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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
(Mark One)
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
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1934.
For the quarterly period ended September 30, 1998
Transition report under Section 13 or 15(d) of the Exchange Act.
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For the transition period from ___________ to ___________
Commission File Number: 0-21975
ECO SOIL SYSTEMS, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
NEBRASKA 47-0709577
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10890 THORNMINT ROAD
SAN DIEGO, CALIFORNIA 92127
(Address, Including Zip Code, of Principal Executive Offices)
(619) 675-1660
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.005 PAR VALUE
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(Title of Class)
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Act during the past 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
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State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of November 9, 1998,
16,696,463 shares of the Registrant's Common Stock, $.005 par value per
share, were outstanding.
Transitional Small Business Disclosure Format (check one):
YES NO X
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ECO SOIL SYSTEMS, INC.
FORM 10-QSB INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations (unaudited) for the
Three Months and Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows (unaudited) for the Nine
Months Ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Eco Soil Systems, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
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(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,850 $ 3,125
Short-term investments, available-for-sale - 3,000
Accounts receivable, net 24,892 10,148
Inventories 15,947 5,587
Prepaid expenses and other current assets 5,442 536
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Total current assets 48,131 22,396
Property and equipment, net 4,424 1,150
Equipment under operating leases, net 5,796 6,735
Intangible assets, net 15,362 6,515
Other assets 3,410 312
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Total assets $ 77,123 $ 37,108
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-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,878 $ 2,492
Accrued expenses 6,470 2,151
Current portion of long-term obligations 520 1,273
-------- --------
Total current liabilities 19,868 5,916
Subordinated notes 15,000 -
Long-term obligations, net of current portion 3,599 1,412
Shareholders' equity:
Preferred stock
$.005 par value; 5,000,000 shares authorized; - -
none issued and outstanding
Common stock
$.005 par value; 50,000,000 and 25,000,000 shares 83 77
authorized at September 30, 1998 and December 31, 1997,
respectively; 16,631,296 and 15,320,923 issued and
outstanding at September 30, 1998 and December 31, 1997,
respectively
Additional paid-in capital 49,370 43,708
Warrants 1,020 242
Notes receivable from shareholders (15) (282)
Accumulated deficit (11,802) (13,965)
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Total shareholders' equity 38,656 29,780
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Total liabilities and shareholders' equity $ 77,123 37,108
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</TABLE>
SEE ACCOMPANYING NOTES.
Note: The Balance Sheet at December 31, 1997 is derived from the audited
financial statements at that date but does not include all of the disclosures
required by generally accepted accounting principles.
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Eco Soil Systems, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
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1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Turf/Golf $21,678 $13,824 $50,808 $28,872
Agriculture 8,311 89 14,474 269
------- ------- ------- -------
Total revenues 29,989 13,913 65,282 29,141
Cost of revenues:
Turf/Golf 14,798 9,790 35,057 19,000
Agriculture 5,323 13 9,857 59
------- ------- ------- -------
Total cost of revenues 20,121 9,803 44,914 19,059
Gross profit 9,868 4,110 20,368 10,082
Operating expenses:
Selling, general and administrative 6,228 2,772 15,394 7,857
Research and development 145 42 313 189
------- ------- ------- -------
Income before interest, depreciation and amortization 3,495 1,296 4,661 2,036
Depreciation 510 234 1,218 376
Amortization of intangibles 395 56 852 401
------- ------- ------- -------
Income from operations 2,590 1,006 2,591 1,259
Interest expense 439 179 779 430
Interest income 147 - 353 -
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Net income $ 2,298 $ 827 $ 2,165 $ 829
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------- ------- ------- -------
Net income per share of common stock - basic $ .14 $ .07 $ .13 $ .07
------- ------- ------- -------
Net income per share of common stock - diluted $ .12 $ .05 $ .11 $ .06
------- ------- ------- -------
Average number of common shares outstanding:
Basic 16,598 11,840 16,214 11,266
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------- ------- ------- -------
Diluted 19,488 15,045 19,546 14,786
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</TABLE>
SEE ACCOMPANYING NOTES.
4
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Eco Soil Systems, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
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1998 1997
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(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,165 $ 829
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 2,070 777
Deferred gain on sale leaseback - 210
Gain on sale of fixed assets (12) -
Changes in operating assets and liabilities, net of effect
of acquired businesses:
Accounts receivable (6,420) (8,359)
Inventories (5,161) (1,630)
Prepaid expenses and other assets (5,180) 42
Accounts payable 224 1,941
Accrued liabilities (74) 1,244
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Net cash used in operating activities (12,388) (4,946)
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INVESTING ACTIVITIES
Sale of short term investments 3,000 -
Payments related to acquired businesses (2,452) (1,424)
Proceeds from disposition of equipment under operating leases - 1,325
Purchase of equipment under operating leases - (5,063)
Purchase of property and equipment (1,311) (715)
Purchase of patents and licenses (25) -
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Net cash used in investing activities (788) (5,877)
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FINANCING ACTIVITIES
Repayments to shareholders (1,068) (356)
Proceeds from subordinated debt 15,000 -
Proceeds from long-term debt 14,719 4,489
Repayments of long-term debt (17,204) (7,297)
Debt issuance costs (1,532) -
Repayments on capital lease obligations (13) (22)
Net proceeds from sale of common stock 1,999 14,071
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Net cash provided by financing activities 11,901 10,885
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Net increase/(decrease) in cash and cash equivalents (1,275) 62
Cash and cash equivalents at beginning of period 3,125 150
-------- -------
Cash and cash equivalents at end of period $ 1,850 $ 212
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</TABLE>
SEE ACCOMPANYING NOTES.
5
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ECO SOIL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not
include all information and footnotes required by generally accepted
accounting principles for complete financial statements.
In the opinion of Eco Soil Systems, Inc. the ("Company"), all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair statement of the results for the three-month and nine-month periods
ended September 30, 1998 and 1997 have been made. The results of operations
for the nine-month period ended September 30, 1998 are not necessarily
indicative of the results to be expected for the full fiscal year.
The accompanying consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto included
in the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997.
2. NET INCOME PER SHARE
In accordance with Financial Accounting Standards Board Statement No.
128, "Earnings per share" ("SFAS 128"), basic earnings per share is
calculated by dividing net income by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of the
Company such as common stock which may be issuable upon exercise of
outstanding common stock options, warrants and preferred stock. These shares
are excluded when their effects are antidilutive. As required by SFAS 128,
the Company has restated prior periods to be presented consistently with the
current year.
3. INVENTORIES
Inventories consist of the following, (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
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<S> <C> <C>
Work in process $ 6,058 $1,072
Finished goods 10,071 4,645
Reserve (182) (130)
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$15,947 $5,587
------- ------
------- ------
</TABLE>
6
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ECO SOIL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company has no components of comprehensive income,
other than net income or loss, to report.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in this Management's Discussion and
Analysis that are not related to historical results are forward looking
statements. Actual results may differ materially from those projected or
implied in the forward-looking statements. Further, certain forward-looking
statements are based upon assumptions of future events, which may not prove
to be accurate. These forward-looking statements involve risks and
uncertainties including but not limited to those referred to in "Item 5.
Other Information. Factors That Could Affect Future Performance."
This information should be read in conjunction with the financial
statements and notes thereto included in Item 1 of this report for the
quarter ended September 30, 1998. Additionally, the financial statements and
notes thereto and Management's Discussion and Analysis in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997 will
provide additional information.
In addition to other endeavors, the Company develops, markets and sells
proprietary biological and traditional chemical products and distributes
certain other biological and traditional chemical products to two principal
markets: the turf and golf management market ("Turf/Golf") and the
agricultural and crop market ("Agriculture").
THIRD QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO THIRD QUARTER ENDED
SEPTEMBER 30, 1997
REVENUES
For the third quarter of 1998, revenues were $30 million, an increase of
116% versus $13.9 million for the third quarter of 1997. The increase in
revenues reflects an increase in both Turf/Golf and Agriculture revenues.
For the third quarter of 1998, Turf/Golf revenues were $21.7 million, an
increase of 57% versus $13.8 million for the third quarter of 1997. The
increase in Turf/Golf sales occurred in all three operating regions of the
U.S. primarily as a result of the Company's acquisitions, in the first
quarter of 1998, of Cannon Turf Supply, Inc. and Benham Chemical Corporation
in the Midwest, the opening of warehouses in the West and stronger sales in
the East. Turf/Golf revenues included royalty fees under a distribution
agreement of $450,000.
For the third quarter of 1998, Agriculture revenues were $8.3 million,
compared to $89,000 for the third quarter of 1997. Agriculture revenues
increased as a result of the acquisitions of Agricultural Supply, Inc. in
April 1998 and Yuma Sprinkler & Pipe Supply and Riegomex S.A. de C.V. in June
1998.
GROSS PROFIT
For the third quarter of 1998, the Company's gross profit was $9.9
million, an increase of 140% vesus $4.1 million for the third quarter of
1997. The increase in gross profit was due to the increase in both Turf/Golf
and Agriculture revenues. Included in Turf/Golf revenues during the third
quarter of 1997 were $2.4 million in revenues from a sale leaseback
transaction, at zero margin. For the third quarter of 1998, the Company's
gross margin was 33% versus 30% during the third quarter of 1997. The gross
margin for the third quarter of 1997, excluding the sale leaseback
transaction, was 36%. The 3% decrease in gross margin, net of the sale
leaseback transaction, is a function of the product mix associated with the
various distribution businesses acquired during 1998.
For the third quarter 1998, the gross profit on Turf/Golf sales was $6.9
million, an increase of 71% versus $4.0 million during the third quarter of
1997. The increase in gross profit on Turf/Golf sales is directly related to
the increase in Turf/Golf revenue, as previously discussed. For the third
quarter of 1998, the gross margin on Turf/Golf products was 32% versus 29%
during the third quarter of 1997. The gross margin of Turf/Golf products for
the third quarter of 1997, excluding the sale leaseback transaction, was 35%.
The 3% decrease in gross margin, net of the sale leaseback transaction, is a
function of the product mix associated with the various distribution
businesses acquired during 1998.
8
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sales is directly related to the increase in Turf/Golf revenue, as previously
discussed. For the third quarter of 1998, the gross margin on Turf/Golf
products was 32% versus 29% during the third quarter of 1997. The increase
in gross margin on Turf/Golf sales was due to a change in product mix.
For the third quarter of 1998, the gross profit on Agriculture sales was
$3.0 million, compared to $76,000 during the third quarter of 1997. The
increase in gross profit on Agriculture sales was directly related to the
increase in Agriculture revenue, as previously discussed. For the third
quarter of 1998, the gross margin on Agriculture products was 36% versus 85%
during the third quarter of 1997. The increase in gross margin on
Agriculture sales was due to a change in product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For the third quarter of 1998, selling, general and administrative
("SG&A") expense was $6.2 million, an increase of 125% versus $2.8 million
during the third quarter of 1997. The increase in SG&A expense was primarily
due to additional overhead costs associated with the previously discussed
acquisitions partially offset by an adjustment of approximately $400,000
related to the burden rate applied to work in process inventory.
RESEARCH AND DEVELOPMENT EXPENSE
For the third quarter of 1998, research and development ("R&D") expense
was $145,000, an increase of 245% versus $42,000 during the third quarter of
1997. The increase in R&D expense was due to ongoing analysis and testing of
products for the Agriculture and Turf/Golf markets.
INTEREST EXPENSE
For the third quarter of 1998, interest expense was $439,000, an
increase of 145% versus $179,000 for the third quarter of 1997. The increase
in interest expense reflects an increase in the amount of debt outstanding.
In addition, amortization of debt offering cost and warrant value of
approximately $41,000 contributed to this increase.
AMORTIZATION EXPENSE
For the third quarter of 1998, amortization expense was $395,000,
compared to $56,000 for the third quarter of 1997. The increase in
amortization expense is due to an increase in goodwill directly related to
the Company's recent acquisitions.
NET INCOME
For the third quarter of 1998, net income was $2.3 million or $.12 per
share versus net income of $827,000 or $.05 per share during the third
quarter of 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES
For the first nine months of 1998, revenues were $65.3 million, an
increase of 124% versus $29.1 million for the first nine months of 1997. The
increase in revenues reflects an increase in both Turf/Golf and Agriculture
revenues.
9
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For the first nine months of 1998, Turf/Golf revenues were $50.8
million, an increase of 76% versus $28.9 million for the first nine months of
1997. The increase in Turf/Golf revenues occurred in all three operating
regions of the U.S. as a result of the Company's acquisitions, in the first
quarter, of Cannon Turf Supply, Inc. and Benham Chemical Corporation in the
midwest, and the opening of warehouses in the West and East. Turf/Golf
revenues included royalty fees under a distribution agreement of $450,000.
For the first nine months of 1998, Agriculture revenues were $14.5
million, compared to $269,000 for the first nine months of 1997. Agriculture
revenues were affected favorably by the acquisitions of Agricultural Supply,
Inc. in April 1998 and Yuma Sprinkler & Pipe Supply and Riegomex S.A. de C.V.
in June 1998.
GROSS PROFIT
For the first nine months of 1998, the Company's gross profit was $20.4
million, an increase of 102% versus $10.1 million for the first nine months
of 1997. The increase in gross profit was due to the increase in both
Turf/Golf and Agriculture revenues. Included in Turf/Golf revenues during the
first nine months of 1997, were $2.4 million in revenues from a sale lease
back transaction, at zero margin. For the first nine months of 1998, the
Company's gross margin was 31% versus 35% for the first nine months of 1997.
The gross margin for the first nine months of 1997, excluding the sale
leaseback transaction, was 38%. The 7% decrease in gross margin, net of the
sale leaseback transaction, is a function of the product mix associated with
the various distribution businesses acquired during 1998.
For the first nine months of 1998, the gross profit on Turf/Golf sales
was $15.8 million, an increase of 60% versus $9.9 million during the first
nine months of 1997. The increase in the gross profit on Turf/Golf sales is
directly related to the increase in revenue. For the first nine months of
1998, the gross margin on Turf/Golf products was 31% versus 34% during first
nine months of 1997. The gross margin for the first nine months of 1997,
excluding the sale leaseback transaction, was 37%. The 6% decrease in gross
margin, net of the sale leaseback transaction, is a function of the product
mix associated with the various distribution businesses acquired during 1998.
For the first nine months of 1998, the gross profit on Agriculture sales
was $4.6 million, compared to $210,000 during the first nine months of 1997.
The increase in the gross profit on Agriculture sales is directly related to
the increase in Agriculture revenue, as previously discussed. For the first
nine months of 1998, the gross margin on Agriculture products was 32% versus
78% during the first nine months of 1997. The decrease in gross margin on
Agriculture sales was due to a change in product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For the first nine months of 1998, SG&A expense was $15.4 million, an
increase of 96% versus $7.9 million during the first nine months of 1997. The
increase in SG&A expense was primarily due to additional overhead costs
associated with the previously discussed acquisitions partially offset by an
adjustment of approximately $400,000 related to the burden rate applied to
work in process inventory.
RESEARCH AND DEVELOPMENT
For the first nine months of 1998, R&D expense was $313,000, an increase
of 66% versus $189,000 during the first nine months of 1997. The increase in
R&D expense was due to ongoing analysis and testing of products for the
Agriculture and Turf/Golf markets.
INTEREST EXPENSE
For the first nine months of 1998, interest expense was $779,000, an
increase of 81% versus $430,000 during the first nine months of 1997. The
increase in interest expense reflects an increase in
10
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the amount of debt outstanding. In addition, amortization of debt offering
cost and warrant value of approximately $41,000 contributed to this increase.
AMORTIZATION EXPENSE
For the first nine months of 1998, amortization expense was $852,000, an
increase of 112% versus $401,000 during the first nine months of 1997. The
increase in amortization expense is due to an increase in the Company's
goodwill directly related to the previously discussed acquisitions.
NET INCOME
For the nine months ended September 30, 1998 net income was $2.2 million
or $.11 per share versus net income of $829,000 or $.06 per share for the
nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from revenues from sales of its
products, sales of its Common Stock, borrowing from its principal
shareholders and bank financing. The Company's operating and investing
activities used cash of $5.3 million during the third quarter of 1998 and
$13.2 million during the first nine months of 1998.
On August 25, 1998, the Company completed two transactions providing the
Company with $15 million in gross proceeds and the right to borrow up to an
additional $20 million. First, the Company issued an aggregate of $15 million
principal amount of the Company's 12.00% Senior Subordinated Notes due 2003
(the "Notes") and warrants to purchase 262,500 shares of the Company's common
stock (the "Warrants") pursuant to Note and Warrant Purchase Agreements dated
as of August 25, 1998 between the Company and Albion Alliance Mezzanine Fund
and between the Company and Paribas Capital Funding LLC. The Notes are due in
2003 and bear interest at a rate of 12% per annum, which is due quarterly
beginning November 25, 1998. The Warrants may be exercised on or after
February 25, 2000 and on or prior to August 25, 2003. The Warrants have an
exercise price of $.01 per share and carry piggyback registration rights. The
Company has applied the proceeds from the sale of Notes and Warrants to (i)
the repayment in full of the Company's revolving credit facility with
Imperial Bank, term loan and other bank debt and certain promissory notes, in
the aggregate amount of approximately $12.1 million, (ii) the payment of fees
and expenses incurred in connection with the offering and sale of the Notes
and Warrants and the establishment of the Credit Facility and (iii) working
capital.
Second, the Company entered into a Credit Agreement dated as of August
25, 1998 with The Provident Bank, which provides for a $20 million secured
revolving line of credit (the "Line of Credit"). The Line of Credit provides
for advances equal to the sum of 80% of eligible accounts receivable plus 65%
of eligible inventory. The Line of Credit has a three-year term during which
borrowings will bear interest at a rate equal to, at the Company's option, the
adjusted prime rate (prime rate plus 1%) or adjusted LIBOR rate (LIBOR plus
3%). Borrowings under the Line of Credit are secured by all of the Company's
and certain of its subsidiaries' tangible and intangible assets.
On October 9, 1998, the Company entered into the First Amendment to
Credit Agreement (the "First Amendment") with The Provident Bank which, among
other things, provides for a $3.5 million term construction of loan to be used
to the purchase of certain real property and the construction of improvements
on the property. The term loan bears interest at the bank's prime rate plus
2% and matures on the earlier of March 9, 1999 or date of the sale of the
subject property.
The foregoing summary of the terms of the Credit Agreement, the Purchase
Agreement, the Notes, the Warrants and the First Amendment does not purport
to be complete and is qualified in its entirety by reference to the full text
of such agreements. Copies of the Credit Agreement, the Purchase Agreement,
the Notes and the Warrants are attached to the Company's Current Report on
Form 8-K filed on September 11, 1998 as Exhibits 10.1, 10.2, 10.3 and 10.4
and are incorporated herein by reference. A copy of the First Amendment is
attached hereto as Exhibit 10.5 and is incorporated herein by reference.
The Company intends to fund its future operations and growth through a
combination of product revenues, borrowings available under the line of
credit, and public or private debt or equity financing. However, there can
be no assurance that such financing alternatives will be available under
favorable terms, if at all. The Company believes that it has sufficient
resources to finance its operations and future growth for at least the next
twelve months.
YEAR 2000
Many currently installed computer systems are coded to accept only two
digit entries in the date code field. These date code fields need to be
modified or upgraded to accept four digit entries to distinguish 21st century
dates from 20th century dates. Many organizations are expending significant
resources to modify or upgrade their computer systems for such "Year 2000"
compliance. The Company presently believes that, with modifications to
existing software and conversions to new software, the Year 2000 Problem can
be mitigated. However, if such modifications and conversions are not made or
are not completed timely, the Year 2000 Problem could have a material impact
on the operations of the Company.
The Year 2000 issue affects the Company's internal systems, including
information technology ("IT") and non-IT systems. The Company is in the
process of upgrading its existing computer software and IT systems and
recognizes the need to ensure its operations will not be adversely impacted
by Year 2000 software failures. The Company relies upon microprocessor-based
personal computers and commercially available applications software. The
Company also is reviewing its utility systems (heat, light, telephones, etc.)
and other non-IT systems for the impact of Year 2000. Additionally, should
the Company undertake future acquisitions, the Year 2000 risks that affect
the Company can be expected to similarly affect such potential acquisition
candidates. The Company intends to review the systems of all potential
acquisitions for Year 2000 compliance. However, the failure to correct a
material Year 2000 problem either within the Company, within a vendor or
supplier or within a potential acquisition candidate could result in an
interruption in, or a failure of, certain normal business activities or
operations of the Company. Such interruptions or failures could materially
adversely affect the Company's business, operating results and financial
condition.
The Company depends on smooth and timely interactions with its vendors,
customers and other third parties. Any unexpected costs or disruption in the
operations or activities of such vendors, customers or other third parties as
a result of Year 2000 compliance issues within such entities could materially
adversely affect the Company's business, operating results or financial
condition. The Company intends to take continuous steps to identify Year 2000
problems related to its vendors and to formulate a system of working with key
third-parties, including financial institutions and utility-providers, to
understand their ability to continue providing services and products through
the change to Year 2000.
The cost of the Company's Year 2000 compliance assessment and upgrade
is being funded from current operations. The cost to the Company of its Year
2000 identification, assessment, remediation and testing efforts, as well as
currently anticipated costs to be incurred by the Company with respect to
Year 2000 issues of third parties, is expected to be approximately $20,000.
However, because of the uncertainty associated with Year 2000 failures, it is
not possible at present to quantify the cost of corrective actions. The
Company will continue to consider the likelihood of a material business
interruption due to the Year 2000 issue, and, if necessary, implement
appropriate contingency plans. A contingency plan has not been developed for
dealing with the most reasonably likely worst case scenario, and such
scenario has not yet been clearly identified. Since the Company has adopted a
plan to address these Year 2000 issues, it has not developed a comprehensive
contingency plan should Year 2000 issues fail to be addressed successfully or
in their entirety. However, if the Company identifies significant risks or is
unable to meet its anticipated timeline, the Company will develop contingency
plans as deemed necessary at that time.
11
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
On June 1, 1998, the Company issued 66,667 shares of the Company's
common stock to the shareholders of Controlled Irrigation International, Inc.
dba Yuma Sprinkler & Pipe Supply ("Yuma"), pursuant to an Agreement and Plan
of Merger dated as of August 21, 1998 (the "Yuma Merger Agreement") by and
among the Company, Yuma Acquisition Sub, Inc., a wholly owned subsidiary of
the Company ("Yuma Merger Sub"), Yuma Sprinkler and the shareholders of Yuma
Sprinkler (the "Yuma Shareholders"). Pursuant to the Yuma Merger Agreement,
the Company issued to the Yuma Shareholders an aggregate of 66,667 shares of
the Company's common stock and $279,000 in cash in exchange for all the
outstanding common stock of Yuma. The issuance of the Company's common stock
in connection with the Yuma Merger Agreement was effected pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act"), taking into account the
representations of the Yuma Shareholders that they are accredited investors,
they acquired the common stock of the Company for their own account and not
with a view to any distribution thereof to the public and the absence of
general solicitation or advertising. The Company has also agreed to make
certain earn-out payments in cash and the Company's common stock based on the
earnings before interest, taxes, depreciation and amortization (EBITDA) of
the acquired company for the years ending December 31, 1998 and 1999. The
maximum aggregate dollar value of the 1998 and 1999 earn-out payments will be
$400,000 and $300,000, respectively. The cost of the acquired company will be
up to $1.5 million, which includes the fair value of the consideration given
and direct costs.
On August 25, 1998, the Company issued $15 million of 12% senior
subordinated notes due in the year 2003. In connection with the notes, the
Company issued the lenders warrants to purchase 262,500 shares of the
Company's common stock. The issuance of the warrants was made in reliance
upon the exception from registration provided by Section 4(2) of the
Securities Act of 1933 as amended. The purchasers have represented to the
Company that they are accredited investors, the warrants were acquired for
their own account and not with a view to any distribution thereof to the
public and the absence of general solicitation or advertising.
ITEM 5. OTHER INFORMATION
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
This report contains certain forward looking statements about the
business and financial condition of the Company, including various statements
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The actual results of the Company could differ
materially from any forward looking statements contained herein. The
following information sets forth certain factors that could cause the actual
results to differ materially from those contained in the forward looking
12
<PAGE>
statements. For a more detailed discussion of the factors that could cause
actual results to differ, see "Item 1: Business -- Factors That Could Affect
Future Performance" in the Company's Form 10-KSB for the fiscal year ended
December 31, 1997.
At September 30, 1998, the Company had an accumulated deficit of $11.8
million. The Company has evolved from an organizational activities and
research and development focus to a company emphasizing product introductions
and sales and marketing. The Company's recent losses have resulted due to
the seasonal nature of its business as well as cost associated with its
recent dealer acquisitions.
In order to expand its business and achieve significant growth in sales,
the Company must continue to broaden its sales and marketing capability and
increase the size of its customer base, in part through the acquisition of
independent dealers and distributors. Although sales of certain of the
Company's products are growing, the Company's products and operations remain
in the early stages of market introduction and are subject to the risks
inherent in the commercialization of new product concepts. These risks
include unforeseen problems, delays, expenses and complications frequently
encountered in the early phases of research, development and
commercialization of products, and expenses associated with hiring and
training additional sales, marketing and customer service personnel.
Distribution and sales of the Company's products have historically
occurred through direct sales efforts and independent dealers and
distributors. The Company has initiated a strategy of attempting to establish
a nationwide distribution system for its products through the acquisition of
various independent dealers and distributors. Any failure to identify
acquisition candidates properly, any large expenditures on acquisitions that
prove to be unprofitable, or any inability to sell the Company's proprietary
products through the acquired distribution system could have a material
adverse effect on the Company's business, financial position and results of
operations.
The Company's success will be dependent in large measure upon its
ability to obtain and enforce patent protection for its products, maintain
confidentiality of its trade secrets and know-how and operate without
infringing upon the proprietary rights of third parties. Despite precautions
taken by the Company, it may be possible for a third party to copy or
otherwise obtain or use the Company's products or technology without
authorization, or to develop similar products or technology independently.
The Company plans to acquire the rights to additional microbial
products. The Company does not engage in its own research and development
with respect to microbial products. Although the Company is actively seeking
to obtain licenses for additional microbial products, there can be no
assurance that the Company will be successful in obtaining any such licenses
on terms acceptable to the Company, if at all.
The Company may be exposed to liability resulting from the commercial
use of its products. Such liability might result from claims made directly by
customers or others manufacturing such products on behalf of the Company. The
Company currently carries a product liability insurance policy with an
aggregate limit of $17 million. There can be no assurance, however, that such
product liability insurance will adequately protect the Company against any
product liability claim. A product liability or other claim with respect to
uninsured liabilities or in excess of insured liabilities could have a
material adverse effect on the business and prospects of the Company.
Some states have laws imposing liability on certain parties for the
release of fertilizers and other agents into the environment in certain
manners or concentrations. Such liability could include, among other things,
responsibility for cleaning up the damage resulting from such a release. In
addition, the federal Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), commonly known as the "Superfund" law, and other
applicable laws impose liability on certain parties for the release into the
environment of hazardous substances, which might include fertilizers and
water treatment chemicals. The Company is also subject to certain other
environmental laws, including the Environmental Protection Act,
13
<PAGE>
the Toxic Substance Control Act, the Resource Conservation and Recovery Act,
the Clean Air Act and the Clean Water Act and may be subject to other present
and potential future federal, state or local regulations. The Company does
not currently maintain insurance for any environmental claims which might
result from the release of its products into the environment in a manner or
in concentrations not permitted by law. Thus, a claim for environmental
liability could have a material adverse effect on the Company.
The Company competes for market share with a number of companies that
manufacture and market chemical compounds. In addition, a number of companies
are developing biological and organic products for turf maintenance. Many of
these competitors have substantially greater capital resources, research and
development staffs and facilities than the Company, and many of these
competitors have extensive experience in turf maintenance. The fields of
biotechnology and related technologies in which the Company is engaged have
undergone rapid and significant technological changes. The Company expects
that the technologies associated with its research and development will
continue to develop rapidly. There can be no assurance that the Company will
be able to establish itself in such fields or, if established, that it will
be able to maintain a competitive position. Further, there can be no
assurance that the development by others of new or improved processes or
products will not make the Company's products and processes less competitive
or obsolete.
The Company is dependent upon the active participation of William B.
Adams, its Chairman of the Board and Chief Executive Officer, and Douglas M.
Gloff, its President and Chief Operating Officer. The loss of the services of
either of these individuals could have a material adverse effect upon the
Company's future operations. The Company's success depends in large part on
its ability to attract and retain qualified scientific, financial and
management personnel. The Company faces competition for such persons from
other companies, academic institutions, government entities and other
organizations. There can be no assurance that the Company will be successful
in recruiting or retaining personnel of the requisite caliber or in adequate
numbers to enable it to conduct its business as proposed.
RECENT ACQUISITIONS
In June 1998, the Company entered into a binding letter of intent to
purchase all of the outstanding capital stock (the "Riegomex Merger") of
Riegomex, S.A. de C.V. ("Riegomex") from the Riegomex Shareholders. Pursuant
to a Stock Purchase Agreement dated as of September 18, 1998 (the "Purchase
Agreement") by and among the Company, Agricultural Adquisiciones de Mexico
("Agricultural Sub"), Riegomex and the Riegomex Shareholders, the Company
issued to the Riegomex Shareholders $45,943 in cash in exchange for all the
outstanding common stock of Riegomex.
RECENT DEVELOPMENTS
In October 1998, the Company purchased property in San Diego, California
for $2.5 million in cash and intends to relocate its corporate headquarters
to the property. The Company financed the purchase under a $3.5 million term
construction loan obtained from the Provident Bank. The term loan bears
interest at the bank's prime rate plus 2% and matures on the earlier of March
9, 1999 or the date of the sale of the property. The Company intends to sell
and leaseback this property.
14
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<S> <C>
10.1(1) Credit Agreement dated as of August 25, 1998.
10.2(1) Note and Warrant Purchase Agreement dated as of August 25, 1998.*
10.3(1) 12.00% Senior Subordinated Note Due August 25, 2003.*
10.4(1) Common Stock Purchase Warrant Expiring August 25, 2003.*
10.5 First Amendment to Credit Agreement dated as of October 9, 1998.
27.1 Financial Data Schedule
</TABLE>
---------------
(1) Incorporated by reference to the Company's Current Report on Form 8-K
(File No. 001-12653) filed with the Commission on September 11, 1998.
* Includes Schedule 1 showing additional party to and differing terms
of substantially identical document.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K under Item 5 thereof on
September 11, 1998, relating to two transactions: First, the Company
issued an aggregate of $15 million principal amount of the Company's 12.00%
Senior Subordinated Notes due 2003 and warrants to purchase 262,500 shares
of the Company's common stock pursuant to Note and Warrant Purchase
Agreements dated as of August 25, 1998 between the Company and Albion
Alliance Mezzanine Fund and between the Company and Paribas Capital Funding
LLC. Second, the Company entered into a Credit Agreement dated as of
August 25, 1998 with The Provident Bank, which provides for a $20 million
secured revolving line of credit.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Eco Soil Systems, Inc.
Date: NOVEMBER 16, 1998 By: /s/ William B. Adams
------------------------------
William B. Adams
Chairman and Chief Executive
Officer
Date: NOVEMBER 16, 1998 By: /s/ L. Jean Dunn, Jr.
------------------------------
L. Jean Dunn, Jr.
Chief Financial Officer
16
<PAGE>
FIRST AMENDMENT TO
CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT ("FIRST AMENDMENT") dated as of
October 9, 1998, by and among ECO SOIL SYSTEMS, INC., a Nebraska corporation,
ASPEN CONSULTING COMPANIES, INC., a Colorado corporation, TURF SPECIALTY,
INC., a Delaware corporation, TURF ACQUISITION SUB., INC., a Delaware
corporation, ECO TURF PRODUCTS, INC., a Delaware corporation, AGRICULTURAL
SUPPLY, INC., a Delaware corporation, MITIGATION SERVICES, INC., a Delaware
corporation, BENHAM CHEMICAL CORPORATION, a Michigan corporation, and YUMA
ACQUISITION SUB., INC., a Delaware corporation (collectively, the
"BORROWERS"), THE PROVIDENT BANK, an Ohio banking corporation, as agent
("AGENT"), and the various lenders (collectively, the "LENDERS") set forth in
the Credit Agreement (as defined below).
PRELIMINARY STATEMENT
---------------------
WHEREAS, Borrowers, Agent and the Lenders have entered into a Credit
Agreement dated as of August 25, 1998 (the "CREDIT AGREEMENT"); and
WHEREAS, Borrowers, Agent and Lenders now wish to amend the Credit
Agreement in accordance with the terms and provisions hereof.
NOW, THEREFORE, the parties hereto agree to amend the Credit Agreement
upon such terms and conditions as follows:
1. DEFINITIONS. Effective as of the date of this First Amendment,
Section 1.2 of the Credit Agreement shall be amended as follows:
(a) NEW DEFINITIONS. The following defined terms shall be added
to Section 1.2:
"ARCHITECTS" means the architects and/or engineers licensed to
practice in the State of California chosen by Holdings to prepare the
Plans and to supervise the completion of the Improvements; which
Architects shall be reasonably acceptable to Agent.
"ASSIGNMENT OF CONTRACT" shall mean an Assignment of Contract
between Holdings and Agent, in form and substance reasonably
acceptable to Agent, providing in part for an assignment to Agent of
Holdings' rights and interest under that certain Letter of Intent
dated September 8, 1998, between Mr. Brian Sipe
<PAGE>
("Sipe") and Holdings and any and all contracts or other agreements
between such parties and relating to the San Diego Property and all
Improvements thereon.
"ASSIGNMENT OF LIFE INSURANCE" means a Collateral Assignment of
Life Insurance in form and substance satisfactory to the Agent
covering the key man life insurance to be maintained by Holdings in
accordance with Section 6.3 hereof.
"CONTRACTOR'S COST CERTIFICATION" means a statement of the Costs
incurred or to be incurred by trade and category of work prepared by
the General Contractor and submitted to the Agent as part of each
Requisition.
"COSTS" means the aggregate costs of all labor, materials,
equipment, fixtures and furnishings consistent with the detail and
scope as provided in the Project Summary and reasonably acceptable to
the Agent, necessary for completion of the Improvements.
"ENVIRONMENTAL INDEMNITY AGREEMENT" means that Environmental
Indemnity Agreement in form and substance reasonably acceptable to
Agent, and executed by Borrowers in favor of Agent, on behalf of the
Lenders, relating to the Premises covered by the Mortgages.
"GENERAL CONTRACTOR" means any general contractor chosen by
Holdings and reasonably acceptable to Agent to supervise and manage
completion of the Improvements.
"IMPROVEMENTS" means the proposed improvements of the San Diego
Property as set forth in the Project Summary.
"INITIAL TERM CONSTRUCTION LOAN ADVANCE" means the initial
advance for the Improvements to be made under the Term Construction
Loan.
"PLANS" means all final drawings, plans and specifications
prepared by or on behalf of Holdings or the General Contractor which
describe and show the labor, materials, equipment, fixtures and
furnishings necessary for the Improvements, including any amendments
or modifications thereto.
"PROJECT SUMMARY" means the summary of the description of the
Improvements, detailing the work, costs and timing, delivered to Agent
by Holdings and dated October __, 1998.
"PURCHASE PRICE ADVANCE" means the funding of the purchase price
under the San Diego Property Acquisition Agreement in the amount of
<PAGE>
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______________________________ and /100 Dollars ($__________), plus
fees and expenses associated therewith.
"REQUISITION" means a statement by Holdings in a form reasonably
acceptable to Agent requesting an advance of funds under the Term
Construction Loan, together with (i) the Contractor's Cost
Certification in a form reasonably acceptable to Agent, and (ii)
payment receipts from all contractors, subcontractors or suppliers
showing payment in full for all Costs (less any applicable Retained
Amounts) which were the subject of previous Requisitions.
"RETAINED AMOUNTS" means the amounts actually retained by
Holdings from its payments to the General Contractor and any
subcontractors.
"SAN DIEGO MORTGAGE" means that certain Mortgage covering the San
Diego Property.
"SALE CLOSING DATE" means the date upon which Holdings closes on
the sale of the San Diego Property.
"TERM CONSTRUCTION LOAN" means a term loan in the principal
amount of Three Million Five Hundred Thousand and 00/100 Dollars
($3,500,000.00).
"TERM CONSTRUCTION LOAN NOTES" means, collectively, with respect
to the Term Construction Loan, the promissory notes of Borrowers, in
the face amount of each Lender's Participation Percentage of the Term
Construction Loan in or substantially in the form of Exhibit H-1
hereto. "TERM CONSTRUCTION LOAN NOTE" shall mean any one of the Term
Construction Loan Notes.
"TITLE INSURANCE COMPANY" means Stewart Title Company or any
other title insurance company designated by the Borrowers and
reasonably acceptable to the Agent.
(b) AMENDED DEFINITIONS. The following defined terms contained in
Section 1.2 of the Credit Agreement shall be amended in their entirety to
read as follows:
"CREDIT COMMITMENT" means, in relation to any particular Lender,
the sum of (i) the maximum amount with respect to the Revolving Credit
Loan to be loaned by such Lender to Borrowers as set forth on Schedule
1 hereof, and (ii) the maximum amount with respect to the Term
Construction Loan to be loaned by such Lender to Borrowers as set
forth on Schedule 1 hereof.
<PAGE>
-4-
"DRAW DATE" means, in relation to any Revolving Credit Loan or
the Term Construction Loan, the day on which such Loan is made or to
be made to Borrowers pursuant to this Agreement.
"LOANS" mean, collectively, the Revolving Credit Loans and all
advances under the Term Construction Loan, each singly a Loan made or
to be made to Borrowers by the Lenders pursuant to this Agreement.
"MORTGAGES" means the real estate mortgages or deeds of trust
granted from time to time by a Borrower to Agent to secure the Loans,
in form and substance reasonably acceptable to Agent.
"NOTES" mean, collectively, the Revolving Credit Notes and Term
Construction Loan Notes, each of which are to be dated, executed and
delivered to Lenders by Borrowers on the Closing Date or First
Amendment Closing Date, as the case may be. "NOTE" shall mean any one
of the Notes, unless specifically identified.
"REVOLVING CREDIT LOAN" means all Loans (other than Loans made
pursuant to the Term Construction Loan) outstanding from time to time
made pursuant to Section 2.2 hereof and any amounts added to the
principal balance of the Revolving Credit Loan pursuant to this
Agreement.
"SECURITY DOCUMENTS" means, collectively, this Agreement, the
Mortgages, the Blocked Account Agreements, the Assignment of Patents,
the Assignment of Trademarks, the Assignment of Contract, the
Assignment of Life Insurance, the Environmental Indemnity Agreement,
the Pledge Agreement, and each other agreement, assignment or
instrument creating or purporting to create a lien in favor of Agent
for the ratable benefit of the Lenders.
"TERMINATION DATE" means (i) with respect to the Revolving Credit
Loans, the earlier of (a) the third (3rd) anniversary of the Closing
Date, (b) the date upon which the entire principal of the Notes shall
become due pursuant to the provisions hereof (whether as a result of
acceleration by Agent or the Requisite Lenders or otherwise), or
(c) the date upon which the Credit Commitments terminate pursuant to
Section 9.2 hereof; and (ii) with respect to the Term Construction
Loan, the earlier of (a) March 9, 1999, (b) the date upon which the
entire principal of the Notes shall become due pursuant to the
provisions hereof (whether as a result of acceleration by Agent or the
Requisite Lenders or otherwise), (c) the date upon which the Credit
Commitments terminate pursuant to Section 9.2 hereof, and (d) the Sale
Closing Date.
<PAGE>
-5-
2. THE LOANS.
(a) COMMITMENTS. Section 2.1 of the Credit Agreement is hereby
amended in its entirety to read as follows:
"Section 2.1 COMMITMENTS. Each Lender, severally and not
jointly, agrees, upon the terms and subject to the conditions
contained in this Agreement, to make the Revolving Credit Loans and
advances under the Term Construction Loan to Borrowers from time to
time prior to the Termination Date in a principal amount equal to such
Lender's Participation Percentage of the aggregate principal amount of
such Loan."
(b) MAKING THE LOANS. Section 2.2 of the Credit Agreement is
hereby amended to add a second paragraph to read as follows:
"Each Lender will, subject to all of the applicable terms
and conditions of this Agreement, make an amount equal to its
Participation Percentage in each advance under the Term Construction
Loan available to Borrowers in accordance with Section 2.15 hereof.
The Term Construction Loan shall be available to the Borrowers subject
to limitations herein, until the Termination Date. Each borrowing
under the Term Construction Loan shall be made in accordance with the
provisions of Section 2.15 and Article 4 hereof."
(c) THE NOTES. Section 2.4 of the Credit Agreement is hereby
amended to delete the defined term "REVOLVING CREDIT NOTE" contained therein
and replace the same with the defined term "NOTE".
(d) INTEREST RATE. Section 2.5(a) of the Credit Agreement is
hereby amended as follows: (i) first, to delete the defined term "LOANS"
contained in the first sentence thereof and to replace the same with the
defined term "REVOLVING CREDIT LOANS," and (ii) to add a new paragraph to
read as follows:
"Except as otherwise provided herein, the Term Construction
Loan shall bear interest on the daily outstanding principal balance
thereunder at an annual rate equal to the Prime Rate plus two percent
(2%)."
(e) CONVERSIONS. Section 2.5(c) of the Credit Agreement is hereby
amended as follows: to delete the defined term "LOANS" contained in the
first sentence thereof and to replace the same with the defined term
"REVOLVING CREDIT LOANS."
<PAGE>
-6-
(f) MONTHLY INSTALLMENTS. Section 2.5(g) of the Credit Agreement
is hereby amended to add a new subparagraph (iii) to read as follows:
"(iii) for the account of Lenders in accordance with
their respective Pro Rata Shares, monthly in arrears on the first
Business Day of each month commencing November 1, 1998, interest on
the outstanding principal amount of the Term Construction Loan at an
annual rate equal to the Prime Rate plus two percent (2%)."
(g) REPAYMENTS. Section 2.6(a) of the Credit Agreement is hereby
amended as follows: to delete the terms "REVOLVING CREDIT LOANS" contained
therein and to replace the same with the defined term "LOANS."
(h) PREPAYMENTS FROM EXTRAORDINARY DISPOSITION. Section 2.6(c) of
the Credit Agreement is hereby amended to delete subparagraph (c) which reads
as follows:
"(c) any sale of the San Diego Property (or the rights of
Holdings in the San Diego Property Acquisition Agreement) which is
promptly followed with a leaseback of the San Diego Property, if
permitted by Section 8.12 herein."
(i) MATURITY. Section 2.6(f) of the Credit Agreement is hereby
amended in its entirety to read as follows:
"(f) MATURITY. Subject to the terms and conditions of this
Agreement, Borrowers will be entitled to reborrow all or any part of
the principal of the Revolving Credit Notes repaid or prepaid prior to
the Termination Date. The Credit Commitments of Lenders with respect
to the Revolving Credit Loans shall terminate and all of the
indebtedness evidenced by the Revolving Credit Notes shall, if not
sooner paid, be in any event absolutely and unconditionally due and
payable in full by Borrowers on August 25, 2001, the date of the final
maturity of such Notes. The Credit Commitments of Lenders with
respect to the Term Construction Loan shall terminate and all of the
indebtedness evidenced by the Term Loan Construction Notes shall, if
not sooner paid, be in any event absolutely and unconditionally due
and payable in full by Borrowers on the earlier of either the Sale
Closing Date or March 9, 1999, the date of the final maturity of such
Notes."
(j) APPLICATION OF PROCEEDS. Section 2.6(g) of the Credit
Agreement is hereby amended in its entirety to read as follows:
<PAGE>
-7-
"(g) APPLICATION OF PROCEEDS. With respect to mandatory
prepayments described in Sections 2.6(c), 2.6(d) or 2.6(e), all such
prepayments shall be applied in repayment of the Term Construction
Loan; and after the Term Construction Loan has been paid in full, then
all such prepayments shall be applied in repayment of permanent
reduction of the Revolving Credit Loans. Notwithstanding the
foregoing, any Net Proceeds from an Extraordinary Disposition
involving the San Diego Property in excess of the Term Construction
Loan at the time of such Extraordinary Disposition shall be retained
by Borrowers without application to the Revolving Credit Loans
pursuant to Section 2.6(c)."
(k) APPLICATION OF PREPAYMENTS. Section 2.6(i) of the Credit
Agreement is hereby amended to delete the second sentence thereof and replace
the same with the following language:
"Any amounts received in connection with a payment,
repayment or prepayment on the Revolving Credit Loans shall be applied
to the extent possible, first, to Adjusted Prime Rate Loans and, then,
to Libor Rate Loans."
(l) APPLICATION OF FUNDS. Section 2.7(b)(i) of the Credit
Agreement is hereby amended to delete the defined term "REVOLVING LOAN NOTES"
contained therein and to replace the same with the defined term "NOTES".
(m) USE OF PROCEEDS. Section 2.9(a) of the Credit Agreement shall
be amended in its entirety to read as follows:
"(a) PERMITTED USES OF LOAN PROCEEDS. Each Borrower
represents, warrants and covenants to Agent and each Lender that all
proceeds of the Revolving Credit Loans shall be used by Borrowers
solely for the purpose of acquisitions, Capital Expenditures,
construction of proprietary systems, repayment of existing debt
(including, without limitation, the Term Construction Loan), stock
repurchases not prohibited in Section 8.3(c), financing working
capital, any purpose for which the Term Construction Loan may be
utilized and for general corporate purposes, and to pay fees and
expenses reasonably associated with any of the foregoing. Further,
each Borrower represents, warrants and covenants to Agent and each
Lender that all proceeds of the Term Construction Loan shall be used
by Borrowers solely for the purpose of providing capital for the
purchase of the San Diego Property, the Improvements, and other fees
and expenses reasonably associated therewith."
(n) LETTERS OF CREDITS. Sections 2.14(a), 2.14(c), 2.14(e) and
2.14(f) of the Credit Agreement are hereby amended to delete the defined
terms "LOAN" and "LOANS" contained
<PAGE>
-8-
therein and replace the same with "REVOLVING CREDIT LOAN" or "REVOLVING
CREDIT LOANS", as the case may be.
(o) TERM CONSTRUCTION LOAN ADVANCES. Article 2 of the Credit
Agreement is hereby amended to add a new Section 2.15 to read as follows:
"2.15 TERM CONSTRUCTION LOAN ADVANCES.
(a) TERM CONSTRUCTION LOAN ADVANCES. Subject to
satisfaction of the conditions of this Agreement and the First
Amendment, on the First Amendment Closing Date, Lenders shall
make the Purchase Price Advance under the Term Construction Loan.
The Initial Term Construction Loan Advance for the Improvements
will be made upon and subject to the satisfaction of all of the
conditions set forth in Section 4.3 hereof. All subsequent
advances for the payment of Improvements under the Term
Construction Loan shall be made monthly thereafter upon and
subject to the satisfaction of the applicable conditions set
forth in Sections 4.4 and 4.5 hereof. Each advance of the Term
Construction Loan shall be in an amount which shall be equal to
the aggregate of the Costs incurred by Holdings through the end
of the period covered by the Requisition for each such advance,
LESS (1) the aggregate Retained Amounts through the end of such
period (which Retained Amounts shall be decreased from time to
time if and to the extent the same are paid to the General
Contractor or any subcontractors), and (2) the total of the Term
Construction Loan advances theretofore made by the Lenders; AND,
at the election of the Agent, LESS any combination of the
following further amounts:
(i) any costs covered by the Requisition not
approved, certified or verified as provided in Section
2.15(b) below, and/or any Costs covered by a previous
Requisition for which payment receipts have not been
received by the Agent; and/or
(ii) any real estate taxes, mechanics' liens,
security interests, claims or other charges against the San
Diego Property or the Improvements and any interests, fees
or other costs which Holdings may have failed to pay in
accordance with this Agreement, the Notes or any other Loan
Document.
The excess, if any, of the Costs incurred to the
end of the period covered by the latest Requisition (net of
Retained
<PAGE>
-9-
Amounts not then required to be advanced) over the aggregate
Term Construction Loan advances by the Lenders for the Costs
incurred to the end of that period shall be payable by the
Borrowers out of their own funds (and not out of the proceeds of
the Term Construction Loan).
(b) VERIFICATION OF COSTS. All Costs are to be
certified by the General Contractor. Verification of the monthly
progress of the Improvements and Costs which have been incurred
by Holdings from time to time, and the estimated total Costs to
be incurred, may be made from time to time by the Agent, in its
reasonable discretion.
(c) ADVANCES. Requisitions shall be received by the
Agent at least ten (10) Business Days prior to the date of the
requested advance. Simultaneously with each Requisition,
Borrowers shall deliver to the Agent: (i) copies of the
Requisitions of the General Contractor and/or the
subcontractor(s), as the case may be, which are the basis for
such Requisition, together with all materials required to be
delivered by the General Contractor and/or any subcontractor(s),
as the case may be, pursuant to its or their respective contracts
or subcontracts in support of the amounts in question; and
(ii) copies of lien waivers from the General Contractor and all
subcontractors, with respect to all amounts previously paid to
any such Person; PROVIDED, HOWEVER, except that with respect to
subcontracts for amounts not exceeding Five Thousand and 00/100
Dollars ($5,000.00), a certificate of the General Contractor that
such lien waivers have been received from the subcontractors may
be delivered in lieu of such copies. Advances made to the
Borrowers shall be applied solely to pay the Costs set forth in
the pertinent Requisition. Agent and Lenders hereby reserve the
right to disburse all Construction Term Loan proceeds through the
Title Insurance Company.
Each Requisition submitted by Borrowers to Agent shall
constitute a representation that the work and materials for which
payment is being requested have physically been incorporated in
the Premises, free of any security interest, Lien or encumbrance,
other than the Liens in favor of the Agent created as security
for the Loans and Permitted Liens.
(d) DEFICIENCY DEPOSIT. If at any time and from time
to time, the Agent shall determine that the Term Construction
Loan, or the undisbursed balance thereof, is insufficient to cover
the remaining costs of completion of the Improvements, then to
further secure the future payment
<PAGE>
-10-
of such costs the Agent may require the Borrowers to furnish a
deficiency deposit, which shall consist of a deposit into a cash
collateral account, maintained by Holdings at Agent's offices, in
an amount satisfactory to Agent, and which Agent may from time to
time apply, or allow the Borrowers to apply, to the satisfaction
and payment of such remaining costs. Portions of any deficiency
deposit shall be released to the Borrowers when and to the extent
that the Agent determines that the value or amount thereof is more
than the excess, if any, of the total remaining costs of
completing the Improvements over the undisbursed balance of the
Term Construction Loan.
(e) DIRECT ADVANCES TO CONTRACTORS, MATERIALMEN, ETC.
At its option, the Lenders may, after the occurrence of a Default
or Event of Default, or if Agent deems it necessary to aid in the
progress of construction, make all advances for work performed,
materials furnished or services rendered directly to the General
Contractor and/or any subcontractors, or to such other Persons,
including the Lenders, who shall be entitled to payment for any
item of Costs. The execution of this Agreement by Borrowers
constitutes an irrevocable direction and authorization to the
Agent and the Lenders to so advance the funds. No further
direction or authorization from Borrowers shall be necessary or
required for such direct advances and all such advances shall
satisfy the obligations of the Agent and the Lenders hereunder,
and shall be secured by the Mortgage as fully as if made to
Borrowers, regardless of the disposition thereof by the General
Contractor, any subcontractor, or such other Persons who shall be
entitled to payment. Neither Agent nor Lenders shall, in any
event, be responsible or liable for disbursement of or failure to
disburse the Term Construction Loan proceeds or any part thereof,
and no contractor, subcontractor, supplier or laborer shall have
any right or claim against Agent or Lenders under this Agreement
or by virtue of Agent's administration hereof."
3. CONDITIONS PRECEDENT TO DISBURSEMENTS.
(a) Article 4 of the Credit Agreement shall be amended to add a new
Section 4.3 to read as follows:
"4.3 CONDITIONS PRECEDENT TO INITIAL TERM CONSTRUCTION LOAN
ADVANCE. The obligation of Lenders to make the Initial Term
Construction Loan Advance under this Agreement is subject to the
satisfaction of the following
<PAGE>
-11-
conditions precedent (in form, substance and action as is satisfactory
to Agent, in its sole discretion):
(a) The Agent shall have received from Borrowers all
of the following items:
(i) copies of the current Plans which shall be
consistent in all material respects, in terms of the scope
and quality of the Improvements, with the Project Summary
and otherwise reasonably satisfactory to Agent;
(ii) a certified copy of the construction
contract;
(iii) copies of all existing inspection and test
records and reports made by or for the San Diego Property;
(iv) a Requisition for the Initial Term
Construction Loan Advance, along with an AIA form G702
Application and Certificate for payment and a Contractor's
Cost Certification and a copy of all change orders which are
in effect as of the date of the Initial Term Construction
Loan Advance.
(b) The Agent shall have received satisfactory
evidence from Borrowers to the effect that (i) the Plans for
construction work completed that requires approval of
Governmental Authorities have been approved by all Governmental
Authorities having jurisdiction; (ii) the Improvements as shown
by the Plans will comply with applicable laws, zoning ordinances
and regulations; and (iii) all permits needed as of the date of
the subject Requisition for the construction of the Improvements
for their intended purposes have been obtained by Holdings;
(c) The Agent and Lenders shall be satisfied that the
aggregate amount of the Term Construction Loan is sufficient to
pay in full the cost of the Improvements;
(d) The Agent shall have received an endorsement to
the Title Insurance Policy to the date of such advance (which
shall have the effect of increasing the coverage of such policy
by the amount of the advance then being made), in the form
accepted by the Agent or the Agent's counsel, including, but not
limited to, the pending disbursement clause and setting forth no
additional exceptions except those accepted in
<PAGE>
-12-
writing by the Agent or the Agent's counsel ("TITLE UPDATE
ENDORSEMENT"). Without limiting the generality of the foregoing,
the Agent shall have received evidence satisfactory to the Agent
and the Title Insurance Company that there are no mechanic's liens
or other Liens prior to the Lien of the San Diego Mortgage (except
Liens to be discharged or bonded with the proceeds of the advance
in question).
(e) The Agent shall have received builder's completed
value risk insurance against all risks of physical loss, including
collapse and transit coverage, covering the total value of work
performed and equipment, supplies and material furnished to the
San Diego Property for the construction of the Improvements issued
by companies satisfactory to Agent in an aggregate amount
sufficient at all times to protect Agent from any loss which might
be suffered by reason of the risks insured against, containing a
standard form mortgagee's clause with loss payable to Agent as its
interest may appear; and
(f) The Agent shall have received evidence satisfactory
to Agent that no work of any kind in connection with the
construction of the Improvements has been done upon the San Diego
Property or materials placed on the San Diego Property prior to
the recording of the San Diego Mortgage."
(b) Article 4 of the Credit Agreement shall be amended to add a new
Section 4.4 and a new Section 4.5 to read as follows:
"Section 4.4 CONDITIONS PRECEDENT TO ALL SUBSEQUENT TERM
CONSTRUCTION LOAN ADVANCES. The Lenders' obligations to make each and
every Term Construction Loan advance after the Initial Term
Construction Loan Advance shall be subject to the satisfaction of the
following conditions:
(a) All conditions of Sections 4.2 and 4.3 (other than
4.3(f)) shall remain satisfied, performed and unimpaired as of the
date of such subsequent advances;
(b) The Agent shall have received, as of the date of
the advance, such other documentation and information (including
but not limited to progress schedules, affidavits, lien waivers
and payment receipts from the General Contractor, any major
subcontractors and others who have performed work or provided
materials for the Improvements) as the Agent may reasonably
require, including copies of any document or instruments described
in Section 4.3 which shall have been obtained by
<PAGE>
-13-
the Borrowers subsequent to the date of the Initial Term
Construction Loan Advance and amendments, modifications of updates
of any item described in Section 4.3;
(c) The Agent shall have received a Requisition for
the advance, a Contractor's Cost Certification and a copy of all
change orders which are in effect as of the date of such
Requisition;
(d) The Agent shall have received a Title Update
Endorsement in form and substance acceptable to the Agent."
"Section 4.5 CONDITIONS PRECEDENT TO LAST TERM
CONSTRUCTION LOAN ADVANCE. In the case of the last Term Construction
Loan advance, the Agent also shall have received:
(a) Evidence of: (i) approval by all governmental
authorities of the completion of the Improvements in their
entirety; and (ii) the issuance of a permanent certificate or
certificates of occupancy covering the San Diego Property;
(b) A certification by the Architects, that all
design, site, construction, and finishing work necessary for the
completion of the Improvements have been finished and made
available for use in accordance with the Plans."
4 FINANCIAL STATEMENTS. Section 5.5 of the Credit Agreement is hereby
amended to insert the date of "July 31, 1998" in the blank contained in the
first sentence thereof.
5 ACKNOWLEDGMENT OF ASSIGNMENT OF CONTRACT. Article 6 of the Credit
Agreement shall be amended to add a new Section 6.19 to read as follows:
"Section 6.19 ACKNOWLEDGMENT OF ASSIGNMENT OF CONTRACT. Holdings
covenants and agrees that the contract that it is to enter into with
Sipe in accordance with the letter of intent between the parties and
relating to the San Diego Property or any other sale contract relating
to the San Diego Property (either one being referred to herein as the
"Sales Contract") shall contain a provision whereby Sipe or such other
proposed purchaser acknowledges the assignment to Agent by Holdings of
its interest in the Sales Contract and agrees to attorn to Agent, or
its successors or assigns, upon the occurrence of an Event of
Default."
<PAGE>
-14-
6 INTEREST COVERAGE RATIO. Section 7.2 of the Credit Agreement is
hereby amended to substitute the word "less" for the word "greater" that appears
on the second line of this section.
7 LIMITATION ON DISPOSITION OF ASSETS. Section 8.5(a)(B) of the Credit
Agreement is hereby amended in its entirety to read as follows:
"(B) the sale of the San Diego Property (or the rights under the
San Diego Property Acquisition Agreement); provided, however, that
the net sales proceeds are sufficient to pay in full the outstanding
principal balance of the Term Construction Loan and all accrued
interest thereon, and such net sales proceeds, or any required portion
thereof, is applied by Borrowers to pay in full the Term Construction
Loan."
8 LIMITATION ON SALES AND LEASEBACKS. Section 8.12 of the Credit
Agreement shall be amended in its entirety to read as follows:
"Section 8.12 LIMITATION ON SALES AND LEASEBACKS. No Borrower
shall at any time, directly or indirectly, sell and thereafter lease
back any of its respective assets or Property, except the sale and
leaseback of the San Diego Property; provided, however, that the
following conditions are satisfied to Agent's reasonable satisfaction:
(a) the net sales proceeds from such sale is an amount equal to or
greater than the outstanding principal balance and all accrued
interest thereon of the Term Construction Loan at the time of the
sale/leaseback; (b) the lease has a minimum term of at least two (2)
years after the Termination Date of the Revolving Credit Loans and all
of the other terms and conditions of the lease are in compliance with
the industry standard for the San Diego region; and (c) Holdings
executes a Leasehold Mortgage on its leasehold estate in the San Diego
Property and the fee simple owner of the San Diego Property consents
to such lien, agrees to give Agent notice of all defaults under the
lease and an opportunity to cure and agrees to attorn to Agent or its
successors and assigns."
9 REAFFIRMATION OF WARRANTIES AND REPRESENTATIONS. Borrowers hereby
agree and covenant that, as of the date of this First Amendment and after
giving effect to the provisions hereof, all representations and warranties in
the Credit Agreement including, without limitation, all of those warranties
and representations set forth in Article 5, are true and accurate in all
material respects (unless specifically stated to relate only to an earlier
date, in which case such representation or warranty shall be true and
accurate in all material respects as of such earlier date). Borrowers
further represent and warrant to Agent and Lender that, as of the date of
this First Amendment and after giving effect to the provisions hereof:
<PAGE>
-15-
(a) other than the filings and recordings to perfect the security
interest in the San Diego Property, no approval, consent, order,
authorization or license by, or giving notice to, or taking any other action
with respect to, any Person or any governmental or regulatory authority or
agency is required under any applicable law or any agreement, instrument or
other documents to which any Borrower is a party including, without
limitation, the holders of the notes issued pursuant to the Subordinated Debt
Offering; and
(b) the execution, delivery and performance by Borrowers of each
of this First Amendment and the related documents thereto, and the making by
Borrowers of the borrowings contemplated by this First Amendment, do not and
will not conflict with, or result in a breach of the terms of, or constitute
a default under, any agreement, instrument or other material document or
agreement to which any Borrower is a party or by which any Borrower or its
Property is bound or affected, excluding Liens in favor of Lenders.
10 REAFFIRMATION OF COVENANTS. Borrowers reaffirm all covenants in
the Credit Agreement, including all of those covenants set forth in Articles
6, 7 and 8, as if fully set forth herein.
11 WAIVER OF EVENT OF DEFAULT. To the extent that Borrowers are not
currently in compliance with the financial covenant set forth in Section 7.3
of the Credit Agreement, Agent and Lenders agree to waive (i) their rights
to enforce any remedies for this Event of Default, solely as they relate to
this particular Event of Default; and (ii) the requirement under this
Agreement that there exist no Default or Event of Default (but solely as such
Default or Event of Default relates to noncompliance with Section 7.3) in
order for Lenders to be obligated to make any advances under the Term
Construction Loan, which waivers shall terminate upon the Sale Closing Date.
Borrowers acknowledge that these waivers are waivers of Agent's and Lenders'
rights to exercise their remedies and a waiver of Lenders' option not to
disburse advances under the Term Construction Loan and not a waiver of any
other term or condition of this Agreement, including without limitation, any
requirements for disbursement of the Revolving Credit Loans."
12 LEGAL OPINION. Borrowers covenant and agree to deliver to Agent
within four (4) Business Days of the First Amendment Closing Date (as
hereinafter defined) a written legal opinion, addressed to Agent and Lenders
and dated as of the First Amendment Closing Date, from legal counsel for
Holdings, which shall be in a form acceptable to Agent.
13 CONDITIONS PRECEDENT TO CLOSING OF FIRST AMENDMENT. On or prior to
the closing of the First Amendment (hereinafter the "FIRST AMENDMENT CLOSING
DATE"), each of the following conditions precedent shall have been satisfied:
(a) PROOF OF AUTHORITY. Agent and Lenders shall have received
from Borrowers copies, certified by a duly authorized officer to be true and
complete on and as of the
<PAGE>
-16-
First Amendment Closing Date, of records of all action taken by Borrowers to
authorize the execution and delivery of this First Amendment and all other
certificates, documents and instruments to which each of them is or is to
become a party as contemplated or required by this First Amendment, and
performances by each of them of all of their respective obligations under
each of such documents.
(b) CERTIFICATION OF ORGANIZATIONAL DOCUMENTS. Agent shall have
received a certificate from the Secretary or Assistant Secretary of each
Borrower certifying (i) that there have been no amendments, revisions or
supplements to its respective organizational documents previously delivered to
Agent and that the same are in full force and effect; (ii) that each Borrower is
in good standing with its respective state of organization and all other states
in which it is qualified to do business; and (iii) the incumbency certificate
previously delivered to Agent is in full force and effect.
(c) TERM CONSTRUCTION LOAN NOTES. Borrowers shall have executed and
delivered the Term Construction Loan Notes substantially in the form of Exhibit
H-1 attached hereto in favor of each Lender in the amounts of the respective
Lender's Participation Percentage of the Term Construction Loan.
(d) DOCUMENTS. Each of the documents to be executed and delivered at
the closing and all other certificates, documents and instruments to be executed
in connection herewith shall have been duly and properly authorized, executed
and delivered by Borrowers and shall be in full force and effect on and as of
the First Amendment Closing Date.
(e) LEGALITY OF TRANSACTIONS. No change in applicable law shall have
occurred as a consequence of which it shall have become and continue to be
unlawful (i) for Agent or any Lender to perform any of its respective agreements
or obligations under any of the Loan Documents, or (ii) for any Borrower to
perform any of its respective agreements or obligations under any of the Loan
Documents.
(f) PAYMENT OF CLOSING FEE. Borrowers shall have paid to Lenders the
closing fee for the Term Construction Loan separately agreed to by Agent and
Borrowers.
(g) CHANGES; NONE ADVERSE. Since the Closing Date, no changes shall
have occurred in the financial condition, business or operations of Borrowers
which, individually or in the aggregate, are materially adverse to such
Borrowers.
(h) CONSUMMATION OF ACQUISITION AGREEMENT. The San Diego Property
Acquisition Agreement shall have been completed and closed simultaneously with
the First Amendment Closing Date upon terms and conditions satisfactory to the
Agent and Lenders and in full and complete accordance with all applicable laws.
<PAGE>
-17-
(i) REAL ESTATE. The following documents shall be executed (and,
where appropriate, acknowledged) by Persons satisfactory to the Agent:
(i) the San Diego Mortgage duly executed and delivered by
Holdings (and, where appropriate, by the trustee thereunder) in recordable
form (in such number of copies as the Agent shall have requested), together
with such Uniform Commercial Code financing statements as may be needed in
order to perfect the security interests granted by the San Diego Mortgage
in any fixtures and other property therein described which may be subject
to the Uniform Commercial Code, in each case appropriately completed and
duly executed and in proper form for filing in all offices in which
required;
(ii) an Environmental Indemnity Agreement with respect to the
San Diego Property duly executed and delivered by Borrowers;
(iii) with respect to the Premises covered by the San Diego
Mortgage, an ALTA Loan Policy Form B-1970 (or such other form that may be
acceptable to Agent) issued by the Title Insurance Company, insuring the
validity and priority of the Liens created under the San Diego Mortgage for
and in amounts satisfactory to Agent, with all standard and general
exceptions deleted and endorsed over so as to afford full "extended form
coverage" subject only to the Permitted Liens and such other exceptions as
are satisfactory to Agent and including a "Pending Disbursement Clause" and
such endorsements as Agent may require, including without limitation a
"Comprehensive Endorsement" and a "First Loss Endorsement".
(iv) with respect to the Premises covered by the San Diego
Mortgage, a survey prepared by a registered land surveyor or engineer,
duly licensed in the State of California certified to the Title Insurance
Company and in such form as to cause the Title Insurance Company to delete
the standard printed survey exception from the title insurance policy and
to enable the Title Insurance Company to issue its policy free from any
exceptions or objections whatsoever relating to survey matters.
In addition, Borrowers shall have (A) delivered to Agent copies
of all environmental reports and studies made or conducted on the San Diego
Property including, without limitation, a Phase I Site Assessment, each of
which shall be acceptable to Agent, and (B) paid to the Title Insurance
Company all expenses and premiums of the Title Insurance Company in
connection with the issuance of such policy and endorsements. In addition,
Borrowers shall have paid to the Title Insurance Company or the Agent an
amount equal to all mortgage and mortgage recording taxes, intangibles
taxes, stamp taxes and other taxes payable in connection with the execution
and delivery of the San Diego Mortgage, and the obligations secured thereby
and the recording of the San Diego Mortgage in the appropriate land
offices.
<PAGE>
-18-
(j) FLOOD CERTIFICATION. Borrowers shall deliver to Agent a
Standard Flood Hazard Determination Form certifying that the San Diego
Property is not located in a flood plain zone.
(k) INSURANCE CERTIFICATES. Agent shall have received insurance
certificates naming Agent as mortgagee, loss payee and additional insured, as
its interests may appear, as required by Section 6.2(b)(iii) of the Credit
Agreement and Sections 2.4 and 2.5 of the Mortgage.
(l) EMPLOYMENT RESTRICTION WAIVER. Agent shall have received
evidence satisfactory to it, in its sole discretion, that the Employment
Restriction (as defined in the San Diego Property Acquisition Agreement)
imposed by the County of San Diego has been terminated, amended or waived in
a manner and to the extent required in the San Diego Property Acquisition
Agreement.
(m) ASSIGNMENT OF CONTRACT. Agent shall have received the
Assignment of Contract duly executed by Holdings.
(n) APPRAISAL. Agent shall have received an appraisal that is
satisfactory to Agent, of the San Diego Property.
14 AMENDED SCHEDULE 1. Schedule 1 to the Credit Agreement is hereby
amended in its entirety and replaced with the Schedule 1 attached hereto.
15 MISCELLANEOUS.
(a) Borrowers shall reimburse Agent for all fees and disbursements
of legal counsel to Agent which shall have been incurred by Agent in
connection with the preparation, negotiation, review, execution and delivery
of this First Amendment and the handling of any other matters incidental
hereto.
(b) All of the terms, conditions and provisions of the Credit
Agreement not herein modified shall remain in full force and effect. In the
event a term, condition or provision of the Credit Agreement conflicts with a
term, condition or provision of this First Amendment, the latter shall govern.
(c) This First Amendment shall be governed by and shall be
construed and interpreted in accordance with the laws of the State of Ohio.
(d) This First Amendment shall be binding upon and shall inure to
the benefit of the parties hereto and their respective heirs, successors and
assigns.
<PAGE>
-19-
(e) This First Amendment may be executed in several counterparts,
each of which shall constitute an original, but all which together shall
constitute one and the same agreement.
IN WITNESS WHEREOF, this First Amendment has been duly executed and
delivered by or on behalf of each of the parties as of the day and in the year
first above written.
<TABLE>
<S> <C>
SIGNED IN THE PRESENCE OF: BORROWERS:
ECO SOIL SYSTEMS, INC.
/S/ BRETT P. ROSENBLATT By: /S/ L. JEAN DUNN, JR.
- ---------------------------- ----------------------------------
Brett P. Rosenblatt Name: L. Jean Dunn, Jr.
Title: Chief Financial Officer and Secretary
ASPEN CONSULTING COMPANIES, INC.
/S/ BRETT P. ROSENBLATT By: /S/ L. JEAN DUNN, JR.
- ---------------------------- ----------------------------------
Brett P. Rosenblatt Name: L. Jean Dunn, Jr.
Title: Secretary
TURF SPECIALTY, INC.
/S/ BRETT P. ROSENBLATT By: /S/ L. JEAN DUNN, JR.
- ---------------------------- ----------------------------------
Brett P. Rosenblatt Name: L. Jean Dunn, Jr.
Title: Secretary
TURF ACQUISITION SUB., INC.
/S/ BRETT P. ROSENBLATT By: /S/ L. JEAN DUNN, JR.
- ---------------------------- ----------------------------------
Brett P. Rosenblatt Name: L. Jean Dunn, Jr.
Title: Secretary
ECO TURF PRODUCTS, INC.
/S/ BRETT P. ROSENBLATT By: /S/ L. JEAN DUNN, JR.
- ---------------------------- ----------------------------------
Brett P. Rosenblatt Name: L. Jean Dunn, Jr.
Title: Secretary
<PAGE>
AGRICULTURAL SUPPLY, INC. (f.k.a.
AGRICULTURAL ACQUISITION SUB., INC.)
/S/ BRETT P. ROSENBLATT By: /S/ L. JEAN DUNN, JR.
- ---------------------------- ----------------------------------
Brett P. Rosenblatt Name: L. Jean Dunn, Jr.
Title: Secretary
MITIGATION SERVICES, INC.
/S/ BRETT P. ROSENBLATT By: /S/ L. JEAN DUNN, JR.
- ---------------------------- ----------------------------------
Brett P. Rosenblatt Name: L. Jean Dunn, Jr.
Title: Secretary
BENHAM CHEMICAL CORPORATION
/S/ BRETT P. ROSENBLATT By: /S/ L. JEAN DUNN, JR.
- ---------------------------- ----------------------------------
Brett P. Rosenblatt Name: L. Jean Dunn, Jr.
Title: Secretary
YUMA ACQUISITION SUB., INC.
/S/ BRETT P. ROSENBLATT By: /S/ L. JEAN DUNN, JR.
- ---------------------------- ----------------------------------
Brett P. Rosenblatt Name: L. Jean Dunn, Jr.
Title: Secretary
<PAGE>
LENDERS:
THE PROVIDENT BANK
/S/ SHEILA B. ZEUNI By: /S/ K. RODGER DAVIS
- ---------------------------- ----------------------------------
/S/ VIVIAN M. RABY Name: K. Rodger Davis
- ---------------------------- Title: SVP
AGENT:
THE PROVIDENT BANK, as Agent
/S/ SHEILA B. ZEUNI By: /S/ K. RODGER DAVIS
- ---------------------------- ----------------------------------
/S/ VIVIAN M. RABY Name: K. Rodger Davis
- ---------------------------- Title: SVP
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1998 JAN-01-1998 JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1998 SEP-30-1997 SEP-30-1997
<CASH> 1,850 1,850 212 212
<SECURITIES> 0 0 0 0
<RECEIVABLES> 25,245 25,245 10,670 10,670
<ALLOWANCES> 353 353 118 118
<INVENTORY> 15,947 15,947 4,161 4,161
<CURRENT-ASSETS> 48,131 48,131 15,547 4,679
<PP&E> 10,220 10,220 6,098 6,098
<DEPRECIATION> 510 1,218 234 376
<TOTAL-ASSETS> 77,123 77,123 28,105 28,105
<CURRENT-LIABILITIES> 19,868 19,868 10,243 10,243
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 83 83 59 59
<OTHER-SE> 38,573 38,573 16,881 16,881
<TOTAL-LIABILITY-AND-EQUITY> 77,123 77,123 28,105 28,105
<SALES> 29,989 65,282 13,913 29,141
<TOTAL-REVENUES> 29,989 65,282 13,913 29,141
<CGS> 20,121 44,914 9,803 19,059
<TOTAL-COSTS> 20,121 44,914 9,803 19,059
<OTHER-EXPENSES> 7,278 17,777 3,104 8,823
<LOSS-PROVISION> 53 63 11 11
<INTEREST-EXPENSE> 439 779 179 430
<INCOME-PRETAX> 2,298 2,165 827 829
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> 2,298 2,165 827 829
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 2,298 2,165 827 829
<EPS-PRIMARY> .14 .13 .07 .07
<EPS-DILUTED> .12 .11 .05 .06
</TABLE>
