<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------
FORM 10-Q
(Mark One)
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarterly period ended March 31, 1999
__ Transition report under Section 13 or 15(d) of the Exchange Act.
For the transition period from ___________ to ___________
Commission File Number: 0-21975
ECO SOIL SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
NEBRASKA 47-0709577
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10740 THORNMINT ROAD
SAN DIEGO, CALIFORNIA 92127
(Address, Including Zip Code, of Principal Executive Offices)
(619) 675-1660
(Registrant's Telephone Number, Including Area Code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of May 10, 1999, 17,313,569 shares
of the Registrant's Common Stock, $.005 par value were outstanding.
<PAGE>
INDEX
ECO SOIL SYSTEMS, INC.
FORM 10-Q
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure of Market Risk 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds N/A
Item 3. Defaults upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Securities Holders N/A
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
2
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PART I
ITEM 1. FINANCIAL INFORMATION
ECO SOIL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(unaudited) (Note)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 892 $ 3,410
Accounts receivable, net of allowance for doubtful accounts of $1,892
and $1,261 at March 31, 1999 and December 31, 1998, respectively 18,480 13,523
Finished goods inventory 14,464 10,475
Prepaid expenses and other current assets 6,133 6,288
---------- ----------
Total current assets 39,969 33,696
Equipment under construction 3,092 2,823
Equipment under operating leases, net 7,345 8,019
Property and equipment, net 7,135 5,541
Intangible assets, net 14,273 14,571
Other assets 2,286 2,355
---------- ----------
Total assets $ 74,100 $ 67,005
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 18,049 $ 8,037
Accrued expenses 6,045 7,061
Current portion of long-term obligations 204 178
---------- ----------
Total current liabilities 24,298 15,276
Long-term obligations, net of current portion 24,974 22,620
Deferred gain on sale/leaseback of building 551 566
Commitments
Shareholders' equity:
Preferred stock
$.005 par value; 5,000,000 shares authorized; - -
none issued and outstanding
Common stock
$.005 par value; 50,000,000 shares authorized at March 31, 1999 and
December 31, 1998, respectively; 17,224,736 and 17,064,576 shares issued and
outstanding at March 31, 1999 and December 31, 1998, respectively 86 85
Additional paid-in capital 51,884 51,485
Warrants 1,087 958
Notes receivable from shareholders (10) (15)
Accumulated deficit (28,770) (23,970)
---------- ----------
Total shareholders' equity 24,277 28,543
---------- ----------
Total liabilities and shareholders' equity $ 74,100 $ 67,005
---------- ----------
---------- ----------
</TABLE>
See accompanying notes
Note: The Balance Sheet at December 31, 1998 is derived from the audited
financial statements at that date, but does not include all of the
disclosures required by generally accepted accounting principles.
3
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ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
Turf Partners $ 11,659 $ 8,409
Agricultural Supply 5,593 -
--------- ---------
Total revenues 17,252 8,409
Cost of revenues:
Turf Partners 9,252 5,952
Agricultural Supply 4,063 -
--------- ---------
Total cost of revenues 13,315 5,952
Gross profit 3,937 2,457
Operating expenses:
Selling, general and administrative 7,768 3,896
Research and development 93 99
Amortization of intangibles 309 183
--------- ---------
Loss from operations (4,233) (1,721)
Interest expense 710 95
Interest income 143 74
--------- ---------
Net loss $ (4,800) $ (1,742)
--------- ---------
--------- ---------
Net loss per share, basic and diluted (0.28) (0.11)
--------- ---------
Shares used in calculating net loss per share, basic and diluted 17,182 15,714
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
4
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ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (4,800) $ (1,742)
Adjustments to reconcile net cash used in operating activities:
Depreciation and amortization 868 532
Amortization of debt issuance costs and discount
on long-term debt 82 -
Provision for losses on accounts receivable 77 -
Loss on sale of property and equipment (16) -
Compensation expense incurred upon issue of stock options/warrants 204 -
Changes in operating assets and liabilities, net of effect
of acquired businesses:
Accounts receivable (5,034) (3,294)
Inventories (4,209) (4,502)
Prepaid expenses and other assets 144 (442)
Accounts payable 10,012 4,996
Accrued liabilities (1,031) (85)
--------- ---------
Net cash used in operating activities (3,703) (4,537)
INVESTING ACTIVITIES:
Payments related to acquired businesses, net of cash acquired - (2,224)
Proceeds from the sale of property and equipment 36 -
Purchase of property and equipment (1,466) (350)
Sale of short-term investments - 3,000
--------- ---------
Net cash provided by (used in) investing activities (1,430) 426
FINANCING ACTIVITIES:
Advances (to) from shareholders 5 95
Proceeds from long-term obligations 2,349 -
Repayments of long-term obligations (64) (145)
Payments on capital lease obligations - (3)
Net proceeds from issuance of common stock 325 1,500
--------- ---------
Net cash provided by financing activities 2,615 1,447
--------- ---------
Net decrease in cash (2,518) (2,664)
Cash and cash equivalents at beginning of period 3,410 3,124
--------- ---------
Cash and cash equivalents at end of period $ 892 $ 460
--------- ---------
--------- ---------
</TABLE>
See accompanying notes
5
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ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of Eco Soil
Systems, Inc. (the "Company"), all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of the results for
the three-month periods ended March 31, 1999 and 1998 have been made. The
results of operations for the three-month period ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full fiscal
year. For further information, refer to the audited financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
2. NET LOSS PER SHARE
In accordance with Financial Accounting Standards Board Statement No.
128, "Earnings per share" ("SFAS 128"), basic earnings per share is
calculated by dividing net income by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of the
Company such as common stock which may be issuable upon exercise of
outstanding stock options and warrants. These shares are excluded when their
effects are antidilutive.
3. 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.
4. SEGMENT INFORMATION
For purposes of analyzing and understanding the financial statements,
the Company's operations have been classified into the following business
segments:
Turf Partners: This segment leases the Company's proprietary BioJect
system to golf courses, and sells microbial products to such customers, and
also sells several other proprietary products to golf courses. This segment
also wholesales and distributes a wide range of traditional chemical and turf
maintenance products and golf course supplies to golf courses or turf
maintenance service businesses, or distributors which sell to those end-user
markets.
6
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Agricultural Supply: This segment enters into contracts with
agricultural growers to manage the health and productivity of their soil
during the course of the growing season, which requires the Company to
perform a comprehensive soil analysis at the beginning of the season, develop
a treatment regimen, install the Company's proprietary BioJect system at the
customer's site, and provide the microbials and other soil additive products
for the customer to use throughout the season. This segment also distributes
a wide range of irrigation and other agricultural supplies to growers. In
1998, the Company actively commenced its soil maintenance service business
and acquired several distributors or irrigation and other agricultural
supplies, and therefore created this business segment. Prior to 1998,
agricultural operations were insignificant and were not considered to be a
separate segment.
<TABLE>
<CAPTION>
REVENUES SEGMENT PROFIT SEGMENT ASSETS
----------------------- ------------------------- -------------------------
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
TURF PARTNERS $11,659 $ 8,409 $(1,645) $ 727 $ 41,945 $ 46,029
AGRICULTURAL SUPPLY 5,593 - (26) - 25,083 -
CORPORATE AND OTHER - - (3,129) (2,469) 7,072 5,688
------- ------- -------- -------- -------- --------
TOTAL $17,252 $ 8,409 $(4,800) $(1,742) $ 74,100 $ 51,717
</TABLE>
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 March 31, 1999. Additionally, the financial statements and
notes thereto and Management's Discussion and Analysis in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 will provide
additional information.
In addition to other endeavors, the Company develops, markets and sells
proprietary biological and traditional chemical products to two principal
segments: the turf and golf management market ("Turf Partners") and the
agricultural and crop market ("Ag Supply").
FIRST QUARTER ENDED MARCH 31, 1999 COMPARED TO FIRST QUARTER ENDED MARCH 31,
1998
RESULTS OF OPERATIONS
REVENUES
For the first quarter of 1999, our revenues were $17.3 million, an
increase of 105.2% versus $8.4 million for the first quarter of 1998. The
increase reflects an increase in Turf Partners revenues and our entry into
the Agriculture segment during April 1998.
For the first quarter of 1999, our Turf Partners revenues were $11.7
million, an increase of 38.7% versus $8.4 million for the first quarter of
1998. The increase in Turf Partners revenues occurred in all three operating
regions of the U.S. as a result of (i) the acquisitions of two turf
maintenance distributors in the Midwest in the first quarter of 1998 and (ii)
increased sales from our existing business in the East and West.
For the first quarter of 1999, our Agricultural Supply revenues were
$5.6 million versus none for the first quarter of 1998. We established two
segments of our business in April 1998. The revenue relates to (i) sales made
by four distributors of micro-irrigation products which we acquired in the
first half of 1998, and (ii) acreage under contracts with our proprietary
soil maintenance programs.
GROSS PROFIT
For the first quarter of 1999, our gross profit was $3.9 million, an
increase of 60.2% versus $2.5 million for the first quarter of 1998. The
increase in gross profit was due to the increase in Turf Partners revenue and
the addition of the Agricultural Supply segment during April 1998. For the
first quarter of 1999, our gross margin was 22.8% versus 29.2% for the first
quarter of 1998. The decrease in gross margin was primarily related to a
higher proportional amount of lower margin distributed revenue versus
proprietary revenue in our Turf Partners' segment.
For the first quarter 1999, the gross profit on Turf Partners revenues
was $2.4 million, a decrease of 2.0% from $2.5 million for the first quarter
1998. For the first quarter of 1999, the gross margin on Turf Partners
products was 20.6% versus 29.2% for the first quarter of 1998. The decrease
in gross margin and gross profit was due to a change in the product mix, as
previously described.
For the first quarter 1999, the gross profit on the Agricultural Supply
segment revenues were $1.5 million versus none for the first quarter 1998.
For the first quarter 1999, the gross margin on the Agricultural Supply
revenues was 27.4%.
8
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For the first quarter 1999, selling, general and administrative ("SG&A")
expense was $7.8 million, an increase of 99.4% versus $3.9 million for the
first quarter of 1998. The increase in SG&A expense was primarily due to
additional overhead costs associated with the previously discussed
acquisitions. SG&A expense as a percentage of revenues was 45.0% for the
first quarter 1999 compared to 46.3% for the first quarter 1998.
RESEARCH AND DEVELOPMENT
For the first quarter of 1999, research and development expense was
$93,000, compared to $99,000 for the first quarter of 1998.
AMORTIZATION EXPENSE
For the first quarter of 1999, amortization expense was $309,000, compared
to $183,000 for the first quarter of 1998. The increase in amortization expense
was due to an increase in goodwill directly related to 1998 acquisitions as
discussed.
INTEREST EXPENSE
For the first quarter of 1999, interest expense was $710,000 compared to
$95,000 for the first quarter 1998. The increase in interest expense was due to
an increase in the average amount of borrowings outstanding.
NET LOSS
For the first quarter of 1999, net loss was $4.8 million or $0.28 per share
compared to a net loss of $1.7 million or $0.11 per share for the first quarter
of 1998.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception from revenues from sales of
our products, sales of our Common Stock, borrowings from our principal
shareholders and debt financing. Our operating and investing used cash of $5.1
million during first quarter 1999, compared to $4.1 million during the first
quarter 1998.
On August 25, 1998, we completed a financing transaction providing us with
$15 million in gross proceeds. We issued an aggregate of $15 million of our
12.00% Senior Subordinated Notes due 2003 (the "Notes") pursuant to Note
Agreements dated as of August 25, 1998 between Albion Alliance Mezzanine Fund
and us and between Paribas Capital Funding LLC and us. The Notes are due in 2003
and bear interest at a rate of 12% per annum, which is due quarterly. We applied
the proceeds from the Notes to (i) the repayment in full of our 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 financing and
(iii) working capital.
We also have a revolving line of credit with Imperial Bank under which we
can borrow up to $10 million. The line of credit is due in April 2000. We pay
interest on the line of credit monthly at prime plus one-half percent.
Our line of credit and Note Agreements contain certain covenants which
require us to maintain minimum levels of net worth, working capital, and other
financial ratios, as defined. As of March 31, 1999, we were not in compliance
with certain of these covenants. The lenders have provided modifications to or
waivers of such covenants which we believe will allow us to remain in compliance
with the covenants through at least December 31, 1999.
We intend to finance our 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
9
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that such financing alternatives will be available under favorable terms, if
at all. We believe that we have sufficient resources to finance our
operations and future growth for at least the next twelve months.
YEAR 2000
Many currently installed computer systems are coded to accept only two
digit entries in the date code field. These date code fields need to be
modified or upgraded to accept four digit entries to distinguish 21st century
dates from 20th century dates. Many organizations are expending significant
resources to modify or upgrade their computer systems for such "Year 2000"
compliance. We presently believe that, with modifications to existing
software and conversions to new software, the Year 2000 problem can be
mitigated. However, if such modifications and conversions are not made, or
are not timely completed, the Year 2000 problem could have a material impact
on our operations.
The Year 2000 issue affects our internal systems, including information
technology ("IT") and non-IT systems. We are in the process of upgrading our
existing computer software and IT systems and recognize the need to ensure our
operations will not be adversely impacted by Year 2000 software failures. We
rely upon microprocessor-based personal computers and commercially available
applications software. In addition, in the ordinary course of our product
development efforts, we have designed our current proprietary equipment,
consisting of hardware and software, including the BioJect system itself, to be
Year 2000 ready. We are also reviewing our utility systems (heat, light,
telephones, etc.) and other non-IT systems for the impact of Year 2000.
Additionally, should we undertake future acquisitions, the Year 2000 risks that
affect us can be expected to similarly affect such potential acquisition
candidates. We intend to review the systems of all potential acquisitions for
Year 2000 compliance. However, the failure to correct a material Year 2000
problem either within the Company, within a vendor or supplier or within a
potential acquisition candidate could result in an interruption in, or a failure
of, certain normal business activities or operations. Such interruptions or
failures could materially adversely affect our business, operating results and
financial condition.
We depend on smooth and timely interactions with our vendors, customers and
other third parties. Any unexpected costs or disruption in the operations or
activities of such vendors, customers or other third parties as a result of Year
2000 compliance issues within such entities could materially adversely affect
our business, operating results or financial condition. The Company intends to
take continuous steps to identify Year 2000 problems related to its vendors and
to formulate a system of working with key third-parties, including financial
institutions and utility-providers, to understand their ability to continue
providing services and products through the change to Year 2000.
The cost of our Year 2000 compliance assessment and upgrade is being funded
from current operations. The cost to us of our Year 2000 identifications,
assessment, remediation and testing efforts, as well as costs we currently
expect to be incurred with respect to Year 2000 issues of third parties, is
expected to be approximately $20,000. We will continue to consider the
likelihood of a material business interruption due to the Year 2000 issue and,
if necessary, implement appropriate contingency plans. A contingency plan has
not been developed for dealing with the most reasonably likely worst case
scenario, and such scenario has not yet been clearly identified. Since we have
adopted a plan to address these Year 2000 issues, we have not developed a
comprehensive contingency plan should Year 2000 issues fail to be addressed
successfully or in their entirety. However, if we identify significant risks or
are unable to meet our anticipated timeline, we will develop contingency plans
as deemed necessary at that time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's foreign sales are principally to Mexico. All foreign
transactions are denominated in U.S. dollars, therefore, the Company's exposure
to foreign currency fluctuations is minimal.
The Company is exposed to changes in interest rates from its 12% senior
subordinated notes, which are due in full in 2003. A hypothetical 100 basis
point adverse move (decrease) in interest rates along the entire interest rate
yield curve would adversely affect the net fair value of the Notes by
approximately $700,000 as of March 31, 1999.
10
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEDINGS
In November 1998, the Company executed a term sheet with the Palladin
Group, L.P. ("Palladin") concerning negotiations for a possible investment by
Palladin in certain new classes of securities of the Company which, at the time,
the Company was considering issuing to a certain fund managed by Palladin. The
Company subsequently terminated the negotiations in December 1998. An affiliate
of Palladin, Halifax Fund, L.P. ("Halifax"), filed a lawsuit on or about March
19, 1999 in San Diego Superior Court alleging that the termination violated
duties owed by the Company to Halifax under the term sheet. The lawsuit seeks
compensatory damages of approximately $2.6 million and punitive damages of
approximately $12.0 million. The Company disputes Halifax's claim and intends to
vigorously defend itself against the lawsuit.
From time to time, the Company is involved in legal proceedings, claims and
litigation arising in the ordinary course of business, the outcome of which, in
the opinion of management, would not have a material, adverse effect on the
Company.
ITEM 5. OTHER INFORMATION
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
This report contains certain forward looking statements about the business
and financial condition of the Company, including various statements contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The actual results of the Company could differ materially from any
forward looking statements contained herein. The following information sets
forth certain factors that could cause the actual results to differ materially
from those contained in the forward looking statements. For a more detailed
discussion of the factors that could cause actual results to differ, see "Item
1: Business -- Factors That Could Affect Future Performance" in the Company's
Form 10-KSB for the fiscal year ended December 31, 1998.
At March 31, 1999, the Company had an accumulated deficit of $29 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
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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, 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 and
agricultural applications. 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 and agriculture. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit:
10.1 Credit Agreement dated as of December 2, 1998 among Imperial Bank,
the Registrant and various subsidiaries of the Registrant (incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K
filed December 30, 1998).
10.2 First Amendment to Credit Agreement and Waiver effective as of
March 31, 1999.
10.3 Note and Warrant Purchase Agreement between Albion Alliance and the
Registrant dated as of August 25, 1998 (incorporated by reference to Exhibit
10.2 to the Registrant's Current Report on Form 8-K filed September 11, 1998).*
10.4 First Amendment to Note and Warrant Purchase Agreement effective as
of December 7, 1998.
27.1. Financial Data Schedule
* Includes Schedule I showing additional party to and differing terms of
substantially identical document.
No reports on Form 8-K were filed with the SEC during the quarter ended March
31, 1999.
12
<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: May 17, 1999 By: /s/ WILLIAM B. ADAMS
--------------------
William B. Adams
Chairman and Chief Executive
Officer
Date: May 17, 1999 By: /s/ MARK D. BUCKNER
--------------------
Mark D. Buckner
Chief Financial Officer,
Corporate Secretary,
and Senior Vice President
13
<PAGE>
[LOGO]
FIRST AMENDMENT TO CREDIT AGREEMENT AND WAIVER
This First Amendment and Waiver ("Amendment") amends that certain Credit
Agreement ("Agreement"), dated December 2, 1998, by and between Imperial Bank
("Bank") and Eco Soil Systems, Inc., a Nebraska Corporation, Aspen Consulting
Companies, Inc., a Colorado Corporation, Turf Specialty, Inc., a Delaware
Corporation, Eco Turf Products, Inc., a Delaware Corporation, Mitigation
Services, Inc., a Delaware Corporation, Agricultural Supply, Inc., a Delaware
Corporation, Benham Chemical Corporation, a Michigan Corporation, Turf
Acquisition Sub, Inc., a Delaware Corporation, and Yuma Acquisition Sub,
Inc., a Delaware Corporation (collectively, "Borrower") and waives certain
covenant breaches in the Agreement as follows:
I. Borrower is in default of the following sections of the Agreement:
4.05(a) MONTHLY FINANCIAL STATEMENT. As soon as available, and in any
event within thirty (30) days after the close of each month, a
consolidated balance sheet, profit and loss statement and reconcilation
of Borrower's capital balance accounts as of the close of such period
and covering operations for the portion of Borrower's fiscal year
ending on the last day of such period, all in reasonable detail and
reasonably acceptable to Bank, in accordance with generally accepted
accounting principles on a basis consistently maintained by Borrower
and certified by an appropriate officer of Borrower.
Borrower is currently past due for the January 31, 1999 monthly
financial statement.
4.06 MODIFIED QUICK RATIO. Maintain at all times a consolidated
minimum ratio of total accounts receivable divided by total Trading
Liabilities (meaning the total of Revolving Loans, accounts payable and
accrued liabilities) of .85 to 1.00.
The modified quick ratio as of December 31, 1998 was approximately
.63:1.00 which is below the minimum.
4.07 TRADING CAPITAL. Maintain at all times consolidated Trading
Capital (meaning total accounts receivable and inventory minus total
Trading Liabilities as defined in section 4.06) of not less than
fifteen million dollars ($15,000,000).
The trading capital as of December 31, 1998 was approximately
$12,503,000 which is below the minimum.
4.08 EFFECTIVE TANGIBLE NET WORTH. Maintain at all times a
consolidated Effective Tangible Net Worth (defined as (a) stockholder's
equity (including without limitation preferred stock) less any value
for goodwill, trademarks, patents, copyrights, leaseholds, organization
expense and other similar intangible items, and any amounts due from
stockholders, officers and affiliates plus (b) subordinated debt
including, without limitation, the $15,000,000.00 offering of senior
subordinated notes with detachable warrants offered pursuant to the
Note and Warrant Purchase Agreement and the Common Stock Purchase
Warrant, each dated as of August 25, 1998) of not less than thirty-six
million dollars ($36,000,000).
The Effective Tangible Net Worth as of December 31, 1998 was
approximately $29,752,000 which is below the minimum.
4.09 TOTAL LIABILITIES TO EFFECTIVE TANGIBLE NET WORTH. Maintain at all
times a consolidated ratio of total liabilities to Effective Tangible
Net Worth (as defined in section 4.08) of not greater than .75 to 1.00.
The ratio of total liabilities to Effective Tangible Net Worth as of
December 31, 1998 was approximately .79:1.00 which is above the maximum.
4.10 PROFITABILITY. Maintain on a consolidated basis, profitable
operations (meaning a net profit after taxes) of at least one dollar
($1) on an annual (calendar year) basis.
Profitable operations as of December 31, 1998 was a negative value
which is below the minimum.
<PAGE>
ECO SOIL SYSTEMS INC.
AMENDMENT NO. 1
PAGE 2
5.06 LOSSES. Incur losses in the first quarter of fiscal 1999 (ended
March 31) of greater than two million five hundred thousand dollars
($2,500,000) or incur quarterly losses in excess of one dollar ($1) in
any two consecutive calendar quarters.
Quarterly losses as of 4th quarter ending December 31, 1998 were
approximately $12,170,000 and 1st quarter losses ending March 31, 1999
are anticipated to be approximately $2,675,000 which together are a
violation of this covenant.
2. Bank hereby waives the aforementioned covenant defaults for the periods
ending December 31, 1998 and March 31, 1999 only. The waiver contained herein
is specific as to contents and time as shall not be construed as waiving any
other past, presently existing or future noncompliance with any covenant of
the Agreement and in no way affects any rights and remedies that Bank may
have with respect to any other noncompliance with any other covenant of the
Agreement.
3. Section 4.05(a) of the Agreement is hereby amended to read in its
entirety as follows:
"MONTHLY FINANCIAL STATEMENT. As soon as available, and in any event
within thirty (30) days after the close of each month, a consolidated
balance sheet, profit and loss statement and reconcilation of
Borrower's capital balance accounts as of the close of such period and
covering operations for the portion of Borrower's fiscal year ending on
the last day of such period, all in reasonable detail and reasonably
acceptable to Bank, in accordance with generally accepted accounting
principles on a basis consistently maintained by Borrower and certified
by an appropriate officer of Borrower."
4. Section 4.06 of the Agreement is hereby amended to read in its
entirety as follows:
"MODIFIED QUICK RATIO. Maintain at all times a consolidated minimum
ratio of total accounts receivable divided by total Trading Liabilities
(meaning the total of Revolving Loans, accounts payable and accrued
liabilities) of .55 to 1.00."
5. Section 4.07 of the Agreement is hereby amended to read in its entirety
as follows:
"WORKING CAPITAL. Maintain at all times consolidated Working Capital of
not less than eleven million five hundred thousand dollars
($11,500,000)."
6. Section 4.08 of the Agreement is hereby amended to read in its entirety
as follows:
"EFFECTIVE TANGIBLE NET WORTH. Maintain at all times a consolidated
Effective Tangible Net Worth (defined as (a) stockholder's equity
(including without limitation preferred stock) less any value for
goodwill, trademarks, patents, copyrights, leaseholds, organization
expense and other similar intangible items, and any amounts due from
stockholders, officers and affiliates plus (b) subordinated debt
including, without limitation, the $15,000,000.00 offering of senior
subordinated notes with detachable warrants offered pursuant to the
Note and Warrant Purchase Agreement and the Common Stock Purchase
Warrant, each dated as of August 25, 1998) of not less than
twenty-seven million two hundred fifty thousand dollars ($27,250,000)."
7. Section 4.09 of the Agreement is hereby amended to read in its entirety
as follows:
"TOTAL LIABILITIES TO EFFECTIVE TANGIBLE NET WORTH. Maintain at all
times a consolidated ratio of total liabilities to Effective Tangible
Net Worth (as defined in section 4.08) of not greater than 1.25 to 1.00"
<PAGE>
ECO SOIL SYSTEMS INC.
AMENDMENT NO. 1
PAGE 3
8. Section 4.10 of the Agreement is hereby amended to read in its entirety
as follows:
"Maintain, at all times, from June 30, 1999, through December 31, 1999,
on a consolidated basis, year to date profitability of at least one
dollar ($1.00)."
9. A new Section 5.07 is hereby added to the agreement to read in its
entirety as follows:
"PREPAYMENT ON DEBT. Make any principal prepayments on any of
Borrower's obligations, including but not limited to the $15,000,000.00
offering of senior subordinated notes with detachable warrants offered
pursuant to the Note and Warrant Purchase Agreement and the Common
Stock Purchase Warrant, each dated as of August 25, 1998."
10. A new Section 6.11 is hereby added to the Agreement to read in its
entirety as follows:
"LOAN RESTRUCTURE. Failure of Borrower to complete, by April 16, 1999,
documentation to replace the Revolving Line of Credit with a
formula-based accounts receivable inventory line of credit with a 75%
advance rate on eligible accounts receivable and a 35% advance rate on
eligible inventory, with advances thereunder bearing interest at the one
percent (1.00%) in excess of the Prime Rate and with Borrower required
to submit a monthly borrowing base certificate along with accounts
receivable and accounts payable agings and an inventory certificate in
form acceptable to Bank. This restructuring shall include establishment
of a lock box service with Bank and appropriate notices to Borrower's
account debtors regarding lock box payments."
11. Except as provided above, the Agreement remains unchanged and the
parties hereby confirm that the Agreement as herein amended is in full
force and effect.
12. This Amendment is effective as of March 31, 1999, and upon (i)
Borrower's payment to Bank of a waiver fee in the amount of $25,000 and (ii)
Bank's receipt of a fully executed waiver, satisfactory to Bank of any Event
of Default or Potential Event of Default (all as defined therein) under
Borrower's 12.00% Senior Subordinated Note due 2003, and the parties hereby
confirm that the Agreement as amended is in full force and effect.
ECO SOIL SYSTEMS, INC.
"Borrower"
By: /s/ William B. Adams
----------------------------
Title: CEO
-------------------------
IMPERIAL BANK
"Bank"
By: /s/ Peter M. Drees
----------------------------
Title: Assistant Vice President
-------------------------
<PAGE>
EXHIBIT 10.4
FIRST AMENDMENT TO NOTE AND WARRANT PURCHASE AGREEMENT
This Amendment ("Amendment") amends that certain Note and Warrant Purchase
Agreement (the "Agreement") dated as of August 25, 1998, and executed by Eco
Soil Systems, Inc., in favor of the purchasers listed in the Schedule A
attached thereto as follows:
1. The phrases "or the IB Credit Agreement" is hereby inserted immediately
after the phrase "the Credit Agreement" in each of the places it appears in
Section 13.2.
2. The following new definition is hereby added, alphabetically, to
Section 14 to read in its entirety as follows:
"IB CREDIT AGREEMENT" that certain agreement entitled "Credit
Agreement," dated as of December 7, 1998, by and between the Company and
Imperial Bank, as amended from time to time."
3. Except as provided above, the Agreement remains unchanged.
4. This Amendment is effective as of December 7, 1998, and the parties
hereby confirm that the Agreement as amended is in full force and effect.
ECO SOIL SYSTEMS, INC.
By: /s/
----------------------------
Title:
-------------------------
ALBION ALLIANCE MEZZANINE FUND, L.P.
By Albion Alliance L.L.C.
Its General Partner
By: /s/
------------------------
Title:
---------------------
PARIABAS CAPITAL FUNDING LLC
By: /s/ [ILLEGIBLE]
------------------------------
Title:
--------------------------
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 892
<SECURITIES> 0
<RECEIVABLES> 18,480
<ALLOWANCES> 1,893
<INVENTORY> 14,464
<CURRENT-ASSETS> 39,969
<PP&E> 17,572
<DEPRECIATION> 5,316
<TOTAL-ASSETS> 74,100
<CURRENT-LIABILITIES> 24,283
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0
0
<COMMON> 86
<OTHER-SE> 24,191
<TOTAL-LIABILITY-AND-EQUITY> 74,100
<SALES> 17,252
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<CGS> 13,315
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<INCOME-PRETAX> (4,800)
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<INCOME-CONTINUING> (4,800)
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