<PAGE> 1
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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 March 31, 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)
---------------
<TABLE>
<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)
---------------
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 May 1, 2000
----- --------------------------
Common Stock.............................. 8,159,260
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
March 31, 2000 and December 31, 1999 .......................... 1
Consolidated Condensed Statements of Operations
Three Months Ended March 31, 2000 and March 31, 1999 .......... 2
Consolidated Condensed Statement of Stockholders' Equity
Three Months Ended March 31, 2000 ............................. 3
Consolidated Condensed Statements of Cash Flows
Three Months Ended March 31, 2000 and March 31, 1999 .......... 4
Notes to Consolidated Condensed Financial Statements ............ 5
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations ..................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...... 13
PART II
Item 1. Legal Proceedings ............................................... 14
Item 6. Exhibits and Reports on Form 8-K ................................ 14
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STAR SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 372,164 $ 1,476,406
Accounts receivable 2,269,822 1,978,243
Prepaid expenses 299,368 163,149
Deferred income taxes 343,822 195,001
------------ ------------
Total current assets 3,285,176 3,812,799
------------ ------------
Property and equipment, at cost:
Machinery and equipment 7,818,920 6,164,321
Office furniture and equipment 105,614 84,320
Structures and improvements 5,202,040 887,364
------------ ------------
13,126,574 7,136,005
Less accumulated depreciation 901,940 647,427
------------ ------------
Net property and equipment 12,224,634 6,488,578
------------ ------------
Other assets:
Cost in excess of net assets acquired 831,668 534,864
Deferred charges 101,536 113,303
------------ ------------
Total other assets 933,204 648,167
------------ ------------
Total assets $ 16,443,014 $ 10,949,544
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,492,213 $ 1,174,060
Accounts payable 1,225,148 1,260,328
Accrued expenses 920,679 562,737
------------ ------------
Total current liabilities 3,638,040 2,997,125
------------ ------------
Long-term debt, net of current portion 7,842,512 3,094,221
------------ ------------
Stockholders' equity:
Common stock, $.01 par value
30,000,000 shares authorized,
8,159,260 shares issued and outstanding in 2000 81,593
8,100,000 shares issued and outstanding in 1999 81,000
Additional paid-in capital 5,579,445 5,199,393
Retained earnings (accumulated deficit) (698,576) (422,195)
------------ ------------
Total stockholders' equity 4,962,462 4,858,198
------------ ------------
Total liabilities and stockholders' equity $ 16,443,014 $ 10,949,544
============ ============
</TABLE>
See notes to consolidated financial statements
1
<PAGE> 4
STAR SERVICES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three-month period
ended March 31,
-----------------------------
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
Revenues $ 5,037,985 $ 2,217,469
----------- -----------
Expenses:
Direct costs 3,576,767 1,588,770
Selling and administrative 1,002,986 457,626
Stock-based compensation 80,643 53,762
Depreciation and amortization 242,737 53,448
----------- -----------
4,903,133 2,153,606
----------- -----------
Income (loss) from operations 134,852 63,863
Interest income 5,977 --
Interest expense (116,630) (39,743)
Costs related to closure of facilities (449,401) --
----------- -----------
Income (loss) before income taxes (425,202) 24,120
Income taxes benefit (expense) 148,821 (8,442)
----------- -----------
Net income (loss) $ (276,381) $ 15,678
=========== ===========
Earnings (loss) per share $ (0.03) $ 0.00
=========== ===========
Historical weighted average shares
outstanding 8,107,813 5,016,306
=========== ===========
</TABLE>
See notes to consolidated financial statements
2
<PAGE> 5
STAR SERVICES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three-month periods ended March 31, 2000 and 1999
(Information for three-month periods ended March 31, 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) 1,467,500 14,675 2,970,325 --
Net income (unaudited) -- -- -- 15,678
---------- ---------- ---------- ----------
Balance at March 31, 1999 (unaudited) 6,467,500 $ 64,675 $3,418,525 $ (44,372)
========== ========== ========== ==========
Balance at January 1, 2000 8,100,000 $ 81,000 $5,199,393 $ (422,195)
Issuance of common stock and
capital contributions (unaudited) 59,260 593 380,052 --
Net loss (unaudited) -- -- -- (276,381)
---------- ---------- ---------- ----------
Balance at March 31, 2000 (unaudited) 8,159,260 $ 81,593 $5,579,445 $ (698,576)
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 6
STAR SERVICES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three-month period
ended March 31,
-----------------------------
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (276,381) $ 15,678
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 255,209 53,449
Stock-based compensation 80,643 53,762
Deferred charges expenses 11,767 --
Changes in operating assets and liabilities:
Increase in accounts receivable (291,579) (279,513)
Increase in prepaid expenses (136,219) (12,778)
Increase in deferred income tax asset (148,821) (18,817)
Increase(decrease) in accounts payable (35,180) 438,702
Increase in accrued expenses 277,299 34,323
----------- -----------
Net cash provided by (used in)
operating activities (263,262) 284,806
----------- -----------
Cash flows from investing activities:
Capital expenditures (192,907) (13,018)
----------- -----------
Net cash (used in) investing activities (192,907) (13,018)
----------- -----------
Cash flows from financing activities:
Proceeds from stockholder loans -- 67,000
Principal payments under loan agreements (648,073) (228,118)
Net proceeds from issuance of common stock
and capital contributions -- 2,985,000
----------- -----------
Net cash provided by (used in) financing activities (648,073) 2,823,882
----------- -----------
Net increase (decrease) in cash (1,104,242) 3,095,670
Cash, beginning of period 1,476,406 49,149
----------- -----------
Cash, end of period $ 372,164 $ 3,144,819
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest expense paid $ 116,630 $ 39,743
=========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 7
STAR SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 2000 and the results of its
operations and its cash flows for the period then ended and the period ended
March 31, 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.
2. EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per share are calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Earnings
Net Income (Loss) $ (276,381) $ 15,678
Income (loss) applicable to
common shareholders $ (276,381) $ 15,678
=========== ===========
Basic:
Income (loss) applicable to
common shareholders $ (276,381) $ 15,678
Weighted average shares
outstanding during the period 8,107,813 5,016,306
Basic $ (0.03) $ 0.00
Diluted:
Income (loss) applicable to
common shareholders $ (276,381) $ 15,678
Weighted average shares
outstanding during the period 8,107,813 5,016,306
Effect of dilutive securities:
Stock Options 0 0
Diluted weighted common
shares outstanding 8,107,813 5,016,306
Diluted $ (0.03) $ 0.00
</TABLE>
5
<PAGE> 8
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.
The estimated purchase price is 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.
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 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 is
subject to adjustment based on revenues to be generated in the month of August
2000.
6
<PAGE> 9
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.
7
<PAGE> 10
5. RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2000, Star derived $431,338 of
revenue for disposal fees and trucking services provided to J.R. Capital Corp, a
related party corporation which is owned by the chairman of Star. During the
three months ended March 31, 2000, Star incurred $1,218,416 of costs for
disposal fees at J.R. Capital's material recovery facilities.
At March 31, 2000, accounts payable includes net payables to J.R. Capital of
$531,795 and accounts receivable includes net receivables from J.R. Capital of
$177,293. 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 $17,130 and $3,000 for the
three months ended March 31, 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 $63,600 for the three months ended March 31, 2000.
6. COSTS RELATED TO CLOSURE OF FACILITIES
Effective March, 2000 the Company has 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 Secretary of the Company. The County has subsequently closed
the facility and the Company is currently appealing that ruling. Costs equaling
$391,073 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 $148,821 were realized for the three months ended
March 31, 2000, as a result of the Company's net operating loss of approximately
$425,202. 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.
8
<PAGE> 11
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.
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 an 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 and operates a C&D debris landfill in Titusville,
Florida. 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 500 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.
9
<PAGE> 12
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 ended March 31, 2000 and 1999 for each of the Company's principal
lines of business.
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Waste Services
Commercial Waste Services $ 165,673 $ 45,842
Industrial Waste Services 2,728,197 925,554
Other Waste Services .... 0 7,277
---------- ----------
Total Waste Services.. 2,893,870 978,673
MRFs ...................... 1,748,898 1,187,346
Management Services ....... 384,323 0
Landfill .................. 10,894 51,450
---------- ----------
Operating Revenue ......... $5,037,985 $2,217,469
========== ==========
</TABLE>
The following table presents, for the periods indicated, the various
consolidated line items as a percentage of gross revenues.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
------- ------
<S> <C> <C>
Statement of Operations Data:
Revenues ........................ 100.00% 100.00%
------ ------
Expenses:
Direct costs .................. 71.00% 71.65%
Selling and administrative .... 19.91% 20.64%
Stock-based compensation ...... 1.60% 2.42%
Depreciation and amortization . 4.82% 2.41%
------ ------
97.33% 97.12%
------ ------
Income (loss) from operations ... 2.68% 2.88%
Interest income ................. 0.12% 0.00%
Interest expense ................ (2.31%) (1.79%)
Costs related to closure of
facilities .................... (8.91%) 0.00%
------ ------
Income (loss) before income
taxes ......................... (8.42%) 1.09%
Income tax benefit .............. 2.95% (0.39)%
------ ------
Net income (loss) ............... (5.47%) 0.70%
====== ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
------- -------
<S> <C> <C>
Waste Services
Commercial Waste Services ..... 3.29% 2.07%
Industrial Waste Services ..... 54.15% 41.74%
Other Waste Services .......... 0.00% 0.33%
------ ------
Total Waste Services... 57.44% 44.13%
MRFs ............................ 34.71% 53.55%
Management Services ............. 7.63% 0.00%
Landfills ....................... 0.22% 2.32%
------ ------
Operating Revenue ............... 100.00% 100.00%
====== ======
</TABLE>
10
<PAGE> 13
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999
REVENUES
Total revenues for the three months ended March 31 increased to $5,037,985
in 2000 from $2,217,469 in 1999. The increase of $2,820,516 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 into Naples and Titusville and the increased revenues generated from
our rolloff operation in Pompano. The MRFs revenues increased due to increased
activity.
DIRECT COSTS
Total direct costs for the three months ended March 31 increased to
$3,576,767 in 2000 from $1,987,997 in 1999. The increase of $2,189,276 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 71.00% for the three months ended March 31, 2000 from
71.65% for the three months ended March 31, 1999.
SELLING AND ADMINISTRATIVE
Selling and administrative expenses for the three months ended March 31
increased to $1,002,986 in 2000 from 457,626 in 1999. The increase of $545,360
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 March
31 decreased to 19.91% in 2000 from 20.64% 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 3 month periods ended March 31,
2000 and March 31, 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the three months ended March 31
increased to $242,737 in 2000 from $53,448 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 March 31 increased to $5,977 in
2000 from $0 in 1999. Interest expense for the three months ended March 31
increased to $116,630 in 2000 from $39,743 in 1999. The increased interest
expense of $76,887 was a result of higher debt levels resulting from the
purchase of additional property and equipment. Interest income earned for the
three months ended March 31, 2000 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.
11
<PAGE> 14
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, general and administrative ("SG&A") 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.
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 securing additional capital in the near future.
As of March 31, 2000, the Company had a working capital deficit of $352,864
(a ratio of current assets to current liabilities of 0.90:1) and a cash balance
of $372,164 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 $1,123,542 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 three months ended March 31, 2000, net cash used in operating
activities was $263,262 as compared to cash provided by operating activities of
$284,806 for the three months ended March 31, 1999. For the three months ended
March 31, 2000, net cash used in financing activities was $648,073 as compared
to net cash provided by financing activities of $2,823,882 for the three months
ended March 31, 1999.
For the three months ended March 31, 2000 there were no cash dividends paid.
The Company expects to generate sufficient cash flow from its operations in
2000 to cover its anticipated working capital needs and moderate capital
expenditures and acquisitions. 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.
12
<PAGE> 15
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.
13
<PAGE> 16
PART II
ITEM 1. LEGAL PROCEEDINGS
Star Services is a party to various legal proceedings in the ordinary course
of business and as a result of 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 is the 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.
14
<PAGE> 17
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.
Signature Title Date
--------- ----- ----
/s/ Jack R. Casagrande Chairman of the Board and Chief May 10, 2000
- --------------------------- Executive Officer (Principal
Jack R. Casagrande Executive Officer)
/s/ Patrick F. Marzano Chief Financial Officer and May 10, 2000
- --------------------------- President and Director
Patrick F. Marzano
15
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