<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended April 30, 1998
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Commission File Number 1-9579
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Ecogen Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-2487948
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2005 Cabot Boulevard West, Langhorne, Pennsylvania 19047
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (2l5) 757-l590
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Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section l3 or l5 (d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No .
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding at June 5, l998
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<S> <C>
Common Stock, $.01 par value 8,008,848
</TABLE>
<PAGE> 2
ECOGEN INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Unaudited Consolidated Condensed Balance Sheets as of
April 30, l998 and October 3l, l997...................................................................1
Unaudited Consolidated Condensed Statements of Operations for the three
months and six months ended April 30, 1998
and 1997 .............................................................................................2
Unaudited Consolidated Condensed Statement of Stockholders'
Equity for the six months ended April 30, l998........................................................3
Unaudited Consolidated Condensed Statements of Cash Flows
for the six months ended April 30, l998 and l997......................................................4
Notes to Unaudited Consolidated Condensed Financial
Statements............................................................................................6
Item 2 - Management's Discussion and Analysis of Results
of Operations and Financial Condition.............................................................10
PART II - OTHER INFORMATION
Item 2(c) - Changes in Securities..............................................................................15
Item 4 - Submission of Matters to Vote
of Securities Holders........................................................................15
Item 6(a) - Exhibits...........................................................................................15
</TABLE>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
Assets APRIL 30, OCTOBER 31,
1998 1997
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash, cash equivalents and temporary investments....................... $2,379,658 $2,373,945
Trade receivables, net................................................. 3,090,413 1,769,514
Inventory, net......................................................... 6,341,376 8,356,767
Prepaid expenses and other current assets.............................. 1,574,914 571,227
- - ----------------------------------------------------------------------------------------------------------------
Total current assets 13,386,361 13,071,453
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Plant and equipment, net.................................................. 3,220,691 3,649,579
Intangible and other assets, net.......................................... 442,464 837,020
- - ----------------------------------------------------------------------------------------------------------------
$17,049,516 $17,558,052
================================================================================================================
Liabilities and Stockholders' Equity
- - ----------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses.................................. $4,082,354 $5,043,626
Deferred contract revenue.............................................. 1,478,217 957,794
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Total current liabilities 5,560,571 6,001,420
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- - ----------------------------------------------------------------------------------------------------------------
Long-term debt 3,860,617 3,916,432
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- - ----------------------------------------------------------------------------------------------------------------
Other long-term obligations 2,513,227 2,770,548
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Stockholders' equity:
Common stock, par value $.01 per share; authorized 42,000,000
shares; issued 8,118,573 shares in 1998 and 1997..................... 81,186 81,186
Additional paid-in capital............................................. 117,801,851 117,861,372
Accumulated deficit.................................................... (111,315,804) (111,552,038)
Other.................................................................. (1,452,132) (1,520,869)
- - ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 5,115,101 4,869,651
- - ----------------------------------------------------------------------------------------------------------------
$17,049,516 $17,558,052
================================================================================================================
</TABLE>
See Accompanying Notes To Unaudited Consolidated Condensed Financial Statements.
1
<PAGE> 4
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
- - ---------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
----------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Product sales, net........................ $ 3,339,816 $ 2,661,913 $5,055,753 $ 3,574,015
Contract revenue.......................... 521,744 713,762 1,241,588 1,424,063
License and other income.................. 1,064,731 - 3,564,731 -
Interest income, net...................... - 56,215 - 117,665
- - ---------------------------------------------------------------------------------------------------------
Total revenues 4,926,291 3,431,890 9,862,072 5,115,743
- - ---------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of products sold..................... 2,451,418 1,778,014 3,858,002 2,463,524
Research and development:
Funded by third parties................. 123,922 346,722 348,842 587,529
Self funded............................. 801,177 833,057 1,539,025 2,027,501
Selling, general and administrative....... 1,927,238 2,313,537 3,608,059 4,101,226
Special charges........................... - 209,629 - 209,629
Interest expense, net..................... 140,169 - 271,910 -
- - ---------------------------------------------------------------------------------------------------------
Total costs and expenses 5,443,924 5,480,959 9,625,838 9,389,409
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
Net income (loss) ($517,633) ($2,049,069) $ 236,234 ($4,273,666)
=========================================================================================================
Basic and diluted net income (loss) per
common share available to common
stockholders ($0.06) ($0.26) $0.03 ($0.54)
=========================================================================================================
Weighted average number of common
shares outstanding 8,034,000 7,929,000 8,033,000 7,886,000
=========================================================================================================
</TABLE>
See Accompanying Notes To Unaudited Consolidated Condensed Financial Statements.
2
<PAGE> 5
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended April 30, 1998
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL OTHER
COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT EQUITY TOTAL
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<S> <C> <C> <C> <C> <C>
BALANCE NOVEMBER 1, 1997 $81,186 $ 117,861,372 ($111,552,038) ($1,520,869) $4,869,651
Transfer of 5,582 shares of treasury stock
for employee benefits............................... - (59,521) - 72,901 13,380
Net reduction in unrealized gain on securities........ - - - (4,164) (4,164)
Net income............................................ - - 236,234 - 236,234
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE APRIL 30, 1998 $81,186 $ 117,801,851 ($111,315,804) ($1,452,132) $5,115,101
====================================================================================================================================
</TABLE>
See Accompanying Notes To Unaudited Consolidated Condensed Financial Statements.
3
<PAGE> 6
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
APRIL 30,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 236,234 ($4,273,666)
Adjustments to reconcile net income (loss) to net
cash provided by ( used in ) operating activities:
Gain on sale of assets............................. (562,268) -
Depreciation and amortization expense.............. 400,170 186,240
Noncash interest expense........................... 195,826 -
Other.............................................. (2,739) (1,627)
Changes in assets and liabilities, net of effects of
disposition........................................ (1,608,151) (3,389,539)
- - ----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,340,928) (7,478,592)
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Cash flows from investing activities:
Purchase of plant and equipment.......................... (62,617) (146,622)
Net proceeds from sale of pheromone product line......... 1,659,410 -
- - ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 1,596,793 (146,622)
- - ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of capital lease obligation.................... (250,152) (192,277)
Net cash used in financing activities (250,152) (192,277)
- - ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents....... 5,713 (7,817,491)
Cash and cash equivalents, beginning of period............. 2,373,945 9,611,111
- - ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $2,379,658 $1,793,620
==========================================================================================================
</TABLE>
(Continued)
4
<PAGE> 7
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
APRIL 30,
1998 1997
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Changes in assets and liabilities, net of effects of disposition:
Increase in trade receivables ........................................................ ($1,320,899) ($ 687,127)
(Increase) decrease in inventory ..................................................... 309,997 (1,267,110)
(Increase) decrease in prepaid expenses and
other current assets .............................................................. (1,003,687) 42,114
Decrease in other assets ............................................................. 391,482 1,812
Decrease in accounts payable
and accrued expenses .............................................................. (173,813) (993,764)
Increase (decrease) in deferred contract revenue ..................................... 520,423 (390,117)
Decrease in other long-term liabilities .............................................. (331,654) (95,347)
- - ------------------------------------------------------------------------------------------------------------------------------------
Changes in assets and liabilities, net of effects of disposition ($1,608,151) ($3,389,539)
====================================================================================================================================
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Interest paid $ 76,084 $ 64,444
====================================================================================================================================
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Noncash investing and financing activities:
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In the first six months of fiscal 1997, the Company issued 44,030 shares of its common stock upon conversion of the Company's
convertible preferred stock.
In the first six months of fiscal 1997, the Company issued 1,700 shares of common stock, as dividends on the Company's preferred
stock.
In the first six months of fiscal 1998 and 1997, the Company transferred 5,582 and 2,508 shares, respectively, of treasury stock to
outstanding shares pursuant to certain employee benefit plans.
In the first six months of fiscal 1997, the Company issued 136,000 shares of common stock in satisfaction of future royalty
obligations.
===================================================================================================================================
</TABLE>
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
5
<PAGE> 8
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
APRIL 30, 1998 AND 1997
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION:
The consolidated condensed financial statements include the accounts of
Ecogen Inc. ("Ecogen" or the "Company") and its wholly-owned and
majority-owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation.
The accompanying consolidated condensed financial statements include
all adjustments (consisting of normal recurring accruals) which are, in
the opinion of management, necessary for a fair presentation of the
consolidated results of operations and financial position for the
interim periods presented. The consolidated condensed financial
statements have been prepared in accordance with the requirements for
Form l0-Q and, therefore, do not include all disclosures of financial
information required by generally accepted accounting principles. These
consolidated condensed financial statements should be read in
conjunction with the Company's October 31, l997 consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K.
The results of operations for the interim period ended April 30, 1998
are not necessarily indicative of the operating results for the full
year.
OPERATIONS:
The Company is a biotechnology company specializing in the development
and marketing of environmentally compatible products for the control of
pests in agricultural and related markets. The Company has not yet
achieved profitable operations for any of its fiscal years 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, among other things, on the success of the
Company's commercialization efforts and market acceptance of the
Company's products.
NET INCOME (LOSS) PER COMMON SHARE:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings Per
Share" ("SFAS No. 128"). The Company adopted SFAS No. 128 in the first
quarter of fiscal 1998.
Under SFAS No. 128, basic income (loss) per share is based on net
income (loss) for the relevant period, divided by the weighted average
number of common shares outstanding during the period. Diluted income
(loss) per share is based on net income (loss) for the relevant period
divided by common shares outstanding and other potential common shares
if they are dilutive.
(Continued)
6
<PAGE> 9
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS,
CONTINUED
NET INCOME (LOSS) PER COMMON SHARE, CONT.
There is no difference between the Company's historic net loss per
share calculation and basic and diluted net loss as calculated under
SFAS No. 128 because all other potential common shares were
anti-dilutive since the Company reported a net loss. For the current
period, diluted earnings per share were calculated giving effect to the
conversion of the $3.0 million convertible note into 1.0 million common
shares in accordance with the terms of the note, and adding back the
$.1 million of interest expense incurred during the period on the note.
Stock options and warrants were not considered because they were
anti-dilutive.
RECLASSIFICATIONS:
Certain reclassifications have been made to the reported amounts in the
1997 financial statements to conform to the 1998 classifications.
(2) INVENTORY
At April 30, l998, inventory consisted of raw materials of $.6 million,
work-in-progress of $.9 million and finished products of $4.8 million.
(3) MONSANTO TRANSACTION
In January 1996, the Company entered into agreements with Monsanto
Company ("Monsanto") for an equity investment, purchase of technology
and joint research and development arrangement relating to the
Company's proprietary Bacillus thuringiensis ("Bt") technology for
in-plant applications (collectively, the "Monsanto Transaction"). In
January 1998, the Company amended its research and development
agreement with Monsanto. In connection therewith, the Company received
approximately $4.8 million in cash payments during the first half of
fiscal 1998 of which $3.0 million was earned and recorded as other
revenue in the first six months of fiscal 1998 since the Company has no
continuing obligations with respect to such amounts. Further, $1.2
million and $1.4 million was recorded as research contract revenue
principally relating to the Monsanto R&D contract during the six months
ended April 30, 1998 and 1997, respectively. At April 30, 1998, the
balance of deferred contract revenue from Monsanto is approximately
$1.5 million which will be recognized as revenue when earned through
January 1999, the remaining term of the amended agreement.
(4) COMMITMENTS AND CONTINGENCIES
Subsequent to January 31, 1998, the Company entered into a $.7 million
letter of credit with a commercial bank to secure a contract
manufacturing agreement. A $.5 million certificate of deposit is being
maintained as collateral for the letter of credit and is recorded as
other current assets at April 30,1998.
(Continued)
7
<PAGE> 10
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS,
(CONTINUED)
(5) SALE OF PHEROMONE PRODUCT LINE
In April 1998, the Company sold substantially all of the assets
(excluding trade accounts receivable) associated with the pheromone
product line to Scentry Biologicals, Inc. ("Scentry") for total
consideration of approximately $2.4 million. The consideration included
cash of $1.7 million and the assumption of $.7 million of liabilities.
The Company recognized a gain of $.5 million on the sale which is
included in license and other income in the accompanying consolidated
statements of operations. As part of the transaction, the Company
entered into a distribution agreement with Scentry for three pheromone
products, BeeScent(R) Attractant, NoMate(R) LRX MEC and NoMate BHF MEC
in the United States through December 2000. Scentry is a newly formed
company, the principals of which are the former manager of the
Company's pheromone production facility and a principal of one of the
Company's distributors in Central and South America. Unaudited pro
forma consolidated results of operations as if the product line was
sold on November 1, 1996, are as follows:
<TABLE>
<CAPTION>
Six Months Ended April 30,
1998 1997
---- ----
($ in thousands except per share data)
<S> <C> <C>
Total revenues $7,816 $ 4,207
Net income (loss) 44 (4,166)
Basic and diluted net
income (loss) per share .01 (0.53)
====== =======
</TABLE>
The pro forma information is not necessarily indicative of the results
that would have been obtained had the disposition of the pheromone
product line actually occurred on the date indicated nor is it
indicative of the Company's future consolidated results of operations.
(6) SUBSEQUENT EVENTS
In June 1998, the Company sold 20,000 shares of Series 1998-A 8%
convertible preferred stock, stated value $100 per share, to an
institutional investor for net proceeds of $1.9 million. The holder of
the preferred stock was issued five-year warrants to purchase 180,000
shares of common stock at $3.525 per share. Dividends are payable
semi-annually in cash or stock at the option of the Company. The
preferred stock has no voting rights except with respect to certain
matters affecting the Company's preferred stock. At the election of the
holder, the preferred stock may be converted at various dates to shares
of the Company's common stock at the lesser of $3.39 per share or an
average market price, as defined in the agreement, over a ten day
period at the time of conversion. The Company, at its option, may
redeem the preferred stock at 125% of the stated value. If the Company
is unable to issue sufficient shares of common stock within a specified
period of time after the holder has
(Continued)
8
<PAGE> 11
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS,
(CONTINUED)
(6) SUBSEQUENT EVENTS, CONT.
requested conversion, the dividend rate may increase and the Company
may be required to issue additional warrants. Further, in certain
circumstances, all of which are in the control of the Company, the
Company may be required to redeem the shares at various premiums over
stated value. The holder of the preferred stock has certain
registration rights with respect to the shares of common stock
underlying the warrants and the preferred stock and warrants. Included
in the fee paid to the placement agent in connection with the
transaction were 24,000 shares of the Company's common stock.
9
<PAGE> 12
ECOGEN INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE MONTHS AND SIX MONTHS ENDED APRIL 30, 1998 AND 1997
OVERVIEW
For the first six months of fiscal 1998, total revenues increased 93% from $5.1
million in fiscal 1997 to $9.9 million in fiscal 1998. During fiscal 1998, the
Company amended its research and development agreement with Monsanto Company
(Monsanto) which resulted in $3.0 million of other revenues in the first half of
fiscal 1998. There were no comparable payments for the year-ago period. Research
contract revenue was $1.2 million in the first six months of fiscal 1998
compared to $1.4 million in fiscal 1997. Contract research under the recently
amended agreement with Monsanto will cease during the first quarter of 1999.
Product sales increased 42% or $1.5 million from $3.6 million to $5.1 million
for the six months ended April 30, 1997 and 1998, respectively. During the first
six months of fiscal 1998, the Company also realized a reduction in operating
expenses, exclusive of special charges in fiscal 1997, of $1.2 million or 18%
from $6.7 million in the year-ago period to $5.5 million in fiscal 1998. Fiscal
1997 operating expenses included a special charge of $.2 million for the shut
down of Ecogen Israel. As a result of increased revenues and decreased operating
expenses, the Company reported net income of $.2 million or $.03 per basic and
diluted share in the first six months of fiscal 1998 compared to a net loss of
($4.3) million or ($.54) per share in the comparable period in fiscal 1997 on
weighted average shares of 8.0 million and 7.9 million in the first six months
of fiscal 1998 and 1997, respectively.
SIX MONTHS ENDED APRIL 30, 1998 AND 1997
REVENUES
Net product sales increased 42% during the six months ended April 30, 1998 to
$5.1 million compared with $3.6 million in the first six months of 1997. Sales
of the Company's Bt product line, representing 52% of total sales, increased 59%
or $1.0 million due principally to increased volume as a result of sales of
CRYMAX, the Company's new Bt bioinsecticide for control of caterpillars in the
vegetable, tree nut and vine market. Pheromone product sales, representing 46%
of total sales, increased $1.2 million or 100% principally due to increased
sales of the Company's product, NoMate OLR, for control of omnivorous
leafrollers in grapes and kiwi which was introduced for the first time in fiscal
1997 and an increase in sales of NoMate PBW, for control of pink bollworm in
cotton, pursuant to a government bid in Egypt. Biofungicide sales, representing
2% of total sales, decreased $.7 million due to carryover inventory of Aspire at
the Company's distributor for this product, a biofungicide for control of post
harvest rot disease and lower sales of AQ10, for control of powdery mildew, due
to unseasonable rainy weather conditions in California.
Other revenues increased $3.3 million in the current six-month period, due
primarily to the non-recurring payments from Monsanto described above as a
result of an amendment to the Company's research and development contract and
the $.5 million gain on sale of the pheromone product line. It is anticipated
that revenue from Monsanto will be substantially lower in fiscal 1999.
10
<PAGE> 13
In April 1998, the Company sold its pheromone product line to a newly-formed
company for aggregate net proceeds of $2.4 million and recognized a gain on sale
of $.5 million. The Company has agreed to distribute certain of the pheromone
products in the United States through December 31, 2000.
COSTS AND EXPENSES
Cost of products sold increased 57% in the first six months of fiscal 1998
compared to the comparable period in fiscal 1997 due in part to the increase in
product sales. Gross margins decreased to 24% in the first six months of fiscal
1998 compared to 31% in 1997. This decrease was due primarily to lower sales of
biofungicide products during the first half of fiscal 1998 which are high margin
products.
Total operating expenses, exclusive of special charges in fiscal 1997 were $5.5
million in the first six months of fiscal 1998 compared to $6.7 million in 1997,
a decrease of 1.2 million or 18%. Research and development costs decreased $.7
million or 28% due principally to lower process development and start-up costs
and lower personnel costs as a result of the shut down of a research lab in
Israel and reduced basic research activity. Research and development costs are
expected to continue to decrease in fiscal 1998 when compared to fiscal 1997.
Fiscal 1997 included higher process development costs as a result of the since
resolved problem with the Company's scale-up of its new water dispersible (WDG)
formulation. Selling, general and administrative expenses were $3.6 million in
the first six months of fiscal 1998 compared to $4.1 million in 1997,
representing a decrease of $.5 million or 12%. Selling and marketing costs
decreased 7% and general and administrative expenses decreased 17% due to cost
containment efforts including salaries and related costs, outside services and
advertising. The Company expects that these same factors and the sale of the
pheromone product line will continue to drive a decline in operating expenses
throughout fiscal 1998.
Net interest expense was $.3 million during the six months ended April 30, 1998
compared to net interest income of $.1 million in the comparable period of 1997
due to increased levels of long-term obligations and decreased funds available
for investment.
Net income for the six months ended April 30, 1998 was $.2 million, compared to
a net loss of ($4.3) million for the same period in 1997. Basic and diluted net
income per share for the six months ended April 30, 1998 was $.03, compared to
net loss per share of ($.54) on weighted average shares outstanding of 8.0
million and 7.9 million in the first six months of 1998 and 1997, respectively.
THREE MONTHS ENDED APRIL 30, 1998 AND 1997
REVENUES
Net product sales increased 25% during the three months ended April 30, 1998 to
$3.3 million compared with $2.7 million in the second quarter of 1997
principally due to volume. Sales of the Company's Bt product line, representing
58% of total sales, increased 70% due principally to an increase in sales of
CRYMAX, the Company's new Bt bioinsecticide for control of caterpillars in the
vegetable, tree nut and vine market. Pheromone product sales, representing 40%
of total sales, increased $.3 million or 28% principally due to sales of the
Company's NoMate PBW product in Egypt offset by decreases in certain other
pheromone products. Biofungicide sales, representing 2% of total sales,
decreased $.4 million.
11
<PAGE> 14
Other revenues increased $.8 million in the current three-month period, due
primarily to $.5 million gain on the sale of the pheromone business and
increased revenue from Monsanto.
COSTS AND EXPENSES
Cost of products sold increased 38% in the second quarter of fiscal 1998
compared to 1997 due in part to the increase in product sales. Gross margins
decreased to 27% in the second quarter of fiscal 1998 compared to 33% in the
comparable period in fiscal 1997. This decrease was due primarily to lower sales
during the second quarter of fiscal 1998 of the Company's biofungicide products,
which are high margin products. Gross margins improved from the 18% margins
reported in the first quarter of fiscal 1998.
Total operating expenses, exclusive of special charges were $2.9 million in the
second quarter of fiscal 1998 compared to $3.5 million in 1997, a decrease of
18%. Research and development costs decreased $.3 million or 22%. Selling,
general and administrative expenses were $1.9 million in the second quarter of
fiscal 1998 compared to $2.3 million in 1997, representing a decrease of $.4
million or 17%. Selling and marketing decreased 13% and general and
administrative expenses decreased 22%. As described above operating expenses are
expected to continue to decrease throughout fiscal 1998 when compared to prior
periods for the reasons stated above.
Net interest expense was $.1 million during the three months ended April 30,
1998 compared to $.1 million in interest income in fiscal 1997 due primarily to
an increase in long-term debt.
Net loss for the three months ended April 30, 1998 was ($.5) million, compared
to a net loss of ($2.0) million for the same period in fiscal 1997. Basic and
diluted net loss per share for the three months ended April 30, 1998 was ($.06),
compared to net loss per share of ($.26) on weighted average shares outstanding
of 8.0 million and 7.9 million in the second quarter of 1998 and 1997,
respectively. Fiscal 1997 included a special charge of $.2 million or $.03 per
share.
SEASONALITY OF BUSINESS
The bulk of the Company's current products are presently marketed for
agricultural applications in the northern hemisphere, where the growing season
generally runs from spring through fall. Commercial introduction of the
Company's new products is contingent on, among other factors, completion of
field testing and receipt of required regulatory approvals. Unusual weather
conditions during field tests or failure to receive regulatory approvals prior
to the growing season may require additional field tests in subsequent growing
seasons, with resulting delays in product development and commercialization. In
addition, because of the seasonal nature of its business, the Company's product
revenues are likely to be concentrated in the fiscal quarters prior to and
during a particular growing season which may result in substantial variations in
quarter-to-quarter financial results. Product sales from year-to-year are also
affected by unusual weather conditions, such as droughts or floods, and the
level of insect pressure in grower areas.
12
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1998, the Company had cash and liquid investments of $2.4 million
which approximated the same level at October 31, 1997. $1.6 million of cash used
in operations, $.1 million for capital expenditures and $.1 million for
repayment of capital lease obligations substantially were funded by $1.7 million
in proceeds from the sale of the pheromone product line. Of the $1.6 million of
cash used in operations, $1.3 million relates to an increase in trade
receivables due to increased sales. Subsequent to April 30,1998, the Company
raised net proceeds of $1.9 million pursuant to a private placement of
convertible preferred stock to an institutional investor.
The Company has not generated positive cash flow from operations in any fiscal
year. The Company has financed its working capital needs primarily through
private and public offerings of equity securities, research revenues and license
and other fees from research and development alliances and product sales. The
Company believes that its existing working capital and cash flows expected to be
generated from revenues in 1998 should be sufficient to meet its capital and
liquidity requirements for fiscal 1998 based on reduced spending levels over
fiscal 1997. The Company continues to pursue additional avenues to supplement
its working capital, including, among other things, a working capital line of
credit. There is no assurance that such financings will be available on terms
acceptable to the Company or at all. The Company's working capital and working
capital requirements are affected by numerous factors and there is no assurance
that such factors will not have a negative impact on the Company's liquidity.
Principal among these are the success of its product commercialization and
marketing efforts and the efforts of its strategic partners in commercializing
and selling products based on the Company's technology, the technological
advantages and pricing of the Company's products, economic and environmental
considerations which impact agricultural crop production and the agricultural
sector generally, competitive conditions in the agricultural pest control
market, and access to capital markets that can provide the Company with the
resources necessary to fund its strategic priorities. Over the long term, the
Company's liquidity is dependent on market acceptance of its products and
technology.
ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts receivable increased $1.3 million when compared the October 31,1997,
the end of the Company's fiscal year, due to increases in product sales.
Inventory decreased $2.0 million at April 30, 1998 when compared to October 31,
1997 primarily as a result of the sale of the pheromone product line. Other
current assets increased $1.0 million as a result of a $.5 million certificate
of deposit that was obtained to secure the Company's obligation under a contract
manufacturing agreement and a reclassification from long-term other assets.
Accounts payable and accrued expenses decreased $1.0 million due principally to
the assumption of certain liabilities by the purchaser of the pheromone product
line and the timing of payments to vendors. Deferred contract revenue increased
$.5 million at April 30, 1998 when compared to October 31,1997 due to amounts
advanced under the Monsanto research and development agreement that are expected
to be earned through January 31, 1999.
FORWARD LOOKING STATEMENTS
The discussion set forth in this document contains forward looking statements
that involve a number of risks and uncertainties that could cause actual results
to differ materially from expected results. The Company intends to market and
sell a number of newly introduced products over the next several weeks and
months.
13
<PAGE> 16
These products, some of which utilize new formulations, have not to date
been produced on a commercial scale or produced on a commercial scale that has
been replicated. Certain of the manufacturing processes for such products
include newly developed equipment and techniques which may not be successfully
incorporated into the manufacturing process in time to meet targeted sales
opportunities. Additional risks and uncertainties include: (i) the market
acceptance of the Company's current and newly introduced products; (ii) the
efficacy, pricing, ease of use and performance of the Company's products; (iii)
the successful development, registration, commercialization and marketing of
technologically advanced new products; (iv) the continued and uninterrupted
supply of the Company's products from third party toll manufacturers and the
continued financial viability of such manufacturers; (v) economic and
environmental considerations which impact agricultural crop production and
agricultural crop protection including the amount of acres of target crops
planted, the cost and efficacy of competitive products, weather conditions and
the level of insect and disease infestation on target crops, and (vi) the
ability of the Company to fund its strategic priorities through operations or
access to capital markets.
14
<PAGE> 17
PART II - OTHER INFORMATION
Item 2(c): Changes in Securities
In June 1998, the Company sold 20,000 shares of Series 1998-A 8%
Convertible Preferred Stock, stated value $100 per share, to an institutional
investor for net proceeds of $1.9 million for working capital and other
corporate purposes. The holder of the preferred stock was issued five-year
warrants to purchase 180,000 shares of common stock at $3.525 per share.
Dividends on the preferred stock are payable semi-annually in cash or stock at
the option of the Company. The preferred stock has no voting rights except with
respect to certain matters affecting the Company's preferred stock. At the
election of the holder, the preferred stock may be converted at various dates to
shares of the Company's common stock at the lesser of $3.39 per share or an
average market price, as defined in the agreement, over a ten day period at the
time of conversion. The Company, at its option, may redeem the preferred stock
at 125% of the stated value. If the Company is unable to issue sufficient shares
of common stock within a specified period of time after the holder has requested
conversion, the dividend rate may increase and the Company may be required to
issue additional warrants. Further, in certain circumstances, all of which are
in the control of the Company, the Company may be required to redeem the shares
at various premiums over stated value. The holder of the preferred stock has
certain registration rights with respect to the shares of common stock
underlying the warrants and the preferred stock and warrants. The placement
agent for the transaction was Jesup & Lamont Securities Corporation which earned
a fee of $130,000 plus 24,000 shares of Company common stock as a result of the
transaction. The securities were issued by the Company in reliance upon the
exemption from securities registration afforded by Rule 506 under Regulation D
under the Securities Act of 1933, as amended.
Item 4: Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 7, 1998,
at which time the following matters were submitted to a vote of the stockholders
and were approved: (i) the election of Esteban A. Ferrer, Lowell N. Lewis,
Philippe D. Katz, James P. Reilly, Jr. and John R. Sutley to serve on the Board
of Directors of the Company until the next annual meeting; and (ii) the
ratification of the appointment of KPMG Peat Marwick LLP as independent auditors
to audit the Company's books and accounts for fiscal year 1998. A total of 6.4
million votes were cast in favor of each nominee for director and less than one
hundred eighty thousand votes were cast against any such nominee. A total of 6.4
million votes were cast in favor of the ratification of the appointment of KPMG
Peat Marwick LLP as independent auditors of the Company and less than one
hundred ten thousand votes were cast against such ratification.
Item 6(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- - ----------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of Ecogen Inc. (Form
10-Q for fiscal quarter ended January 31, 1996)*
3.8 By-laws of Ecogen Inc., as amended (Form S-1 Registration
Statement filed on May 1, 1991)*
</TABLE>
15
<PAGE> 18
<TABLE>
<S> <C>
3.9 Certificate of Designations, Preferences and Rights of
Series 1998-A Convertible Preferred Stock.
10.133 Asset Purchase and Sale Agreement among Ecogen Inc.,
Ecogen-Bio Inc. and Scentry Biologicals, Inc. dated April
28, 1998.
27 Financial Data Schedule
</TABLE>
* These items are hereby incorporated by reference from the exhibits of the
filing or report indicated and are made part of this report.
16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 12, 1998
ECOGEN INC.
By: /s/ JAMES P. REILLY, JR.
------------------------
James P. Reilly, Jr.
Chairman and Chief Executive
Officer
By: /s/ MARY E. PAETZOLD
--------------------
Mary E. Paetzold
Vice President and Chief Financial Officer
17
<PAGE> 1
EXHIBIT 3.9
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES 1998-A CONVERTIBLE PREFERRED STOCK
OF
ECOGEN INC.
***
Ecogen Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors by the
Certificate of Incorporation (as amended) of said corporation, and
pursuant to the provisions of Section 151 of Title 8 of the Delaware Code of
1953, said Board of Directors, adopted a resolution providing for which
resolution is as follows:
RESOLVED, that a series of the Corporation's Preferred Stock
consisting of 35,000 shares of Preferred Stock, be and hereby is,
designated as "Series 1998-A Convertible Preferred Stock", par value $.01
per share (the "Series A Preferred Stock"), and that the Series A
Preferred Stock shall have the designations, powers, preferences, rights
and qualifications, limitations and restrictions as set forth in the
Certificate of Designation, Preferences and Rights of Series 1998-A
Convertible Preferred Stock (the "Series A Certificate") attached as
Exhibit A.
That said Series A Certificate states that the Board of Directors does
hereby fix and herein state and express such designations, powers, preferences
and relative and other special rights and qualifications, limitations and
restrictions thereof as follows (all terms used herein which are defined in the
Certificate of Incorporation shall be deemed to have the meanings provided
therein).
Section 1. Designation, Amount and Par Value. The series of
preferred stock shall be designated as 8% Series 1998-A Convertible
Preferred Stock (the "Preferred Stock") and the number of shares so designated
shall be 35,000 (which shall not be subject to increase without the consent of
the holders of the Preferred Stock (each, a "Holder" and collectively, the
"Holders")). Each share of Preferred Stock shall have a par value of $.01 and
a stated value of $100.00 (the "Stated Value"). Of the designated shares of
Preferred Stock, 20,000 shares of Preferred Stock are being issued initially,
and up to 15,000 shares of Preferred Stock are being authorized for payment of
dividends in shares of Preferred Stock when, as and if, declared by the Board
of Directors.
<PAGE> 2
Section 2. Dividends.
(a) Holders of Preferred Stock shall be entitled to receive,
when and as declared by the Board of Directors out of funds legally available
therefor, and the Company shall pay, cumulative dividends at the rate per share
(as a percentage of the Stated Value per share) equal to 8% per annum (the
"Dividend Rate"), payable on a semi-annual basis on June 30 and December 31 of
each year during the term hereof (each a "Dividend Payment Date"), commencing on
June 30, 1998, in cash or shares of Preferred Stock (the "Preferred Dividend"),
provided, that in connection with a conversion of the Preferred Stock, the
Company shall be entitled to pay dividends in the form of Common Stock, subject
to the terms and conditions set forth herein, at the option of the Company.
Dividends on the Preferred Stock shall be calculated on the basis of a 360-day
year, shall accrue daily commencing on the Original Issue Date (as defined in
Section 8), and shall be deemed to accrue from such date whether or not earned
or declared and whether or not there are profits, surplus or other funds of the
Company legally available for the payment of dividends. Any dividends not paid
on any Dividend Payment Date shall continue to accrue and shall be due and
payable upon conversion of the Preferred Stock. A party that holds shares of
Preferred Stock on a Dividend Payment Date will be entitled to receive such
dividend payment and any other accrued and unpaid dividends which accrued prior
to such Dividend Payment Date, without regard to any sale or disposition of such
Preferred Stock subsequent to the applicable record date. Except as otherwise
provided herein, if at any time the Company pays less than the total amount of
dividends then accrued on account of Preferred Stock, such payment shall be
distributed ratably among the Holders based upon the number of shares held by
each Holder. The Company shall provide the Holders notice of its intention to
pay dividends in cash or shares of Preferred Stock not less than 10 Business
Days prior to any Dividend Payment Date for as long as shares of Preferred Stock
are outstanding. If dividends are paid in the form of Preferred Stock, the
number of shares of Preferred Stock issuable on account of such dividend shall
equal the cash amount of such dividend on such Dividend Payment Date divided by
the Stated Value. If dividends are paid in shares of Common Stock, the number of
shares of Common Stock issuable on account of such dividend shall equal the cash
amount of such dividend on such Dividend Payment Date divided by the Conversion
Price (as defined below) on such date. The Company shall not be required to
issue stock certificates representing fractions of shares of Preferred Stock and
shall make a cash payment in respect of any final fraction of a share based on
the product of such fractional share and the Stated Value.
(b) Notwithstanding anything to the contrary contained
herein, the Company may not pay dividends in the form of Preferred Dividends or
in shares of Common Stock and must deliver cash in respect thereof if on the
Dividend Payment Date:
(i) (A) the number of shares of Preferred Stock at the time
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<PAGE> 3
authorized for issuance for the payment of Preferred Dividends on such Dividend
Payment Date, together with the number of shares held as treasury stock, is
insufficient to satisfy the Company's then existing obligations to issue shares
of Preferred Stock for the payment of such Preferred Dividends on such Dividend
Payment Date, or (B) the sum of (i) the number of shares of Common Stock at the
time reserved for issuance upon conversion of (x) the shares of Preferred Stock
outstanding on such Dividend Payment Date, and (y) the Preferred Dividends on
such Dividend Payment Date, (ii) the number of authorized but unissued shares of
Common stock not reserved for any purpose, (iii) the number of authorized but
unissued shares of Common Stock not reserved for all other purposes, and (iv)
the number of shares held as treasury stock, is insufficient to satisfy the
Company's then existing conversion and other obligations to issue shares of
Common Stock for all purposes;
(ii) the Common Stock is not then listed on the Nasdaq
National Market ("NASDAQ"), the NASDAQ SmallCap Market or other national
securities exchange; or
(iii) the Company has failed to timely satisfy its
conversion obligations hereunder.
(c) So long as any Preferred Stock shall remain outstanding,
neither the Company nor any subsidiary thereof shall redeem, purchase or
otherwise acquire directly or indirectly any Junior Securities (as defined in
Section 8), nor shall the Company directly or indirectly pay or declare any
dividend or make any distribution (other than a dividend or distribution
described in Section 5) upon, nor shall any distribution be made in respect of,
any Junior Securities, nor shall any monies be set aside for or applied to the
purchase or redemption (through a sinking fund or otherwise) of any Junior
Securities, except for repurchases effected by the Company on the open market,
pursuant to a direct stock purchase plan or in connection with the Company's
401(k) plan.
Section 3. Voting Rights. Except as otherwise provided
herein and as otherwise required by law, the Preferred Stock shall have no
voting rights. However, so long as any shares of Preferred Stock are
outstanding, the Company shall not and shall cause its subsidiaries not to,
without the affirmative vote of the Holders of all of the shares of the
Preferred Stock then outstanding, (a) alter or change adversely the powers,
preferences or rights given to the Preferred Stock, (b) alter or amend this
Certificate of Designation, (c) authorize or create any class of stock ranking
as to dividends or distribution of assets upon a Liquidation (as defined in
Section 4) senior to the Preferred Stock, except for any series of Preferred
Stock issued and sold in accordance with the Purchase Agreement, (d) increase
the authorized number of shares of Preferred Stock or (e) enter into any
agreement with respect to the foregoing.
Section 4. Liquidation. Upon any liquidation, dissolution or
winding-
-3-
<PAGE> 4
up of the Company, whether voluntary or involuntary (a "Liquidation"), the
Holders shall be entitled to receive out of the assets of the Company, whether
such assets are capital or surplus, for each share of Preferred Stock an amount
equal to the Stated Value plus all accrued but unpaid dividends per share,
whether declared or not, before any distribution or payment shall be made to
the holders of any Junior Securities, and if the assets of the Company shall be
insufficient to pay in full such amounts, then the entire assets to be
distributed to the Holders of Preferred Stock shall be distributed among the
Holders of Preferred Stock ratably in accordance with the respective amounts
that would be payable on such shares if all amounts payable thereon were paid
in full. A sale, conveyance or disposition of all or substantially all of the
assets of the Company or the effectuation by the Company of a transaction or
series of related transactions in which more than 50% of the voting power of
the Company is disposed of, or a consolidation or merger of the Company with or
into any other company or companies shall not be treated as a Liquidation, but
instead shall be subject to the provisions of Section 5. The Company shall
mail written notice of any such Liquidation, not less than 45 days prior to the
payment date stated therein, to each record Holder of Preferred Stock.
Section 5. Conversion.
(a)(i) Each share of Preferred Stock shall be convertible into
shares of Common Stock (subject to reduction pursuant to Section
5(a)(ii) hereof and Section 3.8 of the Purchase Agreement) at the Conversion
Ratio (as defined in Section 8) at the option of the Holder, at any time and
from time to time, from and after the date (the "Initial Conversion Date")
which is the earlier of (i) that date the Underlying Securities Registration
Statement (as defined in Section 8) is declared effective by the Commission, or
(ii) the 120th day following the Original Issue Date; provided, that, (A) on
and after the Initial Conversion Date, the Holders shall only be entitled to
convert up to (i) 25% of the number of shares of Preferred Stock originally
issued on the Original Issue Date, and (ii) any Preferred Dividends issued on
such shares of Preferred Stock, (B) on and after the first month anniversary of
the Initial Conversion Date, the Holders shall only be entitled to convert up
to (i) 50% of the number of shares of Preferred Stock originally issued on the
Original Issue Date, and (ii) any Preferred Dividends issued on such shares of
Preferred Stock, (C) on and after the second month anniversary of the Initial
Conversion Date, the Holders shall only be entitled to covert up to (i) 75% of
the number of shares of Preferred Stock, originally issued on the Original
Issue Date, and (ii) any Preferred Dividends issued on such shares of Preferred
Stock, and (D) on and after the third month anniversary of the Initial
Conversion Date, the Holders shall be entitled to convert all of the shares of
Preferred Stock originally issued on the Original Issue Date, together with all
Preferred Dividends issued on such shares of Preferred Stock. Holders shall
effect conversions by surrendering the certificate or certificates representing
the shares of Preferred Stock to be converted to the Company, together with the
form of conversion notice attached hereto as Exhibit A ( a "Conversion
Notice"). Each Conversion Notice shall specify the number of shares of
Preferred Stock to be converted and the date on which such conversion is to be
effected, which date may not be prior to the date the Holder delivers such
Conversion
-4-
<PAGE> 5
Notice to the Company by facsimile (the "Conversion Date"). If no Conversion
Date is specified in a Conversion Notice, the Conversion Date shall be the date
that the Conversion Notice is deemed delivered to the Company hereunder. If the
Holder is converting less than all shares of Preferred Stock represented by the
certificate or certificates tendered by the Holder with the Conversion Notice,
or if a conversion hereunder cannot be effected in full for any reason, the
Company shall promptly deliver to such Holder (in the manner and within the time
set forth in Section 5(b)) a certificate for such number of shares as have not
been converted.
(ii) At no time while the Common Stock is listed for
trading on the NASDAQ or the Nasdaq SmallCap Market shall the Company
issue on conversions of Preferred Stock an aggregate number of shares of Common
Stock that, when added to the number of shares underlying the Trigger Warrants
(as hereinafter defined) if the same were to be issued at such time, and the
number of shares of Common Stock, if any, theretofore issued on conversion of
the Company's 8% Series 1998-B Convertible Preferred Stock, if hereafter
authorized and issued pursuant to the Purchase Agreement, would equal or exceed
20% of the number of shares of Common Stock issued and outstanding on the
Original Issue Date unless the Company shall have theretofore (A) obtained the
vote of shareholders ("Shareholder Approval"), if any, as may be required by
the rules and regulations of the Nasdaq Stock Market (or successor thereto)
applicable to approve the issuance of Common Stock in excess of the Issuable
Maximum in a private placement whereby shares of Common Stock are deemed to
have been issued at a price that is less than the greater of book or fair
market value of the Common Stock, or (B) obtained an exemption from the
requirement for Shareholder Approval from The Nasdaq Stock Market (a "Nasdaq
Exemption"). The maximum number of shares of Common Stock that can be issued
on conversions of Preferred Stock under this Section 5(a)(ii) is referred to as
the "Issuable Maximum." At such time as the Company has issued, on conversions
of Preferred Stock, a number of shares of Common Stock equal to the Issuable
Maximum and has not theretofore obtained Shareholder Approval or a Nasdaq
Exemption (the "Trigger Date"), the Company shall either (i) redeem all
outstanding shares of Preferred Stock and Preferred Dividends at a price equal
to the Optional Redemption Price (as defined in Section 6(c) hereof) pursuant
to the terms and conditions of Section 6(c) hereof (the "Initial Optional
Redemption"), provided, that the conditions listed in Section 6(a)(i)-(iii)
shall not apply to the Initial Optional Redemption, or (ii) within a period of
75 days from the Trigger Date (the "Trigger Period") obtain Shareholder
Approval or a Nasdaq Exemption. On the Trigger Date, if the Company has not
exercised its right to effect the Initial Optional Redemption, the Company
shall issue to the Holders (and distribute pro rata among the Holders based on
the relative number of shares of Preferred Stock held) warrants (the "Trigger
Warrants") to purchase a number of shares of Common Stock equal to 15% of the
quotient obtained by dividing (x) the Stated Value of the Excess Preferred
Stock (as defined below) by (y) the lower of the Per Share Market Value on the
Trigger Date or on the date such warrants are actually distributed to the
Holders (the Trigger Date or such other date, as applicable, is referred to as
the "Measurement Date").
-5-
<PAGE> 6
Such warrants shall be substantially in the form attached as Exhibit B to the
Purchase Agreement and shall entitle the holders thereof to purchase shares of
Common Stock at any time during the five year period following the date on which
such warrants are actually distributed to the Holders at an exercise price per
share equal to 101% of the Per Share Market Value on the Measurement Date. From
and after the Trigger Date until the earlier of (I) the date on which a
Shareholder Approval or a Nasdaq Exemption has been obtained, and (II) the
expiration of the Trigger Period, the Dividend Rate shall be increased to 16%
per annum. From and after the expiration of the Trigger Period, if the Company
shall not have theretofore obtained either the Shareholder Approval or a Nasdaq
Exemption, and until such date, if any, as the Company obtains Shareholder
Approval or a Nasdaq Exemption, the Dividend Rate shall 20% per annum and the
Optional Redemption Price (as defined in Section 6(c)) with respect to any
redemption taking place thereafter shall be equal to the Redemption Amount (as
defined in Section 7). Unless the Company shall have theretofore obtained
Shareholder Approval or a Nasdaq Exemption, (I) if any Holder delivers a
Conversion Notice as a result of which such Holder would be entitled to a number
of shares of Common Stock that would result in the issuance of a number of
shares of Common Stock in excess of the Issuable Maximum, then the Company shall
issue in connection with such conversion such number of shares of Common Stock
as would not result in the aggregate issuances exceeding the Issuable Maximum;
and (II) if more than one Holder has delivered a Conversion Notice at the same
time as a result of which such Holders would be entitled to a number of shares
of Common Stock that would result in the issuance of a number of shares of
Common Stock in excess of the Issuable Maximum, then the Company shall issue the
maximum number of shares of Common Stock permissible to such Holders pro rata in
accordance with the number of shares of Preferred Stock submitted for
conversion; and (III) if at any time the Conversion Price is such that if all
then outstanding and unconverted shares of Preferred Stock were converted into
Common Stock the number of shares of Common Stock that would be issued would
equal or exceed 85% of the Issuable Maximum, the Company shall give prompt
notice thereof to all Holders.
(b)(i) Not later than three (3) Business Days after any
Delivery Date (as hereinafter defined), the Company will deliver to the
Holder (i) a certificate or certificates which shall be free of restrictive
legends and trading restrictions (other than those required by Section 3.1(b)
of the Purchase Agreement) representing the number of shares of Common Stock
being acquired upon the conversion of shares of Preferred Stock (subject to
reduction pursuant to Section 5(a)(ii)), and (ii) one or more certificates
representing the number of shares of Preferred Stock not converted. The
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon conversion of any shares of Preferred Stock until
certificates evidencing such shares of Preferred Stock are either delivered for
conversion to the Company or any transfer agent for the Preferred Stock or
Common Stock, or the Holder of such Preferred Stock notifies the Company that
such certificates have been lost, stolen or destroyed and provides a bond (or
other adequate security) reasonably satisfactory to the Company to indemnify
the Company
-6-
<PAGE> 7
from any loss incurred by it in connection therewith, and the Company shall not
be required to deliver certificates evidencing the shares of Common Stock to an
address outside the United States. The date such certificates or affidavit are
delivered is referred to as the "Delivery Date." If the Delivery Date has not
occurred on or prior to the tenth Business Day following the Conversion Date,
then the Company may, on notice to the Holder, rescind the conversion. The
Company shall, upon request of the Holder, if available, use its reasonable best
efforts to deliver any certificate or certificates required to be delivered by
the Company under this Section electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions. If in the case of any Conversion Notice such certificate or
certificates, including for purposes hereof, any shares of Common Stock to be
issued on the Conversion Date on account of accrued but unpaid dividends
hereunder, are not delivered to or as directed by the applicable Holder by the
fifth (5th) Trading Day after the Delivery Date, the Holder shall be entitled by
written notice to the Company at any time on or before its receipt of such
certificate or certificates thereafter, to rescind such conversion, in which
event the Company shall immediately return the certificates representing the
shares of Preferred Stock tendered for conversion.
(ii) If the Company fails to deliver to the Holder such
certificate or certificates pursuant to Section 5(b)(i), including for purposes
hereof, any shares of Common Stock to be issued on the Conversion Date on
account of accrued but unpaid dividends hereunder, prior to the fifth (5th)
Trading Day after the Delivery Date, the Company shall pay to such Holder, in
cash, as liquidated damages and not as a penalty, $5,000 for each day after such
fifth (5th) Trading Day until such certificates are delivered. Nothing herein
shall limit a Holder's right to pursue actual damages for the Company's failure
to deliver certificates representing shares of Common Stock upon damages for the
Company's failure to deliver certificates representing shares of Common Stock
upon conversion within the period specified herein and such Holder shall have
the right to pursue all remedies available to it at law or in equity including,
without limitation, a decree of specific performance and/or injunctive relief.
The exercise of any such rights shall not prohibit the Holders from seeking to
enforce damages pursuant to any other Section hereof or under applicable law.
Further, if the Company shall not have delivered any cash due in respect of
conversions of Preferred Stock or as payment of dividends thereon by the fifth
(5th) Trading Day after the Conversion Date, the Holder may, subject to Section
5(a)(ii), by notice to the Company, require the Company to issue Underlying
Shares pursuant to Section 5(c), except that for such purpose the Conversion
Price applicable thereto shall be the lesser of the Conversion Price on the
Conversion Date and the Conversion Price on the date of such Holder demand. Any
such Underlying Shares will be subject to the provision of this Section.
(iii) In addition to any other rights available to the
Holder, if the Company fails to deliver to the Holder such certificate or
certificates pursuant to Section 5(b)(i), including for purposes hereof, any
shares of Common Stock to be issued on the
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<PAGE> 8
Conversion Date on account of accrued but unpaid dividends hereunder, prior to
the fifth (5th) Trading Day after the Delivery Date, and if after such fifth
(5th) Trading Day the Holder purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by such
Holder of the Underlying Shares which the Holder anticipated receiving upon such
conversion (a "Buy-In"), then the Company shall pay in cash to the Holder (in
addition to any remedies available to or elected by the Holder) the amount by
which (x) the Holder's total purchase price (including brokerage commissions, if
any) for the shares of Common Stock so purchased exceeds (y) the aggregate
stated value of the shares of Preferred Stock for which such conversion was not
timely honored. For example, if the Holder purchases shares of Common Stock
having a total purchase price of $11,000 to cover a Buy-In with respect to an
attempted conversion of $10,000 aggregate stated value of the shares of
Preferred Stock, the Company shall be required to pay the Holder $1,000. The
Holder shall provide the Company written notice indicating the amounts payable
to the Holder in respect of the Buy-In.
(iv) The provisions of clauses (ii) and (iii) of this
Section 5(b) shall not apply if the Company is not required to honor a
Conversion Notice other than by reason of a breach by the Company of the terms
hereof, of the Purchase Agreement or of the Registration Rights Agreement.
(c)(i) The conversion price for each share of Preferred Stock
(the "Conversion Price") in effect on any Conversion Date shall be the lesser of
(1) 120% of the average of the Per Share Market Values for the ten (10) Trading
Days immediately preceding the Original Issue Date (the "Initial Conversion
Price"), and (b) 100% of the average of the two (2) lowest Per Share Market
Values during the ten (10) consecutive Trading Day period immediately preceding
the applicable Conversion Date; provided, however, that such ten (10) Trading
Day period shall be extended for the number of Trading Days during such period
in which (A) trading in the Common Stock was suspended from the NASDAQ or such
other national securities exchange or market on which the Common Stock is then
listed, or (B) after the date of effectiveness, the Underlying Securities
Registration Statement ceases to be effective, of (C) after the date of
effectiveness, the Prospectus included in the Underlying Securities Registration
Statement may not be used by the Holder for the resale of Underlying Shares. If:
(a) the Underlying Securities Registration Statement is not filed on or prior to
the Filing Date (as defined in the Registration Rights Agreement (if the Company
files such Underlying Securities Registration Statement without affording the
Holder the opportunity to review and comment on the same as required by Section
3(a) of the Registration Rights Agreement, the Company shall be in violation of
this clause (a)), or (b) the Company fails to file with the Commission a request
for acceleration in accordance with Rule 12d1-2 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), within five (5) days of
the date that the Company is notified (orally or in writing, whichever is
earlier) by the Commission that an Underlying Securities Registration Statement
will not be "reviewed," or will not be subject to further review, or (c) the
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Underlying Securities Registration Statement is not declared effective by the
Commission on or prior to the 120th day after the Original Issue Date, or (d)
such Underlying Securities Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to all
Registrable Securities (as such term is defined in the Registration Rights
Agreement) at any time prior to the expiration of the "Effectiveness Period" (as
such term is defined in the Registration Rights Agreement), without being
succeeded within ten (10) Business Days by a subsequent Underlying Securities
Registration Statement filed with and declared effective by the Commission, (e)
trading in the Common Stock shall be suspended from the NASDAQ (other than
temporary suspensions of less than one day pending release of material
information by the Company), or (f) if the conversion rights of the Holders are
suspended for any reason (any such failure or breach being referred to as an
"Event," and for purpose of clauses (a), (c), (e) and (f) the date on which such
Event occurs, or for purposes of clause (b) the date on which such five (5) day
period is exceeded, or for purposes of clause (d) the date which such 10 Trading
Day-period is exceeded, being referred to as "Event Date"), the Company shall,
on the Event Date and on the first day of each monthly anniversary of the Event
Date until such time as the applicable Event is cured, pay to the Holder 2.5% of
the aggregate Stated Value of the shares of Preferred Stock then held by such
Holder, in cash, as liquidated damages and not as a penalty. The provisions of
this Section are not exclusive and shall in no way limit the Company's
obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall (a) pay a stock dividend or otherwise
make a distribution or distributions on shares of its Junior Securities or pari
passu securities payable in shares of Common Stock, (b) subdivide outstanding
shares of Common Stock into a large number of shares, (c) combine outstanding
shares of Common Stock into a smaller number of shares, or (d) issue by
reclassification of shares of Common Stock any shares of capital stock of the
Company, the Initial Conversion Price shall be multiplied by a fraction of which
the numerator shall be the number of shares of Common Stock outstanding before
such event and of which the denominator shall be the number of shares of Common
Stock outstanding after such event. Any adjustment made pursuant to this Section
5(c)(ii) shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of
subdivision, combination or re-classification.
(iii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall issue rights, warrants or options to all
holders of Common Stock entitling them to subscribe for or purchase shares of
Common Stock at a price per share less than the Per Share Market Value at the
record date mentioned below, then the Initial Conversion Price shall be
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock outstanding immediately prior to the issuance of such rights,
warrants or options, plus the number of shares of Common Stock which the
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aggregate offering price of the total number of shares so offered would purchase
at such Per Share Market Value, and the denominator of which shall be the sum of
the number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of shares of Common Stock offered for subscription or
purchase. Such adjustment shall be made whenever such rights or warrants are
issued, and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants.
However, upon the expiration of any right, warrant or option to purchase shares
of Common Stock the issuance of which resulted in an adjustment in the
Conversion Price pursuant to this Section 5(c)(iii), if any such right, warrant
or option shall expire and shall not have been exercised, the Conversion Price
shall immediately upon such expiration shall be recomputed and effective
immediately upon such expiration shall be increased to the price which it would
have been (but reflecting any other adjustments in the Conversion Price made
pursuant to the provisions of this Section 5 upon the issuance of other rights
or warrants) had the adjustment of the Conversion Price made upon the issuance
of such rights, warrants, or options been made on the basis of offering for
subscription or purchase only that number of shares of Common Stock actually
purchased upon the exercise of such rights, warrants or options actually
exercised.
(iv) If the Company or any subsidiary thereof, as
applicable with respect to Common Stock Equivalents (as defined below), at any
time while any shares of Preferred Stock are outstanding, shall issue shares of
Common Stock or rights, warrants, options, or other securities or debt that is
convertible into or exchangeable for shares of Common Stock ("Common Stock
Equivalents") entitling any Person to acquire shares of Common Stock at a price
per share less than the Conversion Price, then the Conversion Price shall be
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock outstanding immediately prior to the issuance of shares of
Common Stock or such Common Stock Equivalents plus the number of shares of
Common Stock which the offering price for such shares of Common Stock or Common
Stock Equivalents would purchase at the Conversion Price, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of shares of Common Stock so
issued or issuable, provided, that for purposes hereof, all shares of Common
Stock that are issuable upon exercise or exchange of Common Stock Equivalents
shall be deemed outstanding immediately after the issuance of such Common Stock
Equivalents. Such adjustment shall be made whenever such shares of Common Stock
or Common Stock Equivalents are issued.
(v) If the Company, at any time while shares of
Preferred Stock are outstanding, shall distribute to all holders of Common Stock
(and not to Holders of Preferred Stock) evidences of its indebtedness or assets
or rights or warrants to subscribe for or purchase any security (excluding those
referred to in Sections 5(c)(ii)-(iv) above), then in each such case the Initial
Conversion Price at which each share of Preferred Stock shall thereafter be
convertible shall be determined by multiplying the Initial Conversion
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Price in effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the Per Share Market Value of Common Stock determined as of
the record date mentioned above, and of which the numerator shall be such Per
Share Market Value of the Common Stock on such record date less the then fair
market value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of Common Stock
as determined by the Board of Directors in good faith; provided, however, that
in the event of a distribution exceeding ten percent (10%) of the net assets of
the Company, if the Holders of a majority in interest of the Preferred Stock
dispute such valuation, such fair market value shall be determined by a
nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may be
the firm that regularly examines the financial statements of the Company) (an
"Appraiser") selected in good faith by the Holders of a majority in interest of
the shares of Preferred Stock then outstanding; and provided, further, that the
Company, after receipt of the determination by such Appraiser shall have the
right to select an additional Appraiser, in good faith, in which case the fair
market value shall be equal to the average of the determinations by each such
Appraiser. In either case the adjustments shall be described in a statement
provided to the Holders of Preferred Stock of the portion of assets or evidences
of indebtedness so distributed or such subscription rights applicable to one
share of Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date mentioned above.
(vi) All calculations under this Section 5 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Conversion Price is adjusted pursuant
to Section 5(c)(ii), (iii), (iv), or (v) the Company shall promptly mail to each
Holder, a notice setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment.
(viii) In case of any reclassification of the Common
Stock, or any compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property (other than compulsory share
exchanges which constitute Change of Control Transactions), the Holders of the
Preferred Stock then outstanding shall have the right thereafter to convert such
shares only into the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following such
reclassification or share exchange, and the Holders of the Preferred Stock shall
be entitled upon such event to receive such amount of securities, cash or
property as a holder of the number of shares of the Common Stock of the Company
into which such shares of Preferred Stock could have been converted immediately
prior to such reclassification or share exchange would have been entitled. This
provision shall similarly apply to successive reclassifications or share
exchanges.
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<PAGE> 12
(ix) If (a) the Company shall declare a dividend (or
any other distribution) on its Common Stock, (b) the Company shall declare a
special nonrecurring cash dividend on or a redemption of its Common Stock, (c)
the Company shall authorize the granting to all holders of the Common Stock
rights or warrants to subscribe for or purchase any shares of capital stock of
any class or of any rights, (d) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock of
the Company, any consolidation or merger to which the Company is a party, any
sale or transfer of all or substantially all of the assets of the Company, of
any compulsory share of exchange whereby the Common Stock is converted into
other securities, cash or property, or (e) the Company shall authorize the
voluntary or involuntary dissolution, liquidation or winding up of the affairs
of the Company; then the Company shall cause to be filed at each office or
agency maintained for the purpose of conversion of Preferred Stock, and shall
cause to be mailed to the Holders of Preferred Stock at their last addresses as
they shall appear upon the stock books of the Company, at least 20 calendar days
prior to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, however, that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. Holders are entitled to convert shares of Preferred Stock during
the 20 day period commencing the date of such notice to the effective date of
the event triggering such notice.
(x) No adjustment in the Conversion Price under
Sections 5(c)(ii), (iii), (iv) or (v) shall be required to be made if such
adjustment would result in a change of less than $.10 in the Conversion Price,
but any adjustments not made by reason of this clause (x) shall be carried
forward and shall be made at the time of and together with the next subsequent
adjustment(s) which, together with any adjustment(s) so carried forward, shall
require an increase or decrease of at least $.10 in the Conversion Price then in
effect.
(d) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued Common Stock
solely for the purpose of issuance upon conversion of Preferred Stock and
Preferred Dividend (assuming payment of all dividends in the form of Preferred
Dividends in accordance with the terms hereof), each as herein provided, free
from preemptive rights or any other actual contingent
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<PAGE> 13
purchase rights of persons other than the Holders of Preferred Stock, not less
than such number of shares of Common Stock as shall (subject to any additional
requirements of the Company as to reservation of such shares set forth in the
Purchase Agreement) be issuable (taking into account the adjustments and
restrictions of Section 5(a) and Section 5(c)) upon the conversion of all
outstanding shares of Preferred Stock and payment of dividends hereunder
(assuming payment of all dividends in shares of Preferred Stock in accordance
with the terms hereof). The Company covenants that all shares of Common Stock
that shall be so issuable shall, upon issue, be duly and validly authorized,
issued and fully paid, nonassessable and freely tradeable, subject to the legend
requirements of Section 3.1(b) of the Purchase Agreement.
(e) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of Common
Stock, but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the Per Share Market Value at such time. If
the Company elects not, or is unable, to make such a cash payment, the Holder of
a share of Preferred Stock shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.
(f) The issuance of certificates for shares of Common Stock
on conversion of Preferred Stock shall be made without charge to the Holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such shares of Preferred
Stock so converted and the Company shall not be required to issue or deliver
such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(g) Shares of Preferred Stock converted into Common Stock
shall be canceled. The Company may not reissue any shares of Preferred Stock.
(h) Any and all notices or other communications or
deliveries to be provided by the Holders of the Preferred Stock
hereunder, including, without limitation, any Conversion Notice, shall be in
writing and delivered personally, by facsimile or sent by a nationally
recognized overnight courier service, addressed to the attention of the Chief
Executive Officer of the Company at the facsimile telephone number or address
of the principal place of business of the Company as set forth in the Purchase
Agreement. Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in writing and delivered personally,
by facsimile or sent by a nationally recognized overnight courier service,
addressed to each Holder of Preferred Stock at the facsimile telephone number
or address of such Holder appearing on the books of the Company, or if no such
facsimile telephone number or address appears, at the principal
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<PAGE> 14
place of business of the Holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 8:00 p.m. (Eastern
Standard Time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 8:00 p.m. (Eastern Standard Time) on any
date and earlier than 11:59 p.m. (Eastern Standard Time) on such date, (iii)
upon receipt, if sent by a nationally recognized overnight courier service, or
(iv) upon actual receipt by the party to whom such notice is required to be
given.
Section 6. Optional Redemption.
(a) The Company shall have the right, exercisable at any
time upon not less than ten (10) Trading Days notice (an "Optional
Redemption Notice") to the Holders of the Preferred Stock given at any time
after the Original Issue Date, to redeem all or any portion of the shares of
Preferred Stock which have not previously been converted or redeemed, at a
price equal to the Optional Redemption Price (as defined below), provided, that
the Company shall not be entitled to deliver an Optional Redemption Notice to
the Holders if: (i) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes is insufficient to satisfy
the Company's conversion obligations of all shares of Preferred Stock then
outstanding, or (ii) the shares of Common Stock issuable upon conversion of
shares of Preferred Stock then outstanding are not registered for resale
pursuant to an effective registration statement that names the Holders as
selling stockholders thereunder and may not be sold without volume restrictions
pursuant to Rule 144 promulgated under the Securities Act, as determined by
counsel to the Company pursuant to a written opinion letter, addressed to the
Company's transfer agent in the form and substance acceptable to the Holders
and such transfer agent, or (iii) the Common Stock is not then listed on the
NASDAQ. The entire Optional Redemption Price shall be paid in cash. Holders
of Preferred Stock may convert (and the Company shall honor such conversions in
accordance with the terms hereof) any shares of Preferred Stock, including
shares subject to an Optional Redemption Notice, during the period from the
date thereof through the 10th Trading Day after the receipt of an Optional
Redemption Notice.
(b) If any portion of the Optional Redemption Price shall
not be paid by the Company within seven (7) calendar days after the tenth (10th)
Trading Day after the delivery of an Optional Redemption Notice, interest shall
accrue thereon at the rate of 15% per annum until the Optional Redemption Price
plus all such interest is paid in full. In addition, if any portion of the
Optional Redemption Price remains unpaid for more than seven (7) calendar days
after the date due, the Holder of the Preferred Stock subject to such redemption
may elect, by written notice to the Company given at any time thereafter, to
either (i) demand conversion of all or any portion of the shares of Preferred
Stock for
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<PAGE> 15
which such Optional Redemption Price, plus accrued liquidated damages, has not
been paid in full (the "Unpaid Redemption Shares"), in which event the
Conversion Price for such shares shall be the lower of the Conversion Price
calculated on the date the Optional Redemption Price was originally due and the
Conversion Price as of the Holder's written demand for conversion, or (ii)
invalidate ab initio such redemption, notwithstanding anything herein contained
to the contrary. If the Holder elects option (i) above, the Company shall within
three (3) Trading Days of its receipt of such election deliver to the Holder the
shares of Common Stock issuable upon conversion of the Unpaid Redemption Shares
subject to such Holder conversion demand and otherwise perform its obligations
hereunder with respect thereto; or, if the Holder elects option (ii) above, the
Company shall promptly, and in any event not later than three (3) Trading Days
from receipt of Holder's notice of such election, return to the Holder all of
the Unpaid Redemption Shares.
(c) The "Optional Redemption Price" shall, except as
provided in Section 5(a)(ii), equal the sum of (i) 125% of the Stated Value of
the shares of Preferred Stock subject to redemption hereunder and all accrued
but unpaid dividends per share of Preferred Stock subject to redemption
hereunder, and (ii) all other amounts, costs, expenses and liquidated damages
due in respect of such shares of Preferred Stock.
Section 7. Triggering Events.
(a) Upon the occurrence of a Triggering Event, each Holder
shall (in addition to all other rights it may have hereunder or under applicable
law), have the right, exercisable at the sole option of such Holder, to require
the Company to purchase all or a portion of the Preferred Stock then held by
such Holder for a redemption price, in cash, equal to the sum of (i) the Payment
Amount plus (ii) the product of (A) the number of Underlying Shares issued in
respect of conversions hereunder and then held by the Holder and (B) the Per
Share Market Value on the date such purchase is demanded or the date the
redemption price hereunder is paid in full, whichever is greater. If the Company
fails to pay the redemption price hereunder in full pursuant to this Section
within seven (7) days after the date of a demand therefor, the Company will pay
interest thereon at a rate of 15% per annum, accruing daily from such seventh
day until the redemption price, plus all such interest thereon, is paid in full.
For purposes of this Section, a share of Preferred Stock is outstanding until
such date as the Holder shall have received Underlying Shares upon a conversion
(or attempted conversion) thereof.
(b) A "Triggering Event" means any one or more of the
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgement, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body);
(i) the failure of the Company to use its best efforts
to cause an
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Underlying Securities Registration Statement to be declared effective
by the Commission on or prior to the 180th day after the Original Issue Date and
such failure is not cured within five (5) days after notice from a Holder;
(ii) if, during the Effectiveness Period, the
effectiveness of the Underlying Securities Registration Statement
lapses for any reason for more than ten (10) consecutive Business Days or more
than fifteen (15) Business Days in any 12-month period, or the Holder shall
have been advised by the Company that is not permitted to resell Registrable
Securities under the Underlying Securities registration Statement for more than
ten (10) consecutive Business Days or more than fifteen (15) Business Days in
any 12-month period, in each case other than (A) as a result of a stop order or
similar order issued by the Commission not at the request of the Company; or
(B) solely as a result of actions taken by the Holder.
(iii) the Company shall fail for any reason to deliver
certificates representing Underlying Shares issuable upon a conversion hereunder
that comply with the provisions hereof prior to the 20th day after the Delivery
Date or the Company shall provide notice to any Holder, including by way of
public announcement, at any time, of its intention not to comply with requests
for conversion of any Preferred Stock in accordance with the terms hereof;
(iv) the Company shall be a party to any Change of
Control Transaction which has been approved by the Board of Directors of the
Company, and a Holder shall have given notice to the Company of its intention
that such Change of Control transaction be a Triggering Event;
(v) the Company shall fail to make any payments
required to be made under Sections 5(b)(ii), 5(b)(iii) or 5(c)(i) within thirty
(30) days after the same are due and such failure is not cured within five (5)
days after notice from a Holder;
(vi) the Company shall fail for any reason to pay all
amounts required pursuant to a Buy-In within seven (7) days after notice is
deemed delivered hereunder and such failure is not cured within five (5) days
after notice from a Holder; or
(vii) the Company shall fail to have available a
sufficient number of authorized and unreserved shares of Common Stock to issue
to such Holder upon a conversion hereunder.
Section 8. Definitions. For the purposes hereof, the
following terms shall have the following meanings:
"Business Day" means any day except Saturday, Sunday and any day
which shall be a Federal legal holiday or a day on which banking institutions in
the State of New
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York are authorized or required by law or other governmental action to close.
"Change of Control Transaction" means the occurrence of any of: (i)
an acquisition after the date hereof by an individual or legal entity or "group"
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of in
excess of 50% of the voting securities of the Company, (ii) a sale or other
disposition via a single transaction or series of related transactions by the
Company or any of its subsidiaries of all or substantially all of the assets of
the Company and its subsidiaries, taken as a whole, other than a sale to a
wholly owned subsidiary of the Company; (iii) the merger or consolidation of the
Company with or into another entity, if the stockholders of the Company
immediately before such merger or consolidation do not own, directly or
indirectly, immediately following such merger or consolidation, more than 50% of
the combined voting power of the resulting outstanding voting securities in
substantially the same proportion as their pre-merger or pre-consolidation
ownership, or sale of all or substantially all of the assets of the Company in
one or a series of related transactions or (iv) the execution by the Company of
an agreement to which the Company is a party or by which it is bound, providing
for any of the events set forth above in (i), (ii) or (iii).
"Common Stock" means the Company's common stock, $.01 par value,
and stock of any other class into which such shares may hereafter have been
reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, of which the
numerator is Stated Value plus accrued and unpaid dividends but only to the
extent not theretofore paid in shares of Preferred Stock in accordance with the
terms hereof, and of which the denominator is the Conversion Price at such time.
"Junior Securities" means the Common Stock and all other equity
securities of the Company which are junior in rights to dividends or liquidation
preference to the Preferred Stock.
"Original Issue Date" shall mean the date of the first issuance of
any shares of the Preferred Stock regardless of the number of transfers
of any particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Payment Amount" for each share of Preferred Stock means the sum of
(i) the greater of (A) 130% of the Stated Value and all accrued dividends with
respect to such share, and (B) the product of (a) the Per Share Market Value on
the Trading Day immediately preceding (x) the date of the Triggering Event or
the Conversion Date, as the case may be, or (y) the date of payment in full by
the Company of the applicable redemption price, whichever is greater, and (b)
the Conversion Ratio calculated on the date of the Triggering Event, or the
Conversion Date, as the case may be, and (ii) all other
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amounts, costs, expenses and liquidated damages due in the respect of such
shares of Preferred Stock.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the NASDAQ or
the Nasdaq SmallCap Market, as the case may be, or any other stock exchange or
quotation system on which the Common Stock is then listed, or if there is no
such price on such date, then the closing bid price on such exchange or
quotation system on which the Common Stock is listed for trading on the date
nearest preceding such date, or (b) if the Common Stock is not listed then on
the NASDAQ or the Nasdaq SmallCap Market or any stock exchange or quotation
system, the closing bid price for a share of Common Stock in the
over-the-counter market, as reported by the National Quotation Bureau
Incorporated or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the Common
Stock is not then reported by the National Quotation Bureau Incorporated (or
similar organization or agency succeeding to its functions of reporting prices),
then the average of the "Pink Sheet" quotes for the relevant conversion period,
as determined in good faith by the Holder, or (d) if the Common Stock is not
then publicly traded the fair market value of a share of Common Stock as
determined by an appraiser selected in good faith by the Holders of a majority
in interest of the shares of the Preferred Stock and approved by the Company.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchaser Agreement" means the Convertible Preferred Stock
Purchase Agreement, dated as of the Original Issue Date, among the Company and
the original Holder of the Preferred Stock.
"Redemption Amount" for each share of Preferred Stock means the
greater of (A) the Optional Redemption Amount, or (B) the sum of (i)
116% (the "Percentage") of the Stated Value and all accrued dividends with
respect to such share, and (ii) all other amounts, costs, expenses and
liquidated damages due in respect of such share of Preferred Stock, provided,
that, if any redemption pursuant to Section 5(a)(ii) occurs after the first
anniversary of the Original Issue Date but prior to the second anniversary of
the Original Issue Date, the Percentage shall increase to 132% for any such
redemption occurring during such period, thereafter, on each subsequent yearly
anniversary of the Original Issue Date, the Percentage shall be increased by an
additional 16% for any such redemption occurring during such yearly period
(e.g. the Percentage shall be 148% for such redemption occurring after the
second anniversary of the Original Issue Date and prior to the third
anniversary of the Original Issue Date).
"Registration Rights Agreement" means the Registration Rights
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Agreement, dated as of the Original Issue Date, by and among the Company and the
original Holder of the Preferred Stock.
"Trading Day" means (a) day on which the Common Stock is traded on
the NASDAQ or the Nasdaq SmallCap Market as the case may be, or other securities
market or exchange on which the Common Stock has been listed, or (b) if the
Common Stock is not listed on the NASDAQ or the Nasdaq SmallCap Market or on any
exchange or market, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the
Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices); provided, however, that in the event that
the Common Stock is not listed or quoted as set forth in (a), (b) and (c)
hereof, then Trading Day shall mean any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"Underlying Securities Registration Statement" means a registration
statement that meets the requirement of the Registration Rights Agreement and
requires the resale of all Underlying Shares by the recipient thereof, who shall
be named as a "selling stockholder" thereunder.
"Underlying Shares" means, collectively, the shares of Common Stock
into which the Shares are convertible in accordance with the terms hereof.
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<PAGE> 1
EXHIBIT 10.133
ASSET PURCHASE AND SALE AGREEMENT
among
ECOGEN INC.,
ECOGEN-BIO INC.
and
SCENTRY BIOLOGICALS, INC.
April 28, 1998
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ASSET PURCHASE AND SALE AGREEMENT
This Asset Purchase and Sale Agreement ("Agreement") is dated as
of April 28, 1998 by and among Ecogen Inc., a Delaware corporation
("Ecogen"), Ecogen-Bio Inc., a Delaware corporation ("Ecogen-Bio"), and
Scentry Biologicals, Inc., a Delaware corporation ("Purchaser"). Ecogen and
Ecogen-Bio are hereinafter collectively referred to as "Seller".
Seller is engaged, among other things, in the business of
developing, manufacturing and selling agricultural pest control products
based upon pheromone, honeybee attractant, insect trap and lure, and insect
feeding stimulant technologies (the "Business"). Seller desires to sell to
Purchaser, and Purchaser desires to purchase from Seller, certain of the
assets of Seller that are primarily used in the conduct of the Business.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties, intending to be legally bound, agree
as follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
1.1 Purchase and Sale. Upon the terms and subject to the
conditions of this Agreement, on the Closing Date (as defined in Section 2.1)
Seller shall sell, assign, transfer, convey and deliver, or caused to be
sold, assigned, transferred, conveyed and delivered, to Purchaser, and
Purchaser shall purchase and accept, the Acquired Assets (as defined in
Section 1.2).
1.2 Acquired Assets. "Acquired Assets" means, subject to
Section 1.3, the following properties, assets and rights of Seller, to the
extent they are in existence on the Closing Date and primarily used in
connection with the Business:
(a) All raw materials (including packaging materials),
works-in-process and finished goods inventories of the Business in
existence as of the Closing Date (the "Closing Date Inventory"). A
list of such inventory as of January 31, 1998 (the "Base Inventory") is
set forth in Schedule 1.2(a);
(b) All customer lists, supplier list, customer records,
advertising and promotional literature of the Business (collectively,
the "Marketing Assets"); provided, however, Seller may retain copies of
existing promotional literature relating to BeeScent Attractant,
NoMate BHF or NoMate LRX.
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(c) All U.S. and foreign patents, trademarks and trade
names identified in Schedule 1.2(c) (the "Intangible Assets");
(d) All fixed assets, production and processing
equipment, warehouse equipment, computer hardware, furniture and
fixtures, transportation equipment and supplies of the Business
identified in Schedule 1.2(d);
(e) All transferable rights relating to the Business
under the contracts, leases and other agreements identified in Schedule
1.2(e) (the "Contracts");
(f) All transferable rights under all customer orders in
existence as of the Closing Date (the "Customer Orders"); and
(g) All transferable rights to the U.S. and foreign
product registrations identified in Schedule 1.2(g) (the "Product
Registrations") and all records and other documentation relating
thereto.
1.3 Excluded Assets. Notwithstanding anything in this
Agreement to the contrary, the Acquired Assets shall not include the
following:
(a) Cash, cash equivalents, bank deposits, trade
receivables and other accounts receivable including, but not limited
to, the items identified on Schedule 1.3(a);
(b) The packaging equipment, ribbon blender, inventory
and other items located at the Business facility in Billings, Montana
but not used primarily in the Business which are listed in Schedule
1.3(b) (the "Non-Business Assets"); and
(c) All rights to the trade name or trademark "Ecogen".
1.4 Assumption of Obligations. Purchaser shall assume and
timely pay, perform and satisfy the liabilities identified below. For
purposes of this Agreement, the term "Assumed Liabilities" shall mean the
liabilities identified in Paragraphs 1.4(a) and 1.4(b), as such liabilities
exist on the Closing Date and the term "Estimated Assumed Liabilities" shall
mean the liabilities identified in Paragraphs 1.4(a) and 1.4(b) as such
liabilities exist on April 10, 1998. Notwithstanding anything herein to the
contrary, except to the extent specifically provided in this Agreement,
Purchaser shall not assume and shall not be liable for any claims,
obligations or liabilities of Seller, Seller's affiliates or the Business of
any nature whatsoever, relating to the period prior to Closing, all of which
shall be retained by Seller.
(a) All trade accounts payable arising in the ordinary
course of business of the Business prior to Closing and reflected on
the books and records
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of the Business as of the Closing Date that are payable to vendors or
suppliers providing services or materials to Ecogen that relate solely to
the Business. A list of all such trade accounts as of April 28, 1998 is
set forth in Schedule 1.4(a);
(b) All customer promotion allowances, royalties and
other obligations which were incurred in the ordinary course of
business of the Business prior to Closing and are reflected on the
books and records of the Business as of the Closing Date. A list of
all such allowances, royalties and obligations as of April 28, 1998 is
set forth in Schedule 1.4(b);
(c) All liabilities and obligations relating to the
Customer Orders; and
(d) All liabilities and obligations relating to the
Contracts not due and payable prior to the Closing Date.
1.5 Payment at Closing. In consideration for the Acquired
Assets and the covenants of Seller contained in this Agreement, Purchaser
shall pay to Seller at the Closing by wire transfer of immediately available
funds to an account designated by Seller the amount of $2,400,000 less the
amount of the Estimated Assumed Liabilities.
1.6 Adjustment to the Amount of Assumed Liabilities. Within
seven days after the Closing, Purchaser will deliver to Seller a proposed
reconciliation between the Estimated Assumed Liabilities and the Assumed
Liabilities proposed by Purchaser. Purchaser and Seller shall then cooperate
to promptly determine the actual amount of Assumed Liabilities. The
difference between the Estimated Assumed Liabilities and the Assumed
Liabilities shall be paid by Seller to Purchaser or by Purchaser to Seller
(as appropriate) by check delivered to the recipient thereof within seven
days after the determination of such difference.
1.7 Inventory Adjustment. The purchase price paid at Closing
shall be adjusted on a dollar-for-dollar basis to reflect the change in the
physical count between the Base Inventory and the Closing Date Inventory.
For purposes of this Agreement, the dollar value of the Base Inventory is
deemed to be $2,292,633 (the "Base Inventory Amount"). In the event that the
Closing Date Inventory Amount (as defined below) is greater than the Base
Inventory Amount, Purchaser, within five days after the determination of the
Closing Date Inventory Amount, shall pay to Seller the difference between the
Closing Date Inventory Amount and the Base Inventory Amount by wire transfer
of immediately available funds to an account designated by Seller. In the
event that the Closing Date Inventory Amount is less than the Base Inventory
Amount, Seller, within five days after the determination of the Closing Date
Inventory Amount, shall pay Purchaser the difference between the Base
Inventory Amount and the Closing Date Inventory Amount by wire transfer of
immediately available funds to an account designated by Purchaser.
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The Closing Date Inventory Amount shall be determined by the
parties as soon as practicable after the Closing. The Closing Date Inventory
Amount shall be based on a physical count of inventory actually existing as
of the Closing and such inventory shall be valued at the various specific
cost factors used to determine the Base Inventory Amount being set forth in
Schedule 1.2(a). There shall be no consideration of the salability,
obsolescence or other factors upon which an inventory reserve may be
calculated. The Closing Date Inventory Amount shall be based solely on the
existence of inventory items as of the Closing valued at the same specific
cost factor used to determine the Base Inventory Amount.
Within five days after the Closing Date one or more
representatives of Purchaser and one or more representatives of Seller shall
together conduct a physical count of the existence of inventory as of the
Closing. Within three days after the conclusion of such physical count,
Seller shall deliver to Purchaser a proposed reconciliation between the Base
Inventory Amount and the Closing Date Inventory Amount. Purchaser and Seller
shall then cooperate to promptly determine the Closing Date Inventory Amount
which shall be calculated by multiplying the number of units of each
inventory item in existence as of the Closing by the specific cost factor
used for such inventory item in determining the Base Inventory Amount.
1.8 NO WARRANTIES. NOTWITHSTANDING ANYTHING CONTAINED IN ANY
PROVISION OF THIS AGREEMENT TO THE CONTRARY, IT IS THE EXPLICIT INTENT OF
EACH PARTY HERETO THAT SELLER IS NOT MAKING ANY REPRESENTATION OR WARRANTY
WHATSOEVER, EXPRESS OR IMPLIED, BEYOND THOSE EXPRESSLY GIVEN IN THIS
AGREEMENT, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OR
REPRESENTATION AS TO THE CONDITION, MERCHANTABILITY, FITNESS FOR PARTICULAR
PURPOSE OR SUITABILITY AS TO ANY OF THE ACQUIRED ASSETS. THE ACQUIRED ASSETS
ARE BEING SOLD, CONVEYED, TRANSFERRED OR ASSIGNED BY SELLER AND ARE BEING
PURCHASED AND ACCEPTED BY PURCHASER ON AN "AS IS, WHERE IS" BASIS.
ARTICLE II
THE CLOSING
2.1 Closing Date. The closing of the transactions contemplated
by this Agreement (the "Closing") shall take place at the offices of
McDonald, Hopkins, Burke & Haber, Cleveland, Ohio at 10:00 a.m., local time,
on April 30, 1998 or at such other time, date and place as shall be agreed in
writing by the parties hereto (such date of the Closing being hereinafter
referred to as the "Closing Date").
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2.2 Procedures at Closing. At the Closing, the parties agree to
take the following actions in the order listed below (provided, however, that
upon their completion all such actions shall be deemed to have occurred
simultaneously):
(a) Seller shall deliver to Purchaser the certificate
required by Section 6.1;
(b) Purchaser shall deliver to Seller the certificate
required by Section 6.2;
(c) Purchaser shall transfer the funds as required by
Section 1.5 and Seller shall receive such funds;
(d) Seller shall deliver to Purchaser a duly executed
Bill of Sale and Assignment, substantially in the form of Exhibit A;
(e) Purchaser and Seller shall each execute and deliver
to the other the Assumption Agreement substantially in the form of
Exhibit B;
(f) Purchaser and Ecogen shall each execute and deliver
to the other the Distribution Agreement substantially in the form of
Exhibit C; and
(g) Purchaser and Ecogen shall each execute and deliver
the Ancillary Agreement substantially in the form of Exhibit D and
shall take the actions required by the Ancillary Agreement to be
performed at the Closing.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Representations and Warranties of the Seller. Seller represents
and warrants to the Purchaser as follows:.
3.1 Corporate Organization. Each Seller is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation.
3.2 Authorization. Each Seller has full corporate power and
authority to execute, deliver and perform this Agreement and the other
documents delivered in connection with this Agreement, to sell, transfer,
convey and assign the Acquired Assets to Purchaser, to execute, deliver and
perform the Distribution Agreement and to consummate the other transactions
contemplated hereby. This Agreement and the other documents delivered in
connection with this Agreement, have been duly and
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validly executed and delivered by Seller, and this Agreement constitutes a valid
and binding agreement of Seller enforceable against Seller in accordance with
its terms.
3.3 No Violations. Except with respect to the contracts,
leases and agreements identified in Schedule 3.3 for which the approval of a
party to such contract, lease or agreement may be required for the transfer
to Purchaser of Seller's rights under such contracts, leases and other
agreements, the execution, delivery and performance of this Agreement by
Seller and the consummation by Seller of the transactions contemplated hereby
do not and will not (i) conflict with or violate any provision of the
Certificate of Incorporation or By-laws of Seller; (ii) conflict with or
violate any statute, ordinance, rule, regulation, order or decree of any
court or of any public, governmental or regulatory body, agency or authority
applicable to Seller or by which any of its properties or assets may be
bound; (iii) conflict with, result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise
to any right of termination, cancellation or acceleration) under any of the
terms, conditions or provisions of any material note, bond, mortgage,
indenture, license, agreement or other instrument or obligation to which
Seller is a party or by which Seller or any of its properties or assets may
be bound, excluding from the foregoing conflicts, violations, breaches and
defaults which, individually and in the aggregate, would not have a material
adverse effect on Seller or on the Business or on the ability of Seller to
perform its obligations hereunder or consummate the transactions contemplated
hereby.
3.4 Ownership Interests. Except with respect to the Intangible
Assets and the Contracts, Seller owns the Acquired Assets, free and clear of
all liens, charges, encumbrances, security interests, options, restrictions
on rights of disposition and claims or third party rights, other than as
described in Schedule 3.4.
3.5 Brokers or Finders. Seller represents that no agent,
broker, investment banker or other firm or person has been retained by Seller
or any affiliate of Seller in connection with any of the transactions
contemplated by this Agreement.
3.6 Litigation. To the Best Knowledge of Seller, there is no
pending litigation, proceeding or governmental investigation to which Seller
is a party that questions the validity or enforceability of the transactions
contemplated by this Agreement, or which would have a material adverse effect
on the Business.
3.7 Intangible Assets. Except as described in Schedule 3.7 and
to the Best Knowledge of Seller, Seller has the right to use the Intangible
Assets, free and clear of all liens, security interests, encumbrances and
other adverse claims. Except as described in Schedule 3.7, Seller has received
no written notice from any third party claiming an interest in the Intangible
Assets. To the Best Knowledge of Seller, all issued patents and registered
trademarks listed in Schedule 3.7 have been validly issued and are in full force
and effect. Except as described in Schedule 3.7, there have not been nor are
there presently pending any claims, actions or judicial or other adversarial
proceedings to which Seller is a party concerning the Intangible Assets. To
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the Best Knowledge of Seller, except as described in Schedule 3.7, Seller's use
of the Intangible Assets has not and does not conflict with, infringe upon, or
violate any patent or other proprietary or intellectual property right of any
other person, and, to the Best Knowledge of Seller, Seller in operating the
Business has not infringed and is not now infringing any patent or other
proprietary right belonging to any other person.
3.8 Taxes. Seller has prepared in compliance with all
applicable laws and duly and timely filed or caused to be filed all material
tax returns and reports relating to the Business and required to be filed by
it with any governmental authority. All material taxes (including, without
limitation, any and all interest and penalties) owed to any governmental
authority by Seller for a period covered by such returns and reports, and all
claims, demands, assessments, judgment, costs and expenses connected
therewith, have been duly and timely paid in full. Seller has duly and
timely paid in full all estimated tax payments and tax deposits. Nether
Seller nor any person on behalf of Seller has executed or filed with any
governmental authority any agreement extending the period for assessment or
collection of any taxes.
3.9 Customers of the Business. Except as set forth in Schedule
3.9, to the Best Knowledge of Seller, Seller has not received, since October
31, 1996, written notice from any customer of the Business accounting for at
least ten percent of the aggregate annual sales revenue of the Business, that
such customer will not continue to be a customer of the Business.
3.10 Regulatory Compliance. Except as set forth in Schedule
3.10, to the Best Knowledge of Seller, Seller has not received, within the
last twelve months prior to the date of this Agreement, written notice from
any governmental authority that the Business has been or is now being
conducted in violation of any applicable law, regulation or order, which
violation would have a material adverse effect on the Business.
3.11 Environmental Compliance. Except as set forth in Schedule
3.11, to the Best Knowledge of Seller, Seller has not received, within the
last twelve months prior to the date of this Agreement, written notice from
any governmental authority that the Business has been or is now being
conducted in violation of any applicable environmental, land use or zoning
law, regulation or order which violation would have a material adverse effect
on the Business.
3.12 Employee Benefits. Except as set forth in Schedule 3.12,
the employee benefits that have been authorized by Seller that are available
as of the date of this Agreement to employees of the Business are set forth
in Seller's Human Resources Policies and Procedures Employee Handbook, a copy
of which has been provided to Purchaser.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Seller as follows:
4.1 Corporate Organization. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation.
4.2 Authorization. Purchaser has full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Purchaser and this Agreement constitutes the valid
and binding agreement of Purchaser enforceable against Purchaser in
accordance with its terms.
4.3 No Violations. The execution, delivery and performance of
this Agreement by Purchaser, and the consummation of the transactions
contemplated hereby, do not and will not (i) conflict with or violate any
provision of Purchaser's Certificate of Incorporation or its By-Laws;
(ii) conflict with or violate any statute, ordinance, rule, regulation, order
or decree of any court or of any public, governmental or regulatory body,
agency or authority applicable to Purchaser or by which any of its respective
properties or assets may be bound; or (iii) conflict with, result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms, conditions or
provisions of any material note, bond, mortgage, indenture, license,
agreement or other instrument or obligation to which Purchaser is a party, or
by which it or any of its properties or assets may be bound, excluding from
the foregoing clauses conflicts, violations, breaches and defaults which,
individually and in the aggregate, would not have a material adverse effect
on Purchaser or on the ability of Purchaser to perform its obligations
hereunder or consummate the transactions contemplated hereby.
4.4 Brokers or Finders. Purchaser represents that, except for
Laux & Company whose fees and commissions will be the exclusive
responsibility of Purchaser, no agent, broker, investment banker or other
firm or person is or will be entitled to any broker's or finder's fee or any
other commission or similar fee in connection with any of the transactions
contemplated by this Agreement as a result of any action of Purchaser.
4.5 Litigation. Purchaser has no knowledge of any pending
litigation, proceeding or governmental investigation to which Purchaser is a
party that questions the validity or enforceability of the transactions
contemplated by this Agreement, or which would have a material adverse effect
on the Business.
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ARTICLE V
COVENANTS PENDING CLOSING
5.1 Covenants of Seller. Seller covenants and agree that,
except as otherwise consented to by Purchaser, prior to the Closing:
(a) Seller shall carry on the Business and operate or use
the Acquired Assets in the ordinary course of business or consistent
with past practices;
(b) Seller shall use all reasonable efforts to cause the
conditions specified in Section 6.2 to be satisfied as soon as
practicable;
(c) Seller shall provide Purchaser, upon reasonable
notice and at reasonable times, access to the properties and operations
of the Business at the Business Facilities, provided, however, such
access shall not disrupt the day-to-day operations of the Business;
(d) From time to time prior to the Closing, Seller shall
deliver to Purchaser information concerning events subsequent to the
date of this Agreement to supplement the Schedules hereto, in order to
keep such information therein timely, complete and accurate and any
covenant, representation or warranty affected thereby shall be deemed
amended accordingly; and
(e) Seller shall, promptly upon Purchaser's request,
provide Purchaser with such information and documentation concerning
Seller as may be reasonably necessary for Purchaser to verify Seller's
performance of and compliance with the representations, warranties,
covenants and conditions made by Seller pursuant to this Agreement.
5.2 Covenants of Purchaser. Purchaser covenants and agrees
that, except as otherwise consented to by Seller, prior to the Closing:
(a) Purchaser shall use all reasonable efforts to cause
the conditions specified in Section 6.1 to be satisfied as soon as
practicable;
(b) Promptly upon the execution and delivery of this
Agreement by the parties, Purchaser shall offer employment to each of
the employees of Seller identified on Schedule 5.2(b) (the "Business
Employees") by delivering to each Business Employee a written offer of
employment as of the Closing Date substantially in the form attached
hereto as Exhibit E, at no less than such Business Employee's base rate
of compensation, with comparable
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benefits, taken as a whole, to those provided by Seller. Purchaser shall
recognize and credit for the benefit of each Business Employee, such
employee's accrued and unused vacation and other benefits. Seller shall
have the right to review and approve the form of written offers of
employment to the Business Employees. Effective as of the Closing Date,
Seller shall cease to employ, and Seller shall cease to provide, any
employee benefits or compensation to the Business Employees;
(c) Purchaser shall, promptly upon Seller's request,
provide Seller with such information and documentation concerning
Purchaser as may be reasonably necessary for Seller to verify
Purchaser's performance of and compliance with the representations,
warranties, covenants and conditions made by Purchaser pursuant to this
Agreement;
(d) Purchaser shall prior to the Closing cause Marketing
Arm International, Inc. to fully pay to Seller all amounts owed to
Seller for products of the Business delivered to Marketing Arm
International, Inc. prior to the Closing and Purchaser shall prior to
the Closing cause Marketing Arm International, Inc. to agree to
terminate and to release Seller from any liabilities and obligations
under the Distributor Agreement between Marketing Arm International,
Inc. and Seller dated as of April 12, 1994.
(e) Purchaser shall prior to the Closing cause
Yellowstone Resources to agree to terminate and to release Seller from
any liabilities and obligations under the Lease between Yellowstone
Resources and Seller dated September 16, 1992 as amended.
ARTICLE VI
CONDITIONS TO CLOSING
6.1 Conditions to Seller's Obligation to Close. The obligation
of Seller to effect the Closing hereunder is subject to the satisfaction, at
or prior to the Closing, of all of the following conditions (each of which is
for the sole benefit of Seller and may be waived by Seller in its sole
discretion):
(a) The representations and warranties of Purchaser set
forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as of the Closing Date as
though made again on and as of the Closing Date, and Seller shall have
received a certificate signed by an authorized representative of
Purchaser to such effect.
(b) Purchaser shall have performed all covenants and
obligations required to be performed by it under this Agreement at or
prior to
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the Closing Date, and Seller shall have received a certificate signed by
an authorized representative of Purchaser to such effect.
(c) All products and other items to be delivered under
Contract No. 536395646 and Contract No. 546395737 (collectively, the
"Designated USDA Contracts") between Seller and the United States
Department of Agriculture ("USDA") have been shipped to the USDA and
Purchaser shall have delivered to Seller a letter (reasonably
acceptable to Seller) representing to Seller that the products and
other items shipped to the USDA meet or exceed the specifications and
other requirements of the Designated USDA Contracts and of the USDA.
6.2 Conditions to Purchaser's Obligation to Close. The
obligation of Purchaser to effect the Closing hereunder is subject to the
satisfaction, at or prior to the Closing, of all of the following conditions
(each of which is for the sole benefit of Purchaser and may be waived by
Purchaser in its sole discretion):
(a) The representations and warranties of Seller set
forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as of the Closing Date as
though made again on and as of the Closing Date, and Purchaser shall
have received a certificate signed by an authorized representative of
Seller to such effect.
(b) Seller shall have performed all covenants and
obligations required to be performed by them under this Agreement at or
prior to the Closing Date, and Purchaser shall have received a
certificate signed by an authorized representative of Seller to such
effect.
ARTICLE VII
POST CLOSING COVENANTS
7.1 Transition Services. For a period of ninety days after the
Closing Date, Seller shall make available by telephone certain of Seller's
employees to provide assistance to Purchaser with respect to questions
Purchaser may have regarding employee benefits, customer billing, financial
accounting, regulatory compliance and insurance. Purchaser shall reimburse
Seller for all out-of-pocket expenses incurred by Seller in providing such
assistance. Out-of-pocket expenses shall not include any allocation for
salaries or wages of Seller's employees providing such assistance to
Purchaser. Purchaser explicitly acknowledges that such assistance is being
provided to Purchaser solely as an accommodation to Purchaser, that Seller is
not making any representations or warranties regarding the value of such
assistance to Purchaser and that Purchaser is solely responsible for the
operation of the Business after Closing. Purchaser explicitly releases
Seller from any liability and/or responsibility based upon
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any assistance provided to Purchaser under this Section 7.1 other than liability
and responsibility resulting from Seller's intentional and malevolent
misconduct.
7.2 Use of Name Ecogen. Within five days after the Closing,
Purchaser shall remove or otherwise permanently conceal all references to
"Ecogen" on its products and in its product brochures, marketing literature
and all other items (except to the extent approved in writing by Seller with
respect to BeeScent, NoMate BHF and NoMate LRX) and shall remove all signage
that refers to "Ecogen" at the Business Facilities. From and after the
Closing, Purchaser shall not use any name, phrase or logo incorporating
"Ecogen" or any other trademark of Seller not acquired under this Agreement
without the prior written consent of Seller.
7.3 Product Registrations. After the Closing, Seller shall use
all reasonable efforts to transfer the Product Registrations to Purchaser
provided, however, if Seller is not able to transfer one or more of the
Product Registrations to Purchaser, Seller and Purchaser shall enter into a
reasonable arrangement that shall be designed to provide to Purchaser the
benefits of the Product Registrations, consideration for which shall be the
purchase price recited in Section 1.5 hereof.
7.4 Packing and Shipping of Non-Business Assets. Upon Seller's
written request, Purchaser shall promptly pack and ship the Non-Business
Assets to one or more destinations determined by Seller. Purchaser shall use
all reasonable care in packing the Non-Business Assets for shipment and shall
arrange for shipment of the Non-Business Assets as requested by Seller. All
costs of insurance and carriage shall be the responsibility of Seller.
Seller explicitly acknowledges that such assistance is being provided to
Seller solely as an accommodation to Seller and that Purchaser is not making
any representations or warranties regarding the value of such assistance to
Seller. Seller explicitly releases Purchaser from any liability and/or
responsibility based upon any assistance provided to Seller under this
Section 7.4 other than liability and responsibility resulting from
Purchaser's intentional and malevolent misconduct.
7.5 Collection of Receivables. Upon Seller's written request,
Purchaser shall, after the Closing, use all reasonable efforts to assist
Seller in the collection of receivables arising from Seller's operation of
the Business and shall cooperate with Seller in providing information or
other assistance with respect to any claim against Seller with respect to
Seller's operation of the Business. Purchaser shall promptly take all steps
necessary to meet the requirements of the USDA with respect to the Designated
USDA Contracts at no charge to Seller or the USDA; provided, however, in the
event that Seller and the USDA agree subsequent to the Closing Date to an
amendment to the Designated USDA Contracts, Purchaser may charge Seller or
the USDA for work required to meet specifications or requirements arising
solely from such subsequent amendment.
7.6 Maintenance of and Access to Records. Seller and Purchaser
shall, whenever reasonably requested by the other, permit the other to have
access to and make copies of, all records relating to the Business which are
retained by it in
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accordance with this Agreement. Purchaser and Seller shall preserve and maintain
all material books and records relating to the Business for at least five years
after the Closing Date.
7.7 Litigation. Seller will defend any pending or threatened
assessment, litigation, claim or proceeding relating to the Business as
operated by Seller prior to the Closing Date, or the ownership, possession,
use or sale of the Acquired Assets prior to the Closing Date whenever such
claim is asserted and whether or not such claim is asserted against Purchaser
or Seller. Seller shall defend and/or settle any such litigation, claim or
proceeding at its own cost and expense, and shall make such payments as may
be necessary as a result thereof. Purchaser shall give prompt notice to
Seller of the assertion of any such claim, or the commencement of any action,
suit or proceeding and will provide to Seller such information with respect
thereto as may be reasonably requested, but no failure to give such notice
shall relieve Seller of any liability hereunder, except to the extent Seller
suffers actual prejudice thereby.
7.8 Non-Compete. Until January 1, 2001, Seller shall not with
its current resources internally develop insect pheromone products that are
competitive with the products identified in Schedule 1.2(g). Notwithstanding
the foregoing, Seller shall not be prohibited or otherwise restricted from
conducting or expanding the business or operation of any business or
operation Seller may acquire or become affiliated with provided, however, for
a period of two years after the date of this Agreement, Seller shall not
acquire or become affiliated with any company or other entity that is engaged
solely in the development and sale of insect pheromone products.
7.9 Third Party Consents. Seller and Purchaser shall cooperate
to obtain any consent or approval of a third party required for the transfer
of Seller's rights under the contracts, leases and other agreements
identified in Schedule 3.3 In the event that the parties do not obtain any
consent or approval required to transfer any of the Contracts from Seller to
Purchaser such rights shall be deemed not to have been transferred pursuant
to this Agreement and the parties shall enter into a reasonable arrangement
that shall be designed to provide to Purchaser the benefits as well as the
detriments and obligations of such Contract after the Closing Date, the
consideration for which shall be the purchase price recited in Section 1.5
hereof.
7.10 Confidentiality. Seller agrees that it shall not use or
disclose to any third party the confidential and proprietary manufacturing
standard operating procedures of the Business (the "Confidential
Procedures"). Notwithstanding the foregoing, the term "Confidential
Procedures" shall not include information that (i) has not been treated as
confidential information by Seller; (ii) becomes available to the public
other than as a result of a disclosure by Seller; (iii) becomes available to
Seller from a source other than Purchaser or (iv) is required to be disclosed
pursuant to a subpoena, court order or other rule or regulation.
13
<PAGE> 15
7.11 Payment of Pre-Closing Liabilities. Seller shall,
consistent with its past practices and procedures, pay and discharge
liabilities relating to the operation of the Business prior to the Closing
Date that are not being assumed by Purchaser.
7.12 Further Assurances. Seller and Purchaser shall each
cooperate with the other to execute and deliver such agreements, instruments
and documents and shall take such other reasonable action as may be
reasonably necessary to effectuate the transactions contemplated by this
Agreement including, without limitation, the execution by Seller of
assignments that may be necessary to transfer the Intangible Assets to
Purchaser.
ARTICLE VIII
INDEMNIFICATION
8.1 Indemnification of Purchaser by Seller. From and after the
Closing Date, Seller shall indemnify and hold harmless Purchaser, its
directors, officers, employees and agents, and each of the heirs, executors,
successors and assigns of any of the foregoing (each an "Indemnified
Purchaser Party") from and against any and all claims, losses, liabilities,
legal actions, damages and expenses, including without limitation, legal fees
and expenses (collectively, "Claims") incurred by or asserted against any of
the Indemnified Purchaser Parties arising or relating to (i) the breach or
failure to comply with any representation, warranty, covenant or obligation
of Seller under this Agreement, or (ii) from the operations, assets,
liabilities or activities of the Business prior to the Closing, other than
Claims arising from or relating to the obligations assumed by Purchaser
pursuant to Section 1.4.
8.2 Indemnification of Seller by Purchaser. From and after the
Closing Date, Purchaser shall indemnify and hold harmless Seller, and each of
their respective directors, officers, employees and agents, and each of the
heirs, executors, successors and assigns of any of the foregoing (each an
"Indemnified Seller Party") from and against any and all Claims incurred by
or asserted against any of the Indemnified Seller Parties arising or relating
to (i) the breach or failure to comply with any representation, warranty,
covenant or obligation of Purchaser under this Agreement, or (ii) from the
operations, assets, liabilities or activities of the Business after the
Closing.
8.3 Notice. Each party entitled to indemnification under this
Article VIII (an "Indemnified Party") shall give notice to the party required
to provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any Claim as to which indemnity may
be sought and shall permit the Indemnifying Party to assume the defense of
any such claim or any litigation resulting therefrom; provided, however, that
counsel for the Indemnifying Party who shall conduct the defense of such
Claim or shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and that the Indemnified Party
14
<PAGE> 16
may participate in such defense at its own expense; and provided further that
the failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Article VIII unless
such failure is materially detrimental to the Indemnifying Party. No
Indemnifying Party, in the defense of any Claim shall, except with the consent
of each Indemnified Party, consent to the entry of any judgment or enter into
any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect to such Claim.
8.4 Survival of Warranties and Representations.
Notwithstanding any provision of this Agreement to the contrary including,
without limitation, the provisions of Sections 8.1 and 8.2 of this Agreement,
all warranties and representations of Seller set forth in Article III and of
Purchaser set forth in Article IV shall survive the date of execution of this
Agreement for a period of one year and at the expiration of such period
neither party shall have the right (i) to initiate any arbitration or other
proceeding based upon any breach of such representations or warranties or
(ii) otherwise seek or obtain a remedy or other relief for any such breach.
ARTICLE IX
TERMINATION OF AGREEMENT
9.1 Termination. This Agreement may be terminated at any time
prior to the Closing by:
(a) The mutual consent of Seller and Purchaser; or
(b) Either Seller or Purchaser if the Closing has not
occurred by the close of business on April 30, 1998 and if the failure
to consummate the Closing on or before such date did not result from
the failure by the party seeking termination of this Agreement to
fulfill any condition, undertaking or commitment provided for herein
that is required to be fulfilled prior to or at Closing.
9.2 Procedure and Effect of Termination. In the event of
termination of this Agreement by either or both of Seller and Purchaser
pursuant to Section 9.1, written notice thereof shall forthwith be given by
the terminating party to the other parties hereto, and this Agreement shall
thereupon terminate and become void and have no further effect, except that
the provisions of Sections 10.2 and 10.8 shall survive the termination of
this Agreement; provided, however, that such termination shall not relieve
any party hereto of any liability for any breach of this Agreement.
15
<PAGE> 17
ARTICLE X
GENERAL PROVISIONS
10.1 Notices. All notices and other communications required or
permitted under this Agreement shall be in writing and shall be deemed given
if delivered personally, or mailed by registered or certified mail (return
receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) if to Seller, to:
Ecogen Inc.
2005 Cabot Boulevard West
Langhorne, PA 19047
Attention: Chairman and Chief Executive Officer
with a copy to:
Ecogen-Bio Inc.
222 Delaware Avenue
Wilmington, Delaware 19801
Attention: Chairman and Chief Executive Officer
(b) if to the Purchaser, to:
Scentry Biologicals, Inc.
610 Central Avenue
Billings, Montana 59102
Attention: President
10.2 Expenses. Except as explicitly set forth in this
Agreement, whether or not the transactions contemplated by this Agreement are
consummated, all legal and other costs and expenses incurred in connection
with this Agreement shall be paid by the party, incurring such costs and
expenses.
10.4 Amendment. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto.
10.5 Waiver. Compliance with any provision of this Agreement
may be waived only in writing signed by the party against which such waiver
is sought to be enforced. No exercise of, or failure to exercise, any right
hereunder and no partial or single exercise of any such right, shall operate
as a waiver, or otherwise affect such exercise or any other exercise of that
or any other right under this Agreement.
16
<PAGE> 18
10.6 Counterparts; Facsimile Signatures. This Agreement may be
executed in two or more counterparts, all of which shall be considered one
and the same agreement and shall become effective when one or more
counterparts have been signed by each of the parties and delivered to the
other party, it being understood that the parties need not sign the same
counterpart. Receipt of facsimile copies of signature pages hereof as
between the recipient thereof and the party that executed such signature
pages shall constitute delivery of such signature pages.
10.7 Entire Agreement; No Third Party Beneficiaries. This
Agreement (including the documents and instruments referred to herein) (a)
constitutes the entire agreement among the parties hereto and supersedes all
prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter hereof including, without limitation, the
Confidentiality Letter Agreement, dated February 26, 1998 between Ecogen Inc.
and Mr. Michael Whalen.
10.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania,
without regard to its conflict of law principles or rules.
10.9 Bulk Sales. The parties hereby waive compliance with the
provisions of the "bulk sales laws" of any state which may be applicable to
the transactions contemplated by this Agreement.
10.10 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto without the prior written consent of the other parties which consent
may not be unreasonably withheld.
10.11 Public Announcement. Each party shall inform the other
parties of the proposed public announcement by each such party of the
transactions contemplated by this Agreement and shall disclose to the other
parties the proposed text of such announcement so as to allow the other
parties the opportunity to consider and comment on the proposed text of the
public announcement.
10.12 Seller's Knowledge. For purposes of this Agreement, the
term "to the Best Knowledge of Seller" shall mean the actual knowledge of the
Chief Executive Officer or Chief Financial Officer of Ecogen.
10.13 Purchaser's Knowledge. Each representation and warranty of
Seller set forth in this Agreement shall be deemed to be qualified by all
information within the actual knowledge of Purchaser, Michael Whalen, Jose
Lopez or principals of Purchaser. Purchaser shall not have the right to
assert a claim for breach of any representation or warranty of Seller that
Purchaser, Michael Whalen, Jose Lopez or any principal of Purchaser had
actual knowledge was false or inaccurate on the date of this Agreement or on
the Closing Date.
17
<PAGE> 19
IN WITNESS WHEREOF, the Purchaser and the Seller have caused this
Agreement to be signed by their duly authorized representatives as of the
date first written above.
ECOGEN INC.
By: /s/ MARY E. PAETZOLD
----------------------------
ECOGEN-BIO INC.
By: /s/ DANIEL P. MCCOLLOM
----------------------------
SCENTRY BIOLOGICALS, INC.
By: /s/ MICHAEL P. WHALEN
----------------------------
18
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0
0
<COMMON> 81,186
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