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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 0-21975
ECO SOIL SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
NEBRASKA 47-0709577
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10890 THORNMINT ROAD, SUITE 200, SAN DIEGO, CA 92127
(Address of Principal Executive Offices) (Zip Code)
(619) 675-1660
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.005 par value Nasdaq National Market
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 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 [_]
Indicate by check mark if disclosure of delinquent filer pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
The Registrant's revenues for the fiscal year ended December 31, 1997
were: $37,525,405.
As of March 16, 1998, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $95,963,215.
As of March 16, 1998, the number of shares outstanding of the
Registrant's Common Stock, $.005 par value, was: 15,557,538.
Transitional Small Business Disclosure Format (check one):
YES [_] NO [X]
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
the definitive Proxy Statement for the Annual Meeting of Shareholders of the
Registrant to be held May 1, 1998, which is being filed on or prior to April 30,
1998.
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FORWARD-LOOKING STATEMENTS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Statements contained in this
document that are not based on historical fact are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. To
the extent statements in this report involve, without limitation, product
development, and introduction plans, the Company's expectations for growth,
estimates of future revenue, expenses, profit, cash flow, balance sheet items,
sell-through or backlog, forecasts of demand or market trends for the Company's
various product categories and for the industries in which the Company operates
or any other guidance on future periods, these statement are forward-looking
statements. Forward-looking statements also may be identified by use of
forward-looking terminology such as "may," "will," "expect," "estimate,"
"anticipate," "believe," "continue" or similar terms, variations of those terms
or the negative of those terms. These risks and uncertainties include those
identified by the Company under the caption "Factors That Could Affect Future
Performance" in Item 1, and other risks identified from time to time in the
Company's filings with the Securities and Exchange Commission, press releases
and other communications. The Company assumes no obligation to update
forward-looking statements.
PART I
ITEM 1. BUSINESS.
GENERAL
Eco Soil Systems, Inc. (the "Company") develops, markets and sells
proprietary biological and traditional chemical products that provide solutions
for a wide variety of turf and crop problems in the golf and agricultural
industries. The Company has developed its patented BioJect(R) system for the
distribution of naturally occurring microbes that complement or reduce the need
for many chemical products currently used in golf and agricultural markets. By
fermenting microbes at the customer's site and distributing them through the
customer's existing irrigation system, the BioJect system provides customers
with cost savings and mitigates the adverse environmental effects associated
with chemical products. The Company initially has focused its sales and
marketing efforts on the golf market, and recently has entered the agricultural
crop and ornamental markets. To date, the Company has installed 369 BioJect
systems at customer sites, including such renowned golf courses as Congressional
Country Club, Winged Foot Golf Club and Spyglass Hill Golf Club.
By utilizing microbes that occur naturally in the environment, the
BioJect system overcomes many of the problems associated with traditional
chemical products. Traditional chemical products require repeated applications,
which reduce the long-term effectiveness of such products and have been shown
to have adverse environmental effects. The BioJect system reduces the need for
repeated chemical product applications--resulting in lower overall product and
labor costs--and increases the effectiveness of traditional chemical products.
In addition, the Company believes that the use of microbes distributed through
the BioJect system provides environmental benefits as compared to chemical
product applications by limiting the exposure of humans to chemical products,
reducing residual pesticide contaminants in plants and soil, and minimizing
groundwater pollution.
The BioJect system overcomes many of the obstacles that historically
have hindered wide-spread use of microbes in the golf and agricultural
industries. Biological products generally have been perceived
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as economically infeasible because of their short shelf life, rapid
deterioration upon exposure to light or heat, specialized transportation
requirements and need for daily, manual applications. By fermenting microbes at
the customer's site and distributing them through the customer's existing
irrigation system, the BioJect system preserves and protects the potency of
microbes, significantly reduces shipping costs, controls the concentration of
product and allows for automated daily application.
The Company generates recurring revenues by leasing BioJect systems to
customers and selling various microbial products for distribution through the
system. The Company has entered into technology transfer agreements pursuant to
which it has obtained rights to certain microbes for distribution through the
BioJect system from leading biotechnology companies such as Mycogen Corporation,
Abbott Laboratories and Encore Technologies, Inc. and major universities such as
Michigan State University and the University of California, Riverside. The
Company currently offers BioJect customers a menu of six microbial products and
intends to obtain rights to additional microbes.
HISTORY
The Company was incorporated under Nebraska law in November 1987. The
Company initially marketed a program that developed blended fertilizers and soil
amendments to golf courses and to other residential and commercial customers in
the Lincoln, Nebraska area. In 1991, the Company decided that it needed a
broader strategic vision and, consequently, concentrated on the development of
biological inoculation service and nutrient programs. In the next several years,
the Company developed its BioJect, ClearLake(R), CleanRack(TM), CalJect(TM) and
SoluJect(TM) systems for distribution to the turf maintenance industry.
See Item 1: "Business -- Products."
As the Company evolved from a product development and market
introduction oriented business to a more sales-driven organization, the Company
decided to de-emphasize its non-proprietary nutrient and seed business and
instead concentrate its resources on the proprietary BioJect, CleanRack, CalJect
and SoluJect systems. The Company also established new distributor relationships
and expanded its international marketing activities.
STRATEGY
The Company's strategy is to expand its leadership position in the
distribution and sale of microbial products in the golf industry and to leverage
its experience in this industry into agricultural crop and ornamental markets.
Increase Penetration of Golf Markets. The Company currently has an
installed base of 344 BioJect systems, 25 SoluJect systems and 6 CalJect systems
in the golf market. These BioJect systems are disbursed among 24 states and 7
countries. The Company intends to continue to focus its sales and marketing
efforts on increasing the number of installations of its BioJect system and
expanding the number of menu items sold to each customer. The Company also
intends to utilize its installed base to further increase the volume of sales of
distributed products. The Company believes that its strategy of leasing rather
than selling BioJect systems promotes a more rapid expansion of its customer
base by relieving its customers of having to make substantial capital
investments. The Company believes that as it demonstrates the advantages of its
proprietary products, the use of biological products in the golf industry will
become more widespread and the Company will be well positioned to exploit new
market opportunities.
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Establish Nationwide Sales and Distribution Network. Major golf course
markets tend to be represented by a single sales organization that controls a
significant portion of new product introductions and their subsequent
penetrations into golf courses in their regions. This distribution network is
highly regionalized and based strongly on individual relationships. The Company
has made three acquisitions in regional markets including New England, the
Chicago metropolitan area and Southern California. In 1998, the Company expanded
its presence in the Midwest as it has acquired Benham Chemical Corporation, a
golf and turf products supplier in Michigan and Cannon Turf Supply, Inc.,
another supplier with operations in Illinois, Indiana, Kentucky, Michigan, Ohio
and Wisconsin. The Company intends to acquire additional dealers and
distributors, to hire selected personnel and to integrate them into a single
sales organization in order to enhance the Company's ability to market and sell
its proprietary products, establish itself as a single source supplier to golf
courses and increase its penetration into golf markets. The Company believes
that this consolidation of golf dealers and distributors also may improve the
Company's profitability by allowing the Company to obtain volume discounts from
suppliers.
Expand into Agricultural Markets. The Company currently has an installed
base of 25 BioJect systems and 8 CalJect systems in agricultural markets.
Although the Company initially has focused on golf applications for the BioJect
system, the Company has begun to focus on agricultural crop and ornamental
markets. The Company currently is conducting tests of salt remediation products
on tomato fields in Mexico and on strawberry fields and avocado and citrus
groves in Southern California. The Company's trials on tomato fields in Mexico
will be expanded from 3,000 acres in 1997 to 25,000 acres in 1998, and the
Company expects to install up to 100 additional BioJect systems and 100
additional CalJect systems on such fields during the 1998 growing season. The
Company also is conducting tests with major universities on the effectiveness of
its microbial products on certain pathogens found in the avocado and citrus
industries. In addition, the Company has begun testing applications for
ornamentals such as ferns and cut flowers with Novartis Crop Protection, Inc. If
the Company's test programs prove successful, the Company may form strategic
partnerships with various companies involved in the sale of products to the
agriculture industry in order to jointly market products.
Increase Number of Microbial Menu Items. In order to maximize the
revenues it generates from each BioJect system, the Company intends to expand
the selection of microbes it offers to its customers. To this end, the Company
has entered into discussions with various leading biotechnology companies and
major universities to obtain rights to additional microbes. The Company also has
increased its research and development efforts to determine which microbes will
be suitable for distribution through the BioJect system.
Further Develop International Markets. To date, the Company has sold 85
BioJect systems to customers in 6 countries outside the U.S., including 11
BioJect systems in Japan and 7 BioJect systems in Mexico. The Company believes
that there is a significant opportunity to further develop its sales in
international markets due to increased demand for alternatives to chemical
products and heightened environmental awareness. The Company has established
formal distribution relationships in Japan, Korea, Australia, Mexico, Canada,
Brunei and South Africa. The Company also owns a 51% interest in a South African
golf products distribution company. The Company intends to expand its
international sales to additional markets, particularly within the Pacific Rim,
through independent third party distributors or through joint ventures.
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PRODUCTS
The Company sells proprietary products and distributed products. The
Company's proprietary products primarily include its patented BioJect system,
its menu of six microbial products, its CalJect and SoluJect systems and certain
other proprietary products, including its CleanRack system. The Company
discontinued its ClearLake system in 1997. The Company's distributed products
consist of traditional fertilizers and pesticides that are distributed through
the Company's dealers and distributors.
Proprietary Products
The Company's proprietary products consist of (i) the BioJect system,
which automatically ferments and distributes microbes through irrigation
systems, (ii) the CalJect and SoluJect systems, which permit the injection of
soil and water amendments into irrigation systems, and (iii) other proprietary
products, including the CleanRack system.
BioJect System
The BioJect system permits the introduction of microbes into the soil
with the required frequency and in a cost-effective and environmentally safe
manner. Because biological products are subject to degradation upon exposure to
high temperatures, light or long storage periods, the introduction of these
microbes into the soil on a regular basis had not been economically feasible
prior to the development of the BioJect system. The BioJect system overcomes the
traditional problems associated with the introduction of microbes into the soil
by fermenting them at the customer's site during the day and then dispensing the
microbes into the customer's irrigation system automatically at night. The
BioJect system includes fermentation chambers, pumps, injectors and computer
controls that coordinate the scale-up of microbial products and their injection
into the customer's irrigation system. The BioJect system is equipped with
hardware and proprietary software that allows the user to select or pre-program
the microbe application rate and time of delivery through its user-friendly
control panel. The system also automatically controls the amount of nutrients,
dissolved oxygen, temperature and pH of the fermentation chamber to optimize the
scale-up of microbial populations from a starter culture.
The Company believes that its BioJect system will become the preferred
distribution vehicle for many microbial products because it is able to overcome
the poor shelf life characteristics that have previously prevented biological
products from being practical alternatives or complements to chemical products.
The BioJect system has been designed to apply up to three microbial
products at a time. The Company is the sole supplier of all of the consumables
(biologicals and media) that are required in its BioJect system, as well as
hardware maintenance services. The BioJect system is the Company's primary
product, and the Company intends to focus most of its efforts on enhancing the
capabilities of and promoting the BioJect system to the golf industry and the
expansion of its BioJect system into the agricultural ornamental and crop
industries.
The Company's installed base of BioJect systems has experienced rapid
growth in recent years, as shown in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1992 1993 1994 1995 1996 1997
------------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Cumulative number of installed 13 46 79 171 238 369
BioJect Systems
</TABLE>
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The Company has sold or leased its BioJect system to some of the most
famous and notable golf courses in the world, including the following:
<TABLE>
<S> <C>
o Aviara Golf Club (CA) o Point-O'Woods Country Club (MI)
o Baltimore Country Club (MD) o Royal Brunei Golf and Country Club (Brunei)
o Big Horn Country Club (CA) o Skokie Country Club (IL)
o Caledonian Golf Club (Japan) o Spyglass Hill Golf Club (CA)
o Congressional Country Club (MD) o Sun City Resorts -- Gary Player Country Club (S. Africa)
o John's Island Club (N,W&S) (FL) o Sun City Resorts -- Lost City Golf Course (S. Africa)
o Jupiter Hills Club (FL) o Tres Vidas Golf Course (Mexico)
o Leopard Creek Golf Course (S. Africa) o Westchester Country Club (NY)
o Merion Golf Club (PA) o Monterey Peninsula Country Club (CA)
o North Shore Country Club (IL) o Winged Foot Golf Club (NY)
o Pelican Hill Golf Club (CA)
</TABLE>
The Company offers a menu of six microbial products that can be
delivered through its BioJect system. The BioJect system has evolved from
delivering only bacteria of the Bascillus family to delivering a variety of
microbial products. The Company licenses and/or acquires such microbes from
universities and corporations. These products appear on the Company's BioJect
menu and complement or reduce the need for many chemical fungicides, herbicides,
insecticides and fertilizers. The consumable product in each menu item is
generally a microbe, and each microbe is cultured in the BioJect system under a
proprietary formula. Different microbes are used for different applications
because their mode of action and performance characteristics.
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Set forth below is a table showing the name of each of the Company's
microbial products, the Company's rights to the microbe, the source of the
microbe and the application for each microbe.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
MICROBE NAME SOURCE COMPANY'S RIGHTS USE
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bascillus Spp. Chr. Hansen, Inc. Public domain Improves soil
porosity to enhance
plant growth
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Azospirillum Encore Technologies, Exclusive worldwide Converts atmospheric
Inc. ("Encore") license for use nitrogen into plant
through the BioJect available form;
system enhances root and
top growth of plants
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Cellulomonas Sps. Encore Public Domain Helps reduce thatch
layer to enhance
turf growth
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Pseudomonas Encore/Michigan Assignment of Promotes organic
aurefaciens TX-1 State University rights granted to matter degradation
("TX-1") Encore under and other activities
exclusive worldwide in the soil and turf
license from environment that
Michigan State minimizes the
University conditions
conductive to the
development of
certain turfgrass
diseases
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Bascillus Abbott Laboratories Non-exclusive Biological
thuringiensis distribution rights insecticide for the
(DiPel 2x) control of armyworms
and sod webworms in
turf (EPA Reg. No.
275-37)
---------------------------------------------------------------------------------------------
Xanthomonas Mycogen Option through Research
campestris Corporation/Michigan November 1, 1998 to Authorization and
State University acquire rights application for
granted to Mycogen Experimental Use
under exclusive Permit as a
worldwide license selective
from Michigan State postemergent
University biological control
of Poa annua
---------------------------------------------------------------------------------------------
</TABLE>
The Company has obtained exclusive rights to several microbes pursuant to a
license and supply agreement with Encore and certain assignments of intellectual
property made by Encore to the Company. The license and supply agreement
provides for an exclusive, worldwide, royalty-free license to use, sell and
distribute Azospirillum brasilense Cd for application through the BioJect
system. In addition, Encore has assigned to the Company all of Encore's rights
to media (proprietary material formulations used to promote fermentation and
multiplication of microbial products in the BioJect system) and rights to
Pseudomonas aureofaciens TX-1 that Encore obtained under a license agreement
with Michigan State University. Under the license and supply agreement with
Encore, Encore is obligated to produce cultures of microbial products suitable
for fermentation in BioJect systems ("Inoculum"), and the Company has agreed to
purchase certain minimum amounts of Inoculum from Encore.
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To increase the menu of items for use in its BioJect system, the Company
intends to enter into additional licensing agreements with leading biotechnology
companies and major universities once new microbial products have been proven
effective. To meet the technical challenges associated with the task of
optimizing the scale-up of these distinct microbes within the BioJect system and
distributing them within the irrigation cycle, the Company has entered into
research and development agreements with companies specializing in the
fermentation of microbes. The Company also intends to bring more technical
expertise in-house in order to evaluate new microbial products, maximize the
value of its programs and gain more expertise in the area of registration and
labeling requirements.
CalJect and SoluJect Systems
The Company's CalJect system permits the injection of soluble soil and
water amendments into irrigation systems. The Company's SoluJect system performs
the same function as the CalJect System and is installed principally at golf
courses because of the SoluJect system's smaller tank size. The Company has
developed ESSI Soluble Gypsum, a soil amendment, specifically for distribution
through the CalJect and SoluJect systems. ESSI Soluble Gypsum combats water
salinity, soil alkalinity and bicarbonate problems most often encountered by
golf courses and growers in the western United States and Mexico. The Company
believes that use of the CalJect and SoluJect systems and ESSI Soluble Gypsum
can reduce golf courses' and growers' water consumption and improve turf quality
and crop yields. At December 31, 1997 the Company had an installed base of 39
CalJect systems.
As golf courses and growers irrigate with poor quality water, salts
accumulate in their soils. These salts damage soil and roots, reducing turf
quality and crop yields. The Company believes that approximately 20% of water
used on golf courses in the western United States is used to leach the excess
salt that accumulates in the soil. Eliminating the need for such extra water
could mean significant savings for such golf courses. In addition, alkaline
soils typically found in the western United States and Mexico harm turf and
crops by stressing roots, blocking nutrient uptake and impeding water
infiltration. The CalJect and SoluJect systems provide for automatic application
of water and soil amendments through irrigation systems to address such
problems.
The CalJect and SoluJect systems convert the Company's water and soil
amendment products, including ESSI Soluble Gypsum, into solution form and inject
them into an irrigation system. The Company designs and implements a customized
CalJect or SoluJect program for each of its customers based on soil and water
test results. The Company monitors the success of each program and prepares a
soil and water analysis for each customer. Independent consultants make on-going
recommendations based on the results of such analyses.
Other Proprietary Products
The Company also offers the CleanRack system, an equipment wash rack and
water treatment system that reclaims contaminated equipment wash water, making
it suitable for recycling or discharge. The Company's CleanRack system cleans
the water that is typically used to wash golf course equipment and recycles it
for use. If the water is reused without treatment, it often contributes to
mechanical breakdowns and can pose serious health risks to those with whom it
comes into contact. The CleanRack system is designed to decontaminate wash water
so that it complies with applicable state and federal environmental and safety
regulations and is suitable for discharge or can be safely recycled. During
1997, the Company discontinued sales of its ClearLake system, a pond and lake
restoration system. The ClearLake system is a patented system that is designed
to improve the aesthetics and water quality of water used for both irrigation
and ornamental ponds and lakes.
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Distributed Products
In addition to the proprietary products described above, the Company
also sells a complete line of traditional chemical fertilizers and pesticides
and other turf maintenance products through the dealers and distributors owned
by the Company. In order to meet all of its customer's turf maintenance needs,
the Company's distributors keep in stock an inventory of branded pesticides,
fertilizers, seed, and other necessary products from many agricultural
manufacturers. Such products include fertilizers from Lebanon Chemical
Corporation, The Doggett Corp., Growth Products Ltd., Plant Marvel Laboratories,
Inc., The Anderson's, Vicksburg Chemical Company, IMC Vigoro and pesticides from
Bayer Corporation, Novartis Corporation, PBI Gordon Corporation, Kincaid
Enterprises, Rhone-Poulenc AG Company and Rohm and Haas Company.
SALES AND DISTRIBUTION
Since May 1996, the Company has focused on establishing sales and
distribution capabilities by acquiring independent turf products dealers and
distributors and integrating them into a single, nationwide sales organization
to promote sales of the Company's BioJect and CalJect/SoluJect systems to golf
courses. To date, the Company has acquired three independent golf product
distributors, which are located in New England, the Chicago metropolitan area
and the Palm Springs area. The Company also has hired sales and other key
personnel to establish a regional presence in Southern California and
Pennsylvania. Since December 31, 1997, the Company has acquired Benham Chemical
Corporation, a golf and turf products supplier with operations in Michigan, and
Cannon Turf Supply Inc., a golf and turf products supplier with operations in
Illinois, Indiana, Kentucky, Michigan, Ohio and Wisconsin and entered into an
agreement in principle, subject to due diligence and final closing conditions,
to acquire Agricultural Supply, Inc., a distributor of micro irrigation products
in Southern California and Mexico. The Company currently has 49 sales and
marketing personnel divided among three sales regions covering the eastern,
midwestern and western parts of the United States. Each region has its own
general manager responsible for maintaining customer satisfaction and expanding
the Company's customer base.
Distribution to Golf Markets
In general, major golf course markets are represented by a single sales
organization that controls a significant portion of new product introductions
and their subsequent penetrations into golf courses in their regions. Prior to
the Company's initial dealer acquisitions in May 1996, the Company sold its
proprietary products primarily through direct sales efforts and relationships
with certain regional dealers. By expanding its distribution capabilities using
full-service turf products dealers, the Company has been able to leverage
existing distributor relationships to more effectively sell its proprietary
systems.
In early 1996, the Company initiated its strategy of consolidating its
golf distribution network through acquiring independent products distributors
and hiring key sales personnel. On May 31, 1996, the Company acquired Turf
Products, Ltd. ("Turf Products"), a Chicago-based company that markets and sells
fertilizers, pesticides, grass seed and soil amendments to golf courses
throughout the greater Chicago metropolitan area, and Turf Specialty, Inc.
("Turf Specialty"), a New Hampshire-based company that markets and sells similar
products to golf courses and municipalities throughout the New England region.
On February 19, 1997, the Company acquired substantially all of the assets of
Turfmakers, Inc. ("Turfmakers"), a turf products distributor in the Palm Springs
area. Turf Products, Turf Specialty and Turfmakers are established in the turf
maintenance industry for golf course markets in the greater Chicago, New England
and Palm Springs areas, respectively. While other dealers in
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these markets generally compete for market share through aggressive pricing, the
Company has adopted a value-added, customer service focus, which is essential
for introducing technologically-advanced, proprietary products such as the
BioJect system.
The Company expects to increase its market penetration in the geographic
areas served by its dealers and distributors by hiring additional sales
personnel as well as opening satellite warehouses to serve new customers. In
February 1997, the Company hired sales people and related personnel in San Diego
and established a distribution operation in Southern California. In March 1997,
the Company hired six sales people in Pennsylvania, enabling the Company to
penetrate that market.
The Company currently is exploring the possibility of acquiring
additional distributors and making additional strategic hires in areas of the
United States not currently serviced by the Company. When reviewing an
acquisition candidate, the Company looks for the following characteristics: (i)
strength of the candidate's management team and sales ability; (ii) the
geographic location of the candidate; (iii) the products sold by the candidate;
and (iv) the profitability of the candidate's business. In most cases, the
Company seeks to keep the candidate's management in place for a period of time.
The Company believes that the establishment of the Company's regional
sales and distribution network will offer several benefits to the Company,
including (i) improved profitability due to increased sales of proprietary
products; (ii) improved overall financial results due to consolidated
operations; (iii) increased margins through volume discounts; and (iv) increased
visibility in golf markets and greater credibility in larger markets such as the
agricultural crop and ornamental industries.
Although the Company has shifted its focus to expanding sales through
the Company's acquired dealers and distributors, the Company maintains
relationships with seven independent distributors. The Company supplements the
sales efforts of its acquired distributors, other regional distributors and its
direct sales force through seminars given by members of the Company's Scientific
Advisory Board on the benefits and efficacy of microbial products.
Distribution to Agricultural Markets
The Company currently has an installed base of 25 BioJect systems and
8 CalJect systems in agricultural markets. Although the Company initially
focused on turf applications for the BioJect system, the Company is now
focusing on agricultural crop and ornamental markets. The Company currently has
four full time sales people dedicated to agricultural markets.
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RESEARCH AND DEVELOPMENT
The Company has not engaged in its own research and development with
respect to the discovery of microbial products. Instead, the Company has
obtained rights to microbial products that have been proven effective for
applications in the turf maintenance and agricultural crop and ornamental
industries. Much of the Company's in-house research and development effort is
targeted at determining which microbes will be suitable for distribution through
the BioJect system and the engineering of the fermentation and product delivery
features of the BioJect system. The Company spent approximately $475,000 and
$268,912 on research and development for the years ended December 31, 1996 and
December 31, 1997, respectively. The Company believes its strategic objectives
can best be met by combining its in-house product development efforts with the
licensing of technology and the establishment of research collaborations with
scientists at academic institutions and at companies working in related fields.
GOVERNMENT REGULATION
The Company is subject to laws and regulations administered by federal,
state and foreign governments, including those requiring registration or
approval of fertilizers, pesticides, water treatment products and product
labeling. To date, with the exception of its bascillus thuringiensis product
which is a registered pesticide with the Environmental Protection Agency
("EPA"), the Company has marketed its microbial products as soil inoculants. The
Company believes future sales will be strengthened if the Company can secure
approval of individual microbes as pesticides.
In most countries, governmental authorities require registration of
pesticides before sales are allowed. In the United States, the EPA regulates
pesticides under the Federal Insecticide, Fungicide and Rodenticide Act
("FIFRA"). Pesticides are also regulated by the individual states such as
California which has its own extensive registration requirements. In order to
market pesticide products outside the United States, the Company must receive
regulatory approval from the authorities of each applicable jurisdiction. In
addition, the EPA under the Federal Food, Drug and Cosmetic Act ("FFDCA")
establishes standards for residues in food to protect health.
Detailed and complex procedures must be followed in order to obtain
approvals under FIFRA to develop and commercialize a pesticide product. A
separate registration application must be submitted to the EPA for each
microbial product. Evaluation data for the registration include, but may not be
limited to, non-target organism testing, environmental data, product analysis
and residue chemistry, and toxicology (hazards to human beings and domestic
animals).
The EPA has established reduced testing requirements for registration of
microbial pesticides, which are set out in Subdivision M of the EPA's Pesticide
Assessment Guidelines. Microbial pesticides are currently subject to a
three-tier toxicology testing procedure, and a four-tier environmental
evaluation process. If results of toxicology and environmental Tier 1 tests do
not suggest health and safety concerns, then subsequent tier testing is not
required. Additional tests may be required, however, in response to any
questions which may arise during any tier of testing. Registration of the
Company's pesticidal products may take between twelve months and five years
including the time necessary for collection of the necessary product data. If
only Tier 1 testing is required, the cost of registration is typically less than
$500,000. In contrast, synthetic chemical pesticides require much more extensive
toxicology and environmental testing to verify product safety prior to receiving
registration, which the Company estimates can take a total of five to seven
years or longer and can cost $5 to $10 million or more.
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In July 1992, the EPA announced its "Reduced Risk Pesticide Policy"
initiative and is in the process of developing criteria for streamlining the
regulatory process. In June 1993, the Clinton Administration announced its
commitment to reduce the use of pesticides and promote sustainable agriculture
in the United States. The EPA, the United States Department of Agriculture (the
"USDA") and the Food and Drug Administration (the "FDA") are all considering
regulatory reforms. In testimony before Congress on September 21, 1993, the
administrators of the USDA, the FDA and EPA stated their intentions to work
jointly to reduce risk associated with pesticides and to facilitate the
availability of alternative effective pest control products. These policy
initiatives and legislative reviews could in the future accelerate the
registration of biopesticides meeting "reduced risk" criteria, but there can be
no assurance of the impact or timing of these initiatives.
FIFRA allows laboratory and greenhouse testing and, usually, small-scale
field testing to be conducted prior to product registration, to evaluate product
efficacy and to gather data necessary to support an application. An Experimental
Use Permit ("EUP") must be obtained from the EPA to conduct large-scale field
testing prior to product registration. An EUP is required for testing in one or
more land sites greater than ten cumulative acres. Issuance of an EUP normally
requires satisfactory completion of certain toxicology and environmental
studies. Field testing of certain microbial agents may require the approval of
the Animal and Plant Health Inspection Service ("APHIS"), an office of the USDA.
APHIS approvals are granted on a site specific basis, and additional state
approvals may also be required.
With the exception of its bascillus thuringiensis product which has been
registered with the EPA by the Company's licensor, the Company has not received
approvals for the use of any of its products as pesticides. The Company is
currently testing its Xanthomonas product that it intends to market as a
pesticide, has applied for an EUP and expects to apply for formal approval by
the EPA and certain state authorities in the future.
For marketing and use of its products outside the United States, the
Company will be subject to foreign regulatory requirements. Such requirements
vary widely from country to country. In some instances foreign government
approval may require different or additional testing data than that required by
the EPA. Failure to achieve such registration would prevent the Company from
marketing its unregistered products as pesticides in those jurisdictions where
approval is not granted. While the Company exports certain of its microbial
products outside the United States, it does not currently market any of its
products as pesticides in any foreign countries.
In addition, the Company is currently subject to the Occupational Safety
and Health Act, the National Environmental Policy 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. From time to time, governmental authorities
review the need for additional laws and regulations for pesticide products that
could, if adopted, apply to the business of the Company. The Company is unable
to predict whether any such new regulations will be adopted or whether, if
adopted, they will adversely affect its business. See " -- Factors That Could
Affect Future Performance -- Government Regulation."
PATENTS AND PROPRIETARY RIGHTS
The Company's success is dependent in large measure upon its ability to
obtain patent protection for its products and to maintain confidentiality and
operate without infringing upon the proprietary rights of
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third parties. The Company has obtained and is seeking additional U.S. and
foreign patents covering both the process of automatically inoculating
irrigation water with biological products and the equipment, namely the BioJect
system, used in such process. Specifically, in 1993 the Company was granted two
U.S. patents that relate to the inoculation process and the related equipment.
In 1995, the Company was granted an additional patent relating to the automatic
inoculation of irrigation water through the use of a BioJect system designed to
"cleanse" itself so that it may grow, culture and dispense distinct microbes or
combinations of microbes on a daily basis. The 1995 patent also expanded the
scope of the invention to include irrigation systems covering all types of
vegetation, in addition to turf. In August 1995, the Company submitted another
patent application that covers a system that is designed to grow and inject
distinct microorganisms or combinations of microorganisms selected on a
preprogrammed basis. This application is still pending.
In addition to the patent applications described above, the Company has
registered or applied for registration of a number of trademarks used in its
business, and has obtained registered trademarks for the names including the
registration of its trade name "BioJect." The Company also relies on trade
secrets and proprietary know-how. See " -- Factors That Could Affect Future
Performance -- Patents, Proprietary Technology and Licenses."
MANUFACTURING AND SUPPLY
A majority of the parts and components utilized in the BioJect, CalJect
and SoluJect systems are standardized industrial components. The computer
controls and the fermentation tank used in the BioJect system are designed and
manufactured to Company specifications by third parties. The Company has no
contracts for supply of parts and components used in its systems. Instead, the
Company submits purchase orders for such items as needed. Parts and components
are shipped directly to the Company's third-party assemblers for assembly and
testing, and the Company's product management team oversees the assembly and
testing process. The completed BioJect, CalJect and SoluJect systems are shipped
by the assemblers to the Company's distributors or directly to customers. The
Company believes that it is not dependent on any single manufacturer or source
of supply.
The Company has established relationships with third party fermentation
specialists that prepare base cultures of microbes for fermentation and
distribution through the BioJect system. The Company maintains starter cultures
for each of its microbes to use for ongoing testing purposes and as a backup
culture supply.
The Company obtains distributed products directly from manufacturers.
The Company does not have any long-term distribution agreements with distributed
product manufacturers. The Company maintains an inventory of distributed
products and submits purchase orders on an as-needed basis. The Company is an
approved distributor for various well-known pesticide, fertilizer and seed
manufacturers, including IMC Vigoro, Bayer Corporation, Novartis Corporation and
Rhone-Poulenc AG Company.
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COMPETITION
The Company's principal competitors with respect to its primary products
are described below:
BioJect System
The Company's BioJect system competes against traditional chemical
insecticides and fungicides, chemical soil penetrants, acid injection systems,
and the direct, manual application of cultured microbial products. Although the
Company believes that none of its competitors offers an automated means of
regularly applying microbial products to turf and crops in an effective manner,
many of the Company's competitors have substantially greater financial,
technical and personnel resources than the Company and include such
well-established companies as Novartis Corporation, Rhone-Poulenc AG Company,
the Dow Chemical Company, O.M. Scotts & Sons, Inc., Lesco, Inc., and The Toro
Company, as well as a number of smaller local and regional competitors. The
Company competes against traditional technologies on the basis of its delivery
mechanism and bioaugmentation expertise. An important factor in the long-term
competitiveness of the BioJect system may be the timing of and extent of the
Company's penetration into golf and agricultural markets compared to the market
penetration achieved by companies offering competing products for microbial
distribution. Such timing will be based on the effectiveness with which the
Company or the competition can complete product testing and approval processes
and supply quantities of its products to market. Competition among microbial
distribution products is expected to be based on, among other things, product
effectiveness, safety, reliability, cost, market capability and patent
protection.
CalJect System and SoluJect System
The CalJect and SoluJect systems compete against a number of products
for applying gypsum onto soil to improve water penetration through soil. At
least one of the Company's competitors in the market for gypsum distribution,
Soil Solutions Corporation ("Soil Solutions"), has greater name recognition in
the soil amendments market and has significantly more installed units. Soil
Solutions' machine, like the Company's CalJect and SoluJect systems, injects
gypsum directly into customers' irrigation systems. Competition among gypsum
distribution products is based on, among other things, cost, name recognition,
product effectiveness and reliability.
Distributed Products
In markets for distributed products, the Company competes against
distributors of traditional chemical products. Many of these competitors have
substantially greater financial, technical and personnel resources than the
Company and include such well-established companies as Lesco, Inc., Terra
Companies, Inc., Con-Agra, Inc. and Wilbur-Ellis Company. The Company competes
on the basis of price, name recognition, convenience and customer service with
distributors of traditional chemical products. See " -- Factors That Could
Affect Future Performance -- Competition."
PERSONNEL
As of December 31, 1997, the Company had 126 full-time employees,
consisting of ten in general management, 38 in sales and marketing, 41 in
customer service, four in research and development, and 33 in finance and
general administrative activities. None of the Company's employees is
represented by a labor union or is covered by a collective bargaining agreement.
The Company has not experienced work stoppages and believes that it maintains
good relations with its employees.
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FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
Accumulated Deficit; Historical Operating Losses. At December 31, 1997,
the Company had an accumulated deficit of $14.0 million. The Company's income
before interest, depreciation and amortization for the year ended December 31,
1997 was $803,000. The Company generated income from operations for the first
time during the quarters ended June 30, 1997 and September 30, 1997. There can
be no assurance that the Company can sustain such profitability. Prior to the
quarter ended June 30, 1997, the Company historically experienced losses due to
significant expenditures for product development, sales, marketing,
administrative and U.S. patent protection expenses, as well as amortization
costs associated with the Company's recent dealer acquisitions. See Item 6:
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and Item 7: "Financial Statements."
Expansion into New Markets. Although sales of certain of the Company's
proprietary products are increasing, such 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 market its proprietary products to agricultural crop and ornamental markets
will prove successful, that marketing partnerships will be established, or that
the Company's intended customers will purchase the Company's systems and
products instead of competing products. Failure to obtain significant customer
satisfaction or market share would have a material adverse effect on the
Company's business, financial condition and results of operations. See Item 6:
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
Management of Growth. The Company has experienced significant growth.
Such growth has placed, and will continue to place, significant strain on the
Company's resources. The Company's ability to manage future growth, should it
occur, will require it to implement and continually expand operational and
financial systems, recruit additional employees and train and manage both
current and new employees. In particular, the Company's success depends in large
part on its ability to attract and retain qualified technical, sales, 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.
Establishment of Sales and Distribution Capabilities. Distribution and
sales of the Company's products have occurred through distributors and dealers
acquired by the Company and through independent dealers and distributors. In
1996, the Company initiated its strategy of establishing a nationwide
distribution system for its turf products through the acquisition of various
independent dealers and distributors and the hiring of selected sales personnel.
This strategy has required and is expected to continue to require significant
capital outlays and, due to the generally lower margins associated with those
dealers' existing products, likely will have the effect of lowering the
Company's gross profit margins. Achieving the anticipated benefits of such
acquisitions will depend on a variety of factors, including whether the
integration of such dealers and distributors with the Company's organization can
be accomplished in an efficient and effective manner and whether the acquired
sales force can effectively sell the Company's proprietary products. Any failure
to identify future hires or acquisition candidates properly, any large
expenditures on acquisitions that prove to be unprofitable, or any difficulties
encountered by the Company in selling its proprietary products through the
existing
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distribution system could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has in the
past, and expects in the future, to continue to acquire companies in part
through the issuance of Common Stock. The issuance of additional shares of
Common Stock in connection with future acquisitions could result in dilution to
existing shareholders.
Future Additional Capital Requirements; No Assurance Future Capital Will
Be Available. The continuing commercialization of the Company's products
requires the commitment of significant capital expenditures. The Company
believes it will have sufficient resources to finance its operations and future
growth for at least the next twelve months, but no assurance can be given in
that regard. The Company anticipates that it will require additional funds to
support the rigorous testing and other costs of obtaining government approval
and for the marketing of its products for agricultural applications. The Company
anticipates that it will seek to obtain additional funds in the future through
public or private equity or debt financing, collaborative or other arrangements
with corporate partners or from other sources. There can be no assurance that
such additional financing can be obtained on desirable terms, if at all. If
additional funds are not available, the Company may be required to curtail its
operations and marketing efforts in certain geographic areas or for one or more
of its product lines. Although the Company has established a line of credit with
Imperial Bank, there can be no assurance that the Company will be able to renew
its line of credit on acceptable terms or to increase such line if additional
financing is required. See Item 6: "Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Liquidity and Capital
Resources."
Patents, Proprietary Technology and Licenses. The Company's success will
depend in large measure upon its ability to obtain and enforce patent protection
for its proprietary products, maintain confidentiality of its trade secrets and
know-how and operate without infringing upon the proprietary rights of third
parties. The Company has been granted three U.S. patents for the technology
relating to the BioJect system and has filed one other U.S. patent application
covering modifications to the BioJect system. The Company does not have foreign
patent protection with respect to the claims covered by its two initial U.S.
patents granted in 1993, and the Company is precluded from obtaining such
foreign rights due to the expiration of the period for filing such claims.
However, in connection with a U.S. patent granted in 1995 and a U.S. application
filed later that year that still is pending, the Company has applied for foreign
patent protection with respect to the BioJect system in selected countries. In
addition, the Company has registered a number of trademarks used in its
business, including "BioJect," and "ClearLake," and has applied for registration
of a number of additional trademarks. The Company also relies on trade secrets
and proprietary know-how. The Company generally enters into confidentiality and
nondisclosure agreements with its employees and consultants and generally
controls access to and distribution of its documentation and other proprietary
information.
Despite the precautions described above, it may be possible for a third
party to copy or otherwise use the Company's products or technology without
authorization, or to develop similar products or technology independently. There
can be no assurance that the Company's patent or trademark applications will be
granted, that its means of protecting its proprietary rights will be adequate or
that the Company's competitors will not independently develop similar or
competing products. Furthermore, although the Company is not aware of any
infringement of any proprietary rights of others, there can be no assurance that
the Company is not infringing other parties' rights. If any of the Company's
patents are infringed upon or if a third party alleges that the Company violates
its proprietary rights, the Company may not have sufficient resources to
prosecute a lawsuit to defend its rights. In addition, an adverse determination
in any litigation could subject the Company to significant liabilities to third
parties, require the Company to seek licenses from or pay royalties to third
parties or prevent the Company from manufacturing, selling or using its
products, any of which could have a
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material adverse effect on the Company's business, financial condition and
results of operations. Even if the Company prevailed in litigation to protect
its intellectual property rights, such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, financial condition and results of operations.
Lack of Manufacturing Capability; Dependence on Contract Manufacturers
and Suppliers. The Company currently does not have any manufacturing capability
and must rely on third parties to manufacture its products and components. The
Company has more than one supplier for the manufacture of most of its products
and components; however, some are being obtained from only one source. Although
the Company believes that it will be able to contract production with alternate
suppliers, there can be no assurance that this will be the case or that the need
to contract with additional suppliers will not delay the Company's ability to
have its products and components manufactured. There can be no assurance that
existing or future manufacturers will meet the Company's requirements for
quality, quantity and timeliness, and any such failure could have a material
adverse effect on the Company's business, financial condition and results of
operations.
No Assurance that Rights to Additional Microbial Products Will Be
Acquired. The Company plans to obtain the rights to additional microbial
products. The Company currently does not engage in its own research and
development with respect to the discovery of microbial products, but instead
licenses or acquires rights to microbial products discovered by others. Although
the Company is actively seeking to obtain licenses for or otherwise acquire
rights to additional microbial products, there can be no assurance that the
Company will be successful in obtaining any such rights on terms acceptable to
the Company, if at all. The failure of the Company to acquire rights to
additional products could have a material adverse effect on the Company's
business, financial condition and results of operations.
Product Liability Claims and Uninsured Risks. The Company may be exposed
to product liability or environmental liability resulting from the commercial
use of its products. The Company currently carries liability insurance, which
covers, among other things, product liability and environmental liability. A
product liability, environmental or other claim with respect to uninsured
liabilities or in excess of insured liabilities could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has obtained insurance of such types and in such amounts as
it believes to be adequate and customary for similarly situated firms in its
business, including casualty insurance and workers' compensation insurance.
However, there are risks not normally covered by insurance over which the
Company has no control and that could result in the Company incurring losses not
covered by insurance. Consequently, there can be no assurance that any losses
will be covered by insurance, that any covered losses will be fully insured
against or that any claim by the Company will be approved for payment by the
insurer.
Environmental Liability. The federal government and 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 federal environmental laws, including the National
Environmental Policy Act, the Toxic Substance Control Act, the Resource
Conservation and Recovery Act, the Clean Air Act
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and the Clean Water Act and their state equivalents and may be subject to other
present and potential future federal, state or local regulations. As noted
above, the Company maintains insurance for environmental claims which might
result from the release of its products into the environment, but there can be
no assurance that any losses covered by insurance will be adequately covered.
Thus, a claim for environmental liability could have a material adverse effect
on the Company's business, financial condition and results of operations.
Government Regulation. The Company is subject to laws and regulations
administered by federal, state and foreign governments, including those
requiring registration or approval of fertilizers, pesticides, water treatment
products and product labeling. The Company's current products are subject to
regulation by the EPA, the FDA and by certain state environmental and
agricultural departments. To date, with the exception of its bascillus
thuringiensis product, which is an EPA registered pesticide, the Company has
marketed its microbes as soil inoculants. The Company believes future sales will
be strengthened if the Company can secure EPA approval of other individual
microbes as pesticides. In order to market a microbe as a pesticide, the Company
must obtain EPA approval of a particular product containing that microbe,
including EPA approval of the claims made in the product label and the method of
application. Registration of the Company's microbial products as pesticides
likely will be a lengthy and expensive process that may or may not result in EPA
approval. Without the desired EPA approvals, the Company will not be able to
market such unregistered microbes as pesticides, and the Company's sales efforts
will be limited to discussions of the soil inoculant features of the microbe. If
the EPA determines that a microbial product has no significant commercially
valuable use other use than as a pesticide, however, the Company will be
precluded from selling the product entirely unless it is approved by the EPA.
In addition, if a microbe is sold as a pesticide for use on crops, the
Company must also seek to have a tolerance level set by the EPA which would
define the acceptable limit on the amount of microbes that could be present on a
given raw agricultural commodity (food crop) at the time of harvest. The Company
also may petition the EPA for tolerance exemptions that would not limit the
residues of the microbial products on crops. If the EPA does not issue a
tolerance exemption, the Company would be required to obtain a separate
tolerance for each food product on which it intends to make its microbial
pesticides available for use. As a result, the Company would incur costly
application fees for each tolerance. There can be no assurance that the Company
will be successful in seeking such tolerances or tolerance exemptions, and any
failure to obtain such status which would prevent the Company from selling
microbes as pesticides for use on crops.
The Company may be subject to regulation in foreign countries.
Compliance with such requirements likely would result in additional cost to the
Company and delays in introducing the Company's products in such foreign
countries.
Compliance with EPA and state environmental regulations as well as other
laws and regulations will increase the costs and time necessary to allow the
Company to operate successfully and may affect the Company in other ways not
currently foreseeable. In addition, more stringent requirements for regulation
or environmental controls may be imposed, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Competition. The BioJect system competes against traditional chemical
insecticides and fungicides, chemical soil penetrants, acid injection systems,
and the direct, manual application of cultured microbial products. Although the
Company believes that none of its competitors offers an automated means of
regularly applying microbial products to turf and crops in an effective manner,
many of the
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Company's competitors have substantially greater financial, technical and
personnel resources than the Company and include such well-established companies
as Novartis Corporation, Rhone-Poulenc AG Company, the Dow Chemical Company,
O.M. Scotts & Sons, Inc., Lesco, Inc., and The Toro Company, as well as a number
of smaller local and regional competitors. The Company competes against
traditional technologies on the basis of its delivery mechanism and
bioaugmentation expertise. An important factor in the long-term competitiveness
of the BioJect system may be the timing and extent of the Company's penetration
into golf and agricultural markets compared to the market penetration achieved
by companies offering competing products for microbial distribution. Such timing
will be based on the effectiveness with which the Company or the competition can
complete product testing and approval processes and supply quantities of its
products to market. Competition among microbial distribution products is
expected to be based on, among other things, product effectiveness, safety,
reliability, cost, market capability and patent protection.
The CalJect and SoluJect systems compete against a number of companies
that have developed products for applying gypsum onto soil to improve water
penetration through soil. At least one of the Company's competitors in the
market for gypsum distribution, Soil Solutions, has greater name recognition in
the soil amendments market and has significantly more installed units. Soil
Solutions' machine, like the Company's CalJect and SoluJect systems, injects
gypsum directly into customers' irrigation systems. Competition among gypsum
distribution products is based on, among other things, cost, name recognition,
product effectiveness and reliability.
In markets for traditional chemical products, the Company competes
against well-established distributors of such products. Many of these
competitors have substantially greater financial, technical and personnel
resources than the Company and include such companies as Lesco, Inc., Terra
Companies, Inc., Con-Agra, Inc. and Wilbur-Ellis Company. The Company competes
on the basis of price, name recognition, convenience and customer service with
distributors of traditional chemical products.
Dependence on the Market for Golf. Golf participation has increased
significantly since 1970. Although the Company believes that golf markets will
continue to grow, a decrease in the number of golfers, their rates of
participation or in consumer spending on golf could have a material adverse
effect on the Company's golf course customers and, in turn, on the Company.
Specifically, the success of efforts to attract and retain members at private
country clubs and the number of rounds played at public golf courses
historically have been dependent upon discretionary spending by consumers, which
may be adversely affected by general and regional economic conditions. In
addition, the construction of additional golf courses is dependent upon growth
in the number of golfers. If customer tastes or economic conditions cause golf
courses to reduce their budgets or slow the development of additional golf
courses, the Company may see a correlative decrease in sales of the BioJect
system and its other products.
Possible Volatility of Stock Price. The Common Stock currently is quoted
on the Nasdaq National Market. The market price of the Common Stock could be
subject to significant fluctuations in response to operating results and other
factors. In addition, the stock market in recent years has experienced extreme
price and volume fluctuations that often have been unrelated or disproportionate
to the operating performance of companies. These fluctuations, as well as
general economic and market conditions, may adversely affect the market price of
the Common Stock. In addition, in the event the listing of the Common Stock were
discontinued for any reason, the liquidity and price of the Common Stock would
be adversely affected. See Item 5: "Market for Registrant's Common Equity and
Related Shareholder Matters."
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Quarterly Fluctuations in the Company's Results of Operations. The
Company's operating results vary from quarter to quarter as a result of
seasonality and various factors. Virtually all of the Company's customers are
located in the Northern Hemisphere and purchase greater quantities of microbes
and distributed products during the spring, summer and fall months. As a result
of low customer activity during the winter, the Company typically markets the
BioJect system during the fourth and first quarters. As a result of these
marketing efforts, the Company typically receives orders during the first and
second quarters and installs BioJect systems during the second and third
quarters. BioJect lease and installation revenues are recognized as payments
come due under the related contracts. Because of this sales cycle, the Company
expects to recognize a significant portion of its revenues during its second and
third quarters. Operating expenses have tended to be independent of the
quarterly sales cycle. As a result, operating expenses generally represent a
higher percentage of sales in the first and fourth quarters as compared to the
second or third quarters, and the Company may experience losses in the first and
fourth quarters. Accordingly, results for any quarter are not necessarily
indicative of results for any future period. The sales cycle for the BioJect
system also makes it difficult to predict the number of BioJect systems that
will be leased and the quantity of microbial product sales that will be sold
until orders are received by the Company during the first half of the year.
Sales of the Company's products also depend to some extent on the severity of
weather patterns in the geographic areas served by the Company. Given these
factors, it is difficult for the Company to accurately predict the level of
demand for its products. See Item 6: "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
Dependence on Key Personnel. The Company is dependent upon the active
participation of William B. Adams, its Chairman of the Board and Chief Executive
Officer, and Douglas M. Gloff, its President. The loss of the services of either
of these individuals could have a material adverse effect upon the Company's
business, financial condition and results of operations. Each of Messrs. Adams
and Gloff has entered into an employment agreement with the Company which
provides for his continued employment with the Company through September 1998.
The Company does not have key person life insurance on any of its key employees.
Control by Principal Shareholders. As of December 31, 1997, the current
principal shareholders and management of the Company owned more than 25% of the
outstanding shares of Common Stock of the Company, assuming the exercise of all
outstanding options and warrants held by them and no exercise of options or
warrants held by others. Accordingly, even though the Company currently has
cumulative voting, the current principal shareholders and management, if voting
in concert, may have the ability to effectively control the election of a
majority of the directors of the Company or any other major decisions involving
the Company or its assets.
Outstanding Warrants and Options. As of December 31, 1997, there were
5,478,204 shares of Common Stock subject to issuance pursuant to options and
warrants issued by the Company. Holders of warrants and options are likely to
exercise them when, in all likelihood, the Company could obtain additional
capital on terms more favorable than those provided by the warrants and options.
While the warrants and options are outstanding, they may adversely affect the
terms on which the Company can obtain additional capital.
Undesignated Preferred Stock; Antitakeover Provisions. The Board of
Directors is authorized, without any action by the Company's shareholders, to
issue up to 5,000,000 shares of authorized but undesignated preferred stock and
to fix the powers, preferences, rights and limitations of any such preferred
stock or any class or series thereof. Persons acquiring preferred stock could
have
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preferential rights with respect to voting, liquidation, dissolution or
dividends over existing shareholders. This ability of the Board would permit the
Company to adopt a shareholders' rights plan or to take other action that could
deter a hostile takeover of the Company, entrench the Board of Directors or
deter an unsolicited tender offer. In addition, certain provisions of the
Company's Amended and Restated Articles of Incorporation, including provisions
creating a staggered board of directors, and certain provisions of Nebraska law,
including the Nebraska Shareholders Protection Act, could have the effect of
deterring or delaying a takeover or other change in control of the Company,
could deny shareholders the receipt of a premium on their Common Stock and could
have a depressive effect on the market price of the Company's Common Stock.
No Dividends. The Company has never paid or declared any cash dividends
on its Common Stock and does not intend to pay dividends on its Common Stock in
the foreseeable future. The Company is currently prohibited from paying
dividends by the terms of a loan agreement between the Company and Imperial
Bank. The Company intends to retain any earnings for use in the operation and
expansion of its business. See Item 5: "Market for Registrant's Common Equity
and Related Stockholder Matters."
ITEM 2. PROPERTIES
The Company's headquarters consist of 21,000 square feet located in San
Diego, California. The Company currently leases this building for warehouse,
sales and marketing, product development and administrative purposes. The
Company's lease for such space provides for base lease payments of $14,284 per
month, plus operating expenses, and expires in October 1999. The Company
currently is negotiating a new lease to replace the Company's current office and
warehouse space in San Diego. The Company does not own any real property.
The Company's Florida subsidiary, Eco Soil Systems, Inc. (Florida),
occupies 5,000 square feet of office and warehouse space. Aspen Consulting, Inc.
("Aspen") leases 2,145 square feet in San Diego, California and 1,245 square
feet in Phoenix, Arizona. The sales organizations recently acquired, Turf
Products, Turf Specialty and Turfmakers, each have office and warehouse space.
Turf Products leases 6,500 square feet in Chicago, Turf Specialty leases 10,000
square feet in northern New Hampshire, 10,000 square feet in York, Pennsylvania
and 4,500 square feet in Gibsonia, Pennsylvania, and Turfmakers leases 14,128
square feet in Palm Desert, California. Management believes that the properties
leased by the Company and its subsidiaries are generally in good operating
condition.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings and
is not aware of any material proceedings that are contemplated by any third
party or governmental authority.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On November 17, 1997, the Company held a Special Meeting of
Shareholders. Notice of the Special Meeting and a Proxy Statement were submitted
to Shareholders of record as of October 22, 1997. At the Special Meeting,
shareholders were asked to vote on the following proposals:
1. To approve amendment to and restatement of the Company's Amended and
Restated Articles of Incorporation to increase the number of authorized shares
of Common Stock from 20,000,000 to 25,000,000.
21
<PAGE> 22
At the meeting on November 17, 1997, the following results of
shareholder votes were recorded:
PROPOSAL 1
To approve amendment to and restatement of the Company's Amended and
Restated Articles of Incorporation to increase the number of authorized shares
of Common Stock from 20,000,000 to 25,000,000.
For 6,293,087
Against 4,100
Abstain 0
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.005 par value per share, trades on The
Nasdaq National Market under the symbol "ESSI." From January 16, 1997, the date
of the Company's initial public offering, to December 3, 1997 the Company's
Common Stock traded on the Nasdaq SmallCap Market under the symbol "ESSI." The
following table sets forth for the periods indicated the high and low sale
prices for the Common Stock as reported by the Nasdaq SmallCap Market for the
period from January 1, 1997 to December 3, 1997 and the Nasdaq National Market
for the period thereafter.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
1997
1st Quarter (from January 16, 1997) 6 15/16 4 3/16
2nd Quarter 6 1/4 3
3rd Quarter 8 5 9/16
4th Quarter 7 3/16 4 3/4
</TABLE>
As of March 16, 1998 there were approximately 15,557,538 shares of
Common Stock outstanding held by approximately 293 holders of record.
The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to pay dividends on its Common Stock in the
foreseeable future. The Company is currently prohibited from paying dividends by
the terms of a loan agreement between the Company and Imperial Bank. The Company
intends to retain any earnings for use in the operation and expansion of its
business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
GENERAL
The Company develops, markets and sells proprietary biological and
traditional chemical products that provide solutions for a wide variety of turf
and crop problems in the golf and agricultural industries. The Company's
principal products include proprietary products and distributed products. The
Company's proprietary products include its patented BioJect system and its
CalJect and SoluJect systems, as well as its CleanRack system. The Company's
distributed products consist of traditional fertilizers and pesticides that are
distributed through the Company's dealers and distributors.
22
<PAGE> 23
The Company significantly changed its focus and product mix after it
moved its headquarters to San Diego from Nebraska in 1991. In 1991, a
significant portion of the Company's revenues were generated by the sale of
products which included fertilizer, nutrient and seed sales to golf courses.
These products generated low gross margins due to significant competition.
Shortly thereafter, the Company began to devote substantial resources towards
the development of the BioJect system, which resulted in the Company generating
net losses. As the BioJect system was developed, the Company began to focus its
efforts on the marketing and sales of BioJect systems and microbial products,
which have higher gross margins, and shifted away from lower margin sales of
seed and fertilizer. In 1996, the Company began to rapidly expand its sales and
marketing capabilities related to the BioJect system by hiring key personnel and
acquiring regional distributors whose sales representatives had established
relationships with potential BioJect customers. On May 31, 1996, the Company
acquired both Turf Products and Turf Specialty. In February 1997, the Company
acquired substantially all of the assets of Turfmakers. The acquisition of these
distributors significantly increased the volume of distributed products sold by
the Company and lead to increased penetration of the BioJect system within the
golf industry. In addition to its acquisitions of regional turf products
dealers, the Company acquired Aspen, an irrigation design and planning firm, in
September 1995. In March 1998, the Company acquired Benham Chemical Corporation
and Cannon Turf Supply Inc. and entered into an agreement in principle, subject
to due diligence and final closing conditions, to acquire Agricultural Supply,
Inc.
The BioJect system generates recurring revenues through customer leases
of BioJect equipment and the sale of various microbial products. In September
1997, the Company sold certain of its equipment under operating leases to Eco
Lease Partners, LLC ("Eco Lease Partners"), an unaffiliated investor group, for
aggregate proceeds of $4.0 million. The Company then leased the BioJect units
back from Eco Lease Partners under a 40-month lease agreement. The equipment is
subleased to end-users, generally under one-year lease terms. In December 1997,
the Company repurchased $2.3 million of the equipment sold to Eco Lease
Partners. Revenues from leasing and subleasing arrangements are recognized based
on the lease terms established with the customer which typically include monthly
lease payments and a one-time installation fee. All of the Company's leases are
terminable by the customer on 30 days' notice. The consumable microbial products
are sold separately on a seasonal basis based on the type and number of
microbial products selected. The Company outsources the assembly of the BioJect
systems to third parties that use parts sourced by the Company. As a result,
during the assembly process, the equipment assets are held in the Company's
inventory and are subsequently transferred to the Company's noncurrent assets
thirty days after each BioJect system is installed. Each BioJect system is
depreciated over seven years.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996
Revenues. For the year ended December 31, 1997, revenues were $37.5
million, an increase of 210% compared to $12.1 million for the year ended
December 31, 1996. The increase in revenues reflects increases in revenues from
the Company's proprietary products and distributed products.
For the year ended December 31, 1997, proprietary revenues were $12.2
million, an increase of 173% compared to $4.5 million for the year ended
December 31, 1996. The increase in proprietary revenues primarily was a result
of the Company's increased installations of BioJect systems. At December 31,
1997, the Company had 369 BioJect systems installed, an increase of 45% compared
to 238 installed at December 31, 1996. For the year ended December 31, 1997,
revenues from BioJect sales were $1.8 million compared to no BioJect sales for
the year ended December 31, 1996. For the year ended December 31, 1997, BioJect
lease revenues were $1.3 million, an increase of 91% compared to $681,000 for
the year ended December 31, 1996. For the year ended December 31, 1997, revenues
from BioJect menu items, primarily microbes, were $2.2 million, an increase of
83% compared to $1.2 million for the year ended December 31, 1996.
23
<PAGE> 24
For the year ended December 31, 1997, revenues from other proprietary
products, which consisted primarily of fertilizer, were $2.0 million, an
increase of 186% compared to $699,000 for the year ended December 31, 1996. The
increase resulted primarily from fertilizer sales of $1.5 million, an increase
of 129% compared to $656,000 for the year ended December 31, 1996.
For the year ended December 31, 1997, CleanRack and ClearLake revenues
were $946,000, an increase of 74% compared to $545,000 for the year ended
December 31, 1996. For the year ended December 31, 1997, CleanRack sales
increased by 146% while ClearLake revenues decreased by 45% compared to the year
ended December 31, 1996. The decline in ClearLake revenues resulted from the
Company's decision to discontinue sales of the ClearLake system.
For the year ended December 31, 1997, the revenues of Aspen Consulting
were $1.5 million, an increase of 37% compared to $1.1 million for the year
ended December 31, 1996. The increase in revenues was due to an increase in
Aspen Consulting's customer base.
For the year ended December 31, 1997, revenues from distributed products
were $25.3 million, an increase of 231% compared to $7.6 million for the year
ended December 31, 1996. The increase in revenues from distributed products was
due to the acquisition of Turfmakers in February 1997 and the opening of Turf
Partners branches in Pennsylvania and Southern California. The increase also
resulted from the inclusion of a full year of operations of Turf Products and
Turf Specialty which were acquired by the Company during 1996.
Gross Profit. For the year ended December 31, 1997, the Company's gross
profit was $12.2 million, an increase of 158% compared to $4.7 million for the
year ended December 31, 1996. The increase in gross profit resulted from an
increase in the Company's revenues. For the year ended December 31, 1997, the
gross margin was 33% versus 39% for the year ended December 31, 1996. The
relative decline in gross profit margin for the year ended December 31, 1997
resulted from an increase in sales of distributed products which carry lower
margins than proprietary products and the Company's sale leaseback on September
30, 1997 of $3.7 million in proprietary equipment which generated no margin.
For the year ended December 31, 1997, gross profit from distributed
products was $5.4 million, an increase of $3.2 million or 142% compared to $2.2
million for the year ended December 31, 1996. The increase in gross profit from
distributed products was due to the previously discussed branch openings. For
the year ended December 31, 1997, the gross margin from distributed products was
21% versus 29% for the year ended December 31, 1996. The decrease in gross
margin from distributed products resulted from a change in the Company's product
mix.
For the year ended December 31, 1997, gross profit from proprietary
products was $6.8 million, an increase of 172% compared to $2.5 million for the
year ended December 31, 1996. The increase in gross profit from proprietary
products was due to the increase in revenues from proprietary products. For the
year ended December 31, 1997, the gross margin from proprietary products was
56%, which reflected no change from the year ended December 31, 1996.
Selling, General and Administrative Expense. For the year ended December
31, 1997, selling, general and administrative expense was $11.2 million, an
increase of 72% compared to $6.5 million for the year ended December 31, 1996.
The increase in selling, general and administrative expense reflects the
acquisition of Turfmakers and the expansion of Turf Partners' presence in
Pennsylvania and Southern California, the expenditures required to support the
Company's growth and the costs associated with being a public company. The
Company continues to add personnel selectively in order to build sufficient
infrastructure to expand its business in the agricultural and golf markets.
24
<PAGE> 25
Research and Development Expense. For the year ended December 31, 1997,
research and development expense was $269,000, a decrease of 43% compared to
$475,000 for the year ended December 31, 1996. The decrease in research and
development expense resulted from lower expenditures on the development of the
BioJect system.
Interest Expense. For the year ended December 31, 1997, interest expense
was $579,000, a decrease of 46% compared to $1.1 million for the year ended
December 31, 1996. The decrease in interest expense primarily was due to the
conversion and repayment of outstanding debt. The amount of short and long term
debt decreased to $2.7 million at December 31, 1997, compared to $9.1 million at
December 31, 1996.
Amortization Expense. For the year ended December 31, 1997, amortization
expense was $580,000, an increase of 25% compared to $464,000 for the year ended
December 31, 1996. The increase in expenses associated with the amortization of
goodwill resulted from the Company's acquisitions in 1996 and 1997 discussed
above.
Net Loss. For the year ended December 31, 1997, the net loss was $1.1
million or $.10 per share compared to a net loss of $4.2 million or $.72 per
share for the year ended December 31, 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO 1995
Revenues. For the year ended December 31, 1996, revenues were $12.1
million, an increase of 222% compared to $3.8 million for the year ended
December 31, 1995. The increase in revenues reflects increases in revenues from
both the Company's proprietary and distributed products.
For the year ended December 31, 1996, revenues from sales of proprietary
products were $4.5 million, an increase of 40% compared to $3.2 million for the
year ended December 31, 1995. The increase in proprietary revenues resulted from
an increase in installations of the BioJect system. For the year ended December
31, 1996, revenues from BioJect leases were $681,000, an increase of 28%
compared to $534,000 for the year ended December 31, 1995. For the year ended
December 31, 1996, revenues from sales of BioJect menu items, primarily
microbes, were $1.2 million, an increase of 27% compared to $942,000 for the
year ended December 31, 1995. The increase in revenues from leases and sales of
menu items resulted from an increase in the number of installed BioJect systems.
At December 31, 1996, the Company had 238 BioJect systems installed, an increase
of 39% compared to 171 installed at December 31, 1995. In addition, the Company
increased the number of menu items available to customers in 1996 compared to
1995.
For the year ended December 31, 1996, revenues from sales of CleanRack
and ClearLake systems were $545,000, a decrease of 10% compared to $605,000 for
the year ended December 31, 1995. For the year ended December 31, 1996,
CleanRack sales increased by 101%, but these gains were offset by a decline of
53% in ClearLake revenues. The decline in the sales of ClearLake systems during
the year ended December 31, 1996 resulted from a decline in unit sales while the
Company redesigned the ClearLake system. While redesigning the ClearLake system,
the Company did not actively market the ClearLake system.
For the year ended December 31, 1996, revenues from sales of distributed
products were $7.6 million, an increase of 1,258% compared to $562,000 for the
year ended December 31, 1995. The increase in revenues from distributed products
resulted from the acquisitions described above. Revenues from sales of
distributed products reflect seven months of revenues from Turf Products and
Turf Specialty of $3.0 million and $3.9 million, respectively.
For the year ended December 31, 1996, revenues from Aspen's operations
were $1.1 million, an increase of 212% compared to $353,000 for the year ended
December 31, 1995. The Company acquired Aspen in September of 1995, and the
results for the year ended December 31, 1995 represent only three months of
operations.
25
<PAGE> 26
For the year ended December 31, 1996, revenues from other proprietary
products, which consisted primarily of fertilizer, were $699,000, a decrease of
14% compared to $809,000 for the year ended December 31, 1995. The decrease
resulted from the Company's decision to focus on the marketing of its BioJect
system and its other proprietary products.
Gross Profit. For the year ended December 31, 1996, gross profit was
$4.7 million, an increase of 167% compared to $1.8 million for the year ended
December 31, 1995. The increase in gross profit resulted from the increase in
the Company's revenues described above. For the year ended December 31, 1996,
gross margin was 39% compared to 47% for the year ended December 31, 1995. The
decline in gross profit margin was due to the increase in sales of distributed
products and a problem with the circuit boards for the BioJect system.
For the year ended December 31, 1996, gross profit from proprietary
products was $2.5 million, an increase of 48% compared to $1.7 million for the
year ended December 31, 1995. The increase in gross profit from proprietary
products resulted from an increase in revenues from proprietary products. For
the year ended December 31, 1996, the gross profit margin on proprietary
products was 56% compared to 53% during the year ended December 31, 1995. The
increase in gross profit margin on the Company's proprietary products resulted
from an increase in the proportion of sales of BioJect menu items, which carry
higher margins than other proprietary products.
For the year ended December 31, 1996, gross profit from distributed
products was $2.2 million, an increase of 2,560% compared to $84,000 for the
year ended December 31, 1995. The increase in gross profit from distributed
product sales resulted from the acquisitions described above. For the year ended
December 31, 1996, gross margin was 29% compared to 15% during the year ended
December 31, 1995.
Selling, General and Administrative Expense. For the year ended December
31, 1996, selling, general and administrative expense was $6.5 million, an
increase of 151% compared to $2.6 million for the year ended December 31, 1996.
The increase in selling, general and administrative expense resulted from the
costs associated with the integration of the Company's acquisitions, an increase
in the number of personnel at the Company and costs associated with the repair
of a circuit board problem on the BioJect system.
Research and Development Expense. For the year ended December 31, 1996,
research and development expense was $475,000, an increase of 15% compared to
$413,000 for the year ended December 31, 1995. The increase in research and
development expense resulted from increased expenditures on the BioJect and
ClearLake systems.
Interest Expense. For the year ended December 31, 1996, interest expense
was $1.1 million, an increase of 306% compared to $262,000 for the year ended
December 31, 1995. The increase in interest expense resulted from an increase in
the amount of debt outstanding. The amount of short and long term debt increased
to $9.1 million at December 31, 1996, compared to $2.6 million at December 31,
1995.
Amortization Expense. For the year ended December 31, 1996, amortization
expense was $464,000, an increase of 931% compared to $45,000 for the year ended
December 31, 1995. The increase in expense associated with the amortization of
goodwill resulted from the acquisitions discussed above.
Net Loss. For the year ended December 31, 1996, the net loss was $4.2
million or $.62 per share compared to $1.8 million or $.35 per share for the
year ended December 31, 1995.
26
<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company had incurred annual net losses and
negative cash flows from operations, and has financed its operations from
revenues from sales of its products, sales of its Common Stock, borrowing from
its principal shareholders and bank financing. In January 1997, the Company
issued 3,795,000 shares of common stock at a price of $4.125 per share in an
initial public offering of its shares. The Company received net proceeds of
approximately $13,510,000 which were used for the purchase of Turfmakers, the
reduction of debt and working capital purposes. In December 1997, the Company
issued and sold 3,244,167 shares of common stock at a price per share of $5.00
per share in a public offering of its shares. The Company received net proceeds
from the December public offering of approximately $14,362,000 which were used
or will be used for capital expenditures primarily related to the construction
of additional BioJect systems, the repurchase of BioJect units currently leased
to the Company, the acquisition of additional independent dealers and
distributors, including the acquisitions of Benham Chemical Corporation and
Cannon Turf Supply Inc., the reduction of debt and working capital purposes.
During 1997, the Company used $9.9 million in cash relating to its operating
activities. At December 31, 1997, the Company had working capital of $16.5
million.
The Company believes that the net proceeds from its public offering of
Common Stock in December 1997 combined with available borrowings from its bank
facilities will be sufficient to finance its operations and future growth for at
least the next twelve months. The Company intends to fund its future operations
and growth through a combination of product revenues, borrowings available under
its 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.
QUARTERLY FLUCTUATIONS
The Company's operating results vary from quarter to quarter as a result
of various factors. Virtually all of the Company's customers are located in the
Northern Hemisphere and purchase greater quantities of microbes and distributed
products during the spring, summer and fall months. Due to low customer activity
during the winter, the Company typically markets the BioJect system during the
fourth and first quarters. As a result of these marketing efforts, the Company
typically receives orders during the first and second quarters and installs
BioJect systems during the second and third quarters. BioJect lease and
installation revenues are recognized upon receipt of payment. Because of this
sales cycle, the Company expects to recognize a significant portion of its
proprietary revenues during its second and third quarters. Operating expenses
have tended to be independent of the quarterly sales cycle. As a result,
operating expenses generally represent a higher percentage of sales in the first
and fourth quarters as compared to the second or third quarters, and the Company
may experience losses in the first and fourth quarters. Accordingly, results for
any quarter are not necessarily indicative of results for any future period. The
sales cycle for the BioJect system also makes it difficult to predict the number
of BioJect systems that will be leased and the quantity of microbial product
sales that will be sold until orders are received by the Company during the
first half of the year. Sales of the Company's products also depend to some
extent
27
<PAGE> 28
on the severity of weather patterns in the geographic areas served by the
Company. Given these factors, it is difficult for the Company to accurately
predict the level of demand for its products.
ACCOUNTING PRINCIPLES
Effective December 31, 1997, the Company adopted the Financial
Accounting Standards Board Statement No. 128, Earnings Per Share. Under
Statement No. 128, the Company is required to present basic net income per
share, which excludes the effects of dilutive common stock equivalents, and
diluted net income per share. Basic net income per share is expected to be
higher than the currently presented primary net income per share in periods of
positive earnings due to the exclusion of dilutive stock options in its
computation. Diluted net income per share is not expected to be materially
different from the earnings per share amounts which would be computed under the
current method.
ITEM 7. FINANCIAL STATEMENTS
See "Index to Consolidated Financial Statements" at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
As indicated in the following table, the information required to be
presented in Part III of this report is hereby incorporated by reference from
the Company's definitive Proxy Statement for its 1998 Annual Meeting of
Shareholders to be prepared in accordance with Schedule 14A and filed with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
covered by this report:
28
<PAGE> 29
Material in Proxy Statement for 1998 Annual Meeting that is incorporated herein
by reference:
<TABLE>
<CAPTION>
ITEM NO. ITEM CAPTION PROXY STATEMENT CAPTION
<S> <C> <C>
9. Directors, Executive Officers, "Directors and Executive Officers"
Promoters and Control Persons;
Compliance With Section 16(a) of the
Exchange Act
10. Executive Compensation "Executive Compensation"
11. Security Ownership of Certain "Security and Management Ownership
Beneficial Owners and Management Shareholders and Management"
12. Certain Relationships and Related "Certain Transactions"
Transactions
</TABLE>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed as part
of this Annual Report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the
fourth quarter of fiscal 1997.
29
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1(4) Amended and Restated Articles of Incorporation
3.2(6) Articles of Correction to Amended and Restated Articles of Incorporation
3.3(7) Articles of Amendment to Amended and Restated Articles of Incorporation
3.4(4) Bylaws, as amended
4.1(2) Form of the Common Stock Certificate
10.1(3) 1992 Stock Option Plan
10.2(3) 1996 Directors' Stock Option Plan
10.3(2) Agreement and Plan of Merger, dated as of May 31, 1996, as amended on
October 28, 1996, by and among the Company, a wholly owned subsidiary
of the Company and Turf Specialty, Inc.
10.4(2) Agreement and Plan of Merger, dated as of May 31, 1996, by and among
the Company, a wholly owned subsidiary of the Company and Turf
Products, Ltd.
10.5(3) Employment Agreement, dated May 21, 1991, as amended, November 7, 1996
between the Company and William B. Adams
10.6(3) Employment Agreement, dated January 1, 1994, as amended, November 7,
1996 between the Company and Douglas M. Gloff
10.7(3) Employment Agreement, dated July 8, 1996, between the Company and Kevin
P. Lyons
10.8(3) Employment Agreement, dated July 8, 1996, between the Company and David
W. Schermerhorn
10.9(4) Employment Agreement, dated July 10, 1996, between the Company and
Walter W. Fuchs
10.10(2) Distribution Agreement, dated August 2, 1996, between the Company and
Abbott Laboratories, Chemical and Agricultural Products Division
10.11(3) Lease Agreement, dated September 1, 1996, between the Company and
Arthur P. Arns
10.12(6) Security and Loan Agreement, dated June 30, 1997, between the Company
and Imperial Bank of San Diego
10.13(6) Warrant to Purchase Common Stock dated June 30, 1997 granted by the
Company to Imperial Bank
10.14(6) Option for Xanthomonas Campestris dated June 3, 1997 made by Mycogen
Corporation in favor of the Company
10.15(6) Settlement Agreement dated as of July 6, 1997 by and between the
Company and Encore Technologies, Inc.
10.16(6) Assignment of TX-1 Intellectual Property made as of July 6, 1997 by
Encore Technologies, Inc. to the Company
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
10.17(6) Assignment of Media Intellectual Property made as of July 6, 1997 by
Encore Technologies, Inc. to the Company
10.18(6) License and Supply Agreement dated as of July 6, 1997 by and between
the Company and Encore Technologies, Inc.
21.1(5) List of Subsidiaries
23.1(1) Consent of Ernst & Young LLP, Independent Auditors
27.1(1) Financial Data Schedule
27.2(1) Amended and Restated Financial Data Schedule for Year Ended
December 31, 1996
</TABLE>
- --------------------
<TABLE>
<S> <C>
(1) Filed herewith
(2) Incorporated by reference to the Company's Registration Statement on
Form SB-2 (File No. 333-15883) filed with the Commission on November 8,
1996.
(3) Incorporated by reference to Amendment No. 3 to the Company's
Registration Statement on Form SB-2 (File No. 333-15883) filed with the
Commission on January 13, 1997.
(4) Incorporated by reference to Amendment No. 4 to the Company's
Registration Statement on Form SB-2 (File No. 333-15883) filed with the
Commission on January 16, 1997.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
(6) Incorporated by reference to the Company's Registration Statement on
Form SB-2 (File No. 333-39399) filed with the Commission on November 4,
1997.
(7) Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form SB-2 (File No. 333-39399) filed with the
Commission on November 21, 1997.
</TABLE>
31
<PAGE> 32
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, on the 31st day of
March, 1998.
Eco Soil Systems, Inc.
By: /s/ WILLIAM B. ADAMS
--------------------------------
William B. Adams
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ WILLIAM B. ADAMS
- -------------------------------- Chairman of the Board and Chief Executive March 26, 1998
William B. Adams Officer (principal executive officer)
/s/ DOUGLAS M. GLOFF
- -------------------------------- President, Chief Operating Officer and March 26, 1998
Douglas M. Gloff Director
/s/ L. JEAN DUNN, JR.
- -------------------------------- Jr. Chief Financial Officer (principal March 26, 1998
L. Jean Dunn, Jr. financial and accounting officer)
/s/ JEFFREY A. JOHNSON
- -------------------------------- President and General Manager of Golf March 26, 1998
Jeffrey A. Johnson Division, Secretary and Director
/s/ BRADLEY K. EDWARDS
- -------------------------------- Director March 27, 1998
Bradley K. Edwards
/s/ S. BARTLEY OSBORN
- -------------------------------- Director March 27, 1998
S. Bartley Osborn
/s/ WILLIAM S. POTTER
- -------------------------------- Director March 27, 1998
William S. Potter
</TABLE>
32
<PAGE> 33
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ECO SOIL SYSTEMS, INC.
Report of Ernst & Young LLP, Independent Auditors .................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 ....... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996 ...................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended December 31, 1997 and 1996 ....................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 ...................................... F-6
Notes to Consolidated Financial Statements ......................... F-7
</TABLE>
F-1
<PAGE> 34
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
Eco Soil Systems, Inc.
We have audited the accompanying consolidated balance sheets of Eco Soil
Systems, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Turf Specialty, Inc., a wholly-owned subsidiary, as of December
31, 1996 and for the period from its acquisition on May 31, 1996 to December 31,
1996, which statements reflect total assets of $2,548,000 as of December 31,
1996, and total revenues of $3,867,000 for the period from May 31, 1996 to
December 31, 1996, included in the consolidated results of operations for the
year ended December 31, 1996. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
data included for Turf Specialty, Inc., as of December 31, 1996 and for the
period from May 31, 1996 to December 31, 1996, is based solely on the report of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Eco Soil Systems, Inc. at
December 31, 1997 and 1996, and the consolidated results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
San Diego, California
March 12, 1998
except for Note 8, for which the date is
March 26, 1998
F-2
<PAGE> 35
ECO SOIL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash ..................................................................... $ 3,125 $ 150
Short-term investments, available-for-sale ............................... 3,000 --
Accounts receivable, net of allowance for doubtful
accounts of $115 and $113 at December
31, 1997 and 1996, respectively ......................................... 10,148 2,193
Inventories .............................................................. 5,587 2,047
Prepaid expenses and other current assets ................................ 536 289
-------- --------
Total current assets ....................................................... 22,396 4,679
Equipment under operating leases, net ...................................... 6,735 1,325
Property and equipment, net ................................................ 1,150 656
Intangible assets, net ..................................................... 6,515 5,663
Other assets ............................................................... 312 563
-------- --------
Total assets ............................................................... $ 37,108 $ 12,886
======== ========
Liabilities and Shareholders' Equity/(Deficit)
Current liabilities:
Accounts payable ......................................................... $ 2,492 $ 2,743
Accrued expenses ......................................................... 2,151 734
Current portion of long-term debt ........................................ 1,259 7,266
Current portion of advances from
shareholders .......................................................... 14 348
Current portion of capital lease obligations ............................. -- 22
-------- --------
Total current liabilities .................................................. 5,916 11,113
Long-term debt, net of current portion ..................................... 1,412 1,826
Advances from shareholders, net of current portion ......................... -- 21
Commitments
Shareholders' equity (deficit):
Preferred stock, $.005 par value;
5,000,000 shares authorized; none
issued and outstanding ................................................. -- --
Common stock, $.005 par value;
25,000,000 shares authorized at December 31, 1997, and 20,000,000 shares
authorized at December 31, 1996; 15,320,923 and 6,606,590 shares
issued and outstanding at December 31,
1997 and December 31, 1996, respectively ............................... 77 33
Additional paid-in capital .............................................. 43,708 12,730
Warrants ................................................................ 242 242
Notes receivable from shareholders ...................................... (282) (192)
Accumulated deficit ..................................................... (13,965) (12,887)
-------- --------
Total shareholders' equity (deficit) ...................................... 29,780 (74)
-------- --------
Total liabilities and shareholders' equity (deficit) ....................... $ 37,108 $ 12,886
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 36
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Proprietary products .............. $ 12,236 $ 4,483
Distributed products .............. 25,289 7,633
-------- --------
Total revenues ............ 37,525 12,116
Cost of revenues:
Proprietary products .............. 5,413 1,971
Distributed products .............. 19,878 5,399
-------- --------
Total cost of revenues .... 25,291 7,370
-------- --------
Gross profit ........................ 12,234 4,746
Operating expenses:
Selling, general and administrative 11,162 6,489
Research and development .......... 269 475
-------- --------
Income (loss) before interest,
depreciation and amortization ..... 803 (2,218)
Depreciation ...................... (819) (447)
Amortization of intangibles ....... (580) (464)
-------- --------
Loss from operations ................ (596) (3,129)
Interest expense .................... (579) (1,069)
Interest income ..................... 97 5
-------- --------
Net loss ............................ $ (1,078) $ (4,193)
======== ========
Net loss per share, basic and diluted $ (.10) $ (.72)
======== ========
Shares used in calculating net
loss per share, basic and diluted ... 11,327 5,815
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 37
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE
------------------ PAID-IN FROM ACCUMULATED
SHARES AMOUNT CAPITAL WARRANTS SHAREHOLDERS DEFICIT TOTAL
--------- ------ ------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ....... 4,968,935 $25 $ 8,510 $ -- $ -- $ (8,694) $ (159)
Issuance of common stock for
purchase of Turf
Products, Ltd. ................. 374,424 2 1,121 -- -- -- 1,123
Issuance of common stock ......... 138,583 1 387 -- -- -- 388
Issuance of warrants in
connection with debt ........... -- -- -- 242 -- -- 242
Exercise of stock options ........ 239,000 1 391 -- (192) -- 200
Issuance of common stock for
purchase of Turf Specialty, Inc. 647,650 3 1,940 -- -- -- 1,943
Conversion of debt ............... 237,998 1 381 -- -- -- 382
Net loss ......................... -- -- -- -- -- (4,193) (4,193)
----------- --- ------- ---- ----- -------- --------
Balance at December 31, 1996 ....... 6,606,590 33 12,730 242 (192) (12,887) (74)
Issuance of common stock in
IPO, net of issuance costs
of $2,145 ...................... 3,795,000 19 13,491 -- -- -- 13,510
Issuance of common stock in
follow-on offering,
net of issuance costs of $1,756 . 3,244,167 17 14,345 -- -- -- 14,362
Issuance of common stock for
purchase of Turfmakers, Inc. ... 25,000 -- 109 -- -- -- 109
Exercise of stock options and
warrants ....................... 1,058,036 5 1,081 -- (90) -- 996
Conversion of debt ............... 592,130 3 1,952 -- -- -- 1,955
Net loss ......................... -- -- -- -- -- (1,078) (1,078)
----------- --- ------- ---- ----- -------- --------
Balance as of December 31, 1997 .... 15,320,923 $77 $43,708 $242 $(282) $(13,965) $ 29,780
=========== === ======= ==== ===== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 38
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ............................................. $ (1,078) $ (4,193)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization ..................... 1,399 911
Amortization of discount on
long-term debt .................................. 70 189
Changes in operating assets and liabilities,
net of effect of acquired businesses:
Accounts receivable .......................... (8,090) 2,045
Inventories .................................. (3,230) 114
Prepaid expenses and other
assets ..................................... 3 (472)
Accounts payable ............................. (242) (2,932)
Accrued liabilities .......................... 1,409 (292)
-------- --------
Net cash used in operating activities ................ (9,759) (4,630)
INVESTING ACTIVITIES
Cash received in acquisitions ........................ -- 1,656
Payments for acquired patents and licenses ........... (129) --
Payments related to acquired businesses .............. (1,408) (2,690)
Payments for equipment under operating leases ........ (7,009) --
Purchase of property and equipment ................... (999) (748)
Proceeds from sale of equipment under operating leases 1,325 --
Purchase of short-term investments .................. (3,000) --
Proceeds from note receivable ........................ -- 595
-------- --------
Net cash used in investing activities ................ (11,220) (1,187)
FINANCING ACTIVITIES
Advances (to) from shareholders ...................... (355) 179
Proceeds from long-term debt ......................... 8,221 6,442
Repayments of long-term debt ......................... (12,757) (1,135)
Payments on capital lease obligations ................ (22) (107)
Net proceeds from issuance of common stock ........... 28,867 588
-------- --------
Net cash provided by financing activities ............ 23,954 5,967
-------- --------
Net increase in cash ................................. 2,975 150
Cash and cash equivalents at beginning of year ....... 150 --
-------- --------
Cash and cash equivalents at end of year ............. $ 3,125 $ 150
======== ========
NON-CASH FINANCING ACTIVITIES
Common stock issued upon
conversion of debt and shareholder advances ........ $ 1,955 $ 382
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid ........................................ $ 708 $ 537
======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 39
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company develops, markets and sells proprietary biological and
traditional chemical products that provide solutions for a wide variety of turf
and crop problems in the golf and agricultural industries. The Company has
developed its patented BioJect system for the distribution of naturally
occurring microbes that complement or reduce the need for many chemical products
currently used in golf and agricultural markets. By fermenting microbes at the
customer's site and distributing them through the customer's existing irrigation
system, the BioJect system provides customers with cost savings and mitigates
the adverse environmental effects associated with chemical products. The Company
initially has focused its sales and marketing efforts on the golf market, and
recently has entered the agricultural crop and ornamental markets. To date, the
Company has installed BioJect systems at various customer sites, including such
golf courses as Congressional Country Club, Winged Foot Golf Club and Spyglass
Hill Golf Club.
Eco Turf Products, Ltd. (d.b.a. Turf Products, Ltd.) and Turf Specialty,
Inc., wholly-owned subsidiaries of the Company, are wholesalers/distributors of
golf course supplies and turfgrass supplies and operate in the Greater Chicago
area and New England, respectively.
In January 1997, the Company completed its initial public offering of
3,795,000 shares of common stock at a price of $4.125 per share, providing the
Company with net proceeds of approximately $13.5 million, after deducting
underwriting discounts, commissions and other offering costs of approximately
$2.1 million. In February 1997, as a result of the completion of the initial
public offering, $1.9 million of debt was converted into 576,823 common shares
and $5.6 million in debt was repaid.
In December 1997, the Company completed a follow-on public offering of
3,244,167 shares of common stock at a price of $5.00 per share, providing the
Company with net proceeds of approximately $14.4 million, after deducting
underwriting discounts, commissions and other offering costs of approximately
$1.8 million. As a result of the secondary offering, $6.2 million of debt was
repaid in December 1997.
BASIS OF CONSOLIDATION
The accompanying financial statements include the accounts of the
Company and its wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
including the allocation of the purchase price relating to acquired businesses,
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from the estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of less than three months to be cash equivalents.
SHORT-TERM INVESTMENTS
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Debt and Equity Securities," the Company's short-term
investments are classified as available-for-sale. Available-for-sale securities
at December 31, 1997 are stated at cost, as the difference between cost and fair
value is immaterial.
F-7
<PAGE> 40
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk are primarily accounts receivable. A substantial
portion of the Company's accounts receivable are from distributors, lawn
maintenance companies and country clubs.
The Company generally does not require collateral and provides for
estimated losses on uncollectable accounts at the time of the sale. Such losses
have historically been minimal and within management's expectations.
No customer accounted for more than 10% of net sales for the years ended
December 31, 1997 or 1996.
INVENTORIES
Finished goods inventory is stated at the lower of cost (first-in,
first-out method) or market. Work in process inventory is stated at cost and is
primarily related to the manufacture of new BioJects.
EQUIPMENT UNDER OPERATING LEASES
Equipment under operating leases is stated at cost. Depreciation is
provided using the straight-line method over seven years, the estimated service
life of the equipment.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided
using the straight-line and accelerated methods over the estimated service lives
of depreciable property and equipment ranging from 3 to 5 years. Equipment under
capital leases is amortized over the shorter of the estimated useful life of the
assets or the lease term and such amortization is included in depreciation in
the accompanying financial statements.
INTANGIBLE ASSETS
Intangible assets primarily represent the excess of the purchase price
over the fair market value of the assets acquired and are generally being
amortized over a period of 15 years.
IMPAIRMENT OF ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" (SFAS 121), the Company recognizes impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the estimated undiscounted cash flows to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. To date,
the Company has not identified any such indicators of impairment or recorded any
impairment losses.
REVENUE AND EXPORT SALES
Proprietary sales revenue is derived from the rental of certain units on
a month to month basis, the sale of microbial products used in those units, and
servicing of the units. Distributed sales revenue is derived primarily from
sales of purchased turf maintenance products. Revenue is recognized upon
shipment of the related products.
Cost of proprietary sales revenues includes cost of the microbial
products. Depreciation on the rental units is included in depreciation expense.
The related cost of the service component is included in selling, general, and
administrative expense. Cost of distributed products revenues is based on the
Company's purchase price.
The Company's export sales totaled $4,842,000 and $543,000 for the years
ended December 31, 1997 and 1996, respectively.
F-8
<PAGE> 41
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25
("APB 25") and related Interpretations in accounting for its employee stock
options for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognize.
NET LOSS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which replaced
the calculation of primary and fully diluted net loss per share with basic and
diluted net loss per share. Basic net loss per share is calculated using the
weighted average number of common shares outstanding. Diluted net loss per share
is calculated using the weighted average number of common shares outstanding
plus the dilutive effect of options and warrants, if any, using the treasury
stock method. All net loss per share amounts for all periods have been
presented, and where appropriate restated, to conform to the SFAS 128
requirements and the recently effective Securities and Exchange Commission Staff
Accounting Bulletin No. 98.
Supplemental net loss per share has been computed as described above and also
gives effect to the repayment of approximately $5.6 million of the Company's
outstanding indebtedness and resulting reduction of interest expense, as if a
portion of the proceeds from the initial public offering, which became effective
in January 1997, had been used to repay the debt at the original dates of
issuance and the number of shares of common stock, whose proceeds were used to
retire the debt, were outstanding from the same dates.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Supplemental net loss per share............ $(.46)
=====
Shares used in computing supplemental net
loss per share (in thousands).............. 7,897
=====
</TABLE>
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income" and SFAS 131, "Segment Information". Both of
these standards are effective for the fiscal years beginning after December 15,
1997. SFAS 130 requires that all components of comprehensive income, including
net income, be reported in the financial statements in the period in which they
are recognized. The Company's comprehensive loss will not be materially
different than net loss as reported. SFAS 131 amends the requirements for public
enterprises to report financial and descriptive information about its reportable
operating segments. The Company currently operates in one business and operating
segment and does not believe adoption of this standard will have a material
impact on the Company's financial statements as reported.
GOVERNMENT REGULATIONS
Substantially all of the Company's facilities are subject to federal,
state and local regulations relating to the discharge of materials into the
environment. Compliance with these provisions has not had, nor does the Company
expect such compliance to have, any material effect upon the operations,
financial condition, capital expenditures, or competitive position of the
Company; however, there can be no assurance that compliance with such
regulations would not have a material effect upon the Company's future results
of operations or financial condition. Management believes that its current
practices and procedures for the control and disposition of such wastes comply
with applicable federal and state requirements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year classifications.
F-9
<PAGE> 42
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS
Effective May 31, 1996, the Company acquired all of the outstanding
stock of Turf Specialty, Inc. ("TSI") for $579,000 cash, two promissory notes
totaling $1,000,000 (see Note 4) and 647,650 shares of the Company's common
stock valued at $3.00 per share. The excess of the purchase price over the net
tangible assets acquired includes approximately $118,000 for legal and other
costs incurred associated with the acquisition.
TSI also gave each officer a non-interest bearing loan of $250,000 which
need not be repaid and will be forgiven on July 1, 1999 if the officers continue
to be employed by TSI. If employment is terminated by the Company prior to that
date, the officers will be obligated to repay a portion of the loan. The Company
has accounted for the loans as additional purchase price for the aquisition.
Effective May 31, 1996, the Company acquired all of the outstanding
stock of Turf Products, Ltd. ("TPL") for $1,198,000 cash and 374,424 shares of
the Company's common stock valued at $3.00 per share. The excess of the purchase
price over the net tangible assets acquired includes approximately $110,000 for
legal and other costs incurred associated with the acquisition.
In February 1997, the Company acquired certain assets of Turfmakers Inc.
(d.b.a. Cameron), a turf maintenance product distributor located in Palm
Springs, California, for $1,225,000 cash and 25,000 shares of common stock
valued at $4.38 per share. The excess of the purchase price over the net
tangible assets acquired includes approximately $45,000 for legal and other
costs incurred associated with the acquisition.
The results of operations of TSI, TPL and Cameron from the respective
dates of acquisition are included in the consolidated financial statements.
Each of the acquisitions was accounted for as a purchase and,
accordingly, the purchase price has been allocated to the assets acquired and
the liabilities assumed based on the estimated fair market values at the date of
the acquisition, as follows (in thousands).
<TABLE>
<CAPTION>
TURF TURF
SPECIALTY, PRODUCTS,
INC. LTD. CAMERON
------ ------ -------
<S> <C> <C> <C>
Assets acquired:
Cash ............................. $1,471 $ 185 $ --
Accounts receivable .............. 1,900 1,021 --
Inventories ...................... 675 894 287
Prepaid expenses and other current
assets ......................... 31 336 --
Property and equipment ........... 164 182 40
Excess of purchase price over net
tangible assets acquired ...... 4,055 1,780 1,053
------ ------ ------
Total assets acquired .............. $8,296 $4,398 $1,380
====== ====== ======
Liabilities assumed:
Accounts payable ................. $3,261 $1,492 $ --
Accrued expenses ................. 895 35 --
Notes payable .................... -- 440 --
------ ------ ------
Total liabilities assumed .......... 4,156 1,967 --
------ ------ ------
Net assets acquired ................ $4,140 $2,431 $1,380
====== ====== ======
</TABLE>
The following unaudited pro forma results assume the TSI and TPL
acquisitions occurred on January 1, 1996. The results of operations of Cameron
prior to its acquisition by the Company were not material and are not included
in the following unaudited pro forma results. The pro forma results have been
prepared utilizing the historical financial statements of the Company and the
acquired businesses.
PRO FORMA RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Net sales..................... $18,636
Net loss...................... (4,576)
Net loss per share............ $ (.64)
</TABLE>
F-10
<PAGE> 43
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The unaudited pro forma results above give effect to pro forma
adjustments related to the amortization of the excess of the purchase price over
the fair market value of the assets acquired, the increase in interest expense
to reflect the notes payable issued to effect the acquisitions, and related
income tax adjustments. This pro forma information is not necessarily indicative
of the actual results that would have been achieved had the above businesses
been acquired on January 1, 1996, nor is it necessarily indicative of future
results.
3. BALANCE SHEET INFORMATION
Inventories consist of the following as of December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Raw materials...... $ -- $ --
Work in process.... 1,072 273
Finished goods..... 4,645 1,827
Reserve............ (130) (53)
------- -------
$ 5,587 $ 2,047
======= =======
</TABLE>
Equipment under operating leases is generally leased under initial one-year
lease terms with month-to-month renewal options. Accumulated depreciation and
amortization of equipment under operating leases totaled $276,000 and $823,000
at December 31, 1997 and December 31, 1996, respectively.
Property and equipment consist of the following at December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Machinery and equipment ......... $ 1,156 $ 256
Vehicles ........................ 851 629
Leasehold improvements .......... 333 170
Furniture and fixtures .......... 128 130
------- -------
2,468 1,185
Less accumulated depreciation and
amortization .................. (1,318) (529)
------- -------
$ 1,150 $ 656
======= =======
</TABLE>
Intangible assets consist of the following at December 31, (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Excess of purchase price over fair
market value of assets acquired
(Note 2) ....................... $ 7,254 $ 5,929
Other intangibles ................ 408 281
Accumulated amortization ......... (1,147) (547)
------- -------
$ 6,515 $ 5,663
======= =======
</TABLE>
F-11
<PAGE> 44
4. LONG-TERM DEBT
Long-term debt consists of the following at December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Revolving line of credit with bank
for $5,000; interest payable monthly
at the bank's prime rate plus 1.5% per
annum (10% at September 1997), expiring June
15, 1998; secured by 75% of eligible
accounts receivable and 35% of the value of
inventory ...................................... $ -- $ --
10% secured promissory note with
bank; interest payable
monthly at the bank's prime rate
plus 1.5% per annum (10% at
December 31, 1997), expiring June 30, 1999 ..... 2,595 --
10% secured promissory notes issued
in connection with the acquisition
of Turf Specialty, Inc., to its officers;
repaid in February 1997 ........................ -- 1,000
8% secured subordinated notes to an
officer and shareholders, net of
unamortized discount of $23; interest
payable quarterly; repaid in December 1997 ..... -- 1,006
8% secured subordinated debentures
to officers and shareholders;
interest payable quarterly;
repaid in December 1997 ........................ -- 700
Revolving line of credit with bank
for $500; repaid in January 1997 ............... -- 500
9% note payable to a bank; repaid
in January 1997 ................................ -- 263
8% unsecured subordinated
promissory note to an officer; repaid
in December 1997 ............................... -- 250
California Export Financing Office
(CEFO) revolving line of credit with
bank for $500; repaid in January 1997 .......... -- 418
10% subordinated promissory bridge
notes, net of unamortized discount of
$24; $1,904 converted into common stock and
the remaining amount repaid in
February 1997 .................................. -- 3,671
Non-interest bearing unsecured note
payable; ....................................... 21 94
10% unsecured subordinated notes;
repaid in August 1997 .......................... -- 120
10% unsecured subordinated
debentures; repaid in August 1997 .............. -- 90
10% unsecured convertible promissory note;
repaid in January 1997 ......................... -- 100
10% unsecured subordinated promissory note to
an officer and shareholder; repaid in March 1997 -- 100
10% convertible promissory note; $100 repaid
in March, 1997 and $50 converted to common
stock in April 1997 ............................ -- 150
8% secured promissory note; repaid
in January 1997 ................................ -- 189
Note payable with bank; repaid in
March 1997 ..................................... -- 200
10% unsecured subordinated promissory note
to officer and shareholder; repaid in
February 1997 .................................. -- 200
Other ............................................ 55 41
------ ------
2,671 9,092
Less amount due within one year .................. 1,259 7,266
------ ------
Long-term debt due after one year ................ $1,412 $1,826
====== ======
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998................................ $1,259
1999................................ 1,412
------
$2,671
======
</TABLE>
Substantially all of the assets of the Company are pledged as collateral
for the debt agreements described above.
The Company's revolving line of credit agreements ("Agreements") contain
certain restrictions and limitations on the Company's operations including
restrictions on capital expenditures, sale of assets, lease liabilities,
mergers, or other forms of business combinations, as well as the prohibition on
the payments of cash dividends. The Agreements also contain certain covenants
which require the Company to maintain minimum levels of net worth, working
capital, and other financial ratios, as defined.
F-12
<PAGE> 45
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors is authorized, without any action by the
Company's shareholders, to issue up to 5,000,000 shares of undesignated
preferred stock and to fix the powers, preferences, rights and limitations of
any such preferred shares or any class or series thereof. Persons acquiring
preferred stock could have preferential rights with respect to voting,
liquidation, dissolution or dividends over existing shareholders.
STOCK OPTION PLAN
In February 1992, the Company established a Qualified Stock Option Plan
(the "Plan") for employees and consultants which, as amended, provides for the
grant of options to purchase up to 1,100,000 shares of common stock. Options
granted under the Plan have a five-year term and vest ratably over a three-year
period.
A summary of the Company's stock option activity and related information
for the years ended December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- ------ ------- ------
<S> <C> <C> <C> <C>
Outstanding -- beginning of year 687,500 $ 2.59 334,168 $ 2.25
Granted ...................... 610,906 $ 4.73 391,000 $ 3.59
Exercised .................... (134,000) $ 1.84 (10,000) $ 2.00
Forfeited .................... (21,166) $ 3.48 (27,668) $ 2.25
========= =======
Outstanding -- end of year ..... 1,143,240 $ 3.92 687,500 $ 2.59
========= =======
Exercisable -- end of year ..... 348,185 $ 3.05 274,167 $ 2.26
========= =======
</TABLE>
At December 31, 1997, no options were available for future grant and
1,100,000 shares of common stock were reserved for future issuance related to
stock options outstanding under the Plan. In 1997 43,240 options were granted
subject to shareholder approval.
Exercise prices and weighted average remaining contractual life for the
options outstanding under the Plan as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.50 - 3.875 438,750 2.66 $ 2.80 278,339 $ 2.81
4.00 - 4.94 574,690 3.98 4.09 69,846 4.02
5.00 - 7.531 129,800 4.63 6.65 - -
--------- -------
1,143,240 348,185
========= =======
</TABLE>
F-13
<PAGE> 46
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro forma information regarding net income (loss) and net income (loss)
per share is required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock plans under the fair value method of that
statement. The fair value for the 1997 options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rates of 5.0% to 6.7%; dividend yields of 0%;
volatility factors of the expected market price of the Company's Common Stock of
72.6%; and a weighted-average expected life of the option of three years. The
fair value for the 1996 options was estimated at the date of grant, using the
"minimum value" method for option pricing with the following weighted-average
assumptions: risk-free interest rate of 7%, dividend yields of 0%; and a
weighted-average expected life of the option of three years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of such options. The
effects of applying Statement 123 for pro forma disclosure purposes are not
likely to be representative of the effects on pro forma net loss or net income
in future years because they do not take into consideration pro forma
compensation expense related to grants made prior to 1995. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1997 1996
--------- ---------
<S> <C> <C>
Pro forma net loss (in thousands) ............. $ (1,741) $ (4,257)
========= =========
Pro forma net loss per share, basic and diluted $ (.15) $ (.73)
========= =========
</TABLE>
OPTIONS AND WARRANTS
Under separate non-qualified stock option agreements in 1992 and 1993, the
Company granted options to purchase 270,000 shares of common stock at prices
ranging from $1.50 to $2.00 per share to several consultants and employees which
have vesting and exercise provisions consistent with those issued pursuant to
the Plan and expire through 1998. In 1996, 164,000 options were exercised at
$2.00 per share and 26,000 options expired. In 1997, there were no options
exercised and 10,000 options expired. As of December 31,1997, 45,000 options
were exercisable.
In 1991 and 1992, the Company also granted to four individuals options to
purchase 812,458 shares of common stock at prices ranging from $.034 to $2.00
per share. In 1996, 40,000 options were exercised at $.034 per share. In 1997,
509,712 options were exercised at $0.034 per share. As of December 31, 1997,
262,746 options were exercisable and expire through May 2001.
In connection with the issuance of the 10% subordinated debentures in 1992 and
1993, the Company issued to the holders of the debentures options to purchase
88,000 shares at $1.50 per share and warrants to purchase 78,000 shares at $3.00
per share. In 1996, 88,000 options were exercised at $1.50 per share through the
cancellation of related debt of $132,000. In 1997 43,000 warrants were
exercised. Warrants to purchase 35,000 shares were outstanding and exercisable
at December 31, 1997 and expire through February 1998.
In connection with the 1994 repurchase of exclusive marketing rights for certain
products, the Company issued warrants to purchase 30,000 common shares at $2.50
per share. All warrants were outstanding and exercisable as of December 31, 1997
and expire through 1999.
During 1994, warrants to purchase 350,000 shares of common stock at $2.50 per
share were issued to an officer of the Company. Warrants for the purchase of
100,000 shares of common stock vested ratably through January 1996 and warrants
for the purchase of 250,000 shares of common stock may not be exercised until
the issuance price of common stock exceeds certain prices. Compensation expense
relating to the contingent shares will be recorded when the options vest based
upon the difference between the then fair market value and the exercise price.
At December 31, 1997, 350,000 of these warrants were exercisable.
F-14
<PAGE> 47
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In accordance with the Company's purchase of Aspen, the previous owner of Aspen
was granted an option to purchase 50,000 shares of the Company's common stock
at $3.00 per share. The option vests over four years if the previous owner
continues employment with the Company and will expire in December 2001. An
additional 150,000 options to purchase the Company's common stock at $3.00 per
share will be granted evenly over the next four years provided employment
continues and contingent upon the level of the pre-tax contribution margin of
Aspen over the next four years. Compensation expense relating to this option
will be recorded when the shares vest based upon the difference between the
then fair market value and the exercise price.
In connection with a new stock option compensation plan for the board of
directors, 30,000 options were granted in January 1996 at $3.00 per share and
39,000 options were granted in January 1997 at $4.13 per share. In June 1997,
9,000 options were granted at $5.19 per share. As of December 31, 1997, 20,000
options were exercisable with the remaining 58,000 options vesting over the next
three years. These options expire in January 2001.
In 1996, in connection with various long-term debt financing transactions, the
Company has issued warrants to purchase 1,880,818 shares of common stock at
$3.00 and $4.00 per share. The warrants are generally exercisable through 2003.
In 1996, warrants were exercised for the purchase of 3,666 shares of common
stock. In 1997 warrants were exercised to purchase 371,324 shares of common
stock. Warrants to purchase 1,505,828 shares were outstanding and exercisable at
December 31, 1997.
Options and warrants have also been issued to various investment banking firms,
debenture holders and shareholders to purchase up to 1,860,190 shares of common
stock. These options and warrants are generally exercisable through April 2004
at $1.50 to $4.95 per share. In 1996, options and warrants were exercised for
purchase of 31,800 shares of common stock. Warrants to purchase 1,828,390
shares were outstanding at December 31, 1997.
As of December 31, 1997, an aggregate of 5,000,000 shares of common stock are
reserved for issuance of options and warrants, exclusive of options granted
under the Plan.
6. INCOME TAXES
At December 31, 1997, the Company had federal and California tax net
operating loss carryforwards of approximately $12.2 million and $4.4 million,
respectively. The difference between the federal and California tax loss
carryforwards is primarily attributable to the fifty percent limitation on
California loss carryforwards. The federal tax loss carryforward will begin
expiring in 2003, unless previously utilized. California net operating losses of
$301,000 expired in 1997, and an additional California tax loss carryforward
will expire in 1998. In addition, the Company had federal and California
research tax credits of $79,000 and $45,000 respectively. The tax credits will
begin to expire in 2009.
Pursuant to Internal Revenue Code Sections 382 and 383, use of the
Company's net operating loss carryforwards may be limited if a cumulative change
in ownership of more than 50% occurs within any three-year period. The Company's
use of a portion of its income tax net operating loss carryforwards will be
limited since the Company has undergone ownership changes of greater than 50%.
Significant components of the Company's deferred tax assets as of
December 31, 1997 and 1996 are shown below. A valuation allowance of $4,828,000,
has been recognized to offset the deferred tax assets as realization of such
assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
------- -------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,552 $ 4,530
Other .......................... 276 106
------- -------
Total deferred tax assets ........ 4,828 4,636
Valuation allowance for
deferred tax assets .............. (4,828) (4,636)
------- -------
Net deferred tax assets .......... $ -- $ --
======= =======
</TABLE>
F-15
<PAGE> 48
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS
In 1997, the Company obtained an exclusive, worldwide, royalty-free
license to use, sell and distribute BioJect Product. In addition, the licensor
assigned to the Company certain rights to proprietary materials. Under the
agreement, the Company agreed to purchase minimum amounts of BioJect Product
over a three year period which commenced in March 1997. During 1997, the Company
purchased $266,000 of such product. Future annual purchase commitments at
December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998 ................ $324
1999 ................ 365
2000 ................ 155
----
$844
====
</TABLE>
The Company leases its office facilities and certain equipment under
non-cancelable operating lease agreements. Future minimum operating lease
payments at December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998 .................... $ 724
1999 .................... 596
2000 .................... 264
2001 .................... 147
2002 .................... 45
Thereafter............... 19
------
$1,795
======
</TABLE>
Rent expense for the years ended December 31, 1997 and 1996 was
approximately $581,000 and $268,000, respectively, including $151,000 and
$90,000, respectively, to a shareholder. The lease with the shareholder expires
February 2001.
In September 1997, the Company sold approximately $4.0 million of
equipment under operating leases to an unrelated investor group. The Company
then leased the equipment back under a 40-month lease agreement. The equipment
is subleased to end-users, generally under one-year lease terms. In December
1997, $2.3 million of this equipment was repurchased by the Company. Minimum
operating lease payments at December 31, 1997 for the equipment remaining under
the leaseback are as follows (in thousands):
<TABLE>
<S> <C>
1998............. $ 503
1999............. 503
2000............. 503
2001............. 84
------
$1,593
======
</TABLE>
F-16
<PAGE> 49
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SUBSEQUENT EVENTS
In March 1998, the Company acquired 100% of the common stock of Benham
Chemical Corporation, a turf maintenance product distributor located in
Farmington Hills, MI for $850,000 cash.
In March 1998, the Company acquired 100% of the common stock of Cannon
Turf Supply, Inc., a turf maintenance product distributor located in Fishers, IN
for $1,312,500 cash and 239,945 shares of common stock valued at $1,312,500.
F-17
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the 1992 Stock Option Plan and 1996 Directors' Stock
Option Plan of Eco Soil Systems, Inc. of our report dated March 12, 1998,
except for Note 8, for which the date is March 26, 1998, with respect to the
consolidated financial statements of Eco Soil Systems, Inc. included in its
Annual Report (Form 10-KSB) for the year ended December 31, 1997, filed with
the Securities and Exchange Commission.
ERNST & YOUNG LLP
San Diego, California
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,125
<SECURITIES> 0
<RECEIVABLES> 10,148
<ALLOWANCES> 115
<INVENTORY> 5,587
<CURRENT-ASSETS> 22,396
<PP&E> 7,885
<DEPRECIATION> 819
<TOTAL-ASSETS> 37,108
<CURRENT-LIABILITIES> 5,916
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 29,703
<TOTAL-LIABILITY-AND-EQUITY> 37,108
<SALES> 37,525
<TOTAL-REVENUES> 37,525
<CGS> 25,291
<TOTAL-COSTS> 25,291
<OTHER-EXPENSES> 12,830
<LOSS-PROVISION> 12
<INTEREST-EXPENSE> 579
<INCOME-PRETAX> (1,078)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,078)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,078)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 150
<SECURITIES> 0
<RECEIVABLES> 2,193
<ALLOWANCES> 113
<INVENTORY> 2,047
<CURRENT-ASSETS> 4,679
<PP&E> 1,981
<DEPRECIATION> 447
<TOTAL-ASSETS> 12,886
<CURRENT-LIABILITIES> 11,113
<BONDS> 0
0
0
<COMMON> 33
<OTHER-SE> (107)
<TOTAL-LIABILITY-AND-EQUITY> 12,886
<SALES> 12,116
<TOTAL-REVENUES> 12,116
<CGS> 7,370
<TOTAL-COSTS> 7,370
<OTHER-EXPENSES> 7,875
<LOSS-PROVISION> 89
<INTEREST-EXPENSE> 1,069
<INCOME-PRETAX> (4,193)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,193)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,193)
<EPS-PRIMARY> (.72)
<EPS-DILUTED> (.72)
</TABLE>
