As filed with the Securities and Exchange Commission on January 10, 1997
Registration No. 333-15883
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
ECO SOIL SYSTEMS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEBRASKA
(State or other jurisdiction of
incorporation or organization)
0711
(Primary Standard Industrial
Classification Code Number)
47-0709577
(I.R.S. Employer
Identification No.)
10890 THORNMINT ROAD, SUITE 200
SAN DIEGO, CALIFORNIA 92127
(619) 675-1660
(ADDRESS AND TELEPHONE NUMBER
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES
AND PRINCIPAL PLACE OF BUSINESS)
WILLIAM B. ADAMS, CHIEF EXECUTIVE OFFICER
ECO SOIL SYSTEMS, INC.
10890 THORNMINT ROAD, SUITE 200
SAN DIEGO, CALIFORNIA 92127
(619) 675-1660
(NAME, ADDRESS AND TELEPHONE NUMBER
OF AGENT FOR SERVICE)
Copies to:
KENNETH L. CUTLER, ESQ. MICHELE D. VAILLANCOURT, ESQ.
DORSEY & WHITNEY LLP WINTHROP & WEINSTINE, P.A.
PILLSBURY CENTER SOUTH 3000 DAIN BOSWORTH PLAZA
220 SOUTH SIXTH STREET 60 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 55402-1498 MINNEAPOLIS, MINNESOTA 55402
TELEPHONE: (612) 340-2740 TELEPHONE: (612) 347-0700
FACSIMILE: (612) 340-8738 FACSIMILE: (612) 347-0600
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 10, 1997
3,000,000 SHARES
[LOGO] ECO SOIL SYSTEMS
COMMON STOCK
All of the shares of Common Stock offered hereby (the "Shares") are being sold
by Eco Soil Systems, Inc. (the "Company"). Prior to this offering, there has
been no public market for the Common Stock of the Company (the "Common Stock").
It is currently anticipated that the initial public offering price per share
will be in the range of $4.00 to $4.50. See "Underwriting" for information
relating to the factors considered in determining the initial public offering
price. Application has been made to have the Common Stock approved for trading
on The Nasdaq SmallCap Market ("Nasdaq") under the symbol "ESSI" upon completion
of this offering.
THE COMMON STOCK OFFERED BY THIS PROSPECTUS IS SPECULATIVE AND INVOLVES A
HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
BEGINNING ON PAGE 6 AND "DILUTION" ON PAGE 15.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
Per Share $ $ $
Total (3) $ $ $
(1) The Company has agreed to pay to R. J. Steichen & Company, as the
representative of the Underwriters (the "Representative"), a
nonaccountable expense allowance equal to 2.0% of the total Price to
Public. The Company has also agreed to sell to the Representative, for a
nominal purchase price, a five-year warrant (the "Representative's
Warrant") to purchase up to 300,000 shares of Common Stock exercisable at
a per share price equal to 120% of the per share Price to Public. In
addition, the Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $
(including the Representative's nonaccountable expense allowance of
2.0% of the gross proceeds referenced in Note 1 above).
(3) The Company has granted the Underwriters a 45-day option to purchase up
to 450,000 additional shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See
"Underwriting."
The Shares are being offered by the Underwriters on a "firm commitment" basis,
subject to prior sale, when, as and if delivered to and accepted by them, and
subject to certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject any order in whole or in
part. It is expected that delivery of the certificates for the Shares will be
made on or about , 1997 in Minneapolis, Minnesota.
[LOGO] R J STEICHEN & COMPANY
The date of this Prospectus is , 1997.
[Diagram of BioJect System]
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.
The following trademarks of the Company are used in this Prospectus:
BioJect(tm), ClearLake(tm) and CleanRack(tm). This Prospectus also includes
trade names, trademarks and registered trademarks of companies other than Eco
Soil Systems, Inc.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MAY BE EFFECTED ON THE NASDAQ
SMALLCAP MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
FOR CALIFORNIA RESIDENTS ONLY
WITH RESPECT TO SALES OF THE COMMON STOCK BEING OFFERED HEREBY TO CALIFORNIA
RESIDENTS, SUCH COMMON STOCK MAY BE SOLD ONLY TO (1) "ACCREDITED INVESTORS"
WITHIN THE MEANING OF REGULATION D UNDER THE SECURITIES ACT OF 1933, (2) BANKS,
SAVINGS AND LOAN ASSOCIATIONS, TRUST COMPANIES, INSURANCE COMPANIES, INVESTMENT
COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940, PENSION AND
PROFIT SHARING TRUSTS, CORPORATIONS OR OTHER ENTITIES WHICH, TOGETHER WITH THE
CORPORATION'S OR OTHER ENTITY'S AFFILIATES, HAVE A NET WORTH ON A CONSOLIDATED
BASIS ACCORDING TO THEIR MOST RECENT REGULARLY PREPARED FINANCIAL STATEMENTS
(WHICH SHALL HAVE BEEN REVIEWED, BUT NOT NECESSARILY AUDITED, BY OUTSIDE
ACCOUNTANTS) OF NOT LESS THAN $14,000,000 AND SUBSIDIARIES OF THE FOREGOING, (3)
ANY CORPORATION, PARTNERSHIP OR ORGANIZATION (OTHER THAN A CORPORATION,
PARTNERSHIP OR ORGANIZATION FORMED FOR THE SOLE PURPOSE OF PURCHASING THE
SECURITIES OFFERED HEREBY) WHO PURCHASES AT LEAST $1,000,000 AGGREGATE AMOUNT OF
THE SECURITIES OFFERED HEREBY, (4) ANY NATURAL PERSON WHO (A) HAS INCOME OF
$65,000 AND A NET WORTH OF $250,000, OR (B) HAS A NET WORTH OF $500,000 (IN EACH
CASE, EXCLUDING HOME, HOME FURNISHINGS AND PERSONAL AUTOMOBILES), OR (5) ANY
"QUALIFIED INSTITUTIONAL BUYER" AS DEFINED UNDER RULE 144A OF THE SECURITIES
ACT.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS
OTHERWISE INDICATED, ALL INFORMATION HEREIN ASSUMES THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION IS NOT EXERCISED. SEE "UNDERWRITING." THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS.
THE COMPANY
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.
To date, the Company has marketed its products and services primarily to golf
courses and currently has approximately 300 BioJect or ClearLake systems in
operation throughout the world. The Company intends to leverage this experience
in the turf maintenance industry into irrigation-dependent agricultural crops
and the soil remediation and water quality management industries. The Company is
pursuing applications of its bioaugmentation technology in agricultural markets
that suffer from chronic problems such as plant diseases and insects that attack
crops, in soil remediation markets that involve hazardous chemicals such as PCBs
and Atrazine, and in water quality management markets that involve problems with
algae, sediment and oxygen levels.
The Company has entered into technology transfer agreements to obtain certain
microorganisms indirectly from the University of California, Michigan State
University and Cornell University, and is pursuing the licensing of microbial
discoveries from other major biotechnological centers around the world. The
Company currently has the exclusive rights through licenses or marketing
agreements to twelve microbial products that: (i) suppress plant diseases, (ii)
improve soil porosity, (iii) break down thatch, (iv) fix atmospheric nitrogen,
(v) inhibit the growth of certain insect pests and (vi) bioremediate certain
hazardous chemicals.
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 acquiring selected independent dealers and
distributors of turf maintenance products throughout the United States. The
Company acquired two independent dealers as of May 31, 1996 and intends to
continue its acquisition strategy to build a nationwide distribution system to
market its proprietary products. The Company believes that its products can be
more effectively marketed by leveraging the customer relationships developed by
these dealers and distributors, particularly in the golf course industry, and by
significantly increasing the size of the Company's own sales force through the
acquisition of an established network of salespersons.
The Company's principal proprietary products are sold or distributed in regions
where approximately 30% of all United States golf courses are located. Although
international sales to date have represented less than 20% of the Company's
sales, the Company has established formal distribution relationships in Japan,
South America, Mexico, Canada, Spain and Korea.
The Company was incorporated under the laws of the State of Nebraska in 1987.
The Company's principal executive offices are located at 10890 Thornmint Road,
Suite 200, San Diego, California 92127, and its telephone number is (619)
675-1660.
THE OFFERING
Common Stock offered...................... 3,000,000 shares
Common Stock outstanding(1):
Before the offering .................... 6,564,166 shares
After the offering ....................... 9,564,166 shares
Use of proceeds .......................... Acquisitions of dealers and
distributors, repayment of Bridge
Notes, repayment of certain
short-term debt and working capital
purposes. See "Use of Proceeds."
Proposed Nasdaq SmallCap Market symbol ... ESSI
(1) The foregoing calculations do not include (i) 1,086,765 shares of
Common Stock issuable upon conversion of $3,695,000 in promissory notes
issued by the Company in July 1996 (the "Bridge Notes") (assuming all
of the Bridge Notes are converted and assuming an initial public
offering price of $4.25 per share), (ii) 739,000 shares of Common Stock
subject to warrants (the "Bridge Warrants") at an exercise price of 80%
of the initial public offering price, (iii) 2,406,568 shares of Common
Stock subject to outstanding options at a weighted average exercise
price of $2.13 per share, (iv) 1,667,465 shares of Common Stock subject
to other outstanding warrants at a weighted average exercise price of
$2.69 per share, and (v) 300,000 shares of Common Stock subject to the
Representative's Warrant at an exercise price of 120% of the initial
public offering price. See "Dilution," "Description of Securities" and
"Underwriting."
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30, NINE MONTHS ENDED SEPTEMBER 30,
1994 1995 1995 1996 1995 1996 1996(1)
(AUDITED) (UNAUDITED) (AUDITED) (UNAUDITED) (PRO FORMA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 2,688 $ 3,757 $1,940 $ 4,139 $ 2,783 $ 9,229 $15,749
Cost of sales 1,998 1,980 844 2,329 1,615 5,705 10,421
Gross profit 690 1,777 1,096 1,810 1,168 3,524 5,328
Selling, general and
administrative 2,996 2,938 1,373 2,961 1,929 5,079 7,099
Research and development 286 413 160 275 264 353 353
Loss from operations (2,592) (1,574) (437) (1,426) (1,025) (1,908) (2,124)
Interest expense (224) (262) (131) (192) (172) (523) (652)
Net loss $(2,816) $(1,836) $ (568) $(1,618) $(1,197) $(2,431) $(2,776)
Net loss per share(2) $ (.62) $ (.35) $ (.11) $ (.27) $ (.23) $ (.40) $ (.44)
Shares used in calculation of
net loss per share(2) 4,557 5,207 5,184 5,980 5,304 6,050 6,359
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
ACTUAL AS ADJUSTED(3)
(UNAUDITED)
<S> <C> <C>
Cash $ 437 $ 5,842
Working capital (deficit) (3,875) 6,969
Total assets 13,979 19,384
Long-term debt and other obligations, net of current
portion 2,020 2,020
Common stock/paid in capital 12,717 23,672
Accumulated deficit (11,125) (11,236)
Total shareholders' equity 1,759 12,603
</TABLE>
(1) The pro forma consolidated statement of operations data give effect to
the acquisition of Turf Specialty, Inc. and Turf Products, Ltd., as if
they were acquired on January 1, 1995. The pro forma consolidated
statement of operations data are presented for illustrative purposes only
and not necessarily indicative of what actual results of operations would
have been for the period presented had the transactions occurred on that
date. See "Unaudited Pro Forma Condensed Consolidated Statements of
Operations."
(2) Computed on the basis described in Note 1 to the Consolidated Financial
Statements.
(3) Adjusted to give effect to the sale of the 3,000,000 Shares offered hereby
at an assumed initial public offering price of $4.25 per Share and the
application of net proceeds therefrom (including repayment of indebtedness
under the Bridge Notes and the write off of $111,000 of related debt
issuance costs). The foregoing calculations do not include (i) 1,086,765
shares of Common Stock issuable upon conversion of the Bridge Notes
(assuming all of the Bridge Notes are converted and assuming an initial
public offering price of $4.25 per share), (ii) 739,000 shares of Common
Stock subject to the Bridge Warrants at an exercise price of 80% of the
initial public offering price, (iii) 2,406,568 shares of Common Stock
subject to outstanding options at a weighted average exercise price of $2.13
per share, (iv) 1,667,465 shares of Common Stock subject to other
outstanding warrants at a weighted average exercise price of $2.69 per
share, and (v) 300,000 shares of Common Stock subject to the
Representative's Warrant at an exercise price of 120% of the initial public
offering price. See "Dilution," "Description of Securities" and
"Underwriting."
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY BY POTENTIAL INVESTORS IN EVALUATING
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
ACCUMULATED DEFICIT; CONTINUING OPERATING LOSSES; GOING CONCERN
CONSIDERATIONS
At September 30, 1996, the Company had an accumulated deficit of $11,125,000.
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. The report of the
independent auditors on the Company's consolidated financial statements for the
years ended December 31, 1994 and 1995 and the six months ended June 30, 1996
includes an explanatory paragraph stating that the Company's recurring losses
from operations raise substantial doubt about its ability to continue as a going
concern. There can be no assurance that the Company will ever achieve successful
or profitable operations. See "Selected Consolidated Financial Data" and
"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. Failure to obtain significant customer satisfaction or
market share would have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
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.
See "Use of Proceeds" and "Business -- Strategy."
FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE
AVAILABLE
The commercialization of the Company's products requires the commitment of
significant capital expenditures. Although the Company believes that existing
capital resources, including the proceeds of this offering and interest earned
thereon, will allow it to maintain its current and planned operations
and finance any potential acquisitions for at least 18 months following this
offering, no assurance can be given in that regard. Furthermore, the Company
will require additional funds to support its development activities through the
rigorous testing and marketing phases of development. The Company will seek to
obtain additional funds through public or private equity or debt financing,
collaborative or other arrangements with corporate partners or from other
sources. There can be no assurance that such additional financing can be
obtained on desirable terms or at all. If additional funds are not available,
the Company may be required to curtail its operations significantly or eliminate
one or more of its research, discovery or development programs or otherwise
curtail marketing efforts in certain territories for one or more of its product
lines. While the Company has established a line of credit with Imperial Bank of
San Diego ("Imperial Bank"), if additional financing is required, there can be
no assurance that the Company will be able to renew or increase its line of
credit on acceptable terms, if at all. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and "Certain Transactions."
POTENTIAL CREDIT RISKS
Historically, the Company has experienced longer collection cycles for its
proprietary products and systems compared to its distributed products. As of
September 30, 1996, approximately 17% of the Company's total accounts receivable
were over 90 days past due. 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 of Notes to
Consolidated Financial Statements.
CUSTOMER CONCENTRATION
For the years ended December 31, 1994 and 1995, the Company recognized revenues
from Wilbur-Ellis Company representing approximately 45% and 13% of the
Company's net sales for such periods, respectively. The Company does not have
any long-term purchase agreements with Wilbur-Ellis Company. No customer
accounted for more than 10% of net sales during the six months ended June 30,
1996 or the nine months ended September 30, 1996. The loss of or a significant
reduction in orders from major customers could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, the timing of orders from major customers could cause fluctuations in
the Company's quarterly financial results. See "-- Quarterly Fluctuations in the
Company's Results of Operations," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 of Notes to
Consolidated Financial Statements.
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 "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 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" and "Business."
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 "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. See "Business."
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 "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 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 "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 "Business -- Government Regulation."
LIMITED SALES AND MARKETING CAPABILITY
The Company has limited experience in sales, marketing and distribution. To
market any of its products directly, the Company must develop or acquire a
marketing and sales force with technical expertise and sufficient distribution
capability, and a customer service capability necessary to effectively market
and service its proprietary products and systems. Although the Company has begun
to develop sales, marketing and distribution service capabilities through the
acquisition of selected independent dealers and distributors, there can be no
assurance that additional acquisition candidates will continue to be available
or that any acquisition efforts will be successful. There can be no assurance
that the Company will be able to establish sales, distribution and customer
service capabilities or be successful in gaining market acceptance for its
products. See "Business."
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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Fluctuations."
MAINTENANCE CRITERIA FOR NASDAQ SECURITIES; PENNY STOCK RISKS
The National Association of Securities Dealers, Inc., which administers Nasdaq,
has adopted certain criteria for continued eligibility on Nasdaq. In order to
continue to be included on Nasdaq, the Company must maintain $2 million in total
assets, a $200,000 market value of its public float and $1 million in total
capital and surplus. In addition, continued inclusion requires two
market-makers, at least 300 holders of the Common Stock and a minimum bid price
of the Common Stock of $1 per share; provided, however, that, if the Common
Stock falls below such minimum bid price, it will remain eligible for continued
inclusion on Nasdaq if the market value of the public float is at least $1
million and the Company has $2 million in capital and surplus. The Company's
failure to meet these maintenance criteria in the future may result in the
discontinuance of the inclusion of its securities on Nasdaq. In such event,
trading, if any, in the securities may then continue to be conducted in the
non-Nasdaq over-the-counter market in less orderly markets commonly referred to
as the electronic bulletin board and the "pink sheets." As a result, an investor
may find it more difficult to dispose of or to obtain accurate quotations as to
the market value of the securities. In addition, the Company would be subject to
a rule promulgated by the Securities and Exchange Commission that, if the
Company fails to meet criteria set forth in such rule, imposes various sales
practice requirements on broker-dealers who sell securities governed by the rule
to persons other than established customers and accredited investors. For these
types of transactions, the broker-dealer must make a special suitability
determination for the purchaser and must have received the purchaser's written
consent to the transactions prior to sale. Consequently, the rule may have an
adverse effect on the ability of broker-dealers to sell the Company's
securities, which may affect the ability of purchasers in this offering to sell
the Company's Common Stock in the secondary market.
If the Company fails to maintain its qualification for Common Stock to trade on
Nasdaq and is trading below $5.00 per share, the Common Stock will be subject to
the rules of the Securities Exchange Act of 1934, as amended, relating to penny
stock. In that event, the Company's securities will be subject to the disclosure
rules for transactions involving penny stocks which require broker-dealers,
among other things, to (i) determine the suitability of purchasers of the
securities, and obtain the written consent of purchasers to purchase such
securities, and (ii) disclose the best (inside) bid and offer prices for such
securities and the price at which the broker-dealers last purchased or sold the
securities. The additional burdens imposed upon broker-dealers may discourage
them from effecting transactions in penny stocks, which could reduce the
liquidity of the Common Stock.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the active participation of William B. Adams,
its Chairman of the Board and Chief Executive Officer, Jeffrey A. Johnson,
its President and Chief Operating Officer, and Douglas M. Gloff, its
Executive Vice President. The loss of the services of any of these
individuals could have a material adverse effect upon the Company's future
operations. Messrs. Adams, Johnson 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. See "Management."
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 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. See "Management."
CONTROL BY PRINCIPAL SHAREHOLDERS
The current principal shareholders and management of the Company own
approximately 56% of the outstanding shares of Common Stock of the Company
before the offering and will own approximately 42% after the offering, 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, since the Company does not have cumulative voting, the current
principal shareholders and management, if voting in concert, may have the
ability to effectively control the election of a majority of the directors of
the Company or any other major decisions involving the Company or its assets.
See "Principal Shareholders" and "Description of Securities."
LACK OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE
Prior to this offering, there has been no public market for the Company's Common
Stock, and there can be no assurance that an active public market will develop
or be sustained after this offering. The initial public offering price will be
determined by negotiations between the Company and the Representative. See
"Underwriting" for a discussion of the determination of the initial public
offering price. If a public market does develop, the market price of the
Company's Common Stock may be significantly affected by factors such as
announcements of the introduction of new microbial products by the Company or
its competitors and quarterly variations in the Company's operating results.
Further, the stock market occasionally experiences extreme volatility in stock
prices. Such volatility may adversely affect the market prices of the Company
and other similar companies in ways that are unrelated or disproportionate to
the operating performance of such companies. See "Underwriting."
OUTSTANDING WARRANTS AND OPTIONS
As of September 30, 1996, there were 4,813,033 shares of Common Stock subject to
issuance pursuant to options and warrants issued by the Company. In addition, in
connection with this offering, the Representative will receive the
Representative's Warrant to purchase up to 300,000 shares of Common Stock.
Holders of warrants and options are likely to exercise them when, in all
likelihood, the Company could obtain additional capital on terms more favorable
than those provided by the warrants and options. While the warrants and options
are outstanding, they may adversely affect the terms on which the Company can
obtain additional capital. See "Description of Securities."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of significant amounts of Common Stock in the public market or the
perception that such sales will occur could adversely affect the market price of
the Common Stock or the future ability of the Company to raise capital through
an offering of its equity securities. Of the 9,564,166 shares of Common Stock to
be outstanding upon completion of this offering, the 3,000,000 Shares offered
hereby will be eligible for immediate sale in the public market without
restriction, with the exception of any shares purchased in the offering by
"affiliates" of the Company within the meaning of Rule 144 under the Securities
Act of 1933, as amended (the "Securities Act"). The remaining 6,564,166 shares
of Common Stock held by existing shareholders upon completion of this offering
will be "restricted securities," as that term is defined in Rule 144 under the
Securities Act. Of these shares, shares will be eligible for resale in the open
market pursuant to Rule 144 beginning 90 days after the date of this Prospectus.
An additional shares will become eligible for resale under Rule 144
between__________, 1996 and ____________, 1997. Directors and executive officers
of the Company (representing 2,703,640 of such restricted shares plus 2,471,504
shares subject to options, warrants or convertible debt) and shareholders of the
Company holding an additional 2,418,504 shares have agreed that they will not
sell, directly or indirectly, any Common Stock without the prior written consent
of the Underwriter for a period of 180 days from the date of this Prospectus. In
addition, certain shareholders have the right, subject to certain conditions, to
participate in future Company registrations and to cause the Company to register
certain shares of Common Stock owned by them. See "Shares Eligible for Future
Sale."
UNDESIGNATED PREFERRED STOCK; ANTITAKEOVER PROVISIONS
The Board of Directors is authorized, without any action by the Company's
shareholders, to issue up to 5,000,000 shares of authorized but undesignated
Preferred Stock and to fix the powers, preferences, rights and limitations of
any such Preferred Stock or any class or series thereof. Persons acquiring
Preferred Stock could have preferential rights with respect to voting,
liquidation, dissolution or dividends over existing shareholders, including
purchasers of Shares 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. See "Description of Securities."
DILUTION
Purchasers of the Shares offered hereby will experience immediate and
substantial dilution in net tangible book value of the Common Stock. Such
investors will incur additional dilution to the extent that options or
warrants outstanding prior to this offering are exercised. See "Dilution."
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. See "Dividend Policy."
USE OF PROCEEDS
The net proceeds to the Company from the sale of Shares offered hereby are
estimated to be $10,955,000 ($12,629,000 if the Underwriters' over-allotment
option is exercised in full) after deducting the underwriting discount and
estimated offering expenses payable by the Company and assuming an initial
public offering price of $4.25 per share. The Company intends to apply such net
proceeds substantially as follows:
Acquisitions $ 4,000,000
Repayment of Bridge Notes 3,787,000
Repayment of short-term debt 1,763,000
Capital expenditures 500,000
Working capital 905,000
Total $10,955,000
ACQUISITIONS. The Company currently intends to use up to $1,500,000 of the net
proceeds to make the final payments due in connection with one of the Company's
recent acquisitions and to use up to an additional $2,500,000 of the net
proceeds for future acquisitions of independent dealers and distributors of turf
maintenance products. The Company is currently evaluating additional acquisition
opportunities throughout the United States but currently does not have any
formal agreements to acquire other companies. See "Certain Transactions."
REPAYMENT OF BRIDGE NOTES. Approximately $3,787,000 of the net proceeds will be
used to pay principal and accrued interest on the Bridge Notes, assuming none of
the Bridge Notes are converted into Common Stock. If some or all of the Bridge
Notes are converted, the net proceeds that would have been used to repay
indebtedness under such Bridge Notes will be used for general working capital
purposes. The outstanding principal and accrued interest on the Bridge Notes
will be due and payable within 30 days after the date of this Prospectus and
bear interest at the rate of 10% per annum. Up to 100% of the principal amount
of the Bridge Notes is convertible for a period of 20 days after the date of
this Prospectus, at the option of the holder thereof, into the Company's Common
Stock at a conversion price of 80% of the initial public offering price. The
proceeds from the Bridge Notes were used to finance the Company's acquisitions,
to repay $100,000 of short-term debt and for general working capital purposes.
See "Description of Securities -- Bridge Financing."
REPAYMENT OF SHORT-TERM DEBT. The Company currently maintains a line of credit
of $1,000,000 with Imperial Bank for working capital purposes. This line
consists of a $500,000 revolving line of credit from the California Export
Financing Office that bears interest at the prime rate plus 1.5% and is payable
in April 1997 and a $500,000 revolving line of credit that bears interest at an
annual rate equal to the prime rate plus 2% and is payable in April 1997. As of
September 30, 1996, the outstanding balance of this loan was $500,000. This line
of credit requires an annual short-term repayment before it can be renewed. The
Company plans to use $1,000,000 of the proceeds of this offering to repay the
line of credit, and to renew the line of credit for use in the future. See
"Certain Transactions."
As of September 30, 1996, the Company owed Peninsula Bank $263,000 under a loan
payable in January 1997. This loan is collateralized with assets pledged by
William S. Potter, a director of the Company. The Company plans to use $263,000
of the proceeds of the offering to repay this loan and to cause the release of
this director's collateral. The Company also plans to repay $500,000 of
unsecured demand notes bearing interest at the rate of 8% per annum from
directors William B. Adams and Douglas M. Gloff, and from Heartland Capital
Fund, Ltd. ("Heartland Capital"), a limited partnership of which Bradley K.
Edwards, a director of the Company, is a general partner. See "Certain
Transactions." All of the proceeds from this short-term debt were used for
working capital purposes.
CAPITAL EXPENDITURES. The Company currently intends to use approximately
$500,000 of the net proceeds for capital expenditures, primarily related to the
construction of additional BioJect systems to satisfy current and future
customer orders.
WORKING CAPITAL AND GENERAL CORPORATE PURPOSES. The remainder of the net
proceeds, approximately $905,000, will be allocated to working capital and
will be used to (i) add customer service and installation personnel necessary to
support expansion of the Company's customer base in existing territories and in
new markets (such as the agricultural crop, soil remediation and water quality
management industries), (ii) finance the growth of receivables and inventory as
revenues expand, thereby reducing dependence on the Company's bank line of
credit, (iii) finance the growth in capital expenditures that occurs as the
installed base of BioJect systems increases without being dependent on obtaining
outside financing, and (iv) provide working capital to expand into potential new
geographical territories.
Pending the use of the net proceeds, the Company intends to invest such funds in
interest-bearing money market funds, short-term certificates of deposit and
United States governmental obligations. The described use of proceeds is based
upon management's assumptions concerning marketing, selling, development,
financial and other matters which may affect the Company. If the development of
the Company's business varies materially from these assumptions, the Company may
reallocate the use of proceeds in such a manner as it deems appropriate under
the circumstances.
CAPITALIZATION
The following table sets forth, at September 30, 1996, the actual capitalization
of the Company and the capitalization as adjusted to give effect to the sale by
the Company of the 3,000,000 Shares offered hereby at an assumed public offering
price of $4.25 per Share (after deduction of the underwriting discount and
estimated offering expenses) and the application of the estimated net proceeds
therefrom. See "Use of Proceeds." The information set forth below should be read
in conjunction with the financial statements and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
ACTUAL(1) AS ADJUSTED(2)
<S> <C> <C>
Long-term debt and other obligations, net of current
portion $ 2,020 $ 2,020
Shareholders' equity (deficit):
Preferred Stock, no par value; 5,000,000 shares
authorized; none issued and outstanding, actual and as
adjusted -- --
Common Stock, $.005 par value; 20,000,000 shares
authorized; 6,564,166 shares issued and outstanding,
9,564,166 shares as adjusted(3) 33 48
Additional paid-in capital 12,684 23,624
Warrants 239 239
Note receivable from shareholder (72) (72)
Accumulated deficit (11,125) (11,236)
Total shareholders' equity 1,759 12,603
Total capitalization $ 3,779 $ 14,623
</TABLE>
(1) Derived from the Company's audited consolidated financial statements
included elsewhere in this Prospectus. See "Consolidated Financial
Statements."
(2) Adjusted to give effect to the sale of the 3,000,000 Shares offered hereby
at an assumed initial public offering price of $4.25 per Share and the
application of net proceeds therefrom (including repayment of indebtedness
under the Bridge Notes and the write off of $111,000 of debt issuance
costs).
(3) Excludes (i) 1,086,750 shares of Common Stock issuable upon conversion of
the Bridge Notes (assuming all of the Bridge Notes are converted and
assuming an initial public offering price of $4.25 per Share), (ii) 739,000
shares of Common Stock subject to the Bridge Warrants at an exercise price
of 80% of the initial public offering price, (iii) 2,406,568 shares of
Common Stock subject to outstanding options at a weighted average exercise
price of $2.13 per share, (iv) 1,667,465 shares of Common Stock subject to
other outstanding warrants at a weighted average exercise price of $2.69 per
share and (v) 300,000 shares of Common Stock subject to the Representative's
Warrant at an exercise price of 120% of the initial public offering price.
See "Description of Securities" and "Underwriting."
DILUTION
The Company's net tangible book value (deficit) at September 30, 1996 was
approximately $(3,608,000), or $(.55) per share. "Net tangible book value per
share" represents the Company's total tangible assets less its total
liabilities, divided by the number of shares of Common Stock outstanding.
Without giving effect to changes in net tangible book value after September 30,
1996, except for the sale of the Shares offered hereby (assuming a public
offering price of $4.25 per Share and after deducting the underwriting discount
and estimated offering expenses payable by the Company), the Company's net
tangible book value at September 30, 1996 would have been approximately
$7,347,000, or $.77 per share. This amount represents an immediate increase in
net tangible book value per Share of $1.32 to existing shareholders and an
immediate dilution of $3.48 per share to the investors purchasing the Shares
offered hereby. The following table illustrates this per share dilution in net
tangible book value to new investors:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per Share $4.25
Net tangible book value (deficit) per share at September 30,
1996 $(.55)
Increase per share attributable to new investors 1.32
Net tangible book value per share after this offering .77
Dilution per Share to new investors $3.48
</TABLE>
If the Underwriter's over-allotment option is exercised in full, and assuming an
initial public offering price of $4.25 per Share, the net tangible book value of
the Company as of September 30, 1996 would have been $9,021,000, or $.90 per
share, representing an immediate increase in net tangible book value of $1.45
per share to existing shareholders and an immediate dilution of $3.35 per Share
to the investors purchasing the Shares offered hereby.
The following summarizes, on a pro forma basis, the differences between existing
shareholders and purchasers of the Shares offered hereby, with respect to their
ownership of Common Stock upon the closing of this offering, the total
consideration paid and the average consideration paid per share:
<TABLE>
<CAPTION>
AVERAGE
SHARES OWNED TOTAL CONSIDERATION PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
<S> <C> <C> <C> <C> <C>
Existing
shareholders 6,564,166 68.6% $14,243,000 52.8% $2.17
New investors 3,000,000 31.4% 12,750,000 47.2% $4.25
Total 9,564,166 100.0% $26,993,000 100.0%
</TABLE>
The foregoing calculations do not include (i) 1,086,765 shares of Common Stock
issuable upon conversion of the Bridge Notes (assuming all of the Bridge Notes
are converted and assuming an initial public offering price of $4.25 per share),
(ii) 739,000 shares of Common Stock subject to the Bridge Warrants at an
exercise price of 80% of the initial public offering price, (iii) 2,406,568
shares of Common Stock subject to other outstanding options at a weighted
average exercise price of $2.13 per share, (iv) 1,667,465 shares of Common Stock
subject to other outstanding warrants at a weighted average exercise price of
$2.69 per share, and (v) 300,000 shares of Common Stock subject to the
Representative's Warrant at an exercise price of 120% of the initial public
offering price. To the extent such securities are converted or exercised, there
may be further dilution to new investors. See "Description of Securities" and
"Underwriting."
DIVIDEND POLICY
The Company has never paid or declared any cash dividends on its Common Stock
and does not intend to pay dividends on its Common Stock in the foreseeable
future. The Company is currently prohibited from paying dividends by the terms
of a loan agreement between the Company and Imperial Bank. The Company intends
to retain any earnings for use in the operation and expansion of its business.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The selected consolidated financial data set forth below, with respect to the
Company's consolidated statement of operations data for the years ended December
31, 1994 and 1995 and the six months ended June 30, 1996, and the consolidated
balance sheet data set forth below as of December 31, 1995, have been derived
from the consolidated financial statements of the Company which have been
audited by Ernst & Young LLP, independent auditors (except for the financial
statements of Turf Specialty, Inc., a consolidated subsidiary, which were
audited by Bigelow & Company Certified Public Accountants, P.C.), as set forth
in their report, which includes an explanatory paragraph that indicates there is
substantial doubt about the Company's ability to continue as a going concern,
included elsewhere in this Prospectus. The consolidated statement of operations
data set forth below for the six months ended June 30, 1995 and the nine months
ended September 30, 1995 and 1996 and the consolidated balance sheet data as of
September 30, 1996 have not been audited but, in the opinion of management,
reflect all adjustments (consisting of only normal recurring adjustments) that
the Company considers necessary to present fairly the financial data for such
period. Results of the interim periods are not necessarily indicative of the
results that may be expected for the entire year or other interim periods. The
information presented below should be read in conjunction with the consolidated
financial statements and notes thereto presented elsewhere in this Prospectus
and in "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30, NINE MONTHS ENDED SEPTEMBER 30,
1994 1995 1995 1996 1995 1996 1996(1)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 2,688 $ 3,757 $ 1,940 $ 4,139 $ 2,783 $ 9,229 $15,749
Cost of sales 1,998 1,980 844 2,329 1,615 5,705 10,421
Gross profit 690 1,777 1,096 1,810 1,168 3,524 5,328
Selling, general and
administrative 2,996 2,938 1,373 2,961 1,929 5,079 7,099
Research and development 286 413 160 275 264 353 353
Loss from operations (2,592) (1,574) (437) (1,426) (1,025) (1,908) (2,124)
Interest expense (224) (262) (131) (192) (172) (523) (652)
Net loss $(2,816) $(1,836) $ (568) $(1,618) $(1,197) $(2,431) $(2,776)
Net loss per share(2) $ (.62) $ (.35) $ (.11) $ (.27) $ (.23) $ (.40) $ (.44)
Shares used in calculation of net
loss per share(2) 4,557 5,207 5,184 5,980 5,304 6,050 6,359
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1996
1995 ACTUAL AS ADJUSTED(3)
<S> <C> <C> <C>
Cash $ -- $ 437 $ 5,842
Working capital (deficit) (1,324) (3,875) 6.969
Total assets 3,981 13,979 19,384
Long-term debt and other obligations, net of current
portion 941 2,020 2,020
Common stock/paid in capital 8,535 12,717 23,672
Accumulated deficit (8,694) (11,125) (11,236)
Total shareholders' equity (deficit) (159) 1,759 12,603
</TABLE>
(1) Pro forma to give effect to the acquisition of Turf Specialty, Inc. and
Turf Products, Ltd. as if they were acquired on January 1, 1995. The pro
forma consolidated statement of operations data are unaudited, presented
for illustrative purposes only and not necessarily indicative of what
actual results of operations would have been for the period presented had
the transactions occurred on that date. See "Unaudited Pro Forma
Condensed Consolidated Statements of Operations."
(2) See Note 1 to Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used in calculating net
loss per share.
(3) Adjusted to give effect to the sale of the 3,000,000 Shares offered hereby
at an assumed initial public offering price of $4.25 per Share and the
application of net proceeds therefrom (including repayment of indebtedness
under the Bridge Notes and the write off of $111,000 of related debt
issuance costs). The foregoing calculations do not include (i) 1,086,765
shares of Common Stock issuable upon conversion of the Bridge Notes
(assuming all of the Bridge Notes are converted and assuming an initial
public offering price of $4.25 per share), (ii) 739,000 shares of Common
Stock subject to the Bridge Warrants at an exercise price of 80% of the
initial public offering price, (iii) 2,406,568 shares of Common Stock
subject to outstanding options at a weighted average exercise price of $2.13
per share, (iv) 1,667,465 shares of Common Stock subject to other
outstanding warrants at a weighted average exercise price of $2.69 per
share, and (v) 300,000 shares of Common Stock subject to the
Representative's Warrant at an exercise price of 120% of the initial public
offering price. See "Dilution," "Description of Securities" and
"Underwriting."
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 September 30, 1996 of approximately $17,000,000 and by raising
approximately $15,600,000 in equity and debt financing.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
The Company generated revenues of $9,229,000 for the nine months ended September
30, 1996, compared to $2,783,000 for the nine months ended September 30, 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 first nine
months of 1996 contain four months of revenues from Turf Products, $2,508,000,
and Turf Specialty, $2,884,000. Revenues generated by sources other than Turf
Products and Turf Specialty increased by approximately 38% to $3,837,000 during
the first nine months of 1996, compared to $2,783,000 during the first nine
months of 1995. In September 1995, the Company acquired Aspen Consulting, Inc.
("Aspen"), an irrigation design and planning firm, and Aspen added $795,000 of
revenues for the first nine months of 1996. In addition, in February 1996 the
Company acquired 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 September 30, 1996, Direct Products contributed
$502,000 to the Company's revenues.
In the first nine months of 1996, the Company's lease and service revenues on
its BioJect system increased 47% to $652,000, compared to $445,000 during the
first nine months of 1995. The Company's revenues from its BioJect menu items,
primarily microbes, increased to $1,040,000 during the first nine months of
1996, up 48%, compared to $703,000 during the first nine months of 1995. The
primary cause of the increase in lease, installation and menu items was the
increase in the number of BioJect systems installed. At September 30, 1996, the
Company had 238 BioJect systems installed, up 49% compared to 160 installed at
September 30, 1995. In addition, the Company increased the number of menu items
available to customers in 1996 compared to 1995.
Revenues from sales of CleanRack systems increased 17% during the first nine
months of 1996 to $224,000, compared to $191,000 during the first nine months of
1995. The increase in CleanRack revenues was due to an increase in the installed
base of CleanRack units from nine units at September 30, 1995 to 15 units at
September 30, 1996. Revenues from sales of ClearLake systems during the first
nine months of 1996 declined 65% to $147,000, compared to $425,000 during the
first nine months of 1995. The decline in the sales of ClearLake systems during
the first nine months of 1996 was due to a decline in unit sales as the Company
redesigned its ClearLake product. As a result, the Company did not actively
market its ClearLake system during that time period.
Other revenues, which consisted primarily of non-proprietary fertilizer,
nutrient and seed sales, declined to $477,000 during the first nine months of
1996, compared to $1,019,000 during the first nine months of 1995. This 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 during the first nine months of 1996 increased to
$3,524,000, compared to $1,168,000 during the first nine months of 1995. The
Company's gross profit margin declined to 38% during the first nine months of
1996, compared to 42% during the first nine months of 1995, primarily due to a
problem with 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 has
redesigned the circuit board and resumed marketing the BioJect system in August
1996.
Selling, general and administrative expenses increased to $5,079,000 during the
first nine months of 1996, compared to $1,929,000 during the first nine months
of 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 and the
previously discussed circuit board problem.
Research and development expenses increased to $353,000 during the first nine
months of 1996, compared to $264,000 during the first nine months of 1995. The
increase in research and development expenses was due to increased expenditures
on the BioJect and ClearLake systems.
Interest expense for the first nine months of 1996 was $523,000, compared to
$172,000 for the first nine months of 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 $8,194,000 at September 30, 1996, compared to
$2,661,000 at September 30, 1995.
The Company incurred $145,000 of expenses associated with the amortization of
goodwill during the first nine months of 1996, compared to $1,500 during the
first nine months of 1995. The increase in expenses associated with the
amortization of goodwill was due to the acquisition of Turf Products and Turf
Specialty in May 1996 as well as nine months of amortization of the goodwill
associated with the acquisition of Aspen. The amount of goodwill associated with
these acquisitions as of September 30, 1996 was $5,317,000 and is currently
being amortized over a period of 15 years.
The Company reported a net loss of $2,431,000 during the first nine months of
1996, compared to a net loss of $1,197,000 during the first nine months of 1995.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
The Company generated revenues of $4,139,000 in the six months ended June 30,
1996, compared to $1,940,000 for the six months ended June 30, 1995. On May 31,
1996 the Company acquired Turf Products and Turf Specialty. The acquisition of
each of these companies has been accounted for as a purchase. Accordingly, the
Company's results for the first six months of 1996 included 30 days of revenues
from Turf Products, $876,000, and Turf Specialty, $538,000. Revenues from
sources other than Turf Products and Turf Specialty increased by approximately
40% to $2,725,000 during the first six months of 1996, compared to $1,940,000
during the first six months of 1995. In September 1995 the Company acquired
Aspen, which added $541,000 to the Company's revenues for the first six months
of 1996. In addition, in February 1996 the Company acquired Direct Products, and
from February 1996 through June 30, 1996, Direct Products generated $295,000 of
revenues. In the first six months of 1996, the Company's lease and installation
revenues from its BioJect system increased 37% to $556,000, compared to $405,000
during the first six months of 1995. The Company's sale of BioJect menu items,
primarily microbes, increased to $565,000 during the first six months of 1996,
up 72% compared to $328,000 during the first six months of 1995. The primary
cause of the increase in lease, installation and menu items was the increase in
the number of BioJect systems installed. At June 30, 1996 the Company had 235
BioJect systems installed, up 53% compared to 154 installed at June 30, 1995. In
addition, the Company increased the number of menu items available to customers
in 1996 compared to 1995, which partially accounted for the significant increase
in menu item sales.
Revenues from CleanRack sales increased 34% during the first six months of 1996
to $188,000, compared to $140,000 during the six months ended June 30, 1995. The
increase in CleanRack revenues was due primarily to an increase in the installed
base of CleanRack units from seven units at June 30, 1995 to 12 units at June
30, 1996. Revenues from sales of ClearLake systems during the six months ended
June 30, 1996 declined to $135,000, compared to $422,000 during the first six
months of 1995. The decline in the sales of ClearLake systems during the first
six months of 1996 was due to a decline in unit sales as the Company improved
the design of its ClearLake system. As a result, the Company did not actively
market its ClearLake system during that time period.
Other revenues, which consisted primarily of non-proprietary fertilizer,
nutrient and seed sales, declined to $445,000 during the first six months of
1996, compared to $645,000 during the first six months of 1995. This decline
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 during the first six months of 1996 increased to
$1,810,000, compared to $1,096,000 during the first six months of 1995. The
Company's gross profit margin declined to 44% during the first six months of
1996 compared to 56% during the first six months of 1995, primarily due to the
previously discussed circuit board problem.
Selling, general and administrative expenses increased to $2,961,000 during the
first six months of 1996, compared to $1,373,000 during the first six months of
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 and the
previously discussed circuit board problem.
Research and development expenses increased to $275,000 for the six months ended
June 30, 1996, compared to $160,000 during the first six months ended June 30,
1995. The increase in research and development expenses was due primarily to
increased expenditures on the BioJect and ClearLake systems.
Interest expense for the first six months of 1996 increased to $192,000,
compared to $131,000 for the first six months of 1995. The increase in interest
expense was due to an increase in the amount of debt outstanding and capital
lease obligations at June 30, 1996, which was $5,563,000, compared to $1,999,000
at June 30, 1995, as well as an increase in the interest rates on the Company's
debt.
The Company reported a net loss of $1,618,000 during the first six months of
1996, compared to a net loss of $568,000 during the first six months of 1995.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1994
The Company generated revenues of $3,757,000 for the year ended December 31,
1995, compared to $2,688,000 for the year ended December 31, 1994, an increase
of $1,069,000, or 40%. The major reason for the increase in revenues was a
growth in revenues on its BioJect system from $719,000 in 1994 to $1,503,000 in
1995, an increase of $784,000, or 109%. At December 31, 1995, the Company had
171 BioJect systems installed, up 116% compared to 79 installed at December 31,
1994. The average revenue per BioJect account also increased in 1995, from
approximately $10,000 per BioJect account in 1994 to more than $11,000 in 1995,
as the Company restructured its BioJect system to sell a number of biological
programs, each of which utilizes distinct bacteria or other biological products.
Sales of ClearLake systems also increased in 1995 and contributed significantly
to the Company's overall sales growth. ClearLake system revenues increased from
$105,000 in 1994 to $436,000 in 1995, an increase of approximately $331,000.
Sales of ClearLake systems increased from 13 systems in 1994 to 30 systems in
1995. The other principal changes in revenue generated by the Company in 1995
were (i) the inclusion of $353,000 of revenue from Aspen and a decrease in seed
sales of approximately the same magnitude, as the Company made the decision at
the end of the first quarter in 1995 to discontinue carrying this product line
due to inconsistent product quality, and (ii) a decrease in sales to
Wilbur-Ellis Company from approximately 45% of net sales in 1994 to
approximately 13% in 1995 as the Company made the decision to expand the number
of distribution outlets for its products. The Company's international revenues,
which are included in these amounts, also showed significant growth during 1995.
International revenues increased by $68,000 to $598,000 in 1995, compared to
$530,000 in 1994.
The growth of higher margin BioJect and ClearLake sales, as well as the
inclusion of Aspen in the Company's results, produced a significant change in
product mix in 1995 that led to a substantial improvement in the gross profit
generated by the Company. In 1995 more than 56% of sales were generated by the
BioJect, ClearLake, and CleanRack product lines. In 1994 these product lines
contributed approximately 40% of sales. The gross profit on each of these
products is significantly higher than the gross profit from sales of the
Company's non-proprietary product lines, such as fertilizer, seed and third
party product sales. As a result of this favorable improvement in product mix,
the gross profit from sales generated by the Company improved from $690,000 in
1994, or 26% of sales, to $1,777,000 in 1995, or 47% of sales, an increase of
$1,087,000.
Selling, general and administrative expenses decreased by $58,000 to $2,938,000
in 1995, compared to $2,996,000 in 1994. In addition to the total amount of
these expenses decreasing by 2%, the composition of these expenses changed
significantly as the Company reduced spending on its mobile laboratory program
to support nutrient (granular and liquid fertilizer) sales in the latter half of
1994 and into 1995, and reallocated resources to field and scientific support of
its BioJect and ClearLake systems.
Research and development expenses increased by $127,000, from $286,000 in 1994
to $413,000 in 1995. The increase in research an development expenses in 1995
reflects the increased costs associated with a new generation of the BioJect
system that was developed in 1995 and introduced to the market in 1996.
Net interest expense increased by $38,000 to $262,000 in 1995, compared to
$224,000 in 1994, as the Company's total borrowing increased from $2,375,000 at
the end of 1994 to $2,933,000 at the end of 1995.
The improvements in gross profit from the growth in revenues, improved product
mix and control of operating expenses led to a $980,000 reduction in the net
loss generated by the Company in 1995 compared to 1994. The Company lost
$1,836,000, or $.35 per share, in 1995, compared to $2,816,000, or $.62 per
share, in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has incurred net losses and negative cash flows
from operations, and at September 30, 1996, the Company had a working capital
deficit of $3,875,000. Since its inception, the Company has financed its
operations from private placements of Common Stock, borrowing from its principal
shareholders, bank financing and the sale of the Bridge Notes and Bridge
Warrants. Until 1991, the Company funded its operations and product development
activities through approximately $600,000 in loans, equity investments and loan
guarantees by the Nebraska Research and Development Authority ("NRDA"), the
predecessor of Heartland Capital Fund, Ltd. ("Heartland Capital"), and through
approximately $100,000 in loans from one of the founders. Since 1991, the
Company has funded its operations primarily by (i) completing a private
placement of Common Stock in February 1992, in which $1,091,502 in capital was
raised at $1.50 per share, (ii) completing a private placement of Common Stock
in February 1993, in which $1,327,000 was raised at $2.00 per share, (iii)
completing a private placement of Common Stock in December 1993, in which
$1,060,000 was raised at $2.50 per share, (iv) completing a private placement of
Common Stock in July 1994, in which $1,574,000 was raised at $2.50 per share,
(v) obtaining a bank line of credit for $1,013,000 in September 1994, (vi)
converting $1,200,000 of shareholder advances and a promissory note from Mr.
William B. Adams, the Company's Chief Executive Officer, into 400,000 shares of
Common Stock at $3.00 per share during the period between December 1994 and
February 1995, (vii) issuing $750,000 of subordinated debentures to certain
principal shareholders in March 1995, (viii) completing a private placement of
Common Stock in November 1995, in which $1,888,000 was raised at $3.00 per
share, (ix) issuing $700,000 of subordinated debentures to certain principal
shareholders in November 1995, (x) issuing $100,000 of unsecured, subordinated
promissory notes to a principal shareholder in March 1996, (xi) obtaining a
$1,000,000 line of credit from Imperial Bank in March 1996, (xii) issuing
$250,000 of promissory notes to certain principal shareholders in March and
April 1996, (xiii) completing its financing of Bridge Notes and Bridge Warrants
in July 1996, in which approximately $3,695,000 was raised and (xiv) converting
$99,000 of outstanding convertible debentures into 66,000 shares of Common Stock
at $1.50 per share in July 1996.
Holders of the Bridge Notes will have the option of being repaid from the
proceeds of this offering or converting up to 100% of the principal amount of
the Bridge Notes into shares of Common Stock at a conversion price equal to 80%
of the initial public offering price. See "Description of Securities -- Bridge
Financing."
As of September 30, 1996, approximately 17% of the Company's total accounts
receivable were over 90 days past due. Historically, the Company has experienced
longer collection cycles for its proprietary products and systems compared to
its distributed products. The Company has established a reserve for bad debt and
returns and allowances of $83,000 as of September 30, 1996 and believes that
such reserve will be adequate to cover potential writeoffs or returned sales. As
of September 30, 1996, no individual account which was over 90 days past due was
significant to the financial position of the Company. Based on the collections
received through January 9, 1997, the Company anticipates that a preponderance
of receivables over 90 days past due will be collected by the end of the first
quarter of 1997. In addition, the Company believes that the allowance for
doubtful accounts at September 30, 1996 is adequate to provide for any
uncollectible accounts.
When evaluating whether to extend credit to a potential customer, the Company
considers, among other factors, (i) the credit-worthiness of the customer; (ii)
the customer's prior payment history; and (iii) the type of the products to be
sold and the related dollar value of the sale. The Company may grant credit to
slow-paying customers depending on the customer's prior history of eventual
payment or the perceived long-term importance of the customer to the Company.
Receivables arising from sales of proprietary products often have longer
collection periods because they represent a significant capital expenditure to
the customer, and customers may delay payments as a form of short-term financing
and to ensure the product is working effectively prior to making payment. Sales
of distributed products tend to be of smaller dollar value on an individual
basis and are often routine, repetitive purchases. The Company anticipates that
proprietary product sales will continue to require longer collection periods
than distributed products due to the above factors. The Company considers the
likely collection period in establishing sales prices for proprietary products,
whereas distributed products are priced according to a standard price list.
The Company records a general allowance for uncollectible accounts at the time
of sale based upon its historical experience. The allowance is allocated to
specific customers if and when collection from such customers appears doubtful,
and further sales to such customers are restricted. The remaining general
allowance is then adjusted accordingly, if appropriate.
The consolidated financial statements of the Company included elsewhere herein
were prepared on a going concern basis, which contemplates the realization of
assets and satisfaction of liabilities and commitments in the normal course of
business. The Company incurred net losses of $2,816,000 and $1,836,000 for the
years ended December 31, 1994 and December 31, 1995, respectively, and had an
accumulated deficit of $11,125,000 at September 30, 1996. The commercialization
of the Company's products requires the commitment of significant capital
expenditures. Although the Company believes that existing capital resources,
including the proceeds of this offering and interest earned thereon, will allow
it to maintain its current and planned operations for at least 18 months
following this offering, no assurance can be given in that regard. Furthermore,
the Company will require additional funds to support its development activities
through the rigorous testing and marketing phases of development. The Company
will seek to obtain additional funds through public or private equity or debt
financing, collaborative or other arrangements with corporate partners or from
other sources. There can be no assurance that such additional financing can be
obtained on desirable terms or at all. If additional funds are not available,
the Company may be required to reduce or eliminate one or more of its research,
discovery or development programs or otherwise curtail its marketing efforts in
certain territories of one or more of its product lines. While the Company has
established a line of credit with Imperial Bank, if additional financing is
required, there can be no assurance that the Company will be able to renew or
increase its line of credit on acceptable terms, if at all. See "Risk Factors --
Future Additional Capital Requirements; No Assurance Future Capital Will Be
Available."
The Company's independent auditors have included an explanatory paragraph in
their report on the Company's financial statements for the six months ended June
30, 1996, which indicates there is substantial doubt about the Company's ability
to continue as a going concern due to the Company's need to generate cash from
operations and obtain additional financing. See "Report of Ernst & Young LLP,
Independent Auditors" on the Company's Consolidated Financial Statements
appearing at page F-2 of this Prospectus.
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 "Risk Factors --
Quarterly Fluctuations in the Company's Results of Operations."
RECENTLY ISSUED ACCOUNTING STANDARDS
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." SFAS No. 121 requires recognition of impairment of long-lived assets if
the net book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. 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. See Note 1 of Notes to
Consolidated Financial Statements.
In addition, the FASB has issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes a fair value-based method of
accounting for stock-based compensation plans and encourages, but does not
rquire, entities to adopt that method in place of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." APB No.
125 and related Interpretations use an intrinsic value-based accounting
method. The Company does not intend to adopt SFAS No. 123 in measuring
expenses. However, the Company must present pro forma net income (loss) and
related per share amounts as if SFAS No. 123 had been adopted, and such pro
forma amounts reflect higher amounts of expenses than the amounts reported in
the financial statements. See Note 1 of Notes to Consolidated Financial
Statements.
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 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 and CleanRack 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 and CleanRack
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 manual means 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.
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.
The Company believes that a significant strategic and financial opportunity
currently exists to acquire a number of small independent dealers and
distributors. At the present time, there are a group of approximately 35 such
dealers and, to date, no group-buying opportunities have been pursued among
these dealers. The Company believes that if it is able to acquire a number of
these small independent dealers, it will be able to develop coordinated
marketing strategies and improve its purchasing terms through group-buying
opportunities. The Company believes that this acquisition strategy will also
enable it to leverage its products into new markets at higher sales penetration
rates than would otherwise be possible and enhance the performance of these
dealers by providing higher margin, proprietary products for these dealers to
sell.
In May 1996, the Company initiated its dealer acquisition and consolidation
strategy by acquiring two regional turf distributors -- Turf Products, a
Chicago-based dealer that markets turf products throughout the greater Chicago
area, and 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, and the Company anticipates that these traditional turf products
will contribute approximately 60% of the Company's total revenues for the year
ending December 31, 1997. 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.
Turf Products and Turf Specialty are recognized in the turf maintenance industry
as leaders in the golf course market in the greater Chicago area and New England
region, respectively. While other dealers in these markets compete for market
share through aggressive pricing, the Company's acquired dealers have adopted a
value-added, customer service focus, an approach which is essential for
introducing technologically-advanced, proprietary products such as the BioJect
and ClearLake systems. In reviewing other potential acquisition candidates, the
Company will continue to seek dealers and distributors with a similar
value-added, customer service approach.
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.
The Company believes that its dealer acquisition and consolidation strategy will
offer several benefits to the Company as well as its acquired dealers, including
the following:
* improved profitability due to increased sales of proprietary products;
* improved overall financial results due to consolidated operations;
* increased margins to consolidated dealers due to group-buying opportunities;
and
* increased visibility in turf maintenance markets and greater credibility in
larger markets such as the agricultural crop and soil remediation
industries.
The direct acquisition of dealers also can provide these dealers with an equity
interest in the Company, thereby creating a financial incentive for such dealers
to introduce the Company's higher margin, proprietary products into their
respective regions. Dealers also can benefit from these acquisitions because
their relationship with the Company should provide these dealers with access to
greater financial resources.
Because new product introduction requires higher sales skills and advanced
marketing strategy, the Company believes that a consolidated group of dealers
possessing the necessary technical expertise could have a major impact on the
industry. Planning is underway to integrate fully the Company's products into
these newly acquired organizations and to begin building more important and
profitable relationships with other key suppliers in this industry. The Company
believes that proceeds from this offering, among other things, will allow the
dealer consolidations to continue and, through the acquisition and training of
an integrated sales force, will enable the Company to establish a nationwide
distribution channel in the turf maintenance and water quality management
industries and to expand into other related markets, including the agricultural
crop and soil remediation industries. Due to the increased visibility created by
the Company's recent dealer acquisitions, certain large agricultural companies
have already contacted the Company about exploring possible relationships for
the introduction of the Company's products into the agricultural crop industry.
OTHER STRATEGIC ACQUISITIONS
In September 1995, the Company acquired 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 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. Some
of the environmental advantages and potential cost savings include the
following:
ENVIRONMENTAL ADVANTAGES
* lower toxicity to humans and other non-target animals and plants;
* fewer residual pesticide contaminants in plants and their byproducts;
* rapid access to treated areas after application; and
* reduced soil and groundwater pollution.
POTENTIAL COST SAVINGS
* the use of well or effluent water as an alternative to more costly city
water for irrigation purposes;
* a reduction in water consumption of up to 40% due to improved soil porosity
and increased toxin remediation;
* a reduction in the rates and frequency of use of chemical fungicides,
herbicides, insecticides and other pesticides; and
* an increase in seed germination rates.
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 and
CleanRack 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 restoration system,
and (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. The Company intends to devote the majority of its
marketing and sales resources to its BioJect and ClearLake systems in the
immediate future. Each of these products is described below.
BIOJECT SYSTEM
The BioJect system is the Company's primary product, and the Company intends to
focus most of its efforts on enhancing the capabilities of and selling the
BioJect system to the turf maintenance industry and exploring potential
expansion of its BioJect system into the agricultural crop, soil remediation and
water quality management industries. 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.
[DIAGRAM OF 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 believes that its BioJect system will become the preferred
distribution vehicle for many biocontrol products because it is able to overcome
the poor shelf life characteristics that have previously prevented biological
products from being practical alternatives or complements to chemical control
products. Consequently, the Company's primary strategy is to expand sales of the
BioJect system and continue to position the BioJect system as the most efficient
and cost-effective means of distributing biological products into
irrigation-dependent markets.
Compared to traditional applications of chemical fertilizers and pesticides, the
Company's BioJect system offers several advantages. Among other factors, the
BioJect system:
* introduces naturally occurring microorganisms that are environmentally safe;
* permits increased frequency of applications at high doses and at night,
which minimizes degradation due to heat and ultraviolet light exposure and
long storage periods;
* eliminates the substantial labor costs associated with mixing and spraying;
* reduces freight expenses associated with shipping the product; and
* provides a user-friendly system that is managed and serviced by Company
personnel.
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 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 a
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 product 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
also intends to bring more technical expertise in-house in order to evaluate new
microbial products, maximize the value of its programs, and gain more expertise
in the area of registration and labeling requirements.
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, and the cost of such microbials varies 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.
The Company's installed base of BioJect systems has experienced rapid growth in
recent years, as evidenced by the following table:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Cumulative number of
installed BioJect systems 0 1 13 46 79 171 238
</TABLE>
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.
[DIAGRAM OF CLEARLAKE SYSTEM]
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;
* 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 Clear Lake 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, and the cost of such microbials
varies 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. The number of
ClearLake systems sold by the Company has experienced rapid growth in recent
years, as evidenced by the following table:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1996
<S> <C> <C> <C> <C>
Cumulative number of installed
ClearLake systems 0 13 30 48
</TABLE>
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 September 30, 1996, the
Company had sold 15 CleanRack systems.
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.
A brief description of these acquired dealers and the products sold by such
dealers is set forth below.
TURF PRODUCTS, LTD.
On May 31, 1996, the Company acquired Turf Products, a Chicago-based company
that markets and sells fertilizers, pesticides, grass seed, soil amendments and
golf accessories to golf courses throughout the greater Chicago metropolitan
area. Turf Products does not sell hardware such as irrigation equipment or
lawnmowers, but instead focuses on various fertilizers, pesticides and other
turf maintenance products. Turf Products currently sells fertilizers from
Lebanon Chemical Corporation, The Anderson's, Vicksburg Chemical Company, IMC
Vigoro, and the Company's own brand of fertilizer. Turf Products also sells
pesticides from many producers, including Bayer Corporation, Ciba-Geigy
Corporation, ISK Biotech Corporation, PBI Gordon Corporation, Rhone-Poulenc AG
Company, O.M. Scotts & Sons, Inc., and Rohm Haas Co.
As of September 30, 1996, Turf Products had ten employees, including four
general salespersons and a fifth salesperson who focuses exclusively on
servicing the BioJect system. Prior to acquiring Turf Products, the Company
distributed its BioJect system through Turf Products from May 1995 through May
1996. Because Turf Products has experience selling the BioJect and has
relationships with many golf course personnel in the greater Chicago
metropolitan area, a region containing over 500 golf courses, the Company
believes that this acquisition represents a significant market opportunity for
the Company.
TURF SPECIALTY, INC.
On May 31, 1996, the Company also acquired Turf Specialty, a New Hampshire-based
company that markets and sells fertilizers, pesticides, grass seed, soil
amendments and golf accessories to golf courses and municipalities throughout
the New England region. Turf Specialty, like Turf Products, does not sell
hardware such as irrigation equipment or lawnmowers, but instead focuses on
various fertilizers, pesticides and other turf maintenance products that meet
the needs of golf courses and municipalities in the New England area. Turf
Specialty currently sells fertilizers from The Anderson's, The Doggett
Corporation, Growth Products, Milwaukee Metropolitan Sewerage District
(Milorganite), Plant Marvel Lab, Inc., Ringer Corporation, Roots Inc., O.M.
Scotts & Sons, Inc., and the Company's own brand of fertilizer. Turf Products
also sells pesticides from many producers, including Bayer Corporation,
Ciba-Geigy Corporation, ISK Biotech Corporation, Kincaid Enterprises, PBI Gordon
Corporation, Rhone-Poulenc AG Company, O.M. Scotts & Sons, Inc. and Rohm Haas
Co.
As of September 30, 1996, Turf Specialty had 11 employees, including five
salespersons. Although Turf Specialty did not have any experience selling the
BioJect system prior to its acquisition by the Company in May 1996, the Company
believes that Turf Specialty has the technical expertise necessary to market and
service the BioJect system and also provides an inroad for the Company into golf
courses and municipalities in the New England region, which represents a new
geographic market for the Company.
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, which ferments new
organisms at the contamination site at a high frequency and dosage in a manner
that the Company believes could make bioremediation cost effective. 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>
<CAPTION>
<S> <C>
* Atlantic Golf Club (NY) * Monterey Peninsula Country Club (CA)
* 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)
* Legacy Golf Club (NV) * Sun City Resorts - Gary Player (S. Africa)
* Leopard Creek Golf Course (Zimbabwe) * Sun City Resorts - Lost City (S.Africa)
* Merion Golf Club (PA) * 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)
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 $286,000 and $413,000 on research
and development for the years ended December 31, 1994 and 1995, respectively,
and spent approximately $353,000 on research and development during the nine
months ended September 30, 1996. 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. In each of the last two
fiscal years, the Company estimates that it has spent less than $100,000
complying with the registration and labeling requirements imposed by
environmental laws and regulations. The Company does not expect that continued
regulatory compliance will have a significant effect on its results of
operations. 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 "Risk Factors -- 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" 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.
PROPRIETARY PRODUCTS
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 Ciba Geigy Corporation, Rhone-Poulenc AG Company, the Dow Chemical Company,
O.M. Scotts & Sons, Inc., Lesco, Inc., and The Toro Company, as well as a number
of smaller local and regional competitors.
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., 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.
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 September 30, 1996, the Company had 72 full-time employees, consisting of
six in general management, 17 in sales and marketing, 29 in customer service,
six in research and development, and 14 in finance and general administrative
activities. None of the Company's employees is represented by a labor union or
is covered by a collective bargaining agreement. The Company has not experienced
work stoppages and believes that it maintains good relations with its employees.
FACILITIES
The Company's headquarters consist of 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 month, plus
operating expenses, and expires in December 1999. The Company does not own any
real property.
The sales organizations recently acquired, Turf Products and Turf Specialty,
both 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.
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.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company and their
ages as of September 30, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
William B. Adams 50 Chairman of the Board, Chief Executive Officer, and
Director
Jeffrey A. Johnson 40 President, Chief Operating Officer, Secretary and
Director
Douglas M. Gloff 50 Executive Vice President and Director
L. Jean Dunn, Jr. 41 Chief Financial Officer
Dr. Thomas C. Quick 41 Vice President, Agriculture
John M. Doyle 37 Vice President of Product Development
Larry K. Runyon 58 Director of New Products
Kevin P. Lyons 40 Senior Vice President and Co-General Manager, Turf
Specialty
David W. Schermerhorn 37 Senior Vice President and Co-General Manager, Turf
Specialty
Wally Fuchs 56 Vice President and General Manager, Turf Products
Michael R. Scott 40 President of Aspen Consulting, Inc.
Bradley K. Edwards 37 Director
S. Bartley Osborn 54 Director
William S. Potter 51 Director
</TABLE>
The Company's Bylaws authorize the Board of Directors to fix the number of
directors from time to time, and the number is currently set at six directors.
All directors hold office until the next annual meeting of the shareholders or
until their successors have been elected and qualified. Officers serve at the
discretion of the Board of Directors. There are no family relationships between
any of the directors or executive officers of the Company.
WILLIAM B. ADAMS has served as Chairman of the Board, Chief Executive Officer
and as a director of the Company since March 1991. Mr. Adams is also currently
Chairman of Orphan Medical, Inc., a publicly traded spinoff of Chronimed, Inc.,
a publicly held medical products company. From 1985 to 1994, Mr. Adams was
Chairman of the Board of Chronimed. Prior to his involvement with the Company,
Mr. Adams founded WBA Consultants, Ltd., a management consulting firm, in 1980
and acted as an independent management consultant until 1994. From August 1989
to February 1991, Mr. Adams was Executive Chairman of Printrak, Inc., a
developer of specialized computer systems for the law enforcement community.
From April 1986 to April 1988, Mr. Adams was President and Chief Executive
Officer of Check Technology Corporation, a manufacturer of electronic printing
equipment.
JEFFREY A. JOHNSON has served as President, Chief Operating Officer and a
director of the Company since March 1991. Prior to his involvement with the
Company, Mr. Johnson was a partner and employee of WBA Consultants from 1986
until March 1991. Mr. Johnson was also a Vice President of Printrak, Inc.
from 1989 to 1991 and Vice President of Corporate Development of Check
Technology Corporation from 1986 to 1988. From 1983 to 1986, Mr. Johnson was
Vice President of Corporate Finance for Craig Hallum, Inc., an investment
banking firm based in Minneapolis, Minnesota.
DOUGLAS M. GLOFF joined the Company as Executive Vice President in January
1994 and became a director of the Company in August 1995. Mr. Gloff shares
many of the executive management duties of the Company with Mr. Adams. Prior
to joining the Company, Mr. Gloff acted as a consultant from 1992 until
January 1994. From 1978 to 1992, he served in various capacities with U.S.
Surgical, Inc., a publicly held supplier of medical instruments used in
surgery, culminating in the position of Director of Sales for the western
area.
L. JEAN DUNN, JR. joined the Company as Corporate Financial Officer/Corporate
Operations Officer in May 1996. From 1992 to 1996, Mr. Dunn had been a
partner in Capital Advisors LLC, an investment banking firm. Prior to that,
Mr. Dunn was a Vice President at Mitsubishi Bank in New York from 1989 to
1992, and a Vice President at Banque Paribas in Los Angeles and New York from
1982 to 1989.
DR. THOMAS C. QUICK has served as the Vice President, Agriculture of the
Company since September 1996. From October 1994 to August 1996, he served as
an International Product Manager, Biopesticides, for Abbott Laboratories.
Prior to that, he served in various capacities with Mycogen Corporation from May
1987 until March 1994, culminating in the position of Technical Sales
Representative.
JOHN M. DOYLE joined the Company in May 1994 as the Company's Vice President of
Product Development. Mr. Doyle is responsible for product and technology
acquisition, regulatory issues, production, marketing and communication
materials, product testing, and sales support for the BioJect system. Prior
to joining the Company, Mr. Doyle spent seven years in various positions with
Ringer Corporation, a supplier of natural turf maintenance products based in
Minneapolis, Minnesota, culminating in the position of Vice President of
Product Development.
LARRY K. RUNYON served as a Vice President of the Company from August 1991 until
October 1996 and is currently employed by the Company on a part-time basis. Mr.
Runyon, who is the inventor of the Company's patented BioJect system, assigned
his rights to the BioJect system to the Company in October 1991. From February
1990 to August 1991, he supervised the restoration of the Rancho Santa Fe Golf
Club in San Diego, California. In 1990, Mr. Runyon was also the architect and
designer of the golf course at the San Francisco Golf Club in Mexico. From
September 1988 to September 1989, he was superintendent of the Mission Country
Club in Odessa, Texas. Mr. Runyon has also acted as a consultant to fertilizer,
turf additive and water treatment companies and to other companies in the golf
industry.
KEVIN P. LYONS has served in various capacities with Turf Specialty since
October 1985, culminating in his current position of Senior Vice President
and Co-General Manager. Prior to joining Turf Specialty, he was a Senior
Technical Representative for O.M. Scott & Sons, Inc. from February 1980 until
October 1985.
DAVID W. SCHERMERHORN has served in various capacities with Turf Specialty
since October 1987, culminating in his current position of Senior Vice
President and Co-General Manager. Prior to joining Turf Specialty, he was a
Technical Representative for O.M. Scott & Sons, Inc. from October 1985 until
October 1987.
WALLY FUCHS founded Turf Products in February 1969 and currently serves as the
Vice President and General Manager of Turf Products. He was an original member
of the Independent Turf and Ornamental Distributors Association (ITODA), the
principal association of golf course and nursery product distributors.
MICHAEL R. SCOTT is the Founder and President of Aspen Consulting, Inc., the
Company's wholly owned subsidiary that plans and designs complete irrigation
systems for golf courses, residential housing projects and large commercial
developments. Mr. Scott founded Aspen in 1981. Mr. Scott is a Certified
Irrigation Designer for golf courses by the American Irrigation Association,
a Certified Irrigation Designer for large commercial projects by the American
Irrigation Association, a member of the American Society of Irrigation
Consultants, and a member of the Center for Irrigation Technology.
BRADLEY K. EDWARDS has served as a director of the Company since July 1991.
Since January 1993, Mr. Edwards has been a general partner of Heartland Capital.
Heartland Capital is the successor to the NRDA, a state-sponsored venture
capital entity that was an original investor in the Company. From November 1989
to January 1993, Mr. Edwards was employed by the NRDA, initially as a fund
manager and later as its President.
S. BARTLEY OSBORN has served as a director of the Company since November
1991. Mr. Osborn is currently Chairman of the Board of Directors of the
Fairway Foundation, a nonprofit foundation dedicated to teaching and exposing
the game of golf to inner-city children in Minneapolis, Minnesota. From
October 1965 through May 1982, Mr. Osborn was Executive Vice President of
Ecolab, Inc., a Fortune 500 specialty chemical manufacturer based in
Minneapolis, Minnesota. Mr. Osborn is a trustee of the IC Koran foundation,
which assists employees of EcoLab through scholarships for its children and
through financial hardship assistance.
WILLIAM S. POTTER has served as a director of the Company since August 1992.
Since 1988, Mr. Potter has also been President of Rugged Rigger, Inc., a
personal services corporation. From 1970 to 1988, Mr. Potter worked in
various capacities for H.M. Stevens Incorporated, a national food service and
catering company specializing in sporting events, culminating in the position
of Operational Vice President. Mr. Potter is a founding member of Fairbanks
Ranch Country Club in San Diego.
COMMITTEES OF THE BOARD OF DIRECTORS
COMPENSATION COMMITTEE
The Company has a Compensation Committee consisting of Messrs. Adams,
Edwards, and Potter. The Compensation Committee provides recommendations
concerning salaries and incentive compensation for the Company's officers and
administers the Company's benefit plans, other than the 1992 Stock Option Plan.
AUDIT COMMITTEE
The Company has an Audit Committee consisting of Messrs. Johnson, Edwards and
Osborn. The Audit Committee recommends to the Board of Directors the engagement
of the Company's independent public accountants and reviews the scope and
results of their audits and other services. The Audit Committee meets with
management and with the independent public accountants to review matters
relating to the quality of the Company's financial reporting and internal
accounting control, including the nature, extent and results of the audits,
proposed changes to the Company's accounting principles and otherwise maintains
communications between the independent public accountants and the Board of
Directors.
SCIENTIFIC ADVISORY BOARD, SPORTS FIELD CONSULTANT AND SUPERINTENDENT'S
ADVISORY BOARD
SCIENTIFIC ADVISORY BOARD
The Company maintains a Scientific Advisory Board (the "SAB") that advises the
Company from time to time with respect to its scientific research and
development programs. These individuals are compensated through the grant of
stock options. They will also receive fees for attending scientific advisory
meetings and reimbursement of out-of-pocket expenses. The SAB met in August 1995
and September 1996.
Members of the SAB may be employed by or have consulting agreements with
entities other than the Company, some of which may conflict or compete with
their obligations to the Company and which may limit their availability to the
Company. Most are not expected to participate actively in the Company's
development. Certain of the institutions with which SAB members are affiliated
may have regulations or policies which are unclear with respect to the ability
of such personnel to act as part-time consultants or in other capacities for a
commercial enterprise. Regulations or policies now in effect or adopted in the
future might limit the ability of the SAB members to consult with the Company.
The loss of the services of certain of the SAB members could adversely affect
the Company.
The current members of the SAB are as follows:
DR. DAVID E. CROWLEY is an Assistant Professor of Soil-Plant Relations at the
University of California, Riverside, where he has concentrated his efforts on
rhizosphere biology, the physiological basis for microbial competition in
soils and the activity of microorganisms that degrade soil contaminants. Dr.
Crowley received his Ph.D. from Colorado State University in 1986 and has
been associated with the University of California, Riverside since 1990.
DR. PETER H. DERNOEDEN is a Professor of Agronomy at the University of
Maryland, where he has focused on the impact of mowing, irrigation and
fertility on disease severity and weed encroachment in turf. He has also
concentrated on disease etiology, the effects of fungicides on non-target
diseases, plant parasitic nematodes, molecular techniques for identifying
root pathogens, and the chemical control of diseases and weeds. Dr. Dernoeden
received his Ph.D. in Plant Pathology from the University of Rhode Island in
1980.
DR. ERIC B. NELSON is currently an Associate Professor of Plant Pathology at
Cornell University, where he has focused on spermosphere and rhizosphere
ecology, plant-microbe and microbe-microbe interactions and biological
control of plant pathogens. Dr. Nelson received his Ph.D. from Ohio State
University and has been associated with Cornell University since 1987.
DR. FREDERICK J. SCHENDEL is the Vice President of Research and Development
for Encore Technologies, Inc. ("Encore"). In this capacity, Dr. Schendel is
in charge of all of Encore's research and development activities. Dr.
Schendel received his Ph.D. from the University of Wisconsin in 1986.
DR. JOSEPH M. VARGAS is a Professor of Botany and Plant Pathology at Michigan
State University, where he has concentrated his efforts on disease management
programs for turf. Dr. Vargas received his Ph.D. from the University of
Minnesota in 1968 and has been associated with Michigan State University
since that time. He has served in various capacities in the International
Turfgrass Society, the Turf and Ornamental Disease Committee of the American
Phytopathological Society and the Michigan Turfgrass Foundation Board.
DR. DANIEL I.C. WANG is a Professor of Chemical Engineering and Director of
the Biotechnology Process Engineering Center at the Massachusetts Institute
of Technology ("MIT"), where he has focused on fermentation processes, enzyme
technology and engineering, biopolymer production and protein purification
and refolding. Dr. Wang received his Ph.D. from the University of
Pennsylvania in 1963 and has been associated with MIT since 1965. Dr. Wang
has served in various capacities on numerous biotechnology editorial boards,
advisory boards and professional society memberships.
SPORTS FIELD CONSULTANT
The Company has established a relationship with a sports field consultant to
establish contacts between various professional sports teams and the Company
regarding potential sales of the Company's products to these teams and to their
sports stadiums. The sports consultant may, however, be employed by and have
consulting relationships with entities other than the Company, some of which may
conflict or compete with certain obligations to the Company and which may limit
such consultant's availability to the Company.
EDWARD C. (WHITEY) FORD currently serves as the Company's sports field
consultant. Mr. Ford is a private investor and nationally known sports
spokesperson. He was a starting pitcher for the New York Yankees in the 1950's
and 1960's and has been inducted into the Baseball Hall of Fame. He continues to
maintain contacts in the professional sports industry and is involved in many
sports charities and other charitable activities.
SUPERINTENDENT'S ADVISORY BOARD
The Company has also recently established an advisory board that consists of a
rotating committee of five golf course superintendents. This board suggests
improvements to the Company's current products and services and reviews and
critiques the Company's product development strategy. The Superintendent's
Advisory Board meets once each year, and the Company consults with its
individual members on an ad hoc basis.
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company has not paid any cash compensation to a director in his capacity
solely as a director and has no present plan to pay directors' fees. It is the
Company's current policy to award non-employee directors an option to purchase
10,000 shares of Common Stock at the then-current market price, vesting over
three years, for each year of service as a director. All directors are
reimbursed for travel and other out-of-pocket expenses incurred in connection
with attendance at meetings of the Board of Directors.
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the fiscal year ending December 31, 1995,
compensation awarded, paid to, or earned by the Company's Chief Executive
Officer and to the only executive officer whose salary and bonus exceeded
$100,000 for that year (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND PRINCIPAL COMMISSIONS OTHER ANNUAL
POSITION YEAR SALARY AND BONUS COMPENSATION
<S> <C> <C> <C> <C>
William B. Adams
Chief Executive Officer 1995 $ 75,000 $ 0 $ 0(1)
Larry K. Runyon(2) 1995 110,000 5,000 6,000(1)
</TABLE>
(1) Consists of a $500 per month car allowance. Mr. Adams declined to accept his
car allowance in 1995.
(2) Mr. Runyon, the inventor of the BioJect system, served as a Vice President
of the Company from August 1991 until October 1996, when he became a
part-time employee. Mr. Runyon currently serves as the Director of New
Products for the Company. Effective October 1996, he is being paid a salary
of $55,000 and has no car allowance.
The following information is furnished as of December 31, 1995 with respect to
stock options then held by the Company's Named Executive Officers.
AGGREGATED OPTION VALUES AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1995 DECEMBER 31, 1995(1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
William B.
Adams 719,823 -- $1,880,521 --
Larry K. Runyon 150,000 -- 633,000 --
</TABLE>
(1) The amounts set forth represent the difference between the estimated
Price to Public of $4.25 per Share and the exercise price of the options,
multiplied by the applicable number of shares underlying the options.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of the Named
Executive Officers and certain other executive officers. A summary of the
principal terms of such agreements is set forth below.
On May 21, 1991, the Company entered into an employment agreements with each of
William B. Adams, Jeffrey A. Johnson and Douglas M. Gloff, setting forth each
officer's duties, compensation, employee benefits and other terms of employment.
Each agreement, as amended, provides for an initial minimum annual salary of
$75,000 for each officer and terminates in December 1998. The Company or each
officer may terminate the agreement earlier, in which case such officer will be
entitled to severance pay equal to six months' base salary. Within six months of
the occurrence of certain change in control events, each officer may voluntarily
terminate his employment and be entitled to severance pay equal to six months'
base salary.
On October 1, 1995, Aspen entered into an employment agreement with Michael R.
Scott setting forth Mr. Scott's duties, compensation, employee benefits and
other terms of employment. Such agreement provides for a minimum annual salary
of $96,000 and terminates on September 30, 1999, unless earlier terminated by
the Company or Mr. Scott. The employment agreement also provides that Mr. Scott
is eligible to receive certain cash bonuses if Aspen's pre-tax net income
exceeds specified levels. The performance objective was met in 1995, and Mr.
Scott is currently being paid a bonus of $50,000 in equal monthly installments.
In addition, Mr. Scott received a non-qualified option to purchase up to 50,000
shares of the Company's Common Stock at $3.00 per share, vesting in equal annual
installments over the next four years, as long as he continues to be employed by
the Company at the end of each anniversary date of the agreement, and an option
to purchase up to 150,000 shares of Common Stock at $3.00 per share if Aspen's
pre-tax net income exceeds certain levels from 1996 through 1999. In 1995, Mr.
Scott received a total of $96,000 in salary, $28,000 of which was paid by the
Company after the merger of the Company with Aspen in September 1995.
On June 1, 1996, the Company entered into an employment agreement with L. Jean
Dunn, Jr. setting forth Mr. Dunn's duties, compensation, employee benefits and
other terms of employment. Such agreement provides for a minimum annual salary
of $90,000 and terminates on December 1, 1998. The agreement also granted Mr.
Dunn an option to purchase up to 75,000 shares of the Company's Common Stock at
$3.00 per share, with such options vesting in three equal annual installments
beginning on December 1, 1996.
On July 8, 1996, the Company entered in employment agreements with Kevin P.
Lyons and David W. Schermerhorn in connection with the Company's acquisition of
Turf Specialty. Each employment agreement provides for a minimum annual salary
of $165,000 and terminates on July 7, 1999 and July 8, 1999, respectively. See
"Certain Transactions."
On July 10, 1996, the Company entered into an employment agreement with Wally
Fuchs in connection with Company's acquisition of Turf Products. The employment
agreement provides for a minimum annual salary of $155,000 and terminates on
July 10, 1998.
On September 1, 1996, the Company entered into an employment agreement with Dr.
Thomas C. Quick setting forth Dr. Quick's duties, compensation, employee
benefits and other terms of employment. Such agreement provides for a minimum
annual salary of $80,000 and terminates on March 1, 1999. The agreement also
grants Dr. Quick an option to purchase up to 30,000 shares of Common Stock at
$3.00 per share, with such options vesting in three equal annual installments
beginning on March 1, 1997.
STOCK OPTION PLANS
1992 STOCK OPTION PLAN
In 1992, the Company adopted a Stock Option Plan (the "Option Plan"), under
which 125,000 shares of Common Stock were initially reserved for issuance upon
exercise of options granted to officers, employees and directors of, and
advisors and consultants to, the Company. The Option Plan provides for the grant
of both stock options intended to qualify as incentive stock options as defined
in the Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified
stock options. The Option Plan will terminate on February 5, 2002, unless sooner
terminated by the Board of Directors. The Company's shareholders approved an
increase in the number of shares reserved for issuance under the Option Plan to
250,000 shares in August 1993, to 350,000 shares in April 1995, to 450,000
shares in May 1996 and to 2,000,000 shares in November 1996.
Subject to the limitations set forth in the Option Plan, the Board of Directors
or a committee, if administration of the plan is delegated to a committee of the
Board comprised of at least two disinterested directors, has the authority to
select the persons to whom grants are to be made, to designate the number of
shares to be covered by each option, to determine whether an option is to be an
incentive stock option or a nonqualified stock option, to establish vesting
schedules and, subject to certain restrictions, to specify other terms of the
options. The maximum term of options granted under the Option Plan is ten years.
Options granted under the Option Plan generally are nontransferable and expire
three months after the termination of an optionee's employment or consultancy
with the Company. In general, if an optionee dies, such person's options may be
exercised up to one year after his or her death.
The exercise price of options granted under the Option Plan is determined by the
Board of Directors (or its committee) at the time of grant. The exercise price
of incentive stock options must equal at least the fair market value of the
Common Stock on the date of grant. The exercise price of incentive stock options
granted to any person who at the time of grant owns stock possessing more than
10% of the total combined voting power of all classes of stock must be at least
110% of the fair market value of such stock on the date of grant, and the term
of these options cannot exceed five years. The exercise price of nonqualified
stock options may be determined by the Board of Directors but must be at least
85% of the fair market value of the stock on the date of grant. As of September
30, 1996, the Company had outstanding options to purchase an aggregate of
555,668 shares (all of which were nonqualified stock options) held by 60 persons
at a weighted average exercise price of $2.93 per share. As of September 30,
1996, no options granted pursuant to the Option Plan had yet been exercised.
1996 DIRECTORS' OPTION PLAN
The 1996 Directors' Stock Option Plan (the "Directors' Plan") provides for the
automatic grant of nonstatutory stock options to purchase 10,000 shares of
Common Stock to nonemployee directors at the time of their election as director,
and an option to purchase 3,000 shares of Common Stock on the date of each
subsequent annual shareholder meeting, subject to certain limitations. Options
granted on the date an individual is elected as a director of the Company shall
become vested and thereby exercisable with respect to 33-1/3% on the date of
such election, with respect to 33-1/3% on the twelve month anniversary date
after such election and with respect to 33-1/3% on the date of the second twelve
month anniversary date after such election; provided, however, that an unvested
portion of such option grant shall only vest so long as the nonemployee director
remains a director on the date such portion vests, and that vested options shall
terminate two years after the date a director ceases to be a director of the
Company. Options granted on the date of each annual meeting of shareholders
become exercisable six months after the date of grant. The option price for
nonemployee directors is equal to the fair market value of a share of Common
Stock as of the date of grant. The Company has reserved a total of 60,000 shares
of Common Stock for issuance under the Directors' Plan, all of which are
currently available for future grants.
INDEMNIFICATION
Pursuant to the Company's charter documents and Nebraska law, the Company's
directors, officers and employees may be entitled to indemnification and
advancement of expenses for certain acts or actions made by or on behalf of the
Company. In addition, the Underwriting Agreement entered into between the
Company and the Underwriters in connection with this offering provides that the
Company will indemnify the Underwriters against certain liabilities, including
civil liabilities under the Securities Act, or will contribute to payments the
Underwriters may be required to make in respect thereof. Insofar as
indemnification for liabilities arising under the 1933 Act may be permitted to
directors, officers and controlling persons of the issuer, the issuer has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable.
CERTAIN TRANSACTIONS
In July 1994, the Company entered into a $1,013,000 line of credit with
Peninsula Bank. The line of credit was secured by all of the Company's accounts
receivable and contract rights, as well as a pledge of personal assets by
William B. Adams, Rugged Rigger, Inc. (a company controlled by William S.
Potter), Douglas M. Gloff and Heartland Capital (a limited partnership, of which
Bradley K. Edwards is a general partner).
During the period from December 1994 to February 1995, Mr. Adams converted $1.2
million of subordinated notes and shareholder advances into 400,000 shares of
Common Stock.
On November 15, 1995, Mr. Gloff and Heartland Capital each purchased $200,000
and Mr. Adams purchased $300,000 of collateralized subordinated debentures
from the Company. The debentures are secured by the assets of the Company but
are subordinated to any senior indebtedness of the Company. The debentures
bear interest at an 8% annual rate, payable on a quarterly basis, and the
entire principal balance is due on November 15, 1998.
On February 1, 1996, Mr. Adams loaned the Company $250,000 under the terms of an
8% unsecured subordinated promissory note, with principal and interest due upon
demand.
On January 22 and 23, 1996, Mr. Adams purchased a total of $300,000 of
collateralized subordinated debentures from the Company. The debentures are
secured by the assets of the Company but are subordinated to any senior
indebtedness of the Company. The debentures bear interest at an 8% annual rate,
payable on a quarterly basis, and the entire principal balance is due on
November 15, 1998. In connection with these debentures, warrants were issued to
Mr. Adams to purchase 200,000 shares of Common Stock at an exercise price of
$3.00 per share. These warrants expire on the earlier of January 2003 or one
year after the closing date of the Company's initial public offering of Common
Stock.
On March 1, 1996, Rugged Rigger, Inc. loaned the Company $100,000. The loan had
an annual interest rate of 8%, payable monthly, and the entire principal balance
was due on November 15, 1998. In connection with this subordinated unsecured
note, warrants were issued to Mr. Potter to purchase 15,000 shares of Common
Stock at an exercise price of $3.00 per share. These warrants expire in March 1,
2001. The loan was repaid in full with the proceeds from the sale of the Bridge
Notes and the Bridge Warrants.
On March 15, 1996, Mr. Adams converted $300,000 of collateral that was pledged
to secure the Company's bank loan at Peninsula Bank into cash and used the cash
to reduce the Company's $1,013,000 principal loan at Peninsula Bank by this
amount. The Company in turn issued Mr. Adams a total of $300,000 of unsecured
subordinated debentures, which bear interest at an 8% annual rate, payable on a
quarterly basis, and the entire principal amount is due on March 15, 1998. In
connection with the debentures, Mr. Adams was granted warrants to purchase up to
100,000 shares of Common Stock at an exercise price of $3.00 per share for a
period of five years.
On March 15, 1996, Mr. Gloff and Heartland Capital converted $250,000 and
$200,000, respectively, of collateral that was pledged to secure the Company's
bank loan at Peninsula Bank into cash and used the cash to reduce the Company's
$1,013,000 principal loan at Peninsula Bank by this amount. The Company in turn
issued a $250,000 secured subordinated promissory note to Mr. Gloff and a
$200,000 secured subordinated promissory note to Heartland Capital, each bearing
interest at an 8% annual rate, payable on a quarterly basis, and the principal
amount of each note is due on March 15, 1998. In connection with the debentures,
warrants were issued to Mr. Gloff and Heartland Capital to purchase up to 83,333
shares and 66,667 shares, respectively, of Common Stock at an exercise price of
$3.00 per share. These warrants expire upon the earlier of seven years from the
date of issuance or one year after the closing date of the Company's initial
public offering of Common Stock.
On March 26, 1996, the Company entered into a $1,000,000 line of credit
agreement with Imperial Bank, $500,000 of which is a revolving line of credit
that expires on April 1, 1997 and $500,000 of which is a revolving credit line
extended to finance exports based on a guarantee extended the Company by the
California Export Finance Organization ("CEFO"). The entire line of credit has
been personally guaranteed by Mr. Adams. The term loan portion of the line of
credit bears interest at a rate of prime plus 2%. The CEFO portion of the credit
line bears interest at prime plus 1.5%. CEFO's obligations are in turn
guaranteed by Mr. Adams. In connection with the revolving line of credit,
warrants were issued to Imperial Bank to purchase 20,833 shares of Common Stock
at an exercise price of $3.00 per share. These warrants expire in March 2001.
Between March and July 1996, the Company loaned $72,000 to Rugged Rigger, Inc.
to enable it to exercise options to purchase Common Stock. The loan bears
interest at an annual rate of 5%, compounded annually, and is payable at the
earlier of two years from the date of the loan or upon the sale of the
underlying Common Stock. This loan will be repaid by Rugged Rigger upon the
earlier of (i) one year following the effective date of this offering or (ii)
the sale of the underlying Common Stock.
On April 1, 1996, Mr. S. Bartley Osborn loaned the Company $100,000. The loan
had an annual interest rate of 10%, payable upon demand, and the entire
principal balance was due on July 1, 1996. In connection with this unsecured
note, warrants were issued to Mr. Osborn to purchase 15,000 shares of Common
Stock at an exercise price of $3.00 per share. These warrants expire in April
2001. The loan was repaid in full with the proceeds from the sale of the Bridge
Notes and the Bridge Warrants.
On May 15, 1996, Mr. Gloff converted the entire principal balance of his
$100,000 unsecured promissory note into 100,000 shares of Common Stock.
On May 24, 1996, the Company issued three convertible unsecured $50,000
promissory notes for the purpose of providing short-term financing until the
proceeds of this initial public offering can be received, one from each of Mr.
Adams, Mr. Gloff and Heartland Capital. Each note is payable upon demand and
bears interest at an annual rate of 8%. In connection with these promissory
notes, warrants were issued to each of Messrs. Adams and Gloff and Heartland
Capital to purchase 7,500 shares of Common Stock at an exercise price of $3.00
per share. These warrants expire in May 2001.
In May 1996, the Company acquired from Kevin P. Lyons and David W. Schermerhorn,
the only shareholders of Turf Specialty, all of the stock of Turf Specialty for
a total of $500,000 in cash and 647,650 shares of Common Stock. In addition, the
Company agreed to pay to Messrs. Lyons and Schermerhorn a total of $1,000,000 if
Turf Specialty earns a pre-tax profit for the year ending December 31, 1996 of
at least $900,000, with lesser payments due if Turf Specialty earns less than
$900,000 in pre-tax profit for the year ending December 31, 1996. The Company
currently expects Turf Specialty to achieve $900,000 in pre-tax profits for the
year ending December 31, 1996.
In connection with the acquisition of Turf Specialty, effective July 8, 1996,
the Company entered into employment agreements with each of Messrs. Lyons and
Schermerhorn providing for minimum annual salary levels of $85,000 and the right
to participate in any incentive compensation plans sponsored by Turf Specialty.
These employment agreements expire on July 9, 1999. Pursuant to these
agreements, the Company has agreed to loan $250,000 to each of these individuals
on or about December 15, 1996. These loans do not have to be repaid and will be
forgiven on July 1, 1999 if these officers are employed by the Company at that
time. If either officer's employment is terminated by the Company before that
date, such officer will be obligated to repay a portion of the loan prorated to
the number of days worked from July 2, 1996 to the effective date of the
termination of his employment. Compensation expense will be recorded by the
Company over the period of forgiveness.
The Company leases its headquarters facility from Mr. Arthur Arnes, who owns
10,000 shares of Common Stock. The Company's lease for this facility provides
for base lease payments of $13,200 per month, plus operating expenses, and
expires in December 1999.
Management of the Company believes that the terms of the transactions described
above were no less favorable to the Company than would have been obtained from
an unaffiliated third party. Any future material transactions and loans with
officers, directors or 5% beneficial shareholders of the Company's Common Stock,
or affiliates of such persons, will be on terms no less favorable to the Company
that could be obtained from unaffiliated third parties and will be approved by a
majority of the outside members of the Company's Board of Directors who do not
have an interest in the transactions.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to beneficial
ownership of the Company's Common Stock as of September 30, 1996 and as adjusted
to reflect the sale of Shares offered hereby (assuming no exercise of the
Underwriters' over-allotment option) by: (i) each director of the Company, (ii)
each Named Executive Officer of the Company, (iii) each person or entity known
by the Company to own beneficially more than five percent of the Company's
Common Stock and (iv) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
SHARES
BENEFICALLY PERCENT OF OUTSTANDING SHARES(1)
NAME AND ADDRESS OWNED BEFORE OFFERING AFTER OFFERING
<S> <C> <C> <C>
William B. Adams(2) 1,541,763 20.50% 14.65%
Bradley K. Edwards(3)
Heartland Capital Fund, Ltd.
11930 Arbor Street, Suite 201
Omaha, NE 68144 801,433 11.78% 8.17%
Douglas M. Gloff(4) 518,556 7.45% 5.21%
Wally Fuchs(5) 400,000 6.09% 4.18%
William S. Potter(6)
13875 Old El Camino Real
San Diego, CA 92130 363,132 5.34% 3.71%
Jeffrey A. Johnson(7) 301,176 4.44% 3.08%
Larry K. Runyon(8) 110,000 1.65% 1.14%
S. Bartley Osborn(9)
360 Orono Orchard Road
Wayzata, MN 55391 74,166 1.22% *
All executive officers and directors
as a group (14 persons)(10) 4,939,726 56.13% 41.86%
</TABLE>
*Less than 1%.
(1) Shares of Common Stock subject to options, warrants or convertible debt
securities currently exercisable or exercisable within 60 days after
September 30, 1996, are deemed to be outstanding for purposes of computing
the percentage of shares beneficially owned by the person holding such
options, warrants or convertible debt securities, but are not deemed to be
outstanding for purposes of computing such percentage for any other person.
Except as indicated by footnote, each person or group identified has sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. Except as otherwise indicated, the
address of each of the above persons is c/o Eco Soil Systems, Inc., 10890
Thornmint Road, Suite 200, San Diego, California 92127.
(2) Includes 619,823 shares of Common Stock subject to currently exercisable
options and 337,500 shares of Common Stock subject to currently exercisable
warrants.
(3) All shares are owned by Heartland Capital; beneficial ownership of such
shares is attributed to Mr. Edwards because he is a general partner of
Heartland Capital and is therefore deemed to exercise voting power and
investment authority with respect to the shares. Shares listed include
56,666 shares of Common Stock subject to currently exercisable options and
180,834 shares of Common Stock subject to currently exercisable warrants.
(4) Includes 163,556 shares of Common Stock subject to currently exercisable
options and 230,000 shares of Common Stock subject to currently exercisable
warrants.
(5) Includes 20,000 shares of Common Stock held by Mr. Fuchs as Trustee for
the Fuchs Family Charitable Remainder Trust.
(6) Includes 70,132 shares of Common Stock subject to convertible debt
securities, 70,000 shares of Common Stock subject to currently exercisable
options and 90,000 shares of Common Stock subject to currently exercisable
warrants. Also includes shares owned by Rugged Rigger, Inc., a California
corporation that is wholly owned by Mr.
Potter.
(7) Includes 225,909 shares of Common Stock subject to currently exercisable
options.
(8) Includes 110,000 shares of Common Stock subject to currently exercisable
options.
(9) Includes 15,000 shares of Common Stock subject to convertible debt
securities, 3,333 shares of Common Stock subject to currently exercisable
options and 15,000 shares of Common Stock subject to currently exercisable
warrants.
(10) See notes 1-9 above. Also includes 48,333 shares of Common Stock subject
to currently exercisable options held by John M. Doyle.
DESCRIPTION OF SECURITIES
GENERAL
The Company's authorized capital stock consists of 20,000,000 shares of Common
Stock and 5,000,000 shares of Preferred Stock. As of September 30, 1996, there
were issued and outstanding 6,564,166 shares of Common Stock, which were held by
276 shareholders of record, and 4,813,033 shares of Common Stock were reserved
for issuance upon exercise of outstanding options, warrants and convertible
debt. No shares of Preferred Stock were outstanding as of that date.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. There is no
cumulative voting for the election of directors, which means that the holders of
more than 50% of the outstanding Common Stock voting for the election of
directors can elect all of the directors of the Company to be elected, if they
so choose. Subject to preferences that may be applicable to any outstanding
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor and are entitled to share ratably in all assets of the
Company available for distribution to holders of the Common Stock upon
liquidation, dissolution or winding up of the affairs of the Company. Holders of
Common Stock have no preemptive, subscription or conversion rights, and there
are no redemption or sinking fund provisions applicable thereto. The outstanding
shares of Common Stock are, and the Shares of Common Stock offered hereby will
be, fully paid and nonassessable.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the Company's Board of
Directors, without further shareholder action, to issue up to 5,000,000 shares
of Preferred Stock in one or more series and to fix the voting rights,
liquidation preferences, dividend rights, repurchase rights, conversion rights,
redemption rights and terms, including sinking fund provisions, and certain
other rights and preferences, of the Preferred Stock. Although there is no
current intention to do so, the Board of Directors of the Company may, without
shareholder approval, issue shares of a class or series of Preferred Stock with
voting and conversion rights which could adversely affect the voting power or
dividend rights of the holders of Common Stock and may have the effect of
delaying, deferring or preventing a change in control of the Company.
BRIDGE FINANCING
In July 1996, the Company completed a bridge financing (the "Bridge Financing")
consisting of the issuance of approximately 74 Units (the "Bridge Units"). Each
Bridge Unit consisted of a $50,000 Bridge Note and Bridge Warrants to purchase
10,000 shares of the Company's Common Stock. The Bridge Financing resulted in
$3,695,000 of principal amount of Bridge Notes outstanding and the issuance of
Bridge Warrants to purchase 739,000 shares of Common Stock.
BRIDGE NOTES
The Bridge Notes were not issued pursuant to an indenture, and no trustee was
retained to enforce any of the obligations represented by the Bridge Notes. The
Bridge Notes bear interest from the date of issuance at 10% annually, payable at
maturity. The Bridge Notes will be payable in full within 30 days after the date
of this Prospectus. Up to 100% of the principal amount of the Bridge Notes will
be convertible, at the option of the holder thereof, into the Company's Common
Stock for a period of 20 days after the date of this Prospectus at a conversion
price equal to 80% of the initial public offering price.
The Bridge Notes are unsecured debt obligations of the Company. Principal and
interest payments on the Bridge Notes are subordinated to the prior payment of
any obligations of the Company to financial institutions representing
indebtedness for borrowed money.
BRIDGE WARRANTS
Each Bridge Warrant entitles the holders thereof to purchase one share of Common
Stock after December 31, 1996. The Bridge Warrants expire on July 5, 2001. The
exercise price of the Bridge Warrants will be equal to 80% of the initial public
offering price.
The Bridge Warrants provide for the automatic adjustment of the number of shares
issuable upon exercise of the Bridge Warrants, and of the exercise price, in
certain events, including stock dividends, stock splits, distributions of Common
Stock, reorganizations, reclassification, subdivisions and combinations of the
Common Stock, and the merger, consolidation or sale of all or substantially all
of the assets of the Company.
REGISTRATION RIGHTS
The Company has agreed to register the stock issued upon exercise of the Bridge
Warrants and conversion of the Bridge Notes under federal and state securities
laws at such time as it becomes eligible to use the Registration Statement on
Form S-3 or 12 months after an initial public offering (whichever is earlier)
upon written request from holders of a majority of the shares of Common Stock
purchasable or purchased at the time of the request upon exercise of the Bridge
Warrants or conversion of the Bridge Notes. The Company is required to maintain
the effectiveness of such registration until the earlier of 12 months after the
effective date or until all shares subject to such registration have been
resold. Holders of shares of stock purchased upon exercise of the Bridge
Warrants or conversion of the Bridge Notes will also be entitled to certain
incidental or "piggyback" registration rights. Holders must convert Bridge Notes
and exercise Bridge Warrants prior to any registration of the sale of the Common
Stock subject thereto.
OTHER WARRANTS
As of September 30, 1996, in addition to the Bridge Warrants to acquire 739,000
shares of Common Stock, the Company had outstanding warrants to purchase a total
of 1,667,465 shares of Common Stock of the Company with a weighted exercise
price of $2.69 per share. Such warrants were issued in connection with prior
financing transactions by the Company. The holders of such warrants, as such,
are not entitled to vote, receive dividends or exercise any of the rights of
holders of shares of Common Stock for any purpose until such warrants have been
duly exercised and payment of the purchase price has been made.
NEBRASKA SHAREHOLDERS PROTECTION ACT
The Company is a Nebraska corporation and is therefore subject to the provisions
of the Nebraska Shareholders Protection Act. The Nebraska Shareholders
Protection Act, subject to certain exemptions, prohibits a Nebraska corporation
from engaging in any of a broad range of "business combinations" involving an
"interested" shareholder, or any affiliate or associate of such interested
shareholder, for a period of five years following the date that such shareholder
became an interested shareholder, unless prior to such date, the Board of
Directors of the corporation approved either the business combination or the
transaction that resulted in the shareholder becoming an interested shareholder.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the shareholder. The Nebraska Shareholders
Protection Act also provides that shares acquired in a control-share acquisition
have no voting rights with respect to matters other than the elections of
directors unless approved by a vote of shareholders of the corporation, and that
any such control share acquisition is effective only if approved by a majority
of the corporation's voting shares that are "not interested" shares. A
control-share "acquisition" is an acquisition of voting stock in a corporation
that, when added to the shares the shareholder had prior to the acquisition,
would elevate the shareholder's voting power into one the three following
ranges: (i) between 20% and 33-1/3%, (ii) between 33-1/3% and 50% and (iii) over
50%. For purposes of the Nebraska Shareholders Protection Act, an "interested
shareholder" is a person who owns 10% or more of a corporation's outstanding
voting stock, or an affiliate or associate of the corporation that owns, or
within five years prior, did own, 10% or more of the corporation's outstanding
voting stock. These provisions may have the effect of discouraging, delaying,
deferring or preventing a change in control of the Company.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, National Association, has been appointed as the transfer
agent and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock.
Upon closing of this offering, assuming no conversion of Bridge Notes or the
exercise of Bridge Warrants, the Company will have outstanding an aggregate of
9,564,166 shares of Common Stock. Of these shares, the 3,000,000 Shares sold in
this offering will be freely tradeable without restriction or further
registration under the Securities Act, except for such Shares, if any, which are
purchased by "affiliates" of the Company, as that term is defined in Rule 144
under the Securities Act (whose sales would be subject to certain volume
limitations and other restrictions described below). The remaining 6,564,166
shares were issued and sold by the Company in private transactions in reliance
upon exemptions from registration under the Securities Act and are, therefore,
restricted securities (the "Restricted Shares") that may not be sold publicly
unless the Restricted Shares are registered under the Securities Act or sold
under Rule 144 or 144A under the Securities Act or under similar exemptions. Of
these Restricted Shares, _______ will be eligible for resale on the effective
date of this offering, _______ will be eligible for resale 90 days following the
effective date of this offering subject to the restrictions imposed by Rule 144,
and the remaining _______ will be eligible for resale under Rule 144 after the
expiration of the two-year holding periods from the dates of acquisition, which
end in August 1998. Holders of _______ of such Restricted Shares have entered
into lock-up agreements under which they have agreed not to offer, sell or
otherwise dispose, or directly or indirectly cause or permit the offer, sale or
other disposition, of any Common Stock owned of record or beneficially and of
which such shareholder has the power to control the disposition for a period of
180 days after the date of this Prospectus without the prior written consent of
the Representative.
In general, under Rule 144, a person (or persons whose sales are aggregated) who
beneficially owns shares last acquired privately from the Company or an
affiliate of the Company at least two years previously, and affiliates of the
Company who beneficially own shares last acquired (whether or not such shares
were acquired privately) from the Company or an affiliate of the Company at
least two years previously, are entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of the Company's Common Stock or the average weekly reported volume of
trading in the Company's Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain manner-of-sale
provisions, notice requirements and the availability of current public
information about the Company. A person who has not been an affiliate of the
Company at any time during the three months preceding a sale, and who
beneficially owns shares last acquired from the Company or an affiliate of the
Company at least three years previously, is entitled to sell all such shares
under Rule 144 without regard to any of the limitations of Rule 144.
The Securities and Exchange Commission has proposed reducing the initial Rule
144 holding period to one year and the Rule 144(k) holding period to two years.
There can be no assurance as to when or whether such rule changes will be
enacted. If enacted, such modifications may have a material effect on the time
when shares of the Company's Common Stock become eligible for resale.
In addition, Rule 144A under the Securities Act generally permits unlimited
resales of certain restricted securities of any issuer provided that the
purchaser is an institution that owns and invests on a discretionary basis at
least $100 million in securities or is a registered broker-dealer that owns and
invests $10 million in securities. Rule 144A allows the existing shareholders of
the Company to sell their shares to such institutions and registered
broker-dealers without regard to any volume or other restrictions. Unlike under
Rule 144, restricted securities sold under Rule 144A to nonaffiliates do not
lose their status as restricted securities.
The Company intends to file a Form S-8 Registration Statement under the
Securities Act to register all shares of Common Stock issuable under the Option
Plan and the Directors' Plan. That registration statement is expected to become
effective immediately upon filing. Shares covered by that registration statement
will be eligible for sale in the public market after the effective date of that
registration statement, subject to Rule 144 limitations applicable to affiliates
and to the lock-up agreements described below.
The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of Common Stock for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the Common Stock in the public markets or the perception
that such sales could occur could adversely affect the market price or the
future ability of the Company to raise capital through an offering of its equity
securities.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, each
Underwriter named below has severally agreed to purchase from the Company, and
the Company has agreed to sell to such Underwriters, the number of shares of
Common Stock set forth opposite the name of such Underwriter below, at the Price
to Public set forth on the cover page of this Prospectus, less the underwriting
discount.
NUMBER
UNDERWRITERS OF SHARES
R. J. Steichen & Company
Total
The Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters will purchase
all of the shares of the Common Stock offered hereby if any are purchased.
The Company has been advised by the Representative that the Underwriters propose
to offer the Shares to the public at the Price to Public set forth on the cover
page of this Prospectus and to certain selected dealers at such Price to Public
less usual and customary concessions not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other securities dealers. Each of the concessions
allowed will be to members of the National Association of Securities Dealers,
Inc. After the initial public offering, the Price to Public, concessions and
reallowance may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 45 days after the date of this Prospectus, to purchase up to an additional
450,000 shares of Common Stock from the Company at the Price to Public less the
underwriting discount set forth on the cover page of this Prospectus solely to
cover over-allotments. To the extent the Underwriters exercise the
over-allotment option, they will have a firm commitment to purchase the number
of Shares to be purchased by them, and the Company will be obligated, pursuant
to the option, to sell such Shares to the Underwriters. The Underwriters may
exercise such option only to cover over-allotments made in connection with
thesale of Common Stock offered hereby. If purchased, the Underwriters will
offer such additional shares on the same terms as those on which the 3,000,000
Shares are being offered hereby.
The Company has agreed to pay to the Representative a nonaccountable expense
allowance equal to 2.0% of the aggregate offering price of the shares offered
hereby, or $________ ($________ if the over-allotment option is exercised in
full), of which $10,000 has been paid. Such allowance is included in the
expenses of the offering set forth on the cover page of this Prospectus.
The Company has agreed to sell to the Representative upon the closing of this
offering, for nominal consideration, the Representative's Warrant to purchase
300,000 shares of Common Stock at an exercise price per share equal to 120% of
the Price to Public. The Representative's Warrant contains anti-dilution
provisions providing for appropriate adjustments upon the occurrence of certain
events and contains a one-time demand and certain "piggyback" registration
rights with respect to the shares of Common Stock issuable upon the exercise of
the Representative's Warrant. The Representative's Warrant will have a "cashless
exercise" feature allowing the holder of the Representative's Warrant to apply
the difference between the exercise price of the Representative's Warrant and
the higher fair market value of the Common Stock underlying the Representative's
Warrant to the payment of the exercise price. The Representative's Warrant will
be exercisable commencing one year from the date of this Prospectus until five
years after such date. The Representative's Warrant is not transferable for a
period of one year after the effective date of the offering, except for
transfers by operation of law, by reason of the reorganization of the Company or
to officers of the Representative. Furthermore, the Representative's Warrant
will not be transferable absent an exemption from applicable state and federal
securities laws. Any profits realized upon the sale of the Representative's
Warrant or the Common Stock issuable upon exercise thereof may be deemed to
constitute additional underwriting compensation.
The Company and the Underwriters have agreed in the Underwriting Agreement to
indemnify each other or provide contribution with respect to certain
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
Underwriting Agreement. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable.
Shareholders of the Company (including its executive officers and directors) who
hold in the aggregate ____ shares outstanding Common Stock and holders of
options and warrants to purchase an additional ____ shares have agreed not to
offer, sell or otherwise dispose, or directly or indirectly cause or permit the
offer, sale or other disposition, of any Common Stock of the Company owned of
record or beneficially and of which such shareholder has the power to control
the disposition for a period of 180 days after the date of this Prospectus
without the prior consent of the Representative. See "Shares Eligible for Future
Sale."
The Underwriters have advised the Company that they do not intend to confirm
sales to any account over which any of them exercises discretionary authority.
Prior to this offering, there has been no public market for the Common Stock of
the Company. The initial public offering price for the Shares was determined by
negotiation between the Company and the Representative, bears no relation to the
Company's current earnings, book value, net worth or financial criteria of
value, and should not be considered as an indication of the actual value of the
Shares offered hereby. After completion of this offering, the market price of
the Shares is subject to change as a result of market conditions and other
factors.
The foregoing is a summary of the provisions of the Underwriting Agreement, the
Representative's Warrant and related documents and does not purport to be a
complete statement of their terms and conditions. The Underwriting Agreement and
the Representative's Warrant have been filed as an exhibit to the Registration
Statement, of which this Prospectus is a part.
EXPERTS
The consolidated financial statements of Eco Soil Systems, Inc. at December 31,
1995 and for the two years in the period then ended and at June 30, 1996 and for
the six months then ended, appearing in this Prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and in the Registration
Statement which, as of June 30, 1996 and the six months then ended are based in
part on the report of Bigelow & Company, independent auditors, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Turf Specialty, Inc. for the years
ended December 31, 1994 and 1995 included in this Prospectus and Registration
Statement and the financial statements as of and for the one month ended June
30, 1996 of Turf Specialty, Inc., as a consolidated subsidiary of the Company,
not included herein, have been audited by Bigelow & Company, Certified Public
Accountants, P.C., as set forth in their reports thereon appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of Turf Products, Ltd. for the years ended December 31,
1994 and 1995 included in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be passed
upon for the Company by Dorsey & Whitney LLP, Minneapolis, Minnesota. Certain
legal matters will be passed upon for the Underwriters by Winthrop & Weinstine,
P.A., Minneapolis, Minnesota.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act
with respect to the Common Stock offered hereby. For further information with
respect to the Company and the Common Stock, reference is made to such
Registration Statement and exhibits filed as a part thereof. Statements
contained in this Prospectus as to the contents of any contract, agreement or
other documents referred to are not necessarily complete. With respect to each
such contract, agreement or document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved. The Registration Statement and exhibits may be inspected
without charge and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at Northwestern Atrium Center, 500 West Madison,
Suite 1400, Chicago, Illinois 60661 and 75 Park Place, 14th Floor, New York, New
York 10048. Copies of such material may be obtained at prescribed rates from the
Commission's Public Reference Section at 450 Fifth Street, N.W., Washington,
D.C. 20549. The Commission also maintains a World Wide Web site which provides
on-line access to registration statements, reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission at the address "http://www.sec.gov."
The Company will become a reporting company under the Securities Exchange Act of
1934, as amended, upon completion of this offering, and intends to furnish to
its shareholders annual reports containing financial statements audited by
independent accountants and quarterly reports containing unaudited financial
information for each of the first three quarters of each year.
ECO SOIL SYSTEMS, INC.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
PAGE
<S> <C>
ECO SOIL SYSTEMS, INC.
Report of Ernst & Young LLP, Independent Auditors F-2
Report of Bigelow & Company, Independent Auditors F-3
Consolidated Balance Sheets as of December 31, 1995, June 30, 1996 and
September 30, 1996 (unaudited) F-4
Consolidated Statements of Operations for the years ended December 31, 1994 and
1995, the six months ended June 30, 1995 (unaudited) and 1996 and the nine
months ended September 30, 1995 (unaudited) and 1996 (unaudited) F-5
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
December 31, 1994 and 1995, the six months ended June 30, 1996 and the three
months ended September 30, 1996 (unaudited) F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1994 and
1995, the six months ended June 30, 1995 (unaudited) and 1996 and the nine
months ended September 30, 1995 (unaudited) and 1996 (unaudited) F-7
Notes to Consolidated Financial Statements F-8
TURF SPECIALTY, INC.
Report of Bigelow & Company, Independent Auditors F-21
Consolidated Statements of Income and Retained Earnings for the years ended
December 31, 1994 and 1995 F-22
Consolidated Statements of Cash Flows for the years ended December 31, 1994
and 1995 F-23
Notes to Consolidated Financial Statements F-24
TURF PRODUCTS, LTD.
Report of Ernst & Young LLP, Independent Auditors F-27
Statements of Income and Retained Earnings for the years ended
December 31, 1994 and 1995 F-28
Statements of Cash Flows for the years ended December 31, 1994 and 1995 F-29
Notes to Financial Statements F-30
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited Pro Forma Condensed Consolidated Statements of Operations F-33
Notes to Pro Forma Condensed Consolidated Statements of Operations F-34
</TABLE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Eco Soil Systems, Inc.
We have audited the accompanying consolidated balance sheets of Eco Soil
Systems, Inc. as of December 31, 1995 and June 30, 1996, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the years ended December 31, 1994 and 1995 and the six months ended
June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Turf Specialty, Inc., a wholly-owned subsidiary, which statements
reflect total assets of $3,775,000 as of June 30, 1996, and total revenues,
since its acquisition on May 31, 1996, of $538,000 included in the consolidated
results of operations for the six months ended June 30, 1996. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Turf Specialty, Inc., is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Eco Soil Systems, Inc. at December 31,
1995 and June 30, 1996, and the consolidated results of its operations and its
cash flows for the years ended December 31, 1994 and 1995 and the six months
ended June 30, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company's
recurring losses from operations raise substantial doubt about its ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
San Diego, California
August 14, 1996
except for Note 10, as to which the date is
September 25, 1996
REPORT OF BIGELOW & COMPANY, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Turf Specialty, Inc.
Londonderry, New Hampshire
We have audited the consolidated balance sheet of Turf Specialty, Inc. (a
wholly-owned subsidiary of Eco Soil Systems, Inc.) as of June 30, 1996 and the
related consolidated statements of income, retained earnings and cash flows for
the one month then ended (not included herein). 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. at June 30, 1996, and the results of its operations and its
cash flows for the one month then ended in conformity with generally accepted
accounting principles.
BIGELOW & COMPANY
Certified Public Accountants, P.C.
By:
/s/ MARIE C. MCKAY
Marie C. McKay
Certified Public Accountant
Manchester, New Hampshire
July 30, 1996
ECO SOIL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ -- $ 1,159 $ 437
Accounts receivable, net of allowance for
doubtful accounts of $24 at December 31,
1995 and $83 at June 30 and September 30,
1996, respectively 1,231 4,130 3,191
Inventories 592 2,229 2,059
Prepaid expenses and other current assets 52 468 638
Total current assets 1,875 7,986 6,325
Property and equipment, net 1,334 2,170 2,060
Intangible assets, net 751 5,318 5,367
Other assets 21 100 227
Total assets $ 3,981 $ 15,574 $ 13,979
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,111 $ 5,353 $ 3,510
Payments due related to acquired businesses -- 1,810 --
Accrued expenses 96 700 515
Advances from shareholder 190 289 239
Current portion of long-term debt 1,703 3,086 5,884
Current portion of capital lease obligations 99 74 52
Total current liabilities 3,199 11,312 10,200
Long-term debt, net of current portion 911 2,086 1,994
Capital lease obligations, net of current
portion 30 7 --
Advances from shareholder -- 21 26
Commitments
Shareholders' equity (deficit)
Common stock
$.005 par value; 15,000,000 shares authorized, 4,968,935, 6,365,166 and
6,564,166 shares issued and outstanding at December 31, 1995 and June 30
and
September 30, 1996, respectively 25 32 33
Additional paid-in capital 8,510 12,409 12,684
Warrants -- 91 239
Note receivable from shareholder -- (72) (72)
Accumulated deficit (8,694) (10,312) (11,125)
Total shareholders' equity (deficit) (159) 2,148 1,759
Total liabilities and shareholders' equity
(deficit) $ 3,981 $ 15,574 $ 13,979
</TABLE>
SEE ACCOMPANYING NOTES.
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1994 1995 1995 1996 1995 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales $ 1,979 $ 2,425 $1,303 $ 3,145 $ 1,743 $ 7,682
Services 709 1,332 637 994 1,040 1,547
Total revenues 2,688 3,757 1,940 4,139 2,783 9,229
Cost of revenues:
Product sales 1,716 1,604 666 2,085 1,324 5,143
Services 282 376 178 244 291 562
Total cost of revenues 1,998 1,980 844 2,329 1,615 5,705
Gross profit 690 1,777 1,096 1,810 1,168 3,524
Operating expenses:
Selling, general and
administrative 2,996 2,938 1,373 2,961 1,929 5,079
Research and development 286 413 160 275 264 353
Total operating
expenses 3,282 3,351 1,533 3,236 2,193 5,432
Loss from operations (2,592) (1,574) (437) (1,426) (1,025) (1,908)
Interest expense (224) (262) (131) (192) (172) (523)
Net loss $(2,816) $(1,836) $ (568) $(1,618) $(1,197) $(2,431)
Net loss per share $ (.62) $ (.35) $ (.11) $ (.27) $ (.23) $ (.40)
Shares used in
calculating net loss per
share 4,557 5,207 5,184 5,980 5,304 6,050
</TABLE>
SEE ACCOMPANYING NOTES.
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (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 $336 629,500 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 $256 606,333 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 130,583 1 387 --
Conversion of debt and shareholder advances 171,998 1 282 --
Exercise of stock options 46,000 -- 92 --
Issuance of common stock for purchase of
Turf Specialty, Inc. 647,650 3 1,940 --
Issuance of common stock for purchase of
Turf Products, Ltd. 400,000 2 1,198 --
Issuance of warrants in connection with debt -- -- -- 91
Net loss -- -- -- --
Balance at June 30, 1996 6,365,166 32 12,409 91
Exercise of stock options (unaudited) 133,000 1 176 --
Conversion of debt (unaudited) 66,000 -- 99 --
Issuance of warrants in connection with
bridge financing (unaudited) -- -- -- 148
Net loss (unaudited) -- -- -- --
Balance at September 30, 1996 (unaudited) 6,564,166 $33 $12,684 $239
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
<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 $336 -- -- 1,238
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 $256 -- -- 1,632
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 -- -- 388
Conversion of debt and shareholder advances -- -- 283
Exercise of stock options (72) -- 20
Issuance of common stock for purchase of
Turf Specialty, Inc. -- -- 1,943
Issuance of common stock for purchase of
Turf Products, Ltd. -- -- 1,200
Issuance of warrants in connection with debt -- -- 91
Net loss -- (1,618) (1,618)
Balance at June 30, 1996 (72) (10,312) 2,148
Exercise of stock options (unaudited) -- -- 177
Conversion of debt (unaudited) -- -- 99
Issuance of warrants in connection with
bridge financing (unaudited) -- -- 148
Net loss (unaudited) -- (813) (813)
Balance at September 30, 1996 (unaudited) $(72) $(11,125) $ 1,759
</TABLE>
SEE ACCOMPANYING NOTES.
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,816) $(1,836) $(568) $(1,618)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 306 354 158 290
Changes in operating assets and liabilities,
net of effect of acquired businesses:
Accounts receivable (50) (652) (612) 21
Inventories (225) (35) 161 (67)
Prepaid expenses and other assets 71 2 (17) (176)
Accounts payable 367 139 158 (497)
Accrued liabilities 75 (3) (63) (326)
Net cash used in operating activities (2,272) (2,031) (783) (2,373)
INVESTING ACTIVITIES
Cash received in acquisitions -- -- -- 1,656
Payments related to acquired businesses -- -- -- --
Purchase of property and equipment (507) (569) (216) (714)
Proceeds from note receivable -- -- -- 595
Net cash (used in) provided by
investing activities (507) (569) (216) 1,537
FINANCING ACTIVITIES
Advances from shareholder 1,435 1,000 390 120
Repayment of advances from shareholder (807) (80) -- --
Proceeds from long-term debt 1,613 858 550 1,717
Repayments of long-term debt (973) (751) (414) (202)
Proceeds from capital lease obligations 49 -- -- --
Payments on capital lease obligations (67) (98) (50) (48)
Repurchase of common stock (120) -- -- --
Net proceeds from issuance of common stock 1,242 1,671 523 408
Net cash provided by financing activities 2,372 2,600 999 1,995
Net (decrease) increase in cash (407) -- -- 1,159
Cash at beginning of period 407 -- -- --
Cash at end of period $ -- $ -- $ -- $ 1,159
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Subordinated debentures issued upon conversion
of shareholder advances $ -- $ 300 $ -- $ --
Common stock issued upon conversion of debt and
shareholder advances $ 550 $ 700 $ 700 $ 283
Long-term debt issued for marketing rights $ 264 $ -- $ -- $ --
Long-term debt issued for purchase of furniture
and equipment $ 45 $ -- $ -- $ --
Payments due related to acquired businesses $ -- $ -- $ -- $ 1,810
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 224 $ 262 $ 131 $ 168
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1995 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,197) $(2,431)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 266 538
Changes in operating assets and liabilities,
net of effect of acquired businesses:
Accounts receivable (545) 961
Inventories 277 103
Prepaid expenses and other assets (68) (634)
Accounts payable (203) (2,340)
Accrued liabilities (68) (511)
Net cash used in operating activities (1,538) (4,314)
INVESTING ACTIVITIES
Cash received in acquisitions -- 1,656
Payments related to acquired businesses -- (1,810)
Purchase of property and equipment (385) (741)
Proceeds from note receivable -- 595
Net cash (used in) provided by
investing activities (385) (300)
FINANCING ACTIVITIES
Advances from shareholder 390 74
Repayment of advances from shareholder -- --
Proceeds from long-term debt 550 5,416
Repayments of long-term debt (267) (948)
Proceeds from capital lease obligations -- --
Payments on capital lease obligations (74) (76)
Repurchase of common stock -- --
Net proceeds from issuance of common stock 1,563 585
Net cash provided by financing activities 2,162 5,051
Net (decrease) increase in cash 239 437
Cash at beginning of period -- --
Cash at end of period $ 239 $ 437
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Subordinated debentures issued upon conversion
of shareholder advances $ -- $ --
Common stock issued upon conversion of debt and
shareholder advances $ 700 $ 382
Long-term debt issued for marketing rights $ -- $ --
Long-term debt issued for purchase of furniture
and equipment $ -- $ --
Payments due related to acquired businesses $ -- $ --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 172 $ 243
</TABLE>
SEE ACCOMPANYING NOTES.
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND AS OF
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
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, Inc. (d.b.a. Turf Products, Ltd. ("TPL")) and Turf
Specialty, Inc. ("TSI"), 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 wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is in the early stages of
introducing its products into the marketplace and has incurred and sustained
significant losses from operations. The Company's growth and investments for
additional anticipated growth have required more cash than operations have
generated. In response to the need for additional cash, the Company has taken
several steps. In July 1996, the Company obtained approximately $3.7 million by
issuing term debt to investors. The Company is also actively seeking additional
equity financing, including the offering contemplated by this Prospectus, to
finance operations beyond this point. The Company is dependent upon improvements
in the profitability of its operations and the availability of additional
financing; management's plans are to obtain such financing until operations
begin generating cash. However, there can be no assurance that the required
improvements in profitability can be attained or that additional financing will
be available in levels to allow the Company to continue as a going concern.
These issues discussed above raise substantial doubt about the Company's ability
to continue as a going concern.
The accompanying financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
possible inability of the Company to attain profitability, obtain additional
financing or continue as a going concern.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The accompanying financial statements and related notes at September 30, 1996,
for the six months ended June 30, 1995 and the nine months ended September 30,
1995 and 1996 are unaudited but include all adjustments (consisting only of
normal recurring adjustments) which, in the opinion of management, are necessary
for a fair statement of the financial position and the operating results and
cash flows for the interim date and periods presented. Results for the interim
periods are not necessarily indicative of results for the entire year or future
periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, including the allocation
of the purchase price relating to acquired businesses, and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from the estimates.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMER AND SUPPLIER
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.
During 1994 and 1995, the Company sold a substantial portion of its product to
one customer. Sales to this customer were approximately $1,200,000, $507,000,
$349,000 and $369,000, representing 45%, 13%, 18% and 13% of net sales in 1994
and 1995, in the six months ended June 30, 1995, and in the nine months ended
September 30, 1995, respectively. No customer accounted for more than 10% of net
sales during the six months ended June 30, 1996 or the nine months ended
September 30, 1996.
Accounts receivable from this customer were $118,000 and $99,000, representing
26% and 8% of total accounts receivable, at December 31, 1994 and 1995,
respectively.
In 1994, TSI entered into a distributor agreement with a major supplier. At June
30, 1996 and September 30, 1996, amounts due to that supplier included in
accounts payable were $825,000 and $935,000, respectively. This agreement has
been terminated effective December 31, 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 (double declining balance) 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 years for acquired marketing
rights and 15 years for the excess of the purchase price over the fair market
value of the assets acquired. Amortization of intangible assets amounted to
$37,000, $45,000, $16,000, $65,000, $29,000 and $173,000 in 1994, 1995, in the
six months ended June 30, 1995 and 1996, and in the nine months ended September
30, 1995 and 1996, respectively.
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.
REVENUE AND EXPORT SALES
Revenue from product sales is recognized upon shipment of the product. The
Company accepts returned products in the normal course of business, and has
established an allowance for estimated returns. Service revenues are derived
from month to month agreements that provide for the use of certain equipment and
related monthly services and are recognized when the services are performed.
Cost of services includes depreciation on such equipment and the cost of the
related monthly service. The Company's export sales totaled $530,000, $598,000,
$129,000, $179,000, $253,000 and $201,000 in 1994, 1995, in the six months ended
June 30, 1995 and 1996 and in the nine months ended September 30, 1995 and 1996,
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. 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 and the estimated public offering price).
Supplemental earnings per share have been computed as described above and also
give effect to the repayment of approximately $6.5 million of the Company's
outstanding indebtedness and resulting reduction of interest expense, as if a
portion of the proceeds from this initial public offering 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.
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
1995 1996
--------- ---------
Supplemental net loss per share ............. $ (.29) $ (.31)
========= =========
Shares used in computing supplemental
net loss per share (in thousands) ........ 5,654 6,845
========= =========
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, as discussed below, 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.
Pro forma information regarding net loss and net loss per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method prescribed by that Statement.
The fair value for these options was estimated at the date of grant using a
minimum value pricing model with the following weighted-average assumptions for
December 31, 1995 and June 30, 1996, respectively: risk-free interest rates of
7%; no dividend yields expected; and an expected life of the option of 3 years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The effect of
amortization on adjusted pro forma disclosures for the year ended December 31,
1995 and the six months ended June 30, 1996 are not indicative of the effects to
be disclosed in subsequent periods. The Company's adjusted pro forma information
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 JUNE 30, 1996
<S> <C> <C>
Pro forma net loss (IN THOUSANDS) $(1,853) $(1,632)
Pro forma net loss per share $ (.37) $ (.28)
</TABLE>
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 results of operations or financial
condition. Management believes that its current practices and procedures for the
control and disposition of such materials 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. for $500,000 cash, two promissory notes totalling
$1,000,000 (See Note 3) and 647,650 shares of the Company's common stock valued
at $3.00 per share. The $500,000 cash payment was paid subsequent to June 30,
1996 and is included in the account "payments due related to acquired
businesses" in the accompanying balance sheet. The acquisition consideration
will be reduced or increased to the extent that pre-tax profits of TSI for the
year ending December 31, 1996 are less than or exceed $900,000. Reductions in
the purchase price will be effected by the return of the Company's shares at one
share for every $4.44 of pre-tax income less than $900,000, and increases in the
purchase price will be paid in cash at one dollar for each dollar of pre-tax
income in excess of $900,000. The adjustments to the purchase price will be
recorded as adjustments to goodwill, which is being amortized over a period of
15 years.
Effective May 31, 1996, the Company acquired all of the outstanding stock of
Turf Products, Ltd. for $1,310,000 cash and 400,000 shares of the Company's
common stock valued at $3.00 per share. The $1,310,000 cash payment was paid
subsequent to June 30, 1996 and is included in the account "payments due related
to acquired businesses" in the accompanying balance sheet.
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
(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 553 2,764 1,859
Total assets acquired $725 $7,600 $4,477
Liabilities assumed:
Accounts payable $ 35 $3,261 $1,492
Accrued expenses 31 895 35
Notes payable 258 -- 440
Total liabilities assumed 324 4,156 1,967
Net assets acquired $401 $3,444 $2,510
</TABLE>
The following unaudited pro forma results assume the TSI and TPL acquisitions
discussed above occurred on January 1, 1995. The results of operations of Aspen
were not material prior to its acquisition and are not included in the following
unaudited pro forma results. The unaudited pro forma results have been prepared
utilizing the historical financial statements of the Company and the acquired
businesses.
PRO FORMA RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
(UNAUDITED)
<S> <C> <C>
Net sales $17,557 $15,749
Net loss (1,596) (2,776)
Net loss per share $ (.29) $ (.44)
</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, JUNE 30, SEPTEMBER 30,
1995 1996 1996
<S> <C> <C> <C>
Machinery and equipment $2,130 $ 3,007 $ 3,045
Furniture and fixtures 109 293 295
2,239 3,300 3,340
Less accumulated depreciation and
amortization (905) (1,130) (1,280)
$1,334 $ 2,170 $ 2,060
</TABLE>
Intangible assets consist of the following (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996
<S> <C> <C> <C>
Excess of purchase price over fair market
value of assets acquired (NOTE 2) $524 $5,156 $5,317
Marketing rights 310 310 310
Accumulated amortization (83) (148) (260)
$751 $ 5,318 $5,367
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996
<S> <C> <C> <C>
8% 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; collateralized by the
capital stock of Turf Specialty, Inc. $ -- $1,000 $1,000
8% secured subordinated notes to an officer and shareholders, net of unamortized
discount of $60; interest payable quarterly, principal due $706 in
March 1998 and $284 in November 1998 -- 990 990
8% secured subordinated debentures; interest
payable quarterly, principal due November 1998 700 700 700
Revolving line of credit with bank for $500; interest payable monthly at the
bank's prime rate plus 2% (10.25% at June 30, 1996) per annum, expiring April
1997; secured by personal assets of an officer/shareholder and substantially
all assets of the Company -- 500 500
9.5% promissory note; interest payable annually,
principal due December 1996 -- 300 --
8% note payable to a bank; interest payable monthly, principal due July 1996;
secured by personal assets of a shareholder and substantially
all assets of the Company 1,013 263 263
8% unsecured subordinated promissory note to an
officer; interest and principal due upon demand -- 250 350
8% convertible unsecured promissory notes to shareholders; interest and
principal due upon demand; convertible into common stock at the
option of the holders at $1.00 per share -- 150 150
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 June 30, 1996), expiring April 1997; secured by personal assets of an
officer/shareholder and substantially all assets of the Company -- 129 --
10% convertible subordinated promissory notes, net of unamortized discount of
$111; interest and principal due at the earlier of December 31, 1996 or within
30 days after the effective date of an initial public offering (IPO) -- -- 3,584
Non-interest bearing unsecured note payable net of imputed interest of $21; due
in monthly installments of $7 through February 1998 with a
final payment of $9 due March 1998 180 128 112
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 at the option of the
holder -- 120 120
8% unsecured subordinated note to a shareholder;
interest payable monthly, principal due November 1998 -- 100 --
10% unsecured note payable to a shareholder; principal and interest due upon
demand; convertible into common stock at the option of the
holder at $1.00 per share -- 100 --
9.5% promissory notes to a former shareholder of
TPL; interest payable annually, principal due March 1997 -- 100 --
10% convertible unsecured subordinated debentures issued to shareholders;
interest payable monthly, principal due July 1996; convertible into common
stock at the option of the holders at $1.50 per share 132 99 --
10% unsecured subordinated debentures; interest
payable monthly, principal due July 1998 290 90 90
9.5% promissory note; interest payable annually,
principal due March 1997 -- 40 --
Non-interest bearing note payable to purchase
marketing rights; due in monthly installments of
$9 through October 1996 86 32 6
8% unsecured note payable to a shareholder,
converted into common stock in 1996 100 -- --
Other 113 81 13
2,614 5,172 7,878
Less amount due within one year 1,703 3,086 5,884
Long-term debt due after one year $ 911 $2,086 $1,994
</TABLE>
Aggregate maturities of long-term debt are as follows:
Three months ending December 31,
1996 $4,093
Year ending December 31, 1997 1,870
Year ending December 31, 1998 1,911
Year ending December 31, 1999 4
$7,878
Substantially all of the assets of the Company are pledged as collateral as a
result of the debt agreements described above.
In July 1996, several debt transactions occurred. The Company converted $99,000
in 10% unsecured subordinated convertible debentures issued to shareholders in
June 1992 to common stock at $1.50 per share. The Company repaid $100,000 of 10%
unsecured notes to shareholders and $100,000 of 8% unsecured notes to
shareholders. The Company also issued a $100,000 10% subordinated demand note to
an officer of the Company. In addition, $45,000 of the CEFO guaranteed line of
credit was repaid in July 1996. In September 1996, the outstanding balance of
$84,000 in the CEFO line of credit was repaid.
In August 1996, a $30,000, three-year, non-interest-bearing loan was made to
an employee of the Company. Also in August 1996, the Company repaid a $50,000
shareholder advance.
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 therein.
In connection with the acquisition of TSI, the Company acquired a line of credit
with a bank for $900,000 at the bank's prime rate plus 1.5% (9.75% at June 30,
1996 and September 30, 1996) that expires December 31, 1996. The line of credit
is unsecured and is personally guaranteed by two officers of TSI. At the
acquisition date, June 30, 1996 and September 30, 1996, there were no
outstanding borrowings under this line of credit.
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 authorized but 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 450,000 shares of common stock, which was increased
to 900,000 shares in November 1996. Options granted under the Plan have a
five-year term and vest ratably over a three-year period. At June 30, 1996,
options exercisable and available for future grants totaled 245,403 and 75,832,
respectively.
Information with respect to the Company's Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTION PRICE PER
SHARES SHARE
<S> <C> <C>
Outstanding at December 31, 1993 162,500 $2.00
Granted 50,000 $2.50
Exercised (2,500) $1.50
Outstanding at December 31, 1994 210,000 $2.00
Granted 126,668 $3.00
Exercised (2,500) $3.00
Outstanding at December 31, 1995 334,168 $2.25
Granted 35,000 $3.00
Canceled (10,000) $2.00
Outstanding at June 30, 1996 359,168 $2.25
Granted (unaudited) 196,500 $4.00
Outstanding at September 30, 1996
(unaudited) 555,668
</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 on various dates through March 1998. In 1995, 25,000 options
were exercised at $1.50 per share. In 1996, 26,000 options were exercised at
$2.00 per share. As of June 30, 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
$.34 to $2.00 per share. As of June 30, 1996, all of these options were
exercisable and expire on various dates 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. All options and warrants were outstanding and exercisable at December
31, 1995 and expire on various dates through February 1998. In 1996, 22,000
options were exercised at $1.50 per share and related debt of $33,000 was
canceled.
In connection with the 1994 repurchase of exclusive marketing rights for certain
products, the Company issued warrants to purchase 30,000 shares of common stock
at $2.50 per share. All warrants were outstanding and exercisable as of June 30,
1996 and expire in June 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 June
30, 1996, 100,000 of these warrants were exercisable.
In accordance with the Company's purchase of Aspen, the previous owner of Aspen
was granted an option to purchase 50,000 shares of the Company's common stock at
$3.00 per share. The option vests over four years if the previous owner
continues employment with the Company and will expire in December 2001. An
additional 150,000 options to purchase the Company's common stock at $3.00 per
share will be granted in equal amounts over the next four years provided
employment continues and contingent upon the level of the pre-tax contribution
margin of Aspen over the next four years. Compensation expense relating to this
option will be recorded when the shares vest based upon the difference between
the then fair market value and the exercise price.
In connection with a new stock option compensation plan for the board of
directors, 30,000 options were granted in January 1996 at $3.00 per share. As of
June 30, 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 1,036,815 shares of common stock at $3.00 per
share. The warrants are generally exercisable through 2001. All warrants were
outstanding and exercisable at June 30, 1996.
Options have also been issued to various investment banking firms, debenture
holders and shareholders to purchase 1,015,798 shares of common stock. These
warrants are exercisable through February 2001 at prices between $1.50 and $3.00
per share. In 1996, warrants were exercised for the purchase of 10,000 shares of
common stock and options were exercised for the purchase of 10,000 shares of
common stock.
In connection with the bridge financing in July 1996, warrants were issued to
purchase 739,000 shares of the Company's common stock at $3.00 per share or 80%
of the IPO price if an IPO occurs on or before December 31, 1996. The warrants
are exercisable on the earlier of the completion of an IPO or December 31, 1996
and expire five years after the date of issuance.
As of June 30, 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. EMPLOYEE BENEFIT PLANS
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 nine months ended
September 30, 1996. Costs of administering the plan are paid by the Company.
TSI PROFIT SHARING PLAN
TSI has a noncontributory profit sharing plan covering substantially all of its
employees. Annual employer contributions to the plan are set by the Board of
Directors. No contributions have been made for the nine months ended September
30, 1996. This plan will be terminated by May 31, 1998.
7. INCOME TAXES
At December 31, 1995, the Company had federal and California tax net operating
loss carryforwards of approximately $8.3 million and $3.0 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,
1995 are shown below. A valuation allowance of $3,153 has been recognized to
offset the deferred tax assets as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
1995
(IN THOUSANDS)
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,093
Other 60
Total deferred tax assets 3,153
Valuation allowance for deferred tax assets (3,153)
Net deferred tax assets $ --
</TABLE>
8. COMMITMENTS
In 1995, the Company entered into a thirty-year consulting/licensing agreement
for BioJect Product (as defined therein). The license calls for royalties of 13%
on all product which was 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 January 2002. Royalty expense for the year ended December 31, 1995,
the six months ended June 30, 1995 and 1996 and the nine months ended September
30, 1995 and 1996 was $100,000, $50,000, $79,000 $75,000 and $127,000,
respectively.
Annual future minimum lease payments, including equipment under capital leases
as of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
<S> <C> <C>
Six months ending December 31, 1996 $63 $ 198
Year ending December 31, 1997 22 366
Year ending December 31, 1998 -- 337
Year ending December 31, 1999 -- 247
Year ending December 31, 2000 -- 83
Year ending December 31, 2001 -- 74
Total minimum lease payments 85 $1,305
Less amount representing interest (4)
Present value of remaining capital lease payments
(including current portion of $74) $81
</TABLE>
Rental expense for the years ended December 31, 1994, 1995, the six months ended
June 30, 1995 and 1996, and the nine months ended September 30, 1995 and 1996
was approximately $102,000, $107,000, $55,000, $70,000, $96,000 and $185,000,
respectively, including $89,000, $78,000, $42,000, $46,000, $65,000 and $65,000
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. It also offers each officer a non-interest
bearing loan of $250,000 to be issued on or about December 15, 1996. 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 will be recorded ratably over
the period of forgiveness. The agreement contains other provisions including
some intended to prevent the employee from entering into any form of competition
with TSI.
The merger agreement related to the acquisition of TSI provides for contingent
payments to the former owners of TSI if actual income, as defined in the merger
agreement, exceeds targeted net income. If the actual net income is below
targeted net income, the purchase price may be reduced.
9. RELATED PARTY TRANSACTIONS
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.
10. BRIDGE FINANCING
In July 1996, the Company issued approximately $3.7 million of 10% convertible
promissory notes under a private placement memorandum. Repayment of the
promissory notes is due at the earlier of December 31, 1996 or within 30 days
after the effective date of an IPO. If an IPO does not occur prior to December
31, 1996, the Company may extend the due date until June 30, 1997. The
promissory notes are convertible at the option of the holder for a period of 20
days after the effective date of an IPO at a price equal to 80% of the IPO
price. In connection with this financing, warrants were issued to purchase
739,000 shares of common stock at $3.00 per share or 80% of the IPO price if an
IPO occurs on or before December 31, 1996. The warrants are exercisable on the
earlier of the completion of an IPO or December 31, 1996 and expire five years
after the date of issuance. Additionally, the holder will have the right to
convert to common stock up to 100% of the principal amount of the notes, at a
price equal to 80% of the IPO price.
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
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.
TURF SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
<S> <C> <C>
1994 1995
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.
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.
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):
Year ending December 31, 1996 $ 51
Year ending December 31, 1997 5
$ 56
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>
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):
YEARS ENDED
DECEMBER 31,
1994 1995
Federal $6 $196
State 3 44
$9 $240
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.
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
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.
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.
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.
2. RELATED PARTY TRANSACTIONS
The Company pays life insurance premiums on behalf of the stockholder. For the
years ended December 31, 1994 and 1995, the Company paid $37,696 and $37,336 in
life insurance premiums. In the event of the death of the stockholder or
termination of a related collateral assignment agreement, the Company is
entitled to reimbursement of these premiums or ownership of the policies. The
premium receivable recorded in the balance sheet reflects the cash surrender
value of the policies which represents the collateralized portion of the
premiums. Premiums paid since inception of the policies in excess of the cash
surrender values totaled $52,192 at December 31, 1995.
The Company sells Eco Soil Systems, Inc. products to their customers. The
effect on cost of sales, net of commissions, of these transactions for the
years ended December 31, 1994 and 1995 was $0 and $9,500, respectively.
In addition to facilities leased as noted above, the Company occupies a
building owned by a stockholder on which no rent is charged.
3. INCOME TAXES
The components of income tax expense were as follows for the years ended
December 31 (IN THOUSANDS):
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Current income tax expense:
Federal $51 $ 98
State 14 23
Deferred income tax expense (benefit):
Federal 7 (24)
State (1) (3)
Total income tax expense $71 $ 94
</TABLE>
A reconciliation from the U.S. federal statutory income tax rate (34 percent) to
the effective income tax rate (income tax expense divided by income before
income taxes) is as follows for the years ended December 31 (IN THOUSANDS):
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Income tax expense at the statutory rate $47 $66
Effect of:
State income tax expense, net of federal income tax effect 9 12
Non-deductible expenses 15 16
Change in tax rates on deferred taxes 7 1
Change in tax due to graduated tax rates (8) (1)
Other, net 1 --
Income tax expense $71 $94
Effective income tax rate 51% 48%
</TABLE>
For the years ended December 31, 1994 and 1995, income tax expense was affected
by the difference between the statutory tax rate of 34% and the graduated tax
rate based on the Company's level of taxable income.
Deferred income taxes are provided for temporary differences between the
carrying amounts of the Company's assets and liabilities for financial statement
purposes and their tax bases. The sources of the 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):
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
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).
ECO SOIL SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996
The following unaudited pro forma condensed consolidated statements of
operations for the year ended December 31, 1995 and the nine months ended
September 30, 1996 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
TURF PRO FORMA PRO FORMA
ECO SOIL SPECIALTY, TURF ADJUSTMENTS REFLECTING
SYSTEMS, INC. INC. PRODUCTS, LTD. (NOTE 2) ACQUISITIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales $ 3,757 $6,886 $6,914 $ -- $17,557
Operating expenses 5,331 6,263 6,692 307 (a) 18,593
Operating income (loss) (1,574) 623 222 (307) (1,036)
Interest expense, net (262) (9) (28) (261)(b) (560)
Income (loss) before income taxes (1,836) 614 194 (568) (1,596)
Provision for income taxes -- 240 94 (334)(c) --
Net income (loss) $(1,836) $ 374 $ 100 $(234) $(1,596)
Net loss per share $ (0.29)
Shares used in computing net loss
per share 5,516,000
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
HISTORICAL
TURF PRO FORMA PRO FORMA
ECO SOIL SPECIALTY, TURF ADJUSTMENTS REFLECTING
SYSTEMS, INC. INC. PRODUCTS, LTD. (NOTE 2) ACQUISITION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales $ 9,229 $3,837 $2,683 $ -- $15,749
Operating expenses 11,137 3,911 2,698 127 (a) 17,873
Operating loss (1,908) (74) (15) (127) (2,124)
Interest expense, net (523) -- (20) (109)(b) (652)
Loss before income taxes (2,431) (74) (35) (236) (2,776)
Provision for income taxes -- -- 20 (20)(c) --
Net loss $(2,431) $ (74) $ (55) $(216) $(2,776)
Net loss per share $ (0.44)
Shares used in computing net loss
per share 6,359,000
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS.
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
$500,000 in cash. To effect the purchase of TPL, the Company issued 400,000
shares of its common stock and paid $1,013,000 in cash. The stock issued in each
of these transactions was valued at $3.00 per share. Each transaction 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 values 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 2,764 1,859
Total assets acquired $7,600 $4,477
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 $3,444 $2,510
</TABLE>
NOTE 2.
The accompanying unaudited pro forma condensed consolidated statements of
operations for the year ended December 31, 1995 and the nine months ended
September 30, 1996 gives effect to the acquisitions of TSI and TPL as if they
had occurred as of January 1, 1995. For the periods presented, transactions
between these entities were not material.
The pro forma adjustments are summarized as follows:
(a) Increased amortization expense of intangibles for goodwill related to the
acquisitions using the straight line method and a 15 year life.
(b) Increased interest expense on the acquisition 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 this Prospectus.
(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
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 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 forma calculation are as follows:
DECEMBER 31, SEPTEMBER 30,
1995 1996
----- -----
Shares used in historical calculation .............. 5,207 6,050
Effect of treasury stock assumptions on shares
issued in acquisitions (1) ................ 309 309
----- -----
Shares used in pro forma calculation ............... 5,516 6,359
----- -----
(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.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE UNDERWRITERS OR ANY OTHER PERSON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY A SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY,
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
Page
Prospectus Summary 3
Risk Factors 6
Use of Proceeds 14
Capitalization 16
Dilution 17
Dividend Policy 17
Selected Consolidated Financial Data 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 19
Business 25
Management 38
Certain Transactions 44
Principal Shareholders 47
Description of Securities 48
Shares Eligible for Future Sale 50
Underwriting 51
Experts 53
Legal Matters 53
Additional Information 54
Index to Consolidated Financial Statements F-1
UNTIL _________, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS AN UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS TO
SUBSCRIPTIONS.
3,000,000 SHARES
[LOGO] ECO SOIL SYSTEMS
COMMON STOCK
PROSPECTUS
[LOGO]
R J
STEICHEN
& COMPANY
____________, 1997
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 21-2004(15) of the Nebraska Business Corporation Act provides, in
summary, that the directors and officers of the Company may, under certain
circumstances, be indemnified by the Company against all expenses incurred by or
imposed upon them as a result of actions, suits or proceedings brought against
them as such directors and officers, or as directors or officers of any other
organization at the request of the Company, if they act in good faith and in a
manner they reasonably believe to be in or not opposed to the best interests of
the Company, and with respect to any criminal action or proceeding, have no
reasonable cause to believe their conduct was unlawful, except that no
indemnification shall be made against expenses in respect of any claim, issue or
matter as to which they shall have been adjudged to be liable to the Company
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, they are fairly and
reasonably entitled to indemnity for such expenses which such court shall deem
proper. Section 21-2004(15) of the Nebraska Business Corporation Act also
provides that directors and officers of the Company are entitled to such
indemnification by the Company to the extent that such persons are successful on
the merits or otherwise in defending any such action, suit or proceeding.
Pursuant to the terms of the Underwriting Agreement filed as Exhibit 1.1 hereto,
the directors and officers of the Company are indemnified against certain civil
liabilities that they may incur under the Securities Act of 1933, as amended, in
connection with this Registration Statement and the related Prospectus.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses incurred by the Company in
connection with the sale and distribution of the Common Stock being offered
hereby, other than the underwriting discount. All amounts shown are estimates
except the Securities and Exchange Commission registration fee, the NASD filing
fee, and the Nasdaq application fee.
SEC registration fee $ 4,705
NASD filing fee 2,053
Nasdaq application fee 10,000
Printing expenses 40,000
Fees and expenses of Company counsel 150,000
Fees and expenses of Company accountants 160,000
Underwriters' expense allowance 255,000
Fees and expenses of Underwriters'
counsel 40,000
Transfer agent and registrar fees 2,500
Blue Sky fees and expenses 40,000
Miscellaneous 6,742
Total $711,000
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since September 30, 1993, the Company has issued and sold the following
securities, which were not registered under the Securities Act of 1933, as
amended (the "Securities Act"):
1. From October 11, 1993 to December 22, 1993, the Company issued and sold
404,000 shares of Common Stock at $2.50 per share to various accredited
investors for a total consideration of $1,010,000. The Company paid $101,000
to the Representative of the Underwriters, R.J. Steichen & Company (
"Steichen"), in connection with this offering.
2. From May 17, 1994 to July 26, 1994, the Company issued and sold 583,500
shares of Common Stock at $2.50 per share to various accredited investors in
a private placement for a total consideration of $1,458,750. The Company paid
$145,875 to Steichen in connection with this offering.
3. During the period from December 1994 to February 1995, Mr. Adams converted
$1,200,000 of subordinated notes and shareholder advances into 400,000 shares
of Common Stock.
4. In March 1995, Mr. Adams, Mr. Gloff and Heartland Capital, in conjunction
with a credit facility the Company obtained from Imperial Bank, used
collateral they had pledged against the Company's bank loan at Peninsula
Bank to repay the outstanding indebtedness under this credit line, and in
turn the Company issued $750,000 of unsecured subordinated debentures to
Mr. Adams, Mr. Gloff and Heartland Capital. These debentures have a
two-year term, include a warrant to purchase up to 250,000 shares of
Common Stock at $3.00 per share and bear interest at the rate of 8%
annually.
5. In March and April 1995, the Company secured $400,000 of bridge loan
financing from certain shareholders. Investors in the bridge loan financing
also received warrants to purchase an aggregate of 60,000 shares of Common
Stock, exercisable at $3.00 per share.
6. In July 1995 and in connection with the entering into of a
consulting/licensing agreement, the Company granted to Encore Technologies,
Inc. a fully exercisable warrant to purchase 50,000 shares of Common Stock at
$3.00 per share, which expires in January 2002.
7. During the period from August 1995 to December 1995, the Company sold 720,666
shares of Common Stock at $3.00 per share to various accredited investors for
a total consideration of $2,161,998. The Company paid $216,199 to Steichen in
connection with this offering.
8. On November 15, 1995, Mr. Gloff and Heartland Capital each purchased $200,000
of collateralized subordinated debentures from the Company. The debentures
are secured by the assets of the Company but are subordinated to any senior
indebtedness of the Company. The debentures bear interest at an 8% annual
rate, payable on a quarterly basis, and the entire principal balance is due
on November 15, 1998. On May 15, 1996, Mr. Gloff converted the entire
principal balance of his $200,000 of subordinated debentures into 100,000
shares of Common Stock.
9. On March 1, 1996, Rugged Rigger, Inc. loaned the Company $100,000. The loan
had an annual interest rate of 8%, payable monthly, and the entire principal
balance was due on March 1, 1997. In connection with this subordinated
unsecured note, warrants were issued to Mr. Potter to purchase 15,000 shares
of Common Stock at an exercise price of $3.00 per share. These warrants
expire in March 1, 2001. The loan was prepaid in full with the proceeds from
the sale of the Bridge Notes and the Bridge Warrants.
10. On March 15, 1996, Mr. Adams converted $300,000 of collateral that was
pledged to secure the Company's bank loan at Peninsula Bank into cash and
used the cash to reduce the Company's $1,013,000 principal loan at Peninsula
Bank by this amount. The Company in turn issued Mr. Adams a total of
$300,000 of unsecured debentures, which bear interest at an 8% annual rate,
payable on a quarterly basis, and the entire principal amount is due on
March 15, 1998. In connection with the debentures, Mr. Adams was granted
options to purchase up to 100,000 shares of Common Stock at an exercise
price of $3.00 per share for a period of five years.
11. On March 15, 1996, Mr. Gloff and Heartland Capital converted $250,000 and
$200,000, respectively, of collateral that was pledged to secure the
Company's bank loan at Peninsula Bank into cash and used the cash to reduce
the Company's $1,013,000 principal loan at Peninsula Bank by this amount.
The Company in turn issued a $250,000 unsecured debenture to Mr. Gloff and a
$200,000 unsecured debenture to Heartland Capital, each bearing interest at
an 10% annual rate, payable on a quarterly basis, and the principal amount
of each note is due on March 15, 1998. In connection with the debentures,
warrants were issued to Mr. Gloff and Heartland Capital to purchase up to
83,333 shares and 66,667 shares, respectively, of Common Stock at an
exercise price of $3.00 per share. These warrants expire upon the earlier of
seven years from the date of issuance or one year after the closing date of
this initial public offering.
12. On March 26, 1996, the Company entered into a $1,000,000 line of credit
agreement with Imperial Bank, $500,000 of which is a revolving line of
credit that expires on April 1, 1997 and $500,000 of which is a revolving
credit line extended to finance exports based on a guarantee extended the
Company by the California Export Finance Organization ("CEFO"). The entire
line of credit has been personally guaranteed by Mr. Adams. The term loan
portion of the line of credit bears interest at a rate of prime plus 2%. The
CEFO portion of the credit line bears interest at prime plus 1.5%. CEFO's
obligations are in turn guaranteed by Mr. Adams. In connection with the
revolving line of credit, warrants were issued to Imperial Bank to purchase
20,833 shares of Common Stock at an exercise price of $3.00 per share. These
warrants expire in March 2001.
13. Between March and July 1996, the Company loaned $72,000 to Rugged Rigger,
Inc. to enable it to exercise options to purchase Common Stock. The loan
bears interest at an annual rate of 5%, compounded annually, and is
payable at the earlier of two years or the sale of the underlying Common
Stock.
14. On April 1, 1996, Mr. S. Bartley Osborn loaned the Company $100,000. The
loan had an annual interest rate of 8%, payable monthly, and the entire
principal balance was due on July 1, 1996. In connection with this note,
warrants were issued to Mr. Osborn to purchase 15,000 shares of Common
Stock at an exercise price of $3.00 per share. These warrants expire in
April 2001. The loan was prepaid in full with the proceeds from the sale of
the Bridge Notes and the Bridge Warrants.
15. On May 24, 1996, the Company issued three $50,000 promissory notes for the
purpose of providing short-term financing until the proceeds of this initial
public offering can be received, one from each of Mr. Adams, Mr. Gloff and
Heartland Capital. Each note is payable upon demand and bears interest at an
annual rate of 8%. In connection with these promissory notes, warrants were
issued to each of Messrs. Adams and Gloff and Heartland Capital to purchase
7,500 shares of Common Stock at an exercise price of $3.00 per share. These
warrants expire in May 2001.
16. In July 1996, the Company secured $3,695,000 in bridge loan financing
through a private placement to accredited investors of the Bridge Notes and
the Bridge Warrants. The Bridge Notes and Bridge Warrants were offered in
Units, each Unit consisting of $50,000 principal amount of Bridge Notes with
Bridge Warrants to purchase 10,000 shares of Common Stock. The Company
issued 739,000 Bridge Warrants in connection with the bridge loan financing.
The Bridge Notes bear interest at 10% per annum and will be repayable, with
interest, at the earlier of December 31, 1996, or 30 days after completion
of this offering. The Bridge Warrants may be exercised to purchase Common
Stock at the earlier of the completion of this offering or December 31,
1996, at 80% of the Price to Public obtained by the Company if this offering
is effective on or before December 31, 1996, or at $3.00 per share if such
an offering is not effective on or before December 31, 1996. The Company
paid $225,700 to Steichen in connection with the bridge loan financing.
The sales of securities above were made in reliance upon Section 4(2) and
Regulation D of the Securities Act, which provide exemption for transactions not
involving a public offering. The purchasers of securities described above
represented that they acquired them for their own account and not with a view to
any distribution thereof to the public. The Company made inquiries of purchasers
of securities in these transactions and obtained representations from such
purchasers to establish that such issuances qualified for an exemption from the
registration requirements. The certificates evidencing the securities bear
legend stating that the shares are not to be offered, sold or transferred other
than pursuant to an effective registration statement under the Securities Act,
or an exemption from such registration requirements.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
** 1.1 Form of Underwriting Agreement
** 1.2 Form of Representative's Warrant
** 1.3 Selected Dealers' Agreement
** 1.4 Agreement Among Underwriters
** 3.1 Articles of Incorporation
* 3.2 Bylaws, as amended
* 4.1 Specimen Form of the Common Stock Certificate
** 5.1 Opinion of Dorsey & Whitney LLP
** 10.1 1992 Stock Option Plan
** 10.2 1996 Directors' Stock Option Plan
* 10.3 Agreement and Plan of Merger, dated as of May 31, 1996, as
amended on October 28, 1996, by and among the Company, a
wholly owned subsidiary of the Company and Turf Specialty,
Inc.
* 10.4 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 Employment Agreement, dated May 21, 1991, between the Company and William B.
Adams, as amended to date
** 10.6 Employment Agreement, dated May 21, 1991, between the Company and Jeffrey A.
Johnson, as amended to date
** 10.7 Employment Agreement, dated May 21, 1991, between the Company and Douglas M.
Gloff, as amended to date
** 10.8 Employment Agreement, dated October 1, 1995, between Aspen Consulting, Inc.
and Michael R. Scott
* 10.9 Employment Agreement, dated June 1, 1996, between the Company and
L. Jean Dunn, Jr.
** 10.10 Employment Agreement, dated July 8, 1996, between the Company and
Kevin P. Lyons
** 10.11 Employment Agreement, dated July 8, 1996, between the Company and
David W. Schermerhorn
* 10.12 Employment Agreement, dated July 10, 1996, between the Company and Wally
Fuchs
* 10.13 Employment Agreement, dated September 1, 1996, between the Company and Dr.
Thomas C. Quick
* 10.14 Distribution Agreement, dated August 2, 1996, between the Company and Abbott
Laboratories, Chemical and Agricultural Products Division
* 10.15 Supply Agreement, dated October 7, 1996, between the Company and CCT
Corporation
* 10.16 Exclusive Consulting Agreement, dated January 1, 1995, between the Company
and Encore Technologies, Inc.
* 10.17 License Agreement, dated April 20, 1992, between the Company and Westbridge
Agricultural Products
* 10.18 Product Supply Agreement, dated November 2, 1993, between the Company and
V.I.T. Products, Inc.
* 10.19 Marketing Agreement, dated July 26, 1995, between the Company and
Wilbur-Ellis Company/Western Division
** 10.20 Credit Agreement, dated March 6, 1996, between the Company and Imperial Bank
of San Diego
10.21 Lease Agreement, dated September 1, 1996 between the Company and Arthur P. Arns
* 11.1 Statement Regarding Computation of Per Share Earnings (Losses)
** 23.1 Consent of Dorsey & Whitney LLP (included in Exhibit 5)
** 23.2 Consent of Ernst & Young LLP, Independent Auditors
** 23.3 Consent of Bigelow & Company Certified Public Accountants, P.C.
** 23.4 Consent of Ernst & Young LLP, Independent Auditors
** 23.5 Consent of Bigelow & Company Certified Public Accountants, P.C.
* 23.6 Consent of Brown, Martion, Haller & McClain LLP
* 24 Powers of Attorney (set forth on the Signature Page hereof)
* 27 Financial Data Schedule
</TABLE>
- --------------
* Previously filed.
** Filed herewith.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) To provide to the Underwriter at the closing specified in the Underwriting
Agreement certificates in such denominations and registered in such names as
required by the Underwriter to permit prompt delivery to each purchaser.
(b) That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) That (1) for determining any liability under the Securities Act, the
Registrant will treat the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant under Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this Registration Statement as of the
time the Commission declared it effective, and (2) for determining any liability
under the Securities Act, the Registrant will treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the securities offered in such registration statement, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering
thereof.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California, on January 10, 1997.
ECO SOIL SYSTEMS, INC.
By /s/ WILLIAM B. ADAMS
William B. Adams
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
indicated on January 10, 1997.
SIGNATURE TITLE
/S/ WILLIAM B. ADAMS Chairman of the Board and Chief Executive Officer
William B. Adams (principal executive officer)
/S/ L. JEAN DUNN, JR. Chief Financial Officer (principal financial and
L. Jean Dunn, Jr. accounting officer)
* President, Chief Operating Officer, Secretary and
Jeffrey A. Johnson Director
* Executive Vice President and Director
Douglas M. Gloff
* Director
Bradley K. Edwards
* Director
S. Bartley Osborn
* Director
William S. Potter
BY: /S/ L. JEAN DUNN, JR.
L. Jean Dunn, Jr.
As Attorney-in-fact
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
<S> <C> <C>
** 1.1 Form of Underwriting Agreement
** 1.2 Form of Representative's Warrant
** 1.3 Selected Dealers' Agreement
** 1.4 Agreement Among Underwriters
** 3.1 Articles of Incorporation
* 3.2 Bylaws, as amended
* 4.1 Specimen Form of the Common Stock Certificate
** 5.1 Opinion of Dorsey & Whitney LLP
** 10.1 1992 Stock Option Plan
** 10.2 1996 Directors' Stock Option Plan
* 10.3 Agreement and Plan of Merger, dated as of May 31, 1996, as
amended on October 28, 1996, by and among the Company, a
wholly owned subsidiary of the Company and Turf Specialty,
Inc.
* 10.4 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 Employment Agreement, dated May 21, 1991, between the Company and William B.
Adams, as amended to date
** 10.6 Employment Agreement, dated May 21, 1991, between the Company and Jeffrey A.
Johnson, as amended to date
** 10.7 Employment Agreement, dated May 21, 1991, between the Company and Douglas M.
Gloff, as amended to date
** 10.8 Employment Agreement, dated October 1, 1995, between Aspen Consulting, Inc.
and Michael R. Scott
* 10.9 Employment Agreement, dated June 1, 1996, between the Company and
L. Jean Dunn, Jr.
** 10.10 Employment Agreement, dated July 8, 1996, between the Company and
Kevin P. Lyons
** 10.11 Employment Agreement, dated July 8, 1996, between the Company and
David W. Schermerhorn
* 10.12 Employment Agreement, dated July 10, 1996, between the Company and Wally
Fuchs
* 10.13 Employment Agreement, dated September 1, 1996, between the Company and Dr.
Thomas C. Quick
* 10.14 Distribution Agreement, dated August 2, 1996, between the Company and Abbott
Laboratories, Chemical and Agricultural Products Division
* 10.15 Supply Agreement, dated October 7, 1996, between the Company and CCT
Corporation
* 10.16 Exclusive Consulting Agreement, dated January 1, 1995, between the Company
and Encore Technologies, Inc.
* 10.17 License Agreement, dated April 20, 1992, between the Company and Westbridge
Agricultural Products
* 10.18 Product Supply Agreement, dated November 2, 1993, between the Company and
V.I.T. Products, Inc.
* 10.19 Marketing Agreement, dated July 26, 1995, between the Company and
Wilbur-Ellis Company/Western Division
** 10.20 Credit Agreement, dated March 6, 1996, between the Company and Imperial Bank
of San Diego
10.21 Lease Agreement, dated September 1, 1996 between the Company and Arthur P. Arns
* 11.1 Statement Regarding Computation of Per Share Earnings (Losses)
** 23.1 Consent of Dorsey & Whitney LLP (included in Exhibit 5)
** 23.2 Consent of Ernst & Young LLP, Independent Auditors
** 23.3 Consent of Bigelow & Company Certified Public Accountants, P.C.
** 23.4 Consent of Ernst & Young LLP, Independent Auditors
** 23.5 Consent of Bigelow & Company Certified Public Accountants, P.C.
* 23.6 Consent of Brown, Martion, Haller & McClain LLP
* 24 Powers of Attorney (set forth on the Signature Page hereof)
* 27 Financial Data Schedule
</TABLE>
- --------------
* Previously filed.
** Filed herewith.
ECO SOIL SYSTEMS, INC.
3,000,000 SHARES OF COMMON STOCK(1)
UNDERWRITING AGREEMENT
____________, 1997
R. J. Steichen & Company
Midwest Plaza
Suite 1100
801 Nicollet Mall
Minneapolis, MN 55402
Ladies/Gentlemen:
Eco Soil Systems, Inc., a Nebraska corporation (the "Company"),
addressing you as the representative (the "Representative") of each of the
underwriters, including the Representative, named in Schedule I hereto (the
"Underwriters"), hereby confirms its agreement to sell to the Underwriters an
aggregate of 3,000,000 authorized and unissued shares (the "Firm Shares") of
common stock, $0.005 par value ("Common Stock"), of the Company. The Company
also hereby confirms its agreement to grant to the Underwriters an option to
purchase up to 450,000 additional authorized and unissued shares of Common Stock
(the "Option Shares") on the terms and for the purposes set forth in Section
2(b) hereof. As used in this Agreement, the term "Shares" shall consist of the
Firm Shares and the Option Shares. The Company also hereby confirms its
agreement to issue to the Representative warrants for the purchase of a total of
300,000 shares of Common Stock as described in Section 6 hereof (the
"Representative's Warrants"), assuming purchase by the Underwriters of the Firm
Shares. The shares issuable upon exercise of the Representative's Warrants are
referred to in this Agreement as the "Warrant Shares."
1. Representations, Warranties and Agreements of the Company.
(a) The Company represents and warrants to and agrees with each of the
Underwriters as follows:
(i) A registration statement on Form SB-2 (File No. 333-15883)
with respect to the Shares, including a prospectus subject to
completion, has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as
amended (the "Securities Act"), and the rules and regulations
(the "Rules and
- --------
(1) Plus an option to purchase up to 450,000 additional shares to cover
over-allotments.
Regulations") of the Securities and Exchange Commission (the
"SEC") thereunder and has been filed with the SEC under the
Securities Act; one or more amendments to such registration
statement have also been so prepared and have been, or will
be, so filed. Copies of the registration statement and
amendments and each related preliminary prospectus to date
have been delivered by the Company to the Underwriters, and,
to the extent applicable, were identical to the electronically
transmitted copies thereof filed with the SEC pursuant to the
SEC's Electronic Data Gathering Analysis and Retrieval System
("EDGAR"), except to the extent permitted by Regulation S-T
under the Securities Act. If the Company has elected not to
rely upon Rule 430A of the Rules and Regulations, the Company
has prepared and will promptly file an amendment to the
registration statement and an amended prospectus. If the
Company has elected to rely upon Rule 430A of the Rules and
Regulations, it will prepare and file a prospectus pursuant to
Rule 424(b) that discloses the information previously omitted
from the prospectus in reliance upon Rule 430A. Such
registration statement as amended at the time it is or was
declared effective by the SEC and, in the event of any
amendment thereto after the effective date and prior to the
First Closing Date (as hereinafter defined), such registration
statement as so amended (but only from and after the
effectiveness of such amendment), including the information
deemed to be part of the registration statement at the time of
effectiveness pursuant to Rule 430A(b), if applicable, is
hereinafter called the "Registration Statement." The
prospectus included in the Registration Statement at the time
it is or was declared effective by the SEC is hereinafter
called the "Prospectus," except that if any prospectus filed
by the Company with the SEC pursuant to Rule 424(b) of the
Rules and Regulations or any other prospectus provided to the
Underwriters by the Company for use in connection with the
offering of the Shares (whether or not required to be filed by
the Company with the SEC pursuant to Rule 424(b) of the Rules
and Regulations) differs from the prospectus on file at the
time the Registration Statement is or was declared effective
by the SEC, the term "Prospectus" shall refer to such
differing prospectus from and after the time such prospectus
is filed with the SEC or transmitted to the SEC for filing
pursuant to such Rule 424(b) or from and after the time it is
first provided to the Underwriters by the Company for such
use. The term "Preliminary Prospectus" as used herein means
any preliminary prospectus included in the Registration
Statement prior to the time it becomes or became effective
under the Securities Act and any prospectus subject to
completion as described in Rule 430A of the Rules and
Regulations. For purposes of this Agreement, all references to
the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement to any of the
foregoing, shall be deemed to include the respective copies
thereof filed with the SEC pursuant to EDGAR.
(ii) At the time the Registration Statement is or was declared
effective by the SEC and at all times subsequent thereto up to
the "First Closing Date" and the "Second Closing Date" (as
such terms are hereinafter defined), the Registration
Statement and Prospectus, and all amendments thereof and
supplements thereto, will comply or complied with the
provisions and requirements of the Securities Act and the
Rules and Regulations. Neither the SEC nor any state
securities authority has issued any order preventing or
suspending the use of any Preliminary Prospectus or requiring
the recirculation of a Preliminary Prospectus, or issued a
stop order with respect to the offering of the Shares (if the
Registration Statement has been declared effective), or
instituted or, to the Company's knowledge, threatened the
institution of, proceedings for any of such purposes. When the
Registration Statement shall become effective and when any
post-effective amendment thereto shall become effective, the
Registration Statement (as amended, if the Company shall have
filed with the SEC any post-effective amendments thereto) will
not or did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. When
the Registration Statement is or was declared effective by the
SEC and at all times subsequent thereto up to the First
Closing Date and the Second Closing Date, the Prospectus (as
amended or supplemented, if the Company shall have filed with
the SEC any amendment thereof or supplement thereto) will not
or did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
When any Preliminary Prospectus was first filed with the SEC
and when any amendment thereof or supplement thereto was first
filed with the SEC, such Preliminary Prospectus and any
amendment thereof and supplement thereto complied in all
material respects with the applicable provisions of the
Securities Act and the Rules and Regulations and did not
contain an untrue statement of a material fact and did not
omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not
misleading. None of the representations and warranties in this
Subsection 1(a) shall apply to statements in, or omissions
from, the Registration Statement or the Prospectus, or any
amendment thereof or supplement thereto, which are based upon
and conform to written information relating to any Underwriter
furnished to the Company by such Underwriter specifically for
use in the preparation of the Registration Statement or the
Prospectus, or any such amendment or supplement.
(iii) The Company has no subsidiaries other than Turf
Products, Ltd., Aspen Consulting, Inc. and Turf Specialty,
Inc. (each one a "Subsidiary" and collectively the
"Subsidiaries") and is not affiliated with any other company
or business entity, except as disclosed in the Prospectus. The
Company and each Subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, with full power
and authority (corporate and other) to own, lease and operate
its properties and conduct its business as described in the
Registration Statement and Prospectus; the Company owns all of
the outstanding capital stock of each of the Subsidiaries free
and clear of any pledge, lien, security interest, incumbrance,
claim or equitable interest; the Company and each Subsidiary
is duly qualified to do business as a foreign corporation and
is in good standing in each jurisdiction in which the
ownership or lease of its properties or the conduct of its
business requires such qualification and in which the failure
to be qualified or in good standing would have a material
adverse effect on the condition (financial or otherwise),
earnings, operations or business of the Company; and no
proceeding has been instituted in any such jurisdiction
revoking, limiting or curtailing, or seeking to revoke, limit
or curtail, such power and authority or qualification.
(iv) The Company and each Subsidiary has and is operating in
material compliance with all authorizations, licenses,
certificates, consents, permits, approvals and orders of and
from all state, federal and other governmental regulatory
officials and bodies necessary to own its properties and to
conduct its business as described in the Registration
Statement and Prospectus, all of which are, to the Company's
knowledge, valid and in full force and effect; the Company and
each Subsidiary is conducting its business in substantial
compliance with all applicable laws, rules and regulations of
the jurisdictions in which it is conducting business; and
neither the Company nor any Subsidiary is in material
violation of any applicable law, order, rule, regulation,
writ, injunction, judgment or decree of any court, government
or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any Subsidiary or over their
respective properties, except as would not materially and
adversely affect the condition (financial or otherwise),
earnings, operations, business or business prospects of the
Company. Except as set forth in the Registration Statement and
Prospectus, (A) the Company is in material compliance with all
material rules, laws and regulations relating to the use,
treatment, storage and disposal of toxic substances and
protection of health or the environment (the "Environmental
Laws") which are applicable to its business, (B) the Company
has received no notice from any governmental authority or
third party of an asserted claim under Environmental Laws,
which claim is required to be disclosed in the Registration
Statement and the Prospectus, (C) the Company will not be
required to make any future material capital expenditures to
comply with Environmental Laws, and (D) no property which is
owned, leased or occupied by the Company has been designated
as a Superfund site pursuant to the Comprehensive Response,
Compensation and Liability Act of 1980, as amended (42 U.S.C.
ss. 9601, et seq.), or otherwise designated as a contaminated
site under applicable state or local law.
(v) Neither the Company nor any Subsidiary is in violation of
its respective articles of incorporation or bylaws or in
default in the performance or observance of any obligation,
agreement, covenant or condition contained in any bond,
debenture, note or other evidence of indebtedness or in any
contract, lease, indenture, mortgage, loan agreement, joint
venture or other agreement or instrument to which it is a
party or by which it or its respective properties are bound,
which default is material to the business of the Company and
its Subsidiaries.
(vi) The Company has full requisite power and authority to
enter into this Agreement and perform the transactions
contemplated hereby. This Agreement has been duly authorized,
executed and delivered by the Company and is a valid and
binding agreement on the part of the Company, enforceable
against the Company in accordance with its terms, except as
enforceability may be limited by the application of
bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the rights of creditors generally and
by judicial limitations on the right of specific performance,
and except as the enforceability of the indemnification or
contribution provisions hereof may be affected by applicable
federal or state securities laws. The performance of this
Agreement and the consummation of the transactions herein
contemplated will not result in a material breach or violation
of any of the terms and provisions of, or constitute a
material default under, (A) any indenture, mortgage, deed of
trust, loan agreement, bond, debenture, note, agreement or
other evidence of indebtedness, any lease, contract,
indenture, mortgage, loan agreement, joint venture or other
agreement or instrument to which the Company or any Subsidiary
is a party or by which the Company or any Subsidiary or their
respective properties may be bound, (B) the respective
articles of incorporation or bylaws of the Company or any
Subsidiary, or (C) any material applicable law, order, rule,
regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any
Subsidiary or over their respective properties. No consent,
approval, authorization or order of or qualification with any
court, governmental agency or body, domestic or foreign,
having jurisdiction over the Company or any Subsidiary or over
their respective properties is required for the execution and
delivery of this Agreement and the consummation by the Company
of the transactions herein contemplated, except such as may be
required under the Securities Act, the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), or under state or
other securities or Blue Sky laws, all of which requirements
have been satisfied.
(vii) Except as is otherwise expressly described in the
Registration Statement or Prospectus, there is not any pending
or, to the best of the Company's knowledge, threatened, any
action, suit, claim or proceeding against the Company, any
Subsidiary, or any of their respective officers or any of
their respective properties, assets or rights before any
court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any
Subsidiary or over their respective officers or properties or
otherwise which (i) might result in any material adverse
change in the condition (financial or otherwise), earnings,
operations or business of the Company or a Subsidiary or might
materially and adversely affect their properties, assets or
rights, or (ii) might prevent consummation of the transactions
contemplated hereby.
(viii) The Company has, and at the First Closing Date and
Second Closing Date (collectively, the "Closing Dates") will
have, the duly authorized and outstanding capitalization set
forth in the Prospectus. All outstanding shares of capital
stock of the Company are duly authorized and validly issued,
fully paid and non-assessable, have been issued in compliance
with all federal and state securities laws, were not issued in
violation of or subject to any preemptive rights or other
rights to subscribe for or purchase securities, and the
authorized and outstanding capital stock of the Company
conforms in all material respects with the statements relating
thereto contained in the Registration Statement and the
Prospectus; the Shares to be sold hereunder by the Company
have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and
delivered by the Company against payment therefor in
accordance with the terms of this Agreement, will be duly and
validly issued and fully paid and nonassessable and will be
sold free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest; and no preemptive
right, co-sale right, registration right, right of first
refusal or other similar right of shareholders exists with
respect to any of the Shares to be sold hereunder by the
Company or the issuance and sale thereof, or the issuance and
sale or exercise of the Representative's Warrants, other than
those that have been expressly waived prior to the date
hereof. Except as disclosed in the Prospectus, the Company has
no outstanding options to purchase, or any preemptive rights
or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts
or commitments to issue or sell, shares of its capital stock
or any such options, rights, convertible securities or
obligations.
(ix) The Representative's Warrants and the Warrant Shares have
been duly authorized. The Representative's Warrants, when
issued and delivered to the Representative, will constitute
valid and binding obligations of the Company in accordance
with their terms, except as enforceability may be limited by
the application of bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the rights of
creditors generally and by judicial limitations on the right
of specific performance. The Warrant Shares, when issued in
accordance with the terms of this Agreement and pursuant to
the Representative's Warrants, will be fully paid and
non-assessable and subject to no preemptive rights or similar
rights on the part of any person or entity. A sufficient
number of shares of Common Stock of the Company has been
reserved for issuance by the Company upon exercise of the
Representative's Warrants.
(x) Ernst & Young LLP, which has expressed its opinion with
respect to the financial statements filed as part of the
Registration Statement and included in the Registration
Statement and Prospectus, are independent accountants within
the meaning of the Securities Act and the Rules and
Regulations. The financial statements of the Company set forth
in the Registration Statement and Prospectus comply in all
material respects with the requirements of the Securities Act
and fairly present the financial position and the results of
operations of the Company and the Subsidiaries at the
respective dates and for the respective periods to which they
apply in accordance with generally accepted accounting
principles consistently applied throughout the periods
involved (subject, in the case of unaudited financial
statements, to normal year-end adjustments which in the
opinion of management of the Company are not material, and
except as otherwise stated therein); and the supporting
schedules included in the Registration Statement present
fairly the information required to be stated therein. The
selected and summary financial and statistical data included
in the Registration Statement present fairly the information
shown therein and have been compiled on a basis consistent
with the audited financial statements presented therein. No
other financial statements or schedules are required by the
Securities Act or the Rules and Regulations to be included in
the Registration Statement.
(xi) Subsequent to the respective dates as of which
information is given in the Registration Statement and
Prospectus, and at each Closing Date, except as is otherwise
disclosed in the Registration Statement or Prospectus, there
has not been: (A) any change in the capital stock or long-term
debt (including any capitalized lease obligation) or material
increase in the short-term debt of the Company or a
Subsidiary; (B) any issuance of options, warrants, convertible
securities or other rights to purchase the capital stock of
the Company; (C) any material adverse change, or any
development involving a material adverse change, in or
affecting the condition (financial or otherwise), earnings,
operations, business, or business prospects, management,
financial position, shareholders' equity, results of
operations or general condition of the Company; (D) any
material transaction entered into by the Company or a
Subsidiary; (E) any material obligation, direct or contingent,
incurred by the Company or a Subsidiary, except obligations
incurred in the ordinary course of business that, in the
aggregate, are not material; (F) any dividend or distribution
of any kind declared, paid or made on the capital stock of the
Company or a Subsidiary; or (G) any loss or damage (whether or
not insured) to the property of the Company or a Subsidiary
which has been sustained which has a material adverse effect
on the condition (financial or otherwise), earnings,
operations or business of the Company or a Subsidiary.
(xii) Except as is otherwise expressly disclosed in the
Registration Statement or Prospectus, (A) the Company and each
Subsidiary has good and marketable title to all of the
property, real and personal, and assets described in the
Registration Statement or Prospectus as being owned by it,
free and clear of any and all pledges, liens, security
interests, encumbrances, equities, charges or claims, other
than such as would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations or
business of the Company, (B) the agreements to which the
Company is a party described in the Registration Statement and
Prospectus are valid agreements, enforceable by the Company
and the Subsidiary (as applicable), except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to
or affecting creditors' rights generally or by judicial
limitations on the right of specific performance, and (C) each
of the Company and the Subsidiaries has valid and enforceable
leases for all properties described in the Registration
Statement and Prospectus as leased by it, except as is
otherwise disclosed in the Registration Statement and
Prospectus and except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting
creditors' rights generally or by judicial limitations on the
right of specific performance. Except as set forth in the
Registration Statement and Prospectus, the Company owns or
leases all such properties as are necessary to its operations
as now conducted.
(xiii) The Company and each Subsidiary has timely filed (or
has timely requested an extension of time to file) all
necessary federal and state income and franchise tax returns
and has paid all taxes shown thereon as due, other than any
which the Company is contesting in good faith; there is no tax
deficiency that has been or, to the best of the Company's
knowledge, could be asserted against the Company or a
Subsidiary that might have a material adverse effect on the
condition (financial or otherwise), earnings, operations,
business or properties of the Company or a Subsidiary; and all
tax liabilities are adequately provided for in the books of
the Company and each Subsidiary.
(xiv) No labor disturbance by the employees of the Company or
a Subsidiary exists or, to the best of the Company's
knowledge, is imminent. Except as disclosed in the
Registration Statement and the Prospectus, no collective
bargaining agreement exists with any of the employees of the
Company or any Subsidiary and, to the best of the Company's
knowledge, no such agreement is imminent.
(xv) The Company and each Subsidiary owns, or possesses
adequate rights to use, all patents, patent applications,
patent rights, inventions, trademarks, trade secrets,
know-how, technology, trademarks, service marks, trade names,
trademark registrations, service mark registrations,
copyrights, licenses and proprietary rights or information
(collectively, the "Proprietary Rights") which are necessary
for the conduct of its present or intended business as
described in the Registration Statement or Prospectus; the
expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not
have a material adverse effect on the condition (financial or
otherwise), earnings, operations or business of the Company or
any Subsidiary; and the Company has not received any notice
of, and has no knowledge of, any infringement of or conflict
with the asserted rights of others with respect to any
Proprietary Rights which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, might
have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business
prospects of the Company or any Subsidiary. Except as
disclosed in the Registration Statement or Prospectus, the
Company is not obligated or under any liability whatsoever to
make any payments by way of royalties, fees or otherwise to
any owner of, licensor of, or other claimant to, any
Proprietary Rights or other intangible assets, with respect to
the use thereof or in connection with the conduct of its
business or otherwise.
(xvi) The Shares have been approved for quotation on The
Nasdaq SmallCap Market.
(xvii) The Company has no defined benefit pension plan or
other pension benefit plan which is intended to comply with
the provisions of the Employee Retirement Income Security Act
of 1974 as amended from time to time, except as disclosed in
the Registration Statement.
(xviii) The Company has not taken and will not take, directly
or indirectly, any action (and does not know of any action by
its directors, officers, shareholders or others) which has
constituted or is designed to, or which might reasonably be
expected to, cause or result in stabilization or manipulation,
as defined in the Exchange Act or otherwise, of the price of
any security of the Company to facilitate the sale or resale
of the Shares. The Company has not distributed and will not
distribute prior to the later of (A) the First Closing Date or
the Second Closing Date, as the case may be, and (B)
completion of the distribution of the Shares, any offering
material in connection with the offering and sale of the
Shares other than any Preliminary Prospectus, the Prospectus,
the Registration Statement and other materials, if any,
permitted by the Securities Act. Except as is otherwise
disclosed in the Registration Statement or Prospectus, and to
the best of the Company's knowledge, no person is entitled,
directly or indirectly, to compensation from the Company or
the Underwriters for services as a "finder" or otherwise in
connection with the transactions contemplated by this
Agreement.
(xix) The Company and each Subsidiary maintains insurance,
which is in full force and effect, with insurers of recognized
financial responsibility of the types and in the amounts
generally deemed adequate for their respective businesses; and
neither the Company nor any Subsidiary has any reason to
believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not
materially and adversely affect the condition (financial or
otherwise), earnings, operations, business or business
prospects of the Company.
(xx) Each officer and director of the Company, and each of
such shareholders of the Company as the Representative shall
identify in its discretion, has agreed pursuant to the form of
Lock-up Agreement attached hereto as Appendix A (the "Lock-up
Agreement") that such person will not, for a period of 180
days from the date (the "Effective Date") that the
Registration Statement is declared effective by the SEC (the
"Lock-up Period"), without the prior written consent of the
Representative, offer to sell, contract to sell, sell, pledge,
hypothecate, transfer or otherwise dispose of, or grant any
rights with respect to (collectively, a "Disposition"), any
shares of Common Stock and options, warrants and other rights
to purchase any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for shares of
Common Stock now owned or hereafter acquired by such person
(collectively, "Securities") or with respect to which such
person has or hereafter acquires the power of Disposition,
other than as permitted by the Lock-Up Agreement. The Company
has provided to counsel for the Underwriters ("Underwriters'
Counsel") true, accurate and complete copies of all of the
Lock-up Agreements. The Company has provided to Underwriters'
Counsel a complete and accurate list of all security holders
of the Company and the number and type of securities held by
each security holder.
(xxi) Neither the Company nor any Subsidiary has at any time
during the last five (5) years made any unlawful contribution
to any candidate for an office or failed to disclose fully any
contribution in violation of law, or made any payment to any
federal or state governmental officer or official, domestic or
foreign, or other person charged with similar public or
quasi-public duties, other than payments required or permitted
by the laws of the United States or any jurisdiction thereof.
The Company and each Subsidiary maintains a system of internal
accounting controls sufficient to provide reasonable
assurances that transactions are executed in accordance with
management's general or specific authorizations, transactions
are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting
principles and to maintain accountability for assets, access
to assets is permitted only in accordance with management's
general or specific authorization, and the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with
respect to any differences.
(xxii) Neither the Company nor any of its affiliates is
presently doing business with the government of Cuba or with
any person or affiliate located in Cuba.
(b) Any certificate signed by any officer of the Company and delivered
to you or to Underwriters' Counsel shall be deemed a representation and
warranty by the Company to each Underwriter as to the matters covered
thereby.
2. Purchase, Sale, Delivery and Payment.
(a) On the basis of the representations, warranties and agreements
herein contained, and subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters, and each
Underwriter agrees, severally and not jointly, to purchase from the
Company, at a purchase price of $__________ per Share, the Firm Shares.
The obligation of each Underwriter to the Company shall be to purchase
from the Company that number of Firm Shares (to be adjusted by the
Representative to avoid fractional shares) which represents the same
proportion of the number of Firm Shares to be sold by the Company
pursuant to this Agreement as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto represents
to the total number of Firm Shares to be purchased by all Underwriters
pursuant to this Agreement; and except as provided in Section 2(c), the
agreement of each Underwriter is to purchase only the respective number
of Firm Shares specified in Schedule I. The Underwriters will purchase
all of the Firm Shares if any are purchased.
The Firm Shares will be delivered by the Company to you for the
accounts of the several Underwriters against payment of the purchase
price therefor by certified or official bank check or checks or other
next-day funds payable to the order of the Company at the offices of R.
J. Steichen & Company, Midwest Plaza, Suite 1100, 801 Nicollet Mall,
Minneapolis, Minnesota 55402 (or at such other place as may be agreed
upon by the Representative and the Company), at 9:00 a.m., Minneapolis,
Minnesota time, on (i) the third (3rd) full business day following the
date hereof if the price of the Firm Shares is determined before 3:30
p.m. Minneapolis, Minnesota time, (ii) the fourth (4th) full business
day following the date hereof if the price of the Firm Shares hereunder
is determined after 3:30 p.m. Minneapolis, Minnesota time, or (iii)
such other time and date as the Representative and the Company may
determine, such time and date of payment and delivery being herein
called the "First Closing Date." The Firm Shares, in definitive form
and in such denominations and registered in such names as the
Representative may request upon at least two (2) business days' prior
notice to the Company, will be made available to the Representative at
the offices of R. J. Steichen & Company, Midwest Plaza, Suite 1100, 801
Nicollet Mall, Minneapolis, Minnesota 55402 (or at such other place as
may be agreed upon by the Representative and the Company). If the
Representative so elects, delivery of the Firm Shares may be made by
credit to "full fast" transfer to the accounts at The Depository Trust
Company designated by the Representative.
(b) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants an option to the several Underwriters
to purchase an aggregate of up to 450,000 Option Shares, all at the
same purchase price as the Firm Shares, for use solely in covering any
over-allotments made by the Underwriters in the sale and distribution
of the Firm Shares. The option granted hereunder may be exercised by
the Representative on behalf of the several Underwriters at any time
(but not more than once), in whole or in part, during the period of
forty-five (45) days after the date of this Agreement by giving written
notice to the Company, which notice shall set forth the aggregate
number of Option Shares as to which the Underwriters are exercising the
option, the names and denominations in which the certificates for the
Option Shares are to be registered, and the date and time, as
determined by the Representative, when the Option Shares are to be
delivered, such time and date being herein referred to as the "Second
Closing Date"; provided, however, that the Second Closing Date shall
not be earlier than the First Closing Date nor earlier than the second
business day after the date on which the option shall have been
exercised. The number of Option Shares to be purchased by each
Underwriter shall be the same percentage of the total number of Option
Shares to be purchased by the Underwriters as the number of Firm Shares
to be purchased by such Underwriter bears to the total number of Firm
Shares to be purchased by the Underwriters, as adjusted by the
Representative in its sole discretion in such manner as it shall deem
advisable to avoid fractional shares. No Option Shares shall be sold
and delivered unless the Firm Shares previously have been, or
simultaneously are, sold and delivered.
The Option Shares will be delivered by the Company, as appropriate, to
the Representative for the accounts of the Underwriters against payment
of the purchase price therefor by certified or official bank check or
other next-day funds payable to the order of the Company at the offices
of R. J. Steichen & Company, Midwest Plaza, Suite 1100, 801 Nicollet
Mall, Minneapolis, Minnesota 55402 (or at such other place as may be
agreed upon by the Representative and the Company) at 9:00 a.m.,
Minneapolis, Minnesota time, on the Second Closing Date. The Option
Shares, in definitive form and in such denominations and registered in
such names as the Representative has set forth in its notice of option
exercise, will be made available to you at the offices of R. J.
Steichen & Company, Midwest Plaza, Suite 1100, 801 Nicollet Mall,
Minneapolis, Minnesota 55402, or such other place as may be agreed upon
by the Representative and the Company at least one business day prior
to the Second Closing Date. If the Representative so elects, delivery
of the Option Shares may be made by credit to "full fast" transfer to
the accounts at The Depository Trust Company designated by the
Representative.
(c) It is understood that any of the Underwriters, may (but shall not
be obligated to) make payment to the Company, on behalf of any
Underwriter, for the Shares to be purchased by such Underwriter. Any
such payment shall not relieve any such Underwriter of any of its
obligations hereunder. Nothing herein contained shall constitute any of
the Underwriters an unincorporated association or partner with the
Company.
3. Covenants of the Company. The Company hereby covenants and agrees with each
of the Underwriters as follows:
(a) If the Registration Statement has not already been declared
effective by the SEC, the Company will use its best efforts to cause
the Registration Statement and any post-effective amendments thereto to
become effective as promptly as possible; the Company will notify the
Representative promptly of the time when the Registration Statement or
any post-effective amendment to the Registration Statement has become
effective or any supplement to the Prospectus has been filed and of any
request by the SEC for any amendment or supplement to the Registration
Statement or Prospectus or additional information; if the Company has
elected to rely on Rule 430A of the Rules and Regulations, the Company
will file a Prospectus containing the information omitted therefrom
pursuant to such Rule 430A with the SEC within the time period required
by, and otherwise in accordance with the provisions of, Rules 424(b)
and 430A of the Rules and Regulations; the Company will prepare and
file with the SEC, promptly upon your request, any amendments or
supplements to the Registration Statement or Prospectus that, in your
opinion, may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters; and the Company will
not file any amendment or supplement to the Registration Statement or
Prospectus to which the Representative shall reasonably object by
notice to the Company after having been furnished a copy a reasonable
time prior to the filing.
(b) The Company will advise the Representative, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance by the SEC
of any stop order suspending the effectiveness of the Registration
Statement, of the suspension of the qualification of the Shares for
offering or sale in any jurisdiction, or of the initiation or
threatening of any proceeding for any such purpose; and the Company
will promptly use its best efforts to prevent the issuance of any stop
order or to obtain its withdrawal if such a stop order should be
issued.
(c) Within the time during which a prospectus relating to the Shares is
required to be delivered under the Securities Act, the Company will
comply as far as it is able with all requirements imposed upon it by
the Securities Act, as now and hereafter amended, and by the Rules and
Regulations, as from time to time in force, so far as necessary to
permit the continuance of sales of or dealings in the Shares as
contemplated by the provisions hereof and the Prospectus. If, during
such period, any event occurs as a result of which the Prospectus would
include an untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of
the circumstances then existing, not misleading, or if, during such
period, it is necessary to amend the Registration Statement or
supplement the Prospectus to comply with the Securities Act, the
Company will promptly notify the Representative and will amend the
Registration Statement or supplement the Prospectus (at the expense of
the Company) so as to correct such statement or omission or effect such
compliance.
(d) The Company will use its best efforts to arrange for the
qualification of the Shares for offering and sale under the securities
laws of such jurisdictions as the Representative may designate and to
continue such qualifications in effect for so long as may be required
for purposes of the distribution of the Shares; provided, however, that
in no event shall the Company be obligated to qualify to do business in
any jurisdiction where it is not now so qualified or to take any action
which would subject it to the service of process in suits, other than
those arising out of the offering or sale of the Shares, in any
jurisdiction where it is not now so subject. In each jurisdiction in
which the Shares shall have been qualified as herein provided, the
Company will make and file such statements and reports in each year as
are or may be reasonably required by the laws of such jurisdiction.
(e) The Company will furnish to the Underwriters copies of the
Registration Statement (one of which will be signed and will include
all exhibits), each Preliminary Prospectus, the Prospectus, and all
amendments and supplements to such documents, in each case as soon as
available and in such quantities as the Representative may from time to
time reasonably request.
(f) For a period of five years from the Effective Date, the Company
will furnish directly to the Representative as soon as the same shall
be sent to its shareholders generally copies of all annual or interim
shareholder reports of the Company and will, for the same period, also
furnish the Representative with the following:
(i) Two copies of any report, application or document (other
than exhibits, which, however, will be furnished on your
request) filed by the Company with the SEC, Nasdaq, the NASD
or any securities exchange;
(ii) As soon as the same shall be sent to shareholders
generally, copies of each communication sent to shareholders;
and
(iii) From time to time, such other information concerning the
Company as the Representative may reasonably request.
The Company will, for a period of five (5) years from the Effective
Date, and as soon as practicable following the close of each applicable
period, furnish directly to the Representative detailed quarterly and
annual profit and loss statements, reports of the Company's cash flow,
other financial statements, and statements of application of the
proceeds of the offering of the Shares by the Company.
(g) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than the fifteen
(15) months after the end of the Company's current fiscal quarter, an
earnings statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a) of the
Securities Act and Rule 158 of the Rules and Regulations and covering a
twelve (12)- month period beginning after the Effective Date of the
Registration Statement.
(h) If required by the Securities Act or the Rules and Regulations
thereunder, the Company will prepare and file with the SEC reports on
Form SR in accordance with the Securities Act and the Rules and
Regulations.
(i) After completion of the offering of the Shares, the Company will
make all filings required to maintain the quotation of the Common Stock
on The Nasdaq SmallCap Market or any national stock exchange.
(j) The Company will apply the net proceeds from the sale of the Shares
being sold by it substantially in the manner set forth under the
caption "Use of Proceeds" in the Prospectus.
(k) During the Lock-Up Period, and except for the sale of Shares by the
Company pursuant to this Agreement, the Company will not, without the
prior written consent of the Representative, effect the Disposition of,
directly or indirectly, any Securities including, without limitation,
any Securities that are convertible into or exchangeable or exercisable
for Common Stock, and shall not accelerate the exercisability of any
Securities that are convertible into or exchangeable or exercisable for
Common Stock.
(l) The Company will not take, and will use its best efforts to cause
each of its officers and directors not to take, directly or indirectly,
any action designed to or which might reasonably be expected to cause
or result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares.
(m) The Company will inform the Florida Department of Banking and
Finance at any time prior to the consummation of the distribution of
the Shares by the Underwriters if it commences engaging in business
with the government of Cuba or with any person or affiliate located in
Cuba. Such information shall be provided within 90 days after the
commencement thereof or after a change occurs with respect to
previously reported information.
4. Expenses.
(a) The Company agrees with each Underwriter that:
(i) Whether or not this Agreement becomes effective or is
terminated or cancelled or the sale of the Shares hereunder is
consummated, and regardless of the reason for or cause of any
such termination, cancellation, or failure to consummate, the
Company will pay or cause to be paid its costs and expenses
related to the Offering, including, but not limited to, the
following: (A) all expenses (including any transfer taxes)
incurred in connection with the delivery to the Underwriters
of the Shares, (B) all expenses and fees (including, without
limitation, fees and expenses of the Company's accountants and
of counsel to the Company, excluding, however, fees of
Underwriters' Counsel) in connection with the preparation,
printing, filing, delivery, and shipping of the Registration
Statement (including the financial statements therein and all
amendments, schedules, and exhibits thereto), each Preliminary
Prospectus, the Prospectus, and any amendment thereof or
supplement thereto, in such quantities as the Representative
shall reasonably request, including filing any such documents
on EDGAR, (C) all fees and reasonable expenses, including all
reasonable counsel fees of counsel to the Company, incurred in
connection with the qualification of the Shares for offering
and sale by the Underwriters or by dealers under the
securities or Blue Sky laws of the states and other
jurisdictions which the Representative may designate in
accordance with Section 3(d) hereof, (D) all costs and
expenses incident to qualification with The Nasdaq SmallCap
Market, (E) postage and express mail charges and any other
expenses in connection with delivery to the Underwriters and
potential investors of the Preliminary Prospectus and
Prospectus, (F) all travel, lodging and entertainment expenses
associated with investor meetings, marketing "roadshows," and
otherwise marketing and selling the Shares, and (G) all other
costs and expenses incident to the performance of the
Company's obligations hereunder that are not otherwise
specifically described herein. In addition to the foregoing,
the Company shall pay to the Representative on each Closing
Date for out-of-pocket expenses (including fees of
Underwriters' Counsel) a nonaccountable expense allowance
equal to two percent (2.0%) of the aggregate Price to Public
for all the Shares sold to the Underwriters on each Closing
Date, including Shares sold pursuant to orders received
through the Company. The Representative acknowledges receipt
of a total of $10,000.00 from the Company as an advance (the
"Advance") against such nonaccountable expense allowance. If
the Underwriters withdraw from the sale of the Shares as
herein proposed for any reason beyond their control, or if the
sale of the Shares as herein proposed is abandoned by the
Company, the Company will pay to the Representative an amount
equal to (AA) the lesser of $20,000.00 or the amount of the
Representative's accountable expenses including, but not
limited to, its travel expenses and the fees and expenses of
Underwriters' Counsel, less (BB) the amount of the Advance;
and, upon any such termination of the sale of the Shares, the
Representative shall refund to the Company any amount of the
Advance that exceeds the amount of the Representative's
Accountable Expenses. The provisions of this Section 4(a)(i)
are intended to relieve the Underwriters from the payment of
the expenses and costs which the Company hereby agrees to pay
and shall not impair the obligations of the Company hereunder
to the several Underwriters.
(ii) In addition to its other obligations under Sections 7(a)
and 8 hereof, the Company agrees that, as an interim measure
during the pendency of any claim, action, investigation,
inquiry or other proceeding described in Section 7(a), it will
reimburse the Underwriters on a monthly basis for all
reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety
and enforceability of the Company's obligation to reimburse
the Underwriters for such expenses and the possibility that
such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been
improper, the Underwriters shall promptly return such payment
to the Company together with interest, compounded daily,
determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing)
listed from time to time in The Wall Street Journal which
represents the base rate on corporate loans posted by a
substantial majority of the nation's thirty (30) largest banks
(the "Prime Rate"). Any such interim reimbursement payments
which are not made to the Underwriters within thirty (30) days
of a request for reimbursement shall bear interest at the
Prime Rate from the date of such request.
(b) It is agreed that any controversy rising out of the operation of
the interim reimbursement arrangements set forth in Section 4(a)(ii)
hereof, including the amounts of any requested reimbursement payments,
the method of determining such amounts, and the basis on which such
amounts shall be apportioned among the reimbursing parties, shall be
settled by arbitration conducted pursuant to the Code of Arbitration
Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of
intention to arbitrate, therein electing the arbitration tribunal. If
the party demanding arbitration does not make such designation of an
arbitration tribunal in such demand or notice, then the party
responding to said demand or notice is authorized to do so. Any such
arbitration will be limited to the operation of the interim
reimbursement provisions contained in Section 4(a)(ii) hereof and will
not resolve the ultimate propriety or enforceability of the obligation
to indemnify for expenses which is created by the provisions of
Sections 7(a) and 7(b) hereof or the obligation to contribute to
expenses which is created by the provisions of Section 8(a) hereof.
5. Conditions of the Underwriters' Obligations. The obligation of the
Underwriters to purchase and pay for the Shares as provided herein shall be
subject to the accuracy of the representations and warranties of the Company, in
the case of the Firm Shares, as of the date hereof and the First Closing Date
(as if made on and as of the First Closing Date), and in the case of the Option
Shares, as of the date hereof and the Second Closing Date (as if made on and as
of the Second Closing Date); to the performance by the Company of its
obligations hereunder; and to the satisfaction of the following additional
conditions on or before the First Closing Date in the case of the Firm Shares
and on or before the Second Closing Date in the case of the Option Shares:
(a) The Registration Statement shall have become effective not later
than 4:00 p.m. Minneapolis, Minnesota time on the date of this
Agreement, or such later date or time as shall be consented to in
writing by you (the "Effective Date"); and no stop order suspending the
effectiveness thereof shall have been issued and no proceedings for
that purpose shall have been initiated or, to the knowledge of the
Company, or any of the Underwriters, threatened by the SEC or any state
securities commission or similar regulatory body; and any request of
the SEC for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with
to the satisfaction of the Underwriters and Underwriters' Counsel.
(b) The Underwriters shall not have advised the Company that the
Registration Statement or Prospectus, or any amendment thereof or
supplement thereto, contains any untrue statement of a fact which is
material or omits to state a fact which is material and is required to
be stated therein or is necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that this Section 5(b) shall not apply
to statements in, or omissions from, the Registration Statement or
Prospectus, or any amendment thereof or supplement thereto, which are
based upon and conform to written information furnished to the Company
by the Underwriters specifically for use in the preparation of the
Registration Statement or the Prospectus, or any such amendment or
supplement.
(c) Subsequent to the Effective Date and prior to each Closing Date,
there shall not have occurred any change, or any development involving
a prospective change, which materially and adversely affects the
Company's condition (financial or otherwise), earnings, operations,
properties, business or business prospects from that set forth in the
Registration Statement or Prospectus, and which, in the
Representative's sole judgment, is material and adverse and that makes
it, in the Representative's sole judgment, impracticable or inadvisable
to proceed with the public offering of the Shares as contemplated by
the Prospectus and this Agreement.
(d) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to
Underwriters' Counsel, and such counsel shall have been furnished with
such papers and information as it may reasonably have requested to
enable it to pass upon the matters referred to in this Section.
(e) On each Closing Date, the Underwriters shall have received the
opinion of Dorsey & Whitney LLP, counsel for the Company, dated as of
such Closing Date, satisfactory in form and substance to the
Underwriters and Underwriters' Counsel, to the effect that:
(i) Each of the Company and the Subsidiaries has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation and has the corporate power and authority to
own, lease and operate its properties and to conduct its
business as currently being carried on and as described in the
Registration Statement and Prospectus.
(ii) Each of the Company and the Subsidiaries is duly
qualified to do business as a foreign corporation and is in
good standing in each jurisdiction, if any, in which the
ownership or leasing of its properties or the conduct of its
business requires such qualification, except where the failure
to be so qualified or be in good standing would not have a
material adverse effect on the condition (financial or
otherwise), earnings, operations or business of the Company
and the Subsidiaries considered as one enterprise. To the best
of such counsel's knowledge, the Company does not own or
control, directly or indirectly, any corporation, association
or other entity other than the Subsidiaries.
(iii) The capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus
under the caption "Description of Securities." The issued and
outstanding shares of capital stock of the Company have been
duly and validly issued and are fully paid and nonassessable,
and the holders thereof are not subject to any personal
liability by reason of being such holders.
(iv) The Shares to be issued by the Company pursuant to the
terms of this Agreement have been duly authorized and, upon
issuance and delivery against payment therefor in accordance
with the terms hereof, will be duly and validly issued and
fully paid and nonassessable, and the holders thereof will not
be subject to personal liability by reason of being such
holders. Except as otherwise stated in the Registration
Statement and Prospectus, there are no preemptive rights or
other rights to subscribe for or to purchase, or any
restriction upon the voting or transfer of, any shares of
Common Stock pursuant to the Company's articles of
incorporation, by-laws or any agreement or other instrument
known to such counsel to which the Company is a party or by
which the Company is bound. To the best of such counsel's
knowledge, except as set forth in the Prospectus, neither the
filing of the Registration Statement nor the offering or sale
of the Shares as contemplated by this Agreement gives rise to
any rights for or relating to the registration of any shares
of Common Stock or other securities of the Company and no such
rights exist, other than those rights that have been waived
prior to the date hereof. To the best of such counsel's
knowledge, except as described in the Registration Statement
and Prospectus, there are no options, warrants, agreements,
contracts or rights in existence to purchase or acquire from
the Company any shares of capital stock of the Company.
(v) The Company has the requisite corporate power and
authority to enter into this Agreement and to issue, sell and
deliver to the Underwriters the Shares to be issued and sold
by it hereunder. This Agreement has been duly authorized by
all necessary corporate action on the part of the Company and
has been duly executed and delivered by the Company and,
assuming due authorization, execution and delivery by the
Representative on behalf of the Underwriters, is a valid,
legal and binding agreement of the Company, enforceable in
accordance with its terms, except insofar as indemnification
and contribution provisions may be limited by applicable law
and except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance
or similar laws relating to or affecting creditors' rights
generally or by general equitable principles.
(vi) The Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge,
no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose
has been instituted or is pending or threatened under the
Securities Act.
(vii) The Registration Statement and the Prospectus, and each
amendment thereof or supplement thereto, (other than the
financial statements, including the notes thereto and the
supporting schedules, and other financial, numerical,
statistical and accounting data derived therefrom, as to which
such counsel need express no opinion), comply as to form in
all material respects with the requirements of the Securities
Act and the Rules and Regulations.
(viii) The form of certificates evidencing the Common Stock
and filed as an exhibit to the Registration Statement complies
with Nebraska law.
(ix) The description in the Registration Statement and the
Prospectus of the Company's articles of incorporation and
bylaws and of statutes, legal and governmental proceedings,
contracts and other documents are accurate in all material
respects and fairly present the information required to be
presented by the Securities Act and the applicable Rules and
Regulations; and such counsel does not know of any statutes or
legal or governmental proceedings required to be described in
the Prospectus that are not described as required, or of any
agreements, contracts, leases or documents of a character
required to be described or referred to in the Registration
Statement or Prospectus or to be filed as an exhibit to the
Registration Statement which are not described or referred to
therein or filed as required.
(x) The execution, delivery and performance of this Agreement
and the consummation of the transactions herein contemplated
do not result in any violation of the Company's articles of
incorporation or bylaws or, to the best of such counsel's
knowledge, result in a breach or violation of any of the terms
and provisions of, or constitute a default under, any bond,
debenture, note or other evidence of indebtedness, or any
material lease, contract, indenture, mortgage, deed of trust,
loan agreement, joint venture or other material agreement or
instrument known to such counsel to which the Company is a
party or by which its properties are bound, or any applicable
statute, rule or regulation known to such counsel or, to the
best of such counsel's knowledge, any order, writ or decree of
any court, government or governmental agency or body having
jurisdiction over the Company or the Subsidiaries or other any
of their material properties or operations.
(xi) To the best of such counsel's knowledge, no consent,
approval, authorization or order of, or filing with, or
qualification with, any court, government or governmental
agency or body is necessary in connection with the execution,
delivery and performance of this Agreement or for the
execution, delivery and performance of this Agreement or for
the consummation of the transactions herein contemplated,
except such as have been obtained under the Securities Act or
such as may be required under state or other securities or
Blue Sky laws in connection with the purchase and the
distribution of the Shares by the Underwriters.
(xii) To the best of such counsel's knowledge, there are no
legal or governmental proceedings pending or threatened
against the Company or any of the Subsidiaries of a character
required to be disclosed in the Registration Statement or the
Prospectus by the Securities Act or the Rules and Regulations,
other than those described therein.
(xiii) To the best of such counsel's knowledge, neither the
Company nor any of the Subsidiaries is presently (A) in
material violation of its respective articles of incorporation
or bylaws, (B) in breach or violation of any applicable
statute, rule or regulation known to such counsel or any
order, writ or decree of any court or governmental agency or
body, or (C) in breach of or otherwise in default in the
performance of any material obligation, agreement or condition
contained in any bond, debenture, note, loan agreement or any
other material contract, lease or other instrument to which
the Company is subject or by which it may be bound, or to
which any of the material assets or property of the Company is
subject.
(xiv) To the best of such counsel's knowledge, the Company
holds, and is operating in compliance in all material respects
with, all franchises, grants, authorizations, licenses,
permits, easements, consents, certificates and orders of any
government or self-regulatory body required for the conduct of
its business, and all such franchises, grants, authorizations,
licenses, permits, easements, consents, certifications and
orders are valid and in full force and effect.
(xv) On the basis of information obtained as a result of
discussions and meetings with officers and other
representatives of the Company, discussions with
representatives of the independent public accountants for the
Company in connection with the preparation of the Registration
Statement and the Prospectus, and the examination of other
information and documents requested by such counsel, nothing
has come to such counsel's attention that has caused them to
believe that the Registration Statement and any amendment
thereof, at the time it became effective and at all times
subsequent thereto up to and on that Closing Date, contained
any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in
order to make the statements therein not misleading, or that
the Prospectus, and any amendment or supplement thereto, at
the first date of its issuance and up to and at all times
subsequent thereto up to and on that Closing Date, contained
any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in
order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Such
counsel may further state that in making the foregoing
comments, such counsel does not intend them to include or
cover the financial statements and notes thereto and related
schedules and other financial, numerical, statistical and
accounting data contained or omitted from the Registration
Statement and any amendment or supplement thereto and the
Prospectus.
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States or the States of Minnesota
and Nebraska, upon opinions of local counsel, and, as to questions of
fact, upon representations or certificates of officers of the Company
or its Subsidiaries and of government officials, in which case their
opinion is to state the extent of such reliance. Copies of any opinion,
representation or certificate so relied upon shall be delivered to the
Representative and to Underwriters' Counsel.
(f) On each Closing Date, the Underwriters shall have received the
opinion of Brown, Martin, Haller and McClain LLP, intellectual property
and patent counsel for the Company, dated as of such Closing Date,
satisfactory in form and substance to the Underwriters and
Underwriters' Counsel, to the effect that:
(i) To the best of such counsel's knowledge, neither the
Company nor any Subsidiary requires any United States or
foreign patent for the conduct of its business as presently
conducted, except as may be disclosed in the Registration
Statement and Prospectus;
(ii) The Company has not received any notice of claim by a
third party asserting infringement or violation of its
Proprietary Rights, and such counsel is not aware that the
Company or any Subsidiary is infringing or otherwise violating
the Proprietary Rights of others; and
(iii) Such counsel has reviewed the Registration Statement and
Prospectus and each amendment and supplement thereto filed by
the Company prior to such Closing Date, and such counsel has
no reason to believe that insofar as concerns Proprietary
Rights owned by or affecting the business or operations of the
Company and any Subsidiary, either the Registration Statement
or the Prospectus or any amendment or supplement thereto
contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements therein
not misleading.
(g) The Underwriters shall have received from Winthrop & Weinstine,
P.A., Underwriters' Counsel, such opinion or opinions as the
Underwriters may reasonably require, dated as of the First Closing Date
and the Second Closing Date, which are satisfactory in form and
substance to the Underwriters, with respect to the sufficiency of
corporate proceedings and other legal matters relating to this
Agreement and the transactions contemplated hereby, and the Company
shall have furnished to Underwriters' Counsel such documents as it may
have requested for the purpose of enabling it to pass upon such
matters. In connection with such opinion, as to matters of fact
relevant to conclusions of law, Underwriters' Counsel may rely, to the
extent that it deems proper, upon representations or certificates of
public officials and of responsible officers of the Company.
(h) At the time of execution of this Agreement, the Underwriters shall
have received from Ernst & Young LLP a letter dated the date of such
execution, in form and substance satisfactory to the Representative, to
the effect that they are independent accountants with respect to the
Company within the meaning of the Securities Act and the applicable
published instructions, and the Rules and Regulations thereunder, and
further stating in effect that:
(i) In their opinion, the audited financial statements
included in the Registration Statement and Prospectus covered
by their report included therein comply as to form in all
material respects with the applicable requirements of the
Securities Act, the published instructions and the Rules and
Regulations.
(ii) On the basis of (A) a reading of the minutes of the
shareholders' and directors' meetings of the Company since
_____________, (B) inquiries of certain officials of the
Company responsible for financial and accounting matters, (C)
a reading of the Company's monthly operating statements
subsequent to _____________, and (D) other specified
procedures and inquiries (but not an audit in accordance with
generally accepted accounting principles), nothing came to
their attention causing them to believe that:
(1) the unaudited consolidated financial statements
of the Company and its Subsidiaries contained in the
Prospectus and any amendment thereof or supplement
thereto do not comply as to form, in all material
respects, with the applicable accounting requirements
of the Securities Act and the published Rules and
Regulations or were not prepared in conformity with
generally accepted accounting principles and
practices applied on a basis consistent in all
material respects with those followed in the
preparation of the audited consolidated financial
statements of the Company and its Subsidiaries
included therein; or
(2) the unaudited consolidated amounts of revenues,
income before provision for income taxes, net income
and ratio of earnings to fixed charges of the Company
and its Subsidiaries, if any, contained in the
Prospectus, or any amendment thereof or supplement
thereto, were not derived from consolidated financial
statements prepared in conformity with generally
accepted accounting principles and practices applied
on a basis consistent in all material respects with
those followed in the preparation of the audited
consolidated financial statements of the Company and
its Subsidiaries included therein; or
(3) the unaudited pro forma consolidated financial
statements of the Company and its Subsidiaries and
recently-acquired companies, if any, contained in the
Prospectus or any amendment thereof or supplement
thereto, were not properly compiled in accordance
with generally accepted accounting principles or did
not provide for all adjustments necessary for a fair
presentation of the information purported to be shown
thereby; or
(4) with respect to the period subsequent to
___________, there were, at a specified date, not
more than five (5) business days prior to the date of
the letter, any changes or any material increases or
decreases in capital stock, long-term or short-term
debt or shareholders' equity, decreases in net
assets, net current assets, or net worth or any
material decrease, as compared with the corresponding
period of the prior year, in revenues or net income
of the Company as compared with the amounts shown in
the consolidated balance sheet included in the
Registration Statement, except as disclosed or
referred to in the Prospectus and Registration
Statement.
(iii) Certain information set forth on the cover of the
Prospectus and page ____ of the Prospectus and in the
Prospectus under the headings ___________________ and that are
expressed in dollars (or percentages derived from dollar
amounts) or numbers have been compared to accounting records
of the Company which were subject to the internal accounting
controls of the Company and are in agreement with such records
or computations made therefrom, excluding any questions of
legal interpretation.
(i) The Underwriters shall have received from Ernst & Young LLP a
letter dated as of each Closing Date to the effect that such
accountants reaffirm, as of such Closing Date, and as though made on
such Closing Date, the statements made in the letter furnished by such
accountants pursuant to Section 5(g), except that the specified date
referred to in such letter will be a date not more than five (5)
business days prior to such Closing Date.
(j) The Underwriters shall have received from the Company a
certificate, dated as of the First Closing Date and the Second Closing
Date, of the principal executive officer and the principal financial or
accounting officer of the Company, to the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct as if made on and as of such
Closing Date, and the Company has complied with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied at, or prior to, such Closing Date;
(ii) No stop order or other order suspending the effectiveness
of the Registration Statement or any amendment thereof or the
qualification of the Shares for offering or sale has been
issued, and no proceedings for that purpose has been
instituted or, to the best of their knowledge, is contemplated
by the SEC or any state or regulatory body; and
(iii) The signers of said certificate have carefully examined
the Registration Statement and the Prospectus and any
amendments thereof or supplements thereto, and (A) such
documents contain all statements and information required to
be included therein; the Registration Statement, or any
amendment thereof, does not contain any untrue statement of a
material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein
not misleading; and the Prospectus, as amended or
supplemented, does not include any untrue statement of
material fact or omit to state a material fact necessary to
make the statements therein, in light of the circumstances
under which they were made, not misleading; (B) since the
Effective Date of the Registration Statement, there has
occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth; (C)
subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, the
Company has not incurred any material liabilities or material
obligations, direct or contingent, or entered into any
material transactions, not in the ordinary course of business
consistent with past practice, or declared or paid any
dividends or made any distribution of any kind with respect to
its capital stock, or entered into any agreement, arrangement
or understanding (whether written or oral) whereby the
consummation of a merger, exchange or similar business
combination with any other person or entity or the purchase of
the assets, securities, or business of any other person or
entity has become likely or probable, and except as disclosed
in the Prospectus, there has not been any change in the
capital stock (other than a change in the number of
outstanding shares of Common Stock due to the issuance of
shares upon the exercise of outstanding options or warrants or
pursuant to employee benefit plans described to in the
Registration Statement), or any material increase in the
short-term debt or long-term debt, or in the issuance of
options, warrants, convertible securities or other rights to
purchase the capital stock, of the Company, or any material
adverse change or any development involving a prospective
material adverse change (whether or not arising in the
ordinary course of business) in the general affairs, condition
(financial or otherwise), business, key personnel, property,
prospects, net worth or results of operations of the Company;
and (D) except as stated in the Registration Statement and
Prospectus, there is not pending or, to their knowledge,
threatened or contemplated, any action, suit or proceeding to
which the Company is a party before or by any court or
governmental agency, authority or body, or any arbitrator,
which might result in any material adverse change of the
condition (financial or otherwise), business, prospects, or
results of operations of the Company.
(k) On each Closing Date, there shall have been furnished to you a
certificate of Secretary of the Company, dated as of such Closing Date,
with the documents listed herein attached, and to the effect and
certifying as follows:
(i) Attached thereto are true and correct copies of the
articles of incorporation of the Company, as amended to the
date of the certificate, and stating that there have been no
changes or amendments to the attached articles of
incorporation of the Company, and no resolutions have been
adopted by the Board of Directors or shareholders of the
Company relating to (A) the amendment of said articles of
incorporation, (B) the merger, consolidation or dissolution of
the Company, or (C) the sale of all or substantially all of
the assets or business of the Company, and that the Company is
in good standing in the State of Nebraska and has paid all of
its corporate franchise taxes due as of the date of such
certificate.
(ii) Attached thereto is a true and correct copy of the bylaws
of the Company as in effect as of the date of such certificate
and no resolutions have been adopted by the Board of Directors
or shareholders of the Company relating to changes or
amendments to the attached Bylaws.
(iii) Attached thereto are true and correct copies of the
resolutions of the Board of Directors of the Company relating
to the preparation and signing of the Registration Statement
and this Agreement, the issuance and sale of the Shares and
other related matters, and such resolutions have not been
amended, modified or rescinded and are in full force and
effect as of the date of such certificate and are the only
resolutions adopted by the Board of Directors of the Company
with respect to the offering contemplated by the Registration
Statement.
(iv) Attached thereto are true and correct copies of all
material correspondence with respect to the Registration
Statement and Prospectus and related matters between the
Company, its counsel, and/or Ernst & Young LLP, on the one
hand and the SEC on the other.
(v) This Agreement, as executed and delivered by the Company,
is in the form presented to and approved by officers
authorized to do so by the Board of Directors of the Company.
(vi) Attached thereto is a specimen of the certificate for the
Common Stock in the form authorized and approved for use by
the Board of Directors of the Company.
(vii) The persons who have signed the Registration Statement
and all amendments thereto were duly elected at the respective
times of such signing and duly acting as officers and
directors of the Company or as an attorney-in-fact therefor,
as set forth in the Registration Statement.
(l) The Underwriters shall have received from each of the officers and
directors of the Company, and each of such shareholders of the Company
as the Representative shall identify in its discretion, a written
agreement in the form of Appendix A hereto whereby each such person
agrees that during the Lock-up Period such person will not, without the
Representative's prior written consent, effect the Disposition of any
Securities now owned or hereafter acquired directly or indirectly by
such person other than by gift to donees who agree to be bound by the
same restriction or by will or the laws of descent.
(m) The Common Stock of the Company shall be included and quoted on The
Nasdaq SmallCap Market.
(n) Dorsey & Whitney LLP shall deliver to the Representative a Blue Sky
Memorandum reasonably satisfactory to the Representative confirming
that all requisite actions for the offer and sale of the Shares in all
jurisdictions requested by the Representative have been taken.
(o) The Company shall have furnished to the Representative and to
Underwriters' Counsel such additional certificates, documents and
evidence as the Representative shall reasonably request.
All such opinions, certificates, letters and documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory to the Representative and Underwriters' Counsel. All statements
contained in any certificate, letter or other document delivered pursuant hereto
by, or on behalf of, the Company shall be deemed to constitute representations
and warranties of the Company.
The Representative may waive in writing the performance of any
one or more of the conditions specified in this Section 5 or extend the time for
their performance.
If any of the conditions specified in this Section 5 shall not
have been fulfilled when and as required by this Agreement to be fulfilled and
if the fulfillment of said condition has not been waived by the Representative,
this Agreement and all obligations of the Underwriters hereunder may be canceled
at, or at any time prior to, each Closing Date by the Representative on behalf
of the Underwriters. Any such cancellation shall be without liability of the
Underwriters to the Company and shall not relieve the Company of its obligations
under Section 4(a) hereof. Notice of such cancellation shall be given to the
Company at the address specified in Section 12 hereof in writing, or by
telegraph or telephone confirmed in writing.
6. Representative's Warrants. In consideration of the agreement of the
Representative to act as an Underwriter and as Representative of the
Underwriters, and upon payment of a purchase price of $______, on the First
Closing Date the Company will issue and deliver to the Representative, for its
account, the Representative's Warrants to purchase Shares in an amount equal to
ten percent (10%) of the number of Firm Shares purchased by the Underwriters in
the offering. The Representative's Warrants shall be issued on the First Closing
Date and shall be dated as of the Effective Date. The Representative's Warrants
shall be exercisable commencing one year after the Effective Date and for a
period of five years after the Effective Date at a price equal to 120% of the
Price to Public per Share set forth on the cover page of the Prospectus. As to
other terms, the Representative's Warrants shall be in form and substance
substantially the same as Appendix B hereto. The Company represents and warrants
that the Representative's Warrants have been duly authorized and, when granted
and delivered in accordance with the terms hereof, will be valid, binding and
enforceable obligations of the Company; the securities issuable upon exercise of
the Representative's Warrants have been duly authorized and reserved for
issuance upon exercise; and upon receipt by the Company of the consideration for
such securities in accordance with the terms of the Representative's Warrants,
the Warrant Shares shall have been duly and validly issued, fully paid and
nonassessable.
7. Indemnification.
(a) The Company hereby agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Securities Act, against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter or each such controlling person may become subject under
the Securities Act, the Exchange Act, the common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of, or are based upon, (i) any breach of any
representation, warranty, agreement or covenant of the Company
contained in this Agreement, (ii) any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement or any amendment thereof or supplement thereto, or the
omission or alleged omission to state in the Registration Statement or
any amendment thereof or supplement thereto a material fact required to
be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading; (iii)
any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, if used prior to the Effective
Date of the Registration Statement, or in the Prospectus (as amended or
as supplemented, if the Company shall have filed with the SEC any
amendment thereof or supplement thereto), or the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; or (iv) any
untrue statement or alleged untrue statement of a material fact
contained in any application or other statement executed by the Company
or based upon written information furnished by the Company filed in any
jurisdiction in order to qualify the Shares under, or exempt the Shares
or the sale thereof from qualification under, the securities laws of
such jurisdiction, or the omission or alleged omission to state in such
application or statement a material fact required to be stated therein
or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company
will reimburse each Underwriter and each such controlling person for
any legal or other expenses reasonably incurred by such Underwriter or
controlling person in connection with investigating or defending
against any such loss, claim, damage, liability or action; provided,
however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or
is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in reliance upon and in conformity
with written information relating to any Underwriter furnished to the
Company by such Underwriter or through you specifically for use in the
preparation of the Registration Statement or any such post-effective
amendment thereof, any such Preliminary Prospectus, or the Prospectus,
or any such amendment thereof or supplement thereto, or in any
application or other statement executed by the Company or the
Underwriters filed in any jurisdiction in order to qualify the Shares
under, or exempt the Shares or the sale thereof from qualification
under, the securities laws of such jurisdiction; and provided further
that the foregoing indemnity agreement is subject to the condition
that, insofar as it relates to any untrue statement, alleged untrue
statement, omission or alleged omission made in any Preliminary
Prospectus but eliminated or remedied in the Prospectus, such indemnity
agreement shall not inure to the benefit of an Underwriter if the
person asserting any loss, claim, damage or liability purchased the
Shares from such Underwriter which is the subject thereof (or to the
benefit of any person who controls such Underwriter), if a copy of the
Prospectus was not sent or given to such person with, or prior to, the
written confirmation of the sale of such Shares to such person. This
indemnity agreement is in addition to any liability which the Company
may otherwise have.
(b) Each Underwriter agrees to indemnify and hold harmless the Company,
each of its directors, each of its officers who has signed the
Registration Statement, and each person who controls the Company within
the meaning of Section 15 of the Securities Act, against any losses,
claims, damages or liabilities to which the Company or any such
director, officer or controlling person may become subject under the
Securities Act, the Exchange Act, the common law or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of, or are based upon, (i) any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof or supplement thereto,
or the omission or alleged omission to state in the Registration
Statement or any amendment thereof or supplement thereto, a material
fact required to be stated therein or necessary to make the statements
therein not misleading; (ii) any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus,
if used prior to the Effective Date of the Registration Statement, or
in the Prospectus (as amended or as supplemented, if the Company shall
have filed with the SEC any amendment thereof or supplement thereto),
or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading; or (iii) any untrue statement or alleged untrue
statement of a material fact contained in any application or other
statement executed by the Company or by the Underwriters and filed in
any jurisdiction in order to qualify the Shares under, or exempt the
Shares or the sale thereof from qualification under, the securities
laws of such jurisdiction, or the omission or alleged omission to state
in such application or statement a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; in each case
to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to
the Company by, or on behalf of, the Underwriters specifically for use
in the preparation of the Registration Statement or any such
post-effective amendment thereof, any such Preliminary Prospectus, or
the Prospectus or any such amendment thereof or supplement thereto, or
in any application or other statement executed by the Company or by the
Underwriters and filed in any jurisdiction; and the Underwriters will
reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer, or controlling person in
connection with investigating or defending against any such loss,
claim, damage, liability or action. This indemnity agreement is in
addition to any liability which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section 7
of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 7, notify in writing the
indemnifying party of the commencement thereof. The omission so to
notify the indemnifying party will relieve it from any liability under
this Section 7 as to the particular item for which indemnification is
then being sought, but not from any other liability which it may have
to any indemnified party. In case any such action is brought against
any indemnified party, and the indemnified party notifies an
indemnifying party of the commencement thereof, the indemnifying party
will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel who shall be reasonably
satisfactory to such indemnified party; and after notice from the
indemnifying party to such indemnified party of the indemnifying
party's election so to assume the defense thereof, the indemnifying
party will not be liable to such indemnified party under this Section 7
for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than
reasonable costs of investigation; provided, however, that if the
defendants in any such action include both the indemnified party and
the indemnifying party, and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties
shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties, in which event the fees
and expenses of such separate counsel shall be borne by the
indemnifying party. Any such indemnifying party shall not be liable to
any such indemnified party on account of any settlement of any claim or
action effected without the consent of such indemnifying party.
8. Contribution.
(a) In order to provide for just and equitable contribution in any
action in which the Underwriters or the Company (or any person who
controls the Underwriters or the Company within the meaning of Section
15 of the Securities Act) makes claim for indemnification pursuant to
Section 7 hereof, but such indemnification is unavailable or
insufficient to hold harmless and indemnify a party under Section 7,
then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims,
damages or liabilities referred to in Section 7 above (i) in such
proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from
the offering of the Shares hereunder or (ii) if the allocation provided
by the foregoing clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in such clause (i) but also the relative fault of the
Company on the one hand and the Underwriters on the other in connection
with the statements or omissions that resulted in such losses, claims,
damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other shall be deemed to be in the
same proportion as the total net proceeds from the offering of the
Shares (before deducting expenses) received by the Company bear to the
total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page
of the Prospectus. The relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement
of a material or the omission or alleged omission to state a material
fact relates to information supplied by the Company or the Underwriters
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8 were to be
determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of
allocation which does not take into account the equitable
considerations referred to in the first sentence of this Section 8. The
amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities referred to in the first sentence of this
Section 8 shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending against any action or claim which is the
subject of this Section 8. Notwithstanding the provisions of this
Section 8, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages that such Underwriter has
otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person
who is not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this Section 8 to contribute are several
in proportion to the respective underwriting obligations and not joint.
(b) Promptly after receipt by a party to this Agreement of notice of
the commencement of any action, suit or proceeding, such person will,
if a claim for contribution in respect thereof is to be made against
another party (the "Contributing Party"), notify the Contributing Party
of the commencement thereof; but the omission so to notify the
Contributing Party will not relieve the Contributing Party from any
liability which it may have to any party other than under this Section
8. Any notice given pursuant to Section 7 hereof shall be deemed to be
like notice hereunder. In case any such action, suit or proceeding is
brought against any party, and such person notifies a Contributing
Party of the commencement thereof, the Contributing Party will be
entitled to participate therein with the notifying party and any other
Contributing Party similarly notified.
9. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective immediately after the time at
which the Registration Statement shall become effective under the
Securities Act.
(b) Until the First Closing Date, this Agreement may be terminated by
the Representative on behalf of the Underwriters, at its option, by
giving notice to the Company, and the option referred to in Section
2(b), if exercised, may be cancelled at any time prior to the Second
Closing Date, if (i) the Company shall have failed, refused, or been
unable, at or prior to such Closing Date, to perform any agreement on
its part to be performed hereunder, (ii) any other condition of the
Underwriters' obligations hereunder is not fulfilled or waived by the
Representative, (iii) trading in securities generally on the New York
Stock Exchange, the American Stock Exchange or in the over-the-counter
market shall have been suspended, (iv) minimum or maximum prices for
trading shall have been fixed, or maximum ranges for prices for
securities shall be required, on the New York Stock Exchange, Nasdaq,
the American Stock Exchange, or in the over-the-counter market, by such
Exchange or by Nasdaq or by order of the SEC or any other governmental
authority having jurisdiction, (v) a banking moratorium shall have been
declared by federal, New York, or Minnesota authorities, (vi) there
shall have been such a serious, unusual and material change in general
economic, monetary, political or financial conditions, or the effect of
international conditions on the financial markets in the United States
shall be such as, in the judgment of the Representative, makes it
inadvisable to proceed with the delivery of the Shares, (vii) the
enactment, publication, decree or other promulgation of any federal or
state statute, regulation, rule or order of any court or other
governmental authority which, in the judgment of the Representative,
materially and adversely affects or will materially and adversely
affect the business or operations of the Company, or (viii) there shall
be a material outbreak of hostilities or material escalation and
deterioration in the political and military situation between the
United States and any foreign power, or a formal declaration of war by
the United States of America shall have occurred. Any such termination
shall be without liability of any party to any other party, except as
provided in Sections 7 and 8 hereof; provided, however, that the
Company shall remain obligated to pay costs and expenses to the extent
provided in Section 4 hereof.
(c) If the Representative elects to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this
Section 9, it shall notify the Company promptly by telegram or
telephone, confirmed by letter sent to the address specified in Section
12 hereof. If the Company shall elect to prevent this Agreement from
becoming effective, it shall notify the Underwriters promptly by
telegram or telephone, confirmed by letter sent to the addresses
specified in Section 12 hereof.
10. Default by the Company. If the Company shall fail at the First Closing Date
to sell and deliver the number of Shares which it is obligated to sell
hereunder, then this Agreement shall terminate without any liability on the part
of any non-defaulting party. No action taken pursuant to this Section shall
relieve the Company from liability, if any, in respect of such default.
11. Survival of Indemnities, Contribution Agreements, Warranties and
Representations. The respective indemnity and contribution agreements of the
Company and the Underwriters contained in Sections 7 and 8; the representations
and warranties of the Company set forth in Section 1 hereof; and the covenants
and agreements of the Company set forth in Section 3 hereof, shall remain
operative and in full force and effect, regardless of any investigation made by,
or on behalf of, the Underwriters, the Company, any of its officers and
directors, or any controlling person referred to in Sections 7 and 8, and shall
survive the delivery of and payment for the Shares. The aforesaid indemnity and
contribution agreements shall also survive any termination or cancellation of
this Agreement. Any successor of any party or of any such controlling person, or
any legal representative of such controlling person, as the case may be, shall
be entitled to the benefit of the respective indemnity and contribution
agreements.
12. Notices. All notices or communications hereunder, except as herein otherwise
specifically provided, shall be in writing and shall be mailed, delivered or
telegraphed, and confirmed, as follows:
If to the Representative or
the Underwriters, to: R. J. Steichen & Company
Midwest Plaza, Suite 1100
801 Nicollet Mall
Minneapolis, Minnesota 55402
Attention: Patrick M. Sidders
with a copy to: Winthrop & Weinstine, P.A.
3000 Dain Bosworth Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
Attention: Michele D. Vaillancourt
If to the Company, to: Eco Soil Systems, Inc.
10890 Thornmint Road, Suite 200
San Diego, California 92127
Attention: William B. Adams
with a copy to: Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402
Attention: Kenneth L. Cutler
13. Information Furnished by the Underwriters. The statements relating to the
stabilization activities of the Underwriters and the statements under the
caption "Underwriting" in any Preliminary Prospectus and in the Prospectus
constitute the written information furnished by, or on behalf of, the
Underwriters specifically for use with reference to the Underwriters referred to
in Section 1(a)(ii) and Section 7(a) hereof.
14. Successors and Assigns. This Agreement shall inure to the benefit of and be
binding upon the Underwriters and the Company and their respective successors
and assigns, and the officers, directors and controlling persons referred to in
Sections 7 and 8. Nothing expressed in this Agreement is intended or shall be
construed to give any person or corporation, other than the parties hereto,
their respective successors and assigns, and the controlling persons, officers
and directors referred to in Sections 7 and 8 any legal or equitable right,
remedy or claim under, or in respect of, this Agreement or any provision herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of the parties
hereto and their respective executors, administrators, successors, assigns and
such controlling persons, officers and directors, and for the benefit of no
other person or corporation. No purchaser of any Shares from the Underwriters
shall be construed a successor or assign merely by reason of such purchase.
15. Governing Law. This Agreement shall be construed and enforced in accordance
with the laws of the State of Minnesota.
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed counterpart of this
Agreement, whereupon it will become a binding agreement among the Company and
the Underwriters in accordance with its terms.
Very truly yours,
ECO SOIL SYSTEMS, INC.
By ________________________________
Signature
___________________________________
Name Typed or Printed
Its________________________________
Title Typed or Printed
ACCEPTANCE
The foregoing Underwriting Agreement is
hereby confirmed and accepted by us, on
behalf of ourselves and the other several
Underwriters named in Schedule I
hereto, as of the date first above written.
R. J. Steichen & Company
As Representative
By ________________________________
Signature
___________________________________
Name Typed or Printed
Its________________________________
Title Typed or Printed
SCHEDULE I
Number of
Underwriters Firm Shares (1)
- ------------ ---------------
R. J. Steichen & Company
---------
Total.......................... 3,000,000
=========
- ------------------
(1) The Underwriters may purchase up to an additional 450,000 Option
Shares, to the extent the option described in Section 2(b) of the
Agreement is exercised, in the proportions and in the manner described
in the Agreement.
APPENDIX A
FORM OF "LOCK-UP" AGREEMENT
R. J. STEICHEN & COMPANY
Midwest Plaza, Suite 1100
801 Nicollet Mall
Minneapolis, MN 55402
Re: Eco Soil Systems, Inc.
Ladies and Gentlemen:
The undersigned, a beneficial owner of common stock (the "Common Stock") of Eco
Soil Systems, Inc. (the "Company"), understands and acknowledges that the
Company is intending to file with the Securities and Exchange Commission a
Registration Statement on Form SB-2 (the "Registration Statement") for the
registration of the offer and sale of shares of Common Stock, including shares
subject to the Underwriters' over-allotment option (collectively, the "Shares").
The undersigned further understands that the Company, as issuer, and R. J.
Steichen & Company, on behalf of the underwriters (collectively, the
"Underwriters") named in Schedule I to that certain proposed underwriting
agreement expected to be entered into in connection with the public offering of
the Shares by the Underwriters (the "Underwriting Agreement"), contemplate
entering into such Underwriting Agreement.
In order to induce the Underwriters to proceed with the public offering, the
undersigned agrees, for the benefit of the Company and the Underwriters, that
should such public offering be effectuated, the undersigned will not, without
the prior written consent of R. J. Steichen & Company, during the 180 days
commencing on the effective date of the Registration Statement:
(i) offer to sell, contract to sell, pledge, hypothecate, transfer
or otherwise dispose of, grant any rights with respect to
(collectively, a "Disposition"), any shares of Common Stock of
the Company, and options, warrants and other rights to
purchase any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for shares of
Common Stock now owned or hereafter acquired by the
undersigned (collectively, "Securities") or with respect to
which the undersigned has or hereafter acquires the power of
Disposition; or
(ii) effect any Disposition of any Securities
other than by gifts to donees who agree in writing to be bound by the same
restriction, or by will or the laws of descent, in which case the Securities
also will be subject to the same restriction.
The undersigned hereby agrees to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of the Securities except in
compliance with this Agreement.
Dated:_______________, 1996. Very truly yours,
_____________________________________
Signature
_____________________________________
Name Typed or Printed
APPENDIX B
FORM OF REPRESENTATIVE'S WARRANTS
ECO SOIL SYSTEMS, INC.
COMMON STOCK PURCHASE WARRANT
NO. _____ 300,000 SHARES
FOR GOOD AND VALUABLE CONSIDERATION, Eco Soil Systems, Inc., a
Nebraska corporation (the "Company"), hereby certifies that R. J. Steichen &
Company, Minneapolis, Minnesota (the "Representative"), or its registered
assigns, is entitled to subscribe for and purchase from the Company at any time
or from time to time after [ONE YEAR FROM EFFECTIVE DATE], to and including
[FIVE YEARS FROM EFFECTIVE DATE], Three Hundred Thousand (300,000) fully paid
and nonassessable shares of the Common Stock of the Company at the purchase
price of $_______ per share [120% OF INITIAL PUBLIC OFFERING PRICE] (the
"Warrant Exercise Price"), subject to adjustment as provided herein. Reference
is made to this Warrant in the Underwriting Agreement dated January ___, 1997 by
and between, among others, the Company and the Representative. As used herein,
(i) this warrant and all warrants hereafter issued in exchange or substitution
for this warrant are referred to as the "Warrants;" (ii) the shares which may be
acquired upon exercise of the Warrants are referred to herein as the "Warrant
Shares;" (iii) the term "Holder" means the Representative, any party who
acquires all or a part of this Warrant as a registered transferee of the
Representative, or any record holder or holders of the Warrant Shares issued
upon exercise, whether in whole or in part, of the Warrant; (iv) the term
"Common Stock" means and includes the Company's presently authorized common
stock, $.005 per share par value, together with any other equity securities
which may be issued by the Company with respect thereto or in substitution
therefor; and (v) the term "Convertible Securities" means any stock or other
securities convertible into, or exchangeable for, Common Stock.
This Warrant is subject to the following provisions, terms and
conditions, to which each Holder hereof consents and agrees:
1. Exercise; Transferability.
(a) The rights represented by this Warrant may be exercised by
the Holder hereof, in whole or in part (but not as to a fractional share of
Common Stock) by written notice of exercise (in the form attached hereto)
delivered to the Company at the principal office of the Company prior to the
expiration of this Warrant and accompanied or preceded by the surrender of this
Warrant along with a check in payment of the Warrant Exercise Price for the
Warrant Shares being acquired upon such exercise.
(b) Until exercisable, this Warrant may not be sold, assigned,
hypothecated, or otherwise transferred (other than by will, pursuant to the
operation of law, or where directed by a court of competent jurisdiction upon
the dissolution or liquidation of a corporate Holder hereof), except to (i) a
person who is both an officer and a shareholder of the Representative, (ii) a
successor in interest to the business of the Representative, (iii) a person who
is both an officer and a shareholder of a successor, or (iv) a person who is an
employee of the Representative or a successor, but only if such employee is also
an officer of the Representative or successor; such transfer to be by
endorsement (by the Holder hereof executing the form of assignment attached
hereto) and delivery in the same manner as in the case of a negotiable
instrument transferable by endorsement and delivery. Further, this Warrant may
not be sold, transferred, assigned, hypothecated or divided into two or more
Warrants of smaller denominations, nor may any Warrant Shares issued pursuant to
exercise of this Warrant be transferred, except as provided in Section 7 hereof.
2. Exchange and Replacement. Subject to Sections 1 and 7 hereof, this
Warrant is exchangeable upon the surrender hereof by the Holder to the Company
at its office for new Warrants of like tenor and date representing in the
aggregate the right to purchase the number of Warrant Shares purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of Warrant Shares (not to exceed the aggregate total number purchasable
hereunder) as shall be designated by the Holder at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction, or mutilation of this Warrant, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
will make and deliver a new Warrant of like tenor, in lieu of this Warrant;
provided, however, that if the Representative shall be such Holder, an agreement
of indemnity by such Holder shall be sufficient for all purposes of this Section
2. This Warrant shall be promptly canceled by the Company upon the surrender
hereof in connection with any exchange or replacement. The Company shall pay all
expenses, taxes (other than stock transfer taxes), and other charges payable in
connection with the preparation, execution, and delivery of Warrants pursuant to
this Section 2.
3. Issuance of the Warrant Shares.
(a) The Company agrees that the shares of Common Stock
purchased upon exercise of this Warrant shall be and are deemed to be issued to
the Holder as of the close of business on the date on which this Warrant shall
have been surrendered and the payment made for such Warrant Shares as aforesaid.
Subject to the provisions of Section 3(b), the Company shall deliver or cause to
be delivered to the Holder within a reasonable time, not exceeding fifteen (15)
calendar days after the rights represented by this Warrant shall have been so
exercised, certificates for the Warrant Shares so purchased, and, unless this
Warrant has expired, a new Warrant representing the right to purchase the number
of Warrant Shares, if any, with respect to which this Warrant shall not then
have been exercised shall also be delivered to the Holder within such time.
(b) Notwithstanding the foregoing, the Company shall not be
required to deliver any certificate for Warrant Shares upon exercise of this
Warrant except in accordance with exemptions from the applicable securities
registration requirements or registrations under applicable securities laws.
Nothing herein, however, shall obligate the Company to effect registrations
under federal or state securities laws, except as provided in Section 9. If
registrations are not in effect and if exemptions are not available when the
Holder seeks to exercise the Warrant, the Warrant exercise period will be
extended, if need be, to prevent the Warrant from expiring, until such time as
either registrations become effective or exemptions are available, and the
Warrant shall then remain exercisable for a period of at least 30 calendar days
from the date the Company delivers to the Holder written notice of the
availability of such registrations or exemptions. The Holder agrees to execute
such documents and make such representations, warranties, and agreements as may
be reasonably required solely to comply with the exemptions relied upon by the
Company, or the registrations made, for the issuance of the Warrant Shares.
4. Covenants of the Company. The Company covenants and agrees that all
Warrant Shares will, upon issuance, be duly authorized and issued, fully paid,
nonassessable and free from all taxes, liens and charges with respect to the
issue thereof. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved for the purpose of issue
or transfer upon exercise of the subscription rights evidenced by this Warrant a
sufficient number of shares of Common Stock to provide for the exercise of the
rights represented by this Warrant.
5. Antidilution Adjustments. The provisions of this Warrant are subject
to adjustment as provided in this Section 5.
(a) If the Company shall at any time after the date this
Warrant was first issued:
(i) declare a dividend on any class of stock of the
Company payable in Common Stock or securities convertible into Common
Stock;
(ii) subdivide its then outstanding shares of Common
Stock into a greater number of shares;
(iii) combine outstanding shares of Common Stock, by
reclassification or otherwise, into a smaller number of shares; or
(iv) issue any shares of its capital stock by
reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which
the Company is the continuing corporation);
then, in any such event, the Warrant Exercise Price in effect at the time of
such record date for such dividend or of the effective date of such subdivision,
combination or reclassification, shall be adjusted immediately after such event
to a price (calculated to the nearest full cent) determined by dividing (A) the
number of shares of Common Stock outstanding immediately prior to such event,
multiplied by the then existing Warrant Exercise Price, by (B) the total number
of shares of Common Stock outstanding immediately after such event (including in
each case the maximum number of shares of Common Stock issuable in respect of
any securities convertible into Common Stock), and the resulting quotient shall
be the adjusted Warrant Exercise Price per share. An adjustment made pursuant to
this subsection shall become effective immediately after the record date in the
case of a dividend or distribution and shall become effective immediately after
the effective date in the case of a subdivision, combination, reclassification
or other event. If, as a result of an adjustment made pursuant to this
subsection, the Holder of any Warrant thereafter surrendered for exercise shall
become entitled to receive shares of two or more classes of capital stock or
shares of Common Stock and other capital stock of the Company, the Company's
Board of Directors (whose determination shall be conclusive, absent manifest
error) shall determine in good faith the allocation of the adjusted Warrant
Exercise Price between or among shares of such classes of capital stock or
shares of Common Stock and other capital stock. Any adjustment made pursuant to
this Section 5(a) shall be made successively whenever any event described above
shall occur. All calculations under this subsection shall be made to the nearest
cent or to the nearest 1/100 of a share, as the case may be. In the event that
at any time as a result of an adjustment made pursuant to this subsection, the
holder of any Warrant thereafter surrendered for exercise shall become entitled
to receive any shares of the Company other than shares of Common Stock,
thereafter the Warrant Exercise Price of such other shares so receivable upon
exercise of any Warrant shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to Common Stock contained in this subsection.
(b) If the Company shall distribute to all holders of Common
Stock (including any such distribution made to the shareholders of the Company
in connection with a consolidation or merger in which the Company is the
continuing corporation) evidences of its indebtedness, cash (other than any cash
dividend which, together with any cash dividends paid within the 12 months prior
to the record date for such distribution, does not exceed 5% of the Current
Market Price (as hereinafter defined) at the record date for such distribution)
or assets (other than dividends payable in shares of its capital stock), or
rights, options, or warrants to subscribe for or purchase Common Stock or
securities convertible into or exchangeable for shares of Common Stock, then, in
each such case, the Warrant Exercise Price shall be adjusted by multiplying the
Warrant Exercise Price in effect immediately prior to the record date for the
determination of shareholders entitled to receive such distribution by a
fraction, the numerator of which shall be the Current Market Price per share of
Common Stock on such record date, less the fair market value (as determined in
good faith by the Company's Board of Directors, whose determination shall be
conclusive, absent manifest error) of the portion of the evidences of
indebtedness or assets so to be distributed, or of such rights, options, or
warrants or convertible or exchangeable securities, or the amount of such cash,
applicable to one share, and the denominator of which shall be such Current
Market Price per share of Common Stock. Such adjustment shall be made whenever
any such distribution is made, and shall become effective on the record date for
the determination of shareholders entitled to receive such distribution.
(c) For the purpose of any computation under this Warrant, the
Current Market Price per share of Common Stock on any date shall be the average
of the daily closing prices for the 30 consecutive trading days immediately
preceding the date in question. The closing price for each day shall be the last
reported sales price regular way or, in case no such reported sale takes place
on such day, the closing bid price regular way, in either case on the principal
national securities exchange (including, for purposes hereof, The Nasdaq
National Market) on which the Common Stock is listed or admitted to trading or,
if the Common Stock is not listed or admitted to trading on any national
securities exchange, the highest reported bid price for the Common Stock as
furnished by the National Association of Securities Dealers, Inc. through Nasdaq
or a similar organization if Nasdaq is no longer reporting such information. If,
on any such date, the Common Stock is not listed or admitted to trading on any
national securities exchange and is not quoted by Nasdaq or any similar
organization, the fair value of a share of Common Stock on such date, as
determined in good faith by the Company's Board of Directors, whose
determination shall be conclusive, absent manifest error, shall be used.
(d) No adjustment in the Warrant Exercise Price shall be
required if such adjustment is less than $.05; provided, however, that any
adjustments which by reason of this Section 5 are not required to be made shall
be carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 5 shall be made to the nearest cent or to the
nearest whole share, as the case may be.
(e) In any case in which this Section 5 shall require that an
adjustment in the Warrant Exercise Price may be made effective as of a record
date for a specified event, the Company may elect to defer, until the occurrence
of such event, issuing to the Holder, if the Holder exercised or converted this
Warrant after such record date, the shares of Common Stock, if any, issuable
upon such exercise or conversion over and above the shares of Common Stock, if
any, issuable upon such exercise or conversion on the basis of the Warrant
Exercise Price in effect prior to such adjustment; provided, however, that the
Company shall deliver to the Holder a due bill or other appropriate instrument
evidencing the Holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
(f) Upon each adjustment of the Warrant Exercise Price
pursuant to Section 5(a) above, the Holder of each Warrant shall thereafter
(until another such adjustment) be entitled to purchase at the adjusted Warrant
Exercise Price the number of shares, calculated to the nearest full share,
obtained by multiplying the number of shares specified in such Warrant (as
adjusted as a result of all adjustments in the Warrant Exercise Price in effect
prior to such adjustment) by the Warrant Exercise Price in effect prior to such
adjustment and dividing the product so obtained by the adjusted Warrant Exercise
Price.
(g) In case of any consolidation or merger to which the
Company is a party other than a merger or consolidation in which the Company is
the continuing corporation, or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, or in the case of any statutory exchange of securities with another
corporation (including any exchange effected in connection with a merger of a
third corporation into the Company), there shall be no adjustment under
Subsection (a) of this Section above but the Holder of each Warrant then
outstanding shall have the right thereafter to convert such Warrant into the
kind and amount of shares of stock and other securities and property which he
would have owned or have been entitled to receive immediately after such
consolidation, merger, statutory exchange, sale, or conveyance had such Warrant
been converted immediately prior to the effective date of such consolidation,
merger, statutory exchange, sale, or conveyance and in any such case, if
necessary, appropriate adjustment shall be made in the application of the
provisions set forth in this subsection with respect to the rights and interests
thereafter of any Holders of the Warrant, to the end that the provisions set
forth in this subsection shall thereafter correspondingly be made applicable, as
nearly as may reasonably be, in relation to any shares of stock and other
securities and property thereafter deliverable on the exercise of the Warrant.
The provisions of this subsection shall similarly apply to successive
consolidations, mergers, statutory exchanges, sales or conveyances.
(h) Upon any adjustment of the Warrant Exercise Price, then
and in each such case, the Company shall (i) give written notice thereof, by
registered mail, postage prepaid, within ten (10) calendar days after the date
when the circumstances giving rise to the adjustment occurred, addressed to the
Holder as shown on the books of the Company, which notice shall state the
Warrant Exercise Price resulting from such adjustment and the increase or
decrease, if any, in the number of shares of Common Stock purchasable at such
price upon the exercise of this Warrant, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based; and
(ii) prepare and retain on file a statement describing in reasonable detail the
method used in arriving at the new Warrant Exercise Price.
6. No Voting Rights. This Warrant shall not entitle the Holder to any
voting rights or other rights as a shareholder of the Company.
7. Notice of Transfer of Warrant or Resale of the Warrant Shares.
(a) Subject to the sale, assignment, hypothecation, or other
transfer restrictions set forth in Section 1 hereof, the Holder, by acceptance
hereof, agrees to give written notice to the Company before transferring this
Warrant or transferring any Warrant Shares of such Holder's intention to do so,
describing briefly the manner of any proposed transfer. Promptly upon receiving
such written notice, the Company shall present copies thereof to the Company's
counsel and to counsel to the original purchaser of this Warrant. If, in the
opinion of each such counsel, the proposed transfer may be effected without
registration or qualification (under any federal or state securities laws), the
Company, as promptly as practicable, shall notify the Holder of such opinion,
whereupon the Holder shall be entitled to transfer this Warrant or to dispose of
Warrant Shares received upon the previous exercise of this Warrant, all in
accordance with the terms of the notice delivered by the Holder to the Company;
provided that an appropriate legend may be endorsed on this Warrant or the
certificates for such Warrant Shares describing restrictions upon transfer
thereof necessary or advisable in the opinion of counsel and satisfactory to the
Company to prevent further transfers which would be in violation of Section 5 of
the Securities Act of 1933, as amended (the "Securities Act") and applicable
state securities laws; and provided further that the prospective transferee or
purchaser shall execute such documents and make such representations,
warranties, and agreements as may be required solely to comply with the
exemptions relied upon by the Company for the transfer or disposition of the
Warrant or Warrant Shares.
(b) If, in the opinion of either of the counsel referred to in
this Section 7, the proposed transfer or disposition of this Warrant or such
Warrant Shares described in the written notice given pursuant to this Section 7
may not be effected without registration or qualification of this Warrant or
such Warrant Shares, the Company shall promptly give written notice thereof to
the Holder, and the Holder will limit its activities in respect to such transfer
or disposition as, in the opinion of both such counsel, are permitted by law.
(c) Until this Warrant is duly transferred on the books of the
Company, the Company shall treat the registered Holder of this Warrant as
absolute owner hereof for all purposes without being affected by any notice to
the Company.
8. Fractional Shares. Fractional shares shall not be issued upon the
exercise of this Warrant, but in any case where the holder would, except for the
provisions of this Section, be entitled under the terms hereof to receive a
fractional share, the Company shall, upon the exercise of this Warrant for the
largest number of whole shares then called for, pay a sum in cash equal to the
sum of (a) the excess, if any, of the "Fair Market Value" (as defined in Section
10(d) hereof) of such fractional share over the proportional part of the Warrant
Exercise Price represented by such fractional share, plus (b) the proportional
part of the Warrant Exercise Price represented by such fractional share.
9. Registration Rights.
(a) The Company agrees that, if at any time (but on a one-time
basis only) during the period commencing one year from the date of this Warrant
and ending five (5) years from [DATE OF EFFECTIVENESS], and provided that a
Registration Statement on Form S-3 (or any successor or equivalent form) is then
available to the Company, the Holder of this Warrant and/or the Holders of any
other Warrants and/or Warrant Shares who collectively shall hold not less than
50% of the Warrants and/or Warrant Shares outstanding at such time and not
previously sold pursuant to this Section 9, shall request that the Company file
a registration statement covering all or any part of the Warrant Shares:
(i) the Company will promptly notify the Holder and
all other registered Holders, if any, of other Warrants and/or Warrant
Shares that such registration statement will be filed and that the
Warrant Shares which are then held and/or which may be acquired upon
the exercise of the Warrants by the Holder and such other Holders will
be included in such registration statement at the Holder's and such
Holders' request; and
(ii) the Company will cause such registration
statement to include all Warrant Shares which it has been so requested
to include, will take all necessary steps to register or qualify such
Warrant Shares under the Securities Act and the securities laws of such
states as the holders may reasonably request, and will use its best
efforts to cause such registration statement and qualifications to
become effective as soon as practicable.
The Company shall keep effective and maintain any registration, qualification,
notification, or approval specified in this Section 9(a) for such period as may
be reasonably necessary for such Holder or Holders of such Warrant Shares to
dispose thereof and from time to time shall amend or supplement the prospectus
used in connection therewith to the extent necessary in order to comply with
applicable law; provided, that the Company need not maintain the effectiveness
of any such registration, qualification, notification or approval, whether or
not at the request of the Holders, more than nine (9) months following the
effective date thereof. Notwithstanding the provisions of this Section 9(a), the
Company shall not be required to file a registration statement covering all or
any part of the Warrant Shares as required by this Section 9(a) if the Company's
Board of Directors or other governing body determines in good faith and by at
least the requisite vote required for such matters that such filing of a
Registration Statement would not be in the best interests of the Company and its
shareholders. If a request for registration is submitted pursuant to this
Section 9(a) and either a Registration Statement is not filed, or a Registration
Statement is filed but is not declared effective by the Securities and Exchange
Commission or any state securities authority within ninety (90) days after
filing and such Registration Statement is withdrawn at the request of the
Holders of at least a majority of the Warrant Shares covered by such
Registration Statement, the right of the Holders to again request registration
of the Warrant Shares under this Section 9(a) shall not be prejudiced or
otherwise affected.
(b) The Company agrees that, if at any time and from time to
time during the period commencing one year from the date of this Warrant and
ending seven (7) years from [DATE OF EFFECTIVENESS], the Company proposes to
file a registration statement under the Securities Act (other than a Form S-4 or
Form S-8 Registration Statement or any successor forms thereto) or qualify for a
public distribution under Section 3(b) of the Securities Act, any of its
securities in connection with the proposed offer of such securities by the
Company or any of its shareholders:
(i) the Company will promptly notify the Holder and
all other registered Holders, if any, of other Warrants and/or Warrant
Shares, at least thirty (30) days prior to each such filing, that it
intends to file such registration statement or effect such
qualification, and that the Warrant Shares which are then held and/or
which may be acquired upon the exercise of the Warrants by the Holder
and such other Holders will be included in such registration statement
or qualification at the Holder's and such Holders' request; and
(ii) the Company will use its best efforts to cause
such registration statement or qualification to include all Warrant
Shares which it has been so requested to include; provided, however,
that in an offering that is underwritten, if a greater number of
Warrant Shares is offered for participation in the proposed offering
than in the reasonable opinion of the managing underwriter of the
proposed offering can be accommodated without adversely affecting the
proposed offering, then the amount of Warrant Shares proposed to be
offered by such Holders for registration, as well as the number of
securities of any other selling shareholders participating in the
registration, shall be proportionately reduced to a number deemed
satisfactory by the managing underwriter.
The Holder and such other Holders may request that their Warrant Shares be
included in such registration statement or qualification by making written
request to the Company specifying the number of Warrant Shares to be so
included. Such request shall be made within twenty (20) days after receipt from
the Company of notice of such intended registration or qualification.
(c) With respect to each inclusion of securities in a
registration or qualification pursuant to this Section 9, the Company shall bear
all fees, costs, and expenses thereof, including, without limitation, all filing
fees, fees imposed by the National Association of Securities Dealers, Inc.,
printing expenses, fees and disbursements of counsel and accountants for the
Company, fees and disbursements of counsel for the underwriter or underwriters
of such securities (if the Company is required to bear such fees and
disbursements), all internal expenses, the premiums and other costs of policies
of insurance against liability arising out of the public offering, and legal
fees and disbursements and other expenses of complying with state securities
laws of any jurisdictions in which the securities to be offered are to be
registered or qualified. Notwithstanding the foregoing, fees and disbursements
of special counsel and accountants for the selling Holders, underwriting
discounts and commissions attributable to the Warrant Shares to be sold, and
transfer taxes for selling Holders shall be borne by the selling Holders.
(d) The Company will furnish the Holders whose Warrant Shares
are included in a registration or qualification pursuant to this Section 9 with
a reasonable number of copies of any prospectus and/or other offering materials
included in such filings and will amend or supplement the same as required
during the period of required use thereof. In connection with any registration
filed or qualification made pursuant to this Section 9 in which Warrant Shares
are included, and to the extent permissible under the Securities Act and
controlling precedent thereunder, the Company and each Holder whose Warrant
Shares are so included in such registration or qualification shall provide
cross-indemnification agreements to each other in customary scope covering the
accuracy and completeness of the information furnished by each in connection
therewith.
(e) Each Holder of Warrant Shares included in a registration
or qualification pursuant to this Section 9 agrees to cooperate with the Company
in the preparation and filing of any such registration statement or other
offering materials and in the furnishing of information concerning the Holder
for inclusion therein, or in any efforts by the Company to establish that the
proposed sale is exempt under the Securities Act as to any proposed
distribution.
10. Right to Convert.
(a) The Holder of this Warrant shall have the right (but not
the obligation) to require the Company to convert this Warrant (the "Conversion
Right"), at any time after one year from the date of this Warrant and prior to
its expiration, into shares of Common Stock as provided for in this Section 10.
Upon exercise of the Conversion Right by the Holder, the Company shall deliver
to the Holder (without payment by the Holder of any exercise price) that number
of shares of Common Stock equal to the quotient obtained by dividing (i) the
value of the Warrant at the time the Conversion Right is exercised (determined
by subtracting the aggregate Warrant Exercise Price for the Warrant Shares in
effect immediately prior to the exercise of the Conversion Right from the
aggregate "Fair Market Value" (as determined below) for the Warrant Shares
immediately prior to the exercise of the Conversion Right) by (ii) the Fair
Market Value of one share of Common Stock immediately prior to the exercise of
the Conversion Right.
(b) The Conversion Right may be exercised by the Holder, at
any time or from time to time, prior to its expiration, on any business day, by
delivering a written notice (the "Conversion Notice") to the Company at the
offices of the Company exercising the Conversion Right and specifying (i) the
total number of shares of Common Stock the Holder will purchase pursuant to such
conversion, and (ii) a place, and a date not less than five (5) nor more than
twenty (20) business days from the date of the Conversion Notice, for the
closing of such purchase.
(c) At any closing under Section 10(b) hereof, (i) the Holder
will surrender the Warrant, (ii) the Company will deliver or cause to be
delivered to the Holder a certificate or certificates for the number of shares
of Common Stock issuable upon such conversion, together with cash, in lieu of
any fraction of a share, and (iii) the Company will deliver to the Holder a new
Warrant representing the number of shares of Common Stock, if any, with respect
to which the Warrant shall not have been converted.
(d) "Fair Market Value" of a share of Common Stock as of a
particular date (the "Determination Date") shall mean:
(i) If the Company's Common Stock is traded on an
exchange or is quoted on The Nasdaq National Market or The Nasdaq
SmallCap Market, then the average closing or last sale prices,
respectively, reported for the ten (10) business days immediately
preceding the Determination Date.
(ii) If the Company's Common Stock is not traded on
an exchange or on The Nasdaq National Market or The Nasdaq SmallCap
Market but is traded in the over-the-counter market, then the average
of the closing bid and asked prices as reported by Metro Data Company,
Inc. (or a similar organization) from quotations by market makers in
such Common Stock on the Minneapolis-St. Paul local over-the-counter
market for the ten (10) business days immediately preceding the
Determination Date.
11. Miscellaneous. The Company shall not, by amendment of its articles
of incorporation or through reorganization, consolidation, merger, dissolution
or sale of assets, or by any other voluntary act or deed, avoid or seek to avoid
the observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by the Company, but will, at
all times in good faith, assist, insofar as it is able, in the carrying out of
all provisions hereof and in the taking of all other action which may be
necessary in order to protect the rights of the Holders against dilution.
Upon written request of the Holder of this Warrant, the Company will
promptly provide such Holder with a then current written list of the names and
addresses of all Holders of warrants originally issued under the terms of, and
concurrent with, this Warrant.
The representations, warranties and agreements herein contained shall
survive the exercise of this Warrant. This Warrant shall be interpreted under
the laws of the State of Minnesota.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its duly authorized officer and to be dated ___________, 1997.
ECO SOIL SYSTEMS, INC.
By____________________________________
Signature
______________________________________
Name Typed or Printed
Its___________________________________
Title Typed or Printed
NOTICE OF EXERCISE OF WARRANT
(To be signed upon the exercise of the Warrant for cash or by check)
The undersigned hereby irrevocably elects to exercise the attached
Warrant and to purchase thereunder, for cash, ________________ of the shares of
Common Stock of Eco Soil Systems, Inc. issuable upon the exercise of such
Warrant, herewith makes payment of $___________ therefor in cash or by check,
and requests that certificates for such shares (together with a new Warrant to
purchase the number of shares, if any, with respect to which this Warrant is not
exercised) be issued in the name set forth below and be delivered to the address
set forth below.
Dated: ________________
_________________________________________
(Signature)
_________________________________________
(Name Typed or Printed)
_________________________________________
(Address)
_________________________________________
(Social Security or Tax Ident. No.)
* The signature on the Notice of Exercise of Warrant must exactly
correspond to the name as written upon the face of the Warrant in every
particular without alteration or any change whatsoever. When signing on
behalf of a corporation, partnership, trust or other entity, PLEASE
indicate your position(s) and title(s) with such entity.
NOTICE OF WARRANT CONVERSION
(To be signed only upon conversion of warrant)
The undersigned hereby irrevocably elects to exercise the conversion
right provided in Section 10 of the attached Warrant and to purchase thereunder
_____________ Shares of the Common Stock of Eco Soil Systems, Inc. to which such
Warrant relates and herewith tenders the Warrant in full payment of the shares
and requests that the certificates for such shares be issued in the name of, and
be delivered to _________________________, whose address is set forth below the
signature of the undersigned.
Dated: ________________
_________________________________________
(Signature)
_________________________________________
(Name Typed or Printed)
_________________________________________
_________________________________________
(Address)
* The signature on the Assignment of Warrant must exactly correspond to
the name as written upon the face of the Warrant in every particular
without alteration or any change whatsoever. When signing on behalf of
a corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
ASSIGNMENT OF WARRANT
(To be signed only upon authorized transfer of the Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers unto _________________________________ the right to purchase
_______________ shares of the Common Stock of Eco Soil Systems, Inc. to which
the within Warrant relates and appoints _________________________________, as
attorney-in-fact, to transfer said right on the books of Eco Soil Systems, Inc.
with full power of substitution in the premises.
Dated: ________________
_________________________________________
(Signature)
_________________________________________
(Name Typed or Printed)
_________________________________________
(Address)
_________________________________________
(Social Security or Tax Ident. No.)
* The signature on the Assignment of Warrant must exactly correspond to
the name as written upon the face of the Warrant in every particular
without alteration or any change whatsoever. When signing on behalf of
a corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
RESTRICTION ON TRANSFER
The security evidenced hereby has not been registered under the
Securities Act of 1933, as amended, or any state securities laws and may not be
sold, transferred, assigned, offered, pledged or otherwise distributed for value
unless there is an effective registration statement under such act or laws
covering such security or the company receives an opinion of counsel for the
Company stating that such sale, transfer, assignment, pledge or distribution is
exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933, as amended, and all applicable state securities laws.
3,000,000 Shares(1)
ECO SOIL SYSTEMS, INC.
Common Stock
SELECTED DEALERS' AGREEMENT
Gentlemen:
1. R. J. Steichen & Company and the other Underwriters named in the
Prospectus referred to below (the "Underwriters"), acting through us as
Representative, have severally agreed to purchase, subject to the terms and
conditions set forth in the Underwriting Agreement referred to in the Prospectus
(the "Underwriting Agreement"), from Eco Soil Systems, Inc., a Nebraska
corporation (the "Company"), an aggregate of 3,000,000 shares (the "Firm
Shares") of the Company's common stock, $0.005 per share par value ("Common
Stock"). In addition, the several Underwriters have been granted an option to
purchase from the Company up to an aggregate of an additional 450,000 shares of
Common Stock (the "Option Shares") to cover overallotments in connection with
the sale of the Firm Shares. The Firm Shares and the Option Shares are
hereinafter collectively called the "Shares." The Shares and the terms upon
which they are to be offered for sale by the several Underwriters are more
particularly described in the enclosed Prospectus.
2. The Shares are to be offered to the public by the several
Underwriters at a price of $_______ per share (hereinafter called the "Public
Offering Price") and in accordance with the terms of offering set forth in the
Prospectus.
3. Subject to the terms and conditions hereof, some or all of the
several Underwriters are severally offering a portion of the Shares for sale to
(i) certain dealers which are members of the National Association of
Shares Dealers, Inc. (the "NASD") and which agree to comply with all
applicable rules of the NASD, including, without limitation, the NASD's
Interpretation with respect to Free-Riding and Withholding and Rule
2740 of the Rules of the Association, and
(ii) foreign dealers or institutions ineligible for membership in the
NASD which agree
(x) not to resell the Shares
(A) to purchasers in, or to persons who are nationals
or residents of, the United States of America, or
- --------
(1) Plus an option to purchase up to 450,000 additional shares to cover
over-allotments.
(B) when there is a public demand for the Shares, to
persons specified as those to whom members of the
NASD participating in a distribution may not sell,
and
(y) to comply, as though such foreign dealer or institution
were a member of the NASD, with such Interpretation with
respect to Free-Riding and Withholding and with Rules 2730,
2740, 2420 (as such Section applies to foreign non-members)
and 2750 of such Rules of the Association
(such dealers and institutions agreeing to purchase Shares hereunder being
hereinafter referred to as "Selected Dealers") at the Pubic Offering Price less
a selling concession of $________ per share, payable as hereinafter provided,
out of which concession an amount not exceeding $______ per share may be
reallowed by Selected Dealers to members of the NASD or to foreign dealers or
institutions ineligible for membership therein which agree as aforesaid. This
offering is made subject to delivery of the Shares and their acceptance by us,
to the approval of all legal matters by counsel and to the terms and conditions
herein set forth. Some or all of the Underwriters may be included among the
Selected Dealers. Each of the Underwriters has agreed that, during the term of
this Agreement, it will be governed by the terms and conditions hereof whether
or not such Underwriter is included among the Selected Dealers.
4. We, acting as Representative, and with our consent, any Underwriter,
may buy Shares from, or sell Shares to, any Selected Dealer, or any other
Underwriter, and any Selected Dealer may buy Shares from, or sell Shares to, any
other Selected Dealer or any Underwriter at the Public Offering Price less all
or any part of the concession. We, acting as Representative, after the initial
public offering, may change the concession and the reallowance.
5. If, prior to the termination of this Agreement, we purchase or
contract to purchase, in the open market or otherwise, for the account of any
Underwriter, any Shares purchased by you hereunder, you agree to pay us on
demand for the accounts of the several Underwriters an amount equal to the
concession on such Shares. In addition, we may charge you with any transfer
taxes and broker's commissions or dealer's mark-up paid in connection with such
purchase or contract to purchase.
6. We shall act on behalf of the Underwriters under this Agreement and
shall have full authority to take such action as we may deem advisable in
respect of all matters pertaining to the public offering of the Shares.
7. If you desire to purchase any of the Shares, your subscription
should reach us promptly by telephone by calling Ms. Vicki Anderson at (612)
341-6276 or by telegraph at the offices of R. J. Steichen & Company, 801
Nicollet Mall, Suite 1100, Minneapolis, Minnesota 55402, and we will use our
best efforts to fill the same. We reserve the right to reject all subscriptions,
in whole or in part, to make allotments and to close the subscription books at
any time without notice. The Shares allotted to you will be confirmed, subject
to the terms and conditions of this Agreement.
8. The privilege of purchasing the Shares is extended to you only on
behalf of the several Underwriters, if any, that may lawfully sell the Shares to
dealers in your state.
9. Any of the Shares purchased by you under the terms of this Agreement
may be immediately reoffered to the public in accordance with the terms of the
offering thereof set forth herein and in the Prospectus, subject to the
securities laws of the various states. Neither you nor any other person is or
has been authorized to give any information or to make any representations in
connection with the sale of the Shares other than as contained in the
Prospectus.
10. This Agreement will terminate when we shall have determined that
the public offering of the Shares has been completed and upon telegraphic notice
to you of such termination, but, if not previously terminated, this Agreement
will terminate at the close of business on the thirtieth (30th) full business
day after the date hereof; provided, however, that we shall have the right to
extend this Agreement for an additional period or periods not exceeding thirty
(30) full business days in the aggregate upon telephonic notice to you. Promptly
after the termination of this Agreement, there shall become payable to you the
selling concession on the number of Shares that you shall have purchased
hereunder and that shall not have been purchased or contracted for (including
certificates issued upon transfer) by us, in the open market or otherwise
(except pursuant to Section 12 hereof), during the term of this Agreement for
account of one or more of the several Underwriters.
11. For the purpose of stabilizing the market in the Common Stock of
the Company, we have been authorized to make purchases and sales thereof, in the
open market or otherwise, and, in arranging for sale of the Shares, to
over-allot.
12. You agree to advise us from time to time upon request, prior to the
termination of this Agreement, of the number of Shares purchased by you
hereunder and remaining unsold at the time of such request, and if, in our
opinion, any such Shares shall be needed to make delivery of the Shares sold or
over-allotted for the account of one or more of the Underwriters, you will,
forthwith upon our request, grant to us for the account or accounts of such
Underwriter or Underwriters the right, exercisable promptly after receipt of
notice from you that such right has been granted, to purchase, at the Public
Offering Price less the selling concession or such part thereof as we shall
determine, such number of Shares owned by you as shall have been specified in
our request.
13. On becoming a Selected Dealer, and in offering and selling the
Shares, you agree (which agreement shall also be for the benefit of the Company)
to comply with all applicable requirements of the Securities Act of 1933, as
amended (the "Securities Act"), and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). You confirm that you are familiar with Rule 15c2-8
under the Exchange Act relating to the distribution of preliminary and final
prospectuses for securities of an issuer and confirm that you have complied and
will comply therewith.
14. Upon request, you will be informed as to the jurisdictions in which
we have been advised that the Shares have been qualified for sale under the
respective securities or Blue Sky laws of such jurisdictions, but neither we nor
any of the Underwriters assume any obligation or responsibility as to the right
of any Selected Dealer to sell the Shares in any jurisdiction or as to any sale
therein. You are responsible for filing any notices, statements or any other
documents with and/or for paying any filing fees or other fees to the respective
securities or Blue Sky law authorities of the states in which the Shares have
been qualified for sale where such notices, statements, or other documents or
fees are necessary or advisable for the sale of the Shares by you in those
states.
15. Additional copies of the Prospectus will be supplied to you in
reasonable quantities upon request.
16. It is expected that public advertisement of the Shares will be no
sooner than the first day after the effective date of the Registration Statement
or such later date as the initial offering price of the Shares is determined if
the Company elects to rely on Rule 430A under the Act. Twenty-four (24) hours
after such advertisement shall have appeared, but not before, you will be free
to advertise at your own expense, over your own name, subject to any restriction
of local laws, but your advertisement must conform in all respects to the
requirements of the Act, and neither we nor the Underwriters shall be under any
obligation or liability in respect of your advertisement.
17. No Selected Dealer is authorized to act as our agent or as agent
for the Underwriters, or otherwise to act on our behalf or on behalf of the
Underwriters, in offering or selling the Shares to the public or otherwise.
18. We and the several Underwriters shall not be under any liability
for or in respect of the value, validity or form of the Shares, or delivery of
the certificates for the Shares, or the performance by anyone of any agreement
on his part, or the qualification of the Shares for sale under the laws of any
jurisdiction, or for or in respect of any matter connected with this Agreement,
except for lack of good faith and for obligations expressly assumed by use or by
the several Underwriters in this Agreement. The foregoing provisions shall not
be deemed a waiver of any liability imposed under the Act.
19. Payment for the Shares sold to you hereunder is to be made at the
Public Offering Price, on or about January 21, 1997 or such later date as we may
advise, by certified or official bank check, payable to the order of R. J.
Steichen & Company, in current funds, at such place as we shall specify on one
day's notice to you against delivery of the Shares. Notwithstanding the
foregoing, if actions in the Shares can be settled through the facilities of The
Depository Trust Company, payment for and delivery of Shares purchased by you
hereunder will be made through the facilities of The Depository Trust Company,
if you are a member, unless you have otherwise notified us prior to the date
specified in our telex or telegram to you, or, if you are not a member,
settlement may be made through a correspondent who is a member pursuant to
instructions you may send us prior to such specified date.
20. Notice to us should be addressed to R. J. Steichen & Company,
Midwest Plaza, Suite 1100, 801 Nicollet Mall, Minneapolis, Minnesota 55402.
Notices to you shall be deemed to have been duly given if telegraphed or mailed
to you at the address to which this letter is addressed.
21. If you desire to purchase any of the Shares, please confirm your
subscription by signing and returning to us your confirmation overleaf on the
duplicate copy of this letter enclosed herewith, even though you have previously
advised us thereof by telephone, teletype or telegraph.
Very truly yours,
R. J. STEICHEN & COMPANY
As Representative
By____________________________________
Signature
Its___________________________________
Title
__________________, 1997.
CONFIRMATION
R. J. STEICHEN & COMPANY
As Representative
Midwest Plaza, Suite 1100
801 Nicollet Mall
Minneapolis, Minnesota 55402
Dear Sirs:
We hereby agree to purchase __________________ shares of common stock,
$.01 par value per share, of Eco Soil Systems, Inc., in accordance with all
terms and conditions stated in the foregoing letter. We hereby acknowledge
receipt of the Prospectus referred to in the first paragraph thereof relating to
said Shares. We further state that in purchasing said Shares we have relied upon
said Prospectus and upon no other statement whatsoever, written or oral. We
hereby confirm that we are a dealer actually engaged in the investment banking
or securities business and that we are either (a) a member in good standing of
the National Association of Securities Dealers. Inc. (the "NASD") or (b) a
dealer with its principal place of business located outside the United States,
its territories and its possessions and not registered as a broker or dealer
under the Securities Exchange Act of 1934, as amended, who hereby agrees not to
make any sales within the United States, its territories or its possessions or
to persons who are nationals thereof or residents therein. We hereby agree to
comply with all applicable rules of the NASD, including, without limitation, the
NASD's Interpretation with respect to Free-Riding and Withholding and Rule 2740
of the Rules of the Association and, if we are a foreign dealer and not a member
of the NASD, we also agree to comply with such Interpretation with respect to
Free-Riding and Withholding and to comply, as though we were a member of the
NASD, with Rules 2730, 2740, 2420 (as such Rule applies to foreign non-members)
and 2750 of Article III of such Rules of the Association. We confirm that we
will not sell any of the Shares to discretionary accounts.
______________________________________
By____________________________________
Authorized Representative
______________________________________
(Address)
______________________________________
Dated: ___________________, 1997.
3,000,000 Shares(1)
ECO SOIL SYSTEMS, INC.
Common Stock
AGREEMENT AMONG UNDERWRITERS
R. J. STEICHEN & COMPANY _____________, 1997
As Representative of the several Underwriters
named in Schedule I to the Underwriting
Agreement described herein
Midwest Plaza, Suite 1100
801 Nicollet Mall
Minneapolis, Minnesota 55402
Dear Sirs:
1. Underwriting Agreement. We understand that an underwriting agreement
(the "Underwriting Agreement") substantially in the form furnished
simultaneously herewith with respect to 3,000,000 shares (the "Firm Shares") of
common stock, $0.005 per share par value ("Common Stock"), of Eco Soil Systems,
Inc., a Nebraska corporation (the "Company"), proposed to be sold by the Company
is to be entered into among the Company, you and other prospective underwriters,
acting severally and not jointly. The parties on whose behalf you are to execute
the Underwriting Agreement to be named in Schedule I thereto and are herein
called the "Underwriters." The Underwriting Agreement also provides for the
grant by the Company to the several Underwriters of an option, on the terms and
conditions set forth therein, to purchase up to an additional 450,000 shares of
Common Stock (the "Option Shares"). The Firm Shares and any Option Shares
purchased pursuant to the Underwriting Agreement are hereinafter collectively
called the "Shares." It is also understood that changes may be made to those who
are to be Underwriters and to the respective aggregate number of Shares to be
purchased by them, but that the aggregate number of the Shares to be purchased
by us as set forth in the accompanying form of Underwriting Agreement will not
be changed without our consent except as provided herein or in the Underwriting
Agreement.
2. Registration Statement and Prospectus. As used herein, the terms
"Registration Statement," "Preliminary Prospectus" and "Prospectus" shall have
the meanings ascribed to them in the Underwriting Agreement. You will furnish to
us as soon as possible copies of the Prospectus to be used in connection with
the offering of the Shares. We will confirm that, if
- --------
(1) Plus an option to purchase up to 450,000 additional shares to cover
over-allotments.
requested by you as Representative, that we have furnished a copy of any amended
Preliminary Prospectus to each person to whom we have furnished a copy of any
previous Preliminary Prospectus, and we confirm that we have delivered and agree
that we will deliver all Preliminary Prospectuses and Prospectuses and all
supplements thereto required for compliance with the provisions of Rule 15c2-8
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We
consent to being named in the Prospectus as one of the Underwriters of the
Shares.
3. Authority and Compensation. We hereby authorize you, as our
Representative and on our behalf, to enter into the Underwriting Agreement with
the Company substantially in the form furnished simultaneously herewith and to
take such action as you deem advisable in connection with the performance of the
Underwriting Agreement and this Agreement and the purchase, carrying, sale and
distribution of the Shares. You may waive performance or satisfaction by the
Company of other obligations or conditions included in the Underwriting
Agreement if, in your judgment, such waiver will not have a material adverse
effect upon the interests of the Underwriters.
As compensation for your services, we will pay you an amount equal to
$_____ per share with respect to each share of the Shares which we agree to
purchase under the Underwriting Agreement, and you may charge our account
therefor.
4. Public Offering. In connection with the public offering of the
Shares, we authorize you, in your discretion:
(a) To determine the time of the initial public offering, to
change the public offering price and the concessions and discounts to
dealers after the initial public offering, to furnish the Company with
the information to be included in the Registration Statement or
Prospectus with respect to the terms of offering and to determine all
matters relating to advertising and communications with dealers or
others;
(b) To reserve for sale to dealers selected by you ("Selected
Dealers") and to others, all or any part of our Shares, such
reservations for sales to others to be as nearly as practicable in
proportion to the respective underwriting obligations of the
Underwriters unless you agree to a smaller proportion at the request of
any Underwriter and, from time to time, to add to the reserved Shares
any Shares retained by us remaining unsold and to release to us any of
our Shares reserved but not sold;
(c) To sell reserved Shares, as nearly as practicable in
proportion to the respective reservations, to Selected Dealers at the
public offering price less the Selected Dealers' concession and to
others at the public offering price; and
(d) To buy Shares for our account from Selected Dealers at the
public offering price less such amount not in excess of the Selected
Dealers' concession as you determine.
We authorize you to determine the form and manner of any communications
or agreements with Selected Dealers. If there shall be any agreements with
Selected Dealers, you are authorized to act as manager thereunder, and we agree
in such event to be governed by the terms and conditions of such agreements. The
form of Selected Dealers' Agreement furnished simultaneously herewith is
satisfactory to us.
Sales of Shares between Underwriters may be made with your prior
consent, or as you deem advisable for Blue Sky purposes.
After advice from you that the Shares have been released for public
offering, we will offer to the public in conformity with the terms of offering
set forth in the Prospectus such of our Shares as you advise us are not
reserved.
If, prior to the termination of this Agreement, you shall purchase or
contract to purchase, in the open market or otherwise, any Shares sold by us
(otherwise than through you) pursuant to this Agreement, we agree to repurchase
such Shares on demand at a price equal to the total cost of such purchase made
by you as Representative, including commissions, if any, and transfer taxes on
the redelivery. Certificates for the Shares delivered on such repurchase need
not be the identical certificates so purchased by you. In lieu of such action,
you may in your discretion sell for our account the Shares so purchased and
debit or credit our account for the loss or profit resulting from such sale, or
charge our account with an amount not in excess of the Selected Dealers'
concession with respect to such Shares.
5. Payment and Delivery. We authorize you to make payment on our behalf
to the Company of the purchase price of our Shares, to take delivery of our
Shares, registered as you may direct in order to facilitate deliveries, and to
deliver our reserved Shares against sales. At your request, we will pay you an
amount equal to the public offering price, less the selling concession, of
either our Shares or our unreserved Shares as you direct, and such payment will
be directed to our account and applied to the payment of the purchase price.
After you receive payment for reserved Shares sold for our account, you will
remit to us the purchase price (if any) paid by us for such Shares and credit or
debit our account with the difference between the sale price and the purchase
price thereof. You will deliver to us our unreserved Shares promptly, and our
reserved but unsold Shares against payment of the purchase price therefor
(except in the case of Shares for which payment has previously been made), as
soon as practicable after the termination of the provisions referred to in
Section 9 hereof, except that if the aggregate number of reserved but unsold
Shares upon such termination does not exceed 10% of the total number of the
Shares, you may in your discretion sell such reserved but unsold Shares for the
accounts of the several Underwriters as soon as practicable after such
termination, at such prices and in such manner as you determine.
6. Authority to Borrow. In connection with the purchase or carrying of
our Shares, we authorize you, in your discretion, to advance your funds for our
account, charging current interest rates, to arrange loans for our account, and
in connection therewith to execute and deliver any notes or other instruments
and to hold or pledge as security any of our Shares. Any lender may rely upon
your instructions in all matters relating to any such loan. Any Shares held by
you for our account may be delivered to us for carrying purposes and, if so
delivered, will be redelivered to you upon demand.
7. Stabilization and Over-Allotment. We authorize you, in your
discretion, to make purchases and sales of Shares and of the outstanding shares
of Common Stock, in the open market or otherwise, for long or short account, on
such terms as you deem advisable, and to over-allot in arranging sales. Such
purchases and sales and over-allotments will be made for the accounts of the
Underwriters as nearly as practicable in proportion to their respective
underwriting obligations. We authorize you, in your discretion, to cover any
short position incurred pursuant to this Section by purchasing securities on
such terms as you deem advisable. At no time will our net commitment under the
foregoing provisions of this Section exceed 15% of our underwriting obligation.
We will on demand take up at cost any securities so purchased and deliver any
securities so sold or over-allotted for our account, and, if any other
Underwriter defaults in its corresponding obligation, we will assume our
proportionate share of such obligation without relieving the defaulting
Underwriter from liability. Upon request, we will advise you of the Shares
retained by us and unsold and will sell to you for the account of one or more of
the Underwriters such of our unsold Shares at such price, not less than the net
price to Selected Dealers nor more than the public offering price, as you
determine.
If you effect stabilizing purchases pursuant to Section 7 hereof, you
will notify us promptly of the initiation and termination thereof. If
stabilization is effected, we will furnish to you not later than three business
days following the date on which stabilizing was commenced such information as
is required by Rule 17a-2(d) under the Exchange Act.
8. Open Market Transactions. We and you agree not to bid for, purchase,
attempt to induce others to purchase, or sell, directly or indirectly, any
Shares or outstanding shares of Common Stock, except as brokers pursuant to
unsolicited orders and as otherwise provided in this Agreement.
We represent that we have not participated in any transaction
prohibited by the preceding paragraph and that we have at all times complied
with the provisions of Rules l0b-6 and l0b-6A of the Securities and Exchange
Commission as applicable to the offering of the Shares.
9. Termination. The provisions of the last two paragraphs of Section 4,
the first sentence of Section 7, and all of Section 8 hereof, will terminate at
the close of business on the thirtieth (30th) day after the date of the initial
public offering of the Shares, unless sooner terminated as hereinafter provided.
You may terminate such provisions at any time by notice to us to the effect that
the offering provisions of this Agreement are terminated.
10. Expenses and Settlement. You may charge our account with any
transfer taxes on sales made by you of Shares purchased by us under the
Underwriting Agreement and with our proportionate share (based upon our
underwriting obligation) of all other expenses incurred by you under this
Agreement or in connection with the purchase, carrying, sale or distribution of
the Shares. The accounts hereunder will be settled as promptly as practicable
after the termination of the provisions referred to in Section 9 hereof, but you
may reserve such amount as you may deem advisable for additional expenses. Your
determination of the amount to be paid to or by us will be conclusive. You may
at any time make partial distributions of credit balances or call for payment of
debit balances. Any of our funds in your hands may be held with your general
funds without accountability for interest. Notwithstanding any settlement, we
will remain liable for any taxes on transfers for our account, and for our
proportionate share (based upon our underwriting obligation) of all expenses and
liabilities which may be incurred by or for the accounts of the Underwriters.
11. Default by Underwriters. Default by one or more Underwriters
hereunder or under the Underwriting Agreement will not release the other
Underwriters from their obligations or affect the liability of any defaulting
Underwriter to the other Underwriters for damages resulting from such default.
If one or more Underwriters default under the Underwriting Agreement, you may
arrange for the purchase by others, including nondefaulting Underwriters, of
Shares not taken up by the defaulting Underwriter or Underwriters.
12. Position of Representative. You will be under no liability to us
for any act or omission except for obligations expressly assumed by you herein,
and no obligation on your part will be implied hereby or inferred herefrom. The
rights and liabilities of the Underwriters are several and not joint, and
nothing will constitute the Underwriters a partnership, association or separate
entity.
If for federal income tax purposes the Underwriters should be deemed to
constitute a partnership, then each Underwriter elects to be excluded from the
application of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code
of 1986, as amended. You, as Representative of the several Underwriters, are
authorized, in your discretion, to execute on behalf of the Underwriters such
evidence of such election as may be required by the Internal Revenue Service.
13. Indemnification. We will indemnify and hold harmless each other
Underwriter and each person, if any, who controls such Underwriter within the
meaning of Section 15 of the Securities Act of 1933, as amended (the "Securities
Act"), or Section 20(a) of the Exchange Act, and reimburse your and their
expenses, to the extent and upon the terms upon which each Underwriter agrees to
indemnity the Company in the Underwriting Agreement.
14. Contribution. Each Underwriter (including you) will pay upon your
request, as contribution, its proportionate share, based upon its underwriting
obligation, of any losses, claims, damages or liabilities, joint or several,
paid or incurred by any Underwriter to any person other than an Underwriter,
arising out of or based upon any untrue statement or alleged untrue statement of
any material fact contained in the Registration Statement, the Prospectus, any
amendment or supplement thereto or any related Preliminary Prospectus, or any
other selling or advertising material approved by you for use by the
Underwriters in connection with the sale of the Shares, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading (other than an untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by an Underwriter specifically for use therein); and will pay such
proportionate share of any legal or other expenses reasonably incurred by you or
with your consent in connection with investigating or defending any such loss,
claim, damage or liability, or any action in respect thereof. In determining the
amount of any Underwriter's obligation under this Section, appropriate
adjustment may be made by you to reflect any amounts received by one or more
Underwriters in respect of such claim from the Company pursuant to Section 6 of
the Underwriting Agreement or otherwise. There shall be credited against any
amount paid or payable by us pursuant to this Section any loss, damage,
liability or expense which is incurred by us as a result of any such claim
asserted against us, and if such loss, claim, damage, liability or expense is
incurred by us subsequent to any payment by us pursuant to this Section,
appropriate provisions shall be made to effect such credit, by refund or
otherwise. If any such claim is asserted, you may take such action in connection
therewith as you deem necessary or desirable, including retention of counsel for
the Underwriters, and in your discretion separate counsel for any particular
Underwriter or group of Underwriters, and the fees and disbursements of any
counsel so retained by you shall be included in the amount payable pursuant to
this Section. In determining amounts payable pursuant to this Section, any loss,
claim, damage, liability or expense incurred by any person controlling any
Underwriter within the meaning of Section 15 of the Securities Act or Section
20(a) of the Exchange Act which has been incurred by reason of such control
relationship shall be deemed to have been incurred by such Underwriter. Any
Underwriter may elect to retain at its own expense its own counsel. You may
settle or consent to the settlement of any such claim, on advice of counsel
retained by you, with the approval of a majority in interest of the
Underwriters. Whenever you receive notice of the assertion of any claim to which
the provisions of this Section would be applicable, you will give prompt notice
thereof to each Underwriter. You will furnish each Underwriter with periodic
reports, at such times as you deem appropriate, as to the status of such claim
and the action taken by you in connection therewith. If any Underwriter or
Underwriters default in their obligation to make any payments under this
Section, each nondefaulting Underwriter shall be obligated to pay its
proportionate share of all defaulted payments, based upon such Underwriter's
underwriting obligation as related to the underwriting obligations of all
nondefaulting Underwriters.
15. Reports and Blue Sky Matters. We authorize you to file with the
Securities and Exchange Commission and any other governmental agency any reports
required in connection with any transaction effected by you for our account
pursuant to this Agreement, and we will furnish any information needed for such
reports. You will not have any responsibility with respect to the right of any
Underwriter or other person to sell the Shares in any jurisdiction,
notwithstanding any information you may furnish in that connection.
16. Miscellaneous. Any notice hereunder from you to us or from us to
you shall be deemed to have been duly given when sent by mail, telegram or
delivered in person, if to us, at the address stated in the Underwriters'
Questionnaire or telex constituting Questionnaire which we have furnished in
connection with this offering or, if to you, to R. J. Steichen & Company,
Midwest Plaza, Suite 1100, 801 Nicollet Mall, Minneapolis, Minnesota 55402.
We understand that you are members in good standing of the National
Association of Securities Dealers, Inc. ("NASD"). We hereby confirm that we are
either (i) a member in good standing of the NASD or (ii) a dealer with its
principal place of business located outside the United States, its territories
and its possessions and not registered as a broker or dealer under the Exchange
Act who agrees not to make any sales within the United States, its territories
or its possessions or to persons who are nationals thereof or residents therein.
We hereby agree to comply with all applicable rules of the NASD, including,
without limitation, the NASD's Interpretation with respect to Free-Riding and
Withholding and Rule 2740 of the Rules of the Association and, if we are a
foreign dealer and not a member of the NASD, to comply with such Interpretation
with respect to Free-Riding and Withholding and the provisions of Rules 2730,
2740, 2420 (as such Section applies to foreign nonmembers) and 2750 of Article
III of such Rules of the Association as though we were a member of the NASD. In
connection with the sales and offers to sell Shares made by us outside the
United States (x) we will either furnish to each person to whom any such sale or
offer is made a copy of the then current Preliminary Prospectus or the
Prospectus (as then amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), as the case may be, or inform such
person that such Preliminary Prospectus or Prospectus will be available upon
request and (y) we will furnish to each person to whom any such sale or offer is
made such Prospectus, advertisement or other offering document containing
information relating to the Shares or the Company as may be required under the
law of the jurisdiction in which such offer or sale is made. Any prospectus,
advertisement or other offering document furnished by us to any such person in
accordance with the preceding sentence and any such additional offering material
as we may furnish to any person (A) shall comply in all respects with the law of
the jurisdiction in which it is so furnished, (B) shall be prepared and so
furnished at our sole risk and expense, and (C) shall not contain information
relating to the Shares or the Company which is inconsistent in any respect with
the information contained in the then current Preliminary Prospectus or in the
Prospectus (as then amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), as the case may be. We confirm that we
will not make sales of the Shares to discretionary accounts.
This instrument may be signed by the Underwriters in various
counterparts which together shall constitute one and the same agreement among
all the Underwriters and shall become effective at such time as all the
Underwriters shall have signed such counterparts and you shall have confirmed
all such counterparts.
Please confirm that the foregoing correctly states the understanding
between us by signing and returning to us a counterpart hereof.
Very truly yours,
________________________________________
[Type or Print Firm Name]
By______________________________________
Signature of Authorized Representative
________________________________________
Name of Authorized Representative Typed
or Printed
Its_____________________________________
Title of Authorized Representative Typed
or Printed
Accepted and confirmed as of the date first above written.
R. J. STEICHEN & COMPANY
As Representative
By: ___________________________________
Its____________________________________
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
ECO SOIL SYSTEMS, INC.
PURSUANT to the provisions of R.S. Supp. 21-2056 and 21-2064
of the Nebraska Business Corporation Act, the undersigned Corporation hereby
adopts the following Amended and Restated Articles of Incorporation:
1. The name of the Corporation is Eco Soil Systems, Inc.
2. These Amended and Restated Articles of Incorporation,
which restate, integrate and amend the Articles of Incorporation of this
Corporation, were duly adopted by the Board of Directors of the Corporation in
accordance with the provisions of Section 21-2056 and Section 21-2064 of the
Nebraska Business Corporation Act.
3. These Amended and Restated Articles of Incorporation
supersede the original Articles of Incorporation, as amended.
4. The Articles of Incorporation as heretofore amended are
hereby amended and restated in their entirety as follows:
ARTICLE 1.
The name of this Corporation is Eco Soil Systems, Inc.
ARTICLE 2.
The period of the Corporation's duration is perpetual.
ARTICLE 3.
The purpose of this Corporation is to engage in any lawful act
or activity for which corporations may be organized under the Nebraska Business
Corporation Act.
ARTICLE 4.
A. Authorized Shares.
The total number of shares of stock which this Corporation is
authorized to issue is 25,000,000 shares of a par value of one half cent ($.005)
per share, of which 20,000,000 shares shall be Common Stock and 5,000,000 shares
shall be Preferred Stock. Before any of such stock is issued, it shall be paid
for in full in cash or in securities, property or other equivalent at a price
agreeable to the Board of Directors.
B. Preferred Stock.
Authority is hereby expressly vested in the Board of
Directors, subject to the provisions of this Article 4 and to the limitations
prescribed by law, to authorize the issue from time to time one or more
series of preferred stock and with respect to each such series to fix, by
resolution or resolutions adopted by the affirmative vote of a majority of the
whole Board of Directors providing for the issue of such series, the voting
powers, full or limited, if any, of the shares of such series and the
designations, preferences and relative, participating, optional or other special
rights and the qualifications, limitations or restrictions thereof. The
authority of the Board of Directors with respect to each series shall include,
but not be limited to, the determination or fixing of the following:
(1) The number of shares constituting such series and the
designation of such series.
(2) The dividend rate of such series, the conditions and dates
upon which such dividends shall be payable, the relation which such
dividends shall bear to the dividends payable on any other class or
classes or series of this Corporation's capital stock, and whether such
dividends shall be cumulative or noncumulative.
(3) Whether the shares of such series shall be subject to
redemption by this Corporation at the option of either the Corporation
or the holder or both or upon the happening of a specified event, and,
if made subject to any such redemption, the times or events, prices and
other terms and conditions of such redemption.
(4) The terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such series.
(5) Whether or not the shares of such series shall be
convertible into, or exchangeable for, at the option of either the
holder or the Corporation or upon the happening of a specified event,
shares of any other class or classes or of any other series of the same
or any other class or classes of the Corporation's capital stock, and,
if provision be made for conversion or exchange, the times or events,
prices, rates, adjustments, and other terms and conditions of such
conversions or exchanges.
(6) The restrictions, if any, on the issue or reissue of any
additional preferred stock, including increases or decreases in the
number of shares of any series subsequent to the issue of shares of
that series.
(7) The rights of the holders of the shares of such series
upon the voluntary or involuntary liquidation, dissolution or winding
up of the Corporation.
(8) Any right to vote with holders of shares of any other
series or class and any right to vote as a class, either generally or
as a condition to specified corporate action, in addition to any voting
powers required by law.
ARTICLE 5.
In furtherance, and not in limitation, of the powers conferred
by statute, the Board of Directors is expressly authorized to make, amend,
alter, change, add to or repeal bylaws of the Corporation, without any action on
the part of the shareholders. The bylaws made by the Board of Directors may be
amended, altered, changed, added to or repealed by the shareholders. Any
specific provision in the bylaws regarding amendment thereof shall be
controlling.
ARTICLE 6.
The Shareholders of the Corporation shall have pre-emptive
rights to acquire unissued shares of the Corporation.
ARTICLE 7.
The name and mailing address/place of residence of the
Incorporator is as follows:
Kenneth L. Cutler
Pillsbury Center South
220 South Sixth Street
Minneapolis, MN 55402
The address of the registered office of the Corporation and the name of
the resident agent at such address is as follows:
Heartland Capital Fund Ltd.
11930 Arbor Street, Suite 201
Omaha, NE 68144
ARTICLE 8.
The affairs of the Corporation shall be conducted by a Board
of Directors, the number of which shall be set by the Shareholders of the
Corporation. The Directors shall elect officers of the Corporation, including
but not limited to a President, a Secretary, and a Treasurer.
ARTICLE 9.
A Director of the Corporation shall not be personally liable
to the Corporation or its shareholders for monetary damages for breach of
fiduciary duty as a Director; provided, however, that this article shall not
eliminate or limit the liability of a Director (a) for any breach of the
Director's duty of loyalty to the Corporation or its shareholders; (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (c) for the unlawful payment of dividends or unlawful
stock purchases or redemptions under Section 21-2046 of the Nebraska Business
Corporation Act; or (d) for any transaction from which the Director derived an
improper personal benefit. This article shall not eliminate or limit the
liability of a Director for any act or omission occurring prior to the effective
date of this Article 9.
If the Nebraska Business Corporation Act is hereafter amended
to authorize any further limitation of the liability of a Director, then the
liability of a Director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Nebraska Business Corporation Act, as amended.
Any repeal or modification of the foregoing provisions of this
Article 9 by the shareholders of the Corporation shall not adversely affect any
right or protection of a Director of the Corporation existing at the time of
such repeal or modification.
ARTICLE 10.
In furtherance and not in limitation of the powers conferred
on them by the laws of the State of Nebraska, the Board of Directors are
expressly authorized to make and alter bylaws, to manage and control the affairs
of the Corporation, to elect and appoint officers, agents and employees of the
Corporation, and to delegate such duties and powers as they may deem necessary
and expedient.
The Corporation may, in its bylaws, confer powers additional
to the foregoing, upon the Directors, in addition to the powers and authorities
expressly conferred upon them by law.
In absence of fraud, no contract or other transaction between
the Corporation or any other person, corporation, firm, syndicate, association,
partnership or joint venture shall be wholly or partially invalidated or
otherwise affected by reason of the fact that one or more Directors of the
Corporation are or become directors or officers of such other corporation, firm,
syndicate or association, or members of such partnerships, or joint ventures, or
have a pecuniary or other interest in such contractual transaction, provided,
however, that the fact that such Director of the Corporation is so situated or
so interested in both corporations, shall be disclosed or shall have been known
to the Board of Directors of the Corporation. Any Director of the Corporation
who is also a director or officer of such other corporation, firm, syndicate or
association, or member of such partnership, or joint venture, or has a pecuniary
or other interest in such contract or transaction may be counted for the purpose
of determining the existence of a quorum at any meeting of the Board of
Directors of the Corporation authorizing any such contract or transaction, and
in the absence of fraud, and as long as such Director acts in good faith, any
such Director may vote thereat to authorize any such contract or transaction,
with like force and effect as if such Director were not a director or officer of
such other firm, corporation, syndicate or association, or a member of such
partnership or joint venture, or had a pecuniary or other interest in such
contract or transaction.
ARTICLE 11.
The Corporation reserves the right to amend, alter, change, or
repeal any or all of the provisions contained in these Amended and Restated
Articles of Incorporation in the manner now or hereafter prescribed by statute,
and all rights conferred upon shareholders herein are granted subject to this
reservation.
ARTICLE 12.
The objects specified herein shall, except where otherwise
expressed, be in no way limited or restricted by reference to or inference from
the terms of any other clause or paragraph of these Amended and Restated
Articles of Incorporation. `The objects and purposes and powers specified in
each of the clauses or paragraphs in these Amended and Restated Articles of
Incorporation shall be regarded as independent objects, purposes and powers.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed
his name this 6th day of December, 1996.
/s/ Jeffrey A. Johnson, Secretary
Exhibit 5.1
Eco Soil Systems, Inc.
10890 Thornmint Road, Suite 200
San Diego, California 92127
Re: Eco Soil Systems, Inc.
Registration Statement on Form SB-2
Registration No. 333-15883
Ladies and Gentlemen:
We have acted as counsel to Eco Soil Systems, Inc. (the "Company"), a
Nebraska corporation, in connection with a Registration Statement on Form SB-2
(the "Registration Statement") relating to the issuance and sale of 3,450,000
shares of Common Stock, $.005 par value (the "Shares"), of the Company. The
Shares will be issued pursuant to an Underwriting Agreement dated January __,
1997 (the "Underwriting Agreement") between the Company and R. J. Steichen and
Company (the "Underwriter").
We have examined such documents and have reviewed such questions of law
as we have considered necessary and appropriate for the purposes of our opinion
set forth below. In rendering our opinion, we have assumed the authenticity of
all documents submitted to us as originals, the genuineness of all signatures
and the conformity to authentic originals of all documents submitted to us as
copies. We have also assumed the legal capacity for all purposes relevant hereto
of all natural persons and, with respect to all parties to agreements or
instruments relevant hereto, that such parties had the requisite power and
authority (corporate or otherwise) to execute, deliver and perform such
agreements or instruments, that such agreements or instruments have been duly
authorized by all requisite action (corporate or otherwise), executed and
delivered by such parties and that such agreements or instruments are the valid,
binding and enforceable obligations of such parties. We have also assumed that
the Shares will be issued and sold as described in the Registration Statement.
Based on the foregoing, we are of the opinion that the Shares being
sold by the Company have been duly authorized and, upon issuance, delivery and
payment therefor as described in the Underwriting Agreement, will be legally
issued, fully paid and nonassessable.
The opinion set forth above is subject to the following qualifications
and exceptions:
(a) Our opinion is subject to the effect of any applicable
bankruptcy, insolvency, reorganization, moratorium or other similar law
of general application affecting creditors' rights.
(b) Our opinion is subject to the effect of general principles
of equity, including (without limitation) concepts of materiality,
reasonableness, good faith and fair dealing, and other similar
doctrines affecting the enforceability of agreements generally
(regardless of whether considered in a proceeding in equity or at law).
We are admitted to practice in the State of Minnesota, and we express
no opinion as to the laws of any jurisdiction other than the State of Minnesota
and the federal laws of the United States of America. For purposes of our
opinions set forth above with respect to corporate matters, we have relied
solely on a review of (a) a copy of the Company's articles of incorporation, as
certified by the Secretary of State of the State of Nebraska and (b) a good
standing certificate issued with respect to the Company by the Secretary of
State of the State of Nebraska. We are not able to express, and do not express,
any opinion with respect to the Nebraska Business Corporation Act.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to our firm under the caption
"Legal Matters" in the Prospectus constituting part of the Registration
Statement.
Dated: January __, 1997
Very truly yours,
/s/ DORSEY & WHITNEY LLP
ECO SOIL SYSTEMS, INC.
STOCK OPTION PLAN
Article I. Establishment and Purpose
1.1 Establishment. Eco Soil Systems, Inc., a Nebraska Corporation
("Company"), hereby establishes a stock option plan for employees and other
providing services to the Company as described herein, which shall be known as
the "STOCK OPTION PLAN OF 1992" (the "Plan"). It is intended that certain of the
options issued pursuant to the Plan to employment of the Company may constitute
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code, and that other options issued pursuant to the Plan shall
constitute nonstatutory options. The board shall determine which options are to
be incentive stock options and which are to be nonstatutory options and shall
enter into option agreements with recipients accordingly.
1.2 Purposes. The purpose of this Plan is to enhance stockholder
investment by attracting, retaining and motivating key employees and consultants
of the Company, and to encourage stock ownership by such employees and
consultants by providing them with a means to acquire a proprietary interest in
the Company's success.
Article II. Definitions
2.1 Definitions. Whenever used herein, the following terms shall have
the respective meanings set forth below, unless the context clearly requires
otherwise, and when said meaning is intended, the term shall be capitalized.
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the Committee provided for by Article
IV hereof, which may be created at the discretion of the
Board.
(d) "Company" means Eco Soil Systems, Inc., a Nebraska
Corporation.
(e) "Consultant" means any person or entity, including an officer
as director of the Company, who provides services (other than
as an Employee) to the Company.
(f) "Date of Exercise" means the date the Company receives notice,
by an Optionee, of the exercise of an Option pursuant to
section 8.1 of this Plan. Such notice shall indicate the
number of shares of Stock the Optionee intends to exercise.
(g) "Employee" means any person, including an officer or director
of the Company, who is employed by the Company.
(h) "Fair Market Value" means the fair market value of Stock upon
which an option is granted under this Plan.
(i) "Incentive Stock Option" means an Option granted under this
Plan which is intended to qualify as an "incentive stock
option" within the meaning of Section 422 of the Code.
(j) "Nonstatutory Option" means an Option granted under this Plan
which is not intended to qualify as an incentive stock option
within the meaning of Section 422 of the Code. Nonstatutory
Options may be granted at such times and subject to such
restrictions as the Board shall determine without conforming
to the statutory rules of Section 422 of the Code applicable
to incentive stock options.
(k) "Option" means the right, granted under this Plan, to purchase
Stock of the Company at the option price for a specified
period of time. For purposes of this Plan, an Option may be
either an Incentive Stock Option or a Nonstatutory Option.
(l) "Optionee" means an Employee or consultant holding an Option
under the Plan.
(m) "Parent Corporation" shall have the meaning set forth in
Section 424(3) of the Code with the Company being treated as
the employer corporation for purposes of this definition.
(n) "Subsidiary Corporation" shall have the meaning set forth in
Section 24(f) of the Code with the Company being treated as
the employer corporation for purposes of this definition.
(o) "Significant Shareholder" means an individual who, within the
meaning of section 422(b)(6) of the Code, owns stock
possessing more than ten percent of the total combined voting
power of all classes of stock of the Company or of any Parent
Corporation or Subsidiary Corporation of the Company. In
determining whether an individual is a Significant
Shareholder, an individual shall be treated as owning stock
owned by certain relatives of the individual and certain stock
owned by corporations in which the individual is a
shareholder, partnerships in which the individual is a
partner, and estates or trusts of which the individual is a
beneficiary, all as provided in Section 424(d) of the Code.
(p) "Stock" means the one-half cent par value common stock of the
Company.
2.2 Gender and Number. Except when otherwise indicated by the context,
any masculine terminology when used in this Plan also shall include the feminine
gender, and the definition of any term herein in the singular also shall include
the plural.
Article III. Eligibility and Participation
3.1 Eligibility and Participation. All Employees are eligible to
participate in this Plan and receive Incentive Stock Options and/or Nonstatutory
Options hereunder. All Consultants are eligible to participate in this Plan and
receive Nonstatutory Options hereunder. Optionees in the Plan shall be selected
by the Board from among those Employees and Consultants who, in the opinion of
the Board, are in a position to contribute materially to the Company's continued
growth and development and to its long-term financial success.
Article IV. Administration
4.1 Administration. The Board shall be responsible for
administering the Plan.
The Board is authorized to interpret the Plan; to prescribe, amend, and
rescind rules and regulations relating to the Plan; to provide for conditions
and assurances deemed necessary or advisable to protect the interests of the
Company and to take all other determinations necessary or advisable for the
administration of the Plan, but only to the extent not contrary to the express
provisions of the Plan. Determinations, interpretations, or other actions made
or taken by the Board pursuant to the provisions of this Plan shall be final and
binding and conclusive for all purposes and upon all persons.
At the discretion of the Board this Plan may be administered by a
Committee which shall be an executive committee of the Board, consisting of not
less than three (3) members of the Board. The members of such Committee may be
directors who are eligible to receive Options under this Plan, but Options may
be granted to such persons only by actions of the full Board and not by action
of the Committee. Such Committee shall have full power and authority, subject to
the limitations of the Plan and any limitations imposed by the Board, to
construe, interpret and administer this Plan and to make determinations which
shall be final, conclusive and binding upon all persons, including, without
limitation, the Company, the stockholders, the directors and any persons having
any interests in any Options which may be granted under this Plan, and, by
resolution or resolution providing for the creation and issuance of any such
Option, to fix the terms upon which, the time or times at or within which, and
the price or prices at which any such shares may be purchased from the Company
upon the exercise of such Option, which terms, time or times and price or prices
shall, in every case, be set forth or incorporated by reference to the
instrument or instruments evidencing such Option, and shall be consistent with
the provisions of this Plan.
The Board may from time to time remove members from, or add members to,
the Committee. The Board may terminate the committee at any time. Vacancies on
the committee, howsoever caused, shall be filled by the Board. The Committee
shall select one of its members as Chairman, and shall hold meetings at such
times and places as the Chairman may determine. A majority of the Committee at
which a quorum is present, or acts reduced to or approved in writing by all of
the members of the Committee, shall be the valid acts of the Committee. A quorum
shall consist of two-thirds (2/3) of the members of the Committee.
Where the Committee has been created by the Board, references herein to
actions to be taken by the Board shall be deemed to refer to the committee as
well, except where limited by this Plan or by the Board.
The Board shall have all of the enumerated powers of the Committee, but
shall not be limited to such powers. No member of the Board or the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any Option granted under it.
Article V. Stock Subject to the Plan.
5.1 Number. The total number of shares of Stock hereby made available
and reserved for issuance under the Plan shall be 2,000,000. The aggregate
number of shares of Stock available under this Plan shall be subject to
adjustment as provided in section 5.3. The total number of shares of Stock may
be authorized but unissued shares of Stock, or shares acquired by purchase as
directed by the Board from time to time in its discretion, to be used for
issuance upon exercise of Options granted hereunder.
5.2 Unused Stock. If an Option shall expire or terminate for any reason
without having been exercised in full, the unpurchased shares of Stock subject
thereto shall (unless the Plan shall have terminated) become available for other
Options under the Plan.
5.3 Adjustment in Capitalization. In the event of any change in the
outstanding shares of Stock by reason of a stock dividend or split,
recapitalization, reclassification, or another similar corporate change, the
aggregate number of shares of Stock set forth in section 5.1 shall be
appropriately adjusted by the Board, whose determination shall be conclusive;
provided however, that fractional shares shall be rounded to the nearest whole
share. In any such case, the number and kind of shares that are subject to any
Option (including any Option outstanding after termination of employment) and
the Option price per share shall be proportionately and appropriately adjusted
without any change in the aggregate Option price to be paid therefor upon
exercise of the Option.
Article VI. Duration of the Plan
6.1 Duration of the Plan Subject to stockholder approval, the Plan
shall be in effect for ten years from the date of its adoption by the Board. Any
Options outstanding at the end of said period shall remain in effect in
accordance with their terms. The Plan shall terminate before the end of said
period, if all Stock subject to it has been purchased pursuant to the exercise
of Options granted under the Plan.
Article VII. Terms of Stock Options
7.1 Grant of Options. Subject to section 5.1, Options may be granted to
Employees or Consultants at any time and from time to time as determined by the
Board; provided, however, that consultants may receive only Nonstatutory
Options, and may not receive Incentive Stock Options. The Board shall have
complete discretion in determining the number of Options granted to each
Optionee. In making such determinations, the Board may take into account the
nature of services rendered by such Employees or consultants, their present and
potential contributions to the Company, and such other factors as the Board in
its discretion shall deem relevant. The Board also shall determine whether an
Option is to be an Incentive Stock Option or a Nonstatutory Option.
In the case of Incentive Stock Options the total Fair Market Value
(determined at the date of grant) of shares of Stock with respect to which
incentive stock options granted after December 31, 1986 are exercisable for the
first time by the Optionee during any calendar year under all plans of the
Company under which Incentive stock options may be granted (and all such plans
of any Parent Corporations and any subsidiary Corporations of the Company) shall
not exceed $100,000. (Hereinafter, this requirement is sometimes referred to as
the "$100,000 Limitation".)
Nothing in this Article VII of the Plan shall be deemed to prevent the
grant of Options permitting exercise in excess of the maximum established by the
preceding paragraph where such excess amount is treated as Nonstatutory Option.
The Board is expressly given the authority to issue amended or
replacement options with respect to shares of Stock subject to an Option
previously granted hereunder. An amended Option amends the terms of an Option
previously granted and thereby supersedes the previous option. A replacement
Option is similar to a new Option granted hereunder except that it provides that
it shall be forfeited to the extent that a previously granted Option is
exercised, or except that its issuance is conditioned upon the termination of a
previously granted Option.
7.2 No Tandem Options. Where an Option granted under this Plan is
intended to be an Incentive Stock Option, the Option shall not contain terms
pursuant to which the exercise of the Option would affect the Optionee's right
to exercise another Option, or vice versa, such that the Option intended to be
an Incentive Stock Option would be deemed a tandem stock option within the
meaning of the regulations under Section 422 of the Code.
7.3 Option Agreement; Terms and Conditions to Apply Unless Otherwise
Specified. As determined by the board on the date of grant, each Option shall be
evidenced by an Option agreement (the "Option Agreement") that includes the
nontransferability provisions required by Section 10.2 hereof and specifies:
Whether the Option is an Incentive Stock Option or a Nonstatutory Option; the
Option Price; the duration of the Option; the number of shares of Stock to which
the Option applies; any vesting or exercisability restrictions which the Board
may impose; if appropriate, in the case of an Incentive Stock Option, a
provision implementing the $100,000 Limitation; and any other terms or
conditions which the Board may impose. All such terms and conditions shall be
determined by the Board at the time of grant of the Option.
If not otherwise specified by the Board, the following terms and
conditions shall apply to Options granted under the Plan:
(a) Term. The duration of the Option shall be five (5) years from
the date of grant. (The duration can never be more than five
(5) years in the case of an Incentive Stock Option granted to
a Significant Shareholder).
(b) Exercise of Option. Unless an Option is terminated as provided
hereunder, an Optionee may exercise his Option for up to, but
not in excess of, the amounts of shares subject to the Option
specified below, based on the Optionee's number of years of
continuous services with the Company or a Subsidiary
Corporation of the Company from the date on which the Option
is granted. In the case of an Optionee who is an Employee,
continuous service shall mean continuous employment; in the
case of an Optionee who is a Consultant, continuous services
shall mean the continuous provision of consulting services. In
applying said limitations, the amount of shares, if any
previously purchased by the Optionee under the Option shall be
counted in determining the amount of shares the Optionee can
purchase at any time. The Optionee may exercise his Option in
the following accounts:
(i) After one (1) year of such continuous services for up
to but not in excess of one-third of the shares
originally subject to the Option;
(ii) After two (2) years of such continuous services, for
up to but not in excess of two-thirds of the shares
originally subject to the Option;
(iii) At the expiration of the third (3rd) year of such
continuous services the Option may be exercised at
any time and from time to time within its terms in
whole or in part, but it shall not be exercisable
after the expiration of five (5) years.
The Board shall be free to specify terms and conditions other than those set
forth above, in its discretion.
All Option Agreements shall incorporate the provisions of this Plan by
reference, with certain provisions to apply depending upon whether the Option
Agreement applies to an Incentive Stock Option or to a Nonstatutory Option.
7.4 Option Price. No Incentive Stock Option Granted pursuant to this
Plan shall have an Option price that is less than the Fair Market Value of Stock
on the date the Option is granted. Incentive Stock Options granted to
Significant Shareholders shall have an Option price of not less than 11 percent
of the Fair Market Value of Stock on the date of grant. The Option price for
Nonstatutory Options shall be established by the Board and shall not be subject
to the restrictions applicable to Incentive Stock Options.
7.5 Term of Options. Each Option shall expire at such time as the board
shall determine when it is granted provided however, that no Option shall be
exercisable later than the tenth anniversary date of this grant. By its terms,
an Incentive Stock Option granted to a Significant Shareholder shall not be
exercisable after five years from the date of grant.
7.6 Exercise of Options. Options granted under the Plan shale be
exercisable at such times and be subject to such restrictions and conditions as
the Board shall in each instance approve, which need not be the same for all
Optionees.
7.7 Payment. Payment for all shares of Stock shall be made at the time
that an Option, or any part thereof, is exercised, and no shares shall be issued
until full payment therefor has been made. Payment shall be made (i) in cash, or
(ii) if acceptable to the Board, in stock or in some other form; provided,
however, in the case of an Incentive Stock Option, that said other form of
payment does not prevent the option from qualifying for treatment as an
"incentive stock option" within the meaning of the Code.
Article VIII. Written Notice, Issuance of Stock Certificates,
Stockholder Privileges
8.1 Written Notice. An Optionee wishing to exercise an Option shall
give written notice to the Company, in the form and manner prescribed by the
Board. Full payment for the shares exercised pursuant to the Option must
accompany the written notice.
8.2 Issuance of Stock Certificates. As soon as practicable after the
receipt of written notice and payment, the Company shall deliver to the Optionee
a certificate or certificates for the requisite number of shares of Stock.
8.3 Privileges of a Stockholder. An optionee or any other person
entitled to exercise an Option under this Plan shall not have stockholder
privileges with respect to any Stock covered by the Option until the date of
issuance of a stock certificate for such stock.
Article IX. Termination of Employment or Services
9.1 Death. If an Optionee's employment in the case of an Employee, or
provision of services as a Consultant, in the case of a consultant, terminates
by reason of death, the Option amy thereafter be exercised at any time prior to
the expiration date of the Option or within 12 months either the date of such
death, whichever period is the shorter, by the person or persons entitled too
under the Optionee's will or, if the Optionee shall fail to have a testamentary
disposition of an Option or shall die intestate, the Optionee's legal
representative or representatives. The Option shall be exercisable only to the
extent that such Option was exercisable as of the date of death.
9.2 Termination Other Than For Cause or Due to Death. In the event of
an Optionee's termination of employment, in the case of an Employee, or
termination of the provision of services as a Consultant, in the case of a
Consultant, other than by reason of death, the Optionee may exercise such
portion of his Option as was exercisable by him at the date of such termination
(the "Termination Date") at any time within three (3) months of the Termination
Date; provided, however, that where the Optionee is an Employee, and is
terminated due to disability within the meaning of Code ss. 422, he may exercise
such portion of his Option as was exercisable by him on his Termination Date
within one year of his Termination Date. In any event, the Option cannot be
exercised after the expiration of the term of the Option. Options not exercised
within the applicable period specified above shall terminate.
In the case of an Employee, a change of duties or position within the
Company or an assignment of employment in a Subsidiary Corporation or Parent
Corporation of the Company, if any, or from such Corporation to the Company,
shall not be considered a termination of employment for purposes of this Plan.
The Option Agreements may contain such provisions as the Board shall approve
with reference to the effect of approved leaves of absence upon termination of
employment.
9.3 Termination for Cause. In the event of an Optionee's termination of
employment, in the case of an Employee, or termination of the provision of
services as a Consultant, in the case of a Consultant, which termination is by
the Company for cause, any Option or Options held by him under the Plan, to the
extent not exercised before such termination, shall forthwith terminate.
Article X. Rights of Optionees
10.1 Service. Nothing in this Plan shall interfere with or limit in any
way the right of the Company to terminate any Employee's employment, or any
Consultant's services, at any time, nor confer upon any Consultant any right to
continue to provide services to the Company.
10.2 Nontransferability. All Options granted under this Plan shall be
nontransferable by the OPtionee, other than by will or the laws of descent and
distribution, and shall be exercisable during the Optionee's lifetime only by
the Optionee.
Article XI. Optionee-Employee's
Transfer of Leave of Absence
11.1 Optionee-Employee's Transfer of Leave of Absence. For Plan
purposes--
(a) A transfer of an Optionee who is an Employee from the
Company to a Subsidiary Corporation or Parent
Corporation, or from one such Corporation to another,
or
(b) a leave of absence for such an Optionee (i) which is
only authorized in writing by the Company, and (ii)
if the Optionee holds an Incentive Stock Option,
which qualifies under the applicable regulations
under the Code which apply in the case of incentive
stock options,
shall not be deemed a termination of employment. However, under no circumstances
may an Optionee exercise an Option during any leave of absence, unless
authorized by the Board.
Article XII. Amendment
Modification and Termination of the Plan
12.1 Amendment, Modification, and Termination of the Plan. The Board
may at any time terminate, and from time to time may amend or modify the Plan,
provided, however, that no such action of the Board, without approval of the
stockholders, may--
(a) increase the total amount of Stock which may be
purchased through Options granted under the Plan,
except as provided in Article V;
(b) change the class of Employees or Consultants eligible
to receive Options;
No amendment, modification, or termination of the Plan shall in any manner
adversely affect any outstanding Option under the Plan without the consent of
the Optionee holding the Option.
Article XIII. Acquisition, Merger, or Liquidation
13.1 Acquisition In the event that an Acquisition occurs with respect
to the Company, the Company shall have the option, but not the obligation, to
cancel Options outstanding as of the effective date of Acquisition, whether or
not such Options are then exercisable, in return for payment to the Optionees of
an amount equal to a reasonable estimate of an amount (hereinafter the "Spread")
equal to the difference between the net amount per share payable in the
Acquisition, or as a result of the Acquisition, less the exercise price of the
Option. In estimating the Spread, appropriate adjustments to give effect to the
existence of the Options shall be made, such as deeming the Options to have been
exercised, with the Company receiving the exercise price payable thereunder, and
treating the shares receivable upon exercise of the Options as being outstanding
in determining the net amount per share. For purposes of this section, an
"Acquisition" shall mean any transaction in which substantially all of the
Company's assets are acquired or in which a controlling amount shall mean more
than 50% of the issued and outstanding shares of stock of the Company. The
Company shall have such an option regardless of how the Acquisition is
effectuated, whether by direct purchase, through a merger or similar corporate
transaction, or otherwise. In cases where the acquisition consists of the
acquisition of assets of the Company, the net amount per share shall be
calculated on the basis of the net amount receivable with respect to shares upon
a distribution and liquidation by the Company after giving effect to expenses
and charges, including but not limited to taxes, payable by the Company before
the liquidation can be completed.
Where the Company does not exercise its option under this Section 13.1
the remaining provisions of this Article XIII shall apply, to the extent
applicable.
13.2 Merger or Consolidation. Subject to any required action by the
stockholders, if the Company shall be the surviving corporation in any merger or
consolidation, any Option granted hereunder shall pertain to and apply to the
securities to which a holder of the number of shares of Stock subject to the
option would have been entitled in such merger or consolidation.
13.3 Other Transactions. A dissolution or a liquidation of the Company
or a merger and consolidation in which the Company is not the surviving
corporation shall cause every Option outstanding hereunder to terminate as of
the effective date of such dissolution, liquidation, merger or consolidation.
However, the Optionee either (i) shall be offered a firm commitment whereby the
resulting or surviving corporation in a merger or consolidation will tender to
the Optionee an option (the "Substitute Option") to purchase its shares on terms
and conditions both as to the number of shares and otherwise, which shall
substantially preserve to the Optionee the rights and benefits of the Option
outstanding hereunder granted by the Company, or (ii) shall have the right
immediately prior to such dissolution, liquidation, merger, or consolidation to
exercise any unexercised Options whether or not then exercisable, subject to the
provisions of this Plan. The board shall have absolute and uncontrolled
discretion to determine whether the Optionee has been offered a firm commitment
and whether the tendered Substitute Option will substantially preserve to the
Optionee the rights and benefits of the Option outstanding hereunder. In any
event, any Substitute Option for an Incentive Stock Option shall comply with the
requirements of Code Section 424(a).
Article XIV. Securities Registration
14.1 Securities Registration. In the event that the Company shall deem
it necessary or desirable to register under the Securities Act of 1933, as
amended, or any other applicable statute, any Options or any Stock with respect
to which an Option may be or shall have been granted or exercised, or to qualify
any such Options or Stock under the Securities Act of 1933, as amended, or any
other statute, then the Optionee shall cooperate with the Company and take such
action as is necessary to permit registration or qualification of such Options
or Stock.
Unless the Company has determined that the following representation is
unnecessary, each person exercising an Option under the Plan may be required by
the Company, as a condition to the issuance of the shares pursuant to exercise
of the Option, to make a representation in writing (a) that he is acquiring such
shares for his own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof, (b) that before any
transfer in connection with the resale of such shares, he will obtain the
written opinion of counsel for the Company, or other counsel acceptable to the
Company, that such shares may be transferred. The Company may also require that
the certificates representing such shares contain legends reflecting the
foregoing.
Article XV. Tax Withholding
15.1 Tax Withholding. Whenever shares of Stock are to be issued in
satisfaction of Options exercised under this Plan, the Company shall have the
power to require the recipient of the Stock to remit to the Company an amount
sufficient to satisfy federal, state, and local withholding tax requirements.
Article XVI. Indemnification
16.1 Indemnification To the extent permitted by law, each person who is
or shall have been a member of the Board shall be indemnified and held harmless
by the Company against and from any loss, cost, liability, or expense that may
be imposed upon or reasonably incurred by him in connection with or resulting
from any claim, action, suit, or proceeding to which he may be a party or in
which he may be involved by reason of any action taken or failure to act under
the Plan and against and from any and all amounts paid by him in settlement
hereof, with the Company approval, or paid by him in satisfaction of judgment in
any such action, suit, or proceeding against him, provided he shall give the
Company an opportunity, at its own expense, to handle and defend the same before
he undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification to
which such person may be entitled under the Company's articles of incorporation
or bylaws, as a matter of law, or otherwise, or any power that the Company may
have to indemnify them or hold them harmless.
Article XVII. Requirements of Law
17.1 Requirements of Law. The granting of Options and the issuance of
shares of Stock upon the exercise of an Option shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.
17.2 Governing Law The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of
California.
Article XVIII. Effective Date of Plan
18.1 Affecting Date. The Plan shall be effective on February 5, 1992,
the date of its adoption by the Board.
Article XIX. Compliance with Code.
19.1 Compliance with Code. Incentive Stock Options granted hereunder
are intended to qualify as "incentive stock options" under Code ss. 422. If any
provision of this plan is susceptible to more than one interpretation, such
interpretation shall be given thereto as is consistent with Incentive Stock
Options granted under this Plan being treated as incentive stock options under
the Code.
Article XX. No Obligation to Exercise Option.
20.1 No obligation to Exercise. The granting of an Option shall
impose no obligation upon the holder thereof to exercise such Option.
ECO SOIL SYSTEMS, INC.
By: /s/ Jeffrey A. Johnson
Its President
ECO SOIL SYSTEMS, INC.
1996 DIRECTORS' STOCK OPTION PLAN
1. Purpose of the Plan. The purpose of this Eco Soil Systems, Inc.
Directors' Stock Option Plan is to attract and retain the best available
individuals for service as Directors of the Company and provide additional
incentive to the Outside Directors of the Company to serve as Directors.
None of the options granted hereunder shall be "incentive stock
options" within the meaning of Section 422 of the Code (as hereinafter defined).
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean Eco Soil Systems, Inc., a Nebraska
corporation.
(e) "Continuous Status as a Director" shall mean the absence
of any interruption or termination of service as a Director.
(f) "Director" shall mean a member of the Board.
(g) "Employee" shall mean any person, including officers and
Directors, employed by the Company or any parent or Subsidiary of the Company.
The payment of a Director's fee by the Company shall not be sufficient in and of
itself to constitute "employment" by the Company.
(h) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(i) "Option" shall mean a stock option granted pursuant to the
Plan.
(j) "Optioned Stock" shall mean the Common Stock subject to an
Option.
(k) "Optionee" shall mean an Outside Director who receives an
Option.
(l) "Outside Director" shall mean a Director who is not an
Employee.
(m) "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 425(e) of the Code.
(n) "Plan" shall mean this Directors' Stock Option Plan.
(o) "Shares" shall mean shares of the Common Stock, as
adjusted in accordance with Section 10 of the Plan.
(p) "Subsidiary" shall mean a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section 425(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 10
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 60,000 Shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan. If Shares which were acquired upon exercise of an
Option are subsequently repurchased by the Company, such Shares shall not in any
event be returned to the Plan and shall not become available for future grant
under the Plan.
4. Administration of and Grants of Options under the Plan.
(a) Administrator. Except as otherwise required herein, the
Plan shall be administered by the Board.
(b) Procedure for Grants. The provisions set forth in this
Section 4(b) shall not be amended more than once every six months, other than to
comport with changes in the Code, the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder. All grants of Options hereunder shall
be automatic and nondiscretionary and shall be made strictly in accordance with
the following provisions:
(i) No person shall have any discretion to select
which Outside Directors shall be granted Options or to determine the number of
Shares to be covered by Options granted to Outside Directors.
(ii) Each Outside Director shall be automatically
granted an Option (an "Initial Grant") to purchase 10,000 Shares upon the date
on which such person first becomes a Director, whether through election by the
shareholders of the Company or appointment by the Board of Directors to fill a
vacancy. Options granted under this section 4(b)(ii) shall become vested and
thereby exercisable with respect to 33.33% of such Initial Grant on the twelve
month anniversary date of such Initial Grant and with respect to 33.33% at each
successive anniversary date; provided, however, an unvested portion of an
Initial Grant shall only vest so long as the Outside Director remains a Director
on the date such portion vests.
(iii) Each Outside Director shall automatically
receive, on the date of each Annual Meeting of Shareholders, an Option to
purchase 3,000 Shares of the Company's Common Stock, such Option to become
exercisable six months subsequent to the date of grant; provided, however, that
such Option shall only be granted to Outside Directors who have served since the
date of the last Annual Meeting of Shareholders and will continue to serve after
the date of grant of such Option.
(iv) The terms of an Option granted hereunder shall
be as follows:
(A) the term of the Option shall be ten (10)
years.
(B) the Option shall be exercisable only
while the Outside Director remains a Director of the
Company, except as set forth in Section 8 hereof.
(C) the exercise price per Share shall be
100% of the fair market value per Share on the date
of grant of the Option.
(D) to the extent necessary to comply with
the applicable provisions of Rule 16b-3 promulgated
under the Exchange Act ("Rule 16b-3"), no Option will
be exercisable until a date more than six months
subsequent to the date of the grant of that Option.
(c) Powers of the Board. Subject to the provisions and
restrictions of the Plan, the Board shall have the authority, in its discretion:
(i) to determine, upon review of relevant information and in accordance with
Section 7(b) of the Plan, the fair market value of the Common Stock; (ii) to
determine the exercise price per share of Options to be granted, which exercise
price shall be determined in accordance with Section 7(a) of the Plan; (iii) to
interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations
relating to the Plan; (v) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Option previously
granted hereunder; and (vi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(d) Effect of Board's Decision. All decisions, determinations
and interpretations of the Board shall be final and binding on all Optionees and
any other holders of any Options granted under the Plan.
5. Eligibility. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4(b) hereof.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate the directorship at any time.
6. Term of Plan. The Plan shall become effective upon the earlier of
(i) its adoption by the Board or (ii) its approval by the shareholders of the
Company as described in Section 16 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 12 of the Plan.
7. Exercise Price and Consideration.
(a) Exercise Price. The per Share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be 100% of the Fair
Market Value per Share on the date of grant of the Option.
(b) Fair Market Value. The fair market value ("Fair Market
Value") of a Share shall be determined by the Board in its discretion; provided,
however, that where there is a public market for the Common Stock, the fair
market value per Share shall be the closing price of the Common Stock in the
over-the-counter market on the date of grant, as reported in The Wall Street
Journal (or, if not so reported, as otherwise reported by the National
Association of Securities Dealers Automated Quotation ("NASDAQ") System) or, in
the event the Common Stock is traded on the NASDAQ National Market System, The
Nasdaq Smallcap Market or listed on a stock exchange, the fair market value per
Share shall be the closing price on such system or exchange on the date of grant
of the Option, as reported in The Wall Street Journal.
(c) Form of Consideration. Subject to compliance with
applicable provisions of Section 16(b) of the Exchange Act (or other applicable
law), the consideration to be paid for the Shares to be issued upon exercise of
an Option, including the method of payment, shall be determined by the Board and
may consist entirely of (i) cash, (ii) check, (iii) other Shares which (X) in
the case of Shares acquired upon exercise of an Option, have been owned by the
Optionee for more than six months on the date of surrender, and (Y) have a Fair
Market Value on the date of exercise equal to the aggregate exercise price of
the Shares as to which said Option shall be exercised, (iv) authorization for
the Company to retain from the total number of Shares as to which the Option is
exercised that number of Shares having a Fair Market Value on the date of
exercise equal to the exercise price for the total number of Shares as to which
the Option is exercised, (v) delivery of a properly executed exercise notice
together with irrevocable instructions to a broker to deliver promptly to the
Company the amount of sale or loan proceeds required to pay the exercise price,
(vi) delivery of an irrevocable subscription agreement for the Shares which
irrevocably obligates the option holder to take and pay for the Shares not more
than twelve months after the date of delivery of the subscription agreement,
(vii) any combination of the foregoing methods of payment or (viii) such other
consideration and method of payment for the issuance of Shares as may be
permitted under applicable laws. In making its determination as to the type of
consideration to accept, the Board shall consider whether acceptance of such
consideration may be reasonably expected to benefit the Company.
8. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any
Option granted hereunder shall be exercisable at such times as are set forth in
Section 4(b) hereof; provided, however, that no Options shall be exercisable
until shareholder approval of the Plan in accordance with Section 16 hereof has
been obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received by
the Company. Full payment may consist of any consideration and method of payment
allowable under Section 7(c) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. A share certificate for the number of Shares so acquired shall be issued
to the Optionee as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 10 of the Plan.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Status as a Director. If an Outside
Director ceases to serve as a Director, such Director may, but only within two
years after the date such Director ceases to be a Director of the Company,
exercise an Option to the extent that such Director was entitled to exercise it
at the date of such termination. To the extent that such Director was not
entitled to exercise an Option at the date of such termination, or if such
Director does not exercise such Option (which such Director was entitled to
exercise) within the time specified herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of
Section 8(b) above, an Optionee who is unable to continue to serve as a Director
with the Company as a result of a total and permanent disability (as defined in
Section 22(e)(3) of the Code) may, but only within seven (7) months from the
date of termination, exercise an Option to the extent such Director was entitled
to exercise it at the date of such termination. To the extent that such Director
was not entitled to exercise the Option at the date of termination, or if such
Director does not exercise such Option (which such Director was entitled to
exercise) within the time specified herein, the Option shall terminate.
(d) Death of Optionee. Notwithstanding the provisions of
Section 8(b) above, in the event of the death of an Optionee:
(i) during the term of the Option who is, at the time
of death, a Director of the Company and who has been in Continuous Status as a
Director since the date of grant of the Option, the Option may be exercised, at
any time within seven (7) months following the date of death, by the Optionee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance, but only to the extent of the right to exercise that would have
accrued had the Optionee continued living and remained in Continuous Status as a
Director for six (6) months after the date of death; or
(ii) within thirty (30) days after the termination of
Continuous Status as a Director, the Option may be exercised, at any time within
seven (7) months following the date of death, by the Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that had accrued at the date of
termination.
9. Non-Transferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
10. Adjustments Upon Changes in Capitalization, Dissolution or Merger.
(a) In the event that the number of outstanding shares of
Common Stock of the Company is changed by a stock dividend, stock split, reverse
stock split, combination, reclassification or similar change in the capital
structure of the Company without consideration, the number of Shares available
under this Plan and the number of Shares subject to outstanding Options and the
exercise price per share of such Options shall be proportionately adjusted,
subject to any required action by the Board or shareholders of the Company and
compliance with applicable securities laws; provided, however, that no
certificate or scrip representing fractional shares shall be issued upon
exercise of any Option and any resulting fractions of a Share shall be ignored.
Such adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive.
(b) In the event of a dissolution or liquidation of the
Company, a merger in which the Company is not the surviving corporation, a
transaction or series of related transactions in which 100% of the then
outstanding voting stock is sold or otherwise transferred, or the sale of
substantially all of the assets of the Company, any or all outstanding
Options shall, notwithstanding any contrary terms of the written agreement
governing such Option, accelerate and become exercisable in full at least ten
days prior to (and shall expire on) the consummation of such dissolution,
liquidation, merger or sale of stock or sale of assets on such conditions as the
Board shall determine unless the successor corporation assumes the outstanding
Options or substitutes substantially equivalent options.
11. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the determination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
12. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time
amend, alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuance shall be made which would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 under
the Exchange Act (or any other applicable law or regulation), the Company shall
obtain shareholder approval of any Plan amendment in such a manner and to such a
degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
14. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of the Shares available
for issuance pursuant to this Plan as shall be sufficient to satisfy the
requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
16. Shareholder Approval.
(a) The Plan shall be subject to approval by the shareholders
of the Company within twelve (12) months of its adoption by the Board. If such
shareholder approval is obtained at a duly held shareholders' meeting, it may be
obtained by the affirmative vote of the holders of a majority of the outstanding
shares of the Company present or represented and entitled to vote thereon. If
such shareholder approval is obtained by written consent, it may be obtained by
the written consent of the holders of a majority of the outstanding shares of
the Company.
(b) Any required approval of the shareholders of the Company
shall be solicited substantially in accordance with Section 14(a) of the
Exchange Act and the rules and regulations promulgated thereunder.
17. Information to Optionees. The Company shall provide to each
Optionee, during the period for which such Optionee has one or more Options
outstanding, copies of all annual reports to shareholders, proxy statements and
other information provided to all shareholders of the Company.
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made as of the 21st day of May 1991, by and between
Eco-Soil Systems, Inc., a Nebraska corporation (the "Corporation"), and William
B. Adams, of San Diego County, California, (hereinafter called "Employee"),
W I T N E S S E T H:
WHEREAS, the Corporation desires to employ the Employee as its Chairman
of the Board and Chief Executive Officer in accordance with the following terms,
conditions and provisions; and
WHEREAS, the Employee desires to perform such services for the
Corporation, all in accordance with the following terms, conditions and
provisions;
WHEREAS, Employee has purchased 183,199 shares of the Corporation's
stock;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, it is agreed as follows:
Section 1. Employment and Duties. The Corporation hereby employs
Employee, and Employee hereby accepts employment as the Corporation's Chairman
of the Board and Chief Executive Officer ("CEO") to perform the duties of
managing the Corporation, subject always to the control and direction of the
Board of Directors of the Corporation (the "Board of Directors"). Employee shall
devote his full time and best efforts to the performance of services hereunder
and to the advancement of the Corporation's business and affairs.
1.1 Employee will serve as Chairman of the Company's Board and
Directors and as such will have one vote on all issues put before the Board.
1.2 Employee shall also perform such other duties, including
administrative duties, in connection with the Corporation's business as shall
from time to time be assigned to him by the Board of Directors.
1.3 Employee, as CEO, shall hire, terminate and set the terms of
employment for all personnel of the Corporation, except other Officers.
1.4 Employee, as CEO, shall select marketing strategy, including, but
not limited to, establishing and expanding marketing and sales of the
Corporation's products and services and setting prices and discounts to
customers.
1.5 Employee, as CEO, shall, subject to review and approval by the
Board of Directors, supervise and make recommendations to the Board of Directors
with respect to the financial affairs of the Corporation, including, but not
limited to, designating the bank or depository of the Corporation's funds and
the borrowing of money. An annual budget and business plan, including a cash
flow and capital expenditure plan, will be prepared under Employee's supervision
and submitted to the Board of Directors prior to the beginning of each fiscal
year for the Board's review and approval.
1.6 Employee, as CEO, shall establish and maintain operating
procedures, including, but not limited to, setting policies and procedures for
the development of the Corporation's products and services, establishing working
hours and establishing policy and procedures for other personnel matters and
establishing policy and procedures for the sale of the Corporation's products.
Section 2. Compensation. Employee shall receive as compensation for the
full and faithful performance of his obligations hereunder, including the
performance of services as an officer, director or member of any committee of
the Board of Directors, a salary, the amount of which shall be determined from
time to time by the Board of Directors, but the Employee's annual salary shall
not be less than $75,000 payable in equal installments twice (2) per month. In
addition to such salary, the Corporation, in the sole discretion of its Board of
Directors, may pay to the Employee bonus compensation. In addition, Employee
will be paid an automobile allowance of $500/month.
Section 3. Term. This Agreement shall commence and become effective on
March 1, 1991, and, unless sooner terminated as provided in Section 12, shall
end on December 31, 1998. The first year of employment under the term hereof
shall end on February 28, 1992, and each subsequent year of employment under the
term hereof shall commence on March 1 and end on the following February 28
within said term.
Employee agrees that until the Company receives the proceeds from the
sale of additional shares of common stock or other securities, that payments of
his salary and other benefits will be deferred. Once the Company elects to break
escrow and receives the proceeds of the "new investment", employee will be paid
the deferred compensation that is due and will begin to be paid on a timely,
normal basis his monthly salary. However, in no event will more than three (3)
months of the employee's salary be deferred and paid after the offering is
completed.
Section 4. Stock Option. That pursuant to a certain Consulting
Agreement dated the 13th of May, 1991, and pursuant to the Nonqualified Stock
Option Agreement by and between the Company and Employee attached hereto and
incorporated herein the Employee shall be granted a stock option to purchase
shares of the Company's common stock on the terms and conditions set forth in
said Nonqualified Stock Option Agreement.
Section 5. Expenses. The Corporation will reimburse Employee for
reasonable expenses and expenditures incurred by Employee from January 1, 1991,
through the term of employment of Employee in connection with and for the
benefit of the business of the Corporation according to policies promulgated
from time to time by the Board of Directors upon presentation by Employee of
appropriate substantiation for such expenses. In the event escrow is not broken
in accordance with a certain Consulting Agreement dated May 13, 1991, such
expense reimbursement shall be limited to Five Thousand and 00/100 dollars
($5,000.00).
Section 6. Employee Benefit Plans. During the term of his employment,
Employee shall be entitled to participate in any employee benefit plan or plans
established and maintained by the Corporation for its employees, in accordance
with the eligibility requirements and other terms and provisions of such plan or
plans. It being understood that the Corporation is under no obligation to
Employee to establish or maintain any employee benefit plan in which Employee
may participate, and that the terms and provisions of any employee benefits plan
of the Corporation are matters solely within the exclusive province of the Board
of Directors.
Section 7. Vacation and Time Off. Employee shall be entitled to four
(4) weeks of vacation in each year of employment under the terms of this
Agreement without reduction of salary. Unused vacation time may not be carried
over to future years of employment hereunder. In addition, the Employee shall be
entitled to such additional time off from work, without loss of compensation,
for attendance at professional meetings, conventions and educational courses in
accordance with the Corporation's general policy in this regard, as from time to
time determined by its Board of Directors.
Section 8. Insurance. Employee agrees that the Corporation, in the
discretion of its Board of Directors, may apply for and procure on its own
behalf, life insurance on the life of Employee, for the purpose of protecting
the Corporation against loss caused by the death of the Employee. Employee
agrees to submit to medical examination and to execute or deliver any
documentation reasonably required by the Corporation's insurer in order to
effectuate such insurance.
Additionally, the Corporation shall, during each year of employment,
apply for and procure on behalf of Employee, life insurance in the amount of
$200,000 on the life of Employee, for the purpose of protecting Employee's
designated beneficiaries in the event of Employee's death.
Section 9. Medical and Dental Coverage. During his employment, Employee
and family shall be entitled to any executive or other medical and dental
coverage provided by the Corporation.
Section 10. Leave of Absence. The Board of Directors may, from time to
time, grant a leave of absence to Employee. The Employee shall have no right
under this Agreement to any compensation during such period of leave of absence,
unless the Board of Directors fixes and determines an amount of compensation to
be paid to Employee during a period of leave of absence. If Employee fails to
return to active employment with Employer within fifteen (15) days after
termination of a leave of absence, Employee shall be deemed to have breached
this Agreement as of the end of said period of leave of absence.
Section 11. Sick Leave and Disability.
11.1 The Employee shall be entitled to ten (10) calendar days of sick
leave in each year of employment hereunder without loss of compensation. Unused
sick leave shall not be carried over to future years of employment under this
Agreement.
11.2 Notwithstanding any other provision of the Agreement, if Employee
is "totally disabled" (as that term is defined in Section 12) for an aggregate
of 120 calendar days in any one year of employment under the terms of this
Agreement, then the Corporation shall not be obligated to pay to Employee the
Compensation provided in this Agreement for any period of "total disability"
during such year in excess of 120 days.
Section 12. Termination. This Agreement, including the Corporation's
obligation pursuant to Section 2 hereof to pay compensation to the Employee,
shall be terminated upon the happening of any one of the following events:
(a) At any time by mutual agreement in writing between the
Corporation and the Employee;
(b) Upon the death of the Employee;
(c) At the Corporation's option, if Employee shall be "totally
disabled" for a continuous period of time in excess of nine
(9) months under the term of this Agreement. The Corporation's
said option shall be exercised by giving at least thirty (30)
days prior written notice thereof to Employee.
(d) At the option of either party hereunder after thirty (30) days
prior written notice given to the other party, in the event of
a breach of any term or provision of this Agreement by the
other party which has not been cured within said thirty (30)
day period.
(e) If the Corporation has "good cause" for termination of
Employee including, but not limited to, the breach of the
covenants of this Agreement or other acts which the Board of
Directors of the Corporation reasonably constitute just and
good cause for the termination of the Employee.
Section 13. Payment Due Upon Termination. If your employment is
terminated prior to the last day of February, 1993, for any reason other than
your death or disability, your employment has been terminated for "good cause"
or you have voluntarily resigned in circumstances not covered by Paragraph 14
below, then you shall be entitled to receive, at the date of termination,
severance pay equal to six (6) months of pay at your then base salary rate.
Section 14. Change in Control.
(a) If you voluntarily leave the employ of the Company within six
(6) months after any "change of control" not approved by the
affirmative vote of the "Continuing Directors" within ten (10)
days after they become aware of the events in question, you
will be entitled to receive, on the date of such termination,
severance pay equal to six (6) months of pay at your base
salary calculated at the rate in effect during the last year
of your term of employment. The normal employee benefits
maintained by the Company for its full-time employees shall be
available to you for six (6) months after such termination.
(b) For purposes of this Agreement:
1. A "change of control" will occur when (x) any person,
company or institution becomes directly or indirectly, the beneficial
owner of thirty percent (30%) or more of the common stock of the
Company, (y) the "Continuing Directors" cease for any reason to
constitute a majority of the Board of Directors of the Company, or (z)
any change in control occurs within the meaning of the proxy rules of
the Securities and Exchange Commission; provided, however, that if in
the case of an event referred to in clause (x) or (z), two thirds of
the Continuing Directors so determine, no change in control will be
deemed to have occurred.
2. The "Continuing Directors" are those members of the Board
of Directors of the of the Company on the date of this Agreement or
elected as Directors prior to the event in question.
3. Your rights under this paragraph are in lieu of your rights
under Paragraph 13 and any other rights you may have under this
Agreement. Accordingly, if you elect under Paragraph 14, you may not
receive compensation under 13 hereof.
4. The change of control definition will not apply if any
person, institution or company becomes -- with your approval -- the
beneficial owner of 30% or more of the common stock of the Company
through the sale of any additional common stock or other additional
securities of the Company.
Section 15. Total Disability. For purposes of this Agreement, Employee
shall be considered to be "totally disabled" when he is considered to be totally
disabled by any insurance company used by the Corporation to provide disability
benefits for the Employee, and Employee shall continue to be considered "totally
disabled" until such insurance company ceases to recognize him as "totally
disabled" for purposes of disability benefits. If no such disability insurance
policies are in force for the benefit of Employee, or if for any reason an
insurance company fails to make a determination of the question of whether
Employee is "totally disabled", Employee shall be considered to be "totally
disabled" if, because of mental or physical illness or other cause, he is unable
to perform the majority of his usual duties on behalf of the Corporation. The
existence of "total disability" of Employee, the date it commenced, and the date
it ceases, shall be determined by the Board of Directors and the Employee. If,
however, the parties cannot agree, then any such determination shall be made
after examination of Employee by a medial doctor selected by the Board of
Directors, and a medical doctor selected by the Employee. If the medical doctors
cannot agree, a third medical doctor shall be selected by the two doctors and
the conclusion of a majority of said doctors shall be final and binding on the
parties.
Section 16. Covenant Not to Compete. Employee hereby covenants and
agrees that during his employment with the Corporation, and for a period of one
(1) year thereafter, he should not be engaged either directly or indirectly, in
any manner or capacity, whether as an adviser, principal, agent, partner,
officer, director, employee, member of an association, or otherwise, in any
business or activity, or own beneficially, or of record, five percent (5%) or
more of the outstanding stock of any class of equity securities in any
corporation, in competition with the business or activity of the Corporation.
16.1 It is understood that if Employee should breach aforesaid covenant
of non-competition, the Corporation would suffer irreparable harm for which a
recovery of money damages would be an inadequate remedy. It is therefore agreed
that the Corporation shall be entitled, as a matter of right, in any court of
competent jurisdiction, to a-mandatory injunction restraining and enjoining
Employee, pending litigation, as well as upon final determination thereof, from
attempting to violate or violating the aforesaid covenant of non-competition;
and it is further agreed that the Corporation's right to such injunction relief
shall be cumulative with and in addition to any other rights, remedies or
actions which the Corporation may have against Employee.
Section 17. Confidentiality.
17.1 Employee will in the course of his employment by the Corporation
have access to confidential or proprietary data or information of the
Corporation. Employee will not at any time divulge or communicate to any person
(other than to a person bound by confidentiality obligations to the Corporation
similar to those contained in this Agreement) or use to the detriment of the
Corporation or for the benefit of any other person of such data or information.
The provisions of this Section 17.1 shall survive employee's employment
hereunder whether by the normal expiration of that employment or otherwise. The
term "confidential or proprietary data or information" as used in this Agreement
shall mean information not generally available to the public including, without
limitation, personnel information, financial information, customer lists,
supplier lists, trade secrets, secret processes, know-how, computer data and
programs, pricing, marketing and advertising data. The Employee acknowledges and
agrees that any confidential or propriety data or information that Employee has
heretofore acquired was received in confidence and as a fiduciary with respect
to the business of the Corporation.
17.2 All written materials, records and documents made by Employee or
coming into Employee's possession during the term of employment concerning any
products, processes, information or services used, developed, investigated or
considered by the Corporation, or otherwise concerning the business or affairs
of the Corporation, shall be the sole property of the Corporation and upon
termination of Employee's employment, or upon request by the Board of Directors
during Employee's employment, Employee shall promptly deliver the same to the
Corporation. In addition, upon termination of Employee's employment, or upon
request of the Board of Directors during Employee's employment, Employee shall
deliver to the Corporation all other property of the Corporation in Employee's
possession or under Employee's control including, but not limited to, financial
statements, marketing and sales data and other document and all Employer credit
cards.
Section 18. Notice. Any notice or other communication required or
desired to be sent pursuant to this Agreement shall be in writing, and shall be
deemed to have been duly given when delivered personally or when deposed in the
mails, certified or registered, return receipt requested, and with the proper
postage prepaid, addressed as follows:
If to the Corporation: Eco-Soil Systems
4101 Industrial Avenue
Lincoln, NE 68504
If to the Employee: William B. Adams
1111 Isabella Street
Coronado, CA 92118
or such other address as either party hereto may designate for itself or written
notice given to the other party from time to time in the manner herein and above
provided.
Section 19. Waiver. This Agreement shall not be modified or amended
except by a further written documents signed by Employee and approved by the
Board of Directors. No provisions hereof may be waived except by an Agreement in
writing signed by the waiving party. A waiver of any term or provision shall not
be construed as a waiver of any other term or provision.
Section 20. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall constitute one and the same instrument.
Section 21. Entire Agreement. This Agreement contains the entire
understanding between the parties relating to the employment of William B. Adams
by the Corporation, and shall not be modified or amended except in writing
signed by both of the parties hereto.
Section 22. Applicable Law. This Agreement shall be subject to and
governed by the laws of the State of Nebraska and all questions concerning the
meaning and intention of the terms of this Agreement and concerning the validity
hereof and questions relating to performance hereunder shall be adjudged and
resolved in accordance with the laws of that state.
Section 23. Binding Effect. This Agreement shall be binding upon and
inure to the benefits of the parties hereto, and their respective heirs,
successors, legal representatives and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the 21st day of May, 1991.
ECO-SOIL SYSTEMS, INC.
By: /s/ Jeffrey A. Johnson -- President
And:
EMPLOYEE:
/s/ William B. Adams
William B. Adams
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made as of the 13th day of May, 1991, by and between
Eco-Soil Systems, Inc., a Nebraska corporation (the "Corporation"), and Jeffrey
A. Johnson, of San Diego County, California, (hereinafter called "Employee"),
W I T N E S S E T H:
WHEREAS, the Corporation desires to employ the Employee as its Chief
Operations Officer and President in accordance with the following terms,
conditions and provisions; and
WHEREAS, the Employee desires to perform such services for the
Corporation, all in accordance with the following terms, conditions and
provisions;
WHEREAS, Employee has purchased 91,600 shares of the Corporation's
stock;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, it is agreed as follows:
Section 1. Employment and Duties. The Corporation hereby employs
Employee, and Employee hereby accepts employment as the Corporation's President
and Chief Operations Officer ("COO") to perform the duties of managing the
Corporation, subject always to the control and direction of the Board of
Directors of the Corporation (the "Board of Directors"). Employee shall devote
his full time and best efforts to the performance of services hereunder and to
the advancement of the Corporation's business and affairs.
1.1 Employee will be responsible for the day to day operations of the
firm and will have direct control of the Company's finance, accounting,
administration, operations, systems and contract pricing department. Employee
will in addition assist the Chief Executive Officer in the Company's sales,
marketing and business development efforts. Employee will also play a key role
in any capital raising activities undertaken by the Company.
1.2 Employee shall also perform such other duties, including
administrative duties, in connection with the Corporation's business as shall
from time to time be assigned to him by the Chief Executive Officer and the
Corporation's Board of Directors.
Section 2. Compensation. Employee shall receive as compensation for the
full and faithful performance of his obligations hereunder, including the
performance of services as an officer, director or member of any committee of
the Board of Directors, a salary, the amount of which shall be determined from
time to time by the Board of Directors, but the Employee's annual salary shall
not be less than $75,000 paid in equal installments twice (2) per month. In
addition to such salary, the Corporation, in the sole discretion of its Board of
Directors, may pay to the Employee bonus compensation. In addition, Employee
will be paid an automobile allowance of $300/month.
Section 3. Term. This Agreement shall commence and become effective on
March 1, 1991, and, unless sooner terminated as provided in Section 12, shall
end on December 31, 1998. The first year of employment under the term hereof
shall end on February 28, 1992, and each subsequent year of employment under the
term hereof shall commence on March 1 and end on the following February 28
within said term.
Employee agrees that until the Company receives the proceeds from the
sale of additional shares of common stock or other securities, that payments of
his salary and other benefits will be deferred. Once the Company elects to break
escrow and receives the proceeds of the "new investment", employee will be paid
the deferred compensation that is due and will begin to be paid on a timely,
normal basis his monthly salary. However, in no event will more than three (3)
months of the employee's salary be deferred and paid after the offering is
completed.
Section 4. Stock Option. That pursuant to a certain Consulting
Agreement dated the 13th of May, 1991, and pursuant to the Nonqualified Stock
Option Agreement by and between the Company and Employee attached hereto and
incorporated herein the Employee shall be granted a stock option to purchase
shares of the Company's common stock on the terms and conditions set forth in
said Nonqualified Stock Option Agreement.
Section 5. Expenses. The Corporation will reimburse Employee for
reasonable expenses incurred by Employee in connection with the business of the
Corporation according to policies promulgated from time to time by the Board of
Directors upon presentation by Employee of appropriate substantiation for such
expenses.
Section 6. Employee Benefit Plans. During the term of his employment,
Employee shall be entitled to participate in any employee benefit plan or plans
established and maintained by the Corporation for its employees, in accordance
with the eligibility requirements and other terms and provisions of such plan or
plans. It being understood that the Corporation is under no obligation to
Employee to establish or maintain any employee benefit plan in which Employee
may participate, and that the terms and provisions of any employee benefits plan
of the Corporation are matters solely within the exclusive province of the Board
of Directors.
Section 7. Vacation and Time Off. Employee shall be entitled to four
(4) weeks of vacation in each year of employment under the terms of this
Agreement without reduction of salary. Unused vacation time may not be carried
over to future years of employment hereunder. In addition, the Employee shall be
entitled to such additional time off from work, without loss of compensation,
for attendance at professional meetings, conventions and educational courses in
accordance with the Corporation's general policy in this regard, as from time to
time determined by its Board of Directors.
Section 8. Insurance. Employee agrees that the Corporation, in the
discretion of its Board of Directors, may apply for and procure on its own
behalf, life insurance on the life of Employee, for the purpose of protecting
the Corporation against loss caused by the death of the Employee. Employee
agrees to submit to medical examination and to execute or deliver any
documentation reasonably required by the corporation's insurer in order to
effectuate such insurance.
Additionally, the Corporation shall, during each year of employment,
apply for and procure on behalf of Employee, life insurance in the amount of
$200,000 on the life of Employee, for the purpose of protecting Employee's
designated beneficiaries in the event of Employee's death.
Section 9. Medical and Dental Coverage. During his employment, Employee
and his family, if any, shall be entitled to any executive or other medical and
dental coverage provided by the Corporation.
Section 10. Leave of Absence. The Board of Directors may, from time to
time, grant a leave of absence to Employee. The Employee shall have no right
under this Agreement to any compensation during such period of leave of absence,
unless the board of Directors fixes and determines an amount of compensation to
be paid to Employee during a period of leave of absence. If Employee fails to
return to active employment with Employer within fifteen (15) days after
termination of a leave of absence, Employee shall be deemed to have breached
this Agreement as of the end of said period of leave of absence.
Section 11. Sick Leave and Disability.
11.1 The Employee shall be entitled to ten (10) calendar days of sick
leave in each year of employment hereunder without loss of compensation. Unused
sick leave shall not be carried over to future years of employment under this
Agreement.
11.2 Notwithstanding any other provision of the Agreement, if Employee
is "totally disabled" (as that term is defined in Section 15) for an aggregate
of 120 calendar days in any one year of employment under the terms of this
Agreement, then the Corporation shall not be obligated to pay to Employee the
Compensation provided in this Agreement for any period of "total disability"
during such year in excess of 120 days.
Section 12. Termination. This Agreement, including the Corporation's
obligation pursuant to Section 2 hereof to pay compensation to the Employee,
shall be terminated upon the happening of any one of the following events:
(a) At any time by mutual agreement in writing between the
Corporation and the Employee;
(b) Upon the death of the Employee;
(c) At the Corporation's option, if Employee shall be "totally
disabled" for a continuous period of time in excess of nine
(9) months under the term of this Agreement. The Corporation's
said option shall be exercised by giving at least thirty (30)
days prior written notice thereof to Employee.
(d) At the option of either party hereunder after thirty (30) days
prior written notice given to the other party, in the event of
a breach of any term or provision of this Agreement by the
other party which has not been cured within said thirty (30)
day period.
(e) If the Corporation has "good cause" for termination of
Employee including, but not limited to, the breach of the
covenants of this Agreement or other acts which the Board of
Directors of the Corporation reasonably constitute just and
good cause for the termination of the Employee.
Section 13. Payment Due Upon Termination. If your employment is
terminated prior to the last day of February, 1993, for any reason other than
your death or disability, your employment has been terminated for "good cause"
or you have voluntarily resigned in circumstances not covered by Paragraph 14
below, then you shall be entitled to receive, at the date of termination,
severance pay equal to six (6) months of pay at your then base salary rate.
Section 14. Change in Control.
(a) If you voluntarily leave the employ of the Company within six
(6) months after any "change of control" not approved by the
affirmative vote of the "Continuing Directors" within ten (10)
days after they become aware of the events in question, you
will be entitled to receive, on the date of such termination,
severance pay equal to six (6) months of pay at your base
salary calculated at the rate in effect during the last year
of your term of employment. The normal employee benefits
maintained by the Company for its full-time employees shall be
available to you for six (6) months after such termination.
(b) For purposes of this Agreement:
1. A "change of control" will occur when (x) any person,
company or institution becomes directly or indirectly, the beneficial
owner of thirty percent (30%) or more of the common stock of the
Company, (y) the "Continuing Directors" cease for any reason to
constitute a majority of the Board of Directors of the Company, or (z)
any change in control occurs within the meaning of the proxy rules of
the Securities and Exchange Commission; provided, however, that if in
the case of an event referred to in clause (x) or (z), two thirds of
the Continuing Directors so determine, no change in control will be
deemed to have occurred.
2. The "Continuing Directors" are those members of the Board
of Directors of the of the Company on the date of this Agreement or
elected as Directors prior to the event in question.
3. Your rights under this paragraph are in lieu of your rights
under Paragraph 13 and any other rights you may have under this
Agreement. Accordingly, if you elect under Paragraph 14, you may not
receive compensation under 13 hereof.
4. The change of control definition will not apply if any
person, institution or company becomes -- with your approval -- the
beneficial owner of 30% or more of the common stock of the Company
through the sale of any additional common stock or other additional
securities of the Company.
Section 15. Total Disability. For purposes of this Agreement, Employee
shall be considered to be "totally disabled" when he is considered to be totally
disabled by any insurance company used by the Corporation to provide disability
benefits for the Employee, and Employee shall continue to be considered "totally
disabled" until such insurance company ceases to recognize him as "totally
disabled" for purposes of disability benefits. If no such disability insurance
policies are in force for the benefit of Employee, or if for any reason an
insurance company fails to make a determination of the question of whether
Employee is "totally disabled", Employee shall be considered to be "totally
disabled" if, because of mental or physical illness or other cause, he is unable
to perform the majority of his usual duties on behalf of the Corporation. The
existence of "total disability" of Employee, the date it commenced, and the date
it ceases, shall be determined by the Board of Directors and the Employee. If,
however, the parties cannot agree, then any such determination shall be made
after examination of Employee by a medial doctor selected by the Board of
Directors, and a medical doctor selected by the Employee. If the medical doctors
cannot agree, a third medical doctor shall be selected by the two doctors and
the conclusion of a majority of said doctors shall be final and binding on the
parties.
Section 16. Covenant Not to Compete. Employee hereby covenants and
agrees that during his employment with the Corporation, and for a period of one
(1) year thereafter, he should not be engaged either directly or indirectly, in
any manner or capacity, whether as an adviser, principal, agent, partner,
officer, director, employee, member of an association, or otherwise, in any
business or activity, or own beneficially, or of record, five percent (5%) or
more of the outstanding stock of any class of equity securities in any
corporation, in competition with the business or activity of the Corporation.
16.1 It is understood that if Employee should breach aforesaid covenant
of non-competition, the Corporation would suffer irreparable harm for which a
recovery of money damages would be an inadequate remedy. It is therefore agreed
that the Corporation shall be entitled, as a matter of right, in any court of
competent jurisdiction, to a mandatory injunction restraining and enjoining
Employee, pending litigation, as well as upon final determination thereof, from
attempting to violate or violating the aforesaid covenant of non-competition;
and it is further agreed that the Corporation's right to such injunction relief
shall be cumulative with and in addition to any other rights, remedies or
actions which the Corporation may have against Employee.
Section 17. Confidentiality.
17.1 Employee will in the course of his employment by the Corporation
have access to confidential or proprietary data or information of the
Corporation. Employee will not be at any time divulge or communicate to any
person (other than to a person bound by confidentiality obligations to the
Corporation similar to those contained in this Agreement) or use to the
detriment of the Corporation or for the benefit of any other person of such data
or information. The provisions of this Section 17.1 shall survive employee's
employment hereunder whether by the normal expiration of that employment or
otherwise. The term "confidential or proprietary data or information" as used in
this Agreement shall mean information not generally available to the public
including, without limitation, personnel information, financial information,
customer lists, supplier lists, trade secrets, secret processes, know-how,
computer data and programs, pricing, marketing and advertising data. The
Employee acknowledges and agrees that any confidential or propriety data or
information that Employee has heretofore acquired was received in confidence and
as a fiduciary with respect to the business of the Corporation.
17.2 All written materials, records and documents made by Employee or
coming into Employee's possession during the term of employment concerning any
products, processes, information or services used, developed, investigated or
considered by the Corporation, or otherwise concerning the business or affairs
of the Corporation, shall be the sole property of the Corporation and upon
termination of Employee's employment, or upon request by the Board of Directors
during Employee's employment, Employee shall promptly deliver the same to the
Corporation. In addition, upon termination of Employee's employment, or upon
request of the Board of Directors during Employee's employment, Employee shall
deliver to the Corporation all other property of the Corporation in Employee's
possession or under Employee's control including, but not limited to, financial
statements, marketing and sales data and other document and all Employer credit
cards.
Section 18. Notice. Any notice or other communication required or
desired to be sent pursuant to this Agreement shall be in writing, and shall be
deemed to have been duly given when delivered personally or when deposed in the
mails, certified or registered, return receipt requested, and with the proper
postage prepaid, addressed as follows:
If to the Corporation: Eco-Soil Systems
4101 Industrial Avenue
Lincoln, NE 68504
If to the Employee: Jeffrey A. Johnson
2357 Caringa Way, #1
Coronado, CA 92118
or such other address as either party hereto may designate for itself or written
notice given to the other party from time to time in the manner herein and above
provided.
Section 19. Waiver. This Agreement shall not be modified or amended
except by a further written documents signed by Employee and approved by the
Board of Directors. No provisions hereof may be waived except by an Agreement in
writing signed by the waiving party. A waiver of any term or provision shall not
be construed as a waiver of any other term or provision.
Section 20. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall constitute one and the same instrument.
Section 21. Entire Agreement. This Agreement contains the entire
understanding between the parties relating to the employment of Jeffrey A.
Johnson by the Corporation, and shall not be modified or amended except in
writing signed by both of the parties hereto.
Section 22. Applicable Law. This Agreement shall be subject to and
governed by the laws of the State of Nebraska and all questions concerning the
meaning and intention of the terms of this Agreement and concerning the validity
hereof and questions relating to performance hereunder shall be adjudged and
resolved in accordance with the laws of that state.
Section 23. Binding Effect. This Agreement shall be binding upon and
inure to the benefits of the parties hereto, and their respective heirs,
successors, legal representatives and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the 13th day of May, 1991.
ECO-SOIL SYSTEMS, INC.
By: /s/ Jeffrey A. Johnson
EMPLOYEE:
/s/ Jeffrey A. Johnson
Jeffrey A. Johnson
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made as of the 1st day of January 1994, by and between
Eco Soil Systems, Inc., a Nebraska Corporation (the "Corporation"), and Douglas
M. Gloff, of San Diego County, California, (Hereinafter called "Employee"),
W I T N E S S E T H :
WHEREAS, the Corporation desires to employ the Employee as its
Executive Vice President in accordance with the following terms, conditions and
provisions; and
WHEREAS, the Employee desires to perform such services for the
Corporation, all in accordance with the following terms, conditions and
provisions;
WHEREAS, Employee has purchased 25.000 shares of the Corporation's
stock and loaned the Company $250,000 through a demand note;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, it is agreed as follows:
SECTION 1. EMPLOYMENT AND DUTIES.
The Corporation hereby employs Employee, and Employee hereby accepts
employment as the Corporation's Executive Vice President ("EVP") to perform the
duties of managing the Corporation, subject always to the control and direction
of the Board of Directors of the Corporation (the "Board of Directors") and the
Company's Chief Executive Officer. Employee shall devote his full time and best
efforts to the performance of services hereunder and to the advancement of the
corporation's business and affairs.
1.1 Employee will be responsible for the day to day operations of the
firm and will have direct control of the Company's sales and marketing and
operations functions. Employee will be responsible for the sales and marketing,
product development, systems and contract pricing department. Employee will also
play a key role in any capital raising activities undertaken by the Company.
1.2 Employee shall also perform such other duties, including
administrative duties, in connection with the Corporation's business as shall
from time to time be assigned to him by the Chief Executive Officer and the
Corporation's Board of Directors.
SECTION 2. COMPENSATION.
Employee shall receive as compensation for the full and faithful
performance of his obligations hereunder, including the performance of services
as an officer, director or member of any committee of the Board of Directors, a
salary, the amount of which shall be determined from time to time by the Board
of Directors, but the Employee's annual salary shall not be less than $75,000
paid in equal installments twice (2) per month. In addition to such salary, the
Corporation, in the sole discretion of its Board of Directors, may pay to the
Employee bonus compensation.
SECTION 3. TERM.
This Agreement shall commence and become effective on January 1, 1994
and, unless sooner terminated as provided in Section 12, shall end on December
31, 1998. The first year of employment under the term hereof shall end on
December 31, 1994, and each subsequent year of employment under the term hereof
shall commence on January 1, and end on the following December 31 within said
term.
Employee agrees that until the Company receives the proceeds from the
sale of additional shares of common stock or other securities, that payments of
his salary and other benefits for the period January 1, 1994 through March 31,
1994 will be deferred. Once the Company elects to break escrow and receives the
proceeds of the "new investment", employee will be paid the deferred
compensation that is due and will begin to be paid on a timely, normal basis his
monthly salary.
SECTION 4. STOCK OPTION.
That pursuant to this Employment Agreement, and pursuant to two (2)
Nonqualified Stock Option Agreements by and between the Company and Employee
attached hereto and incorporated herein the Employee shall be granted a stock
option to purchase shares of the Company's common stock on the terms and
conditions set forth in said Nonqualified Stock Option Agreement.
SECTION 5. EXPENSES.
The Corporation will reimburse Employee far reasonable expenses
incurred by Employee in connection with the business of the Corporation
according to policies promulgated from time to time by the Board of Directors
upon presentation by Employee of appropriate substantiation for such expenses.
SECTION 6. EMPLOYEE BENEFIT PLANS.
During the term of his employment, Employee shall be entitled to
participate in any employee benefit plan or plans established and maintained by
the Corporation for its employees, in accordance with the eligibility
requirements and other terms and provisions of such plan or plans. It being
understood that the Corporation is under no obligation to Employee to establish
or maintain any employee benefit plan in which Employee may participate, and
that the terms and provisions of any employee benefits plan of the Corporation
are matters solely within the exclusive province of the Board of Directors.
SECTION 7. VACATION AND TIME OFF.
Employee shall be entitled to four (4) weeks of vacation in each year
of employment under the terms of this Agreement without reduction salary. Unused
vacation time may not be carried over to future years of employment hereunder.
In addition, the Employee shall be entitled to such additional time off from
work, without loss of compensation, for attendance at professional meetings,
conventions and educational courses in accordance with the Corporation's general
policy in this regard, as from time to time determined by its Board of
Directors.
SECTION 8. INSURANCE.
Employee agrees that the Corporation, in the discretion of its Board of
Directors, may apply for and procure on its own behalf, life insurance on the
life of Employee, for the purpose of protecting the Corporation against loss
caused by the death of the Employee. Employee agrees to submit to medical
examination and to execute or deliver any documentation reasonably required by
the Corporation's insurer in order to effectuate such insurance.
SECTION 9. MEDICAL AND DENTAL COVERAGE.
During his employment, Employee and his family, if any, shall be
entitled to any executive or other medical and dental coverage provided by the
Corporation.
SECTION 10. LEAVE OF ABSENCE.
The Board of Directors may, from time to time, grant a leave of absence
to Employee. The Employee shall have no right under this Agreement to any
compensation during such period of leave of absence, unless the Board of
Directors fixes and determines an amount of compensation to be paid to Employee
during a period of leave of absence. If Employee fails to return to active
employment with Employer within fifteen (15) days after termination of a leave
of absence, Employee shall be deemed to have breached this Agreement as of the
end of said period of leave of absence.
SECTION 11. SICK LEAVE AND DISABILITY.
11.1 The Employee shall be entitled to ten (10) calendar days of sick
leave in each year of employment hereunder without loss of compensation. Unused
sick leave shall not be carried over to future years of employment under this
Agreement.
11.2 Notwithstanding any other provision of the Agreement, if Employee
is "totally disabled" (as that term is defined in Section 15) for an aggregate
of 120 calendar days in any one year of employment under the terms of this
Agreement, then the Corporation shall not be obligated to pay to Employee the
Compensation provided in this Agreement for any period of "total disability"
during such year in excess of 120 days.
SECTION 12. TERMINATION.
This Agreement, including the Corporation's obligation pursuant to
Section 2 hereof to pay compensation to the Employee, shall be terminated upon
the happening of any one of the following events:
(a) At any time by mutual agreement in writing between the
Corporation and the Employee;
(b) Upon the death of the Employee;
(c) At the Corporation's option, if Employee shall be "totally
disabled" for a continuous period of time in excess of nine
(9) months under the term of this Agreement. The Corporation's
said option shall be exercised by giving at least thirty (30)
days prior written notice thereof to Employee.
(d) At the option of either party hereunder after thirty (30) days
prior written notice given to the other party, in the event of
a breach of any term or provision of this Agreement by the
other party which has not been cured within said thirty (30)
day period.
(e) If the Corporation has "good cause" for termination of
Employee including, but not limited to, the breach of the
covenants of this Agreement or other acts which the Board of
Directors of the Corporation reasonably constitute just and
good cause for the termination of the Employee.
SECTION 13. PAYMENT DUE UPON TERMINATION.
If your employment is terminated prior to the last day of December,
1996, for any reason other than your death or disability, your employment has
been terminated for "good cause" or you have voluntarily resigned in
circumstances not covered by Paragraph 14 below, then you shall be entitled to
receive, at the date of termination, severance pay equal to six (6) months of
pay at your then base salary rate.
SECTION 14. CHANGE IN CONTROL.
(a) If you voluntarily leave the employ of the Company within six
(6) months after any "change of control" not approved by the
affirmative vote of the "Continuing Directors" within ten (10)
days after they become aware of the events in question, you
will be entitled to receive, on the day of such termination,
severance pay equal to six (6) months of pay at your base
salary calculated at the rate in effect during the last year
of your term of employment. The normal employee benefits
maintained by the Company for its full-time employees shall be
available to you for six (6) months after such termination.
(b) For purposes of this Agreement:
1. A "change of control" will occur when (x) any persona c()mr)any or
institution becomes directly or indirectly, the beneficial owner of
thirty percent (30%) or more of the common stock of the Company, (y)
the "Continuing Directors" cease for any reason to constitute a
majority of the Board of Directors of the Company, or (z) any change in
control occurs within the meaning of the proxy rules of the Securities
and Exchange Commission; provided, however, that if in the case of an
event referred to in clause (x) or (z), two thirds of the Continuing
Directors so determine, no change in control will be deemed to have
occurred.
2. The "Continuing Directors" are those members of the Board of Directors
of the Company on the date of this Agreement or elected as Directors
prior to the event in question.
3. Your rights under this paragraph are in lieu of your rights under
Paragraph 13 and any other rights you may have under this Agreement.
Accordingly, if you elect under Paragraph 14, you may not receive
compensation under 13 hereof.
4. The change of control definition will not apply if any person,
institution or company becomes -- with your approval -- the beneficial
owner of 30% or more of the common stock of the Company through the
sale of any additional common stock or other additional securities of
the Company.
SECTION 15. TOTAL DISABILITY.
For purposes of this Agreement, Employee shall be considered to be
"totally disabled" when he is considered to be totally disabled by any insurance
company used by the Corporation to provide disability benefits for the Employee,
and Employee shall continue to be considered "totally disabled" until such
insurance company ceases to recognize him as "totally disabled" for purposes of
disability benefits. If no such disability insurance policies are in force for
the benefit of Employee, or if for any reason an insurance company fails to make
a determination of the question of whether Employee is "totally disabled",
Employee shall be considered to be "totally disabled" if, because of mental or
physical illness or other cause, he is unable to perform the majority of his
usual duties on behalf of the Corporation. The existence of "total disability"
of Employee, the date it commenced, and the date it ceases, shall be determined
by the Board of Directors and the Employee. If, however, the parties cannot
agree, then any such determination shall be made after examination of Employee
by a medical doctor selected by the Board of Directors, and a medical doctor
selected by the Employee. If the medical doctors cannot agree, a third medical
doctor shall be selected by the two doctors and the conclusion of a majority of
said doctors shall be final and binding on the parties.
SECTION 16. COVENANT NOT TO COMPETE.
Employee hereby covenants and agrees that during his employment with
the Corporation, and for a period of one (l) year thereafter, he should not be
engaged either directly or indirectly, in any manner or capacity, whether as a
an adviser, principal, agent, partner, officer, director, employee, member of an
associations or otherwise, in any business or activity, or own beneficially, or
of record, five percent (5%) or more of the outstanding stock of any class of
equity securities in any corporation, in competition with the business or
activity of the Corporation.
16.1 It is understood that if Employee should breach aforesaid covenant
of noncompetition, the Corporation would suffer irreparable harm for which a
recovery of money damages would be an inadequate remedy. It is therefore agreed
that the Corporation shall be entitled, as a matter of right, in any court of
competent jurisdiction, to a mandatory injunction restraining and enjoining
Employee, pending litigation, as well as upon final determination thereof, from
attempting to violate or violating the aforesaid covenant of non-competition and
it is further agreed that the Corporation's right to such injunction relief
shall be cumulative with and in addition to any other rights, remedies or
actions which the Corporation may have against Employee.
SECTION 17. CONFIDENTIALITY.
17.1 Employee will in the course of his employment by the Corporation
have access to confidential or proprietary data or information of the
Corporation. Employee will not be at any time divulge or communicate to any
person (other than to a person bound by confidentiality obligations to the
Corporation similar to those contained in this Agreement) or use to the
detriment of the Corporation or for the benefit of any other person of such data
or information. The provisions of this Section 17.1 shall survive employee's
employment hereunder whether by the normal expiration of that employment or
otherwise. The term "confidential or proprietary data or information" as used in
this Agreement shall mean information not generally available to the public
including, without limitation, personnel information, financial information,
customer lists, supplier lists, trade secrets, secret processes, know-how,
computer data and programs, pricing, marketing and advertising data. The
Employee acknowledges and agrees that any confidential or propriety data or
information that Employee has heretofore acquired was received in confidence and
as a fiduciary with respect to the business of the Corporation.
17.2 All written materials, records and documents made by Employee or
coming into Employee's possession during the term of employment concerning any
products, processes, information or services used, developed, investigated or
considered by the Corporation, or otherwise concerning the business or affairs
of the Corporation, shall be the sole property of the Corporation and upon
termination of Employee's employment, or upon request by the Board of Directors
during Employee's employment, Employee shall promptly deliver the same to the
Corporation. In addition, upon termination of Employee's employment, Employee
shall deliver to the Corporation all other property of the Corporation in
Employee's possession or under Employee's control including, but not limited to,
financial statements, marketing and sales data and other document and all
Employer credit cards.
SECTION 18. NOTICE.
Any notice or other communication required or desired to be sent
pursuant to this Agreement shall be in writing, and shall be deemed to have been
duly given when delivered personally or when deposed in the mails, certified or
registered, return receipt requested, and with the proper postage prepaid,
addressed as follows:
If to the Corporation: Eco Soil Systems
4101 Industrial Avenue
Lincoln, NE 68504
If to the Employee: Douglas M. Gloff
16476 Calle Pulido
San Diego, CA 92128
or such other address as either party hereto may designate for itself or written
notice given to the other party from time to time in the manner herein and above
provided.
SECTION 19. WAIVER.
This Agreement shall not be modified or amended except by a further
written documents signed by Employee and approved by the Board of Directors. No
provisions hereof may be waived except by an Agreement in writing signed by the
waiving party. A waiver of any term of provision shall not be construed as a
waiver of any other term or provision.
SECTION 20. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of
which shall constitute one and the same instrument.
SECTION 21. ENTIRE AGREEMENT.
This Agreement contains the entire understanding between the parties
relating to the
SECTION 22. APPLICABLE LAW.
This Agreement shall be subject to and governed by the laws of the
State of Nebraska and all questions concerning the meaning and intention of the
terms of this Agreement and concerning the validity hereof and questions
relating to performance hereunder shall be adjudged and resolved in accordance
with the laws of that state.
SECTION 23. BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefits of the
parties hereto, and their respective heirs, successors, legal representatives
and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the 1st day of January, 1994.
ECO SOIL SYSTEMS, INC.
By: /s/ Jeffrey A. Johnson
And
EMPLOYEE:
/s/ Douglas M. Gloff
Douglas M. Gloff
AGREEMENT OF EMPLOYMENT
THIS AGREEMENT, effective as of October 1, 1995, is entered into by and
between ASPEN CONSULTING COMPANIES, INC., a Colorado corporation ("Employer"), a
wholly owned subsidiary of ECO SOIL SYSTEMS, INC., a Nebraska corporation
("ECO") and MIKE R. SCOTT (the "Employee"), with respect to the following facts:
RECITALS
A. Employer is a California corporation engaged in the general business
of turf and crop maintenance products, sales and service.
B. Employee is the originator of the Employer and is currently being
employed to act as the Chief Executive Officer and Chief Operating Officer for
the Employer.
C. Employer desires assurance of the continued association and services
of Employee in order to retain his experience, skills, abilities, background and
knowledge, and is therefore willing to engage his services on the terms and
conditions set forth below.
D. Employee desires to be employed by Employer and is willing to do so
on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows.
COVENANTS
1. Employment
The Employer hereby employs Employee and Employee accepts employment
with Employer pursuant to the terms and provisions of this Agreement.
2. Effective Date
The effective date of this Employment Agreement shall be as of the date
first written above.
3. Term
Said employment shall continue until September 30, 1999, and from year
to year thereafter, unless terminated earlier under the provisions of Paragraph
18.
a. Any change in the term of this Agreement shall be reflected by a
written endorsement attached to this Agreement and signed by Employee and a duly
authorized officer of Employer.
4. Title
Employee's title during the term of employment shall be "Chief
Executive Officer" and "Chief Operating Officer".
5. Duties of Employee
The duties of the Employee during the term of this Agreement are to
perform those duties ordinarily and necessarily performed by a Chief Executive
Officer and Chief Operating Officer as well as those duties deemed necessary and
appropriate by the Board of Directors of Employer or ECO. In addition, Employee
shall serve as a member of ECO's executive management committee.
6. Matters Requiring Consent of Board of Directors
The Employee shall not, without specific approval of the Board of
Directors of Employer, or its President, do or contract to do any of the
following:
a. Borrow on behalf of Employer sums exceeding $2,500.
b. Purchase capital equipment or make expenditures for amounts in
excess of the amounts budgeted by the Board of Directors.
c. Do any act, except in the exercise of his best judgment, which would
or could subject Employer to liability.
7. Devotion to Employer's Business
Employee shall devote all of his time toward the satisfactory
performance of his duties for Employer.
8. Competitive Activities
During the term of this Agreement and for a period of one (1) year
after its termination the Employee shall not, directly or indirectly, either as
an Employee, Employer, Consultant, Agent, Principal, Partner, Stockholder,
Corporate officer, Director, or in any other individual or representative
capacity, engage or participate in any business that is in competition in any
manner with the business of the Employer or ECO. Such agreement not to compete
shall include such activities in any country, state or county, in which Employer
or ECO conducts business.
9. Trade Secrets
The parties acknowledge and agree that during the term of this
Agreement Employee shall have access to and become acquainted with information
concerning operations and products of Employer and ECO and that such information
constitutes Employer's trade secrets. The Employee specifically agrees that he
shall not misuse, misappropriate, or disclose any such trade secrets, directly
or indirectly, to any other person or use them in any way during the term of
this Agreement or at any time thereafter.
10. Base Compensation
The compensation to be paid to Employee during the term shall be as
follows:
a. For the employment years beginning October 1, 1995, and ending
September 30, 1999, Employee shall receive compensation of Ninety-Six Thousand
Dollars ($96,000), unless increased by the Employer at its sole discretion,
commencing with the first payment on October 15 of each such year and ending
with the last payment on September 15 of each year. Employee shall receive equal
monthly installments of Eight Thousand Dollars ($8,000). The monthly
installments shall be payable one-half (1/2) on the first day of each month and
one-half (1/2) on the fifteenth day of each month.
b. Any change in the base compensation shall be reflected by a written
endorsement attached to this Agreement and signed by Employee and a duly
authorized officer of Employer.
11. Incentive Compensation
Employee shall be entitled to incentive compensation as follows:
a. Stock Incentive Program. Employee shall be entitled to participate
in Eco's stock incentive program and may do so in accordance with the terms and
conditions spelled out in that certain Non-qualified Stock Option Plan effective
October 1, 1995, a copy of which is attached hereto as Exhibit "A" and
incorporated herein by this reference.
b. Performance Bonus 1995. In an effort to encourage the peak
performance of Employee, to the extent that the pre-tax net profit of Employer,
determined in accordance with Generally Accepted Accounting Principals
(excluding performance bonuses), which can be passed up to Eco on its
consolidated tax return for the period beginning on November 1, 1994 and ending
on December 31, 1995, is in excess of Eighty Thousand Dollars ($80,000),
Employer shall pay Employee a one time bonus of Fifty Thousand Dollars
($50,000). Such bonus shall be made in twelve equal monthly installments of Four
Thousand One Hundred Sixty-Six and 67/100 Dollars ($4,166.67) payable fifteen
days after Aspen has delivered its year end 1995 financial statements to Eco.
c. Performance Bonus 1996. In an effort to encourage the peak
performance of Employee, to the extent that the pre-tax net profit of Employer,
determined in accordance with Generally Accepted Accounting Principals
(excluding performance bonuses), which can be passed up to Eco on its
consolidated tax return for its year ending December 31, 1996, is in excess of
One Hundred Ten Thousand Dollars ($110,000), Employer shall pay to Employee a
one time bonus of One Hundred Fifty Thousand Dollars ($150,000). Such bonus
shall be made in one lump sum payment fifteen days after Aspen has delivered its
year end 1996 financial statements to Eco.
12. Business Expenses
The Employer shall promptly reimburse Employee for all reasonable
business expenses within its stated annual budget and for all other preapproved
business expenses incurred by the Employee on behalf of the Employer.
13. Facilities
The Employer shall provide the Employee with an office consistent with
that which Employee had prior to the merger of Employer with ECO, appropriate
office equipment, supplies, stenographic and other employee services, and all
other facilities and services suitable to Employee's position and necessary and
customary for the performance of his duties.
14. Medical Insurance
Employer agrees to provide Employee with suitable medical insurance
commensurate with what Employee maintained for himself just prior to entering
into this Agreement.
15. Life Insurance
To the extent Employee can reasonably pass the required physical
without creating an unreasonable premium, Employer shall provide Employee with
term life insurance with a face amount of One Million Dollars ($1,000,000)
designating the spouse of Employee as the beneficiary.
16. Vacations
The Employee shall be entitled to three (3) weeks vacation time for his
first two (2) years of employment without loss of compensation. For years
beginning October 1, 1997 and October 1, 1998, Employee shall be entitled to
four (4) weeks vacation without loss of compensation. The Employee may be absent
from his employment for vacation at such time or times as the Board of Directors
shall approve. If the Employee is unable, for any reason, to take the total
amount of vacation time authorized during any year, he may accrue that time or
may, in his discretion, receive cash payment in an amount equal to the amount of
annual salary attributable to that period of time.
17. Car Allowance
Employer shall provide Employee with a car allowance of Four Hundred
Sixty Dollars ($460) per month, the agreed upon value of obtaining the use of a
suitable automobile. The Employee shall procure his own automobile and the
Employer shall be responsible for obtaining adequate insurance coverage for the
automobile and for its maintenance.
18. Termination
This Agreement may be terminated in the following manner:
a. For Cause
The Employer may terminate this Agreement upon thirty (30) days written
notice if Employee willfully breaches or habitually neglects the duties he is
required to perform or commits such acts of dishonesty, fraud, misrepresentation
or other acts of moral turpitude as would prevent the effective performance of
his duties.
b. Without Cause
This Agreement may be terminated without cause upon thirty (30) days
written notice to the Employee. If Employee is terminated without cause, he
shall be entitled to severance pay equal to six (6) months of pay.
c. By Employee
The Employee may terminate this Agreement upon giving sixty (60) days
written notice to the Board of Directors.
d. Death or Disability
In the event of Employee's death or on the continuing incapacitating
disability of the Employee for a period in excess of one (1) year during the
term of this Agreement, it shall terminate immediately.
19. Notices
All notices, requests, demands, and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given on the
date of service if served personally to the party to whom notice is to be given,
or on the third day after mailing if mailed to the party to whom notice is to be
given, by first class mail, registered or certified, postage prepaid, and
properly addressed as follows:
To Employer: ASPEN CONSULTING COMPANIES, INC.
c/o William B. Adams
10890 Thornmint Road
San Diego, CA 92127
To Employee: Mike R. Scott
16935 W. Bernardo Drive, Suite 190
San Diego, CA 92127
20. Arbitration
Any controversy between the Employer and Employee regarding the
construction or application of any of the terms, provisions, or conditions of
this Agreement shall, upon the written request of either party served on the
other, be submitted to arbitration in accordance with the provisions of the
California Arbitration Act.
21. Entire Agreement
This Agreement supersedes any and all other agreements, either oral or
in writing, between the parties hereto with respect to provisions of this
Agreement and contains all of the covenants and agreements between the parties
whatsoever. Each party to this Agreement acknowledges that they have read and
understood this Agreement and that no representations, inducements, promises, or
agreements, oral or otherwise, have been made by either party or anyone acting
on behalf of either party, which are not embodied herein, and that no agreement,
statement, or promise not contained in this Agreement shall be valid or binding.
22. Modifications
Any modification of this Agreement will be effective only if it is in
writing and signed by all of the parties.
23. Severability
Should any provision in this Agreement be declared invalid, void or
unenforceable, then such portion shall be deemed to be severable from this
instrument and shall not affect the remainder thereof.
24. Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of the State of California.
25. Binding Upon Successors
This instrument shall be binding upon and inure to the benefit of the
personal and legal representatives, successors and assigns, except as restricted
in Paragraph 26 below, of the parties hereto and also upon the heirs, executors
and administrators of the individual persons executing this instrument.
26. Non-Assignability Clause
It is agreed that neither Employee nor any other designee or successor,
other than the estate of Employee, shall have any right to commute, sell,
assign, transfer, encumber or otherwise convey the right to receive any payments
hereunder, which payments and the right thereto are expressly declared to be
non-assignable and non-transferable, and any attempt to do such shall be null
and void.
27. Cumulative Rights
The various rights, options, elections, powers and remedies of a party
or parties to this instrument shall be construed as cumulative and no one of
them exclusive of any others or of any other legal or equitable remedy which
said party or parties might otherwise have in the event of breach or default in
the terms hereof, and the exercise of one right or remedy by a party or parties
shall not in any way impair his rights to any other right or remedy until all
obligations imposed on a party or parties have been performed.
28. Time
Time is of the essence of this Agreement.
29. No Waiver of Default
No waiver of default by any party or parties hereto shall be implied
from any omission by a party or parties to take any action on account of such
default if such default persists or is repeated and no express waiver shall
affect any default other than the default specified in the express waiver, and
that only for the time and to the extent therein stated. One or more waivers of
any covenant, term or condition of this instrument by a party or parties shall
not be construed to be a waiver of any subsequent breach of the same covenant,
term or condition. The consent or approval by any party or parties shall be
deemed to waive or render unnecessary the consent to or approval of said party
or parties of any subsequent or similar acts by a party or parties.
30. Attorney's Fees
If any action at law or equity is necessary to enforce the terms of
this Agreement, the prevailing party shall be entitled to reasonable attorney's
fees, costs, and necessary disbursements, in addition to any other relief to
which he or it may be entitled.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of
the dates below.
EMPLOYER:
ASPEN CONSULTING COMPANIES, INC.
a Colorado corporation
/s/ William B. Adams
-------------------------------
Date: September 30, 1995 By: William B. Adams, President
EMPLOYEE:
Date: September 30, 1995 /s/ Mike R. Scott
Mike R. Scott
EXHIBIT "A"
ECO SOIL SYSTEMS, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT effective as of October 1, 1995, is entered into by and
between ECO SOIL SYSTEMS, INC. (the "Company"), a Nebraska corporation and MIKE
R. SCOTT (the "Employee").
WHEREAS, Employee, the Company, and Aspen CONSULTING COMPANIES, INC.
("Aspen") are parties to that certain Agreement of Employment dated of even date
herewith (the "Employment Agreement") pursuant to which the Company is granting
this Option to Employee; and
WHEREAS, consistent with the Employment Agreement, the Company wishes
to provide incentive for the Employee to perform services for Aspen and the
Company and to maximize his performance on their behalf by providing a means by
which he can benefit from the increases in the value of the Company.
NOW THEREFORE, in consideration of the foregoing premises and of the
mutual promises and covenants herein contained, the Company and the Employee
agree as follows:
1. Grant. The Company hereby grants to the Employee an option (the
"Option") to purchase shares of the Company's common stock upon the terms and
conditions set forth below. The number of shares and the Employee's eligibility
to exercise such options are as follows:
1.1 A total of Fifty Thousand (50,000) shares in increments of
Twelve Thousand Five Hundred (12,500) shares for each year of Employee's
employment for a period of four (4) years. Employee shall be entitled to
purchase such incremental shares on December 31, 1996, December 31, 1997,
December 31, 1998 and December 31, 1999, so long as Employee continues to be
employed by Aspen on such dates.
1.2 A total of One Hundred Fifty Thousand (150,000) additional
shares shall be made available to Employee in the following incremental amounts,
so long as Employee continues to be employed by Aspen at the times stated below,
and achieves the stated income objectives for Aspen for each period. Such
options shall be exercisable on the first day of the month following the month
in which the Company has had an opportunity to audit the financial statements of
Aspen for each stated period.
1.2.1 Ten Thousand (10,000) shares if the December 31, 1996
pre-tax net income of Aspen which can be passed up to the Company on its
consolidated tax return is greater than One Hundred Ten Thousand Dollars
($110,000).
1.2.2 Twenty Thousand (20,000) shares if the December 31, 1997
pre-tax net income of Aspen which can be passed up to the Company on its
consolidated tax return is greater than One Hundred Sixty Thousand Dollars
($160,000).
1.2.3 Forty Thousand (40,000) shares if the December 31, 1998
pre-tax net income of Aspen which can be passed up to the Company on its
consolidated tax return is greater than Two Hundred Seventy-Five Thousand
Dollars ($275,000).
1.2.4 Eighty Thousand (80,000) shares if the December 31, 1999
pre-tax net income of Aspen which can be passed up to the Company on its
consolidated tax return is greater than Five Hundred Thousand Dollars
($500,000).
2. Definitions. As used herein, the following terms shall have the
meanings set forth below, and where said meaning is intended, said terms shall
be capitalized:
2.1 "Options" mean the Options which are granted to Employee
hereunder.
2.2 "Stock" means the common stock of the Company.
2.3 "Subject Stock" means shares of stock acquired by the
Employee through the exercise of the Options.
3. Purchase Price. The purchase price of the stock shall be Three
Dollars ($3.00) per share.
4. Nonqualified Options. The Options shall be Nonqualified Options and
are not intended to be treated as an incentive stock option under the Internal
Revenue Code of 1986.
5. Term; Exercise. The Options will expire December 31, 2001.
6. Transferability. The Options are not transferable except by will or
the laws of descent and distribution and my be exercised during the lifetime of
the Employee only by him.
7. Death. If the Employee dies, the Options - provided that they have
become exercisable pursuant to the other provisions of this Agreement - may be
exercised by his legal representative or by a person who acquired the right to
exercise such Options by request or inheritance or by reason of the death of the
Employee.
8. Acquisition.
8.1 Acquisition. For purposes of this Section 8, an
"Acquisition" shall mean any transaction in which a majority of the Company's
assets are acquired, or in which shares of the Company's stock representing more
than a fifty percent (50%) equity interest or a fifty percent (50%) voting
interest in the Company are acquired. An Acquisition shall include any
transaction in which the foregoing results are effectuated, whether through a
purchase, merger, consolidation, liquidation and transfer of assets, or
comparable transaction.
8.2 Right to Exercise in the Event of an Acquisition. In the
event that an Acquisition occurs with respect to the Company, the Options shall
become immediately and fully exercisable by Employee.
9. Adjustment to Prevent Dilution. In the event of any change in the
outstanding shares of Stock by reason of a stock dividend or split, or any
combination, recapitalization, or reclassification, the number of unexercised
Options hereunder shall be appropriately adjusted by the Company, whose
reasonable determination shall be conclusive, provided, however, that the
Company may round fractional shares to the nearest whole share.
10. Investment Representation; Legend. The Employee represents and
agrees that all shares of common stock purchased by him under this Agreement
will be purchased for investment purposes only and not with a view to
distribution or resale within the meaning of applicable securities laws. The
Company may required that an appropriate legend be inscribed on the face of any
certificate issued under this Agreement, indicating that transfer of the shares
is restricted, and may place an appropriate stop transfer order with the
Company's transfer agent with respect to such shares. It is understood, that
pursuant to the Consulting Agreement, the Employee holds registration rights
which, in certain circumstances, may result in the restrictions of this section
not being applicable.
11. Method of Exercise. Provided that this Option has become
exercisable as provided in Sections 1, 5 or 8 hereof, the Options may be
exercised, at any time, in whole or in part, by written notice to the Company.
The notice shall be in the form attached to this Agreement and will be
accompanied by payment (in such form as the Company may specify) of the full
purchase price of the shares to be issued. The Company will issue and deliver
certificates representing the number of shares purchased under the Options,
registered in the name of the Employee (r other purchaser under paragraph 7
hereof) as soon as practicable after receipt of the notice. The Company shall
pay any issue or transfer taxes payable in connection with the issue of such
Stock, or the transfer of any Stock by Employee in payment of the exercise
price.
Employee shall pay the exercise price for any shares of Stock purchased
pursuant to the exercise of an Option by delivering to the Company (a) cash in
the amount of the exercise price, (b) certificates, a valid assignment and nay
other necessary documents of transfer assigning to the Company Employee's rights
in shares of Stock of the Company having a Fair Market Value equal to the
exercise price, or (c) a combination of (a) and (b).
12. Miscellaneous.
12.1 Shareholder Privileges. The Employee shall not possess
any right or privilege as a holder of Stock until such time as a certificate for
Stock has been issued to him.
12.2 Governing Law. This Agreement shall be construed under
and governing by the laws of the State of California.
12.3 Amendments. This Agreement shall not be amended except by
a writing duly executed by the parties hereto.
COMPANY:
ECO SOIL SYSTEMS, INC. a Nebraska
corporation
Dated:_September 30, 1995__ By: /s/ Jeffrey A. Johnson
President
EMPLOYEE:
Dated:_September 30, 1995__
Mike R. Scott
AGREEMENT OF EMPLOYMENT
THIS AGREEMENT, effective as of July 8, 1996 (this "Agreement"), is
entered into by and between Eco Specialty, Inc., a Delaware corporation
("Employer"), a wholly owned subsidiary of Eco Soil Systems, Inc., a Nebraska
corporation "Eco"), and Kevin Lyons (the "Employee").
RECITALS
A. Employer is a Delaware corporation engaged in the general business
of turf and crop maintenance products sales and service.
B. Contemporaneously with the execution of this Agreement, Turf
Specialty, Inc., a New Hampshire corporation, of whom Employee was a
shareholder, was merged with and into Eco Specialty, Inc., a Delaware
corporation (the "Merger"), pursuant to an Agreement and Plan of Merger (the
"Merger Agreement).
C. Employer desires to employ Employee in order to retain his
experience, skills, abilities, background and knowledge of the business of
Employer.
D. Employee desires to be employed by Employer and is willing to do so
on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, and for other good.and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows.
COVENANTS
1. Employment.
Employer hereby employs Employee and Employee hereby accepts
employment with Employer pursuant to the terms and provisions of this Agreement.
2. Effective Date.
The effective date of this Agreement shall be July 8, 1996.
3. Term.
Employee's employment under this Agreement shall commence as-
of the effective date of this Agreement and shall continue in full force for a
term of three (3) years, expiring at midnight on July 7, 1999, unless earlier
terminated in the manner specified in Section 20 of this Agreement (hereinafter
referred to as the "Term"). The parties may by mutual agreement reduced to
writing extend this Agreement upon terms mutually agreed upon by the parties.
4. Title.
Employee's title during the Term shall be Senior Vice
President and Co-General Manager.
5. Duties of Employee.
5.1 Duties During Test Period.
During the Test Period (as that term is defined in the Merger
Agreement), it is the intention of Employer and Eco that Employer be operated as
a free-standing and independent subsidiary of Eco. In order to achieve this,
Employee (together with his counterpart, David Schermerhorn ("Schermerhorn"),
who is being employed by Employer under a separate employment agreement) is
hereby vested with day to day operational control over Employer during the Test
Period. In cooperation with Schermerhorn, Employee shall be responsible for the
proper and efficient running, management and promotion of the business, affairs,
and interests of Employer. Without limiting the generality of the foregoing,
during the Test Period Employee shall have complete authority in conjunction
with Schermerhorn, without having to secure the approval or consent of Employer,
to take all actions necessary for the operation of the Employer as a going
business, including but not limited to, hiring and firing employees of Employer,
establishing and administering benefit plans for its employees, entering into
contracts for the purchase and sale of Employer's inventory, executing
appropriate contacts with vendors and customers, purchasing and selling or
otherwise disposing of Employer's equipment, maintaining personal contact with
Employer's customers and vendors, establishing (where necessary) and utilizing
credit facilities for the needs of Employer, and taking any and all other
actions that are deemed by Employee, in his reasonable good faith judgment, to
be in the best interests of Employer. Employer shall not interfere with
Employee's exercise of autonomy during the Test Period. It shall be the sole
responsibility of Employee and David Schermerhorn to divide their specific
duties between themselves as they, in their collective judgment, deem
appropriate. The provisions of Section 19 of the Merger Agreement are hereby
incorporated by reference as covenants of the Employer.
6. Duties Following Test Period.
Employee's duties following the Test Period shall be as
mutually agreed upon by the parties, taking in account Employee's level of
experience, expertise and knowledge of Employer's business and his status as a
senior executive of Employer. Once agreed upon by the parties, those duties
shall be set forth in a duly executed Amendment to this Agreement.
7. Devotion to Employer's Business.
During Employee's employment hereunder, unless prevented by
ill health or accident and except during vacation and holidays permitted by this
Agreement, Employee shall devote his full-time and best efforts to the
performance of his duties as set forth herein.
8. Competitive Activities.
8.1 During the Term of this Agreement and for a period of five (5)
years thereafter, Employee shall not directly or indirectly, either as an
Employee, Employer, Consultant, Agent, Principal, Partner, Shareholder (except
as otherwise provided in Section 8.3 below and except as a ten percent (10%) or
less shareholder in a publicly held company), Corporate Officer, Director, or in
any other individual or representative capacity, engage or participate in any
business that is in competition in any manner with the business of Employer as
it exists when Employee's employment under this Agreement terminates. Such
agreement not to compete shall include such activities in any country, state or
county, in which Employer conducts business.
8.2 The parties intend that this covenant not to compete be construed
in the broadest possible manner. If any court should rule that the territorial
scope of this covenant not to compete is overbroad, and that any city, county,
state, political subdivision of any state, or country, specified is not
permissibly within the scope of the covenant not to compete, this covenant not
to compete shall be narrowed so that its territorial scope would be limited to
the maximum geographical area permitted by law, and shall remain effective and
enforceable with respect to each other specified city, county, state, territory
and country.
8.3 Notwithstanding the foregoing, Employer and Eco are aware that
Employee has an ownership interest in Advanced Agronomics, Inc., a Massachusetts
corporation ("Agronomics"). Employee is not active in the business affairs of
Agronomics. Employee and Eco are also aware that Employee has an ownership
interest in and is active in the business of Universal Turf, Inc., a
Massachusetts corporation. Employer and Eco recognize that Employee will
continue to maintain his ownership interest in Agronomics and his ownership
interest in and business activity with Universal during the Term hereof, and
have agreed that under no circumstances will such ownership and/or activity by
Employee be construed as a breach by Employee of this Section 8. Employee shall,
however, continue to be obligated to devote his full-time and best efforts to
Employer as required under Section 7 above.
8.4 Employee's obligations under this Section 8 shall cease immediately
without recourse to Employer in any of the following events:
(a) Employee terminates his employment hereunder pursuant to
either Section 20.1 (b) or Section 20.1 (f) below;
(b) Employer terminates Employee's employment hereunder pursuant
to Section 20.1 (c)
(c) Employer does not renew Employee's employment following
expiration of the Term on at least as favorable terms as are
provided for hereunder.
In all other events, Employee's obligations under this Section 8 shall continue.
9. Trade Secrets.
The parties acknowledge and agree that during the Term
Employee shall have access to and become acquainted with information concerning
operations and products of Employer and ECO not generally known to the public,
and that such confidential information constitutes Employer's trade secrets.
Employee specifically agrees that he shall not misuse, misappropriate, or
disclose any such trade secrets, directly or indirectly, to any other person or
use them in any way during the term of this Agreement or at any time thereafter.
The term "trade secrets" as used in this Section 9 shall not apply to any
information that is presently or becomes lawfully available to the general
public through a source other than Employee or Employee's agent, representative,
or a person who acquired the information from Employee. Notwithstanding the
foregoing, Employee may make disclosure of "trade secrets":
(a) in response to legal process issued in connection with any
judicial or administrative proceeding; and
(b) in prosecuting or defending litigation concerning this
Agreement to the tribunal before which the matter is pending.
10. Base Compensation.
The compensation to be paid to Employee during the Term shall
be as follows:
10.1 During the period commencing on the effective date of this
Agreement and ending at midnight on December 31, 1996 (the "Initial Period"),
Employee shall receive a minimum annualized base salary of Eighty Thousand
Dollars ($80,000), payable in equal installments every two weeks, less
withholding and other mandatory wage deductions. Employer shall, at Employee's
direction and in Employee's sole and absolute discretion, raise Employee's
annualized base salary during the Initial Period to One Hundred Sixty-Five
Thousand Dollars ($ 165,000). In no event shall Employee be entitled to
carry-over beyond the Initial Period any salary that he would have been entitled
to receive during the Initial Period had he exercised his discretion set forth
in the immediately preceding sentence. Following the Initial Period, and during
the balance of Employee's employment with Employer hereunder, Employee shall,
receive a minimum annualized base salary of One Hundred Sixty-Five Thousand
Dollars ($165,000), payable in equal installments every two weeks, less
withholding and other mandatory wage deductions.
10.2 Any change in Employee's base compensation set forth in Section
10.1 above shall be reflected by a written endorsement attached to this
Agreement and signed by Employee and a duly authorized officer of Employer.
11. Incentive Compensation.
Employee shall be entitled to participate in incentive
compensation programs as may from time to time be established for similarly
situated employees of Employer, Eco or Eco affiliates.
12. Business Expenses.
Subject to compliance by Employee with such policies regarding
expenses and expense reimbursement as may be adopted from time to time by
Employer, Employee is authorized to incur reasonable expenses in the performance
of his duties hereunder in furtherance of the business and affairs of Employer.
Employer shall reimburse Employee for all such reasonable expenses, in all cases
upon the presentation by Employee of an itemized account satisfactory to the
Company in substantiation of the expenses when claiming reimbursement.
13. Locus of Duties; Facilities.
Employee shall perform his duties hereunder at Employer's
premises in Londonderry, New Hampshire and shall not be required to relocate
from Sturbridge, Massachusetts. Employee shall undertake such travel both within
the United States and abroad and in such manner and on such occasions as may be
reasonably necessary for the effective discharge of his duties under this
Agreement, as to which Employee shall be the final arbiter. Employee shall be
reimbursed for the expenses incurred by him in connection with all such travel
in accordance with the provisions of Section 12 above. The Employer shall
provide Employee with an office consistent with that which Employee had prior to
the merger of Turf with Employer, appropriate office equipment, supplies,
stenographic and other employee services, and all other facilities and services
suitable to Employee's position and necessary and customary for the performance
of his duties.
14. Fringe Benefits.
During the term of his employment hereunder, Employee shall be
entitled to participate in employee benefit plans or programs established by
Employer to the extent that his position, tenure, salary, age, health, and other
qualifications make him eligible to participate, subject to regulations and
criteria applicable thereto.
15. Medical Insurance.
Employer agrees to provide Employee with suitable medical and
disability insurance commensurate with what Employee was receiving just prior to
entering into this Agreement, as more particularly set forth on Exhibit A
attached hereto.
16. Vacations.
Employee shall be entitled to four (4) weeks vacation each
employment year during which this Agreement remains in effect, without loss of
compensation. The Employee may be absent from his employment for vacation at
such time or times as the Board of Directors shall approve. If the Employee is
unable, for any reason, to take the total amount of vacation time authorized
during any employment year, he may accrue that time or may, in his discretion,
receive cash payment in an amount equal to the amount of annual salary
attributable to that period of time. Employee shall also be entitled to such
holidays as the Board of Directors of Employer establish for the employees of
Employer.
17. Sickness.
Employer acknowledges that Employee may at any time be
prevented by illness or accident or other incapacity from properly performing
his duties under this Agreement. Employee shall receive normal pay, without
reduction, for a reasonable number of days missed as a result of illness.
18. Automobile.
Employee shall be entitled to the use of an automobile
provided by Employer, without charge, for the purpose of performing his duties
under this Agreement. Employer shall pay all expenses, including but not limited
to, gas, oil, insurance, maintenance, and repair, incurred by Employee in
connection with the operation of the vehicle. The automobile provided by
Employer to Employee under this Section 17 shall at all times be equivalent to
the automobile utilized by Employee in connection with the business of Turf
prior to the Merger.
19. Loan to Employee.
Pursuant to Section 3.4 of the Merger Agreement, Employer has
agreed to make a Post-Closing Loan (as that term is defined in the Merger
Agreement) to Employee.
20. Terminations
20.1 Employee's employment with Employer under this Agreement,
Employee's salary and other rights of Employee under this Agreement or otherwise
as an employee of Employer may be terminated (except as to salary, benefits and
rights accrued prior to such termination): (a) by Employer for cause upon thirty
(30) days written notice (for purposes hereof, "cause" refers to dishonesty or
fraud; conviction of a felony or a crime involving embezzlement, theft or other
conversion of property, or Employee's breach of Section 8 hereof); (b) by either
Employer or Employee, if the other party is in material violation of the other
terms and conditions of this Agreement, but then only if the material violation
is not cured to the satisfaction of the non-breaching party within thirty (30)
days of the non-breaching party notifying the breaching party of the violation;
(c) by Employer without cause upon sixty (60) days written notice; (d) by
Employee for any reason upon sixty (60) days written notice; (e) by Employer in
the event of Employee's continuing physical or mental disability of Employee
which prevents Employee from performing any material part of his duties
hereunder for a period in excess of one (1) year; (f) by Employee, immediately
and without notice if Eco defaults on its obligations to either Employee or
Schermerhorn under the Purchase Notes (as that term is defined in the Merger
Agreement) and the default is not (i) cured within relevant grace periods (if
any), or (ii) waived in writing by the Payee of the Purchase Note; or (g) in all
events, if not terminated earlier, on June 30, 1999.
20.2 In all events of termination as set forth in Section 20.1 above,
any amount then outstanding under any promissory note to which Employee is Payee
executed in connection with the Merger Agreement (the "Promissory Notes") shall
become immediately due and payable to Employee. Notwithstanding the foregoing,
Employee shall have the right to offset dollar for dollar any amounts then
outstanding under the Promissory Notes against amounts then owed by him under
the Loan.
21. Indemnification.
Employee shall not be liable, responsible or accountable in damages or
otherwise to Employer, and Employer shall indemnify, defend and save harmless
Employee from, any loss, damage, claim, liability, cost or expense arising in
connection with the performance of his duties hereunder, or any act or omission
performed or omitted by Employee in good faith on behalf of Employer and in the
reasonable belief of Employee that his conduct was not opposed to the best
interests of Employer; provided, however, that (a) Employee shall not have been
determined to have committed fraud, gross negligence or willful misconduct with
respect to such act or omission, and (b) the satisfaction of any such
indemnification shall be from, and only to the extent of, Employer's assets. Any
act or omission of Employee, or of any of his employees or agents, upon the
advice of legal counsel shall be deemed to have been performed or omitted in
good faith. ECO Soil Systems, Inc., the parent of Employer shall guarantee
Employer's indemnity obligations under this Section 21.
22. Notices.
All notices, requests, demands, and other communications under
this Agreement shall be in writing and shall be deemed to have been duly given
on the date of service if served personally to the party to whom notice is to be
given, or on the third day after mailing if mailed to the party to whom notice
is to be given, by first class mail, registered or certified postage prepaid,
and properly addressed as follows:
To Employer: ECO SPECIALTY, INC.
c/o William B. Adams
10890 Thornmint Road, #200
San Diego, CA 92127
To Employee: KEVIN LYONS
128 Fiske Hill Road
Sturbridge, MA 01566
23. Arbitration.
Any controversy between Employer and Employee regarding the
construction or application of any of the terms, provisions, or conditions of
this Agreement shall, upon written request of either party served on the other
be submitted to arbitration in accordance with Section 20.21 of the Merger
Agreement.
24. Entire Agreement.
This Agreement supersedes any and all other agreements, either
oral or in writing, between the parties hereto with respect to Employee's
employment with Employer, other than Section 3.4 of the Merger Agreement which
remains in full force and effect. Each party to this Agreement acknowledges that
they have read and understood this Agreement and that no representations,
inducements, promises, or agreements, oral or otherwise, have been made by
either party or anyone acting on behalf of either party, which are not embodied
herein, and that no agreement, statement, or promise not contained in this
Agreement shall be valid or binding.
25. Modifications.
Any modification of this Agreement will be effective only if
it is in writing and signed by all parties.
26. Severability
Should any provision in this Agreement be declared invalid,
void or unenforceable, then such portion shall be deemed to be severable from
this instrument and shall not affect the remainder thereof.
27. Governing Law.
This Agreement shall be governed by and construed and enforced
in accordance with the laws of the State of New Hampshire without giving effect
to the principals of conflict of law thereof.
28. Binding Upon Successors.
This instrument shall be binding upon and inure to the benefit
of the personal and legal representatives, successors and assigns, except as
restricted in Section 29 below, of the parties hereto and also upon the heirs,
executors and administrators of the individual persons executing this
instrument.
29. Non-Assignability Clause.
It is agreed that neither Employee nor any other designee or
successor, other than the estate of Employee, shall have any right to commute,
sell, assign, transfer, encumber or otherwise convey the right to receive any
payments hereunder, which payments and the right thereto are expressly declared
to be non-assignable and nontransferable, and any attempt to do such shall be
null and void.
30. Cumulative Rights.
The various rights, options, elections, powers and remedies of
a party or parties to this instrument shall be construed as cumulative and no
one of them exclusive of any others or of any other legal or equitable remedy
which said party or parties might otherwise have in the event of breach or
default in the terms hereof, and the exercise of one right or remedy by a party
or parties shall not in any way impair his rights to any other right or remedy
until all obligations imposed on a party or parties have been performed.
31. Time.
Time is of the essence of this Agreement.
32. No Waiver of Default.
No waiver of default by any party or parties hereto shall be
implied from any omission by a party or parties to take any action on account of
such default if such default persists or is repeated and no express waiver shall
affect any default other than the default specified in the express waiver, and
that only for the time and to the extent therein stated. One or more waivers of
any covenant, term or condition of this instrument by a party or parties shall
not be construed to be a waiver of any subsequent breach of the same covenant,
term or condition. The consent or approval by any party or parties shall be
deemed to waive or render unnecessary the consent to or approval of said party
or parties of any subsequent or similar acts by a party or parties.
33. Attorney's Fees.
If any action at law or equity is necessary to enforce the
terms of this Agreement, the prevailing party shall be entitled to reasonable
attorney's fees, costs, and necessary disbursements, in addition to any other
relief to which he or it may be entitled.
34. Counterparts.
This Agreement may be executed in one or more counterparts,
all of which together shall constitute one agreement.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of
the dates below.
EMPLOYER:
ECO SPECIALTY, INC.
a Delaware corporation
Dated: July 3, 1996 By: /s/ William B. Adams
President
EMPLOYEE:
Dated: July 3, 1996 By: /s/ Kevin Lyons
Kevin Lyons
GUARANTOR:
ECO SOIL SYSTEMS, INC.
as Guarantor of Employer's obligations
under Section 21
Dated: July 3, 1996 By: /s/ William B. Adams
CEO
AGREEMENT OF EMPLOYMENT
THIS AGREEMENT, effective as of July 8, 1996 (this "Agreement"), is
entered into by and between Eco Specialty, Inc., a Delaware corporation
("Employer"), a wholly owned subsidiary of Eco Soil Systems, inc., a Nebraska
corporation ("Eco"), and David Schermerhorn (the "Employee").
RECITALS
A. Employer is a Delaware corporation engaged in the general business
of turf and crop maintenance products sales and service.
B. Contemporaneously with the execution of this Agreement, Turf
Specialty, Inc., a New Hampshire corporation, of whom Employee was a
shareholder, was merged with and into Eco Specialty, Inc., a Delaware
corporation (the merger"), pursuant to an Agreement and Plan of Merger (the
"Merger Agreement).
C. Employer desires to employ Employee in order to retain his
experience, skills, abilities, background and knowledge of the business of
Employer.
D. Employee desires to be employed by Employer and is willing to do so
on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows.
COVENANTS
1. Employment.
Employer hereby employs Employee and Employee hereby accepts
employment with Employer pursuant to the terms and provisions of this Agreement.
2. Effective Date.
The effective date of this Agreement shall be July 8, 1996.
3. Term.
Employee's employment under this Agreement shall commence as
of the effective date of this Agreement and shall continue in full force for a
term of three (3) years, expiring at midnight on July 8, 1999, unless earlier
terminated in the manner specified in Section 20 of this Agreement (hereinafter
referred to as the term"). The parties may by mutual agreement reduced to
writing extend this Agreement upon terms mutually agreed upon by the parties.
4. Title.
Employee's title during the Term shall be Senior Vice
President and Co-General Manager.
5. Duties of Employee.
5.1 Duties During Test Period.
During the Test Period (as that term is defined in the Merger
Agreement), it is the intention of Employer and Eco that Employer be operated as
a free-standing and independent subsidiary of Eco. In order to achieve this,
Employee (together with his counterpart, Kevin Lyons ("Lyons"), who is being
employed by Employer under a separate employment agreement) is hereby vested
with day to day operational control over Employer during the Test Period. In
cooperation with Lyons, Employee shall be responsible for the proper and
efficient running, management and promotion of the business, affairs, and
interests of Employer. Without limiting the generality of the foregoing, during
the Test Period Employee shall have complete authority in conjunction with
Lyons, without having to secure the approval or consent of Employer, to take all
actions necessary for the operation of the Employer as a going business,
including but not limited to, hiring and firing employees of Employer,
establishing and administering benefit plans for its employees, entering into
contracts for the purchase and sale of Employer's inventory, executing
appropriate contracts with vendors and customers, purchasing and selling or
otherwise disposing of Employer's equipment, maintaining personal contact with
Employer's customers and vendors, establishing (where necessary) and utilizing
credit facilities for the needs of Employer, and taking any and all other
actions that are deemed by Employee, in his reasonable good faith judgment, to
be in the best interests of Employer. Employer shall not interfere with
Employee's exercise of autonomy during the Test Period. It shall be the sole
responsibility of Employee and Kevin Lyons to divide their specific duties
between themselves as they, in their collective judgment, deem appropriate. The
provisions of Section 19 of the Merger Agreement are hereby incorporated by
reference as covenants of the Employer.
6. Duties Following Test Period.
Employee's duties following the Test Period shall be as
mutually agreed upon by the parties, taking in account Employee's level of
experience, expertise and knowledge of Employer's business and his status as a
senior executive of Employer. Once agreed upon by the parties, those duties
shall be set forth in a duly executed Amendment to this Agreement.
7. Devotion to Employer's Business.
During Employee's employment hereunder, unless prevented by
ill health or accident and except during vacation and holidays permitted by this
Agreement, Employee shall devote his full-time and best efforts to the
performance of his duties as set forth herein.
8. Competitive Activities.
8.1 During the Term of this Agreement and for a period of five
(5) years thereafter, Employee shall not directly or indirectly, either as an
Employee, Employer, Consultant, Agent, Principal, Partner, Shareholder (except
as otherwise provided in Section 8.3 below and except as a ten percent (10%) or
less shareholder in a publicly held company), Corporate Officer, Director, or in
any other individual or representative capacity, engage or participate in any
business that is in competition in any manner with the business of Employer as
it exists when Employee's employment under this Agreement terminates. Such
agreement not to compete shall include such activities in any country, state or
county, in which Employer conducts business.
8.2 The parties intend that this covenant not to compete be
construed in the broadest possible manner. If any court should rule that the
territorial scope of this covenant not to compete is overbroad, and that any
city, county, state, political subdivision of any state, or country, specified
is not permissibly within the scope of the covenant not to compete, this
covenant not to compete shall be narrowed so that its territorial scope would be
limited to the maximum geographical area permitted by law, and shall remain
effective and enforceable with respect to each other specified city, county,
state, territory and country.
8.3 Notwithstanding the foregoing, Employer and Eco are aware
that Employee has an ownership interest in Advanced Agronomics, Inc., a
Massachusetts corporation ("Argonomics"). Employee is not active in the business
affairs of Argonomics. Employee and Eco are also aware that Employee has an
ownership interest in and is active in the business of Universal Turf, Inc., a
Massachusetts corporation. Employer and Eco recognize that Employee will
continue to maintain his ownership interest in Argonomics and his ownership
interest in and business activity with Universal during the Term hereof, and
have agreed that under no circumstances Still such ownership and/or activity by
Employee be construed as a breach by Employee of this Section 8. Employee shall,
however, continue to be obligated to devote his full-time and best efforts to
Employer as required under Section 7 above.
8.4 Employee's obligations under this Section 8 shall cease
immediately without recourse to Employer in any of the following events:
(a) Employee terminates his employment hereunder pursuant
to either Section 20.1 (b) or Section 20.1 (f) below;
(b) Employer terminates Employee's employment hereunder
pursuant to Section 20.1 (c)below;
(c) Employer does not renew Employee's employment
following expiration of the Term on at least as
favorable terms as are provided for hereunder.
In all other events, Employee's obligations under this Section 8 shall continue.
9. Trade Secrets.
The parties acknowledge and agree that during the Term
Employee shall have access to and become acquainted with information concerning
operations and products of Employer and ECO not generally known to the public,
and that such confidential information constitutes Employer's trade secrets.
Employee specifically agrees that he shall not misuse, misappropriate, or
disclose any such trade secrets, directly or indirectly, to any other person or
use them in any way during the term of this Agreement or at any time thereafter.
The term "trade secrets" as used in this Section 9 shall not apply to any
information that is presently or becomes lawfully available to the general
public through a source other than Employee or Employee's agent, representative,
or a person who acquired the information from Employee. Notwithstanding the
foregoing, Employee may make disclosure of "trade secrets":
(a) in response to legal process issued in connection
with any judicial or administrative proceeding; and
(b) in prosecuting or defending litigation concerning
this Agreement to the tribunal before which the
matter is pending.
10. Base Compensation.
The compensation to be paid to Employee during the Term shall
be as follows:
10.1 During the period commencing on the effective date of
this Agreement and ending at midnight on December 31, 1996 (the "Initial
Period"), Employee shall receive a minimum annualized base salary of Eighty
Thousand Dollars ($80,000), payable in equal installments every two weeks, less
withholding and other mandatory wage deductions. Employer shall, at Employee's
direction and in Employee's sole and absolute discretion, raise Employee's
annualized base salary during the Initial Period to One Hundred Sixty-Five
Thousand Dollars ($165,000). In no event shall Employee be entitled to
carry-over beyond the Initial Period any salary that he would have been entitled
to receive during the Initial Period had he exercised his discretion set forth
in the immediately preceding sentence. Following the Initial Period, and during
the balance of Employee's employment with Employer hereunder, Employee shall,
receive a minimum annualized base salary of One Hundred Sixty-Five Thousand
Dollars ($165,000), payable in equal installments every two weeks, less
withholding and other mandatory wage deductions.
10.2 Any change in Employee's base compensation set forth in
Section 10.1 above shall be reflected by a written endorsement attached to this
Agreement and signed by Employee and a duly authorized officer of Employer.
11. Incentive Compensation.
Employee shall be entitled to participate in incentive
compensation programs as may from time to time be established for similarly
situated employees of Employer, Eco or Eco affiliates.
12. Business Expenses.
Subject to compliance by Employee with such policies regarding
expenses and expense reimbursement as may be adopted from time to time by
Employer, Employee is authorized to incur reasonable expenses in the performance
of his duties hereunder in furtherance of the business and affairs of Employer.
Employer shall reimburse Employee for all such reasonable expenses, in all cases
upon the presentation by Employee of an itemized account satisfactory to the
Company in substantiation of the expenses when claiming reimbursement.
13. Locus of Duties; Facilities.
Employee shall perform his duties hereunder at Employer's
premises in Londonderry, New Hampshire and shall not be required to relocate
from Brimfield, Massachusetts. Employee shall undertake such travel both within
the United States and abroad and in such manner and on such occasions as may be
reasonably necessary for the effective discharge of his duties under this
Agreement, as to which Employee shall be the final arbiter. Employee shall be
reimbursed for the expenses incurred by him in connection with all such travel
in accordance with the provisions of Section 12 above. The Employer shall
provide Employee with an office consistent with that which Employee had prior to
the merger of Turf with Employer, appropriate office equipment, supplies,
stenographic and other employee services, and all other facilities and services
suitable to Employee's position and necessary and customary for the performance
of his duties.
14. Fringe Benefits.
During the term of his employment hereunder, Employee shall be
entitled to participate in employee benefit plans or programs established by
Employer to the extent that his position, tenure, salary, age, health, and other
qualifications make him eligible to participate, subject to regulations and
criteria applicable thereto.
15. Medical Insurance.
Employer agrees to provide Employee with suitable medical and
disability insurance commensurate with what Employee was receiving just prior to
entering into this Agreement, as more particularly set forth on Exhibit A
attached hereto.
16. Vacations.
Employee shall be entitled to four (4) weeks vacation each
employment year during which this Agreement remains in effect, without loss of
compensation. The Employee may be absent from his employment for vacation at
such time or times as the Board of Directors shall approve. If the Employee is
unable, for any reason, to take the total amount of vacation time authorized
during any employment year, he may accrue that time or may, in his discretion,
receive cash payment in an amount equal to the amount of annual salary
attributable to that period of time. Employee shall also be entitled to such
holidays as the Board of Directors of Employer establish for the employees of
Employer.
17. Sickness.
Employer acknowledges that Employee may at any time be
prevented by illness or accident or other incapacity from properly performing
his duties under this Agreement. Employee shall receive normal pay, without
reduction, for a reasonable number of days missed as a result of illness.
18. Automobile.
Employee shall be entitled to the use of an automobile
provided by Employer, without charge, for the purpose of performing his duties
under this Agreement. Employer shall pay all expenses, including but not limited
to, gas, oil, insurance, maintenance, and repair, incurred by Employee in
connection with the operation of the vehicle. The automobile provided by
Employer to Employee under this Section 17 shall at all times be equivalent to
the automobile utilized by Employee in connection with the business of Turf
prior to the Merger.
19. Loan to Employee.
Pursuant to Section 3.4 of the Merger Agreement, Employer has
agreed to make a Post-Closing Loan (as that term is defined in the Merger
Agreement) to Employee.
20. Termination.
20.1 Employee's employment with Employer under this Agreement,
Employee's salary and other rights of Employee under this Agreement or otherwise
as an employee of Employer may be terminated (except as to salary, benefits and
rights accrued prior to such termination): (a) by Employer for cause upon thirty
(30) days written notice (for purposes hereof, "cause" refers to dishonesty or
fraud; conviction of a felony or a crime involving embezzlement, theft or other
conversion of property, or Employee's breach of Section 8 hereof); (b) by either
Employer or Employee, if the other party is in material violation of the other
terms and conditions of this Agreement, but then only if the material violation
is not cured to the satisfaction of the non-breaching party within thirty (30)
days of the non-breaching party notifying the breaching party of the violation;
(c) by Employer without cause upon sixty (60) days written notice; (d) by
Employee for any reason upon sixty (60) days written notice; (e) by Employer in
the event of Employee's continuing physical or mental disability of Employee
which prevents Employee from performing any material part of his duties
hereunder for a period in excess of one (1) year; (f) by Employee, immediately
and without notice if Eco defaults on its obligations to either Employee or
Lyons under the Purchase Notes (as that term is defined in the Merger Agreement)
and the default is not (i) cured within relevant grace periods (if any), or (ii)
waived in writing by the Payee of the Purchase Note; or (g) in all events, if
not terminated earlier, on June 30, 1999.
20.2 In all events of termination as set forth in Section 20.1
above, any amount then outstanding under any promissory note to which Employee
is Payee executed in connection with the Merger Agreement (the "Promissory
Notes") shall become immediately due and payable to Employee. Notwithstanding
the foregoing, Employee shall have the right to offset dollar for dollar any
amounts then outstanding under the Promissory Notes against amounts then owed by
him under the Loan.
21. Indemnification.
Employee shall not be liable, responsible or accountable in
damages or otherwise to Employer, and Employer shall indemnify, defend and save
harmless Employee from, any loss, damage, claim, liability, cost or expense
arising in connection with the performance of his duties hereunder, or any act
or omission performed or omitted by Employee in good faith on behalf of Employer
and in the reasonable belief of Employee that his conduct was not opposed to the
best interests of Employer; provided, however, that (a) Employee shall not have
been determined to have committed fraud, gross negligence or willful misconduct
with respect to such act or omission, and (b) the satisfaction of any such
indemnification shall be from, and only to the extent of, Employer's assets. Any
act or omission of Employee, or of any of his employees or agents, upon the
advice of legal counsel shall be deemed to have been performed or omitted in
good faith. ECO Soil Systems, Inc., the parent of Employer shall guarantee
Employer's indemnity obligations under this Section 21.
22. Notices.
All notices, requests, demands, and other communications under
this Agreement shall be in writing and shall be deemed to have been duly given
on the date of service if served personally to the party to whom notice is to be
given, or on the third day after mailing if mailed to the party to whom notice
is to be given, by first class mail, registered or certified, postage prepaid,
and properly addressed as follows:
To Employer: ECO SPECIALTY, INC.
c/o William B. Adams
10890 Thornmint Road, #200
San Diego, CA 992127
To Employee: DAVID SCHERMERHORN
264 Little Alum Road
Brimfield, MA 010010
23. Arbitration.
Any controversy between Employer and Employee regarding the
construction or application of any of the terms, provisions, or conditions of
this Agreement shall, upon written request of either party served on the other
be submitted to arbitration in accordance with Section 20.21 of the Merger
Agreement.
24. Entire Agreement.
This Agreement supersedes any and all other agreements, either
oral or in writing, between the parties hereto with respect to Employee's
employment with Employer, other than Section 3.4 of the Merger Agreement which
remains in full force and effect. Each party to this Agreement acknowledges that
they have read and understood this Agreement and that no representations,
inducements, promises, or agreements, oral or otherwise, have been made by
either party or anyone acting on behalf of either party, which are not embodied
herein, and that no agreement, statement, or promise not contained in this
Agreement shall be valid or binding.
25. Modifications.
Any modification of this Agreement will be effective only if
it is in writing and signed by all parties.
26. Severability
Should any provision in this Agreement be declared invalid,
void or unenforceable, then such portion shall be deemed to be severable from
this instrument and shall not affect the remainder thereof.
27. Governing Law.
This Agreement shall be governed by and construed and enforced
in accordance with the laws of the State of New Hampshire without giving effect
to the principals of conflict of law thereof.
28. Binding Upon Successors.
This instrument shall be binding upon and inure to the benefit
of the personal and legal representatives, successors and assigns, except as
restricted in Section 29 below, of the parties hereto and also upon the heirs,
executors and administrators of the individual persons executing this
instrument.
29. Non-Assignability Clause.
It is agreed that neither Employee nor any other designee or
successor, other than the estate of Employee, shall have any right to commute,
sell, assign, transfer, encumber or otherwise convey the right to receive any
payments hereunder, which payments and the right thereto are expressly declared
to be non-assignable and nontransferable, and any attempt to do such shall be
null and void.
30. Cumulative Rights.
The various rights, options, elections, powers and remedies of
a party or parties to this instrument shall be construed as cumulative and no
one of them exclusive of any others or of any other legal or equitable remedy
which said party or parties might otherwise have in the event of breach or
default in the terms hereof, and the exercise of one right or remedy by a party
or parties shall not in any way impair his rights to any other right or remedy
until all obligations imposed on a party or parties have been performed.
31. Time.
Time is of the essence of this Agreement.
32. No Waiver of Default.
No waiver of default by any party or parties hereto shall be
implied from any omission by a party or parties to take any action on account of
such default if such default persists or is repeated and no express waiver shall
affect any default other than the default specified in the express waiver, and
that only for the time and to the extent therein stated. One or more waivers of
any covenant, term or condition of this instrument by a party or parties shall
not be construed to be a waiver of any subsequent breach of the same covenant,
term or condition. The consent or approval by any party or parties shall be
deemed to waive or render unnecessary the consent to or approval of said party
or parties of any subsequent or similar acts by a party or parties.
33. Attorney's Fees.
If any action at law or equity is necessary to enforce the
terms of this Agreement, the prevailing party shall be entitled to reasonable
attorney's fees, costs, and necessary disbursements, in addition to any other
relief to which he or it may be entitled.
34. Counterparts.
This Agreement may be executed in one or more counterparts,
all of which together shall constitute one agreement.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of
the dates below.
EMPLOYER:
ECO SPECIALTY, INC.
a Delaware corporation
By: /s/ William B. Adams
------------------------------------
Dated: July 3, 1996 President
EMPLOYEE:
/s/ David Schermerhorn
----------------------------------------
Dated: July 8, 1996 David Schermerhorn
GUARANTOR:
ECO SOIL SYSTEMS, INC.
as Guarantor of Employer's obligations
under Section 21
By: /s/ William B. Adams
------------------------------------
Dated: July 3, 1996 CEO
March 6, 1996
Mr. William B. Adams
Chairman/C . E. O.
Eco Soil Systems
10890 Thornmint Road, Ste. 200
San Diego, CA 92127
Dear Bill:
Based on our discussions concerning the financing of Eco Soil Systems
("Borrower"), and based on our review of the information provided, Imperial Bank
("Bank") is pleased to provide financing as follows. This commitment is subject
to the conditions set forth herein.
1. LINE OF CREDIT
1.1 Availability: A $500,000 Revolving Line of Credit expiring on
April 30, 1997.
1.2 Pricing: Interest on the unpaid principal balance of the line
shall be payable monthly at the rate of two percent (2.0%)
above the Bank's Prime Rate of interest, which is the rate
announced by the Bank's Corporate Headquarters as its Prime
Rate, and which shall very concurrently with any change in
such rate. Interest shall be computed on the basis of actual
number of days during which the principal outstanding is
divided by 360 which, for the purposes of interest
computation, will be considered one year. A facility fee of
$5,000, one percent (1.0%), will be charged upon inception.
1.3 Collateral: First priority security interest in all assets of
the Borrower excluding leased assets.
1.4 Warrants: Concurrently with the execution of the loan
documents, Borrower shall execute and issue to Bank a warrant
with respect to shares of voting common stock of Borrower with
a purchase price representing 12-1/2 % of the total commitment
or $62,500 at the current market value of the Borrower as
mutually agreed between Bank and Borrower on a fully diluted
basis. The warrant shall have a term of 5 years and an initial
exercise price per share to be determined. The warrant shall
include standard and customary issue representations,
warranties and covenants, as well as antidilution provisions,
put provisions, registration rights, and such other provisions
as Bank shall require, all in form and substance satisfactory
to Bank. Bank shall receive on or prior to the closing of the
loan, an opinion of Borrowers counsel with respect to the
warrant, in form and substance satisfactory to Bank.
1.5 Annual 30 day clean up period.
2. CALIFORNIA EXPORT FINANCE (CEFO) LINE
2.1 Availability: A $500,000 Revolving Line of Credit to finance
exports. Availability is based on a CEFO guarantee for 90%
expiring on April 30, 1997.
2.2 Pricing: Interest on the unpaid principal balance of the line
shall be payable monthly at the rate of one and one half
percent (1.5%) above the Bank's Prime Rate of interest, which
is the rate announced by the Bank's Corporate Headquarters as
its Prime Rate, and which shall very concurrently with any
change in such rate. Interest shall be computed on the basis
of actual number of days during which the principal
outstanding is divided by 360 which, for the purposes of
interest computation, will be considered one year. A facility
fee of $5,000, one percent (1.0%), will be charged upon
inception.
2.3 Collateral: First priority security interest in all assets of
the Borrower excluding leased assets.
3. GENERAL CONDITIONS
The extensions of credit would necessarily be subject to the
fulfillment of a number of conditions, including but not limited to the
following:
3.1 The execution and delivery in form and substance acceptable to
Bank, agreements, documents, instruments, financing
statements, consents, evidences of corporate authority,
certificates, insurance certificates, opinions of counsel, and
other such writings to confirm and effectuate the lending
transaction as may be required by Bank and its counsel.
3.2 No material adverse change in the business, operations,
profits, or prospects of Borrower or in the condition of the
assets of the above prior to funding of these financial
accommodations.
3.3 Negotiation and execution of a satisfactory loan agreement
which will include, but not be limited to financial covenants
mutually acceptable to Borrower and Bank.
3.4 Borrower to pay a $250.00 documentation fee.
3.5 All significant deposit accounts of Eco Soil Systems to be
domiciled at Imperial Bank.
3.6 Verification of completion all proposed new sub debt and
equity fundings in the minimum amount of $2,960,000.
3.7 Guarantee of William B. Adams.
REPORTING REQUIREMENTS:
a. Internally prepared monthly financial statements within 30
days of month end. A/R, A/P and Inventory reports to be
provided within 20 days of month end.
b. Annually audited consolidating financial statements from
independent CPA's satisfactory to Bank for Eco Soil Systems to
be provided within 90 days of fiscal year end.
c. Annual financial statement of William B. Adams and Federal Tax
Returns.
We hope this commitment is acceptable to you and request that you execute the
enclosed copy of this letter and return it to us prior to March 15, 1996 at
which time this commitment will expire if unaccepted. Imperial Bank looks
forward to a long and mutually rewarding relationship with your company, and we
hope to assist you in achieving your goals of growth and profitability. Please
do not hesitate to contact us if you have any questions regarding this
commitment.
Sincerely,
IMPERIAL BANK
By:/s/ Chris Woolley By: /s/Jed Harris
Chris Woolley Jed Harris
Senior Vice President Regional Vice President
Accepted and agreed:
Eco Soil Systems
By: /s/ William B. Adams
William B. Adams
Date____________________
IMPERIAL BANK 04/03/96
701 B Street
San Diego, California 92101
Subject: CREDIT TERMS AND CONDITIONS
Gentlemen:
To induce you ("Bank") to make loans to Eco Soil Systems, Inc. (herein called
"Borrower"), and in consideration of any loan or loans you, in your sole
discretion, may make to Borrower, Borrower warrants and agrees as follows:
A. Borrower Represents and Warrants that:
1. EXISTENCE AND RIGHTS. Borrower is a corporation. Borrower is duly
organized and existing and in good standing under the laws of the State of
Nebraska, without limit as to the duration of its existence and is authorized
and in good standing to do business in the State of California; Borrower has
powers and adequate authority, rights and franchises to own its property and to
carry on its business as now conducted, and is duly qualified and in good
standing in each State in which the character of the properties owned by it
therein or the conduct of its business makes such qualification necessary; and
Borrower has the power and adequate authority to make and carry out this
Agreement. Borrower has no investment in any other business entity.
2. AGREEMENT AUTHORIZED. The execution, delivery and performance of
this Agreement are duly authorized and do not require the consent or approval of
any governmental body or other regulatory authority; are not in contravention of
or in conflict with any law or regulation or any term or provision of Borrower's
articles of incorporation, by-laws, or Articles of Association, as the case may
be, and this Agreement is the valid, binding and legally enforceable obligation
of Borrower in accordance with its terms.
3. NO CONFLICT. The execution, delivery and performance of this
Agreement are not in contravention of or in conflict with any agreement,
indenture or undertaking to which Borrower is a party or by which it or any of
its property may be bound or affected, and do not cause any lien, charge or
other encumbrance to be created or imposed upon any such property by reason
thereof.
4. LITIGATION. There is no litigation or other proceeding pending or
threatened against or affecting Borrower, and Borrower is not in default with
respect to any order, writ, injunction, decree or demand of any court or other
governmental or regulatory authority. Borrower also agrees to notify you in
writing of any future litigation threatened against or affecting borrower.
5. FINANCIAL CONDITION. The balance sheet of Borrower as of 12-31-95,
and the related profit and loss statement for the year ended on that date, a
copy of which has heretofore been delivered to you by Borrower, and all other
statements and data submitted in writing by Borrower to you in connection with
this request for credit are true and correct, and said balance sheet and profit
and loss statement truly present the financial condition of Borrower as of the
date thereof and the results of operations for the period covered thereby, and
has been prepared in accordance with generally accepted accounting principles on
a basis consistently maintained. Since such date there have been no material
adverse changes in the ordinary course of business. Borrower has no knowledge or
any liabilities, contingent or otherwise, at such date not reflected in said
balance sheet, and Borrower has not entered into any special commitments or
substantial contracts which are not reflected in said balance sheet, other than
in the ordinary and normal course of its business, which may have a materially
adverse effect upon its financial condition, operations or business as not
conducted.
6. TITLE TO ASSETS. Borrower has good title to its assets, and the same
are not subject to any liens or encumbrances other than those permitted by
Section C.3 hereof.
7. TAX STATUS. Borrower has no liability for any delinquent state,
local or federal taxes, and, if Borrower has contracted with any government
agency, Borrower has no liability for renegotiation of profits.
8. TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with the valid trademarks, trade names, copyrights, patents and license rights
of others.
9. REGULATION U. The proceeds of the notes have not been used to
purchase or carry margin stock (as defined within Regulation U of the Board of
Governors of the Federal Reserve system).
B. Borrower agrees that so long as it is indebted to you, under borrowings, or
other indebtedness, it will, unless you shall otherwise consent in writing:
1. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises
and other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair; conduct its
business in an orderly manner without voluntary interruption and, if a
corporation or partnership, maintain and preserve its existence.
2. INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses and/or in the exercise of good business
judgment.
3. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same
become delinquent and before penalties accrue thereon, all taxes, assessments
and governmental charges upon or against it or any of its properties, and all
its other liabilities at any time existing, except to the extent and so long as:
(a) The same are being contested in good faith and by
appropriate proceedings in such manner as not to cause any materially
adverse effect upon its financial condition or the loss of any right of
redemption from any sale thereunder; and
(b) It shall have set aside on its books reserves (segregated
to the extent required by generally accepted accounting practice)
deemed by it adequate with respect thereto.
4. NET WORTH AND WORKING CAPITAL. Maintain a minimum tangible net worth
(meaning the excess of all assets, excluding any value for goodwill, trademarks,
patents, copyrights, proprietary rights, leaseholds, organization expense and
other similar intangible items, over its liabilities) plus subordinated debt of
not less than $1,500,000; maintain net current assets (i.e.;working capital) of
not less than $500,000 and; maintain a ratio of current assets to current
liabilities not less than 1.3 to 1.0; maintain a ratio of debt to tangible net
worth and sub debt not to exceed 2.0 to 1.00; all as computed and determined in
accordance with generally accepted accounting principles on a basis consistently
maintained by Borrower.
5. RECORDS AND REPORTS. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles on a
basis consistently maintained; permit your representatives to have access to,
and to examine its properties, books and records at all reasonable times during
normal business hours; and furnish you:
(a) As soon as available, and in any event within 30 after the
close of each month of each fiscal year of Borrower, commencing with
the month next ending, a consolidating balance sheet, profit and loss
statement and reconciliation of Borrower's capital accounts as of the
close of such period and covering operations for the portion of
Borrower's fiscal year ending on the last day of such period, all in
reasonable detail and stating in comparative form the figures for the
corresponding date and period in the previous fiscal year, prepared in
accordance with generally accepted accounting principles on a basis
consistently maintained by Borrower and certified by an appropriate
officer of Borrower, subject, however, to year-end audit adjustments;
(b) As soon as available, and in any event within 120 days
after the close of each fiscal year of Borrower, a report of audit of
Company as of the close of and for such fiscal year, all in reasonable
detail and stating in comparative form the figures as of the close of
and for the previous fiscal year, with the unqualified opinion of
accountants satisfactory to you;
(c) Within one hundred twenty (120) days after the end of each
fiscal year of Borrower, a certificate of chief financial officer of
Borrower, stating that Borrower has performed and observed each and
every covenant contained in this Letter to be performed by it and that
no event has occurred and no condition then exists which constitutes an
event of default hereunder or would constitute such an event of default
upon the lapse of time or upon the giving of notice and the lapse of
time specified herein; or, if any such event has occurred or any such
condition exists, specifying the nature thereof;
(d) Promptly after the receipt thereof by Borrower, copies of
any detailed audit reports submitted to Borrower by independent
accountants in connection with each annual or interim audit of the
accounts of Borrower made by such accountants;
(e) Promptly after the same are available, copies of all such
proxy statements, financial statements and reports as Borrower shall
send to its stockholders, if any, and copies of all reports which
Borrower may file with the Securities and Exchange Commission or any
governmental authority at any time substituted therefor;
(f) Accounts Receivable and Accounts Payable Agings within 20
days of month end;
(g) Such other information relating to the affairs of Borrower
as you reasonably may request from time to time;
(h) Guarantor Financial Statement and Tax Return annually; and
(i) Quarterly verification of guarantor's liquid assets.
6. NOTICE OF DEFAULT. Promptly notify the Bank in writing of the
occurrence of any event of default hereunder upon the notice and lapse of time.
C. Borrower agrees that so long as it is indebted to you, it will not, without
your written consent:
1. TYPE OF BUSINESS. Management; make any substantial change in the
character of its business; or make any change in its executive management.
2. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys other than loans from you and additional
subordinated debt except obligations now existing as shown in the financial
statement dated 12-31-95, excluding those being refinanced by your bank; or sell
or transfer, either with or without recourse, any accounts or notes receivable
or any moneys due to become due.
3. LIENS AND ENCUMBRANCES. Create, incur, or assume any mortgage,
pledge, encumbrance, lien or charge of any kind (including the charge upon
property at any time purchased or acquired under conditional sale or other title
retention agreement) upon any asset now owned or hereafter acquired by it, other
than liens for taxes not delinquent and liens in your favor.
4. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or
advances to any person or other entity other than in the ordinary course and
normal course of its business as now conducted or make any investment in the
securities of any person or other entity other than the United States
Government; or guarantee or otherwise become liable upon the obligation of any
person or other entity, except by endorsement of negotiable instruments for
deposit or collection in the ordinary and normal course of its business.
5. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase
or otherwise acquire the assets or business of any person or other entity; or
liquidate, dissolve, merge or consolidate, or commence any proceedings therefor;
or sell any assets except in the ordinary and normal course of its business as
now conducted; or sell, lease, assign, or transfer any substantial pan of its
business or fixed assets, or any property or other assets necessary for the
continuance of its business as now conducted, including without limitation the
selling of any property or other asset accompanied by the leasing back of the
same. The acquisition of Turf Products Ltd. is permitted.
6. DIVIDENDS, STOCK PAYMENTS. If a corporation, declare or pay any
dividend (other than dividends payable in common stock of Borrower) or make any
other distribution on any of its capital stock now outstanding or hereafter
issued or purchase, redeem or retire any of such stock.
7. CAPITAL EXPENDITURES. Make or incur obligations for capital
expenditures in excess of $500,000 in the period from the date hereof to 4-30-97
in the period from the date in any one fiscal year thereafter.
8. LEASE LIABILITY. Make or incur liability for payments of rent under
leases of real property in excess of $200,000 and personal property in excess of
$500,000 in any one fiscal year.
D. The occurrence of any of the following events of default shall, at your
option, terminate your commitment to lend and make all sums of principal and
interest then remaining unpaid on all Borrower's indebtedness to you immediately
due and payable, all without demand, presentment or notice, all of which are
hereby expressly waived:
1. FAILURE TO PAY NOTE. Failure to pay any installment of principal of
or interest on any indebtedness of Borrower to you.
2. BREACH OF COVENANT. Failure of Borrower to perform any other term or
condition of this Letter of Inducement binding upon Borrower.
3. BREACH OF WARRANTY. Any of Borrower's representations or warranties
made herein or any statement or certificate at any time given in writing
pursuant hereto or in connection herewith shall be false or misleading in any
material respect.
4. INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or
admit its inability to pay its debts as they mature; or make an assignment for
the benefit of creditors; or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business.
5. JUDGMENTS, ATTACHMENTS. Any money judgment, writ or warrant of
attachment, or similar process shall be entered or filed against Borrower or any
of its assets and shall remain unvacated, unbonded or unstayed for a period of
10 days or in any event later than five days prior to the date of any proposed
sale thereunder.
6. BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against Borrower and, if
instituted against it, shall be consented to.
E. Miscellaneous Provisions.
1. 30 DAY OUT OF DEBT PERIOD. The Borrower must payoff the Revolving
Line and maintain a minimum 30 consecutive days out of debt in each 12 month
period.
2. CEFO FACILITY. The CEFO facility is available only on CEFO approved
guaranteed transactions. Borrower shall pay all CEFO fees and expenses.
3. GUARANTEE. Both credit facilities are to be guaranteed by William
Adams.
4. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
Imperial Bank or any holder of Notes issued hereunder, in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any such power, right or privilege preclude
other or further exercise thereof or of any other right, power or privilege. All
rights and remedies existing under this agreement or any note issued in
connection with a loan that Imperial Bank may make hereunder, are cumulative to,
and not exclusive of, any rights or remedies otherwise available.
5. LOAN FEE. The fees payable upon execution of this agreement are
$5,000 on the Revolving Line and $5,000 on the CEFO facility.
ECO SOIL SYSTEMS, INC.
By: William B. Adams
Date: April 9, 1996
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only,
September, 1996, is made by and between ARTHUR P. ARNS ("LESSOR") and ECO SOIL
SYSTEMS, INC. ("LESSEE"), (collectively the "PARTIES," or individually a
"PARTY").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 10890 Thornmint Road, located in the County of San Diego, State of
California, and generally described as approximately 21,000 square feet (7,000
office, 14,000 warehouse) concrete tilt-up construction with 72 spaces for
vehicle parking ("PREMISES"). (See also Paragraph 2)
1.3 TERM: 36 months ("ORIGINAL TERM") commencing December 1, 1996
("COMMENCEMENT DATE") and ending October 31, 1999 ("EXPIRATION DATE"). (See also
Paragraph 3)
1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE"). (See also
Paragraphs 3.2 and 3.3)
1.5 BASE RENT: $12,600.00 per month ("BASE RENT"), payable on the
first (1st) day of each month commencing December 1, 1996 (See also Paragraph 4)
|x| If this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $_________ as Base Rent for the
period _____________
1.7 SECURITY DEPOSIT: $4,452.00 (already in Landlord's poss.)
("SECURITY DEPOSIT"). (See also Paragraph 5)
1.8 AGREED USE: Warehouse and distribution. (See also Paragraph 6)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY" unless otherwise
stated herein. (See also Paragraph 8)
1.10 REAL ESTATE BROKERS: (See also Paragraph 15)
(a) REPRESENTATION: The following real estate brokers
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction (check applicable boxes): N/A
| | __________________________________represents Lessor exclusively ("LESSOR'S
BROKER");
| | ________________________________represents Lessee exclusively ("LESSEE'S
BROKER"); or
| | _________________________________represents both Lessor and Lessee ("DUAL
AGENCY").
(b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease
by both Parties, Lessor shall pay to the Broker the fee agreed to in their
separate written agreement (or if there is no such agreement, the sum of _____%
of the total Base Rent for the brokerage services rendered by said Broker).
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to
be guaranteed by _______("GUARANTOR"). (See also Paragraph 37)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 50 through 54 and Exhibits ________, all of which
constitute a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may have
been used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom clean
and free of debris on the Commencement Date or the Early Possession Date,
whichever first occurs ("START DATE"), and, so long as the required service
contracts described in Paragraph 7.1(b) below are obtained by Lessee within
thirty (30) days following the Start Date, warrants that the existing
electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air
conditioning systems ("HVAC"), loading doors, if any, and all other such
elements in the Premises, other than those constructed by Lessee, shall be in
good operating condition on said date and that the structural elements of the
roof, bearing walls and foundation of any buildings on the Premises (the
"BUILDING") shall be free of material defects. If a non-compliance with said
warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation
with respect to such matter, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity of the nature and extent of such non-compliance, rectify same at
Lessor's expense. If, after the Start Date, Lessee does not give Lessor written
notice of any non-compliance with this warranty within: (i) one year as to the
surface of the roof and the structural portions of the roof, foundations and
bearing walls, (ii) six (6) months as to the HVAC systems, (iii) thirty (30)
days as to the remaining systems and other elements of the Building, correction
of such non-compliance shall be the obligation of Lessee at Lessee's sole cost
and expense.
2.3 COMPLIANCE. Lessor warrants that the improvements on the Premises
comply with all applicable laws, covenants or restrictions of record, building
codes, regulations and ordinances ("APPLICABLE REQUIREMENTS") in effect on the
Start Date. Said warranty does not apply to the use to which Lessee will put the
Premises or to any Alterations or Utility Installations (as defined in Paragraph
7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for
determining whether or not the zoning is appropriate for Lessee's intended use,
and acknowledges that past uses of the Premises may no longer be allowed. If the
Premises do not comply with said warranty, Lessor shall, except as otherwise
provided, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify the same
at Lessor's expense. If Lessee does not give Lessor written notice of
non-compliance with this warranty within six (6) months following the Start
Date, correction of that non-compliance shall be the obligation of Lessee at
Lessee's sole cost and expense. If the Applicable Requirements are hereafter
changed (as opposed to being in existence at the Start Date, which is addressed
in Paragraph 6.2(e) below) so as to require during the term of this Lease the
construction of an addition to or an alteration of the Building, the remediation
of any Hazardous Substance, or the reinforcement or other physical modification
of the Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the
cost of such work as follows:
(a) Subject to Paragraph 2.3(c) below, if such Capital
Expenditures are required as a result of the specific and unique use of the
premises by Lessee as compared with uses by tenants in general, Lessee shall be
fully responsible for the cost thereof, provided, however that if such Capital
Expenditure is required during the last two (2) years of this Lease and the cost
thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this
Lease unless Lessor notifies Lessee, in writing, within ten (10) days after
receipt of Lessee's termination notice that Lessor has elected to pay the
difference between the actual cost thereof and the amount equal to six (6)
months' Base Rent. If Lessee elects termination, Lessee shall immediately cease
the use of the Premises which requires such Capital Expenditure and deliver to
Lessor written notice specifying a termination date at least ninety (90) days
thereafter. Such termination date shall, however, in no event be earlier than
the last day that Lessee could legally utilize the Premises without commencing
such Capital Expenditure.
(b) If such Capital Expenditure is not the result of the specific
and unique use of the Premises by Lessee (such as governmentally mandated
seismic modifications), then Lessor and Lessee shall allocate the obligation to
pay for such costs pursuant to the provisions of Paragraph 7.1(c); provided,
however, that if such Capital Expenditure is required during the last two years
of this Lease or if Lessor reasonably determines that it is not economically
feasible to pay its share thereof, Lessor shall have the option to terminate
this Lease upon ninety (90) days prior written notice to Lessee unless Lessee
notifies Lessor, in writing, within ten (10) days after receipt of Lessor's
termination notice that Lessee will pay for such Capital Expenditure. If Lessor
does not elect to terminate, and fails to tender its share of any such Capital
Expenditure, Lessee may advance such funds and deduct same, with Interest, from
Rent until Lessor's share of such costs have been fully paid. If Lessee is
unable to finance Lessor's share, or if the balance of the Rent due and payable
for the remainder of this Lease is not sufficient to fully reimburse Lessee on
an offset basis, Lessee shall have the right to terminate this Lease upon thirty
(30) days written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Lessee as a result of an actual or proposed change in use, change in intensity
of use, or modification to the Premises then, and in that event, Lessee shall be
fully responsible for the cost thereof, and Lessee shall not have any right to
terminate this Lease.
2.4 ACKNOWLEDGMENTS. Lessee acknowledges that: (a) it has been advised
by Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements), and their suitability for Lessee's intended use, (b) Lessee has
made such investigation as it deems necessary with reference to such matters and
assumes all responsibility therefor as the same relate to its occupancy of the
Premises, and (c) neither Lessor, Lessor's agents, nor any Broker has made any
oral or written representations or warranties with respect to said matters other
than as set forth in this Lease. In addition, Lessor acknowledges that: (a)
Broker has made no representations, promises or warranties concerning Lessee's
ability to honor the Lease or suitability to occupy the Premises, and (b) it is
Lessor's sole responsibility to investigate the financial capability and/or
suitability of all proposed tenants.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this Lease
(including but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall, however, be in effect
during such period. Any such early possession shall not affect the Expiration
Date.
3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not, however,
be obligated to pay Rent or perform its other obligations until it receives
possession of the Premises. If possession is not delivered within sixty (60)
days after the Commencement Date, Lessee may, as its option, by notice in
writing within ten (10) days after the end of such sixty (60) day period, cancel
this Lease, in which event the Parties shall be discharged from all obligations
hereunder. If such written notice is not received by Lessor within said ten (10)
day period, Lessee's right to cancel shall terminate. Except as otherwise
provided, if possession is not tendered to Lessee when required and Lessee does
not terminate this Lease, as aforesaid, any period of rent abatement that Lessee
would otherwise have enjoyed shall run from the date of delivery of possession
and continue for a period equal to what Lessee would otherwise have enjoyed
under the terms hereof, but minus any days of delay caused by the acts or
omissions of Lessee. If possession of the Premises is not delivered within four
(4) months after the Commencement Date, this Lease shall terminate unless other
agreements are reached between Lessor and Lessee, in writing.
3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender
possession of the Premises to Lessee until Lessee complies with its obligation
to provide evidence of insurance (Paragraph 8.5). Pending delivery of such
evidence, Lessee shall be required to perform all of its obligations under this
Lease from and after the Start Date, including the payment of Rent,
notwithstanding Lessor's election to withhold possession pending receipt of such
evidence of insurance. Further, if Lessee is required to perform any other
conditions prior to or concurrent with the Start Date, the Start Date shall
occur but Lessor may elect to withhold possession until such conditions are
satisfied.
4. RENT.
4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor under
the terms of this Lease (except for the Security Deposit) are deemed to be rent
("RENT").
4.2 PAYMENT. Lessee shall cause payment of Rent to be received by
Lessor in lawful money of the United States, without offset or deduction, on or
before the day on which it is due. Rent for any period during the term hereof
which is for less than one (1) full calendar month shall be prorated based upon
the actual number of days of said month. Payment of Rent shall be made to Lessor
at its address stated herein or to such other persons or place as Lessor may
from time to time designate in writing. Acceptance of a payment which is less
than the amount then due shall not be a waiver of Lessor's rights to the balance
of such Rent, regardless of Lessor's endorsement of any check so stating.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the
Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults
under this Lease, Lessor may use, apply or retain all or any portion of said
Security Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefor deposit monies with Lessor sufficient to restore said Security
Deposit to the full additional moneys with Lessor so that the total amount of
the Security Deposit shall at all times bear the same proportion to the
increased Base Rent as the initial Security Deposit bore to the initial Base
Rent. Should the Agreed Use be amended to accommodate a material change in the
business of Lessee or to accommodate a sublessee or asignee, Lessor shall have
the right to increase the Security Deposit to the extent necessary, in Lessor's
reasonable judgment, to account for any increased wear and tear that the
Premises may suffer as a result thereof. If a change in control of Lessee occurs
during this Lease and following such change the financial condition of Lessee
is, in Lessor's reasonable judgment, significantly reduced, Lessee shall deposit
such additional monies with Lessor as shall be sufficient to cause the Security
Deposit to be at a commercially reasonable level based on said change in
financial condition. Lessor shall not be required to keep the Security Deposit
separate from its general accounts. Within fourteen (14) days after the
expiration or termination of this Lease, if Lessor elects to apply the Security
Deposit only to unpaid Rent, and otherwise within thirty (30) days after the
Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall
return that portion of the Security Deposit not used or applied by Lessor. No
part of the Security Deposit shall be considered to be held in trust, to bear
interest or to be prepayment for any monies to be paid by Lessee under this
Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the Agreed
Use, or any other legal use which is reasonably comparable thereto, and for no
other purpose. Lessee shall not use or permit the use of the Premises in a
manner that is unlawful, creates damage, waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to neighboring properties. Lessor
shall not unreasonably withhold or delay its consent to any written request for
a modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same, which notice
shall include an explanation of Lessor's objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, or waste
whose presence, use, manufacture, disposal, transportation, or release, either
by itself or in combination with other materials expected to be on the Premises,
is either: (i) potentially injurious to the public health, safety, or welfare,
the environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substances shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, and/or crude oil or any products, by-products, or fractions
thereof. Lessee shall not engage in any activity in or on the Premises which
constitutes a Reportable Use of Hazardous Substances without the express prior
written consent of Lessor and timely compliance (at Lessee's expense) with all
Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, so long as such use
is in compliance with all Applicable Requirements, is not a Reportable Use, and
does not expose the Premises or neighboring property to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may condition its consent to any Reportable Use upon receiving such
additional assurances as Lessor reasonably deems necessary to protect itself,
the public, the Premises and/or the environment against, damage, contamination,
injury and/or liability, including, but not limited to, the installation (and
removal on or before Lease expiration or termination) of protective
modifications (such as concrete encasements) and/or increasing the Security
Deposit.
(b) DUTY TO INFORM LESSOR. If Lessee know, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises, other than as previously consented to by Lessor,
Lessee shall immediately give written notice of such fact to Lessor, and provide
Lessor with a copy of any report, notice, claim or other documentation which it
has concerning the presence of such Hazardous Substance.
(c) LESSEE REMEDIATION. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any Hazardous
Substance brought onto the Premises during the term of this Lease, by or for
Lessee, or any third party.
(d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless
from and against any and all loss of rents and/or damages, liabilities,
judgments, claims, expenses, penalties, and attorneys' and consultants' fees
arising out of or involving any Hazardous Substance brought onto the Premises by
or for Lessee, or any third party (provided, however, that Lessee shall have no
liability under this Lease with respect to underground migration of any
Hazardous Substance under the Premises from adjacent properties). Lessee's
obligations shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created or
suffered by Lessee, and the cost of investigation, removal, remediation,
restoration and/or abatement, and shall survive the expiration or termination of
this Lease. NO TERMINATION, CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY
LESSOR AND LESSEE SHALL RELEASE LESSEE FROM ITS OBLIGATIONS UNDER THIS LEASE
WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS SPECIFICALLY SO AGREED BY LESSOR IN
WRITING AT THE TIME OF SUCH AGREEMENT.
(e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns
shall indemnify, defend, reimburse, and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages which existed as a
result of Hazardous Substances on the Premises prior to the date the Lessee
first occupied the Premises or any portion thereof or which are caused by the
gross negligence, or intentional acts of Lessor, its agents or employees.
Lessor's obligations, as and when required by the Applicable Requirements, shall
include, but not be limited to, the cost of investigation, removal, remediation,
restoration and/or abatement and shall survive the expiration or termination of
this Lease.
(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Start Date. Lessee shall
cooperate fully in any such activities at the request of Lessor, including
allowing Lessor and Lessor's agents to have reasonable access to the Premises at
reasonable times in order to carry out Lessor's investigative and remedial
responsibilities.
(g) LANDLORD TERMINATION OPTION. If a Hazardous Substance
Condition occurs during the term of this Lease, unless Lessee is legally
responsible therefor (in which case Lessee shall make the investigation and
remediation thereof required by the Applicable Requirements and this Lease shall
continue in full force and effect, but subject to Lessor's rights under
Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i)
investigate and remediate such Hazardous Substance Condition, if required, as
soon as reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to remediate
such condition exceeds twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater, give written notice to Lessee, within thirty (30) days
after receipt by Lessor of knowledge of the occurrence of such Hazardous
Substance Condition, of Lessor's desire to terminate this Lease as of the date
sixty (60) days following the date of such notice. In the event Lessor elects to
give a termination notice, Lessee may, within ten (10) days thereafter, give
written notice to Lessor of Lessee's commitment to pay the amount by which the
cost of the remediation of such Hazardous Substance Condition exceeds an amount
equal to twelve (12) times the monthly Base Rent or $100,000, whichever is
greater. Lessee shall provide Lessor with said funds or satisfactory assurance
thereof within thirty (30) days following such commitment. In such event, this
Lease shall continue in full force and effect, and Lessor shall proceed to make
such remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time provided, this Lease shall terminate as of the
date specified in Lessor's notice of termination.
6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as
otherwise provided in this Lease, Lessee, shall, at Lessee's sole expense,
fully, diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date. Lessee
shall, within ten (10) days after receipt of Lessor's written request, provide
Lessor with copies of all permits and other documents, and other information
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving the failure of
Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION: COMPLIANCE. Lessor and Lessor's Lender and consultants
shall have the right to enter into Premises at any time, in the case of an
emergency, and otherwise at reasonable times, for the purpose of inspecting the
condition of the Premises and for verifying compliance by Lessee with this
Lease. The cost of any such inspections shall be paid by Lessor, unless a
violation of the Applicable Requirements, or a contamination is found to exist
or be imminent, or the inspection is requested or ordered by a governmental
authority. In such case, Lessee shall upon request reimburse Lessor for the cost
of such inspections, so long as such inspection reasonably related to the
violation or contamination.
7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) IN GENERAL. Subject to the provisions of Paragraph 6.3
(Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations),
9 (Damage or Destruction, and 14 (Condemnation), Lessee shall, at Lessee's sole
expense, keep the Premises, Utility Installations, and Alterations in good
order, condition and repair (whether or not the portion of the Premises
requiring repairs, or the means of repairing the same, are reasonably or readily
accessible to Lessee, and whether or not the need for such repairs occurs as a
result of Lessee's use, any prior use, the elements or the age of such portion
of the Premises), including, but not limited to, all equipment or facilities,
such as plumbing, HVAC, electrical, lighting facilities, boilers, pressure
vessels, fire protection system, fixture, walls (interior and exterior),
foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights,
landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks
and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the
Premises in good order, condition and repair shall exercise and perform good
maintenance practices, specifically including the procurement and maintenance of
the service contracts required by Paragraph 7.1(b) below. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair. Lessee shall, during the term of this Lease keep the
exterior appearance of the Building in a first-class condition consistent with
the exterior appearance of other similar facilities of comparable age and size
in the vicinity, including, when necessary, the exterior repainting of the
Building.
(b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements. ("BASIC ELEMENTS"), if
any, as and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and
pressure vessels, (iii) fire protection systems, (iv) landscaping and irrigation
systems, (v) roof covering and drains, and (vi) asphalt and parking lots, (vii)
clarifiers and (viii) any other equipment, if reasonably required by Lessor.
(c) REPLACEMENT. Subject to Lessee's indemnification of Lessor as
set forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if the Basic Elements described in Paragraph 7.1(b) cannot be
repaired other than at a cost which is in excess of 50% of the cost of replacing
such Basic Elements, then such Basic Elements shall be replaced by Lessor, and
the cost thereof shall be prorated between the Parties and Lessee shall only be
obligated to pay, each month during the remainder of the term of this Lease, on
the date on which the Base Rent is due, an amount equal to the product of
multiplying the cost of such replacement by a fraction, the numerator of which
is one, and the denominator of which is the number of months of the useful life
of such replacement as such useful life is specified pursuant to Federal income
tax regulations or guidelines for depreciation thereof (including interest on
the unamortized balance as is then commercially reasonable in the judgment of
Lessor's accountants), with Lessee reserving the right to prepay its obligation
at any time.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation),
it is intended by the Parties hereto that Lessor have no obligation, in any
manner whatsoever, to repair and maintain the Premises, or the equipment
therein, all of which obligations are intended to be that of the Lessee. It is
the intention of the Parties that the terms of this Lease govern the respective
obligations of the Parties as to maintenance and repair of the Premises, and
they expressly waive the benefit of any statute now or hereafter in effect to
the extent it is inconsistent with the terms of this Lease.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" refers to all floor and window coverings, air lines, power
panels, electrical distribution, security and fire protection systems,
communication systems, lighting fixtures, HVAC equipment, plumbing and fencing
in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery
and equipment that can be removed without doing material damage to the Premises.
The term "ALTERATIONS" shall mean any modification of the improvements, other
than Utility Installations or Trade Fixtures, whether by addition or deletion.
"LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or
Utility Installations to the Premises without Lessor's prior written consent.
Lessee may, however, make non-structural Utility Installations to the interior
of the Premises (excluding the roof) without such consent but upon notice to
Lessor, as long as they are not visible from the outside, do not involve
puncturing, relocating or removing the roof or any existing walls, and the
cumulative cost thereof during this Lease as extended does not exceed $50,000 in
the aggregate or $10,000 in any one year.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. Consent shall be deemed
conditioned upon Lessee's: (i) acquiring all applicable governmental permits,
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility installation and/or upon Lessee's posting an
additional Security Deposit with Lessor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility. If Lessee shall contest the
validity of any such lien, claim or demand, then Lessee shall, at is sole
expense defend and protect itself, Lessor and the Premises against the same and
shall pay and satisfy any such adverse judgment that may be rendered thereon
before the enforcement thereof. If Lessor shall require, Lessee shall furnish a
surety bond in an amount equal to one and one-half times the amount of such
contested lien, claim or demand, indemnifying Lessor against liability for the
same. If Lessor elects to participate in any such action, Lessee shall pay
Lessor's attorneys' fees and costs.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered a
part of the Premises. Lessor may, at any time, elect in writing to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
termination of this Lease, become the property of Lessor and be surrendered by
Lessee with the Premises.
(b) REMOVAL. By delivery to Lessee of written notice from Lessor
not later than ninety (90) days prior to the end of the term of this Lease,
Lessor may require that any or all Lessee Owned Alterations or Utility
Installations be removed by the expiration or termination of this Lease. Lessor
may require the removal at any time of all or any part of any Lessee Owned
Alterations or Utility Installations made without the required consent.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or deterioration
that would have been prevented by good maintenance practice. Lessee shall repair
any damage occasioned by the installation, maintenance or removal of Trade
Fixtures, furnishings, and equipment as well as the removal of any storage tank
installed by or for Lessee, and the removal, replacement, or remediation of any
soil, material or groundwater contaminated by Lessee. Trade Fixtures shall
remain the property of Lessee and shall be removed by Lessee. The failure by
Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without
the express written consent of Lessor shall constitute a holdover under the
provisions of Paragraph 26 below.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance required
under Paragraph 8 except to the extent of the cost attributable to liability
insurance carried by Lessor under Paragraph 8.2(b) in excess $2,000,000 per
occurrence. Premiums for policy periods commencing prior to or extending beyond
the Lease term shall be prorated to correspond to the Lease term. Payment shall
be made by Lessee to Lessor within ten (10) days following receipt of an
invoice.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damage based upon
or arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than $2,000,000 per
occurrence with AN "ADDITIONAL INSURED-MANAGERS OR LESSORS OF PREMISES
ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT"
for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall
not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance carried by Lessee shall be primary to and not contributory with any
similar insurance carried by Lessor, whose insurance shall be considered excess
insurance only.
(b) CARRIED BY LESSOR. Lessor shall maintain liability insurance
as described in Paragraph 8.2(a) in addition to, and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.
8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain
and keep in force a policy or policies in the name of Lessor, with loss payable
to Lessor and to any Lender insuring loss or damage to the Premises. The amount
of such insurance shall be equal to the full replacement cost of the Premises,
as the same shall exist from time to time, or the amount required by any
Lenders, but in no event more than the commercially reasonable and available
insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations, Trade Fixtures, and Lessee's personal
property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor.
If the coverage is available and commercially appropriate, such policy or
policies shall insure against all risks of direct physical loss or damage
(except the perils of flood and/or earthquake unless required by a Lender),
including coverage for debris removal and the enforcement of any Applicable
Requirements requiring the upgrading, demolition, reconstruction or replacement
of any portion of the Premises as the result of a covered loss. Said policy or
policies shall also contain an agreed valuation provision in lieu of any
coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located. If
such insurance coverage has a deductible clause, the deductible amount shall not
exceed $1,000 per occurrence, and Lessee shall be liable for such deductible
amount in the event of an Insured Loss.
(b) RENTAL VALUE. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor with loss payable to Lessor and
any Lender, insuring the loss of the full Rent for one (1) year. Said insurance
shall provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide for
one full year's loss of Rent from the date of any such loss. Said insurance
shall contain an agreed valuation provision in lieu of any coinsurance clause,
and the amount of coverage shall be adjusted annually to reflect the projected
Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee
shall be liable for any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. If the Premises are part of a larger
building, or of a group of buildings owned by Lessor which are adjacent to the
Premises, the Lessee shall pay for any increase in the premiums for the property
insurance of such building or buildings if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.
8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.
(a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.
(b) BUSINESS INTERRUPTION. If reasonably available, and if Lessor
requests Lessee to do so in writing, Lessee shall obtain and maintain loss of
income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.
(c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 INSURANCE POLICIES. Insurance required herein shall be by
companies duly licensed or admitted to transact business in the state where the
Premises are located, and maintaining during the policy term a "General
Policyholders Rating" of at least B+, V, as set forth in the most current issue
of "Best's Insurance Guide," or such other rating as may be required by a
Lender. Lessee shall not do or permit to be done anything which invalidates the
required insurance policies. Lessee shall, prior to the Start Date, deliver to
Lessor certified copies of policies of such insurance or certificates evidencing
the existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after thirty (30) days prior
written notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. Such policies shall be for a term of at least
one year, or the length of the remaining term of this Lease, whichever is less.
If either Party shall fail to procure and maintain the insurance required to be
carried by it, the other Party may, but shall not be required to, procure and
maintain the same.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages against the other, for loss of or damage
to its property arising out of or incident to the perils required to be insured
against herein. The effect of such releases and waivers is not limited by the
amount of insurance carried or required, or by any deductibles applicable
hereto. The Parties agree to have their respective property damage insurance
carriers waive any right to subrogation that such companies may have against
Lessor or Lessee, as the case may be, so long as the insurance is not
invalidated thereby.
8.7 INDEMNITY. Except for Lessor's sole negligence, Lessee shall
indemnify, protect, defend and hold harmless the Premises, Lessor and its
agents, Lessor's master or ground lessor, partners and Lenders, from and against
any and all claims, loss of rents and/or other damages, liens, judgments,
penalties, attorneys' and consultants' fees, expenses and/or liabilities arising
out of, involving, or in connection with, the use and/or occupancy of the
Premises by Lessee. If any action or proceeding is brought against Lessor by
reason of any of the foregoing matters, Lessee shall upon notice defend the same
at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be defended or indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person of goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this lease, Lessor shall under
no circumstances be liable for injury to Lessee's business or for any loss of
income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, which can reasonably be repaired in six (6) months or
less from the date of the damage or destruction. Lessor shall notify Lessee in
writing within thirty (30) days from the date of the damage or destruction as to
whether or not the damage is Partial or Total.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee Owned Alterations and Utility Installations,
which cannot reasonably be repaired in six (6) months or less from the date of
the damage or destruction. Lessor shall notify Lessee in writing within thirty
(30) days from the date of the damage or destruction as to whether or not the
damage is Partial or Total.
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of Applicable Requirements, and
without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that
is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to effect such repair, the
Insuring Party shall promptly contribute the shortage in proceeds (except as to
the deductible which is Lessee's responsibility) as and when required to
complete said repairs. In the event, however, such shortage was due to the fact
that, by reason of the unique nature of the improvements, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, the party responsible for making the repairs shall complete them as
soon as reasonably possible and this Lease shall remain in full force and
effect. If such funds or assurance are not received, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to: (i) make
such restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case the Lease shall remain in full force and
effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall
not be entitled to reimbursement of any funds contributed by Lessee to repair
any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be
some insurance coverage, but the net proceeds of any such insurance shall be
made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage. Such termination shall be effective sixty (60) days following the date
of such notice. In the event Lessor elects to terminate this Lease, Lessee shall
have the right within ten (10) days after receipt of the termination notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage without reimbursement from Lessor. Lessee shall provide Lessor with
said funds or satisfactory assurance thereof within thirty (30) days after
making such commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
a Premises Total Destruction occurs, this Lease shall terminate sixty (60) days
following such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee except as provided in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of this Lease there is damage for which the cost to repair exceeds one
(1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this
Lease effective sixty (60) days following the date of occurrence of such damage
by giving a written termination notice to Lessee within thirty (30) days after
the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee
at that time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option and
(b) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date upon which
such option expires. If Lessee duly exercises such option during such period and
provides Lessor with funds (or adequate assurance thereof) to cover any shortage
in insurance proceeds, Lessor shall, at Lessor's commercially reasonable
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during such period, then this Lease shall
terminate on the date specified in the termination notice and Lessee's option
shall be extinguished.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) ABATEMENT. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which Lessee
is not responsible under this Lease, the Rent payable by Lessee for the period
required for the repair, remediation or restoration or such damage shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired, but not to exceed the proceeds received from the Rental Value
insurance. All other obligations of Lessee hereunder shall be performed by
Lessee, and Lessor shall have no liability for any such damage, destruction,
remediation, repair or restoration except as provided herein.
(b) REMEDIES. If Lessor shall be obligated to repair or restore
the Premises and does not commence, in a substantial and meaningful way, such
repair or restoration within ninety (90) days after such obligation shall
accrue, Lessee may, at any time prior to the commencement of such repair or
restoration, give written notice to Lessor and to any Lenders of which Lessee
has actual notice, of Lessee's election to terminate this Lease on a date not
less than sixty (60) days following the giving of such notice. If Lessee gives
such notice and such repair or restoration is not commenced within thirty (30)
days thereafter, this Lease shall terminate as of the date specified in said
notice. If the repair or restoration is commenced within said thirty (30) days,
this Lease shall continue in full force and effect. "COMMENCE" shall mean either
the unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
9.7 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be
made concerning advance Base Rent and any other advance payments made by Lessee
to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's
Security Deposit as has not been, or is not then required to be, used by Lessor.
9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 Definition of "REAL PROPERTY TAXES." As used herein, the term
"REAL PROPERTY TAXES" shall include any form of assessment; real estate,
general, special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement bond; and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor in
the Premises, Lessor's right to other income therefrom, and/or Lessor's right to
other income therefrom, and/or Lessor's business of leasing, by any authority
having the direct or indirect power to tax and where the funds are generated
with reference to the Building address and where the proceeds so generated are
to be applied by the city, county or other local taxing authority of a
jurisdiction within which the Premises are located. The term "REAL PROPERTY
TAXES" shall also include any tax, fee, levy, assessment or charge, or any
increase therein, imposed by reason of events occurring during the term of this
Lease, including but not limited to, a change in the ownership of the Premises.
10.2
(a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. Subject to Paragraph
10.2(b), all such payments shall be made at least ten (10) days prior to any
delinquency date. Lessee shall promptly furnish Lessor with satisfactory
evidence that such taxes have been paid. If any such taxes shall cover any
period of time prior to or after the expiration or termination of this Lease,
Lessee's share of such taxes shall be prorated to cover only that portion of the
tax bill applicable to the period that this Lease is in effect, and Lessor shall
reimburse Lessee for any overpayment. If Lessee shall fail to pay any required
Real Property Taxes, Lessor shall have the right to pay the same, and Lessee
shall reimburse Lessor therefor upon demand.
(b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on
any Rent payment, Lessor may, at Lessor's option, estimate the current Real
Property Taxes, and require that such taxes be paid in advance to Lessor by
Lessee, either (i) in a lump sum equal to the installment due, at least twenty
(20) days prior to the applicable delinquency date, or (ii) monthly in advance
with the payment of the Base Rent. If Lessor elects to require payment monthly
in advance, the monthly payment shall be an amount equal to the amount of the
estimated installment of taxes divided by the number of months remaining before
the month in which said installment becomes delinquent. When the actual amount
of the applicable tax bill is known, the amount of such equal monthly advance
payments shall be adjusted as required to provide the funds needed to pay the
applicable taxes. If the amount collected by Lessor is insufficient to pay such
Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such
additional sums as are necessary to pay such obligations. All moneys paid to
Lessor under this Paragraph may be intermingled with other moneys of Lessor and
shall not bear interest. In the event of a Breach by Lessee in the performance
of its obligations under this Lease, then any balance of funds paid to Lessor
under the provisions of this Paragraph may at the option of Lessor, be treated
as an additional Security Deposit.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency,
all taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee's said
personal property shall be assessed with Lessor's real property, Lessee shall
pay Lessor the taxes attributable to Lessee's property within ten (10) days
after receipt of a written statement.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.
(b) A change in the control of Lessee shall constitute an
assignment requiring consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction,
or series of transactions (by way of merger, sale, acquisition, financing,
transfer, leveraged buy-out or otherwise), whether or not a formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee by an amount greater than
twenty-five percent (25%) of such Net Worth as it was represented at the time of
the execution of this Lease or at the time of the most recent assignment to
which Lessor has consented, or as it exists immediately prior to said
transaction or transactions constituting such reduction, whichever was or is
greater, shall be considered an assignment of this Lease to which Lessor may
withhold its consent. "NET WORTH OF LESSEE" shall mean the net worth of Lessee
(excluding any guarantors) established under generally accepted accounting
principles.
(d) An assignment or subletting without consent shall, at
Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a
noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unapproved assignment or subletting as a noncurable
Breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30)
days written notice, increase the monthly Base Rent to one hundred ten percent
(110%) of the Base Rent then in effect. Further, in the event of such Breach and
rental adjustment, (i) the purchase price of any option to purchase the Premises
held by Lessee shall be subject to similar adjustment to one hundred ten percent
(110%) of the price previously in effect, and (ii) all fixed and non-fixed
rental adjustments scheduled during the remainder of the Lease term shall be
increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Rent or for the performance of any other
obligations to be performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any assignee
or sublessee, without first exhausting Lessor's remedies against any other
person or entity responsible therefore to Lessor, or any security held by
Lessor.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a fee of
$1,000 or ten percent (10%) of the current monthly Base Rent applicable to the
portion of the Premises which is the subject of the proposed assignment or
sublease, whichever is greater, as consideration for Lessor's considering and
processing said request. Lessee agrees to provide Lessor with such other or
additional information and/or documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed to
have assumed and agreed to conform and comply with each and every term,
convenant, condition and obligation herein to be observed or performed by Lessee
during the term of said assignment or sublease, other than such obligations as
are contrary to or inconsistent with provisions of an assignment or sublease to
which Lessor has specifically consented to in writing.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all Rent payable on any sublease, and Lessor may collect such Rent
and apply same toward Lessee's obligations under this Lease; provided, however,
that until a Breach shall occur in the performance of Lessee's obligations,
Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or
any assignment of such sublease, nor by reason of the collection of Rent, be
deemed liable to the sublessee for any failure of Lessee to perform and comply
with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a written notice from
Lessor stating that a Breach exists in the performance of Lessee's obligations
under this Lease, to pay to Lessor all Rent due and to become due under the
sublease. Sublessee shall rely upon any such notice from Lessor and shall pay
all Rents to Lessor without any obligation or right to inquire as to whether
such Breach exists, notwithstanding any claim from Lessee to the contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its
option, require Sublessee to attorn to Lessor, in which event Lessor shall
undertake the obligations of the sublessor under such sublease from the time of
the exercise of said option to the expiration of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to such sublessor or for any prior Defaults or Breaches
of such sublessor.
(c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the
Lessee to comply with or perform any of the terms, convenants, conditions or
rules under this Lease. A "BREACH" is defined as the occurrence of one or more
of the following Defaults, and the failure of Lessee to cure such Default within
any applicable grace period.
(a) The abandonment of the Premises; or the vacating of the
Premises without providing a commercially reasonable level of security, or where
the coverage of the property insurance described in Paragraph 8.3 is jeopardized
as a result thereof, or without providing reasonable assurances to minimize
potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any
other monetary payment required to be made by Lessee hereunder, whether to
Lessor or to a third party, when due, to provide reasonable evidence of
insurance or surety bond, or to fulfill any obligation under this Lease which
endangers or threatens life or property, where such failure continues for a
period of three (3) business days following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service contracts,
(iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy
Statement, (v) a requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) any document requested under Paragraph 42 (easements),
or (viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making
of any general arrangement or assignment for the benefit of creditors; (ii)
becoming a "DEBTOR" as defined in 11 U.S. C. ss. 101 or any successor statute
thereto (unless, in the case of a petition filed against Lessee, the same is
dismissed within sixty (60) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days ; provided, however, in the event that any
provision of this subparagraph (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.
(f) The discovery that any financial statement of Lessee or of
any Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this Lease
is guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory basis, and Lessee's failure, within sixty (60) days following
written notice of any such event, to provide written alternative assurance or
security, which, when coupled with the then existing resources of Lessee, equals
or exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of the Lease.
13.2 REMEDIES. If Lessee fails to perform any of its affirmative
duties or obligations, within ten (10) days after written notice (or in case of
an emergency, without notice). Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made by Lessee to
be by cashier's check. In the event of a Breach, Lessor may, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorney's fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of the District within which the Premises are located
at the time of award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Breach of this Lease shall not waive Lessor's right
to recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding any unpaid Rent and damages as are recoverable
therein, or Lessor may reserve the right to recover all or any part thereof in a
separate suit. If a notice and grace period required under Paragraph 13.1 was
not previously given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the failure of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or assign,
subject only to reasonable limitations. Acts of maintenance, efforts to relet,
and/or the appointment of a receiver to protect the Lessor's interests, shall
not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available under the
laws or judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee's occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or
other charges, or for the giving or paying by Lessor to or for Lessee of any
cash or other bonus, inducement or consideration for Lessee's entering into this
Lease, all of which concessions are hereinafter referred to as "INDUCEMENT
PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful
performance of all of the terms, covenants and conditions of this Lease. Upon
Breach of this Lease by Lessee, any such inducement Provision shall
automatically be deemed deleted from this Lease and of no further force or
effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an inducement Provision
shall be immediately due and payable by Lessee to Lessor, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or
the cure of the Breach which initiated the operation of this paragraph shall not
be deemed a waiver by Lessor of the provisions of this paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within five (5) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a one-time late charge equal to five percent (5%) of each such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of such late
payment. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent the exercise of any of the other rights and remedies granted hereunder.
In the event that a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of Base Rent, then notwithstanding any
provision of this Lease to the contrary. Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 INTEREST. Any monetary payment due Lessor hereunder, other than
late charges, not received by Lessor within thirty (30) days following the date
on which it was due, shall bear interest from the thirty-first (31st) day after
it was due. The interest ("INTEREST") charged shall be equal to the prime rate
charged by the largest state chartered bank in the state in which the Premises
are located plus 4%, but shall not exceed the maximum rate allowed by law.
Interest is payable in addition to the potential late charge provided for in
Paragraph 13.4.
13.6 BREACH BY LESSOR.
(a) NOTICE OF BREACH. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and any Lender whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are reasonably
required for its performance, then Lessor shall not be in breach if performance
is commenced within such thirty (30) day period and thereafter diligently
pursued to completion.
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that
neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said notice, or if having commenced said cure they do not diligently
pursue it to completion, then Lessee may elect to cure said breach at Lessee's
expense and offset from Rent an amount equal to the greater of one month's Base
Rent or the Security Deposit, and to pay an excess of such expense under
protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall
document the cost of said cure and supply said documentation to Lessor.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "CONDEMNATION"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building, or more than
twenty-five percent (25%) of the land area not occupied by any building, is
taken by Condemnation, Lessee may, at Lessee's option, to be exercised in
writing within ten (10) days after Lessor shall have given Lessee written notice
of such taking (or in the absence of such notice, within ten (10) days after the
condemning authority shall have taken possession) terminate this Lease as of the
date the condemning authority takes such possession. If Lessee does not
terminate this Lease in accordance with the foregoing, this Lease shall remain
in full force and effect as to the portion of the Premises remaining, except
that the Base Rent shall be reduced in proportion to the reduction in utility of
the Premises caused by such Condemnation. Condemnation awards and/or payments
shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold, the value of the part
taken, or for severance damages; provided, however, that Lessee shall be
entitled to any compensation for Lessee's relocation expenses, loss of business
good will and/or Trade Fixtures, without regard to whether or not this Lease is
terminated pursuant to the provisions of this Paragraph. All Alterations and
Utility Installations made to the Premises by Lessee, for purposes of
Condemnation only, shall be considered the property of the Lessee and Lessee
shall be entitled to any and all compensation which is payable therefor. In the
event that this Lease is not terminated by reason of the Condemnation, Lessor
shall repair any damage to the Premises caused by such Condemnation.
15. BROKER'S FEE.
15.1 ADDITIONAL COMMISSION. In addition to the payments owed pursuant
to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in
writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee
acquires any rights to the Premises or other premises owned by Lessor and
located within the same Project, if any, within which the Premises is located,
(c) if Lessee remains in possession of the Premises, with the consent of Lessor,
after the expiration of this Lease, or (d) if Base Rent is increased, whether by
agreement or operation of an escalation clause herein, then, Lessor shall pay
Brokers a fee in accordance with the schedule of said Brokers in effect at the
time of the execution of this Lease.
15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease shall be deemed to have assumed Lessor's obligation
hereunder. Each Broker shall be a third party beneficiary of the provisions of
Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts
due as and for commissions pertaining to this Lease when due, then such amount
shall accrue interest. In addition, if Lessor fails to pay any amounts to
Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and
Lessee of such failure and if Lessor fails to pay such amounts within ten (10)
days after said notice, Lessee shall pay said monies to its Broker and offset
such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a
third party beneficiary of any commission agreement entered into by and/or
between Lessor and Lessor's Broker.
15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee
and Lessor each represent and warrant to the other that it has had no dealings
with any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Brokers is
entitled to any commission or finder's fee in connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder, or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.
16. TENANCY STATEMENT/ESTOPPEL CERTIFICATE.
16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days
after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party an estoppel certificate in
writing, in form similar to the then most current "TENANCY STATEMENT" form
published by the American Industrial Real Estate Association, plus such
additional information, confirmation and/or statements as may be reasonably
requested by the Requesting Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee and all Guarantors shall deliver to any potential
lender or purchaser designated by Lessor such financial statements as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or this Lease. Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined. Notwithstanding the above, the original Lessor under this Lease, and
all subsequent holders of the Lessor's interest in this Lease shall remain
liable and responsible with regard to the potential duties and liabilities of
Lessor pertaining to Hazardous Substances as outlined in Paragraph 6 above.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. DAYS. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20. LIMITATION ON LIABILITY. Except with respect to Lessor's fraud, gross
negligence or willful misconduct, the obligations of Lessor under this Lease
shall not constitute personal obligations of Lessor, the individual partners of
Lessor or its or their individual partners, directors, officers or shareholders,
and Lessee shall look to the Premises, and to not other assets of Lessor, for
the satisfaction of any liability of Lessor with respect shareholders, or any of
their personal assets for such satisfaction.
21. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. The liability (including court costs and Attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee received by such
Broker pursuant to this Lease; provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by courier)
or may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantee next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the Postal Service or courier. Notices transmitted by
facsimile transmission or similar means shall be deemed delivered upon telephone
confirmation of receipt, provided a copy is also delivered via delivery or mail.
If notice is received on a Saturday, Sunday, or legal holiday, it shall be
deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. The acceptance of Rent by
Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment
made by lessee in connection therewith, which such statements and/or conditions
shall be of no force or effect whatsoever unless specifically agreed to in
writing by Lessor at or before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150% of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this
Lease to be observed or performed by Lessee are both covenants and conditions.
In construing this Lease, all headings and titles are for the convenience of the
parties only and shall not be considered a part of this Lease. Whenever required
by the context, the singular shall include the plural and vice versa. This Lease
shall not be construed as if prepared by one of the parties, but rather
according to its fair meaning as a whole, as if both parties had prepared it.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Leas shall be initiated in the county in which
the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices shall have no liability or
obligation to perform any of the obligations of Lessor under this Lease. Any
Lender may elect to have this Lease and/or any Option granted hereby superior to
the lien of its Security Device b giving written notice thereof to Lessee, this
Lease and such Options shall be deemed prior to such Security Device,
notwithstanding the relative dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not: (i)
be liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership; (ii) be subject to any offsets or
defenses which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises. Further, within sixty (60) days after the execution of this Lease,
Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance
Agreement from the holder of any pre-existing Security Device which is secured
by the Premises. In the event that Lessor is unable to provide the
non-Disturbance Agreement within said sixty (60) days, then Lessee may, at
Lessee's option, directly contact Lessor's lender and attempt to negotiate for
the execution and delivery of a Non-Disturbance Agreement.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.
31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fees award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and
expenses incurred in the preparation and service of notices of Default and
consultations in connection therewith, whether or not a legal action is
subsequently commenced in connection with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises as Lessor may deem necessary.
All such activities shall be without abatement of rent or liability to Lessee.
Lessor may at any time place on the Premises any ordinary "FOR SALE" signs and
Lessor may during the last six (6) months of the term hereof place on the
Premises any ordinary "FOR LEASE" signs. Lessee may at any time place on or
about the Premises any ordinary "FOR SUBLEASE" sign.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any auction
upon the Premises without Lessor's prior written consent. Lessor shall not be
obligated to exercise any standard of reasonableness in determining whether to
permit an auction.
34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place any
sign upon the Premises without Lessor's prior written consent. All signs must
comply with all Applicable Requirements.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs
and expenses (including but not limited to architects', attorneys', engineers'
and other consultants' fees) incurred in the consideration of, or response to, a
request by Lessee for any Lessor consent, including but not limited to consents
to an assignment, a subletting or the presence or use of a hazardous Substance,
shall be paid by Lessee upon receipt of an invoice and supporting documentation
therefor. Lessor's consent to any act, assignment or subletting shall not
constitute an acknowledgment that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing Default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent. The failure to specify herein any particular
condition to Lessor's consent shall not preclude the imposition by Lessor at the
time of consent of such further or other conditions as are then reasonable with
reference to the particular matter for which consent is being given. In the
event that either Party disagrees with any determination made by the other
hereunder and reasonably requests the reasons for such determination, the
determining party shall furnish its reasons in writing and in reasonable detail
within ten (10) business days following such request.
37. GUARANTOR.
37.1 EXECUTION. The Guarantors, if any, shall each execute a guaranty
in the form most recently published by the American Industrial Real Estate
Association, and each such Guarantor shall have the same obligations as Lessee
under this Lease.
37.2 DEFAULT. It shall constitute a Default of the Lessee if any
Guarantor fails or refuses, upon request to provide: (a) evidence of the
execution of the guaranty, including the authority of the party signing on
Guarantor's behalf to obligate Guarantor, and in the case of a corporate
Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, (b) current financial statements, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.
39. MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including the care and cleanliness of the
grounds and including the parking, loading and unloading of vehicles, and that
Lessee will pay its fair share of common expenses incurred in connection
therewith.
40. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
41. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay.
43. AUTHORITY. If either Party hereto is a corporation, trust, limited liability
company, partnership, or similar entity, each individual executing this Lease on
behalf of such entity represents and warrants that he or she is duly authorized
to execute and deliver this Lease on its behalf. Each party shall, within thirty
(30) days after request, deliver to the other party satisfactory evidence of
such authority.
44. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
45. OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
46. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
47. MULTIPLE PARTIES. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
48. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation
and/or the Arbitration of all disputes between the Parties and/or Brokers
arising out of this Lease [ ] IS [X] IS NOT attached to this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERCIAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE
PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE
PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL
INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY
OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: San Diego, California Executed at: San Diego, California
on:________________________________ on:________________________________
By LESSOR: By LESSEE:
/s/ Arthur P. Arns ECO SOIL SYSTEMS, INC.
By:________________________________ By: /s/ Doug Eicoff
Name Printed: ARTHUR P. ARNS Name Printed: Doug Eicoff
Title:_____________________________ Title: E. V. P.
By:________________________________ By:________________________________
Name Printed:______________________ Name Printed:______________________
Title:_____________________________ Title:_____________________________
Address:___________________________ Address:___________________________
Telephone: ( )________________ Telephone: ( )________________
Facsimile: ( )________________ Facsimile: ( )________________
Federal ID No._____________________ Federal ID No._____________________
BROKER: BROKER:
___________________________________ ___________________________________
Executed at:_______________________ Executed at:_______________________
on:________________________________ on:________________________________
By:________________________________ By:________________________________
Name Printed:______________________ Name Printed:______________________
Title:_____________________________ Title:_____________________________
Address:___________________________ Address:___________________________
Telephone: ( )________________ Telephone: ( )________________
Facsimile: ( )________________ Facsimile: ( )________________
Federal ID No._____________________ Federal ID No._____________________
NOTE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the most
current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower
Street, Suite 600, Los Angeles, California 90017. (213) 687-8777. Fax No. (213)
687-8616.
ADDENDUM TO
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT--NET
BETWEEN
ARTHUR P. ARNS, AS LESSOR
AND
ECO SOIL SYSTEMS, INC. AS LESSEE
49. With reference to paragraph 2 of the Lease, Lessee acknowledges
that Lessee has been in possession of substantially all of the Premises prior to
the date of the Lease and that, as set forth in paragraph 2.5, the warranties
made by Lessor in paragraph 2 shall be of no force or effect as to the entirety
of the Premises, Lessee shall be responsible for all such costs and expenses and
Lessee is accepting the Premises in an "as-is" condition.
50. The rent set forth in paragraph 4 of the Lease shall be subject to
adjustment as follows:
a. Cost of Living Adjustment.
(1) The amount of the Base Rent shall be adjusted as of the end
of each "lease year" during the term hereof to reflect any change in the cost of
living. The term "lease year" shall mean a twelve (12) month period beginning
with the first day of the first calendar month following the Commencement Date.
The first lease year shall include any partial monthly period between the
Commencement Date and the start of the first calendar month following the
Commencement Date.
(2) The adjustment, if any, shall be based upon any increase that
may have occurred in the Bureau of Labor Statistics Consumer Price Index,
Subgroup "All Urban Consumers" (the "Index"), as published by the United States
Department of Labor for the Los Angeles-Long Beach-Riverside Metropolitan Area
(1982-84 = 100). The adjustment shall be computed by adding to the initial Base
Rent the sum obtained by multiplying the initial Base Rent by a factor equal to
the percentage increase in the Index as last published immediately preceding the
Commencement Date and the Index last published preceding the date of adjustment;
provided, however, the annual increase shall never be less than three percent
(3%) nor more than eight percent (8%). Lessor shall give written notice to
Lessee indicating the amount of the adjustment and the manner of computation of
same as soon as the information becomes available to Lessor.
(3) In no event shall the Base Rent for any subsequent year be
reduced below the Base Rent for the year immediately preceding the date of
adjustment. If the new Base Rent cannot be determined on the date specified
above, Lessee shall continue paying Base Rent payable during the lease year then
ended until such time as the new Base Rent is determined. When the new Base Rent
is determined, Lessee shall pay the new Base Rent retroactive to the date of
adjustment.
(4) In the event that the Index does not exist in the same format
described above, the Lessor shall substitute any official index published by the
Bureau of Labor Statistics, or successor or similar governmental agency, as may
then be in existence and shall be most nearly equivalent thereto.
Should Tenant pay all rent in a timely fashion, that is, at least 80%
of the base rent by the 5th day of each and every month and the balance no later
than the 10th day of each and every month, then the rent will not be subject to
increase as set forth above; provided, however, should Lessee, in any month fail
to pay the monthly rent in a timely fashion as defined in this paragraph, then
the rent shall thereupon automatically and retroactively be subject to increase
as set forth above in this paragraph.
51. Lessee acknowledges that Lessee is responsible for paying any and
all utilities provided to the Premises and that Lessee must make arrangements
with all utility companies for the provision of such utilities to the Premises,
including, but not limited to, SDG&E, Olivenhain Water, Laidlaw Waste Systems,
JMD Landscape, Sanitech Maintenance and Alarms Unlimited (fire system).
52. All amounts payable by Lessee to Lessor under the Lease, no matter
how denominated, shall be considered rent due under the Lease.
53. INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor
for free or abated rent or waiver of increases in CPI per paragraph 51 or other
charges applicable to the Premises, or for other concessions, hereinafter
referred to as "Inducement Provisions," shall be deemed conditioned upon
Lessee's full and faithful performance of all of the terms, covenants and
conditions of the Lease to be performed or observed by Tenant during the term
hereof as the same may be extended. Upon the occurrence of a default by Tenant
as defined in Paragraph 13 of the Lease, any such Inducement Provisions shall
automatically be deemed deleted from the Lease and of no further force or
effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessee under such an Inducement Provision
shall be immediately due and payable by Lessee to Lessor, and recoverable by
Lessor as additional rent due under the Lease, notwithstanding any subsequent
cure of said default by Tenant, with increases in CPI per paragraph 51 to be
retroactive back to the first date such increase would otherwise have been made.
The acceptance by Lessor of rent or the cure of the default which initiated the
operation of this section shall not be deemed a waiver by Lessor of the
provisions of this section unless specifically so stated in writing by Lessor at
the time of such acceptance.
LESSOR: LESSEE:
ECO SOIL SYSTEMS, INC.
/s/ Arthur P. Arns
- --------------------------------
ARTHUR P. ARNS By: /s/ D. M. [illegible]
----------------------------------
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data", and "Experts" and to the use of our report dated
August 14, 1996 (except for Note 10, as to which the date is September 25, 1996)
in Amendment No. 3 to the Registration Statement on Form SB-2 and related
Prospectus of Eco Soil Systems, Inc. for the registration of 3,450,000 shares of
its common stock.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Diego, California
January 10, 1997
EXHIBIT 23.3
CONSENT OF BIGELOW & COMPANY, CPA, P.C., INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions
"Selected Consolidated Financial Data" and "Experts" and to the use of our
reports dated July 19, 1996, with respect to the financial statements of Turf
Specialty, Inc., included in Amendment No. 2 to the Registration Statement on
Form SB-2 and related prospectus of Eco Soil Systems, Inc., for the registration
of its common stock.
BIGELOW & COMPANY
Certified Public Accountants, P.C.
By: /s/ Marie C. McKay
Marie C. McKay
Certified Public Accountant
January 10, 1997
Manchester, New Hampshire
EXHIBIT 23.4
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated October 3, 1996, with respect to the
financial statements of Turf Products, Ltd. in Amendment No. 3 to the
Registration Statement on Form SB-2 and related Prospectus of Eco Soil Systems,
Inc. for the registration of 3,450,000 shares of its common stock.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Diego, California
January 10, 1997
EXHIBIT 23.5
CONSENT OF BIGELOW & COMPANY, CPA, P.C., INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
July 19, 1996, with respect to the financial statements of Turf Specialty, Inc.,
as a subsidiary of Eco Soil Systems, Inc., which financial statements are not
included in the Amendment No. 2 to the Registration Statement on Form SB-2 and
related Prospectus of Eco Soil Systems, Inc., for the registration of its common
stock.
BIGELOW & COMPANY
Certified Public Accountants, P.C.
By:
Marie C. McKay
Certified Public Accountant
January 10, 1997
Manchester, New Hampshire
