<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
ECO SOIL SYSTEMS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEBRASKA 0711 47-0709577
(STATE OR OTHER JURISDICTION
OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
10890 THORNMINT ROAD, SUITE 200
SAN DIEGO, CALIFORNIA 92127
(619) 675-1660
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND
PRINCIPAL PLACE OF BUSINESS)
WILLIAM B. ADAMS, CHIEF EXECUTIVE OFFICER
ECO SOIL SYSTEMS, INC.
10890 THORNMINT ROAD, SUITE 200
SAN DIEGO, CALIFORNIA 92127
(619) 675-1660
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
THOMAS A. EDWARDS, ESQ. JEREMY D. GLASER, ESQ.
ROBERT E. BURWELL, ESQ. ALEXANDER A. FITZPATRICK, ESQ.
LATHAM & WATKINS COOLEY GODWARD LLP
701 "B" STREET, SUITE 2100 4365 EXECUTIVE DRIVE, SUITE 1100
SAN DIEGO, CALIFORNIA 92101-8197 SAN DIEGO, CA 92121-2128
TELEPHONE: (619) 236-1234 TELEPHONE: (619) 550-6000
FACSIMILE: (619) 696-7419 FACSIMILE: (619) 453-3555
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
=====================================================================================================
PROPOSED
MAXIMUM PROPOSED
AMOUNT OFFERING MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE PER AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) OFFERING PRICE FEE
- -----------------------------------------------------------------------------------------------------
COMMON STOCK, $.005 PAR VALUE... 4,698,708 SHARES $5.875 $27,604,909 $8,366
=====================================================================================================
</TABLE>
(1) Includes 612,875 shares subject to the Underwriters' option to cover
over-allotments and 85,833 shares to be registered by certain selling
shareholders of the Registrant.
(2) Estimated in accordance with Rule 457(c) solely for the purpose of computing
the amount of the registration fee based on the average of the high and low
prices of the Common Stock as reported on the Nasdaq SmallCap Market on
October 28, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy
nor shall there be any sale of these securities in any State in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED NOVEMBER 4, 1997
4,085,833 SHARES
[ECO SOIL SYSTEMS, INC. LOGO]
COMMON STOCK
---------------------------------------
Of the 4,085,833 shares of Common Stock offered hereby (the "Offering"),
4,000,000 shares are being issued and sold by Eco Soil Systems, Inc. ("Eco Soil"
or the "Company") and 85,833 shares are being sold by certain selling
shareholders of the Company (the "Selling Shareholders"). See "Principal and
Selling Shareholders." The Company will not receive any of the proceeds from the
sale of shares by the Selling Shareholders. The Company's Common Stock is traded
on the Nasdaq SmallCap Market under the symbol "ESSI." On October 31, 1997, the
last sale price of the Common Stock as reported by the Nasdaq SmallCap Market
was $6.875 per share. See "Price Range of Common Stock." The Company has applied
to have the Common Stock approved for quotation, subject to official notice of
issuance, on the Nasdaq National Market under the symbol ESSI.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF
COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2)(3) SHAREHOLDERS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total(3)...................... $ $ $ $
</TABLE>
================================================================================
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the offering payable by the Company estimated
at $ .
(3) The Underwriters have been granted an option by the Company, exercisable
within 30 days from the date hereof, to purchase up to 612,875 additional
shares of Common Stock, at the Price to Public per share, less the
Underwriting Discount, for the purpose of covering over-allotments, if any.
If the Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Use of Proceeds" and
"Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters when, as and if
delivered to and accepted by them, subject to their right to withdraw, cancel or
reject orders in whole or in part and subject to certain other conditions. It is
expected that delivery of the certificates representing the shares will be made
against payment on or about , 1997, at the offices of CIBC
Oppenheimer Corp., CIBC Oppenheimer Tower, One World Financial Center, New York,
New York 10281.
------------------------
CIBC OPPENHEIMER CRUTTENDEN ROTH
INCORPORATED
The date of this Prospectus is , 1997
<PAGE> 3
1997 BIOJECT CUSTOMERS BY REGION
[Picture of a map of the United States with dots at the location of each
U.S. installed BioJect unit]
WESTERN REGION
California
Nevada
Texas
Utah
MIDWESTERN REGION
Illinois
Indiana
Michigan
Missouri
Nebraska
Ohio
Wisconsin
NORTHEASTERN REGION
Connecticut
Delaware
Maine
Maryland
Massachusetts
New Jersey
New York
Pennsylvania
Rhode Island
Virginia
SOUTHEASTERN REGION
Florida
North Carolina
South Carolina
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS
OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M.
The following trademarks of the Company are used in this Prospectus:
BioJect(R), ClearLake(R), CleanRack(TM) and CalJect(TM). This Prospectus also
includes trade names, trademarks and registered trademarks of companies other
than Eco Soil Systems, Inc.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus. Unless
otherwise indicated, all information herein (i) excludes 5,052,526 shares of
Common Stock issuable upon exercise of outstanding warrants and stock options;
(ii) assumes shareholder approval of an amendment to the Company's Amended and
Restated Articles of Incorporation to increase the number of authorized shares
of Common Stock to 25,000,000 and (iii) assumes no exercise of the Underwriters'
over-allotment option or the warrants granted to CIBC Oppenheimer Corp. and
Cruttenden Roth Incorporated, as representatives of the Underwriters (the
"Representatives"). See "Underwriting." This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements because of a number of factors, including, but not limited to, those
discussed under "Risk Factors."
THE COMPANY
Eco Soil Systems, Inc. ("Eco Soil" or the "Company") develops, markets and
sells proprietary biological and traditional chemical products that provide
solutions for a wide variety of turf and crop problems in the golf and
agricultural industries. The Company has developed its patented BioJect system
for the distribution of naturally occurring microbes that complement or reduce
the need for many chemical fungicides, herbicides, insecticides and fertilizers
("chemical products") currently used in golf and agricultural markets. By
fermenting microbes at the customer's site and distributing them through the
customer's existing irrigation system, the BioJect system provides customers
with cost savings and mitigates the adverse environmental effects associated
with chemical products. The Company initially has focused its sales and
marketing efforts on the golf market, and recently has entered the agricultural
crop and ornamental markets. To date, Eco Soil has installed 345 BioJect systems
at customer sites, including such renowned golf courses as Congressional Country
Club, Winged Foot Golf Club and Spyglass Hill Golf Club.
By utilizing microbes that occur naturally in the environment, the BioJect
system overcomes many of the problems associated with traditional chemical
products. Traditional chemical products require repeated applications, which
reduce the long-term effectiveness of such products and have been shown to have
adverse environmental effects. The BioJect system reduces the need for repeated
chemical product applications, resulting in lower overall product and labor
costs and increases the effectiveness of traditional chemical products. In
addition, the Company believes that the use of microbes distributed through the
BioJect system provides environmental benefits as compared to chemical product
applications by limiting the exposure of humans to chemical products, reducing
residual pesticide contaminants in plants and soil, and minimizing groundwater
pollution.
The BioJect system overcomes many of the obstacles that historically have
hindered wide-spread use of microbes in the golf and agricultural industries.
Biological products generally have been perceived as economically infeasible
because of their short shelf life, rapid deterioration upon exposure to light or
heat, specialized transportation requirements and need for daily, manual
applications. By fermenting microbes at the customer's site and distributing
them through the customer's existing irrigation system, the BioJect system
preserves and protects the potency of microbes, significantly reduces shipping
costs, controls the concentration of product and allows for automated daily
application. Eco Soil knows of no other company pursuing this approach.
The Company generates recurring revenues by leasing BioJect systems to
customers and selling various microbial products for distribution through the
system. The Company has entered into technology transfer agreements pursuant to
which it has obtained rights to certain microbes for distribution through the
BioJect system from leading biotechnology companies such as Mycogen Corporation,
Abbott Laboratories and Encore Technologies, Inc. and major universities such as
Michigan State University and the University of California, Riverside. Eco Soil
currently offers BioJect customers a menu of six microbial products and intends
to obtain rights to additional microbes.
3
<PAGE> 5
The Company believes that its biological products can be most effectively
marketed for use as part of regular maintenance programs and sold through the
long-standing relationships developed by existing turf products dealers and
distributors. Consequently, Eco Soil has established its sales and distribution
capability through the acquisition of well-established regional turf product
dealers and distributors and by hiring key turf product sales personnel in order
to rapidly penetrate regional markets. To date, the Company has acquired four
distributors. By leveraging a dealer's existing distribution channel, the
Company is able to cost-effectively introduce its line of proprietary products
while also providing traditional products such as fertilizers and chemical
pesticides.
As part of its growth strategy, Eco Soil intends to increase its
penetration of golf markets, continue to establish a nationwide sales and
distribution network, expand into agricultural markets, increase the number of
microbial products available to BioJect customers and further develop
international markets. The Company also intends to leverage its installed base
of BioJect systems to generate follow-on sales of additional microbes and
traditional chemical products with minimal incremental costs.
A survey performed by the National Golf Foundation for 1996 indicated that
more than 15,700 golf courses in the United States spent in excess of $425
million on chemical products. The Company's strategy is to expand its leadership
position in the distribution and sale of microbial products in the golf and turf
industries and to leverage its experience with microbes into agricultural crop
and ornamental markets. According to data reported by AGROW World Crop
Protection News, an industry publication, the total worldwide agricultural
market for chemical products in 1996 was approximately $31.3 billion.
The Company was incorporated under the laws of the State of Nebraska in
1987. The Company's principal executive offices are located at 10890 Thornmint
Road, Suite 200, San Diego, California 92127, and its telephone number is (619)
675-1660.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by:
The Company.............................. 4,000,000 shares
The Selling Shareholders................. 85,833 shares
------------------
Total............................ 4,085,833 shares
==================
Common Stock outstanding after the 15,910,075 shares (1)
Offering..............................
Use of Proceeds.......................... Capital expenditures primarily related to the construction
of additional BioJect systems; acquisitions of independent
dealers and distributors; repayment of short-term debt;
repurchase of certain BioJect systems; and working capital
and general corporate purposes. See "Use of proceeds."
Nasdaq Symbol............................ ESSI
</TABLE>
- ---------------
(1) Based on shares of Common Stock outstanding on October 28, 1997. Excludes
(i) 2,455,451 shares of Common Stock subject to outstanding options at a
weighted average exercise price of $3.07 per share, (ii) 2,597,075 shares of
Common Stock subject to warrants at a weighted average exercise price of
$3.22 per share and (iii) 408,583 shares of Common Stock subject to warrants
issued to the Representatives at an exercise price equal to 120% of the
public offering price per share (the "Representatives' Warrants"). See
"Dilution," "Description of Securities" and "Underwriting."
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL AND OPERATIONS DATA
(IN THOUSANDS, EXCEPT OPERATING DATA AND PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Proprietary products............................. $ 2,511 $ 3,195 $ 4,483 $ 3,626 $ 8,876
Distributed products............................. 177 562 7,633 5,603 20,265
------- ------- ------- ------- -------
Total revenues............................ 2,688 3,757 12,116 9,229 29,141
Cost of revenues:
Proprietary products............................. 1,865 1,502 1,971 1,625 3,830
Distributed products............................. 133 478 5,399 4,080 15,229
------- ------- ------- ------- -------
Total cost of revenues.................... 1,998 1,980 7,370 5,705 19,059
------- ------- ------- ------- -------
Gross profit....................................... 690 1,777 4,746 3,524 10,082
Operating expenses:
Selling, general and administrative.............. 2,690 2,584 6,489 4,541 7,857
Research and development......................... 286 413 475 353 189
------- ------- ------- ------- -------
Income (loss) before interest, depreciation and
amortization..................................... (2,286) (1,220) (2,218) (1,370) 2,036
Depreciation and amortization...................... (306) (354) (911) (538) (777)
------- ------- ------- ------- -------
Income (loss) from operations...................... (2,592) (1,574) (3,129) (1,908) 1,259
Interest expense................................... (224) (262) (1,064) (523) (430)
------- ------- ------- ------- -------
Net income (loss).................................. $(2,816) $(1,836) $(4,193) $(2,431) $ 829
======= ======= ======= ======= =======
Net income (loss) per share(1)..................... $ (.62) $ (.35) $ (.62) $ (.40) $ .06
======= ======= ======= ======= =======
Shares used in calculating net income (loss) per
share(1)......................................... 4,557 5,207 6,809 6,050 14,341
</TABLE>
CONSOLIDATED BALANCE SHEETS DATA:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------
DECEMBER 31, 1996 ACTUAL AS ADJUSTED(2)
----------------- -------- --------------
<S> <C> <C> <C>
Cash...................................................... $ 150 $ 212 $ 21,007
Working capital (deficit)................................. (6,434) 5,304 29,667
Total assets.............................................. 12,886 28,105 48,900
Long-term debt and other obligations, net of current
portion................................................. 1,847 712 --
Common stock -- paid-in capital........................... 12,763 28,948 54,023
Accumulated deficit....................................... (12,887) (12,058) (12,058)
Total shareholders' equity (deficit)...................... (74) 16,940 42,015
</TABLE>
OPERATING DATA:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------------- -------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Number of installed BioJect systems................ 13 46 79 171 238 238 345
</TABLE>
- ---------------
(1) Computed on the basis described in Note 1 to the Consolidated Financial
Statements.
(2) Adjusted to give effect to the sale of the 4,000,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of $6.875
per share and the application of a portion of the net proceeds therefrom to
repay approximately $4.3 million of outstanding debt. The foregoing
calculations do not include (i) 2,455,451 shares of Common Stock subject to
outstanding options at a weighted average exercise price of $3.07 per share,
(ii) 2,597,075 shares of Common Stock subject to warrants at a weighted
average exercise price of $3.22 per share and (iii) 408,583 shares of Common
Stock subject to the Representatives' Warrants. See "Dilution," "Description
of Securities" and "Underwriting."
5
<PAGE> 7
RISK FACTORS
The following factors, in addition to information appearing elsewhere in
this Prospectus, should be considered carefully before making an investment in
the Common Stock offered hereby. Certain statements in this Prospectus that are
not historical fact constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results of the Company to be materially different from historical
results or from any results projected by such forward-looking statements. Such
risks, uncertainties and other factors include, but are not limited to, the
following risks:
ACCUMULATED DEFICIT; HISTORICAL OPERATING LOSSES
At September 30, 1997, the Company had an accumulated deficit of $12.1
million. The Company generated income from operations for the first time during
the quarters ended June 30, 1997 and September 30, 1997. There can be no
assurance that the Company can sustain such profitability. Prior to the quarter
ended June 30, 1997, the Company historically experienced losses due to
significant expenditures for product development, sales, marketing,
administrative and U.S. patent protection expenses, as well as amortization
costs associated with the Company's recent dealer acquisitions. See "Selected
Consolidated Financial and Operations Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
QUARTERLY FLUCTUATIONS IN THE COMPANY'S RESULTS OF OPERATIONS
Eco Soil's operating results vary from quarter to quarter as a result of
seasonality and various factors. Virtually all of the Company's customers are
located in the Northern Hemisphere and purchase greater quantities of microbes
and distributed products during the spring, summer and fall months. As a result
of low customer activity during the winter, the Company typically markets the
BioJect system during the fourth and first quarters. As a result of these
marketing efforts, the Company typically receives orders during the first and
second quarters and installs BioJect systems during the second and third
quarters. BioJect lease and installation revenues are recognized as payments
come due under the related contracts. Because of this sales cycle, the second
and third quarters historically have accounted for approximately 30% and 35%,
respectively, of annual revenues. The first and fourth quarters, by contrast,
historically have accounted for approximately 10% and 25% of revenues
respectively. Operating expenses have tended to be independent of the quarterly
sales cycle. As a result, operating expenses generally represent a higher
percentage of sales in the first and fourth quarters as compared to the second
or third quarters, and the Company may experience losses in the first and fourth
quarters. Accordingly, results for any quarter are not necessarily indicative of
results for any future period. The sales cycle for the BioJect system also makes
it difficult to predict the number of BioJect systems that will be leased and
the quantity of microbial product sales that will be sold until orders are
received by the Company during the first half of the year. Sales of the
Company's products also depend to some extent on the severity of weather
patterns in the geographic areas served by the Company. Given these factors, it
is difficult for the Company to accurately predict the level of demand for its
products. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
EXPANSION INTO NEW MARKETS
Although sales of certain of the Company's proprietary products are
increasing, such products remain in the early stages of market introduction and
are subject to the risks inherent in the commercialization of new product
concepts, particularly with respect to agricultural applications. To fully
maximize its marketing of new agricultural products, the Company believes it
will be necessary to enter into marketing partnerships with market leaders in
the agricultural industry. There can be no assurance that the Company's efforts
to market its proprietary products to agricultural crop and ornamental markets
will prove successful, that marketing partnerships will be established, or that
the Company's intended customers will purchase the Company's systems and
products instead of competing products. Failure to obtain significant customer
satisfaction or market share would have a material adverse effect on the
Company's business, financial condition and results
6
<PAGE> 8
of operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Strategy."
MANAGEMENT OF GROWTH
Eco Soil has experienced significant growth. Such growth has placed, and
will continue to place, significant strain on the Company's resources. The
Company's ability to manage future growth, should it occur, will require it to
implement and continually expand operational and financial systems, recruit
additional employees and train and manage both current and new employees. In
particular, the Company's success depends in large part on its ability to
attract and retain qualified technical, sales, financial and management
personnel. The Company faces competition for such persons from other companies,
academic institutions, government entities and other organizations. There can be
no assurance that the Company will be successful in recruiting or retaining
personnel of the requisite caliber or in adequate numbers to enable it to
conduct its business as proposed. See "Management -- Directors, Executive
Officers and Key Employees" and "Business."
ESTABLISHMENT OF SALES AND DISTRIBUTION CAPABILITIES
Distribution and sales of the Company's products have occurred through
distributors and dealers acquired by the Company and through independent dealers
and distributors. In 1996, Eco Soil initiated its strategy of establishing a
nationwide distribution system for its turf products through the acquisition of
various independent dealers and distributors and the hiring of selected sales
personnel. This strategy has required and is expected to continue to require
significant capital outlays and, due to the generally lower margins associated
with those dealers' existing products, likely will have the effect of lowering
the Company's gross profit margins. Achieving the anticipated benefits of such
acquisitions will depend on a variety of factors, including whether the
integration of such dealers and distributors with the Company's organization can
be accomplished in an efficient and effective manner and whether the acquired
sales force can effectively sell the Company's proprietary products. Any failure
to identify future hires or acquisition candidates properly, any large
expenditures on acquisitions that prove to be unprofitable, or any difficulties
encountered by Eco Soil in selling its proprietary products through the existing
distribution system could have a material adverse effect on the Eco Soil's
business, financial condition and results of operations. The Company has in the
past, and expects in the future, to continue to acquire companies in part
through the issuance of Common Stock. The issuance of additional shares of
Common Stock in connection with future acquisitions could result in dilution to
existing shareholders. See "Use of Proceeds" and "Business -- Strategy."
FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE
AVAILABLE
The continuing commercialization of the Company's products requires the
commitment of significant capital expenditures. Eco Soil believes that upon
consummation of the Offering it will have sufficient resources to finance its
operations and future growth for at least the next 18 months, but no assurance
can be given in that regard. The Company anticipates that it will require
additional funds to support the rigorous testing and other costs of obtaining
government approval and for the marketing of its products for agricultural
applications. The Company anticipates that it will seek to obtain additional
funds in the future through public or private equity or debt financing,
collaborative or other arrangements with corporate partners or from other
sources. There can be no assurance that such additional financing can be
obtained on desirable terms, if at all. If additional funds are not available,
the Company may be required to curtail its operations and marketing efforts in
certain geographic areas or for one or more of its product lines. Although the
Company has established a line of credit with Imperial Bank, there can be no
assurance that the Company will be able to renew its line of credit on
acceptable terms or to increase such line if additional financing is required.
See "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."
7
<PAGE> 9
PATENTS, PROPRIETARY TECHNOLOGY AND LICENSES
The Company's success will depend in large measure upon its ability to
obtain and enforce patent protection for its proprietary products, maintain
confidentiality of its trade secrets and know-how and operate without infringing
upon the proprietary rights of third parties. The Company has been granted three
U.S. patents for the technology relating to the BioJect system and has filed one
other U.S. patent application covering modifications to the BioJect system. The
Company does not have foreign patent protection with respect to the claims
covered by its two initial U.S. patents granted in 1993, and the Company is
precluded from obtaining such foreign rights due to the expiration of the period
for filing such claims. However, in connection with a U.S. patent granted in
1995 and a U.S. application filed later that year that still is pending, the
Company has applied for foreign patent protection with respect to the BioJect
system in selected countries. In addition, the Company has registered a number
of trademarks used in its business, including "BioJect" and "CalJect," and has
applied for registration of a number of additional trademarks. The Company also
relies on trade secrets and proprietary know-how. The Company generally enters
into confidentiality and nondisclosure agreements with its employees and
consultants and generally controls access to and distribution of its
documentation and other proprietary information.
Despite the precautions described above, it may be possible for a third
party to copy or otherwise use the Company's products or technology without
authorization, or to develop similar products or technology independently. There
can be no assurance that the Company's patent or trademark applications will be
granted, that its means of protecting its proprietary rights will be adequate or
that the Company's competitors will not independently develop similar or
competing products. Furthermore, although the Company is not aware of any
infringement of any proprietary rights of others, there can be no assurance that
the Company is not infringing other parties' rights. If any of the Company's
patents are infringed upon or if a third party alleges that the Company violates
its proprietary rights, the Company may not have sufficient resources to
prosecute a lawsuit to defend its rights. In addition, an adverse determination
in any litigation could subject the Company to significant liabilities to third
parties, require the Company to seek licenses from or pay royalties to third
parties or prevent the Company from manufacturing, selling or using its
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Even if the Company
prevailed in litigation to protect its intellectual property rights, such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Patents and Proprietary
Rights."
LACK OF MANUFACTURING CAPABILITY; DEPENDENCE ON CONTRACT MANUFACTURERS AND
SUPPLIERS
Eco Soil currently does not have any manufacturing capability and must rely
on third parties to manufacture its products and components. The Company has
more than one supplier for the manufacture of most of its products and
components; however, some are being obtained from only one source. Although the
Company believes that it will be able to contract production with alternate
suppliers, there can be no assurance that this will be the case or that the need
to contract with additional suppliers will not delay the Company's ability to
have its products and components manufactured. There can be no assurance that
existing or future manufacturers will meet the Company's requirements for
quality, quantity and timeliness, and any such failure could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations" and "Business."
NO ASSURANCE THAT RIGHTS TO ADDITIONAL MICROBIAL PRODUCTS WILL BE ACQUIRED
Eco Soil plans to obtain the rights to additional microbial products. The
Company currently does not engage in its own research and development with
respect to the discovery of microbial products, but instead licenses or acquires
rights to microbial products discovered by others. Although the Company is
actively seeking to obtain licenses for or otherwise acquire rights to
additional microbial products, there can be no assurance that the Company will
be successful in obtaining any such rights on terms acceptable to the Company,
if at all. The failure of the Company to acquire rights to additional products
could have a material
8
<PAGE> 10
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Strategy."
PRODUCT LIABILITY CLAIMS AND UNINSURED RISKS
The Company may be exposed to product liability or environmental liability
resulting from the commercial use of its products. The Company currently carries
liability insurance, which covers, among other things, product liability and
environmental liability. A product liability, environmental or other claim with
respect to uninsured liabilities or in excess of insured liabilities could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company has obtained insurance of such types and in such amounts as it
believes to be adequate and customary for similarly situated firms in its
business, including casualty insurance and workers' compensation insurance.
However, there are risks not normally covered by insurance over which the
Company has no control and that could result in Eco Soil incurring losses not
covered by insurance. Consequently, there can be no assurance that any losses
will be covered by insurance, that any covered losses will be fully insured
against or that any claim by the Company will be approved for payment by the
insurer. See "Business."
ENVIRONMENTAL LIABILITY
The federal government and some states have laws imposing liability on
certain parties for the release of fertilizers and other agents into the
environment in certain manners or concentrations. Such liability could include,
among other things, responsibility for cleaning up the damage resulting from
such a release. In addition, the federal Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA), commonly known as the "Superfund" law,
and other applicable laws impose liability on certain parties for the release
into the environment of hazardous substances, which might include fertilizers
and water treatment chemicals. The Company is also subject to certain other
federal environmental laws, including the National Environmental Policy Act, the
Toxic Substance Control Act, the Resource Conservation and Recovery Act, the
Clean Air Act and the Clean Water Act and their state equivalents and may be
subject to other present and potential future federal, state or local
regulations. As noted above, the Company maintains insurance for environmental
claims which might result from the release of its products into the environment,
but there can be no assurance that any losses covered by insurance will be
adequately covered. Thus, a claim for environmental liability could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "-- Product Liability Claims and Uninsured Risks" and
"Business."
GOVERNMENT REGULATION
The Company is subject to laws and regulations administered by federal,
state and foreign governments, including those requiring registration or
approval of fertilizers, pesticides, water treatment products and product
labeling. Eco Soil's current products are subject to regulation by the
Environmental Protection Agency (the "EPA"), the Food and Drug Administration
(the "FDA") and by certain state environmental and agricultural departments. To
date, with the exception of its bascillus thuringiensis product, which is an EPA
registered pesticide, the Company has marketed its microbes as soil inoculants.
The Company believes future sales will be strengthened if the Company can secure
EPA approval of other individual microbes as pesticides. In order to market a
microbe as a pesticide, the Company must register the microbe with the EPA and
obtain EPA approval of the microbe, its byproducts, the claims made in the
product label and the method of application. Registration of the Company's
microbial products as pesticides likely will be a lengthy and expensive process
that may or may not result in EPA approval. Without the desired EPA approvals,
the Company will not be able to market such unregistered microbes as pesticides,
and the Company's sales efforts will be limited to discussions of the soil
inoculant features of the microbe. If the EPA determines that a microbial
product has no significant commercially valuable use other use than as a
pesticide, however, the Company will be precluded from selling the product
entirely unless it is approved by the EPA.
In addition, if a microbe is sold as a pesticide for use on crops, the
Company must also seek to have a tolerance level set by the EPA which would
define the acceptable limit on the amount of microbes that could
9
<PAGE> 11
be applied on a given food product. The Company also may apply to the EPA for
tolerance exemptions that would permit it to use the microbial product covered
by the exemption without defined limits on applications. If the EPA does not
issue a tolerance exemption, the Company would be required to obtain a separate
tolerance for each food product on which it intends to make its microbial
pesticides available for use. As a result, the Company would incur costly
application fees for each tolerance. There can be no assurance that the Company
will be successful in seeking such tolerances or tolerance exemptions, and any
failure to obtain such status which would prevent the Company from selling
microbes as pesticides for use on crops.
The Company may be subject to regulation in foreign countries. Compliance
with such requirements likely would result in additional cost to the Company and
delays in introducing the Company's products in such foreign countries.
Compliance with EPA and state environmental regulations as well as other
laws and regulations will increase the costs and time necessary to allow the
Company to operate successfully and may affect the Company in other ways not
currently foreseeable. In addition, more stringent requirements for regulation
or environmental controls may be imposed, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Government Regulation."
COMPETITION
The BioJect system competes against traditional chemical insecticides and
fungicides, chemical soil penetrants, acid injection systems, and the direct,
manual application of cultured microbial products. Although the Company believes
that none of its competitors offers an automated means of regularly applying
microbial products to turf and crops in an effective manner, many of the
Company's competitors have substantially greater financial, technical and
personnel resources than the Company and include such well-established companies
as Novartis Corporation, Rhone-Poulenc AG Company, the Dow Chemical Company,
O.M. Scotts & Sons, Inc., Lesco, Inc., and The Toro Company, as well as a number
of smaller local and regional competitors. The Company competes against
traditional technologies on the basis of its delivery mechanism and
bioaugmentation expertise. An important factor in the long-term competitiveness
of the BioJect system may be the timing and extent of the Company's penetration
into golf and agricultural markets compared to the market penetration achieved
by companies offering competing products for microbial distribution. Such timing
will be based on the effectiveness with which the Company or the competition can
complete product testing and approval processes and supply quantities of its
products to market. Competition among microbial distribution products is
expected to be based on, among other things, product effectiveness, safety,
reliability, cost, market capability and patent protection.
The CalJect system competes against a number of companies that have
developed products for applying gypsum onto soil to improve water penetration
through soil. At least one of the Company's competitors in the market for gypsum
distribution, Soil Solutions Corporation ("Soil Solutions"), has greater name
recognition in the soil amendments market and has significantly more installed
units. Soil Solutions' machine, like the Company's CalJect system, injects
gypsum directly into customers' irrigation systems. Competition among gypsum
distribution products is based on, among other things, cost, name recognition,
product effectiveness and reliability.
In markets for traditional chemical products, the Company competes against
well-established distributors of such products. Many of these competitors have
substantially greater financial, technical and personnel resources than the
Company and include such companies as Lesco, Inc., Terra Companies, Inc.,
Con-Agra, Inc. and Wilbur-Ellis Company. The Company competes on the basis of
price, name recognition, convenience and customer service with distributors of
traditional chemical products. See "Business -- Competition."
DEPENDENCE ON THE MARKET FOR GOLF
Golf participation has increased significantly since 1970. Although the
Company believes that golf markets will continue to grow, a decrease in the
number of golfers, their rates of participation or in consumer spending on golf
could have a material adverse effect on Eco Soil's golf course customers and, in
turn, on Eco Soil. Specifically, the success of efforts to attract and retain
members at private country clubs and the number
10
<PAGE> 12
of rounds played at public golf courses historically have been dependent upon
discretionary spending by consumers, which may be adversely affected by general
and regional economic conditions. In addition, the construction of additional
golf courses is dependent upon growth in the number of golfers. If customer
tastes or economic conditions cause golf courses to reduce their budgets or slow
the development of additional golf courses, the Company may see a correlative
decrease in sales of the BioJect system and its other products. See
"Business -- Customers."
POSSIBLE VOLATILITY OF STOCK PRICE
The Common Stock currently is quoted on the Nasdaq SmallCap Market. The
Company has applied to have the Common Stock approved for quotation, subject to
official notice of issuance, on the Nasdaq National Market. The market price of
the Common Stock could be subject to significant fluctuations in response to
operating results and other factors. In addition, the stock market in recent
years has experienced extreme price and volume fluctuations that often have been
unrelated or disproportionate to the operating performance of companies. These
fluctuations, as well as general economic and market conditions, may adversely
affect the market price of the Common Stock. In addition, in the event the
listing of the Common Stock were discontinued for any reason, the liquidity and
price of the Common Stock would be adversely affected. See "Price Range of
Common Stock."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the active participation of William B. Adams,
its Chairman of the Board and Chief Executive Officer, and Douglas M. Gloff, its
President. The loss of the services of either of these individuals could have a
material adverse effect upon the Company's business, financial condition and
results of operations. Each of Messrs. Adams and Gloff has entered into an
employment agreement with the Company which provides for his continued
employment with the Company through September 1998. The Company does not have
key person life insurance on any of its key employees. See "Management."
CONTROL BY PRINCIPAL SHAREHOLDERS
The current principal shareholders and management of the Company own
approximately 33.1% of the outstanding shares of Common Stock of the Company
before the Offering and will own approximately 24.5% after the Offering,
assuming the exercise of all outstanding options and warrants held by them and
no exercise of options or warrants held by others. Accordingly, even though the
Company currently has cumulative voting, the current principal shareholders and
management, if voting in concert, may have the ability to effectively control
the election of a majority of the directors of the Company or any other major
decisions involving the Company or its assets. See "Principal and Selling
Shareholders" and "Description of Securities."
OUTSTANDING WARRANTS AND OPTIONS
As of September 30, 1997, there were 5,052,526 shares of Common Stock
subject to issuance pursuant to options and warrants issued by the Company. In
addition, in connection with the Offering, the Representatives will receive the
Representatives' Warrants to purchase up to 408,583 shares of Common Stock.
Holders of warrants and options are likely to exercise them when, in all
likelihood, the Company could obtain additional capital on terms more favorable
than those provided by the warrants and options. While the warrants and options
are outstanding, they may adversely affect the terms on which the Company can
obtain additional capital. See "Description of Securities."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of significant amounts of Common Stock in the public market or the
perception that such sales will occur could adversely affect the market price of
the Common Stock or the future ability of the Company to raise capital through
an offering of its equity securities. Of the 15,910,075 shares of Common Stock
to be outstanding upon completion of the Offering, the 4,085,833 shares offered
hereby and the 3,795,000 shares sold in the Company's initial public offering
will be eligible for immediate sale in the public market without
11
<PAGE> 13
restriction, with the exception of any shares purchased in the Offering by
"affiliates" of the Company within the meaning of Rule 144 under the Securities
Act. The remaining 8,029,242 shares were issued and sold by the Company in
private transactions in reliance upon exemptions from registration under the
Securities Act and are, therefore, restricted securities (the "Restricted
Shares") that may not be sold publicly unless the Restricted Shares are
registered under the Securities Act or sold under Rule 144 or under similar
exemptions. Except for the 576,823 shares issued upon conversion of certain
bridge notes (as described below) and 25,000 shares issued to the sole
shareholder of Turfmakers, Inc. ("Turfmakers") in connection with the Company's
acquisition of substantially all of Turfmakers' assets in February 1997, all of
the Restricted Shares are eligible for resale subject to the restrictions
imposed by Rule 144. Holders of 4,381,637 shares of Common Stock have entered
into lock-up agreements under which they have agreed not directly or indirectly
to offer, sell or otherwise dispose, of any Common Stock owned or hereafter
acquired as with respect to which such shareholder has the power to control the
disposition for a period of 180 days after the date of this Prospectus without
the prior written consent of the Representatives. In addition, certain
shareholders have the right, subject to certain conditions, to participate in
future Company registrations and to cause the Company to register certain shares
of Common Stock owned by them. See "Shares Eligible for Future Sale."
UNDESIGNATED PREFERRED STOCK; ANTITAKEOVER PROVISIONS
The Board of Directors is authorized, without any action by the Company's
shareholders, to issue up to 5,000,000 shares of authorized but undesignated
preferred stock and to fix the powers, preferences, rights and limitations of
any such preferred stock or any class or series thereof. Persons acquiring
preferred stock could have preferential rights with respect to voting,
liquidation, dissolution or dividends over existing shareholders, including
purchasers of shares of Common Stock in the Offering. This ability of the Board
would permit the Company to adopt a shareholders' rights plan or to take other
action that could deter a hostile takeover of the Company, entrench the Board of
Directors or deter an unsolicited tender offer. In addition, certain provisions
of the Company's Amended and Restated Articles of Incorporation, including
provisions creating a staggered board of directors, and certain provisions of
Nebraska law, including the Nebraska Shareholders Protection Act, could have the
effect of deterring or delaying a takeover or other change in control of the
Company, could deny shareholders the receipt of a premium on their Common Stock
and could have a depressive effect on the market price of the Company's Common
Stock. See "Description of Securities."
DILUTION
Purchasers of the shares offered hereby will experience immediate and
substantial dilution of $4.63 per share in the net tangible book value per share
of the Common Stock as of September 30, 1997. Such investors will incur
additional dilution to the extent that options or warrants outstanding prior to
the Offering are exercised. See "Dilution."
NO DIVIDENDS
The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to pay dividends on its Common Stock in the
foreseeable future. The Company is currently prohibited from paying dividends by
the terms of a loan agreement between the Company and Imperial Bank. The Company
intends to retain any earnings for use in the operation and expansion of its
business. See "Dividend Policy."
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered by the Company hereby, at an assumed public offering price
of $6.875 per share, are estimated to be $25.1 million ($29.0 million if the
Underwriters' over-allotment option is exercised in full). The Company intends
to use the estimated net proceeds as follows: (i) approximately $5.0 million
will be used for capital expenditures, primarily related to the construction of
additional BioJect systems to satisfy current and future customer orders; (ii)
approximately $5.0 million will be used for future acquisitions of independent
dealers and distributors of turf maintenance products and other related
products; (iii) approximately $2.3 million will be used to repay outstanding
amounts on its line of credit with Imperial Bank and approximately $63,000 will
be used to repay other miscellaneous debt; (iv) approximately $1.9 million will
be used to repay outstanding loans from significant shareholders and directors
of the Company; (v) approximately $2.7 million will be used to repurchase
BioJect systems currently leased to the Company; and (vi) approximately $8.2
million will be used for working capital and general corporate purposes.
Although the Company currently is evaluating additional acquisition
opportunities throughout the United States, it does not have any agreements to
acquire other companies. As of September 30, 1997, the outstanding principal
amount under the Imperial Bank line of credit was approximately $2.3 million.
The line of credit bears interest at Imperial Bank's prime rate plus 1.5% and
matures on June 15, 1998. The Company intends to repay an aggregate of
$1,050,000 outstanding on three notes held by William B. Adams, the Company's
Chairman and Chief Executive Officer. The first note held by Mr. Adams, in the
amount of $450,000, is payable on demand and bears interest at the rate of 8.0%
per year. The second note held by Mr. Adams is in the amount of $300,000, bears
interest at the rate of 8.0% per year and is due in November 1998. The third
note held by Mr. Adams is in the amount of $300,000, bears interest at the rate
of 8.0% per year and is due in March 1998. The Company intends to repay an
aggregate of $400,000 outstanding on two notes held by Heartland Capital Fund,
Ltd. ("Heartland Capital"), a significant shareholder of the Company. Bradley K.
Edwards, a director of the Company, is a general partner of Heartland Capital.
The first note held by Heartland Capital is in the amount of $200,000, bears
interest at the rate of 8.0% per year and is due in November 1998. The second
note held by Heartland Capital is in the amount of $200,000, bears interest at
the rate of 8.0% per year and is due in March 1998. The Company intends to repay
an aggregate of $450,000 outstanding on two notes held by Douglas M. Gloff, the
Company's President and a director of the Company. The first note held by Mr.
Gloff, in the amount of $200,000, bears interest at the rate of 8.0% per year
and is due in November 1998. The second note held by Mr. Gloff is in the amount
of $250,000, bears interest at the rate of 8.0% per year and is due in November
1998. The net proceeds from the sale of the 85,833 shares of Common Stock
offered hereby by the Selling Shareholders will be paid directly to the Selling
Shareholders. The Company will not receive any proceeds from such sale. See
"Principal and Selling Shareholders." Pending application of the proceeds as
described above, the Company intends to invest the net proceeds of the Offering
in short-term, investment-grade, interest-bearing securities. The amounts, if
any, actually expended for each described use are at the discretion of the
Company and may vary significantly depending upon a number of factors, including
the Company's future revenue growth, the amount of cash generated by the
Company's operations, the progress of the Company's product development and
marketing programs, changing competitive conditions and market acceptance of the
Company's products.
PRICE RANGE OF COMMON STOCK
The Company effected its initial public offering on January 16, 1997 at a
price to the public of $4.125 per share. Since that date, the Common Stock has
traded on the Nasdaq SmallCap Market under the symbol "ESSI." The following
table sets forth for the periods indicated the high and low sale prices for the
Common Stock as reported by the Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
1st Quarter (from January 16, 1997).......................... 6 15/16 4 3/16
2nd Quarter.................................................. 6 1/4 3 7/8
3rd Quarter.................................................. 8 5 9/16
4th Quarter (through October 29, 1997)....................... 7 5 3/4
</TABLE>
On October 31, 1997, the last reported sale price of the Common Stock on
the Nasdaq SmallCap Market was $6.875. As of October 31, 1997, there were
approximately 287 holders of record of the Common Stock.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of September 30, 1997 and as adjusted to reflect the sale of 4,000,000 shares of
Common Stock offered by the Company hereby at an assumed offering price of
$6.875 per share, the receipt of the estimated net proceeds therefrom and the
repayment of $712,000 of long-term debt. See "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, net of current portion........................ $ 712 $ --
Shareholders' equity:
Preferred Stock, $.005 par value; 5,000,000 shares
authorized; none issued and outstanding, actual and as
adjusted................................................. -- --
Common Stock, $.005 par value; 20,000,000 shares authorized;
11,868,575 shares issued and outstanding: 25,000,000
shares authorized, 15,868,575 shares issued and
outstanding as adjusted(1)............................... 59 79
Additional paid-in capital.................................. 28,889 53,944
Warrants.................................................... 242 242
Note receivable from shareholder............................ (192) (192)
Accumulated deficit......................................... (12,058) (12,058)
-------- --------
Total shareholders' equity............................... 16,940 42,015
-------- --------
Total capitalization................................ $ 17,652 $ 42,015
======== ========
</TABLE>
- ---------------
(1) Assumes shareholder approval at a Special Meeting of Shareholders to be held
on November 13, 1997 of an amendment to the Company's Amended and Restated
Articles of Incorporation to increase the number of authorized shares of
Common Stock from 20,000,000 to 25,000,000. Excludes (i) 2,455,451 shares of
Common Stock subject to outstanding options at a weighted average exercise
price of $3.07 per share, (ii) 2,597,075 shares of Common Stock subject to
warrants at a weighted average exercise price of $3.22 per share and (iii)
408,583 shares subject to the Representatives' Warrants. See "Dilution,"
"Description of Securities" and "Underwriting."
14
<PAGE> 16
DILUTION
As of September 30, 1997, the Company's net tangible book value was
$10,668,000, or $.90 per share. "Net tangible book value" per share represents
the amount of total tangible assets of the Company reduced by the total
liabilities divided by the number of shares of Common Stock outstanding. After
giving effect to the sale by the Company of 4,000,000 shares of Common Stock
offered hereby at an assumed public offering price of $6.875 per share, less
underwriting discounts and commissions and estimated offering expenses payable
by the Company, the Company's net tangible book value as of September 30, 1997
would have been $35,743,000, or $2.25 per share of Common Stock. This amount
represents an immediate increase in net tangible book value per share of $1.35
to existing shareholders and an immediate dilution of $4.63 per share to
investors purchasing shares of Common Stock in the Offering. "Dilution per share
to new investors" represents the difference between the price per share of
Common Stock paid for the shares issued in the Offering and the net tangible
book value per share at September 30, 1997, as adjusted to give effect to the
Offering.
<TABLE>
<S> <C> <C>
Assumed public offering price per share(1)..................... $6.88
Net tangible book value per share at September 30, 1997........ $ .90
Increase per share attributable to new investors............... 1.35
-----
Net tangible book value per share after this offering.......... 2.25
-----
Dilution per share to new investors.......................... $4.63
=====
</TABLE>
- ---------------
(1) Before deduction of underwriting discounts and commissions and estimated
offering expenses payable by the Company.
If the Underwriter's over-allotment option is exercised in full, and
assuming a public offering price of $6.875 per share, the net tangible book
value of the Company as of September 30, 1997 would have been $39,662,000, or
$2.41 per share, representing an immediate increase in net tangible book value
of $1.51 per share to existing shareholders and an immediate dilution of $4.47
per share to the investors purchasing the shares of Common Stock in the
Offering.
The following summarizes, on a pro forma basis, the differences between
existing shareholders and purchasers of the shares offered hereby, with respect
to their ownership of Common Stock upon the closing of the Offering, the total
consideration paid and the average consideration paid per share:
<TABLE>
<CAPTION>
SHARES OWNED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders..................... 11,868,575 74.8% $30,243,000 52.4% $ 2.55
New investors............................. 4,000,000 25.2% $27,500,000 47.6% $ 6.875
---------- ---- ----------- ---- -------
Total........................... 15,868,575 100% $57,743,000 100%
========== ==== =========== ====
</TABLE>
The foregoing calculations do not include (i) 2,455,451 shares of Common
Stock subject to outstanding options at a weighted average exercise price of
$3.07 per share, (ii) 2,597,075 shares of Common Stock subject to warrants at a
weighted average exercise price of $3.22 per share and (iii) 408,583 shares
subject to the Representatives' Warrants. See "Dilution," "Description of
Securities" and "Underwriting."
DIVIDEND POLICY
The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to pay dividends on its Common Stock in the
foreseeable future. The Company is currently prohibited from paying dividends by
the terms of a loan agreement between the Company and Imperial Bank. The Company
intends to retain any earnings for use in the operation and expansion of its
business.
15
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL AND OPERATIONS DATA
(IN THOUSANDS, EXCEPT OPERATING DATA AND PER SHARE AMOUNTS)
The selected consolidated financial data set forth below, with respect to
the Company's consolidated statement of operations data for the years ended
December 31, 1994, 1995 and 1996 and the consolidated balance sheet data set
forth below as of December 31, 1994, 1995 and 1996, have been derived from the
consolidated financial statements of the Company which have been audited by
Ernst & Young LLP, independent auditors (except for the financial statements of
Turf Specialty, Inc., a consolidated subsidiary, which were audited by Bigelow &
Company, Certified Public Accountants, P.C.), as set forth in their report. The
consolidated statement of operations data set forth below for the nine months
ended September 30, 1996 and 1997 and the consolidated balance sheet data as of
September 30, 1997 have not been audited but, in the opinion of management,
reflect all adjustments (consisting of only normal recurring adjustments) that
the Company considers necessary to present fairly the financial data for such
period. Results of the interim periods are not necessarily indicative of the
results that may be expected for the entire year or other interim periods. The
information presented below should be read in conjunction with the consolidated
financial statements and notes thereto presented elsewhere in this Prospectus
and in "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Proprietary products................................................ $ 2,511 $ 3,195 $ 4,483 $ 3,626 $ 8,876
Distributed products................................................ 177 562 7,633 5,603 20,265
------- ------- ------- ------- -------
Total revenues................................................ 2,688 3,757 12,116 9,229 29,141
Cost of revenues:
Proprietary products................................................ 1,865 1,502 1,971 1,625 3,830
Distributed products................................................ 133 478 5,399 4,080 15,229
------- ------- ------- ------- -------
Total cost of revenues........................................ 1,998 1,980 7,370 5,705 19,059
------- ------- ------- ------- -------
Gross profit.......................................................... 690 1,777 4,746 3,524 10,082
Operating expenses:
Selling, general and administrative................................. 2,690 2,584 6,489 4,541 7,857
Research and development............................................ 286 413 475 353 189
------- ------- ------- ------- -------
Income (loss) before interest, depreciation and amortization.......... (2,286) (1,220) (2,218) (1,370) 2,036
Depreciation and amortization......................................... (306) (354) (911) (538) (777)
------- ------- ------- ------- -------
Income (loss) from operations......................................... (2,592) (1,574) (3,129) (1,908) 1,259
Interest expense...................................................... (224) (262) (1,064) (523) (430)
------- ------- ------- ------- -------
Net income (loss)..................................................... $(2,816) $(1,836) $(4,193) $(2,431) $ 829
======= ======= ======= ======= =======
Net income (loss) per share(1)........................................ $ (.62) $ (.35) $ (.62) $ (.40) $ .06
======= ======= ======= ======= =======
Shares used in calculating net income (loss) per share(1)............. 4,557 5,207 6,809 6,050 14,341
</TABLE>
CONSOLIDATED BALANCE SHEETS DATA:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1997
-------------------------------- ---------------------------
1994 1995 1996 ACTUAL AS ADJUSTED(2)
------- ------- -------- -------- --------------
<S> <C> <C> <C> <C> <C>
Cash......................................................... $ -- $ -- $ 150 $ 212 $ 21,007
Working capital (deficit).................................... (793) (1,324) (6,434) 5,304 29,667
Total assets................................................. 2,354 3,981 12,886 28,105 48,900
Long-term debt and other obligations, net of current
portion.................................................... 1,489 941 1,847 712 --
Common stock/paid-in capital................................. 5,762 8,535 12,763 28,948 54,023
Accumulated deficit.......................................... (6,858) (8,694) (12,887) (12,058) (12,058)
Total shareholders' equity (deficit)......................... (1,095) (159) (74) 16,940 42,015
</TABLE>
OPERATING DATA:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of installed BioJect systems..... 13 46 79 171 238 238 345
</TABLE>
- ---------------
(1) See Note 1 to Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used in calculating net
income (loss) per share.
(2) Adjusted to give effect to the sale of the 4,000,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of $6.875
per share and the application of a portion of the net proceeds therefrom to
repay approximately $4.3 million of outstanding debt. The foregoing
calculations do not include (i) 2,455,451 shares of Common Stock subject to
outstanding options at a weighted average exercise price of $3.07 per share,
(ii) 2,597,075 shares of Common Stock subject to warrants at a weighted
average exercise price of $3.22 per share and (iii) 408,583 shares subject
to the Representatives' Warrants. See "Dilution," "Description of
Securities" and "Underwriting."
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company develops, markets and sells proprietary biological and
traditional chemical products that provide solutions for a wide variety of turf
and crop problems in the golf and agricultural industries. The Company's
principal products include proprietary products and distributed products. The
Company's proprietary products include its patented BioJect system and its
CalJect system, as well as its ClearLake and CleanRack systems. The Company's
distributed products consist of traditional fertilizers and pesticides that are
distributed through the Company's dealers and distributors.
The Company significantly changed its focus and product mix after it moved
its headquarters to San Diego from Nebraska in 1991. In 1991, a significant
portion of the Company's revenues were generated by the sale of products which
included fertilizer, nutrient and seed sales to golf courses. These products
generated low gross margins due to significant competition. Shortly thereafter,
the Company began to devote substantial resources towards the development of the
BioJect system, which resulted in the Company generating net losses. As the
BioJect system was developed, the Company began to focus its efforts on the
marketing and sales of BioJect systems and microbial products, which have higher
gross margins, and shifted away from lower margin sales of seed and fertilizer.
In 1996, the Company began to rapidly expand its sales and marketing
capabilities related to the BioJect system by hiring key personnel and acquiring
regional distributors whose sales representatives had established relationships
with potential BioJect customers. On May 31, 1996, the Company acquired both
Turf Products, Ltd., currently operating under the name Eco Turf Products, Inc.,
("Turf Products") and Turf Specialty, Inc. ("Turf Specialty"). In February 1997,
the Company acquired substantially all of the assets of Turfmakers, Inc.
("Turfmakers"). The acquisition of these distributors significantly increased
the volume of distributed products sold by the Company and lead to increased
penetration of the BioJect system within the golf industry. In addition to its
acquisitions of regional turf products dealers, the Company acquired Aspen
Consulting, Inc. ("Aspen"), an irrigation design and planning firm, in September
1995.
The BioJect system generates recurring revenues through customer leases of
BioJect equipment and the sale of various microbial products. In September 1997,
the Company sold certain of its equipment under operating leases to Eco Lease
Partners, LLC, an unaffiliated investor group, for aggregate proceeds of $4.0
million. The Company then leased the BioJect units back from Eco Lease Partners
under a 40-month lease agreement. The equipment is subleased to end-users,
generally under one-year lease terms. The gain of approximately $300,000 on the
sale has been deferred and will be amortized over the 40-month lease term.
Revenues from leasing and subleasing arrangements are recognized based on the
lease terms established with the customer which typically include monthly lease
payments and a one-time installation fee. All of the Company's leases are
terminable by the customer on 30 days' notice. The consumable microbial products
are sold separately on a seasonal basis based on the type and number of
microbial products selected and the desired frequency of application. The
Company outsources the assembly of the BioJect systems to third parties that use
parts sourced by the Company. As a result, during the assembly process, the
equipment assets are held in the Company's inventory and are subsequently
transferred to the Company's noncurrent assets thirty days after each BioJect
system is installed. Each BioJect system is depreciated over seven years.
17
<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's consolidated
statements of operations expressed as a percentage of revenues for the periods
indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- -----------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Proprietary products........................ 93.4% 85.0% 37.0% 39.3% 30.5%
Distributed products........................ 6.6 15.0 63.0 60.7 69.5
------ ------ ------ ------ ------
Total revenues...................... 100.0 100.0 100.0 100.0 100.0
Gross margin:
Proprietary products........................ 25.7 53.0 56.0 55.2 56.8
Distributed products........................ 24.9 15.0 29.3 27.2 24.9
Total gross margin.......................... 25.7% 47.3% 39.2% 38.2% 34.6%
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues. For the nine months ended September 30, 1997, revenues were $29.1
million, an increase of 216% compared to $9.2 million for the nine months ended
September 30, 1996. The increase in revenues reflects an increase in both
distributed and proprietary revenues.
For the nine months ended September 30, 1997, revenues from sales of
proprietary products were $8.9 million, an increase of 145% compared to $3.6
million for the nine months ended September 30, 1996. BioJect lease revenues
were $1.0 million, an increase of 62% compared to $625,000 for the nine months
ended September 30, 1996. Revenues from sales of BioJect menu items, primarily
microbes, were $2.1 million, an increase of 106% compared to $1.0 million for
the nine months ended September 30, 1996. The increase in revenues from BioJect
leases and sales of menu items was due to an increase in the installed base of
BioJect systems from 238 to 345 during the first nine months of 1997. Included
in proprietary revenues for the nine months ended September 30, 1997 are $2.4
million of revenues from the sale leaseback transaction.
For the nine months ended September 30, 1997, revenues from sales of
CleanRack and ClearLake systems were $565,000, an increase of 52% compared to
$371,000 for the nine months ended September 30, 1996.
For the nine months ended September 30, 1997, revenues from Aspen were $1.2
million, an increase of 48% from $807,000 for the nine months ended September
30, 1996. The increase in Aspen's revenues resulted from an increase in the
number of its consulting contracts.
For the nine months ended September 30, 1997, revenues from other
proprietary products, which consisted primarily of fertilizer and nutrient
sales, were $1.0 million, an increase of 110% compared to $477,000 for the nine
months ended September 30, 1996.
For the nine months ended September 30, 1997, revenues from distributed
products were $20.3 million, an increase of 262% compared to $5.6 million for
the nine months ended September 30, 1996. The increase in distributed revenues
reflects the Company's acquisitions and the opening of new distributor
locations, as discussed above.
Gross Profit. For the nine months ended September 30, 1997, the Company's
gross profit was $10.1 million, an increase of 186% compared to $3.5 million for
the nine months ended September 30, 1996. The increase in gross profit resulted
from the increase in both distributed and proprietary revenues. For the nine
months ended September 30, 1997, the Company's gross margin was 35% compared to
38% for the first nine months of 1996. The relative decline in gross margin for
the first nine months of 1997 resulted from an increase in sales of distributed
products which carry lower margins, as well as the sale leaseback transaction,
for which the gain has been deferred.
For the nine months ended September 30, 1997, the gross profit from
proprietary products was $5.0 million, an increase of 152% compared to $2.0
million for the nine months ended September 30, 1996. The increase in the gross
profit from proprietary products resulted from an increase in the number of
installed
18
<PAGE> 20
BioJect systems. For the nine months ended September 30, 1997, the gross margin
on proprietary sales was 57% compared to 55% during the first nine months of
1996. The proprietary products gross margin for the first nine months of 1997
was favorably impacted by the product mix during the first nine months as the
Company has chosen to focus on its BioJect product line, while being negatively
impacted by the sale leaseback transaction.
For the nine months ended September 30, 1997, the Company's gross profit
from distributed products was $5.0 million, an increase of 231% compared to $1.5
million for the nine months ended September 30, 1996. The increase in the gross
profit resulted from an increase in sales of distributed products, which, in
turn, resulted from the acquisitions described above. For the nine months ended
September 30, 1997, the gross margin on distributed products was 25% compared to
27% during the first nine months of 1996. The decline in the gross profit on
sales of distributed products compared to the first nine months of 1996 resulted
from a change in the distributed product mix.
Selling, General and Administrative Expense. For the nine months ended
September 30, 1997, selling, general and administrative expense was $7.9
million, an increase of 73% compared to $4.5 million for the same period for
1996. The increase in selling, general and administrative expense was due to
additional overhead costs associated with the acquisitions discussed above.
Research and Development Expense. For the nine months ended September 30,
1997, research and development expense was $189,000, a decrease of 46% compared
to $353,000 for the nine months ended September 30, 1996. The decline in
research and development expense during the first nine months of 1997 reflects
the Company's decision to concentrate on the engineering and manufacture of the
BioJect system.
Interest Expense. For the nine months ended September 30, 1997, interest
expense was $430,000, a decrease of 18% compared to $523,000 for the nine months
ended September 30, 1996. The decrease in interest expense reflects a decrease
in the average amount of debt outstanding.
Amortization Expense. For the nine months ended September 30, 1997,
amortization expense was $401,000, an increase of 132% compared to $173,000 for
the nine months ended September 30, 1996. The increase in amortization expense
resulted from an increase in the Company's goodwill associated with the
previously discussed acquisitions.
Net Income. For the nine months ended September 30, 1997, net income was
$829,000 or $.06 per share compared to a loss of $2.4 million or $.40 per share
during the first nine months of 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO 1995
Revenues. For the year ended December 31, 1996, revenues were $12.1
million, an increase of 222% compared to $3.8 million for the year ended
December 31, 1995. The increase in revenues reflects increases in revenues from
both the Company's proprietary and distributed products.
For the year ended December 31, 1996, revenues from sales of proprietary
products were $4.5 million, an increase of 40% compared to $3.2 million for the
year ended December 31, 1995. The increase in proprietary revenues resulted from
an increase in installations of the BioJect system. For the year ended December
31, 1996, revenues from BioJect leases were $681,000, an increase of 28%
compared to $534,000 for the year ended December 31, 1995. For the year ended
December 31, 1996, revenues from sales of BioJect menu items, primarily
microbes, were $1.2 million, an increase of 31% compared to $942,000 for the
year ended December 31, 1995. The increase in revenues from leases and sales of
menu items resulted from an increase in the number of installed BioJect systems.
At December 31, 1996, the Company had 238 BioJect systems installed, an increase
of 39% compared to 171 installed at December 31, 1995. In addition, the Company
increased the number of menu items available to customers in 1996 compared to
1995.
For the year ended December 31, 1996, revenues from sales of CleanRack and
ClearLake systems were $545,000, a decrease of 10% compared to $605,000 for the
year ended December 31, 1995. For the year ended December 31, 1996, CleanRack
sales increased by 101%, but these gains were offset by a decline of 53% in
ClearLake revenues. The decline in the sales of ClearLake systems during the
year ended December 31, 1996 resulted from a decline in unit sales while the
Company redesigned the ClearLake system. While redesigning the ClearLake system,
the Company did not actively market the ClearLake system.
19
<PAGE> 21
For the year ended December 31, 1996, revenues from sales of distributed
products were $7.6 million, an increase of 1,258% compared to $562,000 for the
year ended December 31, 1995. The increase in revenues from distributed products
resulted from the acquisitions described above. Revenues from sales of
distributed products reflect seven months of revenues from Turf Products and
Turf Specialty of $3.0 million and $3.9 million, respectively.
For the year ended December 31, 1996, revenues from Aspen's operations were
$1.1 million, an increase of 212% compared to $353,000 for the year ended
December 31, 1995. The Company acquired Aspen in September of 1995, and the
results for the year ended December 31, 1995 represent only three months of
operations.
For the year ended December 31, 1996, revenues from other proprietary
products, which consisted primarily of fertilizer, were $699,000, a decrease of
14% compared to $809,000 for the year ended December 31, 1995. The decrease
resulted from the Company's decision to focus on the marketing of its BioJect
system and its other proprietary products.
Gross Profit. For the year ended December 31, 1996, gross profit was $4.7
million, an increase of 167% compared to $1.8 million for the year ended
December 31, 1995. The increase in gross profit resulted from the increase in
the Company's revenues described above. For the year ended December 31, 1996,
gross margin was 39% compared to 47% for the year ended December 31, 1995. The
decline in gross profit margin was due to the increase in sales of distributed
products and a problem with the circuit boards for the BioJect system.
For the year ended December 31, 1996, gross profit from proprietary
products was $2.5 million, an increase of 48% compared to $1.7 million for the
year ended December 31, 1995. The increase in gross profit from proprietary
products resulted from an increase in revenues from proprietary products. For
the year ended December 31, 1996, the gross profit margin on proprietary
products was 56% compared to 53% during the year ended December 31, 1995. The
increase in gross profit margin on the Company's proprietary products resulted
from an increase in the proportion of sales of BioJect menu items, which carry
higher margins than other proprietary products.
For the year ended December 31, 1996, gross profit from distributed
products was $2.2 million, an increase of 2,560% compared to $84,000 for the
year ended December 31, 1995. The increase in gross profit from distributed
product sales resulted from the acquisitions described above. For the year ended
December 31, 1996, gross margin was 29% compared to 15% during the year ended
December 31, 1995.
Selling, General and Administrative Expense. For the year ended December
31, 1996, selling, general and administrative expense was $6.5 million, an
increase of 151% compared to $2.6 million for the year ended December 31, 1996.
The increase in selling, general and administrative expense resulted from the
costs associated with the integration of the Company's acquisitions, an increase
in the number of personnel at the Company and costs associated with the repair
of a circuit board problem on the BioJect system.
Research and Development Expense. For the year ended December 31, 1996,
research and development expense was $475,000, an increase of 15% compared to
$413,000 for the year ended December 31, 1995. The increase in research and
development expense resulted from increased expenditures on the BioJect and
ClearLake systems.
Interest Expense. For the year ended December 31, 1996, interest expense
was $1.1 million, an increase of 306% compared to $262,000 for the year ended
December 31, 1995. The increase in interest expense resulted from an increase in
the amount of debt outstanding. The amount of short and long term debt increased
to $9.1 million at December 31, 1996, compared to $2.6 million at December 31,
1995.
Amortization Expense. For the year ended December 31, 1996, amortization
expense was $464,000, an increase of 931% compared to $45,000 for the year ended
December 31, 1995. The increase in expense associated with the amortization of
goodwill resulted from the acquisitions discussed above.
Net Loss. For the year ended December 31, 1997, the net loss was $4.2
million or $.62 per share compared to $1.8 million or $.35 per share for the
year ended December 31, 1995.
20
<PAGE> 22
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1994
Revenues. For the year ended December 31, 1995, revenues were $3.8 million,
an increase of 40% compared to $2.7 million for the year ended December 31,
1994. The primary cause of the growth was the increase in revenues from
proprietary product sales.
For the year ended December 31, 1995, revenues from proprietary product
sales were $3.2 million, an increase of 27% compared to $2.5 million for the
year ended December 31, 1994. The major reason for the growth in revenues from
proprietary product sales was the growth in revenues associated with the
Company's BioJect system. For the year ended December 31, 1995 BioJect system
revenues were $1.5 million, an increase of 109% compared to $719,000 for the
year ended December 31, 1994. The cause of the increase was due to an increase
in revenues per BioJect system from approximately $10,000 to $11,000 as well as
an increase in the number of systems installed. In 1995 the BioJect system was
redesigned to distribute up to three microbial products on a daily basis. At
December 31, 1995 the Company had 171 BioJect systems installed, an increase of
116% compared to 79 installed at December 31, 1994.
For the year ended December 31, 1995, sales of the ClearLake system were
$436,000, an increase of 315% compared to $105,000 for the year ended December
31, 1994. The increase in ClearLake revenues was due to an increase in the
number of ClearLake systems sold from 13 to 30.
For the year ended December 31, 1995, revenues from distributed products
were $562,000, an increase of 218% compared to $177,000 for the year ended
December 31, 1994. The increase in distributed product sales reflects an
increase in foreign sales of distributed products.
For the year ended December 31, 1995, the Company had revenues from Aspen
of $353,000. The Company purchased Aspen in September of 1995.
Gross Profit. For the year ended December 31, 1995, gross profit was $1.8
million, an increase of 158% compared to $690,000 for the year ended December
31, 1994. The increase in gross profit was due an increase in the Company's
sales of proprietary products. For the year ended December 31, 1995 the gross
margin was 47% compared to 26% for the year ended December 31, 1994. The growth
of leases of BioJect system, the growth of sales of ClearLake systems, and the
growth of sales of microbes for use in the BioJect and Clearlake systems, all of
which have higher margins than fertilizers and grass seed, as well as the
inclusion of Aspen in the Company's results, produced a significant change in
product mix in 1995 that led to a substantial improvement in the gross margin of
the Company.
For the year ended December 31, 1995, gross profit from proprietary product
sales was $1.7 million, an increase of 162% compared to $646,000 for the year
ended December 31, 1994. For the year ended December 31, 1995, the gross margin
for proprietary product sales was 53% compared to 26% for the year ended
December 31, 1994. The increase in gross profit and gross margin was due to a
favorable product mix. In 1995 more than 65% of the Company's proprietary
product sales were generated from by the BioJect, ClearLake and CleanRack
product lines versus approximately 43% in 1994. The gross margin on these
products was significantly higher than the gross margins on the Company's
fertilizer and seed sales.
Selling, General and Administrative Expense. For the year ended December
31, 1995, selling, general and administrative expense was $2.6 million, a
decrease of 4% compared to $2.7 million for the year ended December 31, 1994.
The decline in selling, general and administrative expense was the result of a
reduction in spending on the Company's mobile laboratory which was used to
support fertilizer and nutrient sales.
Research and Development Expense. For the year ended December 31, 1995,
research and development expense was $413,000, an increase of 44% compared to
$286,000 for the year ended December 31, 1994. The increase in research and
development expense reflects the increased costs associated with a new
generation of the BioJect system which was developed in 1995 and introduced to
the market in 1996.
Interest Expense. For the year ended December 31, 1995, interest expense
was $262,000, an increase of 17% compared to $224,000 in 1994. The increase in
interest expense was due to an increase in outstanding borrowings to $2.6
million at December 31, 1995 from $2.0 million at December 31, 1994.
Net Loss. For the year ended December 31, 1995, the net loss was $1.8
million, or $.35 per share, a decrease of 35% compared to $2.8 million, or $.62
per share for the year ended December 31, 1994.
21
<PAGE> 23
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly financial information for
the eleven quarters ended September 30, 1997. The information has been presented
by the Company on a basis consistent with the Consolidated Financial Statements
included elsewhere in this Prospectus and includes all necessary adjustments,
consisting only of normal recurring adjustments, that management considers
necessary for a fair presentation of the unaudited quarterly results when read
in conjunction with the Consolidated Financial Statements and Notes thereto.
These operating results are not necessarily indicative of results that may be
expected for any subsequent periods.
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------------------------
FISCAL YEAR 1995 FISCAL YEAR 1996
--------------------------------------------- ---------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Proprietary products........... $ 806 $ 929 $ 731 $ 729 $ 963 $1,467 $ 1,196 $ 857
Distributed products........... 106 98 146 212 149 1,560 3,894 2,030
------ ------ ------ ------- ------ ------ ------ -------
Total revenues........... 912 1,027 877 941 1,112 3,027 5,090 2,887
Cost of revenues:
Proprietary products........... 378 456 343 325 500 641 484 346
Distributed products........... 87 80 120 191 112 1,076 2,892 1,319
------ ------ ------ ------- ------ ------ ------ -------
Total cost of revenues... 465 536 463 516 612 1,717 3,376 1,665
Gross profit.................... 447 491 414 425 500 1,310 1,714 1,222
Operating expenses:
Selling, general and
administrative............... 632 620 765 567 974 1,697 1,870 1,948
Research and development....... 4 156 104 149 41 234 78 122
------ ------ ------ ------- ------ ------ ------ -------
Income (loss) before interest,
depreciation and
amortization................... (189) (285) (455) (291) (515) (621) (234) (848)
Depreciation and
amortization................. 84 74 108 88 112 178 248 373
------ ------ ------ ------- ------ ------ ------ -------
Income (loss) from operations... (273) (359) (563) (379) (627) (799) (482) (1,221)
Interest expense................ 66 65 41 90 56 136 331 541
------ ------ ------ ------- ------ ------ ------ -------
Net income (loss)............... $ (339) $ (424) $ (604) $ (469) $ (683) $ (935) $ (813) $(1,762)
====== ====== ====== ======= ====== ====== ====== =======
Net income (loss) per share..... $(0.07) $(0.08) $ (0.11) $ (0.08) $(0.11) $(0.15) $ (0.11) $ (0.23)
====== ====== ====== ======= ====== ====== ====== =======
Shares used in calculating net
income (loss) per share........ 5,155 5,217 5,544 5,933 6,018 6,174 7,459 7,566
====== ====== ====== ======= ====== ====== ====== =======
AS A PERCENTAGE OF REVENUES:
Revenues:
Proprietary products........... 88.4% 90.5% 83.4% 77.5 % 86.6% 48.5% 23.5% 29.7%
Distributed products........... 11.6 9.5 16.6 22.5 13.4 51.5 76.5 70.3
------ ------ ------ ------- ------ ------ ------ -------
Total revenues........... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Proprietary products........... 41.5 44.4 39.1 34.5 45.0 21.2 9.5 12.0
Distributed products........... 9.5 7.8 13.7 20.3 10.0 35.5 56.8 45.7
------ ------ ------ ------- ------ ------ ------ -------
Total cost of revenues... 51.0 52.2 52.8 54.8 55.0 56.7 66.3 57.7
Gross profit.................... 49.0 47.8 47.2 45.2 45.0 43.3 33.7 42.3
Operating expenses:
Selling, general and
administrative............... 69.4 60.4 87.2 60.2 87.6 56.1 36.8 67.5
Research and development....... 0.4 15.2 11.9 15.8 3.7 7.7 1.5 4.2
------ ------ ------ ------- ------ ------ ------ -------
Income (loss) before interest,
depreciation and
amortization................... (20.8) (27.8) (51.9) (30.8) (46.3) (20.5) (4.7) (29.4)
Depreciation and
amortization................. 9.2 7.2 12.3 9.4 10.1 5.9 4.9 12.9
------ ------ ------ ------- ------ ------ ------ -------
Income (loss) from operations... (30.0) (35.0) (64.2) (40.2) (56.4) (26.4) (9.6) (42.3)
Interest expense................ 7.2 6.3 4.7 9.6 5.0 4.5 6.5 18.7
------ ------ ------ ------- ------ ------ ------ -------
Net income (loss)............... (37.2)% (41.3)% (68.9)% (49.8)% (61.4)% (30.9)% (16.1)% (61.0)%
====== ====== ====== ======= ====== ====== ====== =======
<CAPTION>
FISCAL YEAR 1997
----------------------------------
MAR. 31, JUNE 30, SEPT. 30,
1997 1997 1997
-------- -------- ---------
<S> <<C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Proprietary products........... $ 1,144 $ 2,788 $ 4,945
Distributed products........... 2,785 8,512 8,968
------- ------ ------
Total revenues........... 3,929 11,300 13,913
Cost of revenues:
Proprietary products........... 214 543 3,073
Distributed products........... 2,040 6,460 6,730
------- ------ ------
Total cost of revenues... 2,254 7,003 9,803
Gross profit.................... 1,675 4,297 4,110
Operating expenses:
Selling, general and
administrative............... 2,288 2,798 2,772
Research and development....... 135 12 42
------- ------ ------
Income (loss) before interest,
depreciation and
amortization................... (748) 1,487 1,296
Depreciation and
amortization................. 285 202 290
------- ------ ------
Income (loss) from operations... (1,033) 1,285 1,006
Interest expense................ 167 83 179
------- ------ ------
Net income (loss)............... $(1,200) $ 1,202 $ 827
======= ====== ======
Net income (loss) per share..... $ (0.12) $ 0.08 $ 0.06
======= ====== ======
Shares used in calculating net
income (loss) per share........ 9,973 14,656 15,016
======= ====== ======
AS A PERCENTAGE OF REVENUES:
Revenues:
Proprietary products........... 29.1 % 24.7 % 35.5%
Distributed products........... 70.9 75.3 64.5
------- ------ ------
Total revenues........... 100.0 100.0 100.0
Cost of revenues:
Proprietary products........... 5.5 4.8 22.1
Distributed products........... 51.9 57.2 48.4
------- ------ ------
Total cost of revenues... 57.4 62.0 70.5
Gross profit.................... 42.6 38.0 29.5
Operating expenses:
Selling, general and
administrative............... 58.1 24.8 19.9
Research and development....... 3.4 0.1 0.3
------- ------ ------
Income (loss) before interest,
depreciation and
amortization................... (18.9) 13.1 9.3
Depreciation and
amortization................. 7.3 1.8 2.1
------- ------ ------
Income (loss) from operations... (26.2) 11.3 7.2
Interest expense................ 4.3 0.7 1.3
------- ------ ------
Net income (loss)............... (30.5)% 10.5 % 5.9%
======= ====== ======
</TABLE>
22
<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
Prior to its second quarter ended June 30, 1997, the Company had incurred
net losses and negative cash flows from operations. Since its inception, the
Company has financed its operations from revenues from sales of its products,
sales of its Common Stock, borrowing from its principal shareholders and bank
financing. In January 1997, the Company issued 3,795,000 shares of common stock
at a price of $4.125 per share in an initial public offering of its shares. The
Company received net proceeds of approximately $13,272,000 which were used for
the purchase of Turfmakers, the reduction of debt and working capital purposes.
During the first nine months of 1997, the Company used $4.9 million in cash
relating to its operating activities. At September 30, 1997, the Company had
working capital of $5.3 million.
During 1996, the Company used $4.6 million in cash relating to its
operating activities. The Company used $1.8 million to acquire Turf Products and
Turf Specialties in May 1996. The Company generated $6.0 million of cash from
financing activities during 1996. The financing activities consisted primarily
of: $3.7 million of bridge notes issued in July 1996, of which $1.8 million were
repaid and $1.9 million were converted in February 1997 subsequent to the
Company's initial public offering, approximately $1.0 million from bank
financing and approximately $1.3 million from loans from officers and
shareholders.
On September 30, 1997 the Company entered into a sale leaseback of certain
of its equipment under operating leases which generated proceeds of $4.0
million. In addition, the Company expanded its existing line of credit with
Imperial Bank to $5.0 million.
The Company believes that the net proceeds from the Offering will be
sufficient to finance its operations and future growth for at least the next
twelve months. The Company intends to fund its future operations and growth
through a combination of product revenues, borrowing available under the line of
credit, and public or private debt or equity financing. However, there can be no
assurance that such financing alternatives will be available under favorable
terms, if at all.
QUARTERLY FLUCTUATIONS
Eco Soil's operating results vary from quarter to quarter as a result of
various factors. Virtually all of the Company's customers are located in the
Northern Hemisphere and purchase greater quantities of microbes and distributed
products during the spring, summer and fall months. As a result of low customer
activity during the winter, the Company typically markets the BioJect system
during the fourth and first quarters. As a result of these marketing efforts,
the Company typically receives orders during the first and second quarters and
installs BioJect systems during the second and third quarters. BioJect lease and
installation revenues are recognized upon receipt of payment. Because of this
sales cycle, the second and third quarters historically have accounted for
approximately 30% and 35%, respectively, of annual revenues. The first and
fourth quarters, by contrast, historically have accounted for approximately 10%
and 25% of revenues, respectively. Operating expenses have tended to be
independent of the quarterly sales cycle. As a result, operating expenses
generally represent a higher percentage of sales in the first and fourth
quarters as compared to the second or third quarters, and the Company may
experience losses in the first and fourth quarters. Accordingly, results for any
quarter are not necessarily indicative of results for any future period. The
sales cycle for the BioJect system also makes it difficult to predict the number
of BioJect systems that will be leased and the quantity of microbial product
sales that will be sold until orders are received by the Company during the
first half of the year. Sales of the Company's products also depend to some
extent on the severity of weather patterns in the geographic areas served by the
Company. Given these factors, it is difficult for the Company to accurately
predict the level of demand for its products.
23
<PAGE> 25
ACCOUNTING PRINCIPLES
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share. Under Statement No. 128, the Company will be
required to present basic net income per share, which excludes the effects of
dilutive common stock equivalents, and diluted net income per share. Basic net
income per share is expected to be higher than the currently presented primary
net income per share in periods of positive earnings due to the exclusion of
dilutive stock options in its computation. Diluted net income per share is not
expected to be materially different from the earnings per share amounts which
would be computed under the current method.
The Company is required to adopt Statement No. 128 in its fiscal quarter
ending March 31, 1998, and at that time all historical net income per share data
presented will be restated to conform to the provisions of Statement No. 128.
24
<PAGE> 26
BUSINESS
GENERAL
Eco Soil develops, markets and sells proprietary biological and traditional
chemical products that provide solutions for a wide variety of turf and crop
problems in the golf and agricultural industries. The Company has developed its
patented BioJect system for the distribution of naturally occurring microbes
that complement or reduce the need for many chemical products currently used in
golf and agricultural markets. By fermenting microbes at the customer's site and
distributing them through the customer's existing irrigation system, the BioJect
system provides customers with cost savings and mitigates the adverse
environmental effects associated with chemical products. The Company initially
has focused its sales and marketing efforts on the golf market, and recently has
entered the agricultural crop and ornamental markets. To date, Eco Soil has
installed 345 BioJect systems at customer sites, including such renowned golf
courses as Congressional Country Club, Winged Foot Golf Club and Spyglass Hill
Golf Club.
By utilizing microbes that occur naturally in the environment, the BioJect
system overcomes many of the problems associated with traditional chemical
products. Traditional chemical products require repeated applications, which
reduce the long-terms effectiveness of such products and have been shown to have
adverse environmental effects. The BioJect system reduces the need for repeated
chemical product applications, resulting in lower overall product and labor
costs and increases the effectiveness of traditional chemical products. In
addition, the Company believes that the use of microbes distributed through the
BioJect system provides environmental benefits as compared to chemical product
applications by limiting the exposure of humans to chemical products, reducing
residual pesticide contaminants in plants and soil, and minimizing groundwater
pollution.
The BioJect system overcomes many of the obstacles that historically have
hindered wide-spread use of microbes in the golf and agricultural industries.
Biological products generally have been perceived as economically infeasible
because of their short shelf life, rapid deterioration upon exposure to light or
heat, specialized transportation requirements and need for daily, manual
applications. By fermenting microbes at the customer's site and distributing
them through the customer's existing irrigation system, the BioJect system
preserves and protects the potency of microbes, significantly reduces shipping
costs, controls the concentration of product and allows for automated daily
application. Eco Soil knows of no other company pursuing this approach.
The Company generates recurring revenues by leasing BioJect systems to
customers and selling various microbial products for distribution through the
system. The Company has entered into technology transfer agreements pursuant to
which it has obtained rights to certain microbes for distribution through the
BioJect system from leading biotechnology companies such as Mycogen Corporation,
Abbott Laboratories and Encore Technologies, Inc. and major universities such as
Michigan State University and the University of California, Riverside. Eco Soil
currently offers BioJect customers a menu of six microbial products and intends
to obtain rights to additional microbes.
MARKET OVERVIEW
A survey performed by the National Golf Foundation indicates that in 1996
there were over 15,700 golf courses in the United States that purchased annually
in excess of $425 million of chemical products. According to data reported by
AGROW World Group Protection News, an industry publication, the total worldwide
agricultural market for chemical products in 1996 was approximately $31.3
billion.
Microbial products complement or reduce the need for traditional chemical
products and offer a number of advantages. When microbes are applied as part of
the normal irrigation cycle, chemical products can be used less frequently and
at lower rates to address specific problems. This, in turn, reduces the total
amount of chemical pesticides consumed, resulting both in cost savings and
environmental benefits. Environmental benefits include reduced soil and
groundwater contamination, slower resistance on the part of target plants and
animals to chemical products and decreased contact by golf course personnel or
farm workers with chemical products.
25
<PAGE> 27
Biological products generally have been perceived as economically
infeasible because of their short shelf life, rapid deterioration when exposed
to light or heat, specialized transportation requirements and the need for
daily, manual applications. In addition, most biological and chemical products
are applied manually by tank mixing the products in water and then manually
spraying the products on the areas that need to be treated. Due to the need for
manual application, this process is time consuming and labor intensive,
especially when performed on large acreages. In the case of biological products,
where more frequent applications are required than their chemical counterparts,
the need for frequent manual applications has made biological products
economically uncompetitive.
THE ECO SOIL SOLUTION
The BioJect system overcomes many of the obstacles that have hindered
wide-spread use of biological products in the turf and agricultural industries.
By fermenting microbes at the customer's site and distributing them through the
customer's existing irrigation system, the BioJect system preserves and protects
the potency of microbes, significantly reduces shipping costs, controls the
concentration of product and allows for automatic daily application. The "menu"
of six microbial products offered by the Company allows it to address a variety
of turf and crop problems and to customize treatment programs to meet customers'
specific needs. The Company knows of no other company pursuing this approach.
Some of the potential cost savings and environmental advantages of the BioJect
system include the following:
Potential Cost Savings
- reduced amounts and frequency of use of chemical fungicides, herbicides,
insecticides and fertilizers;
- reduced labor costs compared to traditional methods of applying chemical
and biological products by using irrigation water as a distribution
medium;
- reduced water consumption of up to 40% due to improved soil porosity and
increased toxin remediation; and
- increased seed germination rates, which may result in lower seed and
fertilizer costs.
Environmental Advantages
- reduced soil and groundwater pollution;
- fewer residual pesticide contaminants in plants and their byproducts;
- immediate access to treated areas after application; and
- lower toxicity to humans and non-target animals and plants.
STRATEGY
The Company's strategy is to expand its leadership position in the
distribution and sale of microbial products in the golf industry and to leverage
its experience in this industry into agricultural crop and ornamental markets.
Increase Penetration of Golf Markets. The Company currently has an
installed base of 320 BioJect systems and 14 CalJect systems in the golf market.
These BioJect systems are disbursed among 24 states and 7 countries. The Company
intends to continue to focus its sales and marketing efforts on increasing the
number of installations of its BioJect system and expanding the number of menu
items sold to each customer. The Company also intends to utilize its installed
base to further increase the volume of sales of distributed products. The
Company believes that its strategy of leasing rather than selling BioJect
systems promotes a more rapid expansion of its customer base by relieving its
customers of having to make substantial capital investments. The Company
believes that as it demonstrates the advantages of its proprietary products, the
use of biological products in the golf industry will become more widespread and
the Company will be well positioned to exploit new market opportunities.
26
<PAGE> 28
Establish Nationwide Sales and Distribution Network. Major golf course
markets tend to be represented by a single sales organization that controls a
significant portion of new product introductions and their subsequent
penetrations into golf courses in their regions. This distribution network is
highly regionalized and based strongly on individual relationships. The Company
has made three acquisitions in regional markets including New England, the
Chicago metropolitan area and Southern California. The Company intends to
acquire additional dealers and distributors, to hire selected personnel and to
integrate them into a single sales organization in order to enhance the
Company's ability to market and sell its proprietary products, establish itself
as a single source supplier to golf courses and increase its penetration into
golf markets. The Company believes that this consolidation of golf dealers and
distributors also may improve the Company's profitability through volume
discounts.
Expand into Agricultural Markets. The Company currently has an installed
base of 25 BioJect systems and 8 CalJect systems in agricultural markets.
Although the Company initially has focused on golf applications for the BioJect
system, the Company has begun to focus on agricultural crop and ornamental
markets. The Company currently is conducting tests of salt remediation products
on tomato fields in Mexico and on strawberry fields and avocado and citrus
groves in Southern California. The Company also is conducting tests with major
universities on the effectiveness of its microbial products on certain pathogens
found in the peanut, avocado and citrus industries. In addition, the Company has
begun testing applications for ornamentals such as ferns and cut flowers with
Novartis Crop Protection, Inc. If the Company's test programs prove successful,
the Company intends to form strategic partnerships with various companies
involved in the sale of products to the agriculture industry in order to jointly
market products. In particular, the Company intends to devote significant
resources to penetrating the ornamental markets because of the limited
regulation of such markets.
Increase Number of Microbial Menu Items. In order to maximize the revenues
it generates from each BioJect system, Eco Soil intends to expand the selection
of microbes it offers its customers. To this end, the Company has entered into
discussions with various leading biotechnology companies and major universities
to obtain rights to additional microbes. The Company also has increased its
research and development efforts to determine which microbes will be suitable
for distribution through the BioJect system.
Further Develop International Markets. To date, the Company has sold 25
BioJect systems to customers in 6 countries outside the U.S., including 11
BioJect systems in Japan and 7 BioJect systems in Mexico. The Company believes
that there is a significant opportunity to further develop its sales in
international markets due to increased demand for alternatives to chemical
products and heightened environmental awareness. The Company has established
formal distribution relationships in Japan, Korea, Australia, Mexico, Canada,
Brunei and South Africa. The Company also owns a 51% interest in a South African
golf products distribution company. The Company intends to expand its
international sales to additional markets, particularly within the Pacific Rim,
through independent third party distributors or through joint ventures.
PRODUCTS
The Company sells proprietary products and distributed products. The
Company's proprietary products primarily include its patented BioJect system,
its menu of six microbial products, its CalJect system and certain other
proprietary products, including its ClearLake and CleanRack systems. The
Company's distributed products consist of traditional fertilizers and pesticides
that are distributed through the Company's dealers and distributors.
Proprietary Products
The Company's proprietary products consist of (i) the BioJect system, which
automatically ferments and distributes microbes through irrigation systems, (ii)
the CalJect System, which permits the injection of soil and water amendments
into irrigation systems and (iii) other proprietary products, including the
ClearLake and CleanRack systems.
27
<PAGE> 29
BioJect System
The BioJect system permits the introduction of microbes into the soil with
the required frequency and in a cost-effective and environmentally safe manner.
Because biological products are subject to degradation upon exposure to high
temperatures, light or long storage periods, the introduction of these microbes
into the soil on a regular basis had not been economically feasible prior to the
development of the BioJect system. The BioJect system overcomes the traditional
problems associated with introduction of microbes into the soil by fermenting
them at the customers' site during the day and then dispensing the microbes into
the customer's irrigation system automatically at night. The BioJect system
includes fermentation chambers, pumps, injectors and computer controls that
coordinate the scale-up of microbial products and their injection into the
customer's irrigation system. The BioJect system is equipped with hardware and
proprietary software that allows the user to select or pre-program the microbe
application rate and time of delivery through its user-friendly control panel.
The system also automatically controls the amount of nutrients, dissolved
oxygen, temperature and pH of the fermentation chamber to optimize the scale-up
of microbial populations from a starter culture.
The Company believes that its BioJect system will become the preferred
distribution vehicle for many microbial products because it is able to overcome
the poor shelf life characteristics that have previously prevented biological
products from being practical alternatives or complements to chemical products.
The BioJect system has been designed to apply up to three microbial
products at a time. The Company is the sole supplier of all of the consumables
(biologicals and media) that are required in its BioJect system, as well as
hardware maintenance services. The BioJect system is the Company's primary
product, and the Company intends to focus most of its efforts on enhancing the
capabilities of and promoting the BioJect system to the golf industry and
exploring potential expansion of its BioJect system into the agricultural
ornamental and crop industries.
The Company's installed base of BioJect systems has experienced rapid
growth in recent years, as shown in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------- --------------
1992 1993 1994 1995 1996 1996 1997
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Cumulative number of installed
BioJect Systems................... 13 46 79 171 238 238 345
</TABLE>
The Company has sold or leased its BioJect system to some of the most
famous and notable golf courses in the world, including the following:
<TABLE>
<S> <C>
- Aviara Golf Club (CA) - Point-O'Woods Country Club (MI)
- Baltimore Country Club (MD) - Royal Brunei Golf and Country Club
- Big Horn Country Club (CA) (Brunei)
- Caledonian Golf Club (Japan) - Skokie Country Club (IL)
- Congressional Country Club (MD) - Spyglass Hill Golf Club (CA)
- John's Island Club (N,W&S) (FL) - Sun City Resorts -- Gary Player Country
- Jupiter Hills Club (FL) Club (S. Africa)
- Leopard Creek Golf Course (S. Africa) - Sun City Resorts -- Lost City Golf Course
- Merion Golf Club (PA) (S. Africa)
- North Shore Country Club (IL) - Tres Vidas Golf Course (Mexico)
- Pelican Hill Golf Club (CA) - Westchester Country Club (NY)
- Monterey Peninsula Country Club (CA)
- Winged Foot Golf Club (NY)
</TABLE>
The Company offers a menu of six microbial products that can be delivered
through its BioJect system. The BioJect system has evolved from delivering only
bacteria of the Bacillus family to delivering a variety of microbial products.
The Company licenses and/or acquires such microbes from universities and
corporations. These products appear on the Company's BioJect menu and complement
or reduce the need for many chemical fungicides, herbicides, insecticides and
fertilizers. The consumable product in each menu item is generally a microbe,
and each microbe is cultured in the BioJect system under a proprietary formula.
Different microbes are used for different applications because their mode of
action and performance varies.
28
<PAGE> 30
Set forth below is a table showing the name of each of the Company's
microbial products, the Company's rights to the microbe, the source of the
microbe and the application for each microbe.
<TABLE>
<CAPTION>
MICROBE NAME SOURCE COMPANY'S RIGHTS USE EXPIRATION DATES
- -------------------- -------------------- -------------------- ---------------------- -----------------
<S> <C> <C> <C> <C>
Bascillus Spp. Chr. Hansen, Inc. Public domain Improves soil porosity Indefinite
to enhance plant
growth
Azosporillium Encore Technologies, Exclusive worldwide Converts atmospheric February 29, 2000
brasilense Cd Inc. ("Encore") license for use nitrogen into plant
through the BioJect available form;
system enhances root and top
growth of plants
Cellulomonas Sps. Encore Public domain Helps reduce thatch Indefinite
layer to enhance turf
growth
Pseudomonas Encore/Michigan Assignment of rights Promotes organic Expiration date
aureofaciens TX-1 State University granted to Encore matter degradation and of underlying
("TX-1") under exclusive other activities in patents
worldwide license the soil and turf
from Michigan State environment that
University minimizes the
conditions conductive
to the development of
certain turfgrass
diseases
Bascillus Abbott Laboratories Non-exclusive Biological insecticide Terminable upon
thuringiensis distribution rights for the control of 30 days notice
(DiPel 2x) armyworms and sod
webworms in turf (EPA
Reg. No. 275-37)
Xanthomonas Mycogen Option through Research Authorization November 1, 1998
campestris Corporation/Michigan November 1, 1998 to and application for
State University acquire rights Experimental Use
granted to Mycogen Permit as a selective
under exclusive postemergent
worldwide license biological control of
from Michigan State Poa annua
University
</TABLE>
The Company has obtained exclusive rights to several microbes pursuant to a
license and supply agreement with Encore and certain assignments of intellectual
property made by Encore to the Company. The license and supply agreement
provides for an exclusive, worldwide, royalty-free license to use, sell and
distribute Azospirillum brasilense Cd for application through the BioJect
system. In addition, Encore has assigned to the Company all of Encore's rights
to media (proprietary material formulations used to promote fermentation and
multiplication of microbial products in the BioJect system) and rights to
Pseudomonas aureofaciens TX-1 that Encore obtained under a license agreement
with Michigan State University. Under the license and supply agreement with
Encore, Encore is obligated to produce cultures of microbial products suitable
for fermentation in BioJect systems ("Inoculum"), and the Company has agreed to
purchase certain minimum amounts of Inoculum from Encore.
To increase the menu of items for use in its BioJect system, the Company
intends to enter into additional licensing agreements with leading biotechnology
companies and major universities once new microbial products have been proven
effective. To meet the technical challenges associated with the task of
optimizing the scale-up of these distinct microbes within the BioJect system and
distributing them within the irrigation cycle, the Company has entered into
research and development agreements with companies specializing in fermentation
of microbes. The Company also intends to bring more technical expertise in-house
in order to evaluate new microbial products, maximize the value of its programs
and gain more expertise in the area of registration and labeling requirements.
29
<PAGE> 31
CalJect System
The Company's CalJect system permits the injection of soluble soil and
water amendments into irrigation systems. The Company has developed ESSI Soluble
Gypsum, a soil amendment, specifically for distribution through the CalJect
system. ESSI Soluble Gypsum combats water salinity, soil alkalinity and
bicarbonate problems most often encountered by golf courses and growers in the
western United States and Mexico. The Company believes that use of the CalJect
system and ESSI Soluble Gypsum can reduce golf courses' and growers' water
consumption and improve turf quality and crop yields. The Company currently has
an installed base of 22 CalJect systems.
As golf courses and growers irrigate with poor quality water, salts
accumulate in their soils. These salts damage soil and roots, reducing turf
quality and crop yields. The Company believes that approximately 20% of water
used on golf courses in the western United States is used to leach the excess
salt that accumulates in the soil. Eliminating the need for such extra water
could mean significant savings for such golf courses. In addition, alkaline
soils typically found in the western United States and Mexico harm turf and
crops by stressing roots, blocking nutrient uptake and impeding water
infiltration. The CalJect system provides for automatic application of water and
soil amendments through irrigation systems to address such problems.
The CalJect system converts the Company's water and soil amendment
products, including ESSI Soluble Gypsum, into solution form and injects them
into an irrigation system. The Company designs and implements a customized
CalJect program for each of its customers based on soil and water test results.
The Company monitors the success of each program and prepares a soil and water
analysis for each customer. Independent consultants make on-going
recommendations based on the results of such analyses.
Other Products
The Company also offers a ClearLake system, a pond and lake restoration
system, and CleanRack system, an equipment wash rack and water treatment system
that reclaims contaminated equipment wash water, making it suitable for
recycling or discharge. The ClearLake system is a patented system that is
designed to improve the aesthetics and water quality of water used for both
irrigation and ornamental ponds and lakes. The ClearLake system has been
designed for lakes which are particularly difficult to keep clean because the
constant inflow of contaminants and nutrients into the lake is too high for the
lake's ecosystem to stay in balance. The Company's CleanRack system cleans the
water that is typically used to wash golf course equipment and recycles it for
use. If the water is reused without treatment, it often contributes to
mechanical breakdowns and can pose serious health risks to those with whom it
comes into contact. The CleanRack system is designed to decontaminate wash water
so that it complies with applicable state and federal environmental and safety
regulations and is suitable for discharge or can be safely recycled.
Distributed Products
In addition to the proprietary products described above, the Company also
sells a complete line of traditional chemical fertilizers and pesticides and
other turf maintenance products through the dealers and distributors owned by
the Company. In order to meet all of its customer's turf maintenance needs, the
Company's distributors keep in stock an inventory of branded pesticides,
fertilizers, seed, and other necessary products from many agricultural
manufacturers. Such products include fertilizers from Lebanon Chemical
Corporation, The Doggett Corp., Growth Products Ltd., Plant Marvel Laboratories,
Inc., The Anderson's, Vicksburg Chemical Company, IMC Vigoro and pesticides from
Bayer Corporation, Novartis Corporation, ISK Biotech Corporation, PBI Gordon
Corporation, Kincaid Enterprises, Rhone-Poulenc AG Company and Rohm and Haas
Company.
SALES AND DISTRIBUTION
Since May 1996, the Company has focused on establishing sales and
distribution capabilities by acquiring independent turf products dealers and
distributors and integrating them into a single, nationwide sales organization
to promote sales of the Company's BioJect and CalJect systems to golf courses.
To date, the Company has acquired three independent golf product distributors,
which are located in New England, the
30
<PAGE> 32
Chicago metropolitan area and the Palm Springs area. The Company also has hired
sales and other key personnel to establish a regional presence in Southern
California and Pennsylvania. The Company currently has 38 sales and marketing
personnel divided among three sales regions covering the eastern, midwestern and
western parts of the United States. Each region has its own general manager
responsible for maintaining customer satisfaction and expanding the Company's
customer base.
Consistent with the Company's strategy of concentrating initially on golf
course markets, the Company has not sought to acquire agricultural product
distributors. To date, the Company has distributed BioJect and CalJect systems
to agricultural markets through testing programs and direct sales efforts.
Distribution to Golf Markets
In general, major golf course markets are represented by a single sales
organization that controls a significant portion of new product introductions
and their subsequent penetrations into golf courses in their regions. Prior to
the Company's initial dealer acquisitions in May 1996, the Company sold its
proprietary products primarily through direct sales efforts and relationships
with certain regional dealers. By expanding its distribution capabilities using
full-service turf products dealers, the Company has been able to leverage
existing distributor relationships to more effectively sell its proprietary
systems.
In early 1996, the Company initiated its strategy of consolidating its golf
distribution network through acquiring independent products distributors and
hiring key sales personnel. On May 31, 1996, the Company acquired Turf Products,
a Chicago-based company that markets and sells fertilizers, pesticides, grass
seed and soil amendments to golf courses throughout the greater Chicago
metropolitan area, and Turf Specialty, a New Hampshire-based company that
markets and sells similar products to golf courses and municipalities throughout
the New England region. On February 19, 1997, the Company acquired substantially
all of the assets of Turfmakers, a turf products distributor in the Palm Springs
area. Turf Products, Turf Specialty and Turfmakers are established in the turf
maintenance industry for golf course markets in the greater Chicago, New England
and Palm Springs areas, respectively. While other dealers in these markets
generally compete for market share through aggressive pricing, the Company has
adopted a value-added, customer service focus, which is essential for
introducing technologically-advanced, proprietary products such as the BioJect
system.
The Company expects to increase its market penetration in the geographic
areas served by its dealers and distributors by hiring additional sales
personnel as well as opening satellite warehouses to serve new customers. In
February 1997, the Company hired sales people and related personnel in San Diego
and established a distribution operation in Southern California. In March 1997,
the Company hired six sales people in Pennsylvania, enabling the Company to
penetrate that market.
The Company currently is exploring the possibility of acquiring additional
distributors and making additional strategic hires in areas of the United States
not currently serviced by the Company. When reviewing an acquisition candidate,
the Company looks for the following characteristics: (i) strength of the
candidate's management team and sales ability; (ii) the geographic location of
the candidate; (iii) the products sold by the candidate; and (iv) the
profitability of the candidate's business. In most cases, the Company seeks to
keep the candidate's management in place for a period of time.
The Company believes that the establishment of the Company's regional sales
and distribution network will offer several benefits to the Company, including
(i) improved profitability due to increased sales of proprietary products; (ii)
improved overall financial results due to consolidated operations; (iii)
increased margins through volume discounts; and (iv) increased visibility in
golf markets and greater credibility in larger markets such as the agricultural
crop and ornamental industries.
Although the Company has shifted its focus to expanding sales through the
Company's acquired dealers and distributors, the Company maintains relationships
with seven independent distributors. The Company supplements the sales efforts
of its acquired distributors, other regional distributors and its direct sales
force through seminars given by members of the Company's Scientific Advisory
Board on the benefits and efficacy of microbial products.
31
<PAGE> 33
Distribution to Agricultural Markets
The Company currently has an installed base of 25 BioJect systems and 8
CalJect systems in agricultural markets. Although the Company initially focused
on turf applications for the BioJect system, the Company has begun to focus on
agricultural crop and ornamental markets. The Company currently has three full
time sales people dedicated to agricultural markets.
As part of its strategy to penetrate agricultural markets, the Company has
begun testing combined applications of the Bacillus Spp. microbe through the
Bioject system and Eco Soil's soluble gypsum through the CalJect system to
address soil salinity problems. The Company currently is conducting tests of its
salt remediation products on tomato fields in Mexico and on strawberry fields
and avocado and citrus groves in Southern California. The Company also is
conducting tests with the University of Texas on the effectiveness of microbial
products on certain pathogens found in the peanut industry and with the
University of California, Riverside, on pathogens found in the avocado and
citrus industries. The Company intends to expand the number of trials on food
crops and apply for regulatory approval for products which are found to be
effective. In addition, the Company has begun testing applications on
ornamentals such as ferns and cut flowers with Novartis Crop Protection, Inc.
If the Company's test programs prove successful, the Company intends to
form strategic partnerships with various companies involved in the sale of
products to the agriculture industry in order to jointly market products. The
Company does not anticipate building a significant direct sales force for its
products in the agriculture industry.
RESEARCH AND DEVELOPMENT
The Company has not engaged in its own research and development with
respect to the discovery of microbial products. Instead, the Company has
obtained rights to microbial products that have been proven effective for
applications in the turf maintenance and agricultural crop and ornamental
industries. Much of the Company's in-house research and development effort is
targeted at determining which microbes will be suitable for distribution through
the BioJect system and the engineering of the fermentation and product delivery
features of the BioJect system. The Company spent approximately $413,000 and
$475,000 on research and development for the years ended December 31, 1995 and
1996, respectively. The Company believes its strategic objectives can best be
met by combining its in-house product development efforts with the licensing of
technology and the establishment of research collaborations with scientists at
academic institutions and at companies working in related fields.
GOVERNMENT REGULATION
The Company is subject to laws and regulations administered by federal,
state and foreign governments, including those requiring registration or
approval of fertilizers, pesticides, water treatment products and product
labeling. To date, with the exception of its bascillus thuringiensis product
which is an EPA registered pesticide, the Company has marketed its microbial
products as soil amendments. The Company believes future sales will be
strengthened if the Company can secure approval of individual microbes as
pesticides.
In most countries, governmental authorities require registration of
pesticides before sales are allowed. In the United States, the EPA regulates
pesticides under the Federal Insecticide, Fungicide and Rodenticide Act
("FIFRA"). Pesticides are also regulated by the individual states such as
California which has its own extensive registration requirements. In order to
market pesticide products outside the United States, the Company must receive
regulatory approval from the authorities of each applicable jurisdiction. In
addition, the EPA under the Federal Food, Drug and Cosmetic Act ("FFDCA")
establishes standards for residues in food to protect health.
Detailed and complex procedures must be followed in order to obtain
approvals under FIFRA to develop and commercialize a pesticide product. A
separate registration application must be submitted to the EPA for each
microbial product and must list each pest for which the product will be used.
Evaluation data for the
32
<PAGE> 34
registration include, but may not be limited to, non-target organism testing,
environmental data, product analysis and residue chemistry, and toxicology
(hazards to human beings and domestic animals).
The EPA has established reduced testing requirements for registration of
microbial pesticides, which are set out in Subdivision M of the EPA's Pesticide
Assessment Guidelines. Microbial pesticides are currently subject to a
three-tier toxicology testing procedure, and a four-tier environmental
evaluation process. If results of toxicology and environmental Tier 1 tests do
not suggest health and safety concerns, then subsequent tier testing is not
required. Additional tests may be required, however, in response to any
questions which may arise during any tier of testing. Registration of the
Company's pesticidal products may take up to two years including the time
necessary for collection of the necessary product data. The cost of registration
is typically less than $500,000. In contrast, synthetic chemical pesticides
require much more extensive toxicology and environmental testing to verify
product safety prior to receiving registration, which the Company estimates can
take a total of five to seven years or longer and can cost $5 to $10 million or
more. Chemical pesticides that are already registered are also being subjected
to additional testing requirements.
In July 1992, the EPA announced its "Reduced Risk Pesticide Policy"
initiative and is in the process of developing criteria for streamlining the
regulatory process. In June 1993, the Clinton Administration announced its
commitment to reduce the use of pesticides and promote sustainable agriculture
in the United States. The EPA, the United States Department of Agriculture (the
"USDA") and the FDA are all considering regulatory reforms. In testimony before
Congress on September 21, 1993, the administrators of the USDA, the FDA and EPA
stated their intentions to work jointly to reduce risk associated with
pesticides and to facilitate the availability of alternative effective pest
control products. These policy initiatives and legislative reviews could in the
future accelerate the registration of biopesticides meeting "reduced risk"
criteria, but there can be no assurance of the impact or timing of these
initiatives.
FIFRA allows laboratory and greenhouse testing and, usually, small-scale
field testing to be conducted prior to product registration, to evaluate product
efficacy and to gather data necessary to support an application. An Experimental
Use Permit ("EUP") must be obtained from the EPA to conduct large-scale field
testing prior to product registration. An EUP is required for testing in one or
more land sites greater than ten cumulative acres. Issuance of an EUP normally
requires satisfactory completion of certain toxicology and environmental
studies. Field testing of certain microbial agents may require the approval of
the Animal and Plant Health Inspection Service ("APHIS"), an office of the USDA.
APHIS approvals are granted on a site specific basis, and additional state
approvals may also be required.
With the exception of its bascillus thurnigiensis product which has been
registered with the EPA by the Company's licensor, the Company has not received
approvals for the use of any of its products as pesticides. The Company is
currently testing its Xanthomonas product that it intends to market as a
pesticide, has applied for an EUP and expects to apply for formal approval by
the EPA and certain state authorities in the future.
For marketing and use of its products outside the United States, the
Company will be subject to foreign regulatory requirements. Such requirements
vary widely from country to country. In some instances foreign government
approval may require different or additional testing data than that required by
the EPA. Failure to achieve such registration would prevent the Company from
marketing its unregistered products as pesticides in those jurisdictions where
approval is not granted. While the Company exports certain of its microbial
products outside the United States, it does not currently market any of its
products as pesticides in any foreign countries.
In addition, the Company is currently subject to the Occupational Safety
and Health Act, the National Environmental Policy Act, the Toxic Substance
Control Act, the Resource Conservation and Recovery Act, the Clean Air Act and
the Clean Water Act and may be subject to other present and potential future
federal, state or local regulations. From time to time, governmental authorities
review the need for additional laws and regulations for pesticide products that
could, if adopted, apply to the business of Eco Soil. The Company is unable to
predict whether any such new regulations will be adopted or whether, if adopted,
they will adversely affect its business. See "Risk Factors -- Government
Regulation."
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<PAGE> 35
PATENTS AND PROPRIETARY RIGHTS
The Company's success is dependent in large measure upon its ability to
obtain patent protection for its products and to maintain confidentiality and
operate without infringing upon the proprietary rights of third parties. The
Company has obtained and is seeking additional U.S. and foreign patents covering
both the process of automatically inoculating irrigation water with biological
products and the equipment, namely the BioJect system, used in such process.
Specifically, in 1993 the Company was granted two U.S. patents that relate to
the inoculation process and the related equipment. In 1995, the Company was
granted an additional patent relating to the automatic inoculation of irrigation
water through the use of a BioJect system designed to "cleanse" itself so that
it may grow, culture and dispense distinct microbes or combinations of microbes
on a daily basis. The 1995 patent also expanded the scope of the invention to
include irrigation systems covering all types of vegetation, in addition to
turf. In August 1995, the Company submitted another patent application that
covers a system that is designed to grow and inject distinct microorganisms or
combinations of microorganisms selected on a preprogrammed basis. This
application is still pending.
In addition to the patent applications described above, the Company has
registered or applied for registration of a number of trademarks used in its
business, including the trade names "BioJect" and "CalJect." The Company also
relies on trade secrets and proprietary know-how. See "Risk Factors -- Patents,
Proprietary Technology and Licenses."
MANUFACTURING AND SUPPLY
A majority of the parts and components utilized in the BioJect and CalJect
systems are standardized industrial components. The computer controls and the
fermentation tank used in the BioJect system are designed and manufactured to
Company specifications by third parties. The Company has no contracts for supply
of parts and components used in its systems. Instead, the Company submits
purchase orders for such items as needed. Parts and components are shipped
directly to the Company's third-party assemblers for assembly and testing, and
the Company's product management team oversees the assembly and testing process.
The completed BioJect and CalJect systems are shipped by the assemblers to the
Company's distributors or directly to customers. The Company believes that it is
not dependent on any single manufacturer or source of supply.
The Company has established relationships with third party fermentation
specialists that prepare base cultures of microbes for fermentation and
distribution through the BioJect system. The Company maintains starter cultures
for each of its microbes to use for ongoing testing purposes and as a backup
culture supply.
The Company obtains distributed products directly from manufacturers. The
Company does not have any long-term distribution agreements with distributed
product manufacturers. The Company maintains an inventory of distributed
products and submits purchase orders on an as-needed basis. The Company is an
approved distributor for various well-known pesticide, fertilizer and seed
manufacturers, including IMC Vigoro, Bayer Corporation, Novartis Corporation and
Rhone-Poulenc AG Company.
COMPETITION
The Company's principal competitors with respect to its primary products
are described below:
BioJect System
The Company's BioJect system competes against traditional chemical
insecticides and fungicides, chemical soil penetrants, acid injection systems,
and the direct, manual application of cultured microbial products. Although the
Company believes that none of its competitors offers an automated means of
regularly applying microbial products to turf and crops in an effective manner,
many of the Company's competitors have substantially greater financial,
technical and personnel resources than the Company and include such well-
established companies as Novartis Corporation, Rhone-Poulenc AG Company, the Dow
Chemical Company, O.M. Scotts & Sons, Inc., Lesco, Inc., and The Toro Company,
as well as a number of smaller local and regional competitors. The Company
competes against traditional technologies on the basis of its delivery
34
<PAGE> 36
mechanism and bioaugmentation expertise. An important factor in the long-term
competitiveness of the BioJect system may be the timing of and extent of the
Company's penetration into golf and agricultural markets compared to the market
penetration achieved by companies offering competing products for microbial
distribution. Such timing will be based on the effectiveness with which the
Company or the competition can complete product testing and approval processes
and supply quantities of its products to market. Competition among microbial
distribution products is expected to be based on, among other things, product
effectiveness, safety, reliability, cost, market capability and patent
protection.
CalJect System
The CalJect system competes against a number of products for applying
gypsum onto soil to improve water penetration through soil. At least one of the
Company's competitors in the market for gypsum distribution, Soil Solutions, has
greater name recognition in the soil amendments market and has significantly
more installed units. Soil Solutions' machine, like the Company's CalJect
system, injects gypsum directly into customers' irrigation systems. Competition
among gypsum distribution products is based on, among other things, cost, name
recognition, product effectiveness and reliability.
Distributed Products
In markets for distributed products, the Company competes against
distributors of traditional chemical products. Many of these competitors have
substantially greater financial, technical and personnel resources than the
Company and include such well-established companies as Lesco, Inc., Terra
Companies, Inc., Con-Agra, Inc. and Wilbur-Ellis Company. The Company competes
on the basis of price, name recognition, convenience and customer service with
distributors of traditional chemical products. See "Risk Factors --
Competition."
PERSONNEL
As of September 30, 1997, the Company had 122 full-time employees,
consisting of ten in general management, 38 in sales and marketing, 37 in
customer service, three in research and development, and 34 in finance and
general administrative activities. None of the Company's employees is
represented by a labor union or is covered by a collective bargaining agreement.
The Company has not experienced work stoppages and believes that it maintains
good relations with its employees.
FACILITIES
The Company's headquarters consist of 21,000 square feet located in San
Diego, California. The Company currently leases this building for warehouse,
sales and marketing, product development and administrative purposes. The
Company's lease for such space provides for base lease payments of $14,284 per
month, plus operating expenses, and expires in October 1999. The Company
currently is seeking new space to replace the Company's current office and
warehouse space in San Diego. The Company does not own any real property.
The Company's Florida subsidiary, Eco Soil Systems, Inc. (Florida),
occupies 5,000 square feet of office and warehouse space. Aspen leases 2,145
square feet in San Diego, California and 1,245 square feet in Phoenix, Arizona.
The sales organizations recently acquired, Turf Products, Turf Specialty and
Turfmakers, each have office and warehouse space. Turf Products leases 6,500
square feet in Chicago, Turf Specialty leases 10,000 square feet in northern New
Hampshire, 10,000 square feet in York, Pennsylvania and 4,500 square feet in
Gibsonia, Pennsylvania, and Turf Partners leases 14,128 square feet in Palm
Desert, California.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings and is
not aware of any material proceedings that are contemplated by any third party
or governmental authority.
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<PAGE> 37
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company and
their ages as of September 30, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- ----------------------------------------------------
<S> <C> <C>
William B. Adams(1) 51 Chairman of the Board and Chief Executive Officer
Douglas M. Gloff(1) 50 President, Chief Operating Officer and Director
Jeffrey A. Johnson(2) 41 President and General Manager of Golf Division and
Director
L. Jean Dunn, Jr. 42 Chief Financial Officer and Secretary
Dr. Thomas C. Quick 42 Vice President, Agriculture
John M. Doyle 39 Vice President of Product Management
Dr. David A. Odelson 43 Director of Research and Development
Nicholas R. Spardy 34 Vice President of Turf Partners Western Region
Kevin P. Lyons 41 Senior Vice President and Co-General Manager, Turf
Specialty
David W. Schermerhorn 38 Senior Vice President and Co-General Manager, Turf
Specialty
Walter W. Fuchs 57 Vice President and General Manager, Turf Products
Bradley K. Edwards(3) 38 Director
S. Bartley Osborn(3) 55 Director
William S. Potter(2) 51 Director
</TABLE>
- ---------------
(1) Class I director; term expires in 1999.
(2) Class II director; term expires in 1998.
(3) Class III director; term expires in 2000.
WILLIAM B. ADAMS has served as Chairman of the Board and Chief Executive
Officer of the Company since March 1991. Mr. Adams is also currently Chairman of
Orphan Medical, Inc., a publicly traded spinoff of Chronimed, Inc., a publicly
held medical products company. Despite his position with Orphan Medical, Inc.,
Mr. Adams dedicates substantially all of his time to the Company. From 1985 to
1994, Mr. Adams was Chairman of the Board of Chronimed. Prior to his involvement
with the Company, Mr. Adams founded WBA Consultants, Ltd., a management
consulting firm, in 1980 and participated as chief executive officer in
corporate turnarounds. From August 1989 to February 1991, Mr. Adams was
Executive Chairman of Printrak, Inc., a publicly held developer of specialized
identification systems used by the law enforcement community. From April 1986 to
April 1988, Mr. Adams was President and Chief Executive Officer of Check
Technology Corporation, a manufacturer of electronic printing equipment. Mr.
Adams received his B.A. from Texas Tech University.
DOUGLAS M. GLOFF joined the Company as Executive Vice President in January
1994 and became a director of the Company in August 1995. Mr. Gloff has served
as the Company's President and Chief Operating Officer since April 1997. Mr.
Gloff shares many of the executive management duties of the Company with Mr.
Adams. Prior to joining the Company, Mr. Gloff acted as a consultant from 1992
until January 1994. From 1978 to 1992, he served in various capacities with U.S.
Surgical, Inc., a publicly held supplier of medical instruments used in surgery,
culminating in the position of Director of Sales for the western area. Mr. Gloff
received his B.A. and M.B.A. from Indiana University.
JEFFREY A. JOHNSON has served as a director of the Company since March 1991
and has served as President and General Manager of the Company's Golf Division
since April 1997. Mr. Johnson served as President and Chief Operating Officer of
the Company from March 1991 to April 1997 and as Secretary from March 1991 to
June 1997. Prior to his involvement with the Company, Mr. Johnson was a partner
and employee of WBA
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<PAGE> 38
Consultants, Ltd. from 1986 until March 1991. Mr. Johnson was also a Vice
President of Printrak, Inc., a computer systems manufacturer, from 1989 to 1991
and Vice President of Corporate Development of Check Technology Corporation, a
manufacturer of electronic printing equipment, from 1986 to 1988. From 1983 to
1986, Mr. Johnson was Vice President of Corporate Finance for Craig Hallum,
Inc., an investment banking firm based in Minneapolis, Minnesota. Mr. Johnson
received his B.A. and M.B.A. from the University of Minnesota.
L. JEAN DUNN, JR. joined the Company as Chief Financial Officer in May
1996. Mr. Dunn has served as the Company's Secretary since June 1997. From 1992
to 1996, Mr. Dunn had been a partner in Capital Advisors LLC, an investment
banking firm. Prior to that, Mr. Dunn was a Vice President at Mitsubishi Bank in
New York from 1989 to 1992, and a Vice President at Banque Paribas, an
investment bank, in Los Angeles and New York from 1982 to 1989. Mr. Dunn
received his B.A. from the University of California, San Diego and his M.B.A.
from the Columbia University Graduate School of Business.
DR. THOMAS C. QUICK has served as the Vice President, Agriculture of the
Company since September 1996. From October 1994 to August 1996, he served as an
International Product Manager, Biopesticides, for Abbott Laboratories, a
pharmaceutical company. Prior to that, he served in various capacities with
Mycogen Corporation, an agricultural bio-tech company, from May 1987 until March
1994, culminating in the position of Technical Sales Representative. Dr. Quick
received his B.S. from the University of California, Riverside and a Ph.D. in
Agriculture from the University of Wisconsin, Madison.
JOHN M. DOYLE joined the Company in May 1994 as the Company's Vice
President of Product Management. Mr. Doyle is responsible for product and
technology acquisition, regulatory issues, production, marketing and
communication materials, product testing and sales support for the BioJect
system. Prior to joining the Company, Mr. Doyle spent seven years in various
positions with Ringer Corporation, a supplier of natural turf maintenance
products based in Minneapolis, Minnesota, culminating in the position of Vice
President of Product Development. Mr. Doyle received his B.S. and M.S. in
Horticulture from the University of Nebraska.
DR. DAVID A. ODELSON joined the Company in November 1996 as the Company's
Director of Research and Development. From May 1995 to April 1996, he was a
Visiting Scientist at Pharmacia & Upjohn Co., a pharmaceutical company. From
September 1989 to April 1995, he worked as a Co-Investigator at NSF Science and
Technology Center for Microbial Ecology and as an Assistant Professor at Central
Michigan University. Dr. Odelson received his B.S. in Microbiology from the
University of Illinois and his Ph.D. in Microbiology from Michigan State
University.
NICHOLAS R. SPARDY joined the Company in January 1997 as Vice President of
Turf Partners Western Region. From April 1991 to January 1997, Mr. Spardy served
as Branch Manager of Wilbur-Ellis, a turf and agriculture distribution company,
where he was responsible for sales of products to golf courses. Mr. Spardy
obtained his B.S. in Ornamental Horticulture from Cal State Polytechnic, Pomona
and is a certified agronomist.
KEVIN P. LYONS has served in various capacities with Turf Specialty since
October 1985, culminating in his current position of Senior Vice President and
Co-General Manager. The Company acquired Turf Specialty in May 1996. Prior to
joining Turf Specialty, he was a Senior Technical Representative for O.M. Scott
& Sons, Inc., a chemical and fertilizer manufacturer, from February 1980 until
October 1985. Mr. Lyons received his B.S. in Turfgrass Management from the State
University of New Jersey.
DAVID W. SCHERMERHORN has served in various capacities with Turf Specialty
since October 1987, culminating in his current position of Senior Vice President
and Co-General Manager. Prior to joining Turf Specialty, he was a Technical
Representative for O.M. Scott & Sons, Inc. from October 1985 until October 1987.
Mr. Schermerhorn received his B.S. from the University of Massachusetts.
WALTER W. FUCHS founded Turf Products in February 1969 and currently serves
as the Vice President and General Manager of Turf Products, which has been a
wholly owned subsidiary of the Company since May 1996. He was an original member
of the Independent Turf and Ornamental Distributors Association
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<PAGE> 39
(ITODA), the principal association of golf course and nursery product
distributors. Mr. Fuchs received his B.A. from Iowa State University.
BRADLEY K. EDWARDS has served as a director of the Company since July 1991.
Since January 1993, Mr. Edwards has been a general partner of Heartland Capital.
Heartland Capital is the successor to the Nebraska Research and Development
Authority (the "NRDA"), a state-sponsored venture capital entity that was an
original investor in the Company. From November 1989 to January 1993, Mr.
Edwards was employed by the NRDA, initially as a fund manager and later as its
President.
S. BARTLEY OSBORN has served as a director of the Company since November
1991. Mr. Osborn is currently Chairman of the Board of Directors of the Fairway
Foundation, a nonprofit foundation dedicated to teaching the game of golf to
inner-city children in Minneapolis, Minnesota. From 1965 through 1982 Mr. Osborn
held various management positions at EcoLab, Inc., a Fortune 500 specialty
chemical manufacturer based in Minneapolis, Minnesota. Mr. Osborn is a trustee
of the IC Koran foundation, which assists employees of EcoLab through
scholarships for its children and through financial hardship assistance.
WILLIAM S. POTTER served as a director of the Company since August 1992.
Since 1988, Mr. Potter has also been President of Rugged Rigger, Inc., a
personal services corporation. From 1970 to 1988, Mr. Potter worked in various
capacities for H.M. Stevens Incorporated, a national food service and catering
company specializing in sporting events, culminating in the position of
Operational Vice President.
CLASSIFIED BOARD OF DIRECTORS
The Company's Amended and Restated Articles of Incorporation provide for
the Company's Board of Directors to be divided into three classes of directors,
with each class as nearly equal in number as possible, serving staggered
three-year terms. As a result, approximately one-third of the Company's Board of
Directors will be elected each year. The directors in Class I are William B.
Adams and Douglas M. Gloff, whose terms will expire at the annual meeting of
shareholders in 1999. The directors in Class II are Jeffrey A. Johnson and
William S. Potter, whose terms will expire at the annual meeting of shareholders
in 1998. The directors in Class III are Bradley K. Edwards and S. Bartley
Osborn, whose terms will expire at the annual meeting of shareholders in 2000.
COMMITTEES OF THE BOARD OF DIRECTORS
Compensation Committee
The Company has a Compensation Committee consisting of Messrs. Adams,
Edwards and Potter. The Compensation Committee provides recommendations
concerning salaries and incentive compensation for the Company's officers and
administers the Company's benefit plans, other than the 1992 Stock Option Plan.
Audit Committee
The Company has an Audit Committee consisting of Messrs. Johnson, Edwards
and Osborn. The Audit Committee recommends to the Board of Directors the
engagement of the Company's independent public accountants and reviews the scope
and results of their audits and other services. The Audit Committee meets with
management and with the independent public accountants to review matters
relating to the quality of the Company's financial reporting and internal
accounting control, including the nature, extent and results of the audits,
proposed changes to the Company's accounting principles and otherwise maintains
communications between the independent public accountants and the Board of
Directors.
SCIENTIFIC ADVISORY BOARD
The Company maintains a Scientific Advisory Board (the "SAB") that advises
the Company from time to time with respect to its scientific research and
development programs. These individuals are compensated through the grant of
stock options. They also receive fees for attending scientific advisory meetings
and reimbursement of out-of-pocket expenses. The SAB met in August 1995 and
September 1996.
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<PAGE> 40
Members of the SAB may be employed by or have consulting agreements with
entities other than the Company, some of which may conflict or compete with
their obligations to the Company and which may limit their availability to the
Company. Most are not expected to participate actively in the Company's
development. Certain of the institutions with which SAB members are affiliated
may have regulations or policies which are unclear with respect to the ability
of such personnel to act as part-time consultants or in other capacities for a
commercial enterprise.
The current members of the SAB are as follows:
DR. DAVID E. CROWLEY is an Assistant Professor of Soil-Plant Relations at
the University of California, Riverside, where he has concentrated his efforts
on rhizosphere biology, the physiological basis for microbial competition in
soils and the activity of microorganisms that degrade soil contaminants. Dr.
Crowley received his Ph.D. from Colorado State University in 1986 and has been
associated with the University of California, Riverside since 1990.
DR. PETER H. DERNOEDEN is a Professor of Agronomy at the University of
Maryland, where he has focused on the impact of mowing, irrigation and fertility
on disease severity and weed encroachment in turf. He has also concentrated on
disease etiology, the effects of fungicides on non-target diseases, plant
parasitic nematodes, molecular techniques for identifying root pathogens and the
chemical control of diseases and weeds. Dr. Dernoeden received his Ph.D. in
Plant Pathology from the University of Rhode Island in 1980.
DR. ERIC B. NELSON is currently an Associate Professor of Plant Pathology
at Cornell University, where he has focused on spermosphere and rhizosphere
ecology, plant-microbe and microbe-microbe interactions and biological control
of plant pathogens. Dr. Nelson received his Ph.D. from Ohio State University and
has been associated with Cornell University since 1987.
DR. J. SCHENDEL is the Vice President of Research and Development for
Encore, a microbial fermentation company. In this capacity, Dr. Schendel is in
charge of all of Encore's research and development activities. Dr. Schendel
received his Ph.D. from the University of Wisconsin in 1986.
DR. JOSEPH M. VARGAS is a Professor of Botany and Plant Pathology at
Michigan State University, where he has concentrated his efforts on disease
management programs for turf. Dr. Vargas received his Ph.D. from the University
of Minnesota in 1968 and has been associated with Michigan State University
since that time. He has served in various capacities in the International
Turfgrass Society, the Turf and Ornamental Disease Committee of the American
Phytopathological Society and the Michigan Turfgrass Foundation Board.
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<PAGE> 41
EXECUTIVE COMPENSATION
Compensation of Directors
The Company has not paid any cash compensation to a director in his
capacity solely as a director and has no present plan to pay directors' fees. It
is the Company's current policy to award non-employee directors options to
purchase 10,000 shares of Common Stock at the then-current market price, vesting
over three years, upon becoming directors and options to purchase 3,000 shares
of Common Stock, at the then-current market price, vesting six months after the
date of grant, at each annual meeting of the Company's Board of Directors. See
"-- Stock Option Plans -- 1996 Directors' Stock Option Plan." All directors are
reimbursed for travel and other out-of-pocket expenses incurred in connection
with attendance at meetings of the Board of Directors.
Compensation of Officers
The following table shows for each of the last three full fiscal years,
compensation awarded, paid to, or earned by the Company's Chief Executive
Officer and executive officers of the Company's subsidiaries whose compensation
exceeded $100,000 for that year (the "Named Executive Officers"). The Company
had no other executive officers whose compensation exceeded $100,000 for the
fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
----------------------------------------
ANNUAL COMPENSATION OTHER RESTRICTED SECURITIES
NAME AND ----------------------- ANNUAL STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($) COMPENSATION AWARDS($) OPTIONS(#) COMPENSATION($)
- ------------------------------ ---- ------------ -------- ------------ --------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
William B. Adams(1)........... 1996 75,000 0 0 0 0 0
Chairman of the Board and 1995 75,000 0 0 0 5,556 0
Chief Executive Officer 1994 75,000 0 0 0 128,520 0
Kevin P. Lyons(2)............. 1996 85,000 80,000 0 0 10,000 0
Senior Vice President and
Co-General Manager
Turf-Specialty
David W.Schermerhorn(2)....... 1996 85,000 80,000 0 0 10,000 0
Senior Vice President and
Co-General Manager,
Turf-Specialty
Walter K. Fuchs(2)............ 1996 155,000 0 0 0 0 0
Vice President and
General Manager,
Turf Products
</TABLE>
- ---------------
(1) Mr. Adams' current annual salary is $150,000.
(2) Messrs. Lyons, Schermerhorn and Fuchs became employees of the Company on May
31, 1996 upon the acquisition by the Company of Turf Specialty and Turf
Products.
STOCK OPTION GRANTS TABLE
The following table provides information concerning the grant of stock
options to the Named Executive Officers of the Company during fiscal 1996. The
Company does not have any outstanding stock appreciation rights.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN OR BASE EXPIRATION
NAME YEAR GRANTED(#) FISCAL YEAR(%) PRICE($/SH) DATE
- ------------------------------------------------ ---- ---------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
William B. Adams................................ 1996 0(1) 0 N/A N/A
Kevin P. Lyons.................................. 1996 10,000 2.0 3.00 10/15/01
David W. Schermerhorn........................... 1996 10,000 2.0 3.00 10/15/01
Walter K. Fuchs................................. 1996 0 0 N/A N/A
</TABLE>
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<PAGE> 42
- ---------------
(1) Excludes warrants to purchase 242,500 shares of Common Stock at an exercise
price of $3.00 per share. For a further discussion of such warrants, see
"Certain Transactions."
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table provides information with respect to the Named
Executive Officers, concerning the exercise of stock options during fiscal 1996
and unexercised options held as of the end of fiscal 1996.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS
OPTIONS AT AT FY-END
FY-END(#) ($)(1)
------------- -------------
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) VALUE REALIZED($) UNEXERCISABLE UNEXERCISABLE
- -------------------------------- --------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
William B. Adams................ 1996 0 0 353,328(2)/0 586,746/0
Kevin P. Lyons.................. 1996 0 0 10,000/0 11,250/0
David W. Schermerhorn........... 1996 0 0 10,000/0 11,250/0
Walter W. Fuchs................. 1996 0 0 0/0 0/0
</TABLE>
- ---------------
(1) In order to calculate the value of unexercised in-the-money options at
fiscal year end, the Company assumed the fair market value of the Company's
Common Stock at fiscal year end was $4.125, the price set for the initial
public offering of the Company's Common Stock on January 17, 1997.
(2) Excludes warrants to purchase 242,500 shares of Common Stock at an exercise
price of $3.00. For a further discussion of such warrants, see "Certain
Transactions."
Employment Agreements
The Company has entered into employment agreements with each of the Named
Executive Officers and certain other executive officers. A summary of the
principal terms of such agreements is set forth below.
On May 21, 1991, the Company entered into an employment agreement with
William B. Adams, setting forth such officer's duties, compensation, employee
benefits and other terms of employment. The agreement, as amended on November 7,
1996, provides for an initial minimum annual salary of $75,000 and terminates on
December 31, 1998. Both the Company and Mr. Adams have the option to terminate
the agreement prior to the termination date. Under certain circumstances of
termination, Mr. Adams will be entitled to severance pay equal to six months'
base salary. Within six months of the occurrence of certain change in control
events, Mr. Adams may voluntarily terminate his employment and be entitled to
severance pay equal to six months' base salary. In February 1997, the Company's
Compensation Committee approved an increase of Mr. Adams' annual salary to
$150,000.
On January 1, 1994, the Company entered into an employment agreement with
Douglas M. Gloff, setting forth such officer's duties, compensation, employee
benefits and other terms of employment. The agreement, as amended on November 7,
1996, provides for an initial minimum annual salary of $75,000 and terminates on
December 31, 1998. Both the Company and Mr. Gloff have the option to terminate
the agreement prior to the termination date. Under certain circumstances of
termination, Mr. Gloff will be entitled to severance pay equal to six months'
base salary. Within six months of the occurrence of certain change in control
events, Mr. Gloff may voluntarily terminate his employment and be entitled to
severance pay equal to six months' base salary. In February 1997, the Company's
Compensation Committee approved an increase of Mr. Gloff's annual salary to
$150,000.
On July 8, 1996, the Company entered into employment agreements with Kevin
P. Lyons and David W. Schermerhorn in connection with the Company's acquisition
of Turf Specialty. Each employment agreement provides for a minimum annual
salary of $165,000 and terminates on July 7, 1999 and July 8, 1999,
respectively. See "Certain Transactions."
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<PAGE> 43
On July 10, 1996, the Company entered into an employment agreement with
Walter W. Fuchs in connection with Company's acquisition of Turf Products. The
employment agreement provides for a minimum annual salary of $155,000 and
terminates on July 10, 1998.
STOCK OPTION PLANS
1992 Stock Option Plan
In 1992, the Company adopted a Stock Option Plan (the "Option Plan"), under
which 125,000 shares of Common Stock were initially reserved for issuance upon
exercise of options granted to officers, employees and directors of, and
advisors and consultants to, the Company. The Option Plan provides for the grant
of both stock options intended to qualify as incentive stock options as defined
in the Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified
stock options. The Option Plan will terminate on February 4, 2002, unless sooner
terminated by the Board of Directors. The Company's shareholders approved an
increase in the number of shares reserved for issuance under the Option Plan to
250,000 shares in August 1993, to 350,000 shares in April 1995, to 450,000
shares in May 1996, to 900,000 shares in November 1996 and to 1,100,000 shares
in June 1997.
Subject to the limitations set forth in the Option Plan, the Board of
Directors or a committee, if administration of the plan is delegated to a
committee of the Board comprised of at least three directors, has the authority
to select the persons to whom grants are to be made, to designate the number of
shares to be covered by each option, to determine whether an option is to be an
incentive stock option or a nonqualified stock option, to establish vesting
schedules and, subject to certain restrictions, to specify other terms of the
options. Generally, options vest over three years and expire in five years.
Options granted under the Option Plan generally are nontransferable and expire
three months after the termination of an optionee's employment or consultancy
with the Company. In general, if an optionee terminates service due to death or
disability, such person's options may be exercised up to one year after
separation from services.
The exercise price of options granted under the Option Plan is determined
by the Board of Directors (or its committee) at the time of grant. The exercise
price of incentive stock options must equal at least the fair market value of
the Common Stock on the date of grant. The exercise price of incentive stock
options granted to any person who at the time of grant owns stock possessing
more than 10% of the total combined voting power of all classes of stock must be
at least 110% of the fair market value of such stock on the date of grant, and
the term of these options cannot exceed five years. The exercise price of
nonqualified stock options is determined by the Board of Directors. As of
September 30, 1997, the Company had outstanding options under the Option Plan to
purchase an aggregate of 1,030,107 shares (all of which were nonqualified stock
options) held by 95 persons at a weighted average exercise price of $3.87 per
share.
1996 Directors' Stock Option Plan
The 1996 Directors' Stock Option Plan (the "Directors' Plan") provides for
the automatic grant of nonstatutory stock options to purchase 10,000 shares of
Common Stock to nonemployee directors at the time of their election as director,
and an option to purchase 3,000 shares of Common Stock on the date of each
subsequent annual shareholder meeting, subject to certain limitations. Options
granted on the date an individual is elected as a director of the Company shall
become vested and thereby exercisable with respect to 33 1/3% on the first
anniversary of such election, with respect to 33 1/3% on the second anniversary
date after such election and with respect to 33 1/3% on the date of the third
anniversary date after such election; provided, however, that an unvested
portion of such option grant shall only vest so long as the nonemployee director
remains a director on the date such portion vests, and that vested options shall
terminate two years after the date a director ceases to be a director of the
Company. Options granted on the date of each annual meeting of shareholders
become exercisable six months after the date of grant. The option price per
share for nonemployee directors is equal to the fair market value of a share of
Common Stock as of the date of grant. The Company has reserved a total of 60,000
shares of Common Stock for issuance under the Directors' Plan, all of which are
currently available for future grants.
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<PAGE> 44
INDEMNIFICATION
Pursuant to the Company's bylaws and Nebraska law, the Company's directors,
officers and employees may be entitled to indemnification and advancement of
expenses for certain acts or actions made by or on behalf of the Company. In
addition, the Underwriting Agreement entered into between the Company and the
Underwriters in connection with the Offering provides that the Company will
indemnify the Underwriters against certain liabilities, including civil
liabilities under the Securities Act, or will contribute to payments the
Underwriters may be required to make in respect thereof. Insofar as
indemnification for liabilities arising under the 1933 Act may be permitted to
directors, officers and controlling persons of the issuer, the issuer has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable.
The Company also has adopted provisions in its Amended and Restated
Articles of Incorporation that limit the liability of directors for monetary
damages for breach of their fiduciary duties as directors except for (i) any
breach of their duty of loyalty to the Company or its shareholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) the unlawful payment of dividends or unlawful stock
purchases or redemptions under Section 21-2046 of the Nebraska Business
Corporation Act, or (iv) any transaction from which the directors derive an
improper personal benefit.
CERTAIN TRANSACTIONS
During the period from December 1994 to February 1995, Mr. Adams converted
$1.2 million of Subordinated Notes and shareholder advances into 400,000 shares
of Common Stock.
On November 15, 1995, Mr. Gloff and Heartland Capital (a limited
partnership, of which Bradley K. Edwards is a general partner) each purchased
$200,000 and Mr. Adams purchased $300,000 of collateralized subordinated
debentures from the Company. The debentures are secured by the assets of the
Company but are subordinated to any senior indebtedness of the Company. The
debentures bear interest at an 8% annual rate, payable on a quarterly basis, and
the entire principal balance is due on November 15, 1998.
On February 1, 1996, Mr. Adams loaned the Company $250,000 under the terms
of an 8% unsecured subordinated promissory note, with principal and interest due
upon demand.
On January 22 and 23, 1996, Mr. Adams purchased a total of $300,000 of
collateralized subordinated debentures from the Company. The debentures are
secured by the assets of the Company but are subordinated to any senior
indebtedness of the Company. The debentures bear interest at an 8% annual rate,
payable on a quarterly basis, and the entire principal balance is due on
November 15, 1998. In connection with these debentures, warrants were issued to
Mr. Adams to purchase 100,000 shares of Common Stock at an exercise price of
$3.00 per share. These warrants expire in January 1998.
On March 1, 1996, Rugged Rigger, Inc. (a company controlled by William S.
Potter) loaned the Company $100,000. The loan had an annual interest rate of 8%,
payable monthly, and the entire principal balance was due on November 15, 1998.
In connection with this subordinated unsecured note, warrants were issued to Mr.
Potter to purchase 15,000 shares of Common Stock at an exercise price of $3.00
per share. These warrants expire in March 1, 2001. The loan was repaid in full
with the proceeds from the sale of the Bridge Notes and the Bridge Warrants.
On March 15, 1996, Mr. Adams converted $300,000 of collateral that was
pledged to secure the Company's bank loan at Peninsula Bank into cash and used
the cash to reduce the Company's $1,013,000 principal loan at Peninsula Bank by
this amount. The Company in turn issued Mr. Adams a $300,000 secured
subordinated promissory note, which bears interest at an 8% annual rate, payable
on a quarterly basis, and the entire principal amount is due on March 15, 1998.
In connection with the promissory note, Mr. Adams was granted warrants to
purchase up to 100,000 shares of Common Stock at an exercise price of $3.00 per
share. These warrants expire in January 1998.
On March 15, 1996, Mr. Gloff and Heartland Capital converted $250,000 and
$200,000, respectively, of collateral that was pledged to secure the Company's
bank loan at Peninsula Bank into cash and used the cash to reduce the Company's
$1,013,000 principal loan at Peninsula Bank by this amount. The Company in turn
issued a $250,000 secured subordinated promissory note to Mr. Gloff and a
$200,000 secured subordinated
43
<PAGE> 45
promissory note to Heartland Capital, each bearing interest at an 8% annual
rate, payable on a quarterly basis, and the principal amount of each note is due
on March 15, 1998. In connection with the debentures, warrants were issued to
Mr. Gloff and Heartland Capital to purchase up to 83,333 shares and 66,667
shares, respectively, of Common Stock at an exercise price of $3.00 per share.
These warrants expire in January 1998.
On March 26, 1996, the Company entered into a $1,000,000 line of credit
agreement with Imperial Bank, $500,000 of which was a revolving line of credit
that expired on April 1, 1997 and $500,000 of which was a revolving credit line
extended to finance exports based on a guarantee extended the Company by the
California Export Finance Organization ("CEFO"). The entire line of credit was
personally guaranteed by Mr. Adams. The term loan portion of the line of credit
bore interest at a rate of prime plus 2%. The CEFO portion of the credit line
bore interest at prime plus 1.5%. CEFO's obligations were in turn guaranteed by
Mr. Adams. In connection with the revolving line of credit, warrants were issued
to Imperial Bank to purchase 20,833 shares of Common Stock at an exercise price
of $3.00 per share. These warrants expire in March 2001.
Between March and July 1996, the Company loaned $72,000 to Rugged Rigger,
Inc. to enable it to exercise options to purchase Common Stock. The loan bears
interest at an annual rate of 5%, compounded annually, and is payable on demand
with the understanding that Rugged Rigger will repay the loan on the earlier of
(i) January 16, 1998 or (ii) the sale of the underlying Common Stock.
On April 1, 1996, Mr. Osborn loaned the Company $100,000. The loan had an
annual interest rate of 10%, payable upon demand, and the entire principal
balance was due on July 1, 1996. In connection with this unsecured note,
warrants were issued to Mr. Osborn to purchase 15,000 shares of Common Stock at
an exercise price of $3.00 per share. These warrants expire in April 2001. The
loan was repaid in full with the proceeds from the sale by the Company of bridge
notes and bridge warrants in July 1996. See "Description of Securities -- Bridge
Financing."
On May 15, 1996, Mr. Gloff converted the entire principal balance of his
$100,000 unsecured promissory note into 100,000 shares of Common Stock.
On May 24, 1996, the Company issued three convertible unsecured $50,000
promissory notes for the purpose of providing short-term financing until the
proceeds of the Company's initial public offering could be received, one from
each of Mr. Adams, Mr. Gloff and Heartland Capital. Each note is payable upon
demand and bears interest at an annual rate of 8%. In connection with these
promissory notes, warrants were issued to each of Messrs. Adams and Gloff and
Heartland Capital to purchase 7,500 shares of Common Stock at an exercise price
of $3.00 per share. These warrants expire in May 2001.
In May 1996, the Company acquired from Messrs. Lyons and Schermerhorn, the
only shareholders of Turf Specialty, all of the stock of Turf Specialty for a
total of $500,000 in cash and 647,650 shares of Common Stock. In addition, the
Company agreed to pay to Messrs. Lyons and Schermerhorn a total of $1,000,000 if
Turf Specialty earned a pre-tax profit for the year ending December 31, 1996 of
at least $900,000, with lesser payments due if Turf Specialty earned less than
$900,000 in pre-tax profit for the year ending December 31, 1996. Turf Specialty
achieved $979,161 in pre-tax profits for the year ending December 31, 1996.
In connection with the acquisition of Turf Specialty, effective July 8,
1996, the Company entered into employment agreements with each of Messrs. Lyons
and Schermerhorn providing for minimum annual salary levels of $165,000 and the
right to participate in any incentive compensation plans sponsored by Turf
Specialty. The employment agreements for Messrs. Lyons and Schermerhorn expire
on July 7, 1999 and July 8, 1999, respectively. Pursuant to these agreements,
the Company agreed to loan $250,000 to each of these individuals on or about
December 15, 1996. These loans do not have to be repaid and will be forgiven on
July 1, 1999 if these officers are employed by the Company at that time. If
either officer's employment is terminated by the Company before that date, such
officer will be obligated to repay a portion of the loan prorated to the number
of days worked from July 2, 1996 to the effective date of the termination of his
employment. Compensation expense will be recorded by the Company over the period
of forgiveness.
On May 30, 1997, the Company issued a $100,000 unsecured promissory note to
Mr. Gloff. The note was payable on demand and bore interest at an annual rate of
10%. The loan was repaid in full on July 1, 1997.
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<PAGE> 46
In connection with the Offering, the Company has agreed to repay an
aggregate of $450,000 outstanding on two notes held by Heartland Capital. The
Company intends to repay the amounts outstanding on such notes, as well as an
aggregate of $1,050,000 outstanding on three notes held by Mr. Adams and an
aggregate of $450,000 outstanding on two notes held by Mr. Gloff, with a portion
of the proceeds of the Offering. Each of the notes to be repaid bears interest
at the rate of 8.0% per year.
Management of the Company believes that the terms of the transactions
described above were no less favorable to the Company than would have been
obtained from an unaffiliated third party. Any future material transactions and
loans with officers, directors or 5% beneficial shareholders of the Company's
Common Stock, or affiliates of such persons, will be on terms no less favorable
to the Company that could be obtained from unaffiliated third parties and will
be approved by a majority of the outside members of the Company's Board of
Directors who do not have an interest in the transactions.
The Company has agreed with the Minnesota Department of Commerce that so
long as the Company's securities are registered in the State of Minnesota, or
one year from January 16, 1997 (the effective date of the Company's initial
public offering), whichever is longer, the Company will not make loans to its
officers, directors, employees, or principal shareholders, except for loans made
in the ordinary course of business, such as travel advances, expense account
advances, relocation advances, or reasonable salary advances.
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<PAGE> 47
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information known to the Company with
respect to the beneficial ownership of its Common Stock as of October 28, 1997,
and as adjusted to reflect the sale of shares by the Company and the Selling
Shareholders for (i) each person who is known by the Company to own beneficially
more than five percent of the Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers, (iv) all directors and
executive officers as a group and (v) each of the Selling Shareholders. Unless
otherwise indicated in the footnotes to the table set forth below, each person
or entity named below has an address in care of the Company's principal
executive offices.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED(1) OWNED
BEFORE THE OFFERING SHARES AFTER THE OFFERING
------------------- BEING -------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------------------- --------- ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
William B. Adams(2).............................. 1,442,763 11.5% -- 1,442,763 8.7%
Bradley K. Edwards(3)............................ 820,072 6.7 -- 820,072 5.1
Heartland Capital Fund, Ltd.
11930 Arbor Street, Suite 201
Omaha, NE 68144
Douglas M. Gloff(4).............................. 626,056 5.0 -- 626,056 3.8
Walter W. Fuchs(5)............................... 374,424 3.1 -- 374,424 2.4
William S. Potter(6)............................. 383,132 3.2 -- 383,132 2.4
13875 Old El Camino Real
San Diego, CA 92130
Kevin P. Lyons(7)................................ 333,825 2.8 -- 333,825 2.1
David W. Schermerhorn(8)......................... 333,825 2.8 -- 333,825 2.1
Jeffrey A. Johnson(9)............................ 299,166 2.5 -- 299,166 1.9
S. Bartley Osborn(10)............................ 77,499 * -- 77,499 *
360 Orono Orchard Road
Wayzata, MN 55391
Imperial Bank(11)................................ 60,833 * 20,833 40,000 *
701 B Street, Suite 600
San Diego, CA 92101
Christ Church Day School......................... 65,000 * 65,000 -- --
1208 Ninth Street
P.O. Box 180755
Coronado, CA 92148
All executive officers and directors as a group
(10 persons)(12)............................... 4,740,762 34.8% -- 4,740,762 26.9%
</TABLE>
- ---------------
* Less than 1%.
(1) Shares of Common Stock subject to options, warrants or convertible debt
securities currently exercisable or exercisable within 60 days after
October 28, 1997, are deemed to be outstanding for purposes of computing
the percentage of shares beneficially owned by the person holding such
options, warrants or convertible debt securities, but are not deemed to be
outstanding for purposes of computing such percentage for any other person.
Except as indicated by footnote, each person or group identified has sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. Except as otherwise indicated, the
address of each of the above persons is c/o Eco Soil Systems, Inc., 10890
Thornmint Road, Suite 200, San Diego, California 92127.
(2) Includes 353,328 shares of Common Stock subject to currently exercisable
options and 242,500 shares of Common Stock subject to currently exercisable
warrants.
(3) All shares of Common Stock included are owned by Heartland Capital;
beneficial ownership of such shares is attributed to Mr. Edwards because he
is a general partner of Heartland Capital and is therefore deemed to
exercise voting power and investment authority with respect to the shares.
Shares listed
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<PAGE> 48
include 53,333 shares of Common Stock subject to currently exercisable
options held by Heartland Capital, 6,666 shares of Common Stock subject to
currently exercisable options held by Mr. Edwards and 180,834 shares of
Common Stock subject to currently exercisable warrants held by Heartland
Capital.
(4) Includes 271,056 shares of Common Stock subject to currently exercisable
options and 230,000 shares of Common Stock subject to currently exercisable
warrants. Does not include 150,000 shares of Common Stock subject to
currently unexercisable options that will vest in 50,000 share increments
based upon certain market price milestones that may be attained by the
Company's Common Stock.
(5) Includes 18,721 shares of Common Stock held by Mr. Fuchs as Trustee for the
Fuchs Family Charitable Remainder Trust.
(6) Includes 80,132 shares of Common Stock subject to currently exercisable
options and 110,000 shares of Common Stock subject to currently exercisable
warrants all held by Rugged Rigger, Inc., a California corporation that is
wholly owned by Mr. Potter. Also includes 193,000 shares owned by Rugged
Rigger, Inc.
(7) Includes 10,000 shares of Common Stock subject to currently exercisable
options.
(8) Includes 10,000 shares of Common Stock subject to currently exercisable
options.
(9) Includes 72,682 shares of Common Stock subject to currently exercisable
options and 20,000 shares of Common Stock subject to currently exercisable
warrants.
(10) Includes 6,666 shares of Common Stock subject to currently exercisable
options and 30,000 shares of Common Stock subject to currently exercisable
warrants.
(11) Includes 60,833 shares of Common Stock subject to currently exercisable
warrants. Imperial Bank will exercise warrants covering 20,833 shares of
Common Stock prior to the closing of the Offering.
(12) See notes 1-10 above. Also includes 50,000 shares of Common Stock subject
to currently exercisable options held by L. Jean Dunn, Jr.
DESCRIPTION OF SECURITIES
GENERAL
The Company's authorized capital stock currently consists of 20,000,000
shares of Common Stock and 5,000,000 shares of Preferred Stock. The Company is
seeking shareholder approval at a Special Meeting of Shareholders to be held on
November 13, 1997 of an amendment to the Company's Amended and Restated Articles
of Incorporation to increase the number of authorized shares of Common Stock
from 20,000,000 to 25,000,000. The Offering is conditioned on such approval. As
of October 28, 1997, there were issued and outstanding 11,910,075 shares of
Common Stock, which were held by approximately 287 shareholders of record, and
5,052,526 shares of Common Stock were reserved for issuance upon exercise of
outstanding options and warrants. No shares of Preferred Stock were outstanding
as of that date.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders other than in the
election of directors, in which event any holder may exercise cumulative voting.
In cumulative voting, the holders of Common Stock are entitled to cast for each
share held the number of votes equal to the number of directors to be elected. A
holder may cast all of his or her votes for one nominee or distribute them among
any number of nominees for election. Subject to preferences that may be
applicable to any outstanding Preferred Stock, holders of Common Stock are
entitled to receive ratably such dividends, if any) as may be declared by the
Board of Directors out of funds legally available therefor and are entitled to
share ratably in all assets of the Company available for distribution to holders
of the Common Stock upon liquidation, dissolution or winding up of the affairs
of the Company.
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<PAGE> 49
Holders of Common Stock have no preemptive, subscription or conversion rights,
and there are no redemption or sinking fund provisions applicable thereto. The
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be, fully paid and nonassessable.
PREFERRED STOCK
The Company's Amended and Restated Articles of Incorporation authorize the
Company's Board of Directors, without further shareholder action, to issue up to
5,000,000 shares of Preferred Stock in one or more series and to fix the voting
rights, liquidation preferences, dividend rights, repurchase rights, conversion
rights, redemption rights and terms, including sinking fund provisions, and
certain other rights and preferences, of the Preferred Stock. Although there is
no current intention to do so, the Board of Directors of the Company may,
without shareholder approval, issue shares of a class or series of Preferred
Stock with voting and conversion rights which could adversely affect the voting
power or dividend rights of the holders of Common Stock and may have the effect
of delaying, deferring or preventing a change in control of the Company.
BRIDGE FINANCING
In July 1996, the Company completed a bridge financing (the "Bridge
Financing") consisting of the issuance of approximately 74 Units (the "Bridge
Units"). Each Bridge Unit consisted of a note (the "Bridge Note") in the
principal amount of $50,000 and warrants (the "Bridge Warrants") to purchase
10,000 shares of the Company's Common Stock. The Bridge Financing resulted in
the issuance of $3,695,000 of principal amount of Bridge Notes and Bridge
Warrants to purchase 739,000 shares of Common Stock.
Bridge Notes
The Bridge Notes were issued in July 1996 with an annual interest rate of
10% and were payable at maturity. Up to 100% of the principal amount of each
Bridge Note became convertible, at the option of the holder thereof, into the
Company's Common Stock for a period of 20 days after the effective date of the
Company's registration statement for its initial public offering at a conversion
price equal to $3.30 per share. The Bridge Notes became due and payable in full
30 days after the effective date of the registration statement. Bridge Notes in
the aggregate principal amount of $1,900,000 were converted by their holders
into a total of 576,823 shares of Common Stock, and Bridge Notes in the
aggregate principal amount of $1,800,000 were repaid by the Company. None of the
Bridge Notes remains outstanding.
Bridge Warrants
Each Bridge Warrant entitles the holders thereof to purchase one share of
Common Stock after December 31, 1996. The Bridge Warrants expire on July 5,
2001. The exercise price of the Bridge Warrants is $3.00 per share.
The Bridge Warrants provide for the automatic adjustment of the number of
shares issuable upon exercise of the Bridge Warrants, and of the exercise price,
in certain events, including stock dividends, stock splits, distributions of
Common Stock, reorganizations, reclassification, subdivisions and combinations
of the Common Stock, and the merger, consolidation or sale of all or
substantially all of the assets of the Company.
The Company has agreed to register the stock issued upon exercise of the
Bridge Warrants and conversion of the Bridge Notes under federal and state
securities laws at such time as it becomes eligible to use the Registration
Statement on Form S-3 or 12 months after the Company's initial public offering
(whichever is earlier) and upon written request from holders of a majority of
the shares of Common Stock purchasable or purchased at the time of the request
upon exercise of the Bridge Warrants or conversion of the Bridge Notes. The
Company is required to maintain the effectiveness of such registration until the
earlier of 12 months after the effective date or until all shares subject to
such registration have been resold. Holders of shares of stock purchased upon
exercise of the Bridge Warrants or conversion of the Bridge Notes will also be
entitled to certain incidental or "piggyback" registration rights. Holders must
convert Bridge Notes and exercise Bridge Warrants prior to any registration of
the sale of the Common Stock subject thereto. Certain of
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<PAGE> 50
the holders of the Bridge Warrants and shares issued upon conversion of the
Bridge Notes have entered into lock-up agreements with the Underwriters. See
"Shares Eligible for Future Sale."
OTHER WARRANTS
As of September 30, 1997, in addition to the Bridge Warrants to acquire
739,000 shares of Common Stock, the Company had outstanding warrants to purchase
a total of 1,858,075 shares of Common Stock of the Company with a weighted
exercise price of $3.31 per share. Such warrants were issued in connection with
prior financing transactions by the Company. The holders of such warrants, as
such, are not entitled to vote, receive dividends or exercise any of the rights
of holders of shares of Common Stock for any purpose until such warrants have
been duly exercised and payment of the purchase price has been made. Holders of
such Warrants exercisable for 633,483 shares of Common Stock have the right,
subject to certain conditions, to participate in future company registrations.
Holders of such warrants exercisable for 441,383 shares of Common Stock have the
option, subject to certain restrictions, to cause the Company to register
certain shares of Common Stock owned by them.
NEBRASKA SHAREHOLDERS PROTECTION ACT
The Company is a Nebraska corporation and may be subject to the provisions
of the Nebraska Shareholders Protection Act. The Nebraska Shareholders
Protection Act, subject to certain exemptions, prohibits a Nebraska corporation
from engaging in any of a broad range of "business combinations" involving an
"interested" shareholder, or any affiliate or associate of such interested
shareholder, for a period of five years following the date that such shareholder
became an interested shareholder, unless prior to such date, the Board of
Directors of the corporation approved either the business combination or the
transaction that resulted in the shareholder becoming an interested shareholder.
A "business combination" includes, among other things, a merger, asset sale or
other transaction resulting in a financial benefit to the shareholder. The
Nebraska Shareholders Protection Act also provides that shares acquired in a
control-share acquisition have no voting rights with respect to matters other
than the elections of directors unless approved by a vote of shareholders of the
corporation, and that any such control share acquisition is effective only if
approved by a majority of the corporation's voting shares that are "not
interested" shares. A "control-share acquisition" is an acquisition of voting
stock in a corporation that, when added to the shares the shareholder had prior
to the acquisition, would elevate the shareholder's voting power into one the
three following ranges: (i) between 20% and 33 1/3%, (ii) between 33 1/3% and
50% and (iii) over 50%. For purposes of the Nebraska Shareholders Protection
Act, an "interested shareholder" is a person who owns 10% or more of a
corporation's outstanding voting stock, or an affiliate or associate of the
corporation that owns, or within five years prior, did own, 10% or more of the
corporation's outstanding voting stock. These provisions may have the effect of
discouraging, delaying, deferring or preventing a change in control of the
Company.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company serves as the transfer agent and
registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon closing of the Offering, assuming no exercise of any options or
warrants, the Company will have outstanding an aggregate of 15,910,075 shares of
Common Stock. Of these shares, the 4,085,833 shares sold in the Offering and the
3,795,000 shares sold in the Company's initial public offering will be freely
tradeable without restriction or further registration under the Securities Act,
except for such shares, if any, purchased by "affiliates" of the Company, as
that term is defined in Rule 144 under the Securities Act (whose sales would be
subject to certain volume limitations and other restrictions described below).
The remaining 8,029,242 shares were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the Securities
Act and are, therefore, restricted securities (the "Restricted Shares") that may
not be sold publicly unless the Restricted Shares are registered under the
Securities Act or sold under
49
<PAGE> 51
Rule 144 under the Securities Act or under similar exemptions. Except for the
576,823 shares issued upon conversion of the Bridge Notes and 25,000 shares
issued to the sole shareholder of Turfmakers in connection with the Company's
acquisition of substantially all of Turfmakers' assets in February 1997, all of
the Restricted Shares are eligible for resale subject to the restrictions
imposed by Rule 144. Holders of 4,381,637 shares of Common Stock have entered
into lock-up agreements under which they have agreed not to offer, sell or
otherwise dispose, or directly or indirectly cause or permit the offer, sale or
other disposition, of any Common Stock owned of record or beneficially and of
which such shareholder has the power to control the disposition for a period of
180 days after the date of this Prospectus without the prior written consent of
the Representatives. Holders of 589,323 shares of Common Stock and holders of
warrants exercisable for 1,372,483 shares of Common Stock have the right,
subject to certain conditions, to participate in future Company registrations.
Holders of 576,823 shares of Common Stock and holders of warrants exercisable
for 1,179,833 shares of Common Stock have the option, subject to certain
restrictions, to cause the Company to register certain shares of Common Stock
owned by them.
In general, under Rule 144, a person (or persons whose sales are
aggregated) who beneficially owns shares last acquired privately from the
Company or an affiliate of the Company at least one year previously and
affiliates of the Company are entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of the Company's Common Stock or the average weekly reported volume of
trading in the Company's Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain manner-of-sale
provisions, notice requirements and the availability of current public
information about the Company. A person who has not been an affiliate of the
Company at any time during the three months preceding a sale, and who
beneficially owns shares last acquired from the Company or an affiliate of the
Company at least two years previously, is entitled to sell all such shares under
Rule 144 without regard to any of the limitations of Rule 144.
On May 20, 1997 the Company filed a Form S-8 Registration Statement under
the Securities Act to register all shares of Common Stock issuable at that time
under the Option Plan and the Directors' Plan, which became effective upon
filing. Shares covered by that registration statement are eligible for sale in
the public market, subject to Rule 144 limitations applicable to affiliates and
to the lock-up agreements described above.
The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of Common Stock for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the Common Stock in the public markets or the perception
that such sales could occur could adversely affect the market price or the
future ability of the Company to raise capital through an offering of its equity
securities.
50
<PAGE> 52
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for whom CIBC Oppenheimer Corp. and Cruttenden Roth
Incorporated are acting as representatives (the "Representatives"), have
severally agreed with the Company and the Selling Shareholders, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the Company
and the Selling Shareholders, the respective number of shares of Common Stock
set forth opposite the name of such Underwriter below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------------------------------------------------------------ ---------
<S> <C>
CIBC Oppenheimer Corp.............................................
Cruttenden Roth Incorporated......................................
---------
Total...................................................
=========
</TABLE>
The Representatives have advised the Company and the Selling Shareholders
that the Underwriters propose to offer the shares of Common Stock directly to
the public at the public offering price set forth on the cover page of this
Prospectus and in part to certain securities dealers at such price less a
concession of $ per share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
changed by the Representatives. The Underwriters are obligated to take and pay
for all of the shares of Common Stock offered hereby (other than those covered
by the over-allotment option described below) if any are taken.
The Company has granted the Underwriters an option, exercisable for up to
30 days after the date of this Prospectus, to purchase up to an aggregate of
612,875 additional shares of Common Stock to cover over-allotments, if any. If
the Underwriters exercise such option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shared to be purchased by each of them as shown in
the foregoing table bears to the shares of Common Stock offered hereby. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the shares of Common Stock offered hereby.
In connection with the Offering, the Company has agreed to issue to the
Representatives the Representatives' Warrants to purchase up to 408,583 shares
of Common Stock. The Representatives' Warrants are exercisable for a period of
four years, beginning one year from the date of this Prospectus. The
Representatives' Warrants are exercisable at a price equal to 120% of the public
offering price. The Representatives' Warrants are nontransferable for a period
of one year following the date of this Prospectus,
51
<PAGE> 53
except (i) to any of the Underwriters, or to individuals who are either officers
or partners of an Underwriter or (ii) by will or the laws of descent and
distribution. The Representatives intend to transfer some of the Representatives
Warrants to certain of their partners and officers. The holders of the
Representatives' Warrants will have, in that capacity, no voting, dividend or
other shareholder rights. The Representatives possess certain demand and
incidental registration rights that may require the Company to register for
public resale the shares of Common Stock issuable under the Representatives'
Warrants. The number of shares covered by the Representatives' Warrants and the
exercise price are subject to adjustment in certain events to prevent dilution.
Any profit realized by the Representatives on the sale of securities issuable on
exercise of the Representatives' Warrants may be deemed to be additional
underwriting compensation.
The Company and the Selling Shareholders have agreed to indemnify the
Representatives of the Underwriters and the several Underwriters against certain
liabilities, including, without limitation liabilities under the Securities Act.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions,
penalty bids and "passive" market making in accordance with Regulation M under
the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Common Stock in the open market after the
distribution has been completed in order to cover syndicate short positions. In
"passive" market making, market makers in the Common Stock who are Underwriters
or prospective underwriters may, subject to certain limitations, make bids for
or purchases of the Common Stock until the time, if any, at which a stabilizing
bid is made. Penalty bids permit the Representatives to reclaim a selling
concession from a syndicate member when the Common Stock originally sold by such
syndicate member is purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions, penalty bids and passive market making may cause the price of the
Common Stock to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
Pursuant to the terms of lock-up agreements, the officers and directors of
the Company, the Selling Shareholders and certain other significant shareholders
have agreed with the Representatives not to sell, otherwise dispose of, contract
to sell, grant any option to sell, transfer or otherwise dispose of, directly or
indirectly, shares of Common Stock or other equity securities of the Company or
securities exchangeable for or convertible into shares of Common Stock or other
equity securities of the Company for a period of 180 days after the date of this
Prospectus, without the prior written consent of the Representatives. The
Company has agreed not to sell, contract to sell, grant any option to sell,
transfer or otherwise dispose of, directly or indirectly, shares of Common Stock
or other equity securities of the Company for a period of 180 days after the
date of this Prospectus, without the prior written consent of the
Representatives, except that the Company may issue securities pursuant to the
1992 Stock Option Plan and the Directors Option Plan and upon the exercise of
outstanding stock options or purchase rights under such plans. See "Shares
Eligible for Future Sale."
The Underwriters will not make sales to accounts over which they exercise
discretionary authority (i) in excess of five percent of the number of shares of
Common Stock offered hereby, and (ii) unless they obtain specific written
consent of the customer.
EXPERTS
The consolidated financial statements of Eco Soil Systems, Inc. at December
31, 1996 and for each of the three years in the period then ended, appearing in
this Prospectus and Registration Statement, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and in the Registration Statement which, as of December 31,
1996 and the year then ended are based in part on the report of Bigelow &
Company, independent auditors, and are included in reliance upon such reports
given upon the authority of such firms as experts in accounting and auditing.
52
<PAGE> 54
The consolidated financial statements of Turf Specialty, Inc. for the years
ended December 31, 1995 and 1994 included in this Prospectus and Registration
Statement and the financial statements as of and for the seven month period
ended December 31, 1996 of Turf Specialty, Inc., as a consolidated subsidiary of
the Company, not included herein, have been audited by Bigelow & Company,
Certified Public Accountants, P.C., as set forth in their reports thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Turf Products, Ltd. for the years ended
December 31, 1994 and 1995 included in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Fitzgerald, Schorr, Barmettler & Brennan, P.C.,
Omaha, Nebraska. Certain other legal matters in connection with the Offering
will be passed upon for the Company by Latham & Watkins, San Diego, California.
Certain legal matters in connection with the Offering will be passed upon for
the Underwriters by Cooley Godward LLP, San Diego, California. A self-directed
investment account controlled by a partner of Cooley Godward LLP owns 10,000
warrants to purchase Common Stock of the Company at an exercise price of $3.00
per share.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
These materials can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices located
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material can
be obtained at prescribed rates from the public reference section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Electronic
reports, proxy statements and other information filed through the Commission's
Electronic Data Gathering, Analysis and Retrieval system are publicly available
through the Commission's Web site (http://www.sec.gov). In addition, the Common
Stock is listed on the Nasdaq SmallCap Market and similar information concerning
the Company is available for inspection and copying at the offices of the
National Association of Securities Dealers, Inc., 1735 "K" Street, N.W.,
Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
SB-2 (including all amendments thereto, the "Registration Statement") with
respect to the securities offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information about the Company and the Securities
offered hereby, reference is made to the Registration Statement and the exhibits
thereto, which may be examined without charge at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies of which may be obtained from the
Commission upon payment of the prescribed fees.
53
<PAGE> 55
ECO SOIL SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ECO SOIL SYSTEMS, INC.
Report of Ernst & Young LLP, Independent Auditors................................... F-2
Report of Bigelow & Company, Independent Auditors................................... F-3
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997
(unaudited)....................................................................... F-4
Consolidated Statements of Operations for the years ended December 31, 1994, 1995
and 1996 and the nine months ended September 30, 1996 and 1997 (unaudited)........ F-5
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1997
(unaudited)....................................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996 and the nine months ended September 30, 1996 and 1997 (unaudited)........ F-7
Notes to Consolidated Financial Statements.......................................... F-8
TURF SPECIALTY, INC.
Report of Bigelow & Company, Independent Auditors................................... F-20
Consolidated Statements of Income and Retained Earnings for the years ended December
31, 1994 and 1995................................................................. F-21
Consolidated Statements of Cash Flows for the years ended December 31, 1994 and
1995.............................................................................. F-22
Notes to Consolidated Financial Statements.......................................... F-23
TURF PRODUCTS, LTD.
Report of Ernst & Young LLP, Independent Auditors................................... F-26
Statements of Income and Retained Earnings for the years ended December 31,
1994 and 1995..................................................................... F-27
Statements of Cash Flows for the years ended December 31, 1994 and 1995............. F-28
Notes to Financial Statements....................................................... F-29
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited Pro Forma Condensed Consolidated Statements of Operations................. F-32
Notes to Pro Forma Condensed Consolidated Statements of Operations.................. F-33
</TABLE>
F-1
<PAGE> 56
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Eco Soil Systems, Inc.
We have audited the accompanying consolidated balance sheets of Eco Soil
Systems, Inc. as of December 31, 1995 and 1996, and the related consolidated
statements of operations, shareholders' deficit and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did not
audit the financial statements of Turf Specialty, Inc., a wholly-owned
subsidiary, which statements reflect total assets of $2,548,000 as of December
31, 1996, and total revenues, since its acquisition on May 31, 1996 of
$3,867,000 included in the consolidated results of operations for the year ended
December 31, 1996. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to data
included for Turf Specialty, Inc., is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Eco Soil Systems, Inc. at December 31,
1995 and 1996, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
ERNST & YOUNG LLP
San Diego, California
March 14, 1997
F-2
<PAGE> 57
REPORT OF BIGELOW & COMPANY, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Turf Specialty, Inc.
Londonderry, New Hampshire
We have audited the accompanying consolidated balance sheet of Turf
Specialty, Inc. ( a wholly-owned subsidiary of Eco Soil Systems, Inc.) as of
December 31, 1996, and the related consolidated statements of income, retained
earnings and cash flows for the seven months then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and consolidated disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the
first paragraph present fairly, in all material respects, the financial position
of Turf Specialty, Inc. as of December 31, 1996, and the results of its
operations and its cash flows for the seven months then ended in conformity with
generally accepted accounting principles.
BIGELOW & COMPANY
Certified Public Accountants, P.C.
By: /s/ MARIE C. McKAY
--------------------------------------
Marie C. McKay
Certified Public Accountant
Manchester, New Hampshire
January 23, 1997
F-3
<PAGE> 58
ECO SOIL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash.................................................... $ -- $ 150 $ 212
Accounts receivable, net of allowance for doubtful
accounts of $24, $113 and $117 (unaudited) at
December 31, 1995 and 1996 and September 30, 1997,
respectively......................................... 1,231 2,193 10,552
Inventories............................................. 592 2,047 4,161
Prepaid expenses and other current assets............... 52 289 622
------- -------- --------
Total current assets...................................... 1,875 4,679 15,547
Equipment under operating leases, net..................... 1,074 1,325 4,910
Property and equipment, net............................... 260 656 1,188
Intangible assets, net.................................... 751 5,663 6,272
Other assets.............................................. 21 563 188
------- -------- --------
Total assets.............................................. $ 3,981 $ 12,886 $ 28,105
======= ======== ========
Current liabilities:
Accounts payable........................................ $ 1,111 $ 2,743 $ 4,697
Accrued expenses........................................ 96 734 1,978
Current portion of long-term debt....................... 1,703 7,266 3,568
Current portion of advances from shareholders........... 190 348 --
Current portion of capital lease obligations............ 99 22 --
------- -------- --------
Total current liabilities................................. 3,199 11,113 10,243
Long-term debt, net of current portion.................... 911 1,826 712
Deferred gain on sale leaseback, net of current
position................................................ -- -- 210
Advances from shareholders, net of current portion........ -- 21 --
Capital lease obligations, net of current portion......... 30 -- --
Commitments
Shareholders' equity (deficit):
Preferred stock, $.005 par value; 5,000,000 shares
authorized at December 31, 1996 and September 30,
1997; none issued and outstanding.................... -- -- --
Common stock, $.005 par value; 15,000,000 shares
authorized at December 31, 1995, 20,000,000 shares
authorized at December 31, 1996 and September 30,
1997; 4,968,935, 6,606,590 and 11,868,575 (unaudited)
shares issued and outstanding at December 31, 1995
and 1996 and September 30, 1997, respectively........ 25 33 59
Additional paid-in capital.............................. 8,510 12,730 28,889
Warrants................................................ -- 242 242
Note receivable from shareholder........................ -- (192) (192)
Accumulated deficit..................................... (8,694) (12,887) (12,058)
------- -------- --------
Total shareholders' equity (deficit)...................... (159) (74) 16,940
------- -------- --------
Total liabilities and shareholders' equity (deficit)...... $ 3,981 $ 12,886 $ 28,105
======= ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 59
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Proprietary products......................... $ 2,511 $ 3,195 $ 4,483 $ 3,626 $ 8,876
Distributed products......................... 177 562 7,633 5,603 20,265
------- ------- ------- ------- -------
Total revenues....................... 2,688 3,757 12,116 9,229 29,141
Cost of revenues:
Proprietary products......................... 1,865 1,502 1,971 1,625 3,830
Distributed products......................... 133 478 5,399 4,080 15,229
------- ------- ------- ------- -------
Total cost of revenues............... 1,998 1,980 7,370 5,705 19,059
------- ------- ------- ------- -------
Gross profit................................. 690 1,777 4,746 3,524 10,082
Operating expenses:
Selling, general and administrative.......... 2,690 2,584 6,489 4,541 7,857
Research and development..................... 286 413 475 353 189
------- ------- ------- ------- -------
Income (loss) before interest, depreciation and
amortization................................. (2,286) (1,220) (2,218) (1,370) 2,036
Depreciation................................. (269) (309) (447) (365) (376)
Amortization of intangibles.................. (37) (45) (464) (173) (401)
------- ------- ------- ------- -------
Income (loss) from operations.................. (2,592) (1,574) (3,129) (1,908) 1,259
Interest expense............................... (224) (262) (1,064) (523) (430)
------- ------- ------- ------- -------
Net income (loss).............................. $(2,816) $(1,836) $(4,193) $(2,431) $ 829
======= ======= ======= ======= =======
Net income (loss) per share.................... $ (.62) $ (.35) $ (.62) $ (.40) $ .06
======= ======= ======= ======= =======
Shares used in calculating net income (loss)
per share.................................... 4,557 5,207 6,809 6,050 14,341
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 60
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
NOTE
COMMON STOCK ADDITIONAL RECEIVABLE
------------------- PAID-IN FROM ACCUMULATED
SHARES AMOUNT CAPITAL WARRANTS SHAREHOLDER DEFICIT TOTAL
---------- ------ ---------- -------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.... 3,225,268 $ 16 $ 4,075 $ -- $ -- $ (4,042) $ 49
Issuance of common stock, net
of issuance costs of $336... 629,500 3 1,235 -- -- -- 1,238
Conversion of debenture....... 20,000 -- 50 -- -- -- 50
Conversion of advances from
shareholder................. 166,667 1 499 -- -- -- 500
Exercise of employee stock
options..................... 2,500 -- 4 -- -- -- 4
Repurchase of common stock
under rescission offer...... (75,833) -- (120) -- -- -- (120)
Net loss...................... -- -- -- -- -- (2,816) (2,816)
---------- --- ------- ---- ----- -------- -------
Balance at December 31, 1994.... 3,968,102 20 5,743 -- -- (6,858) (1,095)
Issuance of common stock, net
of issuance costs of $256... 606,333 3 1,629 -- -- -- 1,632
Conversion of promissory
note........................ 233,333 1 699 -- -- -- 700
Issuance of common stock for
purchase of Aspen
Consulting, Inc............. 133,667 1 400 -- -- -- 401
Exercise of stock options..... 27,500 -- 39 -- -- -- 39
Net loss...................... -- -- -- -- -- (1,836) (1,836)
---------- --- ------- ---- ----- -------- -------
Balance at December 31, 1995.... 4,968,935 25 8,510 -- -- (8,694) (159)
Issuance of common stock for
purchase of Turf Products,
Ltd......................... 374,424 2 1,121 -- -- -- 1,123
Issuance of common stock...... 138,583 1 387 -- -- -- 388
Issuance of warrants in
connection with debt........ -- -- -- 242 -- -- 242
Exercise of stock options..... 239,000 1 391 -- (192) -- 200
Issuance of common stock for
purchase of Turf Specialty,
Inc......................... 647,650 3 1,940 -- -- -- 1,943
Conversion of debt............ 237,998 1 381 -- -- -- 382
Net loss...................... -- -- -- -- -- (4,193) (4,193)
---------- --- ------- ---- ----- -------- -------
Balance at December 31, 1996.... 6,606,590 33 12,730 242 (192) (12,887) (74)
Issuance of common stock in
IPO, (unaudited)............ 3,795,000 19 13,253 -- -- -- 13,272
Issuance of common stock for
purchase of Turfmakers, Inc.
(unaudited)................. 25,000 -- 109 -- -- -- 109
Exercise of stock options
(unaudited)................. 849,855 4 845 -- -- -- 849
Conversion of debt
(unaudited)................. 592,130 3 1,952 -- -- -- 1,955
Net income (unaudited)........ -- -- -- -- -- 829 829
---------- --- ------- ---- ----- -------- -------
Balance at September 30, 1997
(unaudited)................... 11,868,575 $ 59 $ 28,889 $242 $(192) $ (12,058) $16,940
========== === ======= ==== ===== ======== =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 61
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................. $(2,816) $(1,836) $(4,193) $(2,431) $ 829
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization............... 306 354 911 538 777
Amortization of discount on long-term
debt..................................... -- -- 189 -- --
Deferred gain on sale leaseback............. -- -- -- -- 210
Changes in operating assets and liabilities,
net of effect of acquired businesses:
Accounts receivable...................... (50) (652) 2,045 961 (8,359)
Inventories.............................. (225) (35) 114 103 (1,630)
Prepaid expenses and other assets........ 71 2 (472) (634) 42
Accounts payable......................... 367 139 (2,932) (2,340) 1,941
Accrued liabilities...................... 75 (3) (292) (511) 1,244
------- ------- ------- ------- -------
Net cash used in operating activities......... (2,272) (2,031) (4,630) (4,314) (4,946)
INVESTING ACTIVITIES
Cash received in acquisitions................. -- -- 1,656 1,656 --
Payments related to acquired businesses....... -- -- (2,690) (1,810) (1,424)
Payments for equipment under operating
leases...................................... -- -- -- -- (5,063)
Purchase of property and equipment............ (507) (569) (748) (741) (715)
Proceeds from sale of equipment under
operating leases............................ -- -- -- -- 1,325
Proceeds from note receivable................. -- -- 595 595 --
------- ------- ------- ------- -------
Net cash used in investing activities......... (507) (569) (1,187) (300) (5,877)
FINANCING ACTIVITIES
Advances from shareholder..................... 1,435 1,000 179 74 --
Repayment of advances from shareholder........ (807) (80) -- -- (356)
Proceeds from long-term debt.................. 1,613 858 6,442 5,416 4,489
Repayments of long-term debt.................. (973) (751) (1,135) (948) (7,297)
Payments on capital lease obligations......... (18) (98) (107) (76) (22)
Repurchase of common stock.................... (120) -- -- -- --
Net proceeds from issuance of common stock.... 1,242 1,671 588 585 14,071
------- ------- ------- ------- -------
Net cash provided by financing activities..... 2,372 2,600 5,967 5,051 10,885
------- ------- ------- ------- -------
Net increase (decrease) in cash............... (407) -- 150 437 62
Cash at beginning of period................... 407 -- -- -- 150
------- ------- ------- ------- -------
Cash at end of period......................... $ -- $ -- $ 150 $ 437 $ 212
======= ======= ======= ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Subordinated debentures issued upon conversion
of shareholder advances..................... $ -- $ 300 $ -- $ -- $ --
======= ======= ======= ======= =======
Common stock issued upon conversion of debt
and shareholder advances.................... $ 550 $ 700 $ 382 $ 382 $ 1,955
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid................................. $ 224 $ 262 $ 537 $ 243 $ 652
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-7
<PAGE> 62
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Eco Soil develops, markets and sells proprietary biological and traditional
chemical products that provide solutions for a wide variety of turf and crop
problems in the golf and agricultural industries. The Company has developed its
patented BioJect system for the distribution of naturally occurring microbes
that complement or reduce the need for many chemical products currently used in
golf and agricultural markets. By fermenting microbes at the customer's site and
distributing them through the customer's existing irrigation system, the BioJect
system provides customers with cost savings and mitigates the adverse
environmental effects associated with chemical products. The Company initially
has focused its sales and marketing efforts on the golf market, and recently has
entered the agricultural crop and ornamental markets. To date, Eco Soil has
installed 345 BioJect systems at customer sites, including such renowned golf
courses as Congressional Country Club, Winged Foot Golf Club and Spyglass Hill
Golf Club.
Eco Turf Products, Ltd. (d.b.a. Turf Products, Ltd.) and Turf Specialty,
Inc., wholly-owned subsidiaries of the Company, are wholesalers/distributors of
golf course supplies and turfgrass supplies and operate in the Greater Chicago
area and New England, respectively.
In January 1997, the Company completed its initial public offering of
3,795,000 shares of common stock at a price of $4.125 per share, providing the
Company with net proceeds of approximately $13.3 million, after deducting
underwriting discounts, commissions and other offering costs of approximately
$2.0 million. At December 31, 1996, included in other assets are deferred
issuance costs associated with this offering of approximately $462,000.
Additionally, in February 1997, as a result of the completion of the initial
public offering, $1,904,000 of debt and related accrued interest were converted
into 576,823 common shares and $5,613,000 in debt was repaid.
BASIS OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The accompanying financial statements and related notes as of September 30,
1997 and for the nine months ended September 30, 1996 and 1997 are unaudited but
include all adjustments (consisting only of normal recurring adjustments) which,
in the opinion of management, are necessary for a fair statement of the
financial position and the operating results and cash flows for the interim date
and period presented. Results for the interim period are not necessarily
indicative of results for the entire year or future periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
including the allocation of the purchase price relating to acquired businesses,
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from the estimates.
F-8
<PAGE> 63
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMER
Financial instruments which potentially expose the Company to
concentrations of credit risk are primarily accounts receivable. A substantial
portion of the Company's accounts receivable are from distributors and country
clubs.
The Company generally does not require collateral and provides for
estimated losses on uncollectible accounts at the time of the sale. Such losses
have historically been minimal and within management's expectations.
During 1994 and 1995, sales to a single customer were approximately
$1,200,000 and $507,000, representing 45% and 13% of net sales, respectively.
Amounts receivable from this customer were $118,000 and $99,000 at December 31,
1994 and 1995, representing 26% and 8% of total accounts receivable,
respectively. No customer accounted for more than 10% of net sales for the year
ended December 31, 1996 or the nine months ended September 30, 1996 and 1997.
INVENTORIES
Inventories consist primarily of finished goods and are stated at the lower
of cost (first-in, first-out method) or market.
EQUIPMENT UNDER OPERATING LEASES
Equipment under operating leases is stated at cost. Depreciation is
provided using the straight-line method over seven years, the estimated service
life of the equipment.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line and accelerated methods over the estimated service lives of
depreciable property and equipment ranging from 3 to 7 years. Equipment under
capital leases is amortized over the shorter of the estimated useful life of the
assets or the lease term and such amortization is included in depreciation in
the accompanying financial statements.
INTANGIBLE ASSETS
Intangible assets represent acquired marketing rights and the excess of the
purchase price over the fair market value of the assets acquired. Intangible
assets are being amortized over a period of 3 to 9 years for acquired marketing
rights and 15 years for the excess of the purchase price over the fair market
value of the assets acquired.
IMPAIRMENT OF ASSETS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the estimated
undiscounted cash flows to be generated by those assets are less than the
assets' carrying amount. SFAS No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company adopted the
provisions of SFAS No. 121 effective January 1, 1996. There was no effect of
such adoption on the Company's financial position or results of operations.
F-9
<PAGE> 64
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE AND EXPORT SALES
Proprietary sales revenue is derived from the rental of certain units on a
month to month basis, the sale of microbial products used in those units, and
servicing of the units. Distributed sales revenue is derived primarily from
sales of purchased turf maintenance products. Revenue is recognized upon
delivery of the related products.
Cost of proprietary sales revenues includes depreciation on the rental
units, cost of the microbial products, and the related cost of the service
component. Cost of distributed products revenues is based on the Company's
purchase price.
The Company's export sales totaled $530,000 $598,000 and $543,000 during
1994, 1995 and 1996, respectively, and $201,000 (unaudited) and $2,613,000
(unaudited) during the nine months ended September 30, 1996 and 1997,
respectively.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number
of shares of common stock outstanding during each period. Common stock
equivalents were not included in computing net loss per share since the effect
would have been antidilutive, except that, pursuant to the requirements of the
Securities and Exchange Commission, shares of common stock issued during the
twelve months immediately preceding the initial filing of the registration
statement relating to the Company's initial public offering, plus the number of
common equivalent shares under stock options granted or warrants issued during
such period, have been included in the calculation of the shares used in
computing net loss per share as if they were outstanding through the date of the
Company's IPO for all periods presented (using the treasury stock method).
Supplemental net loss per share has been computed as described above and
also gives effect to the repayment of approximately $5.6 million of the
Company's outstanding indebtedness and resulting reduction of interest expense,
as if a portion of the proceeds from the initial public offering, which became
effective in January 1997 (see Note 10), had been used to repay the debt at the
original dates of issuance and the number of shares of common stock, whose
proceeds are to be used to retire the debt, were outstanding from the same
dates.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1995 1996
----- -----
<S> <C> <C>
Supplemental net loss per share.............................. $(.29) $(.46)
===== =====
Shares used in computing supplemental net loss per share (in
thousands)................................................. 5,654 7,897
===== =====
</TABLE>
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25 ("APB 25") and related Interpretations in accounting for its employee stock
options because the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
F-10
<PAGE> 65
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOVERNMENT REGULATIONS
Substantially all of the Company's facilities are subject to federal, state
and local regulations relating to the discharge of materials into the
environment. Compliance with these provisions has not had, nor does the Company
expect such compliance to have, any material effect upon the operations,
financial condition, capital expenditures, or competitive position of the
Company; however, there can be no assurance that compliance with such
regulations would not have a material effect upon the Company's future results
of operations or financial condition. Management believes that its current
practices and procedures for the control and disposition of such wastes comply
with applicable federal and state requirements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year classifications.
2. ACQUISITIONS
In September 1995, the Company acquired all of the outstanding stock of
Aspen Consulting, Inc. ("Aspen") for 133,667 shares of the Company's common
stock valued at $3.00 per share.
Effective May 31, 1996, the Company acquired all of the outstanding stock
of Turf Specialty, Inc. ("TSI") for $579,000 cash, two promissory notes
totalling $1,000,000 (see Note 4) and 647,650 shares of the Company's common
stock valued at $3.00 per share. The excess of the purchase price over the net
tangible assets acquired includes approximately $118,000 for legal and other
costs incurred associated with the acquisition.
TSI also gave each officer a non-interest bearing loan of $250,000 which
has been recorded as an addition to the excess of purchase price over net
tangible assets. This loan need not be repaid and will be forgiven on July 1,
1999 if the officers continue to be employed by TSI. If employment is terminated
by the Company prior to that date, the officers will be obligated to repay a
portion of the loan pro-rated to the number of days worked from July 2, 1996 to
the effective date of the termination of employment.
Effective May 31, 1996, the Company acquired all of the outstanding stock
of Turf Products, Ltd. ("TPL") for $1,198,000 cash and 374,424 shares of the
Company's common stock valued at $3.00 per share. The excess of the purchase
price over the net tangible assets acquired includes approximately $110,000 for
legal and other costs incurred associated with the acquisition.
In February 1997, the Company acquired the assets of Turfmakers Inc. (dba
Cameron), a turf maintenance product distributor located in Palm Springs,
California for $1,225,000 cash and 25,000 shares of common stock valued at $4.38
per share. The fair market value of the tangible assets acquired was
approximately $525,000 and the excess of the purchase price over the tangible
assets acquired was approximately $810,000.
The results of operations of Aspen, TSI, TPL and Cameron from the
respective dates of acquisition are included in the consolidated financial
statements.
F-11
<PAGE> 66
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
2. ACQUISITIONS (CONTINUED)
Each of the acquisitions was accounted for as a purchase and, accordingly,
the purchase price has been allocated to the assets acquired and the liabilities
assumed based on the estimated fair market values at the date of the
acquisition, as follows (in thousands).
<TABLE>
<CAPTION>
ASPEN TURF TURF
CONSULTING, SPECIALTY, PRODUCTS,
INC. INC. LTD. CAMERON
----------- ---------- --------- -------
<S> <C> <C> <C> <C>
Assets acquired:
Cash................................................... $ -- $1,471 $ 185 $ --
Accounts receivable.................................... 134 1,900 1,021 --
Inventories............................................ -- 675 894 484
Prepaid expenses and other current assets.............. 7 31 336 --
Property and equipment................................. 31 164 182 40
Note receivable from stockholders...................... -- 595 -- --
Excess of purchase price over net tangible assets
acquired............................................ 530 3,460 1,780 831
---- ------ ------ ------
Total assets acquired.................................... $ 702 $8,296 $ 4,398 $1,355
==== ====== ====== ======
Liabilities assumed:
Accounts payable....................................... $ 35 $3,261 $ 1,492 $ --
Accrued expenses....................................... 31 895 35 --
Notes payable.......................................... 235 -- 440 --
---- ------ ------ ------
Total liabilities assumed................................ 301 4,156 1,967 --
---- ------ ------ ------
Net assets acquired...................................... $ 401 $4,140 $ 2,431 $1,355
==== ====== ====== ======
</TABLE>
The following unaudited pro forma results assume the TSI and TPL
acquisitions discussed above occurred on January 1, 1995. The results of
operations of Aspen and Cameron prior to its acquisition by the Company were not
material and are not included in the following unaudited pro forma results. The
unaudited pro forma results have been prepared utilizing the historical
financial statements of the Company and the acquired businesses.
PRO FORMA RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Net sales........................................ $17,557 $18,636
Net loss......................................... (1,686) (4,576)
Net loss per share............................... $ (.31) $ (.64)
</TABLE>
The unaudited pro forma results above give effect to pro forma adjustments
related to the amortization of the excess of the purchase price over the fair
market value of the assets acquired, the increase in interest expense to reflect
the notes payable issued to effect the acquisitions, and related income tax
adjustments.
This pro forma information is not necessarily indicative of the actual
results that would have been achieved had the above businesses been acquired on
January 1, 1995, nor is it necessarily indicative of future results.
F-12
<PAGE> 67
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
3. BALANCE SHEET INFORMATION
Equipment under operating leases is generally leased under initial one-year
lease terms with month-to-month renewal options. Accumulated depreciation and
amortization of equipment under operating leases totaled $535,000, $823,000 and
$152,000 at December 31, 1995 and 1996 and September 30, 1997, respectively.
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------ ------- -------------
<S> <C> <C> <C>
Machinery and equipment..................... $ 204 $ 256 $ 1,131
Vehicles.................................... 317 629 725
Leasehold improvements...................... 56 170 284
Furniture and fixtures...................... 53 130 295
------ ------- -------
630 1,185 2,435
Less accumulated depreciation and
amortization.............................. (370) (529) (1,247)
------ ------- -------
$ 260 $ 656 $ 1,188
====== ======= =======
</TABLE>
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1995 1996 1997
---- ------ -------------
<S> <C> <C> <C>
Excess of purchase price over fair market
value of assets acquired (Note 2)........... $553 $5,929 $ 6,907
Other intangibles............................. 281 281 329
Accumulated amortization...................... (83) (547) (964)
---- ------ ------
$751 $5,663 $ 6,272
==== ====== ======
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Revolving line of credit with bank for
$5,000; interest payable monthly at the
bank's prime rate plus 1.5% per annum (10%
at September 1997), expiring June 15, 1998;
secured by 75% of eligible accounts
receivable and 35% of the value of
inventory.................................. $ -- $ -- 2,317
10% secured promissory notes issued in
connection with the acquisition of Turf
Specialty, Inc., to its officers; repaid in
February 1997.............................. -- 1,000 --
8% secured subordinated notes to an officer
and shareholders, net of unamortized
discount of $23; interest payable
quarterly, principal due $719 in March
1998....................................... -- 1,006 750
8% secured subordinated debentures to
officers and shareholders; interest payable
quarterly, principal due November 1998..... 700 700 700
</TABLE>
F-13
<PAGE> 68
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
4. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Revolving line of credit with bank for $500;
repaid in January 1997..................... $ -- $ 500 $ --
9% note payable to a bank; repaid in January
1997....................................... 1,013 263 --
8% unsecured subordinated promissory note to
an officer; interest and principal due upon
demand..................................... -- 250 450
California Export Financing Office (CEFO)
revolving line of credit with bank for
$500; repaid in January, 1997.............. -- 418 --
10% subordinated promissory bridge notes, net
of unamortized discount of $24; $1,904
converted into common stock and the
remaining amount repaid in February
1997....................................... -- 3,671 --
Non-interest bearing unsecured note payable;
due March 1998............................. 180 94 42
10% unsecured subordinated notes; repaid in
August 1997................................ -- 120 --
10% convertible unsecured subordinated
debentures issued to shareholders;
converted into common stock in 1996........ 132 -- --
10% unsecured subordinated debentures; repaid
in August, 1997............................ 290 90 --
Non-interest bearing note payable to purchase
marketing rights; repaid in 1996........... 86 -- --
8% unsecured note payable to a shareholder;
converted into common stock in 1996........ 100 -- --
10% unsecured convertible promissory note;
repaid in January, 1997.................... -- 100 --
10% unsecured subordinated promissory note to
an officer and shareholder; repaid in
March, 1997................................ -- 100 --
10% convertible promissory note; $100 repaid
in March, 1997 and $50 converted to common
stock in April 1997........................ -- 150 --
8% secured promissory note; repaid in January
1997....................................... -- 189 --
Note payable with bank; repaid in March
1997....................................... -- 200 --
10% unsecured subordinated promissory note to
officer and shareholder; repaid in
February, 1997............................. -- 200 --
Other........................................ 113 41 21
------ ------ ------
2,614 9,092 4,280
Less amount due within one year.............. 1,703 7,266 3,568
------ ------ ------
Long-term debt due after one year............ $ 911 $1,826 $ 712
====== ====== ======
</TABLE>
F-14
<PAGE> 69
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
4. LONG-TERM DEBT (CONTINUED)
Aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Year ending December 31, 1997............................... $ 513
Year ending December 31, 1998............................... 3,767
------
$4,280
======
</TABLE>
Substantially all of the assets of the Company are pledged as collateral as
a result of the debt agreements described above.
The Company's revolving line of credit agreements ("Agreements") contain
certain restrictions and limitations on the Company's operations including
restrictions on capital expenditures, sale of assets, lease liabilities,
mergers, or other forms of business combinations, as well as the prohibition on
the payments of cash dividends. The Agreements also contain certain covenants
which require the Company to maintain minimum levels of net worth, working
capital, and other financial ratios, as defined. In connection with the sale
leaseback of certain BioJect units in September 1997, the Company guaranteed
$3.0 million of debt borrowed by the purchaser of the BioJects. The use of the
line of credit is limited to $5.0 million less the unpaid balance on the
purchaser's debt.
5. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors is authorized, without any action by the Company's
shareholders, to issue up to 5,000,000 shares of undesignated preferred stock
and to fix the powers, preferences, rights and limitations of any such preferred
shares or any class or series thereof. Persons acquiring preferred stock could
have preferential rights with respect to voting, liquidation, dissolution or
dividends over existing shareholders.
STOCK OPTION PLAN
In February 1992, the Company established a Qualified Stock Option Plan
(the "Plan") for employees and consultants which, as amended, provides for the
grant of options to purchase up to 1,100,000 shares of common stock. Options
granted under the Plan have a five-year term and vest ratably over a three-year
period.
A summary of the Company's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
1995 1996
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding -- beginning of year.................... 210,000 $ 2.00 334,168 $ 2.25
Granted........................................... 126,668 $ 3.00 391,000 $ 3.59
Exercised......................................... (2,500) $ 3.00 (10,000) $ 2.00
Forfeited......................................... -- -- (27,668) $ 2.25
------- -------
Outstanding -- end of year.......................... 334,168 $ 2.25 687,500 $ 2.59
======= =======
Exercisable -- end of year.......................... 242,222 $ 1.96 274,167 $ 2.26
======= =======
</TABLE>
Exercise price for options outstanding as of December 31, 1996 ranged from
$1.50 to $4.00. The weighted average remaining contractual life of those options
is approximately 3.4 years.
F-15
<PAGE> 70
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
At December 31, 1996, options for 197,500 shares were available for future
grant. At December 31, 1996, 900,000 shares of common stock were reserved for
future issuance related to stock options and warrants.
Pro forma information regarding net loss and net loss per share is required
by Statement 123, and has been determined as if the Company has accounted for
its employee stock options under the fair value method of that statement. The
fair value of these options was estimated at the date of grant using the minimum
value option pricing model with the following weighted average assumptions for
1996 and 1995, respectively: risk-free interest rates of 7%; no dividend yields
expected; and a weighted-average life of the option of 3 years.
The minimum value option pricing model is similar to the Black-Scholes
model which was developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of such options. The
effects of applying Statement 123 for pro forma disclosure purposes are not
likely to be representative of the effects on pro forma net loss or net income
in future years because they do not take into consideration pro forma
compensation expense related to grants made prior to 1995. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Pro forma net loss (in thousands).................... $(1,853) $(4,257)
======= =======
Pro forma net loss per share......................... $ (.37) $ (.63)
======= =======
Weighted-average fair value of options granted during $ .57 $ 1.16
the year...........................................
======= =======
</TABLE>
OPTIONS AND WARRANTS
Under separate non-qualified stock option agreements in 1992 and 1993, the
Company granted options to purchase 270,000 shares of common stock at prices
ranging from $1.50 to $2.00 per share to several consultants and employees which
have vesting and exercise provisions consistent with those issued pursuant to
the Plan and expire through 1998. In 1995, 25,000 options were exercised at
$1.50 per share. In 1996, 164,000 options were exercised at $2.00 per share and
26,000 options expired. As of December 31, 1996 all remaining options were
exercisable.
In 1991 and 1992, the Company also granted to four individuals options to
purchase 812,458 shares of the Company's common stock at prices ranging from
$.034 to $2.00 per share. In 1996, 40,000 options were exercised at $.034 per
share. As of December 31, 1996, all remaining options were exercisable and
expire through May 2001.
In connection with the issuance of the 10% subordinated debentures in 1992
and 1993, the Company issued to the holders of the debentures options to
purchase 88,000 shares at $1.50 per share and warrants to purchase 78,000 shares
at $3.00 per share. In 1996, 88,000 options were exercised at $1.50 per share
through the cancellation of related debt of $132,000. Warrants to purchase
78,000 shares were outstanding and exercisable at December 31, 1996 and expire
through February 1998.
F-16
<PAGE> 71
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
In connection with the 1994 repurchase of exclusive marketing rights for
certain products, the Company issued warrants to purchase 30,000 common shares
at $2.50 per share. All warrants were outstanding and exercisable as of December
31, 1996 and expire through 1999.
During 1994, warrants to purchase 350,000 shares at $2.50 per share were
issued to an officer of the Company. Warrants for the purchase of 100,000 shares
of common stock vested ratably through January 1996 and warrants for the
purchase of 250,000 shares of common stock may not be exercised until the
issuance price of common stock exceeds certain prices. Compensation expense
relating to the contingent shares will be recorded when the options vest based
upon the difference between the then fair market value and the exercise price.
At December 31, 1996, 100,000 of these warrants were exercisable.
In accordance with the Company's purchase of Aspen, the previous owner of
Aspen was granted an option to purchase 50,000 shares of the Company's common
stock at $3.00 per share. The option vests over four years if the previous owner
continues employment with the Company and will expire in December 2001. An
additional 150,000 options to purchase the Company's common stock at $3.00 per
share will be granted evenly over the next four years provided employment
continues and contingent upon the level of the pre-tax contribution margin of
Aspen over the next four years. Compensation expense relating to this option
will be recorded when the shares vest based upon the difference between the then
fair market value and the exercise price.
In connection with a new stock option compensation plan for the board of
directors, 30,000 options were granted January 1996 at $3.00 per share. As of
December 31, 1996, 10,000 options were exercisable with the remaining options
vesting over the next two years. These options expire in January 2001.
In connection with various long-term debt financing transactions, the
Company has issued warrants to purchase 1,880,818 shares of common stock at
$3.00 and $4.00 per share. The warrants are generally exercisable through 2003.
In 1996, warrants were exercised for the purchase of 3,666 shares of common
stock. All remaining warrants were outstanding and exercisable at December 31,
1996.
Options and warrants have also been issued to various investment banking
firms, debenture holders and shareholders to purchase 1,195,190 shares of common
stock. These options and warrants are generally exercisable through 2001 at
prices between $1.50 and $4.00 per share. In 1996, options and warrants were
exercised for the purchase of 31,800 shares of common stock.
As of December 31, 1996, an aggregate of 5,000,000 shares of common stock
are reserved for issuance under options and warrants, exclusive of options
granted under the Plan.
6. TPL DEFINED CONTRIBUTION PLAN
Substantially all employees of TPL are covered by a defined contribution
plan sponsored by TPL. TPL makes discretionary contributions up to 15% of
eligible employee compensation on an annual basis. No contributions are made by
the participants. No contributions have been made for the year ended December
31, 1996. Costs of administering the plan are paid by the Company and are not
material.
7. INCOME TAXES
At December 31, 1996, the Company had federal and California tax net
operating loss carryforwards of approximately $12.1 million and $4.7 million,
respectively. The difference between the federal and California tax loss
carryforwards is primarily attributable to the fifty percent limitation on
California loss carryforwards. The federal and California tax loss carryforwards
begin expiring in 2003 and 1998, respectively, unless previously utilized.
F-17
<PAGE> 72
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
7. INCOME TAXES (CONTINUED)
Pursuant to Internal Revenue Code Sections 382 and 383, use of the
Company's net operating loss carryforwards may be limited if a cumulative change
in ownership of more than 50% occurs within any three-year period. The Company's
use of a portion of its income tax net operating loss carryforwards will be
limited since the Company has undergone ownership changes of greater than 50%.
Significant components of the Company's deferred tax assets as of December
31, 1996 and 1995 are shown below. A valuation allowance of $4,636,000, of which
$1,483 relates to 1996, has been recognized to offset the deferred tax assets as
realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 3,093 $ 4,530
Other.................................................. 60 106
------ ------
Total deferred tax assets................................ 3,153 4,636
Valuation allowance for deferred tax assets.............. (3,153) (4,636)
------ ------
Net deferred tax assets.................................. $ -- $ --
====== ======
</TABLE>
8. COMMITMENTS
In 1995, the Company entered into a thirty-year licensing agreement for
BioJect Product (as defined). The license called for the Company to pay
royalties of 13% on all product which was evaluated, developed, supplied, or
improved by the licensor, with minimum royalty payments of $100,000 in each of
1996 and 1997. The Company granted the licensor a fully exercisable warrant to
purchase 50,000 shares of the Company's common stock of $3.00 per share which
expires in 2002. Royalty expense for the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1996 and 1997, was $100,000, $153,000,
$79,000 and $0, respectively.
In July 1997, the agreement was revised, whereby the Company obtained an
exclusive, worldwide, royalty-free license to use, sell and distribute BioJect
Product. In addition, the licensor assigned to the Company certain rights to
proprietary materials. Under the revised license and supply agreement, the
Company has agreed to purchase minimum amounts of BioJect Product over a three
year period commencing in March 1997 as follows:
<TABLE>
<S> <C>
March 1997 - February 1998........................................ $210,000
March 1998 - February 1999........................................ $350,000
March 1999 - February 2000........................................ $350,000
</TABLE>
F-18
<PAGE> 73
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
8. COMMITMENTS (CONTINUED)
Annual future minimum lease payments, including equipment under capital
leases as of December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year ending December 31, 1997.............................. $23 $ 364
Year ending December 31, 1998.............................. -- 336
Year ending December 31, 1999.............................. -- 241
Year ending December 31, 2000.............................. -- 72
Year ending December 31, 2001.............................. -- 69
--- ------
Total minimum lease payments............................... 23 $ 1,082
======
Less amount representing interest.......................... 1
---
Present value of remaining capital lease payments
(including current portion of $22)....................... $22
===
</TABLE>
Rental expense for the years ended December 31, 1994, 1995 and 1996 and the
nine months ended September 30, 1996 and 1997 was approximately $102,000,
$107,000, $268,000, $185,000, and $325,000, respectively, including $89,000,
$78,000, $90,000, $65,000, and $113,000, respectively, to a shareholder. The
lease with the shareholder expires in November 1999.
In September 1997, the Company sold approximately $4.0 million of equipment
under operating leases to an unrelated investor group. The Company then leased
the equipment back under a 40-month lease agreement. The equipment is subleased
to end-users, generally under one-year lease terms. The gain of approximately
$300,000 on the sale has been deferred and will be amortized over the 40-month
lease term. Minimum lease payments due under the leaseback are as follows as of
September 30, 1997 (in thousands):
<TABLE>
<S> <C>
Year ending December 31, 1997....................................... $ 500
Year ending December 31, 1998....................................... 1,921
Year ending December 31, 1999....................................... 1,794
Year ending December 31, 2000....................................... 671
Year ending December 31, 2001....................................... 42
------
Total minimum lease payments........................................ $4,928
======
</TABLE>
TSI has entered into employment agreements expiring July 9, 1999 with two
executive officers. The agreements provide for minimum salary levels, adjusted
annually for cost-of-living changes, as well as participation in any incentive
compensation plans sponsored by TSI.
9. RELATED PARTY TRANSACTIONS
As more fully described in Note 4, the Company has various debt
arrangements with officers and shareholders of the Company.
As more fully described in Note 8, the Company leases its facility under an
operating lease which it assumed from two officers of the Company.
F-19
<PAGE> 74
REPORT OF BIGELOW & COMPANY, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Turf Specialty, Inc.
Londonderry, New Hampshire
We have audited the accompanying consolidated statements of income and
retained earnings and cash flows of Turf Specialty, Inc. for the years ended
December 31, 1994 and 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and consolidated disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the
first paragraph present fairly, in all material respects, the results of
operations and cash flows of Turf Specialty, Inc. for the years ended December
31, 1994 and 1995, in conformity with generally accepted accounting principles.
BIGELOW & COMPANY
Certified Public Accountants, P.C.
By: /s/ MARIE C. MCKAY
------------------------------------
Marie C. McKay
Certified Public Accountant
Manchester, New Hampshire
July 19, 1996
F-20
<PAGE> 75
TURF SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Net sales................................................................ $4,557 $6,886
Cost of sales............................................................ 3,101 4,929
------ ------
Gross profit........................................................... 1,456 1,957
Operating expenses....................................................... 1,463 1,347
------ ------
Income (loss) from operations............................................ (7) 610
Other income............................................................. 43 4
------ ------
Income before provision for income taxes................................. 36 614
Provision for income taxes............................................... 9 240
------ ------
Net income............................................................... 27 374
Retained earnings at beginning of year .................................. 573 600
------ ------
Retained earnings at end of year......................................... $ 600 $ 974
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-21
<PAGE> 76
TURF SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1994 1995
----- -----
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................................. $ 27 $ 374
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................. 31 51
Loss on sale of property and equipment.................................... 8 4
Change in operating assets and liabilities:
Accounts receivable.................................................... (109) (940)
Inventory.............................................................. 32 (652)
Income taxes........................................................... (7) 240
Prepaid expenses....................................................... (3) --
Accounts payable....................................................... 63 1,530
Accrued expenses....................................................... 7 (8)
Customer deposits...................................................... 29 11
----- -----
Net cash provided by operating activities.............................. 78 610
INVESTING ACTIVITIES:
Purchase of property and equipment.......................................... (69) (78)
Advances (repayments) on notes receivable from stockholders................. 75 (90)
Proceeds from sale of property and equipment................................ 19 6
----- -----
Net cash provided by (used in) investing activities......................... 25 (162)
----- -----
FINANCING ACTIVITIES:
Principal payments on notes payable......................................... (29) (35)
Repurchase of common stock.................................................. (75) (75)
Proceeds (repayments) of note payable to stockholder........................ 79 (78)
----- -----
Net cash used in financing activities....................................... (25) (188)
Net increase in cash........................................................ 78 260
Cash at beginning of year................................................... 49 128
----- -----
Cash at end of year......................................................... $ 127 $ 388
===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes.................................................. $ 16 $ 2
===== =====
Cash paid for interest...................................................... $ 13 $ 9
===== =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-22
<PAGE> 77
TURF SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Substantially all gross revenues are derived from the purchase and resale
of turfgrass supplies. Most of the Company's business activity is with golf
courses located in New England.
Basis of Consolidation
The consolidated financial statements include the accounts of Turf
Specialty, Inc. (the Company) and its wholly-owned subsidiary, 3MT, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Allowance for Doubtful Accounts
The Company considers its accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is provided.
Inventories
Inventories consist primarily of finished goods and are valued at the lower
of cost (first-in, first-out) or market value.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
accelerated methods based on the estimated useful lives of the assets.
Maintenance and repairs are charged to expense when incurred.
Advertising Costs
Advertising costs are charged to the expense as incurred. Advertising costs
were $8,683 and $9,191 for the years ended December 31, 1994 and 1995,
respectively.
Governmental Regulations
Substantially all of the Company's facilities are subject to federal, state
and local regulations relating to the discharge of materials into the
environment. Compliance with these provisions has not had, nor does the Company
expect such compliance to have, any material effect upon the net income,
financial condition, capital expenditures, or competitive position of the
Company. Management believes that its current practices and procedures for the
control and disposition of such wastes comply with applicable federal and state
requirements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk are primarily cash and accounts receivable. The
Company deposits its cash in financial institutions. At times, such
F-23
<PAGE> 78
TURF SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
investments may be in excess of insured limits. To date, the Company has not
experienced any losses on its cash investments. A substantial portion of the
Company's accounts receivable are from distributors and country clubs. The
Company generally does not require collateral and provides for estimated losses
on uncollectible accounts at the time of the sale. Such losses have historically
been minimal and within management's expectations.
3. MAJOR SUPPLIER
Beginning in 1994, the Company has a distributor agreement with a major
supplier. At December 31, 1995, amounts due to that supplier included in
accounts payable were $1,745,381. This agreement has been terminated effective
December 31, 1996.
4. LINE OF CREDIT
The Company has available a $900,000 line of credit at the bank's prime
rate plus 1.5% (10% at December 31, 1995). The line is unsecured and is
personally guaranteed by the stockholders. There were no borrowings outstanding
under this agreement at December 31, 1994 and 1995.
5. RELATED PARTY TRANSACTIONS
The stockholders have personally guaranteed all of the bank debt of the
Company (SEE NOTE 4).
As more fully described in Note 6, the Company leases its facility under an
operating lease which it assumed from its stockholders.
6. OPERATING LEASES
The Company leases its facility under a five-year operating lease which
expires February 1997. The lease agreement was entered into by the stockholders
of the Company. The Company utilizes the premises and has assumed the obligation
and liability under the lease. The lease payment is $3,467 per month and
includes property tax and common area charges which are subject to change. The
Company is also party to a number of operating leases for office equipment.
Rental expense under these leases for the years ended December 31, 1994 and 1995
was $44,789 and $57,688, respectively.
The following is a schedule of minimum future rental payments to be made
under these leases as of December 31, 1995 (IN THOUSANDS):
<TABLE>
<S> <C>
Year ending December 31, 1996.................................. $51
Year ending December 31, 1997.................................. 5
---
$56
===
</TABLE>
7. REPURCHASED STOCK
The Company has repurchased shares of the Company's common stock, as
follows:
<TABLE>
<CAPTION>
NUMBER OF COST OF
SHARES REPURCHASED
REPURCHASED SHARES
----------- --------------
(IN THOUSANDS)
<S> <C> <C>
Year ended December 31, 1994....................... 23.82 $ 75
Year ended December 31, 1995....................... 23.84 75
----- ----
47.66 $150
===== ====
</TABLE>
F-24
<PAGE> 79
TURF SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
A reconciliation of federal and state income taxes computed at current
rates to the amounts provided in the financial statements is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------
1994 1995
---- ----
<S> <C> <C>
Federal....................................................... $6 $196
State......................................................... 3 44
-- ----
$9 $240
== ====
</TABLE>
9. PROFIT SHARING PLAN
The Company has a non-contributory profit sharing plan covering
substantially all of its employees. Annual employer contributions to the plan
are set by the Board of Directors. Contributions for the years ended December
31, 1994 and 1995 amounted to $103,275 and $109,155, respectively.
10. SUBSEQUENT EVENT
Effective May 31, 1996, the Company was merged into Eco Specialty, Inc., a
Delaware corporation. Eco Specialty, Inc. was the surviving corporation which
changed its name to Turf Specialty, Inc.
F-25
<PAGE> 80
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
STOCKHOLDER
TURF PRODUCTS, LTD.
We have audited the accompanying statements of income and retained earnings
and cash flows of Turf Products, Ltd. for each of the two years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
ERNST & YOUNG LLP
San Diego, California
October 3, 1996
F-26
<PAGE> 81
TURF PRODUCTS, LTD.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Net sales.................................................................. $5,219 $6,914
Cost of sales.............................................................. 3,584 4,946
------ ------
Gross profit..................................................... 1,635 1,968
Operating expenses:
Selling expenses......................................................... 442 523
General and administrative expenses...................................... 1,031 1,224
------ ------
1,473 1,747
------ ------
Operating income........................................................... 162 221
Other income (expense):
Interest expense......................................................... (23) (28)
Interest income.......................................................... 1 1
Other, net............................................................... (1) --
------ ------
(23) (27)
------ ------
Income before income taxes................................................. 139 194
Provision for income taxes................................................. 71 94
------ ------
Net income................................................................. 68 100
Cash dividends............................................................. (50) (25)
Retained earnings at beginning of year..................................... 543 561
------ ------
Retained earnings at end of year........................................... $ 561 $ 636
====== ======
</TABLE>
See accompanying notes.
F-27
<PAGE> 82
TURF PRODUCTS, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1994 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................................. $ 68 $100
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................. 52 65
Provision for doubtful accounts........................................... -- 11
Deferred income taxes..................................................... 6 (27)
Changes in operating assets and liabilities:
Accounts receivable.................................................... (24) 85
Inventories............................................................ (165) (185)
Prepaids and other assets.............................................. (5) 89
Accounts payable and accrued expenses.................................. 102 57
Income taxes payable................................................... 50 31
---- ----
Net cash provided by operating activities................................... 84 226
INVESTING ACTIVITIES
Purchase of property and equipment.......................................... (45) (133)
Premium receivable.......................................................... (21) (30)
---- ----
Net cash used by investing activities....................................... (66) (163)
FINANCING ACTIVITIES
Advances from stockholder................................................... 50 --
Cash dividends paid......................................................... (50) (25)
---- ----
Net cash used by financing activities....................................... -- (25)
---- ----
Increase in cash............................................................ 18 38
Cash at beginning of year................................................... 77 95
---- ----
Cash at end of year......................................................... $ 95 $133
---- ----
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes.............................................................. $ 20 $ 91
==== ====
Interest.................................................................. $ 17 $ 28
==== ====
</TABLE>
See accompanying notes.
F-28
<PAGE> 83
TURF PRODUCTS, LTD.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Turf Products, Ltd. is a wholesaler/distributor of golf course and
turfgrass supplies. The Company is privately owned and operates in the Greater
Chicago area.
Concentration of Credit Risk
No single customer is large enough to pose a significant financial risk to
the Company. To the extent the Company's customers become delinquent, collection
activities commence. The Company maintains an allowance for losses based on the
expected collectability of accounts receivable. Credit losses historically have
been insignificant and within management's expectations.
Inventories
Inventories consist primarily of finished goods and are stated at the lower
of cost (principally first in, first out method) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed by
applying an accelerated method for transportation equipment and a straight-line
method for all other property and equipment based on the estimated useful lives
of the assets. Repairs and maintenance costs are expensed as incurred.
Goodwill
Goodwill resulted from the buyout of certain partners of the original
partnership (the Company was incorporated from a partnership in 1971). The
goodwill is being amortized over 40 years. Amortization of goodwill amounted to
approximately $1,000 for each of the years ended December 31, 1994 and 1995.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were
$18,938 and $22,690 for the years ended December 31, 1994 and 1995,
respectively.
Government Regulations
Substantially all of the Company's facilities are subject to federal, state
and local regulations relating to the discharge of materials into the
environment. Compliance with these provisions has not had, nor does the Company
expect such compliance to have, any material effect upon the net income,
financial condition, capital expenditures, or competitive position of the
Company. Management believes that its current practices and procedures for the
control and disposition of such wastes comply with applicable federal and state
requirements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-29
<PAGE> 84
TURF PRODUCTS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. RELATED PARTY TRANSACTIONS
The Company pays life insurance premiums on behalf of the stockholder. For
the years ended December 31, 1994 and 1995, the Company paid $37,696 and $37,336
in life insurance premiums. In the event of the death of the stockholder or
termination of a related collateral assignment agreement, the Company is
entitled to reimbursement of these premiums or ownership of the policies. The
premium receivable recorded in the balance sheet reflects the cash surrender
value of the policies which represents the collateralized portion of the
premiums. Premiums paid since inception of the policies in excess of the cash
surrender values totaled $52,192 at December 31, 1995.
The Company sells Eco Soil Systems, Inc. products to their customers. The
effect on cost of sales, net of commissions, of these transactions for the years
ended December 31, 1994 and 1995 was $0 and $9,500, respectively.
In addition to facilities leased as noted above, the Company occupies a
building owned by a stockholder on which no rent is charged.
3. INCOME TAXES
The components of income tax expense were as follows for the years ended
December 31 (in thousands):
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Current income tax expense:
Federal..................................................... $51 $ 98
State....................................................... 14 23
Deferred income tax expense (benefit):
Federal..................................................... 7 (24)
State....................................................... (1) (3)
--- ----
Total income tax expense...................................... $71 $ 94
=== ====
</TABLE>
A reconciliation from the U.S. federal statutory income tax rate (34
percent) to the effective income tax rate (income tax expense divided by income
before income taxes) is as follows for the years ended December 31 (in
thousands):
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Income tax expense at the statutory rate....................... $47 $66
Effect of:
State income tax expense, net of federal income tax effect... 9 12
Non-deductible expenses...................................... 15 16
Change in tax rates on deferred taxes........................ 7 1
Change in tax due to graduated tax rates..................... (8) (1)
Other, net................................................... 1 --
--- ---
Income tax expense............................................. $71 $94
=== ===
Effective income tax rate...................................... 51% 48%
=== ===
</TABLE>
For the years ended December 31, 1994 and 1995, income tax expense was
affected by the difference between the statutory tax rate of 34% and the
graduated tax rate based on the Company's level of taxable income.
Deferred income taxes are provided for temporary differences between the
carrying amounts of the Company's assets and liabilities for financial statement
purposes and their tax bases. The sources of the
F-30
<PAGE> 85
TURF PRODUCTS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
differences that gave rise to the deferred income tax assets and liabilities as
of December 31, 1995, along with the income tax effect of each, were as follows
(in thousands):
<TABLE>
<CAPTION>
1995 DEFERRED
INCOME TAX
----------------------
ASSETS LIABILITIES
------ -----------
<S> <C> <C>
Property and equipment.................................... $ -- $ 5
Bad debts................................................. 4 --
Contributions............................................. 9 --
Differences in revenue and expense recognition............ 28 --
Life insurance............................................ -- 25
--- ---
$ 41 $30
=== ===
</TABLE>
4. COMMITMENTS
Annual future payments under the Company's operating leases as of December
31, 1995 are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31, 1996.................................. $54
Year ending December 31, 1997.................................. 23
Year ending December 31, 1998.................................. 3
Year ending December 31, 1999.................................. 2
---
$82
===
</TABLE>
Rental expense for the years ended December 31, 1994 and 1995 was
approximately $200 and $28,500, respectively.
5. DEFINED CONTRIBUTION PLAN
Substantially all employees of the Company were covered by a defined
contribution plan sponsored by Turf Products, Ltd. No contributions are made by
the participants. The Company's contributions aggregated $62,000 for each of the
years ended December 31, 1994 and 1995 and were determined at the Company's
discretion. Costs of administrating the Plan are paid by the Company.
6. SUBSEQUENT EVENT
Effective May 31, 1996, the Company merged with Eco Turf Products, Inc., a
subsidiary of Eco Soil Systems, Inc. The subsidiary is the surviving
corporation. Prior to the closing of this merger, the Company terminated the
defined contribution plan (See Note 5).
F-31
<PAGE> 86
ECO SOIL SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
The following unaudited pro forma condensed consolidated statements of
operations for the years ended December 31, 1996 and 1995 give effect to the
acquisitions of Turf Specialty, Inc. (TSI) and Turf Products, Ltd. (TPL) as if
they were acquired on January 1, 1995.
The pro forma condensed consolidated statements of operations are based on
historical financial statements of Eco Soil Systems, Inc., TSI and TPL, giving
effect to the acquisitions applying the purchase method of accounting and the
assumptions and adjustments as discussed in the accompanying notes to the pro
forma condensed consolidated statements of operations. The unaudited pro forma
condensed consolidated statements of operations should be read in conjunction
with the historical financial statements and notes thereto of Eco Soil Systems,
Inc., TSI and TPL, and narrative sections included elsewhere herein. The pro
forma condensed consolidated statements of operations are presented for
illustrative purposes and are not necessarily indicative of what actual results
of operations would have been for the periods presented had the transactions
occurred on the date indicated and do not purport to indicate the results of
future operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
HISTORICAL
-------------------------------------
ECO SOIL TURF TURF PRO FORMA PRO FORMA
SYSTEMS, SPECIALTY, PRODUCTS, ADJUSTMENTS REFLECTING
INC. INC. LTD. (NOTE 2) ACQUISITIONS
-------- ---------- --------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues........................... $ 3,757 $6,886 $ 6,914 $ -- $ 17,557
Operating expenses................. 5,331 6,263 6,692 349(a) 18,635
------- ------ ------ ----- ----------
Operating income (loss)............ (1,574) 623 222 (349) (1,078)
Interest expense, net.............. (262) (9) (28) (308)(b) (607)
------- ------ ------ ----- ----------
Income (loss) before income
taxes............................ (1,836) 614 194 (657) (1,685)
Provision for income taxes......... -- 240 94 (334)(c) --
------- ------ ------ ----- ----------
Net income (loss).................. $ (1,836) $ 374 $ 100 $(323) $ (1,685)
======= ====== ====== ===== ==========
Net loss per share................. $ (0.31)
==========
Shares used in computing net loss
per share........................ 5,516,000
==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
HISTORICAL
-------------------------------------
ECO SOIL TURF TURF PRO FORMA PRO FORMA
SYSTEMS, SPECIALTY, PRODUCTS, ADJUSTMENTS REFLECTING
INC. INC. LTD. (NOTE 2) ACQUISITIONS
-------- ---------- --------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues........................... $ 12,116 $3,837 $ 2,683 $ -- $ 18,636
Operating expenses................. 15,245 3,911 2,698 146 22,000
------- ------ ------ ----- ----------
Operating loss..................... (3,129) (74) (15) (146) (3,364)
Interest expense, net.............. (1,064) -- (20) (128)(b) (1,212)
------- ------ ------ ----- ----------
Loss before income taxes........... (4,193) (74) (35) (274) (4,576)
Provision for income taxes......... -- -- 20 (20) (c) --
------- ------ ------ ----- ----------
Net loss........................... $ (4,193) $ (74) $ (55) $(254) $ (4,576)
======= ====== ====== ===== ==========
Net loss per share................. $ (.64)
==========
Shares used in computing net loss
per share........................ 7,118,000
==========
</TABLE>
See accompanying notes to Pro Forma Condensed Consolidated Statements of
Operations.
F-32
<PAGE> 87
ECO SOIL SYSTEMS, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)
NOTE 1.
On May 31, 1996, Eco Soil Systems, Inc. (the "Company") acquired all of the
outstanding common stock of Turf Specialty, Inc. ("TSI") and Turf Products, Inc.
("TPL") in separate transactions. To effect the purchase of TSI, the Company
issued 647,650 shares of its common stock and $1,000,000 in debt and paid
$579,000 in cash. To effect the purchase of TPL, the Company issued 374,424
shares of its common stock and paid $1,198,000 in cash. The stock issued in each
of these transactions was valued at $3.00 per share. Each transactions was
accounted for as a purchase.
The purchase price has been allocated to the tangible and intangible assets
acquired and liabilities assumed based on their respective fair value on the
date of acquisition as follows:
<TABLE>
<CAPTION>
TURF TURF
SPECIALTY, INC. PRODUCTS, LTD.
--------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Assets acquired:
Cash............................................ $ 1,471 $ 185
Accounts receivable............................. 1,900 1,021
Inventories..................................... 675 894
Prepaid expenses and other current assets....... 31 336
Property and equipment.......................... 164 182
Note receivable from stockholders............... 595
Excess of purchase price over net tangible
assets acquired.............................. 3,460 1,780
------ ------
Total assets acquired............................. $ 8,296 $4,398
====== ======
Liabilities assumed:
Accounts payable................................ $ 3,261 $1,492
Accrued expenses................................ 895 35
Notes payable................................... -- 440
------ ------
Total liabilities assumed......................... 4,156 1,967
------ ------
Net assets acquired............................... $ 4,140 $2,431
====== ======
</TABLE>
NOTE 2.
The accompanying unaudited pro forma condensed consolidated statements of
operations for the years ended December 31, 1995 and 1996 gives effect to the
acquisitions of TSI and TPL as if they had occurred as of January 1, 1995. For
the periods presented, transactions between these entities were not material.
The pro forma adjustments are summarized as follows:
(a) Increased amortization expense of intangibles for goodwill related to
the acquisitions using the straight line method and a 15 year life.
(b) Increased interest expense on the acquisitions debt of $1 million and
$1.8 million of the bridge notes utilized to complete the acquisitions.
The acquisition debt bears interest at 8% and is due in February 1997,
and the bridge financing bears interest at 10% and is due within 30
days of the date of the completion of the Company's initial public
offering of its common stock.
(c) Adjusted provision for income taxes based on the consolidated
operations for the periods presented.
F-33
<PAGE> 88
ECO SOIL SYSTEMS, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED) (CONTINUED)
NOTE 3.
Pro forma net loss per share is computed using the weighted average number
of shares of common stock outstanding during each period. Common stock
equivalents were not included in computing pro forma net loss per share since
the effect would have been antidilutive. Pursuant to the requirements of the
Securities and Exchange Commission, shares of common stock issued during the
twelve months immediately preceding the initial filing of the registration
statement relating tot he Company's initial public offering, plus the number of
common equivalent share under stock options granted or warrants issued during
such period, have been included in the calculation of the shares used in
computing pro forma net loss per share as if they were outstanding for all
periods presented (using the treasury stock method and the estimated public
offering price), except that the shares utilized to effect the purchase of TSI
and TPL were not reduced utilizing the treasury stock method.
The shares used in the pro form calculation are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
------ ------
<S> <C> <C>
Shares used in historical calculation........................ 5,207 6,809
Effect of treasury stock assumptions on shares issued in
acquisitions(1)............................................ 309 309
----- -----
Shares used in pro forma calculation......................... 5,516 7,118
===== =====
</TABLE>
- ---------------
(1) Such shares represent the effect of the assumed treasury stock repurchase,
which was utilized in the historical calculation for the shares issued in
connection with the acquisitions. For pro forma purposes, the total of the
shares issued in connection with the acquisitions are treated as outstanding
since January 1, 1995, without any treasury stock repurchase.
F-34
<PAGE> 89
THE BIOJECT SYSTEM
---------------------------------------
[DEPICTION OF BIOJECT SYSTEM]
THE COMPANY'S BIOJECT SYSTEM IS A PROPRIETARY DISTRIBUTION
SYSTEM THAT INTRODUCES BENEFICIAL MICROBES INTO THE SOIL BY
FERMENTING THEM ON SITE AND THEN AUTOMATICALLY DISPENSING THE
MICROBES INTO THE CUSTOMER'S IRRIGATION SYSTEM.
------------------------
THE BIOJECT SYSTEM IS CURRENTLY USED BY A WIDE VARIETY OF GOLF
COURSES THROUGHOUT THE WORLD.
<TABLE>
<S> <C> <C>
[Picture of Pittsburgh [Picture of Spyglass Hill [Picture of Turf Valley
Field Country Club golf course, golf course, hole #1,
Club golf course, hole hole #1, Pebble Beach, CA] Elliott City, MD]
#1,
Pittsburgh, PA] SPYGLASS HILL GOLF COURSE,
HOLE #1, PEBBLE BEACH, CA, TURF VALLEY COUNTRY CLUB
PITTSBURGH FIELD CLUB REPRODUCED BY PERMISSION OF GOLF COURSE, HOLE #1,
GOLF COURSE, HOLE #1, PEBBLE BEACH COMPANY. ELLIOTT CITY, MD
PITTSBURGH, PA
</TABLE>
<PAGE> 90
============================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY SELLING SHAREHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED,
OR IN WHICH THE PERSON MAKING SUCH OFFER IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................................... 3
Risk Factors.......................................... 6
Use of Proceeds....................................... 13
Price Range of Common Stock........................... 13
Capitalization........................................ 14
Dilution.............................................. 15
Dividend Policy....................................... 15
Selected Consolidated Financial and Operations Data... 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 17
Business.............................................. 25
Management............................................ 36
Certain Transactions.................................. 43
Principal and Selling Shareholders.................... 46
Description of Securities............................. 47
Shares Eligible for Future Sale....................... 49
Underwriting.......................................... 51
Experts............................................... 52
Legal Matters......................................... 53
Available Information................................. 53
Index to Financial Statements......................... F-1
</TABLE>
============================================================
======================================================
4,085,833 SHARES
[ECO SOIL SYSTEMS, INC. LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
CIBC OPPENHEIMER
CRUTTENDEN ROTH
INCORPORATED
, 1997
======================================================
<PAGE> 91
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 21-20,103 through 21-20,111 of the Nebraska Business Corporation
Act provide, in summary, that the directors and officers of the Company may,
under certain circumstances, be indemnified by the Company against all liability
expenses incurred by or imposed upon them as a result of actions, suits or
proceedings brought against them as such directors and officers, or as directors
or officers of any other organization at the request of the Company, if they act
in good faith and in a manner they reasonably believe to be in or not opposed to
the best interests of the Company, and with respect to any criminal action or
proceeding, have no reasonable cause to believe their conduct was unlawful,
except that no indemnification shall be made against expenses in respect of any
claim, issue or matter as to which they shall have been adjudged to be liable to
the Company unless and only to the extent that the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, they are fairly
and reasonably entitled to indemnity for such expenses which such court shall
deem proper. Sections 21-20,104 and 21-20,108(a) of the Nebraska Business
Corporation Act also provide that directors and officers of the Company are
entitled to such indemnification by the Company to the extent that such persons
are successful on the merits or otherwise in defending any such action, suit or
proceeding to which he or she is a party because of he or she is a director of
officer of the Company.
Pursuant to the terms of the Underwriting Agreement filed as Exhibit 1.1
hereto, the directors and officers of the Company are indemnified against
certain civil liabilities that they may incur under the Securities Act of 1933,
as amended, in connection with this Registration Statement and the related
Prospectus.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses other than underwriting
discounts and commissions, payable by the Company in connection with the sale of
the Common Stock being registered. All of the amounts shown are estimates,
except for the Securities and Exchange Commission registration fee and the NASD
filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 8,366
NASD filing fee................................................ 3,261
Nasdaq National Market listing fee............................. 17,500
Legal fees and expenses........................................ 200,000
Accounting fees and expenses................................... 100,000
Printing and engraving expenses................................ 110,000
Blue Sky fees and expenses..................................... 5,000
Transfer agent and registrar fees.............................. 5,000
Miscellaneous.................................................. 50,493
--------
TOTAL................................................ $500,000
========
</TABLE>
- ---------------
* To be supplied by amendment.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since October 30, 1994, the Company has issued and sold the following
unregistered securities:
1. During the period from December 1994 to February 1995, Mr. Adams
converted $1,200,000 of subordinated notes and shareholder advances into
400,000 shares of Common Stock.
2. In March 1995, Mr. Adams, Mr. Gloff and Heartland Capital, in
conjunction with a credit facility the Company obtained from Imperial Bank,
used collateral they had pledged against the
II-1
<PAGE> 92
Company's bank loan at Peninsula Bank to repay the outstanding indebtedness
under this credit line, and in turn the Company issued $750,000 of
unsecured subordinated debentures to Mr. Adams, Mr. Gloff and Heartland
Capital. These debentures bear interest at the rate of 8% annually and had
an original term of two years, which term was extended on March 15, 1996 so
that the term would expire in March 1998. In connection with the issuance
of the debenturers, the Company issued warrants to purchase up to 250,000
shares of Common Stock at $3.00 per share.
3. In March and April 1995, the Company secured $400,000 of bridge
loan financing from certain shareholders. Investors in the bridge loan
financing also received warrants to purchase an aggregate of 60,000 shares
of Common Stock, exercisable at $3.00 per share.
4. In July 1995 and in connection with the entering into of a
consulting/licensing agreement, the Company granted to Encore a fully
exercisable warrant to purchase 50,000 shares of Common Stock at $3.00 per
share, which expired in June 2002. In May 1997, Encore surrendered the
warrant and the Company granted to each of Encore and Guy W. Miller
warrants to purchase 25,000 shares of Common Stock at $3.00 per share,
which expire in June 2002. In July 1997, Encore exercised its right to
purchase 12,500 shares of Common Stock at $3.00 per share under the
warrant, surrendered the warrant and received a new warrant from the
Company to purchase 12,500 shares of Common Stock at $3.00 per share, which
expires in June 2002.
5. During the period from August 1995 to December 1995, the Company
sold 720,666 shares of Common Stock at $3.00 per share to various
accredited investors for a total consideration of $2,161,998. The Company
paid $216,199 to R.J. Steichen & Co. in connection with the Company's
initial public offering and issued warrants to R.J. Steichen & Co. to
purchase up to 53,600 shares of Common Stock at $3.00 per share.
6. On November 15, 1995, Mr. Gloff and Heartland Capital each
purchased $200,000 of collateralized subordinated debentures from the
Company. The debentures are secured by the assets of the Company but are
subordinated to any senior indebtedness of the Company. The debentures bear
interest at an 8% annual rate, payable on a quarterly basis, and the entire
principal balance is due on November 15, 1998. On May 15, 1996, Mr. Gloff
converted the entire principal balance of his $200,000 of subordinated
debentures into 100,000 shares of Common Stock.
7. On March 1, 1996, Rugged Rigger, Inc. loaned the Company $100,000.
The loan had an annual interest rate of 8%, payable monthly, and the entire
principal balance was due on March 1, 1997. In connection with this
subordinated unsecured note, warrants were issued to Mr. Potter to purchase
15,000 shares of Common Stock at an exercise price of $3.00 per share.
These warrants expire in March 1, 2001. The loan was prepaid in full with
the proceeds from the sale of the Bridge Notes and the Bridge Warrants.
8. On March 15, 1996, Mr. Adams converted $300,000 of collateral that
was pledged to secure the Company's bank loan at Peninsula Bank into cash
and used the cash to reduce the Company's $1,013,000 principal loan at
Peninsula Bank by this amount. The Company in turn issued Mr. Adams a total
of $300,000 of unsecured debentures, which bear interest at an 8% annual
rate, payable on a quarterly basis, and the entire principal amount is due
on March 15, 1998. In connection with the debentures, Mr. Adams was granted
options to purchase up to 100,000 shares of Common Stock at an exercise
price of $3.00 per share for a period of five years.
9. On March 15, 1996, Mr. Gloff and Heartland Capital converted
$250,000 and $200,000, respectively, of collateral that was pledged to
secure the Company's bank loan at Peninsula Bank into cash and used the
cash to reduce the Company's $1,013,000 principal loan at Peninsula Bank by
this amount. The Company in turn issued a $250,000 unsecured debenture to
Mr. Gloff and a $200,000 unsecured debenture to Heartland Capital, each
bearing interest at an 10% annual rate, payable on a quarterly basis, and
the principal amount of each note is due on March 15, 1998. In connection
with the debentures, warrants were issued to Mr. Gloff and Heartland
Capital to purchase up to 83,333 shares and 66,667 shares, respectively, of
Common Stock at an exercise price of $3.00 per share. These warrants
II-2
<PAGE> 93
expire upon the earlier of seven years from the date of issuance or one
year after the closing date of the initial public offering.
10. On March 26, 1996, the Company entered into a $1,000,000 line of
credit agreement with Imperial Bank, $500,000 of which is a revolving line
of credit that expired on April 1, 1997 and $500,000 of which is a
revolving credit line extended to finance exports based on a guarantee
extended the Company by the California Export Finance Organization
("CEFO"). The entire line of credit was personally guaranteed by Mr. Adams.
The term loan portion of the line of credit bore interest at a rate of
prime plus 2%. The CEFO portion of the credit line bears interest at prime
plus 1.5%. CEFO's obligations are in turn guaranteed by Mr. Adams. In
connection with the revolving line of credit, warrants were issued to
Imperial Bank to purchase 20,833 shares of Common Stock at an exercise
price of $3.00 per share. These warrants expire in March 2001.
11. Between March and July 1996, the Company loaned $72,000 to Rugged
Rigger, Inc. to enable it to exercise options to purchase Common Stock. The
loan bore interest at an annual rate of 5%, compounded annually, and was
payable at the earlier of two years or the sale of the underlying Common
Stock.
12. On April 1, 1996, Mr. S. Bartley Osborn loaned the Company
$100,000. The loan had an annual interest rate of 8%, payable monthly, and
the entire principal balance was due on July 1, 1996. In connection with
this note, warrants were issued to Mr. Osborn to purchase 15,000 shares of
Common Stock at an exercise price of $3.00 per share. These warrants expire
in April 2001. The loan was prepaid in full with the proceeds from the sale
of the Bridge Notes and the Bridge Warrants.
13. On May 24, 1996, the Company issued three $50,000 promissory notes
for the purpose of providing short-term financing until the proceeds of the
initial public offering were received, one from each of Mr. Adams, Mr.
Gloff and Heartland Capital. Each note was payable upon demand and bore
interest at an annual rate of 8%. Heartland Capital converted its
promissory note into 15,306 shares of Common Stock. In connection with
these promissory notes, warrants were issued to each of Messrs. Adams and
Gloff and Heartland Capital to purchase 7,500 shares of Common Stock at an
exercise price of $3.00 per share. These warrants expire in May 2001.
14. In July 1996, the Company secured $3,695,000 in bridge loan
financing through a private placement to accredited investors of the Bridge
Notes and the Bridge Warrants. The Bridge Notes and Bridge Warrants were
offered in Units, each Unit consisting of $50,000 principal amount of
Bridge Notes with Bridge Warrants to purchase 10,000 shares of Common
Stock. The Company issued 739,000 Bridge Warrants in connection with the
bridge loan financing. The Bridge Notes bore interest at 10% per annum and
were repayable, with interest, at the earlier of December 31, 1996, or 30
days after completion of the Company's initial public offering. Bridge
Notes in the aggregate principal amount of $1,900,000 were converted by
their holders into a total of 576,823 shares of common stock, and Bridge
Notes in the aggregate principal amount of $1,800,000 were repaid by the
Company. None of the Bridge Notes remain outstanding. The Bridge Warrants
may be exercised to purchase Common Stock at the earlier of the completion
of the Company's initial public offering or December 31, 1996, at 80% of
the Price to Public obtained by the Company if the Company's initial public
offering is effective on or before December 31, 1996, or at $3.00 per share
if such an offering is not effective on or before December 31, 1996. The
Company paid $225,700 to Steichen in connection with the bridge loan
financing.
15. In February 1997, the Company acquired substantially all of the
assets of Turfmakers, Inc. Part of the consideration for such assets was
the issuance of 25,000 shares of Common Stock to Robert C. Maycock, the
sole shareholder of Turfmakers, Inc. Mr. Maycock was an accredited
individual investor.
16. On June 30, 1997, the Company entered into a $5,000,000 line of
credit agreement with Imperial Bank which provides for direct advances up
to $5,000,000. The line provides for advances equal to the sum of 75% of
eligible accounts receivable plus 50% of eligible inventory. Advances
associated with the Company's eligible inventory may not exceed $2.5
million. In connection with the establishment of
II-3
<PAGE> 94
the line of credit, the Company issued a warrant to Imperial Bank to
purchase 40,000 shares of Common Stock at an exercise price of $5.25 per
share. The warrant expires on June 30, 2002.
The sales of securities above were made in reliance upon Section 4(2) and
Regulation D of the Securities Act, which provide exemptions for transactions
not involving a public offering. The purchasers of securities described above
represented that they acquired them for their own account and not with a view to
any distribution thereof to the public. The Company made inquiries of purchasers
of securities in these transactions and obtained representations from such
purchasers to establish that such issuances qualified for an exemption from the
registration requirements. The certificates evidencing the securities bear
legends stating that the shares are not to be offered, sold or transferred other
than pursuant to an effective registration statement under the Securities Act,
or an exemption from such registration requirements.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <S>
1.1 (1) Form of Underwriting Agreement
1.2 (1) Form of Representatives' Warrant
3.1 (5) Amended and Restated Articles of Incorporation
3.2 (1) Articles of Correction to Amended and Restated Articles of Incorporation
3.3 (1) Form of Articles of Amendment to Amended and Restated Articles of Incorporation
3.4 (5) Bylaws, as amended
4.1 (3) Form of the Common Stock Certificate
5.1 (2) Opinion of Fitzgerald, Schorr, Barmettler & Brennan, P.C.
10.1 (4) 1992 Stock Option Plan
10.2 (4) 1996 Directors' Stock Option Plan
10.3 (3) Agreement and Plan of Merger, dated as of May 31, 1996, as amended on October 28,
1996, by and among the Company, a wholly owned subsidiary of the Company and Turf
Specialty, Inc.
10.4 (3) Agreement and Plan of Merger, dated as of May 31, 1996, by and among the Company, a
wholly owned subsidiary of the Company and Turf Products, Ltd.
10.5 (4) Employment Agreement, dated May 21, 1991, as amended, November 7, 1996 between the
Company and William B. Adams
10.6 (4) Employment Agreement, dated January 1, 1994, as amended, November 7, 1996 between
the Company and Douglas M. Gloff
10.7 (4) Employment Agreement, dated July 8, 1996, between the Company and Kevin P. Lyons
10.8 (4) Employment Agreement, dated July 8, 1996, between the Company and David W.
Schermerhorn
10.9 (5) Employment Agreement, dated July 10, 1996, between the Company and Walter W. Fuchs
10.10(3) Distribution Agreement, dated August 2, 1996, between the Company and Abbott
Laboratories, Chemical and Agricultural Products Division
10.11(4) Lease Agreement, dated September 1, 1996, between the Company and Arthur P. Arns
10.12(1) Security and Loan Agreement, dated June 30, 1997, between the Company and Imperial
Bank of San Diego
10.13(1) Warrant to Purchase Common Stock dated June 30, 1997 granted by the Company to
Imperial Bank
10.14(1) Option for Xanthomonas Campestris dated June 3, 1997 made by Mycogen Corporation in
favor of the Company
10.15(1) Settlement Agreement dated as of July 6, 1997 by and between the Company and Encore
Technologies, Inc.
</TABLE>
II-4
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <S>
10.16(1) Assignment of TX-1 Intellectual Property made as of July 6, 1997 by Encore
Technologies, Inc. to the Company
10.17(1) Assignment of Media Intellectual Property made as of July 6, 1997 by Encore
Technologies, Inc. to the Company
10.18(1) License and Supply Agreement dated as of July 6, 1997 by and between the Company
and Encore Technologies, Inc.
11.1 (1) Statement Regarding Computation of Per Share Earnings (Losses)
21.1 (6) List of Subsidiaries
23.1 Consent of Fitzgerald, Schorr, Barmettler & Brennan, P.C. (included in Exhibit 5.1)
23.2 (1) Consent of Ernst & Young LLP, Independent Auditors
23.3 (1) Consent of Bigelow & Company, CPA, P.C., Independent Auditors
24.1 Powers of Attorney (set forth on the Signature Page hereof)
27.1 (1) Financial Data Schedule
</TABLE>
- ---------------
(1) Filed herewith
(2) To be filed by amendment.
(3) Incorporated by reference to the Company's Registration Statement on Form
5B-2 (File No. 333-15883) filed with the commission on November 8, 1996.
(4) Incorporated by reference to Amendment No. 3 to the Company's Registration
Statement on Form SB-2 (File No. 333-15883) filed with the Commission on
January 13, 1997.
(5) Incorporated by reference to Amendment No. 4 to the Company's Registration
Statement on Form SB-2 (File No. 333-15883) filed with the Commission on
January 16, 1997.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
ITEM 27. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(a) That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(b) That (1) for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed
to be part of the Registration Statement as of the time it was declared
effective; and (2) for purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California, on November 3, 1997.
ECO SOIL SYSTEMS, INC.
By: /s/ WILLIAM B. ADAMS
------------------------------------
William B. Adams
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints William B. Adams and Douglas M. Gloff, his
true and lawful attorney-in-fact, each acting alone, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities to sign any and all amendments including post-effective
amendments and any registration statement filed pursuant to Rule 462(b) under
the Securities Act of 1933 to this registration statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact or their substitutes, each acting alone, may lawfully do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ----------------------------- -----------------
<C> <S> <C>
/s/ WILLIAM B. ADAMS Chairman and Chief Executive November 3, 1997
- --------------------------------------------- Officer (Principal executive
William B. Adams officer)
/s/ DOUGLAS M. GLOFF President, Chief Operating November 3, 1997
- --------------------------------------------- Officer and Director
Douglas M. Gloff
/s/ L. JEAN DUNN, JR. Chief Financial Officer and November 3, 1997
- --------------------------------------------- Secretary (Principal
L. Jean Dunn, Jr. financial and accounting
officer)
/s/ JEFFREY A. JOHNSON President and General Manager November 3, 1997
- --------------------------------------------- of Golf Division and Director
Jeffrey A. Johnson
/s/ BRADLEY K. EDWARDS Director November 3, 1997
- ---------------------------------------------
Bradley K. Edwards
/s/ S. BARTLEY OSBORN Director November 3, 1997
- ---------------------------------------------
S. Bartley Osborn
/s/ WILLIAM S. POTTER Director November 3, 1997
- ---------------------------------------------
William S. Potter
</TABLE>
II-6
<PAGE> 97
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <S>
1.1 (1) Form of Underwriting Agreement
1.2 (1) Form of Representatives' Warrant
3.1 (5) Amended and Restated Articles of Incorporation
3.2 (1) Articles of Correction to Amended and Restated Articles of Incorporation
3.3 (1) Form of Articles of Amendment to Amended and Restated Articles of Incorporation
3.4 (5) Bylaws, as amended
4.1 (3) Form of the Common Stock Certificate
5.1 (2) Opinion of Fitzgerald, Schorr, Barmettler & Brennan, P.C.
10.1 (4) 1992 Stock Option Plan
10.2 (4) 1996 Directors' Stock Option Plan
10.3 (3) Agreement and Plan of Merger, dated as of May 31, 1996, as amended on October 28,
1996, by and among the Company, a wholly owned subsidiary of the Company and Turf
Specialty, Inc.
10.4 (3) Agreement and Plan of Merger, dated as of May 31, 1996, by and among the Company, a
wholly owned subsidiary of the Company and Turf Products, Ltd.
10.5 (4) Employment Agreement, dated May 21, 1991, as amended, November 7, 1996 between the
Company and William B. Adams
10.6 (4) Employment Agreement, dated January 1, 1994, as amended, November 7, 1996 between
the Company and Douglas M. Gloff
10.7 (4) Employment Agreement, dated July 8, 1996, between the Company and Kevin P. Lyons
10.8 (4) Employment Agreement, dated July 8, 1996, between the Company and David W.
Schermerhorn
10.9 (5) Employment Agreement, dated July 10, 1996, between the Company and Walter W. Fuchs
10.10(3) Distribution Agreement, dated August 2, 1996, between the Company and Abbott
Laboratories, Chemical and Agricultural Products Division
10.11(4) Lease Agreement, dated September 1, 1996, between the Company and Arthur P. Arns
10.12(1) Security and Loan Agreement, dated June 30, 1997, between the Company and Imperial
Bank of San Diego
10.13(1) Warrant to Purchase Common Stock dated June 30, 1997 granted by the Company to
Imperial Bank
10.14(1) Option for Xanthomonas Campestris dated June 3, 1997 made by Mycogen Corporation in
favor of the Company
10.15(1) Settlement Agreement dated as of July 6, 1997 by and between the Company and Encore
Technologies, Inc.
10.16(1) Assignment of TX-1 Intellectual Property made as of July 6, 1997 by Encore
Technologies, Inc. to the Company
10.17(1) Assignment of Media Intellectual Property made as of July 6, 1997 by Encore
Technologies, Inc. to the Company
10.18(1) License and Supply Agreement dated as of July 6, 1997 by and between the Company
and Encore Technologies, Inc.
11.1 (1) Statement Regarding Computation of Per Share Earnings (Losses)
21.1 (6) List of Subsidiaries
23.1 Consent of Fitzgerald, Schorr, Barmettler & Brennan, P.C. (included in Exhibit 5.1)
</TABLE>
<PAGE> 98
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <S>
23.2 (1) Consent of Ernst & Young LLP, Independent Auditors
23.3 (1) Consent of Bigelow & Company, CPA, P.C., Independent Auditors
24.1 Powers of Attorney (set forth on the Signature Page hereof)
27.1 (1) Financial Data Schedule
</TABLE>
- ---------------
(1) Filed herewith
(2) To be filed by amendment.
(3) Incorporated by reference to the Company's Registration Statement on Form
5B-2 (File No. 333-15883) filed with the commission on November 8, 1996.
(4) Incorporated by reference to Amendment No. 3 to the Company's Registration
Statement on Form SB-2 (File No. 333-15883) filed with the Commission on
January 13, 1997.
(5) Incorporated by reference to Amendment No. 4 to the Company's Registration
Statement on Form SB-2 (File No. 333-15883) filed with the Commission on
January 16, 1997.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
<PAGE> 1
EXHIBIT 1.1
4,085,833 SHARES
ECO SOIL SYSTEMS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
_____________, 1997
CIBC Oppenheimer Corp.
Cruttenden Roth Incorporated
As Representatives of the
Underwriters
c/o CIBC Oppenheimer Corp.
CIBC Oppenheimer Tower
World Financial Center
New York, New York 10281
On behalf of the Several
Underwriters named on
Schedule I attached hereto.
Ladies and Gentlemen:
Eco Soil Systems, Inc., a Nebraska corporation (the "Company"),
proposes to sell to you and the other underwriters named on Schedule I to this
Agreement (the "Underwriters"), for whom you are acting as representatives (the
"Representatives"), an aggregate of 4,000,000 shares (the "Company Shares") of
the Company's Common Stock, $0.005 par value (the "Common Stock"). Certain
shareholders of the Company listed on Schedule II to this Agreement (the
"Selling Shareholders") propose to sell an aggregate of 85,833 shares of
Common Stock (the "Seller Shares") to the Underwriters. Each Selling
Shareholder proposes to sell that number of Seller Shares set forth opposite
such Selling Shareholders name on Schedule II hereto. The Company Shares and
the Seller Shares are collectively referred to herein as the "Firm Shares." In
addition, the Company proposes to grant to the Underwriters an option to
purchase up to an additional 612,875 shares (the "Option Shares") of Common
Stock from it for the purpose of covering over-allotments in connection with
the sale of the Firm Shares. The Firm Shares and the Option Shares are
collectively referred to herein as the "Shares."
The Company also proposes to issue to the Representatives, in their
individual capacity, the warrants referred to in Section 1(c) to purchase up to
an aggregate of 408,583 shares of Common Stock.
1.
<PAGE> 2
1. SALE AND PURCHASE OF THE SHARES. On the basis of the
representations, warranties and agreements contained in, and subject to the
terms and conditions of, this Agreement:
(a) The Company agrees to sell the Company Shares to each
of the Underwriters, each of the Selling Shareholders agree, severally and not
jointly, to sell to each of the Underwriters that number of Seller Shares set
forth opposite such Selling Shareholder's name on Schedule II to this Agreement
and each of the Underwriters agrees, severally and not jointly, to purchase
from the Company and the Selling Shareholders, at $_____ per share (the
"Initial Price"), the respective aggregate number of Firm Shares set forth
opposite the name of such Underwriter on Schedule I to this Agreement.
(b) The Company grants to the several Underwriters an
option to purchase, severally and not jointly, all or any part of the Option
Shares at the Initial Price. The number of Option Shares to be purchased by
each Underwriter shall be the same percentage (adjusted by the Representatives
to eliminate fractions) of the total number of Option Shares to be purchased by
the Underwriters as such Underwriter is purchasing of the Firm Shares. Such
option may be exercised only to cover over-allotments in the sales of the Firm
Shares by the Underwriters and may be exercised in whole or in part at any time
on or before 12:00 noon, New York City time, on the business day before the
Firm Shares Closing Date (as defined below), and only once thereafter within 30
days after the date of this Agreement, in each case upon written or telegraphic
notice, or verbal or telephonic notice confirmed by written or telegraphic
notice, by the Representatives to the Company no later than 12:00 noon, New
York City time, on the business day before the Firm Shares Closing Date or at
least two business days before the Option Shares Closing Date (as defined
below), as the case may be, setting forth the number of Option Shares to be
purchased and the time and date (if other than the Firm Shares Closing Date) of
such purchase.
(c) On the Firm Shares Closing Date, the Company agrees
to issue to CIBC Oppenheimer Corp. and Cruttenden Roth Incorporated for an
aggregate price of $________ (for their own account and not as the
Representatives of the several Underwriters), warrants (the "Warrants") to
purchase an aggregate of 408,583 shares of Common Stock (the "Warrant Shares")
at a price per Warrant Share equal to 120% of the price the Shares are first
offered to the public by the Underwriters. The Warrants will be exercisable at
any time and from time to time on or after the first anniversary of the date of
this Agreement up to the fifth anniversary thereof. Each Warrant shall be
substantially identical to the form of Warrant filed as an exhibit to the
Registration Statement (as defined below).
2. DELIVERY AND PAYMENT. Delivery by the Company of the Firm
Shares to the Representatives for the respective accounts of the Underwriters,
and payment of the purchase price by certified or official bank check or checks
payable in New York Clearing House (next day) funds to the Company, shall take
place at the offices of CIBC Oppenheimer Corp., at CIBC Oppenheimer Tower, World
Financial Center, New York, New York 10281, at 10:00 a.m., New York City time,
on the third or fourth business day (as permitted under Rule 15c6-1 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) following the
date of this Agreement, or at such time on such other date, not later than
seven business days after the date of
2.
<PAGE> 3
this Agreement, as shall be agreed upon by the Company and the Representatives
(such time and date of delivery and payment are called the "Firm Shares Closing
Date").
In the event the option with respect to the Option Shares is exercised, delivery
by the Company of the Option Shares to the Representatives for the respective
accounts of the Underwriters and payment of the purchase price by certified or
official bank check or checks payable in New York Clearing House (next day)
funds to the Company shall take place at the offices of CIBC Oppenheimer Corp.
specified above at the time and on the date (which may be the same date as, but
in no event shall be earlier than, the Firm Shares Closing Date) specified in
the notice referred to in Section 1(b) (such time and date of delivery and
payment are called the "Option Shares Closing Date"). The Firm Shares Closing
Date and the Option Shares Closing Date are called, individually, a "Closing
Date" and, together, the "Closing Dates."
Certificates evidencing the Shares shall be registered in such names and shall
be in such denominations as the Representatives shall request at least two full
business days before the Firm Shares Closing Date or, in the case of Option
Shares, on the day of notice of exercise of the option as described in Section
l(b) and shall be made available to the Representatives for checking and
packaging, at such place as is designated by the Representatives, on the full
business day before the Firm Shares Closing Date (or the Option Shares Closing
Date in the case of the Option Shares).
3. REGISTRATION STATEMENT AND PROSPECTUS; PUBLIC OFFERING. The
Company has prepared in conformity with the requirements of the Securities Act
of 1933, as amended (the "Securities Act") and the published rules and
regulations thereunder (the "Rules") adopted by the Securities and Exchange
Commission (the "Commission") a registration statement on Form SB-2 (No.
333-________), including a preliminary prospectus relating to the Shares, and
has filed with the Commission the Registration Statement (as hereinafter
defined) and such amendments thereof as may have been required to the date of
this Agreement. Copies of such Registration Statement (including all
amendments thereof) and of the related preliminary prospectus have heretofore
been delivered by the Company to you. The term "preliminary prospectus" means
any preliminary prospectus (as described in Rule 430 of the Rules) included at
any time as a part of the Registration Statement. The Registration Statement
as amended at the time and on the date it becomes effective (the "Effective
Date"), including all exhibits and information, if any, deemed to be part of
the Registration Statement pursuant to Rule 424(b) and Rule 430A of the Rules,
is called the "Registration Statement." The term "Prospectus" means the
prospectus in the form first used to confirm sales of the Shares (whether such
prospectus was included in the Registration Statement at the time of
effectiveness or was subsequently filed with the Commission pursuant to Rule
424(b) of the Rules).
The Company understands that the Underwriters propose to make a public offering
of the Shares, as set forth in and pursuant to the Prospectus, as soon after
the Effective Date and the date of this Agreement as the Representatives deem
advisable. The Company hereby confirms that the Underwriters and dealers have
been authorized to distribute or cause to be distributed each preliminary
prospectus and are authorized to distribute the Prospectus (as from time to
time
3.
<PAGE> 4
amended or supplemented if the Company furnishes amendments or supplements
thereto to the Underwriters).
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to each Underwriter as follows:
(a) On the Effective Date the Registration Statement
complied, and on the date of the Prospectus, on the date any post-effective
amendment to the Registration Statement shall become effective, on the date any
supplement or amendment to the Prospectus is filed with the Commission and on
each Closing Date, the Registration Statement and the Prospectus (and any
amendment thereof or supplement thereto) will comply, in all material respects,
with the applicable provisions of the Securities Act and the Rules and the
Exchange Act, and the rules and regulations of the Commission thereunder; the
Registration Statement did not, as of the Effective Date, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading; and on the other dates referred to above neither the Registration
Statement nor the Prospectus, nor any amendment thereof or supplement thereto,
will contain any untrue statement of a material fact or will omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. When any related preliminary prospectus was
first filed with the Commission (whether filed as part of the Registration
Statement or any amendment thereto or pursuant to Rule 424(a) of the Rules) and
when any amendment thereof or supplement thereto was first filed with the
Commission, such preliminary prospectus as amended or supplemented complied in
all material respects with the applicable provisions of the Securities Act and
the Rules and did not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein not misleading. Notwithstanding the foregoing,
the Company makes no representation or warranty as to the paragraph with
respect to stabilization on the inside front cover page of the Prospectus and
the statements contained under the caption "Underwriting" in the Prospectus.
The Company acknowledges that the statements referred to in the previous
sentence constitute the only information furnished in writing by the
Representatives on behalf of the several Underwriters specifically for
inclusion in the Registration Statement, any preliminary prospectus or the
Prospectus.
(b) All contracts and other documents required to be
filed as exhibits to the Registration Statement have been filed with the
Commission as exhibits to the Registration Statement.
(c) The financial statements of the Company (including
all notes and schedules thereto) included in the Registration Statement and
Prospectus present fairly the financial position, the results of operations and
cash flows and the shareholders' equity and the other information purported to
be shown therein of the Company at the respective dates and for the respective
periods to which they apply; and such financial statements have been prepared
in conformity with generally accepted accounting principles, consistently
applied throughout the periods involved, and all adjustments necessary for a
fair presentation of the results for such periods have been made.
4.
<PAGE> 5
(d) Ernst & Young LLP whose reports are filed with the
Commission as a part of the Registration Statement, are and, during the periods
covered by their reports, were independent public accountants as required by
the Securities Act and the Rules.
(e) All documents filed by the Company with the
Commission pursuant to the Securities Act or the Exchange Act, when they became
effective or were filed with the Commission, as the case may be, conformed in
all material respects to the requirements of the Securities Act or the Exchange
Act, as applicable, and the rules and regulations of the Commission thereunder,
and none of such documents contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
(f) The Company and each of its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its respective jurisdiction of incorporation. Except for Aspen
Consulting Companies, Inc., a Colorado corporation ("Aspen"), Turf Specialty,
Inc., a Delaware corporation ("Turf Specialty"), Eco Turf Products, Inc., a
Delaware corporation ("Eco Turf"), Direct Products and Machinery Pty, Ltd., a
South African corporation ("Direct Products") and Golf and Turf CC, a South
African corporation ("Gold and Turf"), the Company has no subsidiaries and does
not control, directly or indirectly, any corporation, partnership, limited
liability company, joint venture, association or other business organization.
The Company and each of its subsidiaries is duly qualified and in good standing
as a foreign corporation in each jurisdiction in which the character or location
of its assets or properties (owned, leased or licensed) or the nature of its
business makes such qualification necessary except for such jurisdictions where
the failure to so qualify would not have a material adverse effect on the assets
or properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company and its subsidiaries taken as a whole (a
"Material Adverse Effect"). Except as disclosed in the Registration Statement
and the Prospectus, neither the Company nor any of its subsidiaries owns, leases
or licenses any asset or property or conducts any business outside the United
States of America. The Company and each of its subsidiaries has all requisite
corporate power and authority, and all necessary authorizations, approvals,
consents, orders, licenses, certificates and permits of and from all
governmental or regulatory bodies or any other person or entity, to own, lease
and license its assets and properties and conduct its businesses as now being
conducted and as described in the Registration Statement and the Prospectus
except for such authorizations, approvals, consents, orders, material licenses,
certificates and permits the failure to so obtain would not have a Material
Adverse Effect; no such authorization, approval, consent, order, license,
certificate or permit contains a materially burdensome restriction other than as
disclosed in the Registration Statement and the Prospectus; and the Company has
all such corporate power and authority, and such authorizations, approvals,
consents, orders, licenses, certificates and permits to enter into, deliver and
perform this Agreement and to issue and sell the Shares (except as may be
required under the Securities Act and state and foreign Blue Sky laws).
(g) The Company owns or possesses adequate and
enforceable rights to use all trademarks, trademark applications, trade names,
service marks, copyrights, copyright applications, licenses, know-how and other
similar rights and proprietary knowledge (collectively, "Intangibles")
necessary for the conduct of its business as described in the Registration
Statement and the Prospectus. The Company has not received any notice of, or
to
5.
<PAGE> 6
its best knowledge is not aware of, any infringement of or conflict with
asserted rights of others with respect to any Intangibles which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or finding,
would have a Material Adverse Effect.
(h) The Company and each of its subsidiaries has good
title to each of the items of personal property which are reflected in the
financial statements referred to in Section 4(c) or are referred to in the
Registration Statement and the Prospectus as being owned by it and valid and
enforceable leasehold interests in each of the items of real and personal
property which are referred to in the Registration Statement and the Prospectus
as being leased by it, in each case free and clear of all liens, encumbrances,
claims, security interests and defects, other than those described in the
Registration Statement and the Prospectus and those which do not and will not
have a Material Adverse Effect.
(i) There is no litigation or governmental or other
proceeding or investigation before any court or before or by any public body or
board pending or, to the Company's best knowledge, threatened (and the Company
does not know of any basis therefor) against, or involving the assets,
properties or business of, the Company or any of its subsidiaries which would
materially adversely affect the value or the operation of any such assets or
properties or the business, results of operations, prospects or condition
(financial or otherwise) of the Company and its subsidiaries taken as a whole.
(j) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, except
as described therein, (i) there has not been any material adverse change in
the assets or properties, business, results of operations, prospects or
condition (financial or otherwise), of the Company or any of its subsidiaries,
whether or not arising from transactions in the ordinary course of business;
(ii) neither the Company nor any of its subsidiaries has sustained any material
loss or interference with its assets, businesses or properties (whether owned
or leased) from fire, explosion, earthquake, flood or other calamity, whether
or not covered by insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree; and (iii) and since
the date of the latest balance sheet included in the Registration Statement and
the Prospectus, except as reflected therein, neither the Company nor any of its
subsidiaries has (a) issued any securities or incurred any liability or
obligation, direct or contingent, for borrowed money, except such liabilities
or obligations incurred in the ordinary course of business, (b) entered into
any transaction not in the ordinary course of business or (c) declared or paid
any dividend or made any distribution on any shares of its stock or redeemed,
purchased or otherwise acquired or agreed to redeem, purchase or otherwise
acquire any shares of its stock.
(k) There is no document or contract of a character
required to be described in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement which is not described or
filed as required. Each agreement listed in the Exhibits to the Registration
Statement is in full force and effect and is valid and enforceable by and
against the Company or its subsidiaries in accordance with its terms, assuming
the due authorization, execution and delivery thereof by each of the other
parties thereto. Neither the Company, nor any of its subsidiaries, nor to the
best of the Company's knowledge, any other party is in default
6.
<PAGE> 7
in the observance or performance of any term or obligation to be performed by
it under any such agreement, and no event has occurred which with notice or
lapse of time or both would constitute such a default, in any such case which
default or event would have a Material Adverse Effect. No default exists, and
no event has occurred which with notice or lapse of time or both would
constitute a default, in the due performance and observance of any term,
covenant or condition, by the Company or any of its subsidiaries of any other
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which it or its properties or business may be bound or affected
which default or event would have a Material Adverse Effect.
(l) Neither the Company nor any of its subsidiaries is in
violation of any term or provision of its articles of incorporation or bylaws,
or other charter documents, or of any franchise, license, permit, judgment,
decree, order, statute, rule or regulation, where the consequences of such
violation would have a Material Adverse Effect.
(m) Neither the execution, delivery and performance of
this Agreement and the Warrants by the Company nor the consummation of any of
the transactions contemplated hereby (including, without limitation, the
issuance and sale by the Company of the Shares and the Warrants) will give rise
to a right to terminate or accelerate the due date of any payment due under, or
conflict with or result in the breach of any term or provision of, or
constitute a default (or an event which with notice or lapse of time or both
would constitute a default) under, or require any consent or waiver under, or
result in the execution or imposition of any lien, charge or encumbrance upon
any properties or assets of the Company or any of its subsidiaries pursuant to
the terms of, any indenture, mortgage, deed of trust or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which it or any of its properties or businesses is bound, or any franchise,
license, permit, judgment, decree, order, statute, rule or regulation
applicable to the Company or any of its subsidiaries or violate any provision
of the articles of incorporation or bylaws, or other charter documents, of the
Company or any of its subsidiaries, except for such consents or waivers which
have already been obtained and are in full force and effect.
(n) The Company has an authorized and outstanding capital
stock as set forth under the caption "Capitalization" in the Prospectus. All
of the outstanding shares of capital stock of the Company and each of its
subsidiaries have been duly and validly issued and are fully paid and
nonassessable and none of them was issued in violation of any preemptive or
other similar right. The Company has reserved and kept available for the
exercise of the Warrants such number of authorized but unissued shares as are
sufficient to permit the exercise in full of the Warrants. The Shares, when
issued and sold pursuant to this Agreement, and the Warrant Shares, when issued
and sold pursuant to the Warrants, will be duly and validly issued, fully paid
and nonassessable and none of them will be issued in violation of any
preemptive or other similar right. Except as disclosed in the Registration
Statement and the Prospectus, there is no outstanding option, warrant or other
right calling for the issuance of, and there is no commitment, plan or
arrangement to issue, any share of stock of the Company or any of its
subsidiaries or any security convertible into, or exercisable or exchangeable
for, such stock. The Common Stock, the Shares and the Warrants conform in all
material respects to all statements in relation thereto contained in the
Registration Statement and the Prospectus. All of the issued and
7.
<PAGE> 8
outstanding shares of capital stock of each subsidiary of the Company have been
duly and validly authorized and issued, fully paid and nonassessable and were
not issued in violation of preemptive or similar rights. The Company owns,
directly or indirectly, all of the outstanding shares of capital stock of each
of its subsidiaries free and clear of all liens, security interests, pledges,
charges, claims, encumbrances, stockholder agreements, voting trusts or other
defects of title whatsoever, other than restrictions under federal and state
securities laws.
(o) No holder of any security of the Company has the
right to have any security owned by such holder included in the Registration
Statement or to demand registration of any security owned by such holder during
the period ending 180 days after the date of this Agreement. All registration
rights applicable to the Registration Statement or the transactions
contemplated thereby have been fully complied with or waived by the holder
thereof. Each shareholder holding in aggregate, Common Stock and/or options,
warrants or other rights to acquire, or securities convertible into,
exercisable for, or exchangeable for, shares of Common Stock equal to 20,000 or
more shares, and each director and executive officer of the Company has
delivered to the Representatives his enforceable written agreement that he will
not, for a period of 180 days after the date of this Agreement, offer for sale,
sell, distribute, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, or exercise any registration rights with respect to,
any shares of Common Stock (or any securities convertible into, exercisable
for, or exchangeable for any shares of Common Stock) owned by him, without the
prior written consent of the Representatives.
(p) All necessary corporate action has been duly and
validly taken by the Company to authorize the execution, delivery and
performance of this Agreement and the Warrants and the issuance and sale of the
Shares, the Warrants and the Warrant Shares by the Company. This Agreement has
been, and the Warrants on the Firm Shares Closing Date will be, duly and
validly authorized, executed and delivered by the Company and constitute and
will constitute legal, valid and binding obligations of the Company enforceable
against the Company in accordance with their respective terms, except (A) as
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles and (B) to the
extent that rights to indemnity or contribution under this Agreement may be
limited by Federal and state securities laws or the public policy underlying
such laws.
(q) Neither the Company nor any of its subsidiaries is
involved in any labor dispute nor, to the knowledge of the Company, is any such
dispute threatened, which dispute would have a Material Adverse Effect.
(r) No transaction has occurred between or among the
Company and any of its officers or directors or any affiliate or affiliates of
any such officer or director that is required to be described in and is not
described in the Registration Statement and the Prospectus.
(s) Neither the Company nor any of its subsidiaries has
taken, nor will it take, directly or indirectly, any action designed to or
which might reasonably be expected to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
8.
<PAGE> 9
stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of any of the Shares.
(t) The Company and each of its subsidiaries has filed
all Federal, state, local and foreign tax returns which are required to be
filed through the date hereof, or has received extensions thereof, and has paid
all taxes shown on such returns and all assessments received by it to the
extent that the same are material and have become due.
(u) The Shares have been duly authorized for quotation on
the National Association of Securities Dealers Automated Quotation ("Nasdaq")
National Market.
(v) The Company has complied with all of the requirements
and filed the required forms as specified in Florida Statutes Section 517.075.
5. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS.
Each of the Selling Shareholders, severally and not jointly, represents and
warrants to each Underwriter with respect to the Seller Shares set forth
opposite its name on Schedule II to this Agreement, as follows:
(a) This Agreement, the Custody Agreement signed by the
Selling Shareholders and American Stock Transfer & Trust Company as Custodian,
relating to the deposit of the Seller Shares (the "Custody Agreement") and the
Power of Attorney appointing certain individuals as the Selling Shareholder's
attorneys-in-fact to the extent set forth therein, relating to the transactions
contemplated hereby and by the Registration Statement (the "Power of Attorney")
have been duly authorized, executed and delivered by or on behalf of the
Selling Shareholders and are valid and binding agreements of the Selling
Shareholders enforceable in accordance with their terms, except (A) as the
enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles and (B) to the
extent that rights to indemnity or contribution under this Agreement may be
limited by Federal and state securities laws or the public policy underlying
such laws.
(b) The execution and delivery by each of the Selling
Shareholders of, and the performance by each such Selling Shareholder of its
obligations under, this Agreement, the Custody Agreement and the Power of
Attorney do not contravene any provision of applicable law, and will not result
in (i) any violation of the Selling Shareholder's charter or bylaws (if the
Selling Shareholder is not an individual), (ii) the breach or violation of any
of the terms and provisions, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement, bond, debenture, note agreement or
other evidence of indebtedness, or any lease, contract or other agreement or
instrument to which the Selling Shareholder is a party or by which its
properties are bound, (iii) the breach or violation of any statute, rule or
regulation, of any regulatory body or administrative agency or other
governmental agency or body having jurisdiction over the Selling Shareholder or
any of its properties or operations, or (iv) the breach or violation of any
judgment, order, writ or decree of any government, arbitrator, court,
regulatory body or administrative agency, or other governmental agency or body
having jurisdiction over the Selling Shareholder or any of its properties or
operations.
9.
<PAGE> 10
(c) No authorization, approval or consent of any
regulatory body or administrative agency or other governmental agency or body
is necessary in connection with the performance of this Agreement and
consummation of the transactions herein contemplated by the Selling
Shareholders except such as have been obtained under the Act or such as may be
required under state or other securities or Blue Sky laws.
(d) Each Selling Shareholder has, and on the Closing Date
will have, good and valid title to such Selling Shareholder's Seller Shares and
the legal right and power, and all authorization and approval required by law,
to enter into this Agreement, the Custody Agreement and the Power-of-Attorney,
and to sell, transfer and deliver such Seller Shares, except that no
representation is made with respect to federal and state securities laws.
(e) Delivery of the Selling Shareholders' Seller Shares
against payment therefor will transfer to the Underwriters good and valid title
to such Seller Shares, free and clear of any security interests, claims, liens,
equities and other encumbrances.
(f) All information furnished by or on behalf of the
Selling Shareholders for use in the Registration Statement and Prospectus is,
and on the Closing Date will be, true, correct and complete in all material
respects, and does not, and on the Closing Date will not, contain any untrue
statement of a material fact or omit to state any material fact necessary to
make such information not misleading.
(g) Neither the Selling Shareholders nor, if applicable,
any of their respective directors, officers or controlling persons has taken,
directly or indirectly, any action designed, or which might reasonably be
expected, to cause or result, under the Act or otherwise, in, or which has
constituted, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares.
(h) Without taking any action to verify independently the
Company's representations or warranties made in this Agreement, and without
assuming responsibility for the accuracy, completeness or fairness of such
representations and warranties, no Selling Shareholder has any reason to
believe that the Company's representations and warranties contained in this
Agreement are not accurate.
(i) No Selling Shareholder is aware that the Registration
Statement or the Prospectus includes any untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading.
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations
of the Underwriters under this Agreement are several and not joint. The
respective obligations of the Underwriters to purchase the Shares are subject
to each of the following terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 7(A)(a) of this Agreement.
10.
<PAGE> 11
(b) No order preventing or suspending the use of any
preliminary prospectus or the Prospectus shall have been or shall be in effect
and no order suspending the effectiveness of the Registration Statement shall
be in effect and no proceedings for such purpose shall be pending before or
threatened by the Commission, and any requests for additional information on
the part of the Commission (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to the satisfaction of
the Representatives.
(c) The representations and warranties of the Company and
the Selling Shareholders contained in this Agreement and in the certificates
delivered pursuant to Section 6(d) shall be true and correct when made and on
and as of each Closing Date as if made on such date and the Company and the
Selling Shareholders shall have performed all covenants and agreements and
satisfied all the conditions contained in this Agreement required to be
performed or satisfied by it or them at or before such Closing Date.
(d) The Representatives shall have received on each
Closing Date a certificate addressed to the Representatives and dated such
Closing Date, of the chief executive or chief operating officer and the chief
financial officer of the Company to the effect that the signers of such
certificate have carefully examined the Registration Statement, the Prospectus
and this Agreement and that the representations and warranties of the Company
in this Agreement are true and correct on and as of such Closing Date with the
same effect as if made on such Closing Date and the Company has performed all
covenants and agreements and satisfied all conditions contained in this
Agreement required to be performed or satisfied by it at or prior to such
Closing Date.
(e) The Representatives shall have received on each
Closing Date a certificate, addressed to the Representatives and dated such
Closing Date, signed by the attorney-in-fact for the Selling Shareholders to
the effect that the Selling Shareholders have carefully examined the
Registration Statement, the Prospectus and this Agreement and that the
representations and warranties of them in this Agreement are true and correct
on and as of such Closing Date with the same effect as if made on such Closing
Date and the Selling Shareholders performed all covenants and agreements and
satisfied all conditions contained in this Agreement required to be performed
or satisfied by them at or prior to such Closing Date.
(f) The Representatives shall have received on the
Effective Date, at the time this Agreement is executed and on each Closing Date
a signed letter from Ernst & Young LLP addressed to the Representatives and
dated, respectively, the Effective Date, the date of this Agreement and each
such Closing Date, in form and substance reasonably satisfactory to the
Representatives, confirming that they are independent accountants within the
meaning of the Securities Act and the Rules, that the response to Item 10 of
the Registration Statement is correct insofar as it relates to them and stating
in effect that:
(i) in their opinion the audited financial
statements and financial statement schedules included in the Registration
Statement and the Prospectus and reported on by them comply as to form in all
material respects with the applicable accounting requirements of the Securities
Act and the Rules;
11.
<PAGE> 12
(ii) on the basis of a reading of the amounts
included in the Registration Statement and the Prospectus under the headings
"Summary Financial Information" and "Selected Financial Data," carrying out
certain procedures (but not an examination in accordance with generally
accepted auditing standards) which would not necessarily reveal matters of
significance with respect to the comments set forth in such letter, a reading
of the minutes of the meetings of the shareholders and directors of the
Company, and inquiries of certain officials of the Company who have
responsibility for financial and accounting matters of the Company as to
transactions and events subsequent to the date of the latest audited financial
statements, except as disclosed in the Registration Statement and the
Prospectus, nothing came to their attention which caused them to believe that:
(A) the amounts in "Summary Financial
Information," and "Selected Financial Data" included in the Registration
Statement and the Prospectus do not agree with the corresponding amounts in the
audited and unaudited financial statements from which such amounts were
derived; or
(B) with respect to the Company, there were,
at a specified date not more than five business days prior to the date of the
letter, any increases in the current liabilities and long-term liabilities of
the Company or any decreases in net income or in working capital or the
shareholders' equity in the Company, as compared with the amounts shown on the
Company's audited balance sheet for the fiscal year ended December 31, 1996 and
the nine months ended September 30, 1997 included in the Registration
Statement; and
(iii) they have performed certain other procedures
as a result of which they determined that certain information of an accounting,
financial or statistical nature (which is limited to accounting, financial or
statistical information derived from the general accounting records of the
Company) set forth in the Registration Statement and the Prospectus and
reasonably specified by the Representatives agrees with the accounting records
of the Company.
References to the Registration Statement and the Prospectus in this paragraph
(f) are to such documents as amended and supplemented at the date of the
letter.
(g) The Representatives shall have received on each
Closing Date from Latham & Watkins, counsel for the Company, an opinion,
addressed to the Representatives and dated such Closing Date, and stating in
effect that:
(i) Each of the Company's subsidiaries has been
duly organized and is validly existing as a corporation in good standing under
the laws of its respective state of incorporation. To the best of such
counsel's knowledge, with the exception of Aspen, Turf Specialty, Eco Turf,
Direct Products and Golf and Turf, the Company has no subsidiaries and does
not control, directly or indirectly, any corporation, partnership, limited
liability company, joint venture, association or other business organization.
The Company and each of its subsidiaries is duly qualified and in good standing
as a foreign corporation in each jurisdiction in which the character or location
of its assets or properties (owned, leased or licensed) or the nature of its
businesses makes such qualification necessary, except for such jurisdictions
where the failure to so qualify would not have a Material Adverse Effect.
12.
<PAGE> 13
(ii) The Company and each of its subsidiaries has
all requisite corporate power and authority to own, lease and license its
assets and properties and conduct its business as now being conducted and as
described in the Registration Statement and the Prospectus; and the Company has
all requisite corporate power and authority and all necessary authorizations,
approvals, consents, orders, licenses, certificates and permits to enter into,
deliver and perform this Agreement and the Warrants and to issue and sell the
Shares and the Warrant Shares other than those required under the Securities
Act and state and foreign Blue Sky laws.
(iii) The Company has authorized and issued capital
stock as set forth in the Registration Statement and the Prospectus. To the
best of such counsel's knowledge, except as disclosed in the Registration
Statement and the Prospectus, there is no outstanding option, warrant or other
right calling for the issuance of, and no commitment, plan or arrangement, to
issue, any share of stock of the Company or any security convertible into,
exercisable for, or exchangeable for stock of the Company. The Common Stock,
the Shares and the Warrants conform in all materials respects to the
descriptions thereof contained in the Registration Statement and the
Prospectus.
(iv) The agreement of certain of the Company's
shareholders, directors and officers stating that for a period of 180 days from
the date of this Agreement they will not, without the Representatives' prior
written consent, sell, grant any option for the sale of, or otherwise dispose
of, directly or indirectly, any shares of Common Stock (or any securities
convertible into, exercisable for, or exchangeable for any shares of Common
Stock) owned by them has been duly and validly delivered by such persons and
constitutes the legal, valid and binding obligation of each such person
enforceable against each such person in accordance with its terms, except as
the enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles.
(v) This Agreement has been duly and validly
executed and delivered by the Company (and the Warrants will have been duly and
validly executed and delivered by the Company when paid for on the Firm Shares
Closing Date) and this Agreement constitutes the legal, valid and binding
obligation of the Company (and the Warrants when so executed and delivered will
constitute the legal, valid and binding obligation of the Company) enforceable
against the Company in accordance with their respective terms except (A) as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles and (B) to the
extent that rights to indemnity or contribution under this Agreement may be
limited by Federal or state securities laws or the public policy underlying
such laws.
(vi) Neither the execution, delivery and
performance of this Agreement by the Company nor the consummation of any of the
transactions contemplated hereby (including, without limitation, the issuance
and sale by the Company of the Shares and the Warrants) will give rise to a
right to terminate or accelerate the due date of any payment due under, or
conflict with or result in the breach of any term or provision of, or
constitute a default (or any event which with notice or lapse of time, or both,
would constitute a default) under, or
13.
<PAGE> 14
require consent or waiver under, or result in the execution or imposition of
any lien, charge or encumbrance upon any properties or assets of the Company or
any of its subsidiaries pursuant to the terms of any indenture, mortgage, deed
trust, note, lease or other agreement or instrument of which such counsel is
aware and to which the Company or any of its subsidiaries is a party or by
which it or any of its properties or businesses is bound, or any franchise,
license, permit, judgment, decree, order, statute, rule or regulation of which
such counsel is aware or violate any provision of the articles of incorporation
or bylaws of the Company.
(vii) To the best of such counsel's knowledge, no
default exists, and no event has occurred which with notice or lapse of time,
or both, would constitute a default, in the due performance and observance of
any term, covenant or condition by the Company or any of its subsidiaries of
any indenture, mortgage, deed of trust, note, lease or any other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which it or any of its assets or properties or businesses may be bound or
affected, where the consequences of such default would have a Material Adverse
Effect.
(viii) To the best of such counsel's knowledge,
neither the Company nor any of its subsidiaries is in violation of any term or
provision of its articles of incorporation or bylaws, or other charter
documents, or any franchise, license, permit, judgment, decree, order, statute,
rule or regulation, where the consequences of such violation would have a
Material Adverse Effect.
(ix) No consent, approval, authorization or order
of any court or governmental agency or body is required for the performance of
this Agreement or the Warrants by the Company or the consummation of the
transactions contemplated hereby or thereby, except such as have been obtained
under the Securities Act and such as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution of the Shares by
the several Underwriters.
(x) To the best of such counsel's knowledge,
there is no litigation or governmental or other proceeding or investigation,
before any court or before or by any public body or board pending or threatened
against, or involving the assets, properties or businesses of, the Company or
any of its subsidiaries which would have a Material Adverse Effect.
(xi) To the best of such counsel's knowledge,
there are no outstanding rights to have any securities of the Company
registered or otherwise included in the Registration Statement in connection
with this offering that have not been either fully complied with or waived by
the holders of such registration rights.
(xii) The statements in the Prospectus under the
captions "Description of Securities," "Liquidity and Capital Resources,"
"Business--Products," "Business -- Facilities," "Shares Eligible for Future
Sale," "Management--Employment Agreements," "Management--Stock Options,"
"Management--Indemnification" and "Certain Transactions," insofar as such
statements constitute a summary of documents referred to therein or matters of
law, are fair summaries in all material respects and accurately present the
information called for
14.
<PAGE> 15
with respect to such documents and matters. All contracts and other documents
required to be filed as exhibits to, or described in, the Registration
Statement have been so filed with the Commission or are fairly described in the
Registration Statement, as the case may be.
(xiii) The Registration Statement, all preliminary
prospectuses and the Prospectus and each amendment or supplement thereto
(except for the financial statements and schedules and other financial and
statistical data included therein, as to which such counsel expresses no
opinion) comply as to form in all material respects with the requirements of
the Securities Act and the Rules.
(xiv) The Registration Statement has become
effective under the Securities Act, and no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are threatened, pending or
contemplated.
To the extent deemed advisable by such counsel, they may rely as to matters of
fact on certificates of responsible officers of the Company and public
officials and on the opinions of other counsel satisfactory to the
Representatives as to matters which are governed by laws other than the laws of
the States of New York and California, the General Corporation Law of the State
of Delaware and the Federal laws of the United States; provided that such
counsel shall state that in their opinion the Underwriters and they are
justified in relying on such other opinions. Copies of such certificates and
other opinions shall be furnished to the Representatives and counsel for the
Underwriters.
In addition, such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company,
representatives of the Representatives and representatives of the independent
certified public accountants of the Company, at which conferences the contents
of the Registration Statement and the Prospectus and related matters were
discussed and, although such counsel is not passing upon and does not assume
any responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus (except as specified
in the foregoing opinion), on the basis of the foregoing, no facts have come to
the attention of such counsel which lead such counsel to believe that the
Registration Statement at the time it became effective or as of the Closing
Date (except with respect to the financial statements and notes and schedules
thereto and other financial and statistical data, as to which such counsel need
express no belief) contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, or that the
Prospectus as amended or supplemented (except with respect to the financial
statements and notes schedules thereto and other financial and statistical
data, as to which such counsel need make no statement) on the date thereof or
as of the Closing Date contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.
15.
<PAGE> 16
(h) The Representatives shall have received on each
Closing Date from Fitzgerald, Shorr, Ballmettler & Brennan, P.C., Nebraska
counsel to the Company, an opinion addressed to the Representatives and dated
such Closing Date, and stating in effect that:
(i) The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of the State
of Nebraska.
(ii) The certificates evidencing the Shares are in
due and proper legal form and have been duly authorized for issuance by the
Company; all of the outstanding shares of Common Stock of the Company have been
duly and validly authorized and have been duly and validly issued and are fully
paid and nonassessable and none of them was issued in violation of any
preemptive or other similar right. The Warrant Shares have been duly
authorized and reserved by the Company. The Shares when issued and sold
pursuant to this Agreement and the Warrant Shares, when issued and sold
pursuant to the Warrants, will be duly and validly issued, outstanding, fully
paid and nonassessable and none of them will have been issued in violation of
any preemptive or other similar right. The Common Stock, the Shares and the
Warrants conform in all material respects to the descriptions thereof contained
in the Registration Statement and the Prospectus.
(iii) This Agreement and the Warrants have been
duly authorized by the Company. All necessary corporate action has been duly
and validly taken by the Company to authorize the execution, delivery and
performance of the Agreement, the execution and delivery of the Warrants and
the sale of the Shares, the Warrants and the Warrant Shares. The Warrant
Shares have been duly reserved for issuance upon exercise of the Warrants.
(i) The Representatives shall have received on each
Closing Date from Brown, Martin, Haller & McClain, patent counsel to the
Company, an opinion addressed to the Representatives and dated on such Closing
Date to the effect that:
(i) The statements in the Registration Statement
and Prospectus under the captions "Risk Factors--Patents, Proprietary Technology
and Licenses" and "Business--Patents and Proprietary Rights" insofar as such
statements constitute summaries of statutes, rules, regulations, legal matters
or proceedings referred to therein, are correct and accurate summaries in all
material respects.
(ii) Such counsel has reviewed the Registration
Statement and the Prospectus, has participated in conferences with officers and
other representatives of the Company and its counsel at which the contents of
the Registration Statement and the Prospectus were discussed and, although such
counsel is not passing upon and does not assume any responsibility for, the
accuracy, completeness or fairness of the statements contained in the
Registration Statement and the Prospectus (other than to the extent set forth
in the preceding paragraph ), on the basis of the foregoing (relying as to
materiality to the extent such counsel deems appropriate upon the opinions of
officers and other representatives of the Company), no facts have come to the
attention of such counsel that would lead such counsel to believe that the
sections of the Registration Statement under the captions "Risk Factors
Patents, Proprietary
16.
<PAGE> 17
Technology and Licenses" and "Business--Patents and Proprietary Rights" as of
the effective date of the Registration Statement and as of the date of such
opinion, included or includes any untrue statement of a material fact or omitted
or omits to state any material fact required to be stated therein or necessary
to make the statements therein not misleading or that the sections of the
Prospectus under the captions "Risk Factors--Patents, Proprietary Technology
and Licenses" and "Business--Patents and Proprietary Rights" as of the date of
the Prospectus or the date of such opinion, included or includes any untrue
statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
(j) The Representatives shall have received on each
Closing Date from Morgan, Lewis & Bockius, regulatory counsel to the Company,
an opinion addressed to the Representatives and dated on such Closing Date to
the effect that:
(i) The statements in the Registration Statement
and Prospectus under the captions "Risk Factors--Government Regulation" and
"Business--Government Regulation," insofar as such statements constitute
summaries of statutes, rules, regulations, legal matters or proceedings
referred to therein, are correct and accurate summaries in all material
respects.
(ii) Such counsel has reviewed the Registration
Statement and the Prospectus, has participated in conferences with officers and
other representatives of the Company and its counsel at which the contents of
the Registration Statement and the Prospectus were discussed and, although such
counsel is not passing upon and does not assume any responsibility for, the
accuracy, completeness or fairness of the statements contained in the
Registration Statement and the Prospectus (other than to the extent set forth in
the preceding paragraph), on the basis of the foregoing (relying as to
materiality to the extent such counsel deems appropriate upon the opinions of
officers and other representatives of the Company), no facts have come to the
attention of such counsel that would lead such counsel to believe that the
sections of the Registration Statement under the captions "Risk Factors--
Government Regulation" and "Business--Government Regulation," as of the
effective date of the Registration Statement and as of the date of such opinion,
included or includes any untrue statement of a material fact or omitted or omits
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading or that the sections of the Prospectus
under the captions "Risk Factors--Government Regulation" and "Business--
Government Regulation," as of the date of the Prospectus or the date of such
opinion, included or includes any untrue statement of a material fact or omitted
or omits to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
(k) All proceedings taken in connection with the sale of
the Firm Shares and the Option Shares as herein contemplated shall be
reasonably satisfactory in form and substance to the Representatives and their
counsel and the Underwriters shall have received from Cooley Godward LLP a
favorable opinion, addressed to the Representatives and dated such Closing
Date, with respect to the Shares, the Registration Statement and the
Prospectus, and such other related matters, as the Representatives may
reasonably request, and the Company shall have
17.
<PAGE> 18
furnished to Cooley Godward LLP such documents as they may reasonably request
for the purpose of enabling them to pass upon such matters.
(l) The Representatives shall have received on each
Closing Date a certificate, addressed to the Representative, and dated such
Closing Date, of an executive officer of the Company to the effect that the
signer of such certificate has reviewed and understands the provisions of
Section 517.075 of the Florida Statutes, and represents that the Company has
complied, and at all times will comply, with all provisions of Section 517.075
and further, that as of such Closing Date, neither the Company nor any of its
affiliates does business with the government of Cuba or with any person or
affiliate located in Cuba.
7. COVENANTS OF THE COMPANY.
(A) The Company covenants and agrees as
follows:
(a) The Company shall prepare the Prospectus in a form
approved by the Representatives and file such Prospectus pursuant to Rule
424(b) under the Securities Act not later than the Commission's close of
business on the second business day following the execution and delivery of
this Agreement, or, if applicable, such earlier time as may be required by Rule
430A(a)(3) under the Securities Act, and shall promptly advise the
Representatives (i) when any amendment to the Registration Statement shall have
become effective, (ii) of any request by the Commission for any amendment of
the Registration Statement or the Prospectus or for any additional information,
(iii) of the prevention or suspension of the use of any preliminary prospectus
or the Prospectus or of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the institution
or threatening of any proceeding for that purpose and (iv) of the receipt by
the Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose. The Company shall not file any
amendment of the Registration Statement or supplement to the Prospectus unless
the Company has furnished the Representatives a copy for its review prior to
filing and shall not file any such proposed amendment or supplement to which
the Representatives reasonably object. The Company shall use its best efforts
to prevent the issuance of any such stop order and, if issued, to obtain as
soon as possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the
Shares is required to be delivered under the Securities Act and the Rules, any
event occurs as a result of which the Prospectus as then amended or
supplemented would include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein in the light
of the circumstances under which they were made not misleading, or if it shall
be necessary to amend or supplement the Prospectus to comply with the
Securities Act or the Rules, the Company promptly shall prepare and file with
the Commission, subject to the second sentence of paragraph (a) of this Section
7(A), an amendment or supplement which shall correct such statement or omission
or an amendment which shall effect such compliance.
(c) The Company shall make generally available to its
security holders and to the Representatives as soon as practicable, but not
later than 45 days after the end of the 12-
18.
<PAGE> 19
month period beginning at the end of the fiscal quarter of the Company during
which the Effective Date occurs (or 90 days if such 12-month period coincides
with the Company's fiscal year), an earning statement (which need not be
audited) of the Company, covering such 12-month period, which shall satisfy the
provisions of Section 11(a) of the Securities Act or Rule 158 of the Rules.
(d) The Company shall furnish to the Representatives and
counsel for the Underwriters, without charge, signed copies of the Registration
Statement (including all exhibits thereto and amendments thereof) and to each
other Underwriter a copy of the Registration Statement (without exhibits
thereto) and all amendments thereof and, so long as delivery of a prospectus by
an Underwriter or dealer may be required by the Securities Act or the Rules, as
many copies of any preliminary prospectus and the Prospectus and any amendments
thereof and supplements thereto as the Representatives may reasonably request.
(e) The Company shall cooperate with the Representatives
and their counsel in endeavoring to qualify the Shares for offer and sale under
the laws of such jurisdictions as the Representatives may designate and shall
maintain such qualifications in effect so long as required for the distribution
of the Shares; provided, however, that the Company shall not be required in
connection therewith, as a condition thereof, to qualify as a foreign
corporation or to execute a general consent to service of process in any
jurisdiction or subject itself to taxation as doing business in any
jurisdiction.
(f) For a period of five years after the date of this
Agreement, the Company shall supply to the Representatives, and to each other
Underwriter who may so request in writing, copies of such financial statements
and other periodic and special reports as the Company may from time to time
distribute generally to the holders of any class of its capital stock and to
furnish to the Representatives a copy of each annual or other report it shall
be required to file with the Commission (including the Report on Form SR
required by Rule 463 of the Rules).
(g) Without the prior written consent of the
Representatives, for a period of 180 days after the date of this Agreement, the
Company shall not issue, sell or register (for its own account or for the
account of any other person or entity) with the Commission (other than on Form
S-8 or on any successor form), or otherwise dispose of, directly or indirectly,
any equity securities of the Company (or any securities convertible into or
exercisable or exchangeable for equity securities of the Company), except for
the issuance of the Shares pursuant to the Registration Statement and the
issuance of shares pursuant to the Company's existing stock option plan or bonus
plan, and except for the filing by the Company of a registration statement with
the Commission upon the demand of the holders of the warrants issued in
connection with the Bridge Financing (as defined in the Prospectus) provided
that such registration statement may not become effective prior to 90 days
following the Effective Date of the Registration Statement and such registration
statement shall not include any shares for the account of the Company. In the
event that during this period, (i) any shares are issued pursuant to the
Company's existing stock option plan or bonus plan or (ii) any registration is
effected on Form S-8 or on any successor form, the Company shall obtain the
written agreement of such grantee or purchaser or holder of such registered
securities that, for a period of 180 days after the date of this Agreement, such
person will not, without the prior written consent of the Representatives, offer
for sale, sell, distribute, grant any option for the sale of, or otherwise
dispose of, directly or indirectly, or exercise any registration rights with
respect to, any shares of Common Stock (or any securities convertible into,
exercisable for, or exchangeable for any shares of Common Stock) owned by such
person.
19.
<PAGE> 20
(h) On or before completion of this offering, the Company
shall make all filings required under applicable securities laws and by the
Nasdaq SmallCap Market and National Market (including any required registration
under the Exchange Act).
(i) The Company will not amend any of its outstanding
options or warrants to provide the holders of such options or warrants the
ability to effect a "cashless exercise" of such options or warrants.
(B) The Company agrees to pay, or
reimburse if paid by the Representatives, whether or not the transactions
contemplated hereby are consummated or this Agreement is terminated, all costs
and expenses (including fees and expenses of counsel to the Company and the
Selling Shareholders) incident to the public offering of the Shares and the
performance of the obligations of the Company under this Agreement including
those relating to: (i) the preparation, printing, filing and distribution of
the Registration Statement including all exhibits thereto, each preliminary
prospectus, the Prospectus, all amendments and supplements to the Registration
Statement and the Prospectus, and the printing, filing and distribution of this
Agreement; (ii) the preparation and delivery of certificates for the Shares to
the Underwriters and the Warrants to the Representatives; (iii) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the various jurisdictions referred to in Section
7(A)(e), including the reasonable fees and disbursements of counsel for the
Underwriters in connection with such registration and qualification and the
preparation, printing, distribution and shipment of Blue Sky memoranda; (iv)
the furnishing (including costs of shipping and mailing) to the Representatives
and to the Underwriters of copies of each preliminary prospectus, the
Prospectus and all amendments or supplements to the Prospectus, and of the
several documents required by this Section to be so furnished, as may be
reasonably requested for use in connection with the offering and sale of the
Shares by the Underwriters or by dealers to whom Shares may be sold; (v) the
filing fees of the National Association of Securities Dealers, Inc. in
connection with its review of the terms of the public offering; (vi) the
furnishing (including costs of shipping and mailing) to the Representatives and
to the Underwriters of copies of all reports and information required by
Section 7(A)(f); (vii) inclusion of the Shares for quotation on the Nasdaq
National Market; and (viii) all transfer taxes, if any, with respect to the
sale and delivery of the Shares by the Company to the Underwriters. Subject to
the provisions of Section 10, the Underwriters agree to pay, whether or not the
transactions contemplated hereby are consummated or this Agreement is
terminated, all costs and expenses incident to the performance of the
obligations of the Underwriters under this Agreement not payable by the Company
pursuant to the preceding sentence, including, without limitation, the fees and
disbursements of counsel for the Underwriters.
8. INDEMNIFICATION.
(a) The Company and the Selling Shareholders agree,
jointly and severally, to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act against any and all
losses, claims, damages and liabilities, joint or several (including any
reasonable investigation, legal and other expenses incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted), to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other Federal or state law or regulation,
at common law or otherwise, insofar as such losses, claims, damages or
liabilities arise out of or are based upon any untrue statement or alleged
20.
<PAGE> 21
untrue statement of a material fact contained in any preliminary prospectus,
the Registration Statement or the Prospectus or any amendment thereof or
supplement thereto, or arise out of or are based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however,
that such indemnity shall not inure to the benefit of any Underwriter (or any
person controlling such Underwriter) on account of any losses, claims, damages
or liabilities arising from the sale of the Shares to any person by such
Underwriter if such untrue statement or omission or alleged untrue statement or
omission was made in such preliminary prospectus, the Registration Statement or
the Prospectus, or such amendment or supplement, in reliance upon and in
conformity with information furnished in writing to the Company by the
Representatives on behalf of any Underwriter specifically for use therein.
This indemnity agreement will be in addition to any liability which the Company
and Selling Shareholders may otherwise have. In no event, however, shall the
liability of any Selling Shareholder for indemnification under this Section
8(a) exceed the net proceeds received by such Selling Shareholder from the
Underwriters in the offering.
(b) Each Underwriter agrees, severally and not jointly,
to indemnify and hold harmless the Company and each Selling Shareholder, each
person, if any, who controls the Company or such Selling Shareholder within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act,
and each of their respective partners, directors, officers (if the Selling
Shareholder is not an individual) and each person who signs the Registration
Statement, to the same extent as the foregoing indemnity from the Company and
the Selling Shareholders to each Underwriter, but only insofar as such losses,
claims, damages or liabilities arise out of or are based upon any untrue
statement or omission or alleged untrue statement or omission which was made in
any preliminary prospectus, the Registration Statement or the Prospectus, or
any amendment thereof or supplement thereto, contained in the last paragraph of
the cover page, in the paragraph relating to stabilization on the inside front
cover page of the Prospectus and the statements contained under the caption
"Underwriting" in the Prospectus; provided, however, that the obligation of
each Underwriter to indemnify the Company and the Selling Shareholders
(including any of their respective controlling persons, directors or officers)
shall be limited in the aggregate to the net proceeds received by the Company
from such Underwriter.
(c) Any party that proposes to assert the right to be
indemnified under this Section will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim is to be made against an indemnifying party or parties under this
Section, notify each such indemnifying party of the commencement of such
action, suit or proceeding, enclosing a copy of all papers served. No
indemnification provided for in Section 8(a) or 8(b) shall be available to any
party who shall fail to give notice as provided in this Section 8(c) if the
party to whom notice was not given was unaware of the proceeding to which such
notice would have related and was prejudiced by the failure to give such notice
but the omission so to notify such indemnifying party of any such action, suit
or proceeding shall not relieve it from any liability that it may have to any
indemnified party for contribution or otherwise than under this Section. In
case any such action, suit or proceeding shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in, and, to the extent that it shall
21.
<PAGE> 22
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel reasonably satisfactory to such indemnified
party, and after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof and the approval by the
indemnified party of such counsel, the indemnifying party shall not be liable
to such indemnified party for any legal or other expenses, except as provided
below and except for the reasonable costs of investigation subsequently
incurred by such indemnified party in connection with the defense thereof. The
indemnified party shall have the right to employ its counsel in any such
action, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the employment of counsel by such indemnified
party has been authorized in writing by the indemnifying parties, (ii) the
indemnified party shall have reasonably concluded that there may be a conflict
of interest between the indemnifying parties and the indemnified party in the
conduct of the defense of such action (in which case the indemnifying parties
shall not have the right to direct the defense of such action on behalf of the
indemnified party) or (iii) the indemnifying parties shall not have employed
counsel to assume the defense of such action within a reasonable time after
notice of the commencement thereof, in each of which cases the fees and
expenses of counsel shall be at the expense of the indemnifying parties. An
indemnifying party shall not be liable for any settlement of any action, suit,
proceeding or claim effected without its written consent.
9. CONTRIBUTION. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 8(a) is due in accordance with its terms but for any reason is held to
be unavailable from the Company or the Selling Shareholders, the Company, the
Selling Shareholders, and the Underwriters shall contribute to the aggregate
losses, claims, damages and liabilities (including any investigation, legal and
other expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but after
deducting any contribution received by the Company or the Selling Shareholders
from persons other than the Underwriters, such as persons who control the
Company or the Selling Shareholders within the meaning of the Securities Act,
officers of the Company who signed the Registration Statement and directors of
the Company, who may also be liable for contribution) to which the Company, the
Selling Shareholders and one or more of the Underwriters may be subject in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Shareholders on the one hand and the Underwriters on
the other from the offering of the Shares or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 8
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company and the
Selling Shareholders on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company, the
Selling Shareholders and the Underwriters shall be deemed to be in the same
proportion as (x) the total proceeds from the offering (net of underwriting
discounts but before deducting expenses) received by the Company, and the
Selling Shareholders, as set forth in the table on the cover page of the
Prospectus, bear to (y) the underwriting discounts received by the
Underwriters, as set forth in the table on the cover page of the Prospectus.
The relative fault of the Company, the Selling Shareholders or the Underwriters
22.
<PAGE> 23
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact related to information supplied by
the Company and the Selling Shareholders or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, the Selling Shareholders and
the Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 9 were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
Section 9, (i) in no case shall any Underwriter (except as may be provided in
the Agreement Among Underwriters) be liable or responsible for any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter hereunder, and (ii) the Company and the Selling Shareholders shall
be proportionately liable and responsible for any amount in excess of such
underwriting discount; provided, however, that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 9, each person, if
any, who controls an Underwriter within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act shall have the same rights
to contribution as such Underwriter, and each person, if any, who controls the
Company or the Selling Shareholder within the meaning of the Section 15 of the
Securities Act or Section 20(a) of the Exchange Act, each officer of the
Company who shall have signed the Registration Statement and each director of
the Company shall have the same rights to contribution as the Company, subject
in each case to clauses (i) and (ii) in the immediately preceding sentence of
this Section 9. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against
such party in respect of which a claim for contribution may be made against
another party or parties under this Section, notify such party or parties from
whom contribution may be sought, but the omission so to notify such party or
parties from whom contribution may be sought shall not relieve the party or
parties from whom contribution may be sought from any other obligation it or
they may have hereunder or otherwise than under this Section 9. No party shall
be liable for contribution with respect to any action, suit, proceeding or
claim settled without its written consent. The Underwriter's obligations to
contribute pursuant to this Section 9 are several in proportion to their
respective underwriting commitments and not joint.
10. TERMINATION. This Agreement may be terminated with respect to
the Shares to be purchased on a Closing Date by the Representatives by
notifying the Company and the attorney-in-fact for the Selling Shareholders at
any time
(a) in the absolute discretion of the Representatives at
or before any Closing Date: (i) if on or prior to such date, any domestic or
international event or act or occurrence has materially disrupted, or in the
opinion of the Representatives will in the future materially disrupt, the
securities markets; (ii) if there has occurred any new outbreak or material
escalation of hostilities or other calamity or crisis the effect of which on
the financial markets of the United States is such as to make it, in the
judgment of the Representatives, inadvisable to proceed with the offering;
(iii) if there shall be such a material adverse change in general financial,
political or economic conditions or the effect of international conditions on
the financial markets in the
23.
<PAGE> 24
United States is such as to make it, in the judgment of the Representatives,
inadvisable or impracticable to market the Shares; (iv) if trading in the
Shares has been suspended by the Commission or trading generally on the New
York Stock Exchange, Inc., on the American Stock Exchange, Inc. or on the
Nasdaq National Market has been suspended or limited, or minimum or maximum
ranges for prices for securities shall have been fixed, or maximum ranges for
prices for securities have been required, by said exchanges or by order of the
Commission, the National Association of Securities Dealers, Inc., or any other
governmental or regulatory authority; or (v) if a banking moratorium has been
declared by any state or Federal authority, or
(b) at or before any Closing Date, that any of the
conditions specified in Section 6 shall not have been fulfilled when and as
required by this Agreement.
If this Agreement is terminated pursuant to any of its provisions, the Company
shall not be under any liability to any Underwriter, and no Underwriter shall
be under any liability to the Company, except that (y) if this Agreement is
terminated by the Representatives or the Underwriters because of any failure,
refusal or inability on the part of the Company to comply with the terms or to
fulfill any of the conditions of this Agreement, the Company will reimburse the
Underwriters for all out-of-pocket expenses (including the reasonable fees and
disbursements of their counsel) incurred by them in connection with the
proposed purchase and sale of the Shares or in contemplation of performing
their obligations hereunder and (z) no Underwriter who shall have failed or
refused to purchase the Shares agreed to be purchased by it under this
Agreement, without some reason sufficient hereunder to justify cancellation or
termination of its obligations under this Agreement, shall be relieved of
liability to the Company or to the other Underwriters for damages occasioned by
its failure or refusal.
11. SUBSTITUTION OF UNDERWRITERS. If one or more of the
Underwriters shall fail (other than for a reason sufficient to justify the
cancellation or termination of this Agreement under Section 10) to purchase on
any Closing Date the Shares agreed to be purchased on such Closing Date by such
Underwriter or Underwriters, the Representatives may find one or more
substitute underwriters to purchase such Shares or make such other arrangements
as the Representatives may deem advisable or one or more of the remaining
Underwriters may agree to purchase such Shares in such proportions as may be
approved by the Representatives, in each case upon the terms set forth in this
Agreement. If no such arrangements have been made by the close of business on
the business day following such Closing Date,
(a) if the number of Shares to be purchased by the
defaulting Underwriters on such Closing Date shall not exceed 10% of the Shares
that all the Underwriters are obligated to purchase on such Closing Date, then
each of the nondefaulting Underwriters shall be obligated to purchase such
Shares on the terms herein set forth in proportion to their respective
obligations hereunder; provided, that in no event shall the maximum number of
Shares that any Underwriter has agreed to purchase pursuant to Section 1 be
increased pursuant to this Section 10 by more than one-ninth of such number of
Shares without the written consent of such Underwriter, or
(b) if the number of Shares to be purchased by the
defaulting Underwriters on such Closing Date shall exceed 10% of the Shares
that all the Underwriters are obligated to
24.
<PAGE> 25
purchase on such Closing Date, then the Company shall be entitled to an
additional business day within which it may, but is not obligated to, find one
or more substitute underwriters reasonably satisfactory to the Representatives
to purchase such Shares upon the terms set forth in this Agreement.
In any such case, either the Representatives or the Company shall have the
right to postpone the applicable Closing Date for a period of not more than
five business days in order that necessary changes and arrangements (including
any necessary amendments or supplements to the Registration Statement or
Prospectus) may be effected by the Representatives and the Company. If the
number of Shares to be purchased on such Closing Date by such defaulting
Underwriter or Underwriters shall exceed 10% of the Shares that all the
Underwriters are obligated to purchase on such Closing Date, and none of the
nondefaulting Underwriters or the Company shall make arrangements pursuant to
this Section within the period stated for the purchase of the Shares that the
defaulting Underwriters agreed to purchase, this Agreement shall terminate with
respect to the Shares to be purchased on such Closing Date without liability on
the part of any nondefaulting Underwriter to the Company and without liability
on the part of the Company, except in both cases as provided in Sections 7(B),
8, 9 and 10. The provisions of this Section shall not in any way affect the
liability of any defaulting Underwriter to the Company or the nondefaulting
Underwriters arising out of such default. A substitute underwriter hereunder
shall become an Underwriter for all purposes of this Agreement.
12. MISCELLANEOUS. The respective agreements, representations,
warranties, indemnities and other statements of the Company or its officers and
of the Underwriters set forth in or made pursuant to this Agreement shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of the officers, directors or
controlling persons referred to in Sections 8 and 9 hereof, and shall survive
delivery of and payment for the Shares. The provisions of Sections 7(B), 8, 9
and 10 shall survive the termination or cancellation of this Agreement.
This Agreement has been and is made for the benefit of the Underwriters and the
Company and their respective successors and assigns, and, to the extent
expressed herein, for the benefit of persons controlling any of the
Underwriters, or the Company, and directors and officers of the Company, and
their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The Company and the
Selling Shareholders acknowledge and agree that the representations, warranties,
agreements and covenants of the Company and the Selling Shareholders shall
remain in full force and effect following such event. The term "successors and
assigns" shall not include any purchaser of Shares from any Underwriter merely
because of such purchase.
All notices and communications hereunder shall be in writing and mailed or
delivered or by telephone or telegraph if subsequently confirmed in writing, (a)
if to the Representatives, c/o CIBC Oppenheimer Corp., CIBC Oppenheimer Tower,
World Financial Center, New York, New York
25.
<PAGE> 26
10281 Attention: Richard D. White, and (b) if to the Company, to its agent for
service as such agent's address appears on the cover page of the Registration
Statement.
This Agreement shall be governed by and construed in accordance with the laws
of the State of New York without regard to principles of conflict of laws.
This Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
Please confirm that the foregoing correctly sets forth the agreement
among us.
Very truly yours,
ECO SOIL SYSTEMS, INC.
By ____________________________
Name: _________________________
Title:_________________________
THE SELLING SHAREHOLDERS
NAMED IN SCHEDULE II HERETO
By _____________________________
L. Jean Dunn, Jr.
Attorney-in-Fact
26.
<PAGE> 27
Confirmed:
CIBC OPPENHEIMER CORP.
CRUTTENDEN ROTH INCORPORATED
Acting severally on behalf of themselves
and as Representatives of the several
Underwriters named in Schedule I annexed
hereto.
CIBC OPPENHEIMER CORP.
By ______________________________________________
Name: ____________________________________________
Title: _________________________________________
CRUTTENDEN ROTH INCORPORATED
By ______________________________________________
Name: ____________________________________________
Title: _________________________________________
27.
<PAGE> 28
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm
Number of Shares to be
Firm Shares to Purchased from the Total
be Purchased Selling Number of Shares to
Underwriter from the Company Shareholders be Purchased
----------- ---------------- ------------------ -------------------
<S> <C> <C> <C>
CBIC Oppenheimer Corp
Cruttenden Roth Incorporated
---------- ---------- ----------
Total
========== ========== ==========
</TABLE>
28.
<PAGE> 29
SCHEDULE II
<TABLE>
<CAPTION>
Number of
Seller Shares
Selling Shareholder to Be Sold
------------------- -------------
<S> <C>
Christ Church Day School 65,000
Imperial Bank 20,833
</TABLE>
29.
<PAGE> 1
EXHIBIT 1.2
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE,
SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT.
VOID AFTER 5:00 P.M., NEW YORK TIME, ON NOVEMBER ___, 2002 OR IF NOT A BUSINESS
DAY, AS DEFINED HEREIN, AT 5:00 P.M., NEW YORK TIME, ON THE NEXT FOLLOWING
BUSINESS DAY.
WARRANT TO PURCHASE
_______ SHARES OF COMMON STOCK
NO. 1
WARRANT TO PURCHASE
COMMON STOCK
OF
ECO SOIL SYSTEMS, INC.
TRANSFER RESTRICTED -- SEE SECTION 5.02
This certifies that, for good and valuable consideration,
CIBC Oppenheimer Corp., and its registered, permitted assigns (collectively,
the "Warrantholder"), is entitled to purchase from Eco Soil Systems, Inc., a
Nebraska corporation (the "Company"), subject to the terms and conditions
hereof, at any time on or after 9:00 A.M., New York time, on November __, 1998,
and before 5:00 P.M., New York time, on November __, 2002 (or, if such day is
not a Business Day, at or before 5:00 P.M., New York time, on the next
following Business Day), the number of fully paid and non-assessable shares of
Common Stock stated above at the Exercise Price. The Exercise Price and the
number of shares purchasable hereunder are subject to adjustment from time to
time as provided in Article III hereof.
ARTICLE I
SECTION 1.01 DEFINITION OF TERMS. As used in this Warrant, the
following capitalized terms shall have the following respective meanings:
(a) BUSINESS DAY: A day other than a Saturday,
Sunday or other day on which banks in the State of New York are authorized by
law to remain closed.
(b) COMMON STOCK: Common Stock, $.005 par value
per share, of the Company.
(c) COMMON STOCK EQUIVALENTS: Securities that
are convertible into or exercisable for shares of Common Stock.
(d) DEMAND REGISTRATION: See Section 6.02.
(e) EXCHANGE ACT: The Securities Exchange Act of
1934, as amended.
1.
<PAGE> 2
(f) EXERCISE PRICE: $_________ per Warrant
Share, as such price may be adjusted from time to time pursuant to Article III
hereof.
(g) EXPIRATION DATE: 5:00 P.M., New York time,
on November __, 2002 or if such day is not a Business Day, the next succeeding
day which is a Business Day.
(h) 25% HOLDERS: At any time as to which a
Demand Registration is requested, the Holder and/or the holders of any other
Warrants and/or the holders of Warrant Shares who have the right to acquire or
hold, as the case may be, not less than 25% of the combined total of Warrant
Shares issuable and Warrant Shares outstanding at the time such Demand
Registration is requested.
(i) HOLDER: A Holder of Registrable Securities.
(j) NASD: National Association of Securities
Dealers, Inc.
(k) NASDAQ: NASD Automatic Quotation System.
(l) PERSON: An individual, partnership, limited
liability company, joint venture, corporation, trust, unincorporated
organization or government or any department or agency thereof.
(m) PIGGYBACK REGISTRATION: See Section 6.01.
(n) PROSPECTUS: Any prospectus included in any
Registration Statement, as amended or supplemented by any prospectus
supplement, with respect to the terms of the offering of any portion of the
Registrable Securities covered by such Registration Statement and all other
amendments and supplements to the Prospectus, including post-effective
amendments and all material incorporated by reference in such Prospectus.
(o) PUBLIC OFFERINGS: A public offering of any
of the Company's equity or debt securities pursuant to a registration statement
under the Securities Act.
(p) REGISTRATION EXPENSES: Any and all expenses
incurred in connection with any registration or action incident to performance
of or compliance by the Company with Article VI, including, without limitation,
(i) all SEC, national securities exchange and NASD registration and filing
fees; all listing fees and all transfer agent fees; (ii) all fees and expenses
of complying with state securities or blue sky laws (including the fees and
disbursements of counsel for the underwriters in connection with blue sky
qualifications of the Registrable Securities); (iii) all printing, mailing,
messenger and delivery expenses and (iv) all fees and disbursements of counsel
for the Company and of its accountants, including the expenses of any special
audits and/or "cold comfort" letters required by or incident to such
performance and compliance, but excluding underwriting discounts and
commissions, brokerage fees and transfer taxes, if any, and fees of counsel or
accountants retained by the holders of Registrable Securities to advise them in
their capacity as Holders of Registrable Securities.
(q) REGISTRABLE SECURITIES: Any Warrant Shares
issued to CIBC Oppenheimer Corp., Cruttenden Roth Incorporated and/or their
respective designees or transferees as permitted under Section 5.02 and/or other
securities that may be or are issued by the Company upon exercise of this
Warrant, including those which may thereafter be issued by the Company in
respect of any such
2.
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securities by means of any stock splits, stock dividends, recapitalizations,
reclassifications or the like, and as adjusted pursuant to Article III hereof.
(r) REGISTRATION STATEMENT: Any registration
statement of the Company filed or to be filed with the SEC which covers any of
the Registrable Securities pursuant to the provisions of this Agreement,
including all amendments (including post-effective amendments) and supplements
thereto, all exhibits thereto and all material incorporated therein by
reference.
(s) SEC: The Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act or the
Exchange Act.
(t) SECURITIES ACT: The Securities Act of 1933,
as amended.
(u) TRANSFER: See Section 5.02.
(v) WARRANTS: This Warrant, all other warrants
in the same form as this Warrant issued on the date hereof and all other
warrants that may be issued in its or their place (together evidencing the
right to purchase an aggregate of 408,583 shares of Common Stock), originally
issued as set forth in the definition of Registrable Securities.
(w) WARRANTHOLDER: The person(s) or entity(ies)
to whom this Warrant is originally issued, or any successor in interest
thereto, or any assignee or transferee thereof, in whose name this Warrant is
registered upon the books to be maintained by the Company for that purpose.
(x) WARRANT SHARES: Common Stock, Common Stock
Equivalents and other securities purchased or purchasable upon exercise of the
Warrants.
ARTICLE II
DURATION AND EXERCISE OF WARRANT
SECTION 2.01 DURATION OF WARRANT. Subject to the limitations
specified in Section 2.02(a)(ii) regarding a Cashless Exercise, the
Warrantholder may exercise this Warrant at any time and from time to time after
9:00 A.M., New York time, on November __, 1998, and before 5:00 P.M., New York
time, on the Expiration Date. If this Warrant is not exercised on or prior to
the Expiration Date, it shall become void, and all rights hereunder shall
thereupon cease.
SECTION 2.02 EXERCISE OF WARRANT.
(a) The Warrantholder may exercise this Warrant,
in whole or in part, as follows:
(i) By presentation and surrender of
this Warrant to the Company at its principal executive offices or at the office
of its stock transfer agent, if any, with the Subscription Form annexed hereto
duly executed and accompanied by payment of the full Exercise Price for each
Warrant Share to be purchased; or
(ii) By presentation and surrender of
this Warrant to the Company at its principal executive offices with a Cashless
Exercise Form annexed hereto duly executed (a "Cashless Exercise"). In the
event of a Cashless Exercise, the Warrantholder shall exchange its warrant for
that
3.
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number of shares of Common Stock determined by multiplying the number of
Warrant Shares by a fraction, the numerator of which shall be the amount by
which the then current market price per share of Common Stock exceeds the
Exercise Price, and the denominator of which shall be the then current market
price per share of Common Stock. For purposes of any computation under this
Section 2.02(a)(ii), the then current market price per share of Common Stock at
any date shall be deemed to be the last sale price of the Common Stock on the
business day prior to the date of delivery of the Cashless Exercise or, in case
no such reported sales take place on such day, the average of the last reported
bid and asked prices of the Common Stock on such day, in either case on the
principal national securities exchange on which the Common Stock is admitted to
trading or listed, or if not listed or admitted to trading on any such
exchange, the representative closing bid price of the Common Stock as reported
by Nasdaq, or other similar organization if Nasdaq is no longer reporting such
information, or if not so available, the fair market price of the Common Stock
as determined by the Board of Directors.
(b) Upon receipt of this Warrant, in the case of
Section 2.02(a)(i), with the Subscription Form duly executed and accompanied by
payment of the aggregate Exercise Price for the Warrant Shares for which this
Warrant is then being exercised, or, in the case of Section 2.02(a)(ii), with
the Cashless Exercise Form duly executed, the Company shall cause to be issued
certificates for the total number of whole shares of Common Stock for which
this Warrant is being exercised (adjusted to reflect the effect of the
anti-dilution provisions contained in Article III hereof, if any, and as
provided in Section 2.04 hereof) in such denominations as are requested for
delivery to the Warrantholder, and the Company shall thereupon deliver such
certificates to the Warrantholder. The Warrantholder shall be deemed to be the
holder of record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall not
then be actually delivered to the Warrantholder. If at the time this Warrant
is exercised, a Registration Statement is not in effect to register under the
Securities Act the Warrant Shares issuable upon exercise of this Warrant, the
Company may require the Warrantholder to make such representations, and may
place such legends on certificates representing the Warrant Shares, as may be
reasonably required in the opinion of counsel to the Company to permit the
Warrant Shares to be issued without such registration.
(c) In case the Warrantholder shall exercise this
Warrant with respect to less than all of the Warrant Shares that may be
purchased under this Warrant, the Company shall execute a new warrant in the
form of this Warrant for the balance of such Warrant Shares and deliver such
new warrant to the Warrantholder.
(d) The Company shall pay any and all stock
transfer and similar taxes which may be payable in respect of the issue of this
Warrant or in respect of the issue of any Warrant Shares.
SECTION 2.03 RESERVATION OF SHARES. The Company hereby agrees
that at all times there shall be reserved for issuance and delivery upon
exercise of this Warrant such number of shares of Common Stock or other shares
of capital stock of the Company from time to time issuable upon exercise of
this Warrant. All such shares shall be duly authorized, and when issued upon
such exercise, shall be validly issued, fully paid and nonassessable, free and
clear of all liens, security interests, charges and other encumbrances or
restrictions on sale and free and clear of all preemptive rights (except the
restrictions imposed by the legend appearing at the top of Page 1 of this
Warrant).
SECTION 2.04 FRACTIONAL SHARES. The Company shall not be required
to issue any fraction of a share of its capital stock in connection with the
exercise of this Warrant, and in any case where the
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<PAGE> 5
Warrantholder would, except for the provisions of this Section 2.04, be
entitled under the terms of this Warrant to receive a fraction of a share upon
the exercise of this Warrant, the Company shall, upon the exercise of this
Warrant and tender of the Exercise Price (as adjusted to cover the balance of
the share), issue the larger number of whole shares purchasable upon exercise
of this Warrant. The Company shall not be required to make any cash or other
adjustment in respect of such fraction of a share to which the Warrantholder
would otherwise be entitled.
SECTION 2.05 LISTING. Prior to the issuance of any shares of
Common Stock upon exercise of this Warrant, the Company shall secure the
listing of such shares of Common Stock upon each national securities exchange
or automated quotation system, if any, upon which shares of Common Stock are
then listed (subject to official notice of issuance upon exercise of this
Warrant) and shall maintain, so long as any other shares of Common Stock shall
so be listed, such listing of all shares of Common Stock from time to time
issuable upon the exercise of this Warrant; and the Company shall so list on
each national securities exchange or automated quotation system, and shall
maintain such listing of, any other shares of capital stock of the Company
issuable upon the exercise of this Warrant if and so long as any shares of the
same class shall be listed on such national securities exchange or automated
quotation system.
ARTICLE III
ADJUSTMENT OF SHARES OF COMMON STOCK
PURCHASABLE AND OF EXERCISE PRICE
The Exercise Price and the number and kind of Warrant Shares shall be
subject to adjustment from time to time upon the happening of certain events as
provided in this Article III.
SECTION 3.01 MECHANICAL ADJUSTMENTS.
(a) If at any time prior to the exercise of this
Warrant in full, the Company shall (i) declare a dividend or make a
distribution on the Common Stock payable in shares of its capital stock
(whether shares of Common Stock or of capital stock of any other class); (ii)
subdivide, reclassify or recapitalize outstanding Common Stock into a greater
number of shares; (iii) combine, reclassify or recapitalize its outstanding
Common Stock into a smaller number of shares; or (iv) issue any shares of its
capital stock by reclassification of its Common Stock (including any such
reclassification in connection with a consolidation or a merger in which the
Company is the continuing corporation), the Exercise Price in effect at the
time of the record date of such dividend, distribution, subdivision,
combination, reclassification or recapitalization shall be adjusted so that the
Warrantholder shall be entitled to receive the aggregate number and kind of
shares which, if this Warrant had been exercised in full immediately prior to
such event, such Warrantholder would have owned upon such exercise and been
entitled to receive by virtue of such dividend, distribution, subdivision,
combination, reclassification or recapitalization. Any adjustment required by
this paragraph 3.01(a) shall be made successively immediately after the record
date, in the case of a dividend or distribution, or the effective date, in the
case of a subdivision, combination, reclassification or recapitalization, to
allow the purchase of such aggregate number and kind of shares.
(b) If at any time prior to the exercise of this
Warrant in full, the Company shall fix a record date for the issuance or making
a distribution to all holders of Common Stock (including any such distribution
to be made in connection with a consolidation or merger in which the Company is
to be the continuing corporation) of evidences of its indebtedness, any other
securities of the Company or any cash, property or other assets (excluding a
combination, reclassification or
5.
<PAGE> 6
recapitalization referred to in Section 3.01(a), regular cash dividends or cash
distributions paid out of net profits legally available therefor and in the
ordinary course of business and subscription rights, options or warrants for
Common Stock or Common Stock Equivalents (any such nonexcluded event being
herein called a "Special Dividend"), (i) the Exercise Price shall be decreased
immediately after the record date for such Special Dividend to a price
determined by multiplying the Exercise Price then in effect by a fraction, the
numerator of which shall be the then current market price of the Common Stock
(as defined in Section 3.01(e)) on such record date less the fair market value
(as determined by the Company's Board of Directors) of the evidences of
indebtedness, securities or property, or other assets issued or distributed in
such Special Dividend applicable to one share of Common Stock or of such
subscription rights, options or warrants applicable to one share of Common
Stock and the denominator of which shall be such then current market price per
share of Common Stock (as so determined) and (ii) the number of shares of
Common Stock subject to purchase upon exercise of this Warrant shall be
increased to a number determined by multiplying the number of shares of Common
Stock subject to purchase immediately before such Special Dividend by a
fraction, the numerator of which shall be the Exercise Price in effect
immediately before such Special Dividend and the denominator of which shall be
the Exercise Price in effect immediately after such Special Dividend. Any
adjustment required by this paragraph 3.01(b) shall be made successively
whenever such a record date is fixed and in the event that such distribution is
not so made, the Exercise Price shall again be adjusted to be the Exercise
Price that was in effect immediately prior to such record date.
(c) If at any time prior to the exercise of this
Warrant in full, the Company shall make a distribution to all holders of the
Common Stock of stock of a subsidiary or securities convertible into or
exercisable for such stock, then in lieu of an adjustment in the Exercise Price
or the number of Warrant Shares purchasable upon the exercise of this warrant,
each Warrantholder, upon the exercise hereof at any time after such
distribution, shall be entitled to receive from the Company, such subsidiary or
both, as the Company shall determine, the stock or other securities to which
such Warrantholder would have been entitled if such Warrantholder had exercised
this Warrant immediately prior thereto, all subject to further adjustment as
provided in this Article III, and the Company shall reserve, for the life of
the Warrant, such securities of such subsidiary or other corporation; PROVIDED,
HOWEVER that no adjustment in respect of dividends or interest on such stock or
other securities shall be made during the term of this Warrant or upon its
exercise.
(d) Whenever the Exercise Price payable upon
exercise of each Warrant is adjusted pursuant to one or more of paragraphs (a)
and (b) of this Section 3.01, the Warrant Shares shall simultaneously be
adjusted by multiplying the number of Warrant Shares initially issuable upon
exercise of each Warrant by the Exercise Price in effect on the date of such
adjustment and dividing the product so obtained by the Exercise Price, as
adjusted.
(e) For the purpose of any computation under this
Section 3.01, the current market price per share of Common Stock at any date
shall be deemed to be the average of the daily closing prices for 20
consecutive trading days commencing 30 trading days before such date. The
closing price for each day shall be the last sale price regular way or, in case
no such reported sales take place on such day, the average of the last reported
bid and asked prices regular way, in either case on the principal national
securities exchange on which the Common Stock is admitted to trading or listed,
or if not listed or admitted to trading on any such exchange, the
representative closing bid price as reported by Nasdaq, or other similar
organization if Nasdaq is no longer reporting such information, or if not so
available, the fair market price as determined by the Board of Directors of the
Company.
6.
<PAGE> 7
(f) No adjustment in the Exercise Price shall be
required unless such adjustment would require an increase or decrease of at
least ten cents ($.10) in such price; PROVIDED, HOWEVER that any adjustments
which by reason of this paragraph (f) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 3.01 shall be made to the nearest cent or to
the nearest one-hundredth of a share, as the case may be. Notwithstanding
anything in this Section 3.01 to the contrary, the Exercise Price shall not be
reduced to less than the then existing par value of the Common Stock as a
result of any adjustment made hereunder.
(g) In the event that at any time, as a result of
any adjustment made pursuant to Section 3.01(a), the Warrantholder thereafter
shall become entitled to receive any shares of the Company other than Common
Stock, thereafter the number of such other shares so receivable upon exercise
of any Warrant shall be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as practicable to the provisions with respect to
the Common Stock contained in Section 3.01(a).
(h) In the case of an issue of additional Common
Stock or Common Stock Equivalents for cash, the consideration received by the
Company therefor, after deducting therefrom any discount or commission or other
expenses paid by the Company for any underwriting of, or otherwise in
connection with, the issuance thereof, shall be deemed to be the amount
received by the Company therefor. The term "issue" shall include the sale or
other disposition of shares held by or on account of the Company or in the
treasury of the Company but until so sold or otherwise disposed of such shares
shall not be deemed outstanding.
SECTION 3.02 NOTICE OF ADJUSTMENT. Whenever the number of Warrant
Shares or the Exercise Price is adjusted as herein provided, the Company shall
prepare and deliver forthwith to the Warrantholder a certificate signed by its
President, and by any Vice President, Chief Financial Officer or Secretary,
setting forth the adjusted number of shares purchasable upon the exercise of
this Warrant and the Exercise Price of such shares after such adjustment, a
brief statement of the facts requiring such adjustment and the computation by
which adjustment was made.
SECTION 3.03 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in
Section 3.01 of this Agreement, no adjustment in respect of any cash dividends
paid by the Company shall be made during the term of this Warrant or upon the
exercise of this Warrant.
SECTION 3.04 PRESERVATION OF PURCHASE RIGHTS IN CERTAIN
TRANSACTIONS. In case of any reclassification, capital reorganization or other
change of outstanding shares of Common Stock (other than a subdivision or a
combination of the outstanding Common Stock and other than a change in the par
value of the Common Stock or in case of any consolidation or merger of the
Company with or into another corporation or other entity (other than a merger
with a subsidiary in which the Company is the continuing corporation and said
merger does not result in any reclassification, capital reorganization or other
change of outstanding shares of Common Stock of the class issuable upon
exercise of this Warrant)) or in case of any sale, lease, transfer or
conveyance to another corporation or other entity of the property and assets of
the Company as an entirety or substantially as an entirety, the Company shall,
as a condition precedent to such transaction, cause such successor or
purchasing corporation or other entity, as the case may be, to execute with the
Warrantholder an agreement granting the Warrantholder the right thereafter,
upon payment of the Exercise Price in effect immediately prior to such action,
to receive upon exercise of this Warrant the kind and amount of shares and
other securities and property which he would have owned or have been entitled
to receive after the happening of such reclassification, change, consolidation,
merger, sale or conveyance had this Warrant been exercised immediately prior to
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<PAGE> 8
such action. Such agreement shall provide for adjustments in respect of such
shares of stock and other securities and property, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Article III. In the event that in connection with any such reclassification,
capital reorganization, change, consolidation, merger, sale or conveyance,
additional shares of Common Stock shall be issued in exchange, conversion,
substitution or payment, in whole or in part, for, or of, a security of the
Company other than Common Stock, any such issue shall be treated as an issue of
Common Stock covered by the provisions of Article III. The provisions of this
Section 3.04 shall similarly apply to successive reclassification, capital
reorganizations, consolidations, mergers, sales or conveyances.
SECTION 3.05 FORM OF WARRANT AFTER ADJUSTMENTS. The form of this
Warrant need not be changed because of any adjustments in the Exercise Price or
the number or kind of the Warrant Shares, and Warrants theretofore or
thereafter issued may continue to express the same price and number and kind of
shares as are stated in this Warrant, as initially issued.
SECTION 3.06 TREATMENT OF WARRANTHOLDER. Prior to due presentment
for registration of transfer of this Warrant, the Company may deem and treat
the Warrantholder as the absolute owner of this Warrant (notwithstanding any
notation of ownership or other writing hereon) for all purposes and shall not
be affected by any notice to the contrary.
ARTICLE IV
OTHER PROVISIONS RELATING
TO RIGHTS OF WARRANTHOLDER
SECTION 4.01 NO RIGHTS AS SHAREHOLDERS; NOTICE TO WARRANTHOLDERS.
Nothing contained in this Warrant shall be construed as conferring upon the
Warrantholder or his or its transferees the right to vote or to receive
dividends or to consent to or receive notice as a shareholder in respect of any
meeting of shareholders for the election of directors of the Company or any
other matter, or any other rights whatsoever as shareholders of the Company.
The Company shall give notice to the Warrantholder by registered mail if at any
time prior to the expiration or exercise in full of the Warrants, any of the
following events shall occur:
(a) the Company shall authorize the payment of
any dividend upon shares of Common Stock payable in any securities or authorize
the making of any distribution (other than a cash dividend subject to the
parenthetical set forth in Section 3.01(b)) to all holders of Common Stock;
(b) the Company shall authorize the issuance to
all holders of Common Stock of any additional shares of Common Stock or Common
Stock Equivalents or of rights, options or warrants to subscribe for or
purchase Common Stock or Common Stock Equivalents or of any other subscription
rights, options or warrants;
(c) a dissolution, liquidation or winding up of
the Company (other than in connection with a consolidation, merger, or sale or
conveyance of the property of the Company as an entirety or substantially as an
entirety); or
(d) a capital reorganization or reclassification
of the Common Stock (other than a subdivision or combination of the outstanding
Common Stock and other than a change in the par value of the Common Stock) or
any consolidation or merger of the Company with or into another corporation or
other entity (other than a consolidation or merger in which the Company is the
continuing
8.
<PAGE> 9
corporation and that does not result in any reclassification or change of
Common Stock outstanding) or in the case of any sale or conveyance to another
corporation or other entity of the property of the Company as an entirety or
substantially as an entirety.
Such giving of notice shall be initiated (i) at least 10 Business Days prior to
the date fixed as a record date or effective date or the date of closing of the
Company's stock transfer books for the determination of the shareholders
entitled to such dividend, distribution or subscription rights, or for the
determination of the shareholders entitled to vote on such proposed merger,
consolidation, sale, conveyance, dissolution, liquidation or winding up. Such
notice shall specify such record date or the date of closing the stock transfer
books, as the case may be. Failure to provide such notice shall not affect the
validity of any action taken in connection with such dividend, distribution or
subscription rights, or proposed merger, consolidation, sale, conveyance,
dissolution, liquidation or winding up.
SECTION 4.02 LOST, STOLEN, MUTILATED OR DESTROYED WARRANTS. If
this Warrant is lost, stolen, mutilated or destroyed, the Company may, on such
terms as to indemnity or otherwise as it may in its discretion impose (which
shall, in the case of a mutilated Warrant, include the surrender thereof),
issue a new Warrant of like denomination and tenor as and in substitution for
this Warrant.
ARTICLE V
SPLIT-UP, COMBINATION
EXCHANGE AND TRANSFER OF WARRANTS
SECTION 5.01 SPLIT-UP, COMBINATION, EXCHANGE AND TRANSFER OF
WARRANTS. Subject to the provisions of Section 5.02 hereof, this Warrant may
be split up, combined or exchanged for another Warrant or Warrants containing
the same terms to purchase a like aggregate number of Warrant Shares. If the
Warrantholder desires to split up, combine or exchange Warrants, such
Warrantholder shall make such request in writing delivered to the Company and
shall surrender to the Company any Warrants to be so split up, combined or
exchanged. Upon any such surrender for a split up, combination or exchange,
the Company shall execute and deliver to the person entitled thereto a Warrant
or Warrants, as the case may be, as so requested. The Company shall not be
required to effect any split up, combination or exchange which will result in
the issuance of a Warrant entitling the Warrantholder to purchase upon exercise
a fraction of a share of Common Stock or a fractional Warrant. The Company may
require such Warrantholder to pay a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any split up,
combination or exchange of Warrants.
SECTION 5.02 RESTRICTIONS ON TRANSFER. Neither this Warrant nor
the Warrant Shares may be disposed of or encumbered (any such action, a
"Transfer"), except (i) to CIBC Oppenheimer Corp., any successor to the
business of such company, or any officer of such company, or (ii) to any
underwriter in connection with a Public Offering of the Common Stock, provided
(as to (ii)) that this Warrant is exercised upon such Transfer and the shares
of Common Stock issued upon such exercise are sold by such underwriter as part
of such Public Offering and, as to both (i) and (ii), only in accordance with
and subject to the provisions of the Securities Act and the rules and
regulations promulgated thereunder. If at the time of a Transfer, a
Registration Statement is not in effect to register this Warrant or the Warrant
Shares, the Company may require the Warrantholder to make such representations,
and may place such legends on certificates representing this Warrant, as may be
reasonably required in the opinion of counsel to the Company to permit a
Transfer without such registration.
9.
<PAGE> 10
ARTICLE VI
REGISTRATION UNDER THE SECURITIES ACT OF 1933
6.01 PIGGYBACK REGISTRATION.
(a) RIGHT TO INCLUDE REGISTRABLE SECURITIES. If
at any time or from time to time after November __, 1998 and prior to the
Expiration Date, the Company proposes to register any of its securities under
the Securities Act on any form for the registration of securities under such
Act, whether or not for its own account (other than by a registration statement
on Form S-8 or other form which does not include substantially the same
information as would be required in a form for the general registration of
securities or would not be available for the Registrable Securities) (a
"Piggyback Registration"), it shall as expeditiously as possible give written
notice to all Holders of its intention to do so and of such Holders' rights
under this Section 6.01. Such rights are referred to hereinafter as "Piggyback
Registration Rights." Upon the written request of any such Holder made within
20 days after receipt of any such notice (which request shall specify the
Registrable Securities intended to be disposed of by such Holder), the Company
shall include in the Registration Statement the Registrable Securities which
the Company has been so requested to register by the Holders thereof and the
Company shall keep such registration statement in effect and maintain
compliance with each Federal and state law or regulation for the period
necessary for such Holder to effect the proposed sale or other disposition (but
in no event for a period greater than 120 days).
(b) WITHDRAWAL OF PIGGYBACK REGISTRATION BY
COMPANY. If, at any time after giving written notice of its intention to
register any securities in a Piggyback Registration but prior to the effective
date of the related Registration Statement, the Company shall determine for any
reason not to register such securities, the Company shall give written notice
of such determination to each Holder and, thereupon, shall be relieved of its
obligation to register any Registrable Securities in connection with such
Piggyback Registration. All best efforts obligations of the Company pursuant
to Section 6.04 shall cease if the Company determines to terminate prior to
such effective date any registration where Registrable Securities are being
registered pursuant to this Section 6.01.
(c) PIGGYBACK REGISTRATION OF UNDERWRITTEN PUBLIC
OFFERINGS. If a Piggyback Registration involves an offering by or through
underwriters, then, (i) all Holders requesting to have their Registrable
Securities included in the Company's Registration Statement must sell their
Registrable Securities to the underwriters selected by the Company on the same
terms and conditions as apply to other selling shareholders and (ii) any Holder
requesting to have his or its Registrable Securities included in such
Registration Statement may elect in writing, not later than three Business Days
prior to the effectiveness of the Registration Statement filed in connection
with such registration, not to have his or its Registrable Securities so
included in connection with such registration.
(d) PAYMENT OF REGISTRATION EXPENSES FOR
PIGGYBACK REGISTRATION. The Company shall pay all Registration Expenses in
connection with each registration of Registrable Securities requested pursuant
to a Piggyback Registration Right contained in this Section 6.01.
(e) PRIORITY IN PIGGYBACK REGISTRATION. If a
Piggyback Registration involves an offering by or through underwriters, the
Company shall not be required to include Registrable Shares therein if and to
the extent the underwriter managing the offering reasonably believes in good
faith and advises each Holder requesting to have Registrable Securities
included in the Company's Registration Statement that such inclusion would
materially adversely affect such offering;
10.
<PAGE> 11
provided that (i) if other selling shareholders who are employees, officers,
directors or other affiliates of the Company have requested registration of
securities in the proposed offering, the Company will reduce or eliminate such
other selling shareholders' securities before any reduction or elimination of
Registrable Securities; (ii) any such reduction or elimination (after taking
into account the effect of clause (i)) shall be PRO RATA to all other holders
of the securities of the Company exercising "piggyback registration rights"
similar to those set forth herein in proportion to the respective number of
shares they have requested to be registered, and (iii) in such event, such
Holders may delay any offering by them of all Registrable Shares requested to
be included (or that portion of such Registrable Shares eliminated for such
period, not to exceed 60 days, as the managing underwriter shall request) and
the Company shall file such supplements and post-effective amendments and take
such other action necessary under Federal and state law or regulation as may be
necessary to permit such Holders to make their proposed offering for a period
of 90 days following such period of delay.
SECTION 6.02 DEMAND REGISTRATION.
(a) REQUEST FOR REGISTRATION. If, at any time
subsequent to November __, 1998 and prior to the Expiration Date, any 25%
Holders request that the Company file a registration statement under the
Securities Act, the Company as soon as practicable shall use its best efforts
to file a registration statement with respect to all Warrant Shares that it has
been so requested to include and obtain the effectiveness thereof, and to take
all other action necessary under any Federal or state law or regulation to
permit the Warrant Shares that are then held and/or that may be acquired upon
the exercise of the Warrants specified in the notices of the Holders or holders
thereof to be sold or otherwise disposed of, and the Company shall maintain
such compliance with each such Federal and state law and regulation for the
period necessary for such Holders or holders to effect the proposed sale or
other disposition (but in no event for more than 120 days); PROVIDED, HOWEVER
the Company shall be entitled to defer such registration for a period of up to
60 days if and to the extent that its Board of Directors shall determine that
such registration would interfere with a pending corporate transaction. The
Company shall also promptly give written notice to the Holder and the holders
of any other Warrants and/or the holders of any Warrant Shares who or that have
not made a request to the Company pursuant to the provisions of this subsection
(a) of its intention to effect any required registration or qualification and
shall use its best efforts to effect as expeditiously as possible such
registration or qualification of all other such Warrant Shares that are then
held and/or that may be acquired upon the exercise of the Warrants, the Holder
or holders of which have requested such registration or qualification, within
15 days after such notice has been given by the Company, as provided in the
preceding sentence. The Company shall be required to effect a registration or
qualification pursuant to this subsection (a) on one occasion only. A demand
registration shall be deemed effected by the Company only if the registration
statement with respect to such demand registration has been declared effective
by the SEC and remains effective for the period set forth above.
(b) PAYMENT OF REGISTRATION EXPENSES FOR DEMAND
REGISTRATION. The Company shall pay all Registration Expenses in connection
with the Demand Registration.
(c) SELECTION OF UNDERWRITERS. If any Demand
Registration is requested to be in the form of an underwritten offering, the
managing underwriter shall be CIBC Oppenheimer Corp., the co-manager shall be
Cruttenden Roth Incorporated and the independent pricer required under the
rules of the NASD (if any) shall be selected and obtained by the Holders of a
majority of the Warrant Shares to be registered. Such selection shall be
subject to the Company's consent, which consent shall not be unreasonably
withheld. All fees and expenses (other than Registration Expenses otherwise
required to be paid) of any managing underwriter, any co-manager or any
independent underwriter or
11.
<PAGE> 12
other independent pricer required under the rules of the NASD shall be paid for
by such underwriters or by the Holders or holders whose shares are being
registered. If CIBC Oppenheimer Corp. should decline to serve as managing
underwriter, then Cruttenden Roth Incorporated shall be the managing
underwriter. If Cruttenden Roth Incorporated also declines to serve as
managing underwriter, then the Holders of a majority of the Warrant Shares to
be registered may select and obtain one or more managing underwriters. Such
selection shall be subject to the Company's consent, which consent shall not be
unreasonably withheld.
SECTION 6.03 BUY-OUTS OF REGISTRATION DEMAND. In lieu of carrying
out its obligations to effect a Piggyback Registration or Demand Registration
of any Registrable Securities pursuant to this Article VI, the Company may
carry out such obligation by offering to purchase and purchasing such
Registrable Securities requested to be registered at an amount in cash equal to
the difference between (a) the last sale price of the Common Stock on the day
the request for registration is made and (b) the Exercise Price in effect on
such day.
SECTION 6.04 REGISTRATION PROCEDURES. If and whenever the Company
is required to use its best efforts to take action pursuant to any Federal or
state law or regulation to permit the sale or other disposition of any Warrant
Shares that are then held or that may be acquired upon exercise of the
Warrants, in order to effect or cause the registration of any Registrable
Securities under the Securities Act as provided in this Article VI, the Company
shall, as expeditiously as practicable:
(a) furnish to each selling Holder of Registrable
Securities and the underwriters, if any, without charge, as many copies of the
Registration Statement, the Prospectus or the Prospectuses (including each
preliminary prospectus) and any amendment or supplement thereto as they may
reasonably request;
(b) enter into such agreements (including an
underwriting agreement) and take all such other actions reasonably required in
connection therewith in order to expedite or facilitate the disposition of such
Registrable Securities and in such connection, if the registration is in
connection with an underwritten offering (i) make such representations and
warranties to the underwriters in such form, substance and scope as are
customarily made by issuers to underwriters in underwritten offerings and
confirm the same if and when requested; (ii) obtain opinions of counsel to the
Company and updates thereof (which counsel and opinions in form, scope and
substance shall be reasonably satisfactory to the underwriters) addressed to
the underwriters and the Holders covering the matters customarily covered in
opinions requested in underwritten offerings and such other matters as may be
reasonably requested by such underwriters; (iii) obtain "cold comfort" letters
and updates thereof from the Company's accountants addressed to the
underwriters such letters to be in customary form and to cover matters of the
type customarily covered in "cold comfort" letters to underwriters and the
Holders in connection with underwritten offerings; (iv) set forth in full, in
any underwriting agreement entered into, the indemnification provisions and
procedures of Section 6.05 hereof with respect to all parties to be indemnified
pursuant to said Section; and (v) deliver such documents and certificates as
may be reasonably requested by the underwriters to evidence compliance with
clause (i) above and with any customary conditions contained in the
underwriting agreement or other agreement entered into by the Company; the
above shall be done at each closing under such underwriting or similar
agreement or as and to the extent required thereunder;
(c) make available for inspection by one or more
representatives of the Holders of Registrable Securities being sold, any
underwriter participating in any disposition pursuant to such registration, and
any attorney or accountant retained by such Holders or underwriter, all
financial
12.
<PAGE> 13
and other records, pertinent corporate documents and properties of the Company,
and cause the Company's officers, directors and employees to supply all
information reasonably requested by any such representatives in connection with
such;
(d) otherwise use its best efforts to comply with
all applicable Federal and state regulations; and take such other action as may
be reasonably necessary or advisable to enable each such Holder and each such
underwriter to consummate the sale or disposition in such jurisdiction or
jurisdiction, in which any such Holder or underwriter shall have requested that
the Registrable Securities be sold.
Except as otherwise provided in this Agreement, the Company shall have sole
control in connection with the preparation, filing, withdrawal, amendment or
supplementing of each Registration Statement, the selection of underwriters,
and the distribution of any preliminary prospectus included in the Registration
Statement, and may include within the coverage thereof additional shares of
Common Stock or other securities for its own account or for the account of one
or more of its other security holders;
Each seller of Registrable Securities as to which any registration is
being effected shall furnish to the Company such information regarding the
distribution of such securities and such other information as may otherwise be
required by the Securities Act to be included in such Registration Statement.
SECTION 6.05 INDEMNIFICATION.
(a) INDEMNIFICATION BY COMPANY. In connection
with each Registration Statement relating to disposition of Registrable
Securities, the Company shall indemnify and hold harmless each Holder and each
underwriter of Registrable Securities and each Person, if any, who controls
such Holder or underwriter (within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act) against any and all losses, claims,
damages and liabilities, joint or several (including any reasonable
investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of any action, suit or proceeding or any claim
asserted), to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other Federal or state law or regulation,
at common law or otherwise, insofar as such losses, claims, damages or
liabilities arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement,
Prospectus or preliminary prospectus or any amendment thereof or supplement
thereto, or arise out of or are based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading; PROVIDED, HOWEVER that such
indemnity shall not inure to the benefit of any Holder or underwriter (or any
Person controlling such Holder or underwriter within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) on account of any
losses, claims, damages or liabilities arising from the sale of Registrable
Securities if such untrue statement or omission or alleged untrue statement or
omission was made in such Registration Statement, Prospectus or preliminary
prospectus, or such amendment or supplement, in reliance upon and in conformity
with information furnished in writing to the Company by the Holder or
underwriter specifically for use therein. The Company shall also indemnify
selling brokers, dealer managers and similar securities industry professionals
participating in the distribution, their officers and directors and each Person
who controls such Persons (within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act) to the same extent as provided above
with respect to the indemnification of the Holders of Registrable Securities,
if requested. This indemnity agreement shall be in addition to any liability
which the Company may otherwise have.
13.
<PAGE> 14
(b) INDEMNIFICATION BY HOLDER. In connection
with each Registration Statement, each Holder shall indemnify, to the same
extent as the indemnification provided by the Company in Section 6.05(a), the
Company, its directors and each officer who signs the Registration Statement
and each Person who controls the Company (within the meaning of Section 15 of
the Securities Act and Section 20 of the Exchange Act) but only insofar as such
losses, claims, damages and liabilities arise out of or are based upon any
untrue statement or omission or alleged untrue statement or omission which was
made in the Registration Statement, the Prospectus or preliminary prospectus or
any amendment thereof or supplement thereto, in reliance upon and in conformity
with information furnished in writing by such Holder to the Company
specifically for use therein. In no event shall the liability of any selling
Holder of Registrable Securities hereunder be greater in amount than the dollar
amount of the net proceeds received by such Holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation. The
Company shall be entitled to receive indemnities from underwriters, selling
brokers, dealer managers and similar securities industry professionals
participating in the distribution, to the same extent as provided above, with
respect to information so furnished in writing by such Persons specifically for
inclusion in any Prospectus, Registration Statement or preliminary prospectus
or any amendment thereof or supplement thereto.
(c) CONDUCT OF INDEMNIFICATION PROCEDURE. Any
party that proposes to assert the right to be indemnified hereunder will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim is to be made against
an indemnifying party or parties under this Section, notify each such
indemnifying party of the commencement of such action, suit or proceeding,
enclosing a copy of all papers served. No indemnification provided for in
Section 6.05(a) or 6.05(b) shall be available to any party who shall fail to
give notice as provided in this Section 6.05(c) if the party to whom notice was
not given was unaware of the proceeding to which such notice would have related
and was prejudiced by the failure to give such notice, but the omission so to
notify such indemnifying party of any such action, suit or proceeding shall not
relieve it from any liability that it may have to any indemnified party for
contribution or otherwise than under this Section. In case any such action,
suit or proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate in, and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof and the approval by the indemnifying
party to such indemnified party of its election so to assume the defense
thereof and the approval by the indemnified party of such counsel, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses, except as provided below and except for the reasonable costs
of investigation subsequently incurred by such indemnified party in connection
with the defense thereof. The indemnified party shall have the right to employ
its counsel in any such action, but the fees and expenses of such counsel shall
be at the expense of such indemnified party unless (i) the employment of
counsel by such indemnified party has been authorized in writing by the
indemnifying parties, (ii) the indemnified party shall have reasonably
concluded that there may be a conflict of interest between the indemnifying
parties and the indemnified party in the conduct of the defense of such action
(in which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party) or (iii) the
indemnifying parties shall not have employed counsel to assume the defense of
such action within a reasonable time after notice of the commencement thereof,
in each of which cases the fees and expenses of counsel shall be at the expense
of the indemnifying parties. An indemnifying party shall not be liable for any
settlement of any action, suit, proceeding or claim effected without its
written consent.
14.
<PAGE> 15
(d) CONTRIBUTION. In connection with each
Registration Statement relating to the disposition of Registrable Securities,
if the indemnification provided for in subsection (a) hereof is unavailable to
an indemnified party thereunder in respect of any losses, claims, damages or
liabilities referred to therein, then the Company shall, in lieu of
indemnifying such indemnified party, contribute to the amount paid or payable
by such indemnified party as a result of such losses, claims, damages or
liabilities. The amount to be contributed by the Company hereunder shall be an
amount which is in the same proportionate relationship to the total amount of
such losses, claims, damages or liabilities as the total net proceeds from the
offering (before deducting expenses) of the Registrable Securities bears to the
total price to the public (including underwriters' discounts) for the offering
of the Registrable Securities covered by such registration.
(e) SPECIFIC PERFORMANCE. The Company and the
Holder acknowledge that remedies at law for the enforcement of this Section
6.05 may be inadequate and intend that this Section 6.05 shall be specifically
enforceable.
ARTICLE VII
OTHER MATTERS
SECTION 7.01 AMENDMENTS AND WAIVERS. The provisions of this
Warrant, including the provisions of this sentence, may not be amended,
modified or supplemented, and waiver or consents to departures from the
provisions hereof may not be given unless the Company has obtained the written
consent of holders of at least a majority of the outstanding Registrable
Securities. Holders shall be bound by any consent authorized by this Section
whether or not certificates representing such Registrable Securities have been
marked to indicate such consent.
SECTION 7.02 COUNTERPARTS. This Warrant may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
SECTION 7.03 GOVERNING LAW. This Warrant shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 7.04 SEVERABILITY. In the event that any one or more of
the provisions contained herein, or the application thereof in any
circumstances, is held invalid, illegal or unenforceable, the validity,
legality and enforceability of any such provisions in every other respect and
of the remaining provisions contained herein shall not be affected or impaired
thereby.
SECTION 7.05 ATTORNEYS' FEES. In any action or proceeding brought
to enforce any provisions of this Warrant, or where any provisions hereof or
thereof is validly asserted as a defense, the successful party shall be
entitled to recover reasonable attorneys' fees and disbursements in addition to
its costs and expenses and any other available remedy.
SECTION 7.06 COMPUTATIONS OF CONSENT. Whenever the consent or
approval of Holders of a specified percentage of Registrable Securities is
required hereunder, Registrable Securities held by the Company or its
affiliates (other than the Warrantholder or subsequent Holders if they are
deemed to be such affiliates solely by reason of their holdings of such
Registrable Securities) shall not be counted in determining whether such
consent or approval was given by the Holders of such required percentage.
15.
<PAGE> 16
SECTION 7.07 NOTICE. Any notices or certificates by the Company
to the Holder and by the Holder to the Company shall be deemed delivered if in
writing and delivered in person or by registered mail (return receipt
requested) to the Holder addressed to him in care of CIBC Oppenheimer Corp.,
CIBC Oppenheimer Tower, World Financial Center, New York, New York 10281 or, if
the Holder has designated, by notice in writing to the Company, any other
address, to such other address, and if to the Company, addressed to it at 10890
Thornmint Road, Suite 200, San Diego, California 92127. The Company may change
its address by written notice to the Holder and the Holder may change his or its
address by written notice to the Company.
16.
<PAGE> 17
IN WITNESS WHEREOF, this Warrant has been duly executed by the Company
under its corporate seal as of the ___ day of November, 1997.
ECO SOIL SYSTEMS, INC.
By:__________________________
Name:
Title:
Attest:___________________________
Secretary
17.
<PAGE> 18
ASSIGNMENT
(To be executed only upon assignment of Warrant Certificate)
For value received, hereby sells, assigns
and transfers unto ______________ the within Warrant Certificate, together with
all right, title and interest therein, and does hereby irrevocably constitute
and appoint attorney, to transfer said Warrant
Certificate on the books of the within-named Company with respect to the number
of Warrants set forth below, with full power of substitution in the premises:
<TABLE>
<CAPTION>
NAME(S) OF
ASSIGNEE(S) ADDRESS NO. OF WARRANTS
<S> <C> <C>
</TABLE>
And if said number of Warrants shall not be all the Warrants represented by the
Warrant Certificate, a new Warrant Certificate is to be issued in the name of
said undersigned for the balance remaining of the Warrants represented by said
Warrant Certificate
Dated: , 19
________________________________
Note: The above signature should
correspond exactly with the
name on the face of this
Warrant Certificate.
18.
<PAGE> 19
SUBSCRIPTION FORM
(TO BE EXECUTED UPON EXERCISE OF WARRANT
PURSUANT TO SECTION 2.02(a)(i))
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant Certificate for, and to purchase
thereunder shares of Common Stock, as provided for therein, and
tenders herewith payment of the purchase price in full in the form of cash or a
certified or official bank check in the amount of $ .
Please issue a certificate or certificates for such Common Stock in
the name of:
Name:____________________________
________________________________
________________________________
________________________________
(Please Print Name, Address and
Social Security Number)
Signature________________________
NOTE: The above signature should respond exactly with the name on the first
page of this Warrant Certificate or with the name of the assignee
appearing in the assignment form below.
And if said number of shares shall not be all the shares purchasable
under the within Warrant Certificate, a new Warrant Certificate is to be issued
in the name of said undersigned for the balance remaining of the shares
purchasable thereunder rounded up to the next higher number of shares.
19.
<PAGE> 20
CASHLESS EXERCISE FORM
(TO BE EXECUTED UPON EXERCISE OF WARRANT
PURSUANT TO SECTION 2.02(a)(ii))
The undersigned hereby irrevocably elects to Exchange its Warrant for
such shares of Common Stock pursuant to the Cashless Exercise provisions of the
within Warrant Certificate, as provided for in Section 2.02(a)(ii) of such
Warrant Certificate.
Please issue a certificate or certificates for such Common Stock in
the name of:
Name:__________________________________
_______________________________________
_______________________________________
_______________________________________
(Please Print Name, Address and Social
Security Number)
Signature_____________________________
NOTE: The above signature should correspond exactly with the name on the first
page of this Warrant Certificate or with the name of the assignee
appearing in the assignment form below.
And if said number of shares shall not be all the shares exchangeable
or purchasable under the within Warrant Certificate, a new Warrant Certificate
is to be issued in the name of the undersigned for the balance remaining of the
shares purchasable rounded up to the next higher number of shares.
20.
<PAGE> 1
EXHIBIT 3.2
ARTICLES OF CORRECTION
TO
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
ECO SOIL SYSTEMS, INC.
UNDER SECTION 21-2007 OF THE
BUSINESS CORPORATION ACT
WE, THE UNDERSIGNED, Douglas M. Gloff and Jeffrey A. Johnson, being,
respectively, the President and Secretary of Eco Soil Systems, Inc., for the
purpose of correcting the inadvertent omission from the Amended and Restated
Articles of Incorporation of language providing for staggering the terms of
directors in accordance with Section 21-2083 of the Business Corporation Act,
hereby certify that:
1. The name of the Corporation is Eco Soil Systems, Inc.
2. The Amended and Restated Articles of Incorporation of the
Corporation were filed with the Secretary of State on January 22, 1997.
3. Said Amended and Restated Articles of Incorporation were adopted at
a special meeting of shareholders held on December 6, 1996 at which a quorum was
present. The Officer's Certificate with respect to the vote on the Amended and
Restated Articles of Incorporation correctly stated that the number of
outstanding shares of Common Stock entitled to vote on the Amended and Restated
Articles of Incorporation was 6,564,166, but incorrectly stated that the number
of votes indiputably represented at the special meeting was 6,564,166 and that
the number of votes cast in favor of adopting the Amended and Restated Articles
of Incorporation was 6,564,166. The number of votes indiputably represented at
the special meeting actually was 3,821,452, and the number of votes cast in
favor of adopting the Amended and Restated Articles of Incorporation actually
was 3,814,952.
4. Article VIII of the Corporation's original Articles of Incorporation
(filed October 14, 1987) stated:
"The affairs of the Corporation shall be conducted by a Board
of Directors, the number of which shall be set by the
Stockholders of the Corporation. The Directors shall elect
officers of the Corporation, including but not limited to a
President, a Secretary, and a Treasurer. The Directors shall
be elected by the Stockholders and shall hold office for one
year or until their successors are elected and qualified."
5. At a special meeting of the Corporation's shareholders held on
December 6, 1996, the shareholders approved a proposal "To approve the
classification of directors of the Company into three classes with staggered
terms of three years each." As noted above, 3,821,452 of the 6,538,590 shares of
Common Stock eligible to vote at the special meeting were present. Of such
number of shares present at the meeting, 3,814,952 were voted in favor of the
proposal for the classification of directors, with no votes against, and 6,500
abstaining. In connection with the action taken by shareholders at the special
meeting, Article VIII of the Articles of Incorporation was amended and restated
to delete the last sentence thereof, which provided for one-year terms for
Directors. But for an omission by the Corporation, Article VIII (Article 8 of
the Amended and Restated Articles of
<PAGE> 2
Incorporation) would have been further revised to include language specifically
providing for staggered terms for Directors. Inasmuch as the omission of such
language from Article 8 of the Amended and Restated Articles of Incorporation
was inadvertent and a mistake, Article 8 is corrected to read in its entirety as
follows:
"The affairs of the Corporation shall be conducted by a Board
of Directors, the number of which shall be set by the
Shareholders of the Corporation. The Directors shall elect
officers of the Corporation, including but not limited to a
President, a Secretary, and a Treasurer. The Directors of the
Corporation shall be divided into three classes, as nearly
equal in number as reasonably possible, to serve for staggered
terms of three years, except that one initial class of
directors will hold office for a two-year term and one initial
class will hold office for a one-year term. Each Director
shall hold office until the annual meeting of Shareholders
held three years after such Director's election or until the
Shareholders have elected directors by consent in writing
without a meeting and until such Director's successor is
elected and qualified or until such Director's earlier death,
resignation or removal."
IN WITNESS WHEREOF, we have signed and subscribed these
Articles of Correction on the 24th day of April, 1997, and we affirm the
statements contained herein as true under penalty of perjury.
/s/ DOUGLAS M. GLOFF
----------------------------------------
Douglas M. Gloff
President
/s/ JEFFREY A. JOHNSON
----------------------------------------
Jeffrey A. Johnson
Secretary
<PAGE> 1
EXHIBIT 3.3
ARTICLES OF AMENDMENT
TO THE
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
ECO SOIL SYSTEMS, INC.
Pursuant to the provisions of the Nebraska Business Corporation Act,
Section 21-20,121, Eco Soil Systems, Inc. (the "Corporation") hereby adopts the
following Articles of Amendment to its Amended and Restated Articles of
Incorporation:
1. The following amendment to the Amended and Restated Articles of
Incorporation was adopted by the shareholders of the Corporation and by
the directors at a joint meeting on the 13th day of November, 1996, in
the manner prescribed by the Nebraska Business Corporation Act:
That the first paragraph of Article Four and any amendments thereto
were deleted and amended and restated as follows:
A. Authorized Shares. The total number of shares of stock
which this Corporation is authorized to issue is 30,000,000
shares of a par value of one half cent ($.005) per share, of
which 25,000,000 shares shall be Common Stock and 5,000,000
shares shall be Preferred Stock. Before any of such stock is
issued, it shall be paid for in full in cash or in securities,
property or other equivalent at a price agreeable to the Board
of Directors.
2. The number of shares of the Corporation that were outstanding at the
time of the adoption of the aforesaid amendment was eleven million,
nine hundred and five thousand, two hundred (11,905,200) shares, with
the same number of shares entitled to vote.
3. ________________________ (______) shares voted in favor of said
amendment and ________________________ (______) shares voted against
said amendment. The number of votes cast for the amendment by
shareholders was sufficient for approval by such shareholders.
4. The stated capital of the Corporation, after said amendment, assuming
all shares are issued and duly paid for, is one hundred, fifty thousand
dollars ($150,000) which is an increase from the Corporation's
previously stated capital. Actual stated capital, based on shares
outstanding on the date of the shareholder approval of the above
amendment, was ______________________ ($______).
Dated: November __, 1997
ECO SOIL SYSTEMS, INC.
---------------------------------------
Name: Douglas M. Gloff
Title: President
<PAGE> 1
EXHIBIT 10.12
[IMPERIAL BANK]
Member FDIC
SECURITY AND LOAN AGREEMENT
(ACCOUNTS RECEIVABLE AND/OR INVENTORY)
This Agreement is entered into between ECO SOIL SYSTEMS, INC.
_____________________________________, a Corporation
(herein called "Borrower") and IMPERIAL BANK (herein called "Bank").
1. Bank hereby commits, subject to all the terms and conditions of this
Agreement and prior to the termination of its commitment as hereinafter
provided, to make loans to Borrower from time to time in such amounts as
may be determined by Bank up to, but not exceeding in the aggregate unpaid
principal balance, the following Borrowing Base:
75% of Eligible Accounts
35% of the Value of Inventory
($1,300,000.00 limit) and in no event more than $5,000,000.00
2. The amount of each loan made by Bank to Borrower hereunder shall be debited
to the loan ledger account of Borrower maintained by Bank (herein called
"Loan Account") and Bank shall credit the Loan Account with all Loan
repayments made by Borrower. Borrower promises to pay Bank (a) the unpaid
balance of Borrower's Loan Account on demand and (b) on or before the tenth
day of each month, interest on the average daily unpaid balance of the Loan
Account during the immediately preceding month at the date of one and one
half percent (1.50%) per annum in excess of the rate of interest which Bank
has announced as its prime lending rate ("Prime Rate") which shall vary
concurrently with any change in such Prime Rate. Interest shall be computed
at the above rate on the basis of the actual number of days during which the
principal balance of the Loan Account is outstanding divided by 360, which
shall for interest computation purposes be considered one year. Bank at its
option may demand payment of any or all of the amount due under the Loan
Account including accrued but unpaid interest at any time. Such notice may
be given verbally or in writing and should be effective upon receipt by
Borrower. The amount of interest payable each month by Borrower shall not be
less than a minimum monthly charge of $250.00. Bank is hereby authorized to
charge Borrower's deposit account(s) with Bank for all sums due Bank under
this Agreement.
3. Requests for loans hereunder shall be in writing duly executed by Borrower
in a form satisfactory to Bank and shall contain a certification setting
forth the matters referred to in Section 1, which shall disclose that
Borrower is entitled to the amount of loan being requested.
4. As used in this Agreement, the following terms shall have the following
meanings:
A. "Accounts" means any right to payment for goods sold or leased, or
to be sold or to be leased, or for services rendered or to be
rendered no matter how evidenced, including accounts receivable,
contract rights, chattel paper, instruments, purchase orders, notes,
drafts, acceptances, general intangibles and other forms of
obligations and receivables.
B. "Inventory" means all of the Borrower's goods, merchandise and
other personal property which are held for sale or lease, including
those held for display or demonstration or out on lease or
consignment or to be furnished under a contract of service or are
raw materials, work in process or materials used or consumed, or to
be used or consumed in Borrower's business, and shall include all
property rights, patents, plans, drawings, diagrams, schematics,
assembly and display material relating thereto.
C. "Collateral" means any and all personal property of Borrower which
is assigned or hereafter is assigned to Bank as security or in
which Bank now has or hereafter acquires a security interest.
D. "Eligible Accounts" means all of Borrower's Accounts excluding,
however, (1) all Accounts under which payment is not received
within 90 days from any invoice date, (2) all Accounts against
which the account debtor or any other person obligated to make
payment thereon asserts any defense, offset, counterclaim or other
right to avoid or reduce the liability represented by the Account
and (3) any Accounts if the account debtor or any other person
liable in connection therewith is insolvent, subject to bankruptcy
or receivership proceedings or has made an assignment for the
benefit of creditors or whose credit standing is unacceptable to
Bank and Bank has so notified Borrower. Eligible Accounts shall
only include such accounts as Bank in its sole discretion shall
determine are eligible from time to time.
E. "Value of Inventory" means the value of Borrower's Inventory
determined in accordance with generally accepted accounting
principles consistently applied excluding, however, the amount of
progress payments, pre-delivery payments, deposits and any other
sums received by Borrower in anticipation of the sale and delivery
of Inventory, all Inventory on consignment or lease to others, and
all property on consignment or lease from others to Borrower.
5. Borrower hereby assigns to Bank all Borrower's present and future
Accounts, including all proceeds due thereunder, all guaranties and
security therefor and all merchandise giving rise thereto, and hereby
grants to Bank a continuing security interest in all Borrower's Inventory
and in all proceeds and products thereof, whether now owned or hereafter
existing or acquired, including all moneys in the Collateral Account
referred to in Section 6 hereof, as security for any and all obligations of
Borrower to Bank, whether now owing or hereafter incurred and whether
direct, indirect, absolute or contingent. So long as Borrower is indebted to
Bank or Bank is committed to extend credit to Borrower, Borrower will
execute and deliver to Bank such assignments, including Bank's standard
forms of Specific or General Assignment covering individual Accounts,
notices, financing statements, and other documents and papers as Bank may
require in order to affirm, effectuate or further assure the assignment to
Bank of the Collateral or to give any third party, including the account
debtors obligated on the Accounts, notice of Bank's interest in the
Collateral.
6. Until Bank exercises its rights to collect the Accounts and Inventory
proceeds pursuant to paragraph 10, Borrower will collect with diligence all
Borrower's Accounts and Inventory proceeds, provided that no legal action
shall be maintained thereon or in connection therewith without Bank's prior
written consent. Any collection of Accounts or Inventory proceeds by
Borrower, whether in the form of cash, checks, notes, or other instruments
for the payment of money (properly endorsed or assigned where required to
enable Bank to collect same), shall be in trust for Bank, and Borrower shall
keep all such collections separate and apart from all other funds and
property so as to be capable of identification as the property of Bank and
deliver said collections, together with the proceeds of all cash sales,
daily to Bank in the identical form received. The proceeds of such
collections when received by Bank may be applied by Bank directly to the
payment of Borrower's Loan Account or any other obligation secured hereby.
Any credit given by Bank upon receipt of said proceeds shall be conditional
credit subject to collection. Returned items at Bank's option may be charged
to Borrower's general account. All collections of the Accounts and Inventory
proceeds shall be set forth on an itemized schedule, showing the name of the
account debtor, the amount of each payment and such other information as
Bank may request.
7. Until Bank exercises its rights to collect the Accounts or Inventory
proceeds pursuant to paragraph 10, Borrower may continue its present
policies with respect to returned merchandise and adjustments. However,
Borrower shall immediately notify Bank of all cases involving returns,
repossessions, and loss or damage of or to merchandise represented by the
Accounts or constituting Inventory and of any credits, adjustments or
disputes arising in connection with the goods or services represented by
the Accounts or constituting Inventory and, in any of such events, Borrower
will immediately pay to Bank from its own funds (and not from the proceeds
of Accounts or Inventory) for application to Borrower's Loan Account or any
other obligation secured hereby the amount of any credit for such returned
or repossessed merchandise and adjustments made to any of the Accounts.
Until payment is made as provided herein or until release by Bank from its
security interest, all merchandise returned to or
<PAGE> 2
repossessed by Borrower shall be set aside and identified as the property
of Bank and Bank shall be entitled to enter upon any premises where such
merchandise is located and take immediate possession thereof and remove
same.
8. Borrower represents and warrants to Bank: (i) if Borrower is a corporation,
that Borrower is duly organized and existing in the State of its
incorporation and the execution, delivery and performance hereof are within
Borrower's corporate powers, have been duly authorized and are not in
conflict with law or the terms of any charter, by-law or other
incorporation papers, or of any indenture, agreement or undertaking to
which Borrower is a party or by which Borrower is found or affected; (ii)
Borrower is, or at the time the collateral becomes subject to Bank's
security interest will be, the true and lawful owner of and has, or at the
time the Collateral becomes subject to Bank's security interest will have,
good and clear title to the Collateral, subject only to Bank's rights
therein; (iii) Each Account is, or at the time the Account comes into
existence will be, a true and correct statement of a bona fide indebtedness
incurred by the debtor named therein in the amount of the Account for
either merchandise sold or delivered (or being held subject to Borrower's
delivery instructions) to, or services rendered, performed and accepted by,
the account debtor; (iv) That there are or will be no defenses,
counterclaims, or setoffs which may be asserted against the Accounts; and
(v) any and all financial information, including information relating to
the Collateral, submitted by Borrower to Bank, whether previously or in the
future, is or will be true and correct.
9. Borrower will: (i) Furnish Bank from time to time such financial statements
and information as Bank may reasonably request and inform Bank immediately
upon the occurrence of a material adverse change therein; (ii) Furnish Bank
periodically, in such form and detail and at such times as Bank may
require, statements showing aging and reconciliation of the Accounts and
collections thereon, and reports as to the Inventory and sales thereof;
(iii) Permit representatives of Bank to inspect the Inventory and
Borrower's books and records relating to the Collateral and make extracts
therefrom at any reasonable time and to arrange for verification of the
Accounts, under reasonable procedures, acceptable to Bank, directly with
the account debtors or otherwise at Borrower's expense; (iv) Promptly
notify Bank of any attachment or other legal process levied against any of
the Collateral and any information received by Borrower relative to the
Collateral, including the Accounts, the account debtors or other persons
obligated in connection therewith, which may in any way affect the value of
the Collateral or the rights and remedies of Bank in respect thereto; (v)
Reimburse Bank upon demand for any and all legal costs, including
reasonable attorneys' fees, and other expense incurred in collecting any
sums payable by Borrower under Borrower's Loan Account or any other
obligation secured hereby, enforcing any term or provision of this Security
Agreement or otherwise or in the checking, handling and collection of the
Collateral and the preparation and enforcement of any agreement relating
thereto; (vi) Notify Bank of each location at which the inventory is or
will be kept, other than for temporary processing, storage or similar
purposes, and of any removal thereof to a new location and of each office
of Borrower at which records of Borrower relating to the Accounts are kept;
(vii) Provide, maintain and deliver to Bank policies insuring the
Collateral against loss or damage by such risks and in such amounts, forms
and companies as Bank may require and with loss payable solely to Bank,
and, in the event Bank takes possession of the Collateral, the insurance
policy or policies and any unearned or returned premium thereon shall at
the option of Bank become the sole property of Bank, such policies and the
proceeds of any other insurance covering or in any way relating to the
Collateral, whether now in existence or hereafter obtained, being hereby
assigned to Bank; (viii) Do all acts necessary to maintain, preserve and
protect all Inventory, keep all Inventory in good condition and repair and
not to cause any waste or unusual or unreasonable depreciation thereof, and
(ix) in the event the unpaid balance of Borrower's Loan Account shall
exceed the maximum amount of outstanding loans to which Borrower is
entitled under Section 1 hereof, Borrower shall immediately pay to Bank,
from its own funds and not from the proceeds of Collateral, for credit to
Borrower's Loan Account the amount of such excess.
10. Bank may at any time, without prior notice to Borrower, collect the
Accounts and Inventory proceeds and may give notice of assignment to any
and all account debtors, and Borrower does hereby make, constitute and
appoint Bank its irrevocable, true and lawful attorney with power to
receive, open and dispose of all mail addressed to Borrower, to endorse the
name of Borrower upon any checks or other evidences of payment that may
come into the possession of Bank upon the Accounts or as proceeds of
Inventory; to endorse the name of the undersigned upon any document or
instrument relating to the Collateral; in its name or otherwise, to
demand, sue for, collect and give acquittances for any and all moneys due
or to become due upon the Accounts; to compromise, prosecute or defend any
action, claim or proceeding with respect thereto; and to do any and all
things necessary and proper to carry out the purpose herein contemplated.
11. Until Borrower's Loan Account and all other obligations secured hereby
shall have been repaid in full, Borrower shall not sell, dispose of or
grant a security interest in any of the Collateral other than to Bank, or
execute any financing statements covering the collateral in favor of any
secured party or person other than Bank.
12. Should: (i) Default be made in the payment of any obligation, or breach be
made in any warranty, statement, promise, term or condition, contained
herein or hereby secured; (ii) Any statement or representation made for
the purpose of obtaining credit hereunder prove false; (iii) Bank deem the
Collateral inadequate or unsafe or in danger of misuse; (iv) Borrower
become insolvent or make an assignment for the benefit of creditors; or
(v) Any proceeding be commended by or against Borrower under any
bankruptcy, reorganization, arrangement, readjustment of debt or
moratorium law or statute; then in any such event, Bank may, at its option
and without demand first made and without notice to Borrower, do any one
or more of the following: (a) Terminate its obligation to make loans to
Borrower as provided in Section 1 hereof; (b) Declare all sums secured
hereby immediately due and payable; (c) Immediately take possession of the
Collateral wherever it may be found, using all necessary force so to do,
or require Borrower to assemble the Collateral and make it available to
Bank at a place designated by Bank which is reasonably convenient to
Borrower and Bank, and Borrower waives all claims for damages due to or
arising from or connected with any such taking; (d) Proceed in the
foreclosure of Bank's security interest and sale of the Collateral in any
manner permitted by law, or provided for herein; (e) Sell, lease or
otherwise dispose of the Collateral at public or private sale, with or
without having the Collateral at the place of sale, and upon terms and in
such manner as Bank may determine, and Bank may purchase same at any such
sale; (f) Retain the Collateral in full satisfaction of the obligations
secured thereby; (g) Exercise any remedies of a secured party under the
Uniform Commercial Code. Prior to any such disposition, Bank may, at its
option, cause any of the Collateral to be repaired or reconditioned in
such manner and to such extent as Bank may deem advisable, and any sums
expended therefor by Bank shall be repaid by Borrower and secured hereby.
Bank shall have the right to enforce one or more remedies hereunder
successively or concurrently, and any such action shall not estop or
prevent Bank from pursuing any further remedy which it may have hereunder
or by law. If a sufficient sum is not realized from any such disposition
of Collateral to pay all obligations secured by this Security Agreement,
Borrower hereby promises and agrees to pay Bank any deficiency.
13. If any writ of attachment, garnishment, execution or other legal process
be issued against any property of Borrower, or if any assessment for taxes
against Borrower, other than real property, is made by the Federal or
State government or any department thereof, the obligation of Bank to make
loans to Borrower as provided in Section 1 hereof shall immediately
terminate and the unpaid balance of the Loan Account, all other
obligations secured hereby and all other sums due hereunder shall
immediately become due and payable without demand, presentment or notice.
14. Borrower authorizes Bank to destroy all invoices, delivery receipts,
reports and other types of documents and records submitted to Bank in
connection with the transactions contemplated herein at any time
subsequent to four months from the time such items are delivered to Bank.
15. Nothing herein shall in any way limit the effect of the conditions set
forth in any other security or other agreement executed by Borrower, but
each and every condition hereof shall be in addition thereto.
*16. Additional Provisions: See "EXHIBIT A" attached.
Executed this 30th day of June, 1997
ECO SOIL SYSTEMS, INC.
--------------------------------
(Name of Borrower)
BY: /S/ DOUGLAS M. GLOFF C.O.O.
--------------------------------
IMPERIAL BANK (Authorized Signature and Title)
BY: [SIG] [illegible] V.P. BY: /S/ L. JEAN DUNN, JR. C.F.O.
------------------------------------ --------------------------------
Title (Authorized Signature and Title)
*If none, insert "None"
AC8 E (Rev 10/92)
Page 2 of 2
<PAGE> 3
"EXHIBIT A"
ADDENDUM TO SECURITY AND LOAN AGREEMENT
BETWEEN ECO SOIL SYSTEMS, INC. AND
IMPERIAL BANK
DATED JUNE 30,1997
This Addendum is made and entered into as of June 30, 1997, between ECO SOIL
SYSTEMS, INC. ("Borrower") and IMPERIAL BANK ("Bank"). This Addendum amends and
supplements the Security and Loan Agreement. In the event of any inconsistency
between the terms herein and the terms of the Security and Loan Agreement, the
terms herein shall in all cases govern and control. All capitalized terms
herein, unless otherwise defined herein, shall have the meaning set forth in the
Security and Loan Agreement.
1. Any commitment of Bank, pursuant to the terms of the Security and Loan
Agreement, to make advances against Eligible Accounts shall expire on JUNE 15,
1998, subject to Bank's right to renew said commitment in its sole discretion.
Any such renewal of the commitment shall not be binding upon Bank unless it is
in writing and signed by an officer of the Bank. The amount of the commitment of
the Bank referred to above shall be reduced by the amount outstanding of the
$3,000,000 term loan made by the Bank to Eco Lease Partners.
2. Borrower represents and warrants that:
a. LITIGATION. There is no litigation or other proceeding pending or
threatened against or affecting Borrower, and Borrower is not in default with
respect to any order, writ, injunction, decree or demand of any court or other
governmental or regulatory authority.
b. FINANCIAL CONDITION. The balance sheet of Borrower of MARCH 31, 1997,
and the related profit and loss statement on that date, a copy of which has
heretofore been delivered to Bank by Borrower, and all other statements and data
submitted in writing by Borrower to Bank in connection with this request for
credit are true and correct, and said balance sheet and profit and loss
statement truly present the financial condition of Borrower as of the date
thereof and the results of the operations of Borrower for the period covered
thereby, and have been prepared in accordance with generally accepted accounting
principles on a basis consistently maintained. Since such date, there have been
no materially adverse changes in the financial condition or business of
Borrower. Borrower has no knowledge of any liabilities, contingent or otherwise,
at such date not reflected in said balance sheet, and Borrower has not entered
into any special commitments or substantial contracts which are not reflected in
said balance sheet, other than in the ordinary and normal course of its
business, which may have a materially adverse effect upon its financial
condition, operations or business as now conducted.
c. TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to
<PAGE> 4
EXHIBIT A
PAGE 2
conduct its business as now operated, without any known conflict with valid
trademarks, trade names, copyrights, patents and license rights of others.
d. TAX STATUS. Borrower has no liability for any delinquent state, local or
federal taxes, and, if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.
3. Borrower agrees that so long as it is indebted to Bank, it WILL NOT,
without Bank's WRITTEN CONSENT:
a. TYPE OF BUSINESS. MANAGEMENT. Make any substantial change in the
character of its business; or make any change in its executive management.
b. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys greater than $250,000, other than loans from
Bank except obligations now existing as shown in financial statement dated MARCH
31, 1997, including those being refinanced by Bank; or sell or transfer, either
with or without recourse, any accounts or notes receivable or any moneys due to
become due.
c. LIENS AND ENCUMBRANCES. Create, incur, assume any mortgage, pledge,
encumbrance, lien or charge of any kind (including the charge upon property at
any time purchased or acquired under conditional sale or other title retention
agreement) greater than $250,000, upon any asset now owned or hereafter acquired
by it, other than liens for taxes not delinquent, and liens in Bank's favor.
d. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances to
any person or other entity other than in the ordinary and normal course of its
business as now conducted or make any investment in the securities of any person
or other entity other than the United States Government; or guarantee or
otherwise become liable upon the obligation of any person or other entity,
except by endorsement of negotiable instruments for deposit or collection in the
ordinary and normal course of its business.
e. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or
otherwise acquire the assets or business of any person or other entity; or
liquidate, dissolve, merge or consolidate, or commence any proceedings
therefore; or sell any assets except in the ordinary and normal course of its
business as now conducted; or sell, lease, assign, or transfer any substantial
part of its business or fixed assets, or any property or other assets necessary
for the continuance of its business as now conducted, including without
limitation the selling of any property or other asset accompanied by the.
leasing back of the same.
f. DIVIDENDS, STOCK PAYMENTS. Declare or pay any dividend (other than
dividends payable in common stock of Borrower) or make any other distribution on
any of its capital stock now outstanding or hereafter issued, or purchase,
redeem or retire any of such stock.
<PAGE> 5
EXHIBIT A
PAGE 3
g. CAPITAL EXPENDITURES. Make or incur obligations for capital expenditures
in excess of $1,000,000 in any one fiscal year.
h. LEASE LIABILITY. Make or incur liability for payments of rent under
leases of real property in excess of $250,000 in any one fiscal year.
4. Should there be a default under the Security and Loan Agreement, the
General Security Agreement, or under the Note, all obligations, loans and
liabilities of Borrower to Bank, due or to become due, whether now existing or
hereafter arising, shall, at the option of Bank, become immediately due and
payable without notice or demand, and Bank shall thereupon have the right to
exercise all of its default rights and remedies. The default rate of interest
shall be five percent per year in excess of the rate otherwise charged.
5. As a CONDITION PRECEDENT to Bank's obligation to make any advances to
Borrower, Borrower shall, among other things: provide Bank with evidence of
receipt of outside equity in the amount of $1,250,000 to Eco Lease Partners.
6. In addition to the provisions in the Security and Loan Agreement,
Eligible Accounts shall only include such accounts as Bank in its sole
discretion shall determine are eligible from time to time. "Eligible Accounts"
shall also NOT include any of the following:
a. Accounts with respect to which the account debtor is an officer,
director, shareholder, employee, subsidiary or affiliate of Borrower.
b. Accounts with respect to which 25% or more of the account debtor's total
accounts or obligations outstanding to Borrower are more than 90 days from
invoice date.
c. Salesmen's accounts for promotional purposes.
d. For accounts representing more than 20% of total accounts receivable,
the balance in excess of the 20%. However, the Bank may deem, at its sole
discretion, the entire amount, or any portion thereof, eligible.
e. Accounts with respect to international transactions unless insured by an
insurance company acceptable to the Bank or covered by letters of credit issued
or confirmed by a bank acceptable to the Bank.
f. Credit balances greater than 90 days from invoice date.
g. U.S. Government receivables, unless formally assigned to the Bank.
<PAGE> 6
EXHIBIT A
PAGE 4
h. Accounts over 90 days from invoice date.
i. Accounts where the account debtor is a seller to Borrower, whereby a
potential offset exists.
j. Consignment or guaranteed sales.
k. Contract receivables; bill and hold accounts.
l. Equipment and rental offsets: collection accounts (aged up to 90 days
from invoice date), customer deposits.
7. Borrower may borrow against eligible inventory consisting of finished
goods only, deemed acceptable to Bank, up to a $1,300,000 sublimit within the
line of credit, not to exceed 35% of the balance outstanding, or the accounts
receivable borrowing base, whichever is less, and substantiated by monthly
inventory certification submitted by Borrower to Bank.
Inventory eligible for advance under the Security and Loan Agreement shall
NOT include the following:
a. Goods on consignment.
b. Inventory reserve amounts.
c. Obsolete inventory; parts, allocations, etc.
d. Inventory not insured, or inventory for which Bank is not named as loss
payee.
e. Raw material, and work in process.
f. Inventory located in areas making it difficult to verify its existence,
or which will cause undue expense in liquidation due to transportation costs,
or other logistical reasons,
g. Inventory located outside of the United States.
h. Microbes.
8. All financial covenants and financial information referenced herein shall
be interpreted and prepared in accordance with generally accepted accounting
principles
<PAGE> 7
EXHIBIT A
PAGE 5
applied an a basis consistent with previous years. Compliance with financial
covenants shall be calculated and monitored on a quarterly basis.
9. Borrower affirmatively covenants that so long as any loans, obligations
or liabilities remain outstanding or unpaid to Bank, it WILL:
a. Have and maintain a Minimum Tangible Net Worth (meaning the excess of
all assets, excluding any value for goodwill, trademarks, patents, copyrights,
organization expense and other similar intangible items, over its liabilities,
less subordinated debt) of not less than $10,000,000 from June 31, 1997
increasing to $11,500,000 from FYE 12/31/97 and thereafter.
b. Have and maintain a ratio of total liabilities to Tangible Net Worth of
not greater than 1.0 to 1.0.
c. Have and maintain a minimum Working Capital (meaning the Borrower's
Current Assets minus Current Liabilities)of not less than $6,000,000. Current
Liabilities does not include any subordinated debt.
d. At all times maintain a Current Ratio of at least 1.9 to 1.0. Current
Ratio shall mean Current Assets divided by Current Liabilities. Current
Liabilities does not include any subordinated debt.
e. At all times maintain a Quick Ratio of not less than .8 to 1.0. Quick
Ratio is cash and cash equivalents plus trade receivables divided by current
liabilities.
f. Cash flow coverage 1.25 to 1.0. Cash flow coverage is defined as net
profits plus depreciation and amortization divided by current portion of long
term debt and current portion of capital leases.
g. Maintain profitable operations in the second and third quarters and at
fiscal year end.
h. Maintain all significant bank deposit accounts and banking relationship
with Bank.
i. Within 10 days from each month-end, deliver to Bank an accounts
receivable aging reconciled to the general ledger of Borrower, a detailed
accounts payable aging reconciled to the Borrower's general ledger and setting
forth the amount of any book overdraft or the amount of checks issued but not
sent and an inventory certification outlining both inventory composition and
activity for the month. All the foregoing will be in a form and with such detail
as Bank may request from time to time.
<PAGE> 8
EXHIBIT A
PAGE 6
j. Within 30 days after the end of each month, deliver to Bank a profit and
loss statement and a balance sheet in form satisfactory to Bank all certified by
an officer of Borrower.
k. Within 5 days of filing, deliver to Bank a copy of the 10-Q filing, and
a letter certifying compliance with all loan covenants signed by the Chief
Financial Officer of Borrower.
l. Within 90 days after the end of Borrower's fiscal year, deliver to Bank
the same financial statements as otherwise provided monthly together with
Changes in Financial Position Statement, prepared on an AUDITED CONSOLIDATING
basis by an independent certified public accountant selected by Borrower, but
acceptable to Bank.
m. Within 5 days of filing, deliver to Bank a copy of the 10-K filing, and
a letter certifying compliance with all loan covenants signed by the Chief
Financial Officer of Borrower.
n. On a quarterly basis, provide Bank with an alphabetized list of
customers including addresses.
o. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and
other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair; conduct its
business in an orderly manner without voluntary interruption and, if a
corporation or partnership, maintain and preserve its existence.
p. INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses. Borrower shall provide evidence of property
insurance in amounts and types acceptable to the Bank and Bank shall be named as
Loss Payee in a Lender's Loss Payable Endorsement Form 438BFU or equivalent.
q. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments and
governmental charges upon or against it or any of its properties, and any of its
other liabilities at any time existing, except to the extent and so long as:
(a) The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any materially adverse
effect upon its financial condition or the loss of any right of
redemption from any sale thereunder, and
(b) It shall have set aside on its books reserves
<PAGE> 9
EXHIBIT A
PAGE 7
(segregated to the extent required by generally accepted accounting
practice) deemed by it adequate with respect thereto,
r. RECORDS AND REPORTS. Maintain a standard and modern system of accounting
in accordance with generally accepted accounting principles on a basis
consistently maintained; permit Bank's representatives to have access to, and to
examine its properties, books and records at all reasonable times.
s. SUBORDINATION. Cause $1,350,000 owed by Borrower to William Adams and
Douglas Gloff, to be subordinated to Bank's line of credit by a subordination
agreement acceptable to Bank.
10. The extensions of credit under the Security and Loan Agreement shall be
available as follows:
a. Up to $5,000,000 in direct advances.
b. Included in the accounts receivable borrowing base, up to $1,300,000 of
eligible finished goods inventory as described in paragraph 6 above, not to
exceed 35% of total inventory, or the accounts receivable borrowing base,
WHICHEVER IS LESS.
c. Stand-By letters of credit up to $2,000,000, Stand-By letters of credit
are priced at 2.0% per annum.
d. The combined outstandings of a., b., c. and the amount outstanding under
the term loan made by the Bank to Eco Lease Partners shall not exceed
$5,000,000.
11. FEES AND INTEREST:
The rate of interest applicable to the Line of Credit Loan Account shall be
1.50% above the rate of interest which Bank has announced as its prime lending
rate ("Prime Rate") which shall vary concurrently with any change in such Prime
Rate. A documentation fee of $150 shall be due upon execution of documents as
well as a facility fee of $12,500 also will be due.
Interest shall be computed at the above rate on the basis of the actual number
of days during which the principal balance of the loan account is outstanding
divided by 360, which shall for interest computation purposes be considered one
year. The default rate shall be five percent per year in excess of the rate
otherwise applicable.
If any installment payment, interest payment, principal payment or principal
balance payment due hereunder is delinquent twenty or more days, Borrower agrees
to pay Bank
<PAGE> 10
EXHIBIT A
PAGE 8
a late charge in the amount of 5% of the payment so due and unpaid, in addition
to the payment; but nothing in this paragraph is to be construed as any
obligation on the part of Bank to accept payment of any payment past due or less
than the total unpaid principal balance after maturity, All payments shall be
applied first to any late charges owing, then to interest and the remainder, if
any, to principal.
12. CROSS DEFAULT. Any default under the Eco Lease Partners Credit Terms and
Conditions Dated June 30, 1997 also creates a default under this agreement.
13. MISCELLANEOUS PROVISIONS. Failure or Indulgence Not Waiver. No failure or
delay on the part of your Bank or any holder or Notes Issued hereunder, in the
exercise of any power, right or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof or of any other right,
power or privilege. All rights and remedies existing under this agreement or any
not issued in connection with a loan that your Bank may make hereunder, are
cumulative to, and not exclusive of, any rights or remedies otherwise available.
14. NOTICE OF DEFAULT. Borrower shall promptly notify Bank in writing of the
occurrence of any event of default hereunder or any event which upon notice and
lapse of time would be an event of default,
15. REFERENCE PROVISION. The terms of the attached Reference Provisions are
incorporated herein.
16. HEARTLAND CAPITAL. Neither of the two subordinated notes from Heartland
Capital in the amount $200,000 each will not be modified or prepaid.
17. GOVERNING LAW. In any action brought under, in connection with or arising
out of this Agreement, each Obligor, including successor(s) or assign(s) hereby
consents to the application of California law (other than provisions on
conflicts of law), to the jurisdiction of any competent court within the State
of California and to service of process by any means authorized by California
law.
This addendum is executed by and on behalf of the parties as of the date
first above written
ECO SOIL SYSTEMS, INC., "BORROWER"
BY: /S/ DOUGLAS M. GLOFF /S/ L. JEAN DUNN, JR.
- ---------------------------------- -----------------------------
President and C.O.O. C.F.O.
- ---------------------------------- -----------------------------
Title
<PAGE> 11
EXHIBIT A
PAGE 9
IMPERIAL BANK, "BANK"
BY: [ILLEGIBLE]
- -----------------------------------
Vice President
- -----------------------------------
Title
<PAGE> 1
EXHIBIT 10.13
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE LAWS OF ANY STATE AND MAY NOT BE
SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF
UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT
REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: Eco Soil Systems, Inc., a Nebraska corporation
Number of Shares: 40,000 shares
Class of Stock: Common
Initial Exercise Price: $5.25 per share
Issue Date: June 30, 1997
Expiration Date: June 30, 2002 (subject to Article 4.1)
THIS WARRANT CERTIFIES THAT, in consideration of the payment of $1.00
and for other good and valuable consideration including the extension of credit
to Company, IMPERIAL BANK ("Holder") is entitled to purchase the number of fully
paid and nonassessable shares of the class of securities (the "Shares") of the
corporation (the "Company") at the initial exercise price per Share (the
"Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of
this Warrant, subject to the provisions and upon the terms and conditions set
forth of this Warrant.
ARTICLE 1. EXERCISE
1.1 Method of Exercise. Holder may exercise this Warrant by delivering
this Warrant and a duly executed Notice of Exercise in substantially the form
attached as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as specified in
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant to Section 1.5.
1.3 Right to Put Warrant. At Holder's option, in lieu of exercising its
rights as set forth in Sections 1.1 or 1.2, Holder shall have the right to
require the Company to purchase the Warrant under the circumstances set forth on
Exhibit A.
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1.4 Fair Market Value. If the Shares are traded regularly in a public
market, the fair market value of the Shares shall be the closing price of the
Shares (or the closing price of the Company's stock into which the Shares are
convertible) reported for the business day immediately before Holder delivers
its Notice of Exercise to the Company. If the Shares are not regularly traded in
a public market, the Board of Directors of the Company shall determine fair
market value in its reasonable good faith judgment. The foregoing
notwithstanding, if Holder advises the Board of Directors in writing that Holder
disagrees with such determination, then the Company and Holder shall promptly
agree upon a reputable investment banking firm to undertake such valuation. If
the valuation of such investment banking firm is greater than that determined by
the Board of Directors, then all fees and expenses of such investment banking
firm shall be paid by the Company. In all other circumstances, such fees and
expenses shall be paid by Holder.
1.5 Delivery of Certificate and New Warrant. Promptly after Holder
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.6 Replacements of Warrants. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.7 Repurchase on Sale, Merger, or Consolidation of the Company.
1.7.1. "Acquisition". For the purpose of this Warrant,
"Acquisition" means any sale, license, or other disposition of all or
substantially all of the assets (including intellectual property) of the
Company, or any reorganization, consolidation, or merger of the Company where
the holders of the Company's securities before the transaction beneficially own
less than 50% of the outstanding voting securities of the surviving entity after
the transaction.
1.7.2. Assumption of Warrant. If upon the closing of any
Acquisition the successor entity assumes the obligations of this Warrant, then
this Warrant shall be exercisable for the same securities, cash, and property as
would be payable for the Shares issuable upon exercise of the unexercised
portion of this Warrant as if such Shares were outstanding on the record date
for the Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly. The Company shall use reasonable efforts to cause the surviving
corporation to assume the obligations of this Warrant.
1.7.3. Nonassumption. If upon the closing of any Acquisition the
successor entity does not assume the obligations of his Warrant and Holder has
not
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otherwise exercised this Warrant in full, then the unexercised portion of this
Warrant shall be deemed to have been automatically converted pursuant to Section
1.2 and thereafter Holder shall participate in the acquisition on the same terms
as other holders of the same class of securities of the Company.
1.7.4. Purchase Right. Notwithstanding the foregoing, at the
election of Holder, the Company shall purchase the unexercised portion of this
Warrant for cash upon the closing of any Acquisition for an amount equal to (a)
the fair market value of any consideration that would have been received by
Holder in consideration of the Shares had Holder exercised the unexercised
portion of this Warrant immediately before the record date for determining the
shareholders entitled to participate in the proceeds of the Acquisition, less
(b) the aggregate Warrant Price of the Shares, but in no event less than zero.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
dividend on its common stock payable in common stock, or other securities,
subdivides the outstanding common stock into a greater amount of common stock,
then upon exercise of this Warrant, for each Share acquired, Holder shall
receive, without cost to Holder, the total number and kind of securities to
which Holder would have been entitled had Holder owned the Shares of record as
of the date the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's Articles of
Incorporation upon the closing of a registered public offering of the Company's
common stock. The Company or its successor shall promptly issue to Holder a new
Warrant for such new securities or other property. The new Warrant shall provide
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article 2 including, without limitation,
adjustments to the Warrant Price and to the number of securities or property
issuable upon exercise of the new Warrant. The provisions of this Section 2.2
shall similarly apply to successive reclassifications, exchanges, substitutions,
or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
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2.4 Adjustments for Diluting Issuances. The Warrant Price and the
number of Shares issuable upon exercise of this Warrant shall be subject to
adjustment, from time to time, in the manner set forth on Exhibit B in the
event of Diluting Issuances (as defined on Exhibit B).
2.5 No Impairment. The Company shall not, by amendment of its Articles
of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed under this Warrant by the Company,
but shall at all times in good faith assist in carrying out all the provisions
of this Article 2 and in taking all such action as may be necessary or
appropriate to protect Holder's rights under this Article against impairment.
If the Company takes any action affecting the Shares or its common stock other
than as described above that adversely affects Holder's rights under this
Warrant, the Warrant Price shall be adjusted downward and the number of Shares
issuable upon exercise of this Warrant shall be adjusted upward in such a
manner that the aggregate Warrant Price of this Warrant is unchanged.
2.6 Certificate as to Adjustments. Upon each adjustment of the
Warrant Price, the Company at its expense shall promptly compute such
adjustment, and furnish Holder with a certificate of its Chief Financial
Officer setting forth such adjustment and the facts upon which such adjustment
is based. The Company shall, upon written request, furnish Holder a
certificate setting forth the Warrant Price in effect upon the date thereof
and the series of adjustments leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 Representations and Warranties. The Company hereby represents and
warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of this
Warrant is not greater than (i) the price per share at which the Shares were
last issued in an arms-length transaction in which at least $500,000 of the
Shares were sold and (ii) the fair market value of the Shares as of the date of
this Warrant.
(b) All Shares which may be issued upon the exercise of the
purchase right represented by this Warrant shall, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable, and free of any liens
and encumbrances except for restrictions on transfer provided for herein or
under applicable federal and state securities laws.
3.2 Notice of Certain Events. If the Company proposes at any time (a)
to declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend,
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional
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shares of stock of any class or series or other rights; (c) to effect any
reclassification or recapitalization of common stock; (d) to merge or
consolidate with or into any other corporation, or sell, lease, license, or
convey all or substantially all of its assets, or to liquidate, dissolve or wind
up; or (e) offer holders of registration rights the opportunity to participate
in an underwritten public offering of the company's securities for cash, then,
in connection with each such event, the Company shall give Holder (a) at least
20 days prior written notice of the date on which a record will be taken for
such dividend, distribution, or subscription rights (and specifying the date on
which the holders of common stock will be entitled thereto) or for determining
rights to vote, if any, in respect of the matters referred to in (c) and (d)
above; (2) in the case of the matters referred to in (c) and (d) above at least
20 days prior written notice of the date when the same will take place (and
specifying the date on which the holders of common stock will be entitled to
exchange their common stock for securities or other property deliverable upon
the occurrence of such event); and (3) in the case of the matter referred to in
(e) above, the same notice as is given to the holders of such registration
rights.
3.3 Information Rights. So long as the Holder holds this Warrant and/or
any of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all communiques to the shareholders of the Company, (b)
within ninety (90) days after the end of each fiscal year of the Company, the
annual audited financial statements of the Company certified by independent
public accountants of recognized standing and (c) within forty-five (45) days
after the end of each of the first three quarters of each fiscal year, the
Company's quarterly, unaudited financial statements.
3.4 Registration Under Securities Act of 1933, as amended. The Company
agrees that the Shares shall be subject to the registration rights set forth on
Exhibit C.
ARTICLE 4. MISCELLANEOUS.
4.1 Term: Notice of Expiration, This Warrant is exercisable, in whole
or in part, at any time and from time to time on or before the Expiration Date
set forth above. The Company shall give Holder written notice of Holder's right
to exercise this Warrant in the form attached as Appendix 2 not more than 90
days and not less than 30 days before the Expiration Date. If the notice is not
so given, the Expiration Date shall automatically be extended until 30 days
after the date the Company delivers the notice to Holder.
4.2 Legends. This Warrant and the Shares shall be imprinted with a
legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO
RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
<PAGE> 6
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
Shares issuable upon exercise this Warrant may not be transferred or assigned in
whole or in part without compliance with applicable federal and state securities
laws by the transferor and the transferee (including, without limitation, the
delivery of investment representation letters and legal opinions reasonably
satisfactory to the Company). The Company shall not require Holder to provide an
opinion of counsel if the transfer is to an affiliate of Holder or if there is
no material question as to the availability of current information as referenced
in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e)
in reasonable detail, the selling broker represents that it has complied with
Rule 144(f), and the Company is provided with a copy of Holder's notice of
proposed sale.
4.4 Transfer Procedure. Subject to the provisions of Section 4.2,
Holder may transfer all or part of this Warrant or the Shares issuable upon
exercise of this Warrant by giving the Company notice of the portion of the
Warrant being transferred setting forth the name, address and taxpayer
identification number of the transferee and surrendering this Warrant to the
Company for reissuance to the transferees) (and Holder, if applicable). Unless
the Company is filing financial information with the SEC pursuant to the
Securities Exchange Act of 1934, the Company shall have the right to refuse to
transfer any portion of this Warrant to any person who directly competes with
the Company.
4.5 Notices. All notices and other communications from the Company to
the Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from time
to time.
4.6 Waiver. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 Attorneys' Fees. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and construed in,
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
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"COMPANY"
Eco Soil Systems, Inc.
By /S/ DOUGLAS M. GLOFF
------------------------------
Name Douglas M. Gloff
------------------------------
(Print)
Title: Chairman of the Board,
President, or Vice President
By /S/ L. JEAN DUNN, JR.
------------------------------
Name L. Jean Dunn, Jr.
------------------------------
(Print)
Title: Chief Financial Officer,
Secretary, Assistant Treasurer or
Assistant Secretary
<PAGE> 1
EXHIBIT 10.14
ECO SOIL SYSTEMS, INC.
10890 Thornmint Road, Suite 200
San Diego, California 92127
Telephone: (619) 675-1660
Facsimile: (619) 675-1662
June 3, 1997
Mycogen Corporation
5501 Oberlin Drive
San Diego, CA 92121
Attn: Mr. Andrew C. Barnes
Executive Vice President
Re: Option for Xanthomonas Campestris
Dear Mr. Barnes:
The purpose of this letter is to memorialize our understandings regarding
the option which Mycogen Corporation ("Mycogen") is providing to Eco Soil
Systems, Inc. ("Eco Soil") to purchase all of Mycogen's rights to the family of
Microorganisms known as xanthomonas campestris (collectively, the
"Microorganisms Technology), including without limitation the following:
(a) any inventions which are the subject of United States Patent
Nos. 5,192,541 or 5,271,932 (collectively, the "XC Patents");
(b) any strains thereof which are licensed to Mycogen pursuant to
that certain Exclusive License Agreement dated as of February 28, 1989 executed
by Michigan State University, as licensor (as amended by an amendment dated
September 28, 1995, the "Michigan State License");
(c) any strains thereof which have been identified or tested by
Mycogen for utilization in connection with the control of poaannua; and
(d) all rights of Mycogen and its affiliates under the various
agreements (including without limitation the Bioherbicide/BioToxin Research and
Development Agreement and the Bioadjurant Research and Development Agreement)
which Mycogen and/or its affiliates have with Japanese Tobacco (USA), Inc. and
its affiliates (collectively, "JT") with respect thereto (collectively, as the
same may be amended in accordance with Section 4 of this letter, the "JT
Agreements"), and any technology referenced in the JT Agreements (including
without limitation any "Joint Enabling Technology," "Joint Bioherbicide
Material," "xanthomonas campestris technology," "Mycogen Enabling Technology" or
"Bioherbicide Material");
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provided, however, that the rights referenced in this clause (d) only shall be
included within the definition of Microorganisms Technology to the extent that
they involve or relate to the matters referenced in items (a) through (c) above.
The microorganisms which are the subject of the Microorganisms Technology
sometimes are referred to herein as the "Microorganisms."
1. GRANT OF In consideration for the payment by Eco Soil to Mycogen of
OPTION. $30,000 (the "Option Payment"), Mycogen hereby grants to Eco
Soil an exclusive option (the "Option") to purchase the
Microorganisms Technology and all right, title, claims and
interest of Mycogen thereto, including without limitation
Mycogen's rights under or with respect to the XC Patents or
the Michigan State License. The Option Payment shall be
non-refundable except as provided in Section 4 hereof.
Should Eco Soil exercise the Option, the purchase and sale
of the Microorganisms Technology shall be on the terms and
conditions set forth herein. As more fully set forth in the
attached form of assignment document, Eco Soil also shall
obtain a license to certain intellectual property rights of
Mycogen that are not related solely and exclusively to the
Microorganisms, but only to the extent such rights relate in
a material manner to the development, fermentation,
manufacture, use, distribution, application, sale or
licensing of the Microorganisms in the control of poaannua.
2. OPTION PERIOD. The term of the Option shall begin on the date of this
letter and end on November 1, 1998 (the "Option Period"). If
the Option is not exercised by such date, then the Option
shall terminate.
3. DILIGENCE During the Option Period, Eco Soil shall have the right to
DURING OPTION assess the desirability of exercising the Option and
PERIOD. acquiring the Microorganisms Technology. Such assessment may
include without limitation (a) analysis of the technical and
economic feasibility of using and distributing the
Microorganisms Technology through Eco Soil's BioJect(TM)
delivery systems or through other systems or vehicles
(collectively, the "Delivery Systems") for delivery,
distribution and/or application of biological product in the
turf maintenance, architectural crop, soil remediation
and/or water quality management industries and (b) use of
the Microorganisms and the Microorganisms Technology
(including Mycogen's existing contractual rights thereto and
governmental approvals) in field testing.
4. MYCOGEN Mycogen shall take such cooperative steps as Eco Soil
COOPERATION reasonably may request to assist in the assessment of the
DURING OPTION desirability of exercising the Option and acquiring the
PERIOD. Microorganisms Technology. Such cooperation shall include
the following:
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(a) Promptly following the execution of this letter,
Mycogen shall provide Eco Soil with cultures of the
Microorganisms and with copies of all tests and data
produced to date regarding the Microorganisms Technology,
including without limitation test and data regarding the
efficacy and toxicological effects of the Microorganisms and
the Microorganisms Technology.
(b) Mycogen shall apply its best efforts to obtain the
approval of Michigan State University, as expeditiously as
possible and in any event on or before August 1, 1997, to
the assignment contemplated by this letter agreement.
(c) Mycogen shall apply its best efforts to enter into
appropriate agreements with JT in order to implement, as
expeditiously as possible and in any event by August 1,
1997, the transactions contemplated by the terms sheet
attached hereto as Exhibit "A" (the "JT Terms Sheet"). Such
agreements shall be in form and substance reasonably
satisfactory to Eco Soil. Such agreements further shall
clarify that: (i) as between JT and Mycogen (or any
successor to Mycogen's rights in the Microorganisms
Technology, such as Eco Soil) (the "US Owner"), the US Owner
shall own the Microorganisms and the Microorganisms
Technology subject only to the rights in favor of JT under
the JT Agreements; (ii) as between JT and the US Owner, the
US Owner shall have exclusive royalty-free rights to market,
sell, license, sub-license apply or otherwise use or
practice the Microorganisms and the Microorganisms
Technology or the claims embodied therein within the United
States, subject only to the rights provided to JT in
accordance with Section 9 of the JT Terms Sheet; and (iii)
as between JT and the US Owner, JT shall be responsible for
(and shall reimburse and hold the US Owner harmless for) any
amounts payable under the MSU License as a consequence of
actions (e.g., sales, sublicenses, etc.) of JT or any
parties claiming through JT.
If Mycogen has not obtained the approvals and agreements
contemplated by clauses (b) and (c) above by the dates set
forth, then Eco Soil shall have the right any time
thereafter to terminate the Option by written notice to
Mycogen, and Mycogen then shall return the Option Payment to
Eco Soil within 3 business days after receipt of such
notice. The rights provided in this paragraph will be Eco
Soil's sole and exclusive remedy in the event that such
approvals and agreements are not obtained by Mycogen as
provided above.
5. EXERCISE OF The Option may be exercised by Eco Soil's delivery to
OPTION. Mycogen, during the Option Period, of written notice stating
that the Option is exercised. Said
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notice shall specify a closing date for consummation of the
transfer of the Microorganisms Technology (the "Closing
Date"), which Closing Date shall be no more than three (3)
business days after the delivery of the notice of exercise.
6. CONVEYANCE If Eco Soil exercises the Option, then on the Closing Date
DOCUMENTS. Mycogen shall deliver to Eco Soil: (a) an Assignment of
Intellectual Property Rights and License Agreement in the
form attached hereto as Exhibit "B" and such further
documents as Eco Soil reasonably may request in order to
evidence, effect and protect the assignment of "Intellectual
Property" contemplated thereby (including without limitation
appropriate documentation for filing or recording with the
United States Patent Office), and (b) an assignment in form
and content reasonably satisfactory to Eco Soil of all
rights of Mycogen and its affiliates under the JT Agreements
to the extent that they relate to or involve Microorganisms
Technology, as the JT Agreements may be modified pursuant to
Section 4 of this letter agreement, together with a consent
from JT to such assignment, if such consent should be
required.
7. PURCHASE If Eco Soil exercises the Option, then the Purchase Price
PRICE. shall be $280,000, which shall be paid as follows:
(a) On the Closing Date, Mycogen shall apply the Option
Payment against the Purchase Price.
(b) On the Closing Date, Eco Soil shall deliver to Mycogen
a non-refundable cash payment (by wire transfer in
next-day available funds) in the amount of $100,000.
(c) The balance of the Purchase Price (to wit, $150,000),
shall be paid within 30 days after Eco Soil has
received "Net Sales Revenues" of at least $1,000,000
from sales of Microorganisms (and/or products
incorporating some or all Microorganisms Technology).
"Net Sales Revenues" means aggregate invoiced sales
prices billed by Eco Soil to third parties (e.g.,
distributors or customers who are not affiliates of Eco
Soil), less (to the extent included in the invoiced
sales price): (i) credits, allowances, discounts and
rebates to, and chargebacks from the account of, such
third parties for spoiled, damaged, out-dated, rejected
or returned products (and reasonable reserves
established by Eco Soil with respect to the foregoing);
(ii) actual freight and insurance costs incurred in
transporting the Microorganisms (and/or products
incorporating some or all Microorganisms Technology) in
final form to such customers; (iii) cash, quantity and
trade discounts; and (iv) sales, use, value-added and
other taxes or governmental charges incurred in
connection with the exportation or importation of
Microorganisms (and/or products
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incorporating some or all Microorganisms Technology) in
final form.
(d) In order to permit Mycogen to monitor Net Sales
Revenues, Eco Soil shall provide Mycogen with quarterly
sales reports as to the Net Sales Revenues achieved to
date. The sales reports shall be delivered within 45
days after the end of each full calendar quarter (e.g.,
January to March, April to June, July to September or
October to December) following the Closing Date.
(e) Notwithstanding the foregoing, if Eco Soil, by the
fourth anniversary of the Closing Date, has not
received Net Sales Revenues of at least $1,000,000 or
otherwise paid to Mycogen the $150,000 contemplated by
clause (c) above, then Eco Soil promptly thereafter
shall reconvey to Mycogen all rights which Eco Soil
then has to the Microorganisms Technology, and Eco Soil
shall be released from any obligation to pay any
further consideration for the Microorganisms Technology
(i.e., pursuant to clause (c) above or otherwise) or to
deliver any further sales reports (other than a final
sales report for the last calendar quarter up to and
including such reconveyance).
8. POST-CLOSING Mycogen, at Eco Soil's expense, shall take such steps as Eco
MYCOGEN Soil reasonably may request to assist Eco Soil in obtaining
COOPERATION. appropriate governmental approvals for use of the
Microorganisms and the Microorganisms Technology transferred
to Eco Soil by Mycogen (including without limitation
assistance in connection with processing and maintenance of,
or applications for, appropriate patents and other
intellectual property protections and/or registration of
Microorganisms Technology, Microorganisms or related
products as pesticides or herbicides under state, federal or
foreign laws, as reasonably determined by Eco Soil).
9. CONFIDEN- Mycogen and Eco Soil acknowledge and agree that confidential
TIALITY. information pertaining to the Microorganisms Technology will
diminish in value if it does not remain secret and generally
unknown. Accordingly, Eco Soil agrees that (i) prior to
exercise of the Option and (ii) if the Option is not
exercised, for the 3-year period following termination of
the Option, Eco Soil shall take all steps necessary to
maintain the confidentiality and secrecy of information
pertaining to the Microorganisms Technology identified in
writing by Mycogen to be "confidential." Similarly, Mycogen
agrees that, (i) during the Option Period and (ii) if the
Option is exercised, before and for a period of 5 years
after the Closing Date, Mycogen shall take all steps
necessary to maintain the confidentiality and secrecy of
information pertaining to the Microorganisms Technology
identified in writing by Eco Soil to be "confidential"
(including any "confidential" information provided
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by Mycogen during the Option Period). Any such
"confidential" information shall be referred to herein as
"Confidential Information." Specifically, but without
limitation, each of the parties agrees that during such
respective periods it will: (a) maintain all Confidential
Information in strictest confidence and utilize all
reasonable precautions necessary to protect such
Confidential Information, except as may otherwise be
authorized in writing by the other party; (b) refrain from
disclosing any Confidential Information to any third party
without the other party's prior written consent; (c) limit
access to Confidential Information to those employees who
reasonably require the information to enable such party to
exercise its rights and fulfill its obligations hereunder
(provided that such employees shall be required to expressly
agree to treat such Confidential Information as confidential
in the same manner and to the same extent as such party's
own confidential information); and (d) abide by such other
confidentiality restrictions or practices with respect to
the Confidential Information that may be reasonably
requested by the other party, including the execution and
delivery of such confidentiality/nondisclosure agreements as
may be requested from time to time. Mycogen will, however,
have the right to disclose Confidential Information to
Michigan State University and JT for purposes of meeting its
obligations under the MSU License and the JT Agreements,
provided that such disclosure is made in a manner and
pursuant to procedures reasonably tailored to protect the
secrecy and commercial value to Eco Soil of the Confidential
Information. Nothing contained in this Agreement shall in
any way restrict: (i) Eco Soil's rights (1) to use, disclose
or otherwise deal with any Confidential Information which:
(A) was in Eco Soil's possession through legitimate means
prior to the date of this Agreement, (B) Eco Soil obtained
thereafter from a source entitled to freely disclose such
Confidential Information without breaching any
confidentiality obligation to Mycogen, (C) was already
generally known and within the public domain as of the date
of initial disclosure hereunder, or (D) which becomes
generally known thereafter through legitimate means and
through no fault of Eco Soil; or (2) subsequent to the
Closing Date, to use any information which it acquires
pursuant to this letter agreement in such manner as Eco Soil
shall deem appropriate; or (ii) Mycogen's rights to deal
with any Confidential Information which: (A) Mycogen
obtained after the date of this Agreement from a source
entitled to disclose such Confidential Information without
breaching any confidentiality obligation to Eco Soil; (B)
was already generally known and within the public domain as
of the date of initial disclosure hereunder; or (C) which
becomes generally known thereafter through legitimate means
and through no fault of Mycogen.
10. REPRESENTA- 10.1 Mycogen represents and warrants to Eco Soil as follows
TIONS AND as of the date hereof: (a) Mycogen has full right, power and
WARRANTIES OF authority to execute and deliver this letter agreement and
consummate the transactions contemplated
6
<PAGE> 7
MYCOGEN. hereby, and neither such execution and delivery nor such
consummation shall violate any contractual obligations of
Mycogen; (b) the Microorganisms Technology (and all
information and studies pertaining thereto possessed by
Mycogen) are owned by Mycogen free and clear of any claims
(other than under third party patent rights, if any, which
are unknown to Mycogen as of the date hereof) of any other
parties whatsoever, other than (i) claims of Michigan State
University pursuant to MSU License and (ii) JT pursuant to
the JT Agreements; and (c) there are no pending (or to the
best knowledge of Mycogen, threatened) suits, legal
proceedings, claims or governmental investigations against
Mycogen pertaining to the Microorganisms Technology,
asserting rights or claims to the Microorganisms Technology,
disputing Mycogen's rights to the Microorganisms Technology,
or likely to impede Eco Soil's use of the Microorganisms
Technology as contemplated hereby.
10.2 Eco Soil acknowledges and agrees that the
Microorganisms and the Microorganisms Technology are
experimental in nature. While Mycogen represents and
warrants that it is not aware of any tests or data
demonstrating that the Microorganisms or the Microorganisms
Technology are unusually hazardous or harmful to humans,
Mycogen cautions that the Microorganisms Technology (and/or
the Microorganisms) ultimately may prove to be hazardous or
harmful in this manner, and Eco Soil assumes this risk.
10.3 Except as set forth in Section 10.1 or 10.2 above,
MYCOGEN MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR
IMPLIED, OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, NON-INFRINGEMENT OR OTHERWISE.
11. REPRESENTA- Eco Soil represents and warrants to Mycogen
TIONS AND that it has full right, power and authority to enter into
WARRANTIES OF this letter agreement and consummate the transactions
ECO SOIL contemplated hereby, and neither such execution and delivery
nor such consummation shall violate any contractual
obligations of Eco Soil.
12. MISCELLANEOUS. Each party shall indemnify, protect, defend
and hold the other harmless from losses, claims,
liabilities, obligations or expenses arising out of breach
of representations or warranties made herein by the first
party. During the Option Period, Mycogen shall not grant
any rights in the Microorganisms Technology (or any tests
or studies or other information pertaining thereto) to any
other person or entity, and Mycogen shall not modify the JT
Agreements except as contemplated by Section 4 of this
letter. Eco Soil may not assign its rights hereunder
without the consent of Mycogen, which shall not be
unreasonably withheld (it being understood that it shall be
considered unreasonable for Mycogen to withhold consent to
an assignment
7
<PAGE> 8
to an assignee which reasonably demonstrates the resources
and ability to perform Eco Soil's financial obligations
hereunder). If any party refers this letter agreement to an
attorney to assist in its enforcement following a dispute
hereunder (including without limitation disputes heard or
adjudicated by a bankruptcy court), then the prevailing
party in any action on such dispute shall be entitled to an
award from the other covering the prevailing party's
attorneys' fees and costs. This agreement shall be governed
by California law. This letter agreement contains all of the
parties' agreements with respect to the subject matter.
I believe that the above accurately memorializes our
understandings. To confirm your agreement, please sign this letter in the place
indicated below and return it to me. We then promptly shall provide you with the
Option Payment.
Very truly yours,
/s/ WILLIAM B. ADAMS
---------------------------------
William B. Adams
President
The undersigned hereby confirms Mycogen's agreement to the terms of this letter
agreement.
MYCOGEN CORPORATION
/s/ ANDREW C. BARNES
- -----------------------------------
Andrew C. Barnes
Executive Vice President
Date: 6/9/97
8
<PAGE> 9
EXHIBIT "B"
FORM OF ASSIGNMENT OF
INTELLECTUAL PROPERTY RIGHTS
AND LICENSE AGREEMENT
<PAGE> 10
ASSIGNMENT OF INTELLECTUAL PROPERTY RIGHTS
AND LICENSE AGREEMENT
This Assignment of Intellectual Property Rights and License Agreement
(the "Assignment") is made as of ________________________, 1997 by Mycogen
Corporation, a California corporation ("Assignor"), to Eco Soil Systems, Inc., a
Nebraska corporation ("Eco Soil").
For good and valuable consideration the receipt and adequacy of which
are hereby acknowledged, Assignor hereby agrees as follows:
1. DEFINITIONS. For purposes of this Assignment, the following terms
shall have the following meanings:
"JT" means, collectively, Japanese Tobacco (USA), Inc., and its
affiliates, as defined in the JT Agreements referred to below.
"JT Agreements" means and [INSERT DESCRIPTION OF JT AGREEMENTS,
AS AMENDED PURSUANT TO SECTION 4 OF THE LETTER AGREEMENT].
"Know How" shall mean (a) all data, tests, studies and other
information pertaining to the fermentation, growth, development, use,
application or registration with governmental authorities as a pesticide of the
Microorganisms, including without limitation tests and data produced to date
regarding the efficacy and/or toxicological effects of the Microorganisms, and
(b) all processes, specialized knowledge and techniques, secret formulas or
other secret information or intellectual property, including trade secrets,
which are presently the property of Assignor and which relate in a material
manner to any or all of the development, fermentation, manufacture, use,
distribution, application, sale or licensing of the Microorganisms.
"Letter Agreement" means the letter agreement dated June 3, 1997
by and between Assignor and Eco Soil.
"Michigan State License" means all that certain Exclusive License
Agreement dated as of February 28, 1989, executed by Michigan State University,
as licensor, as amended by an amendment dated September 28, 1995.
"Microorganisms" shall mean the microorganisms known as
xanthomonas campestris, including without limitation (a) any inventions which
are the subject of the XC Patents, (b) any strains thereof which have been
licensed to Assignor pursuant to the Michigan State License Rights, and (c) any
strains thereof which have been identified or tested by Assignor for utilization
in connection with the control of poaannua.
"XC Patents" means United States Patent Nos. 5,192,541 and
5,271,932.
2. ASSIGNMENT OF INTELLECTUAL PROPERTY. For good and valuable
consideration, Assignor hereby assigns, transfers and conveys to Eco Soil the
following property (the "Intellectual Property"):
2.1 All right, title, interest and claims of Assignor in, under
or to the XC Patents and any reissues, divisions, extensions, re-examinations or
improvements thereof;
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<PAGE> 11
2.2 All right, title, interest and claims of Assignor in, under
or to the Michigan State License;
2.3 All right, title, interest and claims of Assignor in, under
or to the JT Agreements, to the extent that the same relate solely and
exclusively to any or all of the development, fermentation, manufacture, use,
distribution, application, sale or licensing of the Microorganisms;
2.4 The Microorganisms and all other inventions or other
intellectual property that are directed solely and exclusively to any or all of
the development, fermentation, manufacture, use, distribution, application, sale
or licensing of the Microorganisms that have been conceived, developed, revised
and/or reduced to practice by, with the assistance of, or under the direction
of, Assignor;
2.5 All of Assignor's right, title to, and interest in all Know
How that is directed solely and exclusively to any or all of the development,
fermentation, manufacture, use, distribution, application, sale or licensing of
the Microorganisms, including without limitation, the right to sue for
injunctive relief and damages for all past, present and future infringements,
and to collect the same for its own account and use;
2.6 All of Assignor's rights under any patents, patent
applications, patent disclosures and inventions that are directed solely and
exclusively to any or all of the development, fermentation, manufacture, use,
distribution, application, sale or licensing of the Microorganisms that have
been conceived, developed, revised and/or reduced to practice by, with the
assistance of, or under the direction of, Assignor, and any reissues, divisions,
extensions, re-examinations or improvements thereof (and any rights to reissue,
divide, extend or improve such items), and any right to sue for injunctive
relief or damages for any past, present or future infringement thereof; and
2.7 All drawings, artwork, specifications, designs, plans,
technical reports and other plans, specifications or reports of any type
relating to any of the foregoing, and all copies and tangible embodiments of any
of the foregoing, whether in printed form, electronic form or any other medium.
3. CONSEQUENCES OF OWNERSHIP OF INTELLECTUAL PROPERTY. As a
consequence of Eco Soil's ownership of the Intellectual Property, Assignor
represents, warrants, and agrees that Assignor shall have no further rights to
use or disclose the Intellectual Property, except as approved in writing by Eco
Soil. Assignor further acknowledges and agrees that such rights in favor of Eco
Soil include the right for Eco Soil to permit third parties to use all or part
of the Intellectual Property, without being required (i) to obtain any consent
or approval from Assignor or (ii) to provide any further compensation whatsoever
to Assignor or any other person or entity. The provisions of this Section 3 are
subject to Section 6 hereof.
4. LICENSE OF LICENSED IP.
4.1 To the extent that the same is not included within the
Intellectual Property assigned to Eco Soil hereby, Assignor hereby grants to Eco
Soil an irrevocable, worldwide, fully-paid, royalty-free, perpetual license to
use any other Know How, patents, patent applications and inventions heretofore
developed, conceived or reduced to practice which relate in a material manner to
any or all of the development, fermentation, manufacture, use, distribution,
application, sale or licensing of the Microorganisms for the control of
poaannua, but only to the extent that Assignor is not presently contractually
prohibited from providing such proprietary technology to Eco Soil (such Know How
and other intellectual property rights sometimes are referred to herein as the
"Licensed IP").
2
<PAGE> 12
4.2 The foregoing license grant is a limited license. No right or
license is hereby granted to Eco Soil, either expressly or by implication, to
use any of the Licensed IP other than to the extent it relates to the
development, fermentation, manufacture, use, distribution, sale or licensing of
the Microorganisms for use in the control of poaannua.
4.3 Eco Soil agrees to maintain all information disclosed to it
in connection with the license and identified in writing by Mycogen as
confidential, and to treat such information in the same manner and to the same
extent as Eco Soil's own confidential information. This obligation of
confidentiality will not apply to any confidential information disclosed under
the foregoing license to the extent that such confidential information: (A) was
already in Eco Soil's possession prior to its disclosure by Assignor; (B) was
already generally known and within the public domain prior to the date of its
disclosure to Eco Soil by Assignor; (C) becomes generally known thereafter
without any breach of Eco Soil's confidentiality obligations hereunder; or (D)
is subsequently disclosed to Eco Soil by a third party entitled to freely
disclose such confidential information without breaching an obligation of
confidentiality to Assignor. Further, this obligation of confidentiality shall
not be construed as limiting Eco Soil's right, by contract, sublicense or
otherwise, to share any such confidential information with third parties to the
extent Eco Soil deems it necessary or appropriate in order to commercially
exploit the Intellectual Property assigned to Eco Soil hereby, provided that Eco
Soil takes steps (e.g., additional confidentiality agreements with such third
parties) reasonably designed to forestall the further disclosure of such
confidential information.
5. FURTHER ACTIONS.
5.1 Assignor agrees that within five days after the date hereof,
it will deliver to Eco Soil all original drawings, artwork, specifications,
designs, plans and technical reports relating to the Intellectual Property or
the Licensed IP, whether existing in printed form, electronic form, or any other
medium.
5.2 Assignor further agrees to execute and deliver such further
documents and take such further steps as Eco Soil from time to time reasonably
may request in order to confirm, effect, evidence, perfect and otherwise
consummate the vesting of all attributes of ownership in the Intellectual
Property in Eco Soil and the licensing of the Licensed IP to Eco Soil. Such
actions shall include without limitation (a) assisting Eco Soil, to the extent
reasonably requested by Eco Soil, in registering with state, federal and foreign
governmental authorities the Microorganisms (or products incorporating some or
all of the Microorganisms) as pesticides and (b) providing Eco Soil with access
from time to time, during normal business hours and upon reasonable prior notice
to Assignor, as requested by Eco Soil, to Assignor's books and records relating
to the Intellectual Property (including any records relating to contracts or
arrangements with employees, suppliers and other third parties involved in the
development of any of the Intellectual Property or any component parts thereof).
6. PRIOR RIGHTS. This Assignment, and all rights of Eco Soil
hereunder, is made, executed and delivered to Eco Soil subject to the rights of
Michigan State University under the MSU License and JT under the JT Agreements.
7. WARRANTY DISCLAIMER; INDEMNIFICATION.
7.1 Eco Soil acknowledges and agrees that the Intellectual
Property and the Licensed IP are experimental in nature. While Assignor
represents and warrants that it is not aware of any tests or data demonstrating
that the Intellectual Property or the License IP is unusually hazardous
3
<PAGE> 13
or harmful to humans, Assignor cautions that the Intellectual Property (and/or
the Licensed IP or the Microorganisms) ultimately may prove to be hazardous or
harmful in this manner, and Eco Soil assumes this risk.
7.2 Assignor hereby reaffirms the accuracy as of the date hereof
of the representations and warranties of Assignor set forth in the Letter
Agreement.
7.3 Eco Soil agrees to defend, indemnify and hold Mycogen and its
wholly-owned affiliates, and their respective directors, officers, employees and
agents harmless from and against any and all damages, claims, demands and causes
of action (including reasonable attorneys' fees) arising out of Eco Soil's use
of the Intellectual Property or the Licensed IP, and the sale or licensing of
any products developed therefrom. The failure of Mycogen to give prompt notice
of any such claim will not release Eco Soil from any obligation under this
provision unless Eco Soil has been prejudiced by such delay.
7.4 Except as set forth herein or in the Letter Agreement,
ASSIGNOR MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OR
OTHERWISE.
8. MISCELLANEOUS. Assignor acknowledges and agrees that nothing
herein shall be construed as limiting the rights of Eco Soil under the Letter
Agreement. This Assignment shall insure to the benefit of the successors and
assigns of Eco Soil, and shall bind the successors and assigns of Assignor.
There are no third party beneficiaries of this Assignment. This Assignment shall
be governed by and construed in accordance with California law.
IN WITNESS WHEREOF, Assignor has executed this Assignment as of
the date first above written.
MYCOGEN CORPORATION,
a California corporation
By:
------------------------
Name:
------------------------
Title:
------------------------
CONSENT:
Michigan State University hereby consents to the assignment of Intellectual
Property contemplated by the foregoing assignment instrument.
MICHIGAN STATE UNIVERSITY
By:
------------------------------
Name:
-----------------------------
Title:
-----------------------------
Date: , 1997
-----------------------
<PAGE> 1
EXHIBIT 10.15
SETTLEMENT AGREEMENT
This SETTLEMENT AGREEMENT dated as of July 6, 1997 (this "Agreement") is
entered into by and among Eco Soil Systems, Inc., a Nebraska corporation ("Eco
Soil"), and Encore Technologies, Inc., a Minnesota corporation ("Encore"). The
foregoing parties are sometimes collectively referred to herein as the
"parties."
RECITALS
A. CONSULTING AGREEMENTS. Eco Soil and Encore are parties to an
Exclusive Consulting Agreement, dated as of January 1, 1995 (the "Existing
Consulting Agreement"), pertaining to, among other things, Eco Soil's
proprietary BioJect(TM) system.
B. LICENSE AGREEMENTS. Eco Soil and Encore are parties to the license
agreements listed on Exhibit "A" hereto (the "License Agreements"). The
Consulting Agreement and the License Agreements are sometimes referred to herein
collectively as the "Existing Agreements."
C. PURPOSE. The parties now desire generally to restructure their
relationship such that, among other things, Encore's role as a consultant will
be eliminated and its ability to enter the production business will be enhanced.
To effect the restructuring, (i) the parties will suspend the Existing
Agreements, (ii) Encore will transfer to Eco Soil all of Encore's intellectual
property rights in "Media" (as defined in the Assignment of Media Intellectual
Property attached hereto as Exhibit "B" (the "Assignment of Media Intellectual
Property")), (iii) Encore will transfer to Eco Soil all of Encore's intellectual
property rights in "TX-1" (as defined in the Assignment of TX-1 Intellectual
Property attached hereto as Exhibit "C" (the "Assignment of TX-1 Intellectual
Property")), (iv) the parties will enter into the License and Supply Agreement
attached hereto as Exhibit "D" (the "License and Supply Agreement"), which
relates to the licensing by Encore to Eco Soil of "AZO" (as defined therein),
and the production and sale of "Inoculum" (as defined therein), (v) Eco Soil
will make certain cash payments to Encore concurrently herewith, and (vi) Eco
Soil shall agree to make certain additional payments to Encore in accordance
with the terms hereof based upon Eco Soil's use of media in the production of
TX-1 or AZO, all as set forth more completely below.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties agree as follows:
1. SUSPENSION, POTENTIAL REVIVAL AND ULTIMATE TERMINATION OF EXISTING
AGREEMENTS. The parties hereby suspend the Existing Agreements, effective as of
the date hereof. As a result, neither party shall have any rights or obligations
under the Existing Agreements from and after the date hereof for so long as the
Existing Agreements are suspended. Notwithstanding the foregoing:
1.1 Upon the occurrence of a "Material Default Date" (as defined
in the License and Supply Agreement), the Existing Agreements shall be deemed
"revived," and the parties shall have the following obligations thereunder:
(a) From and after the Material Default Date, each party,
subject to Section 1.2 below, shall be restored to the same legal positions
which they held immediately prior to the execution and delivery of this
Agreement, and each party (again subject to Section 1.2 below) shall be
obligated to perform in full its obligations under the Existing Agreements so
revived from and after such revival for the unexpired term of such Existing
Agreements (except that Encore shall have no further
<PAGE> 2
obligations under the second sentence of the first paragraph of Section VIII of
the Consulting Agreement).
(b) To the extent that immediately prior to execution and
delivery of this Agreement either party has claims against the other under the
Existing Agreements, any applicable statutes of limitation will be tolled until
the Material Default Date, at which time such party shall have the right to
commence action thereon and, to the extent it prevails, to receive payment
thereon (it being understood, however, that any such claims shall be covered by
the release contemplated in Section 1.2 below).
(c) Any further obligations of Eco Soil to purchase
Inoculum or make "profit" payments under the License and Supply Agreement, or to
make payments hereunder with respect to Media, shall be terminated as of the
Material Default Date.
1.2 Notwithstanding the provisions of Section 1.1 above, the
rights and obligations of the parties under the Existing Agreements shall
finally and fully terminate (without suspension or any prospect of revival) upon
the earlier of:
(a) the date that the sum of the "profit" payments under
Section 3.2 of the License and Supply Agreement, plus any credits or offsets
against such "profit" payments pursuant to Sections 4.2(c) or 8 of the License
and Supply Agreements, equals $910,000;
(b) the termination, pursuant to Section 8(b) or 8(c) of
the License and Supply Agreement, of Eco Soil's obligations to purchase product
and/or make payments to Encore pursuant to the License and Supply Agreement; or
(c) in the event that the Existing Agreements are revived
pursuant to Section 1 hereof, the date upon which the total payments to Encore
pursuant to the Existing Agreements (as revived pursuant to Section 1.1 above)
after the Material Default Date equal the excess of (i) the "Material Default
Amount" (as such term is defined in the License and Supply Agreement) over (ii)
the aggregate amounts collected by Encore pursuant to exercise of remedies as a
consequence of such Material Default under the License and Supply Agreement,
including without limitation any amounts collected pursuant to the "Default
Judgment" called for by Section 7.1 thereof.
In order to further evidence the contemplated full general release of all claims
which the parties may have against each other, the parties agree that upon the
earlier of (i) the date that the sum of the "profit" payments under Section 3.2
of the License and Supply Agreement, plus any credits or offsets against such
"profit" payments pursuant to Sections 4.2(c) or 8 of the License and Supply
Agreements, equals $910,000 or (ii) the full payment of the Material Default
Amount, whether through payment by Eco Soil of the full amount required to be
paid pursuant to Section 1.2(c) hereof or otherwise, Encore and Eco Soil shall
provide each other with a full general release of all claims which Encore may
have against Eco Soil pursuant to the Existing Agreements, this Agreement, the
License and Supply Agreement or otherwise. Each such release shall contain a
waiver of California Civil Code Section 1542 and otherwise shall be in form
reasonably appropriate to evidence a full general release of claims.
Notwithstanding the foregoing, said releases shall not apply to (A) claims
arising under the Assignments or with respect to any representations or
warranties set forth in Section 4 of this Agreement or Section 13 or 14 of the
License and Supply Agreement, (B) the obligation of Encore to deliver product
ordered by Eco Soil in accordance with the terms of the License and Supply
Agreement but not yet delivered by Encore, or (C) the covenants of the parties
under Section 10 of the License and Supply Agreement.
2
<PAGE> 3
2. ESTABLISHMENT OF NEW RELATIONSHIP. The parties shall take the
following steps in order to establish a new relationship:
2.1 Concurrently herewith, Encore shall deliver to Eco Soil the
following:
(a) an executed Assignment of Media Intellectual Property
in the form attached hereto as Exhibit "B";
(b) an executed Assignment of TX-1 Intellectual Property
in the form attached hereto as Exhibit "C" (the documents delivered pursuant to
Sections 2.1(a) and (b) sometimes are referred to herein as the "Assignments");
and
(c) an executed License and Supply Agreement (this
Agreement, the Assignments and the License and Supply Agreement sometimes are
referred to herein collectively as the "Transaction Documents").
2.2 Concurrently herewith, Eco Soil shall deliver to Encore the
following:
(a) an executed License and Supply Agreement;
(b) [INTENTIONALLY DELETED]
(c) Eco Soil shall pay to Encore Fifty Thousand Dollars
($50,000) as consideration for the license granted by Encore to Eco Soil
pursuant to the License and Supply Agreement; and
(d) Eco Soil shall pay to Encore One Hundred Thousand
Dollars ($100,000) as an advance payment for Inoculum ordered (or to be ordered)
by Eco Soil pursuant to the License and Supply Agreement.
2.3 The parties acknowledge that the following steps already have
been taken and shall have the following effects:
(a) As of April 1, 1997, Eco Soil made a payment to
Encore of Fifty Thousand Dollars ($50,000) as an additional advance payment for
Inoculum ordered (or to be ordered) by Eco Soil pursuant to the License and
Supply Agreement, and substantially concurrently therewith Eco Soil provided
Encore with a purchase order (for handling pursuant to the terms hereof) calling
for production of 2,000 gallons of Inoculum by Encore. Accordingly, the total
advance payments made by Eco Soil as of the date hereof for Inoculum, after
giving effect to the payment required pursuant to Section 2.2(d) above, shall
equal $150,000; and
(b) On or about April 1, 1997, Eco Soil paid to Encore an
additional Fifty Thousand Dollars ($50,000). Such sum shall be treated as a
prepayment of amounts due pursuant to Section 3 hereof for the assignment by
Encore to Eco Soil of all of Encore's intellectual property rights in Media.
3
<PAGE> 4
3. MEDIA PAYMENTS.
3.1 As consideration for Encore's assigning all of its
intellectual property rights in Media to Eco Soil, Eco Soil will pay to Encore
$2 for each gallon of any media (whether or not produced using the Media
formulation assigned by Encore pursuant to the Assignment of Media Intellectual
Property) that Eco Soil uses in the scale-up of TX-1 or AZO distributed by Eco
Soil through the BioJect System or any other Biological Products Delivery System
during the three-year period beginning on March 1, 1997. Such media is referred
to herein as the "Earn-Out Media." The parties understand and agree that the
$50,000 payment made by Eco Soil pursuant to Section 2.3(b) hereof will be
considered a prepayment for the first 25,000 gallons of Earn-Out Media so used
by Eco Soil. Accordingly, Eco Soil will not have any obligation to make
additional payments to Encore for Media until it exhausts the $50,000 prepayment
credit. Once the $50,000 credit has been exhausted, Eco Soil shall pay to Encore
$2 for each gallon of Earn-Out Media used by Eco Soil in the scale-up of TX-1 or
AZO distributed by Eco Soil through the BioJect System or any other Biological
Products Delivery System during the three-year period beginning on March 1,
1997. Such payments shall be made within 60 days of any delivery of any such
TX-1 or AZO. If at the end of the three-year period beginning on March 1, 1997,
Eco Soil has not exhausted the $50,000 credit, Encore shall be entitled to keep
the credit balance with no obligation to reimburse Eco Soil. It is further
agreed by the parties that payments made pursuant to this Section 3.1 are
independent of and shall not be credited in any manner against Eco Soil's
obligation to provide certain payments of "Minimum Annual Profit" to Encore
pursuant to Section 5 of the License and Supply Agreement.
3.2 For each year during said 3-year period, Eco Soil shall
furnish to Encore one semiannual report for the six (6) months ending August 31
and one annual report for the year ending February 28/29 showing the total
amount (in gallons) of Earn-Out Media used in the scale-up of TX-1 or AZO
distributed through the BioJect System or any other Biological Products Delivery
System during the period to which such report relates. Such reports shall be due
on October 15 and April 1 of each year. Eco Soil shall keep complete and
accurate records in sufficient detail to properly reflect its use of Earn-Out
Media in the scale-up of TX-1 or AZO delivered through the BioJect System or any
other Biological Products Delivery System so as to enable the payments to be
made hereunder to be determined. Any such records reasonably appropriate for
calculation of the payments required to be made hereunder shall be made
available for review and copying by Encore upon request (provided that Eco Soil
shall have the right to shield from disclosure any information therein that Eco
Soil views as confidential, so long as such shielding does not unreasonably
interfere with calculation of the amounts payable hereunder). If such review
reveals any shortfall of 5% or more between the aggregate payments due under
Section 3.1 hereof and the aggregate amounts paid under Section 3.1 hereof as of
any date of review, then Eco Soil shall reimburse Encore for all audit costs
incurred, including the reasonable fees and expenses of Encore.
4. REPRESENTATIONS AND WARRANTIES.
4.1 Encore represents and warrants to Eco Soil as follows:
(a) Encore has had full access to the books and records
of Eco Soil relating to the parties' existing relationship and has, to its
complete satisfaction, independently assessed the value of its rights and
obligations under the Existing Agreements. On the basis of such analysis, Encore
independently has concluded, without reliance in any manner whatsoever upon any
representations, warranties or covenants of Eco Soil, to proceed with the
execution and consummation of this Agreement. The Existing Agreements and the
warrant referenced in Section 4.1(d) hereof constitute all of the
4
<PAGE> 5
agreements between the parties immediately prior to the execution and delivery
of the Transaction Documents.
(b) Encore does not possess any right, title, interest or
claim in or to Eco Soil's BioJect(TM), ClearLake(TM) or other Biological Product
Delivery Systems (as such term is used in the License and Supply Agreement), and
nothing herein or in the other agreements contemplated hereby shall be construed
as providing Encore with any such right, title, interest or claim.
(c) Encore has the requisite legal power and authority to
execute, deliver and carry out the Transaction Documents. The execution,
delivery and performance of the Transaction Documents by Encore does not require
the consent or approval of any other person or entity (unless such consent or
approval already has been obtained). This Agreement constitutes, and the
Assignments and the License and Supply Agreement will constitute when duly
executed and delivered, legally valid and binding obligations of Encore,
enforceable against Encore in accordance with their terms.
(d) Except for a transfer by Encore to a former
shareholder of half of its interest in a warrant to purchase 50,000 shares of
Eco Soil common stock, Encore has not previously assigned, transferred or
pledged, or purported to assign, transfer or pledge, to any person, any
interests in, or claims arising out of, the Existing Agreements or its past
relationship with Eco Soil. The parties acknowledge and agree that nothing in
this Agreement is intended to affect the validity of said warrant.
(e) Encore has not previously conveyed any right,
license, sublicense or other interest in and to the Intellectual Property (as
such term is defined, respectively, in the Assignment of Media Intellectual
Property and the Assignment of TX-1 Intellectual Property) to any other person
or entity, and no party claiming through Encore shall have a right to receive
any payments from Eco Soil as a consequence of Eco Soil's exercise of its rights
to use Media, to distribute Media or to distribute TX- 1 or AZO developed or
scaled-up with Media (provided that Eco Soil may be required to make certain
payments in connection with the use or sale of TX-1 in accordance with the terms
of the "Michigan State License Agreement" (as such term is defined in the
Assignment of TX-1 Intellectual Property)). Encore is not in default of its
obligations under the Michigan State License Agreement, and Encore has not
received any notice from the licensor thereunder alleging any such default.
Encore has not terminated the license granted therein pursuant to Section
VII.1(a) thereof, and Encore has not converted said License to a non-exclusive
license as contemplated by Section VII.1(b) thereof. As of the date hereof, no
sales or other events have occurred which give rise to the payment of royalties
under the Michigan State License Agreement, except for royalties that have been
paid in full or which Encore hereby covenants it promptly will pay in full out
of the funds provided to Encore pursuant to Section 2.2 hereof, and all minimum
royalties required to be paid thereunder as of the date hereof have been paid in
full.
(f) Encore has taken appropriate steps reasonable under
the circumstances to assure that the Know How (as such term is defined,
respectively, in the Assignment of Media Intellectual Property and the
Assignment of TX-1 Intellectual Property) has not been disclosed to any person
or entity other than Eco Soil and employees of Encore (the "Information
Sensitive Employees") involved in research, development and utilization of such
Know How. To Encore's best knowledge, no person or entity other than Eco Soil
and the Information Sensitive Employees have obtained access to, or have become
aware of, the Know How.
4.2 Eco Soil represents and warrants to Encore as follows:
5
<PAGE> 6
(a) Eco Soil has the requisite legal power and authority
to execute, deliver and carry out this Agreement.
(b) This Agreement has been executed and delivered by Eco
Soil and constitutes a valid and binding obligation, enforceable against it in
accordance with its terms.
(c) Eco Soil has not previously assigned, transferred or
pledged, or purported to assign, transfer or pledge, to any person, any interest
in, or claims arising out of, the Existing Agreements or its past relationship
with Encore. The Existing Agreements and the warrant referenced in Section
4.1(d) hereof constitute all of the agreements between the parties immediately
prior to the execution and delivery of the Transaction Documents.
5. SECRECY COVENANT. Encore shall take appropriate steps reasonable
under the circumstances to assure that the Know How (as such term is defined,
respectively, in the Assignment of Media Intellectual Property and the
Assignment of TX-1 Intellectual Property) is not disclosed to any person or
entity other than Eco Soil.
6. MISCELLANEOUS. The validity, interpretation, and performance of this
Agreement shall be controlled by and construed under the laws of the State of
Minnesota, the state in which this Agreement is accepted. Licensee hereby
irrevocably consents to the jurisdiction of the appropriate Minnesota courts
located in Hennepin County, Minnesota, and agrees that all litigation arising
hereunder shall be venued in Hennepin County, Minnesota. Each person executing
this Agreement represents that he or she has read and fully understands this
Agreement and that he or she has the authority to execute this Agreement. Each
of the parties further acknowledges that it has been represented by counsel in
connection with the preparation and execution of this Agreement and has been
advised of the legal effect hereof. This Agreement, the License and Supply
Agreement, the Assignment of Media Intellectual Property and the Assignment of
TX-1 Intellectual Property set forth the entire understanding of the parties
with respect to the subject matter hereof. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. No change, modification,
extension, termination or waiver of the Agreement, or any of the provisions
herein contained, shall be valid unless made in writing and signed by duly
authorized representatives of the parties hereto. The waiver by either party
hereto of any right hereunder or the failure to perform or of a breach by the
other party shall not be deemed a waiver of any other right hereunder or of any
other breach or failure by said other party whether of a similar nature or
otherwise. Any of the provisions of the Agreement which are determined to be
invalid or unenforceable in any jurisdiction shall be ineffective to the extent
of such invalidity or unenforceability in such jurisdiction, without rendering
invalid or unenforceable the remaining provisions hereof and without affecting
the validity or enforceability of any of the terms of the Agreement in any other
jurisdiction. Paragraph, section and similar headings used herein are not to be
considered part of this Agreement and are included solely for the convenience of
the parties and are not intended to be full or accurate descriptions of the
content thereof. Time is of the essence in this Agreement and the failure of
either party to promptly pay when due any payments (after the expiration of any
applicable notice and cure periods), or to perform any material obligations
required herein (after the expiration of any applicable notice and cure
periods), may be treated by the other party as a material breach of this
Agreement and shall entitle the non-breaching party to all rights and remedies
afforded by applicable law, subject to the limitations set forth herein.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed as of the date first above written.
ECO SOIL SYSTEMS, INC., ENCORE TECHNOLOGIES, INC.,
a Nebraska corporation a Minnesota corporation
By: /s/ William B. Adams By: /s/ David Goulet
- --------------------------------- ----------------------------------
Name: William B. Adams Name: David Goulet
Its: Chief Executive Officer Its: President
7
<PAGE> 1
EXHIBIT 10.16
ASSIGNMENT OF TX-1 INTELLECTUAL PROPERTY
This Assignment of TX-1 Intellectual Property (the "Assignment") is made
as of June 23, 1997 by Encore Technologies, Inc., a Minnesota corporation
("Encore"), to Eco Soil Systems, Inc., a Nebraska corporation ("Eco Soil").
For good and valuable consideration the receipt and adequacy of which
are hereby acknowledged, Encore hereby agrees as follows:
1. DEFINITIONS. For purposes of this Assignment, the following
terms shall have the following meanings:
"Know How" shall mean all secret processes, specialized knowledge
and techniques, secret formulas or other secret information or intellectual
property, including trade secrets, which are presently the property of Encore
and which relate to TX-1.
"License and Supply Agreement" means the License and Supply
Agreement dated July 6, 1997 by and between Encore and Eco Soil.
"Michigan State License Agreement" means that certain Exclusive
License Agreement by and between Michigan State University and Encore with an
"effective date" of June 15, 1995.
"Michigan State License Rights" means all right, title, interest
and claims of Encore under the Michigan State License Agreement.
"Settlement Agreement" means the Settlement Agreement dated as of
July 6, 1997 by and between Encore and Eco Soil.
"TX-1" shall mean the micro organism known as pseudomonas
aureofaciens TX-1.
2. ASSIGNMENT OF INTELLECTUAL PROPERTY. For good and valuable
consideration, including without limitation the execution by Eco Soil of the
Settlement Agreement and the License and Supply Agreement, Encore hereby
assigns, transfers and conveys to Eco Soil the following property (the
"Intellectual Property"):
2.1 The Michigan State License Rights;
2.2 TX-1 and all other inventions or other intellectual property
relating to TX-1 that have been conceived, developed, revised and/or reduced to
practice by, with the assistance of, or under the direction of, Encore;
2.3 All right, title to, and interest in the Know How, including
without limitation, the right to sue for injunctive relief and damages for all
past, present and future infringements, and to collect the same for its own
account and use;
2.4 All rights under any patents, patent applications, patent
disclosures and inventions relating to TX-1 that have been conceived, developed,
revised and/or reduced to practice by, with the assistance of, or under the
direction of, Encore, and any reissues, divisions, extensions, re-examinations
or improvements thereof (and any rights to reissue, divide, extend or improve
such items), and any right to sue for injunctive relief or damages for any past,
present or future infringement thereof;
<PAGE> 2
2.5 All intellectual property rights similar to or relating to
any of the foregoing; and
2.6 All drawings, artwork, specifications, designs, plans,
technical reports and other plans, specifications or reports of any type
relating to any of the foregoing, and all copies and tangible embodiments of any
of the foregoing, whether in printed form, electronic form or any other medium.
3. CONSEQUENCES OF OWNERSHIP OF INTELLECTUAL PROPERTY. As a
consequence of Eco Soil's ownership of the Intellectual Property, Encore agrees
that Eco Soil is fully authorized and entitled to exercise all rights of
ownership with respect to the Intellectual Property that were held by Encore
immediately prior to the delivery of this Assignment, and that Encore shall not
have any further right to use the Intellectual Property or exercise any such
rights of ownership, except as hereafter agreed in writing by Eco Soil. Encore
further acknowledges and agrees that Eco Soil's rights include the right for Eco
Soil to permit third parties to use all or part of the Intellectual Property,
without being required (i) to obtain any consent or approval from Encore or (ii)
to provide any further compensation whatsoever to Encore (except as provided in
the License and Supply Agreement with respect to TX-1 produced by Encore
pursuant to purchase orders submitted by Eco Soil).
4. FURTHER ACTIONS.
4.1 Encore agrees that within five days after the date hereof, it
will deliver to Eco Soil all original drawings, artwork, specifications,
designs, plans and technical reports relating to the Intellectual Property,
whether existing in printed form, electronic form, or any other medium.
4.2 Encore further agrees to execute and deliver such further
documents and take such further steps as Eco Soil from time to time reasonably
may request in order to confirm, effect, evidence, perfect and otherwise
consummate the vesting of all attributes of ownership in the Intellectual
Property in Eco Soil. Such actions shall include without limitation (a)
assisting Eco Soil, to the extent reasonably requested by Eco Soil, in obtaining
a re-issuance of the Michigan State License Rights to Eco Soil in order to
further permit the commercial use and application by Eco Soil of TX-1 (it being
understood that Encore shall have no right, title, interest or claim in any such
re-issued rights or licenses) and (b) providing Eco Soil with access from time
to time, during normal business hours and upon reasonable prior notice to
Encore, as requested by Eco Soil, to Encore's books and records relating to the
Intellectual Property (including any records relating to contracts or
arrangements with employees, suppliers and other third parties involved in the
development of any of the Intellectual Property or any component parts thereof).
5. MISCELLANEOUS. Encore acknowledges that this Assignment is being
executed and delivered pursuant to the Settlement Agreement. Encore further
acknowledges and agrees that nothing herein shall be construed as limiting the
rights of Eco Soil under the Settlement Agreement. This Assignment shall insure
to the benefit of the successors and assigns of Eco Soil, and shall bind the
successors and assigns of Encore. There are no third party beneficiaries of this
Assignment. The validity, interpretation, and performance of this Assignment
shall be controlled by and construed under the laws of the State of Minnesota,
the state in which this Assignment is accepted. Licensee hereby irrevocably
consents to the jurisdiction of the appropriate Minnesota courts located in
Hennepin County, Minnesota, and agrees that all litigation arising hereunder
shall be venued in Hennepin County, Minnesota. No change, modification,
extension, termination or waiver of the Assignment, or any of the provisions
herein contained, shall be valid unless made in writing and signed by duly
authorized representatives of the parties hereto. The waiver by either party
hereto of any right hereunder or the failure to perform or of a breach by the
other party shall not be deemed a waiver of any other right
2
<PAGE> 3
hereunder or of any other breach or failure by said other party whether of a
similar nature or otherwise. Any of the provisions of the Assignment which are
determined to be invalid or unenforceable in any jurisdiction shall be
ineffective to the extent of such invalidity or unenforceability in such
jurisdiction, without rendering invalid or unenforceable the remaining
provisions hereof and without affecting the validity or enforceability of any of
the terms of the Assignment in any other jurisdiction. Paragraph, section and
similar headings used herein are not to be considered part of this Assignment
and are included solely for the convenience of the parties and are not intended
to be full or accurate descriptions of the content thereof. Time is of the
essence in this Assignment and the failure of either party to promptly pay when
due any payments (after the expiration of any applicable notice and cure
periods), or to perform any material obligations required herein (after the
expiration of any applicable notice and cure periods), may be treated by the
other party as a material breach of this Assignment and shall entitle the non-
breaching party to all rights and remedies afforded by applicable law, subject
to the limitations set forth herein.
IN WITNESS WHEREOF, Encore has executed this Assignment as of the
date first above written.
ENCORE TECHNOLOGIES, INC.,
a Minnesota corporation
By: /s/ DAVID GOULET
----------------------------
Name: David Goulet
Title: President
CONSENT
Michigan State University, as the owner of certain rights to TX-1 and as the
licensor under the above-referenced Michigan State License Agreement, hereby
consents to the assignment of Intellectual Property effected by the foregoing
assignment instrument.
Michigan State University
By: /s/ STEPHEN H. TERRY
- ----------------------------
Name: Stephen H. Terry
Title: Assistant VP for Finance
Date: June 30, 1997
3
<PAGE> 1
EXHIBIT 10.17
ASSIGNMENT OF MEDIA INTELLECTUAL PROPERTY
This Assignment of Media Intellectual Property (the "Assignment") is
made as of June 23, 1997 by Encore Technologies, Inc., a Minnesota corporation
("Encore"), to Eco Soil Systems, Inc., a Nebraska corporation ("Eco Soil").
For good and valuable consideration the receipt and adequacy of which
are hereby acknowledged, Encore hereby agrees as follows:
1. DEFINITIONS. For purposes of this Assignment, the following terms
shall have the following meanings:
"Know How" shall mean all secret processes, specialized knowledge
and techniques, secret formulas or other secret information or intellectual
property, including trade secrets, which are presently the property of Encore
and which relate to Media.
"Media" shall mean the proprietary material formulations provided
by Encore used to promote fermentation and multiplication of inoculum and other
biological materials in Eco Soil's proprietary BioJectTM system.
"Settlement Agreement" shall mean the Settlement Agreement dated
as of July 6, 1997 by and between Encore and Eco Soil.
2. ASSIGNMENT OF INTELLECTUAL PROPERTY. For the consideration set
forth at Section 3.1 of the Settlement Agreement, Encore hereby assigns,
transfers and conveys to Eco Soil the following property (the "Intellectual
Property"):
2.1 Media and all other inventions or other intellectual property
relating to Media that have been conceived, developed, revised and/or reduced to
practice by, with the assistance of, or under the direction of, Encore;
2.2 All right, title to, and interest in the Know How, including
without limitation, the right to sue for injunctive relief and damages for all
past, present and future infringements, and to collect the same for its own
account and use;
2.3 All rights under any patents, patent applications, patent
disclosures and inventions relating to Media (if any) that have been conceived,
developed, revised and/or reduced to practice by, with the assistance of, or
under the direction of, Encore, and any reissues, divisions, extensions, re-
examinations or improvements thereof (and any rights to reissue, divide, extend
or improve such items), and any right to sue for injunctive relief or damages
for any past, present or future infringement thereof;
2.4 All intellectual property rights similar to or relating to
any of the foregoing; and
2.5 All drawings, artwork, specifications, designs, plans,
technical reports and other plans, specifications or reports of any type
relating to any of the foregoing, and all copies and tangible embodiments of any
of the foregoing, whether in printed form, electronic form or any other medium.
3. CONSEQUENCES OF OWNERSHIP OF INTELLECTUAL PROPERTY. As a
consequence of Eco Soil's ownership of the Intellectual Property, Encore agrees
that Eco Soil is fully authorized and entitled to exercise all rights of
ownership with respect to the Intellectual Property that were held by Encore
immediately prior to the delivery of this Assignment, and that Encore shall not
have any further right to
<PAGE> 2
use the Intellectual Property or exercise any such rights of ownership, except
as hereafter agreed in writing by Eco Soil. Encore further acknowledges and
agrees that Eco Soil's rights include the right for Eco Soil to permit third
parties to use all or part of the Intellectual Property, without being required
(i) to obtain any consent or approval from Encore or (ii) to provide any further
compensation whatsoever to Encore (except as provided in the Settlement
Agreement).
4. FURTHER ACTIONS.
4.1 Encore agrees that within five days after the date hereof, it
will deliver to Eco Soil all original drawings, artwork, specifications,
designs, plans and technical reports relating to the Intellectual Property,
whether existing in printed form, electronic form, or any other medium.
4.2 Encore further agrees to execute and deliver such further
documents and take such further steps as Eco Soil from time to time reasonably
may request in order to confirm, effect, evidence, perfect and otherwise
consummate the vesting of all attributes of ownership in the Intellectual
Property in Eco Soil. Such actions shall include without limitation providing
Eco Soil with access from time to time, during normal business hours and upon
reasonable prior notice to Encore, as requested by Eco Soil, to Encore's books
and records relating to the Intellectual Property (including any records
relating to contracts or arrangements with employees, suppliers and other third
parties involved in the development of any of the Intellectual Property or any
component parts thereof).
5. MISCELLANEOUS. Encore acknowledges that this Assignment is being
executed and delivered pursuant to the Settlement Agreement. Encore further
acknowledges and agrees that nothing herein shall be construed as limiting the
rights of Eco Soil under the Settlement Agreement. This Assignment shall insure
to the benefit of the successors and assigns of Eco Soil, and shall bind the
successors and assigns of Encore. There are no third party beneficiaries of this
Assignment. The validity, interpretation, and performance of this Assignment
shall be controlled by and construed under the laws of the State of Minnesota,
the state in which this Assignment is accepted. Licensee hereby irrevocably
consents to the jurisdiction of the appropriate Minnesota courts located in
Hennepin County, Minnesota, and agrees that all litigation arising hereunder
shall be venued in Hennepin County, Minnesota. No change, modification,
extension, termination or waiver of the Assignment, or any of the provisions
herein contained, shall be valid unless made in writing and signed by duly
authorized representatives of the parties hereto. The waiver by either party
hereto of any right hereunder or the failure to perform or of a breach by the
other party shall not be deemed a waiver of any other right hereunder or of any
other breach or failure by said other party whether of a similar nature or
otherwise. Any of the provisions of the Assignment which are determined to be
invalid or unenforceable in any jurisdiction shall be ineffective to the extent
of such invalidity or unenforceability in such jurisdiction, without rendering
invalid or unenforceable the remaining provisions hereof and without affecting
the validity or enforceability of any of the terms of the Assignment in any
other jurisdiction. Paragraph, section and similar headings used herein are not
to be considered part of this Assignment and are included solely for the
convenience of the parties and are not intended to be full or accurate
descriptions of the content thereof. Time is of the essence in this Assignment
and the failure of either party to promptly pay when due any payments (after the
expiration of any applicable notice and cure periods), or to perform any
material obligations required herein (after the expiration of any applicable
notice and cure periods), may be treated by the other party as a material breach
of this Assignment and shall entitle the non- breaching party to all rights and
remedies afforded by applicable law, subject to the limitations set forth
herein.
2
<PAGE> 3
IN WITNESS WHEREOF, Encore has executed this Assignment as of the
date first above written.
ENCORE TECHNOLOGIES, INC.,
a Minnesota corporation
By: /s/ DAVID GOULET
----------------------------
Name: David Goulet
Title: President
3
<PAGE> 1
EXHIBIT 10.18
LICENSE AND SUPPLY AGREEMENT
THIS LICENSE AND SUPPLY AGREEMENT (this "Agreement") is entered into as
of July 6, 1997 by and between Eco Soil Systems, Inc., a Nebraska corporation
("Eco Soil"), and Encore Technologies, Inc., a Minnesota corporation ("Encore").
The foregoing parties are sometimes collectively referred to herein as the
"parties."
RECITALS
A. NEW RELATIONSHIP. The parties previously entered into a Settlement
Agreement dated as of July 6, 1997 (the "Settlement Agreement"), pursuant to
which they have agreed to restructure their relationship. Specifically, the
parties have agreed to suspend the Exclusive Consulting Agreement, dated as of
January 1, 1995, and the license agreements listed on Exhibit "A" to the
Settlement Agreement.
B. PURPOSE. The parties' restructuring of their relationship permits
Encore to reduce its role as a consultant and to begin to produce microbes and
related products. As part of the restructuring, (i) Encore has agreed to grant
Eco Soil an exclusive, royalty-free, perpetual and worldwide license with
respect to AZO (as hereinafter defined) in accordance with the additional terms
identified in Section 2 hereof, (ii) Encore has agreed to produce certain
Inoculum for Eco Soil, in the amounts and times ordered by Eco Soil pursuant to
the terms hereof, and (iii) Eco Soil has agreed to purchase product and/or make
payments (including certain payments under the Settlement Agreement) to Encore
in amounts calculated to provide Encore with certain minimum amounts of "profit"
payments pursuant to this Agreement for each of the three years beginning March
1, 1997, all as set forth more completely below.
AGREEMENT
Now, therefore, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the following terms
shall have the following meanings:
"Additional Inoculum Products" shall have the meaning assigned to
such term in Section 6 hereof.
"Affiliate" shall mean, with respect to any Person, any other
Person which directly or indirectly controls, is controlled by, or is under
common control with, such Person. A Person shall be regarded as in control of
another Person if it owns, or directly or indirectly controls, at least forty
percent (40%) of the voting stock or other ownership interest of the other
Person, or if it directly or indirectly possesses the power to direct or cause
the direction of the management and policies of the other Person by any means
whatsoever.
"Assignments" means the Assignment of Media Intellectual Property
and the Assignment of TX-1 Intellectual Property referenced in the Settlement
Agreement.
"AZO" means any of Encore's trade secret or other proprietary
formulations or know how relating to the microorganism known as azospirillum
brasilense Cd, together with any trade secret or other know how relating to
Encore's present ability to produce, develop, deliver, ferment, distribute,
apply and/or otherwise use such microorganism in, by, through or in connection
with Biological Product Delivery Systems.
<PAGE> 2
"Biological Product Delivery Systems" means the BioJect(TM)
system and any equivalent, successor, improved, derivative or alternative
systems or vehicles developed by or marketed by Eco Soil for development,
delivery, fermentation, distribution and/or application of biological
products in the turf maintenance, agricultural crop, soil remediation
and/or water quality management industries.
"Confidential Information" shall have the meaning assigned to
such term in Section 10.1 hereof.
"Contract Year" shall mean each of: (a) March 1, 1997 through
February 28, 1998 (the "First Contract Year"); (b) March 1, 1998 through
February 28, 1999 (the "Second Contract Year"); and (c) March 1, 1999 through
February 29, 2000 (the "Third Contract Year").
"Declination Election" shall have the meaning assigned to such
term in Section 4.2(c) hereof.
"Declined Inoculum" shall have the meaning assigned to such term
in Section 4.2(c) hereof.
"Default Judgment" shall have the meaning assigned to such term
in Section 7.2 hereof.
"Encore Production Default" shall have the meaning assigned to
such term in Section 4.2(d) of this Agreement.
"Inoculum" shall mean AZO and the microorganisms and products
known as pseudomonas aureofaciens TX-1 and burkolaria cepacia J82 ("Deny J82"),
together with any equivalent, successor or improved products as may be capable
of being produced by any additional technology available to Encore without
unreimbursed expense to Encore in excess of that which Encore would incur
hereunder without such additional technology.
"Inoculum Technical Information" shall mean all proprietary
information developed or invented by either party which is utilized in the
design or production of Inoculum.
"Material Default" shall mean either of the following:
(a) a failure by Eco Soil to pay when due to Encore any
payments required under this Agreement aggregating at least $1,000, and the
continuation of such failure for a period of 20 days after Encore's delivery to
Eco Soil of written notice specifying the nature of the default, the amount of
the required payments to Encore that have not been paid when due, and the fact
that the failure to cure such default on or before said 20th day shall
constitute a "Material Default" hereunder (provided however, that from and after
the fourth time that such a default occurs hereunder and Encore provides Eco
Soil with the foregoing notice with respect thereto, the cure period specified
in this clause (a) shall be reduced to 10 days from Encore's delivery to Eco
Soil of the requisite written notice); or
(b) a failure by Eco Soil to perform any other material
obligation of Eco Soil under this Agreement (i.e., a material obligation other
than an obligation calling for the payment of money by Eco Soil to Encore), and
the continuation of such failure for a period of 30 days after Encore's delivery
to Eco Soil of a written notice specifying the nature of the default and the
fact that the failure to cure such default on or before said 30th day shall
constitute a "Material Default" hereunder.
2
<PAGE> 3
"Material Default Amount" shall have the meaning assigned to such
term in Section 7.1 hereof.
"Material Default Date" shall mean the date upon which an
applicable cure period set forth in the definition of "Material Default" expires
without the curing by Eco Soil of the default set forth in notice delivered to
Eco Soil.
"Person" shall mean an individual, corporation, partnership,
trust, business trust, association, joint stock company, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization, governmental
authority or any other form of entity not specifically listed herein.
2. AZO LICENSE.
2.1 Subject to immediate termination in the event of any revival
pursuant to Section 1.2 of the Settlement Agreement of the "Existing Agreements"
(as defined in the Settlement Agreement), Encore hereby grants to Eco Soil an
exclusive, royalty-free, perpetual, worldwide license to make, use, license,
sub-license, sell, offer to sell and distribute AZO for development, delivery,
fermentation, distribution and/or application through BioJect(TM) and other
Biological Product Delivery Systems; provided, however, (a) that Encore retains
the right to make, use, license, sub-license, sell, offer to sell and distribute
AZO for other applications and uses and (b) prior to the date that Eco Soil has
a right to receive the release contemplated by Section 1.2 of the Settlement
Agreement, any such sub-license shall specifically acknowledge the fact that Eco
Soil's rights under the license to AZO granted herein are subject to termination
in accordance with this Agreement.
2.2 Encore agrees that any and all inventions, discoveries,
methods, processes and ideas (collectively, "Improvements") relating to AZO that
are conceived, developed, revised and/or reduced to practice by Encore during
the term of this Agreement, whether patentable or not, shall be promptly
reported to Eco Soil. As used in Section 2.1, the term "AZO" shall be deemed to
include Improvements.
2.3 Upon any termination of the license granted to Eco Soil
pursuant to Section 2.1 above as a consequence of a revival of the Existing
Agreements pursuant to Section 1.1 of the Settlement Agreement, Eco Soil
promptly following request therefor from Encore shall provide Encore with a list
of all persons or entities to whom Eco Soil has sub-licensed any of its rights
under the license granted pursuant to Section 2.1 above.
3. PAYMENTS BY ECO SOIL.
3.1 The parties acknowledge that on or about April 1, 1997, Eco
Soil provided Encore with a purchase order for 2,000 gallons of Inoculum and
with cash in the amount of $50,000, as prepayment of all amounts payable for
such Inoculum. As required by Sections 2.2(c), 2.2(d) and 2.3(a) of the
Settlement Agreement, concurrently herewith Eco Soil further shall deliver to
Encore (a) a purchase order for 4,000 additional gallons of Inoculum, (b) cash
in the amount of $100,000 as advance payment for all amounts payable for such
Inoculum and (c) cash in the amount of $50,000 as consideration for the License
granted by Encore to Eco Soil pursuant to this Agreement.
3.2 Subject to Sections 4.2(c) and 8 hereof, on or before the
last day of each month set forth in the left column below, Eco Soil shall
provide Encore with the corresponding payments listed in the right column below:
3
<PAGE> 4
<TABLE>
<CAPTION>
DATE "PROFIT" PREPAYMENT
- ---- -------------------
<S> <C>
FIRST CONTRACT YEAR:
August 1997 $ 15,000
September 1997 $ 15,000
October 1997 $ 12,000
November 1997 $ 12,000
December 1997 $ 12,000
February 1998 $ 144,000
SECOND CONTRACT YEAR:
April 1998 $ 15,000
May 1998 $ 15,000
June 1998 $ 15,000
July 1998 $ 30,000
August 1998 $ 30,000
September 1998 $ 30,000
October 1998 $ 15,000
November 1998 $ 15,000
December 1998 $ 15,000
January 1999 $ 15,000
February 1999 $ 155,000
THIRD CONTRACT YEAR:
March 1999 $ 15,000
April 1999 $ 15,000
May 1999 $ 15,000
June 1999 $ 15,000
July 1999 $ 30,000
August 1999 $ 30,000
September 1999 $ 30,000
October 1999 $ 15,000
November 1999 $ 15,000
December 1999 $ 15,000
January 2000 $ 15,000
February 2000 $ 140,000
</TABLE>
3.3 The payments described in Section 3.2 represent payments of
the "profit" component of Inoculum or Additional Inoculum Products which Eco
Soil has the right to order under Section 3.4 of this Agreement. Subject to
Sections 4.2(c) and 8 hereof, Encore shall have the right to receive and retain
such payments irrespective of the quantity of Inoculum or Additional Inoculum
Product actually ordered by Eco Soil.
3.4 During each Contract Year, Eco Soil shall have the right to
order Inoculum and Additional Inoculum Products in aggregate quantities which
(on the basis of $15 of "profit" per gallon of Inoculum and an amount of
"profit" per gallon of Additional Inoculum Product as determined pursuant
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to Section 6 below) will not exceed the sum of "profit" payments scheduled to be
made by Eco Soil in said Contract Year pursuant to Section 3.2 (plus any unused
balance of "profit" payments from any prior Contract Year). Further, within 30
days after delivery of Inoculum or Additional Inoculum Product ordered by Eco
Soil (other than the Inoculum referenced in Section 3.1 hereof), Eco Soil shall
pay to Encore $10 for each gallon of Inoculum so delivered and the "cost
component" of each gallon of Additional Inoculum Product so delivered.
3.5 Eco Soil shall employ the following procedures with respect
to purchase orders:
(a) Eco Soil will place orders by facsimile sent to Encore
at the fax number set forth in Section 15.1 below;
(b) Each order placed by Eco Soil shall include a
requested delivery date, which shall be no earlier than 60 days after
the date of the order, unless otherwise agreed by Encore; and
(c) Each order placed by Eco Soil shall specify the volume
of product ordered by the purchase order (which, unless otherwise agreed
by Encore, shall not be less than 60 gallons per purchase order), and
shall state either the type of product to be delivered or that Eco Soil
and Encore shall consult with one another to determine the appropriate
product for Eco Soil's customers' needs.
4. PRODUCTION BY ENCORE.
4.1 Subject to the production covenants set forth in this Section
4 and Section 5 hereof, Encore will produce Inoculum and Additional Inoculum
Product and sell it to Eco Soil when, as and if ordered by Eco Soil during any
Contract Year pursuant to Section 3 above. Encore shall be responsible for
procuring at its own expense all raw materials necessary to produce Inoculum as
and when ordered by Eco Soil. Eco Soil hereby grants to Encore a non-exclusive
license to use the "Intellectual Property" referenced in the Assignment of TX-1
Intellectual Property solely to the extent necessary to produce and deliver TX-1
ordered by Eco Soil pursuant to this Agreement.
4.2 Encore hereby agrees to comply with the following production
covenants with respect to Inoculum:
(a) Encore shall produce all Inoculum in accordance with
the specifications set forth on Attachment No. 1 hereto, as from time to
time modified by mutual agreement of Eco Soil and Encore.
(b) Encore shall obtain and maintain an EPA establishment
number, and further shall obtain, at its sole cost, all necessary and
appropriate government approvals pertaining to the production of
Inoculum. Encore further shall provide reasonable assistance as
requested by Eco Soil in connection with Eco Soil's efforts to obtain
any required permits or product registrations required at federal, state
or local levels for sale of Inoculum produced pursuant to this
Agreement.
(c) Encore shall deliver product on the date(s) specified
in purchase orders delivered by Eco Soil pursuant to this Agreement; it
being understood that the date set for delivery shall be at least 60
days from the date of Encore's receipt of the purchase order, unless
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<PAGE> 6
otherwise agreed by the parties. Notwithstanding the foregoing: (i)
Encore shall not be required to supply more than 5,000 gallons of
Inoculum in any 60-day period, unless otherwise agreed by the parties;
and (ii) in any event, Encore shall have the right within 15 days after
receipt of any purchase order relating to Inoculum, to provide Eco Soil
with written notice (a "Declination Election") that Encore irrevocably
elects to not produce the Inoculum requested in such particular purchase
order (the "Declined Inoculum"), in which case: (A) Encore shall be
released from any obligation to produce, and Eco Soil shall be released
from any obligation to accept from Encore, the Declined Inoculum; (B)
Eco Soil shall receive a credit of $25 per gallon of Declined Inoculum
against the "profit" payments next payable under Section 3.2 hereof; and
(C) the parties' respective rights and obligations hereunder shall not
otherwise be affected.
(d) If (i) Encore does not timely deliver a Declination
Election with respect to a particular purchase order in accordance with
Section 5.2(c)(ii) hereof, (ii) Encore thereafter fails to provide
product requested in such purchase order in accordance with the
requirements of this Agreement by the date set forth in the purchase
order, (iii) such failure is not excused pursuant to Section 15.5
hereof, and (iv) such failure persists for a period of 5 days after Eco
Soil provides Encore with written notice of such failure, then such
failure shall constitute an "Encore Production Default" for purposes of
this Agreement.
5. DELIVERY OF PRODUCT. All deliveries by Encore shall comply with
and shall be subject to the following terms and conditions:
5.1 Any terms contained in purchase orders submitted pursuant to
this Agreement, other than a specification of the type, quantity, requested
delivery dates for the products being ordered, shall have no force and effect
whatsoever. The terms and conditions set forth in this Agreement shall control
performance under any such orders.
5.2 Any Inoculum ordered by Eco Soil shall be shipped F.O.B.
Encore's production facility. All Inoculum ordered by Eco Soil will be shipped
to the location specified in the applicable purchase order (it being understood
that Encore shall not be required to prepare packages for shipment of less than
5 gallons to any particular location specified in the purchase order).
5.3 Eco Soil shall bear all cost of transportation and shall bear
all risk of loss while Inoculum is in transit.
5.4 Encore shall provide Eco Soil an opportunity to inspect, test
and accept or reject all product prior to shipment. Eco Soil may reject product
not meeting the requirements set forth in Section 4.2. In furtherance of these
rights, Encore shall provide Eco Soil, on the first of each month, with a
written schedule setting forth the production and shipment schedules for the
ensuing month (based upon purchase orders theretofore delivered by Eco Soil). In
addition, immediately prior to shipment Encore will make slides reasonably
designed to show the biological structure of Inoculum included in the shipment
and shall retain such slides (in a manner reasonably calculated to preserve
their utility as an indicia of the structure of the Inoculum to which they
apply) for a period of at least three years. If Eco Soil does not exercise its
right to inspect and test product prior to shipment, such product shall be
deemed to meet the specifications set therefor by the parties unless an analysis
of the slides relating to such shipment indicates otherwise.
5.5 Notwithstanding any provisions of this Agreement to the
contrary, Encore shall not be required to deliver (a) any further Additional
Inoculum Product from and after March 1, 2000,
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<PAGE> 7
(b) more than 7,000 gallons of Inoculum from and after March 1, 2000, or (c) any
further Inoculum from and after October 1, 2000.
6. ADDITIONAL INOCULUM PRODUCTS. During the term hereof, Eco Soil may
present Encore with opportunities to produce additional inoculum products
("Additional Inoculum Products") for Eco Soil. The parties hereby agree to
negotiate in good faith to determine the appropriate specifications, delivery
terms and prices for such Additional Inoculum Products. The parties further
agree that in setting the price for such Additional Inoculum Products, they will
specify a "profit component" and a "cost component" for each price so
determined.
7. REMEDIES IN THE EVENT OF A MATERIAL DEFAULT. The parties
generally intend that Eco Soil's obligation hereunder to make payments of
Minimum Annual Profit shall "accelerate" on any Material Default Date and shall
be immediately due and payable. In furtherance of this general intent, the
parties more specifically agree as follows:
7.1 Upon the Material Default Date, Eco Soil shall become
obligated to immediately pay to Encore, in lieu of any further payment
obligations under any other sections of this Agreement, an amount (the "Material
Default Amount") equal to the excess of (i) $910,000 (representing the sum of
the "profit" payments scheduled under Section 3.2 hereof) over (ii) the sum of
(A) the aggregate "profit" payments made by Eco Soil to Encore as of the
Material Default Date, and (B) the aggregate amounts credited against such
"profit" payments pursuant to Section 4.2(c) or 8 hereof as of the Material
Default Date.
7.2 In order to secure Eco Soil's obligation to pay the Material
Default Amount, Encore shall be authorized and entitled to entry of a judgment
against Eco Soil (a "Default Judgment") in the amount of the excess of (a) the
balance of the "profit" payments still required to be made by Eco Soil hereunder
as of the last Quarterly Reporting Date covered by an Approved Quarterly Report,
over (b) an amount equal to $62,500 for each full or partial calendar month
elapsed from said Quarterly Reporting Date through the Material Default Date.
Said judgment shall be substantially in the form of Attachment No. 2 hereto and
may be filed by Encore in the Minnesota courts located in Hennepin County,
Minnesota (provided that (a) in connection therewith Encore files the
accompanying affidavit contemplated by Attachment No. 2 and (b) Eco Soil has not
previously terminated (in accordance with Section 8 hereof) its obligations
hereunder to purchase product and/or make "profit" payments). Eco Soil shall not
be entitled to contest or oppose entry of such Default Judgment, provided that
the foregoing shall not be construed as limiting Eco Soil's right to contest or
oppose entry of the Default Judgment if it contends that a Material Default has
not occurred under this Agreement or if the affidavits have been fraudulently
executed or submitted in bad faith.
7.3 Neither the provisions of Section 7.2 above nor the entry of
the Default Judgment shall limit Encore's right to maintain an action to recover
any excess of the Material Default Amount over the amount of the Default
Judgment.
7.4 In the event that Eco Soil makes payments pursuant to the
Existing Agreements (as revived pursuant to Section 1.1 of the Settlement
Agreement) after the Material Default Date prior to satisfaction in full of the
Default Judgment, such payments shall be applied to reduce Eco Soil's
obligations under the Default Judgment.
8. REMEDIES IN THE EVENT OF ENCORE PRODUCTION DEFAULTS. The parties
acknowledge and agree that Eco Soil may suffer significant damages in the event
that Encore fails to deliver Inoculum as
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<PAGE> 8
and when required by purchase orders. The parties also understand, however, that
Encore desires a reasonable opportunity to work through supply difficulties it
might encounter before facing termination of Eco Soil's purchase obligations
hereunder. Accordingly, the parties agree that in the event of an Encore
Production Default, Eco Soil shall be entitled to exercise all rights and
remedies afforded by applicable law, subject to the following:
(a) Unless and until clause 8(b) or 8(c) below become applicable,
in the event of an Encore Production Default pertaining to Inoculum Eco
Soil's sole remedy shall be to offset against the next "profit" payments
payable pursuant to Section 3.2 hereof a stipulated amount equal to $25
for each gallon of Inoculum which is not timely delivered. The parties
agree that the actual damages that Eco Soil would suffer as a
consequence of such an Encore Production Default are difficult to
calculate, but that said $25 per gallon amount constitutes a reasonable
estimate of such damages and shall constitute reasonable liquidated
damages for such Encore Payment Default, enforceable under Minnesota
law.
(b) At any time after the fifth Encore Production Default after
the date of this Agreement (but not in connection with previous Encore
Production Defaults), Eco Soil shall have the right to terminate its
obligations to purchase product and/or provide any additional "profit"
payments hereunder as follows:
(i) If such Encore Production Default occurs on or before
the 18-month anniversary of the date of this Agreement, then Eco Soil
shall have the right to terminate its obligations to purchase product
and/or provide additional "profit" payments hereunder upon payment of
the lesser of $100,000 or 25% of the "profit" payments called for
hereunder through the end of the Third Contract Year that have not yet
been paid, credited or offset.
(ii) If such Encore Production Default occurs after the
18-month anniversary of the date of this Agreement, Eco Soil shall have
the right to terminate its obligations to purchase product and/or
provide any additional "profit" payments hereunder without obligation to
make any further payments to Encore.
(c) Notwithstanding the foregoing, the obligations of Eco Soil to
purchase further product from Encore and/or to make further payments hereunder
shall terminate upon the occurrence of a bankruptcy of Encore, another
insolvency of Encore, or a general assignment for the benefit of Encore's
creditors.
9. RELATIONSHIP.
9.1 This Agreement is not intended to constitute, create, give
effect to or otherwise recognize a joint venture or partnership relationship of
any kind. Eco Soil and Encore shall act as independent contractors hereunder,
and neither party shall have the authority to act as agent for or partner of the
other.
9.2 Nothing contained in this Agreement is to be construed as
providing for the sharing of profits or losses arising from the efforts of
either party. Unless otherwise agreed in writing, each party shall bear all
technical, development, production, marketing, administrative and other costs
and expenses which it incurs during the course of this Agreement, and neither
party shall have recourse against the other for compensation for any such costs
or expenses.
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<PAGE> 9
10. CONFIDENTIALITY.
10.1 The parties acknowledge and agree that the Inoculum
Technical Information and any technical information relating to Improvements or
Additional Inoculum Products (collectively, the "Confidential Information") are
valuable only as long as they remain secret and generally unknown. Accordingly,
each of the parties agrees to take all steps necessary to maintain the
confidentiality and secrecy of the Confidential Information. Specifically, but
without limitation, each of the parties agrees that it will:
(a) maintain all Confidential Information in strictest
confidence and utilize all reasonable precautions necessary to protect
such Confidential Information, except as may otherwise be authorized in
writing by the other party;
(b) refrain from disclosing any Confidential Information
to any third party without the other party's prior written consent;
(c) limit access to Confidential Information to those
employees who reasonably require the information to enable such party to
exercise its rights and fulfill its obligations hereunder; provided that
such employees expressly agree to treat such Confidential Information as
confidential in the same manner and to the same extent as such party's
own confidential information; and
(d) abide by such other confidentiality restrictions or
practices with respect to the Confidential Information that may be
reasonably requested by the other party, including the execution and
delivery of such confidentiality/nondisclosure agreements as may be
requested from time to time.
10.2 Nothing contained in this Agreement shall in any way
restrict Eco Soil's rights to use, disclose or otherwise deal with any
Confidential Information which: (1) was in Eco Soil's possession through
legitimate means prior to the date of this Agreement; (2) Eco Soil obtained
thereafter from a source entitled to disclose such Confidential Information; (3)
which Eco Soil acquired as a consequence of the Assignment of Media Intellectual
Property or the Assignment of TX-1 Intellectual Property delivered pursuant to
the Settlement Agreement (provided, however, that if Eco Soil desires to provide
such Confidential Information to a third party prior to the date that Eco Soil
has the right to receive the release contemplated by Section 1.2 of the
Settlement Agreement, then Eco Soil shall require such third party to enter into
a confidentiality agreement in favor of both Eco Soil and Encore which
reasonably provides for the protection of such Confidential Information from
disclosure to other third parties that have not entered into such
confidentiality agreements); (4) was already generally known and within the
public domain as of the date of initial disclosure hereunder; or (5) which
becomes generally known thereafter through legitimate means and through no fault
of the party disclosing the same. Further, nothing contained herein shall in any
way restrict Eco Soil from procuring Inoculum or Alternative Inoculum Products
from persons or entities other than Encore, and from providing Inoculum
Technical Information to such parties to the extent Eco Soil deems appropriate
in connection therewith (provided, however, that if Eco Soil desires to provide
such Confidential Information to a third party prior to the date that Eco Soil
has the right to receive the release contemplated by Section 1.2 of the
Settlement Agreement, then Eco Soil shall require such third party to enter into
a confidentiality agreement in favor of both Eco Soil and Encore which
reasonably provides for the protection of such Confidential Information from
disclosure to other third parties that have not entered into such
confidentiality agreements).
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<PAGE> 10
10.3 The obligations of the parties, their employees, personnel,
and others who may have received Confidential Information in confidence, to
maintain such information in confidence and secrecy, shall survive and shall
continue for a period of five years following expiration or termination of this
Agreement; provided, however, that Encore's obligations under this Section 10
shall terminate on any Material Default Date.
11. ACCOUNTING MATTERS. Encore shall furnish to Eco Soil within 30
days after each September 1, December 1, March 1 and June 1 (each, a "Quarterly
Reporting Date") during the term of this Agreement a report showing in
reasonably specific detail (a) the amounts of Inoculum and Additional Inoculum
Products delivered by Encore since the date of this Agreement through the
Quarterly Reporting Date pursuant to orders delivered by Eco Soil pursuant to
Section 3.4 hereof, (b) the amounts of the "profit" payments made by Eco Soil
since the date of this Agreement through the Quarterly Reporting Date, (c) any
amounts of Declined Inoculum since the date hereof through the Quarterly
Reporting Date, and any offsets under Section 8(a) since the date hereof through
the Quarterly Reporting Date. The report shall segregate all such amounts on a
Contract Year by Contract Year basis. The parties acknowledge that the periodic
reports called for in this Section 11 are intended to provide each party with
accurate statements of their respective positions relative to "profit" payments
(including in particular the extent of Eco Soil's continuing obligation to make
"profit" payments hereunder). Accordingly, the reports also shall show the
balance of "profit" payments still required to be made by Eco Soil from and
after the Quarterly Reporting Date. The parties agree to work together in good
faith to develop the format for such reports and to revise the content and
nature of such reports as reasonably requested by a party from time to time in
order to reflect such information. Encore shall keep complete and accurate
records in sufficient detail to properly reflect such matters to enable the
payments to be made hereunder to be determined. Any such records reasonably
appropriate for calculation of the payments required to be made hereunder shall
be made available for review and copying by Eco Soil upon request (provided that
Encore shall have the right to shield from disclosure any information therein
that Encore views as confidential, so long as such shielding does not
unreasonably interfere with calculation of the amounts payable hereunder). If
any such review reveals that a report delivered by Encore overstates by $2,000
or more Eco Soil's obligation to make additional "profit" payments hereunder,
then Encore shall reimburse Eco Soil for all audit costs incurred, including the
reasonable fees and expenses of Eco Soil. Each such report shall be subject to
Eco Soil's review and approval, which shall not be unreasonably withheld. If Eco
Soil objects to such a report, then it shall do so within 20 days after its
receipt thereof in a writing delivered to Encore specifying in reasonable detail
the nature of its objection. Encore shall endeavor to respond to any objections
raised by Eco Soil, and the parties shall work together in good faith to
expeditiously agree upon and formally approve in writing a final report for each
Quarterly Reporting Date. Each Quarterly Report approved in accordance with this
Section 11 shall be referred to as an "Approved Quarterly Report."
12. TERMINATION.
12.1 Except for the 7,000 gallons of Inoculum referenced in
Section 5.5 above, Encore shall have no obligation to produce or sell to Eco
Soil any Inoculum or Additional Inoculum Products requested by Eco Soil pursuant
to purchase orders delivered after the end of the Third Contract Year.
Similarly, Eco Soil shall have no obligation hereunder to provide any additional
"profit" payments with respect to any Contract Year after the Third Contract
Year (it being understood that the foregoing shall not be construed as
diminishing Eco Soil's obligation to pay the cost component of any Inoculum
ordered prior to the end of the Third Contract Year for delivery during the
subsequent year).
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<PAGE> 11
12.2 In the event that the "Existing Agreements" (as such term is
used in the Settlement Agreement) are "revived" in accordance with Section 1.1
of the Settlement Agreement, then (a) Encore's obligation to deliver additional
product hereunder shall terminate and (b) Eco Soil's obligation to purchase
additional product and/or make additional payments hereunder (other than as set
forth in Section 7 hereof or in the Default Judgment) shall terminate (it being
understood, however, that said terminated obligations shall be replaced by the
revived obligations of the parties under the Existing Agreements, subject to the
terms of the Settlement Agreement).
12.3 Upon termination of the supply obligations of Encore and the
payment obligations of Eco Soil as set forth above, Encore shall deliver to Eco
Soil all drawings, specifications, artwork, designs, plans, technical reports
and other materials relating to Additional Inoculum Products, and all copies
thereof, whether existing in printed form, electronic form or any other medium.
13. ENCORE REPRESENTATIONS AND WARRANTIES. Encore hereby represents
and warrants to Eco Soil as follows:
13.1 Encore (a) is a corporation duly organized, validly existing
and in good standing under the laws of the State of Minnesota; (b) has the
corporate power and authority and the legal right to own and operate its
property and assets, to lease the property and assets it operates under lease,
and to carry on its business as it is now being conducted and (c) is in
compliance with all requirements of applicable law, except to the extent that
any noncompliance would not have a material adverse effect on the properties,
business, financial or other condition of it and would not materially adversely
affect its ability to perform its obligations under the Agreement.
13.2 Encore (a) has the corporate power and authority and the
legal right to enter into the Agreement and to perform its obligations hereunder
and (b) has taken all necessary corporate action on its part to authorize the
execution and delivery of the Agreement and the performance of its obligations
hereunder. The Agreement has been duly executed and delivered on behalf of
Encore, and constitutes a legal, valid, binding obligation, enforceable against
Encore in accordance with its terms.
13.3 All necessary consents, approvals and authorizations of all
governmental authorities and other Persons required to be obtained by Encore as
of the date hereof in connection execution, delivery and performance of this
Agreement have been obtained.
13.4 The execution and delivery of the Agreement and the
performance of Encore's obligations hereunder (a) do not conflict with or
violate any requirement of applicable laws or regulations (other than conflicts
or violations which would not have a material adverse effect on the ability of
Encore to perform its obligations hereunder), and (b) do not conflict with, or
constitute a default under, any of its contractual obligations (other than
conflicts or defaults which would not have a material adverse effect on the
ability of Encore to perform its obligations hereunder).
13.5 Encore has not previously assigned, granted, licensed, or
otherwise provided to any person or entity any rights in AZO or the Inoculum
Technical Information pertaining to AZO that would be inconsistent with the
rights granted to Eco Soil hereunder. Encore has the right to grant the rights
granted hereunder free and clear of any rights or claims of any other persons or
entities. As of the date hereof, there are no pending, and to the best knowledge
of Encore, there are no threatened, suits, legal proceedings, claims or
governmental investigations against or with respect to Encore relating to AZO or
the Inoculum Technical Information pertaining thereto. There are no agreements
to which Encore is a party as of the date hereof, and Encore shall not enter
into any agreement during the term
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<PAGE> 12
of this Agreement, that would prevent Encore's timely and complete performance
of the terms and conditions of this Agreement or that would cause any of
Encore's representations or warranties contained herein to be breached. To
Encore's best knowledge, neither AZO nor the Inoculum Technical Information
pertaining thereto violates or infringes any third party's copyrights, patents,
trade secrets, trademarks or other proprietary rights.
14. ECO SOIL REPRESENTATIONS AND WARRANTIES. Eco Soil hereby
represents and warrants to Encore as follows:
14.1 Eco Soil (a) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Nebraska; (b) has
the corporate power and authority and the legal right to own and operate its
property and assets, to lease the property and assets it operates under lease,
and to carry on its business as it is now being conducted and (c) is in
compliance with all requirements of applicable law, except to the extent that
any noncompliance would not have a material adverse effect on the properties,
business, financial or other condition of it and would not materially adversely
affect its ability to perform its obligations under the Agreement.
14.2 Eco Soil (a) has the corporate power and authority and the
legal right to enter into the Agreement and to perform its obligations hereunder
and (b) has taken all necessary corporate action on its part to authorize the
execution and delivery of the Agreement and the performance of its obligations
hereunder. The Agreement has been duly executed and delivered on behalf of Eco
Soil, and constitutes a legal, valid, binding obligation, enforceable against
Eco Soil in accordance with its terms.
14.3 All necessary consents, approvals and authorizations of all
governmental authorities and other Persons required to be obtained by Eco Soil
as of the date hereof in connection with the execution, delivery and performance
of this Agreement have been obtained.
14.4 The execution and delivery of the Agreement and the
performance of Eco Soil's obligations hereunder (a) do not conflict with or
violate any requirement of applicable laws or regulations (other than conflicts
or violations which would not have a material adverse effect on the ability of
Eco Soil to perform its obligations hereunder), and (b) do not conflict with, or
constitute a default under, any of its contractual obligations (other than
conflicts or defaults which would not have a material adverse effect on the
ability of Encore to perform its obligations hereunder).
15. MISCELLANEOUS.
15.1 Notices. Any consent, notice or report required or permitted
to be given or made under the Agreement by one of the parties hereto to the
other party shall be in writing, delivered personally, by facsimile or by U.S.
first class mail or courier, addressed to such other party at its address
indicated below, or to such other address as the addressee shall have last
furnished in writing to the addressor and (except as otherwise provided in the
Agreement) shall be effective upon receipt by the addressee.
(a) If the notice is directed to Encore, then it shall be
directed to the following address:
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Encore Technologies, Inc.
111 Cheshire Lane, Suite 500
Minnetonka, NM 55305
Facsimile: (612) 404-9599
Attn: David Goulet
If the purpose of the notice is to inform Encore of an exercise of
rights under 8(a) or 8(b), to provide a notice of breach of a
representation, warranty or covenant under the Settlement Agreement or
the Assignments, or to provide notice of any other default under Section
15.11 hereof, then a copy also shall be sent to:
Best & Flanagan
4000 First Bank Plaza
601 Second Avenue South
Minneapolis, MN 55402-4331
Facsimile: (612) 339-5897
Attn: David J. Zubke, Esq.
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(b) If the notice is directed to Eco Soil, then it shall
be directed to the following address:
Eco Soil Systems, Inc.
10890 Thornmint Road, Suite 200
San Diego, California 92127
Facsimile: (619) 592-7642
Attention: William B. Adams
If the purpose of the notice is to provide notice of default giving rise
to a Material Default, to provide notice of breach of a representation
or warranty or covenant under the Settlement Agreement or the
Assignments, or to provide notice of any other default under Section
15.11 hereof, then a copy also shall be sent to:
Latham & Watkins
701 "B" Street, Suite 2100
San Diego, California 92101
Facsimile: (619) 696-7419
Attention: Bruce P. Shepherd
15.2 Governing Law. The validity, interpretation, and performance
of this Agreement shall be controlled by and construed under the laws of the
State of Minnesota, the state in which this Agreement is accepted. Licensee
hereby irrevocably consents to the jurisdiction of the appropriate Minnesota
courts located in Hennepin County, Minnesota, and agrees that all litigation
arising hereunder shall be venued in Hennepin County, Minnesota.
15.3 Assignment. Eco Soil shall not assign its rights or
obligations under this Agreement without the prior written consent of Encore;
provided, however, that Eco Soil may, without such consent, assign the Agreement
and its rights and obligations hereunder (a) to an affiliate of Eco Soil, (b) in
connection with the transfer or sale of all or substantially all of its business
or (c) in the event of its merger or consolidation or change in control or
similar transaction. Encore shall not assign its rights or obligations under
this Agreement without the prior written consent of Eco Soil, it being
acknowledged and agreed that Eco Soil is relying upon the particular expertise
possessed by Encore in agreeing to the scope and nature of the obligations
imposed upon Encore hereunder (and to the correlative rights afforded to
Encore). Any permitted assignee shall assume all obligations of its assignor
under the Agreement, but such assignment shall not operate to release the
assignor from liability for such obligations.
15.4 Waivers and Amendments. No change, modification, extension,
termination or waiver of the Agreement, or any of the provisions herein
contained, shall be valid unless made in writing and signed by duly authorized
representatives of the parties hereto.
15.5 Force Majeure. Neither party shall be held liable or
responsible to the other party nor be deemed to have defaulted under or breached
the Agreement for failure or delay in fulfilling or performing any term of the
Agreement to the extent and for so long as, such failure or delay is caused by
or results from causes beyond the reasonable control of the affected party
including but not limited to fire, floods, embargoes, insurrections, riots, acts
of God or acts, omissions or delays in acting by any governmental authority or
the other party; provided, however, that no such event shall excuse performance
hereunder by a party unless the party seeking such excuse provides to the other
party, within 15 days after the occurrence of the event purportedly justifying
such excuse, written notice describing
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such event, its date of occurrence, and its anticipated effect upon such
performance by the party seeking to have its performance excused.
15.6 Entire Agreement. Except for the Settlement Agreement and
the Assignments, this Agreement embodies the entire understanding between the
parties and supersedes any prior understanding and agreements between and among
them respecting the subject matter hereof. There are no representations,
agreements, arrangements or understandings, oral or written, between the parties
hereto relating to the subject matter of the Agreement which are not fully
expressed herein or in the Settlement Agreement or the Assignments.
15.7 Severability. Any of the provisions of the Agreement which
are determined to be invalid or unenforceable in any jurisdiction shall be
ineffective to the extent of such invalidity or unenforceability in such
jurisdiction, without rendering invalid or unenforceable the remaining
provisions hereof and without affecting the validity or enforceability of any of
the terms of the Agreement in any other jurisdiction.
15.8 Waiver. The waiver by either party hereto of any right
hereunder or the failure to perform or of a breach by the other party shall not
be deemed a waiver of any other right hereunder or of any other breach or
failure by said other party whether of a similar nature or otherwise.
15.9 Counterparts. The Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
15.10 Headings. Paragraph, section and similar headings used
herein are not to be considered part of this Agreement and are included solely
for the convenience of the parties and are not intended to be full or accurate
descriptions of the content thereof.
15.11 Time is of the Essence. Time is of the essence in this
Agreement and the failure of either party to promptly pay when due any payments
(after the expiration of any applicable notice and cure periods), or to perform
any material obligations required herein (after the expiration of any applicable
notice and cure periods), may be treated by the other party as a material breach
of this Agreement entitling the non-breaching party to all rights and remedies
afforded by applicable law, subject to any limitations set forth herein.
IN WITNESS WHEREOF, the parties, through their authorized
representatives, have executed this Agreement effective as of the date first set
forth above.
ECO SOIL SYSTEMS, INC., ENCORE TECHNOLOGIES, INC.,
a Nebraska corporation a Minnesota corporation
By: /s/ WILLIAM B. ADAMS By: /s/ DAVID GOULET
- -------------------------------- -------------------------------
Name: William B. Adams Name: David Goulet
Its: Chief Executive Officer Its: President
15
<PAGE> 1
EXHIBIT 11.1
ECO SOIL SYSTEMS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Income (loss) $(2,816) $(1,836) $(4,193) $(2,431) $ 829
Average common shares
outstanding 3,563 4,213 5,815 5,056 11,266
Net effect of dilutive common
share equivalents based on the
treasury stock method -- -- -- -- 3,075
Adjustments to reflect
requirements of the Securities
and Exchange Commission
(Effect of SAB 83) 994 994 994 994 --
------- ------- ------- ------- -------
Adjusted shares outstanding 4,557 5,207 6,809 6,050 14,341
======= ======= ======= ======= =======
Net Income (loss) per share $ (0.62) $ (0.35) $ (0.62) $(0.40) $ 0.06
======= ======= ======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial and Operations Data", and "Experts" and to the use of our
reports dated March 14, 1997, with respect to the financial statements of Eco
Soil Systems, Inc., and October 3, 1996, with respect to the financial
statements of Turf Products, Ltd., in the Registration Statement on Form SB-2
and related Prospectus of Eco Soil Systems, Inc. for the registration of
4,859,708 shares of its common stock.
/s/ ERNST & YOUNG LLP
----------------------
ERNST & YOUNG LLP
San Diego, California
October 30, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF BIGELOW & COMPANY, CPA, P.C., INDEPENDENT AUDITORS
We consent to the reference to our firm in the caption "Experts" and to the
inclusion of our reports dated July 19, 1996 and January 23, 1997, with respect
to the financial statements on Turf Speciality, Inc., as a subsidiary of Eco
Soil Systems, Inc., which financial statements are included in the Registration
Statement on Form SB-2 and related Prospectus of Eco Soil Systems, Inc., for the
registration of its common stock.
BIGELOW & COMPANY
Certified Public Accountants, P.C.
By:
/s/ MARIE McKAY
---------------------------
Marie C. McKay
Certified Public Accountant
Manchester, New Hampshire
October 30, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 212
<SECURITIES> 0
<RECEIVABLES> 10,670
<ALLOWANCES> 118
<INVENTORY> 4,161
<CURRENT-ASSETS> 15,547
<PP&E> 6,098
<DEPRECIATION> 234
<TOTAL-ASSETS> 28,105
<CURRENT-LIABILITIES> 10,243
<BONDS> 0
0
0
<COMMON> 59
<OTHER-SE> 16,881
<TOTAL-LIABILITY-AND-EQUITY> 28,105
<SALES> 29,141
<TOTAL-REVENUES> 29,141
<CGS> 19,059
<TOTAL-COSTS> 8,823
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> 179
<INCOME-PRETAX> 829
<INCOME-TAX> 0
<INCOME-CONTINUING> 829
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 829
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
