives. The Executive shall also be included in the Directors and Officers' indemnification insurance policy, if obtained; (c) The Company shall also issue to the Executive a corporate credit card to be utilized by the Executive in connection with any additional out-of-pocket expenses which he may incur in connection with the performance of his duties. During the term of this Agreement, the Company shall, upon presentation of proper vouchers, also reimburse the Executive for all reasonable expenses incurred by him directly in connection with his performance of services as an 2 officer and Executive of the Company; (d) The Corporation shall maintain a ______ million dollar ($__,000,000) key man policy insuring against the loss of Executive's life, which shall name the Company as beneficiary; (e) The Executive shall receive as paid days off all national holidays that the Company, pursuant to established policy, recognizes and observes. (f) The Executive shall receive a car allowance of $7,200.00 per year. All other expenses of maintaining a vehicle will be born by the Executive except to the extent that mileage shall be reimbursed for business trips of greater than 25 miles per trip. 6. DISABILITY AND DEATH. (a) DISABILITY - If, during the term of this Agreement, the Executive becomes so disabled or incapacitated by reason of any physical or mental illness so as to be unable to perform the services required of him pursuant to this Agreement for a continuous period of four (4) months, or for an aggregate of six (6) months during any consecutive twelve (12) month period, then the Company may, upon 30 days' written notice to the Executive, terminate this Agreement. The Company shall purchase temporary and permanent disability insurance on the Executive. Payments made under such disability policy or policies shall not affect any other payments made to the Executive. (b) DEATH - This Agreement shall automatically terminate upon and as of the date of death of the Executive at any time during the term of this Agreement. Notwithstanding the termination of this Agreement by reason of the Executive's death, the Company shall pay to the Executive's estate his Base Salary, and shall continue family medical benefits coverage for the Executive's family, then in effect for a period of one (1) year following the date of such termination, such payment to be made in one lump sum no later than 3 months following the date of death. 7. COVENANTS AND RESTRICTIONS. (a) For a period of one (1) year following the termination of this Agreement (the "Non-Compete Period"), the Executive shall not, directly or indirectly, engage in, own, manage, operate, assist, join or control, or participate in the ownership, management, operation or control of any Restricted Enterprise (other than the Company or its affiliates), which engages or plans to engage in a Restricted Enterprise anywhere in the United States, whether as a director, officer, executive, agent, consultant, shareholder, partner, owner, independent contractor or otherwise. Notwithstanding the foregoing, these restrictions shall not prevent the Executive from earning his livelihood during the Non-Compete Period. As used herein, a "Restricted Enterprise" shall be any activity that competes with the business of the Company, including the business of Intrex, in any line of business that constitutes 5% or more of the net sales of the Company or Intrex on the date of termination of this Agreement. Notwithstanding the foregoing, the provisions of this Section 7(a) shall not apply if Executive's employment is terminated pursuant to Section 11(b) or Section 12 of this Agreement. (b) The Executive agrees that he shall not divulge to others, nor shall he use to the 3 detriment of the Company or in any business competitive with or similar to any business engaged in by the Company or any of its subsidiary or affiliated companies, at any time during his employment with the Company or thereafter, any Confidential Information obtained by him during the course of his employment with the Company. For the purpose of this Agreement, "Confidential Information" means any and all information developed by or for or processed by the Company or its affiliates of which the Executive has knowledge during the term of his employment that is (1) not generally known in any industry in which the Company or its affiliates does business during the Non-Compete Period or (2) not publicly available and treated as confidential. (c) During the Non-Compete Period, the Executive will neither solicit, hire or seek to solicit or hire any of the Company's personnel in any capacity whatsoever nor shall Executive induce or attempt to induce any of the Company's personnel to leave the employ of the Company to work for Executive or otherwise. 8. REMEDIES. The Executive acknowledges that his breach of any of the restrictive covenants contained in Section 7 herein may cause irreparable damage to the Company for which remedies of law would be inadequate. Accordingly, the Executive breaches or threatens to breach any of the provisions of Section 7, the Company shall be entitled to appropriate injunctive relief, including, without limitation, preliminary and permanent injunctions, in any court of competent jurisdiction, restraining Executive from taking any action prohibited hereby. This remedy shall be in addition to all other remedies available to the Company at law or equity. If any portion of Section 7 is adjudicated to be invalid or unenforceable, Section 7 shall be deemed amended to delete therefrom the points so adjudicated, such deletion to apply only with respect to the operation of Section 7 in the jurisdiction in which the adjudication is made. 9. INDEMNIFICATION. The Company hereby indemnifies and holds the Executive harmless for any and all expenses (including legal fees) or losses incurred by him in connection with the performance of his duties under this Agreement. 10. PRIOR AGREEMENTS. The Executive represents that he is not now under any written agreement, nor has he previously, at any time, entered into any written agreement with any person, firm or corporation, which would or could in any manner preclude or prevent him from giving freely and the Company receiving the exclusive benefit of his services. 11. TERMINATION PROVISIONS. (a) In addition to, and not in lieu of, the termination provisions set forth in Section 6 herein, the employment of the Executive hereunder may be terminated by the Company prior to the termination date of the initial term or any renewal term thereafter (as set forth in Section 2 hereof) for sufficient "cause," which cause is defined specifically in the event that the Executive is guilty of (i) a willful and reckless disregard to perform his duties as set forth in Section 3 herein, or (ii) willful misfeasance for which the Company is directly and adversely affected, or (iii) any act of dishonesty by the Executive bearing directly upon the Company. Termination of the Executive's employment by the Company for reckless disregard of his duties to the Company, willful misfeasance or an act of dishonesty with respect to the Company hereunder shall constitute, and is referred to elsewhere herein, as termination for "Cause." Such termination of the Executive's employment hereunder for Cause shall be effective upon delivery of written notice to the Executive 4 which notice shall be a sworn affidavit from at least two non-interested parties, setting forth with specificity the exact nature of the "cause" for which the Executive is being terminated. Upon the termination of this Agreement for "cause" as set forth in this subparagraph, the Company shall not be obligated to make any further payments hereunder to the executive. (b) Notwithstanding any provisions in this Agreement to the contrary, the Company may terminate the employment of the Executive without Cause, but in such event the Company shall be obligated to pay the Executive any and all amounts payable to the Executive pursuant to Section 4 above for the greater of (i) the remainder of the initial term or the extended term, as the case may be, of the Agreement in effect immediately prior to such termination, or (ii) one (1) year (the "Remainder Term"), and the Company shall also continue for the Remainder Term to permit the Executive to receive or participate in all fringe benefits available to him pursuant to Section 5 above; provided, however, that during the Remainder Term any amounts payable to the Executive pursuant to this Section 11(b), and any fringe benefits which he receives or in which he participates pursuant to this Section 11(b), shall be reduced by any payments or fringe benefits the Executive shall receive during the Remainder Term from any other source of employment which is unaffiliated with the Company. 12. CHANGE OF CONTROL. (a) A "change of control" shall be deemed to occur when (i) the Executive is not elected as an officer of the Company (or one of its subsidiaries or affiliates); (ii) the Company's shareholders approve (x) a merger or consolidation in which the Company is not the surviving corporation and/or which results in any reclassification or reorganization of the then outstanding Common Stock, (y) a sale of all or substantially all of the Company's assets or capital stock or (z) a plan of liquidation or dissolution of Company; (iii) the Common Stock is first purchased pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company) affecting at least 25% of the Common Stock or any other sale of at least 25% of the Common Stock to a person or group of persons who are not officers, directors or 5% shareholders of the Company on the date hereof; or (iv) there is any other material change in ownership or management of the Company after which (x) the Executive is terminated or (y) in the sole determination of the Executive, there is a significant change in the Executive's duties, responsibilities, principal location of employment, or compensation. (b) In the event a change of control occurs at any time during the term of this Agreement: (i) the Executive may, by written notice to the Company within sixty (60) days after the date of such change of control, elect to terminate his employment with the Company within sixty (60) days after such notice (the "Termination Date"). If the Executive elects to terminate his employment pursuant to this Section 12, the Company shall pay the Executive, in addition to the 5 remainder of his annual compensation, a "parachute payment," as said term is defined in Section 280G of the Internal Revenue Code of 1986, as amended, (the "Code") in an amount equal to 2.99 times the Executive's annual compensation (or such other amount then permitted by the Code), including the Base Salary, bonus compensation or other remuneration and fringe benefits, if any. This amount shall be payable by the Company to the Executive in one lump sum payment within sixty (60) days of the Termination Date. The Executive shall be responsible for payment of all income or excise taxes which may become due as a result of the Company's payment to him of any "excess parachute payments," as such phrase is defined in Section 280G of the code, and (ii) any options beneficially owned by the Executive at the time of such change in control shall immediately vest in full and shall be exercisable by the Executive at any time prior to the expiration date of the respective options. 13. ARBITRATION OF DISPUTES. All controversies, claims and disputes arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration conducted by the American Arbitration Association, in accordance with the Commercial Arbitration Rules of said Association in effect at the time of the controversy, claim or dispute. Judgment upon the award rendered by the Arbitrator (or Arbitrators) may be entered in any court having jurisdiction thereof. 14. SUCCESSORS AND ASSIGN. This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns, and upon the Executive, his heirs, executors, administrators, legatees and legal representatives. 15. NOTICE. Any notice, statement, report, request or demand required or permitted to be given by this Agreement shall be in writing, and shall be sufficient if delivered in person or if addressed and sent by certified mail, return receipt requested, to the parties of the addresses set forth above, or at such other place that either party may designate by notice in the foregoing manner to the other. 16. WAIVER. The failure of either party to insist upon the strict performance of any of the terms, conditions and provisions of this Agreement shall not be construed as a waiver or relinquishment of future compliance therewith, and said terms, conditions and provisions shall remain in full force and effect. No waiver of any term or any condition of this Agreement on the part of either party shall be effective for any purpose whatsoever unless such waiver is in writing and signed by such party. 17. MISCELLANEOUS. (a) Should any part of this Agreement, for any reason whatsoever, be declared invalid, illegal, or incapable of being enforced in whole or in part, such decision shall not affect the validity of any remaining portion, which remaining portion shall remain in full force and effect as if this Agreement had been executed with the invalid portion thereof eliminated, and it is hereby declared the intention of the parties hereto that they would have executed the remaining portion of this Agreement without including therein any portion which may for any reason be declared invalid. (b) This Agreement shall be construed and enforced in accordance with the laws of the State of Nevada applicable to agreements made and performed in such State without 6 application to the principles or conflicts of laws. (c) This Agreement and all rights hereunder are personal to the Executive and shall not be assignable, and any purported assignment in violation thereof shall be null and void. Any person, firm or corporation succeeding to the business of the Company by merger, consolidation, purchase of assets or otherwise, shall assume by contract or operation of law the obligations of the Company hereunder; provided, however, that the Company shall, notwithstanding such assumption and/or assignment, remain liable and responsible for the fulfillment of the terms and conditions of the Agreement on the part of the Company. (d) This Agreement constitutes the entire agreement between the parties hereto with respect to the terms and conditions of the Executive's employment by the Company, as distinguished from any other contractual arrangements between the parties pertaining to or arising out of their relationship, and this Agreement supersedes and renders null and void any and all other prior oral or written agreements, understandings, or commitments pertaining to the Executive's employment by the Company. No variation hereof shall be deemed valid unless in writing and signed by the parties hereto, and no discharge of terms hereof shall be deemed valid unless by full performance by the parties hereto or by a writing signed by the parties hereto. No waiver by either party of any provision or condition of this Agreement by him or it to be performed shall be deemed a waiver of similar or dissimilar provisions and conditions at the same time or any prior or subsequent time. (e) The heading of the paragraphs herein are inserted for convenience and shall not affect any interpretation of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first written above. "EXECUTIVE" "COMPANY" FIBERCHEM, INC. /s/ THOMAS A. COLLINS By: /s/ GEOFF HEWITT - ------------------------------ --------------------------------- Name: THOMAS A. COLLINS Name: Geoff Hewitt Title: CEO 7 EX-10.22 6 a2028934zex-10_22.txt EXHIBIT 10.22 EXHIBIT 10.22 EMPLOYMENT AND NON-COMPETITION AGREEMENT AGREEMENT entered into this 27th day of JULY 2000, by and between FiberChem, Inc., a Delaware corporation, with its principal place of business at 1181 Grier Drive, Suite B, Las Vegas, Nevada 89119 (the "Company") and DAVID S. PEACHEY, residing at 4707 FRANCIS PENINSULA ROAD, MADEIRA PARK, BRITISH COLUMBIA, V0N 2H0 (the "Executive"). WITNESSETH: WHEREAS, the Company wishes to employ the Executive in the principal capacity of PRESIDENT AND CHIEF OPERATING OFFICER of FIBERCHEM, INC. upon the terms and conditions contained herein; WHEREAS, the Executive is desirous of employment with the Company and is willing to accept such employment for the inducements and upon the terms and conditions contained herein; and WHEREAS, the Company has bargained, in connection with Executive's employment and in connection with the transactions contemplated by the Amended Arrangement Agreement dated as of May 26, 2000, between the Company and Intrex Data Communications Corp. ("Intrex"), of which Executive is a principal shareholder, for a covenant by the Executive not to compete with the Company's business. NOW, THEREFORE, in consideration of the mutual premises and agreements contained herein and for other good and valuable consideration by each of the parties, the parties hereby agree as follows: 1. EMPLOYMENT. The Company hereby employs the Executive and the Executive hereby accepts employment upon the terms and conditions set forth herein. 2. TERM. The term of this Agreement shall commence on the date hereof and shall continue for an initial term of one (1) year; provided, however, that the term of this Agreement shall be automatically continued and extended, on the same terms and conditions as then in effect hereunder, for additional consecutive twelve month periods commencing upon such termination date, unless at least thirty (30) days before the date of termination of the initial term of this Agreement or of any such extended term, the Company shall give the Executive, or the Executive shall give the Company, notice in writing electing to terminate this Agreement as of such termination date. 3. DUTIES. (a) During the term of this Agreement, the Executive shall serve the Company in an executive capacity and shall perform such duties as are determined from time to time by the Company's Board of Directors. Unless prevented by death or disability, the Executive shall devote his full business time, allowing for vacations and national holidays, as set forth in Sections 5(a) and (e) hereof, and illnesses, exclusively to the business and affairs of the Company, and shall use his best efforts, skill and abilities to promote its interests. Nothing herein contained shall be construed 1 as preventing the Executive from purchasing securities in any publicly held entity, if such purchases shall not result in his owning beneficially 2% or more of the equity securities of such company, provided such investment is not made in a company in competition with the Company. (b) It is hereby acknowledged that the Board of Directors of the Company has elected the Executive to serve as President and Chief Operating Officer of FiberChem, Inc., and the Company hereby agrees to use its best efforts to have the Executive continue to serve as President and Chief Operating Officer of FiberChem, Inc. during the term of this Agreement. The precise services of the Executive may be extended or curtailed from time to time at the direction of the Company's Board of Directors. 4. COMPENSATION. For the services rendered by the Executive hereunder, the Company shall pay and the Executive shall accept the following compensation: (a) From the commencement of the term hereof through September 30, 2000, the Executive shall receive a base annual salary in US Dollars of Two Hundred Thousand Dollars ($200,000) (the "Base Salary") which Base Salary shall be earned and shall be payable at such intervals not less frequently than monthly, in equal installments, and otherwise in such manner as is consistent with the Company's normal practice for remuneration of executives; (b) The Board of Directors shall review the Executive's base salary on each of the anniversary dates of the execution of this agreement in order to determine whether the Executive's salary should receive an upward adjustment; (c) The Executive shall be entitled to bonus compensation during the term hereof, as determined at the discretion of the Board of Directors of the Company; (d) The Executive's salary shall be payable subject to such deductions as are then required by law and such further deductions as may be agreed to by the Executive, in accordance with the Company's prevailing salary payroll practices. 5. BENEFITS AND EXPENSES. During the term of this Agreement, the Executive shall be entitled to the following benefits and expense reimbursement: (a) The Executive shall be entitled to up to four (4) weeks of paid vacation per calendar year, in accordance with the Company's policy from time to time in effect as determined by the Board; (b) The Executive shall be entitled to participate in and/or receive all fringe benefits such as medical, disability, hospital and health insurance plans, and profit sharing, pension plan, life insurance and other plans, if any, which the Company may generally make available to its executives. The Executive shall also be included in the Directors and Officers' indemnification insurance policy, if obtained; (c) The Company shall also issue to the Executive a corporate credit card to be utilized by the Executive in connection with any additional out-of-pocket expenses which he may 2 incur in connection with the performance of his duties. During the term of this Agreement, the Company shall, upon presentation of proper vouchers, also reimburse the Executive for all reasonable expenses incurred by him directly in connection with his performance of services as an officer and Executive of the Company; (d) The Corporation shall maintain a ______ million dollar ($__,000,000) key man policy insuring against the loss of Executive's life, which shall name the Company as beneficiary; (e) The Executive shall receive as paid days off all national holidays that the Company, pursuant to established policy, recognizes and observes. (f) The Executive shall receive a car allowance of $7,200.00 per year. All other expenses of maintaining a vehicle will be born by the Executive except to the extent that mileage shall be reimbursed for business trips of greater than 25 miles per trip. 6. DISABILITY AND DEATH. (a) DISABILITY - If, during the term of this Agreement, the Executive becomes so disabled or incapacitated by reason of any physical or mental illness so as to be unable to perform the services required of him pursuant to this Agreement for a continuous period of four (4) months, or for an aggregate of six (6) months during any consecutive twelve (12) month period, then the Company may, upon 30 days' written notice to the Executive, terminate this Agreement. The Company shall purchase temporary and permanent disability insurance on the Executive. Payments made under such disability policy or policies shall not affect any other payments made to the Executive. (b) DEATH - This Agreement shall automatically terminate upon and as of the date of death of the Executive at any time during the term of this Agreement. Notwithstanding the termination of this Agreement by reason of the Executive's death, the Company shall pay to the Executive's estate his Base Salary, and shall continue family medical benefits coverage for the Executive's family, then in effect for a period of one (1) year following the date of such termination, such payment to be made in one lump sum no later than 3 months following the date of death. 7. COVENANTS AND RESTRICTIONS. (a) For a period of one (1) year following the termination of this Agreement (the "Non-Compete Period"), the Executive shall not, directly or indirectly, engage in, own, manage, operate, assist, join or control, or participate in the ownership, management, operation or control of any Restricted Enterprise (other than the Company or its affiliates), which engages or plans to engage in a Restricted Enterprise anywhere in the United States, whether as a director, officer, executive, agent, consultant, shareholder, partner, owner, independent contractor or otherwise. Notwithstanding the foregoing, these restrictions shall not prevent the Executive from earning his livelihood during the Non-Compete Period. As used herein, a "Restricted Enterprise" shall be any activity that competes with the business of the Company, including the business of Intrex, in any line of business that constitutes 5% or more of the net sales of the Company or Intrex on the date of termination of 3 this Agreement. Notwithstanding the foregoing, the provisions of this Section 7(a) shall not apply if Executive's employment is terminated pursuant to Section 11(b) or Section 12 of this Agreement. (b) The Executive agrees that he shall not divulge to others, nor shall he use to the detriment of the Company or in any business competitive with or similar to any business engaged in by the Company or any of its subsidiary or affiliated companies, at any time during his employment with the Company or thereafter, any Confidential Information obtained by him during the course of his employment with the Company. For the purpose of this Agreement, "Confidential Information" means any and all information developed by or for or processed by the Company or its affiliates of which the Executive has knowledge during the term of his employment that is (1) not generally known in any industry in which the Company or its affiliates does business during the Non-Compete Period or (2) not publicly available and treated as confidential. (c) During the Non-Compete Period, the Executive will neither solicit, hire or seek to solicit or hire any of the Company's personnel in any capacity whatsoever nor shall Executive induce or attempt to induce any of the Company's personnel to leave the employ of the Company to work for Executive or otherwise. 8. REMEDIES. The Executive acknowledges that his breach of any of the restrictive covenants contained in Section 7 herein may cause irreparable damage to the Company for which remedies of law would be inadequate. Accordingly, the Executive breaches or threatens to breach any of the provisions of Section 7, the Company shall be entitled to appropriate injunctive relief, including, without limitation, preliminary and permanent injunctions, in any court of competent jurisdiction, restraining Executive from taking any action prohibited hereby. This remedy shall be in addition to all other remedies available to the Company at law or equity. If any portion of Section 7 is adjudicated to be invalid or unenforceable, Section 7 shall be deemed amended to delete therefrom the points so adjudicated, such deletion to apply only with respect to the operation of Section 7 in the jurisdiction in which the adjudication is made. 9. INDEMNIFICATION. The Company hereby indemnifies and holds the Executive harmless for any and all expenses (including legal fees) or losses incurred by him in connection with the performance of his duties under this Agreement. 10. PRIOR AGREEMENTS. The Executive represents that he is not now under any written agreement, nor has he previously, at any time, entered into any written agreement with any person, firm or corporation, which would or could in any manner preclude or prevent him from giving freely and the Company receiving the exclusive benefit of his services. 11. TERMINATION PROVISIONS. (a) In addition to, and not in lieu of, the termination provisions set forth in Section 6 herein, the employment of the Executive hereunder may be terminated by the Company prior to the termination date of the initial term or any renewal term thereafter (as set forth in Section 2 hereof) for sufficient "cause," which cause is defined specifically in the event that the Executive is guilty of (i) a willful and reckless disregard to perform his duties as set forth in Section 3 herein, or (ii) willful misfeasance for which the Company is directly and adversely affected, or (iii) any act of 4 dishonesty by the Executive bearing directly upon the Company. Termination of the Executive's employment by the Company for reckless disregard of his duties to the Company, willful misfeasance or an act of dishonesty with respect to the Company hereunder shall constitute, and is referred to elsewhere herein, as termination for "Cause." Such termination of the Executive's employment hereunder for Cause shall be effective upon delivery of written notice to the Executive which notice shall be a sworn affidavit from at least two non-interested parties, setting forth with specificity the exact nature of the "cause" for which the Executive is being terminated. Upon the termination of this Agreement for "cause" as set forth in this subparagraph, the Company shall not be obligated to make any further payments hereunder to the executive. (b) Notwithstanding any provisions in this Agreement to the contrary, the Company may terminate the employment of the Executive without Cause, but in such event the Company shall be obligated to pay the Executive any and all amounts payable to the Executive pursuant to Section 4 above for the greater of (i) the remainder of the initial term or the extended term, as the case may be, of the Agreement in effect immediately prior to such termination, or (ii) one (1) year (the "Remainder Term"), and the Company shall also continue for the Remainder Term to permit the Executive to receive or participate in all fringe benefits available to him pursuant to Section 5 above; provided, however, that during the Remainder Term any amounts payable to the Executive pursuant to this Section 11(b), and any fringe benefits which he receives or in which he participates pursuant to this Section 11(b), shall be reduced by any payments or fringe benefits the Executive shall receive during the Remainder Term from any other source of employment which is unaffiliated with the Company. 12. CHANGE OF CONTROL. (a) A "change of control" shall be deemed to occur when (i) the Executive is not elected as an officer of the Company (or one of its subsidiaries or affiliates); (ii) the Company's shareholders approve (x) a merger or consolidation in which the Company is not the surviving corporation and/or which results in any reclassification or reorganization of the then outstanding Common Stock, (y) a sale of all or substantially all of the Company's assets or capital stock or (z) a plan of liquidation or dissolution of Company; (iii) the Common Stock is first purchased pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company) affecting at least 25% of the Common Stock or any other sale of at least 25% of the Common Stock to a person or group of persons who are not officers, directors or 5% shareholders of the Company on the date hereof; or (iv) there is any other material change in ownership or management of the Company after which (x) the Executive is terminated or (y) in the sole determination of the Executive, there is a significant change in the Executive's duties, responsibilities, principal location of employment, or compensation. (b) In the event a change of control occurs at any time during the term of this Agreement: 5 (i) the Executive may, by written notice to the Company within sixty (60) days after the date of such change of control, elect to terminate his employment with the Company within sixty (60) days after such notice (the "Termination Date"). If the Executive elects to terminate his employment pursuant to this Section 12, the Company shall pay the Executive, in addition to the remainder of his annual compensation, a "parachute payment," as said term is defined in Section 280G of the Internal Revenue Code of 1986, as amended, (the "Code") in an amount equal to 2.99 times the Executive's annual compensation (or such other amount then permitted by the Code), including the Base Salary, bonus compensation or other remuneration and fringe benefits, if any. This amount shall be payable by the Company to the Executive in one lump sum payment within sixty (60) days of the Termination Date. The Executive shall be responsible for payment of all income or excise taxes which may become due as a result of the Company's payment to him of any "excess parachute payments," as such phrase is defined in Section 280G of the code, and (ii) any options beneficially owned by the Executive at the time of such change in control shall immediately vest in full and shall be exercisable by the Executive at any time prior to the expiration date of the respective options. 13. ARBITRATION OF DISPUTES. All controversies, claims and disputes arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration conducted by the American Arbitration Association, in accordance with the Commercial Arbitration Rules of said Association in effect at the time of the controversy, claim or dispute. Judgment upon the award rendered by the Arbitrator (or Arbitrators) may be entered in any court having jurisdiction thereof. 14. SUCCESSORS AND ASSIGN. This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns, and upon the Executive, his heirs, executors, administrators, legatees and legal representatives. 15. NOTICE. Any notice, statement, report, request or demand required or permitted to be given by this Agreement shall be in writing, and shall be sufficient if delivered in person or if addressed and sent by certified mail, return receipt requested, to the parties of the addresses set forth above, or at such other place that either party may designate by notice in the foregoing manner to the other. 16. WAIVER. The failure of either party to insist upon the strict performance of any of the terms, conditions and provisions of this Agreement shall not be construed as a waiver or relinquishment of future compliance therewith, and said terms, conditions and provisions shall remain in full force and effect. No waiver of any term or any condition of this Agreement on the part of either party shall be effective for any purpose whatsoever unless such waiver is in writing and signed by such party. 6 17. MISCELLANEOUS. (a) Should any part of this Agreement, for any reason whatsoever, be declared invalid, illegal, or incapable of being enforced in whole or in part, such decision shall not affect the validity of any remaining portion, which remaining portion shall remain in full force and effect as if this Agreement had been executed with the invalid portion thereof eliminated, and it is hereby declared the intention of the parties hereto that they would have executed the remaining portion of this Agreement without including therein any portion which may for any reason be declared invalid. (b) This Agreement shall be construed and enforced in accordance with the laws of the State of Nevada applicable to agreements made and performed in such State without application to the principles or conflicts of laws. (c) This Agreement and all rights hereunder are personal to the Executive and shall not be assignable, and any purported assignment in violation thereof shall be null and void. Any person, firm or corporation succeeding to the business of the Company by merger, consolidation, purchase of assets or otherwise, shall assume by contract or operation of law the obligations of the Company hereunder; provided, however, that the Company shall, notwithstanding such assumption and/or assignment, remain liable and responsible for the fulfillment of the terms and conditions of the Agreement on the part of the Company. (d) This Agreement constitutes the entire agreement between the parties hereto with respect to the terms and conditions of the Executive's employment by the Company, as distinguished from any other contractual arrangements between the parties pertaining to or arising out of their relationship, and this Agreement supersedes and renders null and void any and all other prior oral or written agreements, understandings, or commitments pertaining to the Executive's employment by the Company. No variation hereof shall be deemed valid unless in writing and signed by the parties hereto, and no discharge of terms hereof shall be deemed valid unless by full performance by the parties hereto or by a writing signed by the parties hereto. No waiver by either party of any provision or condition of this Agreement by him or it to be performed shall be deemed a waiver of similar or dissimilar provisions and conditions at the same time or any prior or subsequent time. (e) The heading of the paragraphs herein are inserted for convenience and shall not affect any interpretation of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first written above. "EXECUTIVE" "COMPANY" FIBERCHEM, INC. /s/ DAVID S. PEACHEY By: /s/ MELVIN W. PELLEY - ---------------------------------- ------------------------------------ Name: David S. Peachey Name: Melvin W. Pelley Title: CFO 7 EX-10.23 7 a2028934zex-10_23.txt EXHIBIT 10.23 EXHIBIT 10.23 EMPLOYMENT AND NON-COMPETITION AGREEMENT AGREEMENT entered into this 27th day of JULY 2000, by and between FiberChem, Inc., a Delaware corporation, with its principal place of business at 1181 Grier Drive, Suite B, Las Vegas, Nevada 89119 (the "Company") and PETER J. LAGERGREN, residing at 108 RANCH ROAD, KRUGERVILLE TX 76227 (the "Executive"). WITNESSETH: WHEREAS, the Company wishes to employ the Executive in the principal capacity of PRESIDENT COMMUNICATIONS DIVISION of FIBERCHEM, INC. upon the terms and conditions contained herein; WHEREAS, the Executive is desirous of employment with the Company and is willing to accept such employment for the inducements and upon the terms and conditions contained herein; and WHEREAS, the Company has bargained, in connection with Executive's employment and in connection with the transactions contemplated by the Amended Arrangement Agreement dated as of May 26, 2000, between the Company and Intrex Data Communications Corp. ("Intrex"), of which Executive is a principal shareholder, for a covenant by the Executive not to compete with the Company's business. NOW, THEREFORE, in consideration of the mutual premises and agreements contained herein and for other good and valuable consideration by each of the parties, the parties hereby agree as follows: 1. EMPLOYMENT. The Company hereby employs the Executive and the Executive hereby accepts employment upon the terms and conditions set forth herein. 2. TERM. The term of this Agreement shall commence on the date hereof and shall continue for an initial term of one (1) year; provided, however, that the term of this Agreement shall be automatically continued and extended, on the same terms and conditions as then in effect hereunder, for additional consecutive twelve month periods commencing upon such termination date, unless at least thirty (30) days before the date of termination of the initial term of this Agreement or of any such extended term, the Company shall give the Executive, or the Executive shall give the Company, notice in writing electing to terminate this Agreement as of such termination date. 3. DUTIES. (a) During the term of this Agreement, the Executive shall serve the Company in an executive capacity and shall perform such duties as are determined from time to time by the Company's Board of Directors. Unless prevented by death or disability, the Executive shall devote his full business time, allowing for vacations and national holidays, as set forth in Sections 5(a) and (e) hereof, and illnesses, exclusively to the business and affairs of the Company, and shall use his best efforts, skill and abilities to promote its interests. Nothing herein contained shall be construed as preventing the Executive from purchasing securities in any publicly held entity, if such purchases 1 shall not result in his owning beneficially 2% or more of the equity securities of such company, provided such investment is not made in a company in competition with the Company. (b) It is hereby acknowledged that the Board of Directors of the Company has elected the Executive to serve as President, Communications Division of FiberChem, Inc., and the Company hereby agrees to use its best efforts to have the Executive continue to serve as President, Communications Division of FiberChem, Inc. during the term of this Agreement. The precise services of the Executive may be extended or curtailed from time to time at the direction of the Company's Board of Directors. 4. COMPENSATION. For the services rendered by the Executive hereunder, the Company shall pay and the Executive shall accept the following compensation: (a) From the commencement of the term hereof through September 30, 2000, the Executive shall receive a base annual salary of One Hundred Eighty-Five Thousand dollars ($185,000) (the "Base Salary") which Base Salary shall be earned and shall be payable at such intervals not less frequently than monthly, in equal installments, and otherwise in such manner as is consistent with the Company's normal practice for remuneration of executives; (b) The Board of Directors shall review the Executive's base salary on each of the anniversary dates of the execution of this agreement in order to determine whether the Executive's salary should receive an upward adjustment; (c) The Executive shall be entitled to bonus compensation during the term hereof, as determined at the discretion of the Board of Directors of the Company; (d) The Executive's salary shall be payable subject to such deductions as are then required by law and such further deductions as may be agreed to by the Executive, in accordance with the Company's prevailing salary payroll practices. 5. BENEFITS AND EXPENSES. During the term of this Agreement, the Executive shall be entitled to the following benefits and expense reimbursement: (a) The Executive shall be entitled to up to four (4) weeks of paid vacation per calendar year, in accordance with the Company's policy from time to time in effect as determined by the Board; (b) The Executive shall be entitled to participate in and/or receive all fringe benefits such as medical, disability, hospital and health insurance plans, and profit sharing, pension plan, life insurance and other plans, if any, which the Company may generally make available to its executives. The Executive shall also be included in the Directors and Officers' indemnification insurance policy, if obtained; (c) The Company shall also issue to the Executive a corporate credit card to be utilized by the Executive in connection with any additional out-of-pocket expenses which he may incur in connection with the performance of his duties. During the term of this Agreement, the Company shall, upon presentation of proper vouchers, also reimburse the Executive for all 2 reasonable expenses incurred by him directly in connection with his performance of services as an officer and Executive of the Company; (d) The Corporation shall maintain a ______ million dollar ($__,000,000) key man policy insuring against the loss of Executive's life, which shall name the Company as beneficiary; (e) The Executive shall receive as paid days off all national holidays that the Company, pursuant to established policy, recognizes and observes. (f) The Executive shall receive a car allowance of $7,200.00 per year. All other expenses of maintaining a vehicle will be born by the Executive except to the extent that mileage shall be reimbursed for business trips of greater than 25 miles per trip. 6. DISABILITY AND DEATH. (a) DISABILITY - If, during the term of this Agreement, the Executive becomes so disabled or incapacitated by reason of any physical or mental illness so as to be unable to perform the services required of him pursuant to this Agreement for a continuous period of four (4) months, or for an aggregate of six (6) months during any consecutive twelve (12) month period, then the Company may, upon 30 days' written notice to the Executive, terminate this Agreement. The Company shall purchase temporary and permanent disability insurance on the Executive. Payments made under such disability policy or policies shall not affect any other payments made to the Executive. (b) DEATH - This Agreement shall automatically terminate upon and as of the date of death of the Executive at any time during the term of this Agreement. Notwithstanding the termination of this Agreement by reason of the Executive's death, the Company shall pay to the Executive's estate his Base Salary, and shall continue family medical benefits coverage for the Executive's family, then in effect for a period of one (1) year following the date of such termination, such payment to be made in one lump sum no later than 3 months following the date of death. 7. COVENANTS AND RESTRICTIONS. (a) For a period of one (1) year following the termination of this Agreement (the "Non-Compete Period"), the Executive shall not, directly or indirectly, engage in, own, manage, operate, assist, join or control, or participate in the ownership, management, operation or control of any Restricted Enterprise (other than the Company or its affiliates), which engages or plans to engage in a Restricted Enterprise anywhere in the United States, whether as a director, officer, executive, agent, consultant, shareholder, partner, owner, independent contractor or otherwise. Notwithstanding the foregoing, these restrictions shall not prevent the Executive from earning his livelihood during the Non-Compete Period. As used herein, a "Restricted Enterprise" shall be any activity that competes with the business of the Company, including the business of Intrex, in any line of business that constitutes 5% or more of the net sales of the Company or Intrex on the date of termination of this Agreement. Notwithstanding the foregoing, the provisions of this Section 7(a) shall not apply if Executive's employment is terminated pursuant to Section 11(b) or Section 12 of this Agreement. 3 (b) The Executive agrees that he shall not divulge to others, nor shall he use to the detriment of the Company or in any business competitive with or similar to any business engaged in by the Company or any of its subsidiary or affiliated companies, at any time during his employment with the Company or thereafter, any Confidential Information obtained by him during the course of his employment with the Company. For the purpose of this Agreement, "Confidential Information" means any and all information developed by or for or processed by the Company or its affiliates of which the Executive has knowledge during the term of his employment that is (1) not generally known in any industry in which the Company or its affiliates does business during the Non-Compete Period or (2) not publicly available and treated as confidential. (c) During the Non-Compete Period, the Executive will neither solicit, hire or seek to solicit or hire any of the Company's personnel in any capacity whatsoever nor shall Executive induce or attempt to induce any of the Company's personnel to leave the employ of the Company to work for Executive or otherwise. 8. REMEDIES. The Executive acknowledges that his breach of any of the restrictive covenants contained in Section 7 herein may cause irreparable damage to the Company for which remedies of law would be inadequate. Accordingly, the Executive breaches or threatens to breach any of the provisions of Section 7, the Company shall be entitled to appropriate injunctive relief, including, without limitation, preliminary and permanent injunctions, in any court of competent jurisdiction, restraining Executive from taking any action prohibited hereby. This remedy shall be in addition to all other remedies available to the Company at law or equity. If any portion of Section 7 is adjudicated to be invalid or unenforceable, Section 7 shall be deemed amended to delete therefrom the points so adjudicated, such deletion to apply only with respect to the operation of Section 7 in the jurisdiction in which the adjudication is made. 9. INDEMNIFICATION. The Company hereby indemnifies and holds the Executive harmless for any and all expenses (including legal fees) or losses incurred by him in connection with the performance of his duties under this Agreement. 10. PRIOR AGREEMENTS. The Executive represents that he is not now under any written agreement, nor has he previously, at any time, entered into any written agreement with any person, firm or corporation, which would or could in any manner preclude or prevent him from giving freely and the Company receiving the exclusive benefit of his services. 11. TERMINATION PROVISIONS. (a) In addition to, and not in lieu of, the termination provisions set forth in Section 6 herein, the employment of the Executive hereunder may be terminated by the Company prior to the termination date of the initial term or any renewal term thereafter (as set forth in Section 2 hereof) for sufficient "cause," which cause is defined specifically in the event that the Executive is guilty of (i) a willful and reckless disregard to perform his duties as set forth in Section 3 herein, or (ii) willful misfeasance for which the Company is directly and adversely affected, or (iii) any act of dishonesty by the Executive bearing directly upon the Company. Termination of the Executive's employment by the Company for reckless disregard of his duties to the Company, willful misfeasance or an act of dishonesty with respect to the Company hereunder shall constitute, and is referred to elsewhere herein, as termination for "Cause." Such termination of the Executive's 4 employment hereunder for Cause shall be effective upon delivery of written notice to the Executive which notice shall be a sworn affidavit from at least two non-interested parties, setting forth with specificity the exact nature of the "cause" for which the Executive is being terminated. Upon the termination of this Agreement for "cause" as set forth in this subparagraph, the Company shall not be obligated to make any further payments hereunder to the executive. (b) Notwithstanding any provisions in this Agreement to the contrary, the Company may terminate the employment of the Executive without Cause, but in such event the Company shall be obligated to pay the Executive any and all amounts payable to the Executive pursuant to Section 4 above for the greater of (i) the remainder of the initial term or the extended term, as the case may be, of the Agreement in effect immediately prior to such termination, or (ii) one (1) year (the "Remainder Term"), and the Company shall also continue for the Remainder Term to permit the Executive to receive or participate in all fringe benefits available to him pursuant to Section 5 above; provided, however, that during the Remainder Term any amounts payable to the Executive pursuant to this Section 11(b), and any fringe benefits which he receives or in which he participates pursuant to this Section 11(b), shall be reduced by any payments or fringe benefits the Executive shall receive during the Remainder Term from any other source of employment which is unaffiliated with the Company. 12. CHANGE OF CONTROL. (a) A "change of control" shall be deemed to occur when (i) the Executive is not elected as an officer of the Company (or one of its subsidiaries or affiliates); (ii) the Company's shareholders approve (x) a merger or consolidation in which the Company is not the surviving corporation and/or which results in any reclassification or reorganization of the then outstanding Common Stock, (y) a sale of all or substantially all of the Company's assets or capital stock or (z) a plan of liquidation or dissolution of Company; (iii) the Common Stock is first purchased pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company) affecting at least 25% of the Common Stock or any other sale of at least 25% of the Common Stock to a person or group of persons who are not officers, directors or 5% shareholders of the Company on the date hereof; or (iv) there is any other material change in ownership or management of the Company after which (x) the Executive is terminated or (y) in the sole determination of the Executive, there is a significant change in the Executive's duties, responsibilities, principal location of employment, or compensation. (b) In the event a change of control occurs at any time during the term of this Agreement: (i) the Executive may, by written notice to the Company within sixty (60) days after the date of such change of control, elect to terminate his employment with the Company within sixty (60) days after such notice (the "Termination Date"). If the Executive elects to terminate 5 his employment pursuant to this Section 12, the Company shall pay the Executive, in addition to the remainder of his annual compensation, a "parachute payment," as said term is defined in Section 280G of the Internal Revenue Code of 1986, as amended, (the "Code") in an amount equal to 2.99 times the Executive's annual compensation (or such other amount then permitted by the Code), including the Base Salary, bonus compensation or other remuneration and fringe benefits, if any. This amount shall be payable by the Company to the Executive in one lump sum payment within sixty (60) days of the Termination Date. The Executive shall be responsible for payment of all income or excise taxes which may become due as a result of the Company's payment to him of any "excess parachute payments," as such phrase is defined in Section 280G of the code, and (ii) any options beneficially owned by the Executive at the time of such change in control shall immediately vest in full and shall be exercisable by the Executive at any time prior to the expiration date of the respective options. 13. ARBITRATION OF DISPUTES. All controversies, claims and disputes arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration conducted by the American Arbitration Association, in accordance with the Commercial Arbitration Rules of said Association in effect at the time of the controversy, claim or dispute. Judgment upon the award rendered by the Arbitrator (or Arbitrators) may be entered in any court having jurisdiction thereof. 14. SUCCESSORS AND ASSIGN. This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns, and upon the Executive, his heirs, executors, administrators, legatees and legal representatives. 15. NOTICE. Any notice, statement, report, request or demand required or permitted to be given by this Agreement shall be in writing, and shall be sufficient if delivered in person or if addressed and sent by certified mail, return receipt requested, to the parties of the addresses set forth above, or at such other place that either party may designate by notice in the foregoing manner to the other. 16. WAIVER. The failure of either party to insist upon the strict performance of any of the terms, conditions and provisions of this Agreement shall not be construed as a waiver or relinquishment of future compliance therewith, and said terms, conditions and provisions shall remain in full force and effect. No waiver of any term or any condition of this Agreement on the part of either party shall be effective for any purpose whatsoever unless such waiver is in writing and signed by such party. 17. MISCELLANEOUS. (a) Should any part of this Agreement, for any reason whatsoever, be declared invalid, illegal, or incapable of being enforced in whole or in part, such decision shall not affect the validity of any remaining portion, which remaining portion shall remain in full force and effect as if this Agreement had been executed with the invalid portion thereof eliminated, and it is hereby declared the intention of the parties hereto that they would have executed the remaining portion of this Agreement without including therein any portion which may for any reason be declared invalid. (b) This Agreement shall be construed and enforced in accordance with the laws 6 of the State of Nevada applicable to agreements made and performed in such State without application to the principles or conflicts of laws. (c) This Agreement and all rights hereunder are personal to the Executive and shall not be assignable, and any purported assignment in violation thereof shall be null and void. Any person, firm or corporation succeeding to the business of the Company by merger, consolidation, purchase of assets or otherwise, shall assume by contract or operation of law the obligations of the Company hereunder; provided, however, that the Company shall, notwithstanding such assumption and/or assignment, remain liable and responsible for the fulfillment of the terms and conditions of the Agreement on the part of the Company. (d) This Agreement constitutes the entire agreement between the parties hereto with respect to the terms and conditions of the Executive's employment by the Company, as distinguished from any other contractual arrangements between the parties pertaining to or arising out of their relationship, and this Agreement supersedes and renders null and void any and all other prior oral or written agreements, understandings, or commitments pertaining to the Executive's employment by the Company. No variation hereof shall be deemed valid unless in writing and signed by the parties hereto, and no discharge of terms hereof shall be deemed valid unless by full performance by the parties hereto or by a writing signed by the parties hereto. No waiver by either party of any provision or condition of this Agreement by him or it to be performed shall be deemed a waiver of similar or dissimilar provisions and conditions at the same time or any prior or subsequent time. (e) The heading of the paragraphs herein are inserted for convenience and shall not affect any interpretation of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first written above. "EXECUTIVE" "COMPANY" FIBERCHEM, INC. /s/ PETER J. LAGERGREN By: /s/ MELVIN W. PELLEY - ---------------------------------- -------------------------------------- Name: Peter J. Lagergren Name: Melvin W. Pelley Title: CFO 7 EX-10.24 8 a2028934zex-10_24.txt EXHIBIT 10.24 EXHIBIT 10.24 EMPLOYMENT AND NON-COMPETITION AGREEMENT AGREEMENT entered into this 27th day of JULY 2000, by and between FiberChem, Inc., a Delaware corporation, with its principal place of business at 1181 Grier Drive, Suite B, Las Vegas, Nevada 89119 (the "Company") and BRIAN A. O'NEIL, residing at 1102 - 1425 WEST 6TH AVENUE, VANCOUVER, BRITISH COLUMBIA V6G 4H5 (the "Executive"). WITNESSETH: WHEREAS, the Company wishes to employ the Executive in the principal capacity of VICE PRESIDENT OPERATIONS of FIBERCHEM, INC. upon the terms and conditions contained herein; WHEREAS, the Executive is desirous of employment with the Company and is willing to accept such employment for the inducements and upon the terms and conditions contained herein; and WHEREAS, the Company has bargained, in connection with Executive's employment and in connection with the transactions contemplated by the Amended Arrangement Agreement dated as of May 26, 2000, between the Company and Intrex Data Communications Corp. ("Intrex"), of which Executive is a principal shareholder, for a covenant by the Executive not to compete with the Company's business. NOW, THEREFORE, in consideration of the mutual premises and agreements contained herein and for other good and valuable consideration by each of the parties, the parties hereby agree as follows: 1. EMPLOYMENT. The Company hereby employs the Executive and the Executive hereby accepts employment upon the terms and conditions set forth herein. 2. TERM. The term of this Agreement shall commence on the date hereof and shall continue for an initial term of one (1) year; provided, however, that the term of this Agreement shall be automatically continued and extended, on the same terms and conditions as then in effect hereunder, for additional consecutive twelve month periods commencing upon such termination date, unless at least thirty (30) days before the date of termination of the initial term of this Agreement or of any such extended term, the Company shall give the Executive, or the Executive shall give the Company, notice in writing electing to terminate this Agreement as of such termination date. 3. DUTIES. (a) During the term of this Agreement, the Executive shall serve the Company in an executive capacity and shall perform such duties as are determined from time to time by the Company's Board of Directors. Unless prevented by death or disability, the Executive shall devote his full business time, allowing for vacations and national holidays, as set forth in Sections 5(a) and (e) hereof, and illnesses, exclusively to the business and affairs of the Company, and shall use his best efforts, skill and abilities to promote its interests. Nothing herein contained shall be construed as preventing the Executive from purchasing securities in any publicly held entity, if such purchases 1 shall not result in his owning beneficially 2% or more of the equity securities of such company, provided such investment is not made in a company in competition with the Company. (b) It is hereby acknowledged that the Board of Directors of the Company has elected the Executive to serve as Vice President - Operations of FiberChem, Inc., and the Company hereby agrees to use its best efforts to have the Executive continue to serve as Vice President - Operations of FiberChem, Inc. during the term of this Agreement. The precise services of the Executive may be extended or curtailed from time to time at the direction of the Company's Board of Directors. 4. COMPENSATION. For the services rendered by the Executive hereunder, the Company shall pay and the Executive shall accept the following compensation: (a) From the commencement of the term hereof through September 30, 2000, the Executive shall receive a base annual salary of US Dollars, One Hundred Twenty-Five Thousand dollars ($125,000) (the "Base Salary") which Base Salary shall be earned and shall be payable at such intervals not less frequently than monthly, in equal installments, and otherwise in such manner as is consistent with the Company's normal practice for remuneration of executives; (b) The Board of Directors shall review the Executive's base salary on each of the anniversary dates of the execution of this agreement in order to determine whether the Executive's salary should receive an upward adjustment; (c) The Executive shall be entitled to bonus compensation during the term hereof, as determined at the discretion of the Board of Directors of the Company; (d) The Executive's salary shall be payable subject to such deductions as are then required by law and such further deductions as may be agreed to by the Executive, in accordance with the Company's prevailing salary payroll practices. 5. BENEFITS AND EXPENSES. During the term of this Agreement, the Executive shall be entitled to the following benefits and expense reimbursement: (a) The Executive shall be entitled to up to four (4) weeks of paid vacation per calendar year, in accordance with the Company's policy from time to time in effect as determined by the Board; (b) The Executive shall be entitled to participate in and/or receive all fringe benefits such as medical, disability, hospital and health insurance plans, and profit sharing, pension plan, life insurance and other plans, if any, which the Company may generally make available to its executives. The Executive shall also be included in the Directors and Officers' indemnification insurance policy, if obtained; (c) The Company shall also issue to the Executive a corporate credit card to be utilized by the Executive in connection with any additional out-of-pocket expenses which he may incur in connection with the performance of his duties. During the term of this Agreement, the Company shall, upon presentation of proper vouchers, also reimburse the Executive for all 2 reasonable expenses incurred by him directly in connection with his performance of services as an officer and Executive of the Company; (d) The Corporation shall maintain a ______ million dollar ($__,000,000) key man policy insuring against the loss of Executive's life, which shall name the Company as beneficiary; (e) The Executive shall receive as paid days off all national holidays that the Company, pursuant to established policy, recognizes and observes. (f) The Executive shall receive a car allowance of $7,200.00 per year. All other expenses of maintaining a vehicle will be born by the Executive except to the extent that mileage shall be reimbursed for business trips of greater than 25 miles per trip. 6. DISABILITY AND DEATH. (a) DISABILITY - If, during the term of this Agreement, the Executive becomes so disabled or incapacitated by reason of any physical or mental illness so as to be unable to perform the services required of him pursuant to this Agreement for a continuous period of four (4) months, or for an aggregate of six (6) months during any consecutive twelve (12) month period, then the Company may, upon 30 days' written notice to the Executive, terminate this Agreement. The Company shall purchase temporary and permanent disability insurance on the Executive. Payments made under such disability policy or policies shall not affect any other payments made to the Executive. (b) DEATH - This Agreement shall automatically terminate upon and as of the date of death of the Executive at any time during the term of this Agreement. Notwithstanding the termination of this Agreement by reason of the Executive's death, the Company shall pay to the Executive's estate his Base Salary, and shall continue family medical benefits coverage for the Executive's family, then in effect for a period of one (1) year following the date of such termination, such payment to be made in one lump sum no later than 3 months following the date of death. 7. COVENANTS AND RESTRICTIONS. (a) For a period of one (1) year following the termination of this Agreement (the "Non-Compete Period"), the Executive shall not, directly or indirectly, engage in, own, manage, operate, assist, join or control, or participate in the ownership, management, operation or control of any Restricted Enterprise (other than the Company or its affiliates), which engages or plans to engage in a Restricted Enterprise anywhere in the United States, whether as a director, officer, executive, agent, consultant, shareholder, partner, owner, independent contractor or otherwise. Notwithstanding the foregoing, these restrictions shall not prevent the Executive from earning his livelihood during the Non-Compete Period. As used herein, a "Restricted Enterprise" shall be any activity that competes with the business of the Company, including the business of Intrex, in any line of business that constitutes 5% or more of the net sales of the Company or Intrex on the date of termination of this Agreement. Notwithstanding the foregoing, the provisions of this Section 7(a) shall not apply if Executive's employment is terminated pursuant to Section 11(b) or Section 12 of this Agreement. 3 (b) The Executive agrees that he shall not divulge to others, nor shall he use to the detriment of the Company or in any business competitive with or similar to any business engaged in by the Company or any of its subsidiary or affiliated companies, at any time during his employment with the Company or thereafter, any Confidential Information obtained by him during the course of his employment with the Company. For the purpose of this Agreement, "Confidential Information" means any and all information developed by or for or processed by the Company or its affiliates of which the Executive has knowledge during the term of his employment that is (1) not generally known in any industry in which the Company or its affiliates does business during the Non-Compete Period or (2) not publicly available and treated as confidential. (c) During the Non-Compete Period, the Executive will neither solicit, hire or seek to solicit or hire any of the Company's personnel in any capacity whatsoever nor shall Executive induce or attempt to induce any of the Company's personnel to leave the employ of the Company to work for Executive or otherwise. 8. REMEDIES. The Executive acknowledges that his breach of any of the restrictive covenants contained in Section 7 herein may cause irreparable damage to the Company for which remedies of law would be inadequate. Accordingly, the Executive breaches or threatens to breach any of the provisions of Section 7, the Company shall be entitled to appropriate injunctive relief, including, without limitation, preliminary and permanent injunctions, in any court of competent jurisdiction, restraining Executive from taking any action prohibited hereby. This remedy shall be in addition to all other remedies available to the Company at law or equity. If any portion of Section 7 is adjudicated to be invalid or unenforceable, Section 7 shall be deemed amended to delete therefrom the points so adjudicated, such deletion to apply only with respect to the operation of Section 7 in the jurisdiction in which the adjudication is made. 9. INDEMNIFICATION. The Company hereby indemnifies and holds the Executive harmless for any and all expenses (including legal fees) or losses incurred by him in connection with the performance of his duties under this Agreement. 10. PRIOR AGREEMENTS. The Executive represents that he is not now under any written agreement, nor has he previously, at any time, entered into any written agreement with any person, firm or corporation, which would or could in any manner preclude or prevent him from giving freely and the Company receiving the exclusive benefit of his services. 11. TERMINATION PROVISIONS. (a) In addition to, and not in lieu of, the termination provisions set forth in Section 6 herein, the employment of the Executive hereunder may be terminated by the Company prior to the termination date of the initial term or any renewal term thereafter (as set forth in Section 2 hereof) for sufficient "cause," which cause is defined specifically in the event that the Executive is guilty of (i) a willful and reckless disregard to perform his duties as set forth in Section 3 herein, or (ii) willful misfeasance for which the Company is directly and adversely affected, or (iii) any act of dishonesty by the Executive bearing directly upon the Company. Termination of the Executive's employment by the Company for reckless disregard of his duties to the Company, willful misfeasance or an act of dishonesty with respect to the Company hereunder shall constitute, and is referred to elsewhere herein, as termination for "Cause." Such termination of the Executive's 4 employment hereunder for Cause shall be effective upon delivery of written notice to the Executive which notice shall be a sworn affidavit from at least two non-interested parties, setting forth with specificity the exact nature of the "cause" for which the Executive is being terminated. Upon the termination of this Agreement for "cause" as set forth in this subparagraph, the Company shall not be obligated to make any further payments hereunder to the executive. (b) Notwithstanding any provisions in this Agreement to the contrary, the Company may terminate the employment of the Executive without Cause, but in such event the Company shall be obligated to pay the Executive any and all amounts payable to the Executive pursuant to Section 4 above for the greater of (i) the remainder of the initial term or the extended term, as the case may be, of the Agreement in effect immediately prior to such termination, or (ii) one (1) year (the "Remainder Term"), and the Company shall also continue for the Remainder Term to permit the Executive to receive or participate in all fringe benefits available to him pursuant to Section 5 above; provided, however, that during the Remainder Term any amounts payable to the Executive pursuant to this Section 11(b), and any fringe benefits which he receives or in which he participates pursuant to this Section 11(b), shall be reduced by any payments or fringe benefits the Executive shall receive during the Remainder Term from any other source of employment which is unaffiliated with the Company. 12. CHANGE OF CONTROL. (a) A "change of control" shall be deemed to occur when (i) the Executive is not elected as an officer of the Company (or one of its subsidiaries or affiliates); (ii) the Company's shareholders approve (x) a merger or consolidation in which the Company is not the surviving corporation and/or which results in any reclassification or reorganization of the then outstanding Common Stock, (y) a sale of all or substantially all of the Company's assets or capital stock or (z) a plan of liquidation or dissolution of Company; (iii) the Common Stock is first purchased pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company) affecting at least 25% of the Common Stock or any other sale of at least 25% of the Common Stock to a person or group of persons who are not officers, directors or 5% shareholders of the Company on the date hereof; or (iv) there is any other material change in ownership or management of the Company after which (x) the Executive is terminated or (y) in the sole determination of the Executive, there is a significant change in the Executive's duties, responsibilities, principal location of employment, or compensation. (b) In the event a change of control occurs at any time during the term of this Agreement: (i) the Executive may, by written notice to the Company within sixty (60) days after the date of such change of control, elect to terminate his employment with the Company within sixty (60) days after such notice (the "Termination Date"). If the Executive elects to terminate 5 his employment pursuant to this Section 12, the Company shall pay the Executive, in addition to the remainder of his annual compensation, a "parachute payment," as said term is defined in Section 280G of the Internal Revenue Code of 1986, as amended, (the "Code") in an amount equal to 2.99 times the Executive's annual compensation (or such other amount then permitted by the Code), including the Base Salary, bonus compensation or other remuneration and fringe benefits, if any. This amount shall be payable by the Company to the Executive in one lump sum payment within sixty (60) days of the Termination Date. The Executive shall be responsible for payment of all income or excise taxes which may become due as a result of the Company's payment to him of any "excess parachute payments," as such phrase is defined in Section 280G of the code, and (ii) any options beneficially owned by the Executive at the time of such change in control shall immediately vest in full and shall be exercisable by the Executive at any time prior to the expiration date of the respective options. 13. ARBITRATION OF DISPUTES. All controversies, claims and disputes arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration conducted by the American Arbitration Association, in accordance with the Commercial Arbitration Rules of said Association in effect at the time of the controversy, claim or dispute. Judgment upon the award rendered by the Arbitrator (or Arbitrators) may be entered in any court having jurisdiction thereof. 14. SUCCESSORS AND ASSIGN. This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns, and upon the Executive, his heirs, executors, administrators, legatees and legal representatives. 15. NOTICE. Any notice, statement, report, request or demand required or permitted to be given by this Agreement shall be in writing, and shall be sufficient if delivered in person or if addressed and sent by certified mail, return receipt requested, to the parties of the addresses set forth above, or at such other place that either party may designate by notice in the foregoing manner to the other. 16. WAIVER. The failure of either party to insist upon the strict performance of any of the terms, conditions and provisions of this Agreement shall not be construed as a waiver or relinquishment of future compliance therewith, and said terms, conditions and provisions shall remain in full force and effect. No waiver of any term or any condition of this Agreement on the part of either party shall be effective for any purpose whatsoever unless such waiver is in writing and signed by such party. 17. MISCELLANEOUS. (a) Should any part of this Agreement, for any reason whatsoever, be declared invalid, illegal, or incapable of being enforced in whole or in part, such decision shall not affect the validity of any remaining portion, which remaining portion shall remain in full force and effect as if this Agreement had been executed with the invalid portion thereof eliminated, and it is hereby declared the intention of the parties hereto that they would have executed the remaining portion of this Agreement without including therein any portion which may for any reason be declared invalid. (b) This Agreement shall be construed and enforced in accordance with the laws 6 of the State of Nevada applicable to agreements made and performed in such State without application to the principles or conflicts of laws. (c) This Agreement and all rights hereunder are personal to the Executive and shall not be assignable, and any purported assignment in violation thereof shall be null and void. Any person, firm or corporation succeeding to the business of the Company by merger, consolidation, purchase of assets or otherwise, shall assume by contract or operation of law the obligations of the Company hereunder; provided, however, that the Company shall, notwithstanding such assumption and/or assignment, remain liable and responsible for the fulfillment of the terms and conditions of the Agreement on the part of the Company. (d) This Agreement constitutes the entire agreement between the parties hereto with respect to the terms and conditions of the Executive's employment by the Company, as distinguished from any other contractual arrangements between the parties pertaining to or arising out of their relationship, and this Agreement supersedes and renders null and void any and all other prior oral or written agreements, understandings, or commitments pertaining to the Executive's employment by the Company. No variation hereof shall be deemed valid unless in writing and signed by the parties hereto, and no discharge of terms hereof shall be deemed valid unless by full performance by the parties hereto or by a writing signed by the parties hereto. No waiver by either party of any provision or condition of this Agreement by him or it to be performed shall be deemed a waiver of similar or dissimilar provisions and conditions at the same time or any prior or subsequent time. (e) The heading of the paragraphs herein are inserted for convenience and shall not affect any interpretation of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first written above. "EXECUTIVE" "COMPANY" FIBERCHEM, INC. /s/ BRIAN A. O'NEIL By: /s/ MELVIN W. PELLEY - ---------------------------------- ------------------------------------ Name: Brian A. O'Neil Name: Melvin W. Pelley Title: CFO 7 EX-10.26 9 a2028934zex-10_26.txt EXHIBIT 10.26 EXHIBIT 10.26 RELEASE AND SETTLEMENT AGREEMENT This Release and Settlement Agreement ("Settlement Agreement") is made and entered into effective as of April 12, 2000, by and between Intrex Data Communications Group, Suite 1400, 1500 W. Georgia Street, Vancouver, B.C. V6G 2Z6, Canada (referred to as "Company"), and entrenet Group, LLC, 1304 Southpoint Blvd., Suite 220, Petaluma, California 94954 (referred to as "entrenet"). RECITALS A. Company and entrenet entered into an Engagement Agreement dated April 12, 1999, whereby entrenet agreed to perform certain services for Company (hereinafter referred to as the "Engagement Agreement"). B. As part of the services provided to the Company by entrenet under the Engagement Agreement, entrenet introduced FiberChem, Inc. to the Company and has advised the Company related to a merger with FiberChem, Inc. which is pending closing (hereinafter referred to as the "Merger"). C. Disputes as to the amounts due to entrenet by Company under the Engagement Agreement as well as disputes regarding Convertible Notes and warrants for the acquisition of stock in Company pursuant to the Engagement have arisen between Company, and entrenet (the "Disputes"). D. The purpose of this Settlement Agreement is to resolve the disputes between the Company and Entrenet and between Entrenet & the company E. The Settlement Agreement allows the parties to avoid substantial expenditures, the burden of further negotiations, and the likelihood of arbitration or litigation, all on the terms and conditions set forth below. AGREEMENT NOW, THEREFORE, in consideration of the payments, mutual covenants, warranties and representations set forth below, the parties hereto do hereby agree to settle the Disputes among them on the following terms and conditions: 1. SETTLEMENT SUBJECT TO THE COMPLETION OF MERGER. This Settlement Agreement shall not become effective and the Engagement Agreement shall remain in effect unless and until the consummation of the Merger which is currently pending. 2. ACKNOWLEDGED AMOUNT OWED. The parties acknowledge and agree that upon the completion of the Merger the entire amount due under the Engagement Agreement from Company to entrenet is $3,557.10 in cash, 3,000,000 shares of FiberChem, Inc. Common Stock, a 10% Subordinated Convertible Note in the amount of $126,500 ($115,000 principal plus interest of $11,500 through April 11, 2000) convertible into FiberChem, Inc. Common Stock at a conversion price of $0.185 per share, and a four year Warrant to purchase 960,000 shares of FiberChem, Inc. Common Stock at the price of $0.185 per share (collectively, the "Debt"). Payment of the Debt will result in full payment and full satisfaction of all amounts and obligations due entrenet from Company under the Engagement Agreement. 3. TERMINATION OF ENGAGEMENT AGREEMENT. Upon consummation of the Merger and payment of the Debt described in paragraph 2 to entrenet or its assigns, the Engagement Agreement shall be deemed terminated and void effective as of the Merger date. Thereafter, no party shall have any further obligation or liability, whether accrued or potentially to accrue under the Engagement Agreement, including but not limited to any further obligation by Company to entrenet or its affiliates for (i) the payment of any monies to entrenet under the Engagement Agreement or (ii) the issuance of any Company equity. 4. MUTUAL RELEASE. Except for the provisions of this Settlement Agreement, effective as of the Merger date, all parties to this Setttlement Agreement on their own behalf and on behalf of their respective representatives, agents, servants, employees, heirs, successors, administrators, executors, attorneys, co-partners, co-venturers, insurers, stockholders, predecessors, officers, directors, shareholders and assigns, hereby forever releases and discharges all other parties to this Agreement and each of their respective representatives, agents, servants, employees, officers, administrators, executors, co-partners, co-venturers, directors, shareholders, partners, heirs, successors, assigns, insurers, predecessors, and attorneys of and from any and all present and future obligations (accrued or unaccrued), claims, demands, actions, causes of actions, debts, liabilities, agreements, or losses of any type, whether known or unknown, suspected or unsuspected, fixed or contingent, which have arisen or may hereafter arise out of or are in any way connected with any of the following: any claim to monies owed by or equity ownership or rights to acquire equity ownership in Company, the Engagement Agreement, and the Disputes (collectively, the "Released Claims"). 5. NO DISPARAGEMENT AND COVENANT NOT TO SUE. All parties to this Agreement shall refrain from making any public statements or statements to third parties which demean any of the other parties to this Agreement or which call into question the ethics or competence of any of the other parties to this Agreement. All parties to this Agreement covenant and agree never to commence, voluntarily aid in any way or prosecute or participate in any way in any action or proceeding based upon the Released Claims. If any such action or proceeding is commenced, this Settlement Agreement may be pleaded as a full and complete defense thereto. 6. SECTION 1542. All parties to this Agreement agree that the waivers and releases provided for in this Settlement Agreement shall be effective as a full and final release of and from all matters set forth in this Settlement Agreement, and, in furtherance of this intention, each party hereby acknowledges and agrees that it is familiar with and has been advised by legal counsel concerning the legal effect of California Civil Code Section 1542, which provides as follows: A general release does not extend to claims that the creditor does not know or suspect to exist in his favor at the time of executing this release, which if known by him, must have materially affected his settlement to debtor. 7. ADVICE OF COUNSEL. All parties to this Settlement Agreement being aware of, and having been advised by legal counsel as to the significance and legal effect of Section 1542 of the California Civil Code, hereby expressly waives and relinquishes any and all rights and benefits it may have thereunder or under any other statute or common law principle of similar effect with respect to the waiver and release provided for in this Settlement Agreement. 2 8. UNKNOWN FACTS. All parties to this Settlement Agreement hereby further acknowledge that they are aware that they may hereafter discover facts in addition to or different from those which they now know or believe to be true with respect to the subject matter of this Settlement Agreement, but they agree that it is each party's intention fully, finally, and forever to settle and release all of the matters which are the subject of the waiver and release provided for herein, notwithstanding the discovery hereafter of any additional or different facts existing as of the date of this Settlement Agreement. 9. AFFIRMATIVE COVENANTS. Upon execution of this Settlement Agreement by all parties, Company shall deliver $3,557.10 in cash to entrenet and upon consummation of the Merger the Company shall deliver to entrenet or its assigns the remainder of the Debt as described in Paragraph 2, collectively as full payment and satisfaction for all obligations under the Engagement Agreement. 10. WARRANTIES AND REPRESENTATIONS. Each of the parties hereto represents and warrants that: a. It has the right and authority to enter into and execute this Settlement Agreement; b. It has not sold, assigned, transferred, conveyed, hypothecated, encumbered or otherwise disposed of any of its rights hereunder; c. It has been represented by independent legal counsel of its own choice in connection with the negotiation and execution of this Settlement Agreement and has had adequate opportunity to undertake whatever due diligence or investigation it deemed necessary to enter into this Settlement Agreement; and d. It has not commenced any litigation pending with respect to the facts, circumstances, matters or events which are the subject matter hereof except as expressly disclosed herein, and it has not pledged said rights as security for the performance of any obligation or otherwise encumbered said rights. 11. NO ADMISSION OF LIABILITY. Nothing in this Settlement Agreement constitutes an admission of liability, responsibility or the merit or lack of merit of any claim or defense on the part of entrenet or the Company. 12. MISCELLANEOUS. a. ADDITIONAL DOCUMENTS. Each of the parties agrees to execute and deliver, at the request of the other parties, any and all other documents or other written instruments as may be reasonably necessary to effectuate this Settlement Agreement. b. APPLICABLE LAW. This Settlement Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts between California residents entered into and to be performed entirely within the State of California. c. ATTORNEYS' FEES COSTS/BREACHES. In the event either party hereto engages the services of an attorney to bring suit to enforce, interpret, or otherwise construe the whole or any part of this Agreement, or for damages on account of any breach of covenant contained herein, or to quiet title, or to enforce any other claim or cause of action arising 3 out of the circumstances surrounding the execution of this Agreement, the prevailing party in any such litigation shall be entitled to recover from the other, reasonable attorneys fees and costs incurred therein as part of any judgment awarded by the court in which such litigation is determined. d. COUNTERPARTS. This Settlement Agreement may be executed in separate counterparts, each of which may be executed by less than all of the parties, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. e. DESCRIPTIVE HEADINGS. The headings used herein are descriptive only and for the convenience of identifying provisions, and are not determinative of the meaning or effect of any such provisions. f. ENTIRE AGREEMENT. This Settlement Agreement constitutes the entire agreement and understanding between the parties with respect to the subject matters herein and therein, and shall supersede and replace any prior agreements and understandings, whether oral or written, by and among them with respect to such matters. The provisions of this Settlement Agreement may be waived, altered, amended or repealed in whole or in part only upon the written consent of all parties to this Settlement Agreement. g. NOTICES. All notices, requests, demands, instructions or other communications required or permitted to be given under this Settlement Agreement shall be in writing and directed to the parties at the address set forth below. Such communications shall be deemed to have been received upon delivery, if delivered personally. If given by prepaid telegram, or if mailed first-class, postage prepaid, or if mailed by registered or certified mail, return receipt requested, such communications shall be deemed to have been received seventy-two (72) hours after such dispatch. Either party hereto may change the address to which such communications are to be directed by giving written notice to the other party hereto of such change in the manner above provided. IF FOR COMPANY: Intrex Data Communications Group David S. Peachey Chief Executive Officer Suite 1400, 1500 W. Georgia Street Vancouver, B.C. V6G 2Z6 FAX - 604-682-4041 EMAIL - dpeachey@intrexsat.com IF FOR FIBERCHEM: FiberChem, Inc. Geoffrey F. Hewitt Chief Executive Officer 1181 Grier Drive Building B Las Vegas, NV 89119 FAX - (702) 361-9652 Email - Gfhatfci@aol.com IF FOR ENTRENET: entrenet Group, LLC John Billington Chief Legal & Tax Officer 1304 Southpoint Blvd., Suite 220 Santa Rosa, CA 94954 Fax 707-781-2514 Email john@entre.net h. SEVERABILITY. If for any reason any provision of this Settlement Agreement shall be determined to be invalid or inoperative, the validity and effect of the other provisions hereof shall not be affected thereby, provided that no such severability shall be effective if it causes a material detriment to any party. i. SUCCESSORS AND ASSIGNS. Subject to any provisions herein with regard to assignment, all covenants and agreements herein shall bind and inure to the benefit of the respective heirs, executors, administrators, successors and assigns of the parties hereto. 4 j. SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive the execution and delivery at this Settlement Agreement. k. CONSTRUCTION. The parties hereto and their counsel have reviewed this Settlement Agreement and specifically agree that any rule of construction, to the effect that ambiguities are to be resolved against the drafting party, shall not apply to the interpretation of this Settlement Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Settlement Agreement effective as of the date first written above. CAUTION: THIS AGREEMENT CONTAINS A RELEASE. READ BEFORE SIGNING. INTREX DATA COMMUNICATIONS GROUP ENTRENET GROUP, LLC By: /s/ DAVID S. PEACHEY By: /s/ JOHN BILLINGTON ------------------------------- --------------------------------- David S. Peachey John Billington Chief Executive Officer Chief Legal and Tax Officer Date Executed: May 30, 2000 Date Executed: May 25, 2000 -------------------- ---------------------- FIBERCHEM, INC. By: /s/ GEOFFREY F. HEWITT ------------------------------- Geoffrey F. Hewitt Chief Executive Officer Date Executed: May 31, 2000 -------------------- 5 EX-10.27 10 a2028934zex-10_27.txt EXHIBIT 10.27 EXHIBIT 10.27 [CONTINENTAL CAPITAL & EQUITY CORPORATION LETTERHEAD] MARKET ACCESS PROGRAM MARKETING AGREEMENT THIS AGREEMENT is made and entered into this 2nd day of October 2000, by and between CONTINENTAL CAPITAL & EQUITY CORPORATION, located at 195 Wekiva Springs Road, Suite 200, Longwood, FL 32779, (hereinafter referred to as "CCEC") and FIBERCHEM, INC. DBA DECISIONLINK, INC. located at 1181 Grier Dr - Bldg B LasVegas, NV 89119 (hereinafter referred to as the "Company"). WITNESSETH: For and consideration of the mutual promises and covenants contained herein, the parties hereto agree as follows: 1. ENGAGEMENT. Company hereby hires and employs CCEC as an independent contractor; and CCEC does hereby accept its position as an independent contractor to the Company upon the terms and conditions hereinafter set forth. 2. TERM. The term of this Agreement shall be for twelve (12) months. 3. DUTIES AND OBLIGATIONS OF CCEC. CCEC shall have the following duties and obligations under this Agreement: 3.1 Establish a financial public relations methodology designed to increase awareness of the Company within the investment community. 3.2 Assist the Company in the implementation of its business plan and in accurately disseminating information to the marketplace, which information has been provided by the Company. 3.3 To expose the Company to a broad network of active retail brokers, financial analysts, institutional fund managers, private investors and active financial newsletter writers. 3.4 Prepare Company due diligence reports, corporate profile and fact sheets. 3.5 Conduct a tele-marketing campaign to the investment community and brokerage community and conduct tele-conferences with a CCEC moderator, Company executive(s), brokers, financial analysts, fund managers and other interested participants. 3.6 Feature the Company's profile or fact sheet on CCEC's web site(s). 3.7 Assist the Company in the preparation of all press releases and coordinate the releases via a Company paid account with PR NewsWire or BusinessWire. 3.8 Create, build and continually enhance a fax database of all brokers, investors, analysts and media contacts who have expressed an interest in receiving on-going information on the Company. Assist the Company in setting up an account with a fax broadcasting agency to manage the actual broadcasting in the event Company does not have this capability in-house. Further, CCEC will, at its election, mass-fax broadcast select releases to its extensive network of U.S. stockbrokers, analysts and institutional investors. 3.9 E-mail press releases, corporate announcements, broker updates, Company news developments to CCEC's e-mail database of brokers, institutional fund managers, financial analysts, and industry professionals. Page 1 of 5 3.10 Serve as the Company's external publicist and endeavor to obtain media coverage on the Company in both trade and industry press, on local and national radio and/or TV programming, in subscription-based financial newsletters, and on the worldwide web. 3.11 At the Company's request, strive to obtain the Company analyst coverage and/or investment banking sponsorship. 3.12 Introduce Company to various fund managers and institutional investors. ALL OF THE FOREGOING CCEC PREPARED DOCUMENTATION CONCERNING THE COMPANY, INCLUDING, BUT NOT LIMITED TO, DUE DILIGENCE REPORTS, CORPORATE PROFILE, FACT SHEETS, AND QUARTERLY NEWSLETTERS, SHALL BE PREPARED BY CCEC FROM MATERIALS SUPPLIED TO IT BY THE COMPANY AND SHALL BE APPROVED BY THE COMPANY PRIOR TO DISSEMINATION BY CCEC. 4. CCEC'S COMPENSATION. Upon the execution of this Agreement, Company hereby covenants and agrees to pay CCEC as follows: 4.1 Four Hundred Thousand (400,000) restricted shares of the Company's common stock due upon execution of the agreement. Said shares shall be registered for free trade status by the Company upon execution of this Agreement and Company agrees that registration of these shares will be effective within ninety days from the execution date of this Agreement. Otherwise, Company agrees to pay CCEC a cash penalty of $10,000 per month or partial month that such registration is not effective, unless failure is beyond the reasonable control of the Company. 4.2 An option to purchase Two Hundred Thousand (200,000) shares of the Company's common stock as follows: One Hundred Thousand (100,000) shares at a per share price of ($0.50) and One Hundred Thousand (100,000) SHARES AT A PER SHARE PRICE OF ($0.75) The options shall expire 24 months from the day the Registration Statement registering the underlying shares of the option is deemed effective. The Company agrees to issue piggy-back registration rights to the Common Shares referenced above for resale by CCEC pursuant to its filing of an SEC Registration Statement on Form S-3, or such other applicable form as may be appropriate. The Company agrees to initiate a Registration Statement at Company's cost to register the shares underlying the options, if such shares are "in the money," within thirty (30) days of CCEC's written request to do so. The Company shall use its best efforts to make the Registration effective on a timely basis. 4.3 CCEC recognizes that the acquisition of the Company shares involve a high degree of risk in that (i) an investment in the Company is highly speculative and only investors who can afford the loss of their entire investment should consider investing in the Company; (ii) they may not be able to liquidate their investment; (iii) transferability of the shares is extremely limited; and (iv) CCEC could suffer the loss of their entire investment. CCEC is acquiring the Company securities for its own account, for investment, and not for re-sale unless the re-sale is covered by an effective registration statement or an available exemption from registration provision of the Securities Act of 1933, as amended. 5. CCEC'S EXPENSES AND COSTS. Company shall pay all reasonable costs and expenses incurred by CCEC, its directors, officers, employees and agents, in carrying out its duties and obligations pursuant to the provisions of this Agreement, excluding CCEC's general and administrative expenses and costs, but including and not limited to the following costs and expenses; provided all costs and expense items in excess of $500.00 (Five Hundred U.S. Dollars) must be approved by the Company in writing prior to CCEC's incurrence of the same: 5.1 Travel expenses, including but not limited to transportation, lodging and food expenses, when such travel is conducted on behalf of the Company. 5.2 Seminars, expositions, money and investment shows. 5.3 Radio and television time and print media advertising costs, when applicable. 5.4 Subcontract fees and costs incurred in preparation of research reports, when applicable. 5.5 Cost of on-site due diligence meetings, if applicable. Page 2 of 5 5.6 Printing and publication costs of brochures and marketing materials which are not supplied by the Company. 5.7 Corporate web site development costs. 5.8 Printing and publication costs of Company annual reports, quarterly reports, and/or other shareholder communication collateral material which are not supplied by Company. 5.9 Creation, production, and mailing of Inside Wall Street lead generation pieces and associated fulfillment material and services, i.e. corporate profiles, presidential cover letters, pre-printed envelopes, 1-800 numbers, postage, list selection, lead distribution, etc., at an established price of $2.00 per Inside Wall Street piece mailed, with a minimum of 25,000 pieces. 5.10 Cost of mass-fax broadcasts as referred to in Section 3.8. 5.11 Company shall pay to CCEC reasonable costs and expenses incurred within ten (10) days of receipt of CCEC's written invoice for the same, excluding any costs associated with material and services defined in Section 5.9 above, which are due and payable in advance of material production. 6. COMPANY'S DUTIES AND OBLIGATIONS. Company shall have the following duties and obligations under this Agreement: 6.1 Cooperate fully and timely with CCEC so as to enable CCEC to perform its obligations under this Agreement. 6.2 Within ten (10) days of the date of execution of this Agreement to deliver to CCEC a complete due diligence package on the Company including all the Company's filings with the Securities and Exchange Commission within the last twelve months, the last twelve months of press releases on the Company and all other relevant materials with respect to such filings, including but not limited to corporate reports, brochures, and the like; a list of the names and addresses of all the Company's shareholders known to the Company; and a list of the brokers and market makers in the Company's securities and a list of analysts or fund managers which have been following the Company. 6.3 The Company will act diligently and promptly in reviewing materials submitted to it from time to time by CCEC and inform CCEC of any inaccuracies contained therein prior to the dissemination of such materials. 6.4 Immediately give written notice to CCEC of any change in Company's financial condition or in the nature of its business or operations which had or might have an adverse material effect on its operations, assets, properties or prospects of its business. 6.5 Immediately pay all costs and expenses incurred by CCEC under the provisions of this Agreement when presented with invoices for the same by CCEC. 6.6 Give full disclosure of all material facts concerning the Company to CCEC and update such information on a timely basis. 6.7 Promptly pay the compensation due CCEC under the provisions of this Agreement. 7. NONDISCLOSURE. Except as may be required by law, Company, its officers, directors, employees, agents and affiliates shall not disclose the contents and provisions of this Agreement to any individual or entity without CCEC's expressed written consent subject to disclosing same further to Company counsel, accountants and other persons performing investment banking, financial, or related functions for Company. 8. COMPANY'S DEFAULT. In the event of any default in the payment of CCEC's compensation to be paid to it pursuant to this Agreement, or any other charges or expenses on the Company's part to be paid or met, or any part or installment thereof, at the time and in the manner herein prescribed for the payment thereof and as when the same becomes due and payable, and such default shall continue for twenty five (25) days after CCEC's notice thereof is received by Company; in the event of any default in the performance of any of the other covenants, conditions, restrictions, agreements, or other provisions herein contained on the part of the Company to be performed, kept, complied with or abided by, and such default shall continue for twenty five (25) days after CCEC has given Company written notice thereof, or if a petition in bankruptcy is filed by the Company, or if the Company is adjudicated bankrupt, or if the Company shall compromise all its debts or assign over all its assets for the payment thereof, or if a receiver shall be appointed for the Company's property, then upon the happening of any of such events, Page 3 of 5 CCEC shall have the right, at its option, forthwith or thereafter to accelerate all compensation, costs and expenses due or coming due hereunder and to recover the same from the Company by suit or otherwise and further, to terminate this Agreement. The Company covenants and agrees to pay all reasonable attorney fees, paralegal fees, costs and expenses of CCEC, including court costs, (including such attorney fees, paralegal fees, costs and expenses incurred on appeal) if CCEC employs an attorney to collect the aforesaid amounts or to enforce other rights of CCEC provided for in this Agreement in the event of any default as set forth above and CCEC prevails in such litigation. Further, until CCEC has received the first cash payment as described above in Section 4.1, CCEC shall not be required to commence performing hereunder. 9. COMPANY'S REPRESENTATIONS AND WARRANTIES. Company represents and warrants to CCEC for the purpose of inducing CCEC to enter into and consummate this Agreement as follows: 9.1 Company has the power and authority to execute, deliver and perform this Agreement. 9.2 The execution and delivery by the Company of this Agreement have been duly and validly authorized by all requisite action by the Company. No license, consent or approval of any person is required for the Company's execution and delivery of this Agreement. 9.3 No representation or warranty by the Company in this Agreement and no information in any statement, certificate, exhibit, schedule or other document furnished, or to be furnished by the Company to CCEC pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. There is no fact which the Company has not disclosed to CCEC, in writing, or in SEC filings or press releases, which materially adversely affects, nor, so far as the Company can now reasonably foresee, may adversely affect the business, operations, prospects, properties, assets, profits or condition (financial or otherwise) of the Company. 10. LIMITATION OF CCEC LIABILITY: If CCEC fails to perform its services hereunder, its entire liability to the Company shall not exceed the lessor of (a) the amount of cash compensation CCEC has received from the Company under Section 4 of this Agreement or (b) the actual damage to the Company as a result of such non-performance. IN NO EVENT WILL CCEC BE LIABLE FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES NOR FOR ANY CLAIM AGAINST THE COMPANY BY ANY PERSON OR ENTITY ARISING FROM OR IN ANY WAY RELATED TO THIS AGREEMENT, UNLESS SUCH DAMAGES RESULT FROM THE USE, BY CCEC, OF INFORMATION NOT AUTHORIZED BY THE COMPANY. 11. MISCELLANEOUS 11.1 Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing, and shall be deemed to have been duly given when delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid to the parties hereto at their addresses indicated hereinafter. Either party may change his or its address for the purpose of this paragraph by written notice similarly given. 11.2 Entire Agreement. This Agreement represents the entire agreement between the Parties in relation to its subject matter and supersedes and voids all prior agreements between such Parties relating to such subject matter. 11.3 Amendment of Agreement. This Agreement may be altered or amended, in whole or in part, only in a writing signed by both Parties. 11.4 Waiver. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other subsequent breach or condition, whether of a like or different nature, unless such shall be signed by the person making such waiver and/or which so provides by its terms. 11.5 Captions. The captions appearing in this Agreement are inserted as a matter of convenience and for reference and in no way affect this Agreement, define, limit or describe its scope or any of its provisions. 11.6 Situs. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida. Venue shall be located in Seminole County, Florida. Page 4 of 5 11.7 Benefits. This Agreement shall inure to the benefit of and be binding upon the Parties hereto, their heirs, personal representatives, successors and assigns. 11.8 Severability. If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not in any way affect or render invalid or unenforceable any other provision of this Agreement, and this Agreement shall be carried out as if such invalid or unenforceable provision were not contained herein. 11.9 Arbitration. Except as to a monetary default by Company hereunder, any controversy, dispute or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration. Arbitration proceedings shall be conducted in accordance with the rules then prevailing of the American Arbitration Association or any successor. The award of the Arbitration shall be binding on the Parties. Judgment may be entered upon an arbitration award of in a court of competent jurisdiction and confirmed by such court. Venue for Arbitration proceedings shall be Seminole County, Florida. The costs of arbitration, reasonable attorneys' fees of the Parties, together with all other expenses, shall be paid as provided in the Arbitration award. 11.10 Currency. In all instances, references to monies used in this Agreement shall be deemed to be United States dollars. 11.11 Multiple Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of such counterparts shall constitute one (1) instrument. 12. This Agreement may be executed in counterparts and by fax transmission, each counterpart being deemed an original. IN WITNESS WHEREOF, the Parties have executed this Agreement on the day and year first above written. CONFIRMED AND AGREED ON THIS 9TH DAY OF OCTOBER 2000. --- ------- CONTINENTAL CAPITAL & EQUITY CORPORATION By: /s/ SCOTT A.B. GIBSON ------------------------------- CCEC Representative Scott A.B. Gibson ------------------------------- Print Name CONFIRMED AND AGREED ON THIS 19TH DAY OF OCTOBER 2000. ---- ------- FIBERCHEM, INC. dba DecisonLink, Inc. By: /s/ GEOFFREY F. HEWITT ------------------------------- Duly Authorized Geoffrey F. Hewitt ------------------------------- Print Name Page 5 of 5 EX-13.1 11 a2028934zex-13_1.txt EXHIBIT 13.1 U. S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------- -------- Commission file number 0-17569 ------------------- FIBERCHEM, INC. (Name of small business issuer in its charter) Delaware 84-1063897 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1181 Grier Drive, Suite B, Las Vegas, Nevada 89119 (address of principal executive offices) (Zip Code) Issuer's telephone number: (702) 361-9873 Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock, $.0001 Par Value ----------------------------------------- (Title of class) Indicate by check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO__ Indicate by check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Issuer's revenues for its most recent fiscal year: $1,957,110 The aggregate market value of the voting stock held by non-affiliates computed by reference to the last sale price of such stock on December 23, 1999 of $0.19 was $6,451,593. As of December 23, 1999, the Issuer had 40,126,538 shares of Common Stock, par value $.0001 per share, outstanding. ITEM 1. DESCRIPTION OF BUSINESS (a) BUSINESS DEVELOPMENT FiberChem, Inc. ("FiberChem," the "Company" or "FCI") was formed on April 6, 1987, under the name Tipton Industries, Inc. ("Tipton"). On December 18, 1987, Tipton acquired all of the issued and outstanding stock of FiberChem, Inc., a New Mexico corporation, for approximately 79% of Tipton's Common Shares. The transaction was accounted for as a reverse purchase of Tipton by the Company. Pursuant to stockholder approval on December 21, 1988, Tipton and FiberChem (New Mexico) were merged into the Company, a newly formed Delaware corporation, which changed its name to FiberChem, Inc. From inception through the period ended September 30, 1999, the Company and its wholly-owned subsidiary FCI Environmental, Inc. ("FCI Environmental") have operated in the same industry segment. The Company announced on December 6, 1999 that it has executed a definitive Agreement with Intrex Data Communications Corp. ("Intrex") of Vancouver, British Columbia, to combine the businesses of FiberChem and Intrex. Under the terms of the Agreement, the shareholders of each company will own an equal share of the combined company, to be renamed DecisionLink, Incorporated. Intrex is a private company and its proprietary Internet and communications technology provides customers with a real-time system for communicating data to or from remote or mobile assets using wireless, satellite or cellular data systems. A report on Form 8-K describing the Agreement was filed on December 27, 1999. This report includes forward-looking statements relating to the Company's operations that are based on Management's and third parties' current expectations, estimates and projections. These statements are not guarantees of future performances and actual results could differ materially. The statements in this report regarding FCI's proposed business combination with Intrex, the combined entity's delivery of services over the Internet and the size of the market for the combined company's services, are forward-looking statements that involve risks and uncertainties. These risks and uncertainties include, FCI's ability to complete the combination, the combined entity's ability to market its services using the two companies' technologies, the timely development and acceptance of new products, final promulgation and enforcement of regulations, the impact of competitive products and pricing, the timely funding of customer's projects, customer payments to the Company and other risks detailed from time to time in the Company's SEC reports. (b) BUSINESS OF ISSUER FiberChem develops, produces, markets and licenses its patented fiber optic chemical sensor ("FOCS-Registered Trademark-") technology which detects and monitors hydrocarbon pollution in the air, water and soil. The Company has developed a range of products and systems based on FOCS-Registered Trademark-, which provide IN SITU and continuous monitoring capabilities with real-time information. The Company also is developing a range of sensor products based on its Sensor-on-a-Chip-Registered Trademark- technology for a wide variety of environmental, consumer, commercial, industrial, automotive and military applications. Since its inception in 1987, FiberChem has invested in excess of $25 million in research and development relating to a wide range of technologies, and has focused on products for environmental monitoring and industry. During the last several years, a de-emphasis of environmental issues in Congress has resulted in delays in enactment and enforcement of the regulatory climate upon which the Company's future prospects were at least partially dependent. Several federal and state programs were not re-authorized or funded. Similar to companies in the electric vehicle or alternative fuels arenas, FiberChem found that many of its expected opportunities had evaporated, at least for the foreseeable future. Consequently, FiberChem's Management identified market segments that were driven by other forces. Notwithstanding the slowdown at the Federal level, the Company recognized that certain States represented opportunities for aboveground tank leak detection and set about getting its sensor products specified. At the same time, the phase-out of Freon-Registered Trademark- presented the Company with an opportunity to establish its technology as the preferred 2 replacement for the existing Freon-Registered Trademark-/Infrared method for measurement of total petroleum hydrocarbons (TPH) in process water streams. During this refocusing process the Company also substantially enhanced the value of its development initiatives with Texas Instruments, Inc. ("TI") for its Sensor-on-a-Chip-Registered Trademark-. By working together with the Optoelectronic Group within TI's Semiconductor Group, then with its successor company, Texas Advanced Optoelectronic Solutions, the Company has expanded the scope of the joint marketing activity in the chemical sensor marketplace. The short-term result from this process has been development work on a number of new products, including a gasoline vapor sensor, a carbon monoxide sensor, a flammable gas sensor, a breath alcohol sensor and sensors for the detection of toxic gasses. See "Business-Sensors." PRODUCTS AND APPLICATIONS The PetroSense-Registered Trademark- product line includes a continuous monitoring system ("CMS-5000") designed for IN-SITU measurement of petroleum hydrocarbons in a wide variety of applications including leak detection at aboveground storage tank ("AST") and underground storage tank ("UST") sites, monitoring of soil and water remediation processes and fence line monitoring at contaminated sites. A CMS system typically sells for between $15,000 and $50,000. The CMS-4000 can be used to continuously monitor hydrocarbon levels in applications such as storm water and waste water around industrial facilities. The CMS-4000 is available with analog outputs for use in industrial applications where some control functions need to be performed. The use of on-board modems allows both versions of the CMS to warn of alarm conditions through remote communication. Conversely, the unit itself can be interrogated remotely to provide retrieval of logged data, status and service information. This is particularly important for unmanned sites. Up to sixteen of the Company's Digital Hydrocarbon Probes ("DHPs") can be interfaced to the CMS-5000 to allow monitoring at several different locations within a site. The DHP typically sells for about $4,000. The DHP can also be used as a standalone product to interface with existing data loggers that use the environmental industry standard communications protocol (referred to as Standard Digital Interface ("SDI-12")). A second version of the DHP has been developed by the Company. This product uses the RS-485 communications protocol, allowing direct interface with computers and programmable logic controllers for other industrial applications. The OilSense-Registered Trademark--4000 was specifically developed to address the produced and process water market, both offshore and onshore. It is a version of the CMS-4000 specially developed for highly contaminated streams where there is a need for automatic cleaning of the sensor based on preprogrammed parameters. It incorporates modems for remote communication and has a 4-20 mA output for control loop purposes. The OilSense-Registered Trademark--4000 sells for $20,000 to $35,000 depending upon its hazardous area certification. The PetroSense-Registered Trademark- Portable Hydrocarbon Analyzer ("PHA-100") is a hand-held instrument using an analog hydrocarbon probe which can measure hydrocarbons in the air, soil and in or on water. The PHA-100 typically sells for about $6,900. The microprocessor in the instrument converts the data generated by the probe into a parts per million ("ppm") reading. The user can store the reading for retrieval or can print the data on an external printer after as many as 100 separate measurements are completed. Recent improvements in calibration have expanded the effective range for the PHA-100 down to the parts per billion ("ppb") range (in water) for benzene, toluene, ethyl benzene and xylene ("BTEX"), common petroleum hydrocarbon components of gasoline, diesel and jet fuel. Applications for the PHA-100 include quarterly monitoring of AST and UST sites and pipelines, the detection of contamination levels of soil and general environmental monitoring. A version of the PHA-100, known as the PHA-100W, has been developed for applications where hydrocarbons need to be monitored in water alone. The unit sells for $6,250. It is designed for applications such as breakthrough from remediation processes, monitoring of bodies of water, process water, waste water and storm water. 3 A third version of the PHA-100 is the PHA-100WL. It is specifically designed for measuring total petroleum hydrocarbons ("TPH") in produced water at offshore petroleum production platforms and is designed to imitate the operation of the infrared analyzer used in the existing Freon/Infrared method. It typically sells for $6,375. The PetroSense-Registered Trademark- Field Kit is a product that is an integral part of each of the CMS, PHA-100 and DHP. The field kits contain pre-mixed calibration solutions, manufactured to ISO 9001 standards and traceable to the National Institute of Standards and Technology standards, that are used to calibrate the hydrocarbon probes and accessories such as cleaning solutions, computer and power adapters, and disposable calibration vials and tubes for the customer's convenience. The pre-mixed standards are available at three hydrocarbon concentrations and represent continuing revenue potential for the Company. A vapor calibration procedure has been developed for soil gas applications. A field kit for the CMS-5000 contains a few months' worth of supplies and the field kit for the DHP probes contains a 30-day supply. In addition, refill kits are available to replenish each field kit on an "as needed" basis. The Company has pursued federal, state and local approvals for its products. In November 1994, the Company received Underwriters Laboratories approval for its product line in the United States and Canada. In April 1995, the Company received notification from KEMA, an authorized certification body for Europe, that its products had met their highest standard for intrinsic safety (CENELEC), and, as such, were approved for use in all hazardous environments including offshore platforms. The products have also been designed and tested to meet European Union CE Mark standards which went into effect January 1, 1996 for the European Community. Both the Company's PHA-100 and DHP have been extensively tested by Ken Wilcox Associates, Inc. ("KWA"), an independent testing laboratory, in accordance with EPA protocols. These evaluations meet the requirements of the EPA for external vapor-phase leak detection systems and liquid-phase out-of-tank product detectors. KWA also certified that the data produced by the Company's products was equivalent to the EPA's standard method for groundwater analysis. The Company's products are included in the EPA's Office of Underground Storage Tanks list of products meeting certain minimum third-party certification guidelines, both for vapor and liquid product detection. In addition, the Company has received written or verbal assurance that its products meet the requirements of 47 states. Certain states rely on the EPA list and certain others have no specific requirements. The Company's CMS-5000 product line has been third-party certified for use for AST leak detection in Florida. As a result, FCI Environmental is the only company at this time to have an AST continuous leak detection product approved for all types of sites by the Florida Department of Environmental Protection ("DEP"). An application of the FOCS-Registered Trademark- technology has been introduced to replace a Freon-Registered Trademark- extraction method of analysis currently used on offshore oil production platforms. EPA regulations require oil companies to monitor the hydrocarbon content in water returned to the ocean during the oil production process. The conventional Freon-Registered Trademark- method involves periodic sampling of produced water output and analysis of the samples in the oil production platform's laboratory. The Company's products can be used to monitor the water output continuously, thereby achieving a significant reduction in cost for the operator, both by eliminating the use of Freon-Registered Trademark- and by optimizing the usage of chemical agents used to facilitate removal of oil from produced water. Some operators see the opportunity to minimize downtime in bad weather by continuously monitoring the produced water even when the platform has been evacuated. THE TECHNOLOGY The Company's FOCS-Registered Trademark- technology, which is proprietary and patented, is at the center of the Company's products. FiberChem manufactures a probe which contains a short length (approximately 5 cm) of fiber optic cable. Commercially produced fiber optic cable is coated to keep all wavelengths of light contained. The Company treats the fiber optic cable with the FOCS-Registered Trademark- technology, modifying the cable's coating to permit a certain amount of light to be lost when it comes into contact with hydrocarbon molecules. The resulting change in light transmission is then recorded and transmitted by the probe either to one of the Company's monitoring devices (see "Products and Applications" above) or to other industry standard devices. The Company's devices measure changes in parts per million or, in some 4 instances, in lesser concentrations. Up to 16 probes can be linked together to provide a continuous monitoring system for various types of sites, including USTs, ASTs, remediation sites, pipelines and offshore oil production platforms. The FOCS-Registered Trademark- technology has been further developed through a joint venture with TI to produce Sensor-on-a-Chip-Registered Trademark-, a new generation of semiconductor-based sensor products. The market for these chip-based sensors is represented by customers in the consumer, commercial, industrial, automotive and military fields. Often development costs are partially covered by a customer in exchange for some level of exclusivity. See "Business- Sensors" for a description of chip based sensor products. The Company believes that its patents and patent applications, coupled with the trade secrets, proprietary information and experience in development provide the Company with a competitive advantage. The Company applies for certain international patent rights in addition to United States patent rights as deemed appropriate. Sensor technologies are also protected in the United States by registered trademarks. THE MARKET FiberChem's primary markets and potential markets are the petroleum production, refinery and distribution chain. Major oil companies, distributors and retailers of gasoline, diesel and aircraft fuel are important potential customers. Other important markets and customers include remediation companies, environmental consultants, shipping ports, airports and military bases together with regulatory agencies. The markets for sensors transcend the petroleum hydrocarbon marketplace, are very diverse and are addressed directly by Company personnel. The Company is not dependent on any one major customer. CUSTOMERS AND DISTRIBUTORS ABOVEGROUND STORAGE TANK MARKET The Company had a Strategic Alliance (the "Alliance") for the Aboveground Storage Tank (AST) market with Whessoe Varec, Inc. from June 30, 1996 until July 26, 1999, when the agreement was mutually terminated, as described below. The primary target for the Alliance had been the Florida AST market. On July 13, 1998, after a four year process, the State of Florida passed into law its new storage tank regulations. Under the law, the regulated community has various options for compliance. The lowest cost option for larger tanks is believed to be an internal tank liner with an external, certified, continuous leak detection device. Currently, the Company's PetroSense-Registered Trademark- product line is the only continuous leak detection device certified for use at all such sites. Compliance is required by December 31, 1999. In February 1999, Whessoe Varec and FCI targeted customer sites with over 700 tanks. These sites include coastal bulk storage, inland jobbers, industrial, military, airports, power generation and government facilities. In addition to these targeted accounts, there is a secondary market of unlined tanks which is yet to be qualified. Florida DEP held its annual conference during May 1999 in Tampa and Daytona Beach to update the tank community about its requirements for compliance by December 31, 1999 and its commitment to that compliance date. Some companies have been operating on the assumption that there would be a delay in the enforcement process, but Florida DEP remained firm in its commitment, while redefining compliance as having placed orders for approved equipment by December 31, 1999. Marathon/Ashland, Miami International Airport, Tampa Airport, Orlando Airport, West Palm Beach Airport, City of Lakeland, and Motiva (Texaco) have recently purchased FCI's PetroSense-Registered Trademark- equipment. Florida Power, GATX and Motiva (Shell) have added tanks or locations to their installed base. These orders and commitments represented over $1,000,000 in revenue to FCI. There is usually about a six to eight week delay between order and installation, and therefore full revenue recognition. Management believes that through the compliance date of December 31, 1999, (compliance now being defined as having placed orders for approved equipment by the deadline), the majority population of the regulated community which has not yet taken action to achieve compliance will be motivated to comply, with the result being significant revenues to the Company from this market through at least the third fiscal quarter of 2000. Other companies including Coastal Fuels, Petroleum Fuels (Jacksonville) and Air Kaman (Jacksonville) have also placed new orders for the Company's products. 5 OFFSHORE PRODUCED WATER MARKET For the past 15 or so years, tests to determine the TPH content of certain process water streams returned to the ocean from offshore platforms ("produced water") have been carried out by extracting water samples with Freon-Registered Trademark- and analyzing the resultant extract by infrared spectroscopy ("IR"). With the diminution of its availability and increase in its price, coupled with wide spread concern as to its threat to the Earth's ozone layer, Freon-Registered Trademark- and the Freon-Registered Trademark-/IR method are now viewed as requiring replacement. Of the various other methods currently offered, the Company believes that its FOCS-Registered Trademark- technology offers the best alternative in terms of correlation with the IR method, ease of use, features, benefits and cost and freedom from solvent use. The Company offers two different products to this marketplace. The OilSense-Registered Trademark--4000 is a continuous unit which can operate unattended. It offers a 4-20 mA output and can be interrogated and programmed remotely via modem. It operates for at least 30 days between routine service. At $20,000 to $35,000, it offers good value where manpower is at a premium. The OilSense-Registered Trademark--4000 can also be integrated into the process of treating the produced water stream to automatically optimize the use of water treatment chemicals and can continue operating where platforms are currently shut down due to adverse weather conditions. The PHA-100WL is a single measurement analyzer which directly replaces the Freon-Registered Trademark-/IR method. Its FOCS-Registered Trademark- sensor directly measures TPH in water samples, according to a simple procedure. At $6,375 it offers a direct replacement for the Freon-Registered Trademark-/IR method without the use of Freon-Registered Trademark- or other chemicals. There are about 3,500 platforms in the Gulf of Mexico and a similar number in the rest of the world, mainly in the North Sea, Middle East, South China Sea and offshore West Africa. It appears that each of these regions conforms to similar regulations. This market represents a window of opportunity that will remain open until the IRs are replaced over the next two years or so. While the development of the offshore market for the Company's OilSense-Registered Trademark--4000 and PHA-100WL continued to be slower than originally anticipated, by the end of the reporting period there were indications that the situation was improving. The combination of the lack of availability of Freon-Registered Trademark- and higher oil prices generated new orders for the Company. CNG Producing Company has placed a blanket order for portable units for twelve of its Gulf of Mexico platforms. This brings the number of customers to seventeen and the number of units to well over 60. Amoco, Spirit Energy 76 (Unocal) and Pennzoil have committed to the use of the Company's products on their platforms in the Gulf of Mexico. Spirit Energy has installed 19 PHA-100WLs and Amoco has installed the Company's OilSense-Registered Trademark--4000 and PHA-100WLs at 9 of its more than 25 sites. During December 1998, Pennzoil placed its first order for the Company's PHA-100WLs for 2 of its 15 sites. The recently reported potential link between the chemical n-hexane and the incidence of brain cancer at a now closed research laboratory in Naperville, Illinois, has brought into question the adoption by some operators of the EPA's standard reference method which proposed the use of n-hexane as a replacement for Freon-Registered Trademark- for use in reference lab environments. This would eliminate the one serious competitor to the Company's portable unit and would impact on some of the larger operators in the Gulf and elsewhere. Merger activity among the major oil companies continues to slow installations, but is not believed to have significantly affected the size of the opportunity. After the end of the reporting period, new orders were received from Amoco, Spirit Energy 76, (4 units), Murphy Oil, (4 units) and Santa Fe Resources. The Company is continuing its marketing efforts in other major offshore production areas such as the North Sea and the Persian Gulf. During January 1999, the Company received its first order from Oman. EXCLUSIVE DISTRIBUTION AGREEMENT WITH UNIVERSAL ELECTRONICS & COMPUTERS, INC. On February 7, 1995, FCI Environmental entered into a two-year exclusive distribution agreement with Universal Electronics & Computers, Inc. ("UECI"), a corporation of the Republic of China (Taiwan). Pursuant to the agreement, FCI Environmental agreed to provide UECI with certain environmental products, accessories and parts, and UECI agreed to act as an independent contractor of FCI Environmental to promote and sell such products exclusively in the Republic of China. The agreement automatically renewed for another two years. Projects with China Petroleum and the 6 ROC military are ongoing and other projects are pending. UECI has purchased in excess of $200,000 of the Company's products. UECI is currently involved with introduction of FCI products into the People's Republic of China where there is a large potential project for underground storage tank leak detection. UECI was successful in introducing the Company's products to China Petroleum Corp, which bought 14 portable units and to Formosa Plastics which purchased 3 units, during the reporting period. AGREEMENT WITH SENVECO OY, FINLAND In November 1996, the Company was advised that its proposed joint venture in Finland had received funding authorization from the Finnish government. A new company, Senveco Oy ("Senveco"), was formed, owned 75% by Finnish interests including the Company's existing distributor, and 25% by the Company. Senveco offers sales, service, technical support and consulting services for FCI's products and for complementary products from other manufacturers. Senveco's region consists of Finland, the Baltic States, and Northwest Russia including the key areas of the Kola Peninsula where existing pollution appears to warrant substantial cleanups of soil and water. Senveco also provides technical support to the Company's European distribution network and in the Middle East. In October 1997, the Company was advised that Senveco had been selected for an European Union Baltic Intereg contract to provide consulting and monitoring services to locate "hot spots" of pollution in the Kola Peninsula region of Russia. The contract has not yet been funded and recent events in Russia bring into doubt whether these contracts will actually become effective. As a result, the Company divested itself of its interest in Senveco, which remains an authorized distributor. MARKET DEVELOPMENT AGREEMENT WITH MITSUI MINERAL DEVELOPMENT ENGINEERING CO., LTD. On May 31, 1995, the Company, through FCI Environmental, entered into a two-year joint market development agreement with Mitsui Mineral Development Engineering Co., Ltd. ("MINDECO") pursuant to which the Company and MINDECO were developing the Japanese market for the Company's products, initially limited to petroleum hydrocarbon products. The agreement lapsed during Fiscal 1999. EXCLUSIVE REPRESENTATIVE AGREEMENT WITH SHINHAN SCIENTIFIC CO., LTD. On February 9, 1995, FCI Environmental entered into a two-year exclusive representative agreement with Shinhan Scientific Co., Ltd. ("Shinhan"), a corporation of the Republic of Korea, which agreement was automatically extended for an additional two year period ending February 9, 1999. Pursuant to the agreement, FCI Environmental agreed to provide environmental products, accessories and parts to Shinhan, and Shinhan agreed to act as an independent contractor of FCI Environmental to promote and sell such products exclusively in the Republic of Korea. Shinhan is actively involved in the developing UST regulatory process in the Republic of Korea and has made initial sales to indigenous oil companies. To date, the agreement has not resulted in material revenues for the Company. The slowdown in the Asian economies may further delay significant revenues, although recently, activity has picked up with a sale made to a key regulatory agency. SIPPICAN The Company had a licensing agreement with Sippican Corporation of Marion, MA, a defense contracting company which had planned to move into the environmental market, but reversed its course. The Company and Sippican negotiated a position allowing Sippican to transfer its rights to a third party, while minimizing the potential for competition to the Company from Sippican or others. Those rights have been transferred to Osmonics, Inc., a leading supplier of potable water equipment to the beverage industry and the water utility market. Neither agreement has resulted in significant revenues for the Company to date. COMPETITION 7 In the opinion of Management, the primary bases of competition in the markets for the Company's products are the distinctive and special qualities of the products, their reliability, ease of use and price. Management believes that the distinctive capabilities of the Company's FOCS-Registered Trademark- technology provide competitive advantages in its markets. The Company is unaware of any other product in the marketplace, that can monitor petroleum hydrocarbons at all three desired monitoring points, i.e., the vapor area above the water body, the floating hydrocarbons at the water/air interface and the hydrocarbons dissolved in the water. Management believes that this capability, coupled with the FOCS-Registered Trademark-'s rapid response time and reversibility (the ability to measure both increasing and decreasing levels of pollutants), together with its response to a wide variety of petroleum hydrocarbons including gasoline, diesel and jet fuel, provide the Company with a competitive advantage. In particular, the wide dynamic range of the measuring technology allows the detection of new leaks on top of old contamination. Management believes that the Company's Florida certification is a direct result of this capability. Most tank leak detection methods currently in use are periodic tests. The early warning and early detection of leaks provided by the Company's continuous monitoring systems enable users to minimize environmental damage, liability and cleanup costs relating to leaks that might otherwise occur and remain undetected between periodic tests. In addition, the Company's products permit tanks to be evaluated without being taken out of service, whereas, many competing methods require that tanks be taken out of service for a period of time. The AST leak detection market requires regulations to be enforced to exist. End users usually do not purchase leak detection equipment except for regulatory compliance. However, when regulations are promulgated, and when deadlines are set and enforced, the result can be a significant opportunity to supply products to the regulated community in a readily definable period of time. This is, in fact, the situation in the Florida AST market. Companies have to be in compliance by December 1999. Of the three options - continuous leak detection, double bottomed tanks and dike liners - continuous leak detection is by far the lowest cost. Further, to be a supplier for each of the three options, products have to be certified or approved. In the case of leak detection, a stringent third-party testing process is required prior to acceptance. Only certified products from suppliers who have passed acceptance are considered when compliance plans are reviewed by Florida DEP. To date, only the Company's PetroSense-Registered Trademark- product line has been approved for continuous detection of leaks from ASTs at all sites, although there can be no assurance that other products will not be approved. Competitors such as Tracer Research, Inc. (Tucson, AZ) and NESCO, Inc. (Tulsa, OK) offer products which provide competition in certain situations. Tracer Research, Inc. has received approval by Florida DEP for its periodic leak detection system for ASTs. The approval is conditional in that it specifies certain operating conditions which must be met. There is a specified inoculation period during which the tank is essentially out of service. This is followed by sampling vapor wells and the site for presence of the tracer. These samples are analyzed off site. Use of this technique is conditional upon maintaining the specified inoculation time and testing only when ground water levels allow. The test has to be performed every thirty days. The Company believes these conditions of use provide a competitive advantage to continuous PetroSense-Registered Trademark- products, since groundwater levels often reach the tank bottom during rainy periods in low lying coastal areas such as Florida. This is also true of Sensorcomm, of Bartlett, TN, which recently received conditional approval for relatively clean sites. Their approval is based on specific site conditions, including tank foundation materials, groundwater level, and prior contamination limits. NESCO, Inc. markets a competitive leak detection product line mainly to the military marketplace. Its acceptance in the commercial arena has been limited by its use of a pumping system to draw samples of vapor to the sensor device. High groundwater levels can fill the sample tubes with water and shut down the system. The sensor device is limited to detection of lower levels of hydrocarbons and has not been approved for use in Florida for contaminated sites where higher levels of hydrocarbons already exist. As a result, it is not a competitor for the Florida AST market. The Company's PetroSense-Registered Trademark- product line monitors continuously and detects the level of petroleum hydrocarbons whether the sensor is in a wet or dry environment. Many competing methods used to detect and quantify the presence of petroleum hydrocarbons in the field (e.g., for groundwater monitoring wells, soil remediation sites, process streams and waste water streams) consist of extracting a sample, then analyzing the sample using field or laboratory analytic instruments such as gas chromatographs. This process may take several days. The Company's products provide IN-SITU, real-time results with accuracy closely 8 correlating with laboratory results. Additionally, the products' analog outputs offer the capability to provide feedback loops for process control. Turner Designs (Sunnyvale, CA), Filco (Lafayette, LA) and Wilks (Norwalk, CT) also offer alternatives to the Freon-Registered Trademark-/IR method, sometimes by the use of hexane or other solvents as an extrant. Management believes that the technology of each is limited and in each case these competitors do not provide the full line of both portable and continuous monitoring products offered by the Company. The offshore produced water market exists because Freon-Registered Trademark- is no longer manufactured under the Montreal Protocol. The acceptance of a replacement technology is dependent on the increasing cost and lack of availability of Freon-Registered Trademark-, together with economic conditions such as the price of oil. In each market, the competition to the Company's products utilizes direct selling through its own sales force and through manufacturers representatives. GOVERNMENT REGULATION In the United States, numerous environmental laws have been enacted over the last three decades. These include the Resource Conservation and Recovery Act, the Comprehensive Environmental Response Conservation and Liability ("Superfund") Act, the Clean Air Act, the Clean Water Act, the National Environmental Policy Act which established the EPA and others. The Clean Air and Clean Water Acts require measurement, monitoring and control of municipal, industrial and other discharges of hydrocarbons and numerous other substances including heavy metals, toxic gases, chlorinated solvents and fertilizer and pesticide residues. Many of the Company's early sales projections were made with the assumption that, at the Federal level, there would be a strong regulatory climate on matters involving the environment. In recent years, however, with the Congressional de-emphasis of environmental matters, and the accompanying delays in enactment and/or enforcement of environmental mandates, these projections turned out to be optimistic, at least in their timetable. Consequently, FiberChem's management identified market segments that were driven by other forces. Notwithstanding the slowdown at the federal level, the Company recognized that the States represented a short-term opportunity for aboveground tank leak detection and set about getting its sensor products specified. At the same time, the phase out of Freon-Registered Trademark- presented the Company with an opportunity to establish its technology as the preferred replacement for the existing Freon-Registered Trademark-/Infrared method for measurement of total petroleum hydrocarbons (TPH) in process water streams. Although present federal laws do not require leak detection for ASTs, many state and local governments have enacted or are considering regulations requiring leak detection for ASTs. Two pieces of legislation are pending before Congress, and the EPA has proposed a collaboration with the American Petroleum Institute ("API") on voluntary AST programs in which leak detection is a significant factor. As part of this collaboration, API conducted a test of leak detection equipment at an operating tank farm. The Company's products and those of two other companies were selected for this evaluation. The results are scheduled to be released within the next few months. The State of Florida has perhaps the most stringent regulations and FCI is the only company to have certification for the continuous monitoring of all uncontaminated and contaminated sites in Florida. Other states are expected to follow Florida and promulgate AST regulations. Virginia promulgated its own similar regulations during 1998. Pennsylvania, New Jersey, Minnesota, and Wisconsin have also promulgated regulations. INTERNATIONAL REGULATORY ACTIVITY Several countries have environmental laws or regulations in place or being implemented that affect the market for the Company's products. Belgium has a new environmental law that regulates retail gas stations. Canada's Ontario Province has an AST regulation in process. The Republic of South Korea has a UST law which is currently being implemented. Taiwan has committed to significant expenditure for environmental clean up. Finland has proposed leak detection for retail gasoline stations and has recently promulgated clean up regulations backed by government funding for the clean up of contaminated retail sites in the country. The Company is working with its international distributors and others to promote the Company's products and enhance its name recognition in these countries so that the Company's products are taken into consideration when legislation and regulations are promulgated. The slowdown in the Asian and Russian economies has delayed some of these projects. 9 MANUFACTURING The Company manufactures the FOCS-Registered Trademark- sensors and probes at its facilities located in Las Vegas, Nevada. Printed circuit boards incorporated in the Company's products are fabricated and assembled by other companies using high quality commercially available components. The PHA-100 component parts and subassemblies are purchased by the Company, and final assembly and testing is also performed in house. The data logging and control instruments incorporated in the CMS systems are commercially available from a number of manufacturers; however, the Company has chosen one primary supplier, and integrates the instrument with the Company's DHP, operating and control software, personal computers and peripheral devices such as alarms. Accessory kits are configured by the Company using both commercially available and specially manufactured components. During 1998 the Company began a certification process for ISO 9001, the international standard for the maintenance and improvement of product quality. Due to reductions in personnel during Fiscal 1998 and 1999, the certification process has been delayed. Certification is expected to be completed during Fiscal 2000. RESEARCH AND DEVELOPMENT DEVELOPMENT AGREEMENTS WITH IWACO (HOLLAND) The Company's Port of Rotterdam projects with the Dutch engineering firm IWACO are ongoing. The Company has become an equal partner in both IWACO programs relating to bioremediation and monitoring technologies. The Company benefits from access to data, technology, resources and personnel of the programs' member companies which include TNO, the Dutch national research organization, Shell International Products and Solvay S.A. In the event one of the bioremediation technologies is selected for use, there would be a significant need for monitoring instrumentation to ensure long-term satisfactory operation. Evaluation of the various bioremediation technologies will continue into calendar 2000. The technology development program is aimed at improving the selectivity and sensitivity of the Company's products, and could open up large new markets if successful. DEVELOPMENT AGREEMENT WITH TNO The Company has been invited to enter into a development agreement with the Dutch government research agency TNO to cooperatively develop sensors based on its FOCS technology for certain chemical compounds that cause off-taste in some foods and beverages. The Company, TNO, the Dutch government and Coca Cola (Holland) are to be co-funders of this project. SENSORS The sensors market represents the Company's largest potential market, primarily because applications for sensors are much wider than those for the Company's environmental products. Developed in cooperation with Texas Instruments with the technology patented by FCI, sensors have the potential to exploit a wide range of consumer, industrial, commercial, automotive, military and medical products. This new concept, based on an optical platform that is essentially a double beam spectrometer on a plug-in base in a standard 20-pin integrated circuit package, utilizes standard TI components for ease of design compatibility. These devices incorporate waveguides onto which a chemical matrix may be coated. The chemical matrix is usually developed by the Company. The presence of a chemical analyte which causes a change in the refractive index, absorption or fluorescence of the waveguide material results in a change which can be detected, measured and related to concentration of the analyte, whether in the aqueous or gaseous phase. While these sensors can be used in hardware currently under development at the Company, e.g., portable dosimeter devices as well as continuous monitoring probes and associated hardware, the primary application for these 10 Sensors-on-a-Chip-Registered Trademark- lies in the OEM marketplace. This market is characterized by clients who have needs or wants for sensors that give their products an advantage in their marketplace. Examples of ongoing developments include: - a gasoline vapor sensor for a gasoline retailing application - a carbon monoxide sensor for residential, medical and automotive use - sensors for the detection of toxic gasses and chemical warfare agents - a fuel/air ratio sensor for automotive use - a fail-safe flammable gas sensor for a household appliance control system - a breath alcohol sensor for an ignition interlock device for automotive use These applications represent sensors with selling prices anticipated to be in the $5 to $150 range depending upon application and volume. The Company has sold 10,000 of the Sensor-on-a-Chip devices to Industrial Scientific Corp. for use with its own proprietary coating for a health and safety application. The Company also has invented a proprietary method of analysis for chemical and biological molecules which is essentially a solid state version of the well-known immunoassay technology. This technology was borrowed from the medical community and applied to environmental monitoring. The Company's invention of a single-step immunoassay has potential application to sensor development in areas previously relegated to expensive and slow laboratory analysis. When applied to the Sensor-on-a-Chip-Registered Trademark- this technology could provide a range of sensors and hardware products which could substitute for laboratory analysis in the biomedical and biological analysis marketplace. As an example, the Company recently demonstrated an immunoassay for cocaine and other drugs of abuse that reached a detection limit of 400 parts per trillion. TEXAS INSTRUMENTS, INC. ("TI") On June 15, 1995, the Company entered into an intellectual property license agreement and a cooperative development agreement with TI. Under the License Agreement, TI licensed the Company's patented FOCS-Registered Trademark- for use with TI's optoelectronics technology. The Company granted TI an exclusive worldwide royalty-bearing license to develop, produce and market chip-based chemical sensors for specific applications. In exchange, TI granted the Company a non-exclusive worldwide royalty-bearing license to certain TI technology. The license agreement terminates when the last Company or TI patent concerning the technology under the license agreement expires. The License Agreement and Cooperative Development Agreement replaced similar agreements between the Company and TI, entered into in January 1992, with a goal of miniaturizing the Company's FOCS-Registered Trademark- technologies into microchip sensors. This development work with TI is also the basis for the Sensor-on-a-Chip-Registered Trademark- product which is the subject of the joint development agreement with Gilbarco described below. The Company has been granted a United States patent on chip-based sensors in general and has applied for a patent on a chip-based toxic gas sensor. Under the cooperative development agreement, the Company and TI agreed to design and develop certain custom FOCS-Registered Trademark- based sensors for TI's exclusive use. The first chip-based sensor was developed for carbon monoxide (CO). Changes in the UL Standard for residential CO detectors and significant changes in market dynamics adversely impacted on the introduction of this product by TI. However, the Company is pursuing medical, security and automotive applications for prospective OEM customers. 11 Since the Company developed a working relationship with the Optoelectronics Development Group within TI's Semiconductor Group, the Company has identified and pursued a number of opportunities in the sensor area, some introduced by TI, others directly by the Company. Recently, TI licensed certain optoelectronic technology to Texas Advanced Optoelectronic Solutions (TAOS), a group consisting primarily of the same former TI employees. The Company continues to have a cross license agreement with TI and a marketing agreement with TAOS. AGREEMENT WITH ALCOHOL SENSORS INTERNATIONAL, LTD. On November 8, 1996, the Company entered into an agreement with Alcohol Sensors International, Ltd. (ASI) pursuant to which the Company granted ASI exclusive right, title and interest (including sales and marketing rights) to chemical sensors developed for breath alcohol (alcohol). In consideration therefor, ASI agreed to market, promote and sell instruments employing such alcohol sensors on a worldwide basis and to pay the Company development and licensing fees over the term of the agreement. The term of the agreement is for five years and may be renewed by ASI for successive five-year terms upon written notice to the Company not less than sixty days prior to the expiration of the prior term. Through September 30, 1999, ASI had not reported any sales of the device subject to the licensing agreement, and during Fiscal 1999, ASI filed for Chapter 11 bankruptcy. JOINT DEVELOPMENT AGREEMENT WITH GILBARCO, INC. The Company, through FCI Environmental, completed the development for Gilbarco, Inc. ("Gilbarco") of a low-cost sensor for the detection of gasoline vapor in Phase II vapor recovery systems for gasoline dispensing equipment. The introduction of the equipment is pending the promulgation of regulations by the California Air Resources Board (CARB) establishing a compliance date for new dispensers, followed by an as yet undetermined phase-in period for retrofitting of existing dispensers. The Company's sensor development project with Gilbarco then moved on to a pre-manufacturing mode driven by the expectation that CARB will require suppliers of refueling equipment to certify their products to meet Onboard Refueling Vapor Recovery Phase II ("ORVRII") requirements. FCI is in the process of providing Gilbarco with a limited number of preproduction devices for use in the certification process. Provided that certain key steps are completed by CARB, Gilbarco should commence manufacturing products incorporating the Company's Sensor-on-a-Chip-Registered Trademark- in order to meet the CARB requirements. Gilbarco and FCI recently signed a support contract whereby Gilbarco provides ongoing financial support to FCI through the approval process. Revenues from this project are now expected to begin in Fiscal 2000, if the time schedule is met, but there can be no assurance that this will actually occur. BECHTEL NEVADA In June 1995, the Company entered into a Cooperative Research and Development Agreement ("CRADA") with the U. S. Department of Energy ("DOE") through its operating entity Bechtel Nevada, Inc.'s Remote Sensing Laboratory in Las Vegas, Nevada to develop low-cost, rugged demountable probes suitable for use with the Sensor-on-a-Chip-Registered Trademark- platform. This development resulted in the production of a prototype probe to carry up to three chips. New development has focused on a dosimeter device for hand held use and is ongoing. The Company built five prototypes for Bechtel under the contract during Fiscal 1998 and has received an order for ten more units which will be completed in the first fiscal quarter of 2000. OTHER SENSOR DEVELOPMENT The Company is further developing numerous other sensors for specific contaminants and properties. Certain sensors are completed, but will not be introduced into manufacturing until the Company has the resources to finalize the design of the chip-based platform for that specific application. Other sensors are still in the chemistry development stage. The Company's spending on research and development activities during Fiscal 1998 and 1999 was $752,892 and $546,398, respectively. 12 COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS The Company has determined the costs and effects of compliance with federal, state and local environmental laws to be minimal in amount and exposure. The Company spends less than 1% of its total expenditures to comply with the various environmental laws. EMPLOYEES As of September 30, 1999, the Company and its subsidiaries employed 19 persons on a full-time basis. These include Geoffrey F. Hewitt, President and Chief Executive Officer; Melvin W. Pelley, Chief Financial Officer and Thomas A. Collins, President of FCI Environmental. The Company also employed three administrative persons; two scientists; six laboratory and manufacturing technicians; one manager of manufacturing; one materials, production control, shipping and receiving specialist; one sales applications specialist; and two strategic business unit sales managers. The Company also employed two laboratory and manufacturing technicians on a part-time basis. ITEM 2. DESCRIPTION OF PROPERTIES In September 1989, the Company leased approximately 15,000 square feet of space in a new multi-tenant showroom/warehouse/distribution facility within Hughes Airport Center, 1181 Grier Drive, Suite B, Las Vegas, Nevada. The Company is currently using approximately 8,000 square feet of its facility for production, 4,000 square feet for research, development and engineering and the remaining 3,000 square feet for marketing and administrative purposes. The lease was for five years and expired on February 28, 1995. The Company and the lessor have agreed to a month-to-month lease which is terminable by either party upon 30 days' notice. Current base monthly payments under the month-to-month lease are $12,786. Rent expense during Fiscal 1998 and 1999 was $170,869 and $172,015, respectively. The Company is pursuing alternatives including a renewal of the current lease at approximately the current base monthly rental charge. ITEM 3. LEGAL PROCEEDINGS A former distributor, D2E, filed an action in the Commercial Court of Nanterre, France on June 4, 1997 claiming improper termination of an exclusive distribution agreement by FCI Environmental, Inc. The action seeks monetary damages of approximately $200,000 at current exchange rates. The Company has responded that the distribution agreement provides for arbitration, in Nevada, and that, therefore, the French courts do not have jurisdiction, and further that the claims are without merit. Rulings by the French court are scheduled for January 20, 2000. The Company does not expect an adverse outcome and believes that even in the event of an adverse outcome, such an outcome would not have a material effect on its financial position or results of operations. On September 23, 1998, OCS, Inc., a Texas corporation and customer of the Company's subsidiary, FCI Environmental, Inc., filed a lawsuit against FCIE in the District Court of Harris County, Texas, 165th Judicial District. The lawsuit was based on an alleged breach of warranty for goods purchased from FCIE. The lawsuit was dismissed without prejudice to either party on January 19, 1999. On February 18, 1999, the Company filed an action in Nevada against OCS to collect amounts due from OCS for products sold to OCS, fees, expenses and damages totaling approximately $200,000. The action was subsequently removed to the U.S. District Court of Nevada, and OCS filed counter claims including an alleged breach of warranty and claims for incidental and consequential damages for $750,000. OCS has failed to file verified pleadings and has failed to engage Nevada counsel as required by the Rules of the U. S. District Court. The Company believes that its motion to dismiss the counterclaims is meritorious and should be granted. The Court is expected to rule on the Company's motion to dismiss OCS' counterclaims in January 2000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13 There were no matters submitted to a vote of security holders during the fourth quarter of the year ended September 30, 1999. The Company's 1998 Annual Meeting of Stockholders has been deferred until early 2000 to be held in conjunction with the 1999 Annual Meeting. 14 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS The Company's Common Stock was traded on the Nasdaq/SCM under the symbol "FOCS" until February 25, 1998, when it was delisted from Nasdaq/SCM. Since then it has been traded on the OTCBB. The following table sets forth the high and low trade prices of the Common Stock for the periods shown as reported by Nasdaq and the high and low bid prices as reported by the National Quotation Bureau. The bid prices quoted on the OTCBB reflect inter-dealer prices without retail mark-up, mark-down or commission and may not represent actual transactions.
Trading Period High Low - ------------------------- ------------------------------------------------------------------------------------ COMMON STOCK FISCAL YEAR ENDED SEPTEMBER 30, 1998 First Quarter $0.28 $0.12 Second Quarter 0.22 0.12 Third Quarter 0.24 0.16 Fourth Quarter 0.15 0.11 FISCAL YEAR ENDED SEPTEMBER 30, 1999 First Quarter $0.23 $0.15 Second Quarter 0.28 0.13 Third Quarter 0.23 0.13 Fourth Quarter 0.21 0.12 FISCAL YEAR ENDING SEPTEMBER 30, 2000 First Quarter $0.23 $0.15 (October 9, 1999-December 23, 1999) $0.30 $0.11
On December 23, 1999, the closing bid price of a share of the Company's Common Stock was $0.19. On December 23, 1999, the Company had approximately 445 holders of record and had in excess of 3,500 beneficial holders of its Common Stock. The payment of dividends by the Company is within the discretion of its Board of Directors and depends in part upon the Company's earnings, capital requirements and financial condition. Since its inception, the Company has not paid any dividends on its Common Stock and does not anticipate paying such dividends in the foreseeable future. The Company intends to retain earnings, if any, to finance its operations. Pursuant to the terms of the Company's Convertible Preferred Stock, dividends are payable annually on November 1st. The holders of the Convertible Preferred Stock may elect to receive their dividend payments in cash at a rate of 11% of the liquidation value, or in additional shares at the rate of 8% of the number of shares of Convertible Preferred Stock held by such holder on the date of declaration. In September 1997, the Board of Directors determined that, in view of the recent trading price of the Company's Common Stock and in view of the Company's current cash position, it would not be appropriate to declare the annual dividend payable on the Convertible Preferred Stock on November 1, 1997. Likewise, in September 1998 and September 1999, the Board of Directors determined not to declare the annual dividends payable on November 1, 1998 and 1999. As a result, the undeclared dividends aggregating $1,028,848 (if elected entirely in cash, or 53,981 additional shares of Convertible Preferred Stock if elected wholly in additional shares) will accumulate in accordance with the terms of the Convertible Preferred Stock. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto of the Company appearing elsewhere in this Report. 15 LIQUIDITY AND CAPITAL RESOURCES On October 23, 1998, the Company granted, for no consideration to holders of its Common Stock, Preferred Stock and warrants, transferable rights (the "Rights") to subscribe for units (the "Units") at a subscription price of $0.22 per Unit. Each Unit consists of one share of Common Stock and one redeemable Class E Warrant exercisable for one share of Common Stock at an exercise price for one year (through October 23, 1999) at $0.25 per share; then through October 23, 2000 at $0.35; then through October 23, 2001 at $0.50 per share; then through October 23, 2002 at $0.70 per share; then through October 23, 2003 (at which time the Class E Warrants expire) at $0.90 per share. Each holder of record as of October 16, 1998, of Common Stock and Warrants received one Right for every four shares of Common Stock or Warrants held, and each holder of Preferred Stock received 2.5 Rights for each share of Preferred Stock held. An aggregate of 8,976,962 Rights were issued. An aggregate of 7,678,679 Rights were exercised as of the close of the offering on December 22, 1998, resulting in gross proceeds to the Company of $1,689,309 and the issuance of 7,678,679 shares of Common Stock and a like number of Class E Warrants. Of the total 7,678,679 Rights exercised, 4,195,209 were exercised for cash of $922,946; 1,805,677 were exercised in exchange for the payment of advances (and accrued interest thereon) from officers, directors and affiliates aggregating $397,249; 272,727 were exercised in payment of a $60,000 note payable to others; 489,347 were exercised in payment of $107,656 of deferred salaries due to members of management of the Company; and 915,719 were exercised in payment for legal, consulting and other services totalling $201,458. The Company incurred $286,474 in legal, accounting, distribution and other costs associated with the Rights Offering, resulting in net proceeds of $1,402,835. The Company's 8% senior convertible notes payable, convertible into Common Stock at $0.4078 per share, became due on February 15, 1999. On February 2, 1999, the Company offered to exchange the Notes at their maturity for new Notes (the "New Notes") with a conversion price of $0.23, which was established by using the ten-day average closing price of the Common Stock prior to February 15, 1999. The New Notes provide for semi-annual interest payments at 8% per annum in cash or at 12% per annum in stock (at the Company's option) and are due February 15, 2002. The Company may require conversion if the closing bid price of the Common Stock exceeds 200% of the conversion price for 20 consecutive trading days. In all other material respects, the New Notes have terms similar to those of the old Notes. In order to encourage exchange of the Notes for New Notes, the Company offered a bonus, payable in Common Stock valued at approximately current market, of 8% of the face amount of Notes exchanged for New Notes. The Company offered an additional Common Stock bonus equal to 4% of the face amount of notes exchanged if the holder agreed to accept additional New Notes in payment for the semi-annual interest payment due February 15, 1999. All of the $1,600,000 principal amount of old Notes were exchanged for New Notes, and an additional $21,000 of New Notes were issued as payment of interest due on $525,000 of old Notes. An aggregate of 556,544 shares of Common Stock (valued at $0.23 per share, or a total of $128,005) were issued as the exchange bonus. The exchange bonus of $128,005 and legal and other costs of $30,011 associated are being amortized to interest expense over the three-year term of the New Notes. An aggregate of 91,308 shares of Common Stock (valued at $0.23 per share, or a total of $21,001) was issued as the interest bonus, and charged to interest expense in the current period. The Company had working capital of $394,424 at September 30, 1999, as compared with negative working capital of $918,624 at September 30, 1998, an increase in working capital of $1,313,048. The Company had a decrease in stockholders' deficiency of $137,050. These changes are primarily a result of the Company's rights offering and the exchange of Notes discussed above, offset in part by the Company's net loss for the year ended September 30, 1999 ("Fiscal 1999") of $2,221,742. Net cash used in operating activities during Fiscal 1999 was $1,563,989 compared to net cash used in operating activities during the year ended September 30, 1998 ("Fiscal 1998") of $1,059,466. The deficit during Fiscal 1999 is primarily a result of the Company's net loss of $2,221,742, and adjustments to reconcile net loss to net cash used in operating activities. These adjustments consider changes in current assets and liabilities, as well as non-cash transactions including depreciation and amortization expense of $230,921 and common stock issued in exchange for services valued at $282,538. Members of management of the Company agreed to accept 763,847 shares of 16 Common Stock and 489,347 warrants for the payment of $231,279 in salaries, less approximately $87,938 in withholding taxes which the Company remitted in cash. Management had deferred the payment of a substantial portion of their salaries since June 1997, and continue to do so. Common Stock and warrants were also issued in payment for approximately $238,450 in consulting and other services. In addition, the Company recorded non-cash charges of $162,934 related to the reduction of exercise prices of warrants and the exchange of Unit Warrants for Class E Warrants (see Notes to Financial Statements) and provisions for obsolete inventory and loss on uncollectible accounts receivable totaling $201,541. Net cash used in operating activities during Fiscal 1998 of $1,059,466 was primarily a result of the Company's net loss of $2,392,225, and adjustments for changes in current assets and liabilities and non-cash transactions including depreciation and amortization expense of $380,379; Common Stock issued for services of $121,512; and provisions for obsolete inventory and loss on uncollectible accounts receivable totaling $84,627. Net cash used in investing activities during Fiscal 1999 was $22,980, as compared to net cash used in investing activities of $23,237 during Fiscal 1998. During Fiscal 1999, the Company sold unused, fully depreciated equipment for $750 and paid $23,730 for United States and foreign patent applications. During Fiscal 1998, the Company sold unused equipment for $10,125 and paid $33,362 for patent applications. Net cash provided by financing activities during Fiscal 1999 was $1,517,375 as compared to net cash provided by financing activities during Fiscal 1998 of $746,569. During Fiscal 1999 cash proceeds of $922,946 were received for the exercise of Rights issued to shareholders resulting in the issuance of 4,195,209 shares and warrants. Costs associated with the Rights offering and Note exchange paid during the period were $119,716. Officers and directors of the Company purchased 1,087,500 shares of Common Stock for cash of $141,703, and the Company received $10,000 (less registration costs of $1,201) from an unrelated third party for Class E Warrants to purchase 300,000 shares of Common Stock. The Company also received $4,900 for the exercise of options to purchase 28,000 shares of its Common Stock. Payments on advances against the Company's line of credit with Silicon Valley Bank and other notes were $529,901 and the Company borrowed an additional $911,590 against the line of credit. During Fiscal 1998, the Company borrowed $375,000 from certain of its officers and directors, and received proceeds of $433,000 from promissory notes payable to a bank of which a director is vice chairman. The Company also incurred an aggregate of $147,970 in legal, accounting, and distribution costs pertaining to the rights offering The Company borrowed approximately $413,000 against its line of credit with Silicon Valley Bank and repaid approximately $381,000. See Item 10. Management - Executive Compensation and Note 8 to the Company's Consolidated Financial Statements for information concerning the Company's material contracts for compensation and rent. As discussed in Note 1 to the Consolidated Financial Statements, the Company continues to incur substantial losses and may need additional financing to continue its operations. Management recognizes that the Company must generate additional revenues or reductions in operating costs and may need additional financing to enable it to continue its operations. On December 6, 1999, the Company entered into an agreement providing for the combination of its business with that of Intrex Data Communications Corp. The Company is pursuing several potential sources for $5,000,000 in new financing associated with the business combination. However, no assurance can be given that this or any additional financing can be obtained on terms satisfactory to the Company, nor that forecasted sales will be realized to achieve profitable operations. RESULTS OF OPERATIONS The Company's total revenues for Fiscal 1999 were $1,957,110 as compared to total revenues of $1,317,600 for Fiscal 1998, an increase of $639,510 or 49%. Revenues for Fiscal 1999 include sales to Whessoe Varec, Inc. of approximately $782,000, compared to approximately $147,000 for Fiscal 1998, primarily for the military fuel storage tank market. Revenues recognized from direct sales to the aboveground storage tank market during Fiscal 1999 were over $400,000. There were minimal such direct sales during Fiscal 1998. Revenues for Fiscal 1998 17 include sales to the Florida Department of Environmental Protection ("FLDEP") of approximately $387,000 for 64 PHA-100PLUS portable units for its underground storage tank inspection program. FLDEP chose the Company's unit after a field evaluation showed it provided more capability than other portable instruments. The Company had a Strategic Alliance (the "Alliance") for the Aboveground Storage Tank (AST) market with Whessoe Varec, Inc. from June 30, 1996 until July 26, 1999, when the agreement was ended by mutual agreement of the parties, as described below. The primary target for the Alliance has been the Florida AST market. On July 13, 1998, after a four year process, the State of Florida passed into law its new storage tank regulations. Under the law, the regulated community has various options for compliance. The lowest cost option for most sites is believed to be an internal tank liner with an external, certified, continuous leak detection device. Currently, the Company's PetroSense-Registered Trademark- product line is the only continuous leak detection device certified for use at all such sites. Compliance is required by December 31, 1999. In February 1999, Whessoe Varec and FCI targeted customer sites with over 700 tanks. These sites include coastal bulk storage, inland jobbers, industrial, military, airports, power generation and government facilities. In addition to these targeted accounts, there is a secondary market of unlined tanks which is yet to be qualified. Florida DEP held its annual conference during May 1999 in Tampa and Daytona Beach to update the tank community about its requirements for compliance by December 31, 1999 and its commitment to that compliance date. Some companies have been operating on the assumption that there would be a delay in the enforcement process, but Florida DEP remained firm in its commitment, while redefining compliance as having placed orders for approved equipment by December 31, 1999. The weeks following the Florida DEP meeting were set aside for intensive joint sales activity by FCI and Whessoe direct sales personnel. However, during the period, Endress+Hauser (E+H), which had acquired Whessoe Varec, announced that it had restructured Whessoe Varec and in that process FCI lost its access to the existing Whessoe sales and marketing organization. (It was recently reported to have sold that group.) Subsequently, FCI and Whessoe Varec came to an agreement whereby FCI took back the rights to the commercial AST leak detection market while Whessoe Varec would continue to serve the US Department of Defense (DoD) military tank market. The net result to FCI was to regain direct control over the Florida market at a critical time in its development. In addition, gross revenues from projects in Florida now accrue to the Company, in contrast to the net revenues previously. However, this process took several weeks to resolve and until an agreement was reached the result was that customer orders were delayed until it was clear with whom they should place their orders. Once the agreement was reached in mid July, FCI focussed all of its available resources on the Florida market. There followed a significant shift from a passive "wait and see" posture to a more aggressive and proactive "we need to do something". Marathon/Ashland, Miami International Airport, Tampa Airport, Orlando Airport, West Palm Beach Airport, City of Lakeland, and Motiva (Texaco) have recently purchased FCI's PetroSense-Registered Trademark- equipment. Florida Power, GATX and Motiva (Shell) are adding the Company's equipment to additional tanks or locations. These orders and commitments represented over $1,000,000 in revenue to FCI. There is usually about a six to eight week delay between order and installation, and therefore full revenue recognition. Management believes that through the compliance date of December 31, 1999, (compliance now being defined as having placed orders for approved equipment by the deadline), the majority population of the regulated community which has not yet taken action to achieve compliance will be motivated to comply, with the result being significant revenues to the Company from this market through at least the second quarter of Fiscal 2000. Other companies including Coastal Fuels, Petroleum Fuels (Jacksonville) and Air Kaman (Jacksonville) have also placed new orders for the Company's products. Shell Oil, Texaco, Florida Power Company, Reedy Creek Energy, Jacksonville Electric and GATX had already purchased and installed the Company's equipment. These orders reduced the Whessoe Varec inventory originally purchased as part of their contractual obligations under the Alliance agreement and subsequent purchases to meet market requirements. As part of the process of taking back the rights to the commercial market, FCI re-acquired the inventory from Whessoe Varec in order to be in a position to supply the commercial market in a timely fashion. This inventory has already been partially allocated to fill the recent orders. Revenues per tank are now about $25,000 compared with about $10,000 per tank under the Whessoe Agreement. Once the Company has addressed the lined tank population, it plans to address the next set of prospects, the population of large unlined tanks which is as yet unqualified. 18 As occurred with the Federal UST regulations which had a mandatory compliance date of December 22, 1998, following a ten-year compliance period, some companies are expected to act later than others, impacting on the timing of revenues for the Company. Other states are following Florida in promulgating AST regulations, giving the Company an opportunity for further growth, although there can be no assurance such regulations will be promulgated. Virginia promulgated its own similar regulations during 1998. Pennsylvania, New Jersey, Minnesota and Wisconsin have also promulgated regulations, and Alaska is developing its own regulations. Under the new agreement, FCI and E+H Systems and Gauging Division (formerly Whessoe Coggins) continue to pursue business with the DoD in California, Florida and elsewhere. E+H Systems and Gauging has a significant presence in the military fuel depot market. The Company's products meet all relevant state and federal standards and are compatible with the Whessoe Coggins equipment proposed for the total military's system upgrade. A system incorporating both Whessoe Coggins and Whessoe Varec/FCI products was successfully demonstrated to the military in California during April 1998. The data generated at this test was submitted to the local regulatory authority and met their criteria. During 1998 and through June 30, 1999, the Company's revenues from sales to Whessoe Varec for this market have been approximately $950,000. Whessoe Varec has completed the installation of PetroSense-Registered Trademark- probes at approximately 30 DoD tanks. Another 30-40 tanks are expected to be so equipped sometime in calendar 2000. Equipment will initially come from inventories purchased by Whessoe Varec. These installations would complete this phase of the California compliance effort. There is a similar number of military tanks in Florida where regulations provide for fewer alternatives to the Company's products. There are estimated to be in excess of 5,000 military tanks in the United States. In the UST marketplace, the Company has identified that certain large diesel tanks located at truck stops may present an opportunity for the Company's leak detection equipment. The size and throughput of these tanks is problematic for conventional compliance technologies. The Company is investigating the size of this opportunity. The E+H subsidiary in Japan, Sakura, has identified an opportunity in the retail gasoline marketplace for leak detection equipment potentially for a large number of installations. The Company is pursuing this opportunity with Sakura. The State of California has proposed regulations to upgrade leak detection requirements for certain USTs. The regulations would require compliance by November, 2000. The size of this opportunity has not yet been identified. The State of Florida Department of Environmental Protection purchased 64 of the Company's PHA-100 PLUS units for its storage tank inspection program in Fiscal 1998. The program began in January, 1999. Other states are potential prospects for this application. While the development of the offshore market for the Company's OilSense-Registered Trademark--4000 and PHA-100WL continued to be slower than originally anticipated, by the end of the reporting period there were indications that the situation was improving. The combination of the lack of availability of Freon-Registered Trademark- and higher oil prices generated new orders for the Company. CNG Producing Company has placed a blanket order for portable units for twelve of its Gulf of Mexico platforms. Amoco, Spirit Energy 76 (5 units), Murphy Oil (4 units) and Santa Fe Resources placed new orders. This brings the number of customers to 17 and the number of units to well over 60. Amoco, Spirit Energy 76 (Unocal) and Pennzoil have committed to the use of the Company's products on their platforms in the Gulf of Mexico. Spirit Energy has installed 19 PHA-100WLs and Amoco has installed the Company's OilSense-Registered Trademark--4000 and PHA-100WLs at 9 of their more than 25 sites. During December 1998, Pennzoil placed their first order for the Company's PHA-100WLs for 2 of their 15 sites. The recently reported potential link between the chemical n-hexane and the incidence of brain cancer at a now closed research laboratory in Naperville, Illinois, has brought into question the adoption by some operators of the EPA's standard reference method which proposed the use of n-hexane as a replacement for Freon for use in reference lab environments. This would eliminate the one serious competitor to the Company's portable unit and would impact on some of the larger operators in the Gulf and elsewhere. Merger activity among the major oil companies continues to slow installations, but is not believed to have significantly affected the size of the opportunity. The Company is continuing its marketing efforts in other major offshore production areas such as the North Sea and the Persian Gulf. During January 1999, the Company received its first order from Oman. 19 During Fiscal 1999, the Company had cost of revenues of $985,444, or a gross margin of 50% of sales, as compared to cost of revenues of $617,690, or a gross profit of 53%, during Fiscal 1998. The decrease in gross margin as a percent of revenues resulted primarily from the increased sales during Fiscal 1999 to Whessoe Varec at the more highly discounted distributor pricing. The Company has signed a five-year agreement with Bosch Telecom ("Bosch") whereby the two companies cross license certain of each others proprietary sensor technologies for certain specified markets. Bosch gets access to proprietary chemistry technologies owned by FCI which it can use in the areas of security systems, automotive and other markets. The Company gets access to certain sensor technologies and has access to these technologies in certain regulated and non-regulated markets. These allow the Company to branch out into certain non-regulated markets of interest such as the medical sensor market. This is part of the Company's strategy to lessen its dependence on regulated markets. In conjunction with the Bosch agreement, the Company entered into discussions with a medical instrument manufacturing company to supply certain gas sensor technology for a neonatal application. This company requires a low-cost, disposable sensor package to replace its existing sensing technology. The size of the opportunity is estimated by the manufacturer to be 2,000,000 units per year in the U.S. alone. A study is ongoing to determine the feasibility of the project. Research, development and engineering expenditures decreased by $206,494, or 27%, to $546,398 during Fiscal 1999 from Fiscal 1998. The Company has continued to reduce personnel and other expenditures wherever possible, focussing its resources on its most critical projects. Sales and marketing expenditures decreased by $62,478, or 9%, to $661,544 during Fiscal 1999 from Fiscal 1998. General and administrative expenditures increased by $194,385, or 17%, to $1,347,684 during Fiscal 1999 from Fiscal 1998, primarily as a result of increased consulting and public relations costs, most of which were compensated by the issuance of common stock and warrants as opposed to cash. The Company continues to operate with the reductions in personnel and other expenses and cash expenditures, including the deferral of administrative, as well as other salaries, implemented during Fiscal 1997. Interest expense increased by $59,335 to $366,666 during Fiscal 1999 from Fiscal 1998. The increase resulted primarily from increased borrowing against the Company's line of credit, and extra bonus interest paid to holders of the 8% Senior Convertible Notes as an inducement to the holders to exchange the Notes due February 15, 1999 for new Notes due February 15, 2001. The Company recorded non-cash, non-operating costs of $162,934 related to the reduction of exercise prices of warrants and the exchange of Unit Warrants for Class E Warrants. The Company reduced the exercise prices and offered the exchange in order to encourage exercise of the warrants. As a result of the foregoing, the Company incurred a net loss of $2,221,742, or a net loss of $0.07 per share, for Fiscal 1999 as compared to a net loss of $2,392,225, or a net loss of $0.09 per share, for Fiscal 1998. On December 6, 1999, the Company announced it had signed a definitive agreement to merge with Intrex Data Communications Group of Vancouver, British Columbia, with the expressed intent of addressing the burgeoning remote asset management market, where the combined strength of FCI's sensor technology together with Intrex's communications and Internet expertise are expected to make a powerful team. The merger would be structured as an Arrangement Agreement and conducted as a Plan of Arrangement, in order to accommodate Canadian tax and legal issues. FiberChem, renamed DecisionLink Incorporated, would be the surviving public entity. Intrex would be acquired in a stock transaction. The company would address the oil and gas; tank, pipeline and utility; transportation; environmental monitoring; marine and other markets on a fee-for-service basis. A condition to closing is to obtain financing for the merged entity and to position it for readmission to NASDAQ Small Cap Market. DecisionLink would be headquartered in Las Vegas, with operations also in Dallas, Texas and Vancouver, British Columbia. 20 The Company continues to review the cost and operating impacts of addressing the Year-2000 issue. Management has conducted assessments of the potential costs associated with its internal operations, products shipped to its customers, and material and services provided by its suppliers. The Company has conducted tests of its products and based on such testing, believes that its current products are Year-2000 compliant, in accordance with the Year-2000 Information and Disclosure Act. It has provided upgrades to older products, and believes that all its products are Year-2000 compliant. The Company has not incurred, and does not expect to incur, material costs relative to its products and Year-2000 compliance. The Company has incurred less than $10,000 and expects to incur additional costs of approximately $10,000 during calendar 1999 to upgrade its internal hardware and software systems which are critical to and support its manufacturing, engineering, financial and other operations. Testing of critical systems has been completed. Based on the results of its tests, Management believes its critical systems will continue to operate properly on and after January 1, 2000. The risks of disruptions in the business community in general, as well as with respect to the Company's customers and suppliers, are difficult to discern. Management continues to review these risks with respect to its operations, and does not expect that the Year-2000 issue will have a material impact on the Company's current financial position, liquidity or results of operations. Alternative suppliers of certain materials and services as well as methods of supply have been developed. In the event that public utilities and services are disrupted, the Company expects to curtail or suspend operations or implement manual or alternative processes for brief intervals of time, if necessary. Management does not consider that inflation has had a significant effect on the Company's operations to date, nor is inflation expected to have a material impact over the next year. RECENTLY ISSUED ACCOUNTING STANDARDS During Fiscal 1999 the Company adopted Statement of Financial Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), which establishes new standards for reporting and displaying comprehensive income and its components. The adoption of SFAS 130 had no impact on the Company's consolidated financial position, results of operations or cash flows. Also during Fiscal 1999, the Company adopted Statement of Financial Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"), which requires disclosure of certain information regarding operating segments, products and services, geographic areas of operation and major customers. The adoption of SFAS 131 had no impact on the Company's consolidated financial position, results of operations or cash flows. In March 1998 the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance on the accounting for costs of computer software used internally, including identifying the characteristics of internal-use software and providing examples to assist in determining when computer software is for internal use. The Company is required to adopt this Statement in Fiscal 2000. The adoption of SOP 98-1 is expected to have no impact on the Company's consolidated financial position, results of operations or cash flows. In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 requires that all start-up costs related to new operations must be expensed as incurred and that all start-up costs that were capitalized in the past must be written off when SOP 98-5 is adopted. The Company is required to implement SOP 98-5 in Fiscal 2000. The Company expects that the adoption of SOP 98-5 will not have a material impact on its financial position, results of operations or cash flows. In June 1998 the Financial Accounting Standards Board issued Statement of Financial Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other 21 hedging activities. The Company is required to implement SFAS 133 in Fiscal 2001. Adoption of SFAS 133 is expected to have no impact on the Company's consolidated financial position, results of operations or cash flows. ITEM 7. FINANCIAL STATEMENTS The financial statements of the Company are contained in a separate section of this Form 10-KSB which follows Part III. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 22 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The names, ages and respective positions of the Executive Officers and Directors of the Company are as follows:
Name Age Position - ---- --- -------- Geoffrey F. Hewitt 56 Chairman of the Board, President, Chief Executive Officer and Class A Director Byron A. Denenberg 65 Class C Director Irwin J. Gruverman 66 Class A Director Walter Haemmerli 70 Class B Director Gerald T. Owens 72 Class C Director Melvin W. Pelley 55 Chief Financial Officer and Secretary
The names, ages and respective positions of the Executive Officers and Directors of FCI Environmental are as follows:
Name Age Position - ---- --- -------- Geoffrey F. Hewitt 56 Chairman of the Board, Chief Executive Officer and Director Melvin W. Pelley 55 Chief Financial Officer, Secretary and Director Thomas A. Collins 53 President
GEOFFREY F. HEWITT has served as Chairman of the Board since November 14, 1997 and as President and Chief Executive Officer of the Company, as well as Chairman of the Board and Chief Executive Officer of FCI Environmental since April 1998 and August 1995, respectively. Mr. Hewitt was appointed as a Director of the Company on September 11, 1996. He has also served as a Director of FCI Environmental since April 1994 and as its President from April 1994 to November 1996. He served as Chief Operating Officer of FCI Environmental from April 1994 to August 1995. Prior thereto, from 1977 until March 1994, Mr. Hewitt served as Vice President of worldwide sales and marketing for H.N.U. Systems, Inc., a manufacturer of environmental and material analysis instrumentation. BYRON A. DENENBERG has served as a Director of the Company since August 1995. Mr. Denenberg is a Managing Partner of K B Partners, LLC, a venture capital firm specializing in early-stage technology investments. Mr. Denenberg was co-founder in 1969 of MDA Scientific, Inc. ("MDA"), a manufacturer and marketer of toxic gas monitoring systems, where he was CEO from inception until 1991. MDA was purchased by Zellweger Uster AG in 1988. Mr. Denenberg received a B.S. degree in Mechanical Engineering from Bucknell University, Lewisburg, Pennsylvania. He currently serves as a Director of RCT Systems, Inc., and Orbit Commerce, Inc. Mr. Denenberg was Chairman of MST Analytics, Inc. until its merger with ATMI, Inc. in November 1999. IRWIN J. GRUVERMAN has served as a Director of the Company since May 1994. Since 1990, Mr. Gruverman has served as the General Partner for G&G Diagnostics Funds, a venture capital business, and in 1982 founded and currently serves as Chairman of the Board of Directors and Chief Executive Officer of Microfluidics Corporation, an equipment manufacturer and process research and development company. 23 WALTER HAEMMERLI has served as a Director of the Company since February 1990. Mr. Haemmerli has been the Chief Executive Officer since 1978 of Manport AG, Zurich, Switzerland, an investment management company owned by him. Mr. Haemmerli was employed by Union Bank of Switzerland, Geneva, Basel and Zurich from 1960 to 1978, holding the position of Vice President from 1970. Mr. Haemmerli serves on the Board of Directors and is Vice-Chairman of Privatbank Vermag AG, Chur, Switzerland, and is a Member of the Board of Directors for American Cold Storage, Inc., Louisville, Kentucky. GERALD T. OWENS has served as a Director of the Company since December 1987. Mr. Owens served with Mobil Oil from 1962 to 1983 when he retired. At retirement, he was President of Mobil Sales and Supply Corporation, a wholly-owned subsidiary of Mobil Oil, and he was a Vice President of Mobil Oil. From 1951 to 1961, Mr. Owens practiced law with the law firm of Andrews and Kurth in Houston, Texas. Mr. Owens received an L.L.B. degree from the University of Texas in 1950 and a B.A. degree in history in 1948 from the University of Texas. He serves as Chairman of the Board of Trustees for the Kenny Stout Memorial Golf Foundation, and as a member of the Board of Trustees for the Monterey Institute of International Studies. MELVIN W. PELLEY has been the Chief Financial Officer and Secretary of the Company since April 1994 and has been Chief Financial Officer and Secretary of FCI Environmental since June 1993. Prior thereto, from 1988 he was Vice President of Finance and Administration of Acoustic Imaging Technologies Corporation, Phoenix, Arizona, a manufacturer of diagnostic ultrasound medical equipment. From 1983 to 1988 he was Director of Costs, Financial Planning and Analysis of Advanced Technology Laboratories, Inc., Bothell, Washington, which manufactures and markets real-time ultrasound medical diagnostic equipment. From 1977 to 1983, Mr. Pelley was Chief Financial and Administrative Officer for Advanced Diagnostic Research Corporation, Tempe, Arizona, a designer, manufacturer and marketer of diagnostic ultrasound scanners. THOMAS A. COLLINS has served as President of FCI Environmental since November 1996 and as Vice President of International Marketing and Product Development from March 1996 to November 1996. Prior thereto, from 1992 he was Director of International Sales and Product Marketing of Arizona Instrument Corporation, a manufacturer of environmental and control instrumentation; from 1990 to 1992 he was Director of Marketing of Wayne Division, Dresser Industries, Inc., a manufacturer of dispensing equipment for the gasoline industry; from 1986 to 1989 he was Manager of Domestic Retail Marketing for Diebold, Inc., a manufacturer of transaction terminals in the petroleum retailing market; and from 1968 to 1986 he held marketing and engineering positions at ARCO Petroleum Products Co. Officers serve at the discretion of the Board of Directors. All Directors hold office until the expiration of their terms and the election and qualification of their successors. The Company's Board of Directors is divided into three classes of approximately equal size with the members of each class elected, to three-year terms expiring in consecutive years. Mr. Owens and Mr. Denenberg were elected to three-year terms as Directors at the Company's August 1998 Annual Meeting of Stockholders. Mr. Gruverman and Mr. Hewitt were elected to three-year terms as Directors at the Company's June 1997 Annual Meeting of Stockholders. Mr. Haemmerli was elected to a three-year term as Director at the Company's May 1996 Annual Meeting of Stockholders. In January 1993, the Company established a Stock Option Committee. The Stock Option Committee is responsible for the granting of stock options under the Company's Stock Option Plans. The Company also established a Compensation Review Committee, which is responsible for reviewing the compensation of the Company's executives and employees. In August 1995, Mr. Owens and Mr. Haemmerli were appointed to a single Compensation Review and Stock Option Committee. Also, in August 1995, Mr. Owens was appointed to a newly established Audit Committee. Mr. Gruverman was added to the Audit Committee on November 14, 1997. The Board of Directors did not have a standing nomination committee or committee performing similar functions during the fiscal year ended September 30, 1999. COMPLIANCE WITH 16(a) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers, Directors and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of 24 ownership and changes in ownership with the Securities and Exchange Commission. Officers, Directors and ten percent shareholders are required by regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on the Company's copies of such forms received or written representations from certain reporting persons that no such forms were required for those persons, the Company believes that, during the time period from October 1, 1998 to September 30, 1999, all filing requirements applicable to its officers, Directors and greater than ten percent beneficial owners were complied with except as set forth below. Melvin W. Pelley, Chief Financial Officer of the Company, filed a late report in which a sale of 10,000 shares of common stock was reported. ITEM 10. EXECUTIVE COMPENSATION The compensation paid and/or accrued to each of the executive officers of the Company and its subsidiaries and of all executive officers as a group, whose annual compensation exceeds $100,000, for services rendered to the Company during the three fiscal years ended September 30, 1999, was as follows: (a) SUMMARY COMPENSATION TABLE
Long Term Compensation ---------------------------------------------- Annual Compensation Awards Payouts -------------------------------------- ------------------------------ ------------------ Long-Term Other Restricted Securities Incentive All Name of Individual Fiscal Annual Stock Underlying Plan Other and Principal Position Year Salary($) Bonus($) Compensation($) Awards($) Options/SARs(#) Payouts($) Compensation($) - ----------------------- -------- ----------- --------- ---------------- ------------ --------------- ----------- --------------- Geoffrey F. Hewitt 1999 $217,134(1) $ -- $ -- -- 300,000 $ -- $ -- President and CEO 1998 $211,932(1) $ -- $ -- -- 240,000 $ -- $ -- 1997 $205,000 (2) $ -- $ -- -- 125,000 $ -- $ -- Melvin W. Pelley 1999 $139,479(3) $ -- $ -- -- 275,000 $ -- $ -- Chief Financial Officer 1998 $139,200 (3) $ -- $ -- -- 180,000 $ -- $ -- 1997 $136,708 (4) $ -- $ -- -- 75,000 $ -- $ -- Thomas A. Collins 1999 $132,479 (5) $ -- $ -- -- 200,000 $ -- $ -- President of 1998 $132,200 (5) $ -- $ -- -- 120,000 $ -- $ -- FCI Environmental, Inc. 1997 $129,708 (6) $ -- $ -- -- 75,000 $ -- $ --
(1) Includes accrued but unpaid salary earned during Fiscal 1998 of $55,000 and during Fiscal 1999 of $55,000. (2) Includes $14,808 in accrued but unpaid salary, earned during the period from June 15 through September 30, 1997. (3) Includes accrued but unpaid salary earned during Fiscal 1998 of $32,000 and during Fiscal 1999 of $36,123. (4) Includes $8,615 in accrued but unpaid salary, earned during the period from June 15 through September 30, 1997. (5) Includes accrued but unpaid salary earned in Fiscal 1998 of $25,000 and during Fiscal 1999 of $25,000. (6) Includes $6,730 in accrued but unpaid salary, earned during the period from June 15 through September 30, 1997. 25 (b) OPTION/SAR GRANTS IN LAST FISCAL YEAR
Number of Percent of Total Securities Options/SARs Underlying Granted Exercise Options/SARs to Employees or Base Expiration Name of Individual Granted In Fiscal Year Price($/Share) Date - ----------------------- ------------------------------------------------------------ ------------------------- Geoffrey F. Hewitt 300,000 18.6% $ 0.125 July 19, 2009 Melvin W. Pelley 275,000 17.1% $ 0.125 July 19, 2009 Thomas A. Collins 200,000 12.4% $ 0.125 July 19, 2009
(c) AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES
Number of Securities Value of Unexercised Underlying Unexercised In-The-Money Shares Options/SARs Options/SARs Acquired on Value at Fiscal Year End (#) at Fiscal Year End ($) Name of Individual Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable - ----------------------- -------------------------------------------------------------------------------------------- Geoffrey F. Hewitt -- -- 765,000 / 0 $ 1,500 / $0 Melvin W. Pelley -- -- 534,000 / 0 $ 1,375 / $0 Thomas A. Collins -- -- 395,000 / 0 $ 1,000 / $0
(d) LONG-TERM INCENTIVE PLANS Effective January 1, 1994, the Company implemented an Internal Revenue Code Section 401(k) Profit Sharing Plan (the "Plan"). The Plan provides for voluntary contributions by employees into the Plan subject to the limitations imposed by Internal Revenue Code Section 401(k). The Company will match employee contributions at a rate of 50% of the employee's contribution up to a maximum of 2% of the employee's compensation. The Company matching funds are determined at the discretion of management and are subject to a five-year vesting schedule from the date of original employment. (e) DIRECTORS COMPENSATION Non-management directors receive options to purchase shares of Common Stock of the Company for serving on the Board of Directors and for service on official committees of the Board. On July 19, 1999, the Company granted options to purchase 50,000 shares of Common Stock at $0.125 per share, which was the market value of the Common Stock on that date, to each of its four non-management Directors. In addition the Company granted options to purchase an aggregate of 50,000 shares of Common Stock to three of its non-management directors for service as members of the Audit Committee ($15,000 shares to each of its two members) and Compensation and Stock Options Committee (10,000 shares to each of its two members). (f) EMPLOYMENT CONTRACTS Geoffrey F. Hewitt serves under an employment agreement with the Company, effective October 1, 1997. Mr. Hewitt is currently compensated at a rate of $205,000 per annum and is entitled to receive bonuses, if any, at the discretion of the Board of Directors. The employment contract is terminable for cause. Since June 15, 1997, payment of approximately 27% (or $55,000 per annum) of Mr. Hewitt's salary has been deferred. In December 1998, Mr. Hewitt applied his total unpaid salary from June 1997 through December 1998 of $84,615 to the purchase of unsubscribed Units in the Company's Rights Offering ($50,501 after taxes). In July 1999, Mr. Hewitt applied his total unpaid salary from January 1999 through June 1999 of $27,500 (less taxes of $10,860) to the purchase of 26 restricted shares of the Company's common stock. The same proportion of Mr. Hewitt's salary continues to be deferred, and may be paid during calendar 2000 if the Company's operations and financial position allow. Melvin W. Pelley serves under an employment agreement with the Company, effective October 1, 1997. Mr. Pelley is currently compensated at a rate of $132,000 per annum, and is entitled to receive bonuses, if any, at the discretion of the Board of Directors. The employment contract is terminable for cause. Since June 15, 1997, payment of approximately 24% (or $32,000 per annum) of Mr. Pelley's salary has been deferred. In December 1998, Mr. Pelley applied his total unpaid salary from June 1997 through December 1998 of $49,230 to the purchase of unsubscribed Units in the Company's Rights Offering ($29,395 after taxes).In July 1999, Mr. Pelley applied his total unpaid salary from January 1999 through June 1999 of $16,000 (less taxes of $7,030) to the purchase of restricted shares of the Company's Common Stock. The same proportion of Mr. Pelley's salary continues to be deferred, and may be paid during calendar 2000 if the Company's operations and financial position allow. Thomas A. Collins serves under an employment agreement with the Company, effective October 1, 1997. Mr. Collins is currently compensated at a rate of $125,000 per annum, and is entitled to receive bonuses, if any, at the discretion of the Board of Directors. The employment contract is terminable for cause. Since June 15, 1997, payment of approximately 20% (or $25,000 per annum) of Mr. Collins' salary has been deferred. In December 1998, Mr. Collins applied $12,000 (approximately one-third) of his total unpaid salary from June 1997 through December 1998 to the purchase of unsubscribed Units in the Company's Rights Offering ($7,146 after taxes). In July 1999, Mr. Collins applied $10,000 of his unpaid salary (less taxes of $3,500) to the purchase of restricted shares of the Company's Common Stock. The same proportion of Mr. Collins' salary continues to be deferred, and may be paid during calendar 2000 if the Company's operations and financial position allow. (g) CONSULTING AGREEMENTS None. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of December 23, 1999, certain information concerning those persons known to the Company, based on information obtained from such persons, with respect to the beneficial ownership (as such term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) of shares of Common Stock, $.0001 par value, of the Company by (i) each person known by the Company to be the owner of more than 5% of the outstanding shares of Common Stock, (ii) each Director and executive officer of the Company and its subsidiaries, (iii) each executive officer named in the Summary Compensation Table and (iv) all Directors and officers as a group: 27
Amount and Nature of Name and Address of Beneficial Percentage of Beneficial Owner Ownership (1) Class (2) - ------------------------------------ ------------------------ ---------------------- Geoffrey F. Hewitt (3) 2,165,819 (4) 5.2% Byron A. Denenberg 1,760,476 (5) 4.3% RCT Systems, Inc. 327 Messner Drive Wheeling, IL 60090 Irwin J. Gruverman 1,426,335 (6) 3.5% 30 Ossipee Road Newton, MA 02164 Walter Haemmerli (3) 6,842,674 (7) 15.2% Gerald T. Owens (3) 409,237 (8) 1.0% Melvin W. Pelley (3) 2,387,901 (9) 5.8% Thomas A. Collins (3) 509,962 (10) 1.3% All Directors and Officers as 14,946,446 30.3% a Group (7 persons)
(1) Unless otherwise noted, the Company believes that all persons named in the table have sole investment power with respect to all shares of Common Stock beneficially owned by them. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date hereof upon the exercise of warrants or options or upon the conversion of convertible securities. Each beneficial owner's percentage ownership is determined by assuming that options or warrants or shares of Convertible Preferred Stock or Senior Convertible 8% Notes that are held by such person (but not those held by any other person) and which are exercisable or convertible within 60 days from the date hereof have been exercised or converted. (2) Based on 40,126,538 shares issued and outstanding as of December 23, 1999. (3) The address of this person is c/o FCI Environmental, Inc., 1181 Grier Drive, Suite B, Las Vegas, Nevada 89119. (4) Includes 532,501 Class E Common Stock Purchase Warrants and an aggregate of 765,000 shares of Common Stock issuable upon exercise of a like number of options. Also includes 132 shares of Common Stock and 27 Class E Common Stock Purchase Warrants held by Mr. Hewitt's minor child, as to which Mr. Hewitt disclaims beneficial ownership. (5) Includes 360,238 Class E Common Stock Purchase Warrants and an aggregate of 138,142 shares of Common Stock issuable upon exercise of a like number of options. 28 (6) Includes 8,620 Class E Common Stock Purchase Warrants and an aggregate of 164,000 shares of Common Stock issuable upon exercise of a like number of options. Also includes 67,500 shares of Common Stock held by G&G Diagnostics, L.P. I, 246,270 Class E Common Stock Purchase Warrants, 294,470 shares of Common Stock and a $50,000 Convertible 9% Note convertible into 384,615 shares of Common Stock held by G&G Diagnostics, L.P. II, and 47,815 shares of Common Stock, 47,815 Class E Common Stock Purchase Warrants and 8,161 shares of Convertible Preferred Stock convertible into 81,610 shares of Common Stock held by G&G Diagnostics, L.P. III, all of which Mr. Gruverman is a principal. (7) Includes 610,000 Class E Common Stock Purchase Warrants, 32,000 Class D Common Stock Purchase Warrants, 3,586 shares of Convertible Preferred Stock convertible into 35,860 shares of Common Stock, an aggregate of 125,000 shares of Common Stock issuable upon exercise of a like number of options and a $50,000 Convertible 9% Note convertible into 384,615 shares of Common Stock. Also includes 1,251,500 shares of Common Stock, 863,800 Class D Common Stock Purchase Warrants, 366,000 Class E Common Stock Purchase Warrants and 165,286 shares of Convertible Preferred Stock convertible into 1,652,860 shares of Common Stock, all held by Privatbank Vermag AG, Chur, Switzerland, as custodian for certain customers, of which company Mr. Haemmerli is Vice-Chairman. Also includes $156,000 of Senior Convertible 8% notes convertible into 678,261 shares of Common Stock held by Manport AG, of which company Mr. Haemmerli is Chief Executive Officer. (8) Includes 39,965 Class D Common Stock Purchase Warrants, 36,207 Class E Common Stock Purchase Warrants and an aggregate of 192,000 shares of Common Stock issuable upon exercise of a like number of options. (9) Includes 482,040 Class E Common Stock Purchase Warrants, an aggregate of 530,000 shares of Common Stock issuable upon exercise of a like number of options, and $65,000 in Convertible 9% Notes, convertible into 555,958 shares of Common Stock. (10) Includes 32,481 Class E Common Stock Purchase Warrants and an aggregate of 395,000 shares of Common Stock issuable upon exercise of a like number of options. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Item 10. Executive Compensation, for information concerning stock options granted and employment agreements entered into during Fiscal 1998 and Fiscal 1999 with officers and Directors of the Company. In December 1997 and January and February 1998, four directors (Geoffrey Hewitt, Byron Denenberg, Irwin Gruverman and Walter Haemmerli) and an officer (Melvin Pelley) of the Company each advanced the Company $50,000 and Mr. Haemmerli advanced an additional $75,000. These advances, aggregating $325,000 were evidenced by convertible promissory notes bearing interest at the rate of 8% per annum due five years from issuance. Each note and unpaid accrued interest aggregating $20,275 was cancelled on December 22, 1998 in payment for unsubscribed Units of the Rights Offering resulting in the issuance to the directors and officer of 1,569,431 shares of Common Stock and a like number of Class E Common Stock Purchase Warrants. Mr. Pelley advanced the Company $25,000 on February 27, 1998, and an additional $25,000 on July 1, 1998. Each of these advances is evidenced by a separate promissory note bearing interest at the rate of 8% per annum and were originally due on or before August 31, 1998. Mr. Pelley has agreed to extend the due dates of the promissory notes. Mr. Pelley advanced the Company $25,000 on June 2, 1999 and $25,000 on June 3, 1999 evidenced by promissory notes bearing interest at the rate of 9% per annum and due three years from issuance. Mr. Pelley advanced $25,000 on July 27, 1999 and $40,000 on September 29,1999, Mr. Haemmerli advanced $50,000 on August 30, 1999 and Mr. Gruverman advanced $50,000 on July 26, 1999. Each of these advances are evidenced by convertible promissory notes bearing interest at the rate of 9% per annum and due 3 years from the date of issuance. In March and August 1998, the Company obtained loans aggregating $433,000 from Privatbank Vermag AG, a private investment bank with which Mr. Haemmerli is associated. These loans (the "Bridge Loans") were provided as interim financing until the Company completed its Rights Offering. The Bridge Loans bear interest at approximately 8.5% per annum. In addition, the Company agreed to issue to Privatbank, as additional consideration, 130,000 Units (consisting of 130,000 shares of Common Stock and Class E Warrants to purchase 130,000 shares of Common Stock). The Units were issued in October 1998 as part of the Rights Offering. Also, 29 $50,000 of the Bridge Loans and $1,920 in accrued interest were converted to Common Stock and Warrants as part of the Rights Offering. The remaining $383,000 of Bridge Loans were due on July 15, 1999, when principal of $133,000 and accrued interest of $14,680 were converted to 1,136,000 shares of Common Stock. The due date of the remaining $250,000 principal amount was extended to October 15, 1999 and subsequently to January 15, 2000. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS The following is a complete list of exhibits which are incorporated herein as part of this Report. 3.1 Articles of Incorporation of Registrant, as amended. (1) 3.2 By-Laws of Registrant. (2) 4.1 Class D Warrant Agreement of the Registrant with form of Warrant Certificate. (3) 4.2 Form of 8% Senior Convertible Note Due 1999 issued in the Company's February 1996 private placement. (4) 4.3 Form of Warrant to purchase Common Stock on or before May 31, 2001. (5) 4.4 Form of Class E Common Stock Purchase Warrant. (6) 10.1 Lease Agreement and Reimbursement Agreement dated July 27, 1989 by and between the Company and Howard Hughes Properties for Hughes Airport Center, 1181 Grier Drive, Suite B, Las Vegas, Nevada. (7) 10.2 Amendment dated May 6, 1991 and September 26, 1991 to the Industrial Real Estate Lease (Exhibit 10.10) for the Company's facilities. (8) 10.3 Employee Stock Bonus Plan. (3) 10.4 Amendments dated October 23, 1990 and February 21, 1991 to the Industrial Real Estate Lease (Exhibit 10.10) for the Company's facilities. (9) - ------------------------------ (1) Incorporated by reference from the Company's January 13, 1988 Post Effective Amendment to the Registration Statement on Form S-18 (File No. 33-12097-C) as declared effective on March 3, 1988. (2) Incorporated by reference from the Company's April 15, 1987 Amendment to the Registration Statement on Form S-18 (File No. 33-12097-C) as declared effective on March 3, 1988. (3) Incorporated by reference from the Company's Registration Statement No. 33-35985 (4) Incorporated by reference from the Company's Current Report on Form 8-K for February 15, 1996. (5) Incorporated by reference from the Company's Current Report on Form 8-K on July 15, 1996. (6) Incorporated by reference from the Company's Registration Statement on Form SB-2 for October 23, 1998 (File No. 333-46555). (7) Incorporated by reference from the Company's Registration Statement No. 33-29338. (8) Incorporated by reference from the Company's Annual Report on Form 10-K for September 30, 1991. (9) Incorporated by reference from the Company's April 24, 1991 Post Effective Amendment to the Registration Statement on Form S-18 (File No. 33-35985) as declared effective on April 30, 1991. 30 10.5 Non-qualified stock option plan. (10) 10.6 Qualified Stock Option Plan. (11) 10.7 Qualified Stock Option Plan. (12) 10.8 FCI FiberChem, Inc. and FCI Environmental, Inc. 401(k) Profit Sharing Plan. (13) 10.9 Qualified Stock Option Plan (14) 10.10 License Agreement with Texas Instruments, Incorporated, dated June 15, 1995. (15) 10.11 Cooperative Development Agreement with Texas Instruments, Incorporated, dated June 15, 1995. (15) 10.12 Form of Distribution Agreement. (16) 10.13 Agreement dated November 8, 1996 by and between FCI Environmental, Inc. and Alcohol Sensors International, Ltd. CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SEC PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. (17) 10.14 OEM Strategic Alliance Agreement dated June 30, 1996 by and between Whessoe Varec, Inc. and FCI Environmental, Inc. (17) 10.15 1997 Employee Stock Plan (18) 10.16 Employment agreement with Geoffrey F. Hewitt dated October 1, 1997. (19) 10.17 Employment agreement with Melvin W. Pelley dated October 1, 1997. (19) 10.18 Employment Agreement with Thomas A. Collins dated October 1, 1997. (19) 10.19 Amendment to Whessoe Varec, Inc. OEM Strategic Alliance Agreement dated August 13, 1997. (19) 10.20 Agreement dated October 2, 1997 between the Company and entrenet Group, L.L.C. (19) - --------------------------------- (10) Incorporated by reference from the Company's Registration Statement on Form S-8 for April 28, 1992. (No. 33-47518). (11) Incorporated by reference from the Company's Proxy Statement dated May 3, 1993. (12) Incorporated by reference from the Company's Proxy Statement dated May 23, 1994. (13) Incorporated by reference from the Company's Report on Form 10-KSB for September 30, 1994. (14) Incorporated by reference from the Company's Report on Form S-8 for August 1, 1995. (15) Incorporated by reference from the Company's Report on Form 8-K/A for August 30, 1995. (16) Incorporated by reference from the Company's Report on Form 10-KSB for September 30, 1995. (17) Incorporated by reference from the Company's Report on Form 10-KSB for September 30, 1996. (18) Incorporated by reference from the Company's Proxy Statement dated May 20, 1997. (19) Incorporated by reference from the Company's Report on Form 10-KSB for September 30, 1997. 31 10.21 Arrangement Agreement between FiberChem, Inc. and Intrex Data Communications Corp., dated December 6, 1999. (20) *21.1 Subsidiaries of the Registrant. *23.1 Consent of Goldstein Golub Kessler & Company, P.C. - --------------------------------------- * filed with this Report. (20) Incorporated by reference from the Company's Current Report on Form 8-K for December 6, 1999. - --------------------------------------- (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Company during the fourth quarter ended September 30, 1999. A report on Form 8-K was filed by the Company for December 6, 1999, reporting under "Item 5. Other Events" that the Company had entered into an agreement providing for the combination of its business with that of Intrex Data Communications Corp. - --------------------------------------- 32 SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: December 28, 1999 FIBERCHEM, INC. By: /s/ Geoffrey F. Hewitt --------------------------------- President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Geoffrey F. Hewitt Chairman, President and December 28, 1999 - ------------------------- Chief Executive Officer Geoffrey F. Hewitt (Principal Executive Officer) /s/ Melvin W. Pelley Chief Financial Officer December 28, 1999 - ------------------------- (Principal Accounting Melvin W. Pelley Officer) /s/ Walter Haemmerli Director December 28, 1999 - ------------------------- Walter Haemmerli /s/ Gerald T. Owens Director December 28, 1999 - ------------------------- Gerald T. Owens /s/ Irwin J. Gruverman Director December 28, 1999 - ------------------------- Irwin J. Gruverman /s/ Byron A. Denenberg Director December 28, 1999 - ------------------------- Byron A. Denenberg 33 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS FIBERCHEM, INC. We have audited the accompanying consolidated balance sheets of FiberChem, Inc. and Subsidiaries as of September 30, 1999 and 1998 and the related consolidated statements of operations, stockholders' deficiency, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FiberChem, Inc. and Subsidiaries as of September 30, 1999 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. GOLDSTEIN GOLUB KESSLER LLP New York, New York November 16, 1999, except for the third paragraph of Note 1 and Note 12, as to which the date is December 6, 1999 F-1 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
September 30, September 30, 1998 1999 --------------------- ------------------- 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 --------------------- ------------------- --------------------- -------------------
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, 1998 1999 --------------------- ------------------- Current liabilities: Senior convertible notes payable (note 6) $ 1,600,000 --- Bank loan payable (note 6) 32,452 421,949 Other current notes payable --- 250,000 Current installments of note payable (note 6) 7,808 --- Accounts payable 396,164 272,906 Deferred salaries 179,806 76,353 Accrued salaries and benefits 157,365 199,221 Accrued warranty 113,767 146,282 Accrued legal, accounting and consulting 112,320 70,600 Accrued commissions 41,929 33,799 Other accrued expenses 84,872 93,856 Customer deposits --- 37,775 Interest payable 50,065 55,587 --------------------- ------------------- Total current liabilities 2,776,548 1,658,328 Senior convertible notes payable (note 6) --- 1,621,000 Notes payable to officers, directors and affiliates (note 6) 808,000 265,000 Note payable, net of current installments (note 6) 60,000 --- --------------------- ------------------- Total liabilities 3,644,548 3,544,328 --------------------- ------------------- Stockholders' equity (deficiency) (notes 6 and 7): Preferred stock, $.001 par value. Authorized 10,000,000 shares; 218,998 and 207,848 convertible shares issued and outstanding at September 30, 1998 and September 30, 1999, respectively; at liquidation value of $15 per share 3,284,970 3,117,720 Common stock, $.0001 par value. Authorized 150,000,000 shares; 26,441,407 and 39,831,038 shares issued and outstanding at September 30, 1998, and September 30, 1999, respectively 2,644 3,983 Additional paid-in capital 27,362,272 29,979,833 Deficit (31,988,734) (34,210,476) Deferred costs --- (69,400) Stock subscrition receivable (23,458) --------------------- ------------------- Stockholders' equity (deficiency) (1,338,848) (1,201,798) Commitments and contigencies (notes 6,7 and 8) --------------------- ------------------- Total liabilities and stockholders' equity $ 2,305,700 $ 2,342,530 --------------------- ------------------- --------------------- -------------------
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, ------------------------------------------- 1998 1999 -------------------- -------------------- 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) -------------------- -------------------- -------------------- --------------------
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 (DEFICIENCY) YEARS ENDED SEPTEMBER 30, 1998 AND 1999
Preferred Stock Common Stock Additional -------------------------- ---------------------------- Paid-In Shares Amount Shares Amount Capital Deficit ----------- -------------- ------------- ------------- ------------ ------------- Balance at September 30, 1997 218,998 $ 3,284,970 25,515,660 $ 2,552 27,192,749 (29,596,509) Common stock issued: Exercise of options -- -- 5,000 1 1,099 For services -- -- 676,500 67 121,445 Conversion of senior convertible notes payable (note 6) -- -- 244,047 24 46,979 Net loss (2,392,225) ----------- -------------- ------------- ------------- ------------ ------------- Balance at September 30, 1998 218,998 3,284,970 26,441,207 2,644 27,362,272 (31,988,734) Common stock issued: For conversion of preferred stock (11,150) (167,250) 111,500 11 167,239 -- For cash -- 5,282,709 528 827,649 -- For subscription receivable -- 106,625 10 23,448 -- In connection with exchange of senior convertible notes payable and partial interest thereon -- 647,852 65 148,941 -- For payment of interest on senior convertible notes payable -- 1,296,800 130 194,390 -- For conversion of notes and interest payable to officers, directors and affiliates -- 3,071,677 307 568,360 -- For conversion of other notes payable -- 272,727 27 59,973 -- For services -- 1,808,094 181 277,668 -- For payment of deferred salaries -- 763,847 77 143,264 -- For exercise of options -- 28,000 3 4,897 -- Class E warrants issued for cash -- -- -- 8,799 -- Warrants issued for services -- -- -- 30,000 -- Deferred costs recognized -- -- -- -- -- From warrant exercise price reduction -- -- -- 41,565 -- From E warrant exchange -- -- -- 121,368 -- Net loss -- -- -- -- (2,221,742) ----------- -------------- ------------- ------------- ------------ ------------- Balance at September 30, 1999 207,848 $ 3,117,720 39,831,038 $ 3,983 $ 29,979,833 ($34,210,476) ----------- -------------- ------------- ------------- ------------ ------------- ----------- -------------- ------------- ------------- ------------ ------------- Receivable Deferred for Exercise Costs of Rights Total ------------- ------------ ----------- Balance at September 30, 1997 0 0 883,762 Common stock issued: Exercise of options -- 1,100 For services -- 121,512 Conversion of senior convertible notes payable (note 6) -- 47,003 Net loss -- (2,392,225) ------------- ------------ ----------- Balance at September 30, 1998 0 0 (1,338,848) Common stock issued: For conversion of preferred stock -- -- -- For cash -- -- 828,177 For subscription receivable -- (23,458) -- In connection with exchange of senior convertible notes payable and partial interest thereon -- -- 149,006 For payment of interest on senior convertible notes payable -- -- 194,520 For conversion of notes and interest payable to officers, directors and affiliates -- -- 568,667 For conversion of other notes payable -- -- 60,000 For services (156,152) -- 121,697 For payment of deferred salaries -- -- 143,341 For exercise of options -- -- 4,900 Class E warrants issued for cash -- -- 8,799 Warrants issued for services -- -- 30,000 Deferred costs recognized 86,752 -- 86,752 From warrant exercise price reduction -- -- 41,565 From E warrant exchange -- -- 121,368 Net loss -- -- (2,221,742) ------------- ------------ ----------- Balance at September 30, 1999 (69,400) (23,458) (1,201,798) ------------- ------------ ----------- ------------- ------------ -----------
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, -------------------------------------- 1998 1999 ------------------- ----------------- 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) ------------------- -----------------
The accompanying notes and independent auditor's reports should be read in conjunction with the consolidated financial statements. F-6 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, -------------------------------------- 1998 1999 ------------------- ----------------- 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 ------------------- ----------------- ------------------- -----------------
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, 1998 and 1999 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) NATURE OF BUSINESS AND LIQUIDITY FiberChem, Inc. and its subsidiaries (collectively the "Company" or "FCI") develops, produces, markets and licenses fiber optic chemical sensors (FOCS) for environmental monitoring in the air, water and soil. The Company's primary markets and potential customers are the petroleum production, refinery and distribution chains. Other important markets and customers include remediation companies, environmental consultants, shipping ports, airports and military bases. The Company markets its products world-wide using strategic alliances, distribution agreements and direct sales activities. The Company's consolidated financial statements for the years ended September 30, 1998 and 1999 have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company incurred net losses of $2,392,225 and $2,221,742 for the years ended September 30, 1998 and 1999, respectively, and as of September 30, 1999 had an accumulated deficit of $34,210,476 and a stockholders' deficiency of $1,201,798. Management recognizes that the Company must generate additional revenues or reductions in operating costs and may need additional financing to enable it to continue its operations. On December 6, 1999, the Company entered into an agreement providing for the combination of its business with that of Intrex Data Communications Corp. (See Note 12.) The Company is pursuing several potential sources for $5,000,000 in new financing associated with the business combination. However, no assurance can be given that this or any additional financing can be obtained on terms satisfactory to the Company, nor that forecasted sales will be realized to achieve profitable operations. (2) SIGNIFICANT ACCOUNTING POLICIES (a) PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated. (b) INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. (c) EQUIPMENT Equipment is stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, generally five years. (d) TECHNOLOGY COSTS Technology costs represent values assigned to proven technologies acquired for cash and in exchange for issuance of common stock (Note 4). Patents on certain technologies are pending. Proven technologies are amortized using the straight-line method over an eight year period. (e) PATENT COSTS Costs incurred in acquiring and filing patents are capitalized and amortized using the straight-line method over the shorter of economic or legal life. All existing patents are F-8 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- being amortized over four years. In 1998 the Company reassessed the expected economic life of new patents and changed the period of amortization from 8 years to 4 years due to the shorter expected economic life of such patents in the current technological environment. The Company incurred approximately $88,000 of additional amortization expense for the year ended September 30, 1998 for this change in estimate. (f) REVENUE RECOGNITION The Company recognizes revenue from product sales when title passes, which is upon shipment of product to the customer. There is generally no right of return except for normal warranties. Additionally, the Company performs research and testing services for others under short-term contracts. Revenue on these contracts is recorded when services are performed. (g) WARRANTY The Company warrants its products for a period of one year from the date of delivery, provided the products are used under normal operating conditions. The Company accrues a reserve based on estimated future costs for product warranty, which is charged to cost of sales at the time of sale. (h) RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. (i) PER SHARE DATA In 1998 the Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share. Shares issuable on the exercise of stock options and warrants have been excluded because of their anti-dilutive effect on loss per share. Net loss per common share is computed using the weighted-average number of shares outstanding. (j) INCOME TAXES The Company utilizes Statement of Financial Standards No. 109, ACCOUNTING FOR INCOME TAXES ("Statement 109"). Under this asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (k) STOCK-BASED EMPLOYEE COMPENSATION AWARDS In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company has elected to apply APB Opinion 25 and related interpretations in accounting for its stock options issued to employees and, accordingly, does not recognize additional compensation cost as required by SFAS No. 123. The Company has, however, provided the pro forma disclosures as if the Company had adopted the cost recognition requirements (see Note 7). F-9 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (l) ESTIMATES Preparing financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Examples include provision for bad debts; inventory obsolescence; and the useful lives of patents, technologies and equipment. Actual results may differ from these estimates. (m) Certain reclassifications have been made in the 1998 presentation to conform to the 1999 presentation. (n) Recent accounting pronouncements. During Fiscal 1999 the Company adopted Statement of Financial Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), which establishes new standards for reporting and displaying comprehensive income and its components. The adoption of SFAS 130 had no impact on the Company's consolidated financial position, results of operations or cash flows. Also during Fiscal 1999, the Company adopted Statement of Financial Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"), which requires disclosure of certain information regarding operating segments, products and services, geographic areas of operation and major customers. The adoption of SFAS 131 had no impact on the Company's consolidated financial position, results of operations or cash flows. In March 1998 the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance on the accounting for costs of computer software used internally, including identifying the characteristics of internal-use software and providing examples to assist in determining when computer software is for internal use. The Company is required to adopt this Statement in Fiscal 2000. The adoption of SOP 98-1 is expected to have no impact on the Company's consolidated financial position, results of operations or cash flows. In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 requires that all start-up costs related to new operations must be expensed as incurred and that all start-up costs that were capitalized in the past must be written off when SOP 98-5 is adopted. The Company is required to implement SOP 98- 5 in Fiscal 2000. The Company expects that the adoption of SOP 98-5 will not have a material impact on its financial position, results of operations or cash flows. In June 1998 the Financial Accounting Standards Board issued Statement of Financial Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. The Company is required to implement SFAS 133 in Fiscal 2001. Adoption of SFAS 133 is expected to have no impact on the Company's consolidated financial position, results of operations or cash flows. (3) Inventories F-10 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Inventories consist of:
September 30, ------------- 1998 1999 ---- ---- 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 ---------- ---------- ---------- ----------
(4) TECHNOLOGY COSTS Technology costs include proven technologies acquired by the Company to be utilized for various environmental and medical purposes. These technologies include FOCS(R) which are capable of detecting and monitoring various chemical conditions to be used in environmental, medical and process control applications. (5) PATENT COSTS Patent costs include costs incurred in acquiring, filing and prosecuting patents and patent applications. The Company's policy in general is to apply for patents in major European and Asian countries as well as in the United States. (6) NOTES PAYABLE On February 15, 1996, the Company completed an offering under Regulation S, promulgated under the Securities Act of 1933, as amended (the "Offering"), of 8% Senior Convertible Notes due February 15, 1999 (the "Notes"), for $2,825,000. Interest on the Notes is to be paid semi-annually, commencing August 15, 1996, at a rate of 8% per annum. The Notes are convertible into shares of Common Stock of the Company at a conversion price (the "Conversion Price") of, initially, $0.80 per share at any time after March 26, 1996 and before the close of business on February 14, 1999. The Conversion Price was adjusted, in accordance with the original note agreement, to $0.4078, a price representing a 10% discount from the average closing bid price of the Common Stock for the 30 business days prior to February 15, 1997. During Fiscal 1998, the Company received an unsolicited offer to convert $25,000 of the Notes at a conversion price of $0.21 per share, and another offer to convert $25,000 of the Notes at a conversion price of $0.20 per share, which were approximately the then current market values of the Common Stock. Accordingly, the Company issued 244,047 shares for the conversions. All other Note holders were offered the same temporary conversion price. As of February 15, 1999, an aggregate face amount of $1,225,000 of the Notes had been converted to Common Stock resulting in the issuance of 1,742,851 shares of Common Stock. On February 2, 1999, the Company offered to exchange the Notes at their maturity on February 15, 1999 for new Notes (the "New Notes") with a conversion price of $0.23, which was established by using the ten-day average closing price of the Common Stock prior to February 15, 1999. The New Notes provide for semi-annual interest payments at 8% per annum in cash or at 12% per annum in stock (at the Company's option) and are due February 15, 2002. The Company may require conversion if the closing bid price of the Common Stock exceeds 200% of the conversion price for 20 consecutive trading days. In F-11 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- all other material respects, the New Notes have terms similar to those of the old Notes. In order to encourage exchange of the Notes for New Notes, the Company offered a bonus, payable in Common Stock valued at approximately current market, of 8% of the face amount of Notes exchanged for New Notes. The Company offered an additional Common Stock bonus equal to 4% of the face amount of notes exchanged if the holder agreed to accept additional New Notes in payment of the semi-annual interest payment due February 15, 1999. All of the $1,600,000 principal amount of old Notes were exchanged for New Notes, and an additional $21,000 of New Notes were issued as payment of interest due on $525,000 of old Notes. An aggregate of 556,544 shares of Common Stock (valued at $0.23 per share, or a total of $128,005) were issued as the exchange bonus. The exchange bonus of $128,005 and legal and other associated costs of $30,011 are being amortized to interest expense over the three-year term of the New Notes. An aggregate of 91,308 shares of Common Stock (valued at $0.23 per share, or a total of $21,001) was issued as the interest bonus, and charged to interest expense during Fiscal 1999. During August 1999, the Company exercised its option to pay interest on the New Notes in shares of Common Stock. In accordance with the provisions of the New Notes, 1,296,800 shares of Common Stock were issued, valued at $194,520 ($0.15 per share), representing interest at 12% per annum for the period February 16, 1999 through February 15, 2000. The Company paid fees and expenses associated with the offering amounting to $428,204, which has been amortized as interest expense over the three-year term of the Notes or until conversion, if earlier, when the proportionate unamortized amount is charged to additional paid in capital. As of February 15, 1999 approximately $163,278 of unamortized deferred financing cost had been recorded as a reduction in additional paid-in capital associated with the $1,225,000 of the Notes converted to Common Stock. Also in connection with the Offering, the Company issued to the Placement Agent for the Offering, for nominal consideration, warrants to purchase up to 353,125 shares of Common Stock, at an exercise price of $0.80 per share (the "Exercise Price"), which had been adjusted to $0.4078 per share in accordance with the original Placement Agent Agreement and has been further adjusted to $0.23 per share (See Note 7). Also in accordance with the terms of the warrants, the number of shares exercisable has been adjusted, based on the adjusted Exercise Price, to 692,742 shares of Common Stock. These warrants are exercisable at any time on or after August 15, 1996 through February 14, 2001 and contain certain piggyback registration rights. On July 7, 1998, the Company arranged a line of credit with Silicon Valley Bank. The agreement provides for maximum loans of $1 million, and is secured by accounts receivable, inventories, equipment and intellectual property. The agreement provides for advances against specific sales invoices at an annualized interest rate of approximately 19.75%. During Fiscal 1998, the Company borrowed approximately $413,000 against the line of credit and repaid approximately $381,000. During Fiscal 1999, the Company borrowed approximately $912,000 against the line of credit and repaid approximately $522,000. As of September 30, 1999, the Company owed $421,949 against the line of credit. On October 2, 1997, the Company entered into an agreement with entrenet Group, LLC ("entrenet") for advice and assistance in developing and executing business plans, financing strategies and business partnerships, acquisitions and mergers. As amended in July, 1998, the agreement provides that for its services, entrenet will receive a cash fee of $40,000 in eight installments of $5,000 each (as defined in the agreement); $60,000 in the form of a 10% convertible note, payable on the earlier of (a) a financial transaction (as defined in the agreement) or (b) two years; 5% of the value of any financial transaction (as defined in the agreement); and 5% of any financing provided by or introduced directly by entrenet. In conjunction with the Rights Offering (See Note 7) concluded on December 22, 1998, the principal, accrued interest and unpaid fees were converted to 400,000 shares of Common Stock and 400,000 Class E Common Stock Purchase Warrants. In March and August 1998, the Company obtained loans aggregating $433,000 from Privatbank Vermag AG, a private investment bank with which a director of the Company is associated. These loans F-12 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (the "Bridge Loans") were provided as interim financing until the Company completed its Rights Offering (See Capital Stock below). The Bridge Loans bear interest at approximately 8.5% per annum. In addition, the Company agreed to issue to Privatbank, as additional consideration, 130,000 Units (consisting of 130,000 shares of Common Stock and Class E Warrants to purchase 130,000 shares of Common Stock). The Units were issued in October 1998 as part of the Rights Offering. Also, $50,000 of the Bridge Loans and $1,920 in accrued interest were converted to Common Stock and Warrants as part of the Rights Offering. The remaining $383,000 of Bridge Loans were due on July 15, 1999, when principal of $133,000 and accrued interest of $14,680 were converted to 1,136,000 shares of Common Stock. The due date of the remaining $250,000 principal amount was extended to October 15, 1999 and subsequently to January 15, 2000. During Fiscal 1998, directors and officers of the Company advanced an aggregate of $375,000 to the Company. These advances bear interest at the rate of 8% per annum and are due at various dates between December 14, 2002 and February 4, 2003 unless converted into Common Stock prior to maturity. An aggregate of $325,000 of these advances and $20,329 in accrued interest was converted to Common Stock and Warrants in conjunction with the Rights Offering. During June 1999, an officer advanced an additional $50,000 due in June 2002 with interest of 9% per annum. During July and August 1999 officers and directors advanced an additional $125,000 in exchange for three year 9% notes convertible into common stock at $0.13 per share, the then market value of the Common Stock. During September 1999, an officer advanced an additional $40,000 in exchange for a three year 9% note convertible into Common Stock at $0.11 per share, the then market value of the Common Stock. The maturities of the notes and bank loans payable are as follows: Fiscal 2000 $671,949 Fiscal 2001 --- Fiscal 2002 1,836,000 Fiscal 2003 50,000 ---------- $2,557,949 ---------- ---------- Related party interest expense incurred during the years ended September 30, 1998 and 1999 amounted to $39,235 and $56,111, respectively. (7) STOCKHOLDERS' EQUITY On October 23, 1998, the Company granted, for no consideration to holders of its Common Stock, Preferred Stock and warrants, transferable rights (the "Rights") to subscribe for units (the "Units") at a subscription price of $0.22 per Unit. Each Unit consists of one share of Common Stock and one redeemable Class E Warrant exercisable for one share of Common Stock at an exercise price for one year (through October 23, 1999) of $0.25 per share; then through October 23, 2000 at $0.35; then through October 23, 2001 at $0.50 per share; then through October 23, 2002 at $0.70 per share; then through October 23, 2003 (at which time the Class E Warrants expire) at $0.90 per share. Each holder of record as of October 16, 1998, of Common Stock and Warrants received one Right for every four shares of Common Stock or Warrants held, and each holder of Preferred Stock received 2.5 Rights for each share of Preferred Stock held. An aggregate of 8,976,962 Rights were issued. An aggregate of 7,678,679 Rights were exercised as of the close of the offering on December 22, 1998, resulting in gross proceeds to the Company of $1,689,309 and the issuance of 7,678,679 shares of Common Stock and a like number of Class E Warrants. F-13 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Of the total 7,678,679 Rights exercised, 4,195,209 were exercised for cash of $922,946; 1,805,677 were exercised in exchange for the payment of advances (and accrued interest thereon) from officers, directors and affiliates aggregating $397,249; 272,727 were exercised in payment of a $60,000 note payable to others; 489,347 were exercised in payment of $107,656 of deferred salaries due to members of management of the Company; and 915,719 were exercised in payment for legal, consulting and other services totalling $201,458. The Company incurred $286,474 in legal, accounting, distribution and other costs associated with the Rights Offering, resulting in net proceeds of $1,402,835. During Fiscal 1999, directors and officers of the Company purchased an aggregate of 1,087,500 restricted shares of Common Stock for $141,703 in cash. The Company also issued 274,500 restricted shares of Common Stock to members of management of the Company in return for the cancellation of deferred salaries aggregating $35,685, net of taxes of $23,065. During Fiscal 1993 and Fiscal 1994, the Company conducted a private placement of convertible preferred stock ("Convertible Preferred Stock"). Each share of the Convertible Preferred Stock is convertible into ten shares of FCI Common Stock, initially at $1.50 per share. The conversion ratio is subject to customary anti-dilution provisions. Dividends are cumulative and are payable annually, at the sole discretion of the holders, in cash (11%) or additional shares of Convertible Preferred Stock (8% of the number of shares owned at date of declaration). The Convertible Preferred Stock entitles the holder to a liquidation preference of $15 per share upon liquidation, dissolution or winding up of the Company. The Convertible Preferred Stock is redeemable by the Company when and if the closing bid price of FCI's Common Stock is at least 200% of the conversion price for twenty consecutive trading days. Upon redemption, the Company would issue ten shares of its Common Stock for each share of Convertible Preferred Stock. During Fiscal 1999, 11,150 shares of Convertible Preferred Stock were converted to 111,500 shares of Common Stock. As of September 30, 1999, the Company had 207,848 shares of Convertible Preferred Stock outstanding. On September 12, 1997, the Board of Directors determined that, in view of the recent trading price of the Company's Common Stock and in view of the Company's current cash position, it would not be appropriate to declare the annual dividend payable on the Convertible Preferred Stock on November 1, 1997. Likewise, in September 1998 and September 1999, the Board of Directors determined not to declare the annual dividend payable on November 1, 1998 and 1999, respectively. As a result, the undeclared dividends, aggregating $1,028,848 (if elected entirely in cash, or 53,981 additional shares of Convertible Preferred Stock if elected wholly in additional shares), will accumulate in accordance with the terms of the Convertible Preferred Stock. Had the Company declared a preferred stock dividend, net loss per common share in Fiscal 1999 would be as follows: 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) --------------- ---------------
On May 31, 1996 the Company completed an offering under Regulation S, of 3,333,333 Units, at a price of $0.90 per Unit for total gross proceeds of $3,000,000 before costs and expenses of the offering. The Company paid fees and expenses associated with the Unit offering amounting to $345,683. Each Unit consisted of one share of Common Stock and one warrant to purchase one share of Common Stock (the "Unit Warrants") the shares and warrants being immediately separable. The Unit Warrants are each exercisable at $1.00 at any time from May 31, 1996 through May 30, 2001. On April 23, 1999, as an inducement to encourage exercise of warrants, the Company offered to exchange Unit Warrants for Class E F-14 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Warrants on a one-for-one basis. As of September 30, 1999, 1,696,333 Unit Warrants had been exchanged for E Warrants, resulting in a charge to income of $118,743, reflecting the higher valuation of the E Warrants over the Unit Warrants of $0.07 per warrant. The respective values of Unit Warrants and E Warrants were determined using Black-Scholes estimates of market values. In connection with the 1996 Unit offering, the Company issued to the Placement Agent for the offering, for nominal consideration, warrants to purchase up to 333,333 shares of Common Stock ("the Placement Agent Warrants"), at an exercise price of $0.90 per share which has been adjusted to $0.2343 per share in accordance with the Placement Agent Agreement, and the number of shares issuable upon exercise has been adjusted to 1,280,411. These Placement Agent Warrants are exercisable at any time from November 30, 1996 through May 30, 2001. In May 1999 the Company issued 300,000 Class E Warrants for cash of $10,000 and issued 999,000 shares of Common Stock, valued at $0.15 per share, and warrants to purchase 600,000 shares of Common Stock in exchange for investor relations and other services through January 2000. These warrants are exercisable for 3 years at exercise prices of $0.18 per share for 200,000 shares, $0.50 for 200,000 shares and $1.00 for 200,000 shares. The Common Stock and warrants were valued at a total of $203,850, which is being amortized to expense monthly over the nine months of the agreement for services. In March 1994, the Company's Board of Directors adopted a 1994 Employee Stock Option Plan ("1994 Plan"), approved by stockholders at the May 23, 1994 Annual Stockholders Meeting, covering an aggregate of 1,000,000 shares of FCI Common Stock. As of September 30, 1999, the Company has issued 984,885 stock options, net of forfeitures and regrants, (with initial exercise prices ranging from $1.00 per share to $2.125 per share and current exercise prices of $1.00 per share) under the 1994 Plan to employees of the Company's wholly-owned subsidiary, FCI Environmental, Inc. ("Environmental"). During Fiscal 1998 and Fiscal 1999, 934,385 options expired unexercised and at September 30, 1999 an aggregate of 50,500 options remain exercisable under the 1994 Plan. In April 1995, the Company's Board of Directors adopted a 1995 Employee Stock Option Plan ("1995 Plan"), approved by the stockholders at the May 8, 1995 Annual Stockholders Meeting, covering an aggregate of 1,000,000 shares of FCI Common Stock. As of September 30, 1999, the Company has issued 948,047 stock options, net of forfeitures, (with initial and current exercise prices ranging from $0.93 per share to $1.38 per share) under the 1995 Plan to employees of Environmental and Directors of the Company. During the year ended September 30, 1999, 100,000 options expired unexercised. An aggregate of 660,442 options remain exercisable under the 1995 Plan. In January 1997 the Company's Board of Directors adopted a 1997 Employee Stock Option Plan ("1997 Plan"), approved by the stockholders at the June 23, 1997 Annual Stockholders Meeting, covering an aggregate of 1,500,000 shares of Common Stock and restricting the granting of options to purchase approximately 675,000 shares of Common Stock authorized under previous stock option plans. As of September 30, 1999 the Company has issued options to purchase 1,441,000 shares of Common Stock at prices ranging from $0.15 to $0.25 under the 1997 Plan to employees and consultants of Environmental and Directors of the Company. An aggregate of 1,403,000 options remain exercisable under the 1997 Plan. In May 1999, the Company's Board of Directors adopted a 1999 Employee Stock Option Plan ("1999 Plan"), which is to be submitted for approval by the stockholders at the next Annual Stockholders Meeting, covering an aggregate of 5,000,000 shares of Common Stock. As of September 30, 1999, the Company has issued restricted options to purchase 1,610,000 shares of Common Stock at an exercise price of $0.125 under the 1999 Plan to employees of Environmental and Directors of the Company. An aggregate of 1,610,000 options remain exercisable under the 1999 Plan. F-15 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Effective October 1, 1996, cash compensation to directors was eliminated and replaced by the granting of stock options for service as a director and for service on standing committees. During Fiscal 1998, the Company granted to its four non-management directors options to purchase an aggregate of 150,000 shares of Common Stock at $0.15 per share, which was the fair market value of the Common Stock as of the date of the grants. During Fiscal 1999, the Company granted to its four non-management directors options to purchase an aggregate of 250,000 shares of Common Stock at $0.125 per share, which was the fair market value of the Common Stock on the date of the grants. The Company has granted options under qualified stock option plans as well as other option plans to employees, directors, officers, consultants and other persons associated with the Company who are not employees of, but are involved in the continuing development of the Company. A summary of the status of the Company's stock option plans as of September 30, 1998 and 1999 and changes during those years are as follows:
1998 1999 ------------------------------ ------------------------------ Weighted Weighted Average Average Fixed Options Options Exercise Options Exercise Price Price - ------------------------------ -------------- ------------ ------------- ------------- 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 ========= =========
The following table summarizes information about stock options outstanding and exercisable at September 30, 1998 and 1999.
Weighted Average Weighted Range of Exercise Number Outstanding Remaining Average September 30 Prices and Exercisable Contractual Life Exercise Price - ------------------ -------------------- ------------------------- --------------------- ----------------- 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
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 ------------------------------------ ---------------------------------- 1998 1999 1998 1999 ----------------- --------------- --------------- --------------- 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)
No tax effect was applied in computing loss per share under SFAS No. 123. The Company's assumptions used to calculate the fair values of options issued were (i) risk-free interest rate of 6.0%, (ii) expected life of five years, (iii) expected volatility of 172%, and (iv) expected dividends of zero. F-16 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (8) COMMITMENTS AND CONTINGENCIES The Company entered into an agreement to lease office space for a five-year period beginning in January 1990, which expired in January 1995. The Company and the lessor have agreed to a month-to-month lease which is terminable by either party upon 30 days notice. Monthly payments under the lease were originally $8,807 and escalated approximately $1,300 every twelve months. Current base monthly payments under the month-to-month lease are $12,786. Rent expense during Fiscal 1998 and 1999 was $170,869 and $172,015, respectively. The Company is pursuing alternatives, including a renewal of the month-to-month lease at approximately the current base monthly rental charge. The Company has implemented an Internal Revenue Code Section 401(k) Profit Sharing Plan (the "Plan"). The Plan provides for voluntary contributions by employees into the Plan subject to the limitations imposed by Internal Revenue Code Section 401(k). The Company will match employee contributions at a rate of 50% of the employee's contribution up to a maximum of 2% of the employee's compensation. The Company matching funds are determined at the discretion of management and are subject to a five-year vesting schedule from the date of original employment. The Company's 401(k) matching expense for the years ended September 30, 1998 and 1999 totaled $15,888 and $15,325, respectively. The Company is involved in litigation incidental to its business. In the opinion of the Company's management, the expected outcome of such litigation will not have a material effect on the financial position of the Company. (9) INCOME TAXES Income tax benefit attributable to losses from continuing operations for the year ended September 30, 1998 and 1999 differed from the amount computed by applying the federal income tax rate of 34% to pretax loss from operations as a result of the following:
1998 1999 ---- ---- 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 $ --- $ --- ======= =======
Components of the net deferred tax asset as of September 30, 1998 and 1999 are as follows:
1998 Change 1999 ---- ------ ---- 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 $ --- $ --- $ --- ======== ======== ========
The deferred tax asset is comprised primarily of the tax effects of the net operating loss carryforwards, reserve for inventory obsolescence and allowance for doubtful accounts recorded for financial reporting purposes. The deferred tax liability primarily represents the tax effect of the difference between depreciation recorded for financial statement and income tax reporting purposes. The Company has recorded a valuation allowance in accordance with the provisions of Statement 109 to reflect the estimated amount of deferred tax assets which may not be realized. In assessing the F-17 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- realizability of deferred tax assets, Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. At September 30, 1999, the Company has net operating loss carryforwards for federal income tax purposes of approximately $29,821,000 which are available to offset future taxable income, if any, through 2019. The following table summarizes the dates of generation and expiration of the Company's federal net operating loss carryforward:
------------------------------------------------------------------------------------------------ Year Ended NOL NOL Expiration September 30, Generated Utilized Carryover September 30, ------------------------------------------------------------------------------------------------ 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 ------------------------------------------------------------------------------------------------
However, the use of carryforwards to offset future taxable income is dependent upon having taxable income in the legal entity originally incurring the loss and will be further limited in each year to an amount equal to the Federal long-term tax exempt interest rate times the entity's market value at the time a significant change in ownership occurred. The Company cannot determine the effect of these limitations. (10) FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"), DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. Accordingly, the aggregate fair value amounts presented are not intended to represent the underlying value of the net assets of the Company. The carrying amounts at September 30, 1999 for cash, receivables, accounts payable and accrued liabilities approximate their fair values due to the short maturity of these instruments. In addition the estimated fair value of notes payable approximates the related carrying value at September 30, 1999. (11) MAJOR CUSTOMERS During Fiscal 1998, the Company had sales to one customer of approximately $387,000 (29% of revenues) and a second customer of approximately $147,000 (11% of revenues). During Fiscal 1999, the Company had sales to the same second customer of approximately $782,000 (40% of revenues) and to a third customer of approximately $218,000. During Fiscal 1998 and Fiscal 1999, approximately 80% of revenues were from customers in the United States. Revenues from the Company's distributor in the F-18 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Republic of China (Taiwan) were approximately 7% and 5% of total revenues in Fiscal 1998 and Fiscal 1999, respectively. Other sources of revenue during Fiscal 1998 included customers and distributors in the Netherlands (4%), the United Kingdom (3%), Canada, Mexico, Japan and others. During Fiscal 1999 other sources of revenues included customers and distributors in Germany (5%), Canada (3%), the United Kingdom (2%), Mexico, Japan, the Netherlands and others. (12) SUBSEQUENT EVENTS On December 6, 1999 the Company and Intrex Data Communications Corp., a British Columbia company ("Intrex") entered into an Arrangement Agreement providing for a business combination of FiberChem and Intrex. The agreement provides that all of Intrex's outstanding common shares will be exchanged for 62,904,152 FiberChem common shares, representing the number of FiberChem common shares and certain equivalents outstanding on November 9, 1999. Accordingly, the shareholders of each company will have an approximately equal interest in the combined enterprise. Upon completion of the transaction, FiberChem is to be renamed DecisionLink, Incorporated and will continue to be traded on the electronic over-the-counter bulletin board. The completion of the transaction is subject to the satisfaction or waiver of certain conditions, including, among others: (i) the approval of the arrangement by Intrex common shareholders and the Supreme Court of British Columbia, (ii) the accuracy of representations and warranties and other usual closing conditions and (iii) $5,000,000 in new financing proceeds being available to FiberChem immediately following the combination on terms and conditions satisfactory to FiberChem and Intrex. The Arrangement Agreement also provides that certain outstanding Intrex warrants and convertible securities will be exchanged for similar FiberChem securities on the basis of the common share exchange ratio for the transaction. Under the agreement, Intrex shareholders will have the option initially to exchange their Intrex voting common shares for a combination of non-voting Intrex shares and special non-participating voting FiberChem shares (the "deferral shares"). Shareholders who elect to receive deferral shares can at any time elect to exchange them for the number of FiberChem common shares the holder was initially entitled to receive. On or after December 6, 2009, holders of deferral shares can be required to make the exchange. Intrex is a private company which provides proprietary Internet and communications technology for communicating data to or from remote or mobile assets on a real-time basis using wireless, satellite and cellular data systems. Data is routed through Intrex's global network which acts as a data gateway and applications service provider allowing customers to monitor and control remote or mobile assets such as gas wells, pipelines, compressors, storage tanks, offshore platforms, or service vehicles directly from a desktop PC. Intrex is a licensed reseller of the Orbcomm Global LP low earth orbit or LEO satellite data and messaging communications services. Orbcomm is a partnership owned by Orbital Sciences Corporation and Teleglobe, Inc. of Canada. Intrex also has communications agreements that provide satellite services through Norcom, Inc. as well as digital cellular services. FiberChem will continue to pursue its existing aboveground storage tank, offshore and sensor markets and intends, upon completion of the transaction, to incorporate Intrex's technology where appropriate. FiberChem also intends to pursue new business in Intrex markets that can incorporate FiberChem technology. F-19 EXHIBIT NO. 21.1 SUBSIDIARIES OF FIBERCHEM, INC. NAME STATE OF INCORPORATION ---- ---------------------- FCI Environmental, Inc. (formerly FCI Instruments, Inc.) Nevada Fiberoptic Medical Systems, Inc. (inactive) Nevada PetroTester, Inc. (inactive) New Mexico EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS' The Board of Directors and Shareholders FiberChem, Inc. We hereby consent to the incorporation by reference in Registration Statements No. 33-61479 and 33-82330 on Form S-8 of our report dated November 16, 1999, except for the third paragraph of Note 1 and Note 12, as to which the date is December 6, 1999, related to the consolidated balance sheet of FiberChem, Inc. and Subsidiaries as of September 30, 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended, which report appears in the September 30, 1999 annual report on Form 10-KSB of FiberChem, Inc. and Subsidiaries. GOLDSTEIN GOLUB KESSLER LLP New York, New York December 29, 1999 EXHIBIT 27 ARTICLE 5 LEGEND THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1999 AND 1998 AND FOR EACH OF THE YEARS IN THE TWO YEAR PERIOD ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. /LEGEND PERIOD-TYPE YEAR FISCAL-YEAR-END SEP-30-1999 PERIOD-START OCT-01-1998 PERIOD-END SEP-30-1999 CASH 21,760 SECURITIES 0 RECEIVABLES 739,825 ALLOWANCES (92,423) INVENTORY 1,261,437 CURRENT-ASSETS 2,052,752 PP&E 704,964 DEPRECIATION (645,163) TOTAL-ASSETS 2,342,530 CURRENT-LIABILITIES 1,658,328 BONDS 1,886,000 PREFERRED-MANDATORY 0 PREFERRED 3,117,720 COMMON 3,983 OTHER-SE (4,323,501) TOTAL-LIABILITY-AND-EQUITY 2,342,530 SALES 1,957,110 TOTAL-REVENUES 1,957,110 CGS 985,444 TOTAL-COSTS 3,635,220 OTHER-EXPENSES 0 LOSS-PROVISION 0 INTEREST-EXPENSE 366,666 INCOME-PRETAX (2,221,742) INCOME-TAX 0 INCOME-CONTINUING (2,221,742) DISCONTINUED 0 EXTRAORDINARY 0 CHANGES 0 NET-INCOME (2,221,742) EPS-BASIC (0.07) EPS-DILUTED 0 F1 FN F1 OMITTED BECAUSE OF ANTIDILUTIVE EFFECT ON NET LOSS /FN
EX-13.2 12 a2028934zex-13_2.txt EXHIBIT 13.2 EXHIBIT 13.2 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to _______________________ Commission file number 0-17569 ------------- FIBERCHEM, INC. (Exact name of small business issuer as specified in its charter) Delaware 84-1063897 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1181 Grier Drive, Suite B, Las Vegas, Nevada 89119 (Address of principal executive offices) (702) 361-9873 (Issuer's telephone number) Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- As of August 11, 2000, the issuer had 58,730,263 shares of Common Stock, par value $.0001 per share, issued and outstanding. FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
(UNAUDITED) September 30, June 30, 1999 2000 ----------- ----------- Current assets: Cash and cash equivalents $ 21,760 $ 1,206,662 Cash in escrow as security for bridge loan 675,000 Accounts receivable, net of allowance for doubtful accounts of $92,423 at September 30, 1999 and $36,458 at June 30, 2000 647,402 231,381 Inventories 1,261,437 1,175,218 Prepaid expenses and other 122,153 834,226 ----------- ----------- Total current assets 2,052,752 4,122,487 ----------- ----------- Equipment 704,964 704,964 Less accumulated depreciation (645,163) (668,166) ----------- ----------- Net equipment 59,801 36,798 ----------- ----------- Other assets: Patent costs, net of accumulated amortization of $1,958,108 at September 30, 1999 and $1,997,629 at June 30, 2000 65,734 38,642 Technology costs, net of accumulated amortization of $469,706 at September 30, 1999 and June 30, 2000 -- -- Note refinancing costs, net of accumulated amortization of $32,920 at September 30, 1999 and $7,622 at June 30, 2000 125,096 9,145 Other deferred costs 39,147 318,054 ----------- ----------- Total other assets 229,977 365,841 ----------- ----------- Total assets $ 2,342,530 $ 4,525,126 =========== ===========
See accompanying notes to consolidated financial statements 2 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED) September 30, June 30, 1999 2000 ------------ ------------ Current liabilities: Bank loan payable 421,949 -- Bridge loan payable 600,000 Other current notes payable 250,000 250,000 Accounts payable 272,906 499,556 Deferred salaries 76,353 56,607 Accrued salaries and benefits 199,221 156,163 Accrued warranty 146,282 92,037 Accrued legal, accounting and consulting 70,600 106,325 Accrued commissions 33,799 13,799 Other accrued expenses 93,856 114,874 Customer deposits 37,775 19,516 Interest payable 55,587 60,162 ------------ ------------ Total current liabilities 1,658,328 1,969,039 Senior convertible notes payable $ 1,621,000 $ 172,000 Notes payable to officers, directors and affiliates 265,000 395,000 ------------ ------------ Total liabilities 3,544,328 2,536,039 ------------ ------------ Stockholders' equity (deficiency): Preferred stock, $.001 par value. Authorized 10,000,000 shares; 207,848 convertible shares issued and outstanding at September 30, 1999 and June 30, 2000; at liquidation value of $15 per share 3,117,720 3,117,720 Common stock, $.0001 par value. Authorized 150,000,000 shares; 39,831,038 and 58,725,915 shares issued and outstanding at September 30 1999 and June 30, 2000, respectively 3,983 5,873 Additional paid-in capital 29,979,833 34,870,145 Deficit (34,210,476) (35,916,193) Deferred costs (69,400) -- Stock subscription receivable (23,458) (88,458) ------------ ------------ Stockholders' equity (deficiency) (1,201,798) 1,989,087 ------------ ------------ Total liabilities and stockholders' equity (deficiency) $ 2,342,530 $ 4,525,126 ============ ============
See accompanying notes to consolidated financial statements 3 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three-month period ended Nine-month period ended June 30, June 30, June 30, June 30, 1999 2000 1999 2000 ------------ ------------ ------------ ------------ Revenues $ 264,074 $ 288,287 $ 1,318,907 $ 1,127,533 Cost of revenues 120,665 184,048 644,953 710,399 ------------ ------------ ------------ ------------ Gross profit 143,409 104,239 673,954 417,134 ------------ ------------ ------------ ------------ Operating expense: Research, development and engineering 114,238 104,906 398,399 312,941 General and administrative 348,248 291,197 1,005,159 1,053,780 Sales and marketing 140,674 199,805 471,024 545,029 ------------ ------------ ------------ ------------ Total operating expenses 603,160 595,908 1,874,582 1,911,750 ------------ ------------ ------------ ------------ Loss from operations (459,751) (491,669) (1,200,628) (1,494,616) ------------ ------------ ------------ ------------ Other income (expense): Interest expense (75,536) (37,420) (239,650) (213,597) Interest and other income 478 1,896 8,374 2,496 Other expense (177,217) (177,217) ------------ ------------ ------------ ------------ Total other income (expense) (252,275) (35,524) (408,493) (211,101) ------------ ------------ ------------ ------------ Net loss ($712,026) ($527,193) ($1,609,121) ($1,705,717) ============ ============ ============ ============ Shares of common stock used in computing net loss per share 35,264,117 52,187,056 32,625,841 45,102,244 ============ ============ ============ ============ Net loss per share ($0.02) ($0.01) ($0.05) ($0.04) ============ ============ ============ ============
See accompanying notes to consolidated financial statements 4 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (UNAUDITED)
Preferred Stock Common Stock Additional -------------------------- ------------------------- Paid-In Shares Amount Shares Amount Capital ----------- ----------- ----------- ----------- ----------- Balance at September 30, 1999 207,848 $ 3,117,720 39,831,038 $ 3,983 29,979,833 Common stock issued: For cash -- -- 981,540 98 178,807 For exercise of Class E Warrants -- -- -- -- -- For cash -- -- 7,793,103 780 2,714,021 For services -- -- 388,355 39 135,885 For conversion of notes and interest payable to officers, directors and affiliates -- -- 337,912 34 118,235 Cashless exercise -- -- 557,814 56 (56) For exercise of other warrants -- -- 2,173,153 217 241,731 For exercise of options -- -- 182,500 18 45,392 For conversion of senior convertible 8% notes -- -- 6,300,000 630 1,358,764 For conversion of interest payable to officers, directors and affiliates -- -- 80,500 8 10,038 For services -- -- 100,000 10 26,490 Deferred costs recognized -- -- -- -- -- Warrants issued for services -- -- -- -- 70,750 Redemption of unexercised Class E Warrants -- -- -- -- (9,745) Net loss -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Balance at June 30, 2000 207,848 $ 3,117,720 58,725,915 $ 5,873 34,870,145 =========== =========== =========== =========== ===========
Receivable for Exercise Deferred of Rights Deficit Costs and Warrants Total ----------- ----------- ----------- ----------- Balance at September 30, 1999 (34,210,476) (69,400) (23,458) (1,201,798) Common stock issued: For cash -- -- -- 178,905 For exercise of Class E Warrants -- -- -- -- For cash -- -- (65,000) 2,649,801 For services -- -- -- 135,924 For conversion of notes and interest payable to officers, directors and affiliates -- -- -- 118,269 Cashless exercise -- -- -- -- For exercise of other warrants -- -- -- 241,948 For exercise of options -- -- -- 45,410 For conversion of senior convertible 8% notes -- -- -- 1,359,394 For conversion of interest payable to officers, directors and affiliates -- -- -- 10,046 For services -- -- -- 26,500 Deferred costs recognized -- 69,400 -- 69,400 Warrants issued for services -- -- -- 70,750 Redemption of unexercised Class E Warrants -- -- -- (9,745) Net loss (1,705,717) -- -- (1,705,717) ----------- ----------- ----------- ----------- Balance at June 30, 2000 (35,916,193) 0 (88,458) 1,989,087 =========== =========== =========== ===========
See accompanying notes to consolidated financial statements 5 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine-month period ended June 30 ------------------------------- 1999 2000 ----------- ----------- Cash flows from operating activities: Net loss ($1,609,121) ($1,705,717) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 32,178 23,003 Amortization of patent and technology costs 95,005 39,521 Amortization of financing costs 51,903 26,345 Common stock and warrants issued for services 191,761 233,175 Deferred costs recognized -- 69,400 Exchange of warrants and change in exercise price of warrants 154,708 -- Common stock issued for interest expense 21,001 -- Provisions for loss on accounts receivable and inventories 45,000 40,773 Gain on sale of fixed assets (750) -- Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (411,322) 358,013 Decrease in inventories 215,822 103,454 Decrease in prepaid expenses and other current assets 29,393 88,120 Increase (decrease) in accounts payable (193,745) 226,650 Increase (decrease) in accrued expenses 30,625 (98,565) Increase in interest payable 77,321 32,890 ----------- ----------- Net cash used in operating activities (1,270,221) (562,938) ----------- ----------- Cash flows from investing activities: Sale of equipment 750 -- Payments for patents (19,946) (12,429) ----------- ----------- Net cash used in investing activities (19,196) (12,429) ----------- -----------
See accompanying notes to consolidated financial statements (continued) 6 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash flows from financing activities: Net proceeds from bank loan $ 373,253 $ -- Net proceeds from bridge loan -- 206,800 Proceeds from notes payable, officers, directors and affiliates 50,000 230,000 Proceeds from issuance of common stock and warrants 942,946 178,905 Proceeds from the exercise of Class E Warrants -- 2,649,801 Proceeds from the exercise of other warrants -- 241,948 Proceeds from the exercise of options 4,900 45,410 Payments on note payable to bank and others (7,808) (421,949) Payment of merger costs -- (185,708) Payment of financing costs (119,716) -- Advances to Intrex -- (500,193) Redemption of E warrants -- (9,745) ----------- ----------- Net cash provided by financing activities 1,243,575 2,435,269 ----------- ----------- Net increase (decrease) in cash and cash equivalents ($46,202) $ 1,859,902 Cash and cash equivalents at beginning of period 91,354 21,760 ----------- ----------- Cash and cash equivalents at end of period $ 45,152 $ 1,881,662 =========== =========== Supplemental Cash Flow Information Noncash investing and financing activities: Senior convertible notes payable converted to common stock $ -- $ 1,449,000 Unamortized deferred financing costs associated with senior convertible notes payable converted to common stock -- 89,606 Exchange of senior convertible notes payable due February 15, 1999 for notes due February 15, 2002 1,600,000 -- Notes and interest payable to officers, directors and affiliates converted to common stock and warrants 420,987 128,315 Notes payable to others converted to common stock and warrants 60,000 -- Payment of financing costs with common stock and warrants 178,005 -- Issuance of senior convertible notes in payment of accrued interest 21,000 -- =========== =========== Interest paid $ 80,888 $ 84,406 =========== ===========
See accompanying notes to consolidated financial statements 7 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) =========================================================================== (1) PRESENTATION OF UNAUDITED FINANCIAL STATEMENTS The accompanying unaudited consolidated financial statements include the accounts of FiberChem, Inc. ("FCI" or the "Company") and its subsidiaries. All inter-company accounts and transactions have been eliminated. The unaudited consolidated financial statements have been prepared in accordance with Item 310 of Regulation S-B and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows of the Company, in conformity with generally accepted accounting principles. The information furnished, in the opinion of management, reflects all adjustments (consisting primarily of normal recurring accruals) necessary to present fairly the financial position as of September 30, 1999 and June 30, 2000, and the results of operations and cash flows of the Company for the nine-month periods ended June 30, 1999 and 2000. The results of operations are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended September 30, 1999. Certain Fiscal 1999 Financial Statement amounts have been reclassified to conform with the presentation in the Fiscal 2000 Financial Statements. (2) NOTES PAYABLE On February 15, 1996, the Company completed an offering under Regulation S, promulgated under the Securities Act of 1933, as amended (the "Offering"), of 8% Senior Convertible Notes due February 15, 1999 (the "Notes"), for $2,825,000. Interest on the Notes was to be paid semi-annually, commencing August 15, 1996, at a rate of 8% per annum. The Notes were convertible into shares of Common Stock of the Company at a conversion price (the "Conversion Price") of, initially, $0.80 per share at any time after March 26, 1996 and before the close of business on February 14, 1999. The Conversion Price was adjusted, in accordance with the original note agreement, to $0.4078, a price representing a 10% discount from the average closing bid price of the Common Stock for the 30 business days prior to February 15, 1997. As of the maturity date of the Notes on February 15, 1999, an aggregate face amount of $1,225,000 of the Notes had been converted to Common Stock resulting in the issuance of 1,742,851 shares of Common Stock. On February 2, 1999, the Company offered to exchange the Notes at their maturity on February 15, 1999 for new notes (the "New Notes") with a conversion price of $0.23, which was established by using the ten-day average closing price of the Common Stock prior to February 15, 1999. The New Notes provide for semi-annual interest payments at 8% per annum in cash or at 12% per annum in stock (at the Company's option) and are due February 15, 2002. The Company may require conversion if the closing bid price of the Common Stock exceeds 200% of the conversion price for 20 consecutive trading days. In all other material respects, the New Notes have terms similar to those of the old Notes. In order to encourage exchange of the Notes for New Notes, the Company offered a bonus, payable in Common Stock valued at approximately current market, of 8% of the face amount of Notes exchanged for New Notes. The Company offered an additional Common Stock bonus equal to 4% of the face amount of Notes exchanged if the holder agreed to accept additional New Notes in payment of the semi-annual interest payment due February 15, 1999. All of the $1,600,000 principal amount of old Notes were exchanged for New Notes, and an additional $21,000 of New Notes were issued as payment of interest due on $525,000 of old Notes. An aggregate of 556,544 shares of Common Stock (valued at $0.23 per share, or a total of $128,005) were issued as the exchange bonus. The exchange bonus of $128,005 and legal and other associated costs of $30,011 are being amortized to interest expense over the three-year term of the New Notes. During the period from February 1, 2000 through June 30, 2000, an aggregate principal amount of $1,449,000 of the New Notes were converted into 6,300,000 shares of Common Stock, resulting in a principal balance outstanding at June 30, 2000, of $172,000 of New Notes. During August 1999, the Company exercised its option to pay interest on the New Notes in shares of Common Stock. In accordance with the provisions of the New Notes, 1,296,800 shares of Common Stock were issued, valued at $194,520 ($0.15 per share), representing interest at 12% per annum for the period February 16, 1999 through February 8 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) =========================================================================== 15, 2000. Interest from February 15, 2000 through August 15, 2000 (or the conversion date) is being accrued for payment on or about August 15, 2000. In connection with the 1996 Offering, the Company issued to the Placement Agent for the Offering, for nominal consideration, warrants to purchase up to 353,125 shares of Common Stock, at an exercise price of $0.80 per share (the "Exercise Price"), which were adjusted to $0.4078 per share in accordance with the original Placement Agent Agreement and has been further adjusted to $0.23 per share. Also in accordance with the terms of the warrants, the number of shares exercisable has been adjusted, based on the adjusted Exercise Price, to 692,742 shares of Common Stock. These warrants were exercisable at any time on or after August 15, 1996 through February 14, 2001 and contained certain piggyback registration rights. During January 2000, the Company received offers to convert these and other warrants to Common Stock at approximately $0.105 per share, which the Company accepted. On July 7, 1998, the Company arranged a line of credit with Silicon Valley Bank. The agreement provides for maximum loans of $1 million, and is secured by accounts receivable, inventories, equipment and intellectual property. The agreement provides for advances against specific sales invoices at an annualized interest rate of approximately 19.75%. As of June 30, 2000, the Company had repaid all borrowings against the line of credit. On May 19, 2000, the Company obtained bridge loans aggregating $600,000 from two European investors. The bridge loans and accrued interest thereon formed a part of $2,000,000 in two-year, convertible 12% debentures placed by the Company on July 28, 2000, in conjunction with the combination of its business with Intrex Data Communications Corp ("Intrex") on July 27, 2000. The bridge loans bear interest at the rate of 15% per annum, and the Company paid approximately $90,000 in placement agent, legal and other fees. The Company also issued warrants to the lenders and the placement agent to purchase an aggregate of 70,000 shares of Common Stock at an initial exercise price of $0.50 per share, subject to adjustment under certain circumstances. The placement, legal, warrant and other costs are being amortized to interest expense over the life of the debentures. In March and August 1998, the Company obtained loans aggregating $433,000 from Privatbank Vermag AG, a private investment bank with which a director of the Company is associated. These loans (the "Bridge Loans") were provided as interim financing until the Company completed its Rights Offering (See Capital Stock below). The Bridge Loans bear interest at approximately 8.5% per annum. Also, $50,000 of the Bridge Loans and $1,920 in accrued interest were converted to Common Stock and Warrants as part of the Rights Offering. The remaining $383,000 of Bridge Loans were due on July 15, 1999, when principal of $133,000 and accrued interest of $14,680 were converted to 1,136,000 shares of Common Stock. The due date of the remaining $250,000 principal amount has been extended to September 29, 2000. During Fiscal 1998 and Fiscal 1999, directors and officers of the Company advanced an aggregate of $265,000 to the Company and an additional $230,000 during January 2000. These advances bear interest at rates of 8%, 9% and 12% per annum and are due at various dates between December 14, 2002 and February 4, 2003 unless converted into Common Stock prior to maturity. On June 19, 2000, $100,000 of these advances and accrued interest of $13,269 were applied to the exercise of Class E Common Stock Purchase Warrants and converted to Common Stock. Of the remaining advances, $125,000 is convertible into Common Stock at $0.13 per share; $40,000 at $0.11 per share; $200,000 at $0.12 per share and $30,000 is not convertible. (3) CAPITAL STOCK On October 23, 1998, the Company granted, for no consideration to holders of its Common Stock, Preferred Stock and warrants, transferable rights (the "Rights") to subscribe for units (the "Units") at a subscription price of $0.22 per Unit. Each Unit consisted of one share of Common Stock and one redeemable Class E Warrant exercisable for one share of Common Stock at an exercise price for one year (through October 23, 1999) of $0.25 per share; then through October 23, 2000 at $0.35; then through October 23, 2001 at $0.50 per share; then through October 23, 2002 at $0.70 per share; then through October 23, 2003 (at which time the Class E Warrants expire) at $0.90 per share. Each holder of record as of October 16, 1998, of Common Stock and Warrants received one Right for every four shares of Common Stock or Warrants held, and each holder of Preferred Stock received 2.5 Rights for each share of Preferred Stock held. An aggregate of 8,976,962 Rights were issued. An aggregate of 7,678,679 Rights were exercised as of the close of the 9 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) =========================================================================== offering on December 22, 1998, resulting in gross proceeds to the Company of $1,689,309 and the issuance of 7,678,679 shares of Common Stock and a like number of Class E Warrants. Of the total 7,678,679 Rights exercised, 4,195,209 were exercised for cash of $922,946; 1,805,677 were exercised in exchange for the payment of advances (and accrued interest thereon) from officers, directors and affiliates aggregating $397,249; 272,727 were exercised in payment of a $60,000 note payable to others; 489,347 were exercised in payment of $107,656 of deferred salaries due to members of management of the Company; and 915,719 were exercised in payment for legal, consulting and other services totalling $201,458. The Class E Warrants provided that the Company may call the warrants for redemption if the closing price of the Common Stock equals or exceeds 200% of the current exercise price of the warrants for a period of 30 consecutive trading days. As of March 31, 2000, the closing price of the Common Stock had exceeded $0.70 for each preceding trading day, and on April 4, 2000, the Company announced its intent to redeem the warrants on June 16, 2000, (subsequently extended to June 30, 2000) unless earlier exercised. As of the expiration on June 30, 2000, an aggregate of 8,519,370 Class E Warrants had been exercised at $0.35 each, resulting in gross proceeds to the Company of $2,981,780. An aggregate of an additional 610,109 Class E Warrants with an aggregate market value of $195,235 were surrendered and cancelled in exchange for the exercise of an additional 557,814 Class E Warrants. Of the 8,519,370 Class E Warrants exercised, 7,793,103 were exercised for cash of $2,727,587 less associated fees and costs of $12,786; 337,912 were exercised in payment of notes and accrued interest payable to officers and directors in the amount of $118,269; 214,286 were exercised in payment for $75,000 of legal and other expenses payable; and 174,069 were exercised in payment of $60,924 of after-tax deferred salaries payable to members of management of the Company. During Fiscal 1993 and Fiscal 1994, the Company conducted a private placement of convertible preferred stock ("Convertible Preferred Stock"). Each share of 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. As of March 31, 2000 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. In May 1999, the FiberChem Board of Directors authorized a change in the conversion rate of the Series A Convertible Preferred Stock from ten (10) shares of Common Stock to seventy- five (75) shares of Common Stock, at $.20 per share, in satisfaction of the anti-dilution adjustment obligation and in settlement of undeclared dividends in arrears in the amount of $1,028,848, if elected entirely in cash, or 53,981 shares of Series A Convertible Preferred Stock if elected solely in shares. In order to effect such change, the holders of the Series A Convertible Preferred Stock will be asked to exchange their class of preferred stock for a new class of preferred stock with otherwise similar rights and privileges. On May 31, 1996, the Company completed an offering under Regulation S, of 3,333,333 Units, at a price of $0.90 per Unit for total gross proceeds of $3,000,000 before costs and expenses of the offering. The Company paid fees and expenses associated with the Unit offering amounting to $345,683. Each Unit consisted of one share of Common Stock and one warrant to purchase one share of Common Stock (the "Unit Warrants") the shares and warrants being immediately separable. The Unit Warrants are each exercisable at $1.00 at any time from May 31, 1996 through May 30, 2001. On April 23, 1999, as an inducement to encourage exercise of warrants, the Company offered to exchange Unit Warrants for Class E Warrants on a one-for-one basis. As of the closing of the offer and as of March 31, 2000, 10 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) =========================================================================== 1,696,333 Unit Warrants had been exchanged for Class E Warrants. In connection with the 1996 Unit offering, the Company issued to the Placement Agent for the offering, for nominal consideration, warrants to purchase up to 333,333 shares of Common Stock ("the Placement Agent Warrants"), at an exercise price of $0.90 per share which has been adjusted to $0.2343 per share in accordance with the Placement Agent Agreement, and the number of shares issuable upon exercise has been adjusted to 1,280,411. These Placement Agent Warrants were exercisable at any time from November 30, 1996 through May 30, 2001. During January 2000, the Company received offers to convert these 1,280,411 warrants and 692,742 other warrants at an average price of approximately $0.105 per share, along with the issuance of 75,000 Class E Warrants to certain of the holders. The Company accepted the offers and issued 1,973,153 shares of common stock and 75,000 new warrants (with terms similar to the Class E Warrants) for gross proceeds of $205,948. In May 1999, the Company issued 300,000 Class E Warrants for cash of $10,000 and issued 999,000 shares of Common Stock, valued at $0.15 per share, and warrants to purchase 600,000 shares of Common Stock in exchange for investor relations and other services through January 2000. These warrants are exercisable for 3 years at exercise prices of $0.18 per share for 200,000 shares, $0.50 for 200,000 shares and $1.00 for 200,000 shares. The Common Stock and warrants were valued at a total of $203,850, which is being amortized to expense monthly over the nine months of the agreement for services. During March 2000, the 200,000 warrants exercisable at $0.18 were exercised, resulting in the issuance of 200,000 shares of Common Stock and the receipt of $36,000 in proceeds to the Company. (4) REVENUES The Company continues to incur substantial losses and Management recognizes that the Company must generate additional revenues or reductions in operating costs and needs additional financing to continue its operations. During the first nine months of fiscal 2000, the Company has received proceeds of approximately $3.2 million from the exercise of warrants and options and the issuance of additional shares of Common Stock. On July 27, 2000, the Company consummated the combination of its business with that of Intrex Data Communications Corp. In March 2000, the Company entered into an agreement for a best efforts private placement of $5,000,000 to provide operating funds and to provide funds to develop market opportunities. On May 19, 2000, the Company obtained a bridge loan in the amount of $600,000 which, along with an additional $1.4 million, provided gross proceeds of $2.0 million on July 28, 2000, and the Company is pursuing several potential sources for an additional $3,000,000 or more. However, no assurance can be given that this or any financing can be obtained on terms satisfactory to the Company. ------------------------------------------------------------------------------- 11 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION This report includes forward-looking statements relating to the Company's operations that are based on Management's and third parties' current expectations, estimates and projections. These statements are not guarantees of future performances and actual results could differ materially. The statements in this report regarding FCI's business combination with Intrex, the combined entity's delivery of services over the Internet, the size of the market for the combined company's services and the financing of ongoing operations, are forward-looking statements that involve risks and uncertainties. These risks and uncertainties include: the combined entity's ability to market its services using the two companies' technologies, the timely development and acceptance of new products, final promulgation and enforcement of regulations, the impact of competitive products and pricing, the timely funding of customer's projects, customer payments to the Company and other risks detailed from time to time in the Company's SEC reports. The following discussion and analysis should be read in conjunction with the Unaudited Consolidated Financial Statements and notes thereto. MATERIAL CHANGES IN FINANCIAL CONDITION During the nine-month period ended June 30, 2000 (the "Nine-Month Period 2000"), the Company received approximately $2,900,000 in gross proceeds from the exercise of options and Common Stock purchase warrants, and received approximately $179,000 from other issuances of Common Stock. The Company also borrowed $230,000 from an officer of the Company in return for a three-year convertible promissory note. From February through June 30, 2000, $1,449,000 of the Company's 8% Senior Convertible Notes were converted into Common Stock. Working capital at June 30, 2000, was $2,153,448, compared to $394,424 at September 30, 1999, an increase of $1,759,024. Cash and cash equivalents increased by $1,859,902 to $1,881,662 at June 30, 2000 from $21,760 at September 30, 1999. Stockholders' equity improved by $3,190,885 from a deficit of $1,201,798 at September 30, 1999 to $1,989,087 at June 30, 2000. These changes are primarily the results of the financing activities outlined above, offset by the Company's net loss for the Nine-Month Period 2000 of $1,705,717. Net cash used in operating activities during the Nine-Month Period 2000 was $562,938 compared to net cash used in operating activities during the nine-month period ended June 30, 1999 (the "Nine-Month Period 1999") of $1,270,221. The deficit during the Nine-Month Period 2000 is primarily the result of the Company's net loss of $1,705,717, and adjustments to reconcile net loss to net cash used in operating activities. These adjustments consider changes in current assets and liabilities, as well as non-cash transactions including depreciation and amortization expense of $88,869, and common stock and warrants issued for services of $233,175. The deficit during the Nine-Month Period 1999 was primarily a result of the Company's net loss of $1,609,121, and adjustments to reconcile net loss to net cash used in operating activities. These adjustments include depreciation and amortization expense of $179,086 and common stock issued in exchange for services of $191,761. In addition, the Company recorded non-cash charges of $154,708 related to the reduction of exercise prices of warrants and the exchange of Unit Warrants for Class E Warrants. Net cash used in investing activities during the Nine-Month Period 2000 was $12,429, as compared to net cash used in investing activities of $19,196 during the Nine-Month Period 1999. During the Nine-Month Period 2000, the Company paid $12,429 for United States and foreign patent applications, and during the Nine-Month Period 1999, the Company paid $19,946 for patent applications. Net cash provided by financing activities during the Nine-Month Period 2000 was $2,435,269 as compared to net cash provided by financing activities during the Nine-Month Period 1999 of $1,243,575. During the Nine-Month Period 1999, cash proceeds of $942,946 were received from the exercise of Rights issued to shareholders resulting in the issuance of 4,195,209 shares and warrants. Costs associated with the Rights Offering and the exchange of the Company's 8% Senior Convertible Notes paid during the period were $119,716. Payments on advances against the Company's line of credit with Silicon Valley Bank and other notes were $285,162 and the Company borrowed an additional $658,415 against the line of credit. During January 2000, the Company borrowed $230,000 from an officer 12 of the Company, and during December 1999 and January and February 2000, issued 961,540 restricted shares of Common Stock to four directors and officers of the Company for an aggregate of $178,905. Also during January 2000, the Company received offers to convert warrants issued in connection with its 1996 placement of 8% Convertible Notes and Common Stock. The Company received $154,153 from the exercise of 1,541,526 warrants, and agreed to issue 75,000 Class E Common Stock Purchase Warrants in exchange for the exercise of the remaining 431,627 1996 warrants outstanding for cash in the amount of $51,795. During February and March 2000, the trading price of the Company's Common stock had appreciated substantially from its earlier trading level. As of March 31, 2000, the closing price of the Common Stock had exceeded $0.70 for each preceding trading day, and on April 4, 2000, the Company announced its intent to redeem the warrants on June 16, 2000 (subsequently extended to June 30, 2000), unless earlier exercised. As of the expiration on June 30, 2000, an aggregate of 8,519,370 Class E Warrants had been exercised at $0.35 each, resulting in gross proceeds to the Company of $2,981,780. An aggregate of an additional 610,109 Class E Warrants with an aggregate market value of $195,235 were surrendered and cancelled for the exercise of 557,814 Class E Warrants. Also as a result of the improved market price for the Company's Common Stock, holders of the Company's 8% Senior Convertible Notes converted $1,449,000 of their notes into 6,300,000 shares of Common Stock and will receive warrants exercisable for three years to purchase 6,300,000 additional shares of Common Stock at $0.23 per share, in accordance with the terms of the notes. Other options and warrants were exercised at prices of from $0.15 to $1.00 for 382,500 shares of Common Stock resulting in gross and net process to the Company of $81,410. During the Nine-Month Period 2000, the Company reduced its trade accounts receivable by over $358,000 and repaid associated loans from Silicon Valley Bank of $421,949. As discussed in Note 4 to the Consolidated Financial Statements, the Company continues to incur substantial losses and needs additional financing to continue its operations. During the first nine months of fiscal 2000, the Company has received proceeds of approximately $3.2 million from the exercise of warrants and options and the issuance of additional shares of Common Stock. On July 27, 2000, the Company consummated the combination of its business with that of Intrex Data Communications Corp. In March 2000, the Company entered into an agreement for a best efforts private placement of $5,000,000 to provide operating funds and to provide funds to develop market opportunities. On May 19, 2000, the Company obtained a bridge loan in the amount of $600,000 which, along with an additional $1.4 million, provided gross proceeds of $2.0 million on July 28, 2000, and the Company is pursuing several potential sources for an additional $3,000,000 or more. However, no assurance can be given that this or any financing can be obtained on terms satisfactory to the Company. MATERIAL CHANGES IN RESULTS OF OPERATIONS On July 27, 2000, the Boards of FiberChem, Inc. and Intrex Data Communications Corp. ("Intrex") agreed that the terms of the Amended Arrangement Agreement dated May 26, 2000, had been met to their satisfaction and that all regulatory approvals were in place. The combination of the two companies was therefore made effective on that date. The proposed name for the surviving entity, DecisionLink Incorporated, is subject to a vote of the common shareholders. Geoff Hewitt continues as CEO of FiberChem, Inc. while David Peachey is now President and Chief Operating Officer. Peter Lagergren is President of the Communications Division and Tom Collins, President of the Environmental Division. Brian O'Neil is Executive Vice-President Corporate Development and Mel Pelley continues as CFO. The new Board of Directors of FiberChem is initially comprised of four FiberChem representatives Geoffrey Hewitt, Chairman, Byron Denenberg, Irv Gruverman and Walter Haemmerli; and four Intrex representatives including David Peachey, Peter Lagergren, Brian O'Neil and Trevor Nelson. A ninth Board member will be appointed upon the mutual approval of Geoffrey Hewitt and David Peachey. A FiberChem shareholders meeting will be held early this fall to seek approval of a change in the Company's name to DecisionLink, Inc., to approve a new employee stock option plan, and to increase its authorized share capital. The Company will continue to operate under the FiberChem name and FOCS symbol until the changes are approved. Operations will remain in both Las Vegas and Dallas. 13 FiberChem/DecisionLink's Intrex Division provides proprietary Internet and communications technology for transmitting data to or from remote or mobile assets on a real-time basis using ORBCOMM's and Norcom's satellite services and other wireless data systems. Data is routed through Intrex's global network which acts as a data gateway and applications service provider. This allows customers to monitor and control remote or mobile assets such as gas wells, propane tanks, pipelines, compressors, storage tanks, offshore platforms, or service vehicles directly from a desktop PC. FiberChem/DecisionLink's FCI Environmental Division (FCIE) develops, manufactures, markets and licenses fiber optic chemical sensors that produce continuous, real-time information on environmental pollutants in the air, water and soil. The FCIE product line has been re-engineered to incorporate Intrex-developed communications technology. These new products offer the environmental monitoring community FiberChem's state-of-the-art sensing technology. This gives the customer all the benefits of satellite communications, including dramatically reducing installation and start-up costs, lowering communications charges, ubiquitous coverage and the ability to receive data on a customer-specific Web site. FiberChem/Decisionlink's technologies are currently used in applications such as propane tank level monitoring, compressors, pipeline leak detection, aboveground storage tank monitoring, oil production, water quality monitoring and industrial wastewater compliance monitoring and control. ORBCOMM recently announced that it has adopted a revised sales and marketing strategy for its low earth orbit satellite data communications systems. Under this new strategy, ORBCOMM will focus on its top-tier customers in a number of key industries and distribute its services through valued added resellers and licensees rather than through a combination of indirect and direct sales channels. FiberChem/DecisionLink considers itself to be a key partner to ORBCOMM and to have a proprietary position with regard to the global propane market. This was highlighted when ORBCOMM held its Global Solutions Conference in Atlanta, Georgia, April 9-13, 2000 where Intrex was invited to introduce its development of SensorFusion(TM) products to its future partners and customers. In a paper entitled "Seamless Integration of Sensor Data via the Internet using the ORBCOMM Network," Peter Lagergren, President of Intrex, outlined the benefits to the ORBCOMM community of the combination of Intrex and FiberChem's SensorFusion(TM) technology. Intrex, with ORBCOMM's assistance, is developing a new generation of ORBCOMM satellite communicators married to specialized sensors in a single monitoring and communications package. These very highly integrated chip sets reduce the size, power consumption and cost of the application. The combining of these chip sets with on-board, high technology sensors leads to changes in industrial market paradigms. It has altered the markets' perception of what can and should be remotely monitored because costs are reduced by an order of magnitude compared with current merchant communications implementations. The concept of SensorFusion(TM) is to find a large-scale application where the customer requires the functionality of very high technology sensors, or controls, and fuse the highly integrated sensors and the communications engine. This has led to a family of products that are easy to use, reliable and reduce costs. The final step is to integrate the sensing and messaging engine seamlessly into the Internet through Intrex's Universal Data Network. By using the Internet's TCP/IP as the base protocol, it is possible to take advantage of many powerful existing tools including publish/subscribe topologies that allow an easy interface with nearly any customer-supplied, data management system. The end result is the migration of laboratory quality science and engineering such as FiberChem's Sensor-on-a-Chip(R) into very small, rugged and very low cost systems. One important role of the conference was to bring together ORBCOMM licensees from around the world with solution providers such as Intrex. Senior management from FiberChem/DecisionLink met with International Partners of ORBCOMM and several major potential customers over the four-day conference. The interest in the SensorFusion(TM) concept led to discussions with prospective customers and business partners from South America, Europe, Africa, the Middle East, Central Asia, South East Asia, Australia and China. Business arrangements with these groups are in the process of being concluded and will give DecisionLink a great launch into the global markets for monitoring and reporting for the oil and gas, pipelines, storage tanks, utilities, environmental, transportation and marine industries. FiberChem, Inc. announced on June 9, 2000, that Intrex had signed a Memorandum of Understanding with Cornerstone Propane Partners LP (NYSE:CNO) to form a joint venture to market Intrex's proprietary monitoring 14 system to the propane industry world-wide. This joint venture will become part of the combined company upon execution of a definitive agreement. The joint venture will be equally owned by Cornerstone and DecisionLink. It will market a product package consisting of DecisionLink's proprietary sensor and communication system and Cornerstone's dispatch and delivery software using the ORBCOMM LOW-Earth orbit (LEO) satellite network for data transmission. Cornerstone Propane Partners, LP is a master limited partnership with annual sales of over $2 billion. The Partnership is the nation's fourth largest retail propane marketer serving over 460,000 customers with annual sales of approximately 300 million retail gallons, doing business in 34 states through 299 customer service centers. Its North American energy solutions service division, Coast Energy Group (CEG), supplies, purchases, processes and markets over 48,000 barrels per day of natural gas liquids to resellers and major end users. CEG also sells approximately 1.0 Bcf per day of natural gas and 100,000 barrels per day of crude oil in the United States and Canada. The joint venture will begin operations this fall. The first phase will be the installation of approximately 6,000 units on propane tanks owned by one of Cornerstone's business units in California. Cornerstone expects to outfit the majority of its 460,000 installations with the joint venture package in the second phase of installations beginning early next year. The joint venture will begin marketing the propane monitoring system internationally and domestically this year. Marketing will be through direct contacts in the propane industry and through ORBCOMM's international service distribution partners. There are estimated to be over16,000,000 propane tanks in the US with about 14,300,000 used residentially, 1, 000,000 commercially and the balance in other light industrial use. The Company estimates that there are at least the same number of propane tanks in international markets. Revenue will be generated from sales of hardware, together with recurring revenues from communications charges. Market research indicates that the global market for propane tank monitors is very large, perhaps as large as 50,000,000 tanks. On July 12, 2000, FiberChem, Inc. announced that Intrex had signed a Memorandum of Understanding (MOU) with Mainsborne Communications Inc., of Vancouver, British Columbia. This MOU is expected to form the basis of an agreement to integrate Intrex's proprietary and wireless communication products with Mainsborne's Automated Meter Reading (AMR) modem and its spread spectrum Power Line Carrier (PLC) products. Any final agreement shall also become part of the business of FiberChem/DecisionLink. The Intrex/Mainsborne system, called AMRPowerLink, is being designed to monitor and control remotely located electric, gas and water utility meters. FiberChem/DecisionLink will apply its SensorFusionTM hardware, software and wireless communications technologies as an interface between Mainsborne's PLC applications and its Universal Data Network. Revenue will be generated by transmitting data from utilities and their customers via the ORBCOMM low-earth orbit satellite network to the Company's Communications Hub where the data will be groomed and distributed via the Internet to the utility. The Company will have the exclusive marketing rights to the resulting product. It is believed significant opportunities are being created domestically as a result of deregulation and internationally from emerging nations. AMRPowerLink will extend the use of AMR technology to utilities that have a large rural customer base. This can reduce the cost of data recovery, as well as assist in locating power outages and optimize repair crew routing efficiencies. The technology will also be particularly effective in emerging countries with poor communications infrastructure and where electricity theft is a major problem for utilities. FiberChem/DecisionLink's FCI Environmental Division will continue to pursue its existing aboveground storage tank, offshore and sensor markets. The Company's new satellite-enabled product line offers a more economical solution to these markets. The primary target for the Company's products to date has been the Florida AST market. On July 13, 1998, after a four-year process, the State of Florida passed into law its new storage tank regulations with a compliance date of December 31, 1999. Management believes that as of today, a significant population of the regulated community has not taken action to achieve compliance. To date, Florida DEP has designated about 800 sites as SNCs, sites in Serious Non- 15 Compliance. This program is expected to be the motivating factor for compliance, and therefore installation of the company's systems, although it is difficult to determine how soon. The result should be ongoing revenues to the Company from this market. Certain military facilities had been allowed various exemptions from compliance with the Florida regulations. These exemptions are now expiring and installations are expected to commence shortly. Other states are expected to follow Florida in promulgating AST regulations, giving the Company an opportunity for further growth, although there can be no assurance such regulations will be promulgated or enforced. Recently, the Company and its partner lining company received verbal approval from the Florida DEP for its PetroSense(R) product line for use as a leak detection strategy for pipelines, when used in conjunction with an approved three dimensional exterior coating system. This is expected to open up a new market with a presently undetermined size potential for the Company's products. The Company is also in discussions with a third party to replace obsolete competitive equipment at about 350 government and privately owned tanks around the nation. In the UST marketplace, the Company has identified that certain large, high throughput tanks located at truck stops and convenience stores may present an opportunity for the Company's leak detection equipment. The size and throughput of these tanks is problematic for conventional compliance technologies. The Company is working with a regional chain of truck stops to offer a solution for this problem. The Company has also identified an opportunity in the Japanese retail gasoline marketplace for leak detection equipment potentially for a large number of urban installations. While the development of the offshore market for the Company's OilSense(R)-4000 and PHA-100WL continued to be slower than originally anticipated, existing customers continue to purchase units for more locations. Orders came from BP/Amoco, Newfield, Apache and British Borneo. The Company is continuing its marketing efforts in other major offshore production areas including the North Sea and the Persian Gulf. It was invited to present a technical paper on field experiences in the Gulf of Mexico at an important meeting in Aberdeen, Scotland in July 2000. This has led to a test program with BP/Amoco in the North Sea which is currently underway. The first order for a portable unit was received from Kuwait in June 2000. Revenues for the three-month period ended June 30, 2000 (the "Third Quarter 2000") were $288,287, compared to revenues of $264,074 for the three-month period ended June 30, 1999 (the "Third Quarter 1999"); revenues for the Nine-Month Period 2000 were $1,127,533 compared with revenues of $1,318,907 for the Nine-Month Period 1999. Sales of AST leak detection products were substantially below expectations in the second and third quarters of fiscal 2000. Gross profit for the Third Quarter 2000 was $104,339, or 36% of revenues, compared to $143,409, or 54% of revenues for the Third Quarter 1999. Gross profit for the Nine-Month Period 2000 was $417,134, or 37% of revenues compared to $673,954, or 51% of revenues, for the Nine-Month Period 1999. The decline in gross profits as a percent of revenues from the 1999 periods reflects a higher proportion of relatively lower margin installation revenues during the 2000 periods versus higher margin equipment sales comprising a substantial part of revenues during the 1999 periods. The Company's sensor development project with Gilbarco (now renamed Marconi Commerce Systems) has moved ahead with the announcement by California Air Resources Board (CARB) on March 23, 2000, of a timetable for certification of products to meet Onboard Refueling and Vapor Recovery (ORVR) requirements beginning April 1, 2001. Certification by CARB to its newly defined test protocol is expected to lead to introduction by Gilbarco of a full range of products to meet present and future national regulations and for the Company to supply its Sensor-on-a-Chip(R) to meet Gilbarco's needs. Gilbarco and the Company recently signed a support agreement where Gilbarco provides financial and other support through this period. The Company also entered into an agreement whereby TNO, Coca-Cola Enterprises - NL and FCI began cooperation in the development of certain sensors of interest to the food and beverage industry. The first phase of the program came to a satisfactory conclusion with TNO reporting that the Company's proprietary FOCS(R) technology exhibited better sensitivity than anything currently available. Meetings to initiate phase two of the project were held in early 16 summer. TNO committed additional resources to ensure the satisfactory completion of their part of the development. Further meetings are scheduled to plan product development and introduction. During Fiscal 1999, the Company signed a five-year agreement with Bosch Telecom ("Bosch") whereby the two companies cross license certain proprietary sensor technologies for certain specified markets. Bosch gets access to proprietary chemistry technologies owned by FCI for use in the areas of security systems, automotive and other markets. The Company gets access to certain sensor technologies and has access to these technologies in certain regulated and non-regulated markets. These allow the Company to branch out into certain non-regulated markets of interest such as the medical sensor market. This is part of the Company's strategy to lessen its dependence on regulated markets. In conjunction with the Bosch agreement, the Company entered into an agreement for a feasibility study with a medical instrument manufacturing company to supply certain gas sensor technology for a neonatal application. This company requires a low-cost, disposable sensor package to replace its existing sensing technology. The manufacturer estimates the market to be 2,000,000 units per year in the U.S. alone. Recent results indicate that the goals of the project are likely to be achieved and development is ongoing. The first of the Company's Port of Rotterdam projects with the Dutch engineering firm IWACO, to extend the utility of the Company's detection technology into the low parts per billion (ppb) range, has been successfully completed, with the detection limits improved from 200 ppb to 20 ppb. The Company plans to introduce a new line of products aimed at both the clean and drinking water markets. The second project, to develop a new concept in bioremediation, still awaits an assessment of the feasibility of the various options. In the event one of the bioremediation technologies is selected for use, there would be a significant need for monitoring instrumentation to ensure long-term satisfactory operation. Research, development and engineering expenses decreased by $85,458, or 21%, to $312,941 during the Nine-Month Period 2000 from the Nine-Month Period 1999, and by $9,332, or 8% to, $104,906 during the Third Quarter 2000 from the Third Quarter 1999. These decreases are primarily a result of lower charges for amortization of technology costs, which were fully amortized as of September 30, 1999 General and Administrative expenses increased by $48,621, or 5%, to $1,053,780 during the Nine-Month Period 2000 over the Nine-Month Period 1999, and decreased by $57,051, or 16%, to $291,197 during the Third Quarter 2000 from the Third Quarter 1999. The Company incurred non-cash expenses during the Second Quarter 2000 aggregating approximately $154,000 in legal and financial consulting services, provisions for inventory obsolescence and loss on uncollectible accounts receivable, and provision for settlement of claims by a former distributor of the Company's products. During the Third Quarter 1999, the Company recorded non-cash charges to expense for Common Stock and warrants issued for investor relations services. Sales and marketing expenses increased by $74,005, or 16%, to $545,029 during the Nine-Month Period 2000 over expenses for the Nine-Month Period 1999, and increased by $59,131, or 42%, to $199,805 during the Third Quarter 2000 over expenses for the Third Quarter 1999 primarily due to timing of promotional and sales training costs during the 2000 periods. Interest expense decreased by $26,053, or 11%, to $213,597 during the Nine-Month Period 2000 from the Nine-Month Period 1999, and decreased by $38,116, or 50%, to $37,420 during the Third Quarter 2000 from the Third Quarter 1999, reflecting the conversion of a substantial portion of the 8% Senior Convertible Notes to Common Stock and reduced borrowing against the line of credit during the 2000 periods. Other expenses of $177,217 incurred during the Third Quarter and the Nine-Month Period 1999 consist of non-cash charges to expense for differences arising from changes in warrant exercise prices and terms, as discussed in Notes 2 and 3 to the Consolidated Financial Statements, and costs incurred for registration of warrants and underlying common stock. As a result of the foregoing, the Company incurred a net loss of $527,193, or a net loss of $0.01 per share, for the Third Quarter 2000 as compared to a net loss of $712,026, or a net loss of $0.02 per share, for the Third Quarter 1999, and incurred a net loss of $1,705,717, or a net loss of $0.04 per share, for the Nine-Month Period 2000 as compared to a net loss of $1,609,121, or a net loss of $0.05 per share, for the Six-Month Period 1999. 17 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS A former distributor has filed an action in French national courts claiming improper termination by FCI Environmental, Inc. The Company has responded that the distribution agreement provides for arbitration, in Nevada, of any disputes and that therefore, the French courts do not have jurisdiction, and further that the claims are without merit. The French Court has ruled that the former distributor may be entitled to approximately $80,000 (approximately one-half of the original claim); however, either party may appeal the decision. The Company has appealed the decision, and has accrued a provision for settlement of the claims. The parties have begun preliminary negotiations to settle the claims. On September 23, 1998, OCS, Inc., a Texas corporation and customer of the Company's subsidiary, FCI Environmental, Inc., filed a lawsuit against FCIE in the District Court of Harris County, Texas, 165th Judicial District. The lawsuit was based on an alleged breach of warranty for goods purchased from FCIE. The lawsuit was dismissed without prejudice to either party on January 19, 1999. On February 18, 1999, the Company filed an action in Nevada against OCS to collect amounts due from OCS for products sold to OCS, fees, expenses and damages totaling approximately $200,000. The action was subsequently removed to the U.S. District Court of Nevada, and OCS filed counter claims including an alleged breach of warranty and claims for incidental and consequential damages for $750,000. OCS has failed to file verified pleadings and has failed to engage Nevada counsel as required by the Rules of the U. S. District Court. The Company's motion to dismiss OCS's counter claims and pleadings has been granted by the Court. The Company has been granted a default judgment against OCS. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's stockholders during the three-month period ended June 30, 2000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 27. Financial Data Schedule. (b) Reports on Form 8-K. A report on Form 8-K was filed for June 2, 2000, reporting under "Item 5.0 Other Events" that the Company had entered into an Amended Arrangement Agreement dated as of May 26, 2000, providing for the combination of its business with that of Intrex Data Communications Corp. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIBERCHEM, INC. August 11, 2000 By: /s/ Geoffrey F. Hewitt - --------------- ---------------------- Date Geoffrey F. Hewitt President and Chief Executive Officer August 11, 2000 By: /s/ Melvin W. Pelley - --------------- ---------------------- Date Melvin W. Pelley Chief Financial Officer and Secretary 18 EXHIBIT 27 ARTICLE 5 LEGEND THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED FINANCIAL STATEMENTS AS OF JUNE 30, 2000 AND FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. /LEGEND PERIOD-TYPE 9-MOS FISCAL-YEAR-END SEP-30-2000 PERIOD-END JUN-30-2000 CASH 1,881,662 SECURITIES 0 RECEIVABLES 267,839 ALLOWANCES (36,458) INVENTORY 1,175,218 CURRENT-ASSETS 4,122,487 PP&E 704,964 DEPRECIATION (668,166) TOTAL-ASSETS 4,525,126 CURRENT-LIABILITIES 1,969,039 BONDS 567,000 PREFERRED-MANDATORY 0 PREFERRED 3,117,720 COMMON 5,873 OTHER-SE (1,134,506) TOTAL-LIABILITY-AND-EQUITY 4,525,126 SALES 1,127,533 TOTAL-REVENUES 1,127,533 CGS 710,399 TOTAL-COSTS 2,622,149 OTHER-EXPENSES 0 LOSS-PROVISION 0 INTEREST-EXPENSE 213,597 INCOME-PRETAX (1,705,717) INCOME-TAX 0 INCOME-CONTINUING (1,705,717) DISCONTINUED 0 EXTRAORDINARY 0 CHANGES 0 NET-INCOME (1,705,717) EPS-BASIC (0.04) EPS-DILUTED 0 F1 FN F1 OMITTED BECAUSE OF ANTIDILUTED EFFECT ON NET LOSS PER SHARE. /FN
EX-13.3 13 a2028934zex-13_3.txt EXHIBIT 13.3 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) JULY 27, 2000 FIBERCHEM, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) DELAWARE 0-17569 84-1063897 - ---------------- ------------ ------------ (State or Other (Commission File (IRS Employer Jurisdiction of Number) Identification Number) Incorporation) 1181 GRIER DRIVE, SUITE B, LAS VEGAS, NEVADA 89119 ----------------------------------------------------- (Address of principal executive offices)(Zip Code) (702) 361-9873 ----------------------------------------------------- (Registrant's telephone number, including area code) Item 2. ACQUISITION OR DISPOSITION OF ASSETS. On July 27, 2000, FiberChem, Inc. ("FiberChem") and Intrex Data Communications Corp. ("Intrex") completed the combination of their businesses pursuant to an Amended Arrangement Agreement dated as of May 26, 2000 (the "Amended Arrangement Agreement"). As part of the combination and pursuant to the terms of the Amended Arrangement Agreement, (i) 75.11% of the outstanding Intrex voting shares were converted into non-voting securities of Intrex which may be exchanged for FiberChem Equity Securities and (ii) FiberChem acquired only the remaining Intrex voting shares through the merger of Pandel Instruments, Inc. ("Pandel"), a Texas corporation, which owned the remaining 24.89% of Intrex's outstanding common shares, with and into a wholly-owned subsidiary of FiberChem (the "Pandel Merger"). The combination will be treated for accounting purposes as a reverse acquisition of FiberChem by Intrex. The consideration issuable in the combination provides Intrex shareholders with a minimum of approximately 50% of the combined Company and up to 80% of the equity in the combined Company if certain milestones related to the Intrex business are met during a two-year period following the closing. A substantial portion of the shares issued to the former Intrex shareholders are subject to a one-year Lock-Up Agreement which provides for sales similar to the volume limitations of Rule144 during said one-year period. Pursuant to the Amended Arrangement Agreement, all the outstanding Intrex shares other than those acquired through the Pandel Merger, have been converted into 175,240,930 shares of a new class of non-voting Intrex stock designated as Intrex Class B Shares and 1,752,409 shares of a newly designated class of FiberChem preferred stock designated as Special Shares. Of these shares, 127,758,403 Class B Shares and 1,277,584 Special Shares (76.70% of the arrangement consideration) have been deposited by the Intrex shareholders participating in the Amended Arrangement Agreement into escrow, pursuant to the terms of a pooling agreement (the "Intrex Pooling Agreement"). These shares will be released to the shareholders in installments if certain milestones related to Intrex's business are met by the second anniversary of the closing. An additional 9,450,000 Class B Shares and 94,500 Special Shares have been issued to David Peachey, Intrex's President and Chief Executive Officer and now FiberChem's President and Chief Operating Officer, under a Compensation Agreement entered into among Mr. Peachey, Intrex and FiberChem. All 9,450,000 shares were deposited in escrow and will be subject to release to Mr. Peachey upon achievement of the Intrex Pooling Agreement milestones in the same proportions as the shares under the Intrex Pooling Agreement are released to Intrex shareholders. Each Intrex Class B Share (other than the shares on deposit under the pooling agreements) can be redeemed by the holder beginning not later than December 31, 2000, in exchange for one share of Common Stock. Until exchanged, each Class B Share will be entitled to receive the same dividends and distributions as a share of FiberChem Common Stock and each Special Share will be entitled to one hundred votes, or the same number of votes possessed by the shares of FiberChem common stock for which the related Class B Shares can be exchanged. The Special Shares are subject to redemption for nominal consideration when the related Class B Shares are redeemed. The exchange of Intrex common shares into Intrex Class B Shares and FiberChem Special Shares is -2- intended to allow Intrex shareholders to defer what might otherwise be a taxable disposition under Canadian tax law if the Intrex shares were directly exchangeable for shares of FiberChem Common Stock. Pursuant to the Pandel Merger Agreement, Pandel has been merged into Pandel Mergerco, Inc., a wholly-owned FiberChem subsidiary, which acquired the Intrex Voting Shares owned by Pandel, the only voting shares of Intrex remaining outstanding after the merger. Under the Pandel Merger Agreement, the Pandel shareholders received 580,782.22 shares of FiberChem preferred stock convertible into 58,078,222 shares of Common Stock, the same number of shares of Common Stock that Pandel would have the right to receive if it had participated in the Amended Arrangement Agreement. The Pandel shareholders deposited 423,393.22 shares (72.9% of the 580,782.22 shares) under the Intrex Pooling Agreement subject to proportionate release on the same terms and conditions as the Intrex Pooling Agreement. Peter Lagergren, President and Chief Executive Officer of Intrex's Firebird subsidiary, owned approximately 82% of the outstanding stock of Pandel. The Pandel Merger transaction is intended to qualify as a tax free reorganization under Section 368 of the United States Internal Revenue Code of 1986, as amended. The Convertible Preferred Stock issued to Pandel Shareholders is fully participating and is mandatorily convertible into shares of Common Stock when a sufficient number of shares of Common Stock are authorized by the FiberChem Shareholders at its next meeting of shareholders. An additional 94,500 shares of FiberChem's Convertible Preferred Stock, Pandel Series have been issued to Peter Lagergren under a Compensation Agreement entered into among Mr. Lagergren and FiberChem. Mr. Lagergren became FiberChem's Executive Vice President and Group President of the Communications Division, Chief Technology Officer, and a Director. All 94,500 shares were deposited into escrow, pursuant to the terms of a pooling agreement. These shares will be released to Mr. Lagergren, in installments, if certain milestones related to FiberChem's business are met by the second anniversary of the closing. The completion of the transaction was approved by Intrex common shareholders, the Supreme Court of British Columbia, and the Board of Directors of FiberChem. Immediately following the closing of the merger, on July 28, 2000, FiberChem received financing proceeds of $2,000,000 arranged by RP&C International of London. See "Item 5. Other Events" below. The new board of directors of FiberChem is initially comprised of four FiberChem representatives: Geoffrey Hewitt, Chairman, Byron Denenberg, Irv Gruverman and Walter Haemmerli; and four Intrex representatives: David Peachey, Peter Lagergren, Brian O'Neil and Trevor Nelson. A ninth board member will be appointed upon the mutual approval of Geoffrey Hewitt and David Peachey. Geoff Hewitt will continue as CEO of FiberChem, while David Peachey is now president and chief operating officer. Peter Lagergren is president of the Communications Division and Tom -3- Collins is president of the Environmental Division. Brian O'Neil is executive vice-president of Corporate Development and Mel Pelley will continue as CFO. Intrex was a private company which provides proprietary Internet and communications technology for communicating data to or from remote or mobile assets on a real time basis using wireless, satellite and cellular data systems. Data is routed through Intrex's global data network which acts as a data gateway and applications service provider allowing customers to monitor and control remote or mobile assets such as gas wells, pipelines, compressors, storage tanks, offshore platforms, or service vehicles directly from a desktop PC. Intrex was 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 had 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 to incorporate Intrex's technology where appropriate. FiberChem also intends to pursue new business in Intrex markets that can incorporate FiberChem technology. Item 5. OTHER EVENTS. On July 28, 2000, FiberChem completed an offering under Regulation S promulgated under the Securities Act of 1933, as amended, to investors outside the United States who are not U.S. Persons (the "Debenture Offering") of 12% Senior Convertible Debentures due 2002 (the "Debentures"), for an aggregate purchase price of $1,350,000. The Debentures bear interest at a rate of 12% per annum, payable semi-annually on December 1 and June 1 in each year. The Debentures are convertible into shares (the "Conversion Shares") of common stock of FiberChem, $0.0001 par value (the "Common Stock") at a conversion price of the lesser of (i) $0.30 or (ii) the then applicable Adjusted Market Price. The Adjusted Market Price shall equal 92% of the average of the Market Price of the Common Stock for the 20 consecutive trading days ending two trading days prior to the conversion. "Market Price" shall be the closing bid price on the OTC for the Common Stock on the relevant trading day; provided, however, if the Common Stock is traded on an "Alternative Stock Exchange" then the "Market Price" shall be the closing bid price of the Common Stock on such "Alternative Stock Exchange" on any such trading day. FiberChem can cause the Debentures to be converted into Conversion Shares at the then applicable Conversion Price at any time after FiberChem has complied with its obligations to register for resale the Conversion Shares, provided the average Market Price of the Common Stock during any 20 consecutive trading day period has equaled or exceeded $0.42. In conjunction with the Debenture Offering, FiberChem obtained additional financing with the assistance of RP&C International. Such financing consisted of $650,000 Senior Convertible -4- Notes (the "Notes Offering") ranking PARRI PASSU with the Debentures and containing terms and conditions substantially similar to those of the Debentures. In connection with the Debenture Offering and the Notes Offering, FiberChem paid RP&C International (the "Placement Agent") a selling commission, in cash, of an amount equal to 10% of the aggregate gross proceeds of the securities sold in both the Debenture Offering and the Notes Offering. The Placement Agent also received warrants to purchase up to 840,000 shares of Common Stock (the "Placement Agent Warrants"), at a price per share equal to the lesser of $0.30 per share or 92% of the average trading price per share of the Common Stock for 20 consecutive trading days preceding the exercise date, subject to adjustment, until 5:00 p.m. New York Time, July 28, 2005. FiberChem intends to use the net proceeds of the Debenture Offering and Notes Offering for sales and marketing expenditures, including the immediate hiring of new personnel to direct international sales efforts, product development, acquisition of equipment, patents and technology, and working capital. FiberChem is seeking additional long-term financing to meet the combined company's cash requirements. Item 7. FINANCIAL STATEMENTS. (a) Financial statements of the acquired business will be filed no later than 60 days after the date that this Report is filed. (b) Pro forma financial information of the acquired business will be filed no later than 60 days after the date that this Report is filed. (c) Exhibits: Exhibit Number Description - ------- ----------- 2.1 Amended Arrangement Agreement, dated as of May 26, 2000, entered into on June 2, 2000, between FiberChem, Inc., a Delaware corporation, and Intrex Data Communications Corp., a British Columbia company (incorporated herein by reference from Exhibits to FiberChem's Current Report on Form 8-K dated June 2, 2000). 2.2 Agreement and Plan of Merger by and Among FiberChem, Inc., Pandel Instruments, Inc., Pandel Mergerco, Inc. and Peter J. Lagergren dated as of June 9, 2000 (incorporated herein by reference from Exhibits to FiberChem's Current Report on Form 8-K dated June 2, 2000) . -5- 3.1 Certificate of Merger of Pandel Instruments, Inc. and Pandel Mergerco, Inc. dated July 27, 2000. 3.2 Certificate of Designation of Special Series Stock of FiberChem, Inc. dated July 27, 2000. 3.3 Certificate of Designation of Pandel Series Stock of FiberChem, Inc. dated July 27, 2000. 4.1 Trust Indenture Agreement dated as of July 28, 2000, between FiberChem and The Bank of New York, as Trustee. 4.2 U.S. $1,350,000 Global Bearer Debenture without interest coupons issued by FiberChem on July 28, 2000. 4.3 Form of 12% Senior Convertible Promissory Note due 2002. -6- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, FiberChem has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIBERCHEM, INC. Registrant Dated: August 11, 2000 By: /s/ GEOFFREY F. HEWITT ------------------------------- Geoffrey F. Hewitt, Chief Executive Officer -7- EXHIBIT 3.1 CERTIFICATE OF MERGER OF PANDEL INSTRUMENTS, INC. (a Texas Corporation) AND PANDEL MERGERCO, INC. (a Delaware Corporation) ******** It is hereby certified that: FIRST: The name and state of incorporation of each of the constituent corporations of the merger is as follows: 1. Pandel Instruments, Inc., which is incorporated under the laws of the State of Texas; and 2. Pandel Mergerco, Inc., which is incorporated under the laws of the State of Delaware. SECOND: The Agreement of Merger between the parties to the merger has been approved, adopted, certified, executed and acknowledged by each of the aforesaid constituent corporations in accordance with the provisions of section (c) of Section 252 of the General Corporation Law of State of Delaware, to wit, by Pandel Instruments, Inc. in accordance with the laws of the State of Texas and by Pandel Mergerco Inc., in the same manner as is provided in Section 251 of the General Corporation Law of the State of Delaware. THIRD: The name of the surviving corporation of the merger is Pandel Mergerco, Inc., a Delaware corporation, which will continue its existence as said surviving corporation under its present name, Pandel Mergerco, Inc. upon the effective date of said merger pursuant to the provisions of the General Corporation Law of the State of Delaware. FOURTH: The Certificate of Incorporation of Pandel Mergerco, Inc., as now in force and effect shall continue to be the certificate of Incorporation of said surviving corporation until amended and changed pursuant to the provisions of the General Corporation Law of the State of Delaware. FIFTH: The executed Agreement of Merger is on file at the office of the surviving corporation, the address of which is 1181 Grier Drive, Suite B, Las Vegas, Nevada. SIXTH: A copy of the Agreement of Merger will be furnished by the surviving corporation, on request and without cost, to any stockholder of any constituent corporation. SEVENTH: The authorized capital stock of Pandel Instruments, Inc. consists of 5,000,000 shares of no par value. EIGHTH: The Agreement of Merger between the aforesaid constituent corporations provides that the merger herein certified shall be effective on July 27, 2000. Dated: July 27, 2000 PANDEL MERGERCO, INC. /s/ Melvin W. Pelley ------------------------------ Melvin W. Pelley, Secretary EXHIBIT 3.2 CERTIFICATE OF DESIGNATION OF SPECIAL SERIES STOCK OF FIBERCHEM, INC. __________________ Pursuant to Section 151 of the General Corporation Law of the State of Delaware __________________ FiberChem, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "CORPORATION"), hereby certifies that the following resolutions were adopted by the Board of Directors of the Corporation on June 29, 2000 pursuant to authority of the Board of Directors as required by Section 151 of the General Corporation Law of the State of Delaware: RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation (the "BOARD OF DIRECTORS" or the "BOARD") in accordance with the provisions of its Certificate of Incorporation, the Board of Directors hereby authorizes a series of the Corporation's previously authorized preferred stock, par value $0.01 per share (the "PREFERRED STOCK"), and hereby states the designation and number of shares, and fixes the relative rights, preferences, privileges, powers and restrictions thereof as follows: Of the total number of shares of Preferred Stock , $.01 par value, authorized under the corporation's certificate of incorporation, 2,250,000 shares shall be of a series designated as Special Stock. ARTICLE I The rights and preferences of the holders of the shares of Special Stock shall be as set forth in this ARTICLE I. The holders of the shares of Special Stock shall be entitled to one hundred votes per share voting as a single class with the common stock, but shall not otherwise be entitled to any other voting rights except as may be required by law. The Special Stock shall not be entitled to dividends or to any payment upon liquidation or dissolution of the corporation and shall not be transferable by the holders thereof, except that upon any liquidation or dissolution of the corporation the holders of the Special Stock shall be entitled to receive out of the net proceeds of such liquidation or dissolution in preference and priority to the holders of the common stock, but junior to the holders of the corporation's shares of preferred stock of any class outstanding at the time of first issuance of any of the shares of Special Stock, a payment equal to $.10 per share. Each share of Special Stock shall be subject to mandatory redemption by the corporation at a redemption price equal to $.001 per share upon the exercise by the holder of the holder's right to exchange each Class B Share of Intrex owned by such holder for one share of the corporation's common stock in accordance with the provisions of the Arrangement Agreement. Each share of Special Stock shall be subject to optional redemption by the corporation at a redemption price of $.001 per share at any time when the Class B Shares of Intrex are subject to optional redemption by Intrex pursuant to Article 27 of the Articles of Intrex. Any redemption of shares of Special Stock shall be upon like notice to the holder thereof as provided in Article 27 of the Articles of Intrex for redemption by Intrex of Intrex Class B Shares. ARTICLE II If the provisions of ARTICLE I are not applicable, the rights and preferences of the holders of the shares of Special Stock shall be as set forth in this ARTICLE II. Section 1. Dividends. (a) Dividend Accruals and Payments. The Corporation shall not be required to declare or pay a dividend on the Special Stock, except as set forth in this Section 1. No cash dividend or other distribution shall be paid, or declared and set apart for payment, on any share of Common Stock, unless a cash dividend or other distribution is paid, or declared and set apart for payment, with respect to each outstanding share of Special Stock in an amount equal to the dividend paid or declared on a share of Common Stock multiplied by the Special Stock Ratio (as hereinafter defined). (b) Ratable Allocation of Dividends. If at any time the Corporation pays less than the total amount of dividends then accrued and payable with respect to all outstanding shares of Special Stock, such payment will be distributed ratably among the holders of such shares of Special Stock pro rata in proportion to the aggregate accrued but unpaid dividends on the shares of Special Stock held by each such holder. Section 2. Liquidation, Dissolution, or Winding-Up. In the event of any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, the holders of outstanding shares of Special Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to stockholders, before any payment shall be made to or set aside for the holders of any other class or series of capital stock ranking on liquidation junior to the Special Stock, an amount equal to the greater of: (i) $.10 per share of Special Stock held (subject to adjustment in proportion to any change in the Special Stock Ratio), plus all accrued and unpaid dividends on the Special Stock through the date of such liquidation, dissolution or winding-up; and (ii) such holders' pro rata share of any assets remaining available for distribution to the holders of Special Stock and Common Stock after payment of the liquidation preference applicable to any preferred stock ranking senior to the Special Stock and the Common Stock upon such liquidation based on the number of shares of stock held by each (with each holder of shares of Special Stock being deemed for such purpose to hold a number of shares of stock equal to the number of shares of Special Stock owned by such holder as of the date of such liquidation, dissolution or winding up of the Corporation multiplied by the Special Stock Ratio ), plus all accrued and unpaid dividends on the Special Stock through the date of such liquidation, dissolution or winding-up (the "Special Stock Liquidation Value"). The Common Stock and the Special Stock shall rank on liquidation junior to any shares of preferred stock of any series outstanding immediately prior to the date of first issuance of the Special Stock. If upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, the assets lawfully available to be distributed to the holders of Special Stock shall be insufficient to permit payment to such stockholders of their full applicable Special Stock Liquidation Value per share, then all of the assets of the Corporation lawfully available for distribution shall be distributed pro rata among the holders of shares of Special Stock in proportion to the number of shares of Special Stock held by them as of the date of such liquidation, dissolution or winding-up of the Corporation. Section 3. Voting Rights. Except as otherwise expressly provided herein or as required by applicable law (and not subject to waiver by the Corporation), the holder of each share of Special Stock shall be entitled to vote on all matters on which holders of Common Stock are entitled to vote, including, without limitation, the election of directors. Each share of Special Stock shall entitle the holder thereof to such number of votes per share as shall equal the number of shares of Special Stock owned by such holder as of the record date for the determination of stockholders entitled to vote on such matter, or if no record date is established, at the date such vote is taken or any written consent of stockholders is solicited, multiplied by the Special Stock Ratio. Except as otherwise expressly provided herein or expressly required by applicable law, the holders of shares of Special Stock and Common Stock, respectively, shall vote together as a single class on all matters submitted to a vote or consent of stockholders. Section 4. Special Stock Ratio and Adjustments. (a) Special Stock Ratio. The Special Stock Ratio initially shall be 100, subject to adjustment as provided in this Section 4. (b) Adjustments for Extraordinary Common Stock Events. Upon the happening of an Extraordinary Common Stock Event (as defined in Section 4(c) hereof), automatically and without further action, and simultaneously with the happening of such Extraordinary Common Stock Event, the Special Stock Ratio shall be adjusted by multiplying the then effective Special Stock Ratio by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding (excluding treasury stock) immediately after such Extraordinary Common Stock Event, and the denominator of which shall be the number of shares of Common Stock outstanding (excluding treasury stock) immediately before such Extraordinary Common Stock Event. (c) Extraordinary Common Stock Event. As used herein, "Extraordinary Common Stock Event" means (i)the issuance of additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock , (ii)the subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or (iii)the combination of outstanding shares of Common Stock into a smaller number of shares of Common Stock. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation to be signed by its duly authorized officers on this 27th day of July, 2000. FIBERCHEM, INC. By: /s/ Melvin W. Pelley ----------------------- Name: Melvin W. Pelley Title: Chief Financial Officer & Secretary CERTIFICATE OF DESIGNATION OF PANDEL SERIES STOCK OF FIBERCHEM, INC. _______________________ Pursuant to Section 151 of the General Corporation Law of the State of Delaware _______________________ FiberChem, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "CORPORATION"), hereby certifies that the following resolutions were adopted by the Board of Directors of the Corporation on June 29, 2000 pursuant to authority of the Board of Directors as required by Section 151 of the General Corporation Law of the State of Delaware: RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation (the "BOARD OF DIRECTORS" or the "BOARD") in accordance with the provisions of its Certificate of Incorporation, the Board of Directors hereby authorizes a series of the Corporation's previously authorized preferred stock, par value $0.01 per share (the "PREFERRED STOCK"), and hereby states the designation and number of shares, and fixes the relative rights, preferences, privileges, powers and restrictions thereof as follows: Of the total number of shares of Preferred Stock , $0.01 par value, authorized under the Corporation's Certificate of Incorporation, 750,000 shares shall be of a series designated as Pandel Series Stock: ARTICLE I The rights and preferences of the holders of the shares of Pandel Series Stock shall be as set forth in this ARTICLE I. SECTION 1. DIVIDENDS. (a) DIVIDEND ACCRUALS AND PAYMENTS. The Corporation shall not be required to declare or pay a dividend on the Pandel Series Stock, except as set forth in this Section 1. No cash dividend or other distribution shall be paid, or declared and set apart for payment, on any share of Common Stock, unless a cash dividend or other distribution is paid, or declared and set apart for payment, with respect to each outstanding share of Pandel Series Stock in an amount equal to the dividend paid or declared on a share of Common Stock multiplied by the Pandel Series Stock Ratio (as hereinafter defined). (b) RATABLE ALLOCATION OF DIVIDENDS. If at any time the Corporation pays less than the total amount of dividends then accrued and payable with respect to all outstanding shares of Pandel Series Stock, such payment will be distributed ratably among the holders of such shares of Pandel Series Stock PRO RATA in proportion to the aggregate accrued but unpaid dividends on the shares of Pandel Series Stock held by each such holder. SECTION 2. LIQUIDATION, DISSOLUTION, OR WINDING-UP. In the event of any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, the holders of outstanding shares of Pandel Series Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to stockholders, before any payment shall be made to or set aside for the holders of any other class or series of capital stock ranking on liquidation junior to the Pandel Series Stock, an amount equal to the greater of: (i) $.10 per share of Pandel Series Stock held (subject to adjustment in proportion to any change in the Pandel Series Stock Ratio), plus all accrued and unpaid dividends on the Pandel Series Stock through the date of such liquidation, dissolution or winding-up; and (ii) such holders' PRO RATA share of any assets remaining available for distribution to the holders of Pandel Series Stock and Common Stock after payment of the liquidation preference applicable to any preferred stock ranking senior to the Pandel Series Stock and the Common Stock upon such liquidation based on the number of shares of stock held by each (with each holder of shares of Pandel Series Stock being deemed for such purpose to hold a number of shares of stock equal to the number of shares of Pandel Series Stock owned by such holder as of the date of such liquidation, dissolution or winding up of the Corporation multiplied by the Pandel Series Stock Ratio ) (the "PANDEL SERIES STOCK LIQUIDATION VALUE"). The Common Stock and the Pandel Series Stock shall rank on liquidation junior to (i) any shares of preferred stock of any series outstanding immediately prior to the date of first issuance of the Pandel Series Stock and (ii) any shares of preferred stock of the series designated Special Stock. If upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, the assets lawfully available to be distributed to the holders of Pandel Series Stock shall be insufficient to permit payment to such stockholders of their full applicable Pandel Series Stock Liquidation Value per share, then all of the assets of the Corporation lawfully available for distribution shall be distributed PRO RATA among the holders of shares of Pandel Series Stock in proportion to the number of shares of Pandel Series Stock held by them as of the date of such liquidation, dissolution or winding-up of the Corporation. SECTION 3. VOTING RIGHTS. Except as otherwise expressly provided herein or as required by applicable law (and not subject to waiver by the Corporation), the holder of each share of Pandel Series Stock shall be entitled to vote on all matters on which holders of Common Stock are entitled to vote, including, without limitation, the election of directors . Each share of Pandel Series Stock shall entitle the holder thereof to such number of votes per share as shall equal the number of shares of Pandel Series Stock owned by such holder as of the record date for the determination of stockholders entitled to vote on such matter, or if no record date is established, at the date such vote is taken or any written consent of stockholders is solicited, multiplied by the Pandel Series Stock Ratio. Except as otherwise expressly provided herein or expressly required by applicable law, the holders of shares of Pandel Series Stock, any other class of stock possessing voting rights and Common Stock, respectively, shall vote together as a single class on all matters submitted to a vote or consent of stockholders. SECTION 4. CONVERSION; PANDEL SERIES STOCK RATIO AND ADJUSTMENTS. Shares of Pandel Series Stock shall be subject to conversion into shares of Common Stock as set forth in this Section 4. (a) AUTOMATIC CONVERSION. (i) AUTOMATIC CONVERSION ON DECEMBER 31, 2000 OR UPON NOTICE. Provided the Corporation shall have a sufficient number of shares of Common Stock reserved for issuance upon conversion of the Pandel Series Stock as hereinafter provided then, on December 31, 2000 without notice, or at any time prior to December 31, 2000 on not less than fifteen days prior written notice to each holder of Pandel Series Stock given by first-class mail at the address of such holder as it appears on the records of the Corporation, each share of Pandel Series Stock outstanding shall be converted into a number of fully paid and non-assessable shares of Common Stock equal to the product obtained by multiplying (A) the number of shares of Pandel Series Stock being converted, by (B) the Pandel Series Stock Ratio (as defined in Section 4(b)) then in effect, automatically and without further action. (ii) MECHANICS OF AUTOMATIC CONVERSION. Upon any automatic conversion of shares of Pandel Series Stock into shares of Common Stock pursuant to this Section 4(a), the holders of such converted shares shall surrender the certificates formerly representing such shares at the office of the Corporation or of any transfer agent for Common Stock. Thereupon, there shall be issued and delivered to each such holder, promptly at such office and in his name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock into which such shares of Pandel Series Stock were so converted. The Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless and until certificates formerly evidencing the converted shares of Pandel Series Stock are either delivered to the Corporation or its transfer agent, as hereinafter provided, or the holder thereof notifies the Corporation or such transfer agent that such certificates have been lost, stolen, or destroyed and executes and delivers an agreement in form and substance satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. (b) PANDEL SERIES STOCK RATIO. The Pandel Series Stock Ratio initially shall be 100, subject to adjustment as provided in this Section 4. (c) ADJUSTMENTS FOR EXTRAORDINARY COMMON STOCK EVENTS. Upon the happening of an Extraordinary Common Stock Event (as defined in Section 4(d) hereof), automatically and without further action, and simultaneously with the happening of such Extraordinary Common Stock Event, the Pandel Series Stock Ratio shall be adjusted by multiplying the then effective Pandel Series Stock Ratio by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding (excluding treasury stock) immediately after such Extraordinary Common Stock Event, and the denominator of which shall be the number of shares of Common Stock outstanding (excluding treasury stock) immediately before such Extraordinary Common Stock Event. (d) EXTRAORDINARY COMMON STOCK EVENT. As used herein, "EXTRAORDINARY COMMON STOCK EVENT" means (i) the issuance of additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock , (ii) the subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or (iii) the combination of outstanding shares of Common Stock into a smaller number of shares of Common Stock. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation to be signed by its duly authorized officers on this 27th day of July, 2000. FIBERCHEM, INC. By: /s/ Melvin W. Pelley ------------------------ Name: Melvin W. Pelley Title: Chief Financial Officer & Secretary EXHIBIT 4.1 FIBERCHEM, INC. TRUST INDENTURE July 28, 2000 TABLE OF CONTENTS ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.01 DEFINITIONS............................................................................1 SECTION 1.02 LEGAL HOLIDAYS.........................................................................9 SECTION 1.03 RULES OF CONSTRUCTION.................................................................10 SECTION 1.04 COMPLIANCE CERTIFICATES AND OPINIONS..................................................10 SECTION 1.05 FORM OF DOCUMENTS DELIVERED TO TRUSTEE................................................11 SECTION 1.06 ACTS OF DEBENTUREHOLDERS..............................................................11 SECTION 1.07 NOTICES, ETC., TO TRUSTEE AND COMPANY.................................................11 SECTION 1.08 NOTICE TO DEBENTUREHOLDERS; WAIVER....................................................12 SECTION 1.09 EFFECT OF HEADINGS AND TABLE OF CONTENTS..............................................12 SECTION 1.10 SUCCESSORS AND ASSIGNS................................................................12 SECTION 1.11 SEPARABILITY CLAUSE...................................................................12 SECTION 1.12 BENEFITS OF INDENTURE.................................................................12 SECTION 1.13 GOVERNING LAW.........................................................................13 ARTICLE II FORMS OF THE DEBENTURES SECTION 2.01 FORMS GENERALLY.......................................................................13 SECTION 2.02 RESTRICTIVE LEGENDS...................................................................14 ARTICLE III THE DEBENTURES SECTION 3.01 TERMS.................................................................................15 SECTION 3.02 AUTHORIZED DENOMINATION...............................................................16 SECTION 3.03 EXECUTION, AUTHENTICATION, DELIVERY AND DATING........................................16 SECTION 3.04 TEMPORARY DEBENTURES..................................................................17 SECTION 3.05 EXCHANGE..............................................................................17 SECTION 3.06 BOOK-ENTRY PROVISIONS FOR THE GLOBAL DEBENTURE........................................17 SECTION 3.07 SPECIAL TRANSFER PROVISIONS...........................................................18 SECTION 3.08 MUTILATED, DESTROYED, LOST AND STOLEN DEBENTURES......................................19 SECTION 3.09 PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED........................................19 SECTION 3.10 PERSONS DEEMED OWNERS.................................................................20 SECTION 3.11 CANCELLATION..........................................................................20 SECTION 3.12 COMPUTATION OF INTEREST...............................................................20 SECTION 3.13 ISIN, CUSIP OR OTHER IDENTIFYING NUMBERS..............................................20 SECTION 3.14 PRESCRIPTION..........................................................................20 ARTICLE IV SATISFACTION AND DISCHARGE SECTION 4.01 SATISFACTION AND DISCHARGE OF INDENTURE...............................................21 SECTION 4.02 APPLICATION OF TRUST MONEY............................................................21 ARTICLE V EVENTS OF DEFAULT AND REMEDIES SECTION 5.01 EVENTS OF DEFAULT.....................................................................22 SECTION 5.02 ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT....................................23 SECTION 5.03 COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE.......................24 SECTION 5.04 TRUSTEE MAY FILE PROOFS OF CLAIM......................................................24 SECTION 5.05 TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF DEBENTURES...........................25 SECTION 5.06 APPLICATION OF MONEY COLLECTED........................................................25 SECTION 5.07 LIMITATION ON SUITS...................................................................25 SECTION 5.08 UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL AND INTEREST......................26 SECTION 5.09 RESTORATION OF RIGHTS AND REMEDIES....................................................26 -3- SECTION 5.10 RIGHTS AND REMEDIES CUMULATIVE........................................................26 SECTION 5.11 DELAY OR OMISSION NOT WAIVER..........................................................27 SECTION 5.12 CONTROL BY DEBENTUREHOLDERS...........................................................27 SECTION 5.13 WAIVER OF PAST DEFAULTS...............................................................27 SECTION 5.14 WAIVER OF STAY OR EXTENSION LAWS......................................................27 SECTION 5.15 UNDERTAKING FOR COSTS.................................................................27 ARTICLE VI THE TRUSTEE SECTION 6.01 NOTICE OF DEFAULTS....................................................................28 SECTION 6.02 CERTAIN RIGHTS OF TRUSTEE.............................................................28 SECTION 6.03 TRUSTEE NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF DEBENTURES........................29 SECTION 6.04 WHO MAY HOLD DEBENTURES...............................................................29 SECTION 6.05 MONEY HELD IN TRUST...................................................................29 SECTION 6.06 COMPENSATION AND REIMBURSEMENT........................................................30 SECTION 6.07 CORPORATE TRUSTEE REQUIRED; ELIGIBILITY...............................................30 SECTION 6.08 RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.....................................30 SECTION 6.09 ACCEPTANCE OF APPOINTMENT BY SUCCESSOR................................................31 SECTION 6.10 MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS...........................32 SECTION 6.11 CERTAIN DUTIES AND RESPONSIBILITIES...................................................32 SECTION 6.12 MEETINGS OF DEBENTUREHOLDERS..........................................................33 SECTION 6.13 AUTHENTICATING AGENTS.................................................................34 ARTICLE VII DEBENTUREHOLDERS' LISTS AND REPORTS BY COMPANY SECTION 7.01 DISCLOSURE OF NAMES AND ADDRESSES OF DEBENTUREHOLDERS.................................35 SECTION 7.02 REPORTS BY COMPANY....................................................................35 ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER, OR LEASE SECTION 8.01 COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS..................................35 SECTION 8.02 SUCCESSOR SUBSTITUTED.................................................................36 ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01 SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF DEBENTUREHOLDERS...........................36 SECTION 9.02 SUPPLEMENTAL INDENTURES WITH CONSENT OF DEBENTUREHOLDERS..............................37 SECTION 9.03 EXECUTION OF SUPPLEMENTAL INDENTURES..................................................37 SECTION 9.04 EFFECT OF SUPPLEMENTAL INDENTURES.....................................................37 SECTION 9.05 REFERENCE IN DEBENTURES TO SUPPLEMENTAL INDENTURES....................................38 SECTION 9.06 NOTICE OF SUPPLEMENTAL INDENTURES.....................................................38 ARTICLE X COVENANTS SECTION 10.01 PAYMENT OF PRINCIPAL AND INTEREST.....................................................38 SECTION 10.02 MAINTENANCE OF OFFICE OR AGENCY.......................................................38 SECTION 10.03 MONEY FOR PAYMENTS TO BE HELD IN TRUST................................................38 SECTION 10.04 CORPORATE EXISTENCE...................................................................39 SECTION 10.05 PAYMENT OF TAXES AND OTHER CLAIMS.....................................................39 SECTION 10.06 MAINTENANCE OF PROPERTIES.............................................................40 SECTION 10.07 INSURANCE.............................................................................40 SECTION 10.08 STATEMENT BY OFFICERS AS TO DEFAULT...................................................40 SECTION 10.09 PROVISION OF FINANCIAL STATEMENTS.....................................................41 SECTION 10.10 LIMITATION ON OTHER INDEBTEDNESS......................................................41 -4- SECTION 10.11 LIMITATION ON LIENS...................................................................41 SECTION 10.12 CHARTER AMENDMENTS....................................................................41 SECTION 10.13 UNITED STATES WITHHOLDING AND REPORTING REQUIREMENTS..................................41 SECTION 10.14 MAINTENANCE OF LISTINGS FOR DEBENTURES AND SHARES.....................................42 SECTION 10.16 WAIVER OF CERTAIN COVENANTS...........................................................42 ARTICLE XI REDEMPTION OF DEBENTURES SECTION 11.01 RIGHT OF REDEMPTION...................................................................42 SECTION 11.02 APPLICABILITY OF ARTICLE..............................................................42 SECTION 11.03 ELECTION TO REDEEM; NOTICE TO TRUSTEE.................................................42 SECTION 11.04 NOTICE OF REDEMPTION..................................................................43 SECTION 11.05 DEPOSIT OF REDEMPTION PRICE...........................................................43 SECTION 11.06 DEBENTURES PAYABLE ON REDEMPTION DATE.................................................43 SECTION 11.07 SURRENDER OF DEBENTURES...............................................................44 ARTICLE XII CONVERSION SECTION 12.01 CONVERSION RIGHT AND CONVERSION PRICE.................................................44 SECTION 12.02 EXERCISE OF CONVERSION RIGHT..........................................................44 SECTION 12.03 CALCULATION OF SHARES ISSUED ON CONVERSION AND FRACTIONS OF SHARES....................45 SECTION 12.04 ADJUSTMENT OF MAXIMUM CONVERSION PRICE................................................45 SECTION 12.05 NOTICE OF ADJUSTMENTS OF CONVERSION PRICE.............................................49 SECTION 12.06 NOTICE OF CERTAIN CORPORATE ACTION....................................................49 SECTION 12.07 COMPANY TO RESERVE COMMON STOCK.......................................................50 SECTION 12.08 TAXES ON CONVERSIONS..................................................................50 SECTION 12.09 CANCELLATION OF CONVERTED DEBENTURES..................................................50 SECTION 12.10 PROVISIONS IN CASE OF RECLASSIFICATION CONSOLIDATION, MERGER OR SALE OF ASSETS................................................................................50 SECTION 12.11 MANDATORY CONVERSION..................................................................51 SECTION 12.12 RESPONSIBILITY OF TRUSTEE FOR CONVERSION PROVISIONS...................................51 ARTICLE XIII DEFEASANCE AND COVENANT DEFEASANCE SECTION 13.01 COMPANY'S OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE..........................52 SECTION 13.02 LEGAL DEFEASANCE AND DISCHARGE........................................................52 SECTION 13.03 COVENANT DEFEASANCE...................................................................52 SECTION 13.04 CONDITIONS TO LEGAL DEFEASANCE OR COVENANT DEFEASANCE.................................53 SECTION 13.05 DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS........................................................53 SECTION 13.06 REINSTATEMENT.........................................................................54 ARTICLE XIV SENIORITY OF DEBENTURES SECTION 14.01 SENIORITY OF THE DEBENTURES...........................................................54 ARTICLE XV IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 15.01 LIABILITY SOLELY CORPORATE............................................................54
-5- EXHIBITS -------- EXHIBIT A Form of Definitive Bearer Debentures, Coupons, and Trustee's Certificate of Authentication EXHIBIT B Form of Global Debenture EXHIBIT C Form of Certificate from the Company's Chief Financial Officer Transmitting Annual Financial Statements EXHIBIT D Form of Notice from Debentureholder of Exercise of Conversion Rights EXHIBIT E Designated Indebtedness EXHIBIT F Permitted Subsidiary Indebtedness
-6- TRUST INDENTURE dated as of July 28, 2000 ("Indenture"), between FiberChem, Inc., a corporation duly organized and existing under the laws of the State of Delaware ("Company"), and The Bank of New York, a banking corporation duly organized and existing under the laws of the State of New York, as Trustee ("Trustee"). WHEREAS: The Company has duly authorized the creation of an issue of up to U.S. $5,000,000 of 12% Senior Convertible Debentures Due 2002, and the Coupons, if any, thereto appertaining (collectively, the "Debentures"). To provide for the Debentures, the Company has duly authorized the execution and delivery of this Indenture. All things necessary have been done to make the Debentures, when duly issued and executed by the Company and authenticated and delivered hereunder, the valid obligations of the Company and to make this Indenture a valid agreement of the Company, in accordance with their and its terms. The Trustee has agreed to act as trustee under this Indenture on the terms and conditions set forth herein. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Debentures by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Debentures as follows: ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.01 DEFINITIONS. "Act" when used with respect to any Debentureholder, has the meaning specified in Section 1.06. "Adjusted Market Price" shall equal 92% of the average of the Market Price of the Common Stock for the 20 consecutive Stock Exchange Business Days ending two Stock Exchange Business Days prior to the Conversion Date. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agency Agreement" has the meaning set out in Section 10.02. "Agent" means RP&C International Inc. and RP&C International Limited. -7- "Agent Members" has the meaning specified in Section 3.06. "Alternative Stock Exchange" means other than OTC, any national or regional stock exchange or quotation service such as NASDAQ National Market System or any similar quotation service maintained by the National Quotation Bureau or any successor thereto agreed between the Company and the Agent. "Authenticating Agent" means the Person authorized pursuant to Section 6.13 to act on behalf of the Trustee to authenticate the Debentures until a successor Authenticating Agent shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Authenticating Agent" shall mean such successor Authenticating Agent. Pursuant to the terms hereof, The Bank of New York will initially act as the Authenticating Agent for the Debentures. "Authorized Denomination" means the denominations authorized in Section 3.02. "Authorized Newspapers" means the LUXEMBOURG WORT of Luxembourg and THE FINANCIAL TIMES (EUROPEAN EDITION) of London, England. If either such newspaper shall cease to be published, the Company or the Trustee shall substitute for it another newspaper in Europe, customarily published at least once a day for at least five (5) days in each calendar week, of general circulation. If, because of temporary suspension of publication or general circulation of either such newspaper or for any other reason, it is impossible or, in the opinion of the Company or the Trustee, impracticable to make any publication of any Notice required by this Indenture in the manner herein provided, such publication or other Notice in lieu thereof which is made by the Company or the Trustee in the exercise of its reasonable discretion shall constitute a sufficient publication of such Notice. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and be in full force and effect on the date of such certification, and delivered to the Trustee. Where any provision hereof refers to an action to be taken pursuant to a Board Resolution (including establishment of the Debentures and the forms and terms thereof), such action may be taken by any committee, officer or employee of the Company authorised to take such action (generally or in any particular respect) by a Board Resolution. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is a day on which banking institutions in Luxembourg, New York, New York, and London, England are not authorized or obliged by law, regulation or executive order to close. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock whether now outstanding or issued on or after the date of this Indenture, including, without limitation, all Common Stock and Preferred Stock. "Capitalized Lease Obligation" means the amount of the liability under any capital lease that, in accordance with GAAP, is required to be capitalized and reflected as a liability on the balance sheet of the relevant Person. "Certificate of Incorporation" means the Certificate of Incorporation of the Company, as in effect on the date hereof and as amended or restated from time to time hereafter. -8- "Clearstream" means Clearstream Banking, societe anonyme. "Commencement Date" has the meaning set out in Section 12.04. "Commission" means the Securities and Exchange Commission, as from time to time constituted or, if at any time after the execution of this Indenture such Commission is not existing, then the body performing similar duties at such time. "Common Depository"means the common depository appointed by Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System, and Clearstream, which shall initially be The Bank of New York, including the nominees and successors of any Common Depository. "Common Stock" means, with respect to any Person, any and all shares, interests, participation and other equivalents (however designated, whether voting or non-voting) of such Person's common stock, whether now outstanding or issued after the date of this Indenture, and includes, without limitation, all series and classes of such common stock. "Common Stock Equivalent" means equity or debt securities (other than Common Stock) of the Company which are convertible into or exercisable for shares of Common Stock (including, without limitation, shares, units of shares, preferred stock and other convertible securities) which the Board of Directors has deemed to have the same value or economic rights as shares of Common Stock. "Company" means the Person named as the "Company" in the first paragraph of this Indenture, until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman, its Chief Executive Officer, its President, or a Vice President and by its Chief Financial Officer, its Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, and delivered to the Trustee. "Conversion Agent" means any Person (including the Company acting as Conversion Agent) authorized by the Company to effect conversions of the Debentures on behalf of the Company. The Company has initially appointed The Bank of New York to act as the Principal Conversion Agent, and Banque Internationale A Luxembourg as a Conversion Agent for the Debentures. "Conversion Date" means the Business Day on which either (i) the Conversion Right is exercised by delivery to the Conversion Agent of completed Conversion Notice and, if applicable, the Debenture surrendered for conversion or (ii) the date of conversion as specified in the Company's notice of mandatory conversion delivered in accordance with Condition 6(E). "Conversion Notice" means the notice from a Debentureholder reflecting its intention to exercise its Conversion Right, the form of which notice for the Debentures is set forth in Exhibit D hereto. "Conversion Period" means any time up to the close of business on July 24, 2002 (but in no event thereafter), or, if the Debentures shall have been called for redemption pursuant to Article XI, on the date up to and including two (2) Business Days prior to the date fixed for redemption thereof. -9- "Conversion Price" means, on the Issue Date the lesser of (i) the Maximum Conversion Price or (ii) the Adjusted Market Price, and such Conversion Price will be subject to adjustment in the manner provided in Conditions 6(C) and 6(F) of the Debenture. "Conversion Right" means the right of a Holder of any Debenture to convert such Debenture into Conversion Shares. "Conversion Shares" means the Shares into which the Debentures are convertible including the additional Shares a holder of Debentures is entitled pursuant to Condition 6(G) of the Debentures. "Corporate Trust Office" means the corporate trust office of the Trustee, at which at any particular time its corporate trust business shall be principally administered, which office at the date of execution of this Indenture is located at 101 Barclay Street 21st Floor West, New York, NY 10286, except that with respect to presentation of Debentures for payment upon redemption, for conversion or exchange, such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate agency business shall be principally conducted. "Corporation" includes corporations, limited liability companies, limited and general partnerships, associations, joint-stock companies and business trusts. "Coupon" means bearer interest Coupons relating to the Definitive Bearer Debentures and any replacement Coupons issued pursuant to Section 3.08. "Couponholder" means a Person who is the bearer of any Coupon. "Covenant Defeasance" has the meaning set out in Section 13.03. "Current Event" has the meaning set out in Section 12.04. "Debentureholder" means a Person who is the bearer of any Debenture. "Debentures" has the meaning stated in the recitals of this Indenture and more particularly means any Debentures authenticated and delivered under this Indenture. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Default Rate" means a rate of interest of 18% per annum. "Definitive Bearer Debentures" has the meaning set out in Section 2.01. "Designated Indebtedness " means (i) Indebtedness currently in existence and more fully described on Exhibit E attached hereto, (ii) Indebtedness for which the Company or any of its Subsidiaries are the sole obligors and obligees, (iii) Indebtedness secured by Permitted Liens and (iv) other indebtedness permitted pursuant to Exhibit E. "Distribution Compliance Period" means the one year period commencing after the Issue Date. -10- "Effective Date" means the earlier of (a) the first Business Day following the date upon which the Commission declares to be effective a registration statement filed by the Company pursuant to the Securities Act relating to the Conversion Shares and (b) the first Business Day occurring after the expiration of the Distribution Compliance Period. "Euroclear" means the Euroclear System. "Event of Default" has the meaning specified in Section 5.01. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Expiration Time" has the meaning set out in Section 12.04. "Extraordinary Resolution" means a resolution passed at a meeting of the Debentureholders duly convened and held in accordance with Section 6.12 hereof. "Federal Bankruptcy Code" means the Bankruptcy Act or Title 11 of the United States Code, as amended from time to time. "Generally Accepted Accounting Principles" or "GAAP" means generally accepted accounting principles in the United States, as applied from time to time by the Company and its Subsidiaries in the preparation of its financial statements. "Global Debenture" has the meaning specified in Section 2.01. "Guaranty" means all obligations of any Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing or in effect guaranteeing any Indebtedness, dividend or other obligation, of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including without limitation all obligations incurred through an agreement, contingent or otherwise, by such Person: (i) to purchase such Indebtedness or obligation or any Property or assets constituting security therefor, or (ii) to advance or supply funds (1) for the purchase or payment of such Indebtedness or obligation, or (2) to enable the recipient of such funds to maintain certain financial conditions (e.g. agreed amount of working capital) under loan or similar documents, or (iii) to lease Property or to purchase securities or other Property or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of the primary obligor to make payment of the Indebtedness or obligation, or (iv) otherwise to assure the owner of the Indebtedness or obligation of the primary obligor against loss in respect thereof. For the purposes of all computations made under this Indenture, a Guaranty in respect of any Indebtedness shall be deemed to be Indebtedness equal to the principal amount and accrued interest of such Indebtedness which has been guaranteed, and a Guaranty in respect of any other obligation or liability or any dividend shall be deemed to be Indebtedness equal to the maximum aggregate amount of such obligation, liability or dividend. "Holder" means a Person who is a bearer of a Debenture or Coupon, as the case may be. "Indebtedness" of any Person means and includes all present and future obligations of such Person, which shall include, without limitation, all obligations (i) which in accordance with GAAP shall be classified upon a balance sheet of such Person as liabilities of such Person, (ii) for borrowed money, (iii) which have -11- been incurred in connection with the acquisition of Property (including, without limitation, all obligations of such Person evidenced by any debenture, bond, note, commercial paper or other similar security, but excluding, in any case, obligations arising from the endorsement in the ordinary course of business of negotiable instruments for deposit or collection), (iv) secured by any Lien existing on Property owned by such Person, even though such Person has not assumed or become liable for the payment of such obligations, (v) created or arising under any conditional sale or other title retention agreement with respect to Property acquired by such Person, notwithstanding the fact that the rights and remedies of the seller, lender or lessor under such agreement in the event of default are limited to repossession or sale of such Property, (vi) which are Capitalized Lease Obligations, (vii) for all Guaranties, whether or not reflected in the balance sheet of such Person, (viii) that are rental obligations under leases for personal property or fixtures and (ix) which are all reimbursement and other payment obligations (whether contingent, matured or otherwise) of such Person in respect of any acceptance or documentary credit. Notwithstanding the foregoing, Indebtedness shall not include (i) accounts payable incurred in the ordinary course of business, and (ii) Indebtedness represented by rental or lease obligations for personal property or fixtures not to exceed $1,500,000 in any period of 12 months for any Person and its Subsidiaries. "Indenture" means this instrument as originally executed and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Interest Payment Date" means the Stated Maturity of an instalment of interest on the Debentures. "Issue Date" means July 28, 2000. "Legal Defeasance" has the meaning set out in Section 13.02. "Lien" means any mortgage, charge, pledge, lien, security interest or encumbrance of any kind whatsoever, including any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Indenture, the Company or its Subsidiary shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. "Luxembourg Paying Agent and Conversion Agent" means any Person authorised by the Company to act as the Luxembourg paying and conversion agent for the Debentures until a successor Luxembourg Paying and Conversion Agent shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Luxembourg Paying and Conversion Agent" shall mean such successor Luxembourg Paying and Conversion Agent. Pursuant to the terms hereof, the Company has initially appointed Banque Internationale A Luxembourg as the Luxembourg Paying and Conversion Agent for the Debentures. "Mandatory Conversion" means conversion of the Debentures at the option of the Company pursuant to Section 12.11. "Mandatory Conversion Date" means the date specified in a notice published by the Company in accordance with Sections 1.07, 1.08 and 12.11, on which date the Debentureholders are required to surrender -12- their Debentures for conversion. "Market Price" shall be the closing bid price on the OTC for the Shares on the relevant Stock Exchange Business Day; provided, however, if the Shares are traded on an Alternative Stock Exchange, then the "Market Price" shall be the closing bid price of the Common Stock on such Alternative Stock Exchange on any Stock Exchange Business Day and provided further, if the Shares are not quoted on the OTC or an Alternative Stock Exchange, then the Market Price for any particular day shall be calculated promptly at the Company's expense by a reputable investment bank selected upon the mutual agreement of the Company and the Agent. "Maturity," when used with respect to any Debenture, means the date on which the principal of such Debenture becomes due and payable as therein or herein provided, whether at the Stated Maturity or the Redemption Date and whether by declaration of acceleration, call for redemption or otherwise. "Maximum Conversion Price" means U.S. $0.30 per Conversion Share. "Notice" has the meaning specified in Section 1.07. "Officers' Certificate" means a certificate signed by the Chairman, its Chief Executive Officer, the President or a Vice President, and by the Chief Financial Officer, its Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. Any one individual holding the requisite titles may sign and deliver an Officers' Certificate without cosignature of another individual with a requisite title. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, including an employee of the Company, and who shall be reasonably acceptable to the Trustee. "OTC" means the over-the-counter bulletin board as maintained by the National Association of Securities Dealers, Inc. "Other Event" has the meaning set out in Section 12.04. "Outstanding," when used with respect to Debentures, means, as of the date of determination, all Debentures theretofore authenticated and delivered under this Indenture, except: (1) Debentures heretofore cancelled by a Paying and Conversion Agent or delivered to a Paying and Conversion Agent for cancellation; (2) Debentures, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Debentures; PROVIDED that, if such Debentures are to be redeemed, Notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (3) Debentures, except to the extent provided in Sections 13.02 and 13.03, with respect to which the Company has effected Legal Defeasance and/or Covenant Defeasance as provided in Article XIII; and (4) Debentures which have been paid pursuant to Section 3.08 or in exchange for or in lieu of which other Debentures have been authenticated and delivered pursuant to this Indenture, other than any such Debentures in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Debentures are held by a bona fide purchaser in whose hands the Debentures are valid obligations of the Company; PROVIDED, HOWEVER, that in determining whether the Holders of the requisite principal amount of Outstanding Debentures have taken any -13- Act or given or made any Extraordinary Resolution or other request, demand, authorization, direction, consent, Notice or waiver hereunder, Debentures owned by the Company or any other obligor upon the Debentures or any Affiliate of the Company (other than persons whose Affiliate relationship arises solely from the ownership of Conversion Shares) or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in making such calculation or in relying upon any such request, demand, authorization, direction, consent, Notice or waiver, only Debentures which a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. Debentures so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Debentures and that the pledgee is not the Company or any other obligor upon the Debentures or any Affiliate of the Company or such other obligor. "Paying Agent" means any Person (including the Company acting as Paying Agent) authorized by the Company to pay the principal of or interest on any Debentures on behalf of the Company. Pursuant to the terms hereof, the Company has initially appointed The Bank of New York as the Principal Paying Agent, and Banque International A Luxembourg as the Luxembourg Paying Agent. "Permitted Liens" means (a) Liens or deposits made to secure payment of worker's compensation (or to participate in any fund in connection with worker's compensation), unemployment insurance, pensions, or social security programs, (b) Liens imposed by mandatory provisions of law such as for materialmen's mechanics, warehousemen's and other Liens arising in the ordinary course of the business of the Company or its Subsidiaries, securing Indebtedness on which payment is not yet due, (c) Liens for taxes imposed upon the Company's or any of its Subsidiaries' income, profits or property, if the same are not yet due and payable or if the same are being contested in good faith and as to which adequate reserves are maintained in accordance with GAAP, (d) Liens in connection with leases, real estate bids, or contracts (other than contracts involving the borrowing of money) or to secure (or in lieu of) surety, stay, appearance or customs bonds and Liens to secure the payment of taxes, assessments, customs, duties or other similar charges, (e) Liens consisting of zoning restrictions, easements or other restrictions on the use of real property PROVIDED THAT such Liens do not impair the use of such property for the uses intended, and none of which is violated by existing or proposed structure or land use, (f) any Lien existing on any property of any person at the time it becomes a Subsidiary or of a successor to or merged with or into the Company so long as (i) that Lien does not encumber any other property of any Company or any Subsidiary and (ii) the aggregate amount of Indebtedness secured by that Lien never exceeds 100% of the fair market value of that property, (g) Liens on any personal property or fixtures acquired by the Company or any Subsidiary after the date of this Indenture and created contemporaneously with the date of that acquisition to secure Indebtedness incurred in connection with the purchase, rental or lease of such personal property or fixtures, and (h) any Lien described in clauses (f) and (g) above resulting from renewing, extending, or refunding outstanding Indebtedness so long as the principal amount of the Indebtedness so secured is not increased and that Lien is not extended to any other property. "Permitted Subsidiary Indebtedness " means as to a Subsidiary of the Company, Indebtedness currently in existence and more fully described on Exhibit F attached hereto. "Person" means any individual, corporation, limited liability company, limited or general partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Debenture" of any particular Debenture means every previous Debenture evidencing all -14- or a portion of the same debt as that evidenced by such particular Debenture; and, for the purposes of this definition, any Debenture authenticated and delivered under Section 3.08 in exchange for or in lieu of a mutilated, lost, destroyed or stolen Debenture shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Debenture. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participation or other equivalents (however designated) of such Person's preferred or preference stock whether now outstanding or issued on or after the date of this Indenture, and includes, without limitation, all classes and series of preferred or preference stock. "Presentation Date" means the date on which a Debenture is presented by a Debentureholder for payment of principal or a Coupon is presented by the Couponholder for payment of interest, as the case may be, or if such date is not a Business Day, the next date which is a Business Day. "Principal Paying and Conversion Agent" means any Person authorized by the Company to act as the principal paying and conversion agent for the Debentures until a successor Principal Paying and Conversion Agent shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Principal Paying and Conversion Agent" shall mean such successor Principal Paying and Conversion Agent. Pursuant to the terms hereof, the Company has initially appointed The Bank of New York as the Principal Paying and Conversion Agent for the Debentures. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Redemption Date," when used with respect to any Debenture to be redeemed, in whole or in part, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price," when used with respect to any Debenture and Coupons to be redeemed, means the price at which they are to be redeemed pursuant to the terms hereof, plus accrued interest as provided herein and in the Debenture, expressed in either a number of Conversion Shares into which such Debenture and Coupons shall be converted in the event the Debentures and Coupons are to be redeemed for Shares or, in the event of any other redemption, a cash amount. "Reference Date" has the meaning set out in Section 12.04. "Registration Rights Agreement" means that certain Registration Rights Agreement dated July 28, 2000 executed by the Company for the benefit of the Debentureholders. "Regulation S" means Regulation S under the Securities Act as in effect on the date hereof or as such Regulation may hereafter be amended and deemed applicable to the Debentures. "Relevant Date" means the date on which the payment first becomes due; PROVIDED, that if the full amount of the money payable has not been received by the Principal Paying Agent or the Trustee on or before the due date, it shall mean the date on which, the full amount of the money having been so received, Notice to that effect shall have been duly given to the Debentureholders by the Company in accordance with Section 1.08. "Replacement Agent" means The Bank of New York or any successor thereof. -15- "Required Filing Dates" has the meaning specified in Section 10.09. "Responsible Officer," when used with respect to the Trustee, means any vice president, any assistant vice president, any assistant treasurer, any trust officer or assistant trust officer or any other officer of the Trustee customarily performing functions similar to those performed by any of the above-designated officers, and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. "Rule 144" means Rule 144, as amended, promulgated by the Commission pursuant to the Securities Act. "Secured Senior Indebtedness " means Indebtedness senior in right of payment to the Debentures, which Indebtedness is limited to Indebtedness incurred pursuant to that certain Accounts Receivable Purchase Agreement dated July 7, 2000, or any extension or renewal thereof, with Silicon Valley Financial Services, which Indebtedness may not at any time exceed $1,000,000. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated from time to time by the Commission pursuant thereto. "Shares" means the common stock, par value U.S.$0.0001, of the Company (and all other (if any) shares or stock resulting from any sub-division, consolidation or reclassification of such shares). "Stated Maturity," when used with respect to any Indebtedness or any instalment of principal thereof or interest thereon, means the date specified in such Indebtedness as the fixed date on which the principal of such Indebtedness or such instalment of principal or interest is due and payable. "Stock Exchange Business Day" means any day (other than a Saturday or Sunday) on which OTC is providing quotes or the Alternative Stock Exchange is open for business. "Subordinated Obligation" means any Indebtedness of the Company outstanding on such date which is contractually subordinate or junior in right of payment to the Debentures. Notwithstanding the immediately preceding sentence, any Indebtedness and shares of Preferred Stock issued by any Subsidiary shall, for purposes of this definition, be treated as Subordinated Obligations. "Subsidiary" of any Person means any Corporation of which at least a majority of the shares of stock having by the terms thereof ordinary voting power to elect a majority of the Board of Directors of such Corporation (irrespective of whether or not at the time stock of any other class or classes of such Corporation shall have or might have voting power by reason of the happening of any contingency) is directly or indirectly owned or controlled by any one of or any combinations of the Company or one or more of its Subsidiaries. "Temporary Conversion Price" has the meaning specified in Section 12.04(j). "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Unexercised Debenture" means any Debenture with respect to which Conversion Rights have not been exercised by the Debentureholder. -16- "U.S. Government Obligations" means securities that are (i) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act), as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt, PROVIDED THAT (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt. "U.S. Person" means any Person who is a "U.S. person" as defined in Regulation S. "Vice President," when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president." SECTION 1.02 LEGAL HOLIDAYS. In any case where any Interest Payment Date, Conversion Date, Redemption Date or Stated Maturity or Maturity of any Debenture or Coupon shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Debentures or Coupons) payment of interest or principal or any other payment required to be made on such date need not be made on such date, but shall be made on the immediately following Business Day with the same force and effect as if made on the Interest Payment Date or Redemption Date, or at the Stated Maturity or Maturity. SECTION 1.03 RULES OF CONSTRUCTION. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) all the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; (c) all ratios and computations based on GAAP contained in this Indenture shall be computed in accordance with the definition of GAAP set forth above; (d) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision of this Indenture; (e) "or" is not exclusive; -17- (f) all references to $, U.S.$, dollars or United States dollars shall refer to the lawful currency of the United States of America; (g) provisions apply to successive events and transactions; (h) all references to Sections or Articles refer to Sections or Articles of this Indenture unless otherwise indicated; and (i) all references to Terms or Conditions refer to the Terms and Conditions of the Debentures unless otherwise indicated. SECTION 1.04 COMPLIANCE CERTIFICATES AND OPINIONS. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall, furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture (including any covenant compliance with which constitutes a condition precedent) relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (a) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such individual, such individual has made such examination or investigation as is necessary to enable such individual to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 1.05 FORM OF DOCUMENTS DELIVERED TO TRUSTEE. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the -18- exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which such officer's certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 1.06 ACTS OF DEBENTUREHOLDERS. (a) Any Extraordinary Resolution, request, demand, authorization, direction, declaration, Notice, consent, waiver or other action provided by this Indenture to be given or taken by Debentureholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Debentureholders in person or by agents duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Debentureholders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favour of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved in any manner which the Trustee deems sufficient. (c) Any Extraordinary Resolution, request, demand, authorization, direction, Notice, consent, waiver or other Act of the Holders of any Debenture shall bind every future Holder of the same Debenture and the Holder of every Debenture issued upon conversion or redemption thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Debenture. SECTION 1.07 NOTICES, ETC., TO TRUSTEE AND COMPANY. Any request, demand, authorization, direction, declaration, notice, consent, waiver, Extraordinary Resolution or Act of Debentureholders or other document provided or pertained by this Indenture (herein collectively called "Notice") to be made upon, given or furnished to, or filed with: (a) the Trustee by any Debentureholder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee and received at its 101 Barclay Street 21st Floor West, New York, NY 10286; or (b) the Company by the Trustee or by any Debentureholder shall be sufficient for every -19- purpose hereunder (unless otherwise herein expressly provided) if made, given, furnished or filed in writing to or with the Company addressed to it at the address of its principal office which shall initially be: 1181 Grier Drive, Suite B, Las Vegas, Nevada 89119. Any Notice to be given hereunder by any party to another shall be in writing and in English (by letter, telex or fax) delivered in person or by courier service requiring acknowledgement of delivery, mailed by first class mail, postage prepaid, or sent by fax or telex to the addressee (including telecopier number, if applicable) set forth herein. Notices to the Trustee given by mail, fax, personal delivery or courier service shall be effective upon actual receipt. Notice given by telex shall be effective upon receipt by the sender of the addressee's answer-back at the end of transmission; PROVIDED, THAT any such Notice or other communication which would otherwise take effect after 4:00 p.m. on any particular day shall not take effect until 10:00 a.m. on the immediately succeeding Business Day in the place of the addressee. A party may change any address to which Notice is to be given to it by giving Notice as provided above of such change of address. SECTION 1.08 NOTICE TO DEBENTUREHOLDERS; WAIVER. Where this Indenture provides for Notice of any event to Debentureholders by the Company or the Trustee, such Notice shall be sufficiently given (unless otherwise herein expressly provided) if published in the Authorized Newspapers. Neither the Trustee nor the Company need give any Notice to the Couponholders and such Couponholders will be deemed to have notice of the contents of any Notice given to the Debentureholders in accordance with this Section. In case by reason of any cause it shall be impracticable to publish Notice of any event to the Debentureholders when such Notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such Notice as shall be satisfactory to the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 1.09 EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 1.10 SUCCESSORS AND ASSIGNS. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. SECTION 1.11 SEPARABILITY CLAUSE. In case any provision in this Indenture or in the Debentures shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions, to the extent permitted by law, shall not in any way be affected or impaired thereby. SECTION 1.12 BENEFITS OF INDENTURE. Nothing in this Indenture or in the Debentures, express or implied, shall give to any Person, other than the parties hereto, any Paying Agent, any Conversion Agent and their respective successors hereunder, and the Debentureholders any legal or equitable right, remedy or claim under this Indenture. -20- SECTION 1.13 GOVERNING LAW. THIS INDENTURE AND THE DEBENTURES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. ARTICLE II FORMS OF THE DEBENTURES SECTION 2.01 FORMS GENERALLY. The Debentures and the Trustee's certificate of authentication shall be in substantially the forms set forth in this Article, except as otherwise provided by or pursuant to one or more indentures supplemental hereto, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required by applicable law or rules or regulations thereunder or as may, consistently herewith, be determined by the officer or officers executing such Debentures, as evidenced by their execution of the Debentures. Any portion of the text of any Debenture may be set forth on the reverse thereof. The definitive Debentures shall be typed, printed, lithographed or engraved on steel-engraved borders or may be produced in any other manner as determined by the officers of the Company executing such Debentures, as evidenced by their execution in accordance with Section 3.03 of such Debentures. The Debentures shall be known as the "12% Senior Convertible Debentures Due 2002" of the Company, and such Debentures and the Trustee's certificate of authentication shall be in substantially the form annexed hereto as Exhibit A. Each such Debenture shall be dated as of the Issue Date. The terms and provisions contained in the form of the Definitive Bearer Debentures annexed hereto as Exhibit A, and in the form of the Global Debenture annexed hereto as Exhibit B, shall constitute, and are hereby expressly made, a part of this Indenture. To the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. The Debentures shall be issued in the form of a global bearer debenture substantially in the form set forth in Exhibit B (the "Global Debenture") deposited with the Common Depository, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Global Debenture may from time to time be decreased by adjustments made on the records of the Common Depository or its nominee, as hereinafter provided. The Debentures offered and sold, other than as described in the preceding paragraphs, shall be issued in the form of permanent certificated Debentures in bearer form in substantially the form set forth in Exhibit A ("Definitive Bearer Debentures") and in an aggregate maximum principal amount equal to the outstanding aggregate principal amount of the Global Debenture immediately prior to issue. The Terms and Conditions contained in the form of the Debentures annexed hereto as Exhibits A and -21- B are expressly incorporated by reference herein. To the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. To the extent of any conflict between the Terms and Conditions of the Debentures and the provisions of this Indenture, the Terms and Conditions shall control the interpretation of the terms of the Debenture and this Indenture. SECTION 2.02 RESTRICTIVE LEGENDS. The Global Debentures and each Definitive Bearer Debenture and Coupon thereto issued prior to the end of the Distribution Compliance Period shall bear the following legend on the face thereof: "NEITHER THIS DEBENTURE NOR THE SHARES OF COMMON STOCK ISSUABLE ON CONVERSION OF THIS DEBENTURE (THE "SHARES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE HOLDER HEREOF, BY PURCHASING THIS DEBENTURE, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS DEBENTURE AND THE SHARES MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT AS FOLLOWS. PRIOR TO THE FIRST ANNIVERSARY OF THE ISSUANCE OF THIS DEBENTURE, THIS DEBENTURE MAY NOT BE SO TRANSFERRED OTHER THAN (1) TO THE COMPANY, (2) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S (RULES 901 THROUGH 905) UNDER THE SECURITIES ACT, OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. AFTER THE FIRST ANNIVERSARY AND PRIOR TO THE SECOND ANNIVERSARY OF THE ISSUANCE OF THIS DEBENTURE, THIS DEBENTURE MAY NOT BE SO TRANSFERRED OTHER THAN (1) TO THE COMPANY, (2) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S (RULES 901 THROUGH 905) UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM THE REGISTRATION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR (4) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. IF THE HOLDER OF THIS DEBENTURE WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF ANY SUCH TRANSFER, THE FOREGOING CONDITIONS MUST BE COMPLIED WITH REGARDLESS OF WHEN SUCH TRANSFER IS MADE. NO HEDGING TRANSACTIONS INVOLVING THIS DEBENTURE OR THE SHARES MAY BE CONDUCTED, UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO -22- LIMITATIONS UNDER THE U.S. INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED." In the event that Regulation S is amended during the period while any Debenture or Coupon remains outstanding and the Company determines that the foregoing restrictive legends are required to be amended as a result thereof or additional or different procedures are required in connection with the trading of such securities, the Company shall provide the Trustee with notice pursuant to Section 1.07 and the Debentureholders pursuant to Section 1.08 of the Indenture setting forth the revised form of restrictive legends and other procedures that the Company believes are required and shall provide the Trustee with an Opinion of Counsel to the effect that such restrictive legends are required to be amended or that such procedures are required to be adopted and observed. The form of Definitive Bearer Debenture set forth at Exhibit A, the Global Debenture set forth at Exhibit B and any Debentures issued shall be deemed to be so amended effective at the date of such notice to the Trustee. Until such time as the two-year holding period provided by Rule 144(k) is satisfied as to Conversion Shares and for any Conversion Shares that may be issued to affiliates of the Company (as defined in Rule 144), any Conversion Shares issued by the Company shall bear the following legend on the face thereof: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE `SHARES') HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE `SECURITIES ACT'), OR THE SECURITIES LAWS OF ANY STATE. THE HOLDER HEREOF AGREES FOR THE BENEFIT OF THE COMPANY THAT THE SHARES MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT AS FOLLOWS. PRIOR TO THE FIRST ANNIVERSARY OF THE ISSUANCE OF THE SHARES, (OR PREDECESSOR SECURITY HERETO), THE SHARES MAY NOT BE SO TRANSFERRED OTHER THAN (1) TO THE COMPANY, (2) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S (RULES 901 THROUGH 905) UNDER THE SECURITIES ACT, OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. AFTER THE FIRST ANNIVERSARY AND PRIOR TO THE SECOND ANNIVERSARY OF THE ISSUANCE OF THE SHARES, (OR PREDECESSOR SECURITY), THE SHARES MAY NOT BE SO TRANSFERRED OTHER THAN (1) TO THE COMPANY, (2) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S (RULES 901 THROUGH 905) UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR (4) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY -23- STATE OF THE UNITED STATES. IF THE HOLDER OF THE SHARES WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF ANY SUCH TRANSFER, THE FOREGOING CONDITIONS MUST BE COMPLIED WITH REGARDLESS OF WHEN SUCH TRANSFER IS MADE. NO HEDGING TRANSACTIONS INVOLVING THE SHARES MAY BE CONDUCTED, UNLESS IN COMPLIANCE WITH THE SECURITIES ACT." ARTICLE III THE DEBENTURES SECTION 3.01 TERMS. The aggregate principal amount of Debentures which may be authenticated and delivered under this Indenture is limited to $1,350,000 except for Debentures authenticated and delivered in exchange for, or in lieu of, other Debentures pursuant to the express terms of this Indenture. The Debentures shall mature on the Maturity Date and they shall have the rights and shall bear interest at the rate per annum specified therein from the Issue Date, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, payable in arrears, and thereafter as provided in the Debentures and at said Stated Maturity, until the principal thereof is paid or duly provided for. The principal of and interest on the Debentures shall be payable at the office or agency of the Company maintained for such purpose in The City of London, or at such other office or agency of the Company as may be maintained for such purpose. The Debentures shall be redeemable as provided in Article XI. The Debentures shall be convertible as provided in Article XII. The Debentures shall be senior in right of payment to Subordinated Obligations and junior in right of payment to the Secured Senior Indebtedness and Permitted Subsidiary Indebtedness as provided in Article XIV. SECTION 3.02 AUTHORIZED DENOMINATION. The Debentures shall be issuable only in bearer form and, in the case of Definitive Bearer Debentures, serially numbered, with Coupons attached thereto on issue, and shall be issuable only in denominations of U.S.$1,000, $5,000 or $10,000. SECTION 3.03 EXECUTION, AUTHENTICATION, DELIVERY AND DATING. The Debentures shall be executed on behalf of the Company by its Chairman, its Chief Executive Officer, its President or a Vice President under a facsimile of its corporate seal reproduced thereon and attested by its Secretary or an Assistant Secretary. The signature of any of these officers on the Debentures may be -24- manual or facsimile signatures of the present or any future such authorized officer and may be imprinted or otherwise reproduced on the Debentures. Debentures bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Debentures or did not hold such offices at the date of such Debentures. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Debentures executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Debentures, and the Trustee or the Authenticating Agent in accordance with such Company Order shall authenticate and deliver such Debentures. Such Company Order shall specify the amount of Debentures to be authenticated and the date on which the original issue of Debentures is to be authenticated. The aggregate principal amount of Debentures outstanding at any time may not exceed $5,000,000 except for Debentures authenticated and delivered in exchange for, or in lieu of, other Debentures pursuant to Section 3.04, 3.05 or 3.08. Each Debenture shall be dated as of the Issue Date. No Debenture shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Debenture a certificate of authentication substantially in the form provided for in Exhibit A duly executed by the Trustee or the Authenticating Agent by manual or facsimile signature of an authorized officer, and such certificate upon any Debenture shall be conclusive evidence, and the only evidence, that such Debenture has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. In case the Company, pursuant to Article VIII, shall be consolidated or merged with or into any other Person or shall convey, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety to any Person, and the successor Person resulting from such consolidation, or surviving such merger, or into which the Company shall have been merged, or the Person which shall have received a conveyance, transfer, lease or other disposition as aforesaid, shall have executed an indenture supplemental hereto with the Trustee pursuant to Article VIII, any of the Debentures authenticated or delivered prior to such consolidation, merger, conveyance, transfer, lease or other disposition may, from time to time, at the request of the successor Person, be exchanged for other Debentures executed in the name of the successor Person with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the Debentures surrendered for such exchange and of like principal amount; and the Trustee or an Authenticating Agent, upon Company Request of the successor Person, shall authenticate and deliver Debentures as specified in such request for the purpose of such exchange. SECTION 3.04 TEMPORARY DEBENTURES. Pending the preparation of definitive Debentures, the Company may execute, and upon Company Order the Trustee or an Authenticating Agent shall authenticate and deliver, temporary Debentures which are printed, lithographed, typewritten, mimeographed or otherwise produced, in the Authorized Denomination, substantially of the tenor of the definitive Debentures in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Debentures may determine, as conclusively evidenced by their execution of such Debentures. -25- If temporary Debentures are issued, the Company will cause a definitive Global Debenture to be prepared without unreasonable delay, but in no event later than thirty (30) days after the Issue Date. After the preparation of definitive Debentures, the temporary Debentures shall be exchangeable, subject to Section 3.05, for definitive Debentures upon surrender of the temporary Debentures at the office or agency of the Company designated for such purpose pursuant to Section 10.02, without charge to the Debentureholder. Upon surrender for cancellation of any one or more temporary Debentures, the Company shall execute and the Trustee or an Authenticating Agent shall authenticate and deliver in exchange therefor a like principal amount of definitive Debentures of the Authorized Denomination. Until so exchanged, the temporary Debentures shall in all respects be entitled to the same benefits under this Indenture as definitive Debentures. SECTION 3.05 EXCHANGE. Upon surrender for exchange of any Debenture at the office or agency of the Company designated pursuant to Section 10.02, the Company shall execute, and the Trustee or the Authenticating Agent shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Debentures of the same series in the Authorized Denomination of a like aggregate principal amount. Furthermore, any Holder of a beneficial interest in the Global Debenture shall, by acceptance of a beneficial interest in such Global Debenture, agree that transfers of such beneficial interest may be effected only through a book-entry system maintained by the holder of such Global Debenture, or its agents, and that ownership of a beneficial interest in the Global Debenture shall be required to be reflected in a book entry. All Debentures issued upon any exchange of Debentures shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Debentures surrendered upon such exchange. Every Debenture presented or surrendered for exchange shall be duly endorsed, or be accompanied by a written instrument of transfer, in form satisfactory to the Company and the Trustee, duly executed by the Debentureholder thereof or such Debentureholder's attorney duly authorized in writing. No service charge shall be made for any exchange, conversion or redemption of Debentures, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any exchange of Debentures, other than exchanges pursuant to Sections 3.03, 3.04, 3.05, 3.06, or 9.05. The Company shall not be required to register the transfer of or exchange of any Debenture during a period beginning five days before the date of Maturity and ending on such date of Maturity. SECTION 3.06 BOOK-ENTRY PROVISIONS FOR THE GLOBAL DEBENTURE. (a) The Global Debenture initially shall be delivered to the Common Depository and shall bear the legends set forth in Section 2.02. Members of, or participants in, Euroclear and Clearstream ("Agent Members") shall have no rights under this Indenture with respect to any Global Debenture held on their behalf by the Common Depository, or under the Global Debenture, and the Common Depository may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Debenture for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee, from giving effect to any written certification, proxy or other -26- authorization furnished by the Common Depository or shall impair, as between the Common Depository and the Agent Members, the operation of customary practices governing the exercise of the rights of a Debentureholder. (b) Transfers of the Global Debenture shall be limited to transfers of such Global Debenture in whole, but not in part, to the Common Depository, its successors or their respective nominees. Interests of beneficial owners in the Global Debenture may be transferred in accordance with the rules and procedures of the Common Depository and the provisions of this Section 3.06. Definitive Bearer Debentures shall be transferred to all beneficial owners in exchange for their beneficial interests in the Global Debenture only if (i) the Common Depository notifies the Company that it is unwilling or unable to continue as Common Depository for such Global Debenture and a successor depository is not appointed by the Company within 90 days of such notice, (ii) Euroclear or Clearstream is closed for business for a continuous period of 14 days (other than by reason of legal holidays) or announces an intention permanently to cease business, or (iii) an Event of Default has occurred and is continuing and the Trustee has received a request from the Common Depository to convert the Global Debenture into Definitive Bearer Debentures. (c) In connection with the transfer of the entire Global Debenture to beneficial owners pursuant to subsection (b) of this Section, the Global Debenture shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee or an Authenticating Agent shall authenticate and deliver, to each beneficial owner identified by the Common Depository in exchange for its beneficial interest in the Global Debenture, an equal aggregate principal amount of Definitive Bearer Debentures of Authorized Denomination. (d) Prior to end of the Distribution Compliance Period, any Definitive Bearer Debenture delivered in exchange for an interest in the Global Debenture pursuant to subsection (b) of this Section shall bear the applicable legend regarding transfer restrictions applicable to the Definitive Bearer Debenture set forth in Section 2.02. (e) The Holder of the Global Debenture may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Debentureholder is entitled to take under this Indenture or the Debentures. (f) Nothing contained herein shall be deemed to authorize any transfers (by book-entry or otherwise) of the Global Debenture otherwise than in accordance with Regulation S and the Securities Act. Unless otherwise required by applicable law, none of the Company or the Common Depository shall recognize, cause to be recognized or or give effect to any attempt to transfer (by book entry or otherwise) or convert any Debenture or any interest therein in violation of either Regulation S or the Securities Act. SECTION 3.07 SPECIAL TRANSFER PROVISIONS. The Debentureholders by acceptance of an interest in the Debentures hereby covenant and agree that neither the Debentures nor the Conversion Shares will be offered, sold, transferred, pledged, converted or otherwise disposed of in the United States or to, or for the account or benefit of, any U.S. Person unless the Debentures and/or the Conversion Shares have been registered under the Securities Act and any applicable state securities or blue sky laws or exemptions from the registration requirements of such laws are available. -27- Each Holder of a Debenture agrees to indemnify the Trustee against any liability that may result from the transfer, exchange or assignment of such Holder's Debenture in violation of any provision of this Indenture and/or applicable United States Federal or state securities law. The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Debenture (including any transfers between or among Agent Members or beneficial owners of interests in any Global Debenture) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. SECTION 3.08 MUTILATED, DESTROYED, LOST AND STOLEN DEBENTURES. If (i) any mutilated Debenture or Coupon is surrendered to the Trustee or the Replacement Agent, or (ii) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Debenture or Coupon, and there is delivered to the Company and the Trustee such security and/or indemnity as may be required by them to save each of them harmless, then, in the absence of Notice to the Company or the Trustee that such Debenture or Coupon has been acquired by a bona fide purchaser, the Company shall execute and upon its receipt of a Company Order, the Trustee or a Replacement Agent shall authenticate and deliver, in exchange for any such mutilated Debenture or Coupon or in lieu of any such destroyed, lost or stolen Debenture or Coupon, a new Debenture or Coupon of like tenor and principal amount, bearing a number not contemporaneously Outstanding. In case any such mutilated, destroyed, lost or stolen Debenture or Coupon has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Debenture or Coupon, pay such Debenture or Coupon, as the case may be. Upon the issuance of any new Debenture or Coupon under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee and the Replacement Agent) connected therewith. Every new Debenture or Coupon issued pursuant to this Section in lieu of any destroyed, lost or stolen Debenture or Coupon shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Debenture or Coupon shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Debentures or Coupons duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debentures or Coupons. Any new Debenture issued under this Section 3.08 in lieu of any destroyed, lost or stolen Debenture shall be issued by the Replacement Agent with all matured Coupons as of such date of issuance cancelled or voided. -28- SECTION 3.09 PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED. Interest on any Debenture which is payable, and is punctually paid or duly provided for, on any Interest Payment Date, shall be paid to the bearer against presentation and surrender (or in the case of part payment only, endorsement) of the relevant Coupons (if Definitive Bearer Debentures are in issue), outside of the United States at the corporate trust office or agency of any Paying Agent maintained for such purpose pursuant to Section 10.02. Each such payment will be made at the specified office of any Paying Agent, at the option of the Holder of such Coupon (if Definitive Bearer Debentures are in issue), by U.S. dollar check drawn on a bank in New York or by transfer to a U.S. dollar account maintained by the payee with a bank outside of the United States subject in all cases to any applicable fiscal or other laws and regulations. Subject to the foregoing provisions of this Section, each Debenture delivered under this Indenture in exchange for or in lieu of any other Debenture shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Debenture. SECTION 3.10 PERSONS DEEMED OWNERS. Subject to the provision of Section 3.14 and except with respect to any unmatured Coupon, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person who is the bearer of any Debenture or Coupon as the owner of such Debenture or Coupon for the purpose of receiving payment of principal of and (subject to Sections 3.05 and 3.09) interest on such Debenture and for all other purposes whatsoever, whether or not such Debenture be overdue, and none of the Company, the Trustee or any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 3.11 CANCELLATION. All Debentures surrendered for payment, conversion, redemption or exchange shall, if surrendered to any Paying or Conversion Agent other than the Trustee, shall be promptly delivered to the Trustee and shall be cancelled by the Trustee once payment, conversion, redemption or exchange has occurred. The Company may at any time deliver to the Trustee for cancellation any Debentures previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Debentures previously authenticated hereunder which the Company has not issued and sold, and all Debentures so delivered shall be promptly cancelled by the Trustee in accordance with its customary procedures. If the Company shall so acquire any of the Debentures, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Debentures unless and until the same are surrendered to the Principal Paying and Conversion Agent for cancellation. No Debentures shall be authenticated in lieu of or in exchange for any Debentures cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Debentures held by the Principal Paying and Conversion Agent shall be disposed of by the Principal Paying and Conversion Agent in accordance with its customary procedures and certification of their disposal delivered to the Company unless by Company Order the Company shall direct that cancelled Debentures be returned to it. SECTION 3.12 COMPUTATION OF INTEREST. -29- Interest on the Debentures shall be computed from the date of issuance on the basis of a 360-day year of twelve 30-day months and, in the case of an incomplete month, the number of days elapsed. SECTION 3.13 ISIN, CUSIP OR OTHER IDENTIFYING NUMBERS. The Company in issuing the Debentures may use "ISIN", "CUSIP" or other identifying numbers (if then generally in use), and the Trustee shall use ISIN CUSIP or other identifying numbers in notices of redemption, conversion or exchange, and any other notice provided for the benefit of the Debentureholders, as a convenience to Debentureholders; PROVIDED that any such notice shall state that no representation is made as to the correctness of such numbers either as printed on the Debentures or as contained in any Notice of redemption, conversion or exchange or other notice. SECTION 3.14 PRESCRIPTION. Debentures and Coupons will become void unless presented for payment within periods of ten (10) years (in the case of principal) and five (5) years (in the case of interest) from the Relevant Date in respect of the Debentures or the Coupons, as the case may be, subject to the provisions of Section 11.07. ARTICLE IV SATISFACTION AND DISCHARGE SECTION 4.01 SATISFACTION AND DISCHARGE OF INDENTURE. This Indenture shall upon Company Request cease to be of further effect (except as to surviving rights of conversion or redemption of Debentures herein expressly provided for and the Company's obligations to the Trustee pursuant to Section 6.06) and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture when: (a) either: (i) all Debentures theretofore authenticated and delivered (other than (1) Debentures which have been destroyed, lost, mutilated or stolen and which have been replaced or paid as provided in Section 3.08 and (2) Debentures for whose payment money has theretofore been deposited in trust with the Trustee or any Paying Agent or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 10.03) have been delivered to the Trustee or a Paying or Conversion Agent for cancellation; or (ii) all such Debentures not theretofore delivered to the Trustee for cancellation (1) have become due and payable, or (2) will become due and payable at their Stated Maturity, within one year, or (3) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of Notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company has irrevocably deposited or caused to be deposited with the Trustee in trust for such purpose an amount sufficient to pay and discharge the entire indebtedness on such Debentures not theretofore delivered to the Trustee for cancellation, for principal and interest to the date of such deposit (in the case of Debentures which have become due and payable) or to the Stated Maturity or Redemption -30- Date, as the case may be; (b) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.06 and, if money shall have been deposited with the Trustee pursuant to subclause (ii) of clause (a) of this Section, the obligations of the Trustee under Section 4.02 and the last paragraph of Section 10.03 shall survive. SECTION 4.02 APPLICATION OF TRUST MONEY. Subject to the provisions of the last paragraph of Section 10.03, all money deposited with the Trustee pursuant to Section 4.01 shall be held in trust and applied by it, in accordance with the provisions of the Debentures and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent), to the Persons entitled thereto, of the principal and interest for whose payment such money has been deposited with the Trustee; but such money need not be segregated from other funds except to the extent required by law. ARTICLE V EVENTS OF DEFAULT AND REMEDIES SECTION 5.01 EVENTS OF DEFAULT. "Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article XIV or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) which shall have occurred and is continuing: (a) if the Company defaults in the payment of the principal of (or premium, if any, on) any Debenture as and when it shall become due and payable at its Maturity, upon redemption, by declaration or otherwise, and continuance of such default for a period of 5 days; or (b) if the Company defaults in the payment of any interest upon any Debenture, or any related Coupon, when such interest or Coupon becomes due and payable, and continuance of such default for a period of 5 days; or (c) if the Company fails to perform or observe any of its other obligations, covenants, conditions or provisions under the Debentures or this Indenture and (except where the Trustee shall have certified to the Company in writing that it considers such failure to be incapable of remedy in which case no such notice or continuation as is hereinafter mentioned will be required) such failure continues for the period of thirty (30) calendar days (or such longer period as the Trustee may in its absolute discretion permit) next following the -31- service by the Trustee on the Company or by the Holders of at least 25% of the aggregate principal amount of Debentures Outstanding on the Trustee and the Company of notice requiring the same to be remedied; or (d) if (i) any other Indebtedness of the Company or any Subsidiary becomes due and payable prior to its Stated Maturity by reason of an event of default (howsoever described) or (ii) any such Indebtedness of the Company or any Subsidiary is not paid when due or, as the case may be, within any applicable grace period or (iii) the Company or any Subsidiary fails to pay when due (or, as the case may be, within any applicable grace period) any amount payable by it under any present or future guarantee for, or indemnity in respect of, any Indebtedness of any Person or (iv) any security given by the Company or any Subsidiary for any Indebtedness of any Person or any Guaranty or indemnity of Indebtedness of any Person by the Company or any Subsidiary becomes enforceable by reason of default in relation thereto and steps are taken to enforce such security save in any such case where there is a bona fide dispute as to whether the relevant Indebtedness or any such Guaranty or indemnity as aforesaid shall be due and payable (following any applicable grace period), provided that in each such case the Indebtedness exceeds in the aggregate U.S. $250,000 and in each case such event continues unremedied for a period of thirty (30) calendar days (or such longer period as the Trustee may in its sole discretion consent to in writing upon receipt of written Notice from the Company); or (e) if the Company or any Subsidiary shall generally fail to pay its debts as such debts become due (except debts which the Company or such Subsidiary, as the case may be, may contest in good faith generally) or shall be declared or adjudicated by a competent court to be insolvent or bankrupt, consents to the entry of an order of relief against it in an involuntary bankruptcy case, shall enter into any assignment or other similar arrangement for the benefit of its creditors or consents to the appointment of a custodian (including, without limitation, a receiver, liquidator or trustee); or (f) if a receiver, administrative receiver, administrator or other similar official shall be appointed in relation to the Company or any Subsidiary or in relation to the whole or a substantial part of the undertaking or assets of any of them or a distress, execution or other process shall be levied or enforced upon or sued out against, or an encumbrancer shall take possession of, the whole or a substantial part of the assets of any of them and in any of the foregoing cases is not paid out or discharged within ninety (90) calendar days (or such longer period as the Trustee may in its absolute discretion consent to in writing upon receipt of written Notice from the Company); or (g) if the Company or any Subsidiary institutes proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganisation under the laws of the Federal Bankruptcy Code or any similar applicable U.S. Federal, State or foreign law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of it or its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they come due; or (h) if a decree or order by a court having jurisdiction in the premises shall have been entered adjudging the Company or any Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking the reorganisation of the Company or any Subsidiary under the Federal Bankruptcy Code or any other similar applicable U.S. Federal State or foreign law, and such decree or order shall have continued undischarged or unstayed for a period of ninety (90) calendar days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of the Company or any Subsidiary or of all or substantially all of -32- its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of ninety (90) calendar days; or (i) if a warranty, representation or other statement made by or on behalf of the Company contained in this Indenture, the Debentures or any certificate or other agreement furnished in compliance with such documents is false in any material respect when made and (except where the Trustee shall have certified to the Company that it considers such falsity to be incapable of remedy; in which case no such Notice or continuation as is hereinafter mentioned will be required) such falsity continues for a period of thirty (30) calendar days (or such longer period as the Trustee may in its absolute discretion permit) next following the service by the Trustee on the Company of Notice requiring the same to be remedied; or (j) if there is any final judgment or judgments for the payment of money exceeding in the aggregate U.S. $250,000 outstanding against the Company or any Subsidiary which has been outstanding for more than sixty (60) calendar days from the date of its entry and shall not have otherwise been discharged in full or stayed by appeal, bond or otherwise. SECTION 5.02 ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. If an Event of Default (other than an Event of Default specified in Section 5.1(f) or 5.1(g)) occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Debentures may, and the Trustee upon the request of the Holders of not less than 25% in principal amount of the Outstanding Debentures shall, declare the principal amount of all the Debentures to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Debentureholders), and upon any such declaration such principal amount together with accrued interest (as provided herein) shall become immediately due and payable. If an Event of Default specified in Section 5.01(f) or 5.01(g) occurs and is continuing, then the principal amount of all the Debentures shall IPSO FACTO become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Debentureholder. At any time after a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Debentures, by written Notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (a) the Company has paid or deposited with the Trustee a sum sufficient to pay (i) all overdue interest on all Outstanding Debentures, (ii) all unpaid principal of any Outstanding Debentures which has become due otherwise than by such declaration of acceleration, and interest on such unpaid principal at the rate prescribed therefor in the Debentures, (iii) to the extent that payment of such interest is legally enforceable, interest on overdue interest at the rate prescribed therefor in the Debentures and herein, and (iv) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; -33- and (b) all Events of Default, other than the non-payment of amounts of principal of or interest on Debentures which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 5.13. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 5.03 COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE. The Company covenants that if (a) default is made in the payment of any instalment of interest on any Debenture, or any related Coupon, when such interest or Coupon becomes due and payable and such default continues for a period of five (5) days, or (b) default is made in the payment of the principal of any Debenture at Maturity, upon redemption, by declaration or otherwise and such default continues for five (5) days, then in either such case, the Company will, upon demand of the Trustee, pay to the Trustee for the benefit of the Holders of such Debentures, the whole amount then due and payable on such Debentures for principal and interest, and interest on any overdue principal and, to the extent that payment of such interest shall be legally enforceable, upon any overdue instalment of interest, at the rate prescribed therefor in the Debentures and herein, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Debentures and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Debentures, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Debentureholders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 5.04 TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Debentures or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Debentures shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by -34- intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Debentures and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Debentureholders allowed in such judicial proceeding; and (b) to participate as a member, voting or otherwise, of any official committee of creditors appointed in such matters; and (c) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Debentureholder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Debentureholders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.06. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Debentureholder any plan of reorganization, arrangement, adjustment or composition affecting the Debentures or the rights of any Debentureholder thereof, or to authorize the Trustee to vote in respect of the claim of any Debentureholder in any such proceeding. SECTION 5.05 TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF DEBENTURES. All rights of action and claims under this Indenture or the Debentures may be prosecuted and enforced by the Trustee without the possession of any of the Debentures or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Debentureholders in respect of which such judgment has been recovered. SECTION 5.06 APPLICATION OF MONEY COLLECTED. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or interest, upon presentation of the Debentures and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 6.06; SECOND: To the payment of the amounts then due and unpaid for principal of and interest on the Debentures in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Debentures for principal and interest, respectively; and -35- THIRD: The balance, if any, to the Person or Persons entitled thereto. SECTION 5.07 LIMITATION ON SUITS. No Debentureholder shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (a) such Debentureholder has previously given written Notice to the Trustee of a continuing Event of Default, with a copy of such Notice to the Company; (b) the Holders of not less than 25% in principal amount of the Outstanding Debentures shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (c) such Debentureholder or Debentureholders have offered to the Trustee indemnity reasonably satisfactory to it against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee for 60 days after its receipt of such Notice, request and offer of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given by Extraordinary Resolution to the Trustee during such 60-day period by the Holders of a majority or more in principal amount of the Outstanding Debentures; it being understood and intended that no one or more Debentureholders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Debentureholders, or to obtain or to seek to obtain priority or preference over any other Debentureholders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Debentureholders. SECTION 5.08 UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL AND INTEREST. Notwithstanding any other provision in this Indenture, the Holder of any Debenture or of any Coupon, as the case may be, shall have the right, which is absolute and unconditional, to receive payment, as provided herein (including, if applicable, Article XIII) and in such Debenture, of the principal of and (subject to Section 3.09) interest on, such Debenture on the respective Stated Maturity expressed in such Debenture or Coupon (or, in the case of redemption, on the Redemption Date) or Coupon and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder; PROVIDED, that all monies paid by the Company to the Paying Agent for the payment of principal or interest on any Debenture which remain unclaimed at the end of two (2) years after the Stated Maturity or Redemption Date of such Debenture will be repaid to the Company and the Holder of any Debenture or Coupon shall thereafter have only the rights of a creditor of the Company or such rights as may be otherwise provided by applicable law. SECTION 5.09 RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any Debentureholder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been -36- determined adversely to the Trustee or to such Debentureholder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Debentureholders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Debentureholders shall continue as though no such proceeding had been instituted. SECTION 5.10 RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debentures in the last paragraph of Section 3.08, no right or remedy herein conferred upon or reserved to the Trustee or to the Debentureholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 5.11 DELAY OR OMISSION NOT WAIVER. No delay or omission of the Trustee or of any Holder of any Debenture to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Debentureholders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Debentureholders, as the case may be. SECTION 5.12 CONTROL BY DEBENTUREHOLDERS. The Holders of not less than a majority in aggregate principal amount of the Outstanding Debentures shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, PROVIDED that in each case: (a) such direction shall not be in conflict with any rule of law or with this Indenture, (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and (c) the Trustee need not take any action which might involve it in personal liability or be unjustly prejudicial to the Debentureholders not joining in such direction. SECTION 5.13 WAIVER OF PAST DEFAULTS. Subject to Section 5.02, the Holders of not less than a majority in principal amount of the Outstanding Debentures may on behalf of the Holders of all the Debentures waive any past default hereunder and its consequences, except a default (a) in respect of the payment of the principal of or interest on any Debenture, or (b) in respect of a covenant or provision hereof which under Article IX cannot be modified or amended without the consent of the Holder of each Outstanding Debenture affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom -37- shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 5.14 WAIVER OF STAY OR EXTENSION LAWS. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 5.15 UNDERTAKING FOR COSTS. All parties to this Indenture agree, and each Holder of any Debenture by such Debentureholder's acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not be deemed to require any court to require an undertaking or to make such an assessment in any suit instituted by the Trustee or by the Company. ARTICLE VI THE TRUSTEE SECTION 6.01 NOTICE OF DEFAULTS. Within 90 days after the occurrence of any Default hereunder, the Trustee shall publish Notice of such Default hereunder known to the Trustee, unless such Default shall have been cured or waived; PROVIDED, HOWEVER, that, except in the case of a Default in the payment of the principal of or interest on any Debenture, the Trustee shall be protected in withholding such Notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such Notice is in the interest of the Debentureholders. SECTION 6.02 CERTAIN RIGHTS OF TRUSTEE. (a) The Trustee may request and conclusively rely and shall be protected in acting or refraining from acting upon any Extraordinary Resolution, Act, Notice or other resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. (b) Any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors -38- may be sufficiently evidenced by a Board Resolution. (c) Whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, conclusively rely upon an Officers' Certificate. (d) The Trustee may consult with counsel of its selection and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (e) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Debentureholders pursuant to this Indenture, unless such Debentureholders shall have offered to the Trustee security or indemnity reasonably satisfactory to it against the costs, expenses (including reasonable fees of Trustee's counsel), and liabilities which might be incurred by it in compliance with such request or direction. (f) The Trustee shall not be bound to make any investigation into the facts or matters stated in any Extraordinary Resolution, Act, Notice or other resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney at the sole cost of the Company and shall incur no liability or additional liability of any kind by reason of such inquiry or investigation. (g) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (h) The Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture. (i) The permissive right of the Trustee to take or refrain from taking any actions enumerated in this Indenture shall not be construed as a duty and the Trustee shall not be answerable in such actions other than for its own negligence or wilful misconduct. (j) The Trustee shall not be deemed to have notice of any Default or Event of Default unless a Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is in fact such a default is received by the Trustee at the Corporate Trust Office of the Trustee, and such notice references the Debentures and this Indenture. (k) The rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder and to each agent, custodian and other Person employed -39- to act hereunder. (l) The Trustee may request that the Company deliver an Officers' Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specific actions pursuant to this Indenture, which Officers' Certificate may be signed by any person authorised to sign an Officers' Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded. The Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. SECTION 6.03 TRUSTEE NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF DEBENTURES. The recitals contained herein and in the Debentures, except for the Trustee's certificates of authentication, and in the Coupons, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Debentures or the Coupons or of the Conversion Shares, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Debentures and perform its obligations hereunder. The Trustee shall not be accountable for the use or application by the Company of Debentures or the proceeds thereof. SECTION 6.04 WHO MAY HOLD DEBENTURES. The Trustee, the Agent, any Paying Agent, any Conversion Agent, any Authenticating Agent, any Replacement Agent or any other agent of the Company or of the Trustee, in its individual or any other capacity, may become the owner or pledgee of Debentures and the Coupons and may otherwise deal with the Company with the same rights it would have if it were not Trustee, Agent, Paying Agent, Conversion Agent, Authenticating Agent, Replacement Agent or such other agent. SECTION 6.05 MONEY HELD IN TRUST. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. SECTION 6.06 COMPENSATION AND REIMBURSEMENT. The Company agrees: (a) to pay to the Trustee from time to time such compensation for all services rendered by it hereunder as the Company and the Trustee shall from time to time agree in writing (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) except as otherwise expressly provided herein, to reimburse the Trustee upon its -40- request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence, bad faith or wilful misconduct; and (c) to indemnify the Trustee (and any predecessor Trustee and their agents) for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. When the Trustee incurs expenses or renders service in connection with an Event of Default specified in Section 5.01 (f) or Section 5.01 (g), the expenses (including the reasonable charges of its counsel) and the compensation for the services are intended to constitute expenses of the administration under any applicable federal, state or foreign bankruptcy, insolvency or other similar law. As security for the performance of the obligations of the Company under this Section, the Trustee shall have a claim prior to the Debentures upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of or interest on particular Debentures. The provision of this Section shall survive the termination of this Indenture or the earlier resignation or removal of the Trustee. Any Paying Agent or Authenticating Agent appointed hereunder shall be entitled to the benefits of Section 6.06(c) as if the indemnity set forth therein were specifically afforded to such Paying Agent or Authenticating Agent. SECTION 6.07 CORPORATE TRUSTEE REQUIRED; ELIGIBILITY. There shall at all times be a Trustee hereunder which shall be eligible to act as Trustee and shall have a combined capital and surplus of at least $50,000,000. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of Federal, State, territorial or District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 6.08 RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 6.09. (b) The Trustee may resign at any time by giving written Notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 6.09 shall not have been delivered to the Trustee within thirty (30) days after the giving of such Notice of resignation, the resigning Trustee may at the Company's expense petition any court of competent jurisdiction for the appointment of a successor Trustee. -41- (c) The Trustee may be removed at any time by Act of the Holders of not less than a majority in principal amount of the Outstanding Debentures, delivered to the Trustee and to the Company. (d) If at any time: (i) the Trustee shall cease to be eligible under Section 6.07 and shall fail to resign after written request therefor by the Company or by any Debentureholder who has been a bona fide Holder of a Debenture for at least six (6) months, or (ii) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, or (iii) the Trustee shall fail or refuse to timely carry out and discharge its duties hereunder, then, in any such case, (i) the Company, by a Board Resolution, may remove the Trustee, or (ii) any Debentureholder who has been a bona fide Holder of a Debenture for at least six (6) months may, on behalf of such Debentureholder and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any reason, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Debentures delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Debentureholders and accepted appointment in the manner hereinafter provided, any Debentureholder who has been a bona fide Holder of a Debenture for at least six (6) months may, on behalf of such Debentureholder and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to the Debentureholders in the manner provided for in Section 1.08. Each Notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 6.09 ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, -42- execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder, whether or not invested. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 6.10 MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Debentures shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Debentures so authenticated with the same effect as if such successor Trustee had itself authenticated such Debentures; and in case at that time any of the Debentures shall not have been authenticated, any successor Trustee may authenticate such Debentures either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Debentures or in this Indenture provided that the certificate of the Trustee shall have; PROVIDED, HOWEVER, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Debentures in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 6.11 CERTAIN DUTIES AND RESPONSIBILITIES. (a) Except during the continuance of an Event of Default, (i) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture, but not to verify the contents thereof. (b) In case an Event of Default has occurred and is continuing of which a Responsible Officer of the Trustee has actual knowledge, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. -43- (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligence, or its own wilful misconduct, except that: (i) this Subsection shall not be construed to limit the effect of Subsection (a) of this Section; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (iii) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Debentureholders, given as provided in Section 5.12, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (iv) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. SECTION 6.12 MEETINGS OF DEBENTUREHOLDERS. (a) The Trustee or the Debentureholders may convene a meeting at any time and from time to time to consider any matter affecting the interests of the Trustee or the Holders of the Debentures, including the modification of the Terms and Conditions or this Indenture and to make, give or take any request, demand, authorization, direction, Notice, consent, waiver or other action provided by this Indenture to be made, given or taken by Holders of the Debentures. (b) The Trustee may at any time call a meeting of the Holders of the Debentures for any purpose specified in Section 6.12(a), to be held at such time and at such place in the Borough of Manhattan, The City of New York, or in the City of London, England, as the Trustee shall determine. Notice of every meeting of the Holders of the Debentures, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given in the manner provided in Section 1.08, not less than 21 nor more than 45 days prior to the date fixed for the meeting. (c) In case at any time the Company, pursuant to a Board Resolution, or the Holders of at least 25% in aggregate principal amount of the Outstanding Debentures shall have requested the Trustee to call a meeting of the Holder of the Debentures for any purpose other than specified in Section 6.12(a), by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have made the first publication of the Notice of such meeting within 21 days after receipt of such request or shall not thereafter proceed to cause the meeting to be -44- held as provided herein, then the Company or the Holders of the Debentures in the amount specified, as the case may be, may determine the time and the place in the Borough of Manhattan, The City of New York, or in the City of London, England, for such meeting and may call such meeting for such purposes by giving Notice thereof as provided in Section 1.08. (d) To be entitled to vote at any meeting of Holders of the Debentures, a Person shall be (i) a Holder of one or more Outstanding Debentures, or (ii) a Person appointed by an instrument in writing as proxy for a Holder or Holders of one or more Outstanding Debentures by such Holder or Holders. The only Persons who shall be entitled to be present or to speak at any meeting of Debentureholders shall be the Persons entitled to vote at such meeting and their counsel, any representatives of the Trustee and the Company, and their respective counsel. (e) Except as provided in Section 9.02, the quorum at any meeting for passing any Extraordinary Resolution will be one or more Persons present holding or representing 25% or more in principal amount of the Outstanding Debentures as of the date of the meeting, or at any adjourned such meeting one or more Persons present whatever the principal amount of the Debentures held or represented by such Person. An Extraordinary Resolution passed at any meeting of the Holders of the Debentures will be binding on all Holders of the Debentures, whether or not such Debentureholders are present at the meeting, and on the Holders of all Coupons. (f) Any action required by this Indenture to be taken at any meeting pursuant to the provisions of this Section 6.12 may be taken without a meeting, if a consent or consents in writing setting forth the action so taken shall be signed by the holders of the appropriate percentage in principal amount of the Debentures then outstanding that would be necessary to authorise or take such action at a meeting. Notice of the action being taken shall be delivered to the Debentureholders in accordance with Section 1.08. Written consents shall be solicited in accordance with the procedures of Clearstream and Euroclear then in effect. Every written consent shall bear the date of signature of each Holder who signs the consent and no written consent shall be effective to take the action referred to therein unless, within 60 days of the earliest date a consent is delivered, written consents signed by a sufficient number of Holders to take such action are received by the Company. The consent of the Holders of the Debentures is not necessary to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment. After an amendment under the Debentures becomes effective, the Company will provide the Holders of the Debentures with a notice briefly describing such amendment. However, the failure to give such notice to all Holders of such Debentures, or any defect therein, will not impair of affect the validity of the amendment. SECTION 6.13 AUTHENTICATING AGENTS. The Principal Paying and Conversion Agent may authenticate the Global Debenture, the Temporary Debentures and the Debentures, as the Trustee's Authenticating Agent. The Trustee may, with the written consent of the Company, appoint an additional Authenticating Agent acceptable to the Company with respect to the Debentures which shall be authorized to act on behalf of the Trustee to authenticate Debentures issued upon exchange or substitution pursuant to this Indenture. Debentures authenticated by an Authenticating Agent shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder, and every reference in this Indenture to the authentication and delivery of Debentures by the Trustee or the Trustee's certificate of authentication shall be deemed to include authentication and delivery on behalf of the Trustee by -45- an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. The Debentures shall have endorsed thereon the certificate of authentication set forth in Exhibits A and B hereto. Each Authenticating Agent shall be subject to acceptance by the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any state thereof, the District of Columbia, Luxembourg, or England and Wales authorised under such laws to act as Authenticating Agent and subject to supervision or examination by government or other fiscal authority. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.13, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section 6.13. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent; PROVIDED such corporation shall be otherwise eligible under this Section 6.13, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written Notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written Notice thereof to such Authenticating Agent and to the Company. Upon receiving such a Notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.13, the Trustee may appoint a successor Authenticating Agent which shall be subject to acceptance by the Company. The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation for this service under Section 6.13. ARTICLE VII DEBENTUREHOLDERS' LISTS AND REPORTS BY COMPANY SECTION 7.01 DISCLOSURE OF NAMES AND ADDRESSES OF DEBENTUREHOLDERS. Every Debentureholder, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Debentureholders regardless of the source from which such information was derived. SECTION 7.02 REPORTS BY COMPANY. The Company shall: (a) file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then, on the 120th day following -46- the initial issuance of the Debentures and annually thereafter, it shall file with the Trustee, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; and (b) file with the Trustee, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations. (c) delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER, OR LEASE SECTION 8.01 COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS. The Company will not merge or consolidate with or sell, convey, transfer or lease or otherwise dispose of all or substantially all of its properties or assets substantially as an entirety to any Person, unless: (a) either (i) the Company shall be the surviving Person or (ii) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety (1) shall be a Person organized and validly existing under the laws of the United States of America, any state thereof or the District of Colombia and (2) shall expressly assume, by a trust indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the Company's obligation for the due and punctual payment of the principal of and interest on all the Debentures and the performance and observance of every covenant of this Indenture on the part of the Company to be performed or observed; (b) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Company in connection with or as a result of such transaction as having been incurred at the time of such transaction), no Default or Event of Default shall have occurred and be continuing; and (c) the Company or such Person shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture complies with Article IX and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 8.02 SUCCESSOR SUBSTITUTED. -47- Upon any consolidation of the Company with or merger of the Company with or into any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety to any Person in accordance with Section 8.01, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and in the event of any such conveyance or transfer, the Company (which term shall for this purpose mean the Person named as the "Company" in the first paragraph of this Indenture or any successor Person which shall theretofore become such in the manner described in Section 8.01), except in the case of a lease, shall be discharged of all obligations and covenants under this Indenture and the Debentures and may be dissolved and liquidated. ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01 SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF DEBENTUREHOLDERS. Without the consent of any Debentureholders, the Company may, when authorized by or pursuant to a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (a) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company contained herein and in the Debentures; or (b) to add to the covenants of the Company for the benefit of the Debentureholders or to surrender any right or power herein conferred upon the Company; or (c) to add any additional Events of Default; or (d) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee pursuant to the requirements of Section 6.09; or (e) to cure any ambiguity or defect in or to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture; PROVIDED THAT such other provisions shall not adversely affect the interests of the Debentureholders in any material respect; or (f) to add a Guaranty or to secure the Debentures. SECTION 9.02 SUPPLEMENTAL INDENTURES WITH CONSENT OF DEBENTUREHOLDERS. With the consent of the Debentureholders of not less than a majority in principal amount of the Outstanding Debentures, by Act of said Debentureholders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Debentureholders under this -48- Indenture; PROVIDED, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Debenture affected thereby: (a) change the Stated Maturity of the principal of, or any instalment of principal of or interest on, any Debenture, or reduce the principal amount thereof or the rate of interest thereon, or change the coin or currency in which any Debenture or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or (b) reduce the percentage in principal amount of the Outstanding Debentures, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences provided for in this Indenture, or (c) modify any of the provisions of this Section or Sections 5.13 or 6.12, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Debenture affected thereby; PROVIDED, that this clause shall not be deemed to require the consent of any Debentureholder with respect to changes in the references to "the Trustee" and concomitant changes in this Section and elsewhere, or the deletion of this proviso, in accordance with the requirements of Section 6.09 and 9.01(d), or (d) modify any of the provisions of Section 10.10 or any of the provisions of this Indenture relating to the subordination of the Debenture in a manner adverse to the Holders thereof or allow the Company to incur additional Senior Secured Indebtedness or other Indebtedness that is senior in right of payment to the Debentures, or (e) amend the terms of the Debentures or this Indenture in a way that would result in the loss of an exemption from any of the withholding taxes described under Condition 8 of the Debenture. It shall not be necessary for any Act of Debentureholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 9.03 EXECUTION OF SUPPLEMENTAL INDENTURES. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.11) shall be fully protected in relying upon, an Opinion of Counsel and an Officers' Certificate stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 9.04 EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Debentures theretofore or thereafter authenticated and delivered hereunder shall be bound -49- thereby. SECTION 9.05 REFERENCE IN DEBENTURES TO SUPPLEMENTAL INDENTURES. Debentures authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Debentures so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Debentures. SECTION 9.06 NOTICE OF SUPPLEMENTAL INDENTURES. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of Section 9.02, the Company shall give Notice thereof to the Holders of each Outstanding Debenture affected, in the manner provided for in Section 1.08, setting forth in general terms the substance of such supplemental indenture. ARTICLE X COVENANTS SECTION 10.01 PAYMENT OF PRINCIPAL AND INTEREST. The Company covenants and agrees for the benefit of the Debentureholders and the Couponholders that it will duly and punctually pay the principal of and interest on the Debentures in accordance with the terms of the Debentures and this Indenture. SECTION 10.02 MAINTENANCE OF OFFICE OR AGENCY. The Company will maintain in Luxembourg and in either New York or in another European city an office or agency where Debentures may be presented or surrendered for payment, where Debentures may be surrendered for conversion or exchange and where Notices and demands to or upon the Company in respect of the Debentures and this Indenture may be served. The office of the Luxembourg Paying Agent at 69, route d'Esch, L-1470, Luxembourg and the corporate trust office of the Principal Paying Agent at 101 Barclay Street 21st Floor West, New York, NY 10286 shall be such offices or agencies of the Company for the purposes of the Debentures unless the Company shall designate and maintain some other offices or agencies for one or more of such purposes pursuant to the terms of that certain Paying and Conversion Agency Agreement of even date herewith (the "Agency Agreement"). The Company will give prompt written Notice to the Trustee of any change in the location of any such offices or agencies. If at any time the Company shall fail to maintain any such required offices or agencies or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, Notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, Notices and demands in such event. The Company may also from time to time designate one or more other offices or agencies (in or outside of Europe) where the Debentures may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; PROVIDED, that no such designation or rescission shall in -50- any manner relieve the Company of its obligation to maintain an office or agency in Europe for such purposes. The Company will give prompt written Notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. SECTION 10.03 MONEY FOR PAYMENTS TO BE HELD IN TRUST. If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of or interest on any of the Debentures, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents for the Debentures, it will, on or before 3:00 p.m. (London time) on the Business Day immediately preceding each due date of the principal of or interest on any Debentures, deposit with a Paying Agent a sum sufficient to pay the principal or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of such action or any failure so to act. Pursuant to the terms of the Agency Agreement, each Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (a) hold all sums held by it for the payment of the principal of or interest on Debentures for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (b) give the Trustee Notice of any Default by the Company in the making of any payment of principal or interest; and (c) at any time during the continuance of any such Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such sums. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of or interest on any Debenture and remaining unclaimed for two (2) years after such principal or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Debenture shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; PROVIDED, HOWEVER, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the Authorized Newspapers, Notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money -51- then remaining will be repaid to the Company. SECTION 10.04 CORPORATE EXISTENCE. Provided that nothing contained in this Section 10.04 shall prohibit any transaction permitted by Article VIII, the Company will at all times maintain, preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises and the Company will carry on and conduct or will cause to be carried on and conducted its business and the business of its Subsidiaries in a proper and efficient manner and will keep or cause to be kept proper books of account and make or cause to be made therein true and accurate entries of all its dealings and transactions in relation to its business and the business of its Subsidiaries, as the case may be, all in accordance with GAAP, and at all reasonable times it will furnish or cause to be furnished to the Trustee or its duly authorized agent or attorney such information relating to its business and that of its Subsidiaries as the Trustee may reasonably require and such books of account shall at all reasonable times be open for inspection by the Trustee or such agent or attorney. SECTION 10.05 PAYMENT OF TAXES AND OTHER CLAIMS. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary and (b) all lawful claims for labour, materials and supplies which, if unpaid, might by law become a Lien upon the property of the Company or any Subsidiary; PROVIDED, HOWEVER, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 10.06 MAINTENANCE OF PROPERTIES. The Company will cause all properties owned by the Company or any Subsidiary or used or held for use in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order (ordinary wear and tear excepted) and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be conducted at all times; PROVIDED, HOWEVER, that nothing in this Section shall prevent the Company from discontinuing the maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the Debentureholders, and PROVIDED, FURTHER, that nothing contained in this Section 10.06 shall prohibit any transaction permitted by Article XIII. SECTION 10.07 INSURANCE. The Company will at all times keep all of the Company's and its Subsidiaries' properties which are of an insurable nature insured with insurers, believed by the Company to be responsible, against loss or damage to the extent that property of similar character is usually so insured by Corporations similarly situated and owning like properties in similar geographic areas in which the Company or such Subsidiary operates; PROVIDED that such insurance is generally available at commercially reasonable rates, and PROVIDED FURTHER that the Company or such Subsidiary may self-insure directly or through captive insurers or insurance cooperatives, to the extent that the Company determines that such practice is consistent with prudent business practices. Such insurance shall be in such amount, on such terms, in such forms and for such periods as are -52- customary for similarly situated Persons in the Company's industry or in insurance markets available to the Company. SECTION 10.08 STATEMENT BY OFFICERS AS TO DEFAULT. The Company will deliver to the Trustee at its Corporate Trust Office, within 120 days after the end of each fiscal year (which on the date hereof is September 30), a brief Officers' Certificate including a statement by the officer executing such certificate that in the course of performing his or her duties as an officer of the Company such officer would normally obtain knowledge of (i) whether or not any Default or Event of Default exists in the performance and observation of any terms, provisions and conditions of this Indenture and (ii) whether or not the Company has otherwise kept, observed, performed and fulfilled its obligations under this Indenture in all material respects. Such Officers' Certificate shall further state, as to the officer signing such certificate, to the knowledge of such officer, as of the date of such Officers' Certificate, (i) whether or not any Default or Event of Default exists, (ii) whether or not the Company during the preceding fiscal year kept, observed, performed and fulfilled in all material respects each and every covenant and obligation of the Company under this Indenture and (c) whether or not there was any Default or Event of Default in the performance and observance of any of the terms, provisions or conditions of this Indenture during such preceding fiscal year. If the officer signing the Officers' Certificate knows of such a Default or Event of Default, whether then existing or occurring during such preceding fiscal year, the Officers' Certificate shall describe such Default or Event of Default and its status with particularity. The First Officer's Certificate delivered pursuant to this Section 10.08 must be delivered no later than 120 days after the first anniversary of the Closing. The Company shall also promptly notify the Trustee if the Company's fiscal year is changed so that the end thereof is on any date other than the then current fiscal year end date. For purposes of this Section 10.08, such compliance shall be determined without regard to any period of grace granted by the Trustee or requirement of Notice under this Indenture. The Company will deliver to the Trustee, forthwith upon becoming aware of any default in the performance or observance of any covenant, agreement or condition contained in this Indenture, or any Event of Default, an Officers' Certificate specifying with particularity such Default or Event of Default and further stating what action the Company has taken or is taking or proposes to take with respect thereto. In connection with the delivery of the Company's annual report, the Company will deliver to the Trustee a properly completed Certificate substantially in the form of the Certificate attached hereto as Exhibit C. SECTION 10.09 PROVISION OF FINANCIAL STATEMENTS. Whether or not the Company is subject to Section 13(a) or 15(d) of the Exchange Act, the Company will, to the extent permitted under the Exchange Act, file with the Trustee the annual reports, quarterly reports and other documents which the Company would have been required to file with the Commission pursuant to such Sections 13(a) or 15(d) if the Company were so subject, such documents to be delivered to the Trustee within 15 days of the respective dates (the "Required Filing Dates") by which the Company would have been required so to file such documents if the Company were so subject. The Company will also in any event (x) within 15 days of each Required Filing Date file with the Trustee copies of the annual reports, quarterly reports and other documents which the Company has filed with the Commission or would have been required to file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if the Company were subject to such Sections and (y) if filing such documents by the Company with the Commission is not permitted under the Exchange Act, the Company will promptly upon written request, supply copies of such documents to any prospective Debentureholder at the Company's cost. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not -53- constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). SECTION 10.10 LIMITATION ON OTHER INDEBTEDNESS. The Company will not create, incur, assume, guarantee or in any other manner become directly or indirectly liable for the payment of any Indebtedness that will rank (i) except for Secured Senior Indebtedness, senior in right of payment to the Debentures and any Coupons or (ii) except for Designated Indebtedness, PARI PASSU with the Debentures and Coupons, except to the extent of Permitted Liens securing Indebtedness. The Company will not permit any of its Subsidiaries to create, incur, assume, guarantee or in any other manner become directly or indirectly liable for the payment of any Indebtedness other than Permitted Subsidiary Indebtedness. SECTION 10.11 LIMITATION ON LIENS. Except for Liens securing Designated Senior Indebtedness and Permitted Liens , the Company will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist, any Lien of any kind upon any properties of the Company or any of its Subsidiaries securing any Indebtedness (whether by agreement, by operation of law, or structurally by virtue of the identity of the obligor), unless the Debentures are equally and ratably secured or rank prior to the Indebtedness secured by such Lien. SECTION 10.12 CHARTER AMENDMENTS. On or before December 1, 2000 , the Company shall increase the authorised capital stock of the Company to provide for a total of 500,000,000 Shares. Except as to the foregoing, the Company will not amend its Certificate of Incorporation or Bylaws except as required by law or except to the extent that such amendment would not have a material adverse effect on (a) the ability of the Company to perform its obligations under this Indenture or the Debentures or (b) the rights of the Debentureholders, except that neither (i) increases in the number of Shares and issuance thereof with related securities, nor (ii) designations of Preferred Stock of the Company, modifications of the terms of such designations and issuance thereof with related securities, nor (iii) modification or expansion of the indemnity provisions provided by the Company to its directors and officers, nor (iv) change of the Company's registered agent shall be deemed an amendment hereunder. SECTION 10.13 UNITED STATES WITHHOLDING AND REPORTING REQUIREMENTS. To the extent permitted by law, the Company will provide to the Trustee, the Paying Agents or to any Debentureholder such statements, certificates or other documentation concerning the organization or operations of the Company as may be reasonably necessary to establish any exceptions or exemptions from United States Federal income tax withholding and reporting requirements. SECTION 10.14 MAINTENANCE OF LISTINGS FOR DEBENTURES AND SHARES. During the term of the Debentures, the Company will maintain a listing of the Debentures on the Luxembourg Stock Exchange and a quotation for all the issued Shares on OTC, it being understood that if the Company is unable to obtain or maintain such listing of Debentures or Shares, it shall obtain and maintain a -54- listing of all the Debentures or all the Shares issued on the exercise of the Conversion Rights on such Alternative Stock Exchange as the Company may from time to time (with the written consent of the Agent) determine and will forthwith give notice to the Debentureholders in accordance with Section 1.08 of the listing, de-listing or quotation or lack of quotation of the Debentures or Shares (as a class) by any such Alternative Stock Exchange. SECTION 10.15 REGISTRATION OF CONVERSION SHARES The Company shall timely comply with the terms of the Registration Rights Agreement. SECTION 10.16 WAIVER OF CERTAIN COVENANTS. The Company may omit in any particular instance to comply with any term, provision or condition set forth in Sections 10.05 through 10.07 or 10.09, if before or after the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Debentures, by Act of such Debentureholders, waive such compliance in such instance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. ARTICLE XI REDEMPTION OF DEBENTURES SECTION 11.01 RIGHT OF REDEMPTION. (a) On giving notice pursuant to Section 11.04, the Company may redeem all of the Debentures for the time being outstanding at their principal amount, together with interest accrued to the Redemption Date, in the event that prior to the date of such Notice, Conversion Rights shall have been exercised and/or purchases (and corresponding cancellations) have been effected in respect of 85% or more in principal amount of the Debentures. (b) Redemption shall be subject to the conditions specified in the form of Debenture and at a Redemption Price equal to 100% of the principal amount thereof, together with accrued and unpaid interest to the Redemption Date, but only to the extent that all unmatured Coupons are attached to such Debentures. SECTION 11.02 APPLICABILITY OF ARTICLE. Redemption of Debentures at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article. SECTION 11.03 ELECTION TO REDEEM; NOTICE TO TRUSTEE. The action of the Company to redeem any Debentures pursuant to Section 11.01 shall be evidenced by a Board Resolution. In case of any redemption pursuant to Section 11.01, the Company shall, at least 45 days and not more than 60 days prior to the Redemption Date fixed by the Company (unless a shorter Notice shall -55- be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Debentures to be redeemed. SECTION 11.04 NOTICE OF REDEMPTION. Notice of redemption shall be given in the manner provided for in Section 1.08 not less than 30 days nor more than 60 days prior to the Redemption Date, to each Holder of Debentures to be redeemed. All Notices of redemption shall state: (a) the Redemption Date; (b) the Redemption Price; (c) that on the Redemption Date the Redemption Price (together with accrued and unpaid interest, if any, to the Redemption Date payable as provided in Section 11.06, but only with respect to Debentures with all unmatured Coupons attached) will become due and payable upon each such Debenture, or the portion thereof, to be redeemed, and that interest thereon will cease to accrue on and after said date; (d) the place or places where such Debentures are to be surrendered for payment of the Redemption Price; (e) pursuant to Section 3.13, any ISIN or other identifying numbers relating to the Debentures; and (f) a statement reflecting that Debentureholders have the right to convert their Debentures up to the date that is two Business Days prior to the date set by the Company for redemption. Notice of redemption of Debentures to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. SECTION 11.05 DEPOSIT OF REDEMPTION PRICE. Not less than one Business Day prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.03) an amount of money sufficient to pay the Redemption Price of, and accrued and unpaid interest on, all the Debentures which are to be redeemed on that date. SECTION 11.06 DEBENTURES PAYABLE ON REDEMPTION DATE. Notice of redemption having been given as aforesaid, the Debentures so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified (together with accrued and unpaid interest, if any, to the Redemption Date, subject to the delivery of all unmatured and matured but unpaid Coupons), and from and after such date (unless the Company shall default in the payment of the Redemption Price) such Debentures shall cease to bear interest. Upon surrender of any such Debenture for redemption in accordance with said Notice, such Debenture shall be paid by the Company at the Redemption Price, together with accrued interest, if any, to the Redemption Date, to the extent that all matured and unpaid -56- and unmatured Coupons, if any, are attached; PROVIDED, HOWEVER, that instalments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Debentures, or one or more Predecessor Debentures, according to their terms. If any Debenture called for redemption shall not be so paid upon surrender by the Debentureholder as prescribed hereunder thereof for redemption, the principal shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Debentures. In the event that the Company shall default in making payment in full in respect of any Debenture which shall have been called for redemption prior to the Stated Maturity Date of the Debenture, on the Redemption Dates the Conversion Right attaching to such Debenture will continue to be exercisable (unless previously exercised by the Company) up to, and including the close of business (at the place where the Debenture is deposited in connection with the exercise of the Conversion Right) on the date upon which the full amount of the monies payable in respect of such Debenture has been duly received by the Trustee or the Principal Paying Agent. SECTION 11.07 SURRENDER OF DEBENTURES. Each Debenture shall be presented for redemption together with all unmatured Coupons relating to such Debenture, failing which the full amount of any missing unmatured Coupon (or, in the case of payment not being made in full, that proportion of the full amount of the missing unmatured Coupons which the amount so paid bears to the total amount due) will be deducted from the amount due for payment. Each amount so deducted will be paid in the manner mentioned above against presentation and surrender (or, in the case of part payment only, endorsement) of such missing Coupon at any time before the expiry of five (5) years after the Relevant Date in respect of the relevant Debenture. ARTICLE XII CONVERSION SECTION 12.01 CONVERSION RIGHT AND CONVERSION PRICE. (a) Subject to and upon compliance with the provisions of this Article, any Debenture may be converted at the option of the Debentureholder during the Conversion Period at the principal amount thereof into fully paid and non-assessable Conversion Shares at the applicable Conversion Price. (b) The Conversion Price shall be adjusted in certain instances as provided in Section 12.04. (c) Except as otherwise provided in this Indenture, a holder of shares of Common Stock issued on conversion of Debentures shall not be entitled to any rights for any record date which precedes the relevant Conversion Date or Mandatory Conversion Date, as the case may be. SECTION 12.02 EXERCISE OF CONVERSION RIGHT. (a) In order to exercise the Conversion Right, the Debentureholder shall provide notice to the Conversion Agent that it intends to exercise its Conversion Right and if the Definitive Bearer Debentures have been issued, the Debentureholder shall surrender such Definitive Bearer Debenture or Debentures and (if applicable) all unmatured Coupons, including the one for the next due interest -57- payment, to the Conversion Agent at its corporate trust offices, or such other office of any Conversion Agent as published in the Authorized Newspapers from time to time, accompanied by a Conversion Notice. A Conversion Notice once delivered shall be irrevocable. (b) Debentures shall be deemed to have been converted on the Conversion Date, and at such time, except as provided in this Section 12.02 below, the rights of the Debentureholders as Debentureholders shall cease, and the Person or Persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Stock at such time. Upon a conversion of the Debentures, the Company will cause the person or persons designated for the purpose in the Conversion Notice to be registered as holder(s) of the relevant number of Shares in compliance with the terms set out in Condition 6(B)(ii) of the Debentures. (c) All accrued and unpaid interest due upon the conversion of the Debentures as a result of an election by the Debentureholder or Company pursuant to its right to cause Mandatory Conversion shall be paid to or on behalf of the Debentureholder by the Company not later than fourteen (14) calendar days after the relevant Conversion Date by a U.S. dollar check drawn on, or by transfer to a U.S. dollar account maintained by the payee in accordance with instructions given by the relevant Debentureholder. SECTION 12.03 CALCULATION OF SHARES ISSUED ON CONVERSION AND FRACTIONS OF SHARES. The number of Shares to be issued on conversion of a Debenture will be determined by dividing the principal amount of the Debenture to be converted by the Conversion Price in effect on the Conversion Date, with the result being rounded down to the nearest whole number. No cash in lieu of or fractional shares of Common Stock shall be issued upon conversion of Debentures. If more than one Debenture shall be surrendered for conversion at one time by the same Debentureholder, the number of full Shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Debentures (or specified portions thereof) so surrendered. SECTION 12.04 ADJUSTMENT OF MAXIMUM CONVERSION PRICE. In addition to the adjustments to the Conversion Price as provided for in Condition 6 of the Debenture, the Maximum Conversion Price shall be subject to further adjustments as follows: (a) In case the Company shall pay or make a dividend or other distribution on its Common Stock exclusively in Common Stock or shall pay or make a dividend or other distribution on any other class of capital stock of the Company which dividend or distribution includes Common Stock, the Maximum Conversion Price in effect at the opening of business on the day next following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Maximum Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day next following the date fixed for such determination. For the purposes of this Section 12.04(a), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company. (b) In case the Company shall pay or make a dividend or other distribution on its -58- Common Stock consisting exclusively of, or shall otherwise issue to all holders of its Common Stock, rights, warrants or options entitling the holders thereof to subscribe for or purchase shares of Common Stock at a price per share less than the Market Price per share (determined as provided in Section 12.04(g)) of the Common Stock on the date fixed for the determination of stockholders entitled to receive such rights, warrants or options, the Maximum Conversion Price in effect at the opening of business on the day following the date fixed for such determination shall be reduced by multiplying such Maximum Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such Market Price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, outstanding at the close of business on the date fixed for such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (b), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company. The Company shall not issue any rights, warrants or options in respect of shares of Common Stock held in the treasury of the Company. (c) In case the Company shall, by dividend or otherwise, make a distribution to all holders of its Common Stock exclusively in cash in an aggregate amount that, together with (i) the aggregate amount of any other distributions to all holders of its Common Stock made exclusively in cash within the 12 months preceding the date of payment of such distribution and in respect of which no Conversion Price adjustment pursuant to this Section 12.04(c) has been made and (ii) the aggregate of any cash plus the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors), as of the expiration of the tender or exchange offer referred to below, of consideration payable in respect of any tender or exchange offer by the Company or a Subsidiary for all or any portion of the Common Stock concluded within the 12 months preceding the date of payment of such distribution and in respect of which no Conversion Price adjustment pursuant to paragraph (f) of this Section 12.04 has been made, exceeds five percent (5%) of the product of the Market Price per share (determined as provided in Section 12.04(g)) of the Common Stock on the date fixed for stockholders entitled to receive such distribution times the number of shares of Common Stock outstanding on such date, the Maximum Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Maximum Conversion Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by this paragraph (c) by a fraction of which the numerator shall be the Market Price per share (determined as provided Section 12.04(g)) of the Common Stock on the date of such effectiveness less the amount of cash so distributed applicable to one share of Common Stock and the denominator shall be such Market Price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the day following the date fixed for the payment of such distribution. (d) Subject to the last sentence of this paragraph (d), in case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock evidences of its indebtedness, shares of any class of capital stock, securities, cash or property (excluding any rights, warrants or options referred to in Section 12.04(b), any dividend or distribution paid exclusively in cash and any dividend or distribution referred to in Section 12.04(a)), the Maximum Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Maximum Conversion -59- Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by this paragraph (d) by a fraction of which the numerator shall be the Market Price per share (determined as provided in paragraph (g) of this Section) of the Common Stock on the date of such effectiveness less the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors and shall, in the case of securities being distributed for which prior thereto there is an actual or when issued trading market, be no less than the value determined by reference to the average of the Market Price over the period specified in the succeeding sentence), on the date of such effectiveness, of the portion of the evidences of indebtedness, shares of capital stock, securities, cash and property so distributed applicable to one share of Common Stock and the denominator shall be such Market Price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the day next following the date fixed for the payment of such distribution (such date to being referred to as the "Reference Date"). If the Board of Directors determines the fair market value of any distribution for purposes of this paragraph (d) by reference to the actual or when issued trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the Market Price per share pursuant to paragraph (g) of this Section. For purposes of this paragraph (d), any dividend or distribution that includes shares of Common Stock or rights, warrants or options to subscribe for or purchase shares of Common Stock shall be deemed instead to be (i) a dividend or distribution of the evidences of indebtedness, cash, property, shares of capital stock or securities other than such shares of Common Stock or such rights, warrants or options (making any Conversion Price reduction required by this paragraph (d)) immediately followed by (ii) a dividend or distribution of such shares of Common Stock or such rights, warrants or options (making any further Conversion Price reduction required by Section 12.04(a) or (b)), except (i) the Reference Date of such dividend or distribution as defined in this Section 12.04(d) shall be substituted as "the date fixed for the determination of stockholders entitled to receive such dividend or other distribution", "the date fixed for the determination of stockholders entitled to receive such rights, warrants or options" and "the date fixed for such determination" within the meaning of Section 12.04(a) and (b) and (ii) any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of Section 12.04(a)). (e) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Maximum Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, the Maximum Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (f) In case a tender or exchange offer made by the Company or any Subsidiary for all or any portion of the Common Stock shall expire and such tender or exchange offer shall involve an aggregate consideration having a fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors) at the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it may be amended) that, together with (i) the aggregate of the cash plus the fair market value (as determined in good faith by the Board of Directors, whose -60- determination shall be conclusive and described in a resolution of the Company's Board of Directors), as of the expiration of the other tender or exchange offer referred to below, of consideration payable in respect of any other tender or exchange offer by the Company or a Subsidiary for all or any portion of the Common Stock concluded within the preceding 12 months and in respect of which no Conversion Price adjustment pursuant to this paragraph (f) has been made and (ii) the aggregate amount of any distributions to all holders of the Common Stock made exclusively in cash within the preceding 12 months and in respect of which no Conversion Price adjustment pursuant to Section 12.04(e) has been made, exceeds five percent (5%) of the product of the Market Price per share (determined as provided in Section 12.04(g)) of the Common Stock on the Expiration Time times the number of shares of Common Stock outstanding (including any tendered shares) on the Expiration Time, the Maximum Conversion Price shall be reduced (but not increased) so that the same shall equal the price determined by multiplying the Maximum Conversion Price in effect immediately prior to the Expiration Time by a fraction of which the numerator shall be (i) the product of the Market Price per share (determined as provided in Section 12.04(g)) of the Common Stock at the Expiration Time times the number of shares of Common Stock outstanding (including any tendered or exchanged shares) at the Expiration Time minus (ii) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and the denominator shall be the product of (i) such Market Price per share at the Expiration Time times (ii) such number of outstanding shares at the Expiration Time less the number of Purchased Shares, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. (g) For the purpose of any computation of the Market Price under this paragraph (g) and Section 12.04(b), (d) and (e), (i) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to paragraph (a), (b), (c), (d), (e) or (f) above ("Other Event") occurs on or after the tenth Stock Exchange Business Day prior to the date in question and prior to the "ex" date for the issuance or distribution requiring such computation (the "Current Event"), the closing price for each Stock Exchange Business Day prior to the "ex" date for such Other Event shall be adjusted by multiplying such closing price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such Other Event, (ii) if the "ex" date for any Other Event occurs after the "ex" date for the Current Event and on or prior to the date in question, the closing price for each Stock Exchange Business Day on and after the "ex" date for such Other Event shall be adjusted by multiplying such closing price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such Other Event, (iii) if the "ex" date for any Other Event occurs on the "ex" date for the Current Event, one of those events shall be deemed for purposes of clauses (i) and (ii) of this proviso to have an "ex" date occurring prior to the "ex" date for the other event, and (iv) if the "ex" date for the Current Event is on or prior to the date in question, after taking into account any adjustment required pursuant to clause (ii) of this proviso, the closing price for each Stock Exchange Business Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value on the date in question (as determined in good faith by the Board of Directors in a manner consistent with any determination of such value for purposes of this Section 12.04(c) or (d), whose determination shall be conclusive and described in a resolution of the Company's Board of Directors) of the portion of the rights, warrants, options, evidences of indebtedness, shares of capital stock, securities, cash or property being distributed applicable to one share of Common Stock. For the purpose of any computation under Section 12.04(f), the Market -61- Price per share of Common Stock on any date in question shall be deemed to be the Market Price on the date selected by the Company commencing on or after the latest (the "Commencement Date") of (i) the date 20 Stock Exchange Business Days before the date in question, (ii) the date of commencement of the tender or exchange offer requiring such computation and (iii) the date of the last amendment, if any, of such tender or exchange offer involving a change in the maximum number of shares for which tenders are sought or a change in the consideration offered, and ending not later than the date of the Expiration Time of such tender or exchange offer (or, if such Expiration Time occurs before the close of trading on a Stock Exchange Business Day, not later than the Stock Exchange Business Day immediately preceding the date of such Expiration Time); PROVIDED, HOWEVER, that if the "ex" date for any Other Event (other than the tender or exchange offer requiring such computation) occurs on or after the Commencement Date and on or prior to the date of the Expiration Time for the tender or exchange offer requiring such computation, the closing price for each Stock Exchange Business Day prior to the "ex" date for such Other Event shall be adjusted by multiplying such closing price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date, (i) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the closing price was obtained without the right to receive such issuance or distribution, (ii) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective, and (iii) when used with respect to any tender or exchange offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the Expiration Time of such tender or exchange offer. (h) The Company may make such reductions in the Conversion Price, in addition to those required by Section 12.04 (a), (b), (c), (d), (e) and (f), as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients. (i) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least five percent (5%) in the Conversion Price; PROVIDED, HOWEVER, that any adjustments which by reason of this paragraph (i) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. (j) In addition to the foregoing, in the event the Company at any time issues shares of Common Stock or Common Stock Equivalents at a price less than the then effective Maximum Conversion Price, the Maximum Conversion Price shall be deemed adjusted to the price at which such shares of Common Stock or Common Stock Equivalents were issued and the Debentureholders shall have the right and option to convert their Debentures at such price (the "Temporary Conversion Price") into shares of Common Stock for a period of sixty (60) calendar days following notice by the Company of any such Temporary Conversion Price; provided, however, that the foregoing shall not apply to any issuances (i) pursuant to the conversion or exercise of currently issued and outstanding shares of Common Stock or Common Stock Equivalents (including the conversion of the Company's Series A Preferred Stock even if the conversion ratio for such stock is increased from 10 to 1 to 75 to 1); (ii) pursuant to the Debentures; (iii) pursuant to conversion of any currently outstanding securities of the Company (including any warrants) or any Warrants issued pursuant to the Offering; (iv) pursuant to any plan adopted by the Company for the purchase of stock in connection with any employee compensation or benefit plan of the Company or any of its Subsidiaries whether now in -62- effect or hereafter created or amended, including, but not limited to, the Company's 1995 Stock Plan, 1994 Stock Option Plan, 1995 Director Option Plan and 1995 Employee Stock Purchase Plan; and (v) pursuant to any compensation arrangement approved by the Board of Directors of the Company with any director, officer or employee or proposed director, officer, or employee of the Company or any Subsidiary. Prior to the Effective Date, the Company will not issue shares of Common Stock or Common Stock Equivalents at less than the Conversion Price, except as provided under (i) through (vii) above. Notice of any such issuance shall be given by the Company to the Trustee and in accordance with Section 1.07 and 1.08 of this Indenture (which notice shall be irrevocable) by publication in two (2) Authorized Newspapers, one of which is required to be a general leading newspaper in Luxembourg, which is expected to be the LUXEMBOURG WORT. Upon any such conversion of any Debenture by a Debentureholder pursuant to the foregoing, payment will be made for interest accrued during the period from the most recent Interest Payment Date to the Conversion Date. Immediately after expiration of such sixty (60) day period, the Conversion Price shall be deemed reset to the Conversion Price as in effect immediately prior to such issuance of Common Stock or Common Stock Equivalents, subject to any adjustments that would otherwise have been made in such Conversion Price pursuant to this Article 12 during the effectiveness of such Temporary Conversion Price. SECTION 12.05 NOTICE OF ADJUSTMENTS OF CONVERSION PRICE. Whenever the Maximum Conversion Price is adjusted as provided in this Article XII or pursuant to Condition 6(F) of the Debenture the Company shall compute the adjusted Maximum Conversion Price in accordance with Section 12.04 and shall prepare a certificate signed by the Chief Financial Officer of the Company setting forth the adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be delivered to the Trustee, the Paying Agent and the Conversion Agent, and the Company shall cause Notice thereof to be published in accordance with Section 1.08 within ten (10) Business Days of the effective date of such adjustment. SECTION 12.06 NOTICE OF CERTAIN CORPORATE ACTION. In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock payable (i) otherwise than exclusively in cash or (ii) exclusively in cash in an amount that would require a Conversion Price adjustment pursuant to Section 12.04(c); or (b) the Company shall authorize the granting to the holders of its Common Stock of rights, warrants or options to subscribe for or purchase any shares of capital stock of any class or of any other rights (excluding employee stock options); or (c) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding shares of Common Stock), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) the Company or any Subsidiary of the Company shall commence a tender or -63- exchange offer for all or a portion of the Company's outstanding shares of Common Stock (or shall amend any such tender or exchange offer); then the Company shall cause to be mailed to the Trustee, the Paying Agent and the Conversion Agent and to be published in the manner provided under Section 1.08 hereof within ten (10) Business Days after the date on which Notice is sent to the holders of the Company's Common Stock, a Notice stating (i) the date on which a record is to be taken for the purpose of such dividend, distribution or granting of rights, warrants or options, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights, warrants or options are to be determined, or (ii) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such re-classification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up, or (iii) the date on which such tender offer commenced, the date on which such tender offer is scheduled to expire unless extended, the consideration offered and the other material terms thereof (or the material terms of any amendment thereto). SECTION 12.07 COMPANY TO RESERVE COMMON STOCK. The Company shall at all times reserve and keep available, free from pre-emptive or similar rights, out of its authorized but unissued Common Stock, solely for the purpose of effecting the conversion of Debentures, the whole number of Shares then issuable upon the conversion in full of all Outstanding Debentures including any additional Conversion Shares that may be granted pursuant to Condition 6(G). The Company covenants with the Trustee and the Holders of the Debentures that all Conversion Shares issued shall be duly and validly issued as fully-paid and non-assessable stock. SECTION 12.08 TAXES ON CONVERSIONS. The Company will pay any and all taxes that may be payable in respect of the issue or delivery of Shares on conversion of Debentures pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Shares in a name other than that of the Holder of the Debentures to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid. SECTION 12.09 CANCELLATION OF CONVERTED DEBENTURES. All Debentures delivered for conversion to the Conversion Agent shall be canceled by the Company, and shall not under any circumstances be reissued. SECTION 12.10 PROVISIONS IN CASE OF RECLASSIFICATION CONSOLIDATION, MERGER OR SALE OF ASSETS. In the event that the Company shall be a party to any transaction, including without limitation any (i) recapitalization or reclassification of the Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination of the Common Stock), (ii) any consolidation of the Company with, or merger of the Company into, any other person, any merger of another person into the Company (other than a merger which does not result in a reclassification, -64- conversion, exchange or cancellation of all of the outstanding shares of Common Stock of the Company), (iii) any sale or transfer of all or substantially all of the assets of the Company, or (iv) any compulsory share exchange pursuant to which the Common Stock is converted into the right to receive other securities, cash or other property, then lawful provision shall be made as part of the terms of such transaction whereby the Holder of each Debenture then outstanding shall have the right thereafter to convert such Debenture only into the kind of common stock receivable upon such transaction by a holder of Common Stock (at an adjusted Conversion Price equal to (a) the Conversion Price determined pursuant to Section 12.04 as though all such securities, cash or property (other than common stock) had been distributed in a dividend covered by Section 12.04(d) with an "ex" date on the date of such transaction divided by (b) the number of shares (or fraction thereof) of common stock receivable upon such transaction in respect of each share of Common Stock). The Person formed by such consolidation or resulting from such merger or which acquired such assets or which acquired the Company's Shares, as the case may be, shall execute and deliver to the Trustee on behalf of each of the Debentureholders an amendment to this Indenture as provided for under Article IX. Such amendment shall provide for adjustments which, for events subsequent to the effective date of such amendment, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article and shall provide for the assumption by such other Person, if any, of the Company's obligations under this Indenture and the Debentures. The above provisions of this Section 12.10 shall similarly apply to successive transactions of the foregoing type. The Trustee shall not have any duty to determine when any adjustment provided for in this Article should be made, the manner in which any such adjustment should be made or what any such adjustment should be. SECTION 12.11 MANDATORY CONVERSION. Each Debentureholder acknowledges and agrees that the Company may, at its own cost, elect to exercise the Conversion Right on behalf of each and every Debentureholder in respect of all of the Debentures Outstanding at the Conversion Price applicable as of the date fixed by the Company for such conversion (the "Mandatory Conversion Date"), provided that (i) the Company has caused a Registration Statement to have been declared effective by the Commission in satisfaction of its obligations under the Registration Rights Agreement and such Registration Statement is currently in effect and remains effective as of the Mandatory Conversion Date and (ii)the average Market Price of the Shares during any 20 consecutive Stock Exchange Business Days falling on or after the date the Company has satisfied its obligations in clause (i) above and on the date the notice is sent, is equal to or greater than $0.42. The Company's election to exercise its conversion rights as set out herein shall not modify the Company's obligations under the Registration Rights Agreement. The Company is required to give notice to the Agent and the Trustee and in the manner set out in Section 1.08 of the Indenture that the criteria for Mandatory Conversion under this Section 12.11 has been met within 20 days of having met such criteria. The Company may give written notice of its election to convert the Debentures within 30 days of having satisfied the criteria set out in clauses (i) and (ii) in the preceding paragraph provided such criteria are also satisfied on the date such notice is sent. The Company shall cause such written notice of the Mandatory Conversion Date to be given to the Trustee, the Paying Agents, the Conversion Agents and the Debentureholders, not less than 20 calendar days prior to the Mandatory Conversion Date, which notice shall be irrevocable and given to the Trustee and in accordance with Section 1.08 of the Indenture by publication in two (2) Authorized Newspapers, one of which is required to be a general leading newspaper in Luxembourg, which is expected to be the LUXEMBOURG WORT. Following such notice the Company shall comply with the -65- procedures for Conversion as set out in Section 6 of the Terms and Conditions and each of the Debentureholders will be required on or before the Mandatory Conversion Date to deliver or procure delivery of its Debentures with all unmatured Coupons relating to such Debentures together with a duly completed Conversion Notice to the specified office of any Conversion Agent, during its usual business hours for such purposes and perform together with the Company, the obligations applicable to it on conversion specified in this Section 12.11. If any Debentureholder with respect to whose Debentures Mandatory Conversion (pursuant to this Section 12.11) is to take place shall fail to perform its obligations specified in this Section 12.11 or shall have a registered address in any territory where, in the absence of any registration statement or other special formalities or legal requirements, the issue, allotment, transfer or delivery of the Shares arising on Mandatory Conversion is or could be unlawful or impracticable, subject to applicable law, the Company or such Debentureholder shall make arrangements for the sale of such Shares to a third party at the best consideration reasonably obtainable and arrange for the Principal Paying and Conversion Agent to pay to such Debentureholder the consideration received by the by the Company or such Debentureholder in respect of such Shares (after any deduction required to reimburse any reasonable and proper expenses incurred in arranging any such sale or any taxes payable in connection therewith arising solely as a result of the Debentureholder's failure to perform its obligations under this Section 12.11). Provided the Company complies with all of its obligations hereunder, from and after the Mandatory Conversion Date the Debentures shall only be deemed to represent the right to receive Shares. SECTION 12.12 RESPONSIBILITY OF TRUSTEE FOR CONVERSION PROVISIONS. Neither the Trustee nor any Conversion Agent shall at any time be under any duty or responsibility to any Debentureholder to determine whether any facts exist which may require any adjustment of the Conversion Price, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. Neither the Trustee nor any Conversion Agent shall be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock or of any securities or Property or cash which may at any time be issued or delivered upon the conversion of any Debenture; and neither the Trustee nor any Conversion Agent make any representation with respect thereto. Neither the Trustee nor the Conversion Agent shall be responsible for any failure of the Company to make any cash payment or to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property upon the surrender of any Debenture for the purpose of conversion, or, subject to Section 6.11, to comply with any of the covenants of the Company contained in this Article Twelve. ARTICLE XIII DEFEASANCE AND COVENANT DEFEASANCE SECTION 13.01 COMPANY'S OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE. The Company may, at its option by Board Resolution, at any time, with respect to the Debentures, elect to have either Section 13.02 or Section 13.03 be applied to all Outstanding Debentures upon compliance with the conditions set forth below in this Article. The Company shall promptly give Notice of such election to the Trustee. Further, the Company shall notify Debentureholders of its election at least 45 days prior to -66- satisfying the conditions set out in Section 13.04 and the Debentureholders shall retain the right to convert their Debentures at any time prior to the satisfaction of the conditions set out in Section 13.04. SECTION 13.02 LEGAL DEFEASANCE AND DISCHARGE. Upon the Company's exercise under Section 13.01 of the option applicable to this Section 13.02, the Company shall be deemed to have been discharged from its obligations with respect to all Outstanding Debentures on the date the conditions set forth in Section 13.04 are satisfied ("Legal Defeasance"). For this purpose, Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Debentures, which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 13.05 and the other Sections of this Indenture referred to in (A) and (B) below, and to have satisfied all its obligations under such Debentures, including the obligation to pay interest on the Debentures, and this Indenture insofar as such Debentures are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same at the Company's request), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of Outstanding Debentures to receive, solely from the trust fund described in Section 13.04 and as more fully set forth in such Section, payments in respect of the principal of and interest on such Debentures when such payments are due, (B) the Company's obligations with respect to such Debentures under Sections 3.04, 3.05, 3.08, 10.02 and 10.03 and with respect to the Trustee under Section 6.06, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (D) this Article. Subject to compliance with this Article, the Company may exercise its option under this Section 13.02 notwithstanding the prior exercise of its option under Section 13.03 with respect to the Debentures. SECTION 13.03 COVENANT DEFEASANCE. Upon the Company's exercise under Section 13.01 of the option applicable to this Section 13.03, the Company shall be released from its obligations under any covenant contained in Sections 10.04 through 10.14 with respect to the Outstanding Debentures on and after the date the conditions set forth in Section 13.04 are satisfied ("Covenant Defeasance"), and the Debentures shall thereafter be deemed not to be "Outstanding" for the purposes of any request, demand, authorization, direction, declaration, Notice, consent, waiver or Act of Debentureholders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such Covenant Defeasance means that, with respect to the Outstanding Debentures, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 5.01(d), but, except as specified above, the remainder of this Indenture and such Debentures shall be unaffected thereby. SECTION 13.04 CONDITIONS TO LEGAL DEFEASANCE OR COVENANT DEFEASANCE. The following shall be the conditions to application of either Section 13.02 or Section 13.03 to the Outstanding Debentures: (a) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 6.07 who shall agree to comply with the provisions of this Article applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the -67- Holders of such Debentures, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, the principal of and interest on the Outstanding Debentures on the Stated Maturity (or Redemption Date, if applicable) of such principal or instalment of interest; PROVIDED that the Trustee shall have been irrevocably instructed in writing to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the Debentures; and PROVIDED FURTHER that, upon the effectiveness of this Section 13.04, the money or U.S. Government Obligations deposited shall not be subject to the rights of the Debentureholders pursuant to the provisions of this Article. Before or after such a deposit, the Company may give to the Trustee, in accordance with Section 11.03 hereof, a Notice of its election to redeem all of the Outstanding Debentures at a future date in accordance with Article XI hereof, which Notice shall be irrevocable. Such irrevocable redemption Notice, if given, shall be given effect in applying the foregoing. (b) No Default or Event of Default with respect to the Debentures shall have occurred and be continuing on the date of such deposit or, insofar as paragraphs (f) and (g) of Section 5.01 hereof are concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (c) No event or condition shall exist that pursuant to the provisions of Section 13.02 or 13.03 would prevent the Company from making payments of the principal of or interest on the Debentures on the date of such deposit or at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (d) Such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under any material agreement or instrument to which the Company is a party or by which it is bound. (e) In the case of an election under Section 13.02, the Company shall have delivered to the Trustee an Opinion of Counsel stating that the Holders of the Outstanding Debentures will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred. (f) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the Legal Defeasance under Section 13.02 or the Covenant Defeasance under Section 13.03 (as the case may be) have been complied with. SECTION 13.05 DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. Subject to the provisions of the last paragraph of Section 10.03, all money and U.S. Government -68- Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee) (collectively for purposes of this Section 13.05, the "Trustee") pursuant to Section 13.04 in respect of the Outstanding Debentures shall be held in trust and applied by the Trustee, in accordance with the provisions of such Debentures and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Debentures of all sums due and to become due thereon in respect of principal and interest, but such money and U.S. Government Obligations need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 13.04 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Outstanding Debentures. Anything in this Article to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 13.04 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance, as applicable, in accordance with this Article. SECTION 13.06 REINSTATEMENT. If the Trustee or any Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 13.05 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Debentures shall be revived and reinstated as though no deposit had occurred pursuant to Section 13.02 or 13.03, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 13.05; PROVIDED, HOWEVER, that no action taken in good faith by the Company after a deposit of money or U.S. Government Obligations or both pursuant to Section 13.05 and prior to the revival and reinstatement of obligations under this Indenture and the Debentures pursuant to this Section 13.06 shall constitute the basis for the assertion of an Event of Default pursuant to Section 5.01; and PROVIDED, FURTHER, that if the Company makes any payment of principal of or interest on any Debenture following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Debentures to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE XIV SENIORITY OF DEBENTURES SECTION 14.01 SENIORITY OF THE DEBENTURES. As set forth above, the Company's obligations under the Debentures and the Coupons and hereunder do and will rank at all times junior to the Secured Senior Indebtedness and the Permitted Subsidiary Indebtedness. ARTICLE XV -69- IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 15.01 LIABILITY SOLELY CORPORATE. No recourse shall be had for the payment of the principal of or interest on any Debentures or any part thereof, or for any claim based thereon or otherwise in respect thereof, or of the indebtedness represented thereby, or upon any obligation, covenant or agreement of this Indenture, against any incorporator, or against any stockholder, officer or director, as such, past, present or future, of the Company, or of any predecessor or successor Person, either directly or through the Company or any such predecessor or successor Person, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, it being expressly agreed and understood that this Indenture and all the Debentures are solely corporate obligations, and that no personal liability whatsoever shall attach to, or be insured by, any such incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any predecessor or successor Person, either directly or through the Company or any such predecessor or successor Person, because of the indebtedness hereby authorized or under or by reason of any of the obligations, covenants, promises or agreements contained in this Indenture or in any of the Debentures or to be implied herefrom or therefrom; and that any such personal liability is hereby expressly waived and released as a condition of, and as part of the consideration for, the execution of this Indenture and the issue of the Debentures; PROVIDED, HOWEVER, that nothing herein or in the Debentures contained shall be taken to prevent recourse to and the enforcement of the liability, if any, of any stockholder or subscriber to capital stock of the Company upon or in respect of shares of capital stock not fully paid up. This Indenture may be signed in any number of counterparts each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Indenture. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the day and year first above written. FiberChem, Inc. By: /s/ Melvin W. Pelley Name: Melvin W. Pelley Title: Secretary & CFO The Bank of New York, as Trustee By: /s/ Luis Perez ------------------------------ Name: Luiz Perez ---------------------------- Title: Assistant Vice President -------------------------- -70- EXHIBIT A(1) DEFINITIVE BEARER DEBENTURE U.S.$__________(2) FIBERCHEM, INC. U.S.$______________ 12% Senior Convertible Debentures Due 2002 THIS IS TO CERTIFY that ______________, a corporation organized under the laws of the State of Delaware (the "Company"), will pay to the bearer of this Debenture on July 26, 2002 (or on such earlier date as the principal sum hereinafter mentioned may become repayable in accordance with the Terms and Conditions endorsed hereon) the principal sum of U.S.$_________(3) (____ THOUSAND UNITED STATES DOLLARS) together with interest on the said principal sum at the rate of 12% per annum from and including [_________](4), payable semi-annually in arrears on December 1 and June 1 in each year, and such additional amounts (if any) as may be payable under the said Terms and Conditions, all subject to and in accordance with the said Terms and Conditions. This Debenture forms one of a series of Debentures in the aggregate principal amount of U.S.$1,350,000 (the "Debentures") and are constituted by a Trust Indenture (the "Trust Indenture") dated as of July 28, 2000, made between the Company and The Bank of New York, as Trustee. The Debentures are issued subject to and with benefit of the provisions of such Trust Indenture. This Debenture is convertible into shares of common stock of the Company in accordance with and subject to the said Terms and Conditions. This Debenture and the coupons appertaining hereto shall not be valid or become binding for any purpose unless and until this Debenture is authenticated by or on behalf of the Trustee (as defined in the Trust Indenture). All terms used in this Debenture which are defined in the Trust Indenture shall have the respective meanings assigned to them in the Trust Indenture. IN WITNESS WHEREOF the Company has caused this Debenture and the coupons appertaining hereto to be duly executed. CERTIFICATE OF AUTHENTICATION This Definitive Bearer Debenture is one of the Debentures referred to in the within mentioned Trust Indenture. FIBERCHEM, INC. The Bank of New York as Trustee By: _______________________________ By: ________________________ Name: __________________________ Authorised Signatory Title: _______________________________ By: _______________________________ ____________ Secretary ------------------------------ (1) This is the form that the Definitive Bearer Debentures will take if ever issued. The Debentures will be printed in the appropriate commercial form by a commercial printer that is in the business of printing Debentures issued in the public markets. (2) Denomination amount to be inserted of $1,000, $5,000 or $10,000 (3) Denomination amount to be inserted of $1,000, $5,000 or $10,000 (4) Insert here the date of the last interest period through which interest has been paid and if no interest has yet been paid insert date of issuance of the Global Debenture. NEITHER THIS DEBENTURE NOR THE SHARES OF COMMON STOCK ISSUABLE ON CONVERSION OF THIS DEBENTURE (THE "SHARES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE HOLDER HEREOF, BY PURCHASING THIS DEBENTURE, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS DEBENTURE AND THE SHARES MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT AS FOLLOWS. PRIOR TO THE FIRST ANNIVERSARY OF THE ISSUANCE OF THIS DEBENTURE, THIS DEBENTURE MAY NOT BE SO TRANSFERRED OTHER THAN (1) TO THE COMPANY, (2) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S (RULES 901 THROUGH 905) UNDER THE SECURITIES ACT, OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. AFTER THE FIRST ANNIVERSARY AND PRIOR TO THE SECOND ANNIVERSARY OF THE ISSUANCE OF THIS DEBENTURE, THIS DEBENTURE MAY NOT BE SO TRANSFERRED OTHER THAN (1) TO THE COMPANY, (2) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S (RULES 901 THROUGH 905) UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR (4) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. IF THE HOLDER OF THIS DEBENTURE WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF ANY SUCH TRANSFER, THE FOREGOING CONDITIONS MUST BE COMPLIED WITH REGARDLESS OF WHEN SUCH TRANSFER IS MADE. NO HEDGING TRANSACTIONS INVOLVING THIS DEBENTURE OR THE SHARES MAY BE CONDUCTED, UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE U.S. INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED -3- FULL SIZE TEXT OF THE TERMS AND CONDITIONS 1. FORM, DENOMINATION AND TITLE (A) The Debentures, which will initially be sold only outside the United States pursuant to Regulation S under the U.S. Securities Act of 1933, as amended (the "Securities Act"), will be in the form of a global bearer debenture without interest coupons (the "Global Debenture"), on deposit with The Bank of New York as common depository (the "Common Depository") and held on behalf of Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System ("Euroclear") and Clearstream, societe anonyme ("Clearstream") and credited to accounts designated by the Debentureholders, in principal amounts of U.S. $1,000 or integral multiples thereof. As provided in the Trust Indenture, under limited circumstances the Debentures may be issued in definitive bearer form ("Definitive Bearer Debentures"), serially numbered, in denominations of U.S. $1,000, $5,000 and $10,000 each with interest coupons ("Coupons") attached on issue. (B) Title to the Global Debenture will pass by transfer as described in the Trust Indenture. Title to the Definitive Bearer Debentures and to the Coupons will pass by delivery. The Company, any Paying Agent and the Trustee may (to the fullest extent permitted by applicable laws) deem and treat the holder of any Definitive Bearer Debenture and the holder of any Coupon as the absolute owner thereof for all purposes (whether or not the Definitive Bearer Debenture or Coupon shall be overdue and notwithstanding any notice of ownership or writing on the Definitive Bearer Debenture or Coupon or any notice of previous loss or theft of the Definitive Bearer Debenture or Coupon). "Debentureholder" and "Holder" means the bearer of any Definitive Bearer Debenture or Coupon (as the case may be) or beneficial owner of an interest in the Global Debenture. In addition to other legends required by the Securities Act, the Debentures and any Coupons will bear the following legend: "Any United States person who holds this obligation will be subject to limitations under the U.S. income tax laws, including the limitations provided in Sections 165(j) and 1287(a) of the United States Internal Revenue Code of 1986, as amended." 2. STATUS The Debentures and any Coupons are direct, unconditional and unsecured obligations of the Company and rank and will rank junior to certain Secured Senior Indebtedness, PARI PASSU, without any preference among themselves and with any Designated Indebtedness. The Debentures and any Coupons will rank senior to all other future Indebtedness of the Company, except to the extent of Permitted Liens securing Indebtedness. The Debentures will not be secured by any assets or properties of the Company. "Secured Senior Indebtedness" is limited to Indebtedness incurred pursuant to that certain Accounts Receivable Purchase Agreement dated July 7, 2000, with Silicon Valley Financial Services, which Indebtedness may not at any time exceed $1,000,000. "Designated Senior Indebtedness", "Permitted Subsidiary Indebtedness" and "Permitted Liens" are defined in the Trust Indenture. 3. COVENANTS Some, but not all, of the covenants contained in the Trust Indenture are as follows: (A) The Company will not merge or consolidate with or sell, convey or otherwise dispose of all, or substantially all of its assets substantially as an entirety to any Person, unless: (i) either (a) the Company shall be the surviving Person or (b) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquired by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an -7- entirety (1) shall be a Person organised and validly existing under the laws of the United States of America, any state thereof, or the District of Columbia and (2) shall expressly assume, by a trust indenture supplemental thereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the Company's obligation for the due and punctual payment of the principal of and interest on all the Debentures and the performance and observance of every covenant of the Trust Indenture on the part of the Company to be performed or observed; (ii) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Company in connection with or as a result of such transaction as having been incurred at the time of such transaction), no Default or Event of Default shall have occurred and be continuing; and (iii) the Company or such Person shall have delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture complies with Article Nine of the Trust Indenture and that all conditions precedent therein provided for relating to such transaction have been complied with. (B) Upon any consolidation of the Company with or merger of the Company with or into any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety to any Person in accordance with Section 8.01 of the Trust Indenture, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Trust Indenture with the same effect as if such successor Person had been named as the Company herein and therein, and in the event of any such conveyance or transfer, the Company, except in the case of a lease, shall be discharged of all obligations and covenants under the Trust Indenture and the Debentures and the Company may be dissolved and liquidated. (C) The Company will not create, incur, assume, guarantee or in any other manner become directly or indirectly liable for the payment of any Indebtedness that will rank (i) except for Secured Senior Indebtedness, senior in right of payment to the Debentures and any Coupons or (ii) except for Designated Indebtedness, PARI PASSU with the Debentures and Coupons, except to the extent of Permitted Liens securing Indebtedness. The Company will not permit any of its Subsidiaries to create, incur, assume, guarantee or in any other manner become directly or indirectly liable for the payment of any Indebtedness other than Permitted Subsidiary Indebtedness. (D) Except for Permitted Liens, the Company will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist, any Lien of any kind upon any properties of the Company or any of its Subsidiaries securing any Indebtedness (whether by agreement, by operation of law, or structurally by virtue of the identity of the obligor), unless the Debentures are equally and ratably secured or rank senior and prior in all respects to the Indebtedness secured by such Lien. 4. INTEREST The Debentures bear interest from (and including) the Issue Date, at the rate of 12% per annum, payable in cash semi-annually in arrears on December 1 and June 1, in each year (each an "Interest Payment Date"), the first such payment to be made on December 1, 2000, in respect of the period from (and including) the Issue Date to (but excluding) December 1, 2000. There will be a short first coupon for the period from (and including) the Issue Date, to (but excluding) December 1, 2000, which will equal U.S. $42.00 per U.S. $1,000 principal amount of the Debentures. Payments of interest will equal U.S. $60.00 per U.S. $1,000 principal amount of the Debentures for each subsequent Interest Payment Date. Interest shall accrue on amounts in default at the Default Rate. Each Debenture will cease to bear interest (i) from its due date for redemption, or (ii) where the Conversion Right shall have been exercised by the Debentureholders or the Company elects to cause a Mandatory Conversion, from the Conversion Date, unless as to any of the foregoing upon due presentation, payment of the principal and interest in respect of -8- the Debenture is improperly withheld or refused, the Conversion Shares are not timely issued or unless Default is otherwise made in respect of such payment, in which event interest shall continue to accrue at the Default Rate as provided in the Trust Indenture. When interest is required to be calculated in respect of a period of less than a full year, it shall be calculated on the basis of a 360 day year consisting of twelve (12) months of thirty (30) days each and, in the case of an incomplete month, the number of days elapsed. 5. PAYMENTS AND PAYING AGENTS (A) All payments of principal and interest shall be made in U.S. dollars. Payment of principal in respect of each Debenture will only be made (i) in the case of the Global Debenture, to the Principal Paying Agent for distribution to the Debentureholders in accordance with the terms of the Paying and Conversion Agreement and the practices of Euroclear and Clearstream, or (ii) in the case of Definitive Bearer Debentures, against presentation and surrender (or, in the case of part payment only, endorsement), of the relevant Definitive Bearer Debenture at the specified office of any of the Paying Agents. Payments of interest due on the Definitive Bearer Debentures on an Interest Payment Date will be made against presentation and surrender (or, in the case of part payment only, endorsement) of the relevant Coupons, at the specified office of any of the Paying Agents or, in the case of the Global Debenture, to the Principal Paying Agent for distribution to the Debentureholders in accordance with the terms of the Paying and Conversion Agreement and the practices of Euroclear and Clearstream. Payments of additional interest will be made upon presentation of a Definitive Bearer Debenture to a Paying Agent, which Debenture will be stamped to reflect such payment, or in the case of the Global Debenture, to the Principal Paying Agent for distribution to the Debentureholders in accordance with the terms of the Paying and Conversion Agreement and the practices of Euroclear and Clearstream. In the case of Definitive Bearer Debentures, all such payments will be made at the specified office of any Paying Agent, at the option of the holder, by U.S. dollar cheque, or by transfer to a U.S. dollar account maintained by the payee outside the U.S. and, in the case of the Global Debenture, by the Principal Paying Agent for distribution to the Debentureholders in accordance with the terms of the Paying and Conversion Agreement and the practices of Euroclear and Clearstream, subject in all cases to any applicable laws and regulations. (B) Upon redemption of the Global Debenture, payment shall be made to the Principal Paying Agent for distribution to the Debentureholders in accordance with the terms of the Paying and Conversion Agreement and the practices of Euroclear and Clearstream. Each Definitive Bearer Debenture should be presented for redemption together (if applicable) with all unmatured Coupons relating to such Debenture, failing which the full amount of any missing unmatured Coupon (or, in the case of payment not being made in full, that portion of the full amount of the missing unmatured Coupons which the amount so paid bears to the total amount due) will be deducted from the amount due for payment. Each amount so deducted will be paid in the manner described above against presentation and surrender (or, in the case of part payment only, endorsement) of such missing Coupons at any time before the expiration of ten years after the Relevant Date in respect of the Debenture (whether or not such Coupon would otherwise have become void pursuant to Condition 10 (Prescription)), or, if later, five years after the date on which such Coupon would have become due, but not thereafter. (C) The Company agrees that so long as any of the Debentures are outstanding, it will maintain (i) a Paying Agent in a western European city for payments on the Debentures, (ii) so long as the Debentures are listed on the Luxembourg Stock Exchange and the rules of such exchange so require, a Paying Agent and Conversion Agent in Luxembourg, (iii) Conversion Agents having specified offices in either London or New York and (iv) Paying Agents having specified offices in either London or New York. The Company has initially appointed The Bank of New York as Trustee, Principal Paying Agent, Principal Conversion Agent, Replacement Agent and Authenticating Agent, and Banque Internationale A Luxembourg, as Paying Agent and Conversion Agent. Subject to the foregoing and the terms of the Paying and Conversion Agreement and the Trust Indenture, the Company shall have the right to terminate any such appointments -9- and/or to appoint any other agents in such other places as it may deem appropriate upon notice in accordance with Condition 15 (Notices). All monies paid by the Company to the Principal Paying Agent for the payment of principal or interest on any Debenture which remain unclaimed at the end of two (2) years after the principal on such Debenture will have become due and payable will be repaid to the Company (and upon such repayment, the obligations of the Principal Paying Agent shall cease) and the Holder of such Debenture or any Coupon appertaining thereto will thereafter have only the rights of a creditor of the Company as described in the Trust Indenture or such rights as may be otherwise provided by applicable law. A Holder shall be entitled to present a Definitive Bearer Debenture or Coupon for payment only on a Presentation Date. "Presentation Date" means the date on which a Definitive Bearer Debenture is presented by a Debentureholder for payment of principal or a Coupon is presented by the Couponholder for payment of interest, as the case may be, or if such date is not a Business Day, the next date which is a Business Day. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is a day on which banking institutions in Luxembourg, the city of New York, New York, and London, England are not authorised or obligated by law, regulation or executive order to close. When making payments to Debentureholders or Couponholders, fractions of one cent will be rounded down to the nearest whole cent. 6. CONVERSION (A) CONVERSION PERIOD, CONVERSION RATIO AND PRICE (i) Debentureholders have the right, subject as provided herein and to any applicable laws and regulations, to require the Company to convert all or any of their Debentures at their principal amount into shares (the "Conversion Shares") of common stock of the Company, U.S. $.0001 par value per share ("Common Stock") at any time during the Conversion Period referred to below. Upon conversion, the right of the converting Debentureholder to repayment of the principal amount of the Debenture to be converted shall be extinguished and released, and in consideration and in exchange therefor the Company shall allot and issue Conversion Shares credited as paid up in full as provided in this Condition 6. Subject to and upon compliance with the provisions of these Conditions, the Conversion Right attaching to any Debenture may be exercised, at any time after the Issue Date up to the close of business on the day two Business Days prior to the Maturity Date (but in no event thereafter) or, if such Debenture shall have been called for redemption pursuant to Condition 7(A) on the date up to and including two (2) Business Days prior to the date fixed for redemption thereof (the "Conversion Period"). The number of Conversion Shares to be issued on conversion of a Debenture will be determined by dividing the principal amount of the Debenture to be converted by the Conversion Price (as defined below) in effect on the Conversion Date, with the result being rounded down to the nearest whole number. In addition, upon the conversion of any Debentures, a Debentureholder will also be entitled to receive an additional number of Conversion Shares calculated in accordance with Condition 6 (G). (ii) If more than one Debenture is converted at any one time by the same Holder, the number of Conversion Shares to be issued upon such conversion will be calculated on the basis of the aggregate principal amount of the Debentures to be converted. Fractions of Conversion Shares will not be issued on conversion and no cash adjustments will be made in -10- respect thereof. (iii) The price at which Conversion Shares will be issued upon conversion (the "Conversion Price") will initially be the lesser of (i) U.S. $0.30 per Conversion Share or (ii) the Adjusted Market Price, but such Conversion Price will be subject to adjustment in the manner provided in Conditions 6(C) and 6(F). The "Adjusted Market Price" shall equal 92% of the average of the Market Price of the Common Stock for the 20 consecutive Stock Exchange Business Days ending two Stock Exchange Business Days prior to the Conversion Date. "Market Price" shall be the closing bid price on the OTC for the Common Stock on the relevant Stock Exchange Business Day; provided, however, if the Common Stock is traded on an Alternative Stock Exchange then the "Market Price" shall be the closing bid price of the Common Stock on such Alternative Stock Exchange on any Stock Exchange Business Day. Notice of any adjustment of the Conversion Price shall be given in accordance with Condition 15 within ten (10) Business Days of such adjustment. (iv) Notwithstanding the provisions of paragraph (i) of this Condition 6(A), if the Company shall default in making payment in full in respect of any Debenture which shall have been called for redemption prior to the Maturity Date, then from the Redemption Date, interest shall continue to accrue on such Debenture at the Default Rate and the Conversion Right attaching to such Debenture will continue to be exercisable up to, and including the close of business (at the place where the Debenture is deposited in connection with the exercise of the Conversion Right) on the date upon which the full amount of the monies payable in respect of such Debenture has been duly received by the Trustee or the Principal Paying Agent. (v) A Conversion Right may only be exercised in respect of an Authorised Denomination. (B) PROCEDURE FOR CONVERSION (i) To exercise the Conversion Right attaching to any Definitive Bearer Debenture, the Holder thereof must complete, execute and deposit at his own expense during normal business hours at the specified office of the Principal Conversion Agent or any of the other Conversion Agents, a notice of conversion (a "Conversion Notice") in the form for the time being currently obtainable from the office of each Conversion Agent specified in the Agency Agreement, together with the relevant Definitive Bearer Debenture and any amount to be paid by the Debentureholder pursuant to this Condition 6(B)(i). The holder of a beneficial interest in the Global Debenture need only provide a Conversion Notice and arrange for the delivery to a Conversion Agent of the beneficial interest being converted as provided in clause (ii) below. Such Conversion Notice shall be in the form attached to the Indenture and shall be provided by any Conversion Agent upon request. The Conversion Date must fall at a time when the Conversion Right attaching to that Debenture is expressed in these Conditions to be exercisable and will be deemed to be the date of the surrender of the Definitive Bearer Debenture (if applicable) and/or the delivery of such Conversion Notice and, if applicable, any payment to be made or indemnity given under these Conditions in connection with the exercise of such Conversion Right. A Conversion Notice once delivered shall be irrevocable. Upon any conversion of a Debenture into Conversion Shares, the Company shall pay any taxes and capital, stamp, issue and registration duties arising on conversion and duties payable in the U.S. or, if applicable, in the place of any Alternative Stock Exchange, as the case may be, and the Debentureholder delivering a Debenture for conversion must pay any taxes and capital, stamp, issue and registration duties arising on conversion and duties payable to an entity located outside the U.S. or in the place of any Alternative Stock Exchange outside the U.S. The foregoing shall not apply to taxes in connection with any transfer of ownership of a Debenture. -11- "Alternative Stock Exchange" means, other than OTC, any national or regional stock exchange or quotation service such as the Nasdaq National Market System or any similar quotation service, as may be agreed between the Company and the Lead Manager. Any Alternative Stock Exchange selected must be recognised by the Luxembourg Exchange otherwise the Debentures may be delisted from the Luxembourg Exchange. (ii) As soon as practicable, and in any event not later than three (3) Stock Exchange Business Days after either the Company's receipt of a completed Conversion Notice or, if conversion is occurring as a result of a mandatory conversion, the Conversion Date, the Company will cause the person or persons designated for that purpose in the Conversion Notice or otherwise to be registered as holder(s) of the relevant number of Conversion Shares, which will include any Conversion Shares issued in accordance with Condition 6(G), and will make a certificate or certificates for the relevant Conversion Shares available for collection at the Company's principal office which is currently in Las Vegas, Nevada or at the Company's transfer agent in Denver, Colorado, or, if so requested in the relevant Conversion Notice, will deliver such certificate or certificates to the person at the place specified in the Conversion Notice, at the risk of the Debentureholder, together with any other securities, property or cash required to be delivered upon conversion and such assignments and other documents (if any) as may be required by law to effect the transfer thereof. If the Company fails to timely satisfy its obligations as provided in this Condition 6(B)(ii), then within two Stock Exchange Business Days after the expiration of such 3 day period, the Company shall pay to the Debentureholder(s) entitled to Conversion Shares a cash payment equal to 1% of the principal amount of Debentures being converted. An additional 1% cash payment will be paid for each additional three (3) day period commencing after the expiration of the relevant 3 day period during which the Company has not complied with its obligations as provided in this condition 6(B)(ii). (iii) The person or persons specified for that purpose will be deemed for all purposes to be the holder of record of the number of Conversion Shares issuable upon conversion with effect from the Conversion Date. The Conversion Shares issued upon conversion of the Debentures will in all respects rank pari passu with the issued and outstanding shares of Common Stock issued on the relevant Conversion Date except for any right excluded by mandatory provisions of applicable law. A holder of Conversion Shares issued on conversion of Debentures shall not be entitled to any shareholder rights for any record date which precedes the relevant Conversion Date. (iv) Subject to Condition 4, all accrued and unpaid interest due upon the conversion of the Debentures (whether as a result of an election by the Debentureholder, or the Company pursuant to its right to cause Mandatory Conversion) shall be paid to or on behalf of the Debentureholder by the Company not later than fourteen (14) calendar days after the relevant Conversion Date by a U.S. dollar cheque, or by transfer to a U.S. dollar account maintained by the payee in accordance with instructions given by the relevant Debentureholder. (v) The Conversion Shares shall be traded on the OTC but shall not be listed on the Luxembourg Stock Exchange. (C) ADJUSTMENTS IN CONVERSION PRICE As provided in the Trust Indenture, the Conversion Price is subject to adjustment upon the occurrence of certain events, including: (i) stock dividends and certain other distributions; (ii) the subdivision, combination or reclassification of outstanding shares of Common Stock; (iii) the issuance to all stockholders of the Company of rights or warrants to acquire shares of Common Stock at a price less than the Market Price for the Common Stock; (iv) the issuance of Common Stock at a price less than the Market Price, other than issuances pursuant to conversion of the Debentures, any issuances pursuant to the conversion of issued and outstanding preferred stock (including conversions related to FiberChem's outstanding preferred stock even if the conversion ratio of such stock is increased from 10 to 1 to 75 to 1), and the conversion or exercise of all -12- other currently outstanding options, warrants, or outstanding indebtedness of the Company, or any warrants issued pursuant to the Offering or in connection with any plan adopted by the Company for the purchase of stock in connection with any employee compensation or benefit plan of the Company or any of its Subsidiaries, whether now in effect or hereafter created or amended; and (v) the distribution to all holders of Common Stock or debt securities of the Company or of assets or rights or warrants to purchase securities of the Company (excluding those rights and warrants referred to above and cash dividends or distributions from current or retained earnings). The Company may at any time or from time to time reduce the Conversion Price temporarily or permanently as to all or any Debentures outstanding. The Company shall cause written notice of any adjustment to the Conversion Price of all the Debentures pursuant to this Condition 6(C) to be given to the Trustee, the Paying Agents, the Conversion Agents and the Holders of the Debentures in accordance with Section 1.08 of the Trust Indenture, and will publish such notice in two (2) Authorised Newspapers, one of which is required to be a general leading daily newspaper in Luxembourg, which is expected to be the LUXEMBURGER WORT. The Company will notify the Luxembourg Stock Exchange upon any adjustment to the Conversion Price of all the Debentures. No adjustment will be made where such adjustment would be less than five percent (5%) of the Conversion Price then in effect. Any adjustment not so made will be carried forward and taken into account in any subsequent adjustment. On any adjustment, the resultant Conversion Price, if not an integral multiple of one cent shall be rounded up to the nearest one cent. The Conversion Price may not be reduced so that, on conversion of Debentures, Conversion Shares would be issued for an amount less than their current par value. Where more than one event which gives or may give rise to an adjustment to the Conversion Price occurs within such a short period of time that in the reasonable opinion of the Company's Board of Directors the foregoing provisions would need to be operated subject to some modification in order to give the intended result, such modification shall be made to the operation of the foregoing provisions as may be advised by the Board of Directors to be in their reasonable opinion appropriate in order to give such intended result. (D) CONSOLIDATION, AMALGAMATION OR MERGER In the case of any consolidation, amalgamation or merger of the Company with any other Person (other than a consolidation, amalgamation or merger in which the Company is the continuing Person), or in the case of any sale or transfer of all, or substantially all, of the assets of the Company, the Company will forthwith notify the Luxembourg Stock Exchange in accordance with its applicable requirements and the Debentureholders of such event in accordance with Section 1.08 of the Trust Indenture and (so far as legally possible) cause the Person resulting from such consolidation, amalgamation or merger or the Person which shall have acquired such assets, as the case may be, to execute a trust indenture supplemental to the Trust Indenture to ensure that the Holder of each outstanding Debenture will have the right (during the period in which such Debenture shall be convertible) to convert such Debenture into the class and amount of shares of Common Stock and other securities and property receivable upon such consolidation, amalgamation, merger, sale or transfer by a Holder of the number of shares of Common Stock which would have become liable to be issued upon conversion of such Debenture immediately prior to such consolidation, amalgamation, merger, sale or transfer. Such supplemental trust indenture will provide for adjustments which will be as nearly equivalent as may be practicable to the adjustments provided for in the foregoing provisions of this Condition. The above provisions of this Condition 6(D) will apply in the same way to any subsequent consolidations, amalgamations, mergers, sales or transfers. (E) MANDATORY CONVERSION At any time after the Company has complied with its registration obligations as provided for in the Registration -13- Rights Agreement, provided the average Market Price of the Common Stock during any twenty (20) consecutive trading day period and on the date the conversion notice is sent is equal to or greater than $0.42, the Company may at its option elect within thirty (30) days of having satisfied the foregoing criteria, to cause the Debentures to be converted, in whole but not in part, into Conversion Shares at the then applicable Conversion Price. The Debentureholders shall be notified of such election by being given not less than twenty (20) calendar days' notice to the Debentureholders in accordance with Section 1.08 of the Trust Indenture (which notice shall be irrevocable) by publication in two (2) Authorised Newspapers, one of which is required to be a general leading daily newspaper in Luxembourg, which is expected to be the LUXEMBURGER WORT. Upon any such mandatory conversion, payment will be made by the Company for all interest accrued prior to the Conversion Date. The Company shall notify the Luxembourg Stock Exchange of any such mandatory conversion and confirm that all such Debentures have been converted. (F) REGISTRATION RIGHTS (i) Pursuant to the Registration Rights Agreement (the "Registration Rights Agreement") dated as of July 28, 2000, by and among the Company and the Trustee for the benefit of the Debentureholders, the Company has agreed to file a registration statement with the U.S. Securities and Exchange Commission (the "Commission") in respect of the resale of the Conversion Shares. In accordance with the terms and conditions of the Registration Rights Agreement, the Company will (i) use its best efforts to cause the Commission to declare effective the registration statement contemplated in the foregoing sentence within three months of the Issue Date and (ii) use its best efforts to maintain the effectiveness of such registration statement until all Conversion Shares that may be issued have been issued. In the event that the Commission does not declare such registration statement effective within four months of the Issue Date, holders of the Debentures will be entitled to convert their Debentures at a discount (the "Registration Default Discount") of 2% from the then applicable Conversion Price and thereafter, commencing on the fifth month from the Issue Date, an additional 5% discount for each month or portion thereof that the registration statement is not declared effective. The Registration Default Discount shall be permanent and shall not be affected by the subsequent effectiveness of the registration statement. All discounts under this Condition 6(F) will be in addition to, and not in lieu of, any other discounts or adjustments applicable to the Conversion Price under the terms of the Debentures. (ii) In addition, if prior to the date the Company satisfies its obligations under the Registration Rights Agreement and for a period of 60 days after it satisfies such obligations, the Company issues any Common Stock or Common Stock Equivalents at a price or having a conversion price less than the then applicable Conversion Price, the applicable Conversion Price shall be adjusted downward only to equal 95% of the price or conversion price attributable to the Common Stock or Common Stock Equivalents. To the extent any issuance of securities causes an adjustment under this Condition 6(F)(ii) and could also provide for an adjustment under Condition 6(C), the only adjustment resulting from such issuance shall occur solely under this Condition 6(F)(ii). (G) Upon the conversion of any Debentures, either upon the election of the Debentureholder or the Company, the Debentureholders will be entitled to receive, at no additional cost, an additional number of Conversion Shares equal to the product of (i) the number of Conversion Shares being issued to such Debentureholder multiplied by (ii) 0.26. The additional shares issued in accordance with this Condition 6(G) will be part of the total number of Conversion Shares to be issued and will be included in the certificate delivered in accordance with Condition 6(B)(ii) above. (H) As provided in the Debentures, the Conversion Price is subject to reduction in a number of different circumstances. The Conversion Price to be used in connection with the conversion of any Debentures will be calculated on the applicable date as follows. The initial Conversion Price will first be calculated using the formula set out in Condition 6(A)(iii). Thereafter, the Conversion Price shall be adjusted downward to give effect to any reductions as provided for in -14- Conditions 6(C) and 6(F), with each such reduction given full effect before the next adjustment is applied. At the request of any Debentureholder or the Lead Manager, the Company shall promptly provide the requesting party with a calculation of the current applicable Conversion Price. Such calculation shall be sent to the requesting Debentureholder by means of a certificate signed by the Company's Chief Financial Officer setting forth the adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based. 7. REDEMPTION AND PURCHASE (A) Unless previously redeemed, converted or purchased and canceled as provided herein, the Company will redeem the Debentures at their principal amount on July 26, 2002; PROVIDED, HOWEVER, that at any time on giving notice in accordance with Condition 15 and the procedures set out in the Trust Indenture, the Company may redeem all of the Debentures outstanding at such time at their principal amount, together with interest accrued to the Redemption Date, in the event that prior to the date of such notice, Conversion Rights shall have been exercised and/or purchases (and corresponding cancellations) have been effected in respect of eighty-five percent (85%) or more in principal amount of the Debentures. The Company shall notify the Luxembourg Stock Exchange upon any such redemption. (B) Subject to applicable law, the Company or any of its Subsidiaries may at any time purchase Debentures together, in the case of Definitive Bearer Debentures, with unmatured Coupons in any manner and at any price in the open market or by private treaty. If purchases are made by tender, tenders must be available to all Debentureholders alike. Debentures purchased by the Company or any of its Subsidiaries will forthwith be surrendered for cancellation and shall no longer be deemed Outstanding. (C) All Debentures that are redeemed by the Company will forthwith be canceled (together with all related unmatured Coupons attached to or surrendered with the Debentures) and may not be reissued or resold. 8. TAXATION All payments in respect of the Debentures by the Company shall be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature ("Taxes") imposed or levied by or on behalf of the U.S. or any political sub-division of, or any authority in, or of, the U.S. having power to tax, unless the withholding or deduction of the Taxes is required by law. In that event, the Company will pay such additional amounts as may be necessary in order that the net amounts received by the Debentureholders and Couponholders after the withholding or deduction shall equal the respective amounts which would have been receivable in respect of the Debentures or, as the case may be, Coupons in the absence of the withholding or deduction; except that no additional amounts shall be payable in relation to any payment in respect of any Debenture or Coupon: (A) to, or to a third party on behalf of, a Holder who is liable for the Taxes in respect of the Debenture or Coupon by reason of such Holder having some connection with the U.S. other than the mere holding of the Debenture or Coupon or the receipt of payments made in connection therewith; or (B) presented for payment more than thirty (30) calendar days after the Relevant Date except to the extent that a Holder would have been entitled to additional amounts on presenting the same for payment on the last day of such period of thirty (30) calendar days. Any reference in these Terms and Conditions to any amounts in respect of the Debentures shall be deemed also to refer to any additional amounts which may be payable under this Condition or under any undertakings given in addition to, or in substitution for, this Condition pursuant to the Trust Indenture. -15- 9. ADDITIONAL COVENANTS While any Conversion Right remains exercisable, the Company will, save with the consent of the Holders as contemplated pursuant to Condition 16 or with the approval of the Trustee where, in its opinion, it is not materially prejudicial to the interests of the Debentureholders to give such approval: (A) at all times keep available for issuance free from any pre-emptive rights out of its authorised but unissued capital such number of Conversion Shares as would enable the Conversion Rights, the rights for additional shares as set forth in Condition 6(G), and all other rights of subscription and exchange for and conversion into Conversion Shares to be satisfied in full; (B) maintain a quotation for all the issued Conversion Shares on OTC, it being understood that if the Company is unable to obtain or maintain such quotation of Conversion Shares, to obtain and maintain a listing or quotation for all the Conversion Shares issued on the exercise of the Conversion Rights on such Alternative Stock Exchange as the Company may from time to time with the written consent of the Lead Manager determine and will forthwith give notice to the Debentureholders in accordance with Section 1.08 of the Trust Indenture of the listing, de-listing or quotation or lack of quotation of the Conversion Shares (as a class) by any such Alternative Stock Exchange; (C) use all reasonable efforts to maintain a listing of the Debentures on the Luxembourg Stock Exchange or an Alternative Stock Exchange; and (D) not adopt any amendment to its Certificate of Incorporation that would modify the rights attaching to the Common Stock. 10. PRESCRIPTION Debentures and Coupons will become void unless presented for payment within periods of ten (10) years (in the case of principal) and five (5) years (in the case of interest) from the Relevant Date in respect of the Debentures or the Coupons, as the case may be, subject to the provisions of Condition 5. 11. EVENTS OF DEFAULT The Trustee at its discretion may, and if so requested in writing by the Holders of at least one-quarter in principal amount of the Debentures then outstanding or if so directed by an Extraordinary Resolution of the Debentureholders shall give notice to the Company that the Debentures are, and they shall accordingly thereby forthwith become, immediately due and payable at their principal amount together with accrued interest (as provided in the Trust Indenture) if any of the following events (each an "Event of Default") shall have occurred (unless (i) such events are expressly permitted or contemplated by the Trust Indenture or (ii) such Event of Default has been remedied to the satisfaction of the Trustee): (A) if the Company defaults in the payment of the principal of (or premium, if any, on) any Debenture as and when it shall become due and payable at its Maturity, upon redemption, by declaration or otherwise; or (B) if the Company defaults in the payment of any interest upon any Debenture, or any related Coupon, when such interest or Coupon becomes due and payable, and the continuance of such default for a period of 5 days; or (C) if the Company fails to perform or observe any of its other obligations, covenants, conditions or provisions -16- under the Debentures or the Trust Indenture and (except where the Trustee shall have certified to the Company in writing that it considers such failure to be incapable of remedy in which case no such notice or continuation as is hereinafter mentioned will be required) such failure continues for the period of thirty (30) calendar days (or such longer period as the Trustee may in its absolute discretion permit) next following the service by the Trustee on the Company of notice requiring the same to be remedied; or (D) if (i) any other Indebtedness of the Company or any Subsidiary becomes due and payable prior to its Stated Maturity by reason of an event of default (howsoever described) or (ii) any such Indebtedness of the Company or any Subsidiary is not paid when due or, as the case may be, within any applicable grace period or (iii) the Company or any Subsidiary fails to pay when due (or, as the case may be, within any applicable grace period) any amount payable by it under any present or future guarantee for, or indemnity in respect of, any Indebtedness of any Person or (iv) any security given by the Company or any Subsidiary for any Indebtedness of any Person or any guaranty or indemnity of Indebtedness of any Person by the Company or any Subsidiary becomes enforceable by reason of default in relation thereto and steps are taken to enforce such security save in any such case where there is a bona fide dispute as to whether the relevant Indebtedness or any such guarantee or indemnity as aforesaid shall be due and payable, provided that in each such case the Indebtedness exceeds in the aggregate U.S. $250,000 and in each case such event continues unremedied for a period of thirty (30) calendar days (or such longer period as the Trustee may in its absolute discretion permit); or (E) if the Company or any Subsidiary shall generally fail to pay its debts as such debts become due (except debts which the Company or such Subsidiary, as the case may be, may contest in good faith generally) or shall be declared or adjudicated by a competent court to be insolvent or bankrupt, consents to the entry of an order of relief against it in an involuntary bankruptcy case, shall enter into any assignment or other similar arrangement for the benefit of its creditors or consents to the appointment of a custodian (including, without limitation, a receiver, liquidator or trustee); or (F) if a receiver, administrative receiver, administrator or other similar official shall be appointed in relation to the Company or any Subsidiary or in relation to the whole or a substantial part of the undertaking or assets of any of them or a distress, execution or other process shall be levied or enforced upon or sued out against, or an encumbrancer shall take possession of, the whole or a substantial part of the assets of any of them and in any of the foregoing cases is not paid out or discharged within ninety (90) calendar days (or such longer period as the Trustee may in its absolute discretion consent to in writing upon receipt of written notice from the Company); or (G) if the Company or any Subsidiary institutes proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganisation under the laws of the Federal Bankruptcy Code or any similar applicable U.S. federal, state or foreign law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of it or its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they come due; or (H) if a decree or order by a court having jurisdiction in the premises shall have been entered adjudging the Company or any Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking the reorganisation of the Company or any Subsidiary under the Federal Bankruptcy Code or any other similar applicable U.S. federal, state or foreign law, and such decree or order shall have continued undischarged or unstayed for a period of ninety (90) calendar days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of the Company or any Subsidiary or of all or substantially all of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of ninety (90) calendar days; or -17- (I) if a warranty, representation or other statement made by or on behalf of the Company contained in the Trust Indenture, the Debentures or any certificate or other agreement furnished in compliance with such documents is false in any material respect when made and (except where the Trustee shall have certified to the Company that it considers such falsity to be incapable of remedy; in which case no such notice or continuation as is hereinafter mentioned will be required) such falsity continues for a period of thirty (30) calendar days (or such longer period as the Trustee may in its absolute discretion permit) next following the service by the Trustee on the Company of notice requiring the same to be remedied; or (J) if there is any final judgment or judgments for the payment of money exceeding in the aggregate U.S.$250,000 outstanding against the Company or any Subsidiary which has been outstanding for more than sixty (60) calendar days from the date of its entry and shall not have otherwise been discharged in full or stayed by appeal, bond or otherwise. 12. ENFORCEMENT The Trustee may at any time, at its discretion and with prior written notice to the Company take such proceedings against the Company as it may think fit to enforce the provisions of the Trust Indenture, the Debentures and the Coupons but it shall not be bound to take any proceedings or any other action in relation to the Trust Indenture, the Debentures or the Coupons unless (a) it shall have been so directed by an Extraordinary Resolution of the Debentureholders or so requested in writing by the Holders of at least one- quarter in principal amount of the outstanding Debentures, and (b) it shall have been indemnified to its satisfaction. No Debentureholder or Couponholder shall be entitled to proceed directly against the Company unless the Trustee, having become bound so to proceed, fails so to do within a reasonable period and such failure shall be continuing. 13. SUBSTITUTION The Trustee may, without the consent of the Debentureholders or Couponholders, agree with the Company to the substitution in place of the Company (or of any previous substitute under this Condition) as the principal debtor under the Debentures, the Coupons and the Trust Indenture of any Subsidiary or holding company (being a corporation holding (directly or indirectly) at least a majority of Conversion Shares having by the terms thereof ordinary voting power to elect a majority of the Board of Directors (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency)) of the Company or any Subsidiary of such holding company, subject to (a) the Trustee being satisfied that the interests of the Debentureholders will not be materially prejudiced by the substitution and (b) certain other conditions set out in the Trust Indenture being complied with. 14. REPLACEMENT OF DEBENTURES AND COUPONS Should any Debenture or Coupon be lost, stolen, mutilated, defaced or destroyed, it may be replaced at the specified office of the Replacement Agent, upon payment by the claimant of the expenses incurred in connection with the replacement and on such terms as to evidence indemnity and security as the Company and the Trustee may reasonably require. Mutilated or defaced Debentures or Coupons must be surrendered before replacements will be issued. 15. NOTICES (A) Notices to all the Debentureholders will be valid if published in two (2) Authorised Newspapers as provided in Section 1.08 of the Trust Indenture, one of which must be a newspaper of general circulation in Luxembourg, for so long as the Debentures are listed on the Luxembourg Stock Exchange (which is expected to be the LUXEMBURGER WORT) and the other is expected to be the FINANCIAL TIMES EUROPEAN EDITION. Any notice shall be deemed to have been given on the date of -18- publication or, if so published more than once, on the date of the first publication. If publication as provided above is not practicable, notice will be given in such other manner, and shall be deemed to have been given on such date, as the Trustee may approve. (B) Couponholders will be deemed for all purposes to have notice of the contents of any notice given to the Debentureholders in accordance with this Condition. 16. MEETINGS OF DEBENTUREHOLDERS, MODIFICATION, WAIVER AND AUTHORISATION (A) The Trust Indenture contains provisions for convening meetings of the Debentureholders to consider any matter affecting their interests, including the modification by Extraordinary Resolution of these Terms and Conditions or the provisions of the Trust Indenture. The quorum at any meeting, or at any adjourned such meeting, for passing an Extraordinary Resolution will be one or more Persons present holding or representing 25% in principal amount of the Outstanding Debentures, except that for certain of the provisions of the Terms and Conditions of the Debentures (including Condition 8) and certain of the provisions of the Trust Indenture, the necessary quorum and vote required for passing an Extraordinary Resolution will be one or more Persons present holding or representing not less than the percentage set out in the Trust Indenture. An Extraordinary Resolution passed at any meeting of the Debentureholders will be binding on all Debentureholders, whether or not they are present at the meeting, and on all Couponholders. (B) As provided in the Trust Indenture, any action required by the Trust Indenture to be taken at any meeting may be taken without a meeting, if a consent or consents in writing setting forth the action so taken shall be signed by the Holders of the required percentage of the principal amount of the Outstanding Debentures that would be necessary to authorise or take such action at such meeting. (C) The Trust Indenture provides that, without the consent of each holder of an outstanding Debenture affected thereby, no amendment may, among other things, (i) change the Stated Maturity of the principal of, or any installment of principal of or interest on, any Debenture, (ii) reduce the principal amount or the rate of interest on any Debenture, (iii) impair the right of any Holder of the Debentures to receive payment of principal of and interest on such Holder's Debentures on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such Holder's Debentures, (iv) make any change in the amendment provisions that require each Holder's consent or in the waiver provisions, (v) make any change in the provisions restricting the ability of the Company to incur Indebtedness that is senior in right of payment to the Debentures, (vi) make any Debenture payable in money other than that stated in such Debenture, or (vii) make any change that adversely affects the rights of any Debentureholder or amends the terms of the Debentures or the Trust Indenture in a way that would result in the loss of an exemption from any of the Taxes described under Condition 8 above. (D) The Trust Indenture also provides that, without the consent of any Holder of the Debentures, the Company and the Trustee may amend the Trust Indenture to cure any ambiguity, omission, defect or inconsistency, to provide for the assumption by a successor corporation of the obligations of the Company under the Trust Indenture, to add guarantees with respect to the Debentures, to secure the Debentures, to add to the covenants of the Company for the benefit of the Holders of the Debentures or to surrender any right or power conferred upon the Company. (E) The consent of the Holders of the Debentures is not necessary to approve the particular form of any proposed amendment, modification or Supplemental Indenture. It is sufficient if such consent approves the substance of the proposed amendment, modification or Supplemental Indenture. (F) After any amendment or Supplemental Indenture to the Trust Indenture or Debentures becomes effective, -19- the Company will provide the Holders of the Debentures with a notice describing such amendment or Supplemental Indenture. A copy of any such amendment or Supplemental Indenture shall also be delivered to the Luxembourg Stock Exchange. The failure to give such notice to all Holders of such Debentures, or any defect therein, will not impair or affect the validity of the amendment or Supplemental Indenture. (G) Any modification, waiver or authorisation shall be binding on the Debentureholders and the Couponholders and, unless the Trustee agrees otherwise, any modification shall be notified by the Company to the Debentureholders as soon as practicable thereafter in accordance with Condition 15 and Section 1.08 of the Trust Indenture. 17. DEFEASANCE The Company has the right to cause a legal defeasance or a covenant defeasance with respect to the Debentures, all as more fully set out in the Trust Indenture. 18. INDEMNIFICATION OF THE TRUSTEE The Trust Indenture contains provisions for the indemnification of the Trustee and for its relief from responsibility, including provisions relieving it from taking action unless indemnified to its satisfaction. 19. GOVERNING LAW The Trust Indenture, the Agency Agreement, the Debentures and the Coupons are governed by, and will be construed in accordance with, the laws of the State of New York. -20- Form of Coupon The form of Bearer Debenture printed will include interest coupons attached thereto for all remaining Interest Periods. Each coupon will be in the following form: __________________________________________________________________________ _______________________________ _________________________ This Coupon is payable to bearer (subject to the Terms and Conditions FIBERCHEM, INC. [1] endorsed on the Debenture to which this Coupon appertains, which shall be binding upon the Holder of this Coupon whether or not this Coupon is Coupon for for the time being attached to such Debenture) at the specified offices of U.S.$_____5 the Paying Agents set out on the reverse hereof (or any other or further By: Paying Agents or specified offices as may from time to time be notified ......................... due on _________6 to the Debentureholders). If the Debenture to which this Coupon .... appertains shall have become due and payable before the maturity date of this Coupon, this Coupon shall become void and no payment shall be made in respect of it. By: ......................... .... __________________________________________________________________________ _______________________________ _________________________
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. ________________________________________________________________________________ --------------------------------- (5)Blank will be completed setting out the interest payment that will due on the specified interest payment date. (6) The first coupon will set out the next occurring Interest Payment Date and additional coupons shall be prepared for all remaining interest periods. GLOBAL DEBENTURE NEITHER THIS DEBENTURE NOR THE SHARES OF COMMON STOCK ISSUABLE ON CONVERSION OF THIS DEBENTURE (THE "SHARES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE HOLDER HEREOF, BY PURCHASING THIS DEBENTURE, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS DEBENTURE AND THE SHARES MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT AS FOLLOWS. PRIOR TO THE FIRST ANNIVERSARY OF THE ISSUANCE OF THIS DEBENTURE, THIS DEBENTURE MAY NOT BE SO TRANSFERRED OTHER THAN (1) TO THE COMPANY, (2) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S (RULES 901 THROUGH 905) UNDER THE SECURITIES ACT, OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. AFTER THE FIRST ANNIVERSARY AND PRIOR TO THE SECOND ANNIVERSARY OF THE ISSUANCE OF THIS DEBENTURE, THIS DEBENTURE MAY NOT BE SO TRANSFERRED OTHER THAN (1) TO THE COMPANY, (2) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S (RULES 901 THROUGH 905) UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR (4) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. IF THE HOLDER OF THIS DEBENTURE WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF ANY SUCH TRANSFER, THE FOREGOING CONDITIONS MUST BE COMPLIED WITH REGARDLESS OF WHEN SUCH TRANSFER IS MADE. NO HEDGING TRANSACTIONS INVOLVING THIS DEBENTURE OR THE SHARES MAY BE CONDUCTED, UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE U.S. INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED. FIBERCHEM, INC. 12% SENIOR CONVERTIBLE DEBENTURES DUE 2002 GLOBAL DEBENTURE FiberChem, Inc., a Delaware corporation (hereinafter, the "Issuer," which term includes any successor corporation under the Trust Indenture hereinafter referred to), for value received, hereby promises to pay to bearer upon presentation and surrender of this Global Debenture (the "Global Debenture") the principal sum of [_______________] United States Dollars (U.S. $[_____________]) (the "Principal Amount") on July 26, 2002, and, to pay interest thereon from the date hereof, semi-annually in arrears on December 1 and June 1 in each year, commencing December 1, 2000, at the rate of 12% per annum, calculated on the basis of a 360-day year consisting of twelve 30-day months, until the principal hereof is paid or payment thereof is duly provided for; provided, however, that the Principal Amount payable upon presentation and surrender may be reduced from time to time in connection with conversions, redemptions, purchase and cancellations and similar events described in the Trust Indenture (as defined below), and such reductions shall be duly noted on Schedule A hereto (which is incorporated herein by this reference as if set out in full); and provided further that interest accruing after the date of a reduction in Principal Amount shall be calculated with reference to the new Principal Amount. This Global Debenture is one of a duly authorized issue of debentures designated as the 12% Senior Convertible Debentures Due 2002 (the "Debentures") of the Issuer issued and to be issued under the Trust Indenture dated as of July 28, 2000 (herein called the "Trust Indenture"), between the Issuer and The Bank of New York, as Trustee. It is a permanent security and is exchangeable in whole for definitive Bearer Debentures in bearer form, with interest coupons attached, upon the events specified in the Trust Indenture. Until exchanged in full for the definitive Bearer Debentures, this Global Debenture shall in all respects be ratably entitled to the same benefits under, and subject to the same Terms and Conditions of, the Trust Indenture as definitive Bearer Debentures authenticated and delivered thereunder. This Global Debenture, the definitive bearer Debentures and the Trust Indenture shall be governed by and construed in accordance with the laws of the State of New York. All terms used in this Global Debenture which are defined in the Trust Indenture shall have the respective meanings assigned to them in the Trust Indenture. Unless the certificate of authentication hereon has been executed by the Trustee or on behalf of the Trustee by the Authenticating Agent by manual signature of one of its authorized signatories, this Global Debenture shall not be entitled to any benefit under the Trust Indenture and shall not be valid or obligatory for any purpose. TERMS AND CONDITIONS OF THE DEBENTURES 1. FORM, DENOMINATION AND TITLE (A) The Debentures, which will initially be sold only outside the United States pursuant to Regulation S under the U.S. Securities Act of 1933, as amended (the "Securities Act"), will be in the form of a global bearer debenture without interest coupons (the "Global Debenture"), on deposit with The Bank of New York as common depository (the "Common Depository") and held on behalf of Morgan Guaranty Trust Company of New York, Brussels office, as operator of the 23 Euroclear System ("Euroclear") and Clearstream, societe anonyme ("Clearstream") and credited to accounts designated by the Debentureholders, in principal amounts of U.S. $1,000 or integral multiples thereof. As provided in the Trust Indenture, under limited circumstances the Debentures may be issued in definitive bearer form ("Definitive Bearer Debentures"), serially numbered, in denominations of U.S. $1,000, $5,000 and $10,000 each with interest coupons ("Coupons") attached on issue. (B) Title to the Global Debenture will pass by transfer as described in the Trust Indenture. Title to the Definitive Bearer Debentures and to the Coupons will pass by delivery. The Company, any Paying Agent and the Trustee may (to the fullest extent permitted by applicable laws) deem and treat the holder of any Definitive Bearer Debenture and the holder of any Coupon as the absolute owner thereof for all purposes (whether or not the Definitive Bearer Debenture or Coupon shall be overdue and notwithstanding any notice of ownership or writing on the Definitive Bearer Debenture or Coupon or any notice of previous loss or theft of the Definitive Bearer Debenture or Coupon). "Debentureholder" and "Holder" means the bearer of any Definitive Bearer Debenture or Coupon (as the case may be) or beneficial owner of an interest in the Global Debenture. In addition to other legends required by the Securities Act, the Debentures and any Coupons will bear the following legend: "Any United States person who holds this obligation will be subject to limitations under the U.S. income tax laws, including the limitations provided in Sections 165(j) and 1287(a) of the United States Internal Revenue Code of 1986, as amended." 2. STATUS The Debentures and any Coupons are direct, unconditional and unsecured obligations of the Company and rank and will rank junior to certain Secured Senior Indebtedness, PARI PASSU, without any preference among themselves and with any Designated Indebtedness. The Debentures and any Coupons will rank senior to all other future Indebtedness of the Company, except to the extent of Permitted Liens securing Indebtedness. The Debentures will not be secured by any assets or properties of the Company. "Secured Senior Indebtedness" is limited to Indebtedness incurred pursuant to that certain Accounts Receivable Purchase Agreement dated July 7, 2000, with Silicon Valley Financial Services, which Indebtedness may not at any time exceed $1,000,000. "Designated Senior Indebtedness", "Permitted Subsidiary Indebtedness" and "Permitted Liens" are defined in the Trust Indenture. 3. COVENANTS Some, but not all, of the covenants contained in the Trust Indenture are as follows: (A) The Company will not merge or consolidate with or sell, convey or otherwise dispose of all, or substantially all of its assets substantially as an entirety to any Person, unless: (i) either (a) the Company shall be the surviving Person or (b) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquired by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety (1) shall be a Person organised and validly existing under the laws of the United States of America, any state thereof, or the District of Columbia and (2) shall expressly assume, by a trust indenture supplemental thereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the Company's obligation for the due and punctual payment of the principal of and interest on all the Debentures and the performance and observance of every covenant of the Trust Indenture on the part of the Company to be performed or observed; (ii) immediately after giving effect to such transaction (and treating any 24 Indebtedness which becomes an obligation of the Company in connection with or as a result of such transaction as having been incurred at the time of such transaction), no Default or Event of Default shall have occurred and be continuing; and (iii) the Company or such Person shall have delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture complies with Article Nine of the Trust Indenture and that all conditions precedent therein provided for relating to such transaction have been complied with. (B) Upon any consolidation of the Company with or merger of the Company with or into any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety to any Person in accordance with Section 8.01 of the Trust Indenture, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Trust Indenture with the same effect as if such successor Person had been named as the Company herein and therein, and in the event of any such conveyance or transfer, the Company, except in the case of a lease, shall be discharged of all obligations and covenants under the Trust Indenture and the Debentures and the Company may be dissolved and liquidated. (C) The Company will not create, incur, assume, guarantee or in any other manner become directly or indirectly liable for the payment of any Indebtedness that will rank (i) except for Secured Senior Indebtedness, senior in right of payment to the Debentures and any Coupons or (ii) except for Designated Indebtedness, PARI PASSU with the Debentures and Coupons, except to the extent of Permitted Liens securing Indebtedness. The Company will not permit any of its Subsidiaries to create, incur, assume, guarantee or in any other manner become directly or indirectly liable for the payment of any Indebtedness other than Permitted Subsidiary Indebtedness. (D) Except for Permitted Liens, the Company will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist, any Lien of any kind upon any properties of the Company or any of its Subsidiaries securing any Indebtedness (whether by agreement, by operation of law, or structurally by virtue of the identity of the obligor), unless the Debentures are equally and ratably secured or rank senior and prior in all respects to the Indebtedness secured by such Lien. 4. INTEREST The Debentures bear interest from (and including) the Issue Date, at the rate of 12% per annum, payable in cash semi-annually in arrears on December 1 and June 1, in each year (each an "Interest Payment Date"), the first such payment to be made on December 1, 2000, in respect of the period from (and including) the Issue Date to (but excluding) December 1, 2000. There will be a short first coupon for the period from (and including) the Issue Date, to (but excluding) December 1, 2000, which will equal U.S. $42.00 per U.S. $1,000 principal amount of the Debentures. Payments of interest will equal U.S. $60.00 per U.S. $1,000 principal amount of the Debentures for each subsequent Interest Payment Date. Interest shall accrue on amounts in default at the Default Rate. Each Debenture will cease to bear interest (i) from its due date for redemption, or (ii) where the Conversion Right shall have been exercised by the Debentureholders or the Company elects to cause a Mandatory Conversion, from the Conversion Date, unless as to any of the foregoing upon due presentation, payment of the principal and interest in respect of the Debenture is improperly withheld or refused, the Conversion Shares are not timely issued or unless Default is otherwise made in respect of such payment, in which event interest shall continue to accrue at the Default Rate as provided in the Trust 25 Indenture. When interest is required to be calculated in respect of a period of less than a full year, it shall be calculated on the basis of a 360 day year consisting of twelve (12) months of thirty (30) days each and, in the case of an incomplete month, the number of days elapsed. 5. PAYMENTS AND PAYING AGENTS (A) All payments of principal and interest shall be made in U.S. dollars. Payment of principal in respect of each Debenture will only be made (i) in the case of the Global Debenture, to the Principal Paying Agent for distribution to the Debentureholders in accordance with the terms of the Paying and Conversion Agreement and the practices of Euroclear and Clearstream, or (ii) in the case of Definitive Bearer Debentures, against presentation and surrender (or, in the case of part payment only, endorsement), of the relevant Definitive Bearer Debenture at the specified office of any of the Paying Agents. Payments of interest due on the Definitive Bearer Debentures on an Interest Payment Date will be made against presentation and surrender (or, in the case of part payment only, endorsement) of the relevant Coupons, at the specified office of any of the Paying Agents or, in the case of the Global Debenture, to the Principal Paying Agent for distribution to the Debentureholders in accordance with the terms of the Paying and Conversion Agreement and the practices of Euroclear and Clearstream. Payments of additional interest will be made upon presentation of a Definitive Bearer Debenture to a Paying Agent, which Debenture will be stamped to reflect such payment, or in the case of the Global Debenture, to the Principal Paying Agent for distribution to the Debentureholders in accordance with the terms of the Paying and Conversion Agreement and the practices of Euroclear and Clearstream. In the case of Definitive Bearer Debentures, all such payments will be made at the specified office of any Paying Agent, at the option of the holder, by U.S. dollar cheque, or by transfer to a U.S. dollar account maintained by the payee outside the U.S. and, in the case of the Global Debenture, by the Principal Paying Agent for distribution to the Debentureholders in accordance with the terms of the Paying and Conversion Agreement and the practices of Euroclear and Clearstream, subject in all cases to any applicable laws and regulations. (B) Upon redemption of the Global Debenture, payment shall be made to the Principal Paying Agent for distribution to the Debentureholders in accordance with the terms of the Paying and Conversion Agreement and the practices of Euroclear and Clearstream. Each Definitive Bearer Debenture should be presented for redemption together (if applicable) with all unmatured Coupons relating to such Debenture, failing which the full amount of any missing unmatured Coupon (or, in the case of payment not being made in full, that portion of the full amount of the missing unmatured Coupons which the amount so paid bears to the total amount due) will be deducted from the amount due for payment. Each amount so deducted will be paid in the manner described above against presentation and surrender (or, in the case of part payment only, endorsement) of such missing Coupons at any time before the expiration of ten years after the Relevant Date in respect of the Debenture (whether or not such Coupon would otherwise have become void pursuant to Condition 10 (Prescription)), or, if later, five years after the date on which such Coupon would have become due, but not thereafter. (C) The Company agrees that so long as any of the Debentures are outstanding, it will maintain (i) a Paying Agent in a western European city for payments on the Debentures, (ii) so long as the Debentures are listed on the Luxembourg Stock Exchange and the rules of such exchange so require, a Paying Agent and Conversion Agent in Luxembourg, (iii) Conversion Agents having specified offices in either London or New York and (iv) Paying Agents having specified offices in either London or New York. The Company has initially appointed The Bank of New York as Trustee, Principal Paying Agent, Principal Conversion Agent, Replacement Agent and Authenticating Agent, and Banque Internationale A Luxembourg, as Paying Agent and Conversion Agent. Subject to the foregoing and the terms of the Paying and Conversion Agreement and the Trust Indenture, the Company shall have the right to terminate any such appointments 26 and/or to appoint any other agents in such other places as it may deem appropriate upon notice in accordance with Condition 15 (Notices). All monies paid by the Company to the Principal Paying Agent for the payment of principal or interest on any Debenture which remain unclaimed at the end of two (2) years after the principal on such Debenture will have become due and payable will be repaid to the Company (and upon such repayment, the obligations of the Principal Paying Agent shall cease) and the Holder of such Debenture or any Coupon appertaining thereto will thereafter have only the rights of a creditor of the Company as described in the Trust Indenture or such rights as may be otherwise provided by applicable law. A Holder shall be entitled to present a Definitive Bearer Debenture or Coupon for payment only on a Presentation Date. "Presentation Date" means the date on which a Definitive Bearer Debenture is presented by a Debentureholder for payment of principal or a Coupon is presented by the Couponholder for payment of interest, as the case may be, or if such date is not a Business Day, the next date which is a Business Day. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is a day on which banking institutions in Luxembourg, the city of New York, New York, and London, England are not authorised or obligated by law, regulation or executive order to close. When making payments to Debentureholders or Couponholders, fractions of one cent will be rounded down to the nearest whole cent. 6. CONVERSION (A) CONVERSION PERIOD, CONVERSION RATIO AND PRICE (i) Debentureholders have the right, subject as provided herein and to any applicable laws and regulations, to require the Company to convert all or any of their Debentures at their principal amount into shares (the "Conversion Shares") of common stock of the Company, U.S. $.0001 par value per share ("Common Stock") at any time during the Conversion Period referred to below. Upon conversion, the right of the converting Debentureholder to repayment of the principal amount of the Debenture to be converted shall be extinguished and released, and in consideration and in exchange therefor the Company shall allot and issue Conversion Shares credited as paid up in full as provided in this Condition 6. Subject to and upon compliance with the provisions of these Conditions, the Conversion Right attaching to any Debenture may be exercised, at any time after the Issue Date up to the close of business on the day two Business Days prior to the Maturity Date (but in no event thereafter) or, if such Debenture shall have been called for redemption pursuant to Condition 7(A) on the date up to and including two (2) Business Days prior to the date fixed for redemption thereof (the "Conversion Period"). The number of Conversion Shares to be issued on conversion of a Debenture will be determined by dividing the principal amount of the Debenture to be converted by the Conversion Price (as defined below) in effect on the Conversion Date, with the result being rounded down to the nearest whole number. In addition, upon the conversion of any Debentures, a Debentureholder will also be entitled to receive an additional number of Conversion Shares calculated in accordance with Condition 6 (G). (ii) If more than one Debenture is converted at any one time by the same Holder, the number of Conversion 27 Shares to be issued upon such conversion will be calculated on the basis of the aggregate principal amount of the Debentures to be converted. Fractions of Conversion Shares will not be issued on conversion and no cash adjustments will be made in respect thereof. (iii) The price at which Conversion Shares will be issued upon conversion (the "Conversion Price") will initially be the lesser of (i) U.S. $0.30 per Conversion Share or (ii) the Adjusted Market Price, but such Conversion Price will be subject to adjustment in the manner provided in Conditions 6(C) and 6(F). The "Adjusted Market Price" shall equal 92% of the average of the Market Price of the Common Stock for the 20 consecutive Stock Exchange Business Days ending two Stock Exchange Business Days prior to the Conversion Date. "Market Price" shall be the closing bid price on the OTC for the Common Stock on the relevant Stock Exchange Business Day; provided, however, if the Common Stock is traded on an Alternative Stock Exchange then the "Market Price" shall be the closing bid price of the Common Stock on such Alternative Stock Exchange on any Stock Exchange Business Day. Notice of any adjustment of the Conversion Price shall be given in accordance with Condition 15 within ten (10) Business Days of such adjustment. (iv) Notwithstanding the provisions of paragraph (i) of this Condition 6(A), if the Company shall default in making payment in full in respect of any Debenture which shall have been called for redemption prior to the Maturity Date, then from the Redemption Date, interest shall continue to accrue on such Debenture at the Default Rate and the Conversion Right attaching to such Debenture will continue to be exercisable up to, and including the close of business (at the place where the Debenture is deposited in connection with the exercise of the Conversion Right) on the date upon which the full amount of the monies payable in respect of such Debenture has been duly received by the Trustee or the Principal Paying Agent. (v) A Conversion Right may only be exercised in respect of an Authorised Denomination. (B) PROCEDURE FOR CONVERSION (i) To exercise the Conversion Right attaching to any Definitive Bearer Debenture, the Holder thereof must complete, execute and deposit at his own expense during normal business hours at the specified office of the Principal Conversion Agent or any of the other Conversion Agents, a notice of conversion (a "Conversion Notice") in the form for the time being currently obtainable from the office of each Conversion Agent specified in the Agency Agreement, together with the relevant Definitive Bearer Debenture and any amount to be paid by the Debentureholder pursuant to this Condition 6(B)(i). The holder of a beneficial interest in the Global Debenture need only provide a Conversion Notice and arrange for the delivery to a Conversion Agent of the beneficial interest being converted as provided in clause (ii) below. Such Conversion Notice shall be in the form attached to the Indenture and shall be provided by any Conversion Agent upon request. The Conversion Date must fall at a time when the Conversion Right attaching to that Debenture is expressed in these Conditions to be exercisable and will be deemed to be the date of the surrender of the Definitive Bearer Debenture (if applicable) and/or the delivery of such Conversion Notice and, if applicable, any payment to be made or indemnity given under these Conditions in connection with the exercise of such Conversion Right. A Conversion Notice once delivered shall be irrevocable. Upon any conversion of a Debenture into Conversion Shares, the Company shall pay any taxes and capital, stamp, issue and registration duties arising on conversion and duties payable in the U.S. or, if applicable, in the place of any 28 Alternative Stock Exchange, as the case may be, and the Debentureholder delivering a Debenture for conversion must pay any taxes and capital, stamp, issue and registration duties arising on conversion and duties payable to an entity located outside the U.S. or in the place of any Alternative Stock Exchange outside the U.S. The foregoing shall not apply to taxes in connection with any transfer of ownership of a Debenture. "Alternative Stock Exchange" means, other than OTC, any national or regional stock exchange or quotation service such as the Nasdaq National Market System or any similar quotation service, as may be agreed between the Company and the Lead Manager. Any Alternative Stock Exchange selected must be recognised by the Luxembourg Exchange otherwise the Debentures may be delisted from the Luxembourg Exchange. (ii) As soon as practicable, and in any event not later than three (3) Stock Exchange Business Days after either the Company's receipt of a completed Conversion Notice or, if conversion is occurring as a result of a mandatory conversion, the Conversion Date, the Company will cause the person or persons designated for that purpose in the Conversion Notice or otherwise to be registered as holder(s) of the relevant number of Conversion Shares, which will include any Conversion Shares issued in accordance with Condition 6(G), and will make a certificate or certificates for the relevant Conversion Shares available for collection at the Company's principal office which is currently in Las Vegas, Nevada or at the Company's transfer agent in Denver, Colorado, or, if so requested in the relevant Conversion Notice, will deliver such certificate or certificates to the person at the place specified in the Conversion Notice, at the risk of the Debentureholder, together with any other securities, property or cash required to be delivered upon conversion and such assignments and other documents (if any) as may be required by law to effect the transfer thereof. If the Company fails to timely satisfy its obligations as provided in this Condition 6(B)(ii), then within two Stock Exchange Business Days after the expiration of such 3 day period, the Company shall pay to the Debentureholder(s) entitled to Conversion Shares a cash payment equal to 1% of the principal amount of Debentures being converted. An additional 1% cash payment will be paid for each additional three (3) day period commencing after the expiration of the relevant 3 day period during which the Company has not complied with its obligations as provided in this condition 6(B)(ii). (iii) The person or persons specified for that purpose will be deemed for all purposes to be the holder of record of the number of Conversion Shares issuable upon conversion with effect from the Conversion Date. The Conversion Shares issued upon conversion of the Debentures will in all respects rank pari passu with the issued and outstanding shares of Common Stock issued on the relevant Conversion Date except for any right excluded by mandatory provisions of applicable law. A holder of Conversion Shares issued on conversion of Debentures shall not be entitled to any shareholder rights for any record date which precedes the relevant Conversion Date. (iv) Subject to Condition 4, all accrued and unpaid interest due upon the conversion of the Debentures (whether as a result of an election by the Debentureholder, or the Company pursuant to its right to cause Mandatory Conversion) shall be paid to or on behalf of the Debentureholder by the Company not later than fourteen (14) calendar days after the relevant Conversion Date by a U.S. dollar cheque, or by transfer to a U.S. dollar account maintained by the payee in accordance with instructions given by the relevant Debentureholder. (v) The Conversion Shares shall be traded on the OTC but shall not be listed on the Luxembourg Stock Exchange. (C) ADJUSTMENTS IN CONVERSION PRICE 29 As provided in the Trust Indenture, the Conversion Price is subject to adjustment upon the occurrence of certain events, including: (i) stock dividends and certain other distributions; (ii) the subdivision, combination or reclassification of outstanding shares of Common Stock; (iii) the issuance to all stockholders of the Company of rights or warrants to acquire shares of Common Stock at a price less than the Market Price for the Common Stock; (iv) the issuance of Common Stock at a price less than the Market Price, other than issuances pursuant to conversion of the Debentures, any issuances pursuant to the conversion of issued and outstanding preferred stock (including conversions related to FiberChem's outstanding preferred stock even if the conversion ratio of such stock is increased from 10 to 1 to 75 to 1), and the conversion or exercise of all other currently outstanding options, warrants, or outstanding indebtedness of the Company, or any warrants issued pursuant to the Offering or in connection with any plan adopted by the Company for the purchase of stock in connection with any employee compensation or benefit plan of the Company or any of its Subsidiaries, whether now in effect or hereafter created or amended; and (v) the distribution to all holders of Common Stock or debt securities of the Company or of assets or rights or warrants to purchase securities of the Company (excluding those rights and warrants referred to above and cash dividends or distributions from current or retained earnings). The Company may at any time or from time to time reduce the Conversion Price temporarily or permanently as to all or any Debentures outstanding. The Company shall cause written notice of any adjustment to the Conversion Price of all the Debentures pursuant to this Condition 6(C) to be given to the Trustee, the Paying Agents, the Conversion Agents and the Holders of the Debentures in accordance with Section 1.08 of the Trust Indenture, and will publish such notice in two (2) Authorised Newspapers, one of which is required to be a general leading daily newspaper in Luxembourg, which is expected to be the LUXEMBURGER WORT. The Company will notify the Luxembourg Stock Exchange upon any adjustment to the Conversion Price of all the Debentures. No adjustment will be made where such adjustment would be less than five percent (5%) of the Conversion Price then in effect. Any adjustment not so made will be carried forward and taken into account in any subsequent adjustment. On any adjustment, the resultant Conversion Price, if not an integral multiple of one cent shall be rounded up to the nearest one cent. The Conversion Price may not be reduced so that, on conversion of Debentures, Conversion Shares would be issued for an amount less than their current par value. Where more than one event which gives or may give rise to an adjustment to the Conversion Price occurs within such a short period of time that in the reasonable opinion of the Company's Board of Directors the foregoing provisions would need to be operated subject to some modification in order to give the intended result, such modification shall be made to the operation of the foregoing provisions as may be advised by the Board of Directors to be in their reasonable opinion appropriate in order to give such intended result. (D) CONSOLIDATION, AMALGAMATION OR MERGER In the case of any consolidation, amalgamation or merger of the Company with any other Person (other than a consolidation, amalgamation or merger in which the Company is the continuing Person), or in the case of any sale or transfer of all, or substantially all, of the assets of the Company, the Company will forthwith notify the Luxembourg Stock Exchange in accordance with its applicable requirements and the Debentureholders of such event in accordance with Section 1.08 of the Trust Indenture and (so far as legally possible) cause the Person resulting from such consolidation, amalgamation or merger or the Person which shall have acquired such assets, as the case may be, to execute a trust indenture supplemental to the Trust Indenture to ensure that the Holder of each outstanding Debenture will have the right (during the period in which such Debenture shall be convertible) to convert such Debenture into the class and amount of shares of Common Stock and other 30 securities and property receivable upon such consolidation, amalgamation, merger, sale or transfer by a Holder of the number of shares of Common Stock which would have become liable to be issued upon conversion of such Debenture immediately prior to such consolidation, amalgamation, merger, sale or transfer. Such supplemental trust indenture will provide for adjustments which will be as nearly equivalent as may be practicable to the adjustments provided for in the foregoing provisions of this Condition. The above provisions of this Condition 6(D) will apply in the same way to any subsequent consolidations, amalgamations, mergers, sales or transfers. (E) MANDATORY CONVERSION At any time after the Company has complied with its registration obligations as provided for in the Registration Rights Agreement, provided the average Market Price of the Common Stock during any twenty (20) consecutive trading day period and on the date the conversion notice is sent is equal to or greater than $0.42, the Company may at its option elect within thirty (30) days of having satisfied the foregoing criteria, to cause the Debentures to be converted, in whole but not in part, into Conversion Shares at the then applicable Conversion Price. The Debentureholders shall be notified of such election by being given not less than twenty (20) calendar days' notice to the Debentureholders in accordance with Section 1.08 of the Trust Indenture (which notice shall be irrevocable) by publication in two (2) Authorised Newspapers, one of which is required to be a general leading daily newspaper in Luxembourg, which is expected to be the LUXEMBURGER WORT. Upon any such mandatory conversion, payment will be made by the Company for all interest accrued prior to the Conversion Date. The Company shall notify the Luxembourg Stock Exchange of any such mandatory conversion and confirm that all such Debentures have been converted. (F) REGISTRATION RIGHTS (i) Pursuant to the Registration Rights Agreement (the "Registration Rights Agreement") dated as of July 28, 2000, by and among the Company and the Trustee for the benefit of the Debentureholders, the Company has agreed to file a registration statement with the U.S. Securities and Exchange Commission (the "Commission") in respect of the resale of the Conversion Shares. In accordance with the terms and conditions of the Registration Rights Agreement, the Company will (i) use its best efforts to cause the Commission to declare effective the registration statement contemplated in the foregoing sentence within three months of the Issue Date and (ii) use its best efforts to maintain the effectiveness of such registration statement until all Conversion Shares that may be issued have been issued. In the event that the Commission does not declare such registration statement effective within four months of the Issue Date, holders of the Debentures will be entitled to convert their Debentures at a discount (the "Registration Default Discount") of 2% from the then applicable Conversion Price and thereafter, commencing on the fifth month from the Issue Date, an additional 5% discount for each month or portion thereof that the registration statement is not declared effective. The Registration Default Discount shall be permanent and shall not be affected by the subsequent effectiveness of the registration statement. All discounts under this Condition 6(F) will be in addition to, and not in lieu of, any other discounts or adjustments applicable to the Conversion Price under the terms of the Debentures. (ii) In addition, if prior to the date the Company satisfies its obligations under the Registration Rights Agreement and for a period of 60 days after it satisfies such obligations, the Company issues any Common Stock or Common Stock Equivalents at a price or having a conversion price less than the then applicable Conversion Price, the applicable Conversion Price shall be adjusted downward only to equal 95% of the price or conversion price attributable to the Common Stock or Common Stock Equivalents. To the extent any issuance of securities causes an adjustment under this Condition 6(F)(ii) and could also provide for an adjustment under Condition 6(C), the only adjustment resulting from such issuance 31 shall occur solely under this Condition 6(F)(ii). (G) Upon the conversion of any Debentures, either upon the election of the Debentureholder or the Company, the Debentureholders will be entitled to receive, at no additional cost, an additional number of Conversion Shares equal to the product of (i) the number of Conversion Shares being issued to such Debentureholder multiplied by (ii) 0.26. The additional shares issued in accordance with this Condition 6(G) will be part of the total number of Conversion Shares to be issued and will be included in the certificate delivered in accordance with Condition 6(B)(ii) above. (H) As provided in the Debentures, the Conversion Price is subject to reduction in a number of different circumstances. The Conversion Price to be used in connection with the conversion of any Debentures will be calculated on the applicable date as follows. The initial Conversion Price will first be calculated using the formula set out in Condition 6(A)(iii). Thereafter, the Conversion Price shall be adjusted downward to give effect to any reductions as provided for in Conditions 6(C) and 6(F), with each such reduction given full effect before the next adjustment is applied. At the request of any Debentureholder or the Lead Manager, the Company shall promptly provide the requesting party with a calculation of the current applicable Conversion Price. Such calculation shall be sent to the requesting Debentureholder by means of a certificate signed by the Company's Chief Financial Officer setting forth the adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based. 7. REDEMPTION AND PURCHASE (A) Unless previously redeemed, converted or purchased and canceled as provided herein, the Company will redeem the Debentures at their principal amount on July 26, 2002; PROVIDED, HOWEVER, that at any time on giving notice in accordance with Condition 15 and the procedures set out in the Trust Indenture, the Company may redeem all of the Debentures outstanding at such time at their principal amount, together with interest accrued to the Redemption Date, in the event that prior to the date of such notice, Conversion Rights shall have been exercised and/or purchases (and corresponding cancellations) have been effected in respect of eighty-five percent (85%) or more in principal amount of the Debentures. The Company shall notify the Luxembourg Stock Exchange upon any such redemption. (B) Subject to applicable law, the Company or any of its Subsidiaries may at any time purchase Debentures together, in the case of Definitive Bearer Debentures, with unmatured Coupons in any manner and at any price in the open market or by private treaty. If purchases are made by tender, tenders must be available to all Debentureholders alike. Debentures purchased by the Company or any of its Subsidiaries will forthwith be surrendered for cancellation and shall no longer be deemed Outstanding. (C) All Debentures that are redeemed by the Company will forthwith be canceled (together with all related unmatured Coupons attached to or surrendered with the Debentures) and may not be reissued or resold. 8. TAXATION All payments in respect of the Debentures by the Company shall be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature ("Taxes") imposed or levied by or on behalf of the U.S. or any political sub-division of, or any authority in, or of, the U.S. having power to tax, unless the withholding or deduction of the Taxes is required by law. In that event, the Company will pay such 32 additional amounts as may be necessary in order that the net amounts received by the Debentureholders and Couponholders after the withholding or deduction shall equal the respective amounts which would have been receivable in respect of the Debentures or, as the case may be, Coupons in the absence of the withholding or deduction; except that no additional amounts shall be payable in relation to any payment in respect of any Debenture or Coupon: (A) to, or to a third party on behalf of, a Holder who is liable for the Taxes in respect of the Debenture or Coupon by reason of such Holder having some connection with the U.S. other than the mere holding of the Debenture or Coupon or the receipt of payments made in connection therewith; or (B) presented for payment more than thirty (30) calendar days after the Relevant Date except to the extent that a Holder would have been entitled to additional amounts on presenting the same for payment on the last day of such period of thirty (30) calendar days. Any reference in these Terms and Conditions to any amounts in respect of the Debentures shall be deemed also to refer to any additional amounts which may be payable under this Condition or under any undertakings given in addition to, or in substitution for, this Condition pursuant to the Trust Indenture. 9. ADDITIONAL COVENANTS While any Conversion Right remains exercisable, the Company will, save with the consent of the Holders as contemplated pursuant to Condition 16 or with the approval of the Trustee where, in its opinion, it is not materially prejudicial to the interests of the Debentureholders to give such approval: (A) at all times keep available for issuance free from any pre-emptive rights out of its authorised but unissued capital such number of Conversion Shares as would enable the Conversion Rights, the rights for additional shares as set forth in Condition 6(G), and all other rights of subscription and exchange for and conversion into Conversion Shares to be satisfied in full; (B) maintain a quotation for all the issued Conversion Shares on OTC, it being understood that if the Company is unable to obtain or maintain such quotation of Conversion Shares, to obtain and maintain a listing or quotation for all the Conversion Shares issued on the exercise of the Conversion Rights on such Alternative Stock Exchange as the Company may from time to time with the written consent of the Lead Manager determine and will forthwith give notice to the Debentureholders in accordance with Section 1.08 of the Trust Indenture of the listing, de-listing or quotation or lack of quotation of the Conversion Shares (as a class) by any such Alternative Stock Exchange; (C) use all reasonable efforts to maintain a listing of the Debentures on the Luxembourg Stock Exchange or an Alternative Stock Exchange; and (D) not adopt any amendment to its Certificate of Incorporation that would modify the rights attaching to the Common Stock. 10. PRESCRIPTION Debentures and Coupons will become void unless presented for payment within periods of ten (10) years (in the case 33 of principal) and five (5) years (in the case of interest) from the Relevant Date in respect of the Debentures or the Coupons, as the case may be, subject to the provisions of Condition 5. 11. EVENTS OF DEFAULT The Trustee at its discretion may, and if so requested in writing by the Holders of at least one-quarter in principal amount of the Debentures then outstanding or if so directed by an Extraordinary Resolution of the Debentureholders shall give notice to the Company that the Debentures are, and they shall accordingly thereby forthwith become, immediately due and payable at their principal amount together with accrued interest (as provided in the Trust Indenture) if any of the following events (each an "Event of Default") shall have occurred (unless (i) such events are expressly permitted or contemplated by the Trust Indenture or (ii) such Event of Default has been remedied to the satisfaction of the Trustee): (A) if the Company defaults in the payment of the principal of (or premium, if any, on) any Debenture as and when it shall become due and payable at its Maturity, upon redemption, by declaration or otherwise; or (B) if the Company defaults in the payment of any interest upon any Debenture, or any related Coupon, when such interest or Coupon becomes due and payable, and the continuance of such default for a period of 5 days; or (C) if the Company fails to perform or observe any of its other obligations, covenants, conditions or provisions under the Debentures or the Trust Indenture and (except where the Trustee shall have certified to the Company in writing that it considers such failure to be incapable of remedy in which case no such notice or continuation as is hereinafter mentioned will be required) such failure continues for the period of thirty (30) calendar days (or such longer period as the Trustee may in its absolute discretion permit) next following the service by the Trustee on the Company of notice requiring the same to be remedied; or (D) if (i) any other Indebtedness of the Company or any Subsidiary becomes due and payable prior to its Stated Maturity by reason of an event of default (howsoever described) or (ii) any such Indebtedness of the Company or any Subsidiary is not paid when due or, as the case may be, within any applicable grace period or (iii) the Company or any Subsidiary fails to pay when due (or, as the case may be, within any applicable grace period) any amount payable by it under any present or future guarantee for, or indemnity in respect of, any Indebtedness of any Person or (iv) any security given by the Company or any Subsidiary for any Indebtedness of any Person or any guaranty or indemnity of Indebtedness of any Person by the Company or any Subsidiary becomes enforceable by reason of default in relation thereto and steps are taken to enforce such security save in any such case where there is a bona fide dispute as to whether the relevant Indebtedness or any such guarantee or indemnity as aforesaid shall be due and payable, provided that in each such case the Indebtedness exceeds in the aggregate U.S. $250,000 and in each case such event continues unremedied for a period of thirty (30) calendar days (or such longer period as the Trustee may in its absolute discretion permit); or (E) if the Company or any Subsidiary shall generally fail to pay its debts as such debts become due (except debts which the Company or such Subsidiary, as the case may be, may contest in good faith generally) or shall be declared or adjudicated by a competent court to be insolvent or bankrupt, consents to the entry of an order of relief against it in an involuntary bankruptcy case, shall enter into any assignment or other similar arrangement for the benefit of its creditors or consents to the appointment of a custodian (including, without limitation, a receiver, liquidator or trustee); or (F) if a receiver, administrative receiver, administrator or other similar official shall be appointed in relation to 34 the Company or any Subsidiary or in relation to the whole or a substantial part of the undertaking or assets of any of them or a distress, execution or other process shall be levied or enforced upon or sued out against, or an encumbrancer shall take possession of, the whole or a substantial part of the assets of any of them and in any of the foregoing cases is not paid out or discharged within ninety (90) calendar days (or such longer period as the Trustee may in its absolute discretion consent to in writing upon receipt of written notice from the Company); or (G) if the Company or any Subsidiary institutes proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganisation under the laws of the Federal Bankruptcy Code or any similar applicable U.S. federal, state or foreign law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of it or its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they come due; or (H) if a decree or order by a court having jurisdiction in the premises shall have been entered adjudging the Company or any Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking the reorganisation of the Company or any Subsidiary under the Federal Bankruptcy Code or any other similar applicable U.S. federal, state or foreign law, and such decree or order shall have continued undischarged or unstayed for a period of ninety (90) calendar days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of the Company or any Subsidiary or of all or substantially all of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of ninety (90) calendar days; or (I) if a warranty, representation or other statement made by or on behalf of the Company contained in the Trust Indenture, the Debentures or any certificate or other agreement furnished in compliance with such documents is false in any material respect when made and (except where the Trustee shall have certified to the Company that it considers such falsity to be incapable of remedy; in which case no such notice or continuation as is hereinafter mentioned will be required) such falsity continues for a period of thirty (30) calendar days (or such longer period as the Trustee may in its absolute discretion permit) next following the service by the Trustee on the Company of notice requiring the same to be remedied; or (J) if there is any final judgment or judgments for the payment of money exceeding in the aggregate U.S.$250,000 outstanding against the Company or any Subsidiary which has been outstanding for more than sixty (60) calendar days from the date of its entry and shall not have otherwise been discharged in full or stayed by appeal, bond or otherwise. 12. ENFORCEMENT The Trustee may at any time, at its discretion and with prior written notice to the Company take such proceedings against the Company as it may think fit to enforce the provisions of the Trust Indenture, the Debentures and the Coupons but it shall not be bound to take any proceedings or any other action in relation to the Trust Indenture, the Debentures or the Coupons unless (a) it shall have been so directed by an Extraordinary Resolution of the Debentureholders or so requested in writing by the Holders of at least one- quarter in principal amount of the outstanding Debentures, and (b) it shall have been indemnified to its satisfaction. No Debentureholder or Couponholder shall be entitled to proceed directly against the Company unless the Trustee, having become bound so to proceed, fails so to do within a reasonable period and such failure shall be continuing. 35 13. SUBSTITUTION The Trustee may, without the consent of the Debentureholders or Couponholders, agree with the Company to the substitution in place of the Company (or of any previous substitute under this Condition) as the principal debtor under the Debentures, the Coupons and the Trust Indenture of any Subsidiary or holding company (being a corporation holding (directly or indirectly) at least a majority of Conversion Shares having by the terms thereof ordinary voting power to elect a majority of the Board of Directors (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency)) of the Company or any Subsidiary of such holding company, subject to (a) the Trustee being satisfied that the interests of the Debentureholders will not be materially prejudiced by the substitution and (b) certain other conditions set out in the Trust Indenture being complied with. 14. REPLACEMENT OF DEBENTURES AND COUPONS Should any Debenture or Coupon be lost, stolen, mutilated, defaced or destroyed, it may be replaced at the specified office of the Replacement Agent, upon payment by the claimant of the expenses incurred in connection with the replacement and on such terms as to evidence indemnity and security as the Company and the Trustee may reasonably require. Mutilated or defaced Debentures or Coupons must be surrendered before replacements will be issued. 15. NOTICES (A) Notices to all the Debentureholders will be valid if published in two (2) Authorised Newspapers as provided in Section 1.08 of the Trust Indenture, one of which must be a newspaper of general circulation in Luxembourg, for so long as the Debentures are listed on the Luxembourg Stock Exchange (which is expected to be the LUXEMBURGER WORT) and the other is expected to be the FINANCIAL TIMES EUROPEAN EDITION. Any notice shall be deemed to have been given on the date of publication or, if so published more than once, on the date of the first publication. If publication as provided above is not practicable, notice will be given in such other manner, and shall be deemed to have been given on such date, as the Trustee may approve. (B) Couponholders will be deemed for all purposes to have notice of the contents of any notice given to the Debentureholders in accordance with this Condition. 16. MEETINGS OF DEBENTUREHOLDERS, MODIFICATION, WAIVER AND AUTHORISATION (A) The Trust Indenture contains provisions for convening meetings of the Debentureholders to consider any matter affecting their interests, including the modification by Extraordinary Resolution of these Terms and Conditions or the provisions of the Trust Indenture. The quorum at any meeting, or at any adjourned such meeting, for passing an Extraordinary Resolution will be one or more Persons present holding or representing 25% in principal amount of the Outstanding Debentures, except that for certain of the provisions of the Terms and Conditions of the Debentures (including Condition 8) and certain of the provisions of the Trust Indenture, the necessary quorum and vote required for passing an Extraordinary Resolution will be one or more Persons present holding or representing not less than the percentage set out in the Trust Indenture. An Extraordinary Resolution passed at any meeting of the Debentureholders will be binding on all Debentureholders, whether or not they are present at the meeting, and on all Couponholders. 36 (B) As provided in the Trust Indenture, any action required by the Trust Indenture to be taken at any meeting may be taken without a meeting, if a consent or consents in writing setting forth the action so taken shall be signed by the Holders of the required percentage of the principal amount of the Outstanding Debentures that would be necessary to authorise or take such action at such meeting. (C) The Trust Indenture provides that, without the consent of each holder of an outstanding Debenture affected thereby, no amendment may, among other things, (i) change the Stated Maturity of the principal of, or any installment of principal of or interest on, any Debenture, (ii) reduce the principal amount or the rate of interest on any Debenture, (iii) impair the right of any Holder of the Debentures to receive payment of principal of and interest on such Holder's Debentures on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such Holder's Debentures, (iv) make any change in the amendment provisions that require each Holder's consent or in the waiver provisions, (v) make any change in the provisions restricting the ability of the Company to incur Indebtedness that is senior in right of payment to the Debentures, (vi) make any Debenture payable in money other than that stated in such Debenture, or (vii) make any change that adversely affects the rights of any Debentureholder or amends the terms of the Debentures or the Trust Indenture in a way that would result in the loss of an exemption from any of the Taxes described under Condition 8 above. (D) The Trust Indenture also provides that, without the consent of any Holder of the Debentures, the Company and the Trustee may amend the Trust Indenture to cure any ambiguity, omission, defect or inconsistency, to provide for the assumption by a successor corporation of the obligations of the Company under the Trust Indenture, to add guarantees with respect to the Debentures, to secure the Debentures, to add to the covenants of the Company for the benefit of the Holders of the Debentures or to surrender any right or power conferred upon the Company. (E) The consent of the Holders of the Debentures is not necessary to approve the particular form of any proposed amendment, modification or Supplemental Indenture. It is sufficient if such consent approves the substance of the proposed amendment, modification or Supplemental Indenture. (F) After any amendment or Supplemental Indenture to the Trust Indenture or Debentures becomes effective, the Company will provide the Holders of the Debentures with a notice describing such amendment or Supplemental Indenture. A copy of any such amendment or Supplemental Indenture shall also be delivered to the Luxembourg Stock Exchange. The failure to give such notice to all Holders of such Debentures, or any defect therein, will not impair or affect the validity of the amendment or Supplemental Indenture. (G) Any modification, waiver or authorisation shall be binding on the Debentureholders and the Couponholders and, unless the Trustee agrees otherwise, any modification shall be notified by the Company to the Debentureholders as soon as practicable thereafter in accordance with Condition 15 and Section 1.08 of the Trust Indenture. 17. DEFEASANCE The Company has the right to cause a legal defeasance or a covenant defeasance with respect to the Debentures, all as more fully set out in the Trust Indenture. 18. INDEMNIFICATION OF THE TRUSTEE 37 The Trust Indenture contains provisions for the indemnification of the Trustee and for its relief from responsibility, including provisions relieving it from taking action unless indemnified to its satisfaction. 19. GOVERNING LAW The Trust Indenture, the Agency Agreement, the Debentures and the Coupons are governed by, and will be construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the Issuer has caused this Global Debenture to be duly executed in its corporate name by the manual or facsimile signatures of the undersigned duly authorized officers of the Issuer. Dated as of July __, 2000. FIBERCHEM, INC. By: _____________________ Name: _____________________ Title _____________________ [Corporate Seal] ATTEST: By: ___________________ __________ Secretary TRUSTEE'S CERTIFICATE OF AUTHENTICATION This Global Debenture is one of the Debentures referred to in the within mentioned Trust Indenture. The Bank of New York as Trustee By: __________________________ Authorised Signatory 38 SCHEDULE A PRINCIPAL AMOUNT OF THIS GLOBAL DEBENTURE The aggregate principal amount of this Global Debenture is as shown by the latest entry made by or on behalf of the Principal Paying Agent in the fourth column below. Reductions in the outstanding principal amount of this Global Debenture following redemption, conversion into shares of Common Stock, or the purchase and cancellation of Debentures are entered in the second and third columns below.
__________________ _______________________ _________________ ______________________________ ________________________________________ NOTATION MADE BY OR ON REASON FOR OUTSTANDING BEHALF OF THE PRINCIPAL CHANGE IN THE PRINCIPAL AMOUNT OF THE PAYING AGENT (OTHER THAN IN OUTSTANDING AMOUNT GLOBAL DEBENTURE RESPECT OF THE INITIAL DATE PRINCIPAL AMOUNT OF SUCH FOLLOWING SUCH CHANGE PRINCIPAL AMOUNT OF THIS GLOBAL CHANGE DEBENTURE(7) __________________ _______________________ _________________ ______________________________ ________________________________________ [_______, Not applicable Not [$_________] Not applicable 2000] applicable __________________ _______________________ _________________ ______________________________ ________________________________________ __________________ _______________________ _________________ ______________________________ ________________________________________ __________________ _______________________ _________________ ______________________________ ________________________________________ __________________ _______________________ _________________ ______________________________ ________________________________________ __________________ _______________________ _________________ ______________________________ ________________________________________ __________________ _______________________ _________________ ______________________________ ________________________________________ __________________ _______________________ _________________ ______________________________ ________________________________________
---------------------- (7) State whether the reduction or adjustment results from (1) conversion of interests in the Debenture into shares of Common Stock, (2) partial redemption of the Debenture, or (3) the purchase and cancellation of interests in the Debenture. SCHEDULE B INTEREST PAYMENTS IN RESPECT OF THIS GLOBAL DEBENTURE The following payments of interest in respect of this Global Debenture have been made:
_______________________ __________________________ __________________________________ ___________________________________________ AMOUNT OF NOTATION MADE BY OR ON DATE MADE INTEREST DUE AND AMOUNT OF INTEREST PAID BEHALF OF THE PRINCIPAL PAYING PAYABLE AGENT _______________________ __________________________ __________________________________ ___________________________________________ _______________________ __________________________ __________________________________ ___________________________________________ _______________________ __________________________ __________________________________ ___________________________________________ _______________________ __________________________ __________________________________ ___________________________________________ _______________________ __________________________ __________________________________ ___________________________________________ _______________________ __________________________ __________________________________ ___________________________________________ _______________________ __________________________ __________________________________ ___________________________________________ _______________________ __________________________ __________________________________ ___________________________________________ _______________________ __________________________ __________________________________ ___________________________________________ _______________________ __________________________ __________________________________ ___________________________________________ _______________________ __________________________ __________________________________ ___________________________________________ _______________________ __________________________ __________________________________ ___________________________________________ _______________________ __________________________ __________________________________ ___________________________________________ _______________________ __________________________ __________________________________ ___________________________________________
EXHIBIT C ANNUAL REPORTING CERTIFICATE To: [Trustee] THAT, the undersigned duly elected and authorized Chief Financial Officer of FiberChem, Inc. a Delaware corporation (the "Company"), in compliance with the Trust Indenture dated as of [____________] (the "Indenture") does hereby certify that: (a) attached hereto is a copy of the Annual Report on Form 10-K for the fiscal year ending September 30,___________. (b) to the knowledge of the Company, no Default or Event of Default with respect to any of the Debentures has occurred and is continuing as of the date of this Certificate. (c) As of the date hereof, the Company is in compliance with the requirements of the Indenture and the Debentures. All terms used and not otherwise defined herein shall have their respective meanings as set forth in the Indenture. DATE: _______________ __________________ Chief Financial Officer EXHIBIT D DEBENTUREHOLDER'S CONVERSION NOTICE [___________________] DEBENTURES To: [Conversion Agent] The undersigned Holder of the12% Senior Debentures (the "Debentures") in the aggregate principal amount of U.S.$________________ tendered herewith hereby irrevocably exercises the option to convert such Debenture(s) into shares of Common Stock (this and other capitalised terms used but not defined herein have the meanings ascribed to such terms in the Trust Indenture dated as of [_____________], 2000 (the "Indenture")) in accordance with the terms of the Indenture and directs that the Conversion Shares issuable and deliverable upon such conversion be issued and delivered to the undersigned in the name and at the address set forth below. Provided the Conversion Shares are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act of 1933, as amended (the "Securities Act"), the undersigned Holder (and any Person to which the Conversion Shares are to be issued other than the undersigned Holder) hereby certifies to the Company that it: (1) either (i) is not a "U.S. person" (as defined in Regulation S under the United States Securities Act of 1933, as amended (the "Securities Act")), and is not acquiring the Conversion Shares for the account or benefit of any U.S. person or (ii) is acquiring the Conversion Shares in a transaction exempt from the registration requirements of the Securities Act provided by Rule 144 under the Securities Act if applicable; (2) acknowledges that the Conversion Shares have not been registered under the Securities Act and may not be offered or sold within the United States or to, or for the benefit of, U.S. persons except as permitted below; (3) understands and agrees that within two years after the date of original issuance of the Debentures or within three months after it ceases to be an affiliate (within the meaning of Rule 144 under the Securities Act) of the Company, the Conversion Shares may be resold, pledged or transferred only (i) to the Company, (ii) pursuant to offers and sales to non-U.S. persons that occur outside the United States in a transaction meeting the requirements of Rules 901 through 905 of Regulation S under the Securities Act, (iii) pursuant to an exemption from the registration requirements of the Securities Act provided by Rule 144 (if applicable) under the Securities Act, or (iv) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States; (4) understands and agrees that hedging transactions in the Conversion Shares are prohibited by Regulation S, unless permitted by the Securities Act; and (5) understands that the certificates representing the Conversion Shares will bear a restrictive legend describing the foregoing restrictions, unless otherwise agreed by the Company. If the Conversion Shares are to be issued in the name of a Person other than the undersigned, the undersigned Holder will pay all transfer taxes payable with respect thereto and is delivering herewith a certificate in proper form certifying that the applicable restrictions on transfer have been complied with. All terms used and not otherwise defined herein shall have the respective meanings set forth in the Indenture. DATE: _______________ ___________________________ Name of Holder ___________________________ Signature(s) of Holder Name(s) for Registration of Share Certificates (if different than Holder): ___________________________ ___________________________ Signature(s) of such Person Address for Delivery of Share Certificates ___________________________ ___________________________ ___________________________ ___________________________ EXHIBIT E DESIGNATED INDEBTEDNESS 1. 8% Senior Notes due February 15, 2002; $172,000 outstanding as of June 30 and July 27, 2000 2. Secured Senior Indebtedness as described in this Indenture; no balance outstanding as of June 30 and July 27, 2000. 3. Loans from Officers, Directors and Affiliates: Privatbank Vermag AG; five 8% Notes, $50,000 each; due July 15, 2002, extended to September 29, 2000 Walter Haemmerli; 9% Convertible Note due July 26, 2000; $50,000 G & G Diagnostics, LP II; 9% Convertible Note due July 26, 2002; $25,000 G & G Diagnostics, LP II; 9% Convertible Note due July 26, 2002; $25,000 Melvin W. Pelley; 9% Convertible Note due July 27, 2002; $25,000 Melvin W. Pelley; 9% Convertible Note due September 28, 2002; $40,000 Melvin W. Pelley; 12% Convertible Note due January 11, 2003; $200,000 4. Entrenet Group, LLC; 10% subordinated convertible note due April 11, 2001; $126,500; effective upon consummation of the Arrangement Agreement, July 27, 2000 5. Indebtedness incurred in connection with the issuance of the Convertible Preferred Stock of the Company, which Preferred Stock is more fully described in the Placing Agreement of even date herewith by and between the Company and the Agent. 6. $650,000 of Indebtedness reflected by that certain 12% Senior Convertible Note issued by the Company and dated on or about July 28, 2000. 7. Additional Indebtedness, which in the aggregate and when included with the Indebtedness represented by the Debentures, and the Indebtedness represented by the instruments referenced in paragraphs 5 and 6 above does not exceed $5 million, provided such additional Indebtedness has on the whole terms no more favorable to the holders of such Indebtedness as the terms of the Debentures or the Senior Convertible Note referenced in paragraph 6 above. Through August [14], such additional Indebtedness may only be placed using the assistance of the Agent or a Person approved in writing by Agent. EXHIBIT F PERMITTED SUBSIDIARY INDEBTEDNESS FCI ENVIRONMENTAL, INC.: Indebtedness under Accounts Receivable Purchase Agreement dated July 7, 1998, (Silicon Valley Bank) and any extension or renewal thereof. No balance outstanding as of June 30 and July 27, 2000. This Indebtedness is also referenced on Exhibit E as the Senior Secured Indebtedness Deutsche Financial Services; Financing lease agreement; telephone equipment at Carrollton, Texas; 48 monthly payments of $1,245.80 beginning May 2000 INTREX DATA COMMUNICATIONS CORP: Advances to and expenses paid on behalf of Intrex by Intrex officers, directors and affiliates; $360,985 at December 31, 1999. Harvard Property (Metrocrest) LP; Commercial lease agreement for facilities Carrollton, Texas; 24 monthly rental payments of $5,812.12 beginning April 2000 GLOBAL DEBENTURE NEITHER THIS DEBENTURE NOR THE SHARES OF COMMON STOCK ISSUABLE ON CONVERSION OF THIS DEBENTURE (THE "SHARES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE HOLDER HEREOF, BY PURCHASING THIS DEBENTURE, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS DEBENTURE AND THE SHARES MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT AS FOLLOWS. PRIOR TO THE FIRST ANNIVERSARY OF THE ISSUANCE OF THIS DEBENTURE, THIS DEBENTURE MAY NOT BE SO TRANSFERRED OTHER THAN (1) TO THE COMPANY, (2) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S (RULES 901 THROUGH 905) UNDER THE SECURITIES ACT, OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. AFTER THE FIRST ANNIVERSARY AND PRIOR TO THE SECOND ANNIVERSARY OF THE ISSUANCE OF THIS DEBENTURE, THIS DEBENTURE MAY NOT BE SO TRANSFERRED OTHER THAN (1) TO THE COMPANY, (2) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S (RULES 901 THROUGH 905) UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR (4) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. IF THE HOLDER OF THIS DEBENTURE WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF ANY SUCH TRANSFER, THE FOREGOING CONDITIONS MUST BE COMPLIED WITH REGARDLESS OF WHEN SUCH TRANSFER IS MADE. NO HEDGING TRANSACTIONS INVOLVING THIS DEBENTURE OR THE SHARES MAY BE CONDUCTED, UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE U.S. INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(J) AND 1287(A) OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED. FIBERCHEM, INC. 12% SENIOR CONVERTIBLE DEBENTURES DUE 2002 GLOBAL DEBENTURE FiberChem, Inc., a Delaware corporation (hereinafter, the "Issuer," which term includes any successor corporation under the Trust Indenture hereinafter referred to), for value received, hereby promises to pay to bearer upon presentation and surrender of this Global Debenture (the "Global Debenture") the principal sum of One Million Three Hundred Fifty Thousand and No/100 United States Dollars (U.S. $1,350,000) (the "Principal Amount") on July 26, 2002, and, to pay interest thereon from the date hereof, semi-annually in arrears on December 1 and June 1 in each year, commencing December 1, 2000, at the rate of 12% per annum, calculated on the basis of a 360-day year consisting of twelve 30-day months, until the principal hereof is paid or payment thereof is duly provided for; provided, however, that the Principal Amount payable upon presentation and surrender may be reduced from time to time in connection with conversions, redemptions, purchase and cancellations and similar events described in the Trust Indenture (as defined below), and such reductions shall be duly noted on Schedule A hereto (which is incorporated herein by this reference as if set out in full); and provided further that interest accruing after the date of a reduction in Principal Amount shall be calculated with reference to the new Principal Amount. This Global Debenture is one of a duly authorized issue of debentures designated as the 12% Senior Convertible Debentures Due 2002 (the "Debentures") of the Issuer issued and to be issued under the Trust Indenture dated as of July 28, 2000 (herein called the "Trust Indenture"), between the Issuer and The Bank of New York, as Trustee. It is a permanent security and is exchangeable in whole for definitive Bearer Debentures in bearer form, with interest coupons attached, upon the events specified in the Trust Indenture. Until exchanged in full for the definitive Bearer Debentures, this Global Debenture shall in all respects be ratably entitled to the same benefits under, and subject to the same Terms and Conditions of, the Trust Indenture as definitive Bearer Debentures authenticated and delivered thereunder. This Global Debenture, the definitive bearer Debentures and the Trust Indenture shall be governed by and construed in accordance with the laws of the State of New York. All terms used in this Global Debenture which are defined in the Trust Indenture shall have the respective meanings assigned to them in the Trust Indenture. Unless the certificate of authentication hereon has been executed by the Trustee or on behalf of the Trustee by the Authenticating Agent by manual signature of one of its authorized signatories, this Global Debenture shall not be entitled to any benefit under the Trust Indenture and shall not be valid or obligatory for any purpose. TERMS AND CONDITIONS OF THE DEBENTURES 1. FORM, DENOMINATION AND TITLE (A) The Debentures, which will initially be sold only outside the United States pursuant to Regulation S under the U.S. Securities Act of 1933, as amended (the "Securities Act"), will be in the form of a global bearer debenture without interest coupons (the "Global Debenture"), on deposit 3 with The Bank of New York as common depository (the "Common Depository") and held on behalf of Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System ("Euroclear") and Clearstream, societe anonyme ("Clearstream") and credited to accounts designated by the Debentureholders, in principal amounts of U.S. $1,000 or integral multiples thereof. As provided in the Trust Indenture, under limited circumstances the Debentures may be issued in definitive bearer form ("Definitive Bearer Debentures"), serially numbered, in denominations of U.S. $1,000, $5,000 and $10,000 each with interest coupons ("Coupons") attached on issue. (B) Title to the Global Debenture will pass by transfer as described in the Trust Indenture. Title to the Definitive Bearer Debentures and to the Coupons will pass by delivery. The Company, any Paying Agent and the Trustee may (to the fullest extent permitted by applicable laws) deem and treat the holder of any Definitive Bearer Debenture and the holder of any Coupon as the absolute owner thereof for all purposes (whether or not the Definitive Bearer Debenture or Coupon shall be overdue and notwithstanding any notice of ownership or writing on the Definitive Bearer Debenture or Coupon or any notice of previous loss or theft of the Definitive Bearer Debenture or Coupon). "Debentureholder" and "Holder" means the bearer of any Definitive Bearer Debenture or Coupon (as the case may be) or beneficial owner of an interest in the Global Debenture. In addition to other legends required by the Securities Act, the Debentures and any Coupons will bear the following legend: "Any United States person who holds this obligation will be subject to limitations under the U.S. income tax laws, including the limitations provided in Sections 165(j) and 1287(a) of the United States Internal Revenue Code of 1986, as amended." 2. STATUS The Debentures and any Coupons are direct, unconditional and unsecured obligations of the Company and rank and will rank junior to certain Secured Senior Indebtedness, PARI PASSU, without any preference among themselves and with any Designated Indebtedness. The Debentures and any Coupons will rank senior to all other future Indebtedness of the Company, except to the extent of Permitted Liens securing Indebtedness. The Debentures will not be secured by any assets or properties of the Company. "Secured Senior Indebtedness" is limited to Indebtedness incurred pursuant to that certain Accounts Receivable Purchase Agreement dated July 7, 2000, with Silicon Valley Financial Services, which Indebtedness may not at any time exceed $1,000,000. "Designated Senior Indebtedness", "Permitted Subsidiary Indebtedness" and "Permitted Liens" are defined in the Trust Indenture. 3. COVENANTS Some, but not all, of the covenants contained in the Trust Indenture are as follows: (A) The Company will not merge or consolidate with or sell, convey or otherwise dispose of all, or substantially all of its assets substantially as an entirety to any Person, unless: (i) either (a) the Company shall be the surviving Person or (b) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquired by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety (1) shall be a Person organised and validly existing under the laws of the United States of America, any state thereof, or the District of Columbia and (2) shall expressly assume, by a trust indenture supplemental thereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the Company's obligation for the due and punctual payment of the principal of and interest 4 on all the Debentures and the performance and observance of every covenant of the Trust Indenture on the part of the Company to be performed or observed; (ii) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Company in connection with or as a result of such transaction as having been incurred at the time of such transaction), no Default or Event of Default shall have occurred and be continuing; and (iii) the Company or such Person shall have delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture complies with Article Nine of the Trust Indenture and that all conditions precedent therein provided for relating to such transaction have been complied with. (B) Upon any consolidation of the Company with or merger of the Company with or into any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety to any Person in accordance with Section 8.01 of the Trust Indenture, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Trust Indenture with the same effect as if such successor Person had been named as the Company herein and therein, and in the event of any such conveyance or transfer, the Company, except in the case of a lease, shall be discharged of all obligations and covenants under the Trust Indenture and the Debentures and the Company may be dissolved and liquidated. (C) The Company will not create, incur, assume, guarantee or in any other manner become directly or indirectly liable for the payment of any Indebtedness that will rank (i) except for Secured Senior Indebtedness, senior in right of payment to the Debentures and any Coupons or (ii) except for Designated Indebtedness, PARI PASSU with the Debentures and Coupons, except to the extent of Permitted Liens securing Indebtedness. The Company will not permit any of its Subsidiaries to create, incur, assume, guarantee or in any other manner become directly or indirectly liable for the payment of any Indebtedness other than Permitted Subsidiary Indebtedness. (D) Except for Permitted Liens, the Company will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist, any Lien of any kind upon any properties of the Company or any of its Subsidiaries securing any Indebtedness (whether by agreement, by operation of law, or structurally by virtue of the identity of the obligor), unless the Debentures are equally and ratably secured or rank senior and prior in all respects to the Indebtedness secured by such Lien. 4. INTEREST The Debentures bear interest from (and including) the Issue Date, at the rate of 12% per annum, payable in cash semi-annually in arrears on December 1 and June 1, in each year (each an "Interest Payment Date"), the first such payment to be made on December 1, 2000, in respect of the period from (and including) the Issue Date to (but excluding) December 1, 2000. There will be a short first coupon for the period from (and including) the Issue Date, to (but excluding) December 1, 2000, which will equal U.S. $42.00 per U.S. $1,000 principal amount of the Debentures. Payments of interest will equal U.S. $60.00 per U.S. $1,000 principal amount of the Debentures for each subsequent Interest Payment Date. Interest shall accrue on amounts in default at the Default Rate. 5 Each Debenture will cease to bear interest (i) from its due date for redemption, or (ii) where the Conversion Right shall have been exercised by the Debentureholders or the Company elects to cause a Mandatory Conversion, from the Conversion Date, unless as to any of the foregoing upon due presentation, payment of the principal and interest in respect of the Debenture is improperly withheld or refused, the Conversion Shares are not timely issued or unless Default is otherwise made in respect of such payment, in which event interest shall continue to accrue at the Default Rate as provided in the Trust Indenture. When interest is required to be calculated in respect of a period of less than a full year, it shall be calculated on the basis of a 360 day year consisting of twelve (12) months of thirty (30) days each and, in the case of an incomplete month, the number of days elapsed. 5. PAYMENTS AND PAYING AGENTS (A) All payments of principal and interest shall be made in U.S. dollars. Payment of principal in respect of each Debenture will only be made (i) in the case of the Global Debenture, to the Principal Paying Agent for distribution to the Debentureholders in accordance with the terms of the Paying and Conversion Agreement and the practices of Euroclear and Clearstream, or (ii) in the case of Definitive Bearer Debentures, against presentation and surrender (or, in the case of part payment only, endorsement), of the relevant Definitive Bearer Debenture at the specified office of any of the Paying Agents. Payments of interest due on the Definitive Bearer Debentures on an Interest Payment Date will be made against presentation and surrender (or, in the case of part payment only, endorsement) of the relevant Coupons, at the specified office of any of the Paying Agents or, in the case of the Global Debenture, to the Principal Paying Agent for distribution to the Debentureholders in accordance with the terms of the Paying and Conversion Agreement and the practices of Euroclear and Clearstream. Payments of additional interest will be made upon presentation of a Definitive Bearer Debenture to a Paying Agent, which Debenture will be stamped to reflect such payment, or in the case of the Global Debenture, to the Principal Paying Agent for distribution to the Debentureholders in accordance with the terms of the Paying and Conversion Agreement and the practices of Euroclear and Clearstream. In the case of Definitive Bearer Debentures, all such payments will be made at the specified office of any Paying Agent, at the option of the holder, by U.S. dollar cheque, or by transfer to a U.S. dollar account maintained by the payee outside the U.S. and, in the case of the Global Debenture, by the Principal Paying Agent for distribution to the Debentureholders in accordance with the terms of the Paying and Conversion Agreement and the practices of Euroclear and Clearstream, subject in all cases to any applicable laws and regulations. (B) Upon redemption of the Global Debenture, payment shall be made to the Principal Paying Agent for distribution to the Debentureholders in accordance with the terms of the Paying and Conversion Agreement and the practices of Euroclear and Clearstream. Each Definitive Bearer Debenture should be presented for redemption together (if applicable) with all unmatured Coupons relating to such Debenture, failing which the full amount of any missing unmatured Coupon (or, in the case of payment not being made in full, that portion of the full amount of the missing unmatured Coupons which the amount so paid bears to the total amount due) will be deducted from the amount due for payment. Each amount so deducted will be paid in the manner described above against presentation and surrender (or, in the case of part payment only, endorsement) of such missing Coupons at any time before the expiration of ten years after the Relevant Date in respect of the Debenture (whether or not such Coupon would otherwise have become void pursuant to Condition 10 6 (Prescription)), or, if later, five years after the date on which such Coupon would have become due, but not thereafter. (C) The Company agrees that so long as any of the Debentures are outstanding, it will maintain (i) a Paying Agent in a western European city for payments on the Debentures, (ii) so long as the Debentures are listed on the Luxembourg Stock Exchange and the rules of such exchange so require, a Paying Agent and Conversion Agent in Luxembourg, (iii) Conversion Agents having specified offices in either London or New York and (iv) Paying Agents having specified offices in either London or New York. The Company has initially appointed The Bank of New York as Trustee, Principal Paying Agent, Principal Conversion Agent, Replacement Agent and Authenticating Agent, and Banque Internationale A Luxembourg, as Paying Agent and Conversion Agent. Subject to the foregoing and the terms of the Paying and Conversion Agreement and the Trust Indenture, the Company shall have the right to terminate any such appointments and/or to appoint any other agents in such other places as it may deem appropriate upon notice in accordance with Condition 15 (Notices). All monies paid by the Company to the Principal Paying Agent for the payment of principal or interest on any Debenture which remain unclaimed at the end of two (2) years after the principal on such Debenture will have become due and payable will be repaid to the Company (and upon such repayment, the obligations of the Principal Paying Agent shall cease) and the Holder of such Debenture or any Coupon appertaining thereto will thereafter have only the rights of a creditor of the Company as described in the Trust Indenture or such rights as may be otherwise provided by applicable law. A Holder shall be entitled to present a Definitive Bearer Debenture or Coupon for payment only on a Presentation Date. "Presentation Date" means the date on which a Definitive Bearer Debenture is presented by a Debentureholder for payment of principal or a Coupon is presented by the Couponholder for payment of interest, as the case may be, or if such date is not a Business Day, the next date which is a Business Day. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is a day on which banking institutions in Luxembourg, the city of New York, New York, and London, England are not authorised or obligated by law, regulation or executive order to close. When making payments to Debentureholders or Couponholders, fractions of one cent will be rounded down to the nearest whole cent. 6. CONVERSION (A) CONVERSION PERIOD, CONVERSION RATIO AND PRICE (i) Debentureholders have the right, subject as provided herein and to any applicable laws and regulations, to require the Company to convert all or any of their Debentures at their principal amount into shares (the "Conversion Shares") of common stock of the Company, U.S. $.0001 par value per share ("Common Stock") at any time during the Conversion Period referred to below. Upon conversion, the right of the converting Debentureholder to repayment of the principal 7 amount of the Debenture to be converted shall be extinguished and released, and in consideration and in exchange therefor the Company shall allot and issue Conversion Shares credited as paid up in full as provided in this Condition 6. Subject to and upon compliance with the provisions of these Conditions, the Conversion Right attaching to any Debenture may be exercised, at any time after the Issue Date up to the close of business on the day two Business Days prior to the Maturity Date (but in no event thereafter) or, if such Debenture shall have been called for redemption pursuant to Condition 7(A) on the date up to and including two (2) Business Days prior to the date fixed for redemption thereof (the "Conversion Period"). The number of Conversion Shares to be issued on conversion of a Debenture will be determined by dividing the principal amount of the Debenture to be converted by the Conversion Price (as defined below) in effect on the Conversion Date, with the result being rounded down to the nearest whole number. In addition, upon the conversion of any Debentures, a Debentureholder will also be entitled to receive an additional number of Conversion Shares calculated in accordance with Condition 6 (G). (ii) If more than one Debenture is converted at any one time by the same Holder, the number of Conversion Shares to be issued upon such conversion will be calculated on the basis of the aggregate principal amount of the Debentures to be converted. Fractions of Conversion Shares will not be issued on conversion and no cash adjustments will be made in respect thereof. (iii) The price at which Conversion Shares will be issued upon conversion (the "Conversion Price") will initially be the lesser of (i) U.S. $0.30 per Conversion Share or (ii) the Adjusted Market Price, but such Conversion Price will be subject to adjustment in the manner provided in Conditions 6(C) and 6(F). The "Adjusted Market Price" shall equal 92% of the average of the Market Price of the Common Stock for the 20 consecutive Stock Exchange Business Days ending two Stock Exchange Business Days prior to the Conversion Date. "Market Price" shall be the closing bid price on the OTC for the Common Stock on the relevant Stock Exchange Business Day; provided, however, if the Common Stock is traded on an Alternative Stock Exchange then the "Market Price" shall be the closing bid price of the Common Stock on such Alternative Stock Exchange on any Stock Exchange Business Day. Notice of any adjustment of the Conversion Price shall be given in accordance with Condition 15 within ten (10) Business Days of such adjustment. (iv) Notwithstanding the provisions of paragraph (i) of this Condition 6(A), if the Company shall default in making payment in full in respect of any Debenture which shall have been called for redemption prior to the Maturity Date, then from the Redemption Date, interest shall continue to accrue on such Debenture at the Default Rate and the Conversion Right attaching to such Debenture will continue to be exercisable up to, and including the close of business (at the place where the Debenture is deposited in connection with the exercise of the Conversion Right) on the date upon which the full amount of the monies payable in respect of such Debenture has been duly received by the Trustee or the Principal Paying Agent. (v) A Conversion Right may only be exercised in respect of an Authorised Denomination. (B) PROCEDURE FOR CONVERSION (i) To exercise the Conversion Right attaching to any Definitive Bearer Debenture, the 8 Holder thereof must complete, execute and deposit at his own expense during normal business hours at the specified office of the Principal Conversion Agent or any of the other Conversion Agents, a notice of conversion (a "Conversion Notice") in the form for the time being currently obtainable from the office of each Conversion Agent specified in the Agency Agreement, together with the relevant Definitive Bearer Debenture and any amount to be paid by the Debentureholder pursuant to this Condition 6(B)(i). The holder of a beneficial interest in the Global Debenture need only provide a Conversion Notice and arrange for the delivery to a Conversion Agent of the beneficial interest being converted as provided in clause (ii) below. Such Conversion Notice shall be in the form attached to the Indenture and shall be provided by any Conversion Agent upon request. The Conversion Date must fall at a time when the Conversion Right attaching to that Debenture is expressed in these Conditions to be exercisable and will be deemed to be the date of the surrender of the Definitive Bearer Debenture (if applicable) and/or the delivery of such Conversion Notice and, if applicable, any payment to be made or indemnity given under these Conditions in connection with the exercise of such Conversion Right. A Conversion Notice once delivered shall be irrevocable. Upon any conversion of a Debenture into Conversion Shares, the Company shall pay any taxes and capital, stamp, issue and registration duties arising on conversion and duties payable in the U.S. or, if applicable, in the place of any Alternative Stock Exchange, as the case may be, and the Debentureholder delivering a Debenture for conversion must pay any taxes and capital, stamp, issue and registration duties arising on conversion and duties payable to an entity located outside the U.S. or in the place of any Alternative Stock Exchange outside the U.S. The foregoing shall not apply to taxes in connection with any transfer of ownership of a Debenture. "Alternative Stock Exchange" means, other than OTC, any national or regional stock exchange or quotation service such as the Nasdaq National Market System or any similar quotation service, as may be agreed between the Company and the Lead Manager. Any Alternative Stock Exchange selected must be recognised by the Luxembourg Exchange otherwise the Debentures may be delisted from the Luxembourg Exchange. (ii) As soon as practicable, and in any event not later than three (3) Stock Exchange Business Days after either the Company's receipt of a completed Conversion Notice or, if conversion is occurring as a result of a mandatory conversion, the Conversion Date, the Company will cause the person or persons designated for that purpose in the Conversion Notice or otherwise to be registered as holder(s) of the relevant number of Conversion Shares, which will include any Conversion Shares issued in accordance with Condition 6(G), and will make a certificate or certificates for the relevant Conversion Shares available for collection at the Company's principal office which is currently in Las Vegas, Nevada or at the Company's transfer agent in Denver, Colorado, or, if so requested in the relevant Conversion Notice, will deliver such certificate or certificates to the person at the place specified in the Conversion Notice, at the risk of the Debentureholder, together with any other securities, property or cash required to be delivered upon conversion and such assignments and other documents (if any) as may be required by law to effect the transfer thereof. If the Company fails to timely satisfy its obligations as provided in this Condition 6(B)(ii), then within two Stock Exchange Business Days after the expiration of such 3 day period, the Company shall pay to the Debentureholder(s) entitled to Conversion Shares a cash payment equal to 1% of the principal amount of Debentures being converted. An additional 1% cash payment will be paid for each additional three (3) day period commencing after the expiration of the relevant 3 day period during which the 9 Company has not complied with its obligations as provided in this condition 6(B)(ii). (iii) The person or persons specified for that purpose will be deemed for all purposes to be the holder of record of the number of Conversion Shares issuable upon conversion with effect from the Conversion Date. The Conversion Shares issued upon conversion of the Debentures will in all respects rank pari passu with the issued and outstanding shares of Common Stock issued on the relevant Conversion Date except for any right excluded by mandatory provisions of applicable law. A holder of Conversion Shares issued on conversion of Debentures shall not be entitled to any shareholder rights for any record date which precedes the relevant Conversion Date. (iv) Subject to Condition 4, all accrued and unpaid interest due upon the conversion of the Debentures (whether as a result of an election by the Debentureholder, or the Company pursuant to its right to cause Mandatory Conversion) shall be paid to or on behalf of the Debentureholder by the Company not later than fourteen (14) calendar days after the relevant Conversion Date by a U.S. dollar cheque, or by transfer to a U.S. dollar account maintained by the payee in accordance with instructions given by the relevant Debentureholder. (v) The Conversion Shares shall be traded on the OTC but shall not be listed on the Luxembourg Stock Exchange. (C) ADJUSTMENTS IN CONVERSION PRICE As provided in the Trust Indenture, the Conversion Price is subject to adjustment upon the occurrence of certain events, including: (i) stock dividends and certain other distributions; (ii) the subdivision, combination or reclassification of outstanding shares of Common Stock; (iii) the issuance to all stockholders of the Company of rights or warrants to acquire shares of Common Stock at a price less than the Market Price for the Common Stock; (iv) the issuance of Common Stock at a price less than the Market Price, other than issuances pursuant to conversion of the Debentures, any issuances pursuant to the conversion of issued and outstanding preferred stock (including conversions related to FiberChem's outstanding preferred stock even if the conversion ratio of such stock is increased from 10 to 1 to 75 to 1), and the conversion or exercise of all other currently outstanding options, warrants, or outstanding indebtedness of the Company, or any warrants issued pursuant to the Offering or in connection with any plan adopted by the Company for the purchase of stock in connection with any employee compensation or benefit plan of the Company or any of its Subsidiaries, whether now in effect or hereafter created or amended; and (v) the distribution to all holders of Common Stock or debt securities of the Company or of assets or rights or warrants to purchase securities of the Company (excluding those rights and warrants referred to above and cash dividends or distributions from current or retained earnings). The Company may at any time or from time to time reduce the Conversion Price temporarily or permanently as to all or any Debentures outstanding. The Company shall cause written notice of any adjustment to the Conversion Price of all the Debentures pursuant to this Condition 6(C) to be given to the Trustee, the Paying Agents, the Conversion Agents and the Holders of the Debentures in accordance with Section 1.08 of the Trust Indenture, and will publish such notice in two (2) Authorised Newspapers, one of which is required to be a general leading daily newspaper in Luxembourg, which is expected to be the LUXEMBURGER WORT. The Company will notify the Luxembourg Stock Exchange upon any adjustment to the Conversion Price of all the Debentures. No adjustment will be made where such adjustment would be less than five percent (5%) of 10 the Conversion Price then in effect. Any adjustment not so made will be carried forward and taken into account in any subsequent adjustment. On any adjustment, the resultant Conversion Price, if not an integral multiple of one cent shall be rounded up to the nearest one cent. The Conversion Price may not be reduced so that, on conversion of Debentures, Conversion Shares would be issued for an amount less than their current par value. Where more than one event which gives or may give rise to an adjustment to the Conversion Price occurs within such a short period of time that in the reasonable opinion of the Company's Board of Directors the foregoing provisions would need to be operated subject to some modification in order to give the intended result, such modification shall be made to the operation of the foregoing provisions as may be advised by the Board of Directors to be in their reasonable opinion appropriate in order to give such intended result. (D) CONSOLIDATION, AMALGAMATION OR MERGER In the case of any consolidation, amalgamation or merger of the Company with any other Person (other than a consolidation, amalgamation or merger in which the Company is the continuing Person), or in the case of any sale or transfer of all, or substantially all, of the assets of the Company, the Company will forthwith notify the Luxembourg Stock Exchange in accordance with its applicable requirements and the Debentureholders of such event in accordance with Section 1.08 of the Trust Indenture and (so far as legally possible) cause the Person resulting from such consolidation, amalgamation or merger or the Person which shall have acquired such assets, as the case may be, to execute a trust indenture supplemental to the Trust Indenture to ensure that the Holder of each outstanding Debenture will have the right (during the period in which such Debenture shall be convertible) to convert such Debenture into the class and amount of shares of Common Stock and other securities and property receivable upon such consolidation, amalgamation, merger, sale or transfer by a Holder of the number of shares of Common Stock which would have become liable to be issued upon conversion of such Debenture immediately prior to such consolidation, amalgamation, merger, sale or transfer. Such supplemental trust indenture will provide for adjustments which will be as nearly equivalent as may be practicable to the adjustments provided for in the foregoing provisions of this Condition. The above provisions of this Condition 6(D) will apply in the same way to any subsequent consolidations, amalgamations, mergers, sales or transfers. (E) MANDATORY CONVERSION At any time after the Company has complied with its registration obligations as provided for in the Registration Rights Agreement, provided the average Market Price of the Common Stock during any twenty (20) consecutive trading day period and on the date the conversion notice is sent is equal to or greater than $0.42, the Company may at its option elect within thirty (30) days of having satisfied the foregoing criteria, to cause the Debentures to be converted, in whole but not in part, into Conversion Shares at the then applicable Conversion Price. The Debentureholders shall be notified of such election by being given not less than twenty (20) calendar days' notice to the Debentureholders in accordance with Section 1.08 of the Trust Indenture (which notice shall be irrevocable) by publication in two (2) Authorised Newspapers, one of which is required to be a general leading daily newspaper in Luxembourg, which is expected to be the LUXEMBURGER WORT. Upon any such mandatory conversion, payment will be made by the Company for all interest accrued prior to the Conversion Date. The Company shall notify the Luxembourg Stock Exchange of any such mandatory conversion and confirm that all such Debentures have been converted. 11 (F) REGISTRATION RIGHTS (i) Pursuant to the Registration Rights Agreement (the "Registration Rights Agreement") dated as of July 28, 2000, by and among the Company and the Trustee for the benefit of the Debentureholders, the Company has agreed to file a registration statement with the U.S. Securities and Exchange Commission (the "Commission") in respect of the resale of the Conversion Shares. In accordance with the terms and conditions of the Registration Rights Agreement, the Company will (i) use its best efforts to cause the Commission to declare effective the registration statement contemplated in the foregoing sentence within three months of the Issue Date and (ii) use its best efforts to maintain the effectiveness of such registration statement until all Conversion Shares that may be issued have been issued. In the event that the Commission does not declare such registration statement effective within four months of the Issue Date, holders of the Debentures will be entitled to convert their Debentures at a discount (the "Registration Default Discount") of 2% from the then applicable Conversion Price and thereafter, commencing on the fifth month from the Issue Date, an additional 5% discount for each month or portion thereof that the registration statement is not declared effective. The Registration Default Discount shall be permanent and shall not be affected by the subsequent effectiveness of the registration statement. All discounts under this Condition 6(F) will be in addition to, and not in lieu of, any other discounts or adjustments applicable to the Conversion Price under the terms of the Debentures. (ii) In addition, if prior to the date the Company satisfies its obligations under the Registration Rights Agreement and for a period of 60 days after it satisfies such obligations, the Company issues any Common Stock or Common Stock Equivalents at a price or having a conversion price less than the then applicable Conversion Price, the applicable Conversion Price shall be adjusted downward only to equal 95% of the price or conversion price attributable to the Common Stock or Common Stock Equivalents. To the extent any issuance of securities causes an adjustment under this Condition 6(F)(ii) and could also provide for an adjustment under Condition 6(C), the only adjustment resulting from such issuance shall occur solely under this Condition 6(F)(ii). (G) Upon the conversion of any Debentures, either upon the election of the Debentureholder or the Company, the Debentureholders will be entitled to receive, at no additional cost, an additional number of Conversion Shares equal to the product of (i) the number of Conversion Shares being issued to such Debentureholder multiplied by (ii) 0.26. The additional shares issued in accordance with this Condition 6(G) will be part of the total number of Conversion Shares to be issued and will be included in the certificate delivered in accordance with Condition 6(B)(ii) above. (H) As provided in the Debentures, the Conversion Price is subject to reduction in a number of different circumstances. The Conversion Price to be used in connection with the conversion of any Debentures will be calculated on the applicable date as follows. The initial Conversion Price will first be calculated using the formula set out in Condition 6(A)(iii). Thereafter, the Conversion Price shall be adjusted downward to give effect to any reductions as provided for in Conditions 6(C) and 6(F), with each such reduction given full effect before the next adjustment is applied. At the request of any Debentureholder or the Lead Manager, the Company shall promptly provide the requesting party with a calculation of the current applicable Conversion Price. Such calculation shall be sent to the requesting Debentureholder by means of a certificate signed by the Company's Chief Financial Officer setting forth the adjusted Conversion Price and showing in 12 reasonable detail the facts upon which such adjustment is based. 7. REDEMPTION AND PURCHASE (A) Unless previously redeemed, converted or purchased and canceled as provided herein, the Company will redeem the Debentures at their principal amount on July 26, 2002; PROVIDED, HOWEVER, that at any time on giving notice in accordance with Condition 15 and the procedures set out in the Trust Indenture, the Company may redeem all of the Debentures outstanding at such time at their principal amount, together with interest accrued to the Redemption Date, in the event that prior to the date of such notice, Conversion Rights shall have been exercised and/or purchases (and corresponding cancellations) have been effected in respect of eighty-five percent (85%) or more in principal amount of the Debentures. The Company shall notify the Luxembourg Stock Exchange upon any such redemption. (B) Subject to applicable law, the Company or any of its Subsidiaries may at any time purchase Debentures together, in the case of Definitive Bearer Debentures, with unmatured Coupons in any manner and at any price in the open market or by private treaty. If purchases are made by tender, tenders must be available to all Debentureholders alike. Debentures purchased by the Company or any of its Subsidiaries will forthwith be surrendered for cancellation and shall no longer be deemed Outstanding. (C) All Debentures that are redeemed by the Company will forthwith be canceled (together with all related unmatured Coupons attached to or surrendered with the Debentures) and may not be reissued or resold. 8. TAXATION All payments in respect of the Debentures by the Company shall be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature ("Taxes") imposed or levied by or on behalf of the U.S. or any political sub-division of, or any authority in, or of, the U.S. having power to tax, unless the withholding or deduction of the Taxes is required by law. In that event, the Company will pay such additional amounts as may be necessary in order that the net amounts received by the Debentureholders and Couponholders after the withholding or deduction shall equal the respective amounts which would have been receivable in respect of the Debentures or, as the case may be, Coupons in the absence of the withholding or deduction; except that no additional amounts shall be payable in relation to any payment in respect of any Debenture or Coupon: (A) to, or to a third party on behalf of, a Holder who is liable for the Taxes in respect of the Debenture or Coupon by reason of such Holder having some connection with the U.S. other than the mere holding of the Debenture or Coupon or the receipt of payments made in connection therewith; or (B) presented for payment more than thirty (30) calendar days after the Relevant Date except to the extent that a Holder would have been entitled to additional amounts on presenting the same for payment on the last day of such period of thirty (30) calendar days. Any reference in these Terms and Conditions to any amounts in respect of the Debentures 13 shall be deemed also to refer to any additional amounts which may be payable under this Condition or under any undertakings given in addition to, or in substitution for, this Condition pursuant to the Trust Indenture. 9. ADDITIONAL COVENANTS While any Conversion Right remains exercisable, the Company will, save with the consent of the Holders as contemplated pursuant to Condition 16 or with the approval of the Trustee where, in its opinion, it is not materially prejudicial to the interests of the Debentureholders to give such approval: (A) at all times keep available for issuance free from any pre-emptive rights out of its authorised but unissued capital such number of Conversion Shares as would enable the Conversion Rights, the rights for additional shares as set forth in Condition 6(G), and all other rights of subscription and exchange for and conversion into Conversion Shares to be satisfied in full; (B) maintain a quotation for all the issued Conversion Shares on OTC, it being understood that if the Company is unable to obtain or maintain such quotation of Conversion Shares, to obtain and maintain a listing or quotation for all the Conversion Shares issued on the exercise of the Conversion Rights on such Alternative Stock Exchange as the Company may from time to time with the written consent of the Lead Manager determine and will forthwith give notice to the Debentureholders in accordance with Section 1.08 of the Trust Indenture of the listing, de-listing or quotation or lack of quotation of the Conversion Shares (as a class) by any such Alternative Stock Exchange; (C) use all reasonable efforts to maintain a listing of the Debentures on the Luxembourg Stock Exchange or an Alternative Stock Exchange; and (D) not adopt any amendment to its Certificate of Incorporation that would modify the rights attaching to the Common Stock. 10. PRESCRIPTION Debentures and Coupons will become void unless presented for payment within periods of ten (10) years (in the case of principal) and five (5) years (in the case of interest) from the Relevant Date in respect of the Debentures or the Coupons, as the case may be, subject to the provisions of Condition 5. 11. EVENTS OF DEFAULT The Trustee at its discretion may, and if so requested in writing by the Holders of at least one-quarter in principal amount of the Debentures then outstanding or if so directed by an Extraordinary Resolution of the Debentureholders shall give notice to the Company that the Debentures are, and they shall accordingly thereby forthwith become, immediately due and payable at their principal amount together with accrued interest (as provided in the Trust Indenture) if any of the following events (each an "Event of Default") shall have occurred (unless (i) such events are expressly permitted or contemplated by the Trust Indenture or (ii) such Event of Default has been remedied to the satisfaction of the Trustee): 14 (A) if the Company defaults in the payment of the principal of (or premium, if any, on) any Debenture as and when it shall become due and payable at its Maturity, upon redemption, by declaration or otherwise; or (B) if the Company defaults in the payment of any interest upon any Debenture, or any related Coupon, when such interest or Coupon becomes due and payable, and the continuance of such default for a period of 5 days; or (C) if the Company fails to perform or observe any of its other obligations, covenants, conditions or provisions under the Debentures or the Trust Indenture and (except where the Trustee shall have certified to the Company in writing that it considers such failure to be incapable of remedy in which case no such notice or continuation as is hereinafter mentioned will be required) such failure continues for the period of thirty (30) calendar days (or such longer period as the Trustee may in its absolute discretion permit) next following the service by the Trustee on the Company of notice requiring the same to be remedied; or (D) if (i) any other Indebtedness of the Company or any Subsidiary becomes due and payable prior to its Stated Maturity by reason of an event of default (howsoever described) or (ii) any such Indebtedness of the Company or any Subsidiary is not paid when due or, as the case may be, within any applicable grace period or (iii) the Company or any Subsidiary fails to pay when due (or, as the case may be, within any applicable grace period) any amount payable by it under any present or future guarantee for, or indemnity in respect of, any Indebtedness of any Person or (iv) any security given by the Company or any Subsidiary for any Indebtedness of any Person or any guaranty or indemnity of Indebtedness of any Person by the Company or any Subsidiary becomes enforceable by reason of default in relation thereto and steps are taken to enforce such security save in any such case where there is a bona fide dispute as to whether the relevant Indebtedness or any such guarantee or indemnity as aforesaid shall be due and payable, provided that in each such case the Indebtedness exceeds in the aggregate U.S. $250,000 and in each case such event continues unremedied for a period of thirty (30) calendar days (or such longer period as the Trustee may in its absolute discretion permit); or (E) if the Company or any Subsidiary shall generally fail to pay its debts as such debts become due (except debts which the Company or such Subsidiary, as the case may be, may contest in good faith generally) or shall be declared or adjudicated by a competent court to be insolvent or bankrupt, consents to the entry of an order of relief against it in an involuntary bankruptcy case, shall enter into any assignment or other similar arrangement for the benefit of its creditors or consents to the appointment of a custodian (including, without limitation, a receiver, liquidator or trustee); or (F) if a receiver, administrative receiver, administrator or other similar official shall be appointed in relation to the Company or any Subsidiary or in relation to the whole or a substantial part of the undertaking or assets of any of them or a distress, execution or other process shall be levied or enforced upon or sued out against, or an encumbrancer shall take possession of, the whole or a substantial part of the assets of any of them and in any of the foregoing cases is not paid out or discharged within ninety (90) calendar days (or such longer period as the Trustee may in its absolute discretion consent to in writing upon receipt of written notice from the Company); or (G) if the Company or any Subsidiary institutes proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or 15 answer or consent seeking reorganisation under the laws of the Federal Bankruptcy Code or any similar applicable U.S. federal, state or foreign law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of it or its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they come due; or (H) if a decree or order by a court having jurisdiction in the premises shall have been entered adjudging the Company or any Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking the reorganisation of the Company or any Subsidiary under the Federal Bankruptcy Code or any other similar applicable U.S. federal, state or foreign law, and such decree or order shall have continued undischarged or unstayed for a period of ninety (90) calendar days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of the Company or any Subsidiary or of all or substantially all of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of ninety (90) calendar days; or (I) if a warranty, representation or other statement made by or on behalf of the Company contained in the Trust Indenture, the Debentures or any certificate or other agreement furnished in compliance with such documents is false in any material respect when made and (except where the Trustee shall have certified to the Company that it considers such falsity to be incapable of remedy; in which case no such notice or continuation as is hereinafter mentioned will be required) such falsity continues for a period of thirty (30) calendar days (or such longer period as the Trustee may in its absolute discretion permit) next following the service by the Trustee on the Company of notice requiring the same to be remedied; or (J) if there is any final judgment or judgments for the payment of money exceeding in the aggregate U.S.$250,000 outstanding against the Company or any Subsidiary which has been outstanding for more than sixty (60) calendar days from the date of its entry and shall not have otherwise been discharged in full or stayed by appeal, bond or otherwise. 12. ENFORCEMENT The Trustee may at any time, at its discretion and with prior written notice to the Company take such proceedings against the Company as it may think fit to enforce the provisions of the Trust Indenture, the Debentures and the Coupons but it shall not be bound to take any proceedings or any other action in relation to the Trust Indenture, the Debentures or the Coupons unless (a) it shall have been so directed by an Extraordinary Resolution of the Debentureholders or so requested in writing by the Holders of at least one-quarter in principal amount of the outstanding Debentures, and (b) it shall have been indemnified to its satisfaction. No Debentureholder or Couponholder shall be entitled to proceed directly against the Company unless the Trustee, having become bound so to proceed, fails so to do within a reasonable period and such failure shall be continuing. 13. SUBSTITUTION The Trustee may, without the consent of the Debentureholders or Couponholders, agree with the Company to the substitution in place of the Company (or of any previous substitute under this Condition) as the principal debtor under the Debentures, the Coupons and the Trust Indenture of any Subsidiary or holding company (being a corporation holding (directly or indirectly) at least a majority 16 of Conversion Shares having by the terms thereof ordinary voting power to elect a majority of the Board of Directors (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency)) of the Company or any Subsidiary of such holding company, subject to (a) the Trustee being satisfied that the interests of the Debentureholders will not be materially prejudiced by the substitution and (b) certain other conditions set out in the Trust Indenture being complied with. 14. REPLACEMENT OF DEBENTURES AND COUPONS Should any Debenture or Coupon be lost, stolen, mutilated, defaced or destroyed, it may be replaced at the specified office of the Replacement Agent, upon payment by the claimant of the expenses incurred in connection with the replacement and on such terms as to evidence indemnity and security as the Company and the Trustee may reasonably require. Mutilated or defaced Debentures or Coupons must be surrendered before replacements will be issued. 15. NOTICES (A) Notices to all the Debentureholders will be valid if published in two (2) Authorised Newspapers as provided in Section 1.08 of the Trust Indenture, one of which must be a newspaper of general circulation in Luxembourg , for so long as the Debentures are listed on the Luxembourg Stock Exchange (which is expected to be the LUXEMBURGER WORT) and the other is expected to be the FINANCIAL TIMES EUROPEAN EDITION. Any notice shall be deemed to have been given on the date of publication or, if so published more than once, on the date of the first publication. If publication as provided above is not practicable, notice will be given in such other manner, and shall be deemed to have been given on such date, as the Trustee may approve. (B) Couponholders will be deemed for all purposes to have notice of the contents of any notice given to the Debentureholders in accordance with this Condition. 16. MEETINGS OF DEBENTUREHOLDERS, MODIFICATION, WAIVER AND AUTHORISATION (A) The Trust Indenture contains provisions for convening meetings of the Debentureholders to consider any matter affecting their interests, including the modification by Extraordinary Resolution of these Terms and Conditions or the provisions of the Trust Indenture. The quorum at any meeting, or at any adjourned such meeting, for passing an Extraordinary Resolution will be one or more Persons present holding or representing 25% in principal amount of the Outstanding Debentures, except that for certain of the provisions of the Terms and Conditions of the Debentures (including Condition 8) and certain of the provisions of the Trust Indenture, the necessary quorum and vote required for passing an Extraordinary Resolution will be one or more Persons present holding or representing not less than the percentage set out in the Trust Indenture. An Extraordinary Resolution passed at any meeting of the Debentureholders will be binding on all Debentureholders, whether or not they are present at the meeting, and on all Couponholders. (B) As provided in the Trust Indenture, any action required by the Trust Indenture to be taken at any meeting may be taken without a meeting, if a consent or consents in writing setting forth the action so taken shall be signed by the Holders of the required percentage of the principal amount of the Outstanding Debentures that would be necessary to authorise or take such action at such meeting. 17 (C) The Trust Indenture provides that, without the consent of each holder of an outstanding Debenture affected thereby, no amendment may, among other things, (i) change the Stated Maturity of the principal of, or any installment of principal of or interest on, any Debenture, (ii) reduce the principal amount or the rate of interest on any Debenture, (iii) impair the right of any Holder of the Debentures to receive payment of principal of and interest on such Holder's Debentures on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such Holder's Debentures, (iv) make any change in the amendment provisions that require each Holder's consent or in the waiver provisions, (v) make any change in the provisions restricting the ability of the Company to incur Indebtedness that is senior in right of payment to the Debentures, (vi) make any Debenture payable in money other than that stated in such Debenture, or (vii) make any change that adversely affects the rights of any Debentureholder or amends the terms of the Debentures or the Trust Indenture in a way that would result in the loss of an exemption from any of the Taxes described under Condition 8 above. (D) The Trust Indenture also provides that, without the consent of any Holder of the Debentures, the Company and the Trustee may amend the Trust Indenture to cure any ambiguity, omission, defect or inconsistency, to provide for the assumption by a successor corporation of the obligations of the Company under the Trust Indenture, to add guarantees with respect to the Debentures, to secure the Debentures, to add to the covenants of the Company for the benefit of the Holders of the Debentures or to surrender any right or power conferred upon the Company. (E) The consent of the Holders of the Debentures is not necessary to approve the particular form of any proposed amendment, modification or Supplemental Indenture. It is sufficient if such consent approves the substance of the proposed amendment, modification or Supplemental Indenture. (F) After any amendment or Supplemental Indenture to the Trust Indenture or Debentures becomes effective, the Company will provide the Holders of the Debentures with a notice describing such amendment or Supplemental Indenture. A copy of any such amendment or Supplemental Indenture shall also be delivered to the Luxembourg Stock Exchange. The failure to give such notice to all Holders of such Debentures, or any defect therein, will not impair or affect the validity of the amendment or Supplemental Indenture. (G) Any modification, waiver or authorisation shall be binding on the Debentureholders and the Couponholders and, unless the Trustee agrees otherwise, any modification shall be notified by the Company to the Debentureholders as soon as practicable thereafter in accordance with Condition 15 and Section 1.08 of the Trust Indenture. 17. DEFEASANCE The Company has the right to cause a legal defeasance or a covenant defeasance with respect to the Debentures, all as more fully set out in the Trust Indenture. 18. INDEMNIFICATION OF THE TRUSTEE The Trust Indenture contains provisions for the indemnification of the Trustee and for its 18 relief from responsibility, including provisions relieving it from taking action unless indemnified to its satisfaction. 19. GOVERNING LAW The Trust Indenture, the Agency Agreement, the Debentures and the Coupons are governed by, and will be construed in accordance with, the laws of the State of New York. 19 IN WITNESS WHEREOF, the Issuer has caused this Global Debenture to be duly executed in its corporate name by the manual or facsimile signatures of the undersigned duly authorized officers of the Issuer. Dated as of July 28, 2000. FIBERCHEM, INC. By: __________________ Name: _____________________ Title _____________________ [Corporate Seal] ATTEST: By: ___________________ __________ Secretary TRUSTEE'S CERTIFICATE OF AUTHENTICATION This Global Debenture is one of the Debentures referred to in the within mentioned Trust Indenture. The Bank of New York as Trustee By: ____________________________ Authorised Signatory 20 SCHEDULE A PRINCIPAL AMOUNT OF THIS GLOBAL DEBENTURE The aggregate principal amount of this Global Debenture is as shown by the latest entry made by or on behalf of the Principal Paying Agent in the fourth column below. Reductions in the outstanding principal amount of this Global Debenture following redemption, conversion into shares of Common Stock, or the purchase and cancellation of Debentures are entered in the second and third columns below.
_________________ _________________________ _________________ ____________________________ _________________________________________ NOTATION MADE BY OR REASON FOR OUTSTANDING ON BEHALF OF THE PRINCIPAL CHANGE IN THE PRINCIPAL AMOUNT OF PAYING AGENT (OTHER THAN OUTSTANDING AMOUNT THE GLOBAL IN RESPECT OF THE INITIAL DATE PRINCIPAL AMOUNT OF SUCH DEBENTURE FOLLOWING PRINCIPAL AMOUNT OF THIS GLOBAL CHANGE SUCH CHANGE DEBENTURE(1) _________________ _________________________ _________________ ____________________________ _________________________________________ July 28, Not applicable Not $1,350,000 Not applicable 2000 applicable _________________ _________________________ _________________ ____________________________ _________________________________________ _________________ _________________________ _________________ ____________________________ _________________________________________ _________________ _________________________ _________________ ____________________________ _________________________________________ _________________ _________________________ _________________ ____________________________ _________________________________________ _________________ _________________________ _________________ ____________________________ _________________________________________ _________________ _________________________ _________________ ____________________________ _________________________________________ _________________ _________________________ _________________ ____________________________ _________________________________________ _________________ _________________________ _________________ ____________________________ _________________________________________
_______________ (1) State whether the reduction or adjustment results from (1) conversion of interests in the Debenture into shares of Common Stock, (2) partial redemption of the Debenture, or (3) the purchase and cancellation of interests in the Debenture. SCHEDULE B INTEREST PAYMENTS IN RESPECT OF THIS GLOBAL DEBENTURE The following payments of interest in respect of this Global Debenture have been made:
________________________ ___________________________ ____________________________________ ____________________________________ AMOUNT OF NOTATION MADE BY OR ON DATE MADE INTEREST DUE AMOUNT OF INTEREST PAID BEHALF OF THE PRINCIPAL AND PAYABLE PAYING AGENT ________________________ ___________________________ ____________________________________ ____________________________________ ________________________ ___________________________ ____________________________________ ____________________________________ ________________________ ___________________________ ____________________________________ ____________________________________ ________________________ ___________________________ ____________________________________ ____________________________________ ________________________ ___________________________ ____________________________________ ____________________________________ ________________________ ___________________________ ____________________________________ ____________________________________ ________________________ ___________________________ ____________________________________ ____________________________________ ________________________ ___________________________ ____________________________________ ____________________________________
FIBERCHEM, INC. 12% SENIOR CONVERTIBLE NOTE 1. PROMISE TO PAY. FiberChem, Inc., a Delaware corporation (hereinafter, the "Issuer," which term includes any successor corporation permitted hereunder), for value received, hereby promises to pay RemoteData Partners or its successors or assignees ("Lender") upon presentation and surrender of this 12% Senior Convertible Note the principal sum of Six Hundred and Fifty Thousand United States Dollars (U.S. $650,000) (the "Principal Amount") on July 26, 2002, and, to pay interest hereon from the date hereof, semi-annually in arrears on December 1 and June 1 in each year, commencing December 1, 2000, at the rate of 12% per annum. Except as is expressly provided for herein, the Company shall not have the right to prepay the indebtedness represented by this Note. 2. STATUS This Note is a direct, unconditional and unsecured obligation of the Company and ranks and will rank junior to certain Secured Senior Indebtedness, and PARI PASSU, with any Designated Indebtedness. This Note will rank senior to all other future Indebtedness of the Company, except to the extent of Permitted Liens securing Indebtedness. Lender will not be secured by any assets or properties of the Company. "Designated Senior Indebtedness", "Permitted Subsidiary Indebtedness", "Permitted Liens" and "Secured Senior Indebtedness" are defined in Section 14 below. 3. INTEREST The indebtedness reflected by this Note will bear interest from (and including) the Issue Date, at the rate of 12% per annum, payable in cash semi-annually in arrears on December 1 and June 1, in each year (each an "Interest Payment Date"), the first such payment to be made on December 1, 2000, in respect of the period from (and including) the Issue Date to (but excluding) December 1, 2000. Interest shall accrue on amounts in default at the Default Rate. This Note will cease to bear interest when paid in full, or where the Conversion Right shall have been exercised by the Lender or the Company elects to cause a Mandatory Conversion, from the Conversion Date, unless as to any of the foregoing upon due presentation, payment of the principal and interest in respect of the Note is improperly withheld or refused, the Conversion Shares are not timely issued or unless Default is otherwise made in respect of such payment, in which event interest shall continue to accrue at the Default Rate. When interest is required to be calculated in respect of a period of less than a full year, it shall be calculated on the basis of a 360 day year consisting of twelve (12) months of thirty (30) days each and, in the case of an incomplete month, the number of days elapsed. 4. PAYMENTS Time is of the essence in this Note. All payments of principal and interest shall be made in U.S. dollars. Issuer shall make each payment under this Note not later than noon (New York time) on the day when due to the Lender in immediately available funds. All payments by Issuer hereunder shall be made without any offset, abatement, withholding, or reduction. All payments due to the Lender shall be wired to such accounts as may be designated from time to time by the Lender. 5. CONVERSION 5.1 CONVERSION PERIOD, CONVERSION RATIO AND PRICE 5.1.1 Lender shall have the right, subject as provided herein and to any applicable laws and regulations, to require the Company to convert this Note at its principal amount into shares (the "Conversion Shares") of common stock of the Company, U.S. $.0001 par value per share ("Common Stock") at any time during the Conversion Period referred to below. Upon conversion, the right of Lender to repayment of the principal amount of the Note shall be extinguished and released, and in consideration and in exchange therefor the Company shall allot and issue Conversion Shares credited as paid up in full as provided in this Section 5. Subject to and upon compliance with the provisions of this Note, the Conversion Right may be exercised, at any time after the Issue Date up to the close of business on the day two Business Days prior to the Maturity Date (but in no event thereafter)(the "Conversion Period"). The number of Conversion Shares to be issued on conversion of this Note will be determined by dividing the principal amount of the Note by the Conversion Price (as defined below) in effect on the Conversion Date, with the result being rounded down to the nearest whole number. In addition, upon the conversion of this Note, Lender will also be entitled to receive an additional number of Conversion Shares calculated in accordance with Section 5.7. Fractions of Conversion Shares will not be issued on conversion and no cash adjustments will be made in respect thereof. 5.1.2 The price at which Conversion Shares will be issued upon conversion (the "Conversion Price") will initially be the lesser of (i) the Maximum Conversion Price or (ii) the Adjusted Market Price, but such Conversion Price will be subject to adjustment in the manner provided in Sections 5.3 and 5.6. The "Adjusted Market Price" shall equal 92% of the average of the Market Price of the Common Stock for the 20 consecutive Stock Exchange Business Days ending two Stock Exchange Business Days prior to the Conversion Date. "Market Price" shall be the closing bid price on the OTC for the Common Stock on the relevant Stock Exchange Business Day; provided, however, if the Common Stock is traded on an Alternative Stock Exchange then the "Market Price" shall be the closing bid price of the Common Stock on such Alternative Stock Exchange on any Stock Exchange Business Day. Notice of any adjustment of the Conversion Price shall be given in accordance with Section 13.4 within ten (10) Business Days of such adjustment. 5.1.3 If the Company shall default in making payment in full in respect of this Note which shall have been called for redemption prior to the Maturity Date, then from the Redemption Date, interest shall continue to accrue this Note at the Default Rate and the Conversion Right will continue to be exercisable up to, and including the close of business (at the place where the Note is deposited in connection with the exercise of the Conversion Right) on the date upon which the full amount of the monies payable in respect of Note has been duly received by the Lender. 5.2 PROCEDURE FOR CONVERSION 5.2.1 To exercise the Conversion Right attaching to this Note, Lender must complete, execute and deliver at his own expense to the Company, a notice of conversion (a "Conversion Notice") in the form attached hereto as Exhibit A, together with any amount, if any, to be paid by the Lender pursuant to this Section 5.2.1. The Conversion Date must fall at a time when the Conversion Right is expressed to be exercisable and will be deemed to be the date of the delivery of such Conversion Notice and, if applicable, any payment to be made or indemnity given under this Note in connection with the exercise of such Conversion Right. A Conversion Notice once delivered shall be irrevocable. Upon the conversion of this Note into Conversion Shares, the Company shall pay any taxes and capital, stamp, issue and registration duties arising on conversion and duties payable in the U.S. or, if applicable, in the place of any Alternative Stock Exchange, as the case may be, and the Lender must pay any taxes and capital, stamp, issue and registration duties arising on conversion and duties payable to an entity located outside the U.S. or in the place of any Alternative Stock Exchange outside the U.S. The foregoing shall not apply to taxes in connection with any transfer of ownership of this Note. -3- 5.2.2 As soon as practicable, and in any event not later than three (3) Stock Exchange Business Days after either the Company's receipt of a completed Conversion Notice or, if conversion is occurring as a result of a mandatory conversion, the Conversion Date, the Company will cause the person or persons designated for that purpose in the Conversion Notice or otherwise to be registered as holder(s) of the relevant number of Conversion Shares, which will include any Conversion Shares issued in accordance with Section 5.7, and will make a certificate or certificates for the relevant Conversion Shares available for collection at the Company's principal office which is currently in Las Vegas, Nevada or at the Company's transfer agent in Denver, Colorado, or, if so requested in the relevant Conversion Notice, will deliver such certificate or certificates by courier to the person at the place specified in the Conversion Notice, at the risk of Lender, together with any other securities, property or cash required to be delivered upon conversion and such assignments and other documents (if any) as may be required by law to effect the transfer thereof. If the Company fails to timely satisfy its obligations as provided in this Section 5.2.2, then within two Stock Exchange Business Days after the expiration of such 3 day period, the Company shall pay to Lender a cash payment equal to 1% of the principal amount of this Note. An additional 1% cash payment will be paid for each additional three (3) day period commencing after the expiration of the relevant 3 day period during which the Company has not complied with its obligations as provided in this Section 5.2.2. 5.2.3 The person or persons specified for that purpose will be deemed for all purposes to be the holder of record of the number of Conversion Shares issuable upon conversion with effect from the Conversion Date. The Conversion Shares issued upon conversion of this Note will in all respects rank PARI PASSU with the issued and outstanding shares of Common Stock issued on the relevant Conversion Date except for any right excluded by mandatory provisions of applicable law. A holder of Conversion Shares issued on conversion of this Note shall not be entitled to any shareholder rights for any record date which precedes the relevant Conversion Date. 5.2.4 Subject to Section 3, all accrued and unpaid interest due upon the conversion of this Note (whether as a result of an election by Lender, or the Company pursuant to its right to cause Mandatory Conversion) shall be paid to or on behalf of Lender by the Company not later than three (3) calendar days after the relevant Conversion Date by a U.S. dollar cheque, or by transfer to a U.S. dollar account maintained by the payee in accordance with instructions given by Lender. 5.2.5 The Conversion Shares shall be traded on the OTC. 5.3 ADJUSTMENTS IN CONVERSION PRICE As provided in Section 10 below, the Conversion Price is subject to adjustment upon the occurrence of certain events, including: (i) stock dividends and certain other distributions; (ii) the subdivision, combination or reclassification of outstanding shares of Common Stock; (iii) the issuance to all stockholders of the Company of rights or warrants to acquire shares of Common Stock at a price less than the Market Price for the Common Stock; (iv) the issuance of Common Stock at a price less than the Market Price, other than any issuances pursuant to the conversion of issued and outstanding preferred stock (including conversions related to FiberChem's outstanding preferred stock even if the conversion ratio of such stock is increased from 10 to 1 to 75 to 1), and the conversion or exercise of all other currently outstanding options, warrants, or outstanding indebtedness of the Company, or any warrants issued pursuant to the Offering or in connection with any plan adopted by the Company for the purchase of stock in connection with any employee compensation or benefit plan of the Company or any of its Subsidiaries, whether now in effect or hereafter created or amended; and (v) the distribution to all holders of Common Stock or debt securities of the Company or of assets or rights or warrants to purchase securities of the Company (excluding those rights and warrants referred to above and cash dividends or distributions from current or retained earnings). The Company shall cause written notice of any adjustment to the Conversion Price pursuant to this Section 5.3 or Section 10 to be given to the Lender in accordance with Section 13.4. No adjustment will be made pursuant to this Section 5.3 or Section 10 where such adjustment would be less than five percent (5%) of the Conversion Price then in effect. Any adjustment not so made -4- will be carried forward and taken into account in any subsequent adjustment. On any adjustment, the resultant Conversion Price, if not an integral multiple of one cent shall be rounded up to the nearest one cent. The Conversion Price may not be reduced so that, on conversion of this Note, Conversion Shares would be issued for an amount less than their current par value. Where more than one event which gives or may give rise to an adjustment to the Conversion Price occurs within such a short period of time that in the reasonable opinion of the Company's Board of Directors the foregoing provisions would need to be operated subject to some modification in order to give the intended result, such modification shall be made to the operation of the foregoing provisions as may be advised by the Board of Directors to be in their reasonable opinion appropriate in order to give such intended result. 5.4 CONSOLIDATION, AMALGAMATION OR MERGER In the case of any consolidation, amalgamation or merger of the Company with any other Person (other than a consolidation, amalgamation or merger in which the Company is the continuing Person), or in the case of any sale or transfer of all, or substantially all, of the assets of the Company, the Company will forthwith notify Lender of such event in accordance with Section 13.4 and (so far as legally possible) cause the Person resulting from such consolidation, amalgamation or merger or the Person which shall have acquired such assets, as the case may be, to execute an express assumption of the obligations set out in this Note to ensure that Lender will have the right (during the period in which this Note shall be convertible) to convert this Note into the class and amount of shares of Common Stock and other securities and property receivable upon such consolidation, amalgamation, merger, sale or transfer by a Holder of the number of shares of Common Stock which would have become liable to be issued upon conversion of this Note immediately prior to such consolidation, amalgamation, merger, sale or transfer. Such assumption agreement will provide for adjustments which will be as nearly equivalent as may be practicable to the adjustments provided for in the foregoing provisions of this Section 5. The above provisions of this Section 5.4 will apply in the same way to any subsequent consolidations, amalgamations, mergers, sales or transfers. 5.5 MANDATORY CONVERSION Lender acknowledges and agrees that the Company may, at its own cost, elect to exercise the Conversion Right at the Conversion Price applicable as of the date fixed by the Company for such conversion (the "Mandatory Conversion Date"), provided that (i) the Company has caused a Registration Statement to have been declared effective by the Commission in satisfaction of its obligations under the Registration Rights Agreement and such Registration Statement is currently in effect and remains effective as of the Mandatory Conversion Date and (ii)the average Market Price of the Shares during any 20 consecutive Stock Exchange Business Days falling on or after the date the Company has satisfied its obligations in clause (i) above and on the date the notice is sent, is equal to or greater than $0.42. The Company's election to exercise its conversion rights as set out herein shall not modify the Company's obligations under the Registration Rights Agreement. The Company is required to give notice to Lender that the criteria for Mandatory Conversion under this Section 5.5 has been met within 20 days of having met such criteria. The Company may give written notice of its election to convert the Note within 30 days of having satisfied the criteria set out in clauses (i) and (ii) in the preceding paragraph provided such criteria are also satisfied on the date such notice is sent. The Company shall cause such written notice of the Mandatory Conversion Date to be given to Lender not less than 20 calendar days prior to the Mandatory Conversion Date, which notice shall be irrevocable and given to Lender. Following such notice the Company shall comply with the procedures for Conversion as set out in this Section 5 and Lender will be required on or before the Mandatory Conversion Date to deliver or procure delivery of the Note together with a duly completed Conversion Notice to the Company. -5- 5.6 REGISTRATION RIGHTS 5.6.1 Pursuant to the Registration Rights Agreement (the "Registration Rights Agreement") dated as of July 28, 2000, by the Company for the benefit of Lender, the Company has agreed to file a registration statement with the U.S. Securities and Exchange Commission (the "Commission") in respect of the resale of the Conversion Shares. In accordance with the terms and conditions of the Registration Rights Agreement, the Company will (i) use its best efforts to cause the Commission to declare effective the registration statement contemplated in the foregoing sentence within three months of the Issue Date and (ii) use its best efforts to maintain the effectiveness of such registration statement until all Conversion Shares that may be issued have been issued. In the event that the Commission does not declare such registration statement effective within four months of the Issue Date, Lender will be entitled to convert this Note at a discount (the "Registration Default Discount") of 2% from the then applicable Conversion Price and thereafter, commencing on the fifth month from the Issue Date, an additional 5% discount for each month or portion thereof that the registration statement is not declared effective. The Registration Default Discount shall be permanent and shall not be affected by the subsequent effectiveness of the registration statement. All discounts under this Section 5.6 will be in addition to, and not in lieu of, any other discounts or adjustments applicable to the Conversion Price under the terms of this Note. 5.6.2 In addition, if prior to the date the Company satisfies its obligations under the Registration Rights Agreement and for a period of 60 days after it satisfies such obligations, the Company issues any Common Stock or Common Stock Equivalents at a price or having a conversion price less than the then applicable Conversion Price, the applicable Conversion Price shall be adjusted downward only to equal 95% of the price or conversion price attributable to the Common Stock or Common Stock Equivalents. To the extent any issuance of securities causes an adjustment under this Section 5.6.2 and could also provide for an adjustment under Section 5.3, the only adjustment resulting from such issuance shall occur solely under this Section 5.6.2. 5.7 ADDITIONAL SHARES. Upon the conversion of this Note, either upon the election of Lender or the Company, Lender will be entitled to receive, at no additional cost, an additional number of Conversion Shares equal to the product of (i) the number of Conversion Shares being issued to Lender multiplied by (ii) 0.26. The additional shares issued in accordance with this Section 5.7 will be part of the total number of Conversion Shares to be issued and will be included in the certificate delivered in accordance with Section 5.2.2 above. 5.8 CALCULATION OF CONVERSION PRICE. As provided in this Note, the Conversion Price is subject to reduction in a number of different circumstances. The Conversion Price to be used in connection with the conversion of this Note will be calculated on the applicable date as follows. The initial Conversion Price will first be calculated using the formula set out in Section 5.1.2. Thereafter, the Conversion Price shall be adjusted downward to give effect to any reductions as provided for in Section 5.3 and Section 5.6, with each such reduction given full effect before the next adjustment is applied. At the request of Lender, the Company shall promptly provide Lender with a calculation of the current applicable Conversion Price. Such calculation shall be sent by means of a certificate signed by the Company's Chief Financial Officer setting forth the adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based. 6. COVENANTS 6.1 PAYMENT OF PRINCIPAL AND INTEREST. The Company covenants and agrees for the benefit of Lender that it will duly and punctually pay the principal of and interest on the Note in accordance with the terms of the Note. 6.2 CORPORATE EXISTENCE. Provided that nothing contained in this Section 6.2 shall prohibit any transaction permitted by Section 9, the Company will at all times maintain, preserve and keep in full force -6- and effect its corporate existence, rights (charter and statutory) and franchises and the Company will carry on and conduct or will cause to be carried on and conducted its business and the business of its Subsidiaries in a proper and efficient manner and will keep or cause to be kept proper books of account and make or cause to be made therein true and accurate entries of all its dealings and transactions in relation to its business and the business of its Subsidiaries, as the case may be, all in accordance with GAAP, and at all reasonable times it will furnish or cause to be furnished to Lender or its duly authorized agent or attorney such information relating to its business and that of its Subsidiaries as Lender may reasonably require and such books of account shall at all reasonable times be open for inspection by Lender or such agent or attorney. 6.3 PAYMENT OF TAXES AND OTHER CLAIMS. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary and (b) all lawful claims for labour, materials and supplies which, if unpaid, might by law become a Lien upon the property of the Company or any Subsidiary; PROVIDED, HOWEVER, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. 6.4 MAINTENANCE OF PROPERTIES. The Company will cause all properties owned by the Company or any Subsidiary or used or held for use in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order (ordinary wear and tear excepted) and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be conducted at all times; PROVIDED, HOWEVER, that nothing in this Section 6.4 shall prevent the Company from discontinuing the maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to Lender. 6.5 INSURANCE. The Company will at all times keep all of the Company's and its Subsidiaries' properties which are of an insurable nature insured with insurers, believed by the Company to be responsible, against loss or damage to the extent that property of similar character is usually so insured by Corporations similarly situated and owning like properties in similar geographic areas in which the Company or such Subsidiary operates; PROVIDED that such insurance is generally available at commercially reasonable rates, and PROVIDED FURTHER that the Company or such Subsidiary may self-insure directly or through captive insurers or insurance cooperatives, to the extent that the Company determines that such practice is consistent with prudent business practices. Such insurance shall be in such amount, on such terms, in such forms and for such periods as are customary for similarly situated Persons in the Company's industry or in insurance markets available to the Company. 6.6 STATEMENT BY OFFICERS AS TO DEFAULT. The Company will deliver to Lender, within 120 days after the end of each fiscal year (which on the date hereof is September 30), a brief Officers' Certificate including a statement by the officer executing such certificate that in the course of performing his or her duties as an officer of the Company such officer would normally obtain knowledge of (i) whether or not any Default or Event of Default exists in the performance and observation of any terms, provisions and conditions of the Note and (ii) whether or not the Company has otherwise kept, observed, performed and fulfilled its obligations under the Note in all material respects. Such Officers' Certificate shall further state, as to the officer signing such certificate, to the knowledge of such officer, as of the date of such Officers' Certificate, (i) whether or not any Default or Event of Default exists, (ii) whether or not the Company during the preceding fiscal year kept, observed, performed and fulfilled in all material respects each and every covenant and obligation of the Company under the Note and (c) whether or not there was any Default or Event of Default in the performance and observance of any of the terms, provisions or conditions of the Note during such preceding fiscal year. If the officer signing the Officers' Certificate knows of such a Default or Event of Default, whether then existing or occurring during such preceding fiscal year, the Officers' Certificate shall describe such Default or Event of Default and its status with -7- particularity. The First Officer's Certificate delivered pursuant to this Section 6.6 must be delivered no later than 120 days after the first anniversary of the Closing. The Company shall also promptly notify Lender if the Company's fiscal year is changed so that the end thereof is on any date other than the then current fiscal year end date. For purposes of this Section 6.6, such compliance shall be determined without regard to any period of grace granted by Lender or requirement of Notice under the Note. The Company will deliver to Lender, forthwith upon becoming aware of any default in the performance or observance of any covenant, agreement or condition contained in the Note, or any Event of Default, an Officers' Certificate specifying with particularity such Default or Event of Default and further stating what action the Company has taken or is taking or proposes to take with respect thereto. In connection with the delivery of the Company's annual report, the Company will deliver to Lender a properly completed Certificate substantially in the form of the Certificate attached hereto as Exhibit B. 6.7 PROVISION OF FINANCIAL STATEMENTS. Whether or not the Company is subject to Section 13(a) or 15(d) of the Exchange Act, the Company will, to the extent permitted under the Exchange Act, file with Lender the annual reports, quarterly reports and other documents which the Company would have been required to file with the Commission pursuant to such Sections 13(a) or 15(d) if the Company were so subject, such documents to be delivered to Lender within 15 days of the respective dates (the "Required Filing Dates") by which the Company would have been required so to file such documents if the Company were so subject. The Company will also in any event (x) within 15 days of each Required Filing Date file with Lender copies of the annual reports, quarterly reports and other documents which the Company has filed with the Commission or would have been required to file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if the Company were subject to such Sections and (y) if filing such documents by the Company with the Commission is not permitted under the Exchange Act, the Company will promptly upon written request, supply copies of such documents to any prospective assignee of the Note at the Company's cost. 6.8 LIMITATION ON OTHER INDEBTEDNESS. The Company will not create, incur, assume, guarantee or in any other manner become directly or indirectly liable for the payment of any Indebtedness that will rank (i) except for Secured Senior Indebtedness, senior in right of payment to the Note or (ii) except for Designated Indebtedness, PARI PASSU with the Note, except to the extent of Permitted Liens securing Indebtedness. The Company will not permit any of its Subsidiaries to create, incur, assume, guarantee or in any other manner become directly or indirectly liable for the payment of any Indebtedness other than Permitted Subsidiary Indebtedness. 6.9 LIMITATION ON LIENS. Except for Liens securing Designated Senior Indebtedness and Permitted Liens , the Company will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist, any Lien of any kind upon any properties of the Company or any of its Subsidiaries securing any Indebtedness (whether by agreement, by operation of law, or structurally by virtue of the identity of the obligor). 6.10 CHARTER AMENDMENTS. On or before December 1, 2000 , the Company shall increase the authorised capital stock of the Company to provide for a total of 500,000,000 Shares. Except as to the foregoing, the Company will not amend its Certificate of Incorporation or Bylaws except as required by law or except to the extent that such amendment would not have a material adverse effect on (a) the ability of the Company to perform its obligations under the Note or (b) the rights of Lender, except that neither (i) increases in the number of Shares and issuance thereof with related securities, nor (ii) designations of Preferred Stock of the Company, modifications of the terms of such designations and issuance thereof with related securities, nor (iii) modification or expansion of the indemnity provisions provided by the Company to its directors and officers, nor (iv) change of the Company's registered agent shall be deemed an amendment hereunder. 6.11 MAINTENANCE OF LISTINGS FOR SHARES. During the term of the Note, the Company will maintain a quotation for all the issued Shares on OTC, it being understood that if the Company is unable to obtain or maintain such listing of Shares, it shall obtain and maintain a listing of all Shares issued on the exercise of the Conversion Rights on such Alternative Stock Exchange as the Company may from time to time (with the written consent of the Lender) determine and will forthwith give notice to Lender in accordance with -8- Section 13.4 herein of the listing, de-listing or quotation or lack of quotation of the Shares (as a class) by any such Alternative Stock Exchange. 6.12 REGISTRATION OF CONVERSION SHARES. The Company shall timely comply with the terms of the Registration Rights Agreement. 6.13 ADDITIONAL COVENANTS. In addition to the foregoing, while any Conversion Right remains exercisable, the Company will, save with the consent of Lender: 6.13.1 at all times keep available for issuance free from any pre-emptive rights out of its authorised but unissued capital such number of Conversion Shares as would enable the Conversion Rights, the rights for additional shares as set forth in Section 5.7, and all other rights of subscription and exchange for and conversion into Conversion Shares to be satisfied in full; 6.13.2 maintain a quotation for all the issued Conversion Shares on OTC, it being understood that if the Company is unable to obtain or maintain such quotation of Conversion Shares, to obtain and maintain a listing or quotation for all the Conversion Shares issued on the exercise of the Conversion Rights on such Alternative Stock Exchange as the Company may from time to time with the written consent Lender determine and will forthwith give notice to the Lender in accordance with Section 13.4 of the listing, de-listing or quotation or lack of quotation of the Conversion Shares (as a class) by any such Alternative Stock Exchange; and 6.13.3 not adopt any amendment to its Certificate of Incorporation that would modify the rights attaching to the Common Stock. 7. EVENTS OF DEFAULT AND REMEDIES 7.1 EVENTS OF DEFAULT. "Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of this Section 7 or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) which shall have occurred and is continuing: 7.1.1 if the Company defaults in the payment of the principal of (or premium, if any, on) this Note as and when it shall become due and payable at its Maturity, upon redemption, by declaration or otherwise, and continuance of such default for a period of 5 days; or 7.1.2 if the Company defaults in the payment of any interest upon this Note when such interest becomes due and payable, and continuance of such default for a period of 5 days; or 7.1.3 if the Company fails to perform or observe any of its other obligations, covenants, conditions or provisions under this Note and such failure continues for the period of thirty (30) calendar days next following the service by Lender on the Company of notice requiring the same to be remedied; or 7.1.4 if (i) any other Indebtedness of the Company or any Subsidiary becomes due and payable prior to its Stated Maturity by reason of an event of default (howsoever described) or (ii) any such Indebtedness of the Company or any Subsidiary is not paid when due or, as the case may be, within any applicable grace period or (iii) the Company or any Subsidiary fails to pay when due (or, as the case may be, within any applicable grace period) any amount payable by it under any present or future guarantee for, or indemnity in respect of, any Indebtedness of any Person or (iv) any security given by the Company or any Subsidiary for any Indebtedness of any Person or any Guaranty or indemnity of Indebtedness of any Person by the Company or any Subsidiary becomes enforceable by reason of default in relation thereto and steps are taken to enforce such security save in any such case where there is a bona fide dispute as to whether the relevant Indebtedness or any such Guaranty or indemnity as aforesaid shall be due and payable (following any applicable grace period), provided that in each such case the Indebtedness exceeds in the aggregate U.S. $250,000 and in each case such event continues unremedied for a period of thirty -9- (30) calendar days; or 7.1.5 if the Company or any Subsidiary shall generally fail to pay its debts as such debts become due (except debts which the Company or such Subsidiary, as the case may be, may contest in good faith generally) or shall be declared or adjudicated by a competent court to be insolvent or bankrupt, consents to the entry of an order of relief against it in an involuntary bankruptcy case, shall enter into any assignment or other similar arrangement for the benefit of its creditors or consents to the appointment of a custodian (including, without limitation, a receiver, liquidator or trustee); or 7.1.6 if a receiver, administrative receiver, administrator or other similar official shall be appointed in relation to the Company or any Subsidiary or in relation to the whole or a substantial part of the undertaking or assets of any of them or a distress, execution or other process shall be levied or enforced upon or sued out against, or an encumbrancer shall take possession of, the whole or a substantial part of the assets of any of them and in any of the foregoing cases is not paid out or discharged within ninety (90) calendar days; or 7.1.7 if the Company or any Subsidiary institutes proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganisation under the laws of the Federal Bankruptcy Code or any similar applicable U.S. Federal, State or foreign law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of it or its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they come due; or 7.1.8 if a decree or order by a court having jurisdiction in the premises shall have been entered adjudging the Company or any Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking the reorganisation of the Company or any Subsidiary under the Federal Bankruptcy Code or any other similar applicable U.S. Federal State or foreign law, and such decree or order shall have continued undischarged or unstayed for a period of ninety (90) calendar days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of the Company or any Subsidiary or of all or substantially all of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of ninety (90) calendar days; or 7.1.9 if a warranty, representation or other statement made by or on behalf of the Company contained in this Note or any certificate or other agreement furnished in compliance with such documents is false in any material respect when made and such falsity continues for a period of thirty (30) calendar days next following the service by the Lender on the Company of Notice requiring the same to be remedied; or 7.1.10 if there is any final judgment or judgments for the payment of money exceeding in the aggregate U.S. $250,000 outstanding against the Company or any Subsidiary which has been outstanding for more than sixty (60) calendar days from the date of its entry and shall not have otherwise been discharged in full or stayed by appeal, bond or otherwise. 7.2 ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. If an Event of Default (other than an Event of Default specified in Section 7.1.6 or 7.1.7) occurs and is continuing, then and in every such case the Lender may declare the principal amount of this Note to be due and payable immediately, by a notice in writing to the Company and upon any such declaration such principal amount together with accrued interest (as provided herein) shall become immediately due and payable. If an Event of Default specified in Section 7.1.6 or 7.1.7 occurs and is continuing, then the principal amount of this Note shall IPSO FACTO become and be immediately due and payable without any declaration or other act on the part of the Lender. -10- If the Company fails to pay such amounts forthwith upon such demand, Lender may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon this Note and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon this Note, wherever situated. If an Event of Default occurs and is continuing, Lender may proceed to protect and enforce its rights by such appropriate judicial proceedings it shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Note or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. 7.3 APPLICATION OF MONEY COLLECTED. Any money collected by the Lender pursuant to this Section 7 shall be applied in the following order: FIRST: To the payment of the amounts then due and unpaid for principal of and interest on this Note in respect of which or for the benefit of which such money has been collected, according to the amounts due and payable on this Note for principal and interest, respectively; and SECOND: To the payment of all costs and expenses incurred by Lender in enforcing its rights under this Note; and THIRD: The balance, if any, to the Person or Persons entitled thereto. 7.4 RESTORATION OF RIGHTS AND REMEDIES. If the Lender has instituted any proceeding to enforce any right or remedy under this Note and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Lender, then and in every such case, subject to any determination in such proceeding, the Company and the Lender shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Lender shall continue as though no such proceeding had been instituted. 7.5 RIGHTS AND REMEDIES CUMULATIVE. No right or remedy herein conferred upon or reserved to the Lender is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. 7.6 DELAY OR OMISSION NOT WAIVER. No delay or omission of the Lender to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Section 7 or by law to Lender may be exercised from time to time, and as often as may be deemed expedient, by Lender. 7.7 WAIVER OF STAY OR EXTENSION LAWS. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Note; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the -11- execution of any power herein granted to Lender, but will suffer and permit the execution of every such power as though no such law had been enacted. 8. REPORTS BY COMPANY 8.1 REPORTS BY COMPANY. The Company shall: 8.1.1 deliver to Lender, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then, on the 120th day following the issuance of the Note and annually thereafter, it shall deliver to the Lender, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; and 8.1.2 deliver to Lender, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of the Note as may be required from time to time by such rules and regulations. 9. CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER, OR LEASE 9.1 COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS. The Company will not merge or consolidate with or sell, convey, transfer or lease or otherwise dispose of all or substantially all of its properties or assets substantially as an entirety to any Person, unless: 9.1.1 either (i) the Company shall be the surviving Person or (ii) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety (1) shall be a Person organized and validly existing under the laws of the United States of America, any state thereof or the District of Colombia and (2) shall expressly assume, in form satisfactory to the Lender, the Company's obligation for the due and punctual payment of the principal of and interest on the Note and the performance and observance of every covenant of the Note on the part of the Company to be performed or observed; 9.1.2 immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Company in connection with or as a result of such transaction as having been incurred at the time of such transaction), no Default or Event of Default shall have occurred and be continuing; and 9.1.3 the Company or such Person shall have delivered to the Lender an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease complies with all provisions contained in this Note and that all conditions precedent therein and herein provided for relating to such transaction have been complied with. 9.2 SUCCESSOR SUBSTITUTED. Upon any consolidation of the Company with or merger of the Company with or into any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety to any Person in accordance with Section 5.4, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer -12- or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Note with the same effect as if such successor Person had been named as the Company therein, and in the event of any such conveyance or transfer, the Company (which term shall for this purpose mean the Person named as the "Company" in the first paragraph of the Note or any successor Person which shall theretofore become such in the manner described in Section 5.4), except in the case of a lease, shall be discharged of all obligations and covenants under the Note and may be dissolved and liquidated. 10. ADDITIONAL PROVISIONS RELATING TO CONVERSION. 10.1 ADJUSTMENT OF MAXIMUM CONVERSION PRICE. In addition to the adjustments to the Conversion Price as provided for in Section 5.3, the Maximum Conversion Price shall be subject to further adjustments as follows: 10.1.1 In case the Company shall pay or make a dividend or other distribution on its Common Stock exclusively in Common Stock or shall pay or make a dividend or other distribution on any other class of capital stock of the Company which dividend or distribution includes Common Stock, the Maximum Conversion Price in effect at the opening of business on the day next following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Maximum Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day next following the date fixed for such determination. For the purposes of this Section 10.1.1, the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company. 10.1.2 In case the Company shall pay or make a dividend or other distribution on its Common Stock consisting exclusively of, or shall otherwise issue to all holders of its Common Stock, rights, warrants or options entitling the holders thereof to subscribe for or purchase shares of Common Stock at a price per share less than the Market Price per share (determined as provided in Section 10.1.5) of the Common Stock on the date fixed for the determination of stockholders entitled to receive such rights, warrants or options, the Maximum Conversion Price in effect at the opening of business on the day following the date fixed for such determination shall be reduced by multiplying such Maximum Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such Market Price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, outstanding at the close of business on the date fixed for such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this Section 10.1.2, the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company. The Company shall not issue any rights, warrants or options in respect of shares of Common Stock held in the treasury of the Company. 10.1.3 In case the Company shall, by dividend or otherwise, make a distribution to all holders of its Common Stock exclusively in cash in an aggregate amount that, together with (i) the aggregate amount of any other distributions to all holders of its Common Stock made exclusively in cash within the 12 months preceding the date of payment of such distribution and in respect of which no Conversion Price adjustment pursuant to this Section 10.1.3 has been made and (ii) the aggregate of any cash plus the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors), as of the expiration of the tender or exchange offer referred to below, of consideration payable in respect of any tender or exchange offer by the Company or a Subsidiary for all or any portion of the Common Stock concluded within the 12 -13- months preceding the date of payment of such distribution and in respect of which no Conversion Price adjustment pursuant to Section 10.1. 6 has been made, exceeds five percent (5%) of the product of the Market Price per share (determined as provided in Section 10.1.7) of the Common Stock on the date fixed for stockholders entitled to receive such distribution times the number of shares of Common Stock outstanding on such date, the Maximum Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Maximum Conversion Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by this Section 10.1.3 by a fraction of which the numerator shall be the Market Price per share (determined as provided Section 10.1.7) of the Common Stock on the date of such effectiveness less the amount of cash so distributed applicable to one share of Common Stock and the denominator shall be such Market Price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the day following the date fixed for the payment of such distribution. 10.1.4 Subject to the last sentence of this Section 10.1.4, in case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock evidences of its indebtedness, shares of any class of capital stock, securities, cash or property (excluding any rights, warrants or options referred to in Section 10.1.2, any dividend or distribution paid exclusively in cash and any dividend or distribution referred to in Section 10.1.1), the Maximum Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Maximum Conversion Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by this Section 10.1.4 by a fraction of which the numerator shall be the Market Price per share (determined as provided in Section 10.1.7) of the Common Stock on the date of such effectiveness less the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors and shall, in the case of securities being distributed for which prior thereto there is an actual or when issued trading market, be no less than the value determined by reference to the average of the Market Price over the period specified in the succeeding sentence), on the date of such effectiveness, of the portion of the evidences of indebtedness, shares of capital stock, securities, cash and property so distributed applicable to one share of Common Stock and the denominator shall be such Market Price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the day next following the date fixed for the payment of such distribution (such date to being referred to as the "Reference Date"). If the Board of Directors determines the fair market value of any distribution for purposes of this Section 10.1.4 by reference to the actual or when issued trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the Market Price per share pursuant to Section 10.1.7of this Section. For purposes of this Section 10.1.4, any dividend or distribution that includes shares of Common Stock or rights, warrants or options to subscribe for or purchase shares of Common Stock shall be deemed instead to be (i) a dividend or distribution of the evidences of indebtedness, cash, property, shares of capital stock or securities other than such shares of Common Stock or such rights, warrants or options (making any Conversion Price reduction required by this Section 10.1.4) immediately followed by (ii) a dividend or distribution of such shares of Common Stock or such rights, warrants or options (making any further Conversion Price reduction required by Section 10.1.1 or Section 10.1.2), except (i) the Reference Date of such dividend or distribution as defined in this Section 10.1.4 shall be substituted as "the date fixed for the determination of stockholders entitled to receive such dividend or other distribution", "the date fixed for the determination of stockholders entitled to receive such rights, warrants or options" and "the date fixed for such determination" within the meaning of Section 10.1.1 and Section 10.1.2 and (ii) any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of Section 10.1.1). 10.1.5 In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Maximum Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, the Maximum Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the -14- opening of business on the day following the day upon which such subdivision or combination becomes effective. 10.1.6 In case a tender or exchange offer made by the Company or any Subsidiary for all or any portion of the Common Stock shall expire and such tender or exchange offer shall involve an aggregate consideration having a fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors) at the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it may be amended) that, together with (i) the aggregate of the cash plus the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors), as of the expiration of the other tender or exchange offer referred to below, of consideration payable in respect of any other tender or exchange offer by the Company or a Subsidiary for all or any portion of the Common Stock concluded within the preceding 12 months and in respect of which no Conversion Price adjustment pursuant to this Section 10.1.6 has been made and (ii) the aggregate amount of any distributions to all holders of the Common Stock made exclusively in cash within the preceding 12 months and in respect of which no Conversion Price adjustment pursuant to Section 10.1.5 has been made, exceeds five percent (5%) of the product of the Market Price per share (determined as provided in Section 10.1.7) of the Common Stock on the Expiration Time times the number of shares of Common Stock outstanding (including any tendered shares) on the Expiration Time, the Maximum Conversion Price shall be reduced (but not increased) so that the same shall equal the price determined by multiplying the Maximum Conversion Price in effect immediately prior to the Expiration Time by a fraction of which the numerator shall be (i) the product of the Market Price per share (determined as provided in Section 10.1.7) of the Common Stock at the Expiration Time times the number of shares of Common Stock outstanding (including any tendered or exchanged shares) at the Expiration Time minus (ii) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and the denominator shall be the product of (i) such Market Price per share at the Expiration Time times (ii) such number of outstanding shares at the Expiration Time less the number of Purchased Shares, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. 10.1.7 For the purpose of any computation of the Market Price under this Section 10.1.7 and Section 10.1.2, Section 10.1.4 and Section 10.1.5, (i) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 10.1.1 through Section 10.1.6above ("Other Event") occurs on or after the tenth Stock Exchange Business Day prior to the date in question and prior to the "ex" date for the issuance or distribution requiring such computation (the "Current Event"), the closing price for each Stock Exchange Business Day prior to the "ex" date for such Other Event shall be adjusted by multiplying such closing price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such Other Event, (ii) if the "ex" date for any Other Event occurs after the "ex" date for the Current Event and on or prior to the date in question, the closing price for each Stock Exchange Business Day on and after the "ex" date for such Other Event shall be adjusted by multiplying such closing price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such Other Event, (iii) if the "ex" date for any Other Event occurs on the "ex" date for the Current Event, one of those events shall be deemed for purposes of clauses (i) and (ii) of this proviso to have an "ex" date occurring prior to the "ex" date for the other event, and (iv) if the "ex" date for the Current Event is on or prior to the date in question, after taking into account any adjustment required pursuant to clause (ii) of this proviso, the closing price for each Stock Exchange Business Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value on the date in question (as determined in good faith by the Board of Directors in a manner consistent with any determination of such value for purposes of this Section 10.1.3 or Section 10.1.4, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors) of the portion of the rights, warrants, options, evidences of indebtedness, shares of capital stock, securities, cash or property being distributed applicable to one share of Common Stock. For the purpose of any computation under Section 10.1.6, the -15- Market Price per share of Common Stock on any date in question shall be deemed to be the Market Price on the date selected by the Company commencing on or after the latest (the "Commencement Date") of (i) the date 20 Stock Exchange Business Days before the date in question, (ii) the date of commencement of the tender or exchange offer requiring such computation and (iii) the date of the last amendment, if any, of such tender or exchange offer involving a change in the maximum number of shares for which tenders are sought or a change in the consideration offered, and ending not later than the date of the Expiration Time of such tender or exchange offer (or, if such Expiration Time occurs before the close of trading on a Stock Exchange Business Day, not later than the Stock Exchange Business Day immediately preceding the date of such Expiration Time); PROVIDED, HOWEVER, that if the "ex" date for any Other Event (other than the tender or exchange offer requiring such computation) occurs on or after the Commencement Date and on or prior to the date of the Expiration Time for the tender or exchange offer requiring such computation, the closing price for each Stock Exchange Business Day prior to the "ex" date for such Other Event shall be adjusted by multiplying such closing price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event. For purposes of this Section 10.1.7, the term "ex" date, (i) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the closing price was obtained without the right to receive such issuance or distribution, (ii) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective, and (iii) when used with respect to any tender or exchange offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the Expiration Time of such tender or exchange offer. 10.1.8 The Company may make such reductions in the Conversion Price, in addition to those required by Section 10.1.1 through 10.1.6, as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients. 10.1.9 No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least five percent (5%) in the Conversion Price; PROVIDED, HOWEVER, that any adjustments which by reason of this Section 10.1.9are not required to be made shall be carried forward and taken into account in any subsequent adjustment. 10.1.10 In addition to the foregoing, in the event the Company at any time issues shares of Common Stock or Common Stock Equivalents at a price less than the then effective Maximum Conversion Price, the Maximum Conversion Price shall be deemed adjusted to the price at which such shares of Common Stock or Common Stock Equivalents were issued and Lender shall have the right and option to convert the Note at such price (the "Temporary Conversion Price") into shares of Common Stock for a period of sixty (60) calendar days following notice by the Company of any such Temporary Conversion Price; provided, however, that the foregoing shall not apply to any issuances (i) pursuant to the conversion or exercise of currently issued and outstanding shares of Common Stock or Common Stock Equivalents (including the conversion of the Company's Series A Preferred Stock even if the conversion ratio for such stock is increased from 10 to 1 to 75 to 1); (ii) pursuant to the Note; (iii) pursuant to conversion of any currently outstanding securities of the Company (including any warrants) or any Warrants issued pursuant to the Offering; (iv) pursuant to any plan adopted by the Company for the purchase of stock in connection with any employee compensation or benefit plan of the Company or any of its Subsidiaries whether now in effect or hereafter created or amended, including, but not limited to, the Company's 1995 Stock Plan, 1994 Stock Option Plan, 1995 Director Option Plan and 1995 Employee Stock Purchase Plan; and (v) pursuant to any compensation arrangement approved by the Board of Directors of the Company with any director, officer or employee or proposed director, officer, or employee of the Company or any Subsidiary. Prior to the Effective Date, the Company will not issue shares of Common Stock or Common Stock Equivalents at less than the -16- Conversion Price, except as provided under (i) through (vii) above. Notice of any such issuance shall be given by the Company to Lender. Upon any such conversion of the Note pursuant to the foregoing, payment will be made for interest accrued during the period from the most recent Interest Payment Date to the Conversion Date. Immediately after expiration of such sixty (60) day period, the Conversion Price shall be deemed reset to the Conversion Price as in effect immediately prior to such issuance of Common Stock or Common Stock Equivalents, subject to any adjustments that would otherwise have been made in such Conversion Price pursuant to this Section 10.1 during the effectiveness of such Temporary Conversion Price. 10.2 NOTICE OF CERTAIN CORPORATE ACTION. In case: 10.2.1 the Company shall declare a dividend (or any other distribution) on its Common Stock payable (i) otherwise than exclusively in cash or (ii) exclusively in cash in an amount that would require a Conversion Price adjustment pursuant to Section 10.1.3; or 10.2.2 the Company shall authorize the granting to the holders of its Common Stock of rights, warrants or options to subscribe for or purchase any shares of capital stock of any class or of any other rights (excluding employee stock options); or 10.2.3 of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding shares of Common Stock), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or 10.2.4 of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or 10.2.5 the Company or any Subsidiary of the Company shall commence a tender or exchange offer for all or a portion of the Company's outstanding shares of Common Stock (or shall amend any such tender or exchange offer); then the Company shall cause to be mailed to Lender within ten (10) Business Days after the date on which Notice is sent to the holders of the Company's Common Stock, a Notice stating (i) the date on which a record is to be taken for the purpose of such dividend, distribution or granting of rights, warrants or options, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights, warrants or options are to be determined, or (ii) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such re-classification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up, or (iii) the date on which such tender offer commenced, the date on which such tender offer is scheduled to expire unless extended, the consideration offered and the other material terms thereof (or the material terms of any amendment thereto). 10.3 PROVISIONS IN CASE OF RECLASSIFICATION CONSOLIDATION, MERGER OR SALE OF ASSETS. In the event that the Company shall be a party to any transaction, including without limitation any (i) recapitalization or reclassification of the Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination of the Common Stock), (ii) any consolidation of the Company with, or merger of the Company into, any other person, any merger of another person into the Company (other than a merger which does not result in a reclassification, conversion, exchange or cancellation of all of the outstanding shares of Common Stock of the Company), (iii) any sale or transfer of all or substantially all of the assets of the Company, or (iv) any compulsory share exchange pursuant to which the Common Stock is converted into the right to receive other securities, cash or other property, then lawful provision shall be made as part of the terms of such transaction whereby Lender shall have the right thereafter to convert the Note only into the kind of common stock receivable upon such transaction by a holder of Common Stock (at an adjusted Conversion -17- Price equal to (a) the Conversion Price determined pursuant to Section 10.1 as though all such securities, cash or property (other than common stock) had been distributed in a dividend covered by Section 10.1.4 with an "ex" date on the date of such transaction divided by (b) the number of shares (or fraction thereof) of common stock receivable upon such transaction in respect of each share of Common Stock). 11. SENIORITY OF NOTE As set forth above, the Company's obligations under the Note and hereunder do and will rank at all times junior to the Secured Senior Indebtedness and the Permitted Subsidiary Indebtedness. 12. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS No recourse shall be had for the payment of the principal of or interest on the Note or any part thereof, or for any claim based thereon or otherwise in respect thereof, or of the indebtedness represented hereby, or upon any obligation, covenant or agreement of the Note, against any incorporator, or against any stockholder, officer or director, as such, past, present or future, of the Company, or of any predecessor or successor Person, either directly or through the Company or any such predecessor or successor Person, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, it being expressly agreed and understood that the Note is solely a corporate obligation, and that no personal liability whatsoever shall attach to, or be insured by, any such incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any predecessor or successor Person, either directly or through the Company or any such predecessor or successor Person, because of the indebtedness hereby authorized or under or by reason of any of the obligations, covenants, promises or agreements contained in the Note or to be implied herefrom or therefrom; and that any such personal liability is hereby expressly waived and released as a condition of, and as part of the consideration for, the execution of the Note; PROVIDED, HOWEVER, that nothing herein contained shall be taken to prevent recourse to and the enforcement of the liability, if any, of any stockholder or subscriber to capital stock of the Company upon or in respect of shares of capital stock not fully paid up. 13. MISCELLANEOUS 13.1 GOVERNING LAW. This Note is governed by, and will be construed in accordance with, the laws of the State of New York. 13.2 RULES OF CONSTRUCTION. For all purposes of the Note, except as otherwise expressly provided or unless the context otherwise requires: 13.2.1 all the terms defined in this Note have the meanings assigned to them in this Note, and include the plural as well as the singular; 13.2.2 all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; 13.2.3 all ratios and computations based on GAAP contained in the Note shall be computed in accordance with the definition of GAAP set forth above; 13.2.4 the words "herein," "hereof" and "hereunder" and other words of similar import refer to the Note as a whole and not to any particular Section or other subdivision of the Note; 13.2.5 the words "therein," "thereof" and "thereunder" and other words of similar import refer to the Note as a whole and not to any particular Section or other subdivision of the Note; 13.2.6 "or" is not exclusive; -18- 13.2.7 all references to $, U.S.$, dollars or United States dollars shall refer to the lawful currency of the United States of America; 13.2.8 provisions apply to successive events and transactions; and 13.2.9 all references to Sections refer to Sections of this Note unless otherwise indicated. 13.3 COMPLIANCE CERTIFICATES AND OPINIONS. Every certificate or opinion with respect to compliance with a condition or covenant provided for in the Note shall include: 13.3.1 a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions relating thereto; 13.3.2 a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; 13.3.3 a statement that, in the opinion of each such individual, such individual has made such examination or investigation as is necessary to enable such individual to express an informed opinion as to whether or not such covenant or condition has been complied with; and 13.3.4 a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. 13.4 NOTICES. Any request, demand, authorization, direction, declaration, notice, consent, waiver, or other document provided or pertained by the Note (herein collectively called "Notice") to be made upon, given or furnished to, or filed with: 13.4.1 the Lender by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with: RemoteData Partners 800 North Shoreline Boulevard Suite 2200 South Corpus Christi, Texas 78401 13.4.2 the Company shall be sufficient for every purpose hereunder (unless otherwise expressly provided) if made, given, furnished or filed in writing to or with the Company addressed to it at the address of its principal office which shall initially be: 1181 Grier Drive, Suite B, Las Vegas, Nevada 89119. Any Notice to be given hereunder by any party to another shall be in writing and in English (by letter, telex or fax) delivered in person or by courier service requiring acknowledgment of delivery, mailed by first class mail, postage prepaid, or sent by fax to the addressee (including telecopier number, if applicable) set forth herein. Notices to the Lender given by mail, fax, personal delivery or courier service shall be effective upon actual receipt. Any such Notice or other communication which would otherwise take effect after 4:00 p.m. on any particular day shall not take effect until 10:00 a.m. on the immediately succeeding Business Day in the place of the addressee. A party may change any address to which Notice is to be given to it by giving Notice as provided above of such change of address. 13.5 EFFECT OF HEADINGS. The Section headings herein are for convenience only and shall not affect the construction hereof. 13.6 SUCCESSORS AND ASSIGNS. -19- This Note may be assigned by Lender in part or in whole without the consent of the Company. All covenants and agreements in the Note by the Company shall bind its permitted successors and assigns, whether so expressed or not. 13.7 SEPARABILITY CLAUSE. In case any provision in the Note shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions, to the extent permitted by law, shall not in any way be affected or impaired thereby. 13.8 BENEFITS OF THE NOTE. Nothing in the Note, express or implied, shall give to any Person, other than the parties thereto, and their respective successors thereunder, any legal or equitable right, remedy or claim under the Note. 13.9 PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED. Interest and all other payments due on the Note, shall be paid Lender at the address specified in the Note or at such other address as is specified by Lender. 14. DEFINITIONS. In addition to the terms defined above, the following terms have the following meanings: "Adjusted Market Price" has the meaning set out in Section 5.1. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Alternative Stock Exchange" means other than OTC, any national or regional stock exchange or quotation service such as NASDAQ National Market System or any similar quotation service maintained by the National Quotation Bureau or any successor thereto agreed between the Company and Lender. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is a day on which banking institutions in New York, New York are not authorized or obliged by law, regulation or executive order to close. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock whether now outstanding or issued on or after the date of the Note, including, without limitation, all Common Stock and Preferred Stock. "Capitalized Lease Obligation" means the amount of the liability under any capital lease that, in accordance with GAAP, is required to be capitalized and reflected as a liability on the balance sheet of the relevant Person. "Certificate of Incorporation" means the Certificate of Incorporation of the Company, as in effect on the date hereof and as amended or restated from time to time hereafter. -20- "Commencement Date" has the meaning set out in Section 10.1. "Commission" shall have the meaning as specified in Section 5.6. "Common Stock Equivalent" means equity or debt securities (other than Common Stock) of the Company which are convertible into or exercisable for shares of Common Stock (including, without limitation, shares, units of shares, preferred stock and other convertible securities) which the Board of Directors has deemed to have the same value or economic rights as shares of Common Stock. "Company" means the Person named as the "Company" in the first paragraph of the Note, until a successor Person shall have become such pursuant to the applicable provisions of the Note, and thereafter "Company" shall mean such successor Person. "Conversion Date" means the Business Day on which either (i) the Conversion Right is exercised by delivery to the Company of completed Conversion Notice or (ii) the date of conversion as specified in the Company's notice of mandatory conversion delivered in accordance with Section 5.5 of the Note. "Conversion Notice" shall have the meaning as set forth in Section 5.2. "Conversion Period" shall have the meaning as set out in Section 5.1. "Conversion Price" shall have the meaning as set out in Section 5.1. "Conversion Right" means the right of Lender to convert the Note into Conversion Shares. "Conversion Shares" means the Shares into which the Note is convertible including the additional Shares Lender is entitled pursuant to the Note. "Corporation" includes corporations, limited liability companies, limited and general partnerships, associations, joint-stock companies and business trusts. "Current Event" has the meaning set out in Section 10.1. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Default Rate" means a rate of interest of 18% per annum. "Designated Indebtedness" means (i) Indebtedness currently in existence and more fully described on Exhibit C attached hereto, (ii) Indebtedness for which the Company or any of its Subsidiaries are the sole obligors and obligees, (iii) Indebtedness secured by Permitted Liens and (iv) other indebtedness permitted pursuant to Exhibit E. "Effective Date" means the earlier of (a) the first Business Day following the date upon which the Commission declares to be effective a registration statement filed by the Company pursuant to the Securities Act relating to the Conversion Shares and (b) the first Business Day occurring after the expiration of the Distribution Compliance Period. "Event of Default" shall have the meaning specified in Section 7. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Expiration Time" has the meaning set out in Section 10.1. "Federal Bankruptcy Code" means the Bankruptcy Act or Title 11 of the United States Code, as -21- amended from time to time. "Generally Accepted Accounting Principles" or "GAAP" means generally accepted accounting principles in the United States, as applied from time to time by the Company and its Subsidiaries in the preparation of its financial statements. "Guaranty" means all obligations of any Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing or in effect guaranteeing any Indebtedness, dividend or other obligation, of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including without limitation all obligations incurred through an agreement, contingent or otherwise, by such Person: (i) to purchase such Indebtedness or obligation or any Property or assets constituting security therefor, or (ii) to advance or supply funds (1) for the purchase or payment of such Indebtedness or obligation, or (2) to enable the recipient of such funds to maintain certain financial conditions (e.g. agreed amount of working capital) under loan or similar documents, or (iii) to lease Property or to purchase securities or other Property or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of the primary obligor to make payment of the Indebtedness or obligation, or (iv) otherwise to assure the owner of the Indebtedness or obligation of the primary obligor against loss in respect thereof. For the purposes of all computations made under the Note, a Guaranty in respect of any Indebtedness shall be deemed to be Indebtedness equal to the principal amount and accrued interest of such Indebtedness which has been guaranteed, and a Guaranty in respect of any other obligation or liability or any dividend shall be deemed to be Indebtedness equal to the maximum aggregate amount of such obligation, liability or dividend. "Indebtedness" of any Person means and includes all present and future obligations of such Person, which shall include, without limitation, all obligations (i) which in accordance with GAAP shall be classified upon a balance sheet of such Person as liabilities of such Person, (ii) for borrowed money, (iii) which have been incurred in connection with the acquisition of Property (including, without limitation, all obligations of such Person evidenced by any debenture, bond, note, commercial paper or other similar security, but excluding, in any case, obligations arising from the endorsement in the ordinary course of business of negotiable instruments for deposit or collection), (iv) secured by any Lien existing on Property owned by such Person, even though such Person has not assumed or become liable for the payment of such obligations, (v) created or arising under any conditional sale or other title retention agreement with respect to Property acquired by such Person, notwithstanding the fact that the rights and remedies of the seller, lender or lessor under such agreement in the event of default are limited to repossession or sale of such Property, (vi) which are Capitalized Lease Obligations, (vii) for all Guaranties, whether or not reflected in the balance sheet of such Person, (viii) that are rental obligations under leases for personal property or fixtures and (ix) which are all reimbursement and other payment obligations (whether contingent, matured or otherwise) of such Person in respect of any acceptance or documentary credit. Notwithstanding the foregoing, Indebtedness shall not include (i) accounts payable incurred in the ordinary course of business, and (ii) Indebtedness represented by rental or lease obligations for personal property or fixtures not to exceed $1,500,000 in any period of 12 months for any Person and its Subsidiaries. "Interest Payment Date" has the meaning set out in Section 3. "Issue Date" means July 28, 2000. "Lien" means any mortgage, charge, pledge, lien, security interest or encumbrance of any kind whatsoever, including any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of the Note, the Company or its Subsidiary shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for -22- security purposes. "Mandatory Conversion" means conversion of the Note at the option of the Company pursuant to Section 5.5. "Mandatory Conversion Date" shall have the meaning specified in Section 5.5. "Market Price" shall have the meaning as set out in Section 5.1. "Maturity," when used with respect to the Note, means the date on which the principal of the Note becomes due and payable as therein or herein provided, whether at the Stated Maturity or the Redemption Date and whether by declaration of acceleration, call for redemption or otherwise. "Maximum Conversion Price" means U.S. $0.30 per Conversion Share. "Note" means this 12% Senior Convertible Note as originally executed and as it may from time to time be supplemented or amended. "Notice" has the meaning specified in Section 13.4. "Officers' Certificate" means a certificate signed by the Chairman, its Chief Executive Officer, the President or a Vice President, and by the Chief Financial Officer, its Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company, and delivered to Lender. Any one individual holding the requisite titles may sign and deliver an Officers' Certificate without cosignature of another individual with a requisite title. "Offering" means the Company's issuance of the 12% Senior Convertible Debentures constituted by the Trust Indenture dated on or about July 28, 2000. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, including an employee of the Company, and who shall be reasonably acceptable to Lender. "OTC" means the over-the-counter bulletin board as maintained by the National Association of Securities Dealers, Inc. "Other Event" has the meaning set out in Section 10.1. "Permitted Liens" means (a) Liens or deposits made to secure payment of worker's compensation (or to participate in any fund in connection with worker's compensation), unemployment insurance, pensions, or social security programs, (b) Liens imposed by mandatory provisions of law such as for materialmen's mechanics, warehousemen's and other Liens arising in the ordinary course of the business of the Company or its Subsidiaries, securing Indebtedness on which payment is not yet due, (c) Liens for taxes imposed upon the Company's or any of its Subsidiaries' income, profits or property, if the same are not yet due and payable or if the same are being contested in good faith and as to which adequate reserves are maintained in accordance with GAAP, (d) Liens in connection with leases, real estate bids, or contracts (other than contracts involving the borrowing of money) or to secure (or in lieu of) surety, stay, appearance or customs bonds and Liens to secure the payment of taxes, assessments, customs, duties or other similar charges, (e) Liens consisting of zoning restrictions, easements or other restrictions on the use of real property PROVIDED THAT such Liens do not impair the use of such property for the uses intended, and none of which is violated by existing or proposed structure or land use, (f) any Lien existing on any property of any person at the time it becomes a Subsidiary or of a successor to or merged with or into the Company so long as (i) that Lien does not encumber any other property of any Company or any Subsidiary and (ii) the aggregate amount of Indebtedness secured by that Lien never exceeds 100% of the fair market value of that property, (g) Liens on any personal property or fixtures acquired by the Company or any Subsidiary after the date of the Note and created contemporaneously with the date of that acquisition to secure Indebtedness incurred in connection with the purchase, rental or lease of such personal property or fixtures, and (h) any Lien described in clauses (f) and (g) above resulting from renewing, extending, or -23- refunding outstanding Indebtedness so long as the principal amount of the Indebtedness so secured is not increased and that Lien is not extended to any other property. "Permitted Subsidiary Indebtedness " means as to a Subsidiary of the Company, Indebtedness currently in existence and more fully described on Exhibit D attached hereto. "Person" means any individual, corporation, limited liability company, limited or general partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participation or other equivalents (however designated) of such Person's preferred or preference stock whether now outstanding or issued on or after the date of the Note, and includes, without limitation, all classes and series of preferred or preference stock. "Principal Amount" has meaning as defined in Section 1. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Redemption Date," when used with respect to the Note, means the date fixed for such redemption by or pursuant to the Note. "Redemption Price," when used with respect to the Note, means the price at which it is to be redeemed pursuant to the terms hereof, plus accrued interest as provided herein, expressed in either a number of Conversion Shares into which the Note shall be converted in the event the Note is to be redeemed for Shares or, in the event of any other redemption, a cash amount. "Reference Date" has the meaning set out in Section 10.1. "Registration Default Discount" shall have the meaning specified in Section 5.6. "Registration Rights Agreement" means that certain Registration Rights Agreement dated July 28, 2000 executed by the Company for the benefit of Lender. "Required Filing Dates" has the meaning specified in Section 6.7. "Rule 144" means Rule 144, as amended, promulgated by the Commission pursuant to the Securities Act. "Secured Senior Indebtedness " means Indebtedness senior in right of payment to the Note, which Indebtedness is limited to Indebtedness incurred pursuant to that certain Accounts Receivable Purchase Agreement dated July 7, 2000, or any extension or renewal thereof, with Silicon Valley Financial Services, which Indebtedness may not at any time exceed $1,000,000. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated from time to time by the Commission pursuant thereto. "Shares" means the common stock, par value U.S.$0.0001, of the Company (and all other (if any) shares or stock resulting from any sub-division, consolidation or reclassification of such shares). "Stated Maturity" when used with respect to any Indebtedness or any instalment of principal thereof or interest thereon, means the date specified in such Indebtedness as the fixed date on which the -24- principal of such Indebtedness or such instalment of principal or interest is due and payable. "Stock Exchange Business Day" means any day (other than a Saturday or Sunday) on which OTC is providing quotes or the Alternative Stock Exchange is open for business. "Subordinated Obligation" means any Indebtedness of the Company outstanding on such date which is contractually subordinate or junior in right of payment to the Note. Notwithstanding the immediately preceding sentence, any shares of Preferred Stock issued by any Subsidiary shall, for purposes of this definition, be treated as Subordinated Obligations. "Subsidiary" of any Person means any Corporation of which at least a majority of the shares of stock having by the terms thereof ordinary voting power to elect a majority of the Board of Directors of such Corporation (irrespective of whether or not at the time stock of any other class or classes of such Corporation shall have or might have voting power by reason of the happening of any contingency) is directly or indirectly owned or controlled by any one of or any combinations of the Company or one or more of its Subsidiaries. "Temporary Conversion Price" has the meaning specified in Section 10.1.10. "U.S. Person" means any Person who is a "U.S. person" as defined in Regulation S. "Vice President," when used with respect to the Company, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president." IN WITNESS WHEREOF, the Company has caused this Note to be duly executed in its corporate name by the undersigned duly authorized officers of the Company. Dated as of July 28, 2000. FIBERCHEM, INC. By: /s/ Melvin W. Pelley ----------------------- Name: Melvin W. Pelley ----------------------- Title Secretary & CFO ----------------------- -25- EXHIBIT A NOTEHOLDER'S CONVERSION NOTICE 12% SENIOR CONVERTIBLE PROMISSORY NOTE To: The Company The undersigned Holder of the12% Senior Convertible Promissory Note (the "Note") in the aggregate principal amount of U.S.$_______________ tendered herewith hereby irrevocably exercises the option to convert such Note into shares of Common Stock (this and other capitalised terms used but not defined herein have the meanings ascribed to such terms in the Note) in accordance with the terms of the Note and directs that the Conversion Shares issuable and deliverable upon such conversion be issued and delivered to the undersigned in the name and at the address set forth below. Provided the Conversion Shares are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act of 1933, as amended (the "Securities Act"), the undersigned Holder (and any Person to which the Conversion Shares are to be issued other than the undersigned Holder) hereby certifies to the Company that it: (1) acknowledges that the Conversion Shares have not been registered under the Securities Act and may not be offered or sold within the United States or to, or for the benefit of, U.S. persons except as permitted below; (2) understands and agrees that within two years after the date of original issuance of the Note or within three months after it ceases to be an affiliate (within the meaning of Rule 144 under the Securities Act) of the Company, the Conversion Shares may be resold, pledged or transferred only (i) to the Company, (ii) pursuant to offers and sales to non-U.S. persons that occur outside the United States in a transaction meeting the requirements of Rules 901 through 905 of Regulation S under the Securities Act, (iii) pursuant to an exemption from the registration requirements of the Securities Act provided by Rule 144 (if applicable) under the Securities Act, or (iv) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States; (5) understands that the certificates representing the Conversion Shares will bear a restrictive legend describing the foregoing restrictions, unless otherwise agreed by the Company. -26- If the Conversion Shares are to be issued in the name of a Person other than the undersigned, the undersigned Holder will pay all transfer taxes payable with respect thereto and is delivering herewith a certificate in proper form certifying that the applicable restrictions on transfer have been complied with. DATE: _______________ ______________________________ Name of Lender ______________________________ Signature(s) of Lender Name(s) for Registration of Share Certificates (if different than Lender): ______________________________ ______________________________ Signature(s) of such Person Address for Delivery of Share Certificates ______________________________ ______________________________ ______________________________ ______________________________ -27- EXHIBIT B ANNUAL REPORTING CERTIFICATE To: Lender THAT, the undersigned duly elected and authorized Chief Financial Officer of FiberChem, Inc. a Delaware corporation (the "Company"), in compliance with the 12% Senior Convertible Note dated as of [____________] (the "Note") does hereby certify that: (a) Attached hereto is a copy of the Annual Report on Form 10-K for the fiscal year ending September 30, ______. (b) To the knowledge of the Company, no Default or Event of Default with respect to the Note has occurred and is continuing as of the date of this Certificate. (c) As of the date hereof, the Company is in compliance with the requirements of the Note. All terms used and not otherwise defined herein shall have their respective meanings as set forth in the Note. DATE: _______________ ___________________________ Chief Financial Officer -28- EXHIBIT C DESIGNATED INDEBTEDNESS 1. 8% Senior Notes due February 15, 2002; $172,000 outstanding as of June 30 and July 27, 2000 2. Secured Senior Indebtedness as described in this Indenture; no balance outstanding as of June 30 and July 27, 2000. 3. Loans from Officers, Directors and Affiliates: Privatbank Vermag AG; five 8% Notes, $50,000 each; due July 15, 2000, extended to September 29, 2000 Walter Haemmerli; 9% Convertible Note due July 26, 2002; $50,000 G & G Diagnostics, LP II; 9% Convertible Note due July 26, 2002; $25,000 G & G Diagnostics, LP II; 9% Convertible Note due July 26, 2002; $25,000 Melvin W. Pelley; 9% Convertible Note due July 27, 2002; $25,000 Melvin W. Pelley; 9% Convertible Note due September 28, 2002; $40,000 Melvin W. Pelley; 12% Convertible Note due January 11, 2003; $200,000 4. Entrenet Group, LLC; 10% subordinated convertible note due April 11, 2001; $126,500; effective upon consummation of the Arrangement Agreement, July 27, 2000 5. Indebtedness incurred in connection with the issuance of the Convertible Preferred Stock of the Company issued on or about July 28, 2000, which Preferred Stock has been placed with the assistance of RP&C Limited. 6. $1,350,000 of Indebtedness reflected by that certain 12% Convertible Debentures issued by the Company and dated on or about July 28, 2000. 7. Additional Indebtedness, which in the aggregate and when included with the Indebtedness represented by the Debentures, and the Indebtedness represented by the instruments referenced in paragraphs 5 and 6 above does not exceed $5 million, provided such additional Indebtedness has on the whole terms no more favorable to the holders of such Indebtedness as the terms of the Debentures or the Senior Convertible Note referenced in paragraph 6 above. Through August 14, such additional Indebtedness may only be placed using the assistance of the Agent or a Person approved in writing by Agent. -29- EXHIBIT D PERMITTED SUBSIDIARY INDEBTEDNESS FBI ENVIRONMENTAL, INC.: Indebtedness under Accounts Receivable Purchase Agreement dated July 7, 1998, (Silicon Valley Bank) and any extension or renewal thereof. No balance outstanding as of June 30 and July 27, 2000. This Indebtedness is also referenced on Exhibit E as the Senior Secured Indebtedness Deutsche Financial Services; Financing lease agreement; telephone equipment at Carrollton, Texas; 48 monthly payments of $1,245.80 beginning May 2000 INTREX DATA COMMUNICATIONS CORP: Advances to and expenses paid on behalf of Intrex by Intrex officers, directors and affiliates; $360,985 at December 31, 1999. Harvard Property (Metro crest) LP; Commercial lease agreement for facilities Carrollton, Texas; 24 monthly rental payments of $5,812.12 beginning April 2000 -30- EX-13.4 14 a2028934zex-13_4.txt EXHIBIT 13.4 EXHIBIT 13.4 ================================================================================ 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) ================================================================================ 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 FIBERCHEM, INC. INDEX TO FINANCIAL STATEMENTS AND PRO FORMA INFORMATION 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
2 INTREX DATA COMMUNICATIONS CORP. CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 AND 1998 3 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 INTREX DATA COMMUNICATIONS CORP. Consolidated Balance Sheet December 31, 1999, with comparative figures for 1998
- ------------------------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. On behalf of the Board: "D.S. Peachey" Director - ---------------------------------- "P. Lagergren" Director - ---------------------------------- 5 INTREX DATA COMMUNICATIONS CORP. Consolidated Statement of Operations and Deficit Year ended December 31, 1999, with comparative figures for 1998
- ---------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 6 INTREX DATA COMMUNICATIONS CORP. Consolidated Statement of Cash Flows Year ended December 31, 1999, with comparative figures for 1998
- ---------------------------------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------------------------------- 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 -- -- - ----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 7 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 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 4. Capital assets:
----------------------------------------------------------------------------------------------- 1999 1998 ----------------------------------------------------------------------------------------------- Accumulated Net Net Cost amortization book value book value ----------------------------------------------------------------------------------------------- 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 -----------------------------------------------------------------------------------------------
5. Intellectual property:
----------------------------------------------------------------------------------------------- 1999 1998 ----------------------------------------------------------------------------------------------- Cost $1,200,000 $1,200,000 Less accumulated amortization (960,000) (720,000) ----------------------------------------------------------------------------------------------- $ 240,000 $ 480,000 -----------------------------------------------------------------------------------------------
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: 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 -----------------------------------------------------------------------------------------------
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 8. Due to related parties:
- ------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------
(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:
- --------------------------------------------------------------------------------------------------------- Number of shares Amount - --------------------------------------------------------------------------------------------------------- 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
11 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 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 PANDEL INSTRUMENTS, INC. FINANCIAL STATEMENTS AT AND FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 14 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 PANDEL INSTRUMENTS, INC. BALANCE SHEETS
DECEMBER 31, -------------------------------------- 1999 1998 --------------- -------------- 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 =============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 16 PANDEL INSTRUMENTS, INC. STATEMENTS OF OPERATIONS
Year Ended December 31, 1999 1998 ------------ ------------ 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
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 17 PANDEL INSTRUMENTS, INC. STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Common Stock Additional Total --------------------------------- Paid Accumulated Stockholder's Shares Amount Capital Deficit Equity --------------- ---------------- --------------- --------------- ------------------ 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) =============== ================ =============== =============== =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 18 PANDEL INSTRUMENTS, INC. STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 1998 ------------------ ------------------ 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 $ - - ================== ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 19 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 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 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 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS September 30, 1998 and 1999 23 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 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
September 30, September 30, 1998 1999 -------------- -------------- 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 ============== ==============
The accompanying notes and independent auditor's reports should be read in conjunction with the consolidated financial statements 25 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, September 30, 1998 1999 -------------- -------------- 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 ============== ==============
The accompanying notes and independent auditor's reports should be read in conjunction with the consolidated financial statements. 26 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30, ---------------------------- 1998 1999 ------------ ------------ 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) ============ ============
The accompanying notes and independent auditor's reports should be read in conjunction with the consolidated financial statements. 27 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1998 AND 1999
Preferred Stock Common Stock Additional ---------------------------- ---------------------------- Paid-In Shares Amount Shares Amount Capital ------------ ------------ ------------ ------------ ------------ 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 ============ ============ ============ ============ ============
Receivable Deferred for Exercise Deficit Costs of Rights Total ------------ ------------ ------------ ------------ 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) ============ ============ ============ ============
The accompanying notes and independent auditor's reports should be read in conjunction with the consolidated financial statements. 28 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, ----------------------------- 1998 1999 ------------ ------------ 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) ------------ ------------
The accompanying notes and independent auditor's reports should be read in conjunction with the consolidated financial statements. (continued) 29 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS 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 =============== ===============
The accompanying notes and independent auditor's reports should be read in conjunction with the consolidated financial statements. 30 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 $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 (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 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1998 and 1999 ================================================================================ (3) INVENTORIES Inventories consist of:
SEPTEMBER 30, -------------------------- 1998 1999 ----------- ----------- 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 =========== ===========
(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 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 Also, $50,000 of the Bridge Loans and $1,920 in accrued interest were converted to Common Stock and Warrants as part of the Rights Offering. The remaining $383,000 of Bridge Loans were due on July 15, 1999, when principal of $133,000 and accrued interest of $14,680 were converted to 1,136,000 shares of Common Stock. The due date of the remaining $250,000 principal amount was extended to October 15, 1999 and subsequently to January 15, 2000. During Fiscal 1998, directors and officers of the Company advanced an aggregate of $375,000 to the Company. These advances bear interest at the rate of 8% per annum and are due at various dates between December 14, 2002 and February 4, 2003 unless converted into Common Stock prior to maturity. An aggregate of $325,000 of these advances and $20,329 in accrued interest was converted to Common Stock and Warrants in conjunction with the Rights Offering. During June 1999, an officer advanced an additional $50,000 due in June 2002 with interest of 9% per annum. During July and August 1999 officers and directors advanced an additional $125,000 in exchange for three year 9% notes convertible into common stock at $0.13 per share, the then market value of the Common Stock. During September 1999, an officer advanced an additional $40,000 in exchange for a three year 9% note convertible into Common Stock at $0.11 per share, the then market value of the Common Stock. The maturities of the notes and bank loans payable are as follows: Fiscal 2000 $ 671,949 Fiscal 2001 -- Fiscal 2002 1,836,000 Fiscal 2003 50,000 ---------- $2,557,949 ==========
Related party interest expense incurred during the years ended September 30, 1998 and 1999 amounted to $39,235 and $56,111, respectively. (7) STOCKHOLDERS' EQUITY On October 23, 1998, the Company granted, for no consideration to holders of its Common Stock, Preferred Stock and warrants, transferable rights (the "Rights") to subscribe for units (the "Units") at a subscription price of $0.22 per Unit. Each Unit consists of one share of Common Stock and one redeemable Class E Warrant exercisable for one share of Common Stock at an exercise price for one year (through October 23, 1999) of $0.25 per share; then through October 23, 2000 at $0.35; then through October 23, 2001 at $0.50 per share; then through October 23, 2002 at $0.70 per share; then through October 23, 2003 (at which time the Class E Warrants expire) at $0.90 per share. Each holder of record as of October 16, 1998, of Common Stock and Warrants received one Right for every four shares of Common Stock or Warrants held, and each holder of Preferred Stock received 2.5 Rights for each share of Preferred Stock held. An aggregate of 8,976,962 Rights were issued. An aggregate of 7,678,679 Rights were exercised as of the close of the offering on December 22, 1998, resulting in gross proceeds to the Company of $1,689,309 and the issuance of 7,678,679 shares of Common Stock and a like number of Class E Warrants. 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 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: 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) ============
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 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
1998 1999 ---------------------------- ---------------------------- Weighted Weighted Average Average Exercise Exercise Fixed Options Options Price Options Price - ------------------------------ ------------ ------------ ------------ ------------ 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 ============ ============
The following table summarizes information about stock options outstanding and exercisable at September 30, 1998 and 1999.
Weighted Average Range of Exercise Number Outstanding and Remaining Weighted Average September 30 Prices Exercisable Contractual Life Exercise Price - ------------------ -------------------- ------------------------- --------------------- ----------------- 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
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 ------------------------------------ ---------------------------------- 1998 1999 1998 1999 ----------------- --------------- --------------- --------------- 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)
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 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:
1998 1999 --------- --------- 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 $ -- $ -- ========= =========
Components of the net deferred tax asset as of September 30, 1998 and 1999 are as follows:
1998 CHANGE 1999 ------------ ------------ ------------ 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 $ -- $ -- $ -- ============ ============ ============
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
- ------------------------------------------------------------------------ Year Ended NOL NOL Expiration September 30, Generated Utilized Carryover September 30, - ------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------
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 (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 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 FIBERCHEM, INC. PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED) JUNE 30, 2000
Historical (1) Pro Forma ------------------------------------------ Pro Forma Financial FiberChem Intrex Pandel Adjustments Statements ------------ --------- ---------- ----------- ----------- 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 ============ ========= ========== ===========
The accompanying notes are an integral part of these financial statements 44 FIBERCHEM, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX AND NINE MONTHS ENDED JUNE 30, 2000
Historical (1) Pro Forma --------------------------------------------- Pro Forma Financial FiberChem Intrex Pandel Adjustments Statements -------------- ---------------- ----------- -------------- --------------- 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
The accompanying notes are an integral part of these financial statements 45 FIBERCHEM, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND DECEMBER 31, 1999
Historical Pro Forma ------------------------------ --------------- Pro Forma Financial FiberChem Intrex Pandel Adjustments Statements -------------- --------------- --------------- --------------- --------------- 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
The accompanying notes are an integral part of these financial statements 46 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 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)):
Shares --------------------------------------------- Consideration Non Pooled Pooled Total Value ($) ---------- ----------- ----------- ------------- 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 ========== =========== =========== =============
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:
FiberChem Common Shares Issued and Outstanding Upon Exchange - Change to Ultimate ---------------------------------------------- FiberChem Common Percent Intrex Minority ---------------------------------- Acquired Interest Interest Total Par Value ($) Paid-in Capital ($) -------- ----------- ---------- ----------- ------------- ------------------- 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
(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 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: 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 ===============
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 $5,500,000 was expensed on January 1, 1999 and is included in retained deficit at June 30, 2000. The effect of various percentages of Intrex's interest in the acquired net assets of FiberChem depending on the ultimate distribution of Pooled Shares is as follows:
Six Month Twelve Month Ultimate Six Month Twelve Month Minority Minority Minority Percent Amortization Amortization Equity Loss Loss Acquired Goodwill ($) Expense ($) Expense ($) Interest($) Interest($) Interest($) -------- ------------ ------------ ----------- ----------- ----------- ----------- 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
(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
(F) Represents minority interest. (G) Represents elimination of intercompany accounts. 49 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 EX-21.1 15 a2028934zex-21_1.txt EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF FIBERCHEM, INC.
NAME STATE OF INCORPORATION FCI Environmental, Inc. (formerly FCI Instruments, Inc.) Nevada Fiberoptic Medical Systems, Inc. (inactive) Nevada Firebird Data Communications, Inc. Texas Intrex Data Communications Corp. British Columbia Pandel Mergerco, Inc. Delaware PetroTester, Inc. (inactive) New Mexico
EX-23.2 16 a2028934zex-23_2.txt EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITOR'S CONSENT To the Board Of Directors and Stockholders of FiberChem, Inc. We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-2 of our report dated November 16, 1999, except for the third paragraph of Note 1 and Note 12, as to which the date is December 6, 1999, on the balance sheet of FiberChem, Inc. and Subsidiaries as of September 30, 1999 and the related consolidated statements of operations, stockholders' deficiency, and cash flows for each of the two years then ended which report appears in the September 30, 1999 annual report on Form 10-KSB of FiberChem, Inc. We also consent to the reference to our firm under the caption "Experts" in such prospectus. GOLDSTEIN GOLUB KESSLER LLP New York, New York November 3, 2000 -----END PRIVACY-ENHANCED MESSAGE-----