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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: Commission File Number:
DECEMBER 31, 1996 0-21975
ECO SOIL SYSTEMS, INC.
(Exact Name of Registrant As Specified In Its Charter)
NEBRASKA 47-0709577
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
10890 THORNMINT ROAD, SUITE 200
SAN DIEGO, CALIFORNIA 92127
(Address, Including Zip Code, Of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code:
(619) 675-1660
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.005 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB: / /
The aggregate market value of the voting stock held by non-affiliates of
the Registrant: $51,516,458 as of March 31, 1997.
The number of shares outstanding of the Registrant's Common Stock, $.005
par value, as of March 31, 1997: 11,390,171.
Documents Incorporated by Reference: The information called for by Part
III is incorporated by reference to the definitive Proxy Statement for the
Annual Meeting of Stockholders of the Registrant to be held June 3, 1997, which
is being filed on or prior to April 30, 1997.
Exhibit Index on Page 26
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which provides a new "safe harbor" for these types of statements. To the
extent statements in this Annual Report involve, without limitation, product
development and introduction plans, the Company's expectations for growth,
estimates of future revenue, expenses, profit, cash flow, balance sheet items,
sell-through or backlog, forecasts of demand or market trends for the Company's
various product categories and for the industries in which the Company operates
or any other guidance on future periods, these statements are forward-looking
statements. These risks and uncertainties include those identified by the
Company under the caption "Factors That Could Affect Future Performance" in Item
1, and other risks identified from time to time in the Company's filings with
the Securities and Exchange Commission, press releases and other communications.
The Company assumes no obligation to update forward-looking statements.
PART I
ITEM 1. BUSINESS
GENERAL
The Company has developed two patented distribution systems that enable
the Company to market and support a proprietary line of microbial products which
control and manage a wide variety of soil, crop and water problems. The Company
believes that these biological products, when introduced through its BioJect and
ClearLake delivery systems, will cost-effectively replace or complement the use
of chemical pesticides or fertilizers in the turf maintenance, agricultural
crop, soil remediation and water quality management industries. Use of the
Company's systems can contribute to a reduction in the negative cumulative
environmental effect of chemical use with no increase in cost or crop damage.
The Company's goals are to increase the market share for biocontrol products and
to make its delivery systems the principal methods for distributing
biotechnology products in its targeted industries.
The Company's delivery systems ferment environmentally-safe microorganisms
at the site of application and automatically dispense the appropriate amount and
type of cultured product at the desired frequency directly into the customer's
irrigation system, pond or lake. By fermenting its biological products at the
customer's site, the Company is able to preserve and protect the potency of the
microorganisms, significantly reduce shipping costs and control the frequency of
application and concentration of product. The Company believes that its
microbial products, delivery systems and bioaugmentation expertise have
positioned it as a leader in the introduction, marketing and management of
biological complements or alternatives to many chemical pesticide and fertilizer
products.
HISTORY
The Company was incorporated under Nebraska law in November 1987. The
Company initially marketed a program that developed blended fertilizers and soil
amendments to golf courses and to other residential and
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commercial customers in the Lincoln, Nebraska area. In 1991, the Company decided
that it needed a broader strategic vision and, consequently, concentrated on the
development of biological inoculation service and nutrient programs. In the next
several years, the Company developed its BioJect, ClearLake, CleanRack and
CalJect systems for distribution to the turf maintenance industry.
As the Company evolved from a product development and market introduction
oriented business to a more sales-driven organization, the Company decided to
de-emphasize its non-proprietary nutrient and seed business and instead
concentrate its resources on the proprietary BioJect, ClearLake, CleanRack and
CalJect systems. The Company also established new distributor relationships and
expanded its international marketing activities.
MARKET OVERVIEW
In 1995, an estimated $30 billion was spent on fertilizers and pesticides
in the turf maintenance and agricultural crop markets. Most biological and
chemical products are applied 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 biocontrol products,
where more frequent applications are required compared to their chemical
counterparts, the need for frequent manual applications has made these
biocontrol products economically uncompetitive.
Despite the potential environmental benefits of biological pesticides
compared to their chemical counterparts, the agricultural and turf markets have
been slow to accept the use of biological products due to the poor shelf life
characteristics of biological products using traditional transportation and
distribution systems. Pesticide and fertilizer products have typically been
shipped over land and stored for long periods before application, practices
which create an inhospitable environment for biological products that
deteriorate rapidly when exposed to light, high temperatures or long storage
periods. In 1995, according to the Organization for Economic Cooperation and
Development, biological products comprised only 0.5% of the overall market for
fertilizers and pesticides in the turf maintenance and agricultural crop
industries, or approximately $150 million per year.
To address these problems, the Company developed a patented process and
designed proprietary equipment to automatically ferment microbial products
on-site to high population levels and then inject the microorganisms during the
irrigation cycles into the customer's irrigation or sprinkler system. A major
advantage of the Company's BioJect system is that it uses the irrigation water
as the distribution medium, thereby eliminating the substantial labor costs
incurred in traditional methods and making the BioJect system the most
cost-effective means of distributing biological products over large acreages.
The BioJect system also allows customers to choose from a "menu" of biological
control products, thereby enabling the Company to address a variety of turf and
crop problems and to customize its products to the needs of individual customers
and markets.
The Company has initially targeted its biological products, delivery
systems and support services to the golf course industry. A survey performed by
the National Golf Foundation indicates that in 1995 there were over 15,000 golf
courses in the United States that purchased annually in excess of $500 million
of fertilizer and chemicals. Although the Company has focused initially on the
turf maintenance and water quality management industries, the Company believes
that it can leverage its experience in these industries into the agricultural
crop and soil remediation markets.
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BUSINESS STRATEGY
The Company's goals are to increase the market share of biological
products in the turf maintenance, agricultural crop, soil remediation and water
quality management industries and to make the BioJect system the preferred
delivery mechanism for all biological products in these industries. The Company
intends to accomplish these goals by developing and controlling a distribution
system through the acquisition of selected independent regional dealers and
distributors, commercializing new biotechnology innovations, and expanding the
use of these new products in additional markets.
Over the past five years, the Company has focused primarily on its core
delivery technology and the licensing of microbial products that can be
delivered through the Company's BioJect and ClearLake delivery systems. During
this period, only a minimal amount of capital and personnel resources were
devoted to manufacturing and distribution, and the Company's sales and marketing
efforts were limited to the efforts of its executive officers, a small number of
salespersons and relationships with a few regional distributors. In order to
expand its customer base, the Company determined that it would have to make
substantial capital and personnel commitments, and the Company believes that the
most efficient method of accomplishing this objective is to pursue a strategy of
acquiring and consolidating independent dealers and distributors. In May 1996,
the Company launched its strategy of acquiring selected dealers and distributors
in an attempt to integrate and consolidate them into a single sales
organization, thereby improving the Company's ability to market and sell its
proprietary products, increasing its penetration into the turf maintenance
industry, and enhancing its visibility within its target markets.
ACQUISITION AND PRODUCT DISTRIBUTION CONSOLIDATION STRATEGY
In general, major golf course markets are dominated by a single sales
organization that controls all 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. Although this strategy enabled the Company to introduce its proprietary
products into selected golf course markets, these markets represented regions
where only approximately 30% of all United States golf courses are located. The
Company also discovered that many of these dealers were accustomed to selling
traditional fertilizers and pesticides and therefore lacked the technical
expertise necessary to market and service the Company's
technologically-advanced, proprietary products.
In May 1996, the Company initiated its dealer acquisition and
consolidation strategy by acquiring two regional turf distributors -- Turf
Products Ltd. ("Turf Products"), a Chicago-based dealer that markets turf
products throughout the greater Chicago area, and Turf Specialty, Inc. ("Turf
Specialty"), a New Hampshire-based dealer that markets turf products throughout
the New England region. These two dealers have traditionally offered a wide
variety of turf maintenance products, including fertilizers and pesticides. The
Company expects that the percentage of non-proprietary turf products sold by
these dealers will decline as the Company uses these dealers to leverage its
technologically-advanced, proprietary products into their respective regions. In
February 1997, the Company acquired substantially all of the assets of
Turfmakers, Inc. ("Turfmakers"), a turf products distributor in the Palm
Springs, California area. See "--Recent Developments."
The Company is currently evaluating additional acquisition opportunities
throughout the United States. The Company intends to commit substantial time and
resources to create the necessary organizational framework and acquisition
structure (including pricing, employment contracts, reporting and
accountability) necessary to explore and analyze these acquisition opportunities
so that the Company can create an integrated marketing and distribution system
for its products.
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OTHER STRATEGIC ACQUISITIONS
In September 1995, the Company acquired Aspen Consulting Companies, Inc.
("Aspen"), which designs and plans complete irrigation systems for golf courses,
residential housing projects and large commercial developments, in order to
bring additional irrigation system design and expertise in-house. The Company
believes that the acquisition of Aspen will enhance the distribution of the
BioJect and ClearLake systems in the new construction and large residential
housing development markets and will provide increased exposure in the golf
course architectural community, where Aspen has conducted business for years.
The Company also believes that Aspen will play an integral role in enhancing the
design of both the BioJect and ClearLake systems due to its knowledge and
expertise in the design and operation of all phases of irrigation systems.
In February 1996, the Company acquired a 51% interest in Direct Products
and Machinery Pty. Ltd. ("Direct Products"). Direct Products, which had served
as the Company's distributor in South Africa since June 1994, distributes a wide
range of turf maintenance products, including fertilizers, seed and chemicals,
and has also established relationships with citrus and avocado growers in South
Africa. The acquisition of Direct Products will form the basis for the Company's
international business unit.
PRODUCT AND MARKET STRATEGIES
In addition to its strategy of acquiring selected dealers and distributors
in key geographic markets, the Company also plans to develop and commercialize
new innovations in biotechnology and expand the use of its products in
additional markets and industries. The BioJect system is the Company's principal
product for achieving these goals, and the Company intends to continue to
position the BioJect system as the most efficient and cost-effective means of
distributing biological products into irrigation-dependent markets.
The Company believes that the introduction of naturally-occurring
biologicals through its patented delivery systems will enable customers to
overcome many of the environmental problems inherent in large-scale chemical
applications while offering significant cost savings over traditional chemical
applications.
In addition to expanding the marketing and sale of its patented delivery
systems in the turf maintenance and water quality management industries, the
Company intends to leverage its experience in these industries into the
agricultural crop and soil remediation markets. The Company has recently
expanded its marketing efforts to encompass these additional markets and, in the
long term, expects to establish partnerships or other formal relationships with
large agricultural or chemical companies that service these markets.
PRODUCTS
The Company's principal products and services for accomplishing its goals
can be divided into two categories -- proprietary products and distributed
products. The Company's proprietary products include its patented BioJect,
ClearLake, CleanRack and CalJect systems. The Company's distributed products
consist of other traditional fertilizers and pesticides that are distributed
through the Company's wholly owned dealers and distributors. Each of these
product categories is summarized below.
PROPRIETARY PRODUCTS
The Company's principal proprietary products consist of (i) the BioJect
system, which automatically cultures and distributes biological products through
irrigation water, (ii) the ClearLake system, a pond and lake
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restoration system, (iii) the CleanRack system, an equipment wash rack and water
treatment system that decontaminates equipment wash water so that it is suitable
for recycling or discharge and (iv) the CalJect system, which utilizes the
customer's irrigation system to introduce soil and water remediation products
onto golf courses and agricultural areas. Each of these products is described
below.
BioJect System
The BioJect system is the Company's primary product. The Company's 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 and a "menu" of microbial products that can be
delivered through its BioJect system.
The BioJect system has evolved over the past four years from delivering
only bacteria of the Bacillus family to delivering a variety of microbial
products. These products appear on the Company's BioJect menu as replacements
for or complements to fungicides, insecticides or soil amendments. The
consumable product in each menu item is generally a microbe, and each microbe is
cultured in the BioJect device under a proprietary formula. Different microbes
are used for different applications because their mode of action and performance
varies. As a result, these microbes are targeted to very specific problems.
The microbial products delivered by the BioJect system are proprietary
formulations, consisting of a variety of different strains. Different microbes
are used for different applications because their function and performance
varies. The Company currently has under license or under control microbial
products that: (i) produce toxins harmful to plant diseases (Pseudomonas
Aureofaciens), (ii) improve soil porosity (Bacillus spp.), (iii) break down
thatch (Cellulomonas), (iv) fix atmospheric nitrogen (Azospirillum Brasilense),
(v) inhibit the growth of certain insect pests (Bacillus Thuringiensis), and
(vi) bioremediate certain hazardous chemicals (Pseudomonas Flourescens,
Cytophaga Michiganese, Cytophaga Heparina and Pseudomonas spp).
Because microorganisms are subject to degradation upon exposure to high
temperatures, ultraviolet light or long storage periods, the introduction of
these microbials into the soil on a regular basis had not been feasible prior to
the development of the BioJect system. The BioJect system permits, for the first
time, the introduction of microorganisms into the soil at the required frequency
and in a cost-effective and environmentally safe manner. The BioJect system
overcomes the traditional problems associated with the introduction of
microorganisms into the soil by culturing and growing the microbial colonies
during the day and then dispensing the microbial colonies into the customer's
irrigation system automatically at night. The current BioJect system has been
designed to pump large amounts of oxygen to the fermentation chamber, maintain a
specific temperature range, and keep the pH at a neutral level. By doing so, the
BioJect system creates an environment that optimizes the fermentation process,
thereby allowing the scale-up of microbial populations from a starter culture.
The Company has obtained exclusive rights to several microorganisms
pursuant to a consulting agreement with Encore Technologies, Inc. ("Encore").
This thirty (30)-year consulting agreement provides that Encore shall (i)
identify organisms from third parties which may be used in the BioJect system as
pesticides, herbicides, fungicides or soil amendments, (ii) test such organisms
to determine whether they can be scaled up in the BioJect system, (iii) conduct
any necessary regulatory work and (iv) provide such organisms to the Company for
use in its proprietary systems. In return for these services, the Company pays
Encore a specified percentage of the price received from sales of the BioJect
system by the Company's dealers and distributors. In addition to the Encore
agreement, the Company has also acquired the rights to other microorganisms
through licensing and/or distribution agreements with CCT Corporation ("CCT")
and Abbott Laboratories ("Abbott"). Under the CCT agreement, the Company has
exclusive rights to certain microbial products and pays a licensing
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fee based on a percentage of the selling price of the products subject to the
agreement. The term of the CCT agreement extends through December 31, 1997,
subject to one-year renewals thereafter upon the agreement of the parties. Under
the Abbott agreement, which may be terminated by either party upon 30 days'
notice, the Company is to pay for products at the time of shipment.
To increase the menu of items for use in its BioJect system, the Company
intends to enter into additional exclusive licensing agreements with various
universities or owners 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 microorganisms within the BioJect system and
distributing them within the irrigation cycle, the Company has entered into
research and development agreements with fermentation specialists.
The Company generates revenues from its BioJect system by renting or
selling it to customers, collecting service and maintenance fees, and selling
the microbial products delivered through the BioJect system. The Company
generally rents the BioJect system to customers for approximately $5,000 per
year, plus a one-time installation fee of $1,000. The consumable microbial
products are sold separately on a seasonal basis at the annual rate of $5,000 to
$15,000 per microbial, with the cost of such microbials varying depending on the
type of microbials and the desired frequency of application. 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.
ClearLake System
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 utilizes an injector to introduce
microbial products in small lakes and a BioJect system for larger lakes and
those that are more difficult to treat.
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 ClearLake system treats ponds and lakes by (i) injecting large amounts of
oxygen into the water through venturi intakes, (ii) creating circulation and
water movement around the perimeter of the pond or lake, (iii) redistributing
water from the deepest part of the pond or lake to the other parts through a
submersible pump, and (iv) distributing biological products throughout the lake
through an injection system. The biological products introduced through the
ClearLake system help to counteract excessive algae bloom. By significantly
reducing the amount of algae and increasing the dissolved oxygen levels in ponds
and lakes, the ClearLake system can dramatically improve the quality of water
used for irrigation and of water in ornamental ponds and lakes and can,
therefore, greatly reduce the quantity of water consumed in irrigation and
reduce the need for chemical algaecides.
The ClearLake system, which integrates a computer control center with a
proprietary oxygen diffusion system and a water delivery apparatus as described
above, is customized according to the specific dimensions of the pond or lake.
The ClearLake system can simultaneously utilize four methods of improving water
quality. These methods:
- increase the dissolved oxygen content of the water;
- eliminate water stagnation by introducing a current that travels
around the perimeter of the pond into the irregularly shaped fingers
and inlets;
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- eliminate the cold anaerobic zone in the lake or pond by pumping the
coldest water from the deepest parts to the shallow, warmer edges;
and
- introduce biologicals that out-compete the algae for food and, in
some cases, attack the algae directly.
Three different models of ClearLake systems are available depending on the
size of the pond or lake. ClearLake systems vary in price from $7,500 to $25,000
per year, depending on the size and shape of the pond or lake and the desired
horsepower of the ClearLake circulation center. Consumable microbial products
and a maintenance and service contract are sold separately to customers at the
annual rate of $1,500 to $5,000 per microbial, with the cost of such microbials
varying depending on the type of microbials and the desired frequency of
application. The Company generates revenues from its ClearLake system by selling
the hardware and consumables and collecting maintenance and service fees.
CleanRack System
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 serious 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. As of December 31, 1996, the
Company had sold 18 CleanRack systems.
CalJect System
The Company's CalJect system utilizes the customer's irrigation system to
introduce soil and water remediation products onto golf courses and agricultural
areas. The Company has targeted the CalJect system for use on areas which suffer
from high salt and alkalinity problems. The CalJect system facilitates the
introduction of non-biological soil amendments which will reduce the alkalinity
of the soil, thereby enhancing plant growth. The Company introduced the product
during the recent GCSAA Golf Show in February and recently has begun to actively
market the product.
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 Turf Products and Turf Specialty, its
recently acquired dealers and distributors. Besides the Company's proprietary
products, these distributors keep in stock an inventory of branded pesticides,
fertilizers, seed, and other necessary products from many agricultural
manufacturers.
In addition to expanding the Company's product line, the acquisition of
these dealers provides the Company with an established sales and marketing force
and a presence in many new geographic markets. Although the Company estimates
that traditional chemical and turf products sold by these dealers will represent
approximately 60% of the Company's overall revenues in the year ending December
31, 1997 if no additional dealers are acquired, the Company expects this
percentage will decline as the Company uses these new dealers to leverage its
technologically-advanced, proprietary products into additional regional markets.
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PRODUCT DEVELOPMENT
In addition to the Company's existing proprietary and distributed products
described above, the Company is in the process of investigating and developing
other products which may provide long-term benefits to the turf maintenance,
agricultural crop, soil remediation, and water quality management industries.
The Company's Aspen subsidiary currently performs several services related
to product development. These services include water source evaluation, water
supply planning, computer analysis of distribution, and evaluation of applicable
products. Currently, Aspen is working with engineers at the Company to develop a
complete turn-key system for turf managers at major sports stadiums. This system
will be an improvement on the current state-of-the-art system because it will
bring together current technologies in heating and cooling, drainage, and
biological injection to sports fields.
The Company has completed a number of trials for water and soil
remediation and continues to test technologies in these markets. Two
technologies appear to show promise in these industries, and the Company intends
to invest further in their development. The first technology is the BioJect
system. The second technology encompasses the use of new microorganisms. The
Company is currently evaluating two new microbial products that have shown
favorable laboratory results. One product speeds up the breakdown of Atrazine, a
widely used herbicide and recently discovered deep water (aquifer) contaminant.
University trials have shown that the other product breaks up PCB molecules into
harmless gasses and liquids. Although the Company believes that there may be
significant markets for these products, extensive testing and governmental
approvals will be required before the Company can begin to market these
products.
CUSTOMERS
The Company has sold its BioJect system to some of the most famous and
notable golf courses in the world, including the following:
<TABLE>
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* Aviara Golf Club (CA) * North Shore Country Club (IL)
* Baltimore Country Club (MD) * Oakland Hills Country Club (MI)
* Bighorn Country Club (CA) * Pelican Hills - Links Ocean (CA)
* Caledonian Golf Club (Japan) * Point-O-Woods Country Club (MI)
* Congressional Country Club (MD) * Royal Brunei Golf Club (Brunei)
* John's Island (N,W&S) (FL) * San Francisco Country Club (CA)
* Jupiter Hills (FL) * Skokie Country Club (IL)
* Kyowe Country Club (Japan) * Spyglass Hill Golf Club (CA)
* Leopard Creek Golf Course (Zimbabwe) * Sun City Resorts - Gary Player (S. Africa)
* Merion Golf Club (PA) * Sun City Resorts - Lost City (S. Africa)
* Monterey Peninsula Country Club (CA) * Tres Vidas Golf Course (Mexico)
</TABLE>
Customers for the ClearLake system include the following:
* Del Mar Country Club (CA) * Somas Aguas Golf Club (Spain)
* The Lakes Country Club (CA) * Sunrise Golf Club (NV)
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RESEARCH AND DEVELOPMENT
The Company does not conduct basic research. Instead, the Company licenses
microbial products that have test data suggesting beneficial uses in the turf
maintenance, agricultural crop, soil remediation and water quality management
industries. The Company spent approximately $475,000 and $413,000 on research
and development for the years ended December 31, 1996 and 1995, 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. Much of the in-house
research and development effort is targeted at the engineering of the
fermentation and product delivery features of its BioJect system. System
adaptation by modification of the physical design allows flexibility to accept a
variety of microbial agents. System design also considers the Company's service
component and simplifies maintenance procedures and the duration of the service
visit.
GOVERNMENT REGULATION
Various state laws and regulations require the Company to register all of
its nutrient products with the Department of Agriculture in each state in which
the Company sells its products. Fertilizer products are also subject to
periodic monitoring by each state's Department of Agriculture. Although the
Company has spent less than $100,000 complying with the registration and
labeling requirements imposed by environmental laws and regulations in each of
the last two fiscal years, the Company expects to spend approximately
$200,000 on regulatory compliance in fiscal 1997. However, the Company can be
subject to fines and loss of its fertilizer license in any state where its
products fail to comply substantially with the Company's approved labels or
registration. The Company is currently subject to the Occupational Safety and
Health Act, the Environmental Protection 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. 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 addition, as the
Company expands, it may decide to register certain of its microbial products as
pesticides with the EPA, which involves a complex approval process. Failure to
achieve such registration could limit the market potential of such microbial
products. See "Factors That Could Affect Future Performance -- Government
Regulation."
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 U.S. and foreign patents regarding the
technology relating to the automatic inoculation of irrigation water with
biological products to improve soil quality. Specifically, the Company was
granted two U.S. patents in July 1993 that cover both the process of
automatically inoculating irrigation water with biological products and the
equipment (the BioJect system) that the Company uses to inoculate irrigation
water automatically. In May 1994, the Company was granted a patent on its
ClearLake system for the improvement of water quality in a pond or similar body
of water. The Company also has six additional U.S. patents pending with respect
to its ClearLake system.
The Company filed a new patent application in 1994 relating to the
automatic inoculation of irrigation water with biological products that
incorporates a BioJect system that is able to grow, culture and dispense into
the irrigation system distinct microorganisms or combinations of microorganisms
on a frequent (daily) basis. The type of microorganism or combination of
microorganisms can be changed frequently as the tank is "cleansed"
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on a regular basis. This application also expanded the scope of the invention to
include irrigation systems covering all types of vegetation, in addition to
turf. This application was approved by the Patent Examiners office in January
1995, and the Company was issued a formal patent on September 5, 1995.
In August 1995, the Company submitted another patent application that
covers a further modification to the BioJect system. This application also
covers a system that is designed to grow and inject distinct microorganisms or
combinations of microorganisms that are selected on a preprogrammed basis.
However, this application incorporates biological and food sources being stored
and added to the BioJect system in a liquid state. The application also expands
the scope of the invention to cover the application of biological products to
all types of vegetation in addition to turf and expands the way these
microorganisms can be distributed onto vegetation to include utilizing a system
to fill up a spray tank for manual application to turf or vegetation in addition
to the utilization of the irrigation system. 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. The Company also relies on trade secrets and proprietary know-how. The
Company occasionally has elected to disclose its trade secrets and proprietary
know-how to employees, consultants, potential corporate partners, and contract
manufacturers.
COMPETITION
The Company's systems ferment and distribute environmentally-safe
alternatives to chemicals for the treatment of various soil and water problems.
The Company's proprietary products and services compete against traditional
means of plant and water maintenance that require heavy use of chemical
products, with an emphasis on treating problem areas as they develop. These
traditional technologies include chemical insecticides and fungicides, chemical
soil penetrants, acid injection systems, and the direct, manual application of
cultured microbial products. The Company competes against these traditional
technologies on the basis of its delivery mechanism and bioaugmentation
expertise.
The Company's principal competitors with respect to its various
proprietary systems are described below:
BioJect System
The BioJect system competes against a number of companies that have
developed biological products for plant maintenance. The BioJect system also
competes against a number of technologies that are designed to reduce the
incidence and severity of turf and plant disease and sodium build-up in the
water, soil and tissue of the grass. These technologies include 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 products to turf and crops in an effective manner,
many of these competitors have substantially greater access to financial,
technical and personnel resources than the Company and include such
well-established companies as Novartis, Inc., 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.
ClearLake System
There are a number of companies that have developed conventional pond and
lake aeration equipment, including The Toro Company, Otterbine Barebo, Inc.,
Dennis Manufacturing Co., Fresh-Flo Corp., Ziegler Bros.,
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Inc. and Spraying Systems Co. However, these systems use only one or two methods
to improve water quality, as compared to the four methods utilized in the
ClearLake system.
CleanRack System
Competitive equipment wash and water treatment systems are sold by RGF
Environmental and Llanda, Inc. RGF Environmental is the industry leader with
over 2,000 installations worldwide, while Llanda is estimated to have over 800
installations. Both companies have designed systems for heavy industrial
applications and have not, to date, focused on developing systems specifically
for the golf industry. The Company competes with RGF Environmental and Llanda on
the basis of the features and benefits of its product line in relation to cost.
CalJect System
There are a number of companies that have developed systems to introduce
soil and water remediation products onto golf courses and agricultural areas,
including Soil Solutions, Inc. and The Toro Company. The Company believes that
its product has a competitive advantage over its competitors due to the
system's features and flexibility.
DISTRIBUTED PRODUCTS
The Company's distributed products and services compete against
manufacturers and distributors of traditional technologies, including chemical
insecticides and fungicides, chemical soil penetrants, acid injection systems
and the direct, manual application of fertilizers and pesticides. Many of these
competitors have substantially greater access to 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.
PERSONNEL
As of December 31, 1996, the Company had 66 full-time employees,
consisting of five in general management, 19 in sales and marketing, 13 in
customer service, four in research and development, and 25 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.
RECENT DEVELOPMENTS
On January 16, 1997 the Company sold 3,300,000 shares of its Common Stock
at a price of $4.125 in an initial public offering of its shares (the
"Offering"). On February 20, 1997, the Company sold an additional 495,000 shares
at a price of $4.125 pursuant to the exercise by the underwriters of their
overallotment option. The Company received net proceeds of approximately
$13,600,000 which were used for the purchase of Turfmakers (as described
below), for the reduction of debt and for working capital purposes.
On February 19, 1997, the Company acquired substantially all of the assets
of Turfmakers, other than its accounts receivable, for a purchase price of $1.2
million and 25,000 shares of the Company's Common Stock. The cash portion of the
purchase price is subject to certain post-closing adjustments, based on the
value of inventory and equipment acquired. The Company intends to continue
Turfmakers' turf products marketing business in the Palm Springs area.
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FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
This report contains certain forward looking statements about the business
and financial condition of the Company, including various statements contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The actual results of the Company could differ materially from any
forward looking statements contained herein. The following information sets
forth certain factors that could cause the actual results to differ materially
from those contained in the forward looking statements.
ACCUMULATED DEFICIT; CONTINUING OPERATING LOSSES. At December 31, 1996 the
Company had an accumulated deficit of $12,887,000. The Company has never
generated net income and continues to sustain operating losses. To date, the
Company has been principally engaged in organizational activities, research and
development, licensing activities, product introductions and the establishment
of a sales and marketing organization. Due to increased expenditures for product
development, U.S. patent protection and sales and marketing expenses, including
the costs of the Company's recent dealer acquisitions, the Company expects to
continue generating losses at least through the first six months of 1997. The
Company is dependent upon improvements in the profitability of its operations,
the availability of additional financing, revenue growth from acquisitions, the
successful integration of dealers and distributors, and obtaining rights to
additional microbial products to increase revenues to a level necessary to
achieve profitability. There can be no assurance that the Company will ever
achieve successful or profitable operations. See Item 6: "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON FUTURE GROWTH; RISKS OF NEW PRODUCT CONCEPTS. In order to
expand its business and achieve significant growth in sales, the Company must
continue to broaden its sales and marketing capability and increase the size of
its customer base, in part through the acquisition of independent dealers and
distributors. Although sales of certain of the Company's products are growing,
the Company's products and operations remain in the early stages of market
introduction and are subject to the risks inherent in the commercialization of
new product concepts. These risks include unforeseen problems, delays, expenses
and complications frequently encountered in the early phases of research,
development and commercialization of products, and expenses associated with
hiring and training additional sales, marketing and customer service personnel.
Many of these events may be beyond the Company's control. The Company is also
attempting to market its products into several new industries, including the
agricultural crop and soil remediation markets. There can be no assurance that
such efforts will prove to be successful or that the Company's intended
customers will purchase the Company's systems and products instead of competing
products. See Item 6: "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RISKS ASSOCIATED WITH DEALER ACQUISITION STRATEGY. Distribution and sales
of the Company's products have historically occurred through direct sales
efforts and independent dealers and distributors. The Company has initiated a
strategy of attempting to establish a nationwide distribution system for its
products through the acquisition of various independent dealers and
distributors. Such acquisitions will require significant capital outlays and,
due to the generally lower margins associated with those dealers' existing
products, may 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 or not the acquired sales force can effectively
sell the Company's proprietary products. Any failure to identify acquisition
candidates properly, any large expenditures on acquisitions that prove to be
unprofitable, or any inability to sell the Company's proprietary products
through the acquired distribution system could have a material adverse effect on
the Company's business, financial position and results of operations.
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POTENTIAL CREDIT RISKS. Historically, the Company has experienced longer
collection cycles for its proprietary products and systems compared to its
distributed products. The Company generally does not require a pledge of
collateral securing these accounts receivable and provides for estimated losses
on uncollectible accounts at the time of sale. Although losses on uncollectible
accounts have been minimal and within management's expectations, the failure of
the Company to maintain adequate procedures relative to the issuance of credit
or establish adequate allowances for uncollectible accounts receivable could
have a material adverse effect upon the Company's business, financial position
and results of operations.
PATENTS, PROPRIETARY TECHNOLOGY AND LICENSES. The Company's success will
be dependent in large measure upon its ability to obtain and enforce patent
protection for its 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 two U.S. patents for the technology
relating to the BioJect system and has filed two other applications covering
modifications to the BioJect system, one of which has been approved. The Company
has also obtained U.S. patent protection for its ClearLake system and may apply
for foreign patent protection in selected countries. The Company does not have
foreign patent rights with respect to the claims covered by the two initial
BioJect patents, 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 the two subsequent BioJect patent applications, the Company
expects to be permitted to apply for foreign patent protection with respect to
these inventions and may apply for such protection in selected countries. The
Company has registered or applied for registration of a number of trademarks
used in its business and also relies on trade secrets and proprietary know-how.
The Company occasionally has elected to disclose its trade secrets and
proprietary know-how to employees, consultants, potential corporate partners and
contract manufacturers.
Despite the precautions described above, it may be possible for a third
party to copy or otherwise obtain or 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 products. Furthermore, if any of the Company's patents are
infringed upon, it may not have sufficient resources to prosecute a patent suit
to defend its patents. In addition, an adverse determination in any litigation
would 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 and prospects.
See Item 1: "Business -- Patents and Proprietary Rights."
LACK OF MANUFACTURING CAPABILITY; RISKS RELATED TO DEPENDENCE ON CONTRACT
MANUFACTURERS AND SUPPLIERS. The Company 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 a number of 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 these manufacturers
will meet the Company's requirements for quality, quantity and timeliness, or
that the Company will be able to find substitute manufacturers for its products
and components in the future. In the first six months of 1996, the Company
experienced a problem with a circuit board in its BioJect system which required
the Company to incur expenses in making circuit board repairs in its installed
BioJect systems and resulted in a delay in certain installations of new BioJect
systems. Although the Company believes that it has solved this problem by
contracting with a different manufacturer for its circuit boards, there can be
no assurance that similar unforeseen problems will not develop in the future,
any of which could have a material adverse effect
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on the Company's operations. In addition, if the Company is unable to obtain or
retain contract manufacturers, or to obtain manufacturing on commercially
acceptable terms, it may not be able to commercialize its products as planned.
NO ASSURANCE THAT ADDITIONAL MICROBIAL PRODUCTS WILL BE ACQUIRED. The
Company plans to acquire the rights to additional microbial products. The
Company does not engage in its own research and development with respect to
microbial products. Although the Company is actively seeking to obtain licenses
for additional microbial products, there can be no assurance that the Company
will be successful in obtaining any such licenses on terms acceptable to the
Company, if at all. The failure of the Company to acquire rights to additional
products could have a material adverse effect on the Company, its results of
operations and prospects. See Item 1: "Business -- Business Strategy."
PRODUCT LIABILITY CLAIMS AND UNINSURED RISKS. The Company may be exposed
to liability resulting from the commercial use of its products. Such liability
might result from claims made directly by customers or others manufacturing such
products on behalf of the Company. The Company currently carries a product
liability insurance policy with an aggregate limit of $2,000,000. There can be
no assurance, however, that such product liability insurance will adequately
protect the Company against any product liability claim. A product liability or
other claim with respect to uninsured liabilities or in excess of insured
liabilities could have a material adverse effect on the business and prospects
of the Company.
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 but which could result in the Company incurring losses
not covered by insurance. Losses incurred as the result of the improper
application of fertilizers or other compounds, or which result from the
violation of environmental or other governmental regulations, are generally not
covered by insurance and could result in losses being incurred by the Company.
There can be no assurance that any losses covered by insurance will be
adequately covered or that any claim by the Company will be approved for payment
by the insurer.
ENVIRONMENTAL LIABILITY. 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 Environment 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
environmental laws, including the Environmental Protection 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. The Company does not currently
maintain insurance for any environmental claims which might result from the
release of its products into the environment in a manner or in concentrations
not permitted by law. Thus, a claim for environmental liability could have a
material adverse effect on the Company. See Item 1: "Business -- Government
Regulation."
COMPETITION AND RAPID TECHNOLOGICAL CHANGE. The Company competes for
market share with a number of companies that manufacture and market chemical
compounds. In addition, a number of companies are developing biological and
organic products for turf maintenance. Many of these competitors have
substantially greater capital resources, research and development staffs and
facilities than the Company, and
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many of these competitors have extensive experience in turf maintenance. The
Company's competitors may develop and introduce products and processes
competitive with or superior to those of the Company. For certain of the
Company's potential products, an important factor in competition may be the
timing of market introduction of its products compared to those of potential
competitors. 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 these products to market. Competition among products
approved for sale will be based on, among other things, product efficacy,
safety, reliability, price, market capability and patent protection.
The fields of biotechnology and related technologies in which the Company
is engaged have undergone rapid and significant technological changes. The
Company expects that the technologies associated with its research and
development will continue to develop rapidly. There can be no assurance that the
Company will be able to establish itself in such fields or, if established, that
it will be able to maintain a competitive position. Further, there can be no
assurance that the development by others of new or improved processes or
products will not make the Company's products and processes less competitive or
obsolete. See Item 1:"Business -- Competition."
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, soil additives and
amendments, water treatment products and product labeling. The Company'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
agricultural departments. Compliance with laws and regulations will increase the
costs and time necessary to allow the Company to operate successfully and may
affect the Company in other respects not currently foreseeable. More stringent
requirements for regulation or environmental controls may be imposed, which
could have a material adverse effect on the Company. See Item 1: "Business --
Government Regulation."
QUARTERLY FLUCTUATIONS IN THE COMPANY'S RESULTS OF OPERATIONS. The
Company's operating results vary from quarter to quarter as a result of various
factors, including the fact that customers who purchase the Company's ClearLake
and CleanRack systems generally purchase such systems out of their available
capital expenditure budget, the amount of which is typically approved on a
yearly basis due to the capital expenditure nature of the product. As a result,
sales of ClearLake and CleanRack systems are generally higher in the first three
quarters than in the fourth quarter since many customers have already spent
their full capital budgets by the fourth quarter. To date, sales of the
Company's BioJect systems have not varied materially due to seasonal factors.
Because the Company's business is directly related to the capital expenditure
budget of its customers, the Company expects that quarterly fluctuations in its
operating results will continue. Therefore, results for any quarter are not
necessarily indicative of results for any future period. See Item 6:
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Fluctuations."
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 and Chief Operating Officer. The
loss of the services of either of these individuals could have a material
adverse effect upon the Company's future operations. Messrs. Adams and Gloff
have each entered into an employment agreement with the Company which provides
for their continued employment with the Company through September 1998. The
Company does not have key person life insurance on any of its key employees.
NEED FOR TECHNICAL PERSONNEL. The Company's success depends in large part
on its ability to attract and retain qualified scientific and management
personnel. The Company faces competition for such persons from other companies,
academic institutions, government entities and other organizations. There can be
no
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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. Furthermore, the Company's expected expansion
into activities requiring additional expertise will place increased demands on
its resources and management skills. The Company's Scientific Advisory Board
members and consultants are employed by or consult with others, and they are
expected to devote only a small portion of their time to the Company. In
addition, the Company's Scientific Advisory Board members and consultants may
have consulting or other advisory arrangements with other entities which may
conflict or compete with their obligations to the Company.
CONTROL BY PRINCIPAL SHAREHOLDERS. The current principal shareholders and
management of the Company own approximately 41% of the outstanding shares of
Common Stock of the Company, assuming the exercise of all outstanding options
and the conversion of debt held by them and no exercise of options or warrants
or the conversion of debt 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.
OUTSTANDING WARRANTS AND OPTIONS. As of December 31, 1996, there were
5,093,500 shares of Common Stock subject to issuance pursuant to options and
warrants issued by the Company. 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.
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 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 in this
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 Bylaws, as
amended, 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.
NO DIVIDENDS. The Company has never paid a cash dividend on its Common
Stock, and the Company is currently prohibited from paying dividends by the
terms of a loan agreement between the Company and Imperial Bank. For the
foreseeable future, it is anticipated that any earnings that may be generated
from the Company's operations will be used to finance its growth and that cash
dividends will not be paid to holders of Common Stock.
ITEM 2. PROPERTIES
The Company's headquarters consist of 22,000 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 $13,200 per
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month, plus operating expenses, and expires in December 1999. The Company does
not own any real property.
The Company's Florida subsidiary, Eco Soil Systems, Inc. (Florida),
occupies 3,400 square feet of office and warehouse space for total monthly rent
of $1,400.
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 at a base rent of $3,750 a month plus operating expenses.
Turf Specialty leases 8,000 square feet in northern New Hampshire at a base rent
of $4,500 per month plus operating expenses. Turfmakers leases 12,700 square
feet in Cathedral City, California for monthly rent of $3,400 and an additional
2,500 square feet for monthly rent of $200. The Turfmakers lease relating to
12,700 square feet of space expires May 31, 1997. The Company currently is
negotiating the terms of a lease for a new facility to replace the 12,700 square
foot Cathedral City facility.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 6, 1996 the Company held a Special Meeting of Shareholders.
Notice of the Special Meeting and a Proxy Statement were submitted to
Shareholders of record as of November 19, 1996. At the Special Meeting,
shareholders were asked to vote on the following proposals:
1. To approve amendments to and restatement of the Company's Articles
of Incorporation to increase the Company's authorized capital stock
to 25,000,000 shares and to provide for up to 5,000,000 shares of
undesignated preferred stock;
2. To approve amendments to and restatement of the Company's Bylaws;
3. To approve the classification of directors of the Company into three
classes with staggered terms of three years each;
4. To approve the 1996 Directors' Stock Option Plan; and
5. To approve an increase in the number of shares of the Company's
Common Stock reserved for issuance under the 1992 Stock Option Plan
from 450,000 to 900,000.
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At the meeting on December 6, 1996, the following results of shareholder votes
were recorded:
PROPOSAL 1
To approve amendments to and restatement of the Company's Articles of
Incorporation to increase the Company's authorized capital stock to 25,000,000
shares and to provide for up to 5,000,000 shares of undesignated preferred
stock.
For 3,814,952
Against 0
Abstain 6,500
PROPOSAL 2
To approve amendments to and restatement of the Company's Bylaws.
For 3,814,952
Against 0
Abstain 6,500
PROPOSAL 3
To approve the classification of directors of the Company into three
classes with staggered terms of three years each.
For 3,814,952
Against 0
Abstain 6,500
PROPOSAL 4
To approve the 1996 Directors' Stock Option Plan.
For 3,734,452
Against 32,500
Abstain 6,500
PROPOSAL 5
To approve an increase in the number of shares of the Company's Common
Stock reserved for issuance under the 1992 Stock Option Plan from 450,000 to
900,000.
For 3,795,952
Against 0
Abstain 6,500
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock, $.005 par value per share, trades on The
Nasdaq SmallCap Market under the symbol "ESSI." As of March 31, 1997 there were
approximately 11,390,171 shares of Common Stock outstanding held by
approximately 350 holders of record.
There was no public market for the Company's Common Stock during the two
fiscal years ended December 31, 1996.
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Eco Soil Systems, Inc. (the "Company") has developed two patented
distribution systems that enable the Company to market and support a proprietary
line of microbial products which control and manage a wide variety of soil, crop
and water problems. The Company believes that these biological products, when
introduced through its BioJect and ClearLake delivery systems, will
cost-effectively replace or complement the use of chemical pesticides or
fertilizers in the turf maintenance, agricultural crop, soil remediation and
water quality management industries. Use of the Company's systems can contribute
to a reduction in the negative cumulative environmental effect of chemical use
with no increase in cost or crop damage. The Company's goals are to increase the
market share for biocontrol products and to make its delivery systems the
principal methods for distributing biotechnology products in its targeted
industries.
The Company's delivery systems ferment environmentally-safe microorganisms
at the site of application and automatically dispense the appropriate amount and
type of cultured product at the desired frequency directly into the customer's
irrigation system, pond or lake. By fermenting its biological products at the
customer's site, the Company is able to preserve and protect the potency of the
microorganisms, significantly reduce shipping costs and control the frequency of
application and concentration of product. The Company believes that its
microbial products, delivery systems and bioaugmentation expertise have
positioned it as a leader in the introduction, marketing and management of
biological complements or alternatives to many chemical pesticide and fertilizer
products.
The Company has financed its operations since inception by generating
cumulative revenues through December 31, 1996 of approximately $19,887,000 and
by raising approximately $16,618,000 in equity and debt financing.
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RESULTS OF OPERATIONS
Year Ended December 31, 1996 compared to 1995
The Company generated revenues of $12,116,000 for the year ended December
31, 1996, compared to $3,757,000 for the year ended December 31, 1995. On May
31, 1996, the Company acquired Turf Products, Ltd. ("Turf Products") and Turf
Specialty, Inc. ("Turf Specialty"), and the acquisition of each of these
companies has been accounted for as a purchase. The results for the year ended
December 31, 1996 contain seven months of revenues from Turf Products,
$3,027,000, and Turf Specialty, $3,867,000. The majority of revenues generated
by Turf Products and Turf Specialty are from sales of distributed products.
Revenues from the sales of proprietary products increased by approximately 40%
to $4,483,000 during the year ended December 31, 1996, compared to $3,195,000
during the year ended December 31, 1995. Revenues from proprietary products
consist of products designed by the Company and sold under the Company's name.
In September 1995, the Company acquired Aspen Consulting, Inc. ("Aspen"), an
irrigation design and planning firm, and Aspen accounted for $1,079,000 of
revenues for the year ended December 31, 1996. In addition, in February 1996 the
Company acquired a 51% interest in Direct Products and Machinery Pty. Ltd. and
Golf and Turf CC ("Direct Products"), a distributor of the Company's products in
South Africa. From February 1996 through December 31, 1996, Direct Products
contributed $790,000 to the Company's revenues.
In 1996, the Company's lease revenues on its BioJect system increased
approximately 28% to $681,000, compared to $534,000 during 1995. The Company's
revenues from its BioJect menu items, primarily microbes, increased to
$1,237,000 during 1996, up 31%, compared to $942,000 during 1995. The primary
cause of the increase in lease, installation and menu items was the increase in
the number of BioJect systems installed. At December 31, 1996, the Company had
238 BioJect systems installed, up 39% compared to 171 installed at December 31,
1995. In addition, the Company increased the number of menu items available to
customers during 1996.
During the year ended December 31, 1996 the Company had international
sales of approximately $1,333,000 as compared to $598,000 in 1995. The increase
in international sales was due to the sales made through Direct Products in
1996.
Revenues from the sales of CleanRack systems increased 101% to $339,000
during the year ended December 31, 1996, compared to $169,000 during the year
ended December 31, 1995. The increase in CleanRack sales reflects an increase in
the number of units sold. Revenues from the sales of ClearLake systems during
1996 declined 53% to $206,000, compared to $436,000 during 1995. The decline in
the sales of ClearLake systems during the year ended December 31, 1996 was due
to a decline in unit sales as the Company redesigned its ClearLake product and
as a result the Company did not actively market its ClearLake system during that
time period.
Sales of other proprietary products, which consisted primarily of
fertilizer, nutrient and seed sales, declined to $699,000 during the year ended
December 31, 1996 compared to $809,000 during 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.
The Company's gross profit margin for its proprietary products increased
to 56% during the year ended December 31, 1996 as compared to 53% during the
year ended December 31, 1995. The increase in the gross profit margin for the
Company's proprietary products was due to an increase in the proportion of
BioJect menu sales, which carry higher gross profit margins as a percentage of
total proprietary product sales. The Company's
21
<PAGE> 22
gross profit margin for distributed products was 29% during the year ended
December 31, 1996 as compared to 15% during the year ended December 31, 1995.
The increase in gross profit margin for distributed products reflects the
acquisitions of Turf Products and Turf Specialty which traditionally sell higher
margined distributed products. The Company's overall gross profit margin was 39%
for the year ended December 31, 1996 as compared to 47% for the year ended
December 31, 1995. The decline in gross profit margin was due to the increase in
the number of lower margined sales of distributed products as a result of the
acquisitions in May 1996 and to a lesser extent a problem with the circuit
boards for its BioJect system.
During the first and second quarters of 1996, the Company purchased a
significant number of faulty circuit boards from an outside vendor. These
circuit boards caused the Company to incur in excess of $800,000 of expenses,
which decreased the Company's gross profit and increased its selling, general
and administrative expenses. The additional expenses were due to (i) the costs
of diagnosing the problem, (ii) the costs of designing, producing and installing
new circuit boards, (iii) excess product usage of menu items and (iv)
significant customer service expenses. In addition, given the circuit board
problem, the Company chose to stop marketing its BioJect system to additional
customers in May 1996 until the problem was rectified. The Company redesigned
the circuit board and resumed marketing the BioJect system in August 1996.
Selling, general and administrative expenses increased to $6,489,000
during the year ended December 31, 1996, compared to $2,584,000 during the year
ended December 31, 1995. The increase in selling, general and administrative
expenses was the result of the costs associated with the integration of the
Company's acquisitions, an increase in the number of personnel at the Company to
support future growth and the previously discussed circuit board problem.
Research and development expenses increased to $475,000 during the year
ended December 31, 1996, compared to $413,000 during the year ended December 31,
1995. The increase in research and development expenses was due to increased
expenditures on the BioJect and ClearLake systems.
Interest expense for the year ended December 31, 1996 was $1,064,000
compared to $262,000 during the year ended December 31, 1995. The increase in
interest expense was primarily due to the amount of debt outstanding. The amount
of short and long term debt increased to $9,483,000 at December 31, 1996,
compared to $2,933,000 at December 31, 1995.
The Company incurred $464,000 of expenses associated with the
amortization of goodwill and other intangible assets during the year ended
December 31, 1996 as compared to $45,000 during the year ended December 31,
1995. The increase in expenses associated with that amortization was due to the
acquisition of Turf Products and Turf Specialty in May 1996 as well as twelve
months of amortization of the goodwill associated with the acquisition of
Aspen. The amount of goodwill associated with these acquisitions as of December
31, 1996 was $5,240,000 and is currently being amortized over a period of 15
years.
The Company reported a net loss of $4,193,000 for the year ended December
31, 1996 as compared to a net loss of $1,836,000 during the year ended December
31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has incurred net losses and negative cash
flows from operations, and at December 31, 1996, the Company had a working
capital deficit of $6,434,000. Since its inception, the Company has financed its
operations from private placements of Common Stock, Bridge Notes and Bridge
Warrants, borrowing from its principal shareholders and bank financing. During
1996, the Company used $4.6 million in cash relating to its operating
22
<PAGE> 23
activities, which is consistent with the Company's net loss for the year of $4.2
million. The Company used $1.2 million for investing activities during 1996,
which relates to the net cash paid for the acquisition of Turf Products and Turf
Speciality 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, which were repaid
($1,800,000) or converted ($1,900,000) in February 1997 subsequent to the
initial public offering; approximately $1 million from bank financing and
approximately $1.3 million from loans from officers and shareholders.
Subsequent to December 31, 1996 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 $13,600,000
which were used for the purchase of Turfmakers and for the reduction of debt
and working capital purposes. The Company presently has $1,000,000 of borrowing
capability from its existing line of credit with Imperial Bank. The Company
believes that it has sufficient resources to finance its operations and future
growth for at least the next twelve months.
QUARTERLY FLUCTUATIONS
The Company's operating results vary from quarter to quarter as a result
of various factors, including the fact that customers who purchase the Company's
ClearLake and CleanRack systems and other capital items generally purchase such
systems out of their available capital expenditure budget, the amount of which
is typically approved on a yearly basis. As a result, sales of ClearLake and
CleanRack systems and other capital items are generally higher in the first
three quarters than in the fourth quarter since many customers have already
spent their full capital budgets by the fourth quarter. To date, sales of the
Company's BioJect systems have not varied materially due to seasonal factors.
Because the Company's business is directly related to the capital expenditure
budgets of its customers, the Company expects that quarterly fluctuations in its
operating results will continue. Therefore, results for any quarter are not
necessarily indicative of results for any future period. See Item 1: "Business
- -- Factors That Could Affect Future Performance -- Quarterly Fluctuations in the
Company's Results of Operations."
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements required by this Item are set forth
at the pages indicated in Item 13(a) below.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
23
<PAGE> 24
PART III
As indicated in the following table, the information required to be
presented in Part III of this report is hereby incorporated by reference from
the Company's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders to be prepared in accordance with Schedule 14A and filed with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
covered by this report:
MATERIAL IN PROXY STATEMENT FOR 1997 ANNUAL MEETING
WHICH IS INCORPORATED HEREIN BY REFERENCE:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Item Item Caption Proxy Statement Caption
No.
- ----------------------------------------------------------------------------------------
<S> <C> <C>
9 Directors and Executive Officers of the Registrant "Directors and Executive
Officers"
- ----------------------------------------------------------------------------------------
10 Executive Compensation "Executive Compensation"
- ----------------------------------------------------------------------------------------
11 Security Ownership of Certain Beneficial Owners "Security Ownership
and Management Shareholders and
Management"
- ----------------------------------------------------------------------------------------
12 Certain Relationships and Related Transactions "Certain Transactions"
- ----------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statements
See "Index to Consolidated Financial Statements" at page F-1.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the
fourth quarter of fiscal 1996.
(c) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed as part of
this Annual Report.
25
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
1.1(3) Form of Underwriting Agreement
1.2(3) Form of Representative's Warrant
1.3(3) Selected Dealers' Agreement
1.4(2) Agreement Among Underwriters
3.1(3) Articles of Incorporation
3.2(3) Bylaws, as amended
4.1(1) Specimen Form of the Common Stock Certificate
10.1(2) 1992 Stock Option Plan
10.2(2) 1996 Directors' Stock Option Plan
10.3(1) 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(1) 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(2) Employment Agreement, dated May 21, 1991, between the Company and
William B. Adams
10.6(2) Employment Agreement, dated May 21, 1991, between the Company and
Jeffrey A. Johnson
10.7(2) Employment Agreement, dated May 21, 1991, between the Company and
Douglas M. Gloff
10.8(2) Employment Agreement, dated October 1, 1995, between Aspen
Consulting, Inc. and Michael R. Scott
10.9(1) Employment Agreement, dated June 1, 1996, between the Company and
L. Jean Dunn, Jr.
10.10(2) Employment Agreement, dated July 8, 1996, between the Company and
Kevin P. Lyons
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
10.11(2) Employment Agreement, dated July 8, 1996, between the Company and
David W. Schermerhorn
10.12(3) Employment Agreement, dated July 10, 1996, between the Company
and Wally Fuchs
10.13(1) Employment Agreement, dated September 1, 1996, between the
Company and Dr. Thomas C. Quick
10.14(1) Distribution Agreement, dated August 2, 1996, between the Company
and Abbott Laboratories, Chemical and Agricultural Products
Division
10.15(1) Supply Agreement, dated October 7, 1996, between the Company and
CCT Corporation
10.16(1) Exclusive Consulting Agreement, dated January 1, 1995, between
the Company and Encore Technologies, Inc.
10.17(1) License Agreement, dated April 20, 1992, between the Company and
Westbridge Agricultural Products
10.18(1) Product Supply Agreement, dated November 2, 1993, between the
Company and V.I.T. Products, Inc.
10.19(1) Marketing Agreement, dated July 26, 1995, between the Company and
Wilbur-Ellis Company/Western Division
10.20(2) Credit Agreement, dated March 6, 1996, between the Company and
Imperial Bank of San Diego
10.21(2) Lease Agreement, dated September 1, 1996, between the Company and
Arthur P. Arns
10.22 Asset Purchase Agreement dated as of February 13, 1997 by and
among the Company, Turfmakers, Inc. and Robert C. Maycock
11.1 Statement Regarding Computation of Per Share Earnings (Losses)
21.1 List of Subsidiaries
</TABLE>
27
<PAGE> 28
27.1 Financial Data Schedule
- --------------
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 333- 15883) filed with the Commission on November 8, 1996.
(2) 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.
(3) Incorporated by reference to Amendment No. 4 to the Company's Registration
Statement on Form SB-2 (File No. 333-15833 filed with the Commission on
January 16, 1997.
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 14th day of
April, 1997.
Eco Soil Systems, Inc.
By: /s/ William B. Adams
-------------------------------------
William B. Adams
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ William B. Adams Chairman of the Board April 14, 1997
- ------------------------------ and Chief Executive
William B. Adams Officer (principal
executive officer)
/s/ Douglas M. Gloff President, Chief Operating April 14, 1997
- ------------------------------ Officer and Director
Douglas M. Gloff
/s/ L. Jean Dunn, Jr. Chief Financial Officer April 14, 1997
- ------------------------------ (principal financial and accounting
L. Jean Dunn, Jr. officer)
/s/ Jeffrey A. Johnson President and General April 14, 1997
- ------------------------------ Manager of Golf Division,
Jeffrey A. Johnson Secretary and Director
/s/ Bradley K. Edwards Director April 14, 1997
- ------------------------------
Bradley K. Edwards
/s/ Bartley Osborn Director April 14, 1997
- ------------------------------
S. Bartley Osborn
/s/ William S. Potter Director April 14, 1997
- ------------------------------
William S. Potter
</TABLE>
29
<PAGE> 30
Eco Soil Systems, Inc.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
ECO SOIL SYSTEMS, INC. PAGE
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................................................F-2
Report of Bigelow & Company, Independent Auditors....................................................F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995.........................................F-4
Consolidated Statements of Operations for the years ended December 31, 1996
and 1995..........................................................................................F-5
Consolidated Statements of Shareholders' Deficit for the years
ended December 31, 1996 and 1995..................................................................F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996
and 1995..........................................................................................F-7
Notes to Consolidated Financial Statements...........................................................F-8
TURF SPECIALTY, INC.
Report of Bigelow & Company, Independent Auditors...................................................F-24
Consolidated Statements of Income and Retained Earnings for the
years ended December 31, 1994 and 1995...........................................................F-25
Consolidated Statements of Cash Flows for the years ended
December 31, 1994 and 1995.......................................................................F-26
Notes to Consolidated Financial Statements..........................................................F-27
TURF PRODUCTS, LTD.
Report of Ernst & Young LLP, Independent Auditors...................................................F-30
Statements of Income and Retained Earnings for the years ended
December 31, 1994 and 1995.......................................................................F-31
Statements of Cash Flows for the years ended December 31, 1994 and 1995.............................F-32
Notes to Financial Statements.......................................................................F-33
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited Pro Forma Condensed Consolidated Statements of Operations.................................F-36
Notes to Pro Forma Condensed Consolidated Statements of Operations..................................F-38
</TABLE>
F-1
<PAGE> 31
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, 1996 and 1995, and the related consolidated
statements of operations, shareholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We 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,
1996 and 1995, and the consolidated results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/S/ ERNST & YOUNG LLP
San Diego, California
March 14, 1997
F-2
<PAGE> 32
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:
Marie C. McKay
Certified Public Accountant
January 23, 1997
F-3
<PAGE> 33
Eco Soil Systems, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 150 $ --
Accounts receivable, net of allowance for doubtful accounts of
$113 and $24 at December 31, 1996 and 1995, respectively
2,193 1,231
Inventories 2,047 592
Prepaid expenses and other current assets 289 52
-------- --------
Total current assets 4,679 1,875
Property and equipment, net 1,981 1,334
Intangible assets, net 5,663 751
Other assets 563 21
-------- --------
Total assets $ 12,886 $ 3,981
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 2,743 $ 1,111
Accrued expenses 734 96
Current portion of long-term debt 7,266 1,703
Current portion of advances from shareholders 348 190
Current portion of capital lease obligations 22 99
-------- --------
Total current liabilities 11,113 3,199
Long-term debt, net of current portion 1,826 911
Advances from shareholders, net of current portion 21 --
Capital lease obligations, net of current portion -- 30
Commitments
Shareholders' deficit
Preferred stock
$.005 par value; 5,000,000 shares authorized; none issued and
outstanding -- --
Common stock
$.005 par value; 20,000,000 and 15,000,000 shares authorized at December
31, 1996 and 1995, respectively; 6,606,590 and 4,968,935 shares issued and
outstanding at December 31, 1996 and
1995, respectively 33 25
Additional paid-in capital 12,730 8,510
Warrants 242 --
Note receivable from shareholder (192) --
Accumulated deficit (12,887) (8,694)
-------- --------
Total shareholders' deficit (74) (159)
-------- --------
Total liabilities and shareholders' deficit $ 12,886 $ 3,981
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 34
Eco Soil Systems, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Proprietary products $ 4,483 $ 3,195
Distributed products 7,633 562
----------- -----------
Total revenues 12,116 3,757
Cost of revenues:
Proprietary products 1,971 1,502
Distributed products 5,399 478
----------- -----------
Total cost of revenues 7,370 1,980
----------- -----------
Gross profit 4,746 1,777
Operating expenses:
Selling, general and administrative 6,489 2,584
Research and development 475 413
----------- -----------
Loss before interest, depreciation and amortization (2,218) (1,220)
Depreciation (447) (309)
Amortization of intangibles (464) (45)
----------- -----------
Loss from operations (3,129) (1,574)
Interest expense (1,064) (262)
----------- -----------
Net loss $ (4,193) $ (1,836)
=========== ===========
Net loss per share $ (.62) $ (.35)
=========== ===========
Shares used in calculating net loss
per share 6,809,000 5,207,000
=========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 35
Eco Soil Systems, Inc.
Consolidated Statements of Shareholders' Deficit
(in thousands, except shares)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN
SHARES AMOUNT CAPITAL WARRANTS
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 3,225,268 $ 16 $ 4,075 $ --
Issuance of common stock, net of issuance costs of 629,500 3 1,235 --
Conversion of debenture 20,000 -- 50 --
Conversion of advances from shareholder 166,667 1 499 --
Exercise of employee stock options 2,500 -- 4 --
Repurchase of common stock under rescission offer (75,833) -- (120) --
Net loss -- -- -- --
--------- ---------- ---------- ----------
Balance at December 31, 1994 3,968,102 20 5,743 --
Issuance of common stock, net of issuance costs of 606,333 3 1,629 --
Conversion of promissory note 233,333 1 699 --
Issuance of common stock for purchase of Aspen
Consulting, Inc. 133,667 1 400 --
Exercise of stock options 27,500 -- 39 --
Net loss -- -- -- --
--------- ---------- ---------- ----------
Balance at December 31, 1995 4,968,935 25 8,510 --
Issuance of common stock for purchase of Turf
Products, Ltd. 374,424 2 1,121 --
Issuance of common stock 138,583 1 387 --
Issuance of warrants in connection with debt -- -- -- 242
Exercise of stock options 239,000 1 391 --
Issuance of common stock for purchase of Turf
Specialty, Inc. 647,650 3 1,940 --
Conversion of debt 237,998 1 381 --
Net loss -- -- -- --
--------- ---------- ---------- ----------
Balance at December 31, 1996 6,606,590 $ 33 $ 12,730 $ 242
=== ==== ========= ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
NOTE
RECEIVABLE
FROM ACCUMULATED
SHAREHOLDER DEFICIT TOTAL
-------------- ----------- ----------
<S> <C> <C> <C>
Balance at December 31, 1993 $ -- $ (4,042) $ 49
Issuance of common stock, net of issuance costs of -- -- 1,238
$336
Conversion of debenture -- -- 50
Conversion of advances from shareholder -- -- 500
Exercise of employee stock options -- -- 4
Repurchase of common stock under rescission offer -- -- (120)
Net loss -- (2,816) (2,816)
---------- ---------- ----------
Balance at December 31, 1994 -- (6,858) (1,095)
Issuance of common stock, net of issuance costs of -- -- 1,632
$256
Conversion of promissory note -- -- 700
Issuance of common stock for purchase of Aspen
Consulting, Inc. -- -- 401
Exercise of stock options -- -- 39
Net loss -- (1,836) (1,836)
---------- ---------- ----------
Balance at December 31, 1995 -- (8,694) (159)
Issuance of common stock for purchase of Turf
Products, Ltd. -- -- 1,123
Issuance of common stock -- -- 388
Issuance of warrants in connection with debt -- -- 242
Exercise of stock options (192) -- 200
Issuance of common stock for purchase of Turf
Specialty, Inc. -- -- 1,943
Conversion of debt -- -- 382
Net loss -- (4,193) (4,193)
---------- ---------- ----------
Balance at December 31, 1996 $ (192) $ (12,887) $ (74)
========== ========== ==========
</TABLE>
See accompanying notes.
F-6
<PAGE> 36
Eco Soil Systems, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,193) $(1,836)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 911 354
Amortization of discount on long-term debt 189 --
Changes in operating assets and liabilities, net of effect of
acquired businesses:
Accounts receivable 2,045 (652)
Inventories 114 (35)
Prepaid expenses and other assets (472) 2
Accounts payable (2,932) 139
Accrued liabilities (292) (3)
------- -------
Net cash used in operating activities (4,630) (2,031)
INVESTING ACTIVITIES
Cash received in acquisitions 1,656 --
Payments related to acquired businesses (2,690) --
Purchase of property and equipment (748) (569)
Proceeds from note receivable 595 --
------- -------
Net cash used in investing activities (1,187) (569)
FINANCING ACTIVITIES
Advances from shareholder 179 1,000
Repayment of advances from shareholder -- (80)
Proceeds from long-term debt 6,442 858
Repayments of long-term debt (1,135) (751)
Payments on capital lease obligations (107) (98)
Net proceeds from issuance of common stock 588 1,671
------- -------
Net cash provided by financing activities 5,967 2,600
------- -------
Net increase in cash 150 --
Cash at beginning of year -- --
------- -------
Cash at end of year $ 150 $ --
======= =======
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
$ 382 $ 700
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 537 $ 262
======= =======
</TABLE>
See accompanying notes.
F-7
<PAGE> 37
Eco Soil Systems, Inc.
Notes to Consolidated Financial Statements
December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Eco Soil Systems, Inc. (the "Company") develops, markets, sells and supports a
proprietary line of biologically-produced, environmentally safe products
designed to address a variety of problems in the turf maintenance, agricultural
crop, soil redemption and water quality management industries. The Company has
developed two patented delivery systems that enable the Company to ferment
microorganisms at the customer's site and then dispense the appropriate amount
of cultured product directly into the customer's irrigation system, pond or
lake. The Company operates primarily in California, Florida and South Africa.
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.
BASIS OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
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.
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 turf product distributors and country
clubs.
F-8
<PAGE> 38
Eco Soil Systems, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 1995, sales to a single customer were approximately $507,000,
representing 13% of net sales. Amounts receivable from this customer were
$99,000 at December 31, 1995, representing 8% of total accounts receivable. No
customer accounted for more than 10% of net sales during 1996.
INVENTORIES
Inventories consist primarily of finished goods and are stated at the lower of
cost (first-in, first-out method) or market.
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> 39
Eco Soil Systems, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE AND EXPORT SALES
Proprietary product 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 product revenue is derived primarily from
purchased turf maintenance products. Revenue from product sales is recognized
upon shipment of the product. Service revenues are recognized when the services
are performed, and rental revenue is recognized in the month in which the unit
is used by the customer.
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 $543,000 and $598,000 in 1996 and 1995,
respectively.
NET LOSS PER SHARE
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 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 for all periods presented (using the treasury
stock method).
Supplemental 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,
------------------------
1996 1995
----- ---------
<S> <C> <C>
Supplemental net loss per share $(.46) $ (.29)
===== =========
Shares used in computing supplemental net loss per
share (in thousands) 7,897 5,654
===== =========
</TABLE>
The supplemental information is not necessarily indicative of the actual
results that would have been achieved had such debt never been outstanding, nor
is it necessarily indicative of future results.
F-10
<PAGE> 40
Eco Soil Systems, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-11
<PAGE> 41
Eco Soil Systems, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
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. Compensation expense is
recorded ratably over the period of forgiveness. Approximately $83,000 has been
amortized in the year ended December 31, 1996 related to the forgiveness of
these notes.
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.
The results of operations of Aspen, TSI and TPL from the respective dates of
acquisition are included in the consolidated financial statements.
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.
----------- ---------- ---------
<S> <C> <C> <C>
Assets acquired:
Cash $-- $1,471 $ 185
Accounts receivable 134 1,900 1,021
Inventories -- 675 894
Prepaid expenses and other current assets 7 31 336
Property and equipment 31 164 182
Note receivable from stockholders -- 595 --
Excess of purchase price over net tangible assets
acquired 530 3,460 1,780
---- ------ ------
Total assets acquired $702 $8,296 $4,398
==== ====== ======
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
==== ====== ======
</TABLE>
F-12
<PAGE> 42
Eco Soil Systems, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
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
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.
<TABLE>
<CAPTION>
Pro Forma Results of Operations
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995
-------- --------
<S> <C> <C>
Net revenues $ 18,636 $ 17,557
Net loss (4,576) (1,685)
Net loss per share $ (.64) $ (.31)
</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.
3. BALANCE SHEET INFORMATION
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
------- -------
<S> <C> <C>
Machinery and equipment $ 2,404 $ 1,813
Vehicles 629 317
Leasehold improvements 170 56
Furniture and fixtures 130 53
------- -------
3,333 2,239
Less accumulated depreciation and amortization
(1,352) (905)
------- -------
$ 1,981 $ 1,334
======= =======
</TABLE>
F-13
<PAGE> 43
Eco Soil Systems, Inc.
Notes to Consolidated Financial Statements (continued)
3. BALANCE SHEET INFORMATION (CONTINUED)
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
------- -----
<S> <C> <C>
Excess of purchase price over fair market
value of assets acquired
(Note 2) $ 5,929 $ 553
Marketing rights 281 281
Accumulated amortization (547) (83)
------- -----
$ 5,663 $ 751
======= =====
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------ ----
<S> <C> <C>
10%secured promissory notes issued in connection
with the acquisition of Turf Specialty, Inc., to its
officers; interest payable monthly, principal due the
earlier of February 1997 or 10 days after the
effective date of an initial public offering (IPO);
collateralized by the capital stock of Turf Specialty,
Inc.; repaid in February 1997 (See Note 10) $1,000 $--
8% secured subordinated notes to an officer and
shareholders, net of unamortized discount of $44;
interest payable quarterly, principal due $719 in
March 1998 and $287 in November 1998 1,006 --
8% secured subordinated debentures; interest payable
quarterly, principal due November 1998 700 700
Revolving line of credit with bank for $500; interest
payable monthly at the bank's prime rate plus 2%
per annum (10.25% at December 31, 1996), expiring
December 1997; secured by personal assets of an
officer/shareholder and substantially all assets of the
Company 500 --
</TABLE>
F-14
<PAGE> 44
Eco Soil Systems, Inc.
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
----- ----
<S> <C> <C>
9% note payable to a bank; interest payable monthly,
principal due January 1997; secured by personal
assets of a shareholder and substantially all assets of
the Company 263 1,013
8% unsecured subordinated promissory note to an
officer; interest and principal due upon demand 250 --
California Export Financing Office (CEFO) revolving
line of credit with bank for $500; interest payable
monthly at the bank's prime rate plus 1.5% per
annum (9.75% at December 31, 1996), expiring
April 1997; secured by personal assets of an
officer/shareholder and substantially all assets of the
Company 418 --
10%subordinated promissory bridge notes, net of
unamortized discount of $24; interest and principal
due at the earlier of June 1997 or within 30 days
after the effective date of an IPO; convertible, at the
option of the note holder, into common stock at
80% of an IPO price for a period of 20 days after
the effective date of the IPO (See Note 10) 3,671 --
Non-interest bearing unsecured note payable net of
imputed interest of $7; due in monthly installments
of $7 through February 1998 with a final payment of
$9 due March 1998 94 180
10% unsecured subordinated notes; interest payable
quarterly, principal due upon demand; convertible, at
the option of the note holder, into common stock at
80% of an IPO price if the IPO is completed prior to
July 1997 120 --
10%convertible unsecured subordinated debentures
issued to shareholders; converted into common
stock in 1996 -- 132
</TABLE>
F-15
<PAGE> 45
Eco Soil Systems, Inc.
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
<S> <C> <C>
10% unsecured subordinated debentures; interest
payable monthly, principal due July 1998 90 290
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; interest
and principal due January 1997 100 --
10% unsecured subordinated promissory note to an
officer and shareholder; interest payable quarterly,
principal due upon demand 100 --
10%convertible promissory note; interest and
principal due the earlier of June 1997 or within 30 days after the
effective date of an IPO, (see Note 10) 150 --
8% secured promissory note; principal and interest
due January 1997 or within 10 days after the
effective date of an IPO, (see Note 10) 189 --
Note payable with bank; interest payable monthly at
prime the bank's rate plus 2% (10.25% at December
31, 1996) per annum; principal due February 1997 200 --
10% unsecured subordinated promissory note to
officer and shareholder; interest payable quarterly,
principal due on demand 200 --
Other 41 113
------ ------
9,092 2,614
Less amount due within one year 7,266 1,703
------ ------
Long-term debt due after one year $1,826 $ 911
====== ======
</TABLE>
F-16
<PAGE> 46
Eco Soil Systems, Inc.
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31, 1997 $7,266
Year ending December 31, 1998 1,826
------
$9,092
======
</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.
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 900,000 shares of common stock. Options granted
under the Plan have a five-year term and vest ratably over a three-year period.
F-17
<PAGE> 47
Eco Soil Systems, Inc.
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity and related information is as
follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- -------- ------- --------
Outstanding - beginning of year
<S> <C> <C> <C> <C>
334,168 $ 2.25 210,000 $ 2.00
Granted 391,000 $ 3.59 126,668 $ 3.00
Exercised (10,000) $ 2.00 (2,500) $ 3.00
Forfeited (27,668) $ 2.25 -- --
------- -------
Outstanding - end of year 687,500 $ 2.59 334,168 $ 2.25
======= =======
Exercisable - end of year 274,167 $ 2.26 242,222 $ 1.96
======= =======
</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.
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
F-18
<PAGE> 48
Eco Soil Systems, Inc.
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY (CONTINUED)
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 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,
----------------------------
1996 1995
--------- ---------
<S> <C> <C>
Pro forma net loss (in thousands) $ (4,257) $ (1,853)
========= =========
Pro forma net loss per share $ (.63) $ (.37)
========= =========
Weighted-average fair value of options granted during the year $ 1.16 $ .57
========= =========
</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-19
<PAGE> 49
Eco Soil Systems, Inc.
Notes to Consolidated Financial Statements (continued)
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 200,000 shares of the Company's
common stock at $3.00 per share. The option vests over four years and will
expire in December 2001.
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.
F-20
<PAGE> 50
Eco Soil Systems, Inc.
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY (CONTINUED)
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.
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,
-------------------------
1996 1995
------- -------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,530 $ 3,093
Other 106 60
------- -------
Total deferred tax assets 4,636 3,153
Valuation allowance for deferred tax assets (4,636) (3,153)
------- -------
Net deferred tax assets $ -- $ --
======= =======
</TABLE>
F-21
<PAGE> 51
Eco Soil Systems, Inc.
Notes to Consolidated Financial Statements (continued)
8. COMMITMENTS
In 1995, the Company entered into a thirty-year licensing agreement for Bioject
Product (as defined). The license calls for the Company to pay royalties of 13%
on all product which were evaluated, developed, supplied, or improved by the
licensor. The license calls for 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, 1996 and 1995
was $153,000 and $100,000, respectively.
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
(all current) $ 22
=====
</TABLE>
Rental expense for the years ended December 31, 1996 and 1995 was approximately
$268,000 and $107,000, respectively, including $90,000 and $78,000,
respectively, to a shareholder. The lease with the shareholder expires in
November 1999.
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-22
<PAGE> 52
Eco Soil Systems, Inc.
Notes to Consolidated Financial Statements (continued)
10. SUBSEQUENT EVENTS
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 $13.6 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.
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.
F-23
<PAGE> 53
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-24
<PAGE> 54
TURF SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1995
------- ------
<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-25
<PAGE> 55
TURF SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1995
------ -------
<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-26
<PAGE> 56
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 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.
F-27
<PAGE> 57
TURF SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-28
<PAGE> 58
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-29
<PAGE> 59
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-30
<PAGE> 60
TURF PRODUCTS, LTD.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1994 1995
------- -------
<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-31
<PAGE> 61
TURF PRODUCTS, LTD.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1995
----- -----
<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-32
<PAGE> 62
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-33
<PAGE> 63
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
F-34
<PAGE> 64
bases. The sources of the 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-35
<PAGE> 65
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>
See accompanying notes to Pro Forma Condensed Consolidated Statements of
Operations.
F-36
<PAGE> 66
ECO SOIL SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------
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
========
</TABLE>
See accompanying notes to Pro Forma Condensed Consolidated Statements of
Operations.
F-37
<PAGE> 67
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 $4,390
==================================
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, 1996 and 1995 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.
F-38
<PAGE> 68
ECO SOIL SYSTEMS, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
NOTE 2. (continued)
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.
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,
1996 1995
--------------------
<S> <C> <C>
Shares used in historical calculation 6,809 5,207
Effect of treasury stock assumptions on shares
issued in acquisitions (1) 309 309
====================
Shares used in pro forma calculation 7,118 5,516
====================
</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-39
<PAGE> 1
EXHIBIT 10.22
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement, dated as of February 13, 1997,
is by and among ECO SOIL SYSTEMS, INC., a Nebraska corporation ("Buyer"),
TURFMAKERS, INC., a California corporation, ("Seller"), and ROBERT MAYCOCK, an
individual ("Shareholder").
RECITALS
A. Seller owns certain assets which it uses in the
conduct of the Business (as defined below). Shareholder owns all of the
outstanding capital stock of Seller.
B. Buyer desires to purchase from Seller, and Seller
desires to sell to Buyer, such assets upon the terms and subject to the
conditions of this Agreement.
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants and
promises contained herein and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereto agree
as follows:
ARTICLE I
DEFINITIONS
1.1 Defined Terms. As used herein, the terms below shall have the
following meanings. Any of such terms, unless the context otherwise requires,
may be used in the singular or plural, depending upon the reference.
"Affiliate" shall have the meaning set forth in the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder.
"Ancillary Agreements" shall mean the Covenants Not to
Compete substantially in the forms attached hereto as Exhibits F and G,
respectively, and a consulting agreement in form and substance reasonably
satisfactory to Seller and Shareholder providing for Shareholder to be retained
by Buyer as a consultant for a period of five months beginning February 1, 1997
at a rate of $5,000 per month. Shareholder's duties as a consultant will
include assisting in the transition of the business and using his best efforts
to obtain orders for seed and control products.
"Assets" shall mean all of the right, title and interest in
and to the business, properties, assets and rights of any kind, as of the
Closing, except as set forth below, whether tangible or intangible, real or
personal and constituting, or used or useful in connection with, or related to,
the Business, including without limitation all of Seller's right, title and
interest in the following:
(a) all Contract Rights, to the extent transferable;
(b) all accounts and notes receivable of Seller arising
from deliveries of product on and after the Effective Date;
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(c) the Leases listed on Schedule 4.6;
(d) the Leasehold Estate, to the extent transferable;
(e) all Leasehold Improvements;
(f) all Fixtures and Equipment;
(g) all Inventory;
(h) all automobiles and trucks;
(i) copies of all Books and Records as requested by
Buyer;
(j) all Proprietary Rights relating to the Business, to
the extent transferable;
(k) to the extent transferable, all Permits;
(l) all available supplies, sales literature, promotional
literature, customer, supplier and distributor lists, art work, display units,
telephone and fax numbers and purchasing records related to the Business;
(m) all rights under or pursuant to all warranties,
representations and guarantees made by suppliers in connection with the Assets
or services furnished to Seller pertaining to the Business or affecting the
Assets, to the extent such warranties, representations and guarantees (i) are
not required by Seller to fulfill its obligations under this Agreement and (ii)
are assignable;
(n) all claims, causes of action, choses in action,
rights of recovery and rights of set-off of any kind, against any person or
entity, except as related to enforcing payment of Seller's accounts and notes
receivable (whether current or noncurrent) arising from deliveries of products
by Seller related to the Business prior to the Effective Date;
(o) all computer hardware and, to the extent
transferable, software with respect to the Business; and
(p) all rights to the name "Turfmakers";
but excluding therefrom the Excluded Assets.
"Books and Records" shall mean (a) all records and lists of
Seller pertaining to the Assets, (b) all records and lists pertaining to the
Business, customers, suppliers or personnel of Seller, (c) all product,
business and marketing plans of Seller and (d) all books, ledgers, files,
reports, plans, drawings and operating records of every kind maintained by
Seller, but excluding Seller's minute books, stock books and tax returns.
"Business" shall mean the Seller's business of selling and
distributing seed, fertilizer and pesticides to golf courses and the ornamental
turf industry.
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"Closing Date" shall mean February 14, 1997, or such other
date as Buyer and Seller shall mutually agree upon.
"Code" shall mean the Internal Revenue Code of 1986, as
amended, and the rules and regulations thereunder.
"Contract" shall mean any agreement, contract, note, loan,
evidence of indebtedness, purchase order, letter of credit, franchise
agreement, undertaking, covenant not to compete, employment agreement, license,
instrument, obligation or commitment to which Seller is a party or is bound and
which relates to the Business or the Assets, whether oral or written, but
excluding the Facility Lease.
"Contract Rights" shall mean all of Seller's rights and
obligations under the Contracts listed on Schedule 4.6.
"Disclosure Schedule" shall mean a schedule executed and
delivered by Seller to Buyer as of the date hereof which sets forth the
exceptions to the representations and warranties contained in Article IV hereof
and certain other information called for by this Agreement.
"Effective Date" shall mean February 1, 1997.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
"Employee Plan" shall mean an "employee plan" as defined
under ERISA.
"Encumbrance" shall mean any claim, lien, pledge, option,
charge, easement, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, conditional sales agreement,
encumbrance or other right of third parties, whether voluntarily incurred or
arising by operation of law, and includes, without limitation, any agreement to
give any of the foregoing in the future, and any contingent sale or other title
retention agreement or lease in the nature thereof.
"Excluded Assets," notwithstanding any other provision of this
Agreement, shall mean the following assets of Seller on the Closing Date which
are not to be acquired by Buyer hereunder:
(a) all cash and cash equivalents held by Seller;
(b) all accounts and notes receivable (whether current or
noncurrent) of Seller with respect to the Business arising from deliveries of
product prior to the Effective Date;
(c) all Permits, to the extent not transferable;
(d) all claims, causes of action, choses in action,
rights of recovery and rights of set-off of any kind against any person or
entity arising out of or relating to the Excluded Assets and/or relating to the
Assets to the extent related to the Excluded Liabilities;
(e) utility, lease and other deposits and all prepaid
expenses of Seller including without limitation the security deposit on the
Lease;
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(f) all leasehold estates or other real property
interests in any Former Facility;
(g) all rights and interests in Insurance Policies,
including without limitation, prepaid insurance premiums, unearned premium
refunds and claim proceeds; and
(h) all assets of Seller not related to or otherwise used
in connection with the Business.
"Facility" shall mean the premises located at 68-805C Perez
Road, Building F, Suites 31-38, 55-57, 21-25, 27-28, Building G, Suites 67-69,
Cathedral City, California 92234.
"Facility Lease" shall mean the lease of the Facility listed
on Schedule 4.5.
"Financial Statements" shall mean the compilation financial
statements of Seller for each of the three years ended December 31, 1996
previously provided by Seller to Buyer.
"Fixtures and Equipment" shall mean all of the furniture,
fixtures, furnishings, machinery, spare parts, supplies, equipment and other
tangible personal property owned by Seller and used in connection with the
Business.
"Former Facility" shall mean any plant, office, manufacturing
facility, store, warehouse, improvement, administrative building and all real
property and related facilities used in connection with the Business which was
owned, leased or operated by Seller at any time up to and including the date
hereof, but excluding the Facility.
"Insurance Policies" shall mean the insurance policies related
to the Assets as described in Section 4.21.
"Inventory" shall mean (i) all of Seller's inventory held for
resale and (ii) all bulk store supplies of Seller, with respect to the
Business, which are located in the Facility; provided that "Inventory" shall
not be deemed to include any ferric sulphate.
"Leased Real Property" shall mean all leased property described
in the Facility Lease.
"Leasehold Estate" shall mean all of Seller's rights and
obligations as lessee under the Facility Lease.
"Leasehold Improvements" shall mean all leasehold improvements
situated in or on the Leased Real Property to the extent owned by Seller.
"Leases" shall mean all of the existing leases with respect to
the personal or real property of Seller listed on Schedules 4.5 and 4.6.
"material adverse effect" or "material adverse change" shall
mean with respect to the Business or the Assets any adverse effect or change in
the condition (financial or other), business, results of operations, prospects,
assets, liabilities or operations of the Business and/or the Assets or on the
ability of Seller to consummate the transactions contemplated hereby, or any
event or condition
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which would, with the passage of time, constitute a "material adverse effect"
or "material adverse change."
"Permits" shall mean all licenses, permits, franchises,
approvals, authorizations, consents or orders of, or filings with, any
governmental authority, whether foreign, federal, state or local, or any other
person, necessary or desirable for the present or anticipated conduct of, or
relating to the operation of the Business.
"Purchased Assets" means all of Seller's right, title and
interest in and to the Assets, except the Excluded Assets.
"Representative" shall mean any officer, director, principal,
attorney, agent, employee or other representative.
"Tax" shall mean any federal, state, local, foreign or other
tax, levy, impost, fee, assessment or other government charge, including
without limitation income, estimated income, business, occupation, franchise,
property, payroll, personal property, sales, transfer, use, employment,
commercial rent, occupancy, franchise or withholding taxes, and any premium,
including without limitation interest, penalties and additions in connection
therewith.
1.2 Other Defined Terms. The following terms shall have the
meanings defined for such terms in the Sections set forth below:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Action 4.11
Assumed Liabilities 2.2
Assumption Documents 3.2(b)
Bulk Sales Act 10.4
Claim 10.3(d)
Claim Notice 10.2(d)
Closing 3.1
Confidential Information 11.11
Damages 10.3(a)
Environmental Conditions 4.26(k)
Environmental Laws 4.26
Excluded Liabilities 2.3
Hazardous Substance 4.26
Lease Modifications 4.5
Proposed Acquisition Transaction 6.2(a)
Proprietary Rights 4.17(a)
Purchase Price 2.4(a)
Release 4.26(a)
</TABLE>
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ARTICLE II
PURCHASE AND SALE OF ASSETS
2.1 Transfer of Assets. Upon the terms and subject to the
conditions contained herein, at the Closing, Seller will sell, convey,
transfer, assign and deliver to Buyer, and Buyer will acquire from Seller, the
Purchased Assets.
2.2 Assumption of Liabilities. Upon the terms and subject to the
conditions contained herein, at the Closing, Buyer shall assume the following,
and only the following, obligations and liabilities of Seller (the "Assumed
Liabilities"): (i) all obligations and liabilities accruing, arising out of, or
relating to events or occurrences happening after the Effective Date under the
Contracts and Leases listed on Schedules 4.5 and 4.6 and (ii) the accounts
payable listed on Schedule 2.2. In addition, Buyer will reimburse Seller for
all wages earned by Seller's employees in the ordinary course of business from
the Effective Date through the Closing Date.
2.3 Excluded Liabilities. Notwithstanding any other provision of
this Agreement, except for the Assumed Liabilities expressly specified in
Section 2.2, Buyer shall not assume, or otherwise be responsible for, any
liabilities or obligations of Seller, whether actual or contingent, matured or
unmatured, liquidated or unliquidated, or known or unknown, whether arising out
of occurrences prior to, at or after the date hereof ("Excluded Liabilities"),
which Excluded Liabilities include, without limitation:
(a) Any liability or obligation to or in respect of any
employees or former employees of Seller including without limitation (i) any
employment agreement, whether or not written, between Seller and any person
including without limitation accrued vested vacation benefits, unpaid bonuses
and salaries, (ii) any liability under any Employee Plan at any time
maintained, contributed to or required to be contributed to by or with respect
to Seller or under which Seller may incur liability, or any contributions,
benefits or liabilities therefor, or any liability with respect to Seller's
withdrawal or partial withdrawal from or termination of any Employee Plan and
(iii) any claim of an unfair labor practice, or any claim under any state
unemployment compensation or worker's compensation law or regulation or under
any federal or state employment discrimination law or regulation, which shall
have been asserted on or prior to the Closing Date or is based on acts or
omissions which occurred on or prior to the Closing Date;
(b) Any liability or obligation of Seller in respect of
any Tax;
(c) Any liability arising from any injury to or death of
any person or damage to or destruction of any property, whether based on
negligence, breach of warranty, strict liability, enterprise liability or any
other legal or equitable theory arising from defects in products manufactured
or from services performed by or on behalf of Seller or any other person or
entity on or prior to the Closing Date;
(d) Any liability or obligation of Seller arising out of
or related to any Action against Seller or any Action which adversely affects
the Assets and which shall have been asserted on or prior to the Closing Date
or to the extent the basis of which shall have arisen on or prior to the
Closing Date;
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(e) Any liability or obligation of Seller resulting from
entering into, performing its obligations pursuant to or consummating the
transactions contemplated by, this Agreement (including without limitation any
liability or obligation of Seller pursuant to Article X hereof); and
(f) Any liability or obligation related to any Former
Facility, including without limitation any liability under any applicable
Environmental Laws.
2.4 Purchase Price.
(a) Purchase Price. Upon the terms and subject to the
conditions set forth herein, Buyer shall pay to Seller for the sale, transfer,
assignment, conveyance and delivery of the Purchased Assets, the aggregate
amount of: (i) upon execution hereof, a deposit of One Hundred Thousand Dollars
($100,000); (ii) at Closing, Four Hundred Fifty Thousand Dollars ($450,000);
(iii) at Closing, a partial equipment payment of Eighty Thousand Dollars
($80,000); (iv) at Closing, a partial inventory payment of Four Hundred Sixty
Thousand Dollars ($460,000); (v) at Closing, Twenty-Five Thousand shares of
Common Stock, par value $.005 per share, of Buyer; (vi) on March 7, 1997, an
additional equipment payment of Twenty Thousand Dollars ($20,000), unless Buyer
obtains at its expense an independent appraisal (calculating the average of the
retail and wholesale market values of the equipment) prior to March 7, 1997
which shows the fair market value of Seller's equipment to be less than
$100,000, in which case the additional equipment payment shall be reduced on a
dollar for dollar basis; (vii) on March 7, 1997, an additional inventory
payment of Forty Thousand Dollars ($40,000), unless the value of Seller's
Inventory as determined through a physical inventory on February 4, 1997,
adjusted to book on or before March 7, 1997, is less than $500,000, in which
case the additional inventory payment shall be reduced on a dollar for dollar
basis; (viii) on August 7, 1997, One Hundred Fifty Thousand Dollars ($150,000)
(collectively, the payments in clauses (i)-(viii) above are referred to herein
as the "Purchase Price"). The portions of the Purchase Price payable in cash
at Closing shall be paid as follows: $243,000 to Hemet Federal Savings & Loan;
$191,880.00 to Willamette Seed Co.; $336,372.30 to International Seeds, Inc.;
$110,000 to J.R. Simplot/Best Products; and $108,747.70 to Seller; it being
understood that the amounts set forth in the preceding clause shall be subject
to adjustment prior to Closing based on quotes from such creditors of the
amounts owed to them by Seller. Each portion of the Purchase Price payable
after the Closing shall be payable by same day wire transfer, cashier's check
or other "same day funds" acceptable to Seller. In the event the amount of the
value of Seller's equipment as determined by the appraisal is less than
$80,000, Seller will refund to Buyer on March 7, 1997 the amount by which
$80,000 exceeded the value of Seller's equipment at Closing.
(b) Allocations. The Purchase Price shall be allocated
among the Purchased Assets in the manner required by Section 1060 of the Code
and regulations thereunder. Exhibit A attached hereto sets forth the amount of
the Purchase Price allocable to the various Purchased Assets. Buyer and Seller
agree to each prepare and file on a timely basis with the Internal Revenue
Service substantially identical initial and supplemental Internal Revenue
Service Forms 8594 "Asset Acquisition Statements Under Section 1060" consistent
with Exhibit A.
(c) Inventory. The quantities of Inventory to be
purchased and sold hereunder shall be determined by the itemized inventory
taken on February 4, 1997, which shall be adjusted to book on or before March
7, 1997, using the same procedures normally used by Buyer to take inventories
of the type of Inventory being counted. Seller's Inventory shall be valued in
an amount as agreed by Buyer and Seller in accordance with generally accepted
accounting principles at the lower
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of cost or market value in the manner prescribed in Section 4.22. To the
extent Seller's Inventory includes items not of a quality or quantity usable or
salable in the ordinary course of business, Buyer shall be entitled to return
such items to Seller and deduct an amount equal to the book value thereof from
the additional inventory payment described in Section 2.4 above.
(d) Legend. All share certificates representing shares
of the common stock of Buyer to be delivered to the Seller hereunder shall bear
a legend substantially as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES
LAWS (THE "STATE ACTS"), HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT
BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT
PURSUANT TO A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND
QUALIFICATION UNDER THE STATE ACTS OR EXEMPTIONS FROM SUCH
REGISTRATION OR QUALIFICATION REQUIREMENTS (INCLUDING, IN THE CASE OF
THE SECURITIES ACT, THE EXEMPTION AFFORDED BY RULE 144).
2.5 Closing Costs; Transfer Taxes and Fees. Seller shall be
responsible for any documentary and transfer taxes and any sales, use or other
taxes imposed by reason of the transfers of Purchased Assets provided hereunder
and any deficiency, interest or penalty asserted with respect thereto. Seller
shall pay the fees and costs of recording or filing all applicable conveyancing
instruments described in Section 3.2(a). Buyer shall pay all costs of applying
for new Permits and obtaining the transfer of existing Permits which may be
lawfully transferred.
2.6 Prorations. Any prepaid rent plus, to the extent water,
sewage, disposal, electricity, telephone and other utilities and services have
not been transferred to Buyer as of the Effective Date, the charges for such
utilities and services shall be prorated between Buyer and Seller as of the
Effective Date. Such prorations shall, insofar as feasible, be determined and
paid at the Closing, with best efforts to achieve final settlement of such
prorations within 30 days after the Closing. Seller shall be responsible for
payment of all unpaid rent, common area maintenance expenses and real property
taxes through the Effective Date. Seller shall be responsible for payments to
employees pursuant to Section 2.3(a)(i).
ARTICLE III
CLOSING
3.1 Closing. The Closing of the transactions contemplated herein
(the "Closing") shall be at 10:00 a.m. on the Closing Date at the offices of
Latham & Watkins, 701 "B" Street, Suite 2100, San Diego, California, unless the
parties hereto otherwise agree.
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3.2 Conveyances at Closing.
(a) Instruments and Possession. To effect the sale and
transfer referred to in Section 2.1 hereof, Seller will, at the Closing,
execute and deliver to Buyer:
(i) one or more bills of sale, in the form
attached hereto as Exhibit B, conveying in the aggregate all of Seller's owned
personal property included in the Purchased Assets;
(ii) subject to Section 9.2, Assignment of Lease
substantially in the form attached hereto as Exhibit C, with respect to the
Lease;
(iii) Assignment and Acceptance of Purchased
Assets, substantially in the form of Exhibit D attached hereto, with respect to
the Contract Rights;
(iv) the Ancillary Agreements; and
(v) such other instruments as shall be reasonably
requested by Buyer to vest in Buyer title in and to the Purchased Assets in
accordance with the provisions hereof.
(b) Instruments; Payment. Upon the terms and subject to
the conditions contained herein, at the Closing Buyer shall execute and deliver
to Seller:
(i) an instrument of assumption substantially in
the form attached hereto as Exhibit E, evidencing Buyer's assumption, pursuant
to Section 2.2, of the Assumed Liabilities (the "Assumption Document");
(ii) such other instruments as shall be reasonably
requested by Seller; and
(iii) payment of the portion of the Purchase Price
required to be paid at the Closing pursuant to Section 2.4.
(c) Form of Instruments. To the extent that a form of
any document to be delivered hereunder is not attached as an Exhibit hereto,
such documents shall be in form and substance, and shall be executed and
delivered in a manner, reasonably satisfactory to Buyer and Seller.
(d) Certificates. Buyer and Seller shall deliver the
certificates and other matters described in Articles VII and VIII.
(e) Consents. Subject to Section 9.2, Seller shall
deliver all Permits that are transferrable and any third party consents as
contemplated by this Agreement.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER AND SHAREHOLDER
Seller and Shareholder each hereby represents and warrants to
Buyer as follows, except as otherwise set forth on the Disclosure Schedule,
which representations and warranties are, as of the date hereof, and will be,
as of the Closing Date, true and correct:
4.1 Organization of Seller. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. Seller is duly qualified to do business as a corporation and is in
good standing in each jurisdiction where the character of its properties owned
or leased or the nature of its activities make such qualification necessary,
except where the failure to be so qualified or in good standing would not have
a material adverse effect on the Purchased Assets or the Business. Copies of
the Articles of Incorporation and Bylaws of Seller, and all amendments thereto,
heretofore delivered to Buyer are accurate and complete as of the date hereof.
Schedule 4.1 contains a true, correct and complete list of all jurisdictions in
which Seller is qualified to do business as a foreign corporation. Shareholder
is the record and beneficial owner of all outstanding capital stock of Seller.
4.2 Subsidiaries. Seller does not have any Subsidiaries which are
used by Seller in the conduct of the Business or which own any of the Assets.
Neither Seller nor Shareholder has any direct or indirect stock or other equity
or ownership interest (whether controlling or not) in any corporation,
association, partnership, joint venture or other entity, except for Cameron
Nursery and Turf Products, Inc., a California corporation ("Cameron Nursery"),
and Turfmakers, Inc., a Nevada corporation ("Turfmakers Nevada"), each of which
is owned exclusively by Shareholder. Turfmakers Nevada is not an active
corporation and does not conduct any business. Seller and Shareholder
understand that Turfmakers Nevada, as an affiliate of both Seller and
Shareholder, is subject to the Covenants Not to Compete attached as Exhibits F
and G hereof. Shareholder shall disolve Turfmakers Nevada promptly following
the Closing.
4.3 Authorization. Seller has all requisite power and authority,
and has taken all corporate action necessary, to own, lease and operate the
Purchased Assets, to conduct the Business as it is presently being conducted,
to execute and deliver this Agreement, to consummate the transactions
contemplated hereby and to perform its obligations hereunder. The execution
and delivery of this Agreement by Seller and the consummation by Seller of the
transactions contemplated hereby have been duly approved by the boards of
directors and shareholder of Seller. No other corporate proceedings on the
part of Seller are necessary to authorize this Agreement and the transactions
contemplated hereby. Shareholder has all requisite power and authority to
enter into this Agreement and the Ancillary Agreements to which it is a party.
This Agreement has been duly executed and delivered by Shareholder and Seller
and is a legal, valid and binding obligation of Shareholder and Seller
enforceable against each of them in accordance with its terms, subject to
equitable principles and remedies. Shareholder is acquiring the shares of
Buyer's common stock issuable hereunder for his own account without a view to
distribution thereof, except in accordance with the Securities Act of 1933, as
amended (the "Securities Act"). Shareholder is an "accredited investor" within
the meaning of the rules and regulations promulgated under the Securities Act.
4.4 Assets. Excluding the Leased Real Property, Seller has and
will transfer good and marketable title to the Purchased Assets and upon the
consummation of the transactions contemplated
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hereby, Buyer will acquire good title to all of the Purchased Assets, free and
clear of any Encumbrances.
4.5 Facility. Schedule 4.5 contains the Lease with respect to the
Facility. Schedule 4.5 also sets forth all modifications which must be made
prior to the Closing with respect to the Lease (the "Lease Modifications").
Such Lease is valid, binding and enforceable in accordance with its terms and
is in full force and effect; no event of default has occurred which (whether
with or without notice, lapse of time or both or the happening or occurrence of
any other event) would constitute a material default thereunder on the part of
Seller; and Seller and Shareholder have no knowledge of the occurrence of any
event of default which (whether with or without notice, lapse of time or both
or the happening or occurrence of any other event) would constitute a material
default thereunder by any other party.
(a) Actions. Except as set forth on Schedule 4.5, there
are no pending or, to the best knowledge of Seller, threatened condemnation
proceedings with respect to the Facility, or litigation or administrative
actions relating to the Facility.
(b) Leases or Other Agreements. Except for the Facility
Lease set forth in Schedule 4.5, there are no leases, subleases, licenses,
occupancy agreements, options, rights, concessions or other agreements or
arrangements, written or oral, granting to any person the right to purchase,
use or occupy the Facility, or any real property in connection with the
Business or any portion thereof or interest in the Facility or real property.
(c) Facility Lease and Leased Real Property. With
respect to the Facility Lease, Seller has and will transfer to Buyer at the
Closing an unencumbered interest in the Leasehold Estate. Seller enjoys
peaceful and undisturbed possession of the Leased Real Property, subject to the
rights set forth in the Lease of the fee owner, and to be best of Seller's
knowledge, Seller has in all material respects performed all the obligations
required to be performed by it through the date hereof.
(d) Certificate of Occupancy. To the best of Seller's
knowledge, the Facility has received all required approvals of governmental
authorities (including without limitation Permits and a certificate of
occupancy or other similar certificate permitting lawful occupancy of the
Facility) required in connection with the operation of the Business at
Facility.
(e) Utilities. The Facility is supplied with utilities
at the lessee's expense (including without limitation water, sewage, disposal,
electricity and telephone) and other services necessary for the operation of
the Facility as currently operated.
(f) Improvements, Fixtures and Equipment. The
improvements constructed on the Facility, including without limitation all
Leasehold Improvements, and all Fixtures and Equipment and other tangible
assets owned, leased or used by Seller at the Facility are (i) insured to the
extent and in a manner customary in the industry, (ii) structurally sound with
no known material defects, (iii) to Seller's best knowledge, in good operating
condition and repair, subject to ordinary wear and tear, (iv) to Seller's best
knowledge, not in need of maintenance or repair except for ordinary routine
maintenance and repair, the cost of which would not be material, (v) sufficient
for the operation of the Business as presently conducted and (vi) in
conformity, in all material respects, with all applicable laws, ordinances,
orders, regulations and other requirements relating thereto currently in
effect. None of the improvements is subject to any commitment or other
arrangement for their sale or use by
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any affiliate of Seller or third parties. Schedule 4.5(f) contains a list of
all of the equipment owned by Seller and used at the Facility and the
approximate fair market value of each piece of equipment so listed.
(g) No Special Assessment. Seller has not received
notice of any special assessment relating to the Facility or any portion
thereof and there is no pending or threatened special assessment.
4.6 Contracts and Leases.
(a) Contracts. Schedule 4.6 sets forth a complete and
accurate list of all Contracts and Leases of the following categories:
(i) Contracts not made in the ordinary course of
Seller's Business;
(ii) Employment contracts and severance
agreements, including without limitation Contracts (A) to employ or terminate
executive officers or other personnel and other contracts with present or
former officers, directors or shareholders of Seller or (B) that will result in
the payment by, or the creation of any commitment or obligation (absolute or
contingent) to pay on behalf of Buyer or Seller any severance, termination,
"golden parachute," or other similar payments to any present or former
personnel following termination of employment or otherwise as a result of the
consummation of the transactions contemplated by this Agreement;
(iii) Labor or union contracts;
(iv) Distribution, franchise, license, sales,
commission, consulting agency or advertising contracts related to the Assets or
the Business or which are not cancelable on thirty (30) calendar days notice;
(v) Options with respect to any property, real or
personal, whether Seller shall be the grantor or grantee thereunder;
(vi) Contracts involving expenditures or
liabilities, actual or potential, in excess of $10,000 or otherwise material to
the Business or the Assets;
(vii) Contracts or commitments relating to
commission arrangements with others;
(viii) Promissory notes, loans, agreements,
indentures, evidences of indebtedness, letters of credit, guarantees, or other
instruments relating to an obligation to pay money in connection with the
Business, individually in excess of or in the aggregate in excess of $10,000,
whether Seller shall be the borrower or guarantor thereunder or whereby any
Assets are pledged (excluding credit provided by Seller in the ordinary course
of Seller's Business to purchasers of its products);
(ix) Contracts containing covenants limiting the
freedom of Seller or any officer, director, shareholder or affiliate of Seller,
to engage in any line of business or compete with any person;
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(x) Any Contract with the United States, state or
local government or any agency or department thereof involving expenditures or
liabilities in excess of $10,000;
(xi) Leases of real property; and
(xii) Leases of personal property not cancelable
(without liability) within 30 calendar days.
Seller has delivered to Buyer true, correct and complete copies of all of the
Contracts listed on Schedule 4.6, including all amendments and supplements
thereto, except Contracts not included as Purchased Assets.
(b) Absence of Breaches or Defaults. All of the
Contracts are valid and in full force and effect. Seller has duly performed
all of its obligations under the Contracts to the extent those obligations to
perform have accrued, and no material violation of, or material default or
breach under any Contracts by Seller or any other party has occurred and
neither Seller nor any other party to Seller's best knowledge has repudiated
any provisions thereof.
(c) Product Warranty. Seller has committed no act, and
there has been no omission, which may result in, and there has been no
occurrence which may give rise to, product liability or liability for breach of
warranty (whether covered by insurance or not) on the part of Seller, with
respect to products designed, manufactured, assembled, repaired, maintained,
delivered or installed or services rendered prior to or on the Closing Date.
4.7 Permits. Seller has all Permits required to conduct the
Business as now being conducted, except such Permits the failure of which to
obtain would not have a material adverse effect on the Purchased Assets or the
Business. All Permits of Seller are valid and in full force and effect and are
listed on Schedule 4.7. Except as disclosed on Schedule 4.7 hereto, no notice
to, declaration, filing or registration with, or Permit from, any domestic or
foreign governmental or regulatory body or authority, or any other person or
entity, is required to be made or obtained by Shareholder or Seller in
connection with the execution, delivery or performance of this Agreement and
the consummation of the transactions contemplated hereby. Schedule 4.7 sets
forth all consents required for the assignment by Seller to Buyer of the
rights, benefits and claims and Buyer's assumptions of obligations under the
Contracts. Except as set forth on Schedule 4.7, (a) none of the rights of
Seller in the Contracts or Permits transferred to Buyer will be materially
impaired by reason of the consummation of the transactions contemplated by this
Agreement, and (b) all of the rights of Seller in those Contracts assumed by
Buyer will be enforceable by Buyer after the Closing to the same extent as if
such transactions had not been consummated. All lessors under Leases have, or
will have prior to the Closing Date, subject to the provisions of Section 9.2
hereof, consented (where such consent is necessary) to the assignment of the
Leases by Seller to Buyer.
4.8 No Conflict or Violation. Neither the execution, delivery or
performance of this Agreement nor the consummation of the transactions
contemplated hereby, nor compliance by Seller with any of the provisions
hereof, will (a) violate or conflict with any provision of the Articles of
Incorporation or Bylaws of Seller, (b) violate, conflict with, or result in a
breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result
in the termination of, or accelerate the performance required by, or result in
a right of termination or acceleration under, or result in the creation of any
Encumbrance upon any of
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the Assets under, any of the terms, conditions or provisions of any Contract,
indebtedness, note, bond, indenture, security or pledge agreement, commitment,
license, Lease, franchise, Permit, agreement, or other instrument or obligation
(i) to which Seller is a party or (ii) by which the Assets are bound, (c)
violate any statute, rule, regulation, ordinance, code, order, judgment,
ruling, writ, injunction, decree or award, (d) impose any Encumbrance,
restriction or charge on the Assets or the Business except in the case of each
of clauses (a), (b), (c) and (d) above, for such violations, conflicts,
breaches, defaults, terminations, accelerations or creations of Encumbrances
which, in the aggregate would not have a material adverse effect on the Assets,
the Business or on the ability of Shareholder or Seller to consummate the
transactions contemplated hereby.
4.9 Financial Statements. Seller has heretofore delivered to
Buyer the Financial Statements. The Financial Statements and all subsequent
interim financial statements provided by Seller to Buyer (a) are in accordance
with the books and records of Seller, (b) have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods covered thereby and (c) fairly and accurately present the results of
operations for the periods then ended subject only to normal year-end
adjustments with respect to any interim financial statements.
4.10 Books and Records. Seller has made and kept (and given Buyer
access to) Books and Records and accounts, which, in reasonable detail,
accurately and fairly reflect the activities of Seller. The minute books of
Seller previously delivered to Buyer accurately and adequately reflect all
action previously taken by the shareholders, board of directors and committees
of the board of directors of Seller. The copies of the stock book records of
Seller previously delivered to Buyer are true, correct and complete, and
accurately reflect all transactions effected in Seller's stock through and
including the date hereof.
4.11 Litigation. Except as set forth on Schedule 4.11, there is no
action, order, writ, injunction, judgment or decree outstanding or any claim,
suit, litigation, proceeding, labor dispute, arbitral action, governmental
audit or investigation (collectively, "Actions") pending or, to the best of
Seller's knowledge, threatened or anticipated (a) against, related to or
affecting (i) Seller, the Business or the Assets, (ii) any officers or
directors of Seller as such, or (iii) any shareholder of Seller in such
shareholder's capacity as a shareholder of Seller, (b) seeking to delay, limit
or enjoin the transactions contemplated by this Agreement (c) that involve the
risk of criminal liability, or (d) in which Seller is a plaintiff, including
any derivative suits brought by or on behalf of Seller. Seller is not in
default with respect to or subject to any judgment, order, writ, injunction or
decree of any court or governmental agency, and there are no unsatisfied
judgments against Seller, the Business or the Assets. There is not a
reasonable likelihood of an adverse determination of any pending Actions.
4.12 Labor Matters. Seller is not a party to any labor agreement
with respect to its employees with any labor organization, union, group or
association and there are no employee unions (nor any other similar labor or
employee organizations) under local statutes, custom or practice. In the last
five years, Seller has not experienced any attempt by organized labor or its
representatives to make Seller conform to demands of organized labor relating
to its employees or to enter into a binding agreement with organized labor that
would cover the employees of Seller. There is no labor strike or labor
disturbance pending or, to the best of Seller's knowledge, threatened against
Seller nor is any grievance currently being asserted, and in the past five
years Seller has not experienced a work stoppage or other labor difficulty. To
the best of Seller's knowledge, Seller is in compliance in all material
respects with all applicable laws respecting employment practices, employee
documentation, terms and conditions of employment and wages and hours and is
not and has not engaged in any
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unfair labor practice. There is no unfair labor practice charge or complaint
against Seller pending before the National Labor Relations Board or any other
domestic or foreign governmental agency arising out of conduct of the Business,
and to the best of Seller's knowledge, there are no facts or information which
would give rise thereto.
4.13 Liabilities. Other than Excluded Liabilities, Seller has no
material liabilities, obligations or commitments of any nature (whether
absolute, accrued, contingent or otherwise and whether matured or unmatured
related to or otherwise connected to the Business), including without
limitation Tax liabilities due or to become due, except liabilities arising
under Contracts, Leases, letters of credit, purchase orders, licenses, Permits,
purchase agreements and other agreements, business arrangements and commitments
described in the Disclosure Schedule (and under those Contracts which are not
required to be disclosed on the Disclosure Schedule). Schedule 4.13 hereto
contains a complete and accurate list of all of Seller's creditors and the
amounts owed to each of them.
4.14 Compliance with Law. Seller and the conduct of the Business
have not violated and are in compliance with all laws, statutes, ordinances,
regulations, rules and orders of any foreign, federal, state or local
government and any other governmental department or agency, and any judgment,
decision, decree or order of any court or governmental agency, department or
authority, including without limitation Environmental Laws, relating to the
Assets or the Business or operations of Seller, except where the violation or
failure to comply, individually or in the aggregate, would not have a material
adverse effect on the Assets or the Business. Seller and the conduct of the
Business are in conformity with all energy, public utility, zoning, building
and health codes, regulations and ordinances, OSHA and Environmental Laws and
all other foreign, federal, state, and local governmental and regulatory
requirements, except where any nonconformity would not have a material adverse
effect on the Assets or the Business. Seller has not received any notice to
the effect that, or otherwise been advised that, it is not in compliance with
any such statutes, regulations, rules, judgments, decrees, orders, ordinances
or other laws, and Seller and Shareholder have no reason to anticipate that any
existing circumstances are likely to result in violations of any of the
foregoing which failure or violation could, in any one case or in the
aggregate, have a material adverse effect on the Assets of the Business.
4.15 No Brokers. Neither Seller nor any of its officers,
directors, employees, shareholders or affiliates has employed or made any
agreement with any broker, finder or similar agent or any person or firm which
will result in the obligation of Buyer or any of its affiliates to pay any
finder's fee, brokerage fees or commission or similar payment in connection
with the transactions contemplated hereby.
4.16 No Other Agreements to Sell the Assets. Neither Seller nor
any of its officers, directors, shareholders or affiliates have any commitment
or legal obligation, absolute or contingent, to any other person or firm other
than the Buyer to sell, assign, transfer or effect a sale of any of the Assets
(other than inventory in the ordinary course of business), to sell or effect a
sale of a majority of the capital stock of Seller, to effect any merger,
consolidation, liquidation, dissolution or other reorganization of Seller, or
to enter into any agreement or cause the entering into of an agreement with
respect to any of the foregoing.
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4.17 Proprietary Rights.
(a) Proprietary Rights. Schedule 4.17 lists all of
Seller's domestic or foreign federal, state and foreign registrations of
trademarks and of other marks, trade names or other trade rights, and all
pending applications for any such registrations and all of Seller's patents and
copyrights and all pending applications therefor, in which Seller has any
interest whatsoever, whether or not registered, that are used by or on behalf
of Seller in connection with the Business (collectively, "Proprietary Rights").
Seller has no patents, or pending patents. The Proprietary Rights listed in
the Disclosure Schedule are all those used by Seller in connection with the
Business. Shareholder has conveyed to Seller all of his right, title and
interest in any Proprietary Rights used in connection with the Business.
(b) Royalties and Licenses. No person has a right to
receive a royalty or similar payment in respect of any Proprietary Rights
whether or not pursuant to any contractual arrangements entered into by Seller.
Seller has no licenses granted, sold or otherwise transferred by or to it nor
other agreements to which it is a party, relating in whole or in part to any of
the Proprietary Rights.
(c) Ownership and Protection of Proprietary Rights.
Seller owns and has the sole right to use each of the Proprietary Rights.
Except as set forth in the Disclosure Schedule and except for applications
pending, all of the trademarks listed in the Disclosure Schedule have been duly
issued and except as set forth in the Disclosure Schedule, all of the other
Proprietary Rights exist, are registered and are subsisting. None of the
Proprietary Rights is involved in any pending or threatened litigation. Seller
has not received any notice of invalidity or infringement of any rights of
others with respect to such trademarks. Seller has taken all reasonable and
prudent steps to protect the Proprietary Rights from infringement by any other
firm, corporation, association or person. To the best of Seller's knowledge,
no other firm, corporation, association or person (i) has the right to use any
such trademarks on the goods on which they are now being used in Seller's
market area either in identical form or in such near resemblance thereto as to
be likely, when applied to the goods of any such firm, corporation, association
or person, to cause confusion with the trademarks or to cause a mistake or to
deceive, (ii) has notified Seller or Shareholder that it is claiming any
ownership of or right to use such Proprietary Rights, or (iii) is infringing
upon any such Proprietary Rights in any way. To the best of Seller's
knowledge, Seller's use of the Proprietary Rights is not infringing upon or
otherwise violating the rights of any third party in or to such Proprietary
Rights, and no proceedings have been instituted against or notices received by
Seller or Shareholder that are presently outstanding alleging that Seller's use
of the Proprietary Rights infringes upon or otherwise violates any rights of a
third party in or to such Proprietary Rights. To the best of Seller's
knowledge, all of the Proprietary Rights are valid and enforceable rights of
Seller in Seller's market area and will not cease to be valid and in full force
and effect by reason of the execution, delivery and performance of this
Agreement or the consummation of the transactions contemplated by this
Agreement. To the best of Seller's knowledge, there are not, and it is
reasonably expected that after the Closing there will not be, any restrictions
on Seller's, or Buyer's, as the case may be, right to sell products
manufactured by Seller or Buyer, as the case may be, in connection with the
Business.
4.18 Employee Plans.
Buyer shall not incur or assume any liability with respect to
any Employee Plan involving any employee or former employee of Seller as a
result of the transactions contemplated by this Agreement.
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4.19 Transactions with Certain Persons. Except as set forth on the
Disclosure Schedule, no officer, director or employee of Seller nor any member
of any such person's immediate family is presently, or within the past five
years has been, a party to any transaction with Seller relating to the
Business, including without limitation, any contract, agreement or other
arrangement (a) providing for the furnishing of services by, (b) providing for
the rental of real or personal property from, or (c) otherwise requiring
payments to (other than for services as officers, directors or employees of
Seller) any such person or corporation, partnership, trust or other entity in
which any such person has an interest as a shareholder, officer, director,
trustee or partner.
4.20 Tax Matters.
(a) Filing of Tax Returns. Seller (and any affiliated
group of which Seller is now or has been a member) has timely filed with the
appropriate taxing authorities all returns (including without limitation
information returns and other material information) in respect of Taxes
required to be filed through the date hereof and will timely file any such
returns required to be filed on or prior to the Closing Date. To the best of
Seller's knowledge, the returns and other information filed are complete and
accurate in all material respects. Except as specified in Schedule 4.20,
neither Seller, nor any group of which Seller now or was a member, has
requested any extension of time within which to file returns (including without
limitation information returns) in respect of any Taxes, which returns have not
been filed. Seller has delivered to Buyer complete and accurate copies of
Seller's federal, state and local tax returns for the past three years.
(b) Payment of Taxes. To the best of Seller's knowledge,
all Taxes, in respect of periods beginning before the Closing Date, have been
timely paid, or will be timely paid, or an adequate reserve has been
established therefor, as set forth in the Disclosure Schedule or the Financial
Statements, and Seller does not have any material liability for Taxes in excess
of the amounts so paid or reserves so established.
(c) Audits, Investigations or Claims. Except as set
forth in the Disclosure Schedule, the consolidated federal income tax returns
of Seller have not been examined by the Internal Revenue Service for all
periods to and including those set forth in the Disclosure Schedule, and except
to the extent shown therein, no material deficiencies for Taxes, have been
claimed, proposed or assessed by any taxing or other governmental authority
against Seller. To the best of Seller's knowledge, except as set forth in the
Disclosure Schedule, there are no pending or threatened audits, investigations
or claims for or relating to any material additional liability in respect of
Taxes, and there are no matters under discussion with any governmental
authorities with respect to Taxes that in the reasonable judgment of Seller, or
its attorneys or accountants, is likely to result in a material additional
liability for Taxes. Audits of federal, state, and local returns for Taxes by
the relevant taxing authorities have been completed for each period set forth
in the Disclosure Schedule and, except as set forth in the Disclosure Schedule,
Seller has not been notified that any taxing authority intends to audit a
return for any period. Except as set forth in the Disclosure Schedule, to the
best of Seller's knowledge, no extension of a statute of limitations relating
to Taxes is in effect with respect to Seller.
(d) Lien. There are no liens for Taxes (other than for
current Taxes not yet due and payable) on the Assets.
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(e) Foreign Person. Seller is not a person other than a
United States person within the meaning of the Code.
4.21 Insurance. Seller has maintained policies of fire, liability,
title, worker's compensation, product liability on the Business, the Assets or
its employees. Such insurance provides, and during such period provided,
coverage to the extent and in the manner (a) customary for the industry in
which Seller is engaged and (b) as may be required by law and by any and all
Contracts to which Seller is a party. Seller is not in default under any of
such policies or binders, and Seller has not failed to give any notice or to
present any claim under any such policy or binder in a due and timely fashion.
There are no facts upon which an insurer might be justified in reducing
coverage or increasing premiums on existing policies or binders. No insurer
has advised Seller that it intends to reduce coverage, increase premiums or
fail to renew existing policy or binder. There are no outstanding unresolved
claims under any such policies or binders. To the best of Seller's knowledge,
all policies and binders provide sufficient coverage for the risks insured
against, are in full force and effect on the date hereof and shall be kept in
full force and effect through the Closing Date.
4.22 Inventories. The values at which inventories are shown on
Seller's most current balance sheet have been determined in accordance with the
normal valuation policy of Seller, consistently applied and in accordance with
generally accepted accounting principles. The Inventory (and items of
Inventory acquired or manufactured subsequent to the date of such balance
sheet) consists only of items of quality and quantity commercially usable and
salable in the ordinary course of business, except for any items of obsolete
material or material below standard quality, all of which have been written
down to realizable market value, or for which adequate reserves have been
provided, and the present quantities of all inventories are reasonable in the
present circumstances of Seller's business. Seller shall have removed all
ferric sulphate from the Facility prior to the Closing Date.
4.23 Purchase Commitments. As of the date of this Agreement, to
the best of Seller's knowledge, there are no claims against Seller to return
merchandise by reason of alleged overshipments, defective merchandise or
otherwise, or of merchandise in the hands of customers under an understanding
that such merchandise would be returnable. To the best of Seller's knowledge,
no outstanding purchase or outstanding lease commitment of Seller presently is
in excess of the normal, ordinary and usual requirements of the Business or was
made at any price in excess of the now current market price or contains terms
and conditions more onerous than those usual and customary in the Business. To
the best of Seller's knowledge, there is no outstanding bid, proposal, Contract
or unfilled order which relates to the Assets which will or would, if accepted,
have a material adverse effect, individually or in the aggregate, on the
Business or the Assets.
4.24 Payments. Seller has not, directly or indirectly, paid or
delivered any fee, commission or other sum of money or item or property,
however characterized, to any finder, agent, government official or other
party, in the United States or any other country, which is in any manner
related to the Business, Assets or operations of Seller, which is, or may be
with the passage of time or discovery, illegal under any federal, state or
local laws of the United States (including without limitation the U.S. Foreign
Corrupt Practices' Act) or any other country having jurisdiction; and Seller
has not participated, directly or indirectly, in any boycotts or other similar
practices affecting any of its actual or potential customers.
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4.25 Suppliers. Schedule 4.25 sets forth a complete and accurate
list of the names of Seller's suppliers.
4.26 Compliance With Environmental Laws.
(a) Definitions. The following terms, when used in this
Section 4.26, shall have the following meanings. Any of these terms may,
unless the context otherwise requires, be used in the singular or the plural
depending on the reference.
(i) "Release" shall mean and include any
spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, dumping or disposing into the environment or the
workplace of any Hazardous Substance, and otherwise as defined in any
applicable Environmental Law.
(ii) "Hazardous Substance" shall mean any quantity
of asbestos, urea formaldehyde, PCB's, radon gas, crude oil or any fraction
thereof, all forms of natural gas, petroleum products or by-products, any
radioactive substance, any toxic, infectious, reactive, corrosive, ignitible or
flammable chemical or chemical compound and any other hazardous substance,
material or waste (as defined in or for purposes of any applicable
Environmental Law), whether solid, liquid or gas.
(b) Compliance With Applicable Environmental Laws. The
Facility has been maintained in compliance with all applicable federal, state
and local laws, statutes, ordinances, regulations, rules, judgments, orders,
notice requirements, court decisions, agency guidelines or principles of law,
restrictions, licenses, with respect to the Facility in effect on the Closing
Date, which (i) regulate or relate to the protection or clean-up of the
environment, the use, treatment, storage, transportation, handling or disposal
of hazardous, toxic or otherwise dangerous substances, wastes or materials
(whether gas, liquid or solid), the preservation or protection of waterways,
groundwater, drinking water, air, wildlife, plants or other natural resources,
or the health and safety of persons or property, including without limitation
protection of the health and safety of employees or (ii) impose liability with
respect to any of the foregoing, including without limitation the Federal Water
Pollution Control Act (33 U.S.C. Section 1251 et seq.), Resource Conservation
& Recovery Act (42 U.S.C. Section 6901 et seq.) ("RCRA"), Safe Drinking Water
Act (21 U.S.C. Section 349, 42 U.S.C. Section Section 201, 300f), Toxic
Substances Control Act (15 U.S.C. Section 2601 et seq.), Clean Air Act (42
U.S.C. Section 7401 et seq.), Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) ("CERCLA"), or
any other similar federal, state or local law of similar effect, each as
amended ("Environmental Laws").
(c) Facility. The Facility is, and at all times has been
at all times when leased or operated by Seller, leased and operated in
compliance with all applicable Environmental Laws and in a manner that will not
give rise to any liability under any applicable Environmental Laws;
(d) Permits. Seller has, and at all times has had, all
Permits required under any applicable Environmental Law and the Facility is,
and at all times has been, in compliance with all such Permits;
(e) Permits Required. The consummation of any of the
transactions contemplated by this Agreement will not require an application for
issuance, renewal, transfer or extension of, or
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any other administrative action regarding, any Permit required under any
applicable Environmental Law;
(f) Notice of Violation. Seller has not received any
notice at any time that it is or was claimed to be in violation of or in
non-compliance with the conditions of any Permit required under any applicable
Environmental Law or the provisions of any applicable Environmental Law;
(g) Pending Actions. There is not now pending or
threatened, nor any basis for, nor has there ever been, any Action against
Seller under any applicable Environmental Law or otherwise with respect to any
Release or mishandling of any Hazardous Substance;
(h) Judgments. There are no consent decrees, judgments,
judicial or administrative orders or agreements with, or liens by, any
governmental authority or quasi-governmental entity relating to any applicable
Environmental Law which regulate, obligate, bind or in any way affect Seller or
the Facility;
(i) Hazardous Substances. There is not and has not been
any Hazardous Substance used, generated, treated, stored, transported, disposed
of, handled or otherwise existing on, under, about or from the Facility, except
for quantities of any such Hazardous Substances stored or otherwise held on,
under or about the Facility in full compliance with all applicable
Environmental Laws and necessary for the operation of the Business;
(j) Handling of Hazardous Substances. Seller has at all
times used, generated, treated, stored, transported, disposed of or otherwise
handled its Hazardous Substances in compliance with all applicable
Environmental Laws and in a manner that will not result in liability of Seller
under any applicable Environmental Law;
(k) Environmental Conditions. There are no present or
past Environmental Conditions (as defined below) in any way relating to the
Business, and the Leased Real Property. "Environmental Conditions" means the
introduction into the environment of any Hazardous Substance (whether or not
upon the Leased Real Property, or other property of the Business) as a result
of which Seller has or may become liable to any person or by reason of which
the Leased Real Property or any of the Assets may suffer or be subjected to any
lien;
(l) CERCLA or RCRA. No current or past use, generation,
treatment, transportation, storage, disposal or handling practice of Seller
with respect to any Hazardous Substance has or will result in any liability
under the CERCLA or RCRA or any state or local law of similar effect, as in
effect on the Closing Date;
(m) Storage Tank or Pipeline. There is not now and has
not been at any time in the past any underground or above-ground storage tank
or pipeline at the Facility where the installation, use, maintenance, repair,
testing, closure or removal of such tank or pipeline was not in compliance with
all applicable Environmental Laws and there has been no Release from or rupture
of any such tank or pipeline, including without limitation any Release from or
in connection with the filling or emptying of such tank;
(n) Environmental Audits or Assessments. True, complete
and correct copies of the written reports, and all parts thereof, including any
drafts of such reports if such drafts are in the
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possession or control of Seller, of all environmental audits or assessments
which have been conducted at the Facility or any Former Facility within the
past five years, either by Seller or any attorney, environmental consultant or
engineer engaged for such purpose, have been delivered to Buyer and a list of
all such reports, audits and assessments and any other similar report, audit or
assessment of which Seller has knowledge is included on the Disclosure
Schedule;
(o) Indemnification Agreements. Except as set forth in
the Leases and on Schedule 4.26, Seller is not a party, whether as a direct
signatory or as successor, assign or third party beneficiary, or otherwise
bound, to any Lease or other Contract (excluding insurance policies disclosed
on the Disclosure Schedule) under which Seller is obligated by or entitled to
the benefits of, directly or indirectly, any representation, warranty,
indemnification, covenant, restriction or other undertaking concerning
environmental conditions;
(p) Releases or Waivers. Except as set forth in the
Leases and on Schedule 4.26, Seller has not released any other person from any
claim under any applicable Environmental Law or waived any rights concerning
any Environmental Condition; and
(q) Notices, Warnings and Records. Seller has given all
notices and warnings, made all reports, and has kept and maintained all records
required by and in material compliance with all applicable Environmental Laws.
4.27 Material Misstatements Or Omissions. No representations or
warranties by Seller in this Agreement, nor any document, exhibit, statement,
certificate or schedule heretofore or hereinafter furnished to Buyer pursuant
hereto, or in connection with the transactions contemplated hereby, including
without limitation the Disclosure Schedule, contains or will contain any untrue
statement of a material fact, or omits or will omit to state any material fact
known to Seller necessary to make the material statements or facts contained
therein not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows,
which representations and warranties are, as of the date hereof, and will be,
as of the Closing Date, true and correct, to Shareholder and Seller as follows:
5.1 Organization of Buyer. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Nebraska.
5.2 Authorization. Buyer has all requisite corporate power and
authority, and has taken all corporate action necessary, to execute and deliver
this Agreement, to consummate the transactions contemplated hereby and to
perform its obligations hereunder. The execution and delivery of this
Agreement by Buyer and the consummation by Buyer of the transactions
contemplated hereby have been duly approved by the board of directors of Buyer
and the shareholders of Buyer. No other corporate proceedings on the part of
Buyer are necessary to authorize this Agreement and the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Buyer
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and is a legal, valid and binding obligation of Buyer, enforceable against
Buyer in accordance with its terms.
5.3 No Conflict or Violation. To the best of Buyer's knowledge,
neither the execution, delivery or performance of this Agreement nor the
consummation of the transactions contemplated hereby, nor compliance by Buyer
with any of the provisions hereof, will (a) violate or conflict with any
provision of the Certificate of Incorporation or Bylaws of Buyer, (b) violate,
conflict with, or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under indebtedness, note, bond, indenture, security or
pledge agreement, commitment, license, franchise, Permit, agreement or other
instrument or obligation (i) to which Buyer is a party or (ii) by which its
assets are bound, (c) violate any statute, rule, regulation, ordinance, code,
order, judgment, ruling, writ, injunction, decree or award, except in the case
of each of clauses (a), (b) and (c) above, for such violations, conflicts,
breaches and defaults which, in the aggregate, would not have a material
adverse effect on the ability of Buyer to consummate the transactions
contemplated hereby.
5.4 No Brokers. Neither Buyer nor any of its officers, directors,
employees, shareholders or affiliates has employed or made any agreement with
any broker, finder or similar agent or any person or firm which will result in
the obligation of Seller or any of its affiliates to pay any finder's fee,
brokerage fees or commission or similar payment in connection with the
transactions contemplated hereby.
ARTICLE VI
COVENANTS OF SELLER AND BUYER
Shareholder, Seller and Buyer each covenant with the other as
follows:
6.1 Further Assurances. Upon the terms and subject to the
conditions contained herein, each of the parties hereto agrees, both before and
after the Closing, (i) to use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective the transactions contemplated by
this Agreement, (ii) to execute any documents, instruments or conveyances of
any kind which may be reasonably necessary or advisable to carry out any of the
transactions contemplated hereunder, and (iii) to cooperate with each other in
connection with the foregoing, including using their respective best efforts
(A) to obtain all necessary waivers, consents and approvals from other parties
to the Contracts and Leases to be assumed by Buyer; provided, however that
Buyer shall not be required to make any payments, commence litigation or agree
to modifications of the terms thereof in order to obtain any such waivers,
consents or approvals, (B) to obtain all necessary Permits as are required to
be obtained under any federal, state, local or foreign law or regulations, (C)
to defend all Actions challenging this Agreement or the consummation of the
transactions contemplated hereby, (D) to lift or rescind any injunction or
restraining order or other order adversely affecting the ability of the parties
to consummate the transactions contemplated hereby, (E) to effect all necessary
registrations and filings, including without limitation submissions of
information requested by governmental authorities, and (F) to fulfill all
conditions to this Agreement.
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6.2 No Solicitation.
(a) No Solicitation. From the date hereof through the
Closing or the earlier termination of this Agreement, each of Shareholder,
Seller and their Representatives shall not, and shall cause each of their
respective shareholders or Representatives (including without limitation
investment bankers, attorneys and accountants), not to, directly or indirectly,
enter into, solicit, initiate or continue any discussions or negotiations with,
or encourage or respond to any inquiries or proposals by, or participate in any
negotiations with, or provide any information to, or otherwise cooperate in any
other way with, any corporation, partnership, person or other entity or group,
other than Buyer and its Representatives, concerning any sale of all or a
portion of the Purchased Assets or the Business, or of any shares of capital
stock of Seller, or any merger, consolidation, liquidation, dissolution or
similar transaction involving Seller (each such transaction being referred to
herein as a "Proposed Acquisition Transaction"). Seller and its subsidiaries
shall not, directly or indirectly, through any officer, director, employee,
representative, agent or otherwise, solicit, initiate or encourage the
submission of any proposal or offer from any person (including, without
limitation, a "person" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended) or entity relating to any Proposed
Acquisition Transaction or participate in any negotiations regarding, or
furnish to any other person any information with respect to Seller or any of
its subsidiaries for the purposes of, or otherwise cooperate in any way with,
or assist or participate in, facilitate or encourage, any effort or attempt by
any other person to seek or effect a Proposed Acquisition Transaction. Seller
hereby represents that it is not now engaged in discussions or negotiations
with any party other than Buyer with respect to any of the foregoing. Seller
shall notify Buyer promptly (orally and in writing) if any such written offer,
or any inquiry or contact with any person with respect thereto, is made and
shall provide Buyer with a copy of such offer and shall keep Buyer informed on
the status of any negotiations regarding such offer. Seller agrees not to
release any third party from, or waive any provision of, any confidentiality or
standstill agreement to which Seller is a party.
(b) Notification. Seller and Shareholder will promptly
notify Buyer if any discussions or negotiations are sought to be initiated, any
inquiry or proposal is made, or any information is requested with respect to
any Proposed Acquisition Transaction and notify Buyer of the terms of any
proposal which it may receive in respect of any such Proposed Acquisition
Transaction, including without limitation the identity of the prospective
purchaser or soliciting party.
6.3 Notification of Certain Matters. From the date hereof through
the Closing, Shareholder and Seller shall give prompt notice to Buyer of (a)
the occurrence, or failure to occur, of any event which occurrence or failure
would be likely to cause any representation or warranty contained in this
Agreement or in any exhibit or schedule hereto to be untrue or inaccurate in
any material respect and (b) any material failure of Shareholder, Seller, or
any of their respective affiliates, or of any of their respective shareholders
or Representatives, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it under this Agreement or any
exhibit or schedule hereto; provided, however, that such disclosure shall not
be deemed to cure any breach of a representation, warranty, covenant or
agreement or to satisfy any condition.
6.4 Access to Information and Facilities.
From the date hereof through the Closing, Seller shall, and
shall cause its officers, directors, employees and agents to, afford the
Representatives of Buyer and its affiliates complete
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access at all reasonable times upon prior notice and appointment to the Assets
for the purpose of inspecting the same, and to the officers, employees, agents,
attorneys, accountants, properties, Books and Records and Contracts of Seller,
and shall furnish Buyer and its Representatives all operating and other data
and information as Buyer or its affiliates, through their respective
Representatives, may reasonably request.
6.5 Conduct of Business. From the date hereof through the
Closing, Seller shall, except as contemplated by this Agreement, or as
consented to by Buyer in writing which consent will not be unreasonably
withheld, operate the Business in the ordinary course of the Business and
substantially in accordance with past practice and will not take any action
inconsistent with this Agreement or with the consummation of the Closing.
Without limiting the generality of the foregoing, Seller shall not, except as
specifically contemplated by this Agreement:
(a) enter into, extend, materially modify, terminate or
renew any Contract or Lease, except in the ordinary course of Seller's business
or pursuant to the Lease Modification;
(b) sell, assign, transfer, convey, lease, mortgage,
pledge or otherwise dispose of or encumber any of the Assets, or any interests
therein, except in the ordinary course of the Business and, without limiting
the generality of the foregoing, Seller will produce, maintain and sell
inventory consistent with its past practices;
(c) incur any obligations or liability for long-term
interest bearing indebtedness or, except in the ordinary course of the
Business, incur any other obligation or liability with respect to the Business;
(d) (i) take any action with respect to the grant of
any bonus, severance or termination pay (otherwise than pursuant to policies or
agreements of Seller in effect on the date hereof that are described on the
Disclosure Schedule) or with respect to any increase of benefits payable under
its severance or termination pay policies or agreements in effect on the date
hereof or increase in any manner the compensation or fringe benefits of any
employee or pay any benefit;
(ii) make any change in the key management
structure of Seller with respect to the Business, including without limitation
the hiring of additional officers or the termination of existing officers;
(iii) except in the ordinary course of the
Business, adopt, enter into or amend any Employee Plan, agreement (including
without limitation any collective bargaining or employment agreement), trust,
fund or other arrangement for the benefit or welfare of any employee;
(e) acquire by merger or consolidation with, or merge or
consolidate with, or purchase substantially all of the assets of, or otherwise
acquire any material assets or business of any corporation, partnership,
association or other business organization or division thereof;
(f) willingly allow or permit to be done, any act by
which any of the Insurance Policies may be suspended, impaired or canceled;
(g) fail to pay its accounts payable and any debts owed
or obligations due to it, or pay or discharge when due any liabilities, in the
ordinary course of the Business;
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(h) enter into, renew, modify or revise any agreement or
transaction with Shareholder or any of his affiliates;
(i) fail to maintain the Assets in substantially their
current state of repair, excepting normal wear and tear or fail to replace
consistent with Seller's past practice inoperable, worn-out or obsolete or
destroyed Assets;
(j) fail to comply in any material respect with all laws
applicable to it, the Assets and the Business;
(k) intentionally do any other act which would cause any
representation or warranty of Shareholder or Seller in this Agreement to be or
become untrue in any material respect; or
(l) enter into any agreement, or otherwise become
obligated, to do any action prohibited hereunder.
ARTICLE VII
CONDITIONS TO SELLER'S AND SHAREHOLDER'S OBLIGATIONS
The obligations of Seller and Shareholder to consummate the
transactions provided for hereby are subject, in the discretion of Seller and
Shareholder, to the satisfaction, on or prior to the Closing Date, of each of
the following conditions, any of which may be waived by Seller and Shareholder:
7.1 Representations, Warranties and Covenants. All
representations and warranties of Buyer contained in this Agreement shall be
true and correct in all material respects at and as of the date of this
Agreement and at and as of the Closing Date, except as and to the extent that
the facts and conditions upon which such representations and warranties are
based are expressly required or permitted to be changed by the terms hereof,
and Buyer shall have performed and satisfied all material agreements and
covenants required hereby to be performed by it prior to or on the Closing
Date.
7.2 Consents. All Permits and waivers necessary to the
consummation of the transactions contemplated hereby, including all required
third party consents (to the extent not waived) shall have been obtained.
7.3 No Proceedings, Litigation or Laws. No Action by any
governmental authority or other person shall have been instituted or threatened
which questions the validity or legality of the transactions contemplated
hereby and which could reasonably be expected to (a) materially affect the
right or ability of Buyer to own, operate, possess or transfer the Purchased
Assets after the Closing, or (b) materially damage Seller if the transactions
contemplated hereunder are consummated. There shall not be any statute, rule
or regulation that makes the purchase and sale of the Business or the Assets
contemplated hereby illegal or otherwise prohibited.
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7.4 Certificates. Buyer shall furnish Seller with such
certificates of its officers and others to evidence compliance with the
conditions set forth in this Article VII as may be reasonably requested by
Seller.
7.5 Corporate Documents. Seller shall have received from Buyer
resolutions adopted by the board of directors of Buyer approving this Agreement
and the transactions contemplated hereby, certified by Buyer's corporate
secretary.
7.6 Documents. Buyer shall have executed and delivered each of
the documents described in Section 3.2 hereof.
7.7 Payment of Purchase Price. Buyer shall have delivered to
Seller the portion of the Purchase Price required to be paid at the Closing.
ARTICLE VIII
CONDITIONS TO BUYER'S OBLIGATIONS
The obligations of Buyer to consummate the transactions
provided for hereby are subject, in the discretion of Buyer, to the
satisfaction, on or prior to the Closing Date, of each of the following
conditions, any of which may be waived by Buyer:
8.1 Representations, Warranties and Covenants. All
representations and warranties of Seller contained in this Agreement shall be
true and correct in all material respects at and as of the date of this
Agreement and at and as of the Closing Date, except as and to the extent that
the facts and conditions upon which such representations and warranties are
based are expressly required or permitted to be changed by the terms hereof,
and Seller and Shareholder shall have performed and satisfied all material
agreements and covenants required hereby to be performed by it prior to or on
the Closing Date.
8.2 Consents. All Permits and waivers necessary to the
consummation of the transactions contemplated hereby and for the operation of
the Business by Buyer (including, without limitation, all required third party
consents to the assignment of the Leases and Contracts to be assumed by Buyer)
shall have been obtained. Any Lease Modifications set forth on Schedule 4.5
shall have been obtained.
8.3 No Proceedings or Litigation. No Action by any governmental
authority or other person shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated hereby and
which could reasonably be expected to damage Buyer materially if the
transactions contemplated hereby are consummated, including without limitation
any material adverse effect on the right or ability of Buyer to own, operate,
possess or transfer the Purchased Assets after the Closing. There shall not be
any statute, rule or regulation that makes the purchase and sale of the
Business or the Assets contemplated hereby illegal or otherwise prohibited.
8.4 Certificates. Shareholder and Seller shall furnish Buyer with
such certificates of its officers and others to evidence compliance with the
conditions set forth in this Article VIII as may be reasonably requested by
Buyer.
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8.5 Material Changes. Since the date of this Agreement, there
shall not have been any material adverse change with respect to the Business or
the Assets.
8.6 Corporate Documents. Buyer shall have received from Seller
resolutions adopted by the board of directors of Seller approving this
Agreement and the transactions contemplated hereby, certified by Seller's
corporate secretary.
8.7 Due Diligence Review. In the reasonable discretion of Buyer,
Buyer shall be satisfied on the basis of a good faith diligence review of
Seller's Books and Records, Financial Statements, and other records and
accounts of the Business that there has been no material breach of the
representations and warranties or the pre-closing covenants of Shareholder or
Seller made pursuant to this Agreement.
8.8 Conveyancing Documents; Release of Encumbrances. Seller shall
have executed and delivered each of documents described in Section 3.2 hereof
so as to effect the transfer and assignment to Buyer of all right, title and
interest in and to the Purchased Assets, and Seller shall have filed (where
necessary) and delivered to Buyer all documents necessary to release the Assets
from all Encumbrances, which documents shall be in a form reasonably
satisfactory to Buyer's counsel. Specifically, Seller shall have delivered to
Buyer (i) confirmations from Palm Springs Bank, FSB, Willamette Seed Co., and
International Seeds, Inc. releasing their security interests in the Assets
contingent upon receipt of the payments described in Section 2.4 hereof, and
(ii) appropriate UCC termination statements executed by such creditors for
filing with the offices of the Secretaries of State of California, Oregon and
Nevada, as applicable, immediately following payment of the amounts described
in Section 2.4.
8.9 Permits. Buyer shall have obtained or been granted the right
to use all Permits necessary to its operation of the Business.
8.10 Other Agreements. Seller and Shareholder shall have executed
and delivered the Ancillary Agreements in the forms attached as exhibits
hereto.
8.11 Tax Clearance Certificate. Seller shall provide Buyer with a
clearance certificate or similar document(s) that may be required by any state
taxing authority in order to relieve Buyer of any obligation to withhold any
portion of the Purchase Price.
ARTICLE IX
RISK OF LOSS; CONSENTS TO ASSIGNMENT
9.1 Risk of Loss. From the date hereof through the Closing Date,
all risk of loss or damage to the property included in the Assets shall be
borne by Seller, and thereafter shall be borne by Buyer. If any significant
portion of the Assets is destroyed or damaged by fire or any other cause on or
prior to the Closing Date, other than use, wear or loss in the ordinary course
of the Business, Seller shall give written notice to Buyer as soon as
practicable after, but in any event within five (5) calendar days of, discovery
of such damage or destruction, the amount of insurance, if any, covering such
Assets and the amount, if any, which Seller is otherwise entitled to receive as
a consequence. Prior to the Closing, Buyer shall have the option, which shall
be exercised by written notice to Seller
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within ten (10) calendar days after receipt of Seller's notice or if there is
not ten (10) calendar days prior to the Closing Date, as soon as practicable
prior to the Closing Date, of (a) accepting such Assets in their destroyed or
damaged condition in which event Buyer shall be entitled to the proceeds of any
insurance or other proceeds payable with respect to such loss and subject to
Section 10.3(f), to indemnification for any uninsured portion of such loss
pursuant to Section 10.3, and the full Purchase Price shall be paid for such
Assets, (b) excluding such Assets from this Agreement, in which event the
Purchase Price shall be reduced by the amount allocated to such Assets, as
mutually agreed between the parties or (c) if more than a significant portion
of the Assets are destroyed or damaged, terminating this Agreement in
accordance with Section 11.1. If Buyer accepts such Assets, then after the
Closing, any insurance or other proceeds shall belong, and shall be assigned
to, Buyer without any reduction in the Purchase Price; otherwise, such
insurance proceeds shall belong to Seller.
9.2 Consents to Assignment. Anything in this Agreement to the
contrary notwithstanding, this Agreement shall not constitute an agreement to
assign any Contract, Lease, license, sales order, purchase order or any claim
or right or any benefit arising thereunder or resulting therefrom if an
attempted assignment thereof, without the consent of a third party thereto,
would constitute a breach thereof or in any way materially adversely affects
the rights of Buyer thereunder. If such consent is not obtained, or if an
attempted assignment thereof would be ineffective or would affect the rights
thereunder so that Buyer would not receive all such rights, Seller will
cooperate with Buyer, in all reasonable respects, to provide to Buyer the
benefits under any such Contract, Lease, license, sales order, purchase order,
claim or right including without limitation enforcement for the benefit of
Buyer of any and all rights of Seller against a third party thereto arising out
of the breach or cancellation by such third party or otherwise.
ARTICLE X
ACTIONS BY SELLER AND BUYER AFTER THE CLOSING
10.1 Books and Records; Tax Matters.
(a) Books and Records. Each party agrees that it will
cooperate with and make available to the other party, during normal business
hours, all Books and Records, information and employees (without substantial
disruption of employment) retained and remaining in existence after the Closing
which are necessary or useful in connection with any tax inquiry, audit,
investigation or dispute, any litigation or investigation or any other matter
requiring any such Books and Records, information or employees for any
reasonable business purpose. The party requesting any such Books and Records,
information or employees shall bear all of the out-of-pocket costs and expenses
(including without limitation attorneys' fees, but excluding reimbursement for
salaries and employee benefits) reasonably incurred in connection with
providing such Books and Records, information or employees. All information
received pursuant to this Section 10.1(a) shall be subject to the terms of
Section 11.11.
(b) Cooperation and Records Retention. Seller and Buyer
shall (i) each provide the other with such assistance as may reasonably be
requested by any of them in connection with the preparation of any return,
audit, or other examination by any taxing authority or judicial or
administrative proceedings relating to liability for Taxes, (ii) each retain
and provide the other with any records or other information that may be
relevant to such return, audit or examination,
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proceeding or determination, and (iii) each provide the other with any final
determination of any such audit or examination, proceeding, or determination
that affects any amount required to be shown on any tax return of the other for
any period. Without limiting the generality of the foregoing, Buyer and Seller
shall each retain, until the applicable statutes of limitations have expired,
copies of all tax returns, supporting work schedules, and other records or
information that may be relevant to such returns for all tax periods or
portions thereof ending on or before the Closing Date and shall not destroy or
otherwise dispose of any such records without first providing the other party
with a reasonable opportunity to review and copy the same.
(c) Payment of Liabilities. Following the Closing Date,
Seller shall pay promptly when due all of the debts and liabilities of Seller
relating to the Business, including any liability for Taxes, other than Assumed
Liabilities; provided, however, this covenant shall not apply to that portion
(or all) of any debt that Seller is contesting in good faith.
10.2 Survival of Representations, Etc. All statements contained in
the Disclosure Schedule or in any certificate, schedule, exhibit or instrument
or conveyance delivered by or on behalf of the parties pursuant to this
Agreement or in connection with the transactions contemplated hereby shall be
deemed to be representations and warranties by the parties hereunder. The
representations, warranties, covenants and agreements of Seller, Shareholder
and Buyer contained herein shall survive the consummation of the transactions
contemplated hereby and the Closing Date. All such representations and
warranties and all claims and causes of action with respect thereto shall
terminate upon expiration of five years after the Closing Date. The
termination of the representations and warranties provided herein shall not
affect the rights of a party in respect of any Claim made by such party in a
writing received by the other party prior to the expiration of the applicable
survival period provided herein. Notwithstanding the foregoing, the
obligations set forth under Section 10.4 hereof shall expire only as provided
under such Section 10.4.
10.3 Indemnifications.
(a) By Seller and Shareholder. Seller and Shareholder
shall jointly and severally indemnify, save and hold harmless Buyer, its
affiliates and subsidiaries, and its and their respective Representatives, from
and against any and all costs, losses (including without limitation diminution
in value), Taxes, liabilities, obligations, damages, lawsuits, deficiencies,
claims, demands, and expenses (whether or not arising out of third-party
claims), including without limitation interest, penalties, costs of mitigation,
losses in connection with any Environmental Law (including without limitation
any clean-up or remedial action), lost profits and other losses resulting from
any shutdown or curtailment of operations, damages to the environment,
attorneys' fees and all amounts paid in investigation, defense or settlement of
any of the foregoing (herein, "Damages"), incurred in connection with, arising
out of, resulting from or incident to (i) any breach of any representation or
warranty or the inaccuracy of any representation made by Seller or Shareholder
in or pursuant to this Agreement; (ii) any breach of any covenant or agreement
made by Seller or Shareholder in or pursuant to this Agreement; (iii) any
Excluded Liability or (iv) any successor liability imposed upon Buyer by reason
of Buyer's status as transferee of the Business or the Purchased Assets.
The term "Damages" as used in this Section 10.3 is not limited
to matters asserted by third parties against Seller or Buyer, but includes
Damages incurred or sustained by Seller or Buyer in the absence of third party
claims. Payments to third parties by Buyer of amounts for which Buyer is
indemnified hereunder, and payments to third parties by Seller of amounts for
which Seller is
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indemnified, shall not be a condition precedent to recovery. Seller's and
Shareholder's obligation to indemnify Buyer, and Buyer's obligation to
indemnify Seller, shall not limit any other rights, including without
limitation rights of contribution which either party may have under statute or
common law.
(b) By Buyer. Buyer shall indemnify and save and hold
harmless Seller and its respective affiliates and subsidiaries, and its
respective Representatives from and against any and all Damages incurred in
connection with, arising out of, resulting from or incident to (i) any breach
of any representation or warranty or the inaccuracy of any representation made
by Buyer in or pursuant to this Agreement; (ii) any breach of any covenant or
agreement made by Buyer in or pursuant to this Agreement; (iii) from and after
the Closing, any Assumed Liability; or (iv) operation of the Business by Buyer
from and after the Closing.
(c) Cooperation. The indemnified party shall cooperate
in all reasonable respects with the indemnifying party and such attorneys in
the investigation, trial and defense of such lawsuit or action and any appeal
arising therefrom; provided, however, that the indemnified party may, at its
own cost, participate in the investigation, trial and defense of such lawsuit
or action and any appeal arising therefrom. The parties shall cooperate with
each other in any notifications to insurers.
(d) Defense of Claims. If a claim for Damages (a
"Claim") is to be made by a party entitled to indemnification hereunder against
the indemnifying party, the party claiming such indemnification shall, subject
to Section 10.2, give written notice (a "Claim Notice") to the indemnifying
party as soon as practicable after the party entitled to indemnification
becomes aware of any fact, condition or event which may give rise to Damages
for which indemnification may be sought under this Section 10.3. If any
lawsuit or enforcement action is filed against any party entitled to the
benefit of indemnity hereunder, written notice thereof shall be given to the
indemnifying party as promptly as practicable (and in any event within fifteen
(15) calendar days after the service of the citation or summons). The failure
of any indemnified party to give timely notice hereunder shall not affect
rights to indemnification hereunder, except to the extent that the indemnifying
party demonstrates actual damage caused by such failure. After such notice, if
the indemnifying party shall acknowledge in writing to the indemnified party
that the indemnifying party shall be obligated under the terms of its indemnity
hereunder in connection with such lawsuit or action, then the indemnifying
party shall be entitled, if it so elects, (i) to take control of the defense
and investigation of such lawsuit or action, (ii) to employ and engage
attorneys of its own choice to handle and defend the same, at the indemnifying
party's cost, risk and expense unless the named parties to such action or
proceeding include both the indemnifying party and the indemnified party and
the indemnified party has been advised in writing by counsel that there may be
one or more legal defenses available to such indemnified party that are
different from or additional to those available to the indemnifying party, and
(iii) to compromise or settle such Claim, which compromise or settlement shall
be made only with the written consent of the indemnified party, such consent
not to be unreasonably withheld. If the indemnifying party fails to assume the
defense of such Claim within fifteen (15) calendar days after receipt of the
Claim Notice, the indemnified party against which such Claim has been asserted
will (upon delivering notice to such effect to the indemnifying party) have the
right to undertake, at the indemnifying party's cost and expense, the defense,
compromise or settlement of such Claim on behalf of and for the account and
risk of the indemnifying party; provided, however, that such Claim shall not be
compromised or settled without the written consent of the indemnifying party,
which consent shall not be unreasonably withheld. In the event the indemnified
party assumes the defense of the claim, the indemnified party will keep the
indemnifying party reasonably informed of the progress
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of any such defense, compromise or settlement. The indemnifying party shall be
liable for any settlement of any action effected pursuant to and in accordance
with this Section 10.3 and for any final judgment (subject to any right of
appeal), and the indemnifying party agrees to indemnify and hold harmless an
indemnified party from and against any Damages by reason of such settlement or
judgment.
(e) Buyer's Right of Offset. Anything in this Agreement
to the contrary notwithstanding, subject to the provisions of Section 10.3(d),
Buyer may withhold and set off against any other amounts otherwise due Seller
pursuant to this Agreement any amount as to which Seller is obligated to
indemnify Buyer pursuant to any provision of this Section 10.3.
(f) Product and Warranty Liability. The provisions of
this Section 10.3 shall cover, without limitation, all obligations and
liabilities of whatsoever kind, nature or description relating, directly or
indirectly, to product liability, litigation or claims (i) against Buyer in
connection with, arising out of, or relating to products sold or shipped from
the Facility by Seller prior to the Closing Date and (ii) against Seller and
Shareholder in connection with, arising out of, or relating to, products sold
or shipped from the Facility by Buyer from and after the Closing Date.
(g) Brokers and Finders. Pursuant to the provisions of
this Section 10.3, each of Buyer and Seller shall indemnify, hold harmless and
defend the other party from the payment of any and all broker's and finder's
expenses, commissions, fees or other forms of compensation which may be due or
payable from or by the indemnifying party, or may have been earned by any third
party acting on behalf of the indemnifying party in connection with the
negotiation and execution hereof and the consummation of the transactions
contemplated hereby.
(h) Limitation. No party shall be liable under this
Section 10.3 for any Claim until the amount otherwise due any other party
entitled to indemnification hereunder exceeds Ten Thousand Dollars ($10,000) in
the aggregate, in which case such indemnifying party will be liable to the
indemnified party for all such amounts in excess of Ten Thousand Dollars
($10,000).
10.4 Bulk Sales. Although the obligations of Buyer to consummate
the transactions provided for hereby are not conditioned upon Seller's
compliance with the Bulk Sales Act or similar laws, Seller hereby agrees that
the indemnity provisions of Section 10.3 hereof shall apply to any Damages of
Buyer arising out of or resulting from the failure of Seller or Buyer to comply
with any such laws.
10.5 File Exchange Act Reports. Buyer agrees to file, for a period
of one year beginning February 7, 1999, the reports required to be filed by it
under the Exchange Act and the rules and regulations adopted by the Commission
thereunder (or, if Buyer is not required to file such reports, will upon the
request of Seller or Shareholder, make publicly available, at Buyer's own cost
and expense, other information for a period of up to four months) and will take
such further action as Seller or Shareholder may reasonably request, all to the
extent required from time to time to enable Seller or Shareholder to sell the
shares of Buyer's common stock issuable hereunder without registration under
the Securities Act within the limitation of the exemptions provided by (i) Rule
144 under the Securities Act, as such Rule may be amended from time to time, or
(ii) any similar rule or regulation hereafter adopted by the Commission.
31
<PAGE> 32
ARTICLE XI
MISCELLANEOUS
11.1 Termination.
(a) Termination. This Agreement may be terminated at any
time prior to Closing:
(i) By mutual written consent of Buyer, Seller
and Shareholder;
(ii) By Buyer or Seller and Shareholder if the
Closing shall not have occurred on or before February 28, 1997 or on such other
date mutually agreed to by Buyer and Seller; provided however, that this
provision shall not be available to Buyer if Seller has the right to terminate
this Agreement under clause (iv) of this Section 11.1, and this provision shall
not be available to Seller and Shareholder if Buyer has the right to terminate
this Agreement under clause (iii) of this Section 11.1;
(iii) By Buyer, at its option, if there is a
material breach of any representation or warranty set forth herein or any
covenant or agreement to be complied with or performed by Seller or Shareholder
pursuant to the terms of this Agreement or the material failure of a condition
set forth in Article VIII to be satisfied (and such condition is not waived in
writing by Buyer) on or prior to the Closing Date, or the occurrence of any
event which results or would result in the failure of a condition set forth in
Article VIII to be satisfied on or prior to the Closing Date, provided that
Buyer may not terminate this Agreement prior to the Closing if Seller has not
had an adequate notice and opportunity to cure such breach or failure; or
(iv) By Seller and Shareholder, at their option,
if there is a material breach of any representation or warranty set forth
herein or of any covenant or agreement to be complied with or performed by
Buyer pursuant to the terms of this Agreement or the failure of a condition set
forth in Article VII to be satisfied (and such condition is not waived in
writing by Seller) on or prior to the Closing Date, or the occurrence of any
event which results or would result in the failure of a condition set forth in
Article VII to be satisfied on or prior to the Closing Date; provided that,
Seller and Shareholder may not terminate this Agreement prior to the Closing
Date if Buyer has not an adequate notice and opportunity to cure such breach or
failure.
(b) In the Event of Termination. In the event of
termination of this Agreement as permitted by Section 11.1(a), (i) each party
will redeliver all documents, work papers and other material of any other party
relating to the transactions contemplated hereby, whether so obtained before or
after the execution hereof, to the party furnishing the same; (ii) the
provisions of Section 11.11 shall continue in full force and effect; and (iii)
in the event this Agreement is terminated by Buyer pursuant to Section
11.1(a)(iii), Seller shall be obligated to return to Buyer its initial deposit
of $100,000. The foregoing provisions shall not limit or restrict the
availability of specific performance, other injunctive relief or other
contractual remedies to the extent that specific performance or such other
relief or remedies would otherwise be available to a party hereunder.
11.2 Assignment. Neither this Agreement nor any of the rights or
obligations hereunder may be assigned by any party without the prior written
consent of the other parties; except that Buyer
32
<PAGE> 33
may, with Seller's consent, which consent shall not be unreasonably withheld,
assign all such rights to any lender as collateral security and assign all such
rights and obligations to a wholly-owned subsidiary (or a partnership
controlled by Buyer) or subsidiaries of Buyer or to a successor in interest to
Buyer which shall assume all obligations and liabilities of Buyer under this
Agreement. Subject to the foregoing, this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns, and no other person shall have any right, benefit or
obligation under this Agreement as a third party beneficiary or otherwise. In
the event of any such assignment, Buyer shall not be released from any of its
obligations or liabilities pursuant to this Agreement and any document executed
in connection herewith and shall remain primarily liable for all such
obligations and liabilities.
11.3 Notices. All notices, requests, demands and other
communications which are required or may be given under this Agreement shall be
in writing and shall be deemed to have been duly given when received if
personally delivered; when transmitted if transmitted by telecopy, electronic
or digital transmission method; the day after it is sent, if sent for next day
delivery to a domestic address by recognized overnight delivery service (e.g.,
Federal Express); and upon receipt, if sent by certified or registered mail,
return receipt requested. In each case notice shall be sent to:
If to Shareholder or Seller, addressed to:
Turfmakers, Inc.
P.O. Box 1983
Palm Springs, CA 92263
With a copy to:
Schlect, Shevlin & Shoenberger
P.O. Box 2744
801 East Tahquitz Canyon Way, Suite 100
Palm Springs, CA 92263-2711
Attention: Daniel T. Johnson, Esq.
If to Buyer, addressed to:
Eco Soil Systems, Inc.
10890 Thornmint Road #200
San Diego, California 92127
Attention: William B. Adams
With a copy to:
Latham & Watkins
701 "B" Street, Suite 2100
San Diego, CA 92101
Attention: Thomas A. Edwards, Esq.
to such other place and with such other copies as either party may designate as
to itself by written notice to the others.
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<PAGE> 34
11.4 Choice of Law. This Agreement shall be construed, interpreted
and the rights of the parties determined in accordance with the laws of the
State of California, except with respect to matters of law concerning the
internal corporate affairs of any corporate entity which is a party to or the
subject of this Agreement, and as to those matters the law of the jurisdiction
under which the respective entity derives its powers shall govern.
11.5 Entire Agreement; Amendments and Waivers. This Agreement and
the Ancillary Agreements, together with all exhibits and schedules hereto and
thereto (including the Disclosure Schedule), constitute the entire agreement
among the parties pertaining to the subject matter hereof and supersede all
prior agreements, understandings, negotiations and discussions, whether oral or
written, of the parties. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto. No
amendment, supplement, modification or waiver of this Agreement shall be
binding unless executed in writing by the party to be bound thereby. No waiver
of any of the provisions of this Agreement shall be deemed or shall constitute
a waiver of any other provision hereof (whether or not similar), nor shall such
waiver constitute a continuing waiver unless otherwise expressly provided.
11.6 Multiple Counterparts. 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.
11.7 Expenses. Except as otherwise specified in this Agreement,
each party hereto shall pay its own legal, accounting, out-of-pocket and other
expenses incident to this Agreement and to any action taken by such party in
preparation for carrying this Agreement into effect.
11.8 Invalidity. In the event that any one or more of the
provisions contained in this Agreement or in any other instrument referred to
herein, shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
11.9 Titles. The titles, captions or headings of the Articles and
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
11.10 Public Statements and Press Releases. The parties hereto
covenant and agree that, except as provided for hereinbelow, each will not from
and after the date hereof make, issue or release any public announcement, press
release, statement or acknowledgment of the existence of, or reveal publicly
the terms, conditions and status of, the transactions provided for herein,
without the prior written consent of the other party as to the content and time
of release of and the media in which such statement or announcement is to be
made; provided, however, that in the case of announcements, statements,
acknowledgments or revelations which either party is required by law to make,
issue or release, the making, issuing or releasing of any such announcement,
statement, acknowledgment or revelation by the party so required to do so by
law shall not constitute a breach of this Agreement.
34
<PAGE> 35
11.11 Confidential Information.
(a) No Disclosure. The parties acknowledge that the
transaction described herein is of a confidential nature and shall not be
disclosed except to consultants, advisors and affiliates, or as required by
law, until such time as the parties make a public announcement regarding the
transaction as provided in Section 11.10.
(b) Preservation of Confidentiality. In connection with
the negotiation of this Agreement, the preparation for the consummation of the
transactions contemplated hereby, and the performance of obligations hereunder,
Buyer acknowledges that it will have access to confidential information
relating to Seller, including technical, manufacturing or marketing
information, ideas, methods, developments, inventions, improvements, business
plans, trade secrets, scientific or statistical data, diagrams, drawings,
specifications or other proprietary information relating thereto, together with
all analyses, compilations, studies or other documents, records or data
prepared by Seller or Buyer or their respective Representatives which contain
or otherwise reflect or are generated from such information ("Confidential
Information"). The term "Confidential Information" does not include
information received by Buyer in connection with the transactions contemplated
hereby which (i) is or becomes generally available to the public other than as
a result of a disclosure by Buyer or its Representatives, (ii) was within
Buyer's possession prior to its being furnished to Buyer by or on behalf of the
Shareholder or Seller in connection with the transactions contemplated hereby,
provided that the source of such information was not known by Buyer to be bound
by a confidentiality agreement with or other contractual, legal or fiduciary
obligation of confidentiality to Shareholder or Seller or any other Person with
respect to such information or (iii) becomes available to Buyer on a
non-confidential basis from a source other than Shareholder or Seller or any of
their respective Representatives, provided that such source is not bound by a
confidentiality agreement with or other contractual, legal or fiduciary
obligation of confidentiality to Shareholder or Seller or any other Person with
respect to such information.
(c) Buyer shall treat all Confidential Information as
confidential, preserve the confidentiality thereof and not disclose any
Confidential Information, except to its Representatives and Affiliates in
connection with the transactions contemplated hereby. Buyer shall use all
reasonable efforts to cause its Representatives to treat all Confidential
Information as confidential, preserve the confidentiality thereof and not
disclose any Confidential Information. Buyer shall be responsible for any
breach of this Agreement by any of its Representatives. If, however,
Confidential Information is disclosed, Buyer shall immediately notify Seller in
writing and take all reasonable steps required to prevent further disclosure.
(d) Until the Closing or the termination of this
Agreement, all Confidential Information shall remain the property of the party
who originally possessed such information. In the event of the termination of
this Agreement for any reason whatsoever, Buyer shall, and shall cause its
Representatives to, return to Shareholder and Seller all Confidential
Information (including all copies, summaries and extracts thereof) furnished to
Buyer by Shareholder or Seller in connection with the transactions contemplated
hereby.
11.12 Cumulative Remedies. All rights and remedies of either party
hereto are cumulative of each other and of every other right or remedy such
party may otherwise have at law or in equity, and the exercise of one or more
rights or remedies shall not prejudice or impair the concurrent or subsequent
exercise of other rights or remedies.
35
<PAGE> 36
11.13 Consent to Jurisdiction. Each party hereto irrevocably and
unconditionally (1) agrees that any suit, action or other legal proceeding
arising out of this Agreement may be brought in the United States District
Court for the Southern District of California or, if such court does not have
jurisdiction or will not accept jurisdiction, in any court of general
jurisdiction in the County of San Diego, California; (2) consents to the
jurisdiction or any such court in any such suit, action or proceeding; and (3)
waives any objection which such party may have to the laying of venue of any
such suit, action or proceeding in any such court.
11.14 Arbitration. Notwithstanding anything herein to the contrary,
in the event that there shall be a dispute among the parties after the Closing
arising out of or relating to this Agreement, including without limitation the
indemnities provided in Article X, or the breach thereof, the parties agree
that such dispute shall be resolved by final and binding arbitration in San
Diego, California, administered by the American Arbitration Association
("AAA"), in accordance with AAA's commercial rules then in effect or such other
procedures as the parties may agree to prior to the Closing. Depositions may
be taken and other discovery may be obtained during such arbitration
proceedings to the same extent as authorized in civil judicial proceedings.
Any award issued as a result of such arbitration shall be final and binding
between the parties thereto, and shall be enforceable by any court having
jurisdiction over the party against whom enforcement is sought. The fees and
expenses of such arbitration (including reasonable attorneys' fees) or any
action to enforce an arbitration award shall be paid by the party that does not
prevail in such arbitration.
11.15 Attorneys' Fees. If any party to this Agreement brings an
action to enforce its rights under this Agreement, the prevailing party shall
be entitled to recover its costs and expenses, including without limitation
reasonable attorneys' fees, incurred in connection with such action, including
any appeal of such action, which shall be set by the judge and not a jury.
36
<PAGE> 37
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed on their respective behalf, by their respective
officers thereunto duly authorized, all as of the day and year first above
written.
TURFMAKERS, INC. ECO SOIL SYSTEMS, INC.
By /s/ Robert C. Maycock By /s/ William B. Adams
--------------------------- ---------------------------
Name Robert C. Maycock Name William B. Adams
--------------------- ---------------------------
Its President Its CEO
--------------------- ---------------------
/s/ Robert C. Maycock
- ---------------------------------
ROBERT MAYCOCK
37
<PAGE> 1
EXHIBIT 11.1
Eco Soil Systems, Inc.
STATEMENT RE: COMPUTATION OF PER SHARE DATA
(Amounts in thousands, except per share data)
1995 1996
------- -------
Net loss.......................................... $(1,836) $(4,193)
Average common shares outstanding................. 4,213 5,815
Net effect of dilutive common share equivalents
based on the treasury stock method................ 0 0
Adjustments to reflect requirements of the
Securities and Exchange Commission (Effect
of SAB 83)........................................ 994 994
------- -------
Adjusted shares outstanding....................... 5,207 6,809
======== ========
Net loss per share reflecting
requirements of the SEC........................... $ (0.35) $ (0.62)
======== ========
Page 1
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION
NAME OF INCORPORATION
---- ----------------
<S> <C>
Turf Products, Ltd. Delaware
Turf Specialty, Inc. Delaware
Direct Products and Machinery Pty. Ltd. South Africa
Aspen Consulting Companies, Inc. Colorado
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 150
<SECURITIES> 0
<RECEIVABLES> 2,193
<ALLOWANCES> 0
<INVENTORY> 2,047
<CURRENT-ASSETS> 4,679
<PP&E> 3,333
<DEPRECIATION> 1,352
<TOTAL-ASSETS> 12,886
<CURRENT-LIABILITIES> 11,113
<BONDS> 0
<COMMON> 33
0
0
<OTHER-SE> (103)
<TOTAL-LIABILITY-AND-EQUITY> 12,886
<SALES> 12,116
<TOTAL-REVENUES> 12,116
<CGS> 7,370
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,875
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,064
<INCOME-PRETAX> (4,193)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,193)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,193)
<EPS-PRIMARY> (.62)
<EPS-DILUTED> 0
</TABLE>
