-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RNhuspJnt0o8Qa350OXhyiYtzUIQ0IBbEcoqssaRuB05SxKLSSkEt+7UbwDi0pTS appJ9JYNl4y28Lzsg/8F1w== 0000912057-99-006205.txt : 19991117 0000912057-99-006205.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-006205 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ECO SOIL SYSTEMS INC CENTRAL INDEX KEY: 0000876103 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE SERVICES [0700] IRS NUMBER: 470709577 STATE OF INCORPORATION: NE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12653 FILM NUMBER: 99756201 BUSINESS ADDRESS: STREET 1: 10890 THORNMINT ROAD STREET 2: SUITE 200 CITY: SAN DIEGO STATE: CA ZIP: 92127 BUSINESS PHONE: 6196751660 MAIL ADDRESS: STREET 1: 10890 THORNMINT ROAD STREET 2: SUITE 200 CITY: SAN DIEGO STATE: CA ZIP: 92127 10-Q 1 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-Q (Mark One) X Quarterly report under Section 13 or 15(d) of the Securities Exchange - ---- Act of 1934. For the quarterly period ended September 30, 1999 ____ 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.) 10740 THORNMINT ROAD SAN DIEGO, CALIFORNIA 92127 (Address, Including Zip Code, of Principal Executive Offices) (858) 675-1660 (Registrant's Telephone Number, Including Area Code) 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 November 5, 1999, 17,920,755 shares of the Registrant's Common Stock, $.005 par value per share, were outstanding. INDEX ECO SOIL SYSTEMS, INC. FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998 3 Condensed Consolidated Statements of Operations (unaudited) for the Three Months and Nine Months Ended September 30, 1999 and 1998 4 Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings N/A Item 2. Changes in Securities and Use of Proceeds 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders N/A Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 17
2 ECO SOIL SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS
September 30, December 31, 1999 1998 ------------------- ----------------- (unaudited) Current Assets: Cash and cash equivalents $ 5,953 $ 3,410 Accounts receivable, net of allowance for doubtful accounts of $932 and $1,261 at September 30, 1999 and December 31, 1998, respectively 34,118 13,523 Finished goods inventory 21,640 10,475 Prepaid expenses and other current assets 9,236 6,288 ------------------- ----------------- Total current assets 70,947 33,696 Equipment under construction 3,694 4,731 Property and equipment, net 15,397 11,652 Intangible assets, net 14,643 14,571 Other assets 2,829 2,355 ------------------- ----------------- Total assets $107,510 $67,005 ------------------- ----------------- ------------------- ----------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 34,506 $ 8,037 Accrued expenses 5,783 7,061 Short-term obligations 23,047 - Current portion of long-term obligations 107 178 ------------------- ----------------- Total current liabilities 63,443 15,276 Long-term obligations, net of current portion 16,673 22,620 Deferred gain on sale/leaseback of building 538 566 Commitments Shareholders' Equity: Preferred stock $.005 par value; 5,000,000 shares authorized; none issued and outstanding - - Common stock 89 85 $.005 par value; 50,000,000 shares authorized; 17,887,739 and 17,064,576 issued and outstanding at September 30, 1999 and December 31, 1998, respectively Additional paid-in capital 54,261 51,485 Warrants 1,124 958 Notes receivable from shareholders - (15) Accumulated deficit (28,618) (23,970) ------------------- ----------------- Total shareholders' equity 26,856 28,543 ------------------- ----------------- Total liabilities and shareholders' equity $107,510 $67,005 ------------------- ----------------- ------------------- -----------------
See accompanying notes. Note: The Balance Sheet at December 31, 1998 is derived from the audited financial statements at that date, but do not include all of the disclosures required by generally accepted accounting principles. 3 ECO SOIL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Three Months Nine Months Ended September 30, Ended September 30, ----------------------------------------------------------------- 1999 1998 1999 1998 ---------------- -------------- -------------- ---------- (unaudited) (unaudited) (unaudited) (unaudited) Revenues: Turf Partners $ 35,346 $ 21,678 $ 81,169 $ 50,808 Agricultural Supply 8,497 8,311 20,599 14,474 --------------- ----------- ------------ ----------- Total revenues 43,843 29,989 101,768 65,282 Cost of revenues: Turf Partners 27,393 15,071 62,089 35,727 Agricultural Supply 6,003 5,323 14,121 9,857 --------------- ----------- ------------ ----------- Total cost of revenues 33,396 20,394 76,210 45,584 Gross profit 10,447 9,595 25,558 19,698 Operating expenses: Selling, general and administrative 9,606 6,465 26,055 15,942 Research and development 516 145 768 313 Amortization of intangibles 271 395 864 852 Legal settlement - - 198 - --------------- ----------- ------------ ----------- Income (loss) from operations 54 2,590 (2,327) 2,591 Interest expense 1,123 439 2,629 779 Interest income 166 147 308 353 --------------- ----------- ------------ ----------- Net income (loss) $ (903) $ 2,298 $ (4,648) $ 2,165 --------------- ----------- ------------ ----------- --------------- ----------- ------------ ----------- Net income (loss) per share of common stock, basic $ (0.05) $ 0.14 $ (0.27) $ 0.13 --------------- ----------- ------------ ----------- Net income (loss) per share of common stock, diluted $ (0.05) $ 0.12 $ (0.27) $ 0.11 Shares used in calculating net income (loss) per share, basic 17,647 16,598 17,392 16,214 --------------- ----------- ------------ ----------- Shares used in calculating net income (loss) per share, diluted 17,647 19,488 17,392 19,546 --------------- ----------- ------------ ----------- --------------- ----------- ------------ -----------
See accompanying notes. 4 ECO SOIL SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
Nine Months Ended September 30, ---------------------------- 1999 1998 ------------- ----------- Operating activities: Net income (loss) $(4,648) $ 2,165 Adjustments to reconcile net cash used in operating activities: - - Depreciation and amortization 2,652 2,070 Amortization of debt issuance costs and discount on long-term obligations 339 - Provision for losses on accounts receivable 416 63 Loss (gain) on sale of property and equipment 93 (12) Compensation expense incurred upon issue of stock options/warrants 242 - Changes in operating assets and liabilities, net of effect of acquired businesses: Accounts receivable (21,011) (6,483) Inventories (11,783) (5,161) Prepaid expenses and other assets (3,635) (5,180) Accounts payable 26,469 224 Accrued liabilities (1,308) (74) ------------- ----------- Net cash used in operating activities (12,174) (12,388) Investing activities: Payments related to acquired businesses, net of cash acquired - (2,452) Proceeds from the sale of property and equipment 117 - Purchase of property and equipment (4,006) (1,311) Sale of short-term investments - 3,000 Purchase of patents and licenses (275) (25) ------------- ----------- Net cash used in investing activities (4,164) (788) Financing activities: Advances (to) from shareholders 15 (1,068) Debt issuance costs (125) (1,532) Proceeds from subordinated debt - 15,000 Proceeds from long-term obligations 4,242 14,719 Repayments of long-term obligations (10,263) (17,204) Proceeds on short-term obligations 53,898 - Repayments on short-term obligations (30,943) - Payments on capital lease obligations - (13) Net proceeds from issuance of common stock 2,057 1,999 ------------- ----------- Net cash provided by financing activities 18,881 11,901 ------------- ----------- Net increase (decrease) in cash and cash equivalents 2,543 (1,275) Cash and cash equivalents at beginning of period 3,410 3,125 ------------- ----------- Cash and cash equivalents at end of period $5,953 $1,850 ------------- ----------- ------------- -----------
See accompanying notes. 5 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-Q 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 nine-month periods ended September 30, 1999 and 1998 have been made. The results of operations for the three-month and nine-month periods ended September 30, 1999 are not necessarily indicative of the results to be expected for the full fiscal year. For further information, refer to the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 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 issuable upon exercise of outstanding common stock options, warrants and preferred stock. These shares are excluded when their effects are antidilutive. 3. SEGMENT INFORMATION For purposes of analyzing and understanding the financial statements, the Company's operations have been classified into the following business segments: TURF PARTNERS: This segment enters into contracts with golf courses or turf maintenance service businesses, or distributors that sell to those end-user markets to manage the health and productivity of their soil during the golf season. The contracts require the Company to perform a comprehensive soil analysis at the beginning of the season, develop a treatment regimen, install the Company's proprietary BioJect system at the customer's site and provide the microbials throughout the season. This segment also wholesales and distributes a wide range of traditional chemical and turf maintenance products and golf course supplies to the above-mentioned market. AGRICULTURAL SUPPLY: This segment enters into contracts with agricultural growers to manage the health and productivity of their soil during the course of the growing season, which requires the Company to perform a comprehensive soil analysis at the beginning of the season, develop a treatment regimen, install the Company's proprietary BioJect system at the customer's site and provide the microbials and other soil additive products for the customer to use throughout the season. This segment also distributes a wide range of irrigation and other agricultural supplies to growers. In 1998, the Company actively commenced its soil maintenance service business and acquired several distributors of irrigation and other agricultural supplies, and therefore created this business segment. Prior to 1998, agricultural operations were insignificant and were not considered to be a separate segment. 6
Revenues Segment Profits Segment Assets --------------------------- -------------------------- ------------------------- For the three months ended September 30, As of September 30, --------------------------------------------------------- ------------------------- 1999 1998 1999 1998 1999 1998 ----------- ----------- ----------- ----------- ----------- ---------- Turf Partners $35,346 $21,678 $ 1,425 $ 2,498 $ 71,766 $46,104 Agricultural Supply 8,497 8,311 375 1,422 29,105 22,216 Corporate and Other - - (2,703) (1,622) 6,639 8,803 ----------- ----------- ----------- ----------- ----------- ---------- Total $43,843 $29,989 $ (903) $ 2,298 $107,510 $77,123
4. LEGAL SETTLEMENT In November 1998, the Company executed a term sheet with the Palladin Group, L.P. ("Palladin") concerning negotiations for a possible investment by Palladin in certain new classes of securities of the Company which, at the time, the Company was considering issuing to a certain fund managed by Palladin. The Company subsequently terminated the negotiations in December 1998. An affiliate of Palladin, Halifax Fund, L.P. ("Halifax"), filed a lawsuit on or about March 19, 1999 in San Diego Superior Court alleging that the termination violated duties owed by the Company to Halifax under the term sheet. The lawsuit sought compensatory damages of approximately $2.6 million and punitive damages of approximately $12.0 million. In July 1999, the Company executed Settlement and Release Agreements with Halifax Fund, L.P., Palladin Group, L.P., Granite Financial Group, Inc., and Midori Capital Corporation. These agreements mutually release and discharge all claims arising from this litigation. The Company paid termination charges and attorney's fees of $198,000 related to this settlement. 7 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 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 September 30, 1999. Additionally, the financial statements and notes thereto and Management's Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 will provide additional information. In addition to other endeavors, the Company develops, markets and sells proprietary biological products as well as distributes traditional chemical products of third party manufacturers to two principal segments: The turf and golf management market ("Turf Partners") and the agricultural and crop market ("Ag Supply"). THIRD QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO THIRD QUARTER ENDED SEPTEMBER 30, 1998 RESULTS OF OPERATIONS REVENUES For the third quarter of 1999, revenues were $43.8 million, an increase of 46% versus $30.0 million for the third quarter 1998. The increase in revenues reflects an increase in both Turf Partners and Ag Supply distributed revenues. For the third quarter of 1999, Turf Partners revenues were $35.3 million, an increase of 63% versus $21.7 million for the third quarter 1998. The increase in Turf Partners sales occurred in all three operating regions of the U.S. Proprietary sales for Turf Partners decreased by $1.0 million to $2.3 million from $3.3 million in the third quarter of 1998. The decrease in proprietary sales was due to a decrease in BioJect usage as a result of the following: (i) a reorganization in the fall of 1998 that impaired sales momentum, (ii) integration of our sales force assumed from the Scotts Company, (iii) new FreshPack programs challenged our sales force, while providing the customer with a cheaper alternative to the BioJect, (iv) the delay of approval on certain biocontrol products from the EPA, (v) customers believed their improved turf, resulting from several seasons of BioJect programs, could manage without a 1999 program and (vi) drought conditions in the Midwest and Northeast. Distributed revenue increased to $33 million in the third quarter 1999 from $18.3 million in the third quarter of 1998. The increase in distributed revenue is due to the expansion of the Company's turf business. During the second quarter of 1999, Turf Partners completed the integration of the sales force assumed from the Scott's Company in December 1998 and completed the stocking of several new warehouses and the realignment of its distribution networks which extended market penetration to new geographic areas. For the third quarter of 1999, Ag Supply revenues were $8.5 million, an increase of 2%, versus $8.3 million for the third quarter of 1998. Proprietary sales for Ag Supply were $616,000, a decrease of 51% from $1.2 million for the third quarter of 1998. The decrease in proprietary sales was due to a decrease of acreage under production in the Mexican agriculture market caused by growers' decisions not to replant. Mexican weather conditions, political conditions and the world tomato market downturn contributed to the growers' decision not to replant. Distributed sales for the Ag Supply division increased to $7.9 million in the third quarter of 1999 from $7.1 million in the third quarter of 1998. The overall increase in distributed sales was 8 due to the opening of new warehouses, which extended market penetration to new geographic areas, offset by the above-mentioned conditions in Mexico affecting proprietary sales. GROSS PROFIT For the third quarter of 1999, the Company's gross profit was $10.4 million, an increase of 9% versus $9.6 million for the third quarter of 1998. The increase in gross profit was due to the increase in both Turf Partners and Ag Supply distributed revenues. For the third quarter of 1999, the Company's gross margin was 24% versus 32% during the third quarter of 1998. The decrease in gross margin was due to the mix of proprietary and distributed sales during the quarter. Proprietary sales, which carry higher gross margins than distributed sales, decreased while distributed sales increased during the third quarter of 1999. For the third quarter of 1999, the gross profit on Turf Partners sales was $8.0 million, an increase of 20% versus $6.6 million during the third quarter of 1998. The increase in gross profit on Turf Partners sales is directly related to the increase in distributed revenue. For the third quarter of 1999, the gross margin on Turf Partners products was 22% versus 30% during the third quarter of 1998. The decrease in gross margin on Turf Partners sales was due to a decrease in proprietary sales, heavy seed discounting in the West and lower than expected fungicide sales in the East. For the third quarter of 1999, the gross profit on Ag Supply sales was $2.5 million, compared to $3.0 million during the third quarter of 1998. The gross margin on Ag Supply products was 29% versus 36% during the third quarter of 1998. The decrease in gross margin on Ag Supply sales was due to a decrease in proprietary sales, which carry higher margins than distributed sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE For the third quarter of 1999, selling, general and administrative ("SG&A") expense was $9.6 million, an increase of 48% versus $6.5 million during the third quarter of 1998. The increase in SG&A expense was primarily due to additional overhead costs associated with openings of additional warehouses, integration of the Scotts' sales force and expenses related to marketing the Company's proprietary technology as well as advancing strategic relationships to benefit the Company's future. SG&A expense as a percentage of sales remained consistent at 22% for the third quarter of 1999 and 1998. RESEARCH AND DEVELOPMENT EXPENSE For the third quarter of 1999, research and development ("R&D") expense was $516,000, an increase of 256% versus $145,000 during the third quarter of 1998. The increase in R&D expense was due to ongoing analysis and testing of proprietary technology spent by the Company and a $168,000 reclass from SG&A for the first six months of 1999, related to prior period misclassification. AMORTIZATION EXPENSE For the third quarter of 1999, amortization expense was $271,000, a decrease of 31% versus $395,000 for the third quarter of 1998. The decrease in amortization expense is due to goodwill write-off related to the Company's previous acquisitions of Turf Products, Inc. and Turfmakers, Inc. in December 1998. INTEREST EXPENSE For the third quarter of 1999, interest expense was $1.1 million, an increase of 156% versus $439,000 for the third quarter of 1998. The increase in interest expense reflects an increase in the amount of debt outstanding and write-off of debt issuance cost related to a credit facility which was retired in July 1999. 9 NET INCOME For the third quarter of 1999, net loss was $903,000 or $.05 per share versus net income of $2.3 million, or $.14 per share during the third quarter of 1998. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 REVENUES For the first nine months of 1999, revenues were $101.8 million, an increase of 56% versus $65.3 million for the first nine months of 1998. The increase in revenues reflects an increase in both Turf Partners and Ag Supply revenues. For the first nine months of 1999, Turf Partners revenues were $81.1 million, an increase of 60% versus $50.8 million for the first nine months of 1998. The increase in Turf Partners revenues occurred in all three operating regions of the U.S. Proprietary sales for Turf Partners decreased to $4.6 million during the first nine months of 1999 from $6.9 million during the first nine months of 1998. The decrease in proprietary sales was due to a decrease in BioJect usage as a result of the following: (i) a reorganization in the fall of 1998 that impaired sales momentum, (ii) integration of our sales force assumed from the Scotts Company, (iii) new FreshPack programs challenged our sales force, while providing the customer with a cheaper alternative to the BioJect, (iv) the delay of approval on certain biocontrol products from the EPA, (v) customers believed their improved turf, resulting from several seasons of BioJect programs, could manage without a 1999 program and (vi) drought conditions in the Midwest and Northeast. Distributed sales increased to $76.5 million in the first nine months of 1999 from $43.9 million in the first nine months of 1998. The increase in distributed revenue is due to the expansion of the Company's turf business. During the second quarter of 1999, Turf Partners completed the integration of the sales force assumed from the Scotts Company in December 1998 and completed the stocking of several new warehouses and realignment of its distribution networks which extended market penetration to new geographic areas. For the first nine months of 1999, Ag Supply revenues were $20.6 million, an increase of 42%, versus $14.4 million for the first nine months of 1998. Ag Supply 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. Proprietary sales in Mexico and the U.S. increased to $1.5 million during the first nine months of 1999 compared to $1.3 million in the first nine months of 1998. Distributed sales for the Ag Supply division increased to $19.1 million in the first nine months of 1999 from $13.1 million in the first nine months of 1998. The increase in proprietary and distributed revenues was due to the 1998 acquisitions mentioned above and opening of new warehouses which extended market penetration to new geographic areas. GROSS PROFIT For the first nine months of 1999, the Company's gross profit was $25.6 million, an increase of 30% versus $19.7 million for the first nine months of 1998. The increase in gross profit was due to the increase in both Turf Partners and Ag Supply revenues. For the first nine months of 1999, the Company's gross margin was 25% versus 30% for the first nine months of 1998. The decrease in gross margin was due to the mix of proprietary and distributed sales during the first nine months of 1999. Proprietary sales, which carry higher gross margins than distributed sales, decreased while distributed sales increased during the first nine months of 1999. For the first nine months of 1999, the gross profit on Turf Partners revenues was $19.1 million, an increase of 27% versus $15.1 million during the first nine months of 1998. The increase in the gross profit on Turf Partners sales is directly related to the increase in distributed revenue. For the first nine months of 10 1999, the gross margin on Turf Partners products was 24% versus 30% during first nine months of 1998. The decrease in gross margin on Turf Partners sales was due to a decrease in proprietary sales, heavy seed discounting in the West and lower than expected fungicide sales in the East. For the first nine months of 1999, the gross profit on Ag Supply sales was $6.5 million, an increase of 40%, compared to $4.6 million during the first nine months of 1998. The increase in the gross profit on Ag Supply sales is directly related to the increase in revenue, as previously discussed. The gross margin on Ag Supply products was 31% versus 32% during the first nine months of 1998. The decrease in gross margin was due to the mix of proprietary and distributed sales during the nine months. Proprietary sales, which carry higher gross margins than distributed sales, did not increase in the same magnitude that distributed sales did during the first nine months of 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE For the first nine months of 1999, SG&A expense was $26.0 million, an increase of 63% versus $15.9 million during the first nine months of 1998. The increase in SG&A expense was primarily due to additional overhead costs associated with the opening of additional warehouses, integration of the Scotts' sales force and expenses of the Company spent on marketing the Company's proprietary technology as well as advancing strategic relationships to benefit the Company's future. SG&A expense as a percentage of sales was 26% compared to 24% for the first nine months of 1998. RESEARCH AND DEVELOPMENT For the first nine months of 1999, R&D expense was $768,000, an increase of 145% versus $313,000 during the first nine months of 1998. The increase in R&D expense was due to ongoing analysis and testing of proprietary technology spent by the parent. AMORTIZATION EXPENSE For the first nine months of 1999, amortization expense was $864,000, an increase of 1% versus $852,000 during the first nine months of 1998. The increase in amortization expense is due to an increase in the Company's goodwill directly related to the previously discussed acquisitions, offset by a decrease in amortization expense related to goodwill write-off associated with the previous acquisitions of Turf Products, Inc. and Turfmakers, Inc. in December 1998. INTEREST EXPENSE For the first nine months of 1999, interest expense was $2.6 million, an increase of 237% versus $779,000 during the first nine months of 1998. The increase in interest expense reflects an increase in the amount of debt outstanding, amortization of debt issuance cost and the write-off of debt issuance cost related to the Company's credit facility with Imperial Bank retired in July 1999. NET INCOME For the nine months ended September 30, 1999, net loss was $4.6 million or $.27 per share versus net income of $2.1 million or $.13 per share for the nine months ended September 30, 1998. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations from revenues from sales of its products, issuance of its Common Stock, borrowing from its principal shareholders and other lenders and bank financing. The 11 Company's operating and investing activities used cash of $16.3 million during the first nine months of 1999 and $13.2 million during the first nine months of 1998. On June 30, 1999, the Company's wholly owned subsidiary Turf Partners, Inc. entered into a credit agreement with Coast Business Credit (the "Coast Working Capital Facility"). The Coast Working Capital Facility is a $25 million, three-year credit facility based upon Turf Partners' eligible inventory and receivables and has an interest rate of prime rate plus 1.00%. On July 2, 1999 the Company drew down on the facility and paid all amounts due under and terminated a line of credit with Imperial Bank. The Company had approximately $10 million outstanding under a December 14, 1998 Credit Agreement with Imperial Bank prior to the payoff. As of September 30, 1999, the Company had an outstanding balance of $17.5 million under the Coast Working Capital Facility. On June 30, 1999, the Company's wholly owned subsidiary Agricultural Supply, Inc. entered into a credit agreement with First National Bank (the "FNB Working Capital Facility"). The FNB Working Capital Facility is a $10 million, three-year credit facility based upon Agricultural Supply's eligible inventory and receivables and has an interest rate of prime plus .25%. As of September 30, 1999, the Company had an outstanding balance of $4.5 million under this facility. On July 31, 1999, the Company obtained a $2.5 million, two-year term loan from Coast Business Credit (the "Coast Term Loan"). The Coast Term Loan bears interest at Coast's prime rate plus 2.25%, payable monthly. One third of the principal must be repaid in level monthly payments during the first year of the term, with the remainder due in level monthly payments during the second year of the term. The Coast Term Loan is secured by substantially all of the assets of the parent Company, and has been guaranteed by Turf Partners. The Company had an outstanding balance of $2.4 million as of September 30, 1999, with $1.0 million due within the next twelve months. The Coast Term Loan and the Note Agreements contain certain financial covenants pertaining to debt service ratios, as defined. As of September 30, 1999, we were not in compliance with certain of these covenants. Both Coast Business Credit and the Note holders have waived their rights with respect to such noncompliance based on our agreement to enter into amendments on or before December 10, 1999. See ""Item 3. Defaults Upon Senior Securites." 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 Many currently installed computer systems are coded to accept only two digit entries in the date code field. These date code fields need to be modified or upgraded to accept four digit entries to distinguish 21st century dates from 20th century dates. Many organizations are expending significant resources to modify or upgrade their computer systems for such "Year 2000" compliance. We presently believe 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 timely completed, the Year 2000 problem could have a material impact on our operations. The Year 2000 issue affects our internal systems, including information technology ("IT") and non-IT systems. We are in the process of upgrading our existing computer software and IT systems and recognize the need to ensure our operations will not be adversely impacted by Year 2000 software failures. We rely upon microprocessor-based personal computers and commercially available applications software. In addition, in the ordinary course of our product development efforts, we have designed our current proprietary 12 equipment, consisting of hardware and software, including the BioJect system itself, to be Year 2000 ready. We are also reviewing our utility systems (heat, light, telephones, etc.) and other non-IT systems for the impact of Year 2000. Additionally, should we undertake future acquisitions, the Year 2000 risks that affect us can be expected to similarly affect such potential acquisition candidates. We intend to review the systems of all potential acquisitions for Year 2000 compliance. However, the failure to correct a material Year 2000 problem either within the Company, within a vendor or supplier or within a potential acquisition candidate could result in an interruption in, or a failure of, certain normal business activities or operations. Such interruptions or failures could materially adversely affect our business, operating results and financial condition. We depend on smooth and timely interactions with our vendors, customers and other third parties. Any unexpected costs or disruption in the operations or activities of such vendors, customers or other third parties as a result of Year 2000 compliance issues within such entities could materially adversely affect our business, operating results or financial condition. The Company intends to take continuous steps to identify Year 2000 problems related to its vendors and to formulate a system of working with key third-parties, including financial institutions and utility-providers, to understand their ability to continue providing services and products through the change to Year 2000. The cost of our Year 2000 compliance assessment and upgrade is being funded from current operations. The cost to us of our Year 2000 identifications, assessment, remediation and testing efforts, as well as costs we currently expect to be incurred with respect to Year 2000 issues of third parties, is expected to be approximately $40,000. We will continue to consider the likelihood of a material business interruption due to the Year 2000 issue and, if necessary, implement appropriate contingency plans. A contingency plan has not been developed for dealing with the most reasonably likely worst case scenario, and such scenario has not yet been clearly identified. Since we have adopted a plan to address these Year 2000 issues, we have not developed a comprehensive contingency plan should Year 2000 issues fail to be addressed successfully or in their entirety. However, if we identify significant risks or are unable to meet our anticipated timeline, we will develop contingency plans as deemed necessary at that time. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's foreign sales are principally to Mexico. All foreign transactions are denominated in U.S. dollars, therefore, the Company's exposure to foreign currency fluctuations is minimal. The Company is exposed to changes in interest rates from its senior subordinated notes, which are due in full in 2003. A hypothetical 100 basis point adverse move (decrease) in interest rates along the entire interest rate yield curve would adversely affect the net fair value of the Notes by approximately $600,000 as of September 30, 1999. 13 PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS RECENT SALES OF UNREGISTERED SECURITIES On September 2, 1999, the Company issued 91,548 shares of the Company's common stock to Agrium Inc. pursuant to a Purchase Agreement dated as of July 29, 1999 ("Agrium Asset Purchase Agreement"). Pursuant to the Agrium Asset Purchase Agreement, the Company issued to Agrium Inc. 91,548 shares of the Company's common stock valued at $7.10 per share and $350,000 in cash in exchange for certain assets of Agrium. These assets consist of research equipment, and the rights and technology to certain product lines. The issuance of the Company's common stock in connection with the Agrium Asset Purchase 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 Agrium that it is an accredited investor, that Agrium acquired the common stock of the Company for its own account and not with a view to any distribution thereof to the public and that the transaction was completed without any general solicitation or advertising. ITEM 3. DEFAULTS UPON SENIOR SECURITIES The Coast Term Loan and the Note Agreements contain certain financial covenants pertaining to debt service ratios, as defined. As of September 30, 1999, we were not in compliance with certain of these covenants. Both Coast Business Credit and the Note holders have waived their rights with respect to such noncompliance based on our agreement to enter into amendments on or before December 10, 1999. The Company and Coast have agreed that the subsequent amendments to the Coast Term Loan will provide for adjustments in the financial ratios for future periods. The Company and the Note holders have agreed that the subsequent amendment to the Note Agreement will provide for adjustments in the financial ratios for future periods, will eliminate prepayment penalties on the Notes, will provide for amendments of warrants currently held by the Note holders to extend the terms thereof and for the issuance of additional warrants, and, as consideration for the elimination of the prepayment penalty, will require the Company to issue to the Note holders a number of shares of Common Stock equal to $1,275,000 divided by the lesser of (i) $4.00 and (ii) the average of the closisng prices for the Common Stock for the ten consecutive trading days immediately prior to the subsequent amendment. 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-K for the fiscal year ended December 31, 1998. At September 30, 1999, the Company had an accumulated deficit of $28.6 million. The Company has evolved from an organizational activities and research and development focus to a Company emphasizing product introductions and sales and marketing. The Company's recent losses have resulted due to the seasonal nature of the business as well as expenditures on marketing, research and manufacturing of the Company's proprietary technology. 14 Sales of the Company's proprietary products recently have declined in both turf and agricultural markets. These products remain in the early stages of market introduction and are subject to the risks inherent in the commercialization of new product concepts, particularly with respect to agricultural applications. There can be no assurance that the Company's efforts to increase sales of proprietary products to turf and agricultural crop and ornamental markets will prove successful, that marketing partnerships will be established and will become successful, or that the Company's intended customers will purchase the Company's systems and products instead of competing products. In addition, there can be no assurance that the Company will be able to obtain significant customer satisfaction or market share with its proprietary products. Failure to reverse the decline in sales of proprietary products would have a material adverse effect on the Company's business, financial condition and results of operations. The Company has received a term loan and its subsidiaries have received lines of credit from financial institutions, and the Company has received debt financing from institutional investors through the issuance of senior subordinated notes. The loan documents to which the Company and its subsidiaries are parties, including the senior subordinated notes, contain restrictions on the Company's activities and financial covenants with which the Company and its subsidiaries must comply. Among other things, the financial covenants require the Company and its subsidiaries to satisfy net worth requirements, debt service coverage ratios and other financial tests. In the past, the Company has obtained waivers and an amendment of the senior subordinated notes to remain in compliance with the financial covenants and avoid default. For the quarter ended September 30, 1999, the Company's failure to comply with these covenants resulted in a default under the senior subordinated notes, which was subsequently waived by the note holders. There can be no assurance that the Company and its subsidiaries will satisfy all of the applicable financial covenants in future quarters. To the extent the Company or any of its subsidiaries does not satisfy these requirements, the Company would be in default and its obligations could be declared immediately due and payable. To avoid a default, the Company may be required to obtain waivers from third parties, which might not be granted. A default on indebtedness from one lender could result in the acceleration of indebtedness from other lenders. In addition, the Company also can give no assurance that its cash flow and capital resources will be sufficient to repay its indebtedness or that it will be successful in obtaining alternate financing. In the event the Company or any of its subsidiaries is unable to repay its debts, the Company may be forced to delay the expansion of its business, sell some of its assets, obtain additional equity capital or refinance or restructure its debt, any of which could have a material adverse effect on the business, prospects and financial condition of the Company. 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 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. 15 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 $45 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 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 DEVELOPMENTS In August 1999 the Company signed a letter of intent to acquire Agri-Valley Irrigation, Inc. (Agri-Valley) of Fresno, California. The Company currently is negotiating the terms of a definitive agreement, and plans for a closing of the acquisition in early January 2000. Agri-Valley is a full-service irrigation company and services customers throughout most of California. The Company has formed an alliance with the J.R. Simplot Company regarding fertilizer marketing and field trials of Eco Soil's BioJect system. Under the agreement, Turf Partners, an Eco Soil subsidiary, has received preferred marketing rights to the Simplot Company's BEST fertilizer products for distribution east of the Rocky Mountains. Additionally, the companies intend to commence trials using Eco Soil's BioJect 16 system on commercial potato production and waste water reclamation. The Simplot Company is a privately held agribusiness corporation based in Boise, Idaho. Annual sales are $2.8 billion derived principally from food processing, fertilizer manufacturing and cattle feeding. In November 1999, the Company signed a letter of intent with Cebeco Seeds Group to jointly evaluate the use of Eco Soil's products in the European market. The letter of intent covers different plant categories including turf, horticultural and ornamental uses and also provides testing of the biological programs. Cebeco Seeds Group is part of Cebeco Group UA, based in the Netherlands, a $4-billion corporation involved in the use and distribution of agronomical products. When combined with its member cooperatives, the Cebeco Group's revenues exceed $7 billion, utilizing a 40,000-greenhouse grower network engaged in the development of seed, seedlings, bulbs, food and animal feed. 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 27.1 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed with the SEC during the period ended September 30, 1999. 18 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 November 15, 1999 By: /s/ William B. Adams -------------------- William B. Adams Chairman and Chief Executive Officer Date November 15, 1999 By: /s/ Mark D. Buckner -------------------- Mark D. Buckner Chief Financial Officer, Corporate Secretary, and Senior Vice President 19 EX-27 2 EXHIBIT 27
5 0000876103 ECO SOIL SYSTEMS, INC. 1,000 US DOLLARS 3-MOS 9-MOS SEP-30-1999 SEP-30-1999 JUL-01-1999 JAN-01-1999 SEP-30-1999 SEP-30-1999 1 1 5,953 5,953 0 0 34,118 34,118 932 932 21,640 21,640 70,947 70,947 19,091 19,091 6,367 6,367 107,510 107,510 63,443 63,443 0 0 0 0 0 0 89 89 26,767 26,767 107,510 107,510 43,843 101,768 43,843 101,768 33,396 76,210 33,396 76,210 10,067 27,435 326 450 1,123 2,629 (903) (4,648) 0 0 (903) (4,648) 0 0 0 0 0 0 (903) (4,648) (.05) (.27) (.05) (.27)
-----END PRIVACY-ENHANCED MESSAGE-----