<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------
FORM 10-QSB
(Mark One)
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
- --- of 1934.
For the quarterly period ended June 30, 1998
Transition report under Section 13 or 15(d) of the Exchange Act.
- ---
For the transition period from ___________ to ___________
Commission File Number: 0-21975
ECO SOIL SYSTEMS, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
NEBRASKA 47-0709577
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10890 THORNMINT ROAD
SAN DIEGO, CALIFORNIA 92127
(Address, Including Zip Code, of Principal Executive Offices)
(619) 675-1660
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.005 PAR VALUE
-----------------------------
(Title of Class)
Check whether the Registrant (1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
YES X NO
------- -------
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of July 30, 1998, 16,516,980
shares of the Registrant's Common Stock, $.005 par value per share, were
outstanding.
Transitional Small Business Disclosure Format (check one):
YES NO X
------- -------
<PAGE>
ECO SOIL SYSTEMS, INC.
FORM 10-QSB INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998
(unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations
(unaudited) for the Three Months and Six Months
Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows (unaudited) for
the Six Months Ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 12
Item 4. Submissions of Matters to a Vote of Security Holders 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 16
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Eco Soil Systems, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
-------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,325 $ 3,125
Short-term investments, available-for-sale - 3,000
Accounts receivable, net 22,606 10,148
Inventories 15,855 5,587
Prepaid expenses and other current assets 3,710 536
-------- --------
Total current assets 43,496 22,396
Property and equipment, net 3,945 1,150
Equipment under operating leases, net 6,197 6,735
Intangible assets, net 13,752 6,515
Other assets 934 312
-------- --------
Total assets $ 68,324 $ 37,108
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,903 $ 2,492
Accrued expenses 5,627 2,151
Current portion of long-term obligations 10,270 1,273
-------- --------
Total current liabilities 31,800 5,916
Long-term obligations, net of current portion 1,615 1,412
Shareholders' equity:
Preferred stock
$.005 par value; 5,000,000 shares authorized;
none issued and outstanding - -
Common stock
$.005 par value; 50,000,000 and 25,000,000 82 77
shares authorized at June 30, 1998 and
December 31, 1997, respectively; 16,469,600
and 15,320,923 issued and outstanding at
June 30, 1998 and December 31, 1997,
respectively
Additional paid-in capital 48,710 43,708
Warrants 230 242
Notes receivable from shareholders (15) (282)
Accumulated deficit (14,098) (13,965)
-------- --------
Total shareholders' equity 34,909 29,780
-------- --------
Total liabilities and shareholders' equity $ 68,324 $ 37,108
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
Note: The Balance Sheet at December 31, 1997 is derived from the audited
financial statements at that date but does not include all of the disclosures
required by generally accepted accounting principles.
3
<PAGE>
Eco Soil Systems, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------- ------------------
1998 1997 1998 1997
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Turf/Golf $ 20,728 $ 11,120 $ 29,130 $ 15,049
Agriculture 6,156 180 6,163 180
-------- -------- -------- --------
Total revenues 26,884 11,300 35,293 15,229
Cost of revenues:
Turf/Golf 14,560 6,957 20,259 9,211
Agriculture 4,530 46 4,534 46
-------- -------- -------- --------
Total cost of revenues 19,090 7,003 24,793 9,257
Gross profit 7,794 4,297 10,500 5,972
Operating expenses:
Selling, general and administrative 5,382 2,798 9,178 5,085
Research and development 68 12 168 147
-------- -------- -------- --------
Income before interest, depreciation
and amortization 2,344 1,487 1,154 740
Depreciation 346 75 695 143
Amortization of intangibles 275 127 458 344
-------- -------- -------- --------
Income from operations 1,723 1,285 1 253
Interest expense 245 83 340 250
Interest income 130 - 206 -
-------- -------- -------- --------
Net income (loss) $ 1,608 $ 1,202 $ (133) $ 3
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share of
common stock - basic $ .10 $ .11 $ (.01) $ .00
-------- -------- -------- --------
Net income (loss) per share of
common stock - diluted $ .08 $ .08 $ (.01) $ .00
-------- -------- -------- --------
Average number of common shares
outstanding:
Basic 16,665 11,405 16,029 9,199
-------- -------- -------- --------
-------- -------- -------- --------
Diluted 19,898 14,656 16,029 12,315
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
4
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Eco Soil Systems, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-------------------
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (133) $ 3
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,153 487
Changes in operating assets and liabilities,
net of effect of acquired businesses:
Accounts receivable (3,835) (5,648)
Inventories (4,957) (8,560)
Prepaid expenses and other assets (3,113) (410)
Accounts payable 3,249 4,498
Accrued liabilities (69) 528
-------- --------
Net cash used in operating activities (7,705) (9,102)
-------- --------
INVESTING ACTIVITIES
Sale of short term investments 3,000 -
Payments related to acquired businesses (2,321) (1,289)
Purchase of property and equipment
Proceeds from note receivable (787) (578)
Purchase of patents and licenses (25) -
-------- --------
Net cash used in investing activities (133) (1,867)
-------- --------
FINANCING ACTIVITIES
Repayments to shareholders (1,066) (369)
Proceeds from long-term debt 5,845 2,572
Repayments of long-term debt (575) (5,236)
Payments on capital lease obligations (5) (22)
Net proceeds from sale of common stock 1,839 13,891
-------- --------
Net cash provided by financing activities 6,038 10,836
-------- --------
Net decrease in cash and cash equivalents (1,800) (133)
Cash and cash equivalents at beginning of period 3,125 150
-------- --------
Cash and cash equivalents at end of period $ 1,325 $ 17
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of Eco Soil Systems, Inc. ("the Company"), all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair statement of the results for the three-month and six-month periods
ended June 30, 1998 and 1997 have been made. The results of operations for
the six-month period ended June 30, 1998 are not necessarily indicative of
the results to be expected for the full fiscal year.
The accompanying consolidated financial statements should be read
in conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997.
2. NET INCOME (LOSS) PER SHARE
In accordance with Financial Accounting Standards Board Statement
No. 128, "Earnings per share" ("SFAS 128"), basic earnings per share is
calculated by dividing net income by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of the
Company such as common stock which may be present issuable upon exercise of
outstanding common stock options, warrants and preferred stock. These shares
are excluded when their effects are antidilutive. As required by SFAS 128,
the Company has restated prior periods to be presented consistently with the
current year.
3. INVENTORIES
Inventories consist of the following, (in thousands):
June 30, December 31,
1998 1997
-------- ------------
Work in process $ 5,017 $ 1,072
Finished goods 11,021 4,645
Reserve (183) (130)
-------- -------
$ 15,855 $ 5,587
-------- -------
-------- -------
6
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ECO SOIL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company adopted this statement effective January 1, 1998,
and has no components of comprehensive income, other than net income or loss,
to report.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in this Management's Discussion and
Analysis that are not related to historical results are forward looking
statements. Actual results may differ materially from those projected or
implied in the forward looking statements. Further, certain forward looking
statements are based upon assumptions of future events, which may not prove
to be accurate. These forward looking statements involve risks and
uncertainties including but not limited to those referred to below. See
"Item 5. Other Information. Factors That Could Affect Future Performance."
This information should be read in conjunction with the financial
statements and notes thereto included in Item 1 of this report for the
quarter ended June 30, 1998. Additionally, the financial statements and
notes thereto and Management's Discussion and Analysis in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997 will
provide additional information.
In addition to other endeavors, the Company develops, markets and
sells proprietary biological and traditional chemical products and
distributes certain other biological and traditional chemical products to two
principal markets: the golf and turf management market ("Turf/Golf") and the
agricultural and crop market ("Agriculture").
SECOND QUARTER ENDED JUNE 30, 1998 COMPARED TO SECOND QUARTER ENDED JUNE 30,
1997
REVENUES
For the second quarter of 1998, revenues were $26.9 million, an
increase of 138% versus $11.3 million for the second quarter 1997. The
increase in revenues reflects an increase in both Turf/Golf and Agriculture
revenues.
For the second quarter of 1998, Turf/Golf revenues were $20.7
million, an increase of 86% versus $11.1 million for the second quarter 1997.
The increase in Turf/Golf sales occurred in all three operating regions of
the U.S. as a result of the first quarter of 1998 acquisitions of Cannon Turf
Supply, Inc. and Benham Chemical Corporation in the midwest, the opening of
warehouses in the west and stronger sales in the east.
For the second quarter of 1998, Agriculture revenues were $6.2
million, compared to $180,000 for the second quarter of 1997. Agriculture
revenues were affected favorably by the acquisitions of Agricultural Supply,
Inc. in April 1998 and Yuma Sprinkler & Pipe Supply, and Riegomex S.A. de
C.V. in June 1998.
GROSS PROFIT
For the second quarter of 1998, the Company's gross profit was $7.8
million, an increase of 81% versus $4.3 million for the second quarter of
1997. The increase in gross profit was due to the increase in both Turf/Golf
and Agriculture revenues. For the second quarter of 1998, the Company's
gross margin was 29% versus 38% during the second quarter of 1997. The
decrease in gross margin was due to a change in product mix.
For the second quarter of 1998, the gross profit on Turf/Golf sales
was $6.2 million, an increase of 48% versus $4.2 million during the second
quarter of 1997. The increase in gross profit on
8
<PAGE>
Turf/Golf sales is directly related to the increase in revenue, as previously
discussed. For the second quarter of 1998, the gross margin on Turf/Golf
products was 30% versus 37% during the second quarter of 1997. The decrease
in gross margin on Turf/Golf sales was due to a change in the product mix.
For the second quarter of 1998, the gross profit on Agriculture sales
was $1.6 million, compared to $134,000 during the second quarter of 1997.
The increase in gross profit on Agriculture sales was directly related to the
increase in revenue. For the second quarter of 1998, the gross margin on
Agriculture products was 26% versus 74% during the second quarter of 1997.
The decrease in gross margin on Agriculture sales was due to a change in the
product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For the second quarter of 1998, selling, general and administrative
("SG&A") expense was $5.4 million, an increase of 92% versus $2.8 million
during the second quarter of 1997. The increase in SG&A expense was
primarily due to additional overhead costs associated with the previously
discussed acquisitions.
RESEARCH AND DEVELOPMENT EXPENSE
For the second quarter of 1998, research and development ("R&D")
expense was $68,000, an increase of 467% versus $12,000 during the second
quarter of 1997. The increase in R & D expense was due to ongoing analysis
and testing of products for the Agriculture and Turf/Golf markets.
INTEREST EXPENSE
For the second quarter of 1998, interest expense was $245,000, an
increase of 195% versus $83,000 for the second quarter of 1997. The increase
in interest expense reflects an increase in the amount of debt outstanding.
AMORTIZATION EXPENSE
For the second quarter of 1998, amortization expense was $275,000,
an increase of 117% versus $127,000 for the second quarter of 1997. The
increase in amortization expense is due to an increase in goodwill directly
related to the Company's recent acquisitions.
NET INCOME
For the second quarter of 1998, net income was $1.6 million or $.08
per share versus net income of $1.2 million or $.08 per share during the
second quarter of 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES
For the first six months of 1998, revenues were $35.3 million, an
increase of 132% versus $15.2 million for the first six months of 1997. The
increase in revenues reflects an increase in both Turf/Golf and Agriculture
revenues.
9
<PAGE>
For the first six months of 1998, Turf/Golf revenues were $29.1
million, an increase of 94% versus $15 million for the first six months of
1997. The increase in Turf/Golf revenues occurred in all three operating
regions of the U.S. as a result of the first quarter of 1998 acquisitions of
Cannon Turf Supply, Inc. and Benham Chemical Corporation in the midwest and
from warehouse openings in the west and east.
For the first six months of 1998, Agriculture revenues were $6.2
million, compared to $180,000 for the first six months of 1997. Agriculture
revenues were affected favorably by the acquisitions of Agricultural Supply,
Inc. in April 1998 and Yuma Sprinkler & Pipe Supply, and Riegomex S.A. de
C.V. in June 1998.
GROSS PROFIT
For the first six months of 1998, the Company's gross profit was
$10.5 million, an increase of 76% versus $6.0 million for the first six
months of 1997. The increase in gross profit was due to the increase in both
Turf/Golf and Agriculture revenues. For the first six months of 1998, the
Company's gross margin was 30% versus 39% for the first six months of 1997.
The decrease in gross margin was due to a change in product mix.
For the first six months of 1998, the gross profit on Turf/Golf
sales was $8.9 million, an increase of 52% versus $5.8 million during the
first six months of 1997. The increase in the gross profit on Turf/Golf
sales is directly related to the increase in revenue. For the first six
months of 1998, the gross margin on Turf/Golf products was 30% versus 39%
during first six months of 1997. The decrease in gross margin on Turf/Golf
sales was due to a change in the product mix.
For the first six months of 1998, the gross profit on Agriculture
sales was $1.6 million, compared to $134,000 during the first six months of
1997. The increase in the gross profit on Agriculture sales is directly
related to the increase in revenue, as previously discussed. For the first
six months of 1998, the gross margin on Agriculture products was 26% versus
74% during the first six months of 1997. The decrease in gross margin on
Agriculture sales was due to a change in the product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For the first six months of 1998, SG&A expense was $9.2 million,
an increase of 80% versus $5.1 million during the first six months of 1997.
The increase in SG&A expense was primarily due to additional overhead costs
associated with the previously discussed acquisitions.
RESEARCH AND DEVELOPMENT
For the first six months of 1998, R&D expense was $168,000, an
increase of 14% versus $147,000 during the first six months of 1997. The
increase in R&D expense was due to ongoing analysis and testing of products
for the agriculture and golf markets.
INTEREST EXPENSE
For the first six months of 1998 interest expense was $340,000, an
increase of 36% versus $250,000 during the first six months of 1997. The
increase in interest expense reflects an increase in the amount of debt
outstanding.
10
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AMORTIZATION EXPENSE
For the first six months of 1998, amortization expense was
$458,000, an increase of 33% versus $344,000 during the first six months of
1997. The increase in amortization expense is due to an increase in the
Company's goodwill directly related to the previously discussed acquisitions.
NET INCOME
For the six months ended June 30, 1998 net loss was $133,000 or
$.01 per share versus net income of $3,000 or $.00 per share for the six
months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from revenues from sales of
its products, sales of its Common Stock, borrowing from its principal
shareholders and bank financing. The Company's operating and investing
activities used cash of $3.7 million during the second quarter of 1998 and
$7.8 million during the first six months of 1998.
The Company has entered into negotiations to secure $15 million of
senior subordinated notes, and a $20 million line of credit. Financing is
expected to close before the end of the third quarter.
The Company intends to fund its future operations and growth
through a combination of product revenues, borrowings available under the
line of credit, and public or private debt or equity financing. However,
there can be no assurance that such financing alternatives will be available
under favorable terms, if at all. The Company believes that it has sufficient
resources to finance its operations and future growth for at least the next
twelve months.
YEAR 2000
The Company is in the process of upgrading its existing computer
software and information technology and recognizes the need to ensure its
operations will not be adversely impacted by Year 2000 software failures.
The Company presently believes that, with modifications to existing software
and conversions to new software, the Year 2000 Problem can be mitigated.
However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Problem could have a material impact on the
operations of the Company. Software failures due to processing errors
potentially arising from calculations using the Year 2000 date are a known
risk. The project cost is approximately $20,000 and is expected to be
completed not later than December 31, 1998, which is prior to any anticipated
impact on the Company's operating systems. The Company believes that with
modifications to existing software and conversions to new software the Year
2000 issue will not pose significant operation problems for its computer
systems.
11
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
On April 30, 1998, the Company issued 225,284 shares of the
Company's common stock to the shareholders of Agricultural Supply, Inc. ("Ag
Supply") pursuant to an Agreement and Plan of Merger dated as of April 30,
1998 (the "Ag Supply Merger Agreement") by and among the Company,
Agricultural Acquisition Sub, Inc., a wholly owned subsidiary of the Company
("Ag Supply Merger Sub"), Ag Supply and the shareholders of Ag Supply (the
"Ag Supply Shareholders"). Pursuant to the Ag Supply Merger Agreement, the
Company issued to the Ag Supply Shareholders an aggregate of 225,284 shares
of the Company's common stock and $456,000 in cash in exchange for all the
outstanding common stock of Ag Supply. The issuance of the Company's common
stock in connection with the Ag Supply Merger Agreement was effected pursuant
to the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended (the "Securities Act"), taking into account the
representations of the Ag Supply Shareholders that they acquired the common
stock of the Company for their own account and the absence of general
solicitation or advertising.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 19, 1998, the Company held an Annual Meeting of Shareholders at
which the following proposals were voted on by shareholders:
1. Election of two directors for a three-year term to expire at the 2001
Annual Meeting of Shareholders. The votes cast for, against, withheld
or abstained as to each nominee are set forth below.
NOMINEE FOR AGAINST WITHHELD
----------------------------------------------------------
Jeffrey A. Johnson 12,806,964 none 82,887
William S. Potter 12,880,051 none 9,800
2. To amend the Amended and Restated Articles of Incorporation of the
Company to increase the number of authorized shares of Common Stock
from 25,000,000 to 50,000,000 shares.
FOR AGAINST ABSTAINED
------------------------------------
12,683,950 143,841 62,060
3. To approve the adoption of the 1998 Stock Option Plan of the Company
and the reservation of 1,000,000 shares of Common Stock for the
issuance thereunder.
FOR AGAINST ABSTAINED
------------------------------------
8,024,364 871,934 52,826
12
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4. To amend the Amended and Restated Articles of Incorporation of the
Company to provide for a staggered Board of Directors consistent with
the Company's Bylaws, Articles of Correction to Amended and Restated
Articles of Incorporation and current practice.
FOR AGAINST ABSTAINED
------------------------------------
7,347,039 1,549,483 52,602
5. To amend the Amended and Restated Articles of Incorporation of the
Company to allow the Board of Directors to determine the size of the
Board.
FOR AGAINST ABSTAINED
------------------------------------
11,067,258 1,785,796 36,797
ITEM 5. OTHER INFORMATION
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
This report contains certain forward looking statements about the
business and financial condition of the Company, including various statements
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The actual results of the Company could differ
materially from any forward looking statements contained herein. The
following information sets forth certain factors that could cause the actual
results to differ materially from those contained in the forward looking
statements. For a more detailed discussion of the factors that could cause
actual results to differ, see "Item 1: Business -- Factors That Could Affect
Future Performance" in the Company's Form 10-KSB for the fiscal year ended
December 31, 1997
At June 30, 1998, the Company had an accumulated deficit of $14.1
million. 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.
The Company's recent losses have resulted in part from expenditures for
product development, U.S. patent protection and sales and marketing expenses,
including the costs of the Company's recent dealer acquisitions.
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.
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. 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
13
<PAGE>
through the acquired distribution system could have a material adverse effect
on the Company's business, financial position and results of operations.
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. Despite precautions
taken by the Company, 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.
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 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 $17 million. 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.
Some states have laws imposing liability on certain parties for the
release of fertilizers and other agents into the environment in certain
manners or concentrations. Such liability could include, among other things,
responsibility for cleaning up the damage resulting from such a release. In
addition, the federal Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), commonly known as the "Superfund" law, and other
applicable laws impose liability on certain parties for the release into the
environment of hazardous substances, which might include fertilizers and
water treatment chemicals. The Company is also subject to certain other
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.
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 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.
The Company is dependent upon the active participation of William B.
Adams, its Chairman of the Board and Chief Executive Officer, and Douglas M.
Gloff, its President and Chief Operating Officer. The loss of the services of
either of these individuals could have a material adverse effect upon the
Company's future operations. The Company's success depends in large part on
its ability to attract and retain qualified scientific, financial and
management personnel. The Company faces competition for such persons from
other
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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.
RECENT ACQUISITIONS
The Company entered into a binding letter of intent effective June
30, 1998, confirming agreements reached earlier in the month of June, to
acquire Controlled Irrigation International, d.b.a. Yuma Sprinkler and Pipe
Supply, and Riegomex S.A. de C.V., leading suppliers of low volume drip
irrigation systems to the agricultural markets of Arizona, New Mexico and
Central and Northern Mexico. The shareholders of the acquired company will
exchange their shares for $300,000 cash and 48,989 shares of the Company's
common stock. The Company has also agreed to make certain earn-out payments
in cash and the Company's common stock based on the earnings before interest,
taxes, depreciation and amortization (EBITDA) of the acquired company for the
years ending December 31, 1998 and 1999. The maximum aggregate dollar value
of the 1998 and 1999 earn-out payments would be $400,000 and $300,000,
respectively. The cost of the acquired company will be up to $1.5 million,
which includes the fair value of the consideration given and direct costs.
The Company entered into a binding letter of intent effective June 22,
1998, confirming agreements reached earlier in the month of June, to acquire the
remaining 50% interest in Agricultural Supply de Mexico, S.A. de C.V., a
distributor of micro irrigation products in Mexico. The shareholders of the
acquired company will exchange their shares for $300,000 cash. The Company has
also agreed to make certain earn-out payments in the Company's common stock
based on the EBITDA of the acquired company for the years ending December 31,
1998 through 2003. The maximum aggregate dollar value of the 1998 through 2003
earn-out payments would be $1.1 million. The cost of the acquired company will
be up to $1.4 million, which includes the fair value of the consideration
given and direct costs.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit:
10.1. 1998 Stock Option Plan
27.1. Financial Data Schedule
No reports on Form 8-K were filed with the SEC during the period ended June 30,
1998.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Eco Soil Systems, Inc.
Date: AUGUST 11, 1998 By: /s/ William B. Adams
--------------------
William B. Adams
Chairman and Chief Executive
Officer
Date: AUGUST 11, 1998 By: /s/ L. Jean Dunn, Jr.
---------------------
L. Jean Dunn, Jr.
Chief Financial Officer
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THE 1998 STOCK OPTION PLAN
OF
ECO SOIL SYSTEMS, INC.
Eco Soil Systems, Inc., a Nebraska corporation (the "Company"), has
adopted The 1998 Stock Option Plan of Eco Soil Systems, Inc. (the "Plan"),
effective April 29, 1998, for the benefit of its eligible employees,
consultants and directors.
The purposes of this Plan are as follows:
(1) To provide an additional incentive for directors, key Employees
and consultants to further the growth, development and financial success of the
Company by personally benefiting through the ownership of Company stock which
recognizes such growth, development and financial success.
(2) To enable the Company to obtain and retain the services of
directors, key Employees and consultants considered essential to the long range
success of the Company by offering them an opportunity to own stock in the
Company which will reflect the growth, development and financial success of the
Company.
ARTICLE I.
DEFINITIONS
1.1. GENERAL. Wherever the following terms are used in this Plan they
shall have the meanings specified below, unless the context clearly indicates
otherwise.
1.2. AFFILIATE. "Affiliate" shall mean, with respect to any Person,
any Person or Person that, directly or indirectly, controls, or is controlled
by or is under common control with such Person. For the purpose of this
definition, "control" (including the terms "controlling", "controlled by" and
"under common control with"), as used with respect to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities or by contract or agency or otherwise.
1.3. AWARD LIMIT. "Award Limit" shall mean 100,000 shares of Common
Stock, as adjusted pursuant to Section 8.3.
1.4. BOARD. "Board" shall mean the Board of Directors of the Company.
<PAGE>
1.5. CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.6. COMMITTEE. "Committee" shall mean the Compensation Committee of
the Board, or another committee of the Board, appointed as provided in Section
7.1.
1.7. COMMON STOCK. "Common Stock" shall mean the common stock of the
Company, $.005 par value per share, and any equity security of the Company
issued or authorized to be issued in the future, but excluding any preferred
stock and any warrants, options or other rights to purchase Common Stock. Debt
securities of the Company convertible into Common Stock shall be deemed equity
securities of the Company.
1.8. COMPANY. "Company" shall mean Eco Soil Systems, Inc., a Nebraska
corporation.
1.9. CORPORATE TRANSACTION. "Corporate Transaction" shall mean any of
the following shareholder-approved transactions to which the Company is a party:
(a) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is
to change the State in which the Company is incorporated, to form a holding
company or to effect a similar reorganization as to form whereupon this Plan
and all Options are assumed by the successor entity;
(b) the sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, in complete liquidation or
dissolution of the Company in a transaction not covered by the exceptions to
clause (a), above; or
(c) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities are transferred
or issued to a person or persons different from those who held such
securities immediately prior to such merger.
1.10. DIRECTOR. "Director" shall mean a member of the Board.
1.11. DISABILITY. "Disability" shall mean, with respect to any
Optionee, (i) the suffering of any mental or physical illness, disability or
incapacity that shall in all material aspects preclude such Optionee from
performing his or her directorial, employment or consultant duties, or (ii)
the absence of such Optionee from his or her directorial, employment or
consultant duties by reason of any mental or physical illness, disability or
incapacity for a period of six (6) months during any twelve (12) month
period; provided, however, in either case, that such illness, disability or
incapacity shall be
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reasonably determined to be of a permanent nature by the Committee (or the
Board in the case of Options granted to Independent Directors).
1.12. EMPLOYEE. "Employee" shall mean any officer or other employee
(as defined in accordance with Section 3401(c) of the Code) of the Company,
or of any corporation which is a Subsidiary.
1.13. EXCHANGE ACT. "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
1.14. FAIR MARKET VALUE. "Fair Market Value" of a share of Common
Stock as of a given date shall be (i) the closing price of a share of Common
Stock on the principal exchange on which shares of Common Stock are then
trading, if any (or as reported on any composite index which includes such
principal exchange), on the trading day previous to such date, or if shares
were not traded on the trading day previous to such date, then on the next
preceding date on which a trade occurred; or (ii) if Common Stock is not
traded on an exchange but is quoted on NASDAQ or a successor quotation
system, the mean between the closing representative bid and asked prices for
the Common Stock on the trading day previous to such date as reported by
NASDAQ or such successor quotation system; or (iii) if Common Stock is not
publicly traded on an exchange and not quoted on NASDAQ or a successor
quotation system, the Fair Market Value of a share of Common Stock shall be
established by the Committee (or the Board in the case of Options granted to
Independent Directors) acting in good faith, giving predominate weight to the
earnings history, book value and prospects of the Company in light of market
conditions generally.
1.15. INCENTIVE STOCK OPTION. "Incentive Stock Option" shall mean an
option which conforms to the applicable provisions of Section 422 of the Code
and which is designated as an Incentive Stock Option by the Committee.
1.16. INDEPENDENT DIRECTOR. "Independent Director" shall mean a
member of the Board who is not an Employee of the Company.
1.17. NON-QUALIFIED STOCK OPTION. "Non-Qualified Stock Option" shall
mean an Option which is not designated as an Incentive Stock Option by the
Committee.
1.18. OPTION. "Option" shall mean a stock option granted under
Article III of this Plan. An Option granted under this Plan shall, as
determined by the Committee, be either a Non-Qualified Stock Option or an
Incentive Stock Option; provided, however that Options granted to Independent
Directors and consultants shall be Non-Qualified Stock Options.
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1.19. OPTION SHARES. "Option Shares" shall mean shares of Common
Stock acquired by Optionees through the exercise of Options under this Plan.
1.20. OPTIONEE. "Optionee" shall mean an Employee, consultant or
Independent Director granted an Option under this Plan.
1.21. PERSON. "Person" shall mean a corporation, an association, a
partnership, a trust, a limited liability company, an organization, a
business or an individual.
1.22. PLAN. "Plan" shall mean The 1998 Stock Option Plan of Eco Soil
Systems, Inc.
1.23. PUBLIC OFFERING. "Public Offering" shall mean the registration
of an offering of shares of Common Stock under the Securities Act which
becomes effective (other than by a registration on Form S-8 or any successor
or similar forms).
1.24. QDRO. "QDRO" shall mean a qualified domestic relations order
as defined by the Code or Title I of the Employee Retirement Income Security
Act of 1974, as amended, or the rules thereunder.
1.25. RELATED PERSON. "Related Person" shall mean (a) in the event
of a Person's death, such Person's executors, administrators, testamentary
trustees, legatees or beneficiaries or the executors, administrators,
testamentary trustees, legatees or beneficiaries of a Person who has become a
holder of Options or Option Shares in accordance with the terms of this Plan;
or (b) a revocable trust or custodianship the beneficiaries of which may
include only such Person, spouse or lineal descendants by blood or adoption.
1.26. RULE 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3
under the Exchange Act, as such Rule may be amended from time to time.
1.27. SECURITIES ACT. "Securities Act" shall mean the Securities Act
of 1933, as amended.
1.28. SUBSIDIARY. "Subsidiary" shall mean any corporation in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain then owns
stock possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock in one (1) of the other corporations in such
chain.
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1.29. TERMINATION OF CONSULTANCY. "Termination of Consultancy" shall
mean the time when the engagement of an Optionee as a consultant to the
Company or a Subsidiary is terminated for any reason, with or without cause,
including, but not by way of limitation, by resignation, discharge, death,
Disability or retirement; but excluding terminations where there is a
simultaneous commencement of employment with the Company or any Subsidiary.
The Committee, in its absolute discretion, shall determine the effect of all
matters and questions relating to Termination of Consultancy, including, but
not by way of limitation, the question of whether a Termination of
Consultancy resulted from a discharge for good cause, and all questions of
whether particular leaves of absence constitute Terminations of Consultancy.
Notwithstanding any other provision of this Plan, the Company or any
Subsidiary has an absolute and unrestricted right to terminate a consultant's
service at any time for any reason whatsoever, with or without cause, except
to the extent expressly provided otherwise in writing.
1.30. TERMINATION OF DIRECTORSHIP. "Termination of Directorship"
shall mean the time when an Optionee who is an Independent Director ceases to
be a Director for any reason, including, but not by way of limitation, a
termination by resignation, failure to be elected, death, Disability or
retirement. The Board, in its sole and absolute discretion, shall determine
the effect of all matters and questions relating to Termination of
Directorship with respect to Independent Directors.
1.31. TERMINATION OF EMPLOYMENT. "Termination of Employment" shall
mean the time when the employee-employer relationship between an Optionee and
the Company or any Subsidiary is terminated for any reason, with or without
cause, including, but not by way of limitation, a termination by resignation,
discharge, death, Disability or retirement; but excluding (i) terminations
where there is a simultaneous reemployment or continuing employment of an
Optionee by the Company or any Subsidiary, (ii) at the discretion of the
Committee, terminations which result in a temporary severance of the
employee-employer relationship, and (iii) at the discretion of the Committee,
terminations which are followed by the simultaneous establishment of a
consulting relationship by the Company or a Subsidiary with the former
employee. The Committee, in its absolute discretion, shall determine the
effect of all matters and questions relating to Termination of Employment,
including, but not by way of limitation, the question of whether a
Termination of Employment resulted from a discharge for good cause, and all
questions of whether particular leaves of absence constitute Terminations of
Employment; provided, however, that, unless otherwise determined by the
Committee in its discretion, a leave of absence, change in status from an
employee to an independent contractor or other change in the
employee-employer relationship shall constitute a Termination of Employment
if, and to the extent that, such leave of absence, change in status or other
change interrupts employment for the purposes of Section 422(a)(2) of the
Code and the then applicable regulations and revenue rulings under said
Section. Notwithstanding any other provision of this Plan, the Company or
any Subsidiary has an absolute and unrestricted right to terminate an
Employee's employment at any time for any reason whatsoever, with or without
cause, except to the extent expressly provided otherwise in writing.
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1.32. TERMINATION FOR CAUSE. "Termination for Cause" shall mean the time
when the Independent Director-employer, employee-employer or
consultant-employer relationship between an Optionee and the Company or any
Subsidiary is terminated for cause, as termination for cause is defined in
the Optionee's directorial, employment or consultancy agreement; provided
however, that if termination for cause is not therein defined, it shall have
such meaning, in conformance with applicable law, as the Committee (or the
Board in the case of termination for cause of an Independent Director) shall
determine is appropriate.
ARTICLE II.
SHARES SUBJECT TO PLAN
2.1. SHARES SUBJECT TO PLAN.
(a) The shares of stock subject to Options shall be Common Stock.
The aggregate number of such shares which may be issued upon exercise of such
options under the Plan shall be 100,000. The shares of Common Stock of the
Company issuable upon exercise of such options may be either previously
authorized but unissued shares or treasury shares.
(b) The maximum number of shares which may be subject to Options
granted under the Plan to any individual in any fiscal year of the Company
shall not exceed the Award Limit. To the extent required by Section 162(m)
of the Code, shares subject to Options which are canceled continue to be
counted against the Award Limit and if, after grant of an Option, the price
of shares subject to such Option is reduced, the transaction is treated as a
cancellation of the Option and a grant of a new Option and both the Option
deemed to be canceled and the Option deemed to be granted are counted against
the Award Limit.
2.2. ADD-BACK OF OPTIONS. If any Option to acquire shares of Common
Stock under this Plan expires or is canceled without having been fully
exercised, the number of shares subject to such Option but as to which such
Option was not exercised prior to its expiration, cancellation or exercise
may again be available for the granting of Options hereunder, subject to the
limitations of Section 2.1. Furthermore, any shares subject to Options which
are adjusted pursuant to Section 8.3 and become exercisable with respect to
shares of stock of another corporation shall be considered canceled and may
again be available for the granting of Options hereunder, subject to the
limitations of Section 2.1. Shares of Common Stock which are delivered by
the Optionee or withheld by the Company upon the exercise of any Option under
this Plan, in payment of the exercise price thereof, may again be available
for the granting of Options hereunder, subject to the limitations of Section
2.1. Notwithstanding the provisions of this Section 2.2, no shares of Common
Stock may again be available for the granting of Options if such action would
cause an Incentive Stock Option to fail to qualify as an incentive stock
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option under Section 422 of the Code.
ARTICLE III.
GRANTING OF OPTIONS
3.1. ELIGIBILITY. Any Independent Director, Employee or consultant
selected by the Committee (or the Board in the case of Options granted to
Independent Directors) pursuant to Section 3.4(a)(i) shall be eligible to be
granted an Option.
3.2. DISQUALIFICATION FOR STOCK OWNERSHIP. No person may be granted
an Incentive Stock Option under this Plan if such person, at the time the
Incentive Stock Option is granted, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of
the Company or any then existing Subsidiary unless such Incentive Stock
Option conforms to the applicable provisions of Section 422 of the Code.
3.3. QUALIFICATION OF INCENTIVE STOCK OPTIONS. No Incentive Stock
Option shall be granted to any person who is not an Employee.
3.4. GRANTING OF OPTIONS.
(a) The Committee (or the Board in the case of Options granted to
Independent Directors) shall from time to time, in its absolute discretion,
and subject to applicable limitations of this Plan:
(i) Determine which Employees are key Employees and select from
among the Independent Directors, key Employees and consultants (including
Independent Directors, Employees and consultants who have previously
received Options or other awards under this Plan) such of them as in its
opinion should be granted Options;
(ii) Subject to the Award Limit, determine the number of shares
to be subject to such Options granted to the selected Independent
Directors, key Employees and consultants;
(iii) Subject to Section 3.2, determine whether such Options are
to be Incentive Stock Options or Non-Qualified Stock Options and whether
such Options are to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options,
consistent with this Plan; provided, however, that the terms and
conditions of Options intended to qualify as performance-based
compensation as described in
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Section 162(m)(4)(C) of the Code shall include, but not be limited to,
such terms and conditions as may be necessary to meet the applicable
provisions of Section 162(m) of the Code.
(b) Upon the selection of an Independent Director, key Employee or
consultant to be granted an Option, the Committee (or the Board in the case
of Options granted to Independent Directors) shall instruct the Secretary of
the Company to issue the Option and may impose such conditions on the grant
of the Option as it deems appropriate. Without limiting the generality of
the preceding sentence, the Committee (or the Board in the case of Options
granted to Independent Directors) may, in its discretion and on such terms as
it deems appropriate, require as a condition on the grant of an Option to an
Independent Director, Employee or consultant that such Independent Director,
Employee or consultant surrender for cancellation some or all of the
unexercised Options or other rights which have been previously granted to
such Independent Director, Employee or consultant under this Plan or
otherwise. An Option, the grant of which is conditioned upon such surrender,
may have an option price lower (or higher) than the exercise price of such
surrendered Option or other award, may cover the same (or a lesser or
greater) number of shares as such surrendered Option or other award, may
contain such other terms as the Committee (or the Board in the case of
Options granted to Independent Directors) deems appropriate, and shall be
exercisable in accordance with its terms, without regard to the number of
shares, price, exercise period or any other term or condition of such
surrendered Option or other award.
(c) Any Incentive Stock Option granted under this Plan may be
modified by the Committee to disqualify such option from treatment as an
"incentive stock option" under Section 422 of the Code.
(d) Each Independent 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 to fill a vacancy.
Options granted under this section 3.4(c)(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 Independent Director remains a
Director on the date such portion vests.
(e) Each Independent 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 Independent 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.
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ARTICLE IV.
TERMS OF OPTIONS
4.1. OPTION AGREEMENT. Each Option shall be evidenced by a written
Stock Option Agreement, which shall be executed by the Optionee and an
authorized officer of the Company and which shall contain such terms and
conditions as the Committee (or the Board in the case of Options granted to
Independent Directors) shall determine, consistent with this Plan. Stock
Option Agreements evidencing Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall contain
such terms and conditions as may be necessary to meet the applicable
provisions of Section 162(m) of the Code. Stock Option Agreements evidencing
Incentive Stock Options shall contain such terms and conditions as may be
necessary to meet the applicable provisions of Section 422 of the Code.
4.2. OPTION PRICE. The price per share of the shares subject to each
Option shall be set by the Committee (or the Board in the case of Options
granted to Independent Directors); provided, however, that:
(a) Unless otherwise permitted by applicable securities laws, such
price shall be not less than eighty-five percent (85%) of the Fair Market
Value of the stock at the time the option is granted, except that the price
shall be one hundred and ten percent (110%) of the Fair Market Value of the
stock in the case of any person possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or its
Subsidiary;
(b) In the case of Incentive Stock Options and Options intended to
qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code, such price shall not be less than one hundred
percent (100%) of the Fair Market Value of a share of Common Stock on the
date the Option is granted; and
(c) In the case of Incentive Stock Options granted to an individual
then owning (within the meaning of Section 424(d) of the Code) more than ten
percent (10%) of the total combined voting power of all classes of stock of
the Company or any Subsidiary such price shall not be less than one hundred
and ten percent (110%) of the Fair Market Value of a share of Common Stock on
the date the Option is granted.
4.3. OPTION TERM. The term of an Option shall be set by the
Committee (or the Board in the case of Options granted to Independent
Directors) in its discretion; provided, however, that:
(a) No Option may have a term that extends beyond the expiration of
ten (10) years from the date the Option was granted;
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(b) In the case of Incentive Stock Options, the term shall not be
more than ten (10) years from the date the Incentive Stock Option is granted,
or five (5) years from such date if the Incentive Stock Option is granted to
an individual then owning (within the meaning of Section 424(d) of the Code)
more than ten percent (10%) of the total combined voting power of all classes
of stock of the Company or any Subsidiary;
(c) Except as limited by requirements of Section 422 of the Code and
regulations and rulings thereunder applicable to Incentive Stock Options, the
Committee (or the Board in the case of Options granted to Independent
Directors) may extend the term of any outstanding Option in connection with
any Termination of Directorship, Termination of Employment or Termination of
Consultancy of the Optionee, or amend any other term or condition of such
Option relating to such a termination; and
(d) Unless otherwise permitted by applicable securities laws, in the
event of an Optionee's Termination of Directorship, Termination of Employment
or Termination of Consultancy for any reason except death, Disability or
Termination for Cause, the Optionee shall have at least thirty (30) days from
the date of such Termination of Directorship, Termination of Employment or
Termination of Consultancy to exercise the Option, and in the event of an
Optionee's Termination of Directorship, Termination of Employment or
Termination of Consultancy due to the Optionee's death or Disability, the
Optionee shall have at least six (6) months from the date of such Termination
of Directorship, Termination of Employment or Termination of Consultancy to
exercise the Option. Notwithstanding the forgoing, if an Optionee's
Termination of Directorship, Termination of Employment or Termination of
Consultancy also qualifies as a Termination for Cause, the Company, in its
discretion, may terminate the Optionee's right to exercise his or her Options
on the date of such termination or such other time as the Committee (or the
Board in the case of Options granted to Independent Directors), in its
discretion, shall deem appropriate.
4.4. OPTION VESTING.
(a) The period during which the right to exercise an Option in whole
or in part vests in the Optionee shall be set by the Committee (or the Board
in the case of Options granted to Independent Directors) and the Committee
(or the Board in the case of Options granted to Independent Directors) may
determine that an Option may not be exercised in whole or in part for a
specified period after it is granted; provided, however, that, subject to
Section 4.4(b), (i) unless otherwise permitted by applicable securities laws,
each Option shall become exercisable no later than five (5) years after such
Option is granted and such Option shall become exercisable with respect to at
least twenty percent (20%) of the shares of Common Stock subject to such
Option, as determined by the Committee (or the Board in the case of Options
granted to Independent Directors) in its sole discretion, on each anniversary
of the date of the grant of such Option; (ii) unless the Committee (or the
Board in the case of Options granted to Independent Directors) otherwise
provides in the terms of the Stock Option Agreement or this Plan otherwise so
dictates, no Option shall be exercisable by any Optionee who is then subject
to Section 16
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of the Exchange Act within the period ending six months and one day after the
date the Option is granted; and (iii) upon the transfer of more than fifty
percent (50%) of Common Stock to a Person who is not an Affiliate of the
Company during the term of the Option, immediately upon such transfer, each
outstanding Option shall automatically become fully exercisable for all of
the shares of Common Stock at the time subject to such Option; provided,
further, that Options may become fully exercisable, subject to reasonable
conditions such as continued directorship, employment or consultancy, at any
time or during any period established by the Committee (or the Board in the
case of Options granted to Independent Directors).
(b) No portion of an Option which is unexercisable at Termination of
Directorship, Termination of Employment or Termination of Consultancy shall
thereafter become exercisable, except as may be otherwise provided by the
Committee (or the Board in the case of Options granted to Independent
Directors) either in the Stock Option Agreement or by action of the Committee
(or the Board in the case of Options granted to Independent Directors)
following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section 422
of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by an Optionee during any calendar year (under
the Plan and all other incentive stock option plans of the Company and any
Subsidiary) exceeds $100,000, such Options shall be treated as Non-Qualified
Options to the extent required by Section 422 of the Code. The rule set
forth in the preceding sentence shall be applied by taking Options into
account in the order in which they were granted. For purposes of this
Section 4.4(c), the Fair Market Value of stock shall be determined as of the
time the Option with respect to such stock is granted.
4.5. CONSIDERATION. In consideration of the granting of an Option,
the Optionee shall agree, in the written Stock Option Agreement, to remain in
the employ (or to consult for or serve as an Independent Director, as
applicable) of the Company or any Subsidiary for a period of at least one (1)
year (or such shorter period as may be fixed in the Stock Option Agreement or
by action of the Committee (or the Board in the case of Options granted to
Independent Directors) following grant of the Option) after the Option is
granted (or, in the case of an Independent Director, until the next annual
meeting of the shareholders of the Company). Nothing in this Plan or in any
Stock Option Agreement hereunder shall confer upon any Optionee any right to
continue in the employ (or to consult for or serve as an Independent
Director, as applicable) of the Company or any Subsidiary or shall interfere
with or restrict in any way the rights of the Company or any Subsidiary,
which are hereby expressly reserved, to discharge any Optionee at any time
for any reason whatsoever, with or without good cause.
4.6. FINANCIAL STATEMENTS. To the extent required by applicable
securities laws, each Optionee shall receive financial statements of the
Company at least annually.
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ARTICLE V.
EXERCISE OF OPTIONS
5.1. PARTIAL EXERCISE. An exercisable Option may be exercised in
whole or in part. However, an Option shall not be exercisable with respect
to fractional shares and the Committee (or the Board in the case of Options
granted to Independent Directors) may require that, by the terms of the
Option, a partial exercise be with respect to a minimum number of shares.
5.2. MANNER OF EXERCISE. All or a portion of an exercisable Option
shall be deemed exercised upon delivery of all of the following to the
Secretary of the Company or such Secretary's office:
(a) A written notice complying with the applicable rules established
by the Committee (or the Board in the case of Options granted to Independent
Directors) stating that the Option, or a portion thereof, is exercised. The
notice shall be signed by the Optionee or other person then entitled to
exercise the Option or such portion;
(b) Such representations and documents as the Committee (or the Board
in the case of Options granted to Independent Directors), in its absolute
discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act and any other federal or state
securities laws or regulations. The Committee (or the Board in the case of
Options granted to Independent Directors) may, in its absolute discretion,
also take whatever additional actions it deems appropriate to effect such
compliance including, without limitation, placing legends on share
certificates and issuing stop-transfer notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 8.1 by any person or persons other than the Optionee, appropriate
proof of the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares
and for payment of any applicable withholding or other applicable employment
taxes with respect to which the Option, or portion thereof, is exercised.
However, the Committee (or the Board in the case of Options granted to
Independent Directors), may in its discretion (i) allow a delay in payment up
to thirty (30) days from the date the Option, or portion thereof, is
exercised; (ii) allow payment, in whole or in part, through the delivery of
shares of Common Stock owned by the Optionee, duly endorsed for transfer to
the Company with a Fair Market Value on the date of delivery equal to the
aggregate exercise price of the Option or exercised portion thereof; (iii)
allow payment, in whole or in part, through the surrender of shares of Common
Stock then issuable upon exercise of the Option having a Fair Market Value on
the date of Option exercise equal to the aggregate exercise price of the
Option or exercised portion thereof; (iv) allow payment, in whole or
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<PAGE>
in part, through the delivery of property of any kind which constitutes good
and valuable consideration; (v) allow payment, in whole or in part, through
the delivery of a full recourse promissory note bearing interest (at no less
than such rate as shall then preclude the imputation of interest under the
Code) and payable upon such terms as may be prescribed by the Committee (or
the Board in the case of Options granted to Independent Directors); (vi)
allow payment, in whole or in part, through the delivery of a notice that the
Optionee has placed a market sell order with a broker with respect to shares
of Common Stock then issuable upon exercise of the Option, and that the
broker has been directed to pay a sufficient portion of the net proceeds of
the sale to the Company in satisfaction of the Option exercise price and any
applicable withholding or other employment taxes; or (vii) allow payment
through any combination of the consideration provided in the foregoing
subparagraphs (ii), (iii), (iv), (v) and (vi). In the case of a promissory
note, the Committee (or the Board in the case of Options granted to
Independent Directors) may also prescribe the form of such note and the
security to be given for such note. The Option may not be exercised,
however, by delivery of a promissory note or by a loan from the Company when
or where such loan or other extension of credit is prohibited by law.
5.3. CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES. The Company shall
not be required to issue or deliver any certificate or certificates for
shares of stock purchased upon the exercise of any Option or portion thereof
prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges,
if any, on which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law, or under the rulings or regulations of
the Securities and Exchange Commission or any other governmental regulatory
body which the Committee or the Board shall, in its absolute discretion, deem
necessary or advisable;
(c) The obtaining of any approval or other clearance from any state
or federal governmental agency which the Committee or the Board shall, in its
absolute discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee or the Board may establish from time
to time for reasons of administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax.
5.4. RIGHTS AS SHAREHOLDERS. The holders of Options shall not be,
nor have any of the rights or privileges of, shareholders of the Company in
respect of any shares purchasable upon the exercise of any part of an Option
unless and until certificates
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<PAGE>
representing such shares have been issued by the Company to such holders.
ARTICLE VI.
RIGHTS AND RESTRICTIONS WITH RESPECT TO OPTION SHARES
6.1. TRANSFER RESTRICTIONS. No Optionee may transfer, assign, pledge
or otherwise encumber any Option Shares except as expressly provided
otherwise in this Article VI; provided, however, that Option Shares may be
transferred at any time to a Related Person, provided that the Related Person
agrees in writing to be bound by the terms of this Plan.
6.2. COMPANY'S RIGHT OF FIRST REFUSAL.
(a) An Optionee (a "Proposed Seller") shall be permitted to transfer,
assign, or sell any Option Shares in an arm's length transaction (a "Proposed
Transfer"); provided, however, such Optionee shall first offer to sell such
Option Shares to the Company under the procedure described in paragraphs (b)
and (c) of this Section 6.2.
(b) Prior to consummating any Proposed Transfer, the Proposed Seller
shall first notify the Company in writing that such Proposed Seller has
received a bona fide written offer to purchase Option Shares (a "Purchase
Offer") and shall offer to sell to the Company all Option Shares subject to
the Purchase Offer upon the terms and conditions (including credit terms, if
any) set forth in such Purchase Offer. Such notice (the "Offer Notice")
shall set forth: (A) the number of Option Shares proposed to be transferred,
(B) the name and address of the Proposed Seller and the proposed purchaser
(the "Proposed Purchaser"), and (C) the proposed amount of consideration and
all other applicable terms and conditions as set forth in, and shall be
accompanied by a copy of, the Purchase Offer.
(c) (i) The Company shall have the option for a period of fifteen
(15) days following the Company's receipt of the Offer Notice to agree to
purchase all of the Option Shares subject to the Purchase Offer, upon the
terms and conditions specified therein.
(ii) In the event the Company agrees to purchase Option Shares
pursuant to and in accordance with this Section 6.2, such purchase shall
occur at the principal office of the Company ten (10) days following the
expiration of the fifteen (15) day period specified in subparagraph (i) of
this paragraph (c). In no event shall the Proposed Seller be required to
transfer any Option Shares to the Company pursuant to this Section 6.2 unless
the Company purchases all of the Option Shares subject the Purchase Offer on
the terms and at the price stated therein and within the time periods
specified herein.
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<PAGE>
(d) In the event the Company does not agree to purchase all of the
Option Shares offered to the Company by a Proposed Seller pursuant to this
Section 6.2, then the Proposed Seller shall have the right for a period of
thirty (30) days after the termination of the Company's right to purchase
such Option Shares (or after waiver by the Company of its option to purchase
such Option Shares) to transfer to the Proposed Purchaser all, but not less
than all, of such Option Shares in the manner and on the terms and conditions
specified in the Purchase Offer; provided, however, the Proposed Purchaser
shall agree in writing to be bound by this Plan.
6.3. LAPSE OF STOCK RESTRICTIONS AND RIGHTS. The provisions set
forth in Sections 6.1 and 6.2 shall terminate and cease to be of any further
force or effect upon the completion of a Public Offering, or a series of
Public Offerings, which result in public ownership of Common Stock of the
Company possessing at least twenty percent (20%) of the total combined voting
power of such Common Stock (or such lesser percentage as dictated by
applicable securities laws).
6.4. OWNERSHIP AND TRANSFER RESTRICTIONS. The Committee (or the
Board in the case of Options granted to Independent Directors), in its
absolute discretion, may impose additional restrictions on the ownership and
transferability of the shares purchasable upon the exercise of an Option as
it deems appropriate. Any such restriction shall be set forth in the
respective Stock Option Agreement and may be referred to on the certificates
evidencing such shares.
6.5. LEGEND. Each certificate representing Option Shares shall be
endorsed with the following legend, which legend shall be removed upon
termination of the stock restrictions set forth in this Article 6.
THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN
1998 STOCK OPTION PLAN OF ECO SOIL SYSTEMS, INC. COPIES OF SUCH
STOCK OPTION PLAN MAY BE OBTAINED UPON WRITTEN REQUEST TO THE
SECRETARY OF THE CORPORATION.
6.6. DISPOSITION OF SHARES. Notwithstanding and in addition to the
foregoing, each Optionee shall be required to give the Company prompt notice
of any disposition of shares of Common Stock acquired by exercise of an
Incentive Stock Option within (i) two (2) years from the date of granting
such Option to such Optionee or (ii) one (1) year after the transfer of such
shares to such Optionee. Certificates evidencing shares acquired by exercise
of an Incentive Stock Option shall refer to such requirement to give prompt
notice of disposition.
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<PAGE>
ARTICLE VII.
ADMINISTRATION
7.1. COMPENSATION COMMITTEE. Prior to the Company's initial
registration of Common Stock under Section 12 of the Exchange Act, the
Compensation Committee shall consist of the entire Board, provided, however,
that the Board may appoint a Committee of its members to administer this Plan
at any time prior to such registration. Following such registration, the
Compensation Committee (or another committee of the Board assuming the
functions of the Committee under this Plan) shall consist solely of two or
more Independent Directors appointed by and holding office at the pleasure of
the Board, each of whom is both a "non-employee director" as defined by Rule
16(b)-3 and an "outside director" for purposes of Section 162(m) of the Code.
Appointment of Committee members shall be effective upon acceptance of
appointment. Committee members may resign at any time by delivering written
notice to the Board. Vacancies in the Committee may be filled by the Board.
7.2. DUTIES AND POWERS OF COMMITTEE. It shall be the duty of the
Committee to conduct the general administration of this Plan in accordance
with its provisions. The Committee shall have the power to interpret this
Plan and the agreements pursuant to which Options are granted or awarded, and
to adopt such rules for the administration, interpretation, and application
of this Plan as are consistent therewith and to interpret, amend or revoke
any such rules. Notwithstanding the foregoing, the full Board, acting by a
majority of its members in office, shall conduct the general administration
of the Plan with respect to Options granted to Independent Directors. Any
such grant or award under this Plan need not be the same with respect to each
Optionee. Any such interpretations and rules with respect to Incentive Stock
Options shall be consistent with the provisions of Section 422 of the Code.
In its absolute discretion, the Board may at any time and from time to time
exercise any and all rights and duties of the Committee under this Plan
except with respect to matters which under Rule 16b-3 or Section 162(m) of
the Code, or any regulations or rules issued thereunder, are required to be
determined in the sole discretion of the Committee.
7.3. MAJORITY RULE; UNANIMOUS WRITTEN CONSENT. The Committee shall
act by a majority of its members in attendance at a meeting at which a quorum
is present or by a memorandum or other written instrument signed by all
members of the Committee.
7.4. COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS.
Members of the Committee shall receive such compensation for their services
as members as may be determined by the Board. All expenses and liabilities
which members of the Committee incur in connection with the administration of
this Plan shall be borne by the Company. The Committee may, with the
approval of the Board, employ attorneys, consultants, accountants,
appraisers, brokers, or other persons. The Committee, the Company and the
Company's officers and Directors shall be entitled to rely upon the advice,
opinions or valuations of any such persons. All actions taken and all
16
<PAGE>
interpretations and determinations made by the Committee or the Board in good
faith shall be final and binding upon all Optionees, the Company and all
other interested persons. No members of the Committee or Board shall be
personally liable for any action, determination or interpretation made in
good faith with respect to this Plan or Options, and all members of the
Committee and the Board shall be fully protected by the Company in respect of
any such action, determination or interpretation.
ARTICLE VIII.
MISCELLANEOUS PROVISIONS
8.1. NOT TRANSFERABLE. Options under this Plan may not be sold,
pledged, assigned, or transferred in any manner other than by will or the
laws of descent and distribution or pursuant to a QDRO, unless and until such
options have been exercised, or the shares underlying such Options have been
issued, and all restrictions applicable to such shares have lapsed. No
Option or interest or right therein shall be liable for the debts, contracts
or engagements of the Optionee or the Optionee's successors in interest or
shall be subject to disposition by transfer, alienation, anticipation,
pledge, encumbrance, assignment or any other means whether such disposition
be voluntary or involuntary or by operation of law by judgment, levy,
attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy), and any attempted disposition thereof shall be null
and void and of no effect, except to the extent that such disposition is
permitted by the preceding sentence.
During the lifetime of the Optionee, only such Optionee may exercise an
Option (or any portion thereof) granted to such Optionee under the Plan,
unless the Option has been disposed of pursuant to a QDRO. After the death
of the Optionee, any exercisable portion of an Option may, prior to the time
when such portion becomes unexercisable under the Plan or the applicable
Stock Option Agreement or other agreement, be exercised by the Optionee's
personal representative or by any person empowered to do so under the
deceased Optionee's will or under the then applicable laws of descent and
distribution.
8.2. AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN. Except as
otherwise provided in this Section 8.2, this Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from
time to time by the Board or the Committee. However, without approval of the
Company's shareholders given within twelve months before or after the action
by the Board or the Committee, no action of the Board or the Committee may,
except as provided in Section 8.3, increase the limits imposed in Section 2.1
on the maximum number of shares which may be issued under this Plan or modify
the Award Limit, and no action of the Board or the Committee may be taken
that would otherwise require shareholder approval as a matter of applicable
law, regulation or rule. No amendment, suspension or termination of this
Plan shall, without the consent of the holder of Options, alter or impair any
rights or obligations
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<PAGE>
under any Options theretofore granted or awarded, unless the award itself
otherwise expressly so provides. No Options may be granted or awarded during
any period of suspension or after termination of this Plan, and in no event may
any Incentive Stock Option be granted under this Plan after the first to occur
of the following events:
(a) The expiration of ten (10) years from the date the Plan is
adopted by the Board; or
(b) The expiration of ten (10) years from the date the Plan is
approved by the Company's shareholders under Section 8.4.
8.3. CHANGES IN COMMON STOCK OR ASSETS OF THE COMPANY, ACQUISITION OR
LIQUIDATION OF THE COMPANY AND OTHER CORPORATE EVENTS.
(a) Subject to Section 8.3(d), (A) in the event that the Committee
(or the Board in the case of Options granted to Independent Directors)
determines that any dividend or other distribution (whether in the form of
cash, Common Stock, other securities, or other property), recapitalization,
reclassification, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, liquidation, dissolution, or sale, transfer,
exchange or other disposition of all or substantially all of the assets of
the Company (including, but not limited to, a Corporate Transaction), or
exchange of Common Stock or other securities of the Company, issuance of
warrants or other rights to purchase Common Stock or other securities of the
Company, or other similar corporate transaction or event, in the Committee's
sole discretion (or, in the case of Options granted to Independent Directors,
the Board's sole discretion), affects the Common Stock such that an
adjustment is determined by the Committee (or the Board in the case of
Options granted to Independent Directors) to be appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan or with respect to an Option, or
(B) in the event of any stock split or reverse stock split, then the
Committee (or the Board in the case of Options granted to Independent
Directors) shall, in such manner as it may deem equitable, adjust any or all
of
(i) the number and kind of shares of Common Stock (or other
securities or property) with respect to which Options may be granted under
the Plan, (including, but not limited to, adjustments of the limitations in
Section 2.1 on the maximum number and kind of shares which may be issued and
adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Options, and
(iii) the grant or exercise price with respect to any Option.
(b) Subject to Sections 8.3(b)(vi) and 8.3(d), in the event of any
Corporate Transaction or other transaction or event described in Section
8.3(a) or any
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<PAGE>
unusual or nonrecurring transactions or events affecting the Company, any
Affiliate of the Company, or the financial statements of the Company or any
Affiliate, or of changes in applicable laws, regulations, or accounting
principles, the Committee (or the Board in the case of Options granted to
Independent Directors) in its discretion is hereby authorized to take any one
(1) or more of the following actions whenever the Committee (or the Board in
the case of Options granted to Independent Directors) determines that such
action is appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan
or with respect to any option under this Plan, to facilitate such
transactions or events or to give effect to such changes in laws, regulations
or principles:
(i) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board in the case
of Options granted to Independent Directors) may provide, either by the terms
of the agreement or by action taken prior to the occurrence of such
transaction or event and either automatically or upon the Optionee's request,
for either the purchase of any such Option for an amount of cash equal to the
amount that could have been attained upon the exercise of such Option, or
realization of the Optionee's rights had such Option been currently
exercisable or payable or fully vested or the replacement of such Option with
other rights or property selected by the Committee (or the Board in the case
of Options granted to Independent Directors) in its sole discretion;
(ii) In its sole and absolute discretion, the Committee (or the
Board in the case of Options granted to Independent Directors) may provide,
either by the terms of such Option or by action taken prior to the occurrence
of such transaction or event that it cannot be exercised after such event;
(iii) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board in the case
of Options granted to Independent Directors) may provide, either by the terms
of such Option or by action taken prior to the occurrence of such transaction
or event, that for a specified period of time prior to such transaction or
event, such Option shall be exercisable as to all shares covered thereby,
notwithstanding anything to the contrary in (i) Section 4.4 or (ii) the
provisions of such Option;
(iv) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board in the case
of Options granted to Independent Directors) may provide, either by the terms
of such Option or by action taken prior to the occurrence of such transaction
or event, that upon such event, such Option be assumed by the successor or
survivor corporation, or a parent or subsidiary thereof, or shall be
substituted for by similar options covering the stock of the successor or
survivor corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices;
19
<PAGE>
(v) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board in the case
of Options granted to Independent Directors) may make adjustments in the
number and type of shares of Common Stock (or other securities or property)
subject to outstanding Options and/or in the terms and conditions of
(including the grant or exercise price), and the criteria included in,
outstanding Options and Options which may be granted in the future; and
(vi) None of the foregoing discretionary actions taken under this
Section 8.3(b) shall be permitted with respect to Options granted to
Independent Directors to the extent that such discretion would be
inconsistent with the applicable exemptive conditions of Rule 16b-3. In the
event of a Corporate Transaction, to the extent that the Board does not have
the ability under Rule 16b-3 to take or to refrain from taking the
discretionary actions set forth in Section 8.3(b)(iii) above, each Option
granted to an Independent Director shall be exercisable as to all shares
covered thereby during the five days immediately preceding the consummation
of such Corporate Transaction and subject to such consummation,
notwithstanding anything to the contrary in Section 4.4 or the vesting
schedule of such Options. In the event of a Corporate Transaction, to the
extent that the Board does not have the ability under Rule 16b-3 to take or
to refrain from taking the discretionary actions set forth in Section
8.3(b)(ii) above, no Option granted to an Independent Director may be
exercised following such Corporate Transaction unless such Option is, in
connection with such Corporate Transaction, either assumed by the successor
or survivor corporation (or parent or subsidiary thereof) or replaced with a
comparable right with respect to shares of the capital stock of the successor
or survivor corporation (or parent or subsidiary thereof).
(c) Subject to Section 8.3(d) and 8.8, the Committee (or the Board in
the case of Options granted to Independent Directors) may, in its discretion,
include such further provisions and limitations in any Option as it may deem
equitable and in the best interests of the Company.
(d) With respect to Incentive Stock Options and Options intended to
qualify as performance-based compensation under Section 162(m), no adjustment
or action described in this Section 8.3 or in any other provision of the Plan
shall be authorized to the extent that such adjustment or action would cause
the Plan to violate Section 422(b)(1) of the Code or would cause such option
to fail to so qualify under Section 162(m), as the case may be, or any
successor provisions thereto. Furthermore, no such adjustment or action
shall be authorized to the extent such adjustment or action would result in
short-swing profits liability under Section 16 or violate the exemptive
conditions of Rule 16b-3 unless the Committee (or the Board in the case of
Options granted to Independent Directors) determines that the Option is not
to comply with such exemptive conditions. The number of shares of Common
Stock subject to any Option shall always be rounded to the next whole number.
8.4. APPROVAL OF PLAN BY SHAREHOLDERS. This Plan will be submitted
for the approval of the Company's shareholders within twelve months after the
date of the
20
<PAGE>
Board's initial adoption of this Plan. Options may be granted prior to such
shareholder approval, provided that such Options shall not be exercisable
prior to the time when this Plan is approved by the shareholders, and
provided further that if such approval has not been obtained at the end of
said twelve-month period, all Options previously granted under this Plan
shall thereupon be canceled and become null and void.
8.5. TAX WITHHOLDING. The Company shall be entitled to require
payment in cash or deduction from other compensation payable to each Optionee
of any sums required by federal, state or local tax law to be withheld with
respect to the issuance, vesting or exercise of any Option. The Committee
(or the Board in the case of Options granted to Independent Directors) may in
its discretion and in satisfaction of the foregoing requirement allow such
Optionee to elect to have the Company withhold shares of Common Stock
otherwise issuable under such Option (or allow the return of shares of Common
Stock) having a Fair Market Value equal to the sums required to be withheld.
8.6. LOANS. The Committee may, in its discretion, extend one (1) or
more loans to key Employees in connection with the exercise or receipt of an
Option granted under this Plan. The terms and conditions of any such loan
shall be set by the Committee.
8.7. FORFEITURE PROVISIONS. Pursuant to its general authority to
determine the terms and conditions applicable to awards under the Plan, the
Committee (or the Board in the case of Options granted to Independent
Directors) shall have the right (to the extent consistent with the applicable
exemptive conditions of Rule 16b-3 and to the extent permitted under
applicable state law) to provide, in the terms of Options made under the
Plan, or to require the recipient to agree by separate written instrument,
that (i) any proceeds, gains or other economic benefit actually or
constructively received by the recipient upon any receipt or exercise of an
Option, or upon the receipt or resale of any Common Stock underlying such
Option, must be paid to the Company, and (ii) the Option shall terminate and
any unexercised portion of such Option (whether or not vested) shall be
forfeited, if (a) a Termination of Directorship, Termination of Employment or
Termination of Consultancy occurs prior to a specified date, or within a
specified time period following receipt or exercise of the Option, or (b) the
recipient at any time, or during a specified time period, engages in any
activity in competition with the Company, or which is inimical, contrary or
harmful to the interests of the Company, as further defined by the Committee
(or the Board, as applicable).
8.8. LIMITATIONS APPLICABLE TO SECTION 16 PERSONS AND
PERFORMANCE-BASED COMPENSATION. Notwithstanding any other provision of this
Plan, this Plan, and any Option granted to any individual who is then subject
to Section 16 of the Exchange Act, shall be subject to any additional
limitations set forth in any applicable exemptive rule under Section 16 of
the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act)
that are requirements for the application of such exemptive rule. To the
extent permitted by applicable law, the Plan and Options granted or awarded
hereunder
21
<PAGE>
shall be deemed amended to the extent necessary to conform to such applicable
exemptive rule. Furthermore, notwithstanding any other provision of this
Plan, any Option intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall be subject to any
additional limitations set forth in Section 162(m) of the Code (including any
amendment to Section 162(m) of the Code) or any regulations or rulings issued
thereunder that are requirements for qualification as performance-based
compensation as described in Section 162(m)(4)(C) of the Code, and this Plan
shall be deemed amended to the extent necessary to conform to such
requirements.
8.9. EFFECT OF PLAN UPON OPTIONS AND COMPENSATION PLANS. The
adoption of this Plan shall not affect any other compensation or incentive
plans in effect for the Company or any Subsidiary. Nothing in this Plan
shall be construed to limit the right of the Company (i) to establish any
other forms of incentives or compensation for Employees, directors or
consultants of the Company or any Subsidiary or (ii) to grant or assume
options or other rights otherwise than under this Plan in connection with any
proper corporate purpose including but not by way of limitation, the grant or
assumption of options in connection with the acquisition by purchase, lease,
merger, consolidation or otherwise, of the business, stock or assets of any
corporation, partnership, limited liability company, firm or association.
8.10. COMPLIANCE WITH LAWS. This Plan, the granting and vesting of
Options under this Plan and the issuance and delivery of shares of Common
Stock and the payment of money under this Plan or under Options granted
hereunder are subject to compliance with all applicable federal and state
laws, rules and regulations (including but not limited to state and federal
securities law and federal margin requirements) and to such approvals by any
listing, regulatory or governmental authority as may, in the opinion of
counsel for the Company, be necessary or advisable in connection therewith.
Any securities delivered under this Plan shall be subject to such
restrictions, and the person acquiring such securities shall, if requested by
the Company, provide such assurances and representations to the Company as
the Company may deem necessary or desirable to assure compliance with all
applicable legal requirements. To the extent permitted by applicable law,
the Plan and Options granted or awarded hereunder shall be deemed amended to
the extent necessary to conform to such laws, rules and regulations.
8.11. TITLES. Titles are provided herein for convenience only and
are not to serve as a basis for interpretation or construction of this Plan.
8.12. GOVERNING LAW. This Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State
of Delaware without regard to conflicts of laws thereof.
* * *
22
<PAGE>
I hereby certify that the foregoing Plan was duly adopted by the Board
of Directors of Eco Soil Systems, Inc. on April 29, 1998.
Executed on this 12th day of August, 1998.
By: /s/ L. Jean Dunn, Jr.
------------------------------
L. Jean Dunn, Jr.
Secretary
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000876103
<NAME> ECO SOIL SYSTEMS, INC.
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1998 JAN-01-1998 APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1998 JUN-30-1997 JUN-30-1997
<EXCHANGE-RATE> 1 1 1 1
<CASH> 1,325 1,325 17 17
<SECURITIES> 0 0 0 0
<RECEIVABLES> 22,906 22,906 7,948 7,948
<ALLOWANCES> 300 300 107 107
<INVENTORY> 15,855 15,855 11,091 11,091
<CURRENT-ASSETS> 43,496 43,496 19,858 19,858
<PP&E> 10,142 10,142 2,456 2,456
<DEPRECIATION> 346 695 75 143
<TOTAL-ASSETS> 68,324 68,324 28,860 28,860
<CURRENT-LIABILITIES> 31,800 31,800 12,195 12,195
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 82 82 57 57
<OTHER-SE> 34,827 34,827 15,876 15,876
<TOTAL-LIABILITY-AND-EQUITY> 68,324 68,324 28,860 28,860
<SALES> 26,884 35,293 11,300 15,229
<TOTAL-REVENUES> 26,884 35,293 11,300 15,229
<CGS> 19,090 24,793 7,005 9,257
<TOTAL-COSTS> 19,090 24,793 7,005 9,257
<OTHER-EXPENSES> 6,011 10,499 3,012 5,719
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 245 340 83 250
<INCOME-PRETAX> 1,608 (133) 1,202 3
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> 1,608 (133) 1,202 3
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 1,608 (133) 1,202 3
<EPS-PRIMARY> .01 (.01) .11 0
<EPS-DILUTED> .08 (.01) .08 0
</TABLE>
