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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-28779
STAR SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
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<TABLE>
<CAPTION>
<S> <C> <C>
FLORIDA 4953 65-0893224
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
STAR SERVICES GROUP, INC.
2075 NORTH POWERLINE ROAD
POMPANO BEACH, FLORIDA 33069
(954) 974-3800
(Address and Telephone Number
of Principal Executive Offices and Principal Place of Business)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD AND THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] OR NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH ISSUER'S CLASS OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING ON OCTOBER 31, 2000
----- -------------------------------
COMMON STOCK............................................8,163,010
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
September 30, 2000 and December 31, 1999 ........................ 2
Consolidated Condensed Statements of Income
Three Months Ended September 30, 2000 and September 30, 1999
Nine Months Ended September 30, 2000 and September 30, 1999 .....
Consolidated Condensed Statement of Stockholders' Equity
Nine Months Ended September 30, 2000 and September 30, 1999...... 4
Consolidated Condensed Statements of Cash Flows
Nine Months Ended September 30, 2000 and September 30, 1999...... 5
Notes to Consolidated Condensed Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 15
PART II
Item 1. Legal Proceedings .................................................... 16
Item 6. Exhibits and Reports on Form 8-K...................................... 16
</TABLE>
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STAR SERVICES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 251,414 $ 1,476,406
Accounts receivable 2,635,826 1,978,243
Prepaid expenses 649,830 163,149
Deferred income taxes 288,785 195,001
------------ ------------
Total current assets 3,825,855 3,812,799
------------ ------------
Property and equipment, at cost:
Machinery and equipment 5,609,921 6,164,321
Office furniture and equipment 127,258 84,320
Structures and improvements 9,343,803 887,364
------------ ------------
15,080,982 7,136,005
Less accumulated depreciation 1,421,239 647,427
------------ ------------
Net property and equipment 13,659,743 6,488,578
------------ ------------
Other assets:
Cost in excess of net assets acquired 789,961 534,864
Deferred charges 93,455 113,303
------------ ------------
Total other assets 883,416 648,167
------------ ------------
Total assets $ 18,369,014 $ 10,949,544
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,818,090 $ 1,174,060
Accounts payable 1,898,378 1,260,328
Accrued expenses 839,350 562,737
------------ ------------
Total current liabilities 4,555,818 2,997,125
------------ ------------
Long-term debt, net of current portion 8,587,300 3,094,221
------------ ------------
Stockholders' equity:
Common stock, $.01 par value
30,000,000 shares authorized,
8,163,010 shares issued and outstanding in 2000 81,630
8,100,000 shares issued and outstanding in 1999 81,000
Additional paid-in capital 5,746,479 5,199,393
Retained earnings (accumulated deficit) (602,213) (422,195)
------------ ------------
Total stockholders' equity 5,225,896 4,858,198
------------ ------------
Total liabilities and stockholders' equity $ 18,369,014 $ 10,949,544
============ ============
</TABLE>
See notes to consolidated financial statements
2
<PAGE> 4
STAR SERVICES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three-month period Nine-month period
ended September 30, ended September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 5,881,109 $ 3,358,381 $ 16,604,876 $ 8,126,509
------------ ------------ ------------ ------------
Expenses:
Direct costs 4,036,230 2,882,922 11,573,091 6,494,178
Selling and administrative 1,147,513 712,116 3,131,897 1,944,063
Stock-based compensation 80,643 80,643 241,929 215,050
Depreciation and amortization 321,211 134,304 888,621 266,273
------------ ------------ ------------ ------------
5,585,597 3,809,985 15,835,538 8,919,564
Income (loss) from operations 295,512 (451,604) 769,338 (793,055)
Interest income 2,557 27,533 19,798 52,777
Interest expense (178,155) (66,560) (447,967) (167,960)
Costs related to closure of facilities (42,925) -- (609,122) --
Income (loss) before income taxes 76,989 (490,631) (267,953) (908,238)
Income taxes benefit (expense) (26,946) 171,721 87,935 317,883
------------ ------------ ------------ ------------
Net income (loss) $ 50,043 $ (318,910) $ (180,018) $ (590,355)
============ ============ ============ ============
Earnings (loss) per share $ 0.01 $ (0.04) $ (0.02) $ (0.09)
============ ============ ============ ============
Historical weighted average shares
outstanding 8,163,010 8,000,000 8,144,268 6,646,016
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements
3
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STAR SERVICES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine-month periods ended September 30, 2000 and 1999
(Information for nine-month periods ended September 30, 2000
and 1999 is unaudited)
<TABLE>
<CAPTION>
Common stock Retained
------------------------- Additional earnings
Issued paid-in (accumulated
Shares Par value capital deficit)
--------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 5,000,000 $ 50,000 $ 448,200 $ (60,050)
Issuance of common stock and
capital contributions (unaudited) 2,000,000 20,000 3,969,000 --
Shares issued in business combination
(unaudited) 1,000,000 10,000 -- --
Stock-based compensation (unaudited) -- -- 215,050 --
Net (loss) (unaudited) -- -- -- (590,355)
---------- ---------- ---------- ----------
Balance at September 30, 1999 (unaudited) 8,000,000 $ 80,000 $4,632,250 $ (650,405)
========== ========== ========== ==========
Balance at January 1, 2000 8,100,000 $ 81,000 $5,199,393 $ (422,195)
Issuance of common stock and
capital contributions (unaudited) 63,010 630 547,086 --
Net (loss) (unaudited) -- -- -- (180,018)
---------- ---------- ---------- ----------
Balance at September 30, 2000 (unaudited) 8,163,010 $ 81,630 $5,746,479 $ (602,213)
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements
4
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STAR SERVICES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine-month period
Ended September 30,
----------------------------
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (180,018) $ (590,355)
Adjustments to reconcile net income (loss) to
net cash (used in) operating activities:
Depreciation and amortization 773,812 266,273
Stock-based compensation 241,929 215,050
Deferred charges expenses 70,538 (95,247)
Changes in operating assets and liabilities:
Increase in accounts receivable (657,583) (747,419)
Increase in prepaid expenses (486,681) 39,042
Increase in deferred income tax asset (93,784) (317,883)
Increase in accounts payable 638,050 585,639
Increase in accrued expenses 276,613 473,706
----------- -----------
Net cash provided by (used in)
operating activities 582,876 (171,194)
----------- -----------
Cash flows from investing activities:
Capital expenditures (620,474) (779,425)
----------- -----------
Net cash (used in) investing activities (620,474) (779,425)
----------- -----------
Cash flows from financing activities:
Principal payments on stockholder loans -- (537,125)
Principal payments under loan agreements (1,187,394) (570,826)
Net proceeds from issuance of common stock
and capital contributions -- 3,999,000
----------- -----------
Net cash provided by (used in)
financing activities (1,187,394) 2,891,049
----------- -----------
Net increase (decrease) in cash (1,224,992) 1,940,430
Cash, beginning of period 1,476,406 49,149
----------- -----------
Cash, end of period $ 251,414 $ 1,989,579
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest expense paid $ 447,967 $ 167,960
=========== ===========
</TABLE>
See notes to consolidated financial statements
5
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STAR SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
These statements do not contain all information required by generally
accepted accounting principles that are included in a full set of financial
statements. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the financial position of Star Services Group, Inc. and subsidiaries
collectively called ("the Company") at September 30, 2000 and the results of its
operations and its cash flows for the period then ended and for the period ended
September 30, 1999. These unaudited condensed consolidated financial statements
should be read in conjunction with the audited financial statements and notes
contained in the Company's Form 10-K for the year ended December 31, 1999.
Results of operations for this period are not necessarily indicative of results
to be expected for the full year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Star
Services Group, Inc. ("Star") and of its wholly-owned subsidiaries, Delta
Recycling Corp. ("Recycling"), Delta Transfer Corp. ("Transfer"), Delrock
Management Corp. ("Delrock"), Eastern Recycling, Inc. ("Eastern") and Delta
Resources Corp. ("Resources"). Recycling, Transfer, Delrock, Eastern and
Resources are collectively referred to as the "Subsidiaries". Significant
intercompany accounts and transactions have been eliminated. On February 4,
1999, Star acquired 100% of the issued and outstanding capital stock of
Recycling, Transfer, Delrock, Eastern and Resources, thereby making them
wholly-owned subsidiaries of Star.
Effective June 22, 1999, Star Services effected a business combination
with Bailey & Baron, Inc., a publicly-held shell corporation. Under the terms of
the agreement, the shell corporation, which had 1,000,000 common shares
outstanding, issued 7,000,000 unregistered shares of its common stock in
exchange for all of the outstanding common stock of Star Services. As a result
of the transaction, the shareholders of Star Services received stock
representing approximately 88% of the public shell corporation, thereby
effecting a change in control of the public entity.
Such business combination has been accounted for as a reverse
acquisition. Under the accounting rules for a reverse acquisition, Star Services
is considered the acquiring entity. As a result, historical financial
information for periods prior to the date of the transaction is that of Star
Services. However, the capital structure for all periods presented has been
restated to reflect the capital structure of Bailey & Baron, Inc. as the legal
acquirer. Goodwill was not recorded in the merger since the transaction was
equivalent to the issuance of stock by Star Services for the net monetary assets
of the public shell corporation.
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2. EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per share are calculated as follows:
Nine Months Ended
September 30,
----------------------------
2000 1999
----------- -----------
Earnings
Net Income (Loss) $ (180,018) $ (590,355)
----------- -----------
Income (loss) applicable to
common shareholders $ (180,018) $ (590,355)
=========== ===========
Basic:
Income (loss) applicable to
common shareholders $ (180,018) $ (590,355)
Weighted average shares
outstanding during the period 8,144,268 6,646,016
Basic $ (0.02) $ (0.09)
Diluted:
Income (loss) applicable to
common shareholders $ (180,018) $ (590,355)
Weighted average shares
outstanding during the period 8,144,268 6,646,016
Effect of dilutive securities:
Stock Options 0 0
Diluted weighted common
shares outstanding 8,144,268 6,646,016
Diluted $ (0.02) $ (0.09)
7
<PAGE> 9
3. BUSINESS COMBINATIONS
On March 20, 2000, Star Services Group, Inc. ("Star") acquired certain
assets of Allied Rolloff Holdings, Inc. ("Allied"), a Florida corporation,
pursuant to a Asset Purchase Agreement dated as of February 16, 2000 (the
"Agreement").
Star acquired all of the containers, carts and compactors
("Containers"), five motor vehicles and all of the recycling equipment and
radios located in the vehicles and equipment, including the radio base station
("Trucks and Joists"), all manual and automated billing systems, all computer
hardware including printers, CPU's, keyboards ("Computers and Furniture"), all
inventory of parts, tires and accessories, all trade secrets, proprietary
rights, symbols, trademarks, logos, and tradenames, and all contractual rights
of Allied with its customers.
In addition, at the Closing, Star entered into Restrictive Covenant
Agreements with Allied and its principals Raul Smith, ATF Holdings, Inc.,
Eduardo Cusco and Raul Sotolongo dated March 1, 2000 restricting among other
activities, competing with Star for a period of five years from the closing.
The purchase price was Nine Hundred Sixty Thousand Four Hundred Dollars
($960,400.00). The components of the purchase price are Two Hundred Thousand
Dollars ($200,000.00) for trucks and joists, Three Hundred Ninety-Two Thousand
Four Hundred Dollars ($392,400.00) for containers, Ten Thousand Dollars
($10,000.00) for computers and furniture, Fifty-Eight Thousand Dollars
($58,000.00) for restrictive covenants, and Three Hundred Thousand Dollars
($300,000.00) for goodwill.
The funds required to pay for the purchased assets of Allied pursuant
to the Asset Purchase Agreement were derived from the proceeds of a secured
promissory note received in the amount of Five Hundred Thousand Dollars
($500,000.00). The remaining cash outflow of One Hundred Sixty Thousand Four
Hundred Dollars ($160,400.00) was withdrawn from the Prudential money market
account whose funds were generated from Star's private placement. In addition,
Fifty-Nine Thousand Two Hundred and Sixty (59,260) shares of duly registered and
freely transferable common stock of Star were issued to Allied. Such shares are
to be held in escrow until the final purchase price is determined. The total
purchase price was subject to adjustment based on revenues that were generated
in the month of August 2000. There was no adjustment made as a result of the
revenues.
On October 27, 2000 the Company entered into a series of agreeements to
acquire specified assets of Peerless Big Apple, Inc., Peerless Dade, Inc. and
Peerless Miami Avenue, Inc., (together referred to as the "Peerless Group"). The
Peerless Group is engaged in the business of waste collection, portable toilets,
hauling, recycling, and transferring of demolition debris. In anticipation of a
closing of these transactions, Star has entered into an operation and management
contract. Completion of the acquistion is contingent upon certain conditions
being satisfied including the delivery to Star of audited financial statements
for the Peerless Group. The closing will add three additional material recovery
facilities to the Company's operation. The purchase price for the assets is $9
million and is comprised of common stock, cash, the assumption of debt and the
issuance of a promissory note. The total number of shares to be issued under the
terms of the agreements is 1,595,000. Estimated revenues for the Peerless
Group's latest fiscal period, for the assets being acquired by the Corporation
are $6.7 million.
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4. PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided on
the straight-line method over the following estimated useful lives:
Years
-----
Machinery and equipment......... 5-10
Office furniture and
equipment..................... 5
Structures and improvements..... 5-39
Maintenance, repairs and renewals which neither materially add to the
value of the equipment nor appreciably prolong its life are charged to expense
as incurred. Gains or losses on dispositions of equipment are included in
income.
During March 2000, the Company exercised its purchase option and closed
on the acquisition of the material recovery facility, which it had previously
leased. The purchase price for the property was $4,000,000 which was paid as
follows: $500,000 at closing and the remainder in two purchase promissory notes:
one at $2,500,000 and the second at $1,000,000 each with interest at the rate of
8%. The promissory notes are for a term of 30 years and call for payments of
$18,344 and $7,338 per month, respectively.
On October 2, 2000, the Company purchased 2.4 acres of property
adjacent to its Construction and Demolition Debris Recycling Facility in Pompano
Beach, Florida for a purchase price of $650,000. The Company made a downpayment
of $200,000 and issued a mortgage of $450,000 to the seller. The mortgage calls
for an interest rate of 8 1/2% with monthly payments according to an amortized
over 15 years and a balloon payment after 10 years.
5. RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2000, Star derived
$1,623,187 of revenue for disposal fees from and trucking services provided to
J.R. Capital Corp, a related party corporation which is owned by the chairman of
Star. During the nine months ended September 30, 2000, Star incurred $2,267,238
of costs for disposal fees at J.R. Capital's material recovery facilities.
At September 30, 2000, accounts payable includes net payables to J.R.
Capital of $800,109 and accounts receivable includes net receivables from J.R.
Capital of $167,955. Such payables and receivables are satisfied in the ordinary
course of business.
Star paid accounting fees to a firm, which is owned, in part, by one of
Star's significant shareholders. Such fees totalled $15,860 and $3,000 for the
three months ended September 30, 2000 and 1999, respectively.
Effective June 1999, Delta Tall Pines Corp. entered into an operating
lease agreement with a related party for a material recovery facility in Palm
Beach County, Florida. The lessor is a corporation which is owned by two of
Star's principal shareholders and officers. The lease is for a 74-month term
ending July 2005, at a monthly rental of $21,200. In addition, the Company is
responsible for all real estate taxes and operating costs. Rent paid to the
related party totalled $190,800 for the nine months ended September 30, 2000.
Effective May 30, 2000, Delta Resources sold the customer list and some
equipment both from the rolloff operations in Brevard County, Florida to Charles
Greene, a former secretary of Star in exchange for a one year promissory note in
the amount of $175,000. The transaction was entered into by Star in an effort to
terminate all operations in Brevard County as a result of the legal proceedings
discussed in the legal proceedings section of this filing.
In October 2000, Jack Casagrande, Chief Executive Officer, Patrick F.
Marzano, President and Dominick Marzano, brother of Patrick F. Marzano, each
loaned the Company $400,000. The terms are interest only payments at 3% above
prime per year payable monthly for a two year period. There will be a balloon
payment due at the end of the two year period. Each loan is guaranteed by the
corporation and secured by real estate owed by the corporation.
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6. COSTS RELATED TO CLOSURE OF FACILITIES
Effective March, 2000 the Company closed one of its MRF facilities
located in Pompano Beach in order to consolidate operations. Costs related to
closure of the facility in the amount of $58,328 represents a payment to the
lessor of the property to buyout the remaining term of the lease of the
facility.
In January 2000, the Company was notified that a temporary injunction
had been issued ordering that its Royal Oak Construction and Demolition Debris
Landfill in Brevard County, Florida be closed. The injunction was based on local
zoning laws. Additionally, two employees of its subsidiary Delta Resources,
Charles Green and Susan Johnson, were arrested and charged with illegal dumping.
Mr. Green is the former Secretary of the Company. The County has subsequently
closed the facility and the Company is currently appealing that ruling. Costs
equaling $609,122 for the nine months ending September 30, 2000 were incurred in
order to properly shut down the facility.
7. INCOME TAXES
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities for which
income tax effects will be realized in future years. Valuation allowances, if
any, are provided when the expected realization of deferred tax assets does not
meet a "more likely than not" criterion.
Deferred tax benefits of $87,935 were realized for the nine months
ended September 30, 2000, as a result of the Company's net operating loss of
approximately $267,953. Such loss is available to be carried forward through the
year 2020 to offset future years' taxable income. Although realization is not
assured, management believes that it is more likely than not that all of the
deferred tax asset will be realized. The deferred tax asset has been classified
as current based on the expected reversal date of the temporary difference.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Quarterly Report on Form 10-Q concerning the
Company's outlook or future economic performance: anticipated profitability,
gross billings, commissions and fees, expenses or other financial items: and
statements made or exceptions to any future events, conditions, performance or
other matter are "forward looking statements: as that term is defined under the
Federal Securities Laws. Forward-looking statements are subject to risks,
uncertainties, and other factors which would cause actual results to differ
materially from those stated in such statements. Such risks, and uncertainties
and factors include but are not limited to, (i) that the company has grown
rapidly and there can be no assurance that the Company will continue to be able
to grow profitably or manage its growth, (ii) risks associated with
acquisitions, (iii) competition, (iv) the Company's quarterly operating results
have fluctuated in the past and are expected to fluctuate in the future, (v) the
Company's business experiences seasonality, (vi) and the loss of services of
certain key individuals could have a material adverse effect on the Company's
business, financial condition or operating results.
OVERVIEW
The Company's primary objective is to become one of the leading
companies in the environmental service industry in the eastern United States.
The Company intends to implement an aggressive program of internal growth and
acquisitions aimed at expanding the Company's existing market share and
acquiring a number of additional, established operating entities.
Star Services intends to grow through both acquisitions and internal
growth. We expect a substantial part of our future growth to come from acquiring
additional solid waste collection, transfer and disposal businesses. Additional
acquisitions could continue to affect period-to-period comparisons of our
operating results. We also expect to invest in collection vehicles and
equipment, maintenance of existing equipment, and management information
systems, which should supply the infrastructure to support our growth. We expect
to fund future acquisitions through cash from operations, borrowings, the
issuance of debt or equity and/or seller financing. We do not presently have any
credit facility for acquisitions or any commitment for one.
The Company operates in several segments of the environmental services
industry: collection, recycling and disposal of construction and demolition
debris, land clearing, yard waste debris, and source separated recyclable
materials. Star Services' operations are carried out by Delta Recycling Corp.,
which was incorporated in Florida on August 26, 1997, Delrock Management Corp.,
which was incorporated in Florida on May 29, 1998, Delta Transfer Corp., which
was incorporated in Florida on August 26, 1998, Eastern Recycling, Inc., which
was incorporated in Florida on June 11, 1997, Delta Resources, which was
incorporated in Florida on January 29, 1999, Delta Waste Corp., which was
incorporated in Florida in January 1999 and Delta Tall Pines Corp., which was
incorporated in Florida in April 1999.
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<PAGE> 12
Star Services operates MRFs which are licensed and regulated by the
State of Florida Department of Environmental Protection and various county
agencies. As MRFs, these facilities accept assorted loads of debris consisting
of construction and demolition debris, land clearing, yard waste and source
separated materials primarily from customers in the construction and demolition
industry. The incoming loads are processed using semi-automated sorting system
to separate recyclables from the waste stream. Additional loads are also
supplied directly by the Company through its hauling operations. The reclaimed
recyclables are shipped to end user markets for re-use. Star Services owns real
estate used in conjunction with certain of its operations and also maintains a
dredge and fill permit. Each of the above-described operations is performed by
one or more of Star Services' subsidiaries.
C&D debris enters the Company's facilities from its own roll-off
collection operation (consisting of over 1,800 containers in Palm Beach,
Miami-Dade and Broward Counties) and from other waste haulers. After the
material is inspected at the entrance inspection station and gate house, as
required by regulations of the Florida Department of Environmental Protection
("FDEP") and operational safety plans, the material is unloaded on the tipping
floor. The material is then sorted to remove appropriately designated recycling
materials, which are then placed in containers for storage or shipment to
markets. The remaining material is then processed or disposed of in landfills or
other facilities.
Land clearing, yard waste and wood are processed in tub grinders or
impact grinders to produce wood chips or mulch which is marketed as boiler fuel
or cover material. Large concrete, rocks and other inert material are sent to
designated tipping areas for future processing and/or disposed of in our
adjoining permitted lakefill operations. The remaining material, consisting of
dirt, fines, paper, plastics, metals, glass, drywall, broken concrete blocks,
bricks, lumber, wood and the like, is stockpiled for removal or processed
through additional screening and picking. The system first screens out fines
which are stockpiled for landfill cover material, with the remaining material
manually sorted to segregate recyclable material such as wood, plastic, glass,
ferrous and non-ferrous metals, corrugated cardboard, paper, roofing and
aggregate. The MRFs currently recycle approximately 70% to 90% of all waste that
they receive.
Effective October 1, 1999, the Delta Site Development Corp. acquired
the business, and substantially all of the assets and liabilities, of Mario's
Equipment Rental, Inc. ("Mario's"). As a result, the Company commenced
operations of providing site development services, such as site clearing and
grading.
RESULTS OF OPERATIONS
The following table reflects the Company's operating revenues for each
of three months and nine months ended September 30, 2000 and 1999 for each of
the Company's principal lines of business.
<TABLE>
<CAPTION>
Three-month period Nine-month period
ended September 30, ended September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Waste Services
Commercial Waste Services $ 300,421 $ 77,972 $ 620,604 $ 188,697
Industrial Waste Services 3,325,506 1,467,050 9,589,699 3,590,248
Other Waste Services 29,752 10,178 29,752 21,855
Total Waste Services 3,655,679 1,555,200 10,240,055 3,800.800
MRFs 1,841,107 1,659,035 5,200,957 3,961,071
Management Services 384,323 0 1,152,970 0
Landfills 0 144,146 10,894 364,638
----------- ----------- ----------- -----------
Operating Revenue $ 5,881,109 $ 3,358,381 $16,604,876 $ 8,126,509
=========== =========== =========== ===========
</TABLE>
The following table presents, for the periods indicated, the various
consolidated line items as a percentage of gross revenues.
<TABLE>
<CAPTION>
Three-month period Nine-month period
ended September 30, ended September 30,
---------------------- ------------------------
2000 1999 2000 1999
-------- -------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 100.00% $ 100.00% $ 100.00% $ 100.00%
-------- -------- --------- ---------
Expenses:
Direct costs 68.63% 85.84% 69.70% 79.91%
Selling and administrative 19.51% 21.20% 18.86% 23.92%
Stock-based compensation 1.37% 2.40% 1.46% 2.65%
Depreciation and amortization 5.46% 4.00% 5.35% 3.28%
94.97% 113.44% 95.37% 109.76%
Income (loss) from operations 5.03% -13.44% 4.63% -9.76%
Interest income 0.04% 0.82% 0.12% 0.65%
Interest expense -3.03% -1.98% -2.70% -2.07%
Costs related to closure of facilities -0.73% 0.00% -3.67% 0.00%
Income (loss) before income taxes 1.31% -14.60% -1.62% -11.18%
Income taxes benefit (expense) -0.46% 5.11% 0.53% 3.91%
-------- -------- --------- ---------
Net income (loss) $ 0.85% $ -9.49% $ -1.09% $ -7.27%
======== ======== ========= =========
</TABLE>
11
<PAGE> 13
<TABLE>
<CAPTION>
Three-month period Nine-month period
ended September 30, ended September 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Waste Services
Commercial Waste Services 5.10% 2.33% 3.74% 2.32%
Industrial Waste Services 56.55% 43.68% 57.75% 44.18%
Other Waste Services 0.51% 0.30% 0.18% 0.27%
------- ------- ------- -------
Total Waste Services 62.16% 46.31% 61.67% 46.77%
MRFs 31.31% 49.40% 31.32% 48.74%
Management Services 6.53% 0.00% 6.94% 0.00%
Landfills 0.00% 4.29% 0.07% 4.49%
------- ------- ------- -------
Operating Revenue 100.00% 100.00% 100.00% 100.00%
======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
Total revenues for the three months ended September 30 increased to
$5,881,109 in 2000 from $3,358,381 in 1999. The increase of $2,522,728 was
primarily attributable to increased volumes in industrial waste services and
MRFs. The industrial waste services revenues increased due to the expansion of
our rolloff operations in Broward and Dade Counties. The MRFs revenues increased
due to increased activity.
DIRECT COSTS
Total direct costs for the three months ended September 30 increased to
$4,036,230 in 2000 from $2,882,922 in 1999. The increase of $1,153,308 was
principally due to increased volume, increased disposal costs and the cost of
the hauling operations of Delta Recycling Corp. Direct costs as a percentage of
revenues decreased to 68.63% for the three months ended September 30, 2000 from
85.84% for the three months ended September 30, 1999.
12
<PAGE> 14
SELLING AND ADMINISTRATIVE
Selling and administrative expenses for the three months ended
September 30 increased to $1,147,513 in 2000 from $712,116 in 1999. The increase
of $435,397 was due to the increase in administrative overhead required to
manage the Company's growth. The largest increases came in the areas of
administrative salaries, professional fees, occupancy costs and travel. As a
percentage of revenues, selling and administrative expenses for the three months
ended September 30 decreased to 19.51% in 2000 from 21.20% in 1999.
STOCK-BASED COMPENSATION
During February 1999, the Company issued 759,000 options to employees
of the Company. The options vest over a four-year period. Stock-based
compensation represents the portion of the total compensation expense to be
recognized over the vesting period, which is attributable to the three month
periods ended September 30, 2000 and September 30, 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the three months ended
September 30 increased to $321,211 in 2000 from $134,304 in 1999. The increase
was the result of the purchase of over $5,900,000 of property and equipment
during the three months ended March 31, 2000 and amortization of costs in excess
of net assets acquired in business combinations.
INTEREST INCOME AND EXPENSE
Interest income for the three months ended September 30 decreased to
$2,557 in 2000 from $27,533 in 1999. Interest expense for the three months ended
September 30 increased to $178,155 in 2000 from $66,560 in 1999. The increased
interest expense of $106,596 was a result of higher debt levels resulting from
the purchase of additional property and equipment. Interest income earned for
the three months ended September 30, 2000 and 1999 was earned on excess cash
balances available as a result of proceeds from the Company's private placement.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
Total revenues for the nine months ended September 30 increased to
$16,604,876 in 2000 from $8,126,509 in 1999. The increase of $8,478,367 was
primarily attributable to increased volumes in industrial waste services and
MRFs. The industrial waste services revenues increased due to the expansion of
our rolloff operations in Broward and Dade Counties. The MRFs revenues increased
due to increased activity.
DIRECT COSTS
Total direct costs for the nine months ended September 30 increased to
$11,573,091 in 2000 from $6,494,178 in 1999. The increase of $5,078,913 was
principally due to increased volume, increased disposal costs and the cost of
the hauling operations of Delta Recycling Corp. Direct costs as a percentage of
revenues decreased to 69.70% for the nine months ended September 30, 2000 from
79.91% for the nine months ended September 30, 1999.
SELLING AND ADMINISTRATIVE
Selling and administrative expenses for the nine months ended September
30 increased to $3,131,897 in 2000 from $1,944,063 in 1999. The increase of
$1,187,834 was due to the increase in administrative overhead required to manage
the Company's growth. The largest increases came in the areas of administrative
salaries, professional fees, occupancy costs and travel. As a percentage of
revenues, selling and administrative expenses for the nine months ended
September 30 decreased to 18.86% in 2000 from 23.92% in 1999.
13
<PAGE> 15
STOCK-BASED COMPENSATION
During February 1999, the Company issued 759,000 options to employees
of the Company. The options vest over a four-year period. Stock-based
compensation represents the portion of the total compensation expense to be
recognized over the vesting period, which is attributable to the nine month
periods ended September 30, 2000 and September 30, 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the nine months ended
September 30 increased to $888,621 in 2000 from $266,273 in 1999. The increase
was the result of the purchase of over $5,900,000 of property and equipment
during the nine months ended September 30, 2000 and amortization of costs in
excess of net assets acquired in business combinations.
INTEREST INCOME AND EXPENSE
Interest income for the nine months ended September 30 decreased to
$19,798 in 2000 from $52,777 in 1999. Interest expense for the nine months ended
September 30 increased to $447,967 in 2000 from $167,960 in 1999. The increased
interest expense of $280,007 was a result of higher debt levels resulting from
the purchase of additional property and equipment. Interest income earned for
the nine months ended September 30, 2000 and 1999 was earned on excess cash
balances available as a result of proceeds from the Company's private placement.
CONTRACTS
Our revenues consist mainly of fees we charge customers for
construction and demolition debris transfer, disposal and recycling services. A
large part of our collection revenue comes from providing service to industrial,
residential and commercial customers. These services are provided under
contracts that generally last from one month to five years. The contracts
provide a relatively stable source of revenue for Star Services.
We typically determine the prices for our solid waste services by the
collection frequency and level of service, route density, volume, weight and
type of waste collected, type of equipment and containers furnished, the
distance to the disposal or processing facility, the cost of disposal or
processing, and prices charged by competitors for similar services.
EXPENSES
Direct costs include labor, fuel, equipment maintenance and tipping
fees paid to third party disposal facilities, workers' compensation and vehicle
insurance, the cost of materials we purchase for recycling, third party
transportation expense, district and state taxes and permits, engineering and
legal services.
Selling and administrative expense includes management, clerical and
administrative compensation and overhead costs associated with our marketing and
sales force, professional services and community relations expenses.
Depreciation and amortization expense includes depreciation of fixed
assets over their estimated useful life using the straight line method and
amortization of goodwill and other intangible assets using the straight line
method.
Star Services intends to capitalize some expenditures related to
pending acquisitions or development projects, such as legal and engineering
expenses. We intend to expense indirect acquisition costs, such as executive and
corporate overhead, public relations and other corporate services. We charge
against net income any unamortized capitalized expenditures and advances (net of
any portion that we believe we may recover, through sale or otherwise) that
relate to any operation that is permanently shut down and any pending
acquisition or landfill development project that is not completed. We routinely
evaluate all capitalized costs, and expense those related to projects that we
believe are not likely to succeed.
We will have material financial obligations relating to closure costs
of any disposal facilities we may own or operate in the future. In such case,
Star Services will accrue for those obligations, based on engineering estimates
of consumption of permitted landfill airspace over the useful life of any such
landfill.
14
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
The Company operates in an industry that requires a high level of
capital investment. The Company's capital requirements primarily stem from its
working capital needs for its ongoing operations, capital expenditures for new
trucks and equipment and business acquisitions. The Company's strategy is to
meet these capital needs first from internally generated funds and secondly from
various financing sources available to the Company, including the incurrence of
debt, and the issuance of its common stock. Currently the Company has no credit
facilities in place and plans on seeking additional capital in the near future.
As of September 30, 2000, the Company had a working capital deficit of
$729,963 (a ratio of current assets to current liabilities of 0.84:1) and a cash
balance of $251,414 which compares to a working capital surplus of $815,674 (a
current ratio of 1.27:1) and a cash balance of $1,476,406 as of December 31,
1999. The main reason for the decrease in cash balances of $1,224,992 is as a
result of the capital used for the downpayment for the purchase of the assets of
Allied Roll Off Holdings, Inc. and the acquisition of the material recovery
facility the Company had previously leased.
For the nine months ended September 30, 2000, net cash provided by
operating activities was $582,876 as compared to cash used in operating
activities of $171,194 for the nine months ended September 30, 1999. For the
nine months ended September 30, 2000, net cash used in financing activities was
$1,187,394 as compared to net cash provided by financing activities of
$2,891,049 for the nine months ended September 30, 1999.
For the nine months ended September 30, 2000 there were no cash
dividends paid.
The Company expects to generate sufficient cash flow from its
operations in 2000 and from shareholder loans to cover its anticipated working
capital needs and moderate capital expenditures and acquisitions. During October
2000, three of the Company's shareholders loaned the Company a total of $1.2
million for a period of two years in order to address the Company's capital
requirements. If the Company's cash flow from operations during 2000 is less
than currently expected or if the Company decides to make substantial
acquisitions, or if the Company's capital requirements increase, either due to
strategic decisions or otherwise, the Company may elect to incur future
indebtedness or issue equity securities to cover any additional capital needs.
However, there can be no assurance that the Company will be successful in
obtaining additional capital on acceptable terms through such debt incurrances
or issuances of additional equity securities.
INFLATION
Inflation has not significantly affected our operations. Consistent
with industry practice, many of our contracts allow us to pass through certain
costs to our customers, including increases in landfill tipping fees and, in
some cases, fuel costs. Therefore, we believe that we should be able to increase
prices to offset many cost increases that result from inflation. However,
competitive pressures may require us to absorb at least part of these cost
increases, particularly during periods of high inflation.
SEASONALITY
Seasonality has not had a material effect on our operations and is not
expected to have a material effect in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risks, primarily related to changes in
U.S. interest rates and, to a lesser extent, recyclable prices. The Company does
not engage in financial transactions for trading and speculative purposes.
COMMODITY RISK ON RESALE OF RECYCLABLES. We provide recycling services.
The sale prices of and demand for recyclable waste products, particularly
wastepaper, are frequently volatile and may affect our operating results.
15
<PAGE> 17
PART II
ITEM 1. LEGAL PROCEEDINGS
Star Services is a party to various legal proceedings in the ordinary
course of business and arising from the extensive governmental regulation of the
solid waste industry. Management does not believe that these proceedings either
individually or in the aggregate, are likely to have a material adverse effect
on our business, financial condition, operating results or cash flows.
In January 2000, the Company was notified that a temporary injunction
had been issued ordering that its Royal Oak Construction and Demolition Debris
Landfill in Brevard County, Florida be closed. The injunction was based on local
zoning laws. Additionally, two employees of its subsidiary Delta Resources,
Charles Green and Susan Johnson, were arrested and charged with illegal dumping.
Mr. Green was a former Secretary of the Company. The County has subsequently
closed the facility and the Company is currently appealing that ruling.
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. The following exhibits are filed as part of this report:
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
b. Exhibits and Reports on Form 8-K
The Company filed a report of Form 8-K dated March 20, 2000, reporting
an acquisition of assets under Item 2 thereof. The acquisition related
to the Company's purchase of most of the assets of Allied Roll Off
Holdings, Inc. ("Allied"). Financial statements of Allied were not
required to be filed with Form 8-K.
All other items of this report are inapplicable.
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STAR SERVICES, INC.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JACK R. CASAGRANDE Chairman of the Board and Chief November 1, 2000
------------------------------- Executive Officer (Principal
Jack R. Casagrande Executive Officer)
/s/ PATRICK F. MARZANO Chief Financial Officer and November 1, 2000
------------------------------- President and Director
Patrick F. Marzano
</TABLE>
17
