<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES, IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION DATED MAY 1, 1998
2,000,000 UNITS
[LOGO]
PHYTOTECH, INC.
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE COMMON STOCK PURCHASE WARRANT
Phytotech, Inc. ("Phytotech" or the "Company") is offering 2,000,000 units
("Units"), each Unit consisting of one share (the "Shares") of the Company's
voting common stock, no par value (the "Common Stock"), and one warrant to
purchase one share of Common Stock (the "Warrants"). The Units will separate,
and the Common Stock and Warrants that make up the Units will trade only as
separate securities, thirty days after the date of this prospectus (the
"Separation Date"). Each Warrant initially entitles the holder to purchase one
share of Common Stock at a price of $ per share (100% of the initial public
offering price of a Unit). The Warrants are exercisable at any time beginning on
the Separation Date unless previously redeemed, until the fifth anniversary of
this Prospectus, subject to certain conditions. The Company may redeem the
Warrants, in whole or in part, at any time upon at least thirty days prior
written notice to the registered holders thereof, at a price of $0.25 per
Warrant, provided that the closing bid price of the Common Stock has been at
least $ (200% of the initial public offering price of a Unit) for at least 20
consecutive trading days ending on a date within 30 days before the date of the
notice of redemption. It is anticipated that the initial public offering price
of a Unit will be between $5.00 and $6.00.
The Company has applied to have the Common Stock, Warrants and Units
approved for listing on the Nasdaq SmallCap Market under the symbols "PHYT,"
"PHYTW" and "PHYTU," respectively.
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON
PAGE 7.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Unit...................................................
Total (3)..................................................
</TABLE>
(1) Excludes a non-accountable expense allowance to the Representative of the
Underwriters (the "Representative") and the value of five-year warrants (the
"Representative's Warrants") entitling the Representative to purchase up to
200,000 Units at a price of $ (120% of the initial public offering
price of the Units). The Company has agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses payable by the Company of $ ,
including the Representative's non-accountable expense allowance.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
300,000 additional Units on the same terms as set forth above to cover
overallotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ , and $ respectively. See
"Underwriting."
The Units are offered by the several Underwriters subject to receipt and
acceptance by them, to prior sale and to their right to reject orders in whole
or in part. It is expected that delivery of certificates for the Shares and
Warrants will be made against payment therefor on or about , 1998.
PAULSON INVESTMENT COMPANY, INC.
MILLENNIUM FINANCIAL GROUP, INC.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
[PHOTO depicting Indian mustard plants at a contaminated industrial site]
INDIAN MUSTARD PLANTS TREATING A LEAD CONTAMINATED INDUSTRIAL SITE IN TRENTON,
NEW JERSEY.
THE PLANTS ARE READY FOR HARVESTING.
------------------------
The Company has not previously been subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company intends to furnish its shareholders with annual reports containing
financial statements audited by its independent certified public accountants and
quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, COMMON
STOCK OR WARRANTS OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ
SMALLCAP MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION INCLUDING THE FINANCIAL STATEMENTS, AND NOTES THERETO, APPEARING
ELSEWHERE IN THE PROSPECTUS.
THE COMPANY
Phytotech is a biotechnology company engaged in the development and
commercialization of products and services based on the control of biochemical
processes in selected plants. Phytotech currently offers waste cleanup
("bioremediation") services using plants grown under carefully controlled
conditions to absorb and dispose of unwanted metals, such as lead or uranium,
from toxic waste sites. The Company has also developed and is beginning to
market nutritionally important minerals absorbed into plants and is beginning to
develop technology for the production of high value proteins in plants.
Phytotech's goal is to develop a portfolio of proprietary and patentable
technologies based on its expertise in plant physiology, soil science, agronomy,
molecular biology and related areas and to commercialize these technologies
internally or through licensing or joint venture relationships with other
companies.
All plants can, under appropriate conditions, absorb metals and other
minerals found in the soil or water in which they are grown. By carefully
selecting certain plants and managing the conditions in which they are
cultivated, it is possible to cause these plants to extract and accumulate
substantial amounts of target metals in the plant tissues. Phytotech has filed
patent applications and developed proprietary technologies involving metal
accumulation in plants for two commercial applications, phytoremediation and
nutritional supplements.
Phytoremediation uses plants to accumulate large amounts of targeted heavy
metals and radionuclides (radioactive elements) in soil or water that has been
contaminated by industrial, military or other processes. The plants are grown
under carefully controlled conditions that optimize their absorption of these
metals. Sequential cropping and disposal or recycling of the plants can result
in the cost effective remediation of soil and water contaminated with heavy
metals such as lead or uranium. Phytotech has demonstrated the scientific and
economic feasibility of this application of its technology, has conducted
several field studies financed by grants, including a lead contaminated site in
Trenton, New Jersey, and is working on its initial commercial projects.
Additional commercial projects for the removal of lead and uranium are in
various stages of progress, from submitted proposals to completed agreements.
Phytotech is actively seeking additional commercial contracts and is expanding
its sales and customer support group in anticipation of business growth in this
area.
Phytotech is also developing its metal accumulation technology by growing
select edible plants under proprietary conditions that cause the accumulation of
nutritionally important minerals such as selenium, chromium, iron, zinc and
manganese. Under cultivation using Phytotech's proprietary technology, the
plants concentrate these minerals to such high levels that they can be dried,
ground, encapsulated and used directly as nutritional supplements. Phytotech
believes that these new products may afford it a competitive advantage over
existing products for two reasons. First, Phytotech believes that its
nutritional supplements are the only botanical source of complete mineral
supplements currently available. Second, research performed by the Company and
others suggests that the bioavailability (the amount of the mineral that the
body can actually absorb and use) of mineral supplements is substantially
greater when delivered in Phytotech's mineral-rich plants than is the case with
most traditional alternatives. Phytotech has established a marketing
relationship with a nutritional supplement distributor and has shipped initial
orders of chromium and selenium containing plants.
Phytotech has recently begun research into the production of high value
proteins and nutritional chemicals in transgenic (genetically engineered)
plants. This technology, if successfully developed, could permit the production
of commercial quantities of human and other high value proteins, such as
collagen, heparin, gelatin and insulin, using genetically engineered plants that
can be cultivated and harvested to produce the required protein. Phytotech
believes that proteins grown in genetically engineered plants may
3
<PAGE>
provide both biological and economic advantages in comparison with currently
available production methods. In cooperation with independent collaborators,
Phytotech intends to develop a series of carefully selected transgenic
plant-based protein products for the consumer market.
Phytotech's ultimate goal is to be a leader in the development and
commercialization of plant-related products and technologies. Phytotech expects
to continue to perform and commission applied research in areas where its
management believes that there is good potential for commercial products, to
develop and protect a diverse portfolio of proprietary technologies, to
demonstrate the commercial feasibility of its proprietary technologies and to
exploit those technologies either directly, where such exploitation does not
require skills or other assets outside of Phytotech's scope of business, or
through licensing, joint venture or other relationships with industry partners
having complementary services and technologies.
The Company was incorporated in New Jersey in 1993. Its executive offices
are located at 1 Deer Park Drive, Suite I, Monmouth Junction, New Jersey 08852,
and its telephone number is (732) 438-0900.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities offered........................... 2,000,000 Units, consisting of one share of
Common Stock and one Warrant to purchase one
share of Common Stock. The Common Stock and
Warrants that make up the Units will trade
only as separate securities, thirty days
after the date of this Prospectus. See
"Description of Securities."
Common Stock to be outstanding after this
offering................................... 4,556,489 Shares(1)
Use of proceeds.............................. To fund research and development, nutritional
studies, marketing and commercialization, to
repay certain promissory notes and for
working capital and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq SmallCap Market symbols...... Common Stock--"PHYT"
Warrants--"PHYTW"
Units--"PHYTU"
</TABLE>
- ------------------------
(1) Assumes no exercise of Warrants, Representative's Warrants or outstanding
options or warrants to purchase Common Stock. At the date of this
Prospectus, there were issued or issuable options or warrants to purchase up
to 924,424 shares of Common Stock at prices ranging from approximately $3.60
to $9.00 per share (assuming an initial public offering price of $6.00 per
Unit). Unless otherwise indicated, all information in this Prospectus
assumes that the Underwriters' overallotment option is not exercised and
gives retroactive effect to (i) the conversion of all outstanding shares of
the Company's Series A Convertible preferred stock ("Series A Voting
Preferred Stock" or "Preferred Stock") and Non-voting Common Stock of the
Company into an aggregate of 1,646,489 shares of Common Stock, effective
upon the effectiveness of this offering (the "Conversions") and (ii) a
1-for-4.5 reverse split of the Common Stock and Non-Voting Common Stock (the
"Reverse Split") effective immediately prior to the effectiveness of this
offering. See "Description of Securities."
5
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31,
------------------------ -----------------------------
1996 1997 1997 1998
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 393,469 $ 461,452 $ 125,931 $ 190,030
---------- ---------- ----------- -----------
Operating expenses:
Research and development................. 1,768,334 2,199,590 460,117 345,226
General and administrative............... 1,157,754 1,189,560 360,239 324,857
---------- ---------- ----------- -----------
Total operating expenses................... 2,926,088 3,389,150 820,356 670,083
---------- ---------- ----------- -----------
Other income (expense)..................... 66,892 (27,443) 5,469 (30,867)
---------- ---------- ----------- -----------
Net loss................................... $(2,465,727) $(2,955,141) $ (688,956) $ (510,920)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Pro forma basic and diluted net loss per
share (1)................................ $ (1.03) $ (1.16) $ (0.27) $ (0.20)
Shares used in computing pro forma basic
and diluted net loss per share (1)....... 2,404,218 2,545,113 2,527,400 2,555,399
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------
AS
ACTUAL ADJUSTED(2)
---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $ 47,326 $7,562,326
Working capital (deficit).......................................... (1,737,763) 6,662,150
Total assets....................................................... 749,423 8,264,423
Notes payable...................................................... 2,415,800 229,000
Accumulated deficit................................................ (8,248,977) (8,422,314)
Total stockholders' equity (deficit)............................... (2,639,946) 7,126,717
</TABLE>
- ------------------------
(1) See "Pro Forma Net Loss Per Share" in Note 1 of "Notes to Financial
Statements." Reflects the shares of Series A Voting Preferred Stock which
convert into shares of Common Stock effective upon consummation of this
offering, as if converted and outstanding from their original date of
issuance.
(2) As adjusted to give effect to the sale by the Company of 2,000,000 Units at
an assumed initial public offering price of $6.00 per Unit, after deducting
the underwriting discount and estimated offering expenses and the receipt of
net proceeds therefrom, and the repayment of principal and interest of
approximately $2,425,000 pursuant to the terms of certain promissory notes.
See "Capitalization."
6
<PAGE>
RISK FACTORS
EXCEPT FOR HISTORICAL INFORMATION, STATEMENTS CONTAINED HEREIN UNDER
"PROSPECTUS SUMMARY," "RISK FACTORS," "BUSINESS," AND "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," INCLUDING
STATEMENTS CONCERNING (I) THE COMPANY'S STRATEGY, (II) THE COMPANY'S EXPANSION
PLANS, (III) THE MARKET FOR THE COMPANY'S PRODUCTS, AND (IV) THE EFFECTS OF
GOVERNMENT REGULATION OF THE COMPANY'S PRODUCTS CONTAIN FORWARD-LOOKING
STATEMENTS CONCERNING THE COMPANY'S OPERATIONS, ECONOMIC PERFORMANCE AND
FINANCIAL CONDITION. BECAUSE SUCH STATEMENTS INVOLVE RISKS AND UNCERTAINTIES,
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS." IN ADDITION TO THE
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS, PROSPECTIVE INVESTORS IN THE
UNITS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, AMONG OTHERS, BEFORE
PURCHASING THE UNITS OFFERED HEREBY.
NEW TECHNOLOGIES
The use of plants for each of the purposes for which the Company proposes to
use them has yet to be shown to be commercially viable. Although the Company has
shown that its phytoremediation techniques can reduce unwanted metals in
contaminated soil, the effectiveness of this process over a broad spectrum of
conditions has not been established. The Company has shown that targeted
minerals can be absorbed in its plants in significant quantities but has not
completed testing with respect to the speciation and bioavailability of the
targeted minerals in that form. The Company has not yet produced proteins from
plants in commercial quantities. In addition to the remaining technological
uncertainties, the novelty of the Company's technologies creates significant
uncertainty as to market acceptance. Companies introducing novel alternatives to
existing technologies generally are required to overcome initial market
skepticism, in particular when the Company introducing the technology is not a
recognized supplier to such markets. There is no assurance that the Company will
be successful in offering a commercially viable product or service or that any
such product or service, if offered, will be accepted by a broad spectrum within
its target market.
CONTINUING LOSSES; NEED FOR ADDITIONAL FINANCING
The Company has incurred losses since its inception and expects to continue
to incur losses at least through the end of the current fiscal year. The timing
and remaining expense associated with bringing the Company's technologies into
full commercial operation are subject to considerable uncertainty. While the
Company believes that the proceeds of this offering will be sufficient to fund
its budgeted capital requirements for at least the next 12 months, unanticipated
events could cause such proceeds to be depleted earlier than anticipated. There
is no assurance that the Company will be able to bring any of its technologies
into full commercial production with the proceeds of this offering or that
additional capital resources will be available to the Company if needed.
Adequate funds to meet the Company's working capital requirements, whether
obtained through financial markets, corporate strategic alliances, additional
equity offerings or from other sources, may not be available to the Company when
required or may not be available on terms acceptable to the Company. Any such
additional financing may result in significant dilution to existing stockholders
or the issuance of securities with rights superior to those of the Common Stock.
In the event the Company is unable to raise or borrow additional funds, the
Company may be required to curtail significantly one or more of its research and
development programs or seek additional third-party funds by relinquishing the
marketing, distribution, development or other rights to the Company's products
and services under development.
UNCERTAINTY OF MARKET ACCEPTANCE OF PHYTOREMEDIATION SERVICES
While the Company's phytoremediation services have been shown to be
effective in field trials, numerous factors may affect the commercial viability
of the service over a broad range of growing conditions. Factors such as
climate, soil conditions, local regulations or timing considerations may make
the Company's phytoremediation services unsuitable for a particular project.
Because of the limited testing of the service to
7
<PAGE>
date, there is no assurance that it will be proven to be commercially viable
over a wide range of conditions. The market for bioremediation services
generally is substantially affected by the actions of the various regulatory
organizations with responsibility for environmental cleanup. Unless remediation
is required by regulatory authorities or as a condition of the sale or new use
of a property, the owner has little incentive to incur cleanup costs. Even where
remediation is required, bioremediation must compete with other technologies
based on cost and effectiveness. There is no assurance that the perceived need
for bioremediation will continue to support a vital market for such services.
See "Business--Phytoremediation."
UNCERTAINTY REGARDING CONSUMPTION OF NUTRITIONAL SUPPLEMENT PRODUCTS
Although the ingredients in the Company's nutritional supplement products
are minerals for which there is a long history of human consumption, the
Company's products contain innovative ingredients or combinations of
ingredients. Although the Company believes all of its products to be safe when
taken as directed by the Company, there is little long-term experience with
human consumption of these innovative product ingredients or combinations
thereof. Although the Company performs research and/or tests the formulation and
production of its products, it has only begun to sponsor limited nutritional
studies. See "Business--Nutritional Supplements."
MANUFACTURING CAPABILITY
The Company has only limited investments in manufacturing resources and will
depend substantially on contract manufacturers. There is no assurance that the
Company will be able to develop adequate manufacturing resources. Significant
time, expense and management resources would be required to develop internal
manufacturing capacity should the Company elect that alternative.
COMPETITION
The Company's future success will depend in part on its ability to maintain
a competitive position with respect to evolving technologies. There is no
assurance that existing approaches or those under development or developed in
the future by others will not render the Company's current or future products or
services obsolete or noncompetitive. Moreover, traditional approaches to the
Company's chosen markets can be expected to have continuing market appeal and,
accordingly, present a serious competitive threat to the Company. The Company
competes against numerous companies, most of which have substantially greater
financial, research and development, testing, marketing and production resources
than does the Company, have established name recognition in their target markets
and are better equipped than is the Company to develop, market and manufacture
competitive products and services. Several such companies have programs, or have
initiated active product development programs, in remediation or nutritional
supplements. See "Business--Competition Sections."
GOVERNMENT REGULATION
Certain of the Company's products and services may require regulatory
approval prior to or during commercialization. There is no assurance that the
Company or its collaborative partners will be able to obtain any necessary
approvals. The effect of government regulation may be to delay marketing of new
products for a considerable or indefinite period of time, to impose costly
procedures upon the Company's activities and to provide a marketplace advantage
to companies that compete with the Company. There is no assurance any regulatory
approval for products or services developed by the Company will be granted on a
timely basis, if at all. Any delay in obtaining, or failure to obtain, maintain
or review such approvals could materially and adversely affect the marketing of
the Company's products and the ability to generate product revenue and earnings.
See "Business--Government Regulation."
PATENTS AND PROPRIETARY RIGHTS
The Company's success will, in part, depend on its ability to obtain patents
on its products, obtain licenses to use third party technologies, protect its
trade secrets and operate without infringing on the
8
<PAGE>
proprietary rights of others. There is no assurance that the Company's pending
patent applications will issue as patents, that any issued or pending patent
will provide the Company with significant competitive advantages, or that
challenges will not be instituted against the validity or enforceability of any
patent owned by the Company or, if instituted, that such challenges will not be
successful. The cost of litigation to uphold the validity and prevent
infringement of a patent is substantial. There is no assurance that others will
not independently develop similar technologies or duplicate the Company's
technology or design around the patented aspects of the Company's technology or
that the Company's proposed technology will not infringe patents or proprietary
rights owned by others, licenses for which may not be available to the Company.
Competitors of the Company may possess or obtain patents claiming products or
processes that are necessary for or useful to the development, use or
manufacture of the Company's products. Such competitors could bring legal
actions against the Company claiming infringement by its products and processes
and seeking damages and injunctive relief. In that event the Company might be
required to obtain licenses from others to continue to develop, manufacture or
market its products or be required to cease those activities. For example, there
is no assurance that the Company will be able to obtain such licenses on
commercially reasonable terms or that the patents underlying the licenses will
be valid and enforceable.
The Company also relies upon unpatented proprietary technology. There is no
assurance that the Company can adequately protect its rights in such unpatented
proprietary technology, or that others will not independently develop
substantially equivalent proprietary information or techniques, otherwise gain
access to the Company's proprietary technology, or disclose such technology. See
"Business--Patents" and "Business--Phytoremediation--Technology Development."
POTENTIAL LIABILITY
Various federal, state and local laws and regulations have been enacted
covering the handling and management of toxic substances and creating liability
for environmental contamination caused by them. The Company is likely to be
subject to extensive compliance review by federal, state and local environmental
regulatory authorities. There is no assurance that the Company's operations or
activities will not result in civil or criminal enforcement actions or private
actions, resulting in mandatory cleanup requirements, revocation of required
permits or licenses, denial of applications for future permits, or significant
fines, penalties or damages, any of which could have a material adverse effect
on the Company, its operations and financial condition. The Company is subject
to laws which regulate its procedures for waste treatment, storage, recycling,
transportation and disposal activities. So-called "toxic tort" litigation has
increased markedly in recent years as those injured by contamination seek
recovery for personal injuries or property damage. While these developments may
enhance the market for the Company's services, they also present a liability
exposure or risk should the Company be deemed to be responsible for
contamination or pollution caused or increased by the Company's normal
operations, including disposal of plant residue, roots or foliage, or by
negligence or other misconduct on the part of the Company.
The Company may also be exposed to liability based on claims that its
nutritional supplements were harmful or ineffective. Although the Company does
not intend to manufacture drugs or other products with a high potential for
adverse effects, it may be exposed to a variety of claims, including claims
associated with product tampering by others. Such claims, even if lacking in
foundation, can cause material damage to the Company's reputation, can cause the
Company material expense, for example to fund a product recall, or can result in
material litigation expense. The Company expects to maintain liability insurance
when and to the extent such insurance is available on a cost effective basis.
However, there is no assurance that such insurance will continue to be available
to the Company on a cost effective basis or at all.
DEPENDENCE ON, ATTRACTION AND RETENTION OF KEY PERSONNEL
Because of the specialized nature of the Company's technology, the Company
is highly dependent upon existing management and its ability to attract and
retain qualified executive officers and scientific personnel for research and
development activities conducted or sponsored by the Company. Phytotech is
9
<PAGE>
currently seeking to recruit additional qualified senior operating, marketing,
scientific and technical personnel. There is intense competition for qualified
personnel in the areas of the Company's activities and there is no assurance
that the Company will be able to continue to attract and retain the qualified
personnel necessary for the development and commercialization of its products.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock and Warrants may fluctuate
significantly based on variations in the Company's results of operations or
other factors. The Company's results of operations could be adversely affected
by a number of factors, some of which are beyond the Company's control,
including economic downturns, variations in demand for remediation technology or
nutritional supplements, changes in the mix of products sold, price changes in
response to competition, increases in the cost of raw materials and possible
supply shortages. In particular, the market price of the Common Stock could be
materially adversely affected by reports by official or unofficial health and
medical authorities and the general media regarding the potential health
benefits or detriments of products sold by the Company or of similar products
distributed by other companies regardless of whether such reports are
scientifically supported and regardless of whether the Company's operating
results are likely to be affected by such reports, as well as by consumer
perceptions regarding the safety and efficacy of the Company's remediation
services or nutritional supplements and consumer preferences generally. In
addition, the stock market in general has experienced wide price and volume
fluctuations in recent periods, and these fluctuations are often unrelated to
the operating performance of the specific issuers whose stock is affected.
ABSENCE OF PUBLIC MARKET
Prior to this offering, there has been no public market for the Common
Stock. Although the Company has applied to list the Common Stock on the Nasdaq
SmallCap Market, there is no assurance that an active trading market for the
Common Stock will develop or be sustained. The initial public offering price of
the Units will be determined by negotiations among the Company and the
Underwriters and will bear no direct relationship to the Company's historical
performance, assets, net worth or book value, or any other generally accepted
valuation criteria.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, the Company will have 4,556,489 shares
of Common Stock outstanding. The 2,000,000 shares of Common Stock sold in this
offering and any shares of Common Stock issuable upon exercise of Warrants will
be freely tradeable without restriction or further registration under the
Securities Act of 1933 (the "Securities Act"), unless held by an affiliate of
the Company. The remaining 2,556,489 shares of Common Stock are "restricted
securities" as that term is defined in Rule 144 under the Securities Act, and
may not be sold unless such sale is registered under the Securities Act or is
made pursuant to an exemption from registration under the Securities Act,
including the exemption provided by Rule 144. Of such 2,556,489 shares,
1,028,889 are held by affiliates, with 1,026,667 shares held for longer than one
year. The remaining 1,527,600 shares are held by nonaffiliates, with 1,258,333
shares held longer than 2 years and 240,978 shares held longer than 1 year but
less than 2 years.
In general, under Rule 144 as currently in effect, a shareholder (or
shareholders whose shares are aggregated) who has beneficially owned any
restricted securities for at least one year (including a shareholder who may be
deemed to be an affiliate of the Company), will be entitled to sell, within any
three-month period, that number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock (45,565 shares based on
4,556,489 shares of Common Stock outstanding upon completion of this offering,
assuming the Underwriter's overallotment option is not exercised) or (ii) the
average weekly trading volume of the Common Stock during the four calendar weeks
preceeding the date on which notice of such sale is given to the Commission,
provided certain public information, manner of sale and notice requirements are
satisfied. A shareholder who is deemed to be an affiliate of the Company,
including members of the Board of Directors and senior management of the
10
<PAGE>
Company, will still need to comply with the restrictions and requirements of
Rule 144, other than the one-year holding period requirement, in order to sell
shares of Common Stock that are not restricted securities, unless such sale is
registered under the Securities Act. A shareholder (or shareholders whose shares
are aggregated) who is deemed not to have been an affiliate of the Company at
any time during the 90 days preceding a sale by such shareholder, and who has
beneficially owned restricted shares for at least two years will be entitled to
sell such shares under Rule 144 without regard to the volume limitations
described above.
As of the date of this Prospectus, options to purchase a total of 253,333
shares of Common Stock were outstanding at exercise prices ranging from $.45 to
$.68 per share, of which options to purchase 56,444 shares of Common Stock are
currently exercisable. As of the date of this Prospectus, warrants to purchase
671,091 shares of Common Stock were issued or issuable at exercise prices
ranging from approximately $3.60 to $9.00 per share (assuming an initial public
offering price of $6.00 per unit), all of which are currently exercisable.
Certain security holders of the Company have the right to require the Company to
register shares of Common Stock obtainable by them as a result of the
Conversions or on exercise of warrants. See "Description of
Securities--Registration Rights." Such shares, if registered, would be
immediately tradable.
The underwriters have requested that all persons holding more than 5% of the
Common Stock prior to this offering, agree not to sell, offer to sell, grant any
option for the sale of or otherwise dispose of any shares of Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock,
without the prior written consent of the Representative, for a period of one
year after the date of this Prospectus, except for transfers to a person's
ancestor, descendants, spouse or a trust and except for bona fide gifts or
certain corporate sales or distributions, as specified therein. No prediction
can be made as to the effect, if any, that sales of shares of Common Stock or
the availability of shares of Common Stock for sale will have on the market
price of the Common Stock from time to time. The sale of a substantial number of
shares, whether pursuant to public offerings or otherwise, or the perception
that such sales could occur, could adversely affect the market price of the
Common Stock and could materially impair the Company's future ability to raise
capital through an offering of equity securities.
USE OF PROCEEDS
The net proceeds from the sale of the Units are estimated to be
approximately $9,940,000 (approximately $11,506,000 if the Underwriters'
overallotment option is exercised in full), assuming an initial public offering
price of $6.00 per Unit and after deducting underwriting discounts and estimated
offering expenses of approximately $ .
The Company intends to use approximately $600,000 of proceeds to fund
internal research and development activities and $900,000 to fund research by
outside collaborators. Of this amount, approximately $200,000 will be paid to
Rutgers, The State University of New Jersey ("Rutgers") over the next 24 months
under the Research Agreement. See "Business--Phytoremediation." The Company also
intends to use approximately $2.4 million to repay outstanding promissory notes.
The Company plans to use approximately $2.0 million of the net proceeds to fund
its sales and marketing efforts.
The remaining net proceeds of approximately $4.0 million will be used for
working capital and general corporate purposes. Pending application of the net
proceeds as set forth above, the Company intends to invest the net proceeds in
short term, investment grade interest-bearing securities. The Company may
reallocate the use of the net proceeds to meet unanticipated technological or
other changes in the Company's business. The Company currently believes that its
existing capital resources, together with the net proceeds of this offering and
interest earned thereon, will satisfy the Company's capital requirements at
least through the 12 months following this offering.
11
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company intends to retain its future earnings, if any, to fund the
development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future.
DILUTION
At March 31, 1998, the Company had a net deficit in tangible book value of
$(2,639,946) or $(1.03) per share of Common Stock. Net tangible book value
represents the amount of total tangible assets less total liabilities, divided
by the number of shares of Common Stock outstanding, after giving effect to the
Conversions and the repayment of principal and interest of approximately
$2,425,000 pursuant to the terms of certain promissory notes. After giving
effect to the sale of 2,000,000 Units in this offering at an assumed initial
public offering price of $6.00 per Unit (attributing no value to the Warrants),
and after deducting the underwriting discounts and estimated offering expenses,
the pro forma net tangible book value of the Company as of March 31, 1998 is
$7,126,717 or $1.56 per share of Common Stock. This represents an immediate
dilution of $4.44 per share to new investors. The following table illustrates
the per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share...................................... $ 6.00
Pro forma net deficit in tangible book value per share as of March 31, 1998........ $ (1.03)
Increase in net tangible book value per share attributable to this offering........ 2.59
---------
Pro forma net tangible book value per share after this offering...................... $ 1.56
---------
Dilution per share to new investors.................................................. $ 4.44
---------
---------
</TABLE>
The following table summarizes as of March 31, 1998, the number of shares of
Common Stock purchased from the Company, the total consideration paid therefor
and the average price per share paid by the existing stockholders (giving effect
to the Conversions) and by new investors in this offering, at an assumed initial
public offering price of $6.00 per Unit (attributing no value to and no exercise
of the Warrants), before deduction of the estimated underwriting discount and
estimated offering expenses payable by the Company.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE PER
AMOUNT PERCENT AMOUNT PERCENT SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................ 2,556,489 56.1% $ 5,571,031 31.7% $ 2.18
New investors................................ 2,000,000 43.9% 12,000,000 68.3% $ 6.00
---------- ----- ------------- -----
Total.................................... 4,556,489 100.0% $ 17,571,031 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 (giving effect to the Reverse Split and certain redesignations of
capital stock approved by the Board of Directors to be effective immediately
prior to the effectiveness of this offering) (i) on an actual basis, (ii) on a
pro forma basis to reflect the Conversions, and (iii) on a pro forma as adjusted
basis to reflect the sale of 2,000,000 Units in this offering at an assumed
initial public offering price of $6.00, (attributing no value to the Warrants)
the receipt of the estimated net proceeds therefrom and the repayment of the
Company's outstanding promissory notes. See "Description of Securities."
<TABLE>
<CAPTION>
MARCH 31, 1998 (UNAUDITED)
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------- ------------- -------------
<S> <C> <C> <C>
Notes payable........................................................ $ 2,415,800 $ 2,415,800 $ 229,000
Stockholders' equity (deficit):
Series A Voting Preferred Stock:
Authorized 10,000,000 shares; issued and outstanding 6,364,500
shares on an actual basis; none issued and outstanding on a
pro forma and pro forma as adjusted basis.................... 5,205,654 -- --
Voting Common Stock:
Authorized 30,000,000 shares; issued and outstanding 910,000,
2,556,489 and 4,556,489 shares on an actual, pro forma and
pro forma as adjusted basis, respectively.................... 308,245 5,571,031 15,511,031
Non-Voting Common Stock:
Authorized 1,111,111 shares; issued and outstanding 232,156
shares; none issued and outstanding on a pro forma and pro
forma as adjusted basis........................................ 57,132 -- --
Additional paid-in capital........................................... 385,000 517,000 517,000
Deferred compensation................................................ (347,000) (479,000) (479,000)
Accumulated deficit.................................................. (8,248,977) (8,248,977) (8,422,314)
------------- ------------- -------------
Total stockholders' equity (deficit)................................. (2,639,946) (2,639,946) 7,126,717
------------- ------------- -------------
Total capitalization (deficit)....................................... $ (224,146) $ (224,146) $ 7,355,717
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
13
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of and for each of the years in the
two-year period ended December 31, 1997 have been derived from the financial
statements of the Company included elsewhere in this Prospectus, which have been
audited by KPMG Peat Marwick LLP, independent certified public accountants. The
selected financial data as of March 31, 1998 and for the three months ended
March 31, 1997 and 1998 have been derived from the Company's unaudited financial
statements included elsewhere in this Prospectus. In the opinion of management
of the Company, such unaudited financial statements have been prepared on a
basis consistent with the audited financial information and include all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the information set forth herein. Operating results for the three months
ended March 31, 1998 are not necessarily indicative of the results to be
expected for the year ending December 31, 1998. The selected financial data set
forth below are qualified in their entirety and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the other financial information included elsewhere in this
Prospectus. The selected financial data should also be read in conjunction with
the financial statements, the related notes and the independent auditors' report
appearing elsewhere in this Prospectus. The independent auditors' report
contains an explanatory paragraph which states that the Company's recurring
losses from operations and insufficient working capital raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements and the selected financial data do not include any adjustments that
might result from the outcome of that uncertainty.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- -------------------------
1996 1997 1997 1998
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Grant revenue............................ $ 325,572 $ 270,936 $ 122,431 $ 116,942
Commercial revenue....................... 67,897 190,516 3,500 73,088
---------- ---------- ----------- -----------
Total revenue.............................. 393,469 461,452 125,931 190,030
---------- ---------- ----------- -----------
Operating expenses:
Research and development................. 1,768,334 2,199,590 460,117 345,226
General and administrative............... 1,157,754 1,189,560 360,239 324,857
---------- ---------- ----------- -----------
Total operating expenses................... 2,926,088 3,389,150 820,356 670,083
---------- ---------- ----------- -----------
Other income (expense)..................... 66,892 (27,443) 5,469 (30,867)
---------- ---------- ----------- -----------
Net loss................................... $(2,465,727) $(2,955,141) $ (688,956) $ (510,920)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Pro forma basic and diluted net loss per
share (1)................................. $ (1.03) $ (1.16) $ (0.27) $ (0.20)
Shares used in computing pro forma basic
and diluted net loss per share (1)........ 2,404,218 2,545,113 2,527,400 2,555,399
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------- MARCH 31, 1998
--------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................................... $ 5,326 $ 47,326
Working deficit............................................................... (1,372,292) (1,737,763)
Total assets.................................................................. 550,841 749,423
Notes payable................................................................. 1,762,360 2,415,800
Accumulated deficit........................................................... (7,738,057) (8,248,977)
Deficit in stockholders' equity............................................... (2,148,806) (2,639,946)
</TABLE>
- ------------------------
(1) See "Pro Forma Net Loss Per Share" in Note 1 of "Notes to Financial
Statements."
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S FINANCIAL STATEMENTS AND THE NOTES THERETO. THE DISCUSSION OF RESULTS,
CAUSES AND TRENDS SHOULD NOT BE CONSTRUED TO IMPLY ANY CONCLUSION THAT SUCH
RESULTS OR TRENDS WILL NECESSARILY CONTINUE IN THE FUTURE.
OVERVIEW
Since its inception in April 1993, the Company has devoted its resources to
research and development of plant-based biotechnology approaches to
environmental, nutritional and commercial protein markets, assembling a
management team, and raising capital. As an early stage company, the Company is
subject to all the risks inherent in establishing a new business, including the
risk that full-scale operations may not occur.
The Company had revenues of approximately $461,000 in 1997 and anticipates
increased revenues in 1998. The Company has been unprofitable since inception
and anticipates that it will continue to incur significant expenses as it
transitions to full-scale commercial operations. The Company has begun to shift
its emphasis from research and development of its phytoremediation products to
focus on the commercialization of this technology. With respect to its
nutritional supplements products, the Company intends to increase its research
and development expenditures over the next 12 months to include preparation and
completion of laboratory testing, commencement of certain toxicology studies and
nutritional trials and other research and development expenses. Historic
spending levels are not indicative of anticipated future spending levels because
the Company is entering a period in which it may increase spending to exploit
its technology, broaden the introduction of its products into the market, and
expand manufacturing capacity. For these reasons, the Company expects to
continue operating at a loss through at least 1998. There is no assurance that
the Company will ever achieve profitability or if achieved, that such
profitability can be sustained.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Grant revenue for the three months ended March 31, 1998 decreased by $5,489
or 4% to $116,942 from $122,431 for the three months ended March 31, 1997.
Commercial revenue for the three months ended March 31, 1998 increased by
$69,588 to $73,088 from $3,500 for the three months ended March 31, 1997 as the
Company transitioned to material commercial operations with an increase in
commercial sales efforts and growing industry acceptance of the Company's
technology. As a result of the foregoing factors, the Company's total revenue
for the three months ended March 31, 1998 increased by $64,099 or 51% to
$190,030 from $125,931 for the three months ended March 31, 1997.
Research and development expenses for the three months ended March 31, 1998
decreased $114,891 or 25%, to $345,226 from $460,117 for the three months ended
March 31, 1997. The decrease was primarily attributable to substantial
completion of development efforts for the Company's phytoremediation products.
The Company expects research and development expenses to increase in the future
and to be funded primarily from the proceeds of this offering.
General and administrative expenses for the three months ended March 31,
1998 decreased $35,382, or 10%, to $324,857 from $360,239 for the three months
ended March 31, 1997. The decrease was primarily attributable to cost controls
implemented by the Company in the period. General and administrative expenses
are expected to increase in future periods due to the hiring of additional sales
staff, expanded marketing efforts and increases in professional fees.
15
<PAGE>
As a result of the foregoing factors, including interest expenses of
$30,867, the Company's net loss for the three months ended March 31, 1998
decreased $178,036, or 26%, to $510,920 from $688,956 for the three months ended
March 31, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Grant revenue for the year ended December 31, 1997 decreased by $54,636 or
17% to $270,936 from $325,572 for the year ended December 31, 1996. Commercial
revenue for the year ended December 31, 1997 increased by $122,619 or 181% to
$190,516 from $67,897 for the year ended December 31, 1996 reflecting the
commencement of material commercial operations. As a result of the foregoing
factors, the Company's total revenue for the year ended December 31, 1997
increased by $67,983 or 17% to $461,452 from $393,469 for the year ended
December 31, 1996.
Research and development expenses for the year ended December 31, 1997
increased $431,256, or 24%, to $2,199,590 from $1,768,334 for the year ended
December 31, 1996. The increase was primarily attributable to increased
development efforts related to the Company's nutritional supplement products.
The Company's development efforts with respect to its nutritional supplement
products included preparation and completion of laboratory testing, preparation
for certain bioavailability studies and nutritional trials.
General and administrative expenses for the year ended December 31, 1997
increased $31,806, or 3%, to $1,189,560 from $1,157,754 for the year ended
December 31, 1996. The increase was primarily attributable to the hiring of
additional personnel.
As a result of the foregoing factors, including interest expense of $33,989,
the Company's net loss for the year ended December 31, 1997 increased $489,414,
or 20%, to $2,955,141 from $2,465,727 for the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the sale of equity
securities and the issuance of promissory notes. From inception (April 15, 1993)
through March 31, 1998, the Company raised net proceeds of approximately
$5,402,000 through private sales of equity securities and $1,867,000 from the
issuance of promissory notes. The Company had cash and cash equivalents of
$47,326 at March 31, 1998.
The Company has incurred net operating losses since its inception and
expects net operating losses for at least the rest of 1998 as it continues its
commercialization efforts. The Company will incur additional net operating
losses until it can generate sufficient revenue from product sales, licenses and
other fees to fund continuing operations.
While the Company has not had any operating profits, the Company believes
that its current capital resources and the proceeds of this offering will enable
it to maintain its current and planned operations for at least the next 12
months. However, there is no assurance that there will not be a change in the
Company's operations that would consume available resources more rapidly than
anticipated. The Company will need substantial funds to support its long term
product development programs. The Company has no established bank financing
arrangement and it is unlikely that the Company will establish a bank financing
arrangement in the foreseeable future. The Company's future capital requirements
will depend on many factors, including, without limitation, the progress of the
Company's commercialization efforts, research and development programs, the
progress and results of toxicology studies and nutritional trials, the timing
and costs involved in obtaining regulatory approvals and the costs of filing,
prosecuting, defending and enforcing patents.
16
<PAGE>
NET OPERATING LOSS AND RESEARCH AND DEVELOPMENT CREDIT CARRYFORWARDS
As of December 31, 1997 the Company had net operating loss ("NOL")
carryforwards of approximately $6,875,000 for federal and state income tax
reporting purposes. These loss carryforwards will expire beginning in 2000 for
state tax purposes and 2008 for federal tax purposes, if not utilized. The
Company also has research and development ("R&D") credit carryforwards of
approximately $119,000 as of December 31, 1997, which are available to reduce
federal income taxes, if any, through 2008. Changes in ownership, as defined in
Section 382 of the Internal Revenue Code of 1986, as amended, resulting from
prior sales of the Company's equity securities and the sale of the Units, could
limit the annual deductibility of a substantial portion of the NOL and R&D
credit carryforwards. See Note 10 of "Notes to Financial Statements."
17
<PAGE>
BUSINESS
OVERVIEW
The Company's core technology has evolved out of research initially
performed at Rutgers on the ability of select plants, under certain conditions,
to absorb very high concentrations of various metals, either in the stems and
leaves ("Phytoextraction") or in the roots ("Rhizofiltration") of the plant. All
plants absorb minerals from the soil or water in which they are growing, but the
ability to absorb very high concentrations of particular heavy metals, such as
lead or uranium, presents the opportunity to use this process for commercial
purposes. The Company was formed to develop the commercial applications of this
technology.
The emerging market for Phytotech's plant-based products and services in
processing and manufacturing presents an immediate opportunity for rapid
technical and commercial growth. Phytotech is exploring the applications of
plant biotechnology to create a unique, proprietary portfolio of products and
services. Phytotech's commercialization strategy is to capitalize on its
technologies through both the licensing and sale of superior products and
services. Phytotech currently offers waste cleanup ("bioremediation") services
using plants grown under carefully controlled conditions to absorb and dispose
of unwanted metals, such as lead or uranium, from toxic waste sites. It has also
developed and is beginning to market nutritionally important minerals absorbed
in plants and is beginning to develop technology for the production of high
value proteins in plants.
Phytotech's ultimate goal is to develop a portfolio of proprietary
technologies based on its expertise in plant physiology, soil science, agronomy,
molecular biology and related areas and to commercialize these technologies
internally or through licensing or joint venture relationships with other
companies. Phytotech expects to continue to perform and commission applied
research in areas where its management believes that there is good potential to
develop commercial products. The Company intends to protect its diverse
portfolio of proprietary technologies, demonstrate their commercial feasibility
and market these technologies either directly, where such sales do not require
skills or other assets outside of Phytotech's scope of business, or through
licensing, joint venture or other relationships with industry partners having
complementary services and technologies.
PHYTOREMEDIATION
TECHNOLOGY. The term phytoremediation refers to the use of plants to treat
contaminated soil and water. The Company has demonstrated the feasibility of
phytoremediation in a number of field trials and several commercial projects
which have led to the development of two distinct approaches to cleanup:
PHYTOEXTRACTION: the use of metal-accumulating plants to transport and
concentrate metals from the soil into the leaves and stems;
RHIZOFILTRATION: the use of plant roots to absorb, concentrate and
precipitate toxic metals from polluted water.
By screening and selection procedures focused on known, well characterized
crop species, Phytotech has identified superior metal-accumulating plant lines
for phytoextraction. The Company has shown that such plants can accumulate lead,
uranium, cesium, strontium, chromium, zinc, selenium, manganese, calcium, iron
and magnesium from soils into the above-ground, harvestable shoots.
Phytotech has investigated several approaches to increasing the
phytoextraction capacity of plants. The Company screened numerous plants in
order to isolate high-performing cultivars and identified soil
18
<PAGE>
amendments and other processes that increase the efficiency of phytoextraction.
The phytoextraction process currently employed by the Company is shown below:
THE PHYTOEXTRACTION PROCESS IN THE FIELD
[CHART]
In the Company's rhizofiltration process, hydroponically cultivated plants
remove heavy metals from water and concentrate them in the roots. Once the water
has been cleaned, the plants can be easily removed, replaced with fresh plants
at low cost, and the process continued. The plants containing heavy metals can
be disposed of or treated to recycle the metal. In addition to lead, plant roots
can effectively remove uranium, strontium, cesium and zinc to concentrations
within accepted state and federal water standards.
TECHNOLOGY DEVELOPMENT. The initial theoretical work on phytoremediation
was performed by scientists at Rutgers. Rutgers and the Company executed a
Research Agreement on November 19, 1993 (as amended, the "Research Agreement")
to perform certain studies and field trials for the phytotreatment of heavy
metals. The initial term of the Research Agreement was for a three year period.
As currently
19
<PAGE>
extended, the Research Agreement expires August 13, 2002 but may be extended,
renewed, or amended by the mutual written agreement of both parties. The Company
agreed to reimburse Rutgers for all direct and indirect costs during the initial
three-year term, and has agreed to reimburse Rutgers for certain additional
costs up to $500,000. The Research Agreement may also be terminated by either
party without further financial obligation by giving at least ninety (90) days
written notice.
Legal title to intellectual property conceived or discovered in the
performance of the Project is vested in Rutgers, subject to the terms and
conditions of the Research Agreement. Rutgers must promptly notify the Company
once it has identified any potentially valuable intellectual property conceived
and/or made during the term of the Research Agreement. If the Company directs
that a patent application or application for other intellectual property
protection be filed, Rutgers must promptly prepare, file and prosecute such U.S.
and foreign application(s) in Rutgers' name. The Company will bear all costs
incurred in connection with the preparation, filing, prosecution and maintenance
of U.S. and foreign application(s) directed to such intellectual property. If
the Company does not request Rutgers to file for protection of intellectual
property in any country, or decides to discontinue the financial support of any
patent prosecution, Rutgers may pursue whatever course it deems necessary to
protect its intellectual property, and Rutgers will have no further obligation
to the Company to option or to license with regard to that country. The Company
and Rutgers executed an Exclusive License Agreement in September 1997. Under the
Exclusive License Agreement, Phytotech is obligated to pay a royalty to Rutgers
equal to 2 1/2% of revenues from projects employing the licensed technology
(subject to increases to 3.5% and 5% at annual revenue rates of $250 million and
$500 million, respectively) and is entitled to the exclusive use of the licensed
technology subject to certain non-commercial exceptions. The Exclusive License
Agreement covers the life of the patents comprising the technology, subject to
earlier termination for breach of the Exclusive License Agreement.
FIELD TRIALS. Phytotech has conducted field trials over the last three
years to demonstrate metal accumulation from soil and water on selected sites.
These trials have provided the Company with the opportunity to validate the
technology, educate the public and accrue on-site experience. Current field
trials are designed to improve the performance of phytoextraction with lead and
uranium.
In 1996 and 1997, Phytotech conducted a field trial on a lead-contaminated,
abandoned industrial site in Trenton, New Jersey. Six croppings of plants over
two growing seasons on this site have, to date, reduced the lead contamination
on 75% of the treated area to within New Jersey residential standards. This site
is the location of the Superfund Innovative Technology Evaluation Program the
Company is conducting in collaboration with the United States Environmental
Protection Agency ("EPA"). Phytoextraction results of lead from soil at the
Trenton test plot is shown below. The New Jersey residential standard for lead
in soil is 400 parts per million ("ppm") or less.
20
<PAGE>
TOTAL SOIL LEAD AT TRENTON SITE
[CHART]
A 30' x 160' site in Trenton, NJ.
Grey scale at right of figure represents ppm of lead.
MARKET OPPORTUNITY. The EPA and various state environmental agencies
determine the requirements for, and standards applicable to, the clean-up and
remediation of contaminated property in the United States. Published reports
estimate that there are more than 30,000 sites in the U.S. requiring hazardous
waste treatment services. The Company believes heavy metals comprise a
particularly problematic component of this market, because no permanent, low
cost solutions exist for remediation of metal contamination. Phytotech is
applying its phytoremediation technology to the cleanup of such metal
contaminated sites, a U.S. market estimated by the EPA to be $35 billion over
the next five years. Based on these assumptions, the Company believes that the
potential U.S. market for its technology in treating heavy metals as the sole
contaminant on a site is of an order of magnitude of approximately $100 million
per year. Expansion of this technology to the treatment of sites contaminated
with a mixture of heavy metals and hazardous organic compounds could increase
the market to approximately $600 million per year. As a practical matter,
Phytotech can expect to be a serious candidate for only a small fraction of
these markets. Phytotech's approach is to penetrate the existing market by
targeting sites that can currently only be
21
<PAGE>
treated using very costly removal and burial technology and that offer
attractive pricing and liability management options.
The emerging radioactive contamination treatment market, estimated at $250
billion over the next 70 years, represents a substantial domestic and
international opportunity. Radionuclides are elements whose nuclei are unstable
and transform into other elements through radioactive decay. This process
releases ionizing radiation that can damage or destroy living cells. A variety
of health risks, particularly various forms of cancer, are associated with
exposure to radionuclides. The Company believes that conventional technology
(excavation and landfill) is significantly more expensive than a plant-based
treatment. The Company is currently field testing and exploring the commercial
application of licenses for its technology to the remediation of these sites.
TARGET CUSTOMER GROUPS. The Company is targeting its marketing efforts
toward:
- Owners of contaminated sites in the private and public sectors identified
through lists published by the EPA, state and local environmental
regulatory agencies as well as through established relationships with
industry;
- Large companies with significant environmental liabilities, including many
Fortune 500 companies;
- Companies in industries known for toxic-metal pollution problems, such as
metal smelters, primary and secondary metal manufacturers, scrap metal
recyclers, paint manufacturers, battery recycling and production
facilities, chemical and petrochemical manufacturers, automobile
manufacturers, utility companies, transportation, the mining industry and
landfill operators.
COMMERCIALIZATION STATUS. Phytotech's phytoremediation technology has been
available on a commercial scale since mid-1997. The Company has demonstrated the
effectiveness of its technology in the field in several demonstration and pilot
scale programs since 1995. Phytotech has entered into several commercial
contracts for the 1998 phytoremediation season and has initiated clean-ups under
state and federal regulated programs for private and public sector clients.
To date, the Company has been awarded nine contracts or subcontracts for
feasibility-scale studies, a full-scale remediation under the EPA Region I
voluntary corrective action program, and two full-scale treatment projects.
Additionally, a major electric utility is evaluating the technology for use as a
process application to prevent the build-up of metals in its wastewater
sprayfields. Revenues for commercial phytoextraction technology projects totaled
$190,000 in 1997. Current funding commitments for work to be performed in 1998
under grants and contracts exceeds $600,000.
The Company has entered into a Cooperative Research and Development
Agreement ("CRADA") with the EPA to evaluate the efficacy of the Company's lead
removal phytoremediation technology at a contaminated site as part of the EPA's
Superfund Innovative Technology Evaluation ("SITE") program. The EPA's review is
expected to be concluded in 1998 and a report on the outcome of the study issued
thereafter. The Company believes that approval by the EPA would enhance the use
of the technology in the Superfund program.
The Company is pursuing both domestic and international markets through
licensing arrangements with third parties. The Company believes that the
European market is equal to, and growing more rapidly than, the U.S. market.
Because phytoremediation is based on established agricultural practices and an
easily transferable applications technology, all of the necessary materials can
be manufactured at or near the treatment site. The Company is expanding its
market overseas through marketing arrangements with UI USA, Inc., a subsidiary
of Credit Agricole. UI USA, Inc. has arranged a technology evaluation agreement
for European applications of the Company's technology between Phytotech and ATE,
Inc., a subsidiary of Rhone Poulenc. Additionally, Phytotech has recently been
awarded a contract for a rhizofiltration treatability study of arsenic and
uranium contaminated groundwater from the Ammon-Zarga basin in Jordan.
22
<PAGE>
COMPETITION. The diversity of technological approaches for hazardous waste
remediation has resulted in a fragmented industry. In 1996, the top 30
remediation companies reported combined treatment revenues of $4.5 billion from
U.S. projects, approximately half of the estimated $9 billion spent annually in
the U.S. for hazardous waste treatment. Standard options for the treatment of
soils contaminated with metals includes excavation and disposal in landfills,
stabilization or capping, which consists of covering the site with an
impermeable layer, such as asphalt or concrete. Each of these options does not
eliminate the liability, is costly and requires on-going operations and
maintenance. Phytotech's technology combines cost advantages with on-site
treatment or leaving cleaned soil in place. The high concentrations of metals in
Phytotech's plant residues may permit metal recycling, which could eliminate or
reduce the need for landfilling of hazardous wastes, and could eliminate the
client's liability, rather than simply moving it to another location. However,
Phytotech's technology may not be suitable in certain soil conditions, in areas
with relatively short growing seasons, where rapid remediation is required or
under other specific circumstances.
Several research institutions or government agencies, such as the United
States Department of Energy ("DOE"), the United States Department of Defense
("DOD"), and the United States Department of Agriculture ("USDA"), have
phytoremediation programs. The Company believes it has the largest and most
advanced soil phytoremediation business in the world.
The following table sets forth certain information relating to the principal
technologies used in soil remediation:
<TABLE>
<CAPTION>
TIME
ESTIMATED REQUIRED
TYPE OF TREATMENT COST/YD(3) (MONTHS)
<S> <C> <C>
Chemical Fixation $90-200 6-9
Landfilling $100-400 6-9
Soil Leaching $250-500 12
Phytoextraction $20-80 12-60
Source: Adapted from M.A. Levin and M.A. Gealt,
1993. Biotreatment of Industrial and Hazardous
Waste, McGraw-Hill, New York, p. 4.
</TABLE>
Many other factors affect the relative advantage of the various treatment
alternatives, including the particular characteristics of each site. The Company
believes that each of the above-listed treatment methods may be suitable for
certain sites and not for others.
Competitive methods of soil treatment are primarily practiced by engineering
and remediation services companies that offer excavation and off-site
landfilling of contaminated soil as hazardous waste. This approach denudes the
site of all contaminated topsoil and is cost prohibitive for large areas.
Landfills charge unloading (tipping) fees of $100-400 per ton. This work is
highly price competitive with low profit margins. The Company believes that many
heavy metals-contaminated sites are best remediated by a combination of
phytoextraction and conventional excavation and landfill. Accordingly,
Phytotech's strategy is to grant technology licenses and team with a number of
these contractors. The use of phytoremediation may provide the opportunity for
many sites to move forward that were previously thought to be cost prohibitive
and could allow municipalities to address more contaminated sites at reduced
cost.
NUTRITIONAL SUPPLEMENTS
TECHNOLOGY. Phytotech's original discoveries of the ability of selected
plants to take up high levels of target metals led the Company to evaluate
plants that would accumulate minerals that are essential trace nutrients. In
order for a plant to be a practical source of mineral supplements, it must be a
recognized, edible species and capable of accumulating large amounts of minerals
in its edible parts. Mineral and vitamin supplements have traditionally been
available as capsules or tablets. The Company has developed plants containing
targeted minerals in such concentrations that the minimum daily adult
requirements can be provided in a single tablet or capsule by reducing the plant
itself to powder form and encapsulating the powder. The plant is cultivated
under controlled conditions so that the metal uptake is specific and the plant
does not also accumulate undesirable minerals such as lead, arsenic or cadmium.
The Company and
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<PAGE>
outside collaborators have identified edible plants and cultivation conditions
capable of producing the required concentrations of the minerals iron, zinc,
manganese, selenium and chromium in the edible parts of the plants.
The following table provides certain information with respect to the mineral
content of the Company's selected plants as compared to several "mineral rich"
vegetables:
<TABLE>
<CAPTION>
MINERAL CONTENT, MG/G DRY BIOMASS
PLANT FE ZN MN SE CR
<S> <C> <C> <C> <C> <C>
Spinach 0.9 0.07 0.05 -- < .01
Romaine Lettuce 0.9 0.07 0.1 -- < .01
Red Beet 0.1 0.07 0.01 -- < .01
Beet Greens 0.3 0.05 0.1 -- < .01
Green Beans 0.1 0.03 0.02 -- < .01
Broccoli 0.1 0.04 0.02 -- < .01
PHYTOTECH'S CRUCIFERS 30 20 2 1.5 5
Recommended Daily Allowance
("RDA") or therapeutic dose:
mg/day 15 15 2 0.2 0.2
</TABLE>
BIOAVAILABILITY. Mineral supplements are available to the consumer as
organic or inorganic salts of metals manufactured primarily by the chemical
industry. Minerals in these forms are difficult for the body to absorb and use.
Some minerals, such as selenium and chromium, are also offered as a complex with
yeast, which makes them easier for the body to absorb. The bioavailability, or
amount actually absorbed by the body, of minerals in supplements has been a
long-standing concern, and forms of the minerals that are shown through testing
to be more bioavailable are highly valued by consumers. The Company believes
that its plant-based minerals may have high bioavailability because the minerals
are in a form that is biologically available to the plants and therefore may be
similarly available to other organisms. Bioavailability is an important property
since the value of the mineral is wasted if it is not taken up and absorbed by
the body. The Company has arranged for bioavailability testing with outside
laboratories and also conducted its own testing. Preliminary testing of the
Company's plants in its laboratories has indicated that its plant-based sources
of iron, zinc, chromium and selenium are among the most bioavailable forms of
these minerals when compared with other commercially available supplements.
The Company has executed a Cooperative Research and Development Agreements
(CRADA) with the USDA laboratory at Cornell University, Ithaca, New York and is
negotiating a similar agreement with the USDA nutritional lab at The Presidio,
San Francisco focused on the measurement of mineral bioavailability in the
Company's plants. The Cornell lab has proposed to evaluate bioavailability IN
VITRO using a method based on transformed human intestinal monolayer cells. The
Presidio lab plans to conduct human nutritional studies with volunteers. The
Company expects these studies to be completed in 1998.
SPECIATION. The Company believes that in order to establish a solid
scientific basis for the nutritional value of its plant-based supplements, it is
important to identify the speciation, or chemical form of the minerals in the
plants. One of the Company's scientific collaborators has begun to characterize
the speciation of minerals in fresh and dried plants. The speciation of selenium
has been completed, and the results of this work are expected to be published in
1998. The speciation of chromium has been partially characterized, and the
Company anticipates its collaborators will characterize all of the minerals
taken up by its plants.
FUTURE DEVELOPMENT. Selenium accumulation by plants in the crucifer family,
of which broccoli and several of the Company's plants are members, combines the
antioxidant and anticarcinogenic aspects of selenium and organoselenium
compounds with natural organic antioxidants found in cruciferous plants.
24
<PAGE>
Cruciferous plants and plant extracts are currently sold as nutritional
supplements by others because these plants are said to contain particular
compounds that have been linked to improved immune functions. The Company
believes that organic antioxidants are also present in its plants and is
developing the capability to identify and measure these compounds. The Company
is planning to measure the antioxidative effect of organoselenium enriched
supplements. Phytotech has recently submitted a proposal in collaboration with
two academic research institutions to the National Cancer Institute to evaluate
the antioxidant and anticarcinogenic properties of its selenium accumulating
cruciferous plants.
MARKET OPPORTUNITY. Recent estimates by THE VITAMIN RETAILER place the
annual sales of nutritional supplements worldwide at $20 billion in 1996.
According to a 1996 industry survey, the U.S. market totaled $6.5 billion,
generated through sales at 38,000 retail outlets and with an annual growth rate
of 15%. Vitamin and mineral supplements accounted for 49% of retail sales, and
single mineral supplements comprised 10% of such sales.
The Company's approach to the development of its nutritional supplements
includes carefully controlled cultivation conditions, characterized
bioavailability and quantified chemical forms of the minerals in its plants at
consistent levels and quality standards. The Company will seek to establish the
following characteristics for its botanical mineral supplement products:
- Batch to batch consistency;
- Precise and carefully controlled quantities of active ingredients;
- Standardized quality;
- Solid scientific basis for the benefits of the supplements; and
- Patented production methods.
The Company has identified five nutritionally important minerals that can be
accumulated in its select plant cultivars at sufficient concentrations to supply
100% of the RDA or recommended daily intake of these supplements. Other mineral
and organic supplements are being evaluated by the Company as priorities allow.
The minerals under development include:
SELENIUM. Selenium is an essential trace mineral and is present in all the
tissues of the body as an activating component of the enzyme glutathione
peroxidase, which has been shown to protect cells from free radical damage.
Intake of 50-70 mg ("micrograms") per day is recommended for good health, but
even this small amount of selenium can be lacking in many diets. Recently,
selenium from a yeast source has been linked in a study by the Arizona Cancer
Center to a reduction in the incidence of and mortality from cancers of the
colon, prostate and lung. The administered dose of selenium in this study was
relatively high compared to multivitamins which typically contain 50 mg
selenium.
CHROMIUM. Chromium is primarily involved in the metabolism of glucose and
the synthesis of proteins. Because of its role in insulin production and glucose
regulation, chromium depletion has been implicated in hypercholesterolemia and
may play a role in the control of glucose levels. Chromium picolinate is
promoted by others as an important part of several weight-loss products, and
some studies support the use of dietary chromium as a weight loss aid.
IRON. Every cell in the body contains and requires iron. When its supply is
low, diverse symptoms and disorders may result. Iron is required in relatively
high doses to maintain proper nutrition. Of all the nutrient allowances, the
allowance for iron is the most difficult to obtain from dietary sources, which
is why iron is the most common single mineral deficiency in the world.
The bioavailability of iron in supplements has historically been a problem.
The most commonly prescribed iron supplements for women of child-bearing years
are poorly absorbed and can cause gastrointestinal upset. Phytotech has
preliminary data indicating that the iron in its hyperaccumulating
25
<PAGE>
crucifers may be more bioavailable than other commercially available
supplements. The Company is planning a human nutritional trial in collaboration
with the USDA to document the benefits of PHYTOIRON-TM- as a "natural" iron
supplement.
ZINC. Zinc is an essential trace mineral that is required in relatively
high doses and it is among the best selling individual trace minerals in the
health food industry. Zinc is an essential component of enzymes for various
metabolic processes. Daily intake of zinc lozenges containing 13 mg of zinc has
also been reported to ameliorate the symptoms of the common cold. Despite the
essential nature of zinc, the human body does not store this mineral, so the
body is dependent upon a continual external supply.
MANGANESE. Manganese is best known as a component in various enzymes,
including those involved in the metabolism of protein, lipids and carbohydrates.
Manganese is poorly absorbed by the body and is scare in processed foods.
Manganese does not have an RDA, but is included in a number of mineral
supplement products. Manganese is promoted by nutritional supplement suppliers
as having a role as an antioxidant and in maintaining healthy bones.
COMMERCIALIZATION STATUS. The Company has completed pilot scale studies for
iron, zinc, selenium and chromium uptake by its plants. The Company commenced
commercial scale production of selenium and chromium containing plants in the
first quarter of 1998. The Company expects to proceed with the commercial
production of iron, zinc and manganese nutritional supplements as resources
permit. The Company is also evaluating several other nutritional minerals as
candidates for a plant-based source. Phytotech has entered into a marketing
arrangement with Arterio, Inc., a distributor of nutritional supplements that
markets products under the brand names Ecological Formulas and Cardiovascular
Research, to market its selenium and chromium supplements and antioxidant skin
care cream. Phytotech contracts with an outside greenhouse contractor to produce
bulk product which is then shipped to a Food and Drug Administration ("FDA")
approved manufacturing facility for tableting, encapsulating, packaging and
labeling. Ecological Formulas provides marketing, distribution and sales
coordination of the plant material as nutritional supplements through its own
sales organization and also to other distributors and marketers of nutritional
supplements.
Phytotech may also choose to sell bulk tablets or capsules to companies
serving the nutritional supplement industry through the following established
distribution channels:
MAIL ORDER. These customers are reached through print and electronic
advertising, including through sites on the internet. Several companies
specialize in direct sales to consumers through mail order advertising.
MULTILEVEL/NETWORK MARKETING. These organizations, such as Amway, Shaklee,
Celltech and Herbalife sell products that generally cannot be obtained in retail
stores.
INDEPENDENT RETAILERS OF NUTRITIONAL SUPPLEMENTS. These retailers include
privately owned health food stores, of which approximately 7,000 existed in the
U.S. in 1996. In addition, nutritional supplements are sold widely in
pharmacies, wholesale outlets and clubs and supermarkets.
OTHER DISTRIBUTORS. These distributors could include private label
wholesalers such as General Nutrition, Nature's Sunshine Products, Weider
Nutrition, Twinlabs, Nature's Bounty, Rexall Sundown, and also fitness centers,
health practitioners and dispensing nutritionists.
COMPETITION. The nutritional supplement industry is fragmented and includes
several large manufacturers along with many smaller producers and distributors.
While a few of the distributors are vertically integrated, most distributors
contract with manufacturers for finished products.
A large number of manufacturers produce mineral supplements for all
marketing outlets. Many of these mineral supplements are inexpensive to
manufacture, but have limited mineral bioavailability, which can reduce their
effectiveness. To attempt to address this problem, advanced formulas containing
chelated
26
<PAGE>
or organically complexed mineral supplements have been introduced to the market
during the last few years. As far as the Company is aware, no other company
offers plant-based nutritional supplements as a source of dietary minerals,
because plants ordinarily do not contain sufficient quantities of minerals to be
effective supplements.
COMMERCIAL PROTEIN PRODUCTION
TECHNOLOGY. The Company has received funding from the USDA under a Small
Business Innovative Research grant to develop transgenic plants, which are
plants capable of making proteins based on genes that are not native to the
plant, and is expanding this effort into a core technology for the expression of
commercially useful proteins in crop plants. Phytotech and its outside
collaborators believe they can develop transgenic crop plants to produce
valuable proteins for selected niche markets at a significant cost savings over
current sources.
Recent developments in the application of plant molecular biology have made
it easier to develop transgenic plants that can inexpensively synthesize
desirable protein products. Applications of these and other methods to create
transgenic plants capable of producing valuable commercial proteins could offer
multiple, significant advantages over conventional fermentation and cell culture
techniques. These advantages could include lower production costs, easier
production scale-up and improved safety characteristics.
Historically, it has been difficult to obtain stable levels of foreign
proteins in plants. In addition, certain plant characteristics complicate
protein recovery and purification processes. Rapid, large scale clonal
propagation of many plant species is now feasible. Evidence of stable, high
level expression of a bacterial gene in the leaves, roots and tubers of
transgenic potato plants has been published by the Company's collaborators.
These results suggest that this core technology can be developed to produce
large amounts of selected proteins in targeted organs of crop plants. Further
work has also shown that foreign proteins can be stably produced and the protein
accumulated in plant seeds.
The Company believes production of proteins through transgenic plants offers
the potential for substantial cost savings, because novel genetic engineering
methods may allow the initial low cost advantage to be carried downstream
through purification, yield and recovery. Certain safety issues may also favor a
plant or plant cell culture based approach. A plant-based approach eliminates
the presence and risk of mammalian infectious agents. Proteins, such as heparin,
gelatin, collagen, insulin, as well as drug manufacturing proteins, such as
brain-heart infusion, bovine serum albumin, and fetal calf serum, all have
mammalian sources. There is a growing concern that proteins derived from
mammalian sources present the possibility of transmission of retroviruses and
other infectious agents. The tests for these infectious agents are complex and
their inactivation or removal is difficult. Phytotech and its collaborators are
presently engaged in developing plant-based proteins lacking these infectious
agents.
MARKET OPPORTUNITY. The potential market for commercial proteins from
transgenic plants is estimated by the Company to be at least $300 million
annually. Collagen is an example of a protein that may present a market
opportunity for plant-based manufacture. Collagen has both therapeutic and
cosmetic applications. Derivatized bovine collagen is the current source for
cosmetic use, plastic surgery, wound and bone healing, and wrinkle removal by
transdermal injection and had worldwide sales in 1997 in excess of $70 million.
Human collagen produced in a transgenic plant or plant organs might present
advantages over the bovine material. The stringent purification and analytical
procedures required for therapeutic use of bovine collagen could be reduced with
a plant-derived material. The absence of potential or perceived mammalian
pathogens in plant-derived collagen would simplify purification, testing and
validation procedures and could reduce manufacturing costs. Approximately 3% of
the human population is allergic to derivatized bovine collagen. A plant based
collagen source may eliminate this problem.
COMMERCIALIZATION STATUS. Phytotech has engaged in preliminary work toward
the development and commercialization of efficient, cost effective methods of
protein production using transgenic plants. The Company is seeking to augment
its internal efforts by licensing advanced technology. Contingent on the
27
<PAGE>
closing of this offering, Phytotech has negotiated an exclusive, worldwide
license with an internationally recognized research organization to use certain
proprietary technology for the cost effective production and commercialization
of selected proteins in transgenic plants.
If the preliminary development work in which the Company is engaged is
successful, the Company intends to use these transgenic plants to manufacture a
series of commercial proteins at significantly reduced cost. The Company plans
to cultivate, harvest and analyze the transgenic plants. Recovery and
purification of the protein product will be performed by outside manufacturers.
Phytotech intends primarily to provide the purified proteins as a bulk product
for resale. For selected products, the Company may market directly to consumers.
Production of proteins using transgenic plants may offer manufacturing cost
advantages for products having moderate to high unit prices and markets in
quantities of tens to thousands of kilograms per year. These include proteins
that have dietary, catalytic or cosmetic applications with expired or dated
intellectual property protection. Some proteins are good potential targets
because both cost and perceived safety issues favor a plant-based approach.
CUSTOMER GROUPS. Phytotech plans to manufacture transgenic plants and
market plant-based proteins with moderate to high value that address niche
markets of $5 to $100 million in annual sales. Potential customer groups for the
Company's planned commercial protein products include:
- Cosmetics formulators for proteins such as collagen and elastin;
- Specialty food companies that use large quantities of proteins such as
rennet in cheese making, pectinases and amylases in food processing and
brewing and malting enzymes;
- Companies producing protein sweeteners;
- Grain processing companies that use enzymes for starch liquefaction and
saccharification; and
- Textile companies that use enzymes for desizing and fabric finishing.
COMPETITION. Large companies with extensive experience and research
programs in transgenic plants include Monsanto, DuPont, Novartis, DowElanco, and
Pioneer. The research programs at these companies are primarily focused on
applications associated with large markets, such as pesticide-containing and
herbicide-resistant transgenic crop plants grown for traditional uses. Mid-sized
firms such as DNA Plant Technology also focus on producing transgenic plants
that appeal to mass markets. Some small, privately held companies such as
BioSource and Prodigene have research programs involving the production of high
value proteins in transgenic plants, which may be directly competitive with
Phytotech's product development plans.
TECHNOLOGY DEVELOPMENT
Phytotech is developing new technologies using its own resources and
expertise and by entering into cooperative arrangements with other
organizations. Funding for new technology development has come both from sales
of the Company's equity securities and promissory notes and from grants received
by the Company.
RESEARCH GRANT FUNDING. Some of the Company's research and development
activity is partially or fully underwritten by outside competitive grant
funding. This support validates the quality and helps defray the costs of
research and development efforts. The Company will continue to pursue additional
grants and contracts and certain Company personnel are actively writing grant
proposals. The Company anticipates that federal and state grants will continue
to defray a portion of the development and commercialization costs. Since
inception, the Company has completed seven funded projects totaling $811,000,
has five ongoing projects with approximately $950,000 in total grant support and
has five proposals pending to various states and federal agencies.
28
<PAGE>
CONTRACTS AND TEAMING AGREEMENTS. The Company has entered into and is
negotiating teaming and technology development agreements with public and
private organizations to further the commercial use of its products and
services. The Company has executed joint development and teaming agreements with
ATE, Inc. in France through its representative UI USA, Inc., and various
environmental consultants. The Company is negotiating similar agreements with
others to market its services.
PATENTS
Phytotech has established an aggressive patent program to protect its
technology and intellectual property. In all countries it deems appropriate, it
holds the exclusive rights to inventions disclosed in three issued United States
patents covering the metal accumulating technologies. Exclusive rights to these
patents have been assigned to the Company. The U.S. government retains certain
rights to some issued patents, including a royalty-free, non-exclusive license.
The Company does not expect the retention of these rights to impact materially
on its patent protection or exclusivity in commercialization.
The Company believes that the three issued patents will enable it to
establish an advantage position on the use of terrestrial plants for the
accumulation of metals. Phytotech continues to enhance these scientific
developments by supporting outside research and through work in the Company's
own laboratory. Three additional patent applications have been filed by Rutgers
covering improvements and new concepts arising from the supported research. A
Notification of Allowance has been issued for one of these patent applications.
The Company has rights to exclusive, worldwide licenses to the inventions
covered by these applications. Six U.S. patent applications arising from
discoveries owned solely by the Company have also been filed. Notifications of
Allowance have been issued for two of these patent applications. The Company
expects that future improvements and discoveries will be covered by additional
patent applications.
GOVERNMENT REGULATION
The Company's products and services are subject to extensive regulation by
various governmental authorities. The Company's products may be regulated by
EPA, FDA and USDA and by various state or foreign regulatory bodies. The effect
of government regulation may be to delay marketing of new products for a
considerable or indefinite period of time, to impose costly procedures upon the
Company's activities and to provide an advantage to companies that compete with
the Company.
REGULATION OF PHYTOREMEDIATION
The Company does not anticipate that it will be subject to the Resource
Conservation and Recovery Act ("RCRA"), as amended, as a "Treatment, Storage or
Disposal Facility" (a "TSD" facility). However, certain treatment systems that
the Company may elect to operate may require it or its customers to obtain a TSD
facility permit from the EPA (or a state authorized to run its own RCRA program)
before placing treatment systems into operation. Obtaining a TSD facility permit
can be a time-consuming and expensive process, requiring considerable
documentation, including process information, waste specifications and
information regarding compliance assessments, security procedures, emergency
plans and insurance. The TSD facility permitting process also requires local
public hearings. Where there is local public opposition to the siting of a
facility, obtaining a TSD facility permit can take more than a year, and in some
cases up to two to four years, if the permit is granted at all. There has been
public concern regarding the use of genetically modified plants in the
environment and there could be public opposition to the use of genetically
modified plants for toxic metal remediation. Delays in obtaining a TSD facility
permit or any other required permits could affect the ability of the Company to
receive revenues from the use or sales of its products, once developed, and such
delays could materially adversely affect the financial condition of the Company
given its limited financial resources. The Company's products may also be
subject to other environmental regulations regarding their operation, including
mandatory removal levels and prohibitions on the release of certain levels of
hazardous wastes in the exit stream of the Company's systems.
29
<PAGE>
Additionally, other permits may be required from the EPA and various state
and local agencies in connection with the use or operation of the Company's
products. The federal and state environmental laws, rules and regulations
regulating the Company's current or proposed business operation are complex,
subject to varying interpretations and are rapidly changing and evolving.
Compliance with these laws, rules and regulations by the Company is expected to
be time-consuming and expensive. Any failure by the Company to comply with the
requirements of these environmental laws regulating its activities, even if
unintentional, could give rise to liabilities, penalties or fines that could
materially adversely affect the financial condition of the Company and could
adversely affect its reputation in the industry.
REGULATION OF NUTRITIONAL SUPPLEMENTS
In the United States as well as in any foreign markets in which the Company
may sell its products, the Company will be subject to regulations regarding (i)
the formulation, manufacture, packaging, labeling, distribution, importation,
sale and storage of the Company's products, and (ii) product claims and
advertising.
The formulation, manufacture, packaging, storing, labeling, advertising,
distribution and sale of the Company's products are subject to regulation by
federal agencies, including the FDA, the Federal Trade Commission ("FTC"), the
Consumer Product Safety Commission ("CPSC"), the USDA, the EPA and the United
States Postal Service. The Company's activities are also regulated by various
agencies of the states, localities and foreign countries in which the Company's
products may be manufactured, distributed and sold. The FDA, in particular,
regulates the formulation, manufacture and labeling of weight management
products, dietary supplements, and cosmetics and skin care products, such as
those expected to be manufactured and sold by the Company. FDA regulations
require the Company and its suppliers to meet relevant regulatory good
manufacturing practices for the preparation, packaging and storage of these
products. Good manufacturing practices for dietary supplements have yet to be
promulgated but are expected to be proposed.
A portion of the Company's planned sales will come from products that are
classified as dietary supplements under the Food, Drug and Cosmetic Act
("FDCA"). The labeling requirements for dietary supplements have not been
clearly established. In December 1995, the FDA issued proposed regulations which
govern the labeling of dietary supplements, including how to declare nutritional
information, how to make permissible "statements of nutritional support" and
when additional, defined terminology may be used on dietary supplements. As a
manufacturer of products that are ingested by consumers, the Company is subject
to the risk that one or more of the ingredients in its products may become the
subject of adverse regulatory action.
In foreign markets, prior to commencing operations and prior to making or
permitting sales of its products, the Company may be required to obtain an
approval, license or certification from the country's ministry of health or
comparable agency. Prior to entering a new market in which a formal approval,
license or certificate is required, the Company will be required to work
extensively with local authorities to obtain the requisite approvals. The
approval process generally requires the Company to present each product and
product ingredient to appropriate regulators and, in some instances, arrange for
testing of products by local technicians for ingredient analysis. Such approvals
may be conditioned on reformulation of the Company's products or may be
unavailable with respect to certain products or ingredients.
The FTC and certain states regulate advertising, product claims, and other
consumer matters, including advertising of the Company's products. All
advertising, promotional and solicitation materials used by distributors must be
approved by the Company prior to use. The FTC has in the past several years
instituted enforcement actions against several dietary supplement companies for
false and misleading advertising of certain products. The Company also is
subject to the risk of claims by distributors and customers who may file actions
on their own behalf, as a class or otherwise, and may file complaints with the
FTC or state or local consumer affairs offices. Proceedings resulting from these
complaints may result
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<PAGE>
in significant defense costs, settlement payments or judgments and could have a
material adverse effect on the Company.
REGULATION OF PLANT-BASED PROTEINS
TRANSGENIC PLANTS. The field scale cultivation of new plants constructed
with recombinant DNA techniques requires prior notification to the USDA.
Large-scale growth of transgenic plants requires prior approval by the USDA.
Unless there is some specific concern, approval is usually granted. Issues of
concern include genetic modifications that involve antibiotic resistance,
weediness or invasiveness, and the potential for genetic transfer to other
species.
The manufacture and sale of nutritional and cosmetic products from
transgenic plants are regulated as products derived from naturally occurring
plants. See "Regulation of Nutritional Supplements" in this section.
The use of products such as human collagen in an injectable form requires
approval from the FDA including Phase I, II and III clinical trials. This
approval process takes 7-12 years and for a new drug can cost in excess of $100
million. Because a form of collagen is already in pharmaceutical use, testing
and approval may be less time-consuming and costly than it would otherwise be.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
PERSONNEL
The Company currently has eighteen employees and several non-employee
consultants. Seven employees have advanced degrees. None of the Company's
employees is covered by collective bargaining agreements and management
considers relations with its employees to be good.
FACILITIES
The Company has a five-year lease expiring February 2000 on approximately
11,000 square feet of laboratory and office space located at 1 Deer Park Drive,
Monmouth Junction, New Jersey. This laboratory and office space is anticipated
to be sufficient to meet the Company's needs for at least the next two years.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table lists the executive officers, certain key employees and
directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- -----------------------------------------------------
<S> <C> <C>
Burt D. Ensley(1)......................... 49 President and CEO, Director
Cindy Orser............................... 41 Director of Scientific Affairs
Jack D. Frost............................. 41 Vice President of Business Development
Alexander Baltovski....................... 39 Chief Financial Officer
Philip J. Whitcome........................ 49 Chairman of the Board, Director
Laura R. Meagher.......................... 45 Director
Ilya Raskin............................... 42 Director
Abraham H. Nechemie(1).................... 74 Director
Schneur Z. Genack(1)...................... 57 Director
Eric K. Johnson........................... 38 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
BURT ENSLEY, PH.D. has served as President and Chief Executive Officer and
Director of the Company since its inception in April 1993. From 1989 through
1992, Dr. Ensley served as Director of Advanced Technology at Envirogen, Inc., a
microbial based bioremediation company. From 1981 to 1989, Dr. Ensley was the
head of the Specialty Chemicals Group at Amgen, Inc. Dr. Ensley received a B.S.
and M.S. in Biology from the University of New Mexico in 1974 and 1976,
respectively, and a Ph.D. in Microbiology from the University of Georgia in
1979. Since 1996, Dr. Ensley has served on the National Science Foundation's
Advisory Board.
CINDY ORSER, PH.D. has served as a consultant in the capacity of the
Director of Scientific Affairs of the Company since September 1996. From 1993
through 1995, Dr. Orser was Group Leader at Xenometrix, Inc., an in vitro
molecular toxicology biotechnology company in Boulder, Colorado. She received
her Ph.D. from the University of California at Berkeley in 1985 in Plant
Pathology and Genetics. Dr. Orser received her B.S. in Botany and M.S. in Plant
Pathology from Montana State University in 1978 and 1980, respectively.
JACK D. FROST has been the Vice President of Business Development since
November 1997. Mr. Frost has a M.S. degree in Agronomy and 16 years of
scientific, business development and management experience. He served as the
Vice President of Industrial Business Development for Blasland, Bouck & Lee,
Inc. and Vice President of Business Development for ICF Kaiser Engineers. He
earned his B.S. and M.S. from West Virginia University.
ALEXANDER BALTOVSKI has served as the Chief Financial Officer of the Company
since November 1997. Mr. Baltovski has nine years accounting experience. From
1993 to 1997, Mr. Baltovski served as a Financial Operations Principal and Chief
Financial Officer of several NASD member securities firms, most recently Joseph,
Dillon and Company, Inc., where he was responsible for regulatory reporting,
operations, accounting, and various underwriting and market making activities.
Mr. Baltovski received a B.S. degree in Accounting from Wagner College in 1981.
PHILIP J. WHITCOME, PH.D. has served as Chairman of the Board of Directors
since May 1994 and as a Director of the Company since October 1993. Dr. Whitcome
devotes only a portion of his time to the business of the Company. Dr. Whitcome
has served on the Board of Directors of Avigen, Inc. since December 1992 and has
served as its Chairman since April 1995. From July 1988 to December 1993, he
served as President and Chief Executive Officer of Neurogen Corporation, a
biotechnology company involved in the field of neuroscience. Dr. Whitcome holds
a Ph.D. in Molecular Biology from the
32
<PAGE>
University of California at Los Angeles, an M.B.A. from the Wharton School of
the University of Pennsylvania and a B.S. degree in Physics from Providence
College. Dr. Whitcome also currently serves on the Board of Directors of Premier
Research Worldwide, a contract research organization.
LAURA R. MEAGHER, PH.D. has served as a Director of the Company since its
inception in April 1993. Dr. Meagher has experience in biotechnology policy and
regulation, technology transfer and economic development. Dr. Meagher is
currently Associate Dean, Cook College, Rutgers. Since 1987, Dr. Meagher has
been senior partner of Technology Development Group. After receiving her Ph.D.
in Ecology from Duke University in 1979, Dr. Meagher helped to plan and develop
the North Carolina Biotechnology Center.
ILYA RASKIN, PH.D. is the scientific founder of the Company and has served
as a Director of the Company since its inception in April 1993. Dr. Raskin has
been on the faculty of the AgBiotech Center at Rutgers since 1989. From 1984 to
1989, Dr. Raskin worked at Shell Agricultural Chemical Company which merged with
DuPont Co. in 1986. Dr. Raskin received his B.S. degree from Brandeis
University. He received his Ph.D. in 1984 from Michigan State University.
ABRAHAM H. NECHEMIE has served as a Director of the Company since November
1995. Mr. Nechemie has over 40 years of experience in the financial services and
management business. He also serves on the Board of Directors of
Electro-Catheter Corporation, a publicly held New Jersey company. Mr. Nechemie
received a B.S. degree in Accounting from Rutgers in 1951 and is a retired
Certified Public Accountant.
SCHNEUR Z. GENACK has served as Director of the Company since August 1996.
Mr. Genack also currently serves on the Board of Directors of EnviroGuard, Inc.,
Industrial Services Technology, Inc., and New Options on Waste and Ponderosa
Fibres of Pennsylvania. Since 1987 Mr. Genack has been a Member of the General
Partnership of the Environmental Venture Fund, L.P., and since 1992 has been a
Member of the General Partner of Environmental Private Equity Fund II, L.P. He
is also a partner in the law firm of Felsen, Genack Associates. Mr. Genack holds
a B.S. from Yeshiva University and a J.D. from New York University School of
Law.
ERIC K. JOHNSON has served as a Director of the Company since October 1997.
Mr. Johnson is Executive Vice President, Investment Banking, of Trautman Kramer
and Company, Inc. He served as a corporate finance officer at Bank of New York.
His initial entry into investment banking was at Ladenburg, Thalmann. He has a
B.A. and an M.B.A. from New York University and additionally, he received
graduate financial education from the Graduate School of Business at Columbia
University and the Darden School of Business at the University of Virginia.
SCIENTIFIC CONSULTANTS AND ADVISORS
The scope of the Company's research and development effort is enhanced
through its scientific consultants. They represent a valuable resource which
serves as an important link between the Company's efforts and those of leading
academic laboratories. The Company has agreements with all of its consultants
which contain provisions that protect confidential information, proprietary data
and intellectual property of the Company. All rights and title to intellectual
property conceived or discovered in the performance of any research conducted by
a consultant while performing his specific duties on behalf of the Company
belongs to the Company.
DR. YORAM KAPULNIK (Head, Rhizospheric Biology Group, The Volcani Center, Bet
Dagan, Israel). One of the inventors of rhizofiltration technology, Dr. Kapulnik
has broad expertise in rhizospheric microbiology, molecular biology and root
physiology.
DR. ALAN J. M. BAKER (Lecturer, The University of Sheffield, UK). Dr. Baker is a
specialist in the biology and ecology of metal-accumulating plants with
expertise in conducting field trials on metal remediation with plants.
33
<PAGE>
DR. ILAN CHET (Vice President for Research and Development of the Hebrew
University of Jerusalem, Israel). Dr. Chet is an expert in rhizospheric biology
and a recipient of numerous international scientific awards and honors.
DR. ROBERT TUCKER (Director of the Ecopolicy Center, Cook College, Rutgers
University). Prior to joining Rutgers, he spent 18 years with the New Jersey
Department of Environmental Protection, including nine years as the Director of
the Division of Science and Research.
DR. GAD GALILI (Professor, Department of Plant Genetics, The Weizmann Institute
of Science, Rehovot, Israel). Dr. Galili is an expert in plant molecular biology
and expression systems in transgenic plants. He received the Bronfman Chair of
Plant Science in 1994.
COMPENSATION OF DIRECTORS
Except as described below, members of the Board of Directors who are not
employees of the Company have not, to date, received any compensation. Directors
are entitled to reimbursement of reasonable expenses incurred in attending such
meetings. In addition, directors are eligible to receive stock options under the
Company's Stock Option Plan.
On November 6, 1995, Mr. Nechemie was appointed to the Board of Directors of
the Company. Mr. Nechemie receives $1,000 per Board meeting as well as options
to purchase 5,556 shares of Non-Voting Common Stock at a purchase price of $.45
per share with the Company's repurchase right over five years if his service on
the Board is terminated.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
(exclusive of stock grants and options) paid during the Company's fiscal year
ended December 31, 1997 to the Chief Executive Officer of the Company. No other
executive officer received compensation in 1997 in excess of $100,000. Messrs.
Baltovski and Frost are currently compensated (exclusive of stock grants and
options) at an annual base salary of $110,000 each.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------
ANNUAL COMPENSATION SECURITIES
------------------------------------ UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS OPTIONS
- ----------------------------------------------------- ------------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Burt D. Ensley....................................... 1997 $ 120,000 -- 55,556
President and Chief Executive Officer 1996 $ 110,548 $ 15,000 10,000
1995 $ 90,000 -- --
</TABLE>
EMPLOYMENT AGREEMENTS
On May 17, 1996, Dr. Burt D. Ensley executed a three year employment
agreement (the "Agreement") to serve as President and CEO of the Company at a
base salary of $120,000 per year. In addition, Dr. Ensley was granted a
performance bonus of $15,000 in 1996. Under the Agreement, Dr. Ensley receives
stock options for 10,000 shares of Common Stock at an exercise price of $.45 per
share vesting over a three year period. An additional amount of stock options
and/or warrants may be granted to Dr. Ensley at the discretion of the Board of
Directors of the Company. The Agreement provides that during and after his term
of employment with the Company, Dr. Ensley must keep secret and retain in
strictest confidence, all confidential matters of the Company.
34
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning stock options
granted to Dr. Ensley during the year ended December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED TO
UNDERLYING EMPLOYEES IN FISCAL EXERCISE PRICE
NAME OPTIONS GRANTED(1) 1997 PER SHARE EXPIRATION DATE
- ----------------------------------- ------------------- ------------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Burt D. Ensley..................... 55,556 65% $ .68 10/1/07
</TABLE>
- ------------------------
(1) Incentive stock options granted under the Company's Stock Option Plan on
October 1, 1997. The options vest in 20% increments over a five year period
beginning October 1, 1997 and each October 1 thereafter.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information with respect to Dr.
Ensley concerning option exercises and year end option values in the fiscal year
ended December 31, 1997.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
SHARES AT FY-END (#) AT FY-END ($)
ACQUIRED ON VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE(1)
- ----------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Burt D. Ensley......... -- -- 14,444/ 39,694/
51,112 139,274
</TABLE>
- ------------------------
(1) The price per share of Common Stock as of December 31, 1997 is deemed to be
$3.375, the deemed fair value for financial statement purposes.
STOCK OPTION PLAN
The Company has adopted the Phytotech Stock Option Plan (the "Plan") which
provides for the award of stock options to those employees, directors and
outside consultants of the Company who make substantial contributions to the
Company by their loyalty, industry and invention. The terms and conditions of
each award will be described in a separate agreement between the Company and the
key executive or consultant, as the case may be. The Plan is administered by the
Board of Directors (the "Board") or by a committee to whom the Board delegates
such authority. The Board or, if applicable, the committee appointed by the
Board, has full and final authority in its discretion (i) to interpret the
provisions of the Plan, (ii) to decide all questions of fact arising in the
Plan's application, (iii) to determine the individuals to whom stock options
shall be awarded under the Plan, (iv) to determine the amount, size and terms of
each such award, (v) to determine the time when awards shall be granted, and
(vi) to make all other determinations necessary or advisable for the
administration of the Plan.
Currently only shares of Non-Voting Common Stock may be issued upon exercise
of options granted under the Plan. The total number of such shares reserved for
issuance subject to options under the Plan may not exceed in the aggregate
555,556 shares. Except as otherwise provided in the Plan, any shares subject to
an option which for any reason expires or is terminated unexercised shall again
be available under the Plan. All shares of Non-Voting Common Stock subject to
currently outstanding stock options will be automatically converted into shares
of Common Stock on a one-for-one basis upon effectiveness of this
35
<PAGE>
offering. Following this offering, the Company intends to amend the Plan to
provide for the issuance of Common Stock on exercise of future options granted
under the Plan.
In the event of any change in the outstanding stock of the Company, by
reason of a stock dividend or distribution, recapitalization, merger,
consolidation, split-up, combination, exchange of shares or the like, the Board
may, in its discretion, adjust the number of shares of Common Stock which may be
issued under the Plan. In such event the Board may make any changes it deems
equitable to outstanding stock options. As of March 31, 1998, there were
outstanding options to purchase an aggregate of 253,333 shares of Non-Voting
Common Stock, of which options to purchase 56,444 such shares were exercisable.
CERTAIN TRANSACTIONS
The Company has issued certain promissory notes to certain of its directors,
payable on demand, in the aggregate amount of $229,000. Such notes were issued
on May 26, 1997: (i) a $100,000 promissory note issued to Burt Ensley; (ii) a
$100,000 promissory note issued to Philip Whitcome; and (iii) a $25,000
promissory note issued to Abraham Nechemie ((i)-(iii), collectively, the
"Notes"). The Notes provide that the principal and interest on the unpaid
balance accruing from and after the date of issuance (the interest being the
minimum rate on the date of issuance necessary under the Code, to avoid an
imputed rate of interest under the Code) are payable on demand. An additional
note in the principal amount of $4,000 was issued to Burt Ensley on May 26,
1997. The note provides that the principal and the accrued interest in the
amount of 10% on the unpaid balance is payable on demand.
Philip Whitcome, Ilya Raskin, Laura Meagher and Abraham Nechemie, directors
of the Company, each have consulting agreements with the Company pursuant to
which such persons perform, from time to time, services to the Company unrelated
to their services as directors. The amount of compensation paid by the Company
under such consulting agreements in 1997 and 1996 was not material.
The Company has paid to Trautman, Kramer and Company, of which Eric Johnson
is an officer, warrants and cash compensation as consideration for its services
as placement agent for the Company in various private placements of the
Company's equity securities and promissory notes. Mr. Johnson received warrants
for services provided to the Company in connection with the Company's two most
recent private placements of promissory notes and warrants.
36
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of the date of this Prospectus, by (1) each
director, (2) each executive officer named in the Summary Compensation Table,
(3) all directors and executive officers as a group and (4) each person known to
the Company to be the beneficial owner of more than 5% of the shares of Common
Stock. Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
beneficially owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER THE OFFERING
---------------------------- ----------------------------
NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT
- ---------------------------------------------------------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
Burt D. Ensley*........................................... 212,223(1) 8.24% 212,223(1) 4.64%
Ilya Raskin*.............................................. 206,668(2) 8.08% 206,668(2) 4.53%
Laura R. Meagher*......................................... 151,112(2) 5.91% 151,112(2) 3.32%
Philip J. Whitcome*....................................... 68,889(3) 2.69% 68,889(3) 1.51%
Abraham H. Nechemie*...................................... 8,889(3) ** 8,889(3) **
Schneur Genack*........................................... 280,000(4)(6) 10.38% 280,000(4)(6) 5.96%
Eric K. Johnson*.......................................... 203,269(5) 7.37% 203,269(5) 4.27%
Stanley R. Harris*........................................ 138,889 5.43% 138,889 3.05%
Nikatech, Inc............................................. 138,889 5.43% 138,889 3.05%
c/o P. Friedli
Freigustrasse 5
Zurich, Switzerland 8002
Environmental Private Equity Fund II, L.P................. 277,778(6) 10.31% 277,778(6) 5.92%
Attn: Bret R. Maxwell, General Partner
233 South Wacker Drive, Suite 9600
Chicago, IL 60606
All directors and executive officers as a group (9
persons)................................................ 888,830(7) 31.37% 888,830(7) 18.39%
</TABLE>
- ------------------------------
* May be contacted at the Company address: 1 Deer Park Drive, Suite I,
Monmouth Junction, New Jersey 08852.
** Less than 1%.
(1) Includes 17,778 shares of Common Stock acquirable upon exercise of presently
exercisable stock options.
(2) Includes 1,112 shares of Common Stock acquirable upon exercise of presently
exercisable stock options and 130,573 shares currently held in escrow for
Laura R. Meagher. While any shares are held in escrow, such shares cannot be
voted.
(3) Includes 8,889 shares of Common Stock acquirable upon exercise of presently
exercisable stock options.
(4) Includes shares owned by Environmental Private Equity Fund II, L.P., listed
below, as to which Mr. Genack disclaims beneficial ownership, and includes
2,223 shares of Common Stock acquirable upon exercise of presently
exercisable stock options. Mr. Genack is one of the general partners of
Environmental Private Equity Fund II, L.P.
(5) Includes 203,269 shares of Common Stock acquirable upon exercise of
presently exercisable warrants.
(6) Includes 138,889 shares of Common Stock acquirable upon exercise of
presently exercisable warrants.
(7) Includes 276,606 shares of Common Stock acquirable upon exercise of
presently exercisable stock options and warrants.
37
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The following description of the Company's securities is a summary and is
subject in all respects to applicable New Jersey law, provisions of the
Company's Certificate of Incorporation and By-laws, the Warrant Agreement
between the Company and Registrar and Transfer Company, as warrant agent,
pursuant to which the Warrants will be issued, the various agreements pursuant
to which other securities of the Company were issued and the Underwriting
Agreement between the Company and the Underwriter.
Giving effect to the Reverse Split and certain redesignations of capital
stock approved by the Board of Directors to be effective immediately prior to
this offering, the Company is authorized to issue 41,111,111 shares of its
capital stock, without par value, of which 30,000,000 shares are designated as
Voting Common Stock, 1,111,111 are designated as Non-Voting Common Stock,
10,000,000 are designated as Series A Voting Preferred Stock. The Board of
Directors has the authority to divide authorized but unissued shares of capital
stock into classes and series or both and to determine or change the designation
and the number of shares of any class or series, and to determine the number of
shares, the relative rights, preferences and limitations of shares of any class
or series. Upon conversion of the outstanding shares of Non-Voting Common Stock
and Series A Voting Preferred Stock concurrently with this offering, the Company
intends to amend its Certificate of Incorporation to cancel all shares of
Non-Voting Common Stock and Series A Voting Preferred Stock, whereupon the
Company will have designated all 30,000,000 authorized shares as Voting Common
Stock.
UNITS
Each Unit consists of one share of Common Stock and one Warrant, each
Warrant entitling the holder thereof to purchase one share of Common Stock. The
Units will separate and the Common Stock and Warrants that make up the Warrants
will trade only as separate securities, thirty days after the date of this
Prospectus.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of the holders of Common Stock, including the election of
directors. There is no right to cumulate votes for the election of directors.
Subject to the rights of outstanding preferred stock, if any, the holders of
Common Stock are entitled to receive dividends when, as and if declared by the
Board of Directors out of funds legally available for such purpose. Subject to
the rights of outstanding preferred stock, if any, holders of Common Stock are
entitled to receive, on a pro rata basis, all assets of the Company available
for distribution to the stockholders in the event of the liquidation,
dissolution or winding up of the Company. Holders of Common Stock do not have
any preemptive rights to become subscribers or purchasers of additional shares
of any class of the Company's capital stock.
NON-VOTING COMMON STOCK
Upon consummation of this offering, the outstanding shares of Non-Voting
Common Stock will be converted into 232,156 shares of Common Stock.
SERIES A VOTING PREFERRED STOCK
Upon the consummation of this offering, the outstanding shares of Series A
Voting Preferred Stock will be converted into 1,414,333 shares of Common Stock.
38
<PAGE>
WARRANTS
REPRESENTATIVE'S WARRANT
In connection with this offering, the Company has authorized the issuance of
the Representative's Warrant and has reserved 400,000 shares of Common Stock for
issuance upon exercise of such warrant (including the warrants issuable upon
exercise of the Representative's Warrant). The Representative's Warrant will
entitle the holder to acquire up to 200,000 Units at an exercise price of
$ per Unit. The Representative's Warrant will be exercisable at any time
from the first anniversary of the date of this Prospectus until the fifth
anniversary of the date of this Prospectus.
UNIT WARRANTS
Each Warrant will entitle the holder to purchase one share of Common Stock
at a price of $ per share. The Warrants will, subject to certain
conditions, be exercisable at any time after the Separation Date and until the
fifth anniversary of the date of this Prospectus, unless earlier redeemed. The
Warrants are redeemable by the Company, at $.25 per Warrant, upon thirty days
written notice, if the closing bid price (as defined in the warrant agreement
(the "Warrant Agreement") between the Company and Registrar and Transfer
Company, as Warrant Agent (the "Warrant Agent") described below) per share of
Common Stock for the twenty consecutive trading days immediately preceding the
date notice of redemption is given equals or exceeds $ . If the Company
gives notice of its intention to redeem, a holder would be forced either to
exercise his or her Warrant before the date specified in the redemption notice
or accept the redemption price.
The Warrants will be issued in registered form under the Warrant Agreement.
The shares of Common Stock underlying the Warrants, when issued upon exercise of
a Warrant will be fully paid and nonassessable, and the Company will pay any
transfer tax incurred as a result of the issuance of Common Stock to the holder
upon its exercise.
The Warrants and the Representative's Warrant contain provisions that
protect the holders against dilution by adjustment of the exercise price. Such
adjustments will occur in the event, among others, that the Company makes
certain distributions to holders of its Common Stock. The Company is not
required to issue fractional shares upon the exercise of a Warrant or the
Representative's Warrant. The holder of a Warrant or the Representative's
Warrant will not possess any rights as a shareholder of the Company until such
holder exercises the Warrant or the Representative's Warrant.
A Warrant may be exercised upon surrender of the Warrant certificate
("Warrant Certificate") on or before the expiration date of the Warrant at the
offices of the Warrant Agent, with the form of "Election To Purchase" on the
reverse side of the Warrant Certificate completed and executed as indicated,
accompanied by payment of the exercise price (by certified or bank check payable
to the order of the Company) for the number of shares with respect to which the
Warrant is being exercised.
For a holder to exercise the Warrants, there must be a current registration
statement in effect with the Commission and qualification in effect under
applicable state securities laws (or applicable exemptions from state
qualifications requirements) with respect to the issuance of shares or other
securities underlying the Warrants. The Company has agreed to use all
commercially reasonable efforts to cause a registration statement with respect
to such securities under the Securities Act to be filed and to become and remain
effective in anticipation of and prior to the exercise of the Warrants and to
take such other actions under the laws of various states may be required to
cause the sale of Common Stock (or other securities) upon exercise of Warrants
to be lawful. If a current registration statement is not in effect at the time a
Warrant is exercised, the Company may at its option redeem the Warrant by paying
to the holder cash equal to the difference between the market price of the
Common Stock on the exercise date and the exercise price of the Warrant. The
Company will not be required to honor the exercise of Warrants if, in the
opinion of the
39
<PAGE>
Company's Board of Directors upon advice of counsel, the sale of securities upon
exercise would be unlawful.
The foregoing discussion of certain terms and provisions of the Warrants and
the Representative's Warrant is qualified in its entirety by reference to the
detailed provisions of the Warrant Agreement and the Representative's Warrant
certificate (the "Representative's Warrant Certificate"), the form of each of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
For the life of the Warrants and the Representative's Warrant, the holders
thereof have the opportunity to profit from a rise in the market price of the
Common Stock without assuming the risk of ownership of the shares of Common
Stock issuable upon the exercise of the Warrants. The Warrant holders may be
expected to exercise their Warrants at a time when the Company would, in all
likelihood, be able to obtain any needed capital by an offering of Common Stock
on terms more favorable than those provided for by the Warrants. Further, the
terms on which the Company could obtain additional capital during the life of
the Warrants may be adversely affected.
OTHER WARRANTS
Warrants to purchase a total of 671,091 shares of Common Stock with exercise
prices ranging from $3.60 to approximately $9.00 per share (assuming an offering
price of $6.00 per Unit) are issued or issuable. All of said warrants are
currently exercisable, with the latest expiration date being March 2003.
All of the warrants and the Common Stock issuable upon exercise thereof are
restricted securities under the Securities Act and as such are subject to
restrictions on transfer, except for shares of Common Stock issuable upon
exercise of warrants which are being registered concurrently with this offering.
The holders of the warrants have demand and piggyback registration rights,
subject to certain conditions, whereupon the exercise of said registration
rights the Company is obligated to register the shares of Common Stock
acquirable upon the exercise of the warrants.
The warrants have antidilution provisions which provide for appropriate
adjustment to the exercise price and the number of shares of Common Stock
acquirable upon exercise in the event of stock splits, reverse stock rights,
stock dividends, reclassifications of the Company's securities, mergers or
consolidations or other similar events. Certain of the warrants also contain
price adjustment provisions in the event the Company issues Common Stock for a
consideration per share less than the exercise price in effect immediately prior
to such issuance.
PROMISSORY NOTES
The Company has outstanding $1,225,000 principal amount of promissory notes
issued September 15, 1997 bearing simple interest at a rate of 10%. In addition,
the Company has outstanding $641,800 and $320,000 principal amount of promissory
notes issued February 27, 1998 and March 16, 1998, respectively, bearing simple
interest at a rate of 12%. In the absence of an initial public offering, the
promissory notes are repayable in 24 equal monthly installments beginning June
30, 1998 (subject to six months extension at the election of a majority in the
principal amount of all noteholders). The Company intends to repay all principal
and interest under the promissory notes with a portion of the net proceeds from
this offering. In addition, the Company has issued certain promissory notes to
certain of its directors, payable on demand in the aggregate amount of $229,000.
Repayment of all of the foregoing notes are secured equally and ratably by a
security interest in the assets of the Company.
40
<PAGE>
REGISTRATION RIGHTS
Registration rights agreements have been entered into with holders of
warrants and Preferred Stock of the Company. In general, the warrants have
piggyback registration rights, subject to the orderly distribution of the
Company's securities. In addition, both the warrants and the Preferred Stock
have single-demand registration rights, which are limited during one hundred and
eighty (180) days following the effective date of the registration statement.
There are a small number of warrants with double-demand registration rights.
Such agreements provide that in connection with a public offering of the
Company's securities, the parties to the agreement will not sell their shares of
the Company for and during the period beginning on the date that the Company
executes an underwriting agreement with respect to such offering and continuing
to and including 180 days after the date of the prospectus included in the
registration statement under the Securities Act for such offering.
The existence and exercise of such registration rights may hinder efforts by
the Company to arrange future financing for the Company and may have an adverse
effect on the market price of the Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Registrar
and Transfer Company. Its address is 10 Commerce Drive, Cranford, New Jersey
07016-3572, and its telephone number is (800) 456-0596.
41
<PAGE>
UNDERWRITING
The Underwriters named below, acting through Paulson Investment Company,
Inc., the Representative, have agreed, severally and not jointly, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase the
2,000,000 Units offered hereby (the "Firm Units") in the amounts set forth
below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER UNITS
- --------------------------------------------------------------------------------- ----------
<S> <C>
Paulson Investment Company, Inc..................................................
Millennium Financial Group, Inc..................................................
----------
Total........................................................................ 2,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the Firm Units if any Units are purchased. The Company has been
advised that the Underwriters propose to offer the Units to the public initially
at the offering price shown on the cover page of this Prospectus and to selected
dealers, including Underwriters, at that price less a concession to be
determined by the Representative. After the initial public offering of the
Units, the public offering price and other offering terms may be changed.
The Company has granted an overallotment option, exercisable by the
Underwriters during the 45-day period after the date of this Prospectus, to
purchase up to 300,000 additional Units (the "Option Units") on the same terms
as are applicable to the Firm Units. The Underwriters may exercise this option
only to cover overallotments in the sale of the Units.
The Underwriters will purchase the Units (including the Units subject to the
Underwriters' overallotment option) at a discount equal to % of the initial
public offering price. The Representative will also receive a non-accountable
expense allowance equal to % of the aggregate initial public offering price
of the Units sold in this offering of which $35,000 has already been paid.
The Company has agreed to issue the Representative's Warrants to the
Representative. The Representative's Warrants will allow the Representative to
purchase up to 200,000 Units. The Representative's Warrants are exercisable for
a period of four years beginning one year from the date of this Prospectus, at a
price of $ per Unit (120% of the initial public offering price of the Units)
and are nontransferable for one year after the date of this Prospectus except
(i) to any of the Underwriters or to individuals who are either an officer or a
partner of an Underwriter or (ii) by will or the laws of descent and
distribution. The holders of the Representative's Warrants will have, in that
capacity, no voting, dividend or other shareholder rights. Any profits realized
on the sale of the securities issuable on exercise of the Representative's
Warrants may be deemed to be additional underwriting compensation.
The sale of the shares issuable upon exercise of the Representative's
Warrants could dilute the interests of the other holders of Common Stock, and
the existence of the Representative's Warrants may make the raising of
additional capital by the Company more difficult. At any time at which exercise
of the Representative's Warrants might be expected, it is likely that the
Company could raise additional capital on terms more favorable than the terms of
the Representative's Warrants.
The Underwriters have requested that all officers, directors and
shareholders of the Company, who own five percent or more of the outstanding
shares of Common Stock (on a fully diluted basis), agree not to sell any Common
Stock of the Company, pursuant to Rule 144 under the Securities Act or
otherwise,
42
<PAGE>
and the Company has agreed not to sell any Common Stock without the prior
written consent of the Representative, for a period of one year after the date
of this Prospectus.
In addition, the Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act, and to
contribute in certain events to any liabilities incurred by the Underwriters in
connection with the sale of the Units.
The Representative has advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of Common Stock on behalf
of the Underwriters to reduce a short position incurred by the Underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
Representative to reclaim the selling concession otherwise accruing to an
Underwriter or syndicate member in connection with the offering if the Common
Stock originally sold by such Underwriter or syndicate member is purchased by
the Representative in a syndicate covering transaction and has therefore not
been effectively placed by such Underwriter or syndicate member. The
Representative has advised the Company that such transactions may be effected on
the Nasdaq Small Cap Market or otherwise and, if commenced, may be discontinued
at any time.
Prior to the offering, there has been no public market for the Company's
securities. The initial public offering price for the Units will be determined
through negotiations between the Company and the Representative and will be
based on, among other things, the Company's financial condition, the prospects
of the Company and its industry in general, the management of the Company and
the market prices of securities of companies engaged in business similar to
those of the Company.
CERTAIN LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Shanley & Fisher, P.C., Morristown, New Jersey. Stoel Rives LLP,
Portland, Oregon has acted as counsel for the Underwriters with respect to
certain legal matters in connection with this offering.
EXPERTS
The financial statements of the Company as of December 31, 1997 and for each
of the years in the two-year period ended December 31, 1997 have been included
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG Peat Marwick LLP covering the December 31, 1997
financial statements contains an explanatory paragraph that states that the
Company's recurring losses from operations and insufficient working capital
raise substantial doubt about the entity's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on Form
SB-2 (the "Registration Statement") (which term shall encompass all amendments,
exhibits and schedules thereto) under the Securities Act with respect to the
Units offered hereby. This Prospectus, which constitutes part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission, and to which reference is hereby
made. For further information with respect to the Company and the Common Stock,
reference is hereby made to the Registration Statement. Statements made in this
Prospectus as to
43
<PAGE>
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference. The
Registration Statement can be inspected and copied at the Public Reference
Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices at Seven World Trade Center,
13th Floor, New York, New York 10048, and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of the Registration
Statement can be obtained from the Public Reference Section of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
In addition, the Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other documents filed electronically with the Commission, including the
Registration Statement.
44
<PAGE>
PHYTOTECH, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Balance Sheets as of December 31, 1997 and March 31, 1998 (unaudited)...................................... F-3
Statements of Operations for the years ended December 31, 1996 and 1997, and the three months ended March
31, 1997 and 1998 (unaudited)............................................................................ F-4
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1996 and 1997 and the three
months ended March 31, 1998 (unaudited).................................................................. F-5
Statements of Cash Flows for the years ended December 31, 1996 and 1997, and the three months ended March
31, 1997 and 1998 (unaudited)............................................................................ F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
WHEN THE TRANSACTIONS REFERRED TO IN THE LAST TWO PARAGRAPHS IN NOTE 1 OF THE
NOTES TO FINANCIAL STATEMENTS HAVE BEEN CONSUMMATED, WE WILL BE IN A POSITION TO
RENDER THE FOLLOWING REPORT.
KPMG PEAT MARWICK LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Phytotech, Inc.:
We have audited the accompanying balance sheet of Phytotech, Inc. as of
December 31, 1997, and the related statements of operations, stockholders'
equity (deficit), and cash flows for each of the years in the two-year period
ended December 31, 1997. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Phytotech, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for each
of the years in the two year period then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Phytotech, Inc. will continue as a going concern. As discussed in note 1 to the
financial statements, Phytotech, Inc. has suffered recurring losses from
operations and has insufficient working capital to fund its current operating
requirements. These factors 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 financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
Princeton, New Jersey
March 30, 1998, except as to the last two paragraphs of note 1,
which are as of
F-2
<PAGE>
PHYTOTECH, INC.
BALANCE SHEETS
DECEMBER 31, 1997
AND MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, MARCH 31, MARCH 31,
1997 1998 1998
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 5)
Current assets:
Cash and cash equivalents............................................. $ 5,326 $ 47,326 $ 47,326
Grant and commercial receivables...................................... 172,009 237,530 237,530
------------ ----------- -----------
Total current assets.............................................. 177,335 284,856 284,856
Property and equipment, net (note 2).................................... 149,171 126,528 126,528
Deferred financing and offering costs, net (note 5)..................... 209,835 323,539 323,539
Other assets............................................................ 14,500 14,500 14,500
------------ ----------- -----------
$ 550,841 $ 749,423 $ 749,423
------------ ----------- -----------
------------ ----------- -----------
LIABILITIES AND DEFICIT IN STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 291,292 $ 326,069 $ 326,069
Accrued expenses (note 3)............................................. 645,995 647,500 647,500
Notes payable--related parties (note 4)............................... 229,000 229,000 229,000
Notes payable--current portion (note 5)............................... 306,250 459,375 459,375
Convertible notes payable--current portion (note 5)................... 77,090 360,675 360,675
------------ ----------- -----------
Total current liabilities......................................... 1,549,627 2,022,619 2,022,619
Notes payable, less current portion (note 5)............................ 918,750 765,625 765,625
Convertible notes payable, less current portion (note 5)................ 231,270 601,125 601,125
------------ ----------- -----------
Total liabilities................................................. 2,699,647 3,389,369 3,389,369
------------ ----------- -----------
Deficit in stockholders' equity (notes 1, 5, 6, 7, 8, 9, 11 and 12):
Series A convertible preferred stock, no par value, voting:
Authorized 10,000,000 shares; issued and outstanding 6,364,500
shares at December 31, 1997 and March 31, 1998 on an actual basis
and none on a pro forma basis (note 12) (aggregate liquidation
value $5,091,600 at December 31, 1997 and March 31, 1998 on an
actual basis and none on a pro forma basis)....................... 5,205,654 5,205,654 --
Voting common stock, no par value:
Authorized 30,000,000 shares in 1997; issued and outstanding 910,000
shares at December 31, 1997 and March 31, 1998 and 2,556,489 pro
forma shares at March 31, 1998.................................... 308,245 308,245 5,571,031
Non-voting common stock, no par value:
Authorized 1,111,111 shares; issued and outstanding 230,978 shares
and 232,156 shares at December 31, 1997 and March 31, 1998,
respectively and none on a pro forma basis........................ 56,352 57,132 --
Additional paid-in capital.............................................. 385,000 517,000 517,000
Deferred compensation (note 7).......................................... (366,000) (479,000) (479,000)
Accumulated deficit..................................................... (7,738,057) (8,248,977) (8,248,977)
------------ ----------- -----------
Total deficit in stockholders' equity............................. (2,148,806) (2,639,946) (2,639,946)
Commitments (notes 5, 8, 9 and 11)
------------ ----------- -----------
$ 550,841 $ 749,423 $ 749,423
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PHYTOTECH, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997, AND THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------ --------------------------
1996 1997 1997 1998
-------------- -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Grant revenue....................................... $ 325,572 $ 270,936 $ 122,431 $ 116,942
Commercial revenue.................................. 67,897 190,516 3,500 73,088
-------------- -------------- ------------ ------------
393,469 461,452 125,931 190,030
-------------- -------------- ------------ ------------
Operating expenses:
Research and development (note 9)................... 1,768,334 2,199,590 460,117 345,226
General and administrative.......................... 1,157,754 1,189,560 360,239 324,857
-------------- -------------- ------------ ------------
2,926,088 3,389,150 820,356 670,083
-------------- -------------- ------------ ------------
Other income (expense):
Interest income..................................... 66,892 6,546 5,469 --
Interest expense.................................... -- (33,989) -- (30,867)
-------------- -------------- ------------ ------------
66,892 (27,443) 5,469 (30,867)
-------------- -------------- ------------ ------------
Net loss........................................ $ (2,465,727) $ (2,955,141) $ (688,956) $ (510,920)
-------------- -------------- ------------ ------------
-------------- -------------- ------------ ------------
Basic and diluted net loss per share (note 1)......... $ (2.18) $ (2.59) $ (.61) $ (.45)
-------------- -------------- ------------ ------------
-------------- -------------- ------------ ------------
Shares used in computing basic and diluted net loss
per share (note 1)................................... 1,132,733 1,140,478 1,135,289 1,141,066
-------------- -------------- ------------ ------------
-------------- -------------- ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PHYTOTECH, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------
SERIES A CONVERTIBLE
PREFERRED STOCK VOTING NON-VOTING ADDITIONAL
-------------------- -------------------- ---------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
--------- --------- --------- --------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995........ 4,812,500 $3,426,113 1,010,000 $ 342,118 118,889 $ 15,039 $ -- $ --
Stock options exercised........... -- -- -- -- 3,733 1,680 -- --
Common stock awarded for services
(note 6)........................ -- -- -- -- 1,111 500 -- --
Issuance of Series A convertible
preferred stock, net of offering
costs (note 6).................. 1,452,000 1,654,541 -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- ----------- ----------- -------------
Balance at December 31, 1996........ 6,264,500 5,080,654 1,010,000 342,118 123,733 17,219 -- --
Stock options exercised........... -- -- -- -- 578 260 -- --
Common stock awarded for services
(note 6)........................ -- -- -- -- 6,667 5,000 -- --
Series A convertible preferred
stock issued for license (note
9).............................. 100,000 125,000 -- -- -- -- -- --
Conversion voting to non-voting
common stock.................... -- -- (100,000) (33,873) 100,000 33,873 -- --
Deferred compensation resulting
from the grant of options (note
7).............................. -- -- -- -- -- -- 385,000 (385,000)
Amortization of deferred
compensation (note 7)........... -- -- -- -- -- -- -- 19,000
Net loss.......................... -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- ----------- ----------- -------------
Balance at December 31, 1997........ 6,364,500 5,205,654 910,000 308,245 230,978 56,352 385,000 (366,000)
Stock options exercised
(unaudited)..................... -- -- -- -- 1,178 780 -- --
Deferred compensation resulting
from the grant of options
(unaudited) (note 7)............ -- -- -- -- -- -- 132,000 (132,000)
Amortization of deferred
compensation (unaudited) (note
7).............................. -- -- -- -- -- -- -- 19,000
Net loss (unaudited).............. -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- ----------- ----------- -------------
Balance at March 31, 1998
(unaudited)....................... 6,364,500 $5,205,654 910,000 $ 308,245 232,156 $ 57,132 $ 517,000 $(479,000)
--------- --------- --------- --------- --------- ----------- ----------- -------------
--------- --------- --------- --------- --------- ----------- ----------- -------------
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------ ----------
<S> <C> <C>
Balance at December 31, 1995........ $(2,317,189) $1,466,081
Stock options exercised........... -- 1,680
Common stock awarded for services
(note 6)........................ -- 500
Issuance of Series A convertible
preferred stock, net of offering
costs (note 6).................. -- 1,654,541
Net loss.......................... (2,465,727) (2,465,727)
------------ ----------
Balance at December 31, 1996........ (4,782,916) 657,075
Stock options exercised........... -- 260
Common stock awarded for services
(note 6)........................ -- 5,000
Series A convertible preferred
stock issued for license (note
9).............................. -- 125,000
Conversion voting to non-voting
common stock.................... -- --
Deferred compensation resulting
from the grant of options (note
7).............................. -- --
Amortization of deferred
compensation (note 7)........... -- 19,000
Net loss.......................... (2,955,141) (2,955,141)
------------ ----------
Balance at December 31, 1997........ (7,738,057) (2,148,806)
Stock options exercised
(unaudited)..................... -- 780
Deferred compensation resulting
from the grant of options
(unaudited) (note 7)............ -- --
Amortization of deferred
compensation (unaudited) (note
7).............................. -- 19,000
Net loss (unaudited).............. (510,920) (510,920)
------------ ----------
Balance at March 31, 1998
(unaudited)....................... $(8,248,977) $(2,639,946)
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PHYTOTECH, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997, AND THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------- ------------------------
1996 1997 1997 1998
------------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $ (2,465,727) $ (2,955,141) $ (688,956) $ (510,920)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash compensation................................. 500 24,000 -- 19,000
Noncash license fee.................................. -- 125,000 -- --
Depreciation and amortization........................ 109,923 163,456 21,092 56,529
Changes in operating assets and liabilities:
(Increase) decrease in grant and commercial
receivables...................................... 26,788 (84,477) (1,089) (65,521)
(Increase) decrease in prepaid expenses............ 4,978 -- (12,842) --
(Increase) decrease in other assets................ (4,933) 5,573 5,573 --
Increase (decrease) in accounts payable and accrued
expenses......................................... (139,322) 709,217 157,303 36,282
------------- ------------- ----------- -----------
Net cash used in operating activities............ (2,467,793) (2,012,372) (518,919) (464,630)
------------- ------------- ----------- -----------
Cash flows from investing activities--purchase of
property and equipment.................................. (116,922) (15,664) (4,404) (5,386)
------------- ------------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable............................ -- 1,762,360 -- 653,440
Deferred financing and offering costs.................. -- (250,835) -- (142,204)
Proceeds from sale of Series A convertible preferred
stock and warrants, net.............................. 1,654,541 -- -- --
Proceeds from exercise of stock options................ 1,680 260 -- 780
------------- ------------- ----------- -----------
Net cash provided by financing activities........ 1,656,221 1,511,785 -- 512,016
------------- ------------- ----------- -----------
Net increase (decrease) in cash and cash equivalents..... (928,494) (516,251) (523,323) 42,000
Cash and cash equivalents at beginning of the period..... 1,450,071 521,577 521,577 5,326
------------- ------------- ----------- -----------
Cash and cash equivalents at end of the period........... $ 521,577 $ 5,326 $ (1,746) $ 47,326
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
Supplemental schedule of noncash financing activities:
Conversion of voting common stock to nonvoting common
stock................................................ $ -- $ 33,873 $ -- $ --
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
Series A convertible preferred stock exchanged for
technology license................................... $ -- $ 125,000 $ -- $ --
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
Deferred compensation.................................. $ -- $ 385,000 $ -- $ 132,000
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
PHYTOTECH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INFORMATION AS OF MARCH 31, 1998 AND WITH RESPECT TO THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Phytotech, Inc. (the "Company") was organized under the laws of the State of
New Jersey on April 15, 1993. Phytotech currently offers waste cleanup services
using plants grown under carefully controlled conditions to absorb and dispose
of unwanted metals, such as lead or uranium, from toxic waste sites. The Company
has also developed and is beginning to market nutritionally important minerals
absorbed into plants and is beginning to develop technology for the production
of high value proteins in plants.
Since inception, the Company has been engaged in organizational activities,
including raising capital and research and development activities, and in
completing certain studies utilizing its technology. There is no assurance that
the Company will be able to expand the market for its products in the future.
The Company has not yet achieved profitable operations, nor has it ever
generated positive cash flows from operations and there is no assurance that
profitable operations, if achieved, could be sustained on a continuing basis.
Further, the Company's future operations are dependent on the success of the
Company's efforts to raise additional capital, such as the initial public
offering of voting common stock and warrants contemplated herein (the
"Offering"), its research and commercialization efforts, and ultimately, the
market acceptance of the Company's products.
The accompanying financial statements have been prepared on a going-concern
basis which contemplates the continuation of operations, realization of assets
and liquidation of liabilities in the ordinary course of business. The Company
incurred net losses of $2,465,727 and $2,955,141 for the years ended December
31, 1996 and 1997, respectively, and $510,920 (unaudited) for the three months
ended March 31, 1998 and has an accumulated deficit of $8,248,977 (unaudited) at
March 31, 1998. The net losses incurred by the Company have consumed working
capital and weakened the Company's financial position. The Company's ability to
continue in business is dependent upon its success in generating sufficient cash
flow from operations or obtaining additional financing. The Company is currently
attempting to complete an equity financing to raise additional capital through
the Offering. The Company's ability to continue as a going concern is dependent
upon the financing efforts being successful. There can be no assurance that
these efforts will be successful. The financial statements do not include any
adjustments relating to the recoverability and classifications of reported asset
amounts or the amounts of liabilities that might result from the outcome of that
uncertainty.
USE OF ESTIMATES
Management of the Company has made certain estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes
in conformity with generally accepted accounting principles. Actual results
could differ from these estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are short-term, highly liquid investments that are
readily convertible to known amounts of cash and are so near their maturity
(three months or less) that they present insignificant
F-7
<PAGE>
PHYTOTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
risk of changes in value because of changes in interest rates. Cash equivalents
are recorded at cost, which approximates market, and include certain
money-market funds.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment is computed using the straight-line method over the
estimated useful lives of the respective assets (ranging from three to ten
years), or the lease term, whichever is less. Maintenance and repairs are
charged to operations as incurred.
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances occur that indicate that the carrying amount
of the assets may not be recoverable. The Company assesses the recoverability of
long-lived assets held and to be used based on undiscounted cash flows, and
measures the impairment, if any, using discounted cash flows.
DEFERRED FINANCING AND OFFERING COSTS
Debt offering costs are deferred and amortized based on a straight-line
method over the life of the related notes payable. Cost associated with the
Offering of approximately $70,000 (unaudited) have been deferred at March 31,
1998 and have not been amortized. These costs will be reclassified to equity
upon the successful completion of the Offering or expensed if the Offering is
unsuccessful.
REVENUE RECOGNITION
Payments due under research grants and commercial revenue agreements are
recognized as revenue when the related research expenses are incurred and the
Company's specific performance obligations under the terms of the respective
contracts are satisfied. Revenue recognized in the accompanying financial
statements is not subject to repayment. Payments, if any, received in advance of
performance under the agreements are deferred and recognized as revenue when
earned. Future losses, if any, on contracts are recognized in the period when
identified by the Company.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method
of accounting. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and the benefits
arising from operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates and laws that will be in
effect for the years in which those differences are expected to reverse. The
measurement of deferred tax assets is reduced, if necessary, by a valuation
allowance for any tax benefits which are not expected to be realized. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the period that such tax rate changes are enacted.
F-8
<PAGE>
PHYTOTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for its stock option issuances in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. As such, deferred
compensation is recorded to the extent that the current market value of the
underlying stock exceeds the exercise price on the date both the number of
shares and the price per share are known (measurement date). Such deferred
compensation is amortized over the respective vesting periods of such option
grants. On January 1, 1996, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which permits entities to continue to apply the
provisions of APB Opinion No. 25 for financial statement reporting purposes and
provide pro forma net loss and net loss per share disclosures for employee
(including director) stock option grants as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 for financial statement reporting
purposes and to provide the pro forma disclosures required by SFAS No. 123.
Transactions with non-employees, in which goods or services are the
consideration received for the issuance of equity instruments, are accounted for
under the fair-value based method defined in SFAS No. 123.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of its receivables. The Company's grant and
commercial receivables are due from the U.S. Department of Defense and various
academic and private institutions. As of December 31, 1997, the Company believes
it has no significant concentration of credit risk with its receivables.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's short-term financial instruments
approximates their carrying value due to the short maturity of those
instruments. The fair value of notes payable approximates their carrying value
due to the short period since their issuance.
EQUITY SECURITY TRANSACTIONS
Since inception, the Company's Board of Directors (the "Board") has
established the fair value of common stock, Series A convertible preferred
stock, stock options and warrants based upon facts and circumstances existing at
the dates such equity transactions occurred, including the price at which equity
instruments were sold to independent third parties.
NET LOSS PER SHARE
Net loss per share is computed in accordance with SFAS No. 128, "Earnings
Per Share." Weighted average common shares outstanding includes both the voting
and non-voting shares of common stock. Outstanding convertible preferred stock,
convertible notes payable, stock options and warrants (see notes 5, 6, 7 and 8)
have not been used in computing diluted net loss per share because to do so
would be anti-dilutive. As such the numerator (net loss) and the denominator
(weighted average shares outstanding), used in computing both basic and diluted
net loss per share are equal. During the periods presented herein, the Company
did not make any nominal issuances of equity securities as discussed in
Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 98.
F-9
<PAGE>
PHYTOTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
The following pro forma basic and diluted loss per share and the pro forma
weighted average number of shares outstanding has been presented reflecting
conversion of the Series A convertible preferred stock into 1,414,333 shares of
voting common stock (see notes 6 and 12) using the if converted method from
their respective dates of issuance:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ -------------
<S> <C> <C>
Pro forma basic and diluted net loss per share.................. $ (1.16) $ (0.20)
------------ -------------
------------ -------------
Shares used in computing pro forma basic and diluted net loss
per share..................................................... 2,545,113 2,555,399
------------ -------------
------------ -------------
</TABLE>
PRO FORMA BALANCE SHEET (UNAUDITED)
Upon the effectiveness of the Offering, all of the outstanding shares of
non-voting common stock convert into 232,156 shares of voting common stock and
all outstanding shares of Series A convertible preferred stock convert into
1,414,333 shares of voting common stock (see notes 6 and 12). The unaudited pro
forma presentation of the March 31, 1998 balance sheet has been prepared
assuming the conversion of the Series A convertible preferred stock and the
non-voting common stock into voting common stock as of March 31, 1998, the most
recent balance sheet included in the accompanying financial statements.
UNAUDITED FINANCIAL STATEMENTS
The balance sheet at March 31, 1998, the statements of operations and cash
flows for the three months ended March 31, 1997 and 1998 and the statement of
stockholders' equity (deficit) for the three months ended March 31, 1998 are
unaudited. In the opinion of management of the Company, such unaudited financial
statements include all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of financial results for these periods. The
results of operations for the three months ended March 31, 1998 are not
necessarily indicative of results to be expected for the entire fiscal year.
REVERSE STOCK SPLIT
On , 1998, the Company effected a 1:4.5 reverse stock split of its
voting and non-voting common stock. All voting and non-voting common shares and
per share amounts in the accompanying financial statements (except as to noted)
have been retroactively adjusted to reflect this reverse stock split. Preferred
stock amounts have not been retroactively adjusted to reflect the reverse stock
split.
AUTHORIZED SHARES
As a result of the reverse stock split and certain actions approved by the
Board, effective on , 1998, the Company's authorized capital stock
consists of 30,000,000 shares of voting common stock, 10,000,000 shares of
Series A convertible preferred stock and 1,111,111 non-voting common stock.
Given the interrelated nature of these actions, these authorized shares have
been reflected on the balance sheet.
F-10
<PAGE>
PHYTOTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
1998
DECEMBER 31, ------------
1997
------------ (UNAUDITED)
<S> <C> <C>
Leasehold improvements........................................... $ 169,575 $ 169,575
Lab equipment.................................................... 176,482 179,450
Computers........................................................ 57,561 59,979
Furniture and fixtures........................................... 42,617 42,617
------------ ------------
446,235 451,621
Less accumulated depreciation and amortization................... 297,064 325,093
------------ ------------
$ 149,171 $ 126,528
------------ ------------
------------ ------------
</TABLE>
(3) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
1998
DECEMBER 31, ------------
1997
------------ (UNAUDITED)
<S> <C> <C>
Research expenditures (note 9)................................... $ 349,000 $ 330,500
Interest......................................................... 33,989 64,863
Professional fees................................................ 263,006 252,137
------------ ------------
$ 645,995 $ 647,500
------------ ------------
------------ ------------
</TABLE>
(4) RELATED PARTIES
During 1997, the Company executed promissory notes with certain directors
and an officer aggregating $229,000 payable on demand. Interest on these notes
is approximately 5%.
During 1997, in connection with both private note offerings (see note 5),
the Company paid fees of approximately $200,000 (approximately $260,000 in total
upon completion of the second private note offering on March 16, 1998) and is
obligated to issue warrants (see note 5) to the placement agent who employs one
of the Company's directors.
(5) NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
In 1997, the Company through a private offering and issued promissory notes
aggregating $1,225,000 and warrants to purchase 54,444 shares of voting common
stock. The Company received net proceeds after offering costs of $1,017,000. The
notes bear total interest of 10% regardless of the period the principal is
outstanding. The notes are secured by the assets of the Company and are
repayable starting at the earlier of (i) seven days after receipt of proceeds
from an initial public offering or (ii) June 30, 1998 in equal payments over a
24 month period (subject to extension for a period of six months at the option
of the majority in principal amount of all note holders). The warrants are
exercisable at $2.50 (pre-reverse-split) (to be subsequently adjusted upon the
effectiveness of the offering based upon a formula contained in the
F-11
<PAGE>
PHYTOTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (CONTINUED)
warrant agreements) from the date of offering to five years after the offering
date. No value was ascribed to the warrants based on the fair value as
determined by a Black Scholes option pricing model calculation.
In December 1997, the Company began a private offering of convertible
promissory notes and warrants to purchase shares of voting common stock. As of
December 31, 1997, the private offering was ongoing. The Company received gross
proceeds of $308,360 and net proceeds after offering costs of $277,525 in 1997.
The Company completed the private offering on March 16, 1998 for $961,800 of
cumulative gross proceeds and net cumulative proceeds after offering costs of
approximately $850,000.
The notes bear total interest of 12% regardless of the period the principal
is outstanding. The notes are secured by the assets of the Company and are
repayable at the earlier of (i) seven days after receipt of proceeds from an
initial public offering or (ii) June 30, 1998 (subject to extension for a period
of six months at the option of the majority in principal amount of all note
holders) in equal payments over a 24 month period. The notes are convertible
into voting common stock at the holders' option upon stated written notice prior
to the dates above on which repayment is triggered. Upon conversion, the holder
will receive a defined number of shares of common stock based on a computation
described in the note agreements. For those note holders who elect conversion,
any beneficial conversion feature will be recorded as additional interest
expense at that time.
In addition, the Company is obligated to issue 20,578 warrants at December
31, 1997 (64,120 total warrants upon completion of the private offering, which
were issued during the three months ended March 31, 1998) to investors. The
warrants are exercisable at $2.50 (pre-reverse-split) (to be subsequently
adjusted upon the effectiveness of the Offering based upon a formula contained
in the warrant agreements) from the offering date to five years after the
offering date. No value was ascribed to the warrants based on the fair value as
determined by a Black Scholes option pricing model calculation.
The Company has agreed to issue 269,658 warrants to purchase voting common
stock to the placement agent as total warrant consideration in connection with
both private offering. The exercise price of the warrants will be 150% of the
price in an initial public offering of the Company's common stock and will have
a five year term.
(6) CAPITAL STOCK
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of preferred stock are entitled to receive out of assets of the
Company available for distribution to stockholders, after satisfaction of
indebtedness but before any distribution of assets is made to holders of common
stock, liquidating distributions in the amount of $.80 per share, plus declared
and unpaid dividends, if any.
Subject to the dividend rights of holders of the preferred stock, holders of
common stock are entitled to any dividend declared by the Board out of funds
legally available for such purpose, and, after the payment of the $.80 per share
liquidation preference to holders of preferred stock ($5,091,600 in the
aggregate), holders of common stock are entitled to receive on a pro rata basis
all remaining assets of the
F-12
<PAGE>
PHYTOTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) CAPITAL STOCK (CONTINUED)
Company available for distribution to the stockholders in the event of the
liquidation, dissolution, or winding up of the Company. Holders of common stock
do not have any preemptive right to become subscribers or purchasers of
additional shares of any class of the Company's capital stock.
There is no optional conversion of preferred stock into common stock. On the
fifth anniversary of the closing date of the first private placement of
preferred stock which closed in November 1994 (the First Offering), shares of
preferred stock then outstanding will automatically be converted into shares of
common stock at a rate of one share of common stock for each share of preferred
stock (the Conversion Rate). Outstanding shares of preferred stock will also be
automatically converted into shares of common stock at the Conversion Rate (a)
upon the effectiveness of an underwritten public offering of common stock of the
Company pursuant to which common stock is offered to the public at a price of at
least $3.00 per share (pre-reverse-split), or (b) immediately prior to the
effectiveness of a consolidation or merger of the Company with or into another
corporation or any sale or transfer of all or substantially all of the assets of
the Company, pursuant to which holders of common stock (assuming the conversion
of all outstanding preferred stock into common stock at the Conversion Rate)
will receive cash, securities or property having a value (as determined by the
Company's Board) of at least $3.00 per share of common stock (pre-reverse-split)
(see note 12). The holder of any shares of preferred stock converted into common
stock in connection with such a public offering or other transaction will be
entitled to payment of all declared but unpaid dividends, if any, payable with
respect to such shares up to and including the date of the closing of such
public offering or other transaction.
Holders of preferred stock will not be entitled to receive dividends on the
preferred stock unless and until dividends are paid and declared on the common
stock. If dividends are paid on the common stock, holders of preferred stock
shall be entitled to receive dividends on the preferred stock at the same time
and at the rate per share of preferred stock based upon the shares of common
stock to which the holders of preferred stock would be entitled, if they had
converted the preferred stock and been holders of common stock on the record
date for such dividend on the common stock.
Each share of preferred stock will be entitled to one vote and will vote
together with the common stock.
The non-voting common stock is convertible into voting common stock at a 1:1
ratio in the event of a public offering of registered securities.
In 1996, the Company sold, in a confidential private offering, 1,452,000
shares of the Company's Series A convertible preferred stock for an aggregate
price of $1,815,000. Expenses relating to the private offering amounted to
$160,459 in agent fees and legal, accounting and printing costs.
In 1996 and 1997, employees exercised stock options for 3,733 and 578
shares, respectively, of non-voting common stock at exercise prices of $.45 per
share. For the three months ended March 31, 1998, employees exercised stock
options for 1,178 shares of non-voting common stock at an average exercise price
of $.66 per share (unaudited).
In 1996, a shareholder was awarded 1,111 shares of non-voting common stock
for services performed. Compensation expense of $500 was recorded which
represented the deemed fair value of the stock as determined by the Board. In
1997, an employee and consultant were awarded 6,667 shares of non-voting common
stock for services performed. Compensation expense totaling $5,000 was recorded
which represented the deemed fair value of the stock as determined by the Board.
F-13
<PAGE>
PHYTOTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) STOCK OPTIONS
On July 15, 1994, the Board adopted the Phytotech, Inc. Stock Option Plan
(the "Plan") which provides for the award of stock options to certain employees,
directors and outside consultants of the Company. The terms and conditions of
each award will be described in a separate agreement between the Company and the
individual recipient. The Plan is to be administered by the Board or by a
committee to whom they delegate such authority.
The shares of non-voting common stock that may be issued under the Plan
shall not exceed in the aggregate a maximum of 222,222 shares (on March 3, 1998,
the Board approved, subject to shareholder approval (see note 12) an increase in
the maximum number of shares to 555,556). Such shares shall be issued from
authorized and unissued shares or treasury stock. Except as otherwise provided
in the Plan, any shares subject to an option, which for any reason expires or is
terminated unexercised, shall again be available under the Plan. Unless
terminated earlier, the Plan shall terminate on July 15, 2004. No stock options
or rights under the Plan shall be granted thereafter. The Board, without
approval of the Company's stockholders, may at any time before that date
terminate the Plan.
The Company had outstanding 37,333 stock options at an exercise price of
$.45 as of December 31, 1995. In 1996, 26,067 options were granted at a $.45 per
share exercise price and 3,733 options were exercised at a $.45 per share
exercise price. In 1997, 174,333 options were granted at an exercise price of
$.68 per share, 578 options were exercised at $.45 per share and 13,578 options
were canceled. The outstanding options at December 31, 1997 were 219,844 with a
weighted average exercise price of $.63. Shares available for grant at December
31, 1997 were 2,378. The options vest at various times over the next five-year
period and expire 10 years from date of grant. At December 31, 1997, 31,422
options were exercisable with a $.68 exercise price and 22,356 options were
exercisable with a $.45 exercise price.
On October 1, 1997, the Company granted 142,222 options primarily to certain
officers and Board members. These options vest ratably on an annual basis over
five years and have an exercise price of $.68 per option. The difference between
the deemed fair value for financial statement purposes and the $.68 exercise
price at the grant date has been recorded as deferred compensation ($385,000)
and is being amortized over the aforementioned vesting period. For other option
grants in 1996 and 1997, the exercise price approximated the deemed fair value
of the common stock at the date of grant as determined by the Board. In
accordance with APB Opinion No. 25, no compensation cost has been recognized for
these employee stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts as follows:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Net loss:
As reported......................................... $ (2,465,727) $ (2,955,141)
------------- -------------
------------- -------------
Pro forma........................................... $ (2,467,071) $ (2,968,141)
------------- -------------
------------- -------------
</TABLE>
The pro forma additional expense related to the 1996 and 1997 options is
being spread ratably over the five-year option vesting period.
The per-share, weighted-average fair value of stock options granted during
1996 and 1997 was approximately $.18 and $.32, respectively, on the date of
grant using the Black Scholes option-pricing
F-14
<PAGE>
PHYTOTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) STOCK OPTIONS (CONTINUED)
model with the following weighted-average assumptions: no expected dividend
yield, risk free interest rate of approximately 6.5%, expected life of ten years
and no volatility as the stock is not publicly traded.
On March 3, 1998, the Board granted, subject to shareholder approval to
increase the number of shares available under the Plan, 34,667 stock options to
certain employees. These options have an exercise price of $.68 per share and
vest over five years. The difference between the deemed fair value for financial
statement purposes and the $.68 exercise price at grant date has been recorded
as deferred compensation ($132,000) and is being amortized over the
aforementioned vesting period.
(8) WARRANTS
As of December 31, 1997, the Company has outstanding warrants to purchase
shares of voting common stock totaling 326,202 (all of which are exercisable) at
prices ranging from $.80 to $2.50 (pre-reverse split, some of which will
subsequently adjust upon effectiveness of the Offering based upon a formula
contained in the warrant agreements). These warrants were issued in connection
with the Series A convertible preferred stock sales (see note 6) and the
issuance of notes payable (see note 5). All warrants expire within the next five
years. As of March 31, 1998, outstanding warrants to purchase shares of voting
common stock totaled 401,433 (all of which are exercisable) with exercise prices
ranging from $.80 to $2.50 (unaudited) (subject to adjustments as above).
(9) RESEARCH AND LICENSE AGREEMENTS
During 1994, the Company entered into an initial three-year research
agreement with an academic institution (the "Institution") to perform certain
studies and field trials for the phytotreatment of heavy metals. Under the
research agreement the Company was to reimburse the Institution for all direct
and indirect costs, a total amount not to exceed approximately $1,100,000 over a
three-year period ending in 1997. In 1997, the agreement was extended for an
additional five years under which the Company has agreed to reimburse the
Institution for certain costs up to but not exceeding $500,000 in the aggregate.
The research agreement may be terminated by either party without any further
financial obligation by giving written notice to the other party of at least 90
days. Each of the studies has specific terms and conditions covering the
ownership of intellectual property conceived or discovered during the
performance of the work. Through December 31, 1997, $1,100,000 of research and
development expense under the initial agreement was incurred ($290,000 in 1996,
$250,000 in 1997 and $100,000 (unaudited) in the three months ended March 31,
1997). Under the 1997 extension, $49,000 of research and development expense was
incurred in 1997 and $21,000 (unaudited) was incurred for the three months ended
March 31, 1998. The Company is remitting payments to the Institution at certain
agreed-upon dates during the term of the agreement; $86,000 is scheduled to be
remitted in 1998.
In 1997, the Company entered into a license agreement with the same
Institution for certain technology previously discovered as well as newly
discovered technology under the extended research agreement. The license period
is through the individual patent expiration date. In exchange for the license,
the Company granted the Institution 100,000 shares of Series A convertible
preferred stock. The deemed fair value of this stock as determined by the Board
was $125,000 which has been expensed in the accompanying statement of
operations. The Company is also obligated to pay royalties on future net sales.
F-15
<PAGE>
PHYTOTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.............. $2,750,000
Research and development credit
carryforward................................ 119,000
Other......................................... 230,000
----------
Total deferred tax assets................. 3,099,000
Less valuation allowance...................... (3,099,000)
----------
Net deferred tax asset...................... $ --
----------
----------
</TABLE>
The valuation allowance previously noted offsets the deferred tax assets to
recognize the uncertainty of realizing such tax benefits. The net change in the
valuation allowance for the year ended December 31, 1997 was an increase of
$1,176,000, primarily related to additional net operating losses incurred by the
Company which are not currently deductible.
At December 31, 1997, the Company has available net operating loss
carryforwards (NOL) of approximately $6,875,000 for Federal and state income tax
reporting purposes which are available to offset future Federal and state
taxable income, if any. These carryforwards expire beginning in 2000 for state
tax purposes and 2008 for Federal tax purposes. The Company also has research
and development credit carryforwards of approximately $119,000 for Federal
income tax reporting purposes which are available to reduce Federal income
taxes, if any, through 2008. The Company made no payments of Federal or state
income taxes, other than minimum state tax payments, since inception.
The Tax Reform Act of 1986 (the Act) provides for a limitation on the annual
use of NOL and research and development tax credit carryforwards (following
certain ownership changes, as defined by the Act) which could significantly
limit the Company's ability to utilize these carryforwards. The Company has
experienced various ownership changes, as defined by the Act, as a result of
past financings and may experience others in connection with future financing.
Accordingly, the Company's ability to utilize the aforementioned carryforwards
may be limited. Additionally, because U.S. tax laws limit the time during which
these carryforwards may be applied against future taxes, the Company may not be
able to take full advantage of these attributes for Federal income tax purposes.
(11) COMMITMENTS
In December 1997, the Company entered into an agreement with a consultant
whereby he was granted 11,111 warrants during the three months ended March 31,
1998, which were issued during the three months ended March 31, 1998, to
purchase voting common stock at $2.00 (pre-reverse split) (subsequently adjusted
upon the effectiveness of Offering based upon a formula in the warrant
agreement). The warrants have a five year term. No value was ascribed to the
warrants based on the fair value as determined by a Black Scholes option pricing
model calculation. An additional warrant to purchase 44,444 voting common shares
will be issued if certain performance criteria is met. The Company will also pay
$2,000 per month for 5 months in connection with this agreement.
On May 17, 1996, the Company's president and chief executive officer
executed a three year employment agreement at a base salary of $120,000 per
year. A performance bonus of $15,000 was paid to him in 1996 (none in 1997). In
addition, under the agreement he received stock options for 10,000 shares of
non-voting common stock at an exercise price of $.45 per share vesting over a
three year period.
F-16
<PAGE>
PHYTOTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) COMMITMENTS (CONTINUED)
The Company has entered into various other consulting agreements with
individuals to perform consulting services on behalf of the Company. Forms of
compensation vary between the payment of cash and granting of stock of the
Company, as approved by the Board. All consulting agreements contain provisions
that protect confidential information, proprietary data and intellectual
property of the Company. In the event that the consultant is deemed the sole
inventor of any intellectual property conceived during the terms of the
consulting agreement which is assigned to the Company, and the Company, at its
sole discretion and expense, obtains issued patents for the intellectual
property, the consultant shall receive a royalty from the Company during the
life of the patent equal to 5% of the portion of the gross revenues earned
attributable to the patented product, process or method invented by the
consultant, or a royalty of 2% in the event the consultant is deemed a
co-inventor of the patented technology (or a percentage mutually agreed upon by
the parties as a royalty if there are more than two co-inventors). Each
consultant has agreed that he will not be entitled to any additional
compensation by law or otherwise beyond that to which he is entitled under the
consulting agreement for any intellectual property.
In 1997, the Company entered into a cooperative research agreement whereby
the Company is obligated to perform certain services valued in the aggregate at
$150,000 in 1998 and 1999.
The Company rents certain equipment and leases, laboratory and office space
under various noncancelable operating lease agreements. Future minimum lease
payments under noncancelable leases as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.............................................. $ 102,675
1999.............................................. 98,938
2000.............................................. 16,538
---------
$ 218,151
---------
---------
</TABLE>
Rental expense for all operating leases amounted to approximately $182,000
for the year ended December 31, 1997.
(12) SUBSEQUENT EVENTS (UNAUDITED)
INITIAL PUBLIC OFFERING
On April 21, 1998, the Board authorized the filing of a registration
statement for the Offering with the SEC for the sale of up to 2,300,000 units
(including 300,000 for the underwriter's overallotment option) consisting of one
share of common stock and a warrant to purchase one share of common stock. All
shares of Series A convertible preferred stock and the non-voting common stock,
assuming effectiveness of the Offering, outstanding as of the closing date of
the Offering will convert into shares of voting common stock on a 1:.22 basis
and 1:1 basis, respectively.
AUTOMATIC CONVERSION
In April 1998, the Board and stockholders approved the removal of a
provision of the Series A convertible preferred stock requiring that the
offering price be above $3.00 (pre-reverse split) (subject to adjustment for
stock splits, combinations and similar events) to automatically convert into
voting common stock in an underwritten public offering.
AUTHORIZED SHARES--STOCK OPTION PLAN
In April 1998, the Board and stockholders approved an increase in the number
of shares of stock reserved for issuance under the Plan to 555,556.
F-17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THIS DATE.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Use of Proceeds................................ 11
Dividend Policy................................ 12
Dilution....................................... 12
Capitalization................................. 13
Selected Financial Data........................ 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 15
Business....................................... 18
Management..................................... 32
Certain Transactions........................... 36
Principal Shareholders......................... 37
Description of Securities...................... 38
Underwriting................................... 42
Certain Legal Matters.......................... 43
Experts........................................ 43
Additional Information......................... 43
Financial Statements........................... F-1
</TABLE>
--------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,000,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE COMMON STOCK PURCHASE
WARRANT
[LOGO]
PHYTOTECH, INC.
---------------------
PROSPECTUS
---------------------
PAULSON INVESTMENT COMPANY, INC.
MILLENNIUM FINANCIAL GROUP, INC.
, 1998
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