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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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, CA 92127
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
REGISTERED
COMMON STOCK, $.005 PAR VALUE NASDAQ NATIONAL MARKET
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 25, 1999, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $101,266,053.
As of March 25, 1999, the number of shares outstanding of the Registrant's
Common Stock, $.005 par value, was: 16,802,888.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders of the
Registrant to be held June 4, 1999, which will be filed on or prior to April 30,
1999.
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FORWARD-LOOKING STATEMENTS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Statements contained in
this document that are not based on historical fact are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. To the extent statements in this report involve, without
limitation, product development and introduction plans, the Company's
expectations for growth, estimates of future revenue, expenses, profit, cash
flow, balance sheet items, sell-through or backlog, forecasts of demand or
market trends for the Company's various product categories and for the
industries in which the Company operates or any other guidance on future
periods, these statement are forward-looking statements. Forward-looking
statements also may be identified by use of forward-looking terminology such
as "may," "will," "expect," "estimate," "anticipate," "believe," "continue"
or similar terms, variations of those terms or the negative of those terms.
These risks and uncertainties include those identified by the Company under
the caption "Factors That Could Affect Future Performance" in Item 1, and
other risks identified from time to time in the Company's filings with the
Securities and Exchange Commission, press releases and other communications.
The Company assumes no obligation to update forward-looking statements.
PART I
ITEM 1. BUSINESS
GENERAL
Eco Soil Systems, Inc. (the "Company") develops, markets and sells
proprietary biological and traditional chemical products that provide
solutions for a wide variety of turf and crop problems in the golf and
agricultural industries. The Company has developed its patented BioJect-R-
system for the distribution of naturally occurring microbes that complement
or reduce the need for many chemical products currently used in golf and
agricultural markets. The Environmental Protection Agency ("EPA") has approved
the BioJect as a means of application for biopesticides and the BioJect is
described as the application method under the directions for use on the
Company's first EPA registered exclusive microbe product. By fermenting
microbes at the customer's site and distributing them through the customer's
existing irrigation system, the BioJect system provides customers with cost
savings and mitigates the adverse environmental effects associated with
chemical products. The Company initially focused its sales and marketing
efforts on the golf market and recently has entered the agricultural crop
markets.
By utilizing microbes that occur naturally in the environment, the
BioJect system overcomes many of the problems associated with traditional
chemical products. Traditional chemical products require repeated
applications, which can lead to pest resistance and adverse environmental
effects. The BioJect system reduces the frequency rate of chemical product
application, resulting in lower overall product and labor cost and increases
the effectiveness of traditional chemical products. In addition, the Company
believes that the use of microbes distributed through the BioJect system
provides environmental benefits as compared to chemical product applications
by limiting the exposure of humans to chemical products, reducing residual
pesticide contaminants in plants and soil, and minimizing groundwater
pollution.
The BioJect system overcomes many of the obstacles that historically have
hindered wide-spread use of microbes in the golf and agricultural industries.
Biological products generally have been perceived as economically infeasible
because of their short shelf life, rapid deterioration upon exposure to light or
heat, specialized transportation requirements and need for daily, manual
applications. By fermenting microbes at the customer's site and distributing
them through the customer's existing irrigation system, the BioJect system
preserves and protects the potency of microbes, significantly reduces shipping
costs, controls the concentration of product and allows for automated daily
application.
The Company generates recurring revenues by leasing BioJect systems to
customers and selling various microbial products for distribution through the
system. The Company has entered into technology transfer agreements pursuant
to which it has obtained rights to certain microbes for distribution through
the BioJect system
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from leading biotechnology companies such as Mycogen Corporation, Abbott
Laboratories and Encore Technologies, Inc. and major universities such as
Michigan State University and the University of California, Riverside. The
Company currently offers BioJect customers a menu of six microbial products
and intends to obtain rights to additional microbes.
In addition to its BioJect and related microbial product line, the
Company sells a complete line of traditional chemical fertilizers and
pesticides and other turf maintenance products through Company-owned dealers
and distributors. These distributed products include branded pesticides,
fertilizers, seed, and other turf maintenance products from major
agricultural manufacturers.
The Company also has developed, and will continue to develop, a series
of packaged products for the turf market under the name FreshPack-TM-. The
FreshPack products, which contain certain microbes together with other soil
amendments, are designed to address several problems encountered by the
Company's golf course customers by helping them to develop stronger root
systems, reduce the level of soil alkalinity, increase the level of oxygen in
the soil and increase the porosity of the soil. The FreshPack products are
fermented centrally and then shipped via overnight or second day delivery to
the customer to be immediately applied to the problem area of the course.
The Company views its FreshPack product line as a method to introduce turf
customers to its biological products and demonstrate their effectiveness.
The Company believes that customers' experience with the FreshPack product
line will encourage them to lease BioJect machines and purchase the
associated microbial products.
The Company offers a complete program to the agriculture market
consisting of various soil analysis to establish a customized program regimen
delivered through the Company's proprietary equipment, the BioJect and
CalJect. The programs' goals are to utilize soil remediation and microbial
activity to move soil pH towards neutral, improve soil structure and
infiltrate and release nutrients through increased mineralization and organic
matter degradation. The Company performs the soil analysis at the beginning
of the season, develops a treatment regimen, installs and services the
equipment at the customer's site and provides the microbials and other soil
additive products for the customer to use throughout the crop's growing
season.
HISTORY
The Company was incorporated under Nebraska law in November 1987. The
Company initially marketed a program that developed blended fertilizers and
soil amendments to golf courses and to other residential and commercial
customers in the Lincoln, Nebraska area. In 1991, the Company decided that it
needed a broader strategic vision and, consequently, concentrated on the
development of biological inoculation service and nutrient programs. In the
next several years, the Company developed its BioJect, CleanRack-TM-,
CalJect-TM- and SoluJect-TM- systems for distribution to the turf maintenance
industry. See Item 1: "Business."
STRATEGY
The Company's strategy is to expand its leadership position in the
distribution and sale of microbial products in the golf industry and to
leverage its experience in this industry into the agricultural crop market.
INCREASE PENETRATION OF GOLF MARKETS. The Company currently has an
installed base of BioJect systems dispersed among 24 states and 7 countries.
The Company intends to continue to focus its sales and marketing efforts on
increasing the number of installations of its BioJect system and expanding
the number of menu items sold to each customer. The Company also intends to
utilize its installed base to further increase the volume of sales of
distributed products. The Company believes that its strategy of leasing
rather than selling BioJect systems promotes a more rapid expansion of its
customer base by relieving its customers of having to make substantial
capital investments. In order to increase awareness of the effectiveness of
biological products and to generate additional income, the Company intends to
actively market its Fresh Pack products to golf industry customers. The
Company believes that as it demonstrates the advantages of its proprietary
products, the use of biological products in the golf industry will become
more widespread and the Company will be well positioned to exploit new market
opportunities.
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ESTABLISH NATIONWIDE SALES AND DISTRIBUTION NETWORK. Major golf course
markets tend to be represented by a single sales organization that controls a
significant portion of new product introductions and subsequent penetration
into golf courses in their regions. This distribution network is highly
regionalized and based strongly on individual relationships. In 1996 and
1997, the Company made three acquisitions in regional markets including New
England, the Chicago metropolitan area and Southern California. In 1998, the
Company expanded its presence in the Midwest with its acquisition of Benham
Chemical Corporation ("Benham"), a golf and turf products supplier in
Michigan, and Cannon Turf Supply, Inc. ("Cannon"), another supplier with
operations in Illinois, Indiana, Kentucky, Michigan, Ohio and Wisconsin. In
December 1998, the Company consolidated its acquired turf market distributors
through merger, and the name of the surviving entity was changed to Turf
Partners, Inc. ("Turf Partners"). Also, in December 1998, the Company
entered into an agreement with The Scotts Company ("Scotts") to exclusively
distribute Scotts' professional turf care products to portions of the Midwest
and Northeast. As part of the agreement, Turf Partners hired a number of
Scotts' sales people. The Company believes that these experienced sales
people will be able to introduce their historical customer base to the
Company's proprietary products and help retain a significant portion of the
revenue that Scotts has historically generated in the exclusive territories.
The Company believes that the agreement with Scotts will provide Turf
Partners with new market penetration usually associated with an acquisition
without the corresponding capital expenditure. The Company intends to
continue to hire selected personnel and to integrate them into a single sales
organization in order to enhance the Company's ability to market and sell its
proprietary products, establish itself as a single source supplier to golf
courses and increase its penetration into golf markets. The Company believes
that this consolidation of golf dealers and distributors also may improve the
Company's ability to obtain volume discounts from suppliers.
EXPAND INTO AGRICULTURAL MARKETS. The Company currently has installed
its proprietary products on more than 25,000 acres of farmland. Although the
Company initially set its attention on golf applications for the BioJect
system, the Company has begun to focus on the agricultural crop market and
expects the agricultural market to be its primary area of growth over the
long term. By combining its proprietary BioJect and CalJect products in a
single program the Company has been successful in reducing the alkalinity of
its customers' soil, increasing the crops' nutrient uptake and reducing the
number of pathogens in the soil. When combined with micro-irrigation
systems, the Company's proprietary products have allowed customers to
increase both the quantity and quality of their fruit production. The
Company intends to market its products into the agricultural markets
principally through the acquisition of independent distributors of
micro-irrigation products. In April 1998, the Company acquired Agricultural
Supply, Inc. ("Agricultural Supply"), a distributor of micro-irrigation
products in Southern California and Mexico. The acquisition of Agricultural
Supply included a 50% interest in Agricultural Supply de Mexico ("ASM"),
Agricultural Supply's Mexican affiliate. In June 1998, the Company acquired
Controlled Irrigation International, Inc. (dba Yuma Sprinkler and Pipe
Supply) ("Yuma Sprinkler"), a distributor of micro-irrigation products in
Arizona and Mexico. Also in June 1998, the Company acquired Riegomex S.A. de
C.V. ("Riegomex") and the remaining 50% interest in ASM. By purchasing
additional dealers and distributors of micro-irrigation products and hiring
selected personnel, the Company believes that it can develop an integrated
sales force and penetrate the agricultural markets with its proprietary
products. The Company believes that this consolidation of agricultural
micro-irrigation dealers and distributors, like the consolidation of its turf
dealers and distributors, may improve the Company's ability to obtain volume
discounts from its suppliers.
INCREASE NUMBER OF MICROBIAL MENU ITEMS. In order to maximize the
revenues it generates from each BioJect system, the Company intends to expand
the selection of microbes it offers to its customers. To this end, the
Company has entered into discussions with various leading biotechnology
companies and major universities to obtain rights to additional microbes. The
Company also has increased its research and development efforts to determine
which microbes will be suitable for distribution through the BioJect system.
PRODUCTS
The Company sells proprietary products and distributed products. The
Company's proprietary products primarily include its patented BioJect system,
its menu of six microbial products, its Fresh Pack microbial products, its
CalJect and SoluJect systems and certain other proprietary products,
including its CleanRack system. The
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Company discontinued its ClearLake system in 1997. The Company's distributed
products consist of traditional seed, fertilizers, and pesticide products that
are distributed through the Company's dealers and distributors in the golf
market and micro-irrigation products which are sold in the agriculture market.
PROPRIETARY PRODUCTS.
The Company's proprietary products consist of (i) the BioJect system, which
automatically ferments and distributes microbes through irrigation systems, (ii)
the CalJect and SoluJect systems, which permit the injection of soil and water
amendments into irrigation systems, (iii) the Fresh Pack line of products, which
are packaged biological and soil amendments, and (iv) other proprietary
products, including the CleanRack system.
BIOJECT SYSTEM
The BioJect system permits the introduction of microbes into the soil
with the required frequency and in a cost-effective and environmentally safe
manner. Because biological products are subject to degradation upon exposure
to high temperatures, light or long storage periods, the introduction of
these microbes into the soil on a regular basis had not been economically
feasible prior to the development of the BioJect system. The BioJect system
overcomes the traditional problems associated with the introduction of
microbes into the soil by fermenting them at the customer's site during the
day and then dispensing the microbes into the customer's irrigation system
automatically at night. The BioJect system includes fermentation chambers,
pumps, injectors and computer controls that coordinate the scale-up of
microbial products and their injection into the customer's irrigation system.
The BioJect system is equipped with hardware and proprietary software that
allow the user to select or pre-program the microbe application rate and time
of delivery through its user-friendly control panel. The system also
automatically controls the amount of nutrients, dissolved oxygen, temperature
and pH of the fermentation chamber to optimize the scale-up of microbial
populations from a starter culture.
The Company believes that its BioJect system will become the preferred
distribution vehicle for many microbial products because it is able to overcome
the poor shelf life characteristics that have previously prevented biological
products from being practical alternatives or complements to chemical products.
The BioJect system has been designed to apply up to three microbial
products at a time. The Company is the sole supplier of all of the
consumables (biologicals and media) that are required in its BioJect system,
as well as hardware maintenance services. The BioJect system is the Company's
primary product, and the Company intends to focus most of its efforts on
enhancing the capabilities of and promoting the BioJect system to the golf
industry and the expansion of its BioJect system into the agricultural
ornamental and crop industries.
The Company's installed base of BioJect systems has experienced rapid
growth in recent years, as shown in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CUMULATIVE NUMBER OF INSTALLED BIOJECT SYSTEMS 46 79 171 238 290 458
</TABLE>
THE COMPANY HAS SOLD OR LEASED ITS BIOJECT SYSTEM TO SOME OF THE MOST
FAMOUS AND NOTABLE GOLF COURSES IN THE WORLD, INCLUDING THE FOLLOWING:
- - AVIARA GOLF CLUB (CA) - POINT-O'WOODS COUNTRY CLUB (MI)
- - BALTIMORE COUNTRY CLUB (MD) - ROYAL BRUNEI GOLF AND COUNTRY CLUB (BRUNEI)
- - JOHN'S ISLAND CLUB (N,W&S) (FL) - SKOKIE COUNTRY CLUB (IL)
- - JUPITER HILLS CLUB (FL) - SPYGLASS HILL GOLF CLUB (CA)
- - LEOPARD CREEK GOLF COURSE - SUN CITY RESORTS -- LOST CITY GOLF COURSE
(S. AFRICA) - TRES VIDAS GOLF COURSE (MEXICO)
- - NORTH SHORE COUNTRY CLUB (IL) - WESTCHESTER COUNTRY CLUB (NY)
- - PELICAN HILL GOLF CLUB (CA) - WINGED FOOT GOLF CLUB (NY)
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The Company offers a menu of six microbial products that can be
delivered through its BioJect system. The BioJect system has evolved from
delivering only bacteria of the Bacillus family to delivering a variety of
microbial products. The Company licenses and/or acquires such microbes from
universities and corporations. These products appear on the Company's BioJect
menu and complement or reduce the need for many chemical fungicides,
herbicides, insecticides and fertilizers. The consumable product in each menu
item is a microbe, and each microbe is cultured in the BioJect system under a
proprietary formula. Different microbes are used for different applications
due to their mode of action or performance characteristics.
Set forth below is a table showing the name of each of the Company's
microbial products, the Company's rights to the microbe, the source of the
microbe and the application for each microbe.
<TABLE>
<CAPTION>
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MICROBE NAME SOURCE COMPANY'S RIGHTS USE
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<S> <C> <C> <C>
BACILLUS Spp. Chr. Hansen, Inc. Public Domain Improves soil porosity to enhance plant
growth
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AZOSPIRILLUM BRASILENSE Cd Encore Technologies, Exclusive worldwide license Converts atmospheric nitrogen into plant
Inc. for use through the BioJect available form; enhances root and top
("Encore") system growth of plants
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CELLULOMONAS Sps. Encore Public Domain Helps reduce thatch layer to enhance
turf growth
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PSEUDOMONAS AUREOFACIENS Encore/Michigan State Assignment of rights granted Promotes organic matter degradation and
TX-1 (Spot-less-TM-) University to Encore under exclusive other activities in the soil and turf
worldwide license from environment that minimizes the
Michigan State University conditions conductive to the development
of certain turfgrass diseases (EPA Reg.
No. 70688-1)
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BACILLUS THURINGIENSIS Abbott Laboratories Non-exclusive distribution Biological insecticide for the control
(DiPel 2x) rights of armyworms and sod webworms in turf
(EPA Reg. No. 275-37)
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XANTHOMONAS CAMPESTRIS pv poa Mycogen Corporation/ Rights under worldwide Experimental Use Permit as a selective
(Xpo-TM-) Michigan State Michigan license from postemergent biological control of Poa
University acquired State University annua
from Mycogen Corporation
(not salable in Japan)
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</TABLE>
The Company has obtained exclusive rights to several microbes pursuant
to a license and supply agreement with Encore and certain assignments of
intellectual property made by Encore to the Company. The license and supply
agreement provides for an exclusive, worldwide, royalty-free license to use,
sell and distribute AZOSPIRILLUM BRASILENSE Cd for application through the
BioJect system. In addition, Encore has assigned to the Company all of
Encore's rights to media (proprietary material formulations used to promote
fermentation and multiplication of microbial products in the BioJect system)
and rights to PSEUDOMONAS AUREOFACIENS TX-1 (Spot-less) that Encore obtained
under a license agreement with Michigan State University. Under the license
and supply agreement with Encore, Encore is obligated to produce cultures of
microbial products suitable for fermentation in BioJect systems ("Inoculum"),
and the Company has agreed to purchase certain minimum amounts of Inoculum
from Encore.
To increase the menu of items for use in its BioJect system, the Company
intends to enter into additional licensing agreements with leading
biotechnology companies and major universities once new microbial products
have been proven effective. To meet the technical challenges associated with
the task of optimizing the scale-up of these distinct microbes within the
BioJect system and distributing them within the irrigation cycle, the Company
has entered into research and development agreements with companies
specializing in the fermentation of microbes. The Company also intends to
bring more technical expertise in-house in order to evaluate new microbial
products, maximize the value of its programs and gain more expertise in the
area of registration and labeling requirements.
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CALJECT AND SOLUJECT SYSTEMS
The Company's CalJect system permits the injection of soluble soil and
water amendments into irrigation systems. The Company's SoluJect system
performs the same function as the CalJect System and is installed principally
at golf courses because of the SoluJect system's smaller tank size. The
Company has developed ESSI Soluble Gypsum, a soil amendment, specifically for
distribution through the CalJect and SoluJect systems. ESSI Soluble Gypsum
combats water salinity, soil alkalinity and bicarbonate problems most often
encountered by golf courses and growers in the Western United States and
Mexico. The Company believes that use of the CalJect and SoluJect systems and
ESSI Soluble Gypsum can reduce golf courses' and growers' water consumption
and improve turf quality and crop yields.
As golf courses and growers irrigate with poor quality water, salts
accumulate in their soils. These salts damage soil and roots, reducing turf
quality and crop yields. The Company believes that approximately 20% of water
used on golf courses in the western United States is used to leach the excess
salt that accumulates in the soil. Eliminating the need for such extra water
could mean significant savings for golf courses. In addition, alkaline soils
typically found in the Western United States and Mexico harm turf and crops
by poisoning roots, blocking nutrient uptake and impeding water infiltration.
The CalJect and SoluJect systems provide for automatic application of water
and soil amendments through irrigation systems to address these problems.
The CalJect and SoluJect systems convert the Company's water and soil
amendment products, including ESSI Soluble Gypsum, into solution form and
inject them into an irrigation system. The Company designs and implements a
customized CalJect or SoluJect program for each of its customers based on
soil and water test results. The Company monitors the success of each program
and prepares a soil and water analysis for each customer. Independent
consultants make on-going recommendations based on the results of such
analyses.
FRESHPACK PRODUCTS
The Company has developed, and intends to continue to make commercially
available, a series of packaged products, named the FreshPack line of
products, which contain certain microbes together with various soil
amendments. The FreshPack products are designed to address various problems
encountered by the Company's golf course customers by helping them to develop
stronger root systems, reduce the level of soil alkalinity, increase the
level of oxygen in the soil and increase the porosity of the soil. The
FreshPack products are fermented centrally and then shipped via overnight or
second day delivery to the customer to be immediately applied to the problem
area of the course. The Company views its FreshPack product line as a method
to introduce turf customers to its biological products and demonstrate their
effectiveness and, in turn, encourage the leasing of additional BioJect
machines and the sale of associated microbial products.
OTHER PROPRIETARY PRODUCTS
The Company also offers the CleanRack system, an equipment wash rack and
water treatment system that recycles contaminated equipment wash water,
making it suitable for recycling or discharge. The CleanRack system is
designed to decontaminate wash water so that it complies with applicable
state and federal environmental and safety regulations and is suitable for
discharge or can be safely recycled.
DISTRIBUTED PRODUCTS
In addition to the proprietary products described above, the Company
also sells a complete line of traditional chemical fertilizers and pesticides
and other turf maintenance products through Company-owned dealers and
distributors. In order to meet all of its customer's turf maintenance needs,
the Company's distributors keep in stock an inventory of branded pesticides,
fertilizers, seed, and other necessary products from many agricultural
manufacturers. Such products include fertilizers from Scotts, Lebanon Chemical
Corporation, The Doggett Corp., Growth Products Ltd., Plant Marvel
Laboratories, Inc., The Andersons, Vicksburg Chemical Company, IMC Vigoro and
pesticides from Bayer Corporation, Novartis Corporation, PBI Gordon
Corporation, Kincaid Enterprises, Rhone-Poulenc AG Company and Rohm, Haas
Company and Scotts Company. In the agriculture industry, the Company
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sells a number of micro-irrigation products as well as pumps and piping.
These products are manufactured by T-Systems, Inc., Spears Manufacturing,
Hydro Agri, and United Agriculture Products, Inc.
SALES AND DISTRIBUTION
The Company has focused on establishing sales and distribution
capabilities by acquiring independent product dealers and distributors and
integrating them into a single, nationwide sales organization to promote
sales of the Company's BioJect and CalJect/SoluJect systems to golf courses
and agriculture. To date, the Company has acquired five independent golf
product distributors, which are located in New England, the Chicago
metropolitan area, Indianapolis, Detroit and the Palm Springs area. The
Company also has hired sales and other key personnel to establish a regional
presence in Southern California and Pennsylvania. The Company currently has
85 sales and marketing personnel divided among three sales regions covering
the Eastern, Midwestern and Western parts of the United States. Each region
has its own general manager responsible for maintaining customer satisfaction
and expanding the Company's customer base. The Company has also acquired four
distributors of micro-irrigation products, which are located in Southern
California and Arizona and have substantial operations in Mexico. The
Company currently has 14 sales people in agriculture.
In December, 1998, the Company signed a contract with Scotts to
exclusively market and distribute fertilizer products to the golf course
industry in 24 states. As a result, the Company hired 25 sales
representatives formerly with Scotts, who will actively market the Scotts
products and all of the other products the Company offers in geographic areas
previously served by independent distributors.
DISTRIBUTION TO GOLF MARKETS
In general, major golf course markets are represented by a single sales
organization that controls a significant portion of new product introductions
and subsequent penetrations into golf courses in their regions. Prior to the
Company's initial dealer acquisitions in May 1996, the Company sold its
proprietary products primarily through direct sales efforts and relationships
with certain regional dealers. By expanding its distribution capabilities
using full-service turf products dealers, the Company has been able to
leverage existing distributor relationships to more effectively sell its
proprietary products.
In early 1996, the Company initiated its strategy of consolidating its
golf distribution network through acquiring independent products distributors
and hiring key sales personnel. In May 1996, the Company acquired Turf
Products, Ltd. ("Turf Products"), a Chicago-based company that markets and
sells fertilizers, pesticides, grass seed and soil amendments to golf courses
throughout the greater Chicago metropolitan area, and Turf Specialty, Inc.
("Turf Specialty"), a New Hampshire-based company that markets and sells
similar products to golf courses and municipalities throughout the New
England region. In February 1997, the Company acquired substantially all of
the assets of Turfmakers, Inc. ("Turfmakers"), a turf products distributor in
the Palm Springs area. In March 1998, the Company acquired Cannon, an
Indianapolis-based company that markets and sells fertilizers, pesticides,
grass seed and soil amendments to golf courses throughout the Midwest, and
Benham, a Detroit-based company that markets and sells fertilizers,
pesticides, grass seed and soil amendments to golf courses throughout
Michigan. Turf Products, Turf Specialty, Turfmakers, Cannon and Benham are
established in the turf maintenance industry for golf course markets in the
greater Chicago, New England, Palm Springs, Midwest and Michigan areas,
respectively. While other dealers in these markets generally compete for
market share through aggressive pricing, the Company has adopted a
value-added, customer service focus, which is essential for introducing
technologically-advanced, proprietary products such as the BioJect system.
The Company expects to increase its market penetration in the geographic
areas served by its dealers and distributors by hiring additional sales
personnel (including the salespeople hired from Scotts) as well as opening
satellite warehouses to serve new customers.
As of December 23, 1998, the Company consolidated its acquired turf
market distributors through merger, and the name of the surviving entity was
changed to Turf Partners. Through Turf Partners, the Company serves the
golf market in three regions covering the Eastern, Midwestern and Western
parts of the United States. The Company believes that the establishment of
the Company's regional sales and distribution network will offer several
benefits to the Company,
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including (i) improved profitability due to increased sales of proprietary
products; (ii) improved overall financial results due to consolidated
operations; (iii) increased margins through volume discounts; and (iv)
increased visibility in golf markets and greater credibility in larger
markets such as the agricultural crop and ornamental industries.
Although the Company has focused on expanding sales through the
Company's acquired dealers and distributors, the Company maintains
relationships with three independent distributors. The Company supplements
the sales efforts of its acquired distributors, other regional distributors
and its direct sales force through seminars given by members of the Company's
Scientific Advisory Board on the benefits and efficacy of microbial products.
DISTRIBUTION TO AGRICULTURAL MARKETS
In early 1998, the Company initiated its strategy of consolidating its
agricultural distribution network through acquiring independent product
distributors and hiring key sales personnel. In April 1998, the Company
acquired Agricultural Supply (including a 50% interest in ASM), a distributor
of micro-irrigation products in Southern California and Mexico. In June 1998,
the Company acquired Yuma Sprinkler, a distributor of micro-irrigation
products in Arizona and Mexico. Also in June 1998, the Company acquired
Riegomex and the remaining 50% interest in ASM. By purchasing these
distributors of micro-irrigation products, the Company believes that it can
rapidly develop an integrated sales force that will allow it to penetrate the
agricultural markets. The Company intends to acquire additional dealers and
distributors to hire selected personnel and to integrate them into a single
sales organization in order to enhance the Company's ability to market and
sell its proprietary products and increase its penetration into the
agricultural market.
RESEARCH AND DEVELOPMENT
The Company has not engaged in its own research and development with
respect to the discovery of microbial products. Instead, the Company has
obtained rights to microbial products that have been proven effective for
applications in the turf maintenance and agricultural crop and ornamental
industries. Much of the Company's in-house research and development effort is
targeted at determining which microbes will be suitable for distribution
through the BioJect system and the engineering of the fermentation and
product delivery features of the BioJect system. The Company spent
approximately $584,000, $269,000 and $475,000 on research and development for
the years ended December 31, 1998, 1997 and 1996, respectively. The Company
believes its strategic objectives can best be met by combining its in-house
product development efforts with the licensing of technology and the
establishment of research collaborations with scientists at academic
institutions and at companies working in related fields. See "--Factors That
Could Affect Future Performance--No Assurance that Rights to Additional
Microbial Products Will Be Acquired."
GOVERNMENT REGULATION
The Company is subject to laws and regulations administered by federal,
state and foreign governments, including those requiring registration or
approval of fertilizers, pesticides, water treatment products and product
labeling. Prior to 1998, the Company had only one registered pesticide with
the EPA, BACILLUS THURINGIENSIS and had marketed its microbial products only
as soil inoculants. In 1998, the Company received two EPA approvals. First,
the Company registered with the EPA PSEUDOMONAS AUREOFACIENS TX-1 (Spot-less)
as a biofungicide for use in turf across the United States and received EPA
approval of the BioJect as a means of application of the microbe. Second,
the Company received EPA approval to use XANTHOMONAS CAMPESTRIS pv poa (Xpo)
as a bioherbicide in Experimental Use Permit ("EUP") trials for use in turf
across the United States. The Company believes its future sales will be
strengthened if the Company can secure approval of individual microbes as
pesticides.
In most countries, governmental authorities require registration of
pesticides before sales are allowed. In the United States, the EPA regulates
pesticides under the Federal Insecticide, Fungicide and Rodenticide Act
("FIFRA"). Pesticides are also regulated by the individual states such as
California which has its own extensive registration requirements. In order to
market pesticide products outside the United States, the Company must
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receive regulatory approval from the authorities of each applicable
jurisdiction. In addition, the EPA under the Federal Food, Drug and Cosmetic
Act ("FFDCA") establishes standards for residues in food to protect health.
Detailed and complex procedures must be followed in order to obtain
approvals under FIFRA to develop and commercialize a pesticide product. A
separate registration application must be submitted to the EPA for each
microbial product. Evaluation data for the registration include, but may not
be limited to, non-target organism testing, environmental data, product
analysis and residue chemistry, and toxicology (hazards to human beings and
domestic animals).
The EPA has established reduced testing requirements for registration of
microbial pesticides, which are set out in Subdivision M of the EPA's
Pesticide Assessment Guidelines. Microbial pesticides are currently subject
to a three-tier toxicology testing procedure, and a four-tier environmental
evaluation process. If results of toxicology and environmental Tier 1 tests
do not suggest health and safety concerns, then subsequent tier testing is
not required. Additional tests may be required, however, in response to any
questions which may arise during any tier of testing. Registration of the
Company's pesticidal products may take between twelve months and five years
including the time necessary for collection of the necessary product data. If
only Tier 1 testing is required, the cost of registration is typically less
than $500,000. In contrast, synthetic chemical pesticides require much more
extensive toxicology and environmental testing to verify product safety prior
to receiving registration, which the Company estimates can take a total of
five to seven years or longer and can cost $5 to $10 million or more.
In July 1992, the EPA announced its "Reduced Risk Pesticide Policy"
initiative and is in the process of developing criteria for streamlining the
regulatory process. In June 1993, the Clinton Administration announced its
commitment to reduce the use of pesticides and promote sustainable
agriculture in the United States. The EPA, the United States Department of
Agriculture (the "USDA") and the Food and Drug Administration (the "FDA") are
all considering regulatory reforms. In testimony before Congress on September
21, 1993, the administrators of the USDA, the FDA and EPA stated their
intentions to work jointly to reduce risk associated with pesticides and to
facilitate the availability of alternative effective pest control products.
These policy initiatives and legislative reviews could in the future
accelerate the registration of biopesticides meeting "reduced risk" criteria,
but there can be no assurance of the impact or timing of these initiatives.
FIFRA allows laboratory and greenhouse testing and, usually, small-scale
field testing to be conducted prior to product registration, to evaluate
product efficacy and to gather data necessary to support an application. An
Experimental Use Permit ("EUP") must be obtained from the EPA to conduct
large-scale field testing prior to product registration. An EUP is required
for testing in one or more land sites greater than ten cumulative acres.
Issuance of an EUP normally requires satisfactory completion of certain
toxicology and environmental studies. Field testing of certain microbial
agents may require the approval of the Animal and Plant Health Inspection
Service ("APHIS"), an office of the USDA. APHIS approvals are granted on a
site specific basis, and additional state approvals may also be required.
For marketing and use of its products outside the United States, the
Company will be subject to foreign regulatory requirements. Such requirements
vary widely from country to country. In some instances foreign government
approval may require different or additional testing data than that required
by the EPA. Failure to achieve such registration would prevent the Company
from marketing its unregistered products as pesticides in those jurisdictions
where approval is not granted. While the Company exports certain of its
microbial products outside the United States, it does not currently market
any of its products as pesticides in any foreign countries.
In addition, the Company is currently subject to the Occupational Safety
and Health Act, the National Environmental Policy Act, the Toxic Substance
Control Act, the Resource Conservation and Recovery Act, the Clean Air Act
and the Clean Water Act and may be subject to other present and potential
future federal, state or local regulations. From time to time, governmental
authorities review the need for additional laws and regulations for pesticide
products that could, if adopted, apply to the business of the Company. The
Company is unable to predict whether any such new regulations will be adopted
or whether, if adopted, they will adversely affect its business. See
"Factors That Could Affect Future Performance--Government Regulation."
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PATENTS AND PROPRIETARY RIGHTS
The Company's success is dependent in large measure upon its ability to
obtain patent protection for its products and to maintain confidentiality and
operate without infringing upon the proprietary rights of third parties. The
Company has obtained and is seeking additional U.S. and foreign patents
covering both the process of automatically inoculating irrigation water with
biological products and the equipment, namely the BioJect system, used in
such process. Specifically, in 1993 the Company was granted two U.S. patents
that relate to the inoculation process and the related equipment. In 1995,
the Company was granted an additional patent relating to the automatic
inoculation of irrigation water through the use of a BioJect system designed
to "cleanse" itself so that it may grow, culture and dispense distinct
microbes or combinations of microbes on a daily basis. The 1995 patent also
expanded the scope of the invention to include irrigation systems covering
all types of vegetation, in addition to turf. In August 1995, the Company
submitted another patent application that covers a system that is designed to
grow and inject distinct microorganisms or combinations of microorganisms
selected on a preprogrammed basis. This application is still pending.
In addition to the patent applications described above, the Company has
registered or applied for registration of a number of trademarks used in its
business, and has obtained registered trademarks for the names including the
registration of its trade name "BioJect." The Company also relies on trade
secrets and proprietary know-how. See "Factors That Could Affect Future
Performance -- Patents, Proprietary Technology and Licenses."
MANUFACTURING AND SUPPLY
A majority of the parts and components utilized in the BioJect, CalJect
and SoluJect systems are standardized industrial components. The computer
controls and the fermentation tank used in the BioJect system are designed
and manufactured to Company specifications by third parties. The Company has
no contracts for supply of parts and components used in its systems. Instead,
the Company submits purchase orders for such items as needed. Parts and
components are shipped directly to the Company's third-party assemblers for
assembly and testing, and the Company's product management team oversees the
assembly and testing process. The completed BioJect, CalJect and SoluJect
systems are shipped by the assemblers to the Company's distributors or
directly to customers. The Company believes that it is not dependent on any
single manufacturer or source of supply.
The Company has established relationships with third party fermentation
specialists that prepare base cultures of microbes for fermentation and
distribution through the BioJect system. The Company maintains starter
cultures for each of its microbes to use for ongoing testing purposes and as
a backup culture supply.
The Company obtains distributed products directly from manufacturers.
The Company does not have any long-term distribution agreements with
distributed product manufacturers. The Company maintains an inventory of
distributed products and submits purchase orders on an as-needed basis. The
Company is an approved distributor for various well-known pesticide,
fertilizer and seed manufacturers, including IMC Vigoro, Bayer Corporation,
Novartis Corporation and Rhone-Poulenc AG Company.
COMPETITION
The Company's principal competitors with respect to its primary products
are described below:
BIOJECT SYSTEM. The Company's BioJect system competes against
traditional chemical insecticides and fungicides, chemical soil penetrants,
acid injection systems, and the direct, manual application of cultured
microbial products. Although the Company believes that none of its
competitors offers an automated means of regularly applying microbial
products to turf and crops in an effective manner, many of the Company's
competitors have substantially greater financial, technical and personnel
resources than the Company and include such well-established companies as
Novartis Corporation, Rhone-Poulenc AG Company, the Dow Chemical Company,
Lesco, Inc., and The Toro Company, as well as a number of smaller local and
regional competitors. The Company competes against traditional technologies
on the basis of its delivery mechanism and bioaugmentation expertise. An
important factor in the long-term competitiveness of the BioJect system may
be the timing of and extent of the
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Company's penetration into golf and agricultural markets compared to the
market penetration achieved by companies offering competing products for
microbial distribution. Such timing will be based on the effectiveness with
which the Company or the competition can complete product testing and
approval processes and supply quantities of its products to market.
Competition among microbial distribution products is expected to be based on,
among other things, product effectiveness, safety, reliability, cost, market
capability and patent protection.
CALJECT SYSTEM AND SOLUJECT SYSTEM. The CalJect and SoluJect systems
compete against a number of products for applying gypsum onto soil to improve
water penetration through soil. At least one of the Company's competitors in
the market for gypsum distribution, Soil Solutions Corporation ("Soil
Solutions"), has greater name recognition in the soil amendments market and
has significantly more installed units. Soil Solutions' machine, like the
Company's CalJect and SoluJect systems, injects gypsum directly into
customers' irrigation systems. Competition among gypsum distribution products
is based on, among other things, cost, name recognition, product
effectiveness and reliability.
DISTRIBUTED PRODUCTS. In markets for distributed products, the Company
competes against distributors of traditional chemical products. Many of these
competitors have substantially greater financial, technical and personnel
resources than the Company and include such well-established companies as
Lesco, Inc., Terra Companies, Inc., Con-Agra, Inc. and Wilbur-Ellis Company.
The Company competes on the basis of price, name recognition, convenience and
customer service with distributors of traditional chemical products. See
"Factors That Could Affect Future Performance--Competition."
PERSONNEL
As of December 31, 1998, the Company had 244 full-time employees,
consisting of eight in general management, 95 in sales and marketing, 14 in
customer service, four in research and development, 77 in warehouse and
operations and 46 in finance and general administrative activities. None of
the Company's employees is represented by a labor union or is covered by a
collective bargaining agreement. The Company has not experienced work
stoppages and believes that it maintains good relations with its employees.
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
ACCUMULATED DEFICIT; HISTORICAL OPERATING LOSSES. At December 31, 1998,
the Company had an accumulated deficit of $24 million. The Company incurred a
net loss of $10.0 million in the year ended December 31, 1998, however, the
Company's "EBITDA," which consists of the net loss excluding interest,
depreciation and amortization, for the year ended December 31, 1998 was $5.5
million, and EBITDA before the Company's special charges was $1.6 million. The
Company has historically experienced losses due to significant expenditures for
product development, sales, marketing, administrative and U.S. patent protection
expenses, as well as amortization costs associated with the Company's recent
dealer acquisitions. See Item 7: "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 8: "Financial
Statements-and Supplementary Data."
EXPANSION INTO NEW MARKETS. Although sales of certain of the Company's
proprietary products are increasing, such products remain in the early stages
of market introduction and are subject to the risks inherent in the
commercialization of new product concepts, particularly with respect to
agricultural applications. There can be no assurance that the Company's
efforts to market its proprietary products to agricultural crop and
ornamental markets will prove successful, that marketing partnerships will be
established, or that the Company's intended customers will purchase the
Company's systems and products instead of competing products. Failure to
obtain significant customer satisfaction or market share would have a
material adverse effect on the Company's business, financial condition and
results of operations. See Item 7: "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
MANAGEMENT OF GROWTH. The Company has experienced significant growth.
Such growth has placed, and will continue to place, significant strain on the
Company's resources. The Company's ability to manage future growth, should it
occur, will require it to implement and continually expand operational and
financial systems, recruit additional employees and train and manage both
current and new employees. In particular, the Company's success depends in
large part on its ability to attract and retain qualified technical, sales,
financial and management
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personnel. The Company faces competition for such persons from other
companies, academic institutions, government entities and other
organizations. There can be no assurance that the Company will be successful
in recruiting or retaining personnel of the requisite caliber or in adequate
numbers to enable it to conduct its business as proposed.
ESTABLISHMENT OF SALES AND DISTRIBUTION CAPABILITIES. Distribution and
sales of the Company's products have occurred through distributors and
dealers acquired by the Company and through independent dealers and
distributors. In 1996, the Company initiated its strategy of establishing a
nationwide distribution system for its turf products through the acquisition
of various independent dealers and distributors and the hiring of selected
sales personnel. This strategy has required and is expected to continue to
require significant capital outlays and, due to the generally lower margins
associated with those dealers' existing products, likely will have the effect
of lowering the Company's gross profit margins. Achieving the anticipated
benefits of such acquisitions will depend on a variety of factors, including
whether the integration of such dealers and distributors with the Company's
organization can be accomplished in an efficient and effective manner and
whether the acquired sales force can effectively sell the Company's
proprietary products. Any failure to identify future hires or acquisition
candidates properly, any large expenditures on acquisitions that prove to be
unprofitable, or any difficulties encountered by the Company in selling its
proprietary products through the existing distribution system could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company has in the past, and expects in the
future, to continue to acquire companies in part through the issuance of
Common Stock. The issuance of additional shares of Common Stock in connection
with future acquisitions could result in dilution to existing shareholders.
FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL
BE AVAILABLE. The continuing commercialization of the Company's products
requires the commitment of significant capital expenditures. The Company
believes it will have sufficient resources to finance its operations and
future growth for at least the next twelve months, but no assurance can be
given in that regard. The Company anticipates that it will require additional
funds to support the rigorous testing and other costs of obtaining government
approval and for the marketing of its products for agricultural applications.
The Company anticipates that it will seek to obtain additional funds in the
future through public or private equity or debt financing, collaborative or
other arrangements with corporate partners or from other sources. There can
be no assurance that such additional financing can be obtained on desirable
terms, if at all. If additional funds are not available, the Company may be
required to curtail its operations and marketing efforts in certain
geographic areas or for one or more of its product lines. Although the
Company has established a line of credit with Imperial Bank, there can be no
assurance that the Company will be able to renew its line of credit on
acceptable terms or to increase such line if additional financing is
required. See Item 7: "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
PATENTS, PROPRIETARY TECHNOLOGY AND LICENSES. The Company's success will
depend in large measure upon its ability to obtain and enforce patent
protection for its proprietary products, maintain confidentiality of its
trade secrets and know-how and operate without infringing upon the
proprietary rights of third parties. The Company has been granted three U.S.
patents for the technology relating to the BioJect system and has filed one
other U.S. patent application covering modifications to the BioJect system.
The Company does not have foreign patent protection with respect to the
claims covered by its two initial U.S. patents granted in 1993, and the
Company is precluded from obtaining such foreign rights due to the expiration
of the period for filing such claims. However, in connection with a U.S.
patent granted in 1995 and a U.S. application filed later that year that
still is pending, the Company has applied for foreign patent protection with
respect to the BioJect system in selected countries. In addition, the Company
has registered a number of trademarks used in its business, including
"BioJect," and has applied for registration of a number of additional
trademarks. The Company also relies on trade secrets and proprietary
know-how. The Company generally enters into confidentiality and nondisclosure
agreements with its employees and consultants and generally controls access
to and distribution of its documentation and other proprietary information.
Despite the precautions described above, it may be possible for a third
party to copy or otherwise use the Company's products or technology without
authorization, or to develop similar products or technology independently.
There can be no assurance that the Company's patent or trademark applications
will be granted, that
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its means of protecting its proprietary rights will be adequate or that the
Company's competitors will not independently develop similar or competing
products. Furthermore, although the Company is not aware of any infringement
of any proprietary rights of others, there can be no assurance that the
Company is not infringing other parties' rights. If any of the Company's
patents are infringed upon or if a third party alleges that the Company
violates its proprietary rights, the Company may not have sufficient
resources to prosecute a lawsuit to defend its rights. In addition, an
adverse determination in any litigation could subject the Company to
significant liabilities to third parties, require the Company to seek
licenses from or pay royalties to third parties or prevent the Company from
manufacturing, selling or using its products, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Even if the Company prevailed in litigation to protect
its intellectual property rights, such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on
the Company's business, financial condition and results of operations.
LACK OF MANUFACTURING CAPABILITY; DEPENDENCE ON CONTRACT MANUFACTURERS
AND SUPPLIERS. The Company currently does not have any manufacturing
capability and must rely on third parties to manufacture its products and
components. The Company has more than one supplier for the manufacture of
most of its products and components; however, some are being obtained from
only one source. Although the Company believes that it will be able to
contract production with alternate suppliers, there can be no assurance that
this will be the case or that the need to contract with additional suppliers
will not delay the Company's ability to have its products and components
manufactured. There can be no assurance that existing or future manufacturers
will meet the Company's requirements for quality, quantity and timeliness,
and any such failure could have a material adverse effect on the Company's
business, financial condition and results of operations.
NO ASSURANCE THAT RIGHTS TO ADDITIONAL MICROBIAL PRODUCTS WILL BE
ACQUIRED. The Company plans to obtain the rights to additional microbial
products. The Company currently does not engage in its own research and
development with respect to the discovery of microbial products, but instead
licenses or acquires rights to microbial products discovered by others.
Although the Company is actively seeking to obtain licenses for or otherwise
acquire rights to additional microbial products, there can be no assurance
that the Company will be successful in obtaining any such rights on terms
acceptable to the Company, if at all. The failure of the Company to acquire
rights to additional products could have a material adverse effect on the
Company's business, financial condition and results of operations.
PRODUCT LIABILITY CLAIMS AND UNINSURED RISKS. The Company may be exposed
to product liability or environmental liability resulting from the commercial
use of its products. The Company currently carries liability insurance, which
covers, among other things, product liability and environmental liability. A
product liability, environmental or other claim with respect to uninsured
liabilities or in excess of insured liabilities could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company has obtained insurance of such types and in such amounts as
it believes to be adequate and customary for similarly situated firms in its
business, including casualty insurance and workers' compensation insurance.
However, there are risks not normally covered by insurance over which the
Company has no control and that could result in the Company incurring losses
not covered by insurance. Consequently, there can be no assurance that any
losses will be covered by insurance, that any covered losses will be fully
insured against or that any claim by the Company will be approved for payment
by the insurer.
ENVIRONMENTAL LIABILITY. The federal government and some states have
laws imposing liability on certain parties for the release of fertilizers and
other agents into the environment in certain manners or concentrations. Such
liability could include, among other things, responsibility for cleaning up
the damage resulting from such a release. In addition, the federal
Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), commonly known as the "Superfund" law, and other applicable laws
impose liability on certain parties for the release into the environment of
hazardous substances, which might include fertilizers and water treatment
chemicals. The Company is also subject to certain other federal environmental
laws, including the National Environmental Policy Act, the Toxic Substance
Control Act, the Resource Conservation and Recovery Act, the Clean Air Act
and the Clean Water Act and their state equivalents and may be subject to
other present and potential future federal, state or local regulations. As
noted above, the Company maintains insurance for environmental
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claims which might result from the release of its products into the
environment, but there can be no assurance that any losses covered by
insurance will be adequately covered. Thus, a claim for environmental
liability could have a material adverse effect on the Company's business,
financial condition and results of operations.
GOVERNMENT REGULATION. The Company is subject to laws and regulations
administered by federal, state and foreign governments, including those
requiring registration or approval of fertilizers, pesticides, water treatment
products and product labeling. The Company's current products are subject to
regulation by the EPA, the FDA and by certain state environmental and
agricultural departments. Prior to 1998, the Company had only one registered
pesticide with the EPA, BACILLUS THURINGIENSIS and had marketed its microbial
products only as soil inoculants. In 1998, the Company received two EPA
approvals. First, the Company registered with the EPA the PSEUDOMONAS
AUREOFACIENS TX-1 (Spot-less) as a biofungicide for use in turf across the
United States and received EPA approval of the BioJect as a means of
application of the microbe. Second, the Company received EPA approval to use
XANTHOMONAS CAMPESTRIS pv poa (Xpo) as a bioherbicide in EUP trials for use in
turf across the United States. There can be no assurance that the Company
will obtain EPA approval for sales of such additional micobial products as
biopesticides. In order to market a microbe as a pesticide, the Company must
obtain EPA approval of a particular product containing that microbe, including
EPA approval of the claims made in the product label and the method of
application. Registration of the Company's microbial products as pesticides
likely will be a lengthy and expensive process that may or may not result in
EPA approval. Without the desired EPA approvals, the Company will not be able
to market such unregistered microbes as pesticides, and the Company's sales
efforts will be limited to discussions of the soil inoculant features of the
microbe. If the EPA determines that a microbial product has no significant
commercially valuable use other use than as a pesticide, the Company will be
precluded from selling the product entirely unless it is approved by the EPA.
In addition, if a microbe is sold as a pesticide for use on crops, the
Company must also seek to have a tolerance level set by the EPA which would
define the acceptable limit on the amount of microbes that could be present
on a given raw agricultural commodity (food crop) at the time of harvest. The
Company also may petition the EPA for tolerance exemptions that would not
limit the residues of the microbial products on crops. If the EPA does not
issue a tolerance exemption, the Company would be required to obtain a
separate tolerance for each food product on which it intends to make its
microbial pesticides available for use. As a result, the Company would incur
costly application fees for each tolerance. There can be no assurance that
the Company will be successful in seeking such tolerances or tolerance
exemptions, and any failure to obtain such status which would prevent the
Company from selling microbes as pesticides for use on crops.
The Company may be subject to regulation in foreign countries.
Compliance with such requirements likely would result in additional cost to
the Company and delays in introducing the Company's products in such foreign
countries.
Compliance with EPA and state environmental regulations as well as other
laws and regulations will increase the costs and time necessary to allow the
Company to operate successfully and may affect the Company in other ways not
currently foreseeable. In addition, more stringent requirements for
regulation or environmental controls may be imposed, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
COMPETITION. The BioJect system competes against traditional chemical
insecticides and fungicides, chemical soil penetrants, acid injection
systems, and the direct, manual application of cultured microbial products.
Although the Company believes that none of its competitors offers an
automated means of regularly applying microbial products to turf and crops in
an effective manner, many of the Company's competitors have substantially
greater financial, technical and personnel resources than the Company and
include such well-established companies as Novartis Corporation,
Rhone-Poulenc AG Company, the Dow Chemical Company, Lesco, Inc., and The Toro
Company, as well as a number of smaller local and regional competitors. The
Company competes against traditional technologies on the basis of its
delivery mechanism and bioaugmentation expertise. An important factor in the
long-term competitiveness of the BioJect system may be the timing and extent
of the Company's penetration into golf and agricultural markets compared to
the market penetration achieved by companies offering competing products for
microbial distribution. Such timing will be based on the effectiveness with
which the Company or the
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competition can complete product testing and approval processes and supply
quantities of its products to market. Competition among microbial
distribution products is expected to be based on, among other things, product
effectiveness, safety, reliability, cost, market capability and patent
protection.
The CalJect and SoluJect systems compete against a number of companies
that have developed products for applying gypsum onto soil to improve water
penetration through soil. At least one of the Company's competitors in the
market for gypsum distribution, Soil Solutions, has greater name recognition
in the soil amendments market and has significantly more installed units.
Soil Solutions' machine, like the Company's CalJect and SoluJect systems,
injects gypsum directly into customers' irrigation systems. Competition among
gypsum distribution products is based on, among other things, cost, name
recognition, product effectiveness and reliability.
In markets for traditional chemical products, the Company competes
against well-established distributors of such products. Many of these
competitors have substantially greater financial, technical and personnel
resources than the Company and include such companies as Lesco, Inc., Terra
Companies, Inc., Con-Agra, Inc. and Wilbur-Ellis Company. The Company
competes on the basis of price, name recognition, convenience and customer
service with distributors of traditional chemical products.
DEPENDENCE ON THE MARKET FOR GOLF. Although the Company believes that
golf markets will continue to grow, a decrease in the number of golfers,
their rates of participation or in consumer spending on golf could have a
material adverse effect on the Company's golf course customers and, in turn,
on the Company. Specifically, the success of efforts to attract and retain
members at private country clubs and the number of rounds played at public
golf courses historically have been dependent upon discretionary spending by
consumers, which may be adversely affected by general and regional economic
conditions. In addition, the construction of additional golf courses is
dependent upon growth in the number of golfers. If customer tastes or
economic conditions cause golf courses to reduce their budgets or slow the
development of additional golf courses, the Company may see a correlative
decrease in sales of the BioJect system and its other products.
POSSIBLE VOLATILITY OF STOCK PRICE. The Common Stock currently is quoted
on the Nasdaq National Market. The market price of the Common Stock could be
subject to significant fluctuations in response to operating results and
other factors. In addition, the stock market in recent years has experienced
extreme price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of companies. These
fluctuations, as well as general economic and market conditions, may
adversely affect the market price of the Common Stock. In addition, in the
event the listing of the Common Stock were discontinued for any reason, the
liquidity and price of the Common Stock would be adversely affected. See Item
5: "Market for Registrant's Common Equity and Related Shareholder Matters."
QUARTERLY FLUCTUATIONS IN THE COMPANY'S RESULTS OF OPERATIONS. The
Company's operating results vary from quarter to quarter as a result of
seasonality and various factors. Virtually all of the Company's customers are
located in the Northern Hemisphere and purchase greater quantities of
microbes and distributed products during the spring, summer and fall months.
As a result of low customer activity during the winter, the Company typically
markets the BioJect system during the fourth and first quarters. As a result
of these marketing efforts, the Company typically receives orders during the
first and second quarters and installs BioJect systems during the second and
third quarters. BioJect lease and installation revenues are recognized as
payments come due under the related contracts. Because of this sales cycle,
the Company expects to recognize a significant portion of its revenues during
its second and third quarters. Operating expenses have tended to be
independent of the quarterly sales cycle. As a result, operating expenses
generally represent a higher percentage of sales in the first and fourth
quarters as compared to the second or third quarters, and the Company may
experience losses in the first and fourth quarters. Accordingly, results for
any quarter are not necessarily indicative of results for any future period.
The sales cycle for the BioJect system also makes it difficult to predict the
number of BioJect systems that will be leased and the quantity of microbial
product sales that will be sold until orders are received by the Company
during the first half of the year. Sales of the Company's products also
depend to some extent on the severity of weather patterns in the geographic
areas served by the Company. Given these factors, it is difficult for the
Company to accurately predict the level of demand for its products. See
Item 7: "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
16
<PAGE>
DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon the active
participation of William B. Adams, its Chairman of the Board and Chief
Executive Officer, and Douglas M. Gloff, its President. The loss of the
services of either of these individuals could have a material adverse effect
upon the Company's business, financial condition and results of operations.
Each of Messrs. Adams and Gloff has entered into an employment agreement with
the Company which provides for his continued employment with the Company
through September 1999. The Company does not have key person life insurance
on any of its key employees.
CONTROL BY PRINCIPAL SHAREHOLDERS. As of December 31, 1998, the current
principal shareholders and management of the Company owned more than 25% of
the outstanding shares of Common Stock of the Company, assuming the exercise
of all outstanding options and warrants held by them and no exercise of
options or warrants held by others. Accordingly, even though the Company
currently has cumulative voting, the current principal shareholders and
management, if voting in concert, may have the ability to effectively control
the election of a majority of the directors of the Company or any other major
decisions involving the Company or its assets.
OUTSTANDING WARRANTS AND OPTIONS. As of December 31, 1998, there were
5,899,411 shares of Common Stock subject to issuance pursuant to options and
warrants issued by the Company. Holders of warrants and options are likely to
exercise them when, in all likelihood, the Company could obtain additional
capital on terms more favorable than those provided by the warrants and
options. While the warrants and options are outstanding, they may adversely
affect the terms on which the Company can obtain additional capital.
UNDESIGNATED PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS. The Board of
Directors is authorized, without any action by the Company's shareholders, to
issue up to 5,000,000 shares of authorized but undesignated preferred stock
and to fix the powers, preferences, rights and limitations of any such
preferred stock or any class or series thereof. Persons acquiring preferred
stock could have preferential rights with respect to voting, liquidation,
dissolution or dividends over existing shareholders. This ability of the
Board would permit the Company to adopt a shareholders' rights plan or to
take other action that could deter a hostile takeover of the Company,
entrench the Board of Directors or deter an unsolicited tender offer. In
addition, certain provisions of the Company's Amended and Restated Articles
of Incorporation, including provisions creating a staggered board of
directors, and certain provisions of Nebraska law, including the Nebraska
Shareholders Protection Act, could have the effect of deterring or delaying a
takeover or other change in control of the Company, could deny shareholders
the receipt of a premium on their Common Stock and could have a depressive
effect on the market price of the Company's Common Stock.
NO DIVIDENDS. The Company has never paid or declared any cash dividends
on its Common Stock and does not intend to pay dividends on its Common Stock
in the foreseeable future. The Company is currently prohibited from paying
dividends by the terms of a loan agreement between the Company and Imperial
Bank. The Company intends to retain any earnings for use in the operation and
expansion of its business. See Item 5: "Market for Registrant's Common Equity
and Related Stockholder Matters."
ITEM 2. PROPERTIES
The Company's headquarters consist of 39,700 square feet located in San
Diego, California. The Company currently leases this building for warehouse,
sales and marketing, product development and administrative purposes. The
Company's lease for such space provides for base lease payments of $29,775
per month, plus operating expenses, and expires in December 2008. The Company
does not own any real property.
The Company's Turf Partners business segment leases office and warehouse
space in various locations in the U.S. including 28,104 square feet in the
West region, 58,540 square feet in the Midwest region and 26,898 square feet
in the East region. The Company's Agricultural Supply business segment leases
29,305 square feet in California, 11,696 square feet in Arizona, 3,600 square
feet in New Mexico and 21,300 square feet in Mexico.
Management believes that the properties leased by the Company and its
subsidiaries are generally in good operating condition.
17
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
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 law
suit on or about March 19, 1999 in San Diego County 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.005 par value per share, trades on The
Nasdaq National Market under the symbol "ESSI." From January 16, 1997, the
date of the Company's initial public offering, to December 3, 1997 the
Company's Common Stock traded on the Nasdaq SmallCap Market under the symbol
"ESSI." The following table sets forth for the periods indicated the high and
low sale prices for the Common Stock as reported by the Nasdaq SmallCap
Market for the period from January 1, 1997 to December 31, 1998 and the Nasdaq
National Market for the period thereafter.
<TABLE>
<CAPTION>
HIGH LOW
---------------------
<S> <C> <C>
1997
1st Quarter....................... $6.9375 $4.1875
2nd Quarter....................... 6.25 3.00
3rd Quarter....................... 8.00 5.5626
4th Quarter....................... 7.1875 4.75
1998
1st Quarter....................... 9.75 5.00
2nd Quarter....................... 12.375 9.375
3rd Quarter....................... 11.625 5.375
4th Quarter....................... 9.00 4.125
</TABLE>
As of March 25, 1999 there were approximately 16,802,888 shares of
Common Stock outstanding held by approximately 295 holders of record.
The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to pay dividends on its Common Stock in the
foreseeable future. The Company is currently prohibited from paying dividends
by the terms of a loan agreement between the Company and Imperial Bank. The
Company intends to retain any earnings for use in the operation and expansion
of its business.
18
<PAGE>
ITEM 6 SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
Item 7: "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements of the Company
and related notes thereto appearing elsewhere in this Report on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues $ 82,371 $ 37,525 $ 12,116 $ 3,757 $ 2,688
Cost of revenues 59,564 25,995 7,705 2,246 2,240
-----------------------------------------------------------------------------
Gross profit 22,807 11,530 4,411 1,511 448
Operating expenses:
Selling, general and administrative 25,405 11,277 6,601 2,647 2,754
Research and development 584 269 475 413 286
Amortization 1,108 580 464 25 0
Special charges 3,875 - - - -
-----------------------------------------------------------------------------
Loss from operations (8,165) (596) (3,129) (1,574) (2,592)
Interest expense 2,494 579 1,069 264 225
Interest income (654) (97) (5) (2) (1)
-----------------------------------------------------------------------------
Net loss $ (10,005) $ (1,078) $ (4,193) $ (1,836) $ (2,816)
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Net loss per share, basic and diluted $ (0.61) $ (0.10) $ (0.72) $ (0.35) $ (0.62)
Shares used in calculating net loss
per share, basic and diluted 16,361 11,327 5,815 5,207 4,557
EBITDA (5,491) 803 (2,218) (1,220) (2,286)
EBITDA before special charges (1,616) 803 (2,218) (1,220) (2,286)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 3,410 $ 3,125 $ 150 $ - $ -
Working capital 18,420 15,408 (6,434) (1,324) (793)
Total assets 67,005 37,108 12,886 3,981 2,354
Long-term obligations, net of current portion 22,620 1,412 1,847 911 1,489
Total shareholders' equity $ 28,543 $ 29,780 $ (74) $ (159) $ (1,095)
</TABLE>
EARNINGS BEFORE INTEREST, INCOME TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)
EBITDA is net income (loss) excluding interest income, interest expense,
depreciation and amortization expense. EBITDA before special charges is
EBITDA excluding special charges, a substantial portion of which are non-cash
in nature and all of which are expected to be infrequently occurring. While
EBITDA should not be construed as a substitute for income (loss) from
operations, net income (loss) or cash flows from operating activities in
analyzing the Company's operating performance, financial condition or cash
flows, the Company is reporting EBITDA because it is commonly used by certain
users of the Company's financial statements to analyze and compare companies
on the basis of operating performance, leverage and liquidity and to
determine a Company's ability to service debt.
EBITDA is calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income (loss) $ (10,005) $ (1,078) $ (4,193) $ (1,836) $ (2,816)
Interest income (654) (97) (5) (2) (1)
Interest expense 2,494 579 1,069 264 225
Depreciation 1,566 819 447 329 306
Amortization 1,108 580 464 25 -
-------------------------------------------------------------------------------
EBITDA (5,491) 803 (2,218) (1,220) (2,286)
Special charges 3,875 - - - -
-------------------------------------------------------------------------------
EBITDA before special charges $ (1,616) $ 803 $ (2,218) $ (1,220) $ (2,286)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Item 6:
"Selected Financial Data" and the Consolidated Financial Statements of the
Company, related notes thereto, and other financial data appearing elsewhere
in this Report on Form 10-K.
GENERAL
Eco Soil Systems, Inc. develops, markets and sells proprietary
biological and traditional chemical products that provide solutions for a
wide variety of turf and crop maintenance problems in the golf and
agricultural industries. We have developed our patented BioJect system for
the distribution of naturally occurring microbes that complement or reduce
the need for many chemical products currently used in golf and agricultural
markets. By fermenting microbes at the customer's site and distributing them
through the customer's existing irrigation system, the BioJect system
provides customers with cost savings and mitigates the adverse environmental
effects associated with chemical products. We initially focused our sales
and marketing efforts on the golf course market, and recently we entered the
agricultural crop and ornamental markets.
Through 1995 our principal activities were the development, marketing
and sale of our proprietary BioJect systems and microbial products, primarily
in the golf course maintenance market. In 1996, we began to rapidly expand
our sales and marketing capabilities related to the BioJect system by hiring
key personnel and acquiring regional distributors whose sales representatives
had established relationships with potential BioJect customers in the golf
course and turf maintenance markets. In May 1996, we acquired two turf
maintenance products distributors located in New England and Illinois. In
February 1997, we acquired substantially all of the assets of a turf
maintenance products distributor located in Southern California. In March
1998, we acquired two additional turf maintenance products distributors
located in Indiana and Michigan. The acquisition of these distributors
significantly increased the volume of distributed products we are selling and
led to increased penetration of the BioJect system within the golf industry.
In December 1998, we consolidated these subsidiaries into our Turf Partners
business segment. Also in December 1998, we signed a contract to exclusively
market and distribute fertilizer products of The Scotts Company (the "Scotts
Contract") to the golf course industry in 24 states. The Scotts Contract
also provides us with similar non-exclusive distribution rights in five
additional states. As a result, we hired 25 sales representatives formerly
with Scotts, who will now be actively marketing both the Scotts products and
all our other products in geographic areas previously served by independent
distributors. We incurred substantial costs in December 1998 to cancel or
buy out our agreements with many of those distributors.
By 1997, we had developed agricultural applications for the BioJect
system and our related CalJect system and commenced generating revenues in
the agricultural market. In 1998, we began to rapidly expand our sales and
marketing capabilities in the agricultural market through the acquisition of
four independent distributors of micro-irrigation products in Southern
California, Arizona and Mexico. In December 1998, we consolidated these
subsidiaries into our Agricultural Supply business segment.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997
REVENUES
In 1998, our revenues were $82.4 million, an increase of 119.5% versus
$37.5 million in 1997. The increase in revenues reflects an increase in both
Turf Partners and Agricultural revenues.
In 1998, our Turf Partners revenues were $61.3 million, an increase of
65.9% versus $36.9 million in 1997. 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 products distributors in the midwest,
(ii) the opening of two new warehouses in the west and (iii) increased sales
from our existing distribution facilities in the east. We expect such
revenues to continue to increase in 1999 as a result of (i) realizing a full
year of operations from the distributors we acquired in 1998, and (ii)
revenues to be generated as a result of the Scotts contract previously
described.
20
<PAGE>
In 1998, our Agricultural Supply revenues were $21.0 million, compared
to $550,000 in 1997. Agricultural Supply revenues primarily increased due to
(i) the acquisitions of four distributors of micro-irrigation products in
1998, and (ii) increased acreage under contract with our proprietary soil
maintenance programs. We expect such revenues to continue to increase in
1999 as a result of (i) realizing a full year of operations from the
distributors we acquired in 1998, and (ii) continued increases in acreage
under contract to our proprietary soil maintenance programs.
GROSS PROFIT
In 1998, our gross profit was $22.8 million, an increase of 97.8% versus
$11.5 million in 1997. The increase in gross profit was due to the increase
in both Turf Partners and Agricultural Supply segment revenues. For 1998, our
gross margin was 27.7% versus 30.7% for 1997. The gross margin on distributed
products is substantially lower than the gross margin on our proprietary
products. In 1998, even though we experienced significant percentage growth
in revenues from our proprietary products, we experienced substantially
greater increases in total revenues from our distributed products. In 1998,
gross margin was also slightly negatively affected by the mix of distributed
products sold.
In 1998, the gross profit on Turf Partners sales was $16.7 million, an
increase of 51.2% versus $11.0 million in 1997. The increase in gross profit
on Turf Partners sales is directly related to the increase in revenue, as
previously discussed. In 1998, the gross margin on Turf Partners products was
27.2% versus 29.8% in 1997. The decrease in gross margin was due to the
factors described previously.
For 1998, the gross profit on Agricultural Supply segment sales was $6.1
million, compared to $499,000 for 1997. The increase in gross profit on
Agricultural Supply sales was directly related to the increase in revenue. In
1998, the gross margin on Agricultural Supply sales was 29.1%, reflecting our
substantially larger volume of lower margin sales of irrigation products,
versus 90.7% in 1997, which consisted solely of our higher margin proprietary
soil maintenance programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For 1998, selling, general and administrative ("SG&A") expense was $25.4
million, an increase of 125.3% versus $11.3 million for 1997. The increase
in SG&A expense was primarily due to additional overhead costs associated
with the previously discussed acquisitions, as well as expenses related to
the buyout or cancellation of certain exclusive distribution agreements which
were driven by the contract signed with Scotts as previously described. SG&A
expense as a percentage of revenues was 30.8% in 1998 compared to 30.1% in
1997. We realized efficiencies in 1998 from the absorption of our
administrative costs over a larger volume of revenues, but such efficiencies
were offset by increased costs to support the rapid expansion of our business
and costs related to the buyout or cancellation of distribution agreements as
described previously. While we expect SG&A expense to continue to increase in
1999 as a result of expected increases in revenues, we expect SG&A expense to
decrease slightly as a percentage of revenues, due to the efficiencies
described previously.
RESEARCH AND DEVELOPMENT EXPENSE
In 1998, research and development expense was $584,000, compared to
$269,000 in 1997. The increase in research and development expense was due to
ongoing analysis and testing of potential products for the Agricultural
Supply and Turf Partners markets.
AMORTIZATION EXPENSE
For 1998, amortization expense was $1.1 million, an increase of 91.0%
versus $580,000 for 1997. The increase in amortization expense is due to an
increase in goodwill directly related to our recent acquisitions.
SPECIAL CHARGES
During the fourth quarter of 1998, we recorded special charges of $3.9
million as a result of our actions to reorganize our basic operations and
better align our overall cost structure and organization with planned revenue
levels. The restructuring activities (shown below in tabular format)
primarily relate to the following:
1) We reorganized into two separate operating segments, Turf Partners
and Agricultural Supply. We expect our restructured organization to enable
us to more efficiently and effectively manage our nationwide golf course and
turf maintenance business. We eliminated certain duplicative positions in all
areas of our business and terminated a total of 28 employees, resulting in
total severance costs of $338,000. We also closed certain leased distribution
facilities and removed certain assets from operations which had become
duplicative or inefficient as a result of our various acquisitions, resulting
in total charges of $148,000.
21
<PAGE>
2) We wrote off impaired goodwill in the amount of $2.4 million related
to the acquisitions of two turf distributors acquired in prior years, Turf
Products in June 1996 and Turfmakers in February 1997. In both cases, we had
experienced significant turnover in both the sales force and customer base of
the acquired businesses. Also, as a result of the reorganization described
above, we expect further attrition due to the geographic relocation of
certain distribution facilities. As a result, such businesses are incurring
negative cash flows and, despite the reorganization, the Company does not
expect to generate positive cash flows from the acquired businesses for the
foreseeable future. Under generally accepted accounting principles, the related
goodwill is impaired and was written down to zero based on the present value
of the estimated discounted future cash flows from such businesses.
3) We incurred charges of $871,000 to wind down our Aspen Consulting
Companies, Inc. subsidiary ("Aspen Consulting"). As we have refocused our
efforts on expanding our Turf Partners and Agricultural Supply business
segments, we no longer intend to pursue the Aspen Consulting business. We
have not historically generated significant revenues or profits from these
operations.
Details of the special charges (in thousands) are as follows:
<TABLE>
<CAPTION>
CASH/ AMOUNT CASH EXPENDED ACCRUED
NON OF THROUGH LIABILITIES AT
DESCRIPTION OF CHARGE: CASH CHARGE DECEMBER 31, 1998 DECEMBER 31, 1998
- -------------------------------------------------- -------- -------- ----------------- -----------------
<S> <C> <C> <C> <C>
REORGANIZATION OF OPERATING STRUCTURE:
Severance of employees: Cash $338 $121 $217
Vacated lease facilities: Cash 55 -- 55
Write-downs of assets removed from operations: Non-cash 93 -- --
Professional fees: Cash 59 2 57
Other: Cash 53 -- 53
----- ---- ----
598 123 382
IMPAIRMENT LOSS ON CERTAIN ASSETS:
Goodwill related to Turf Products subsidiary: Non-cash 1,487 -- --
Goodwill related to Turfmakers subsidiary: Non-cash 919 -- --
----- ---- ----
2,406 -- --
EXIT OF ASPEN CONSULTING OPERATIONS:
Severance of employees: Cash 143 -- 143
Write-downs of assets removed from operations: Non-cash 575 -- --
Vacated lease facilities: Cash 84 -- 84
Other: Cash 69 -- 69
----- ---- ----
871 -- 296
----- ---- ----
TOTAL SPECIAL CHARGES $3,875 $ 123 $ 678
-------- ----------------- -----------------
-------- ----------------- -----------------
</TABLE>
INTEREST EXPENSE
In 1998, interest expense was $2.5 million, an increase of 331% versus
$579,000 in 1997. The increase in interest expense reflects (i) an increase
in the amount of debt outstanding, (ii) additional interest costs of $858,000
associated with the replacement of a prior bank credit facility from
Provident Bank with a new facility from Imperial Bank and (iii) amortization
of the issuance costs associated with the Senior Subordinated Notes and bank
credit facility entered into in August 1998.
NET LOSS
For the year ended December 31, 1998, net loss was $10.0 million or $.61
per share compared to a net loss of $1.1 million or $.10 per share for the
year ended December 31, 1997.
22
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996
REVENUES
In 1997, our revenues were $37.5 million, an increase of 210% compared
to $12.1 million in 1996. The increase in revenues is primarily attributable
to (i) the placement of new BioJect units at customer locations, (ii) a full
year's revenues from the two turf products distributors acquired in June
1996, (iii) the acquisition of Turfmakers in February 1997, (iv) and the
opening of new distribution facilities in Pennsylvania and Southern
California in 1997.
In 1997, our Turf Partners revenues were $36.9 million, an increase of
205% versus $12.1 million in 1996. The increase in revenues was due to the
factors described above.
In 1997, our Agriculture Supply revenues were $550,000 compared to none
in 1996. The increase in revenues resulted from our entering the
Agricultural market during 1997.
GROSS PROFIT
In 1997, our gross profit was $11.5 million, an increase of 161%
compared to $4.4 in 1996. The increase in gross profit resulted from the
increase in revenues. In 1997, the gross margin was 31% versus 36% in 1996.
The decline in gross margin in 1997 resulted from a disproportional increase
in sales of distributed products, which carry lower margins than our
proprietary products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
In 1997, SG&A expense was $11.3 million, an increase of 71% compared to
$6.6 million in 1996. The increase in SG&A expense reflects the costs
related to the acquired businesses, as described above, general corporate
expenditures required to support our growth and the costs associated with
being a public company. SG&A expense declined as a percentage of revenues
from 54.5% in 1996 to 30.1% in 1997 as a result of the absorption of
administrative expenses over the larger volume of sales.
RESEARCH AND DEVELOPMENT
In 1997, research and development expense was $269,000, a decrease of
43% compared to $475,000 in 1996. The decrease in research and development
expense resulted from lower expenditures on the development of the BioJect
system.
AMORTIZATION EXPENSE
In 1997, amortization expense was $580,000, an increase of 25% compared
to $464,000 in 1996. The increase in expenses associated with the
amortization of goodwill resulted from our acquisitions in 1996 and 1997
discussed previously.
INTEREST EXPENSE
In 1997, interest expense was $579,000, a decrease of 46% compared to
$1.1 million in 1996. The decrease in interest expense was primarily due to
the conversion and repayment of outstanding debt. The amount of short and
long-term debt decreased to $2.7 million at December 31, 1997, compared to
$9.1 million at December 31, 1996.
23
<PAGE>
NET LOSS
For the year ended December 31, 1997, the net loss was $1.1 million or
$.10 per share compared to a net loss of $4.2 million or $.72 per share for
the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception from revenues from sales
of our products, sales of our Common Stock, borrowing from our principal
shareholders and debt financing. Our operating and investing activities used
cash of $15.2 million during the year ended December 31, 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
principal amount 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 and
us LLC. 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 December 31, 1998, 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 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 completed timely, the Year 2000 problem could have a material impact
on the 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 th 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.
24
<PAGE>
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 the 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 7A. 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 December 31, 1998.
25
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
As indicated in the following table, the information required to be
presented in Part III of this report is hereby incorporated by reference from
the Company's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders to be prepared in accordance with Schedule 14A and filed with
the Securities and Exchange Commission within 120 days of the end of the
fiscal year covered by this report.
Material in Proxy Statement for 1999 Annual Meeting that is incorporated
herein by reference:
<TABLE>
<CAPTION>
ITEM NO. ITEM CAPTION PROXY STATEMENT CAPTION
- -------- ----------------------------------------------------- -----------------------------------
<S> <C> <C>
10. Directors and Executive Officers of the Registrant "Directors and Executive Officers"
11. Executive Compensation "Executive Compensation"
12. Security Ownership of Certain Beneficial Owners and "Security and Management Ownership"
Management
13. Certain Relationships and Related Transactions "Certain Transactions"
</TABLE>
ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(A) The following documents are filed as part of this report:
1. Financial Statements:
(see "Index to Consolidated Financial Statements" at page F-1).
2. Financial Statement Schedules:
VIII-Valuation and Qualifying Accounts
3. Exhibits
The exhibits listed on the accompanying Exhibit Index are filed as part
of this Annual Report.
(B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K under Item 5 thereof on
December 30, 1998, relating to the Company's entering into a Credit Agreement
with Imperial Bank dated as of December 14, 1998 which provides for a $10
million secured revolving line of credit and the termination of the Company's
line of credit with The Provident Bank.
26
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1(4) Amended and Restated Articles of Incorporation
3.2(5) Articles of Correction to Amended and Restated Articles of
Incorporation
3.3(6) Articles of Amendment to Amended and Restated Articles of
Incorporation
3.4(4) Bylaws, as amended
4.1(2) Form of the Common Stock Certificate
10.1(3) 1992 Stock Option Plan
10.2(3) 1996 Directors' Stock Option Plan
10.3(2) Agreement and Plan of Merger, dated as of May 31, 1996, as
amended on October 28, 1996, by and among the
Company, a wholly owned subsidiary of the Company and Turf
Specialty, Inc.
10.4(2) Agreement and Plan of Merger, dated as of May 31, 1996, by
and among the Company, a wholly owned subsidiary of
the Company and Turf Products, Ltd.
10.5(3) Employment Agreement, dated May 21, 1991, as amended,
November 7, 1996 between the Company and William B. Adams
10.6(3) Employment Agreement, dated January 1, 1994, as amended,
November 7, 1996 between the Company and Douglas M.
Gloff
10.7(3) Employment Agreement, dated July 8, 1996, between the
Company and Kevin P. Lyons
10.8(3) Employment Agreement, dated July 8, 1996, between the
Company and David W. Schermerhorn
10.9(4) Employment Agreement, dated July 10, 1996, between the
Company and Walter W. Fuchs
10.10(2) Distribution Agreement, dated August 2, 1996, between the
Company and Abbott Laboratories, Chemical and
Agricultural Products Division
10.11(3) Lease Agreement, dated September 1, 1996, between the
Company and Arthur P. Arns
10.12(5) Security and Loan Agreement, dated June 30, 1997, between
the Company and Imperial Bank of San Diego
10.13(5) Warrant to Purchase Common Stock dated June 30, 1997
granted by the Company to Imperial Bank
10.14(5) Option for Xanthomonas Campestris dated June 3, 1997 made
by Mycogen Corporation in favor of the Company
10.15(5) Settlement Agreement dated as of July 6, 1997 by and
between the Company and Encore Technologies, Inc.
10.16(5) Assignment of TX-1 Intellectual Property made as of July 6,
1997 by Encore Technologies, Inc. to the Company
10.17(5) Assignment of Media Intellectual Property made as of July
6, 1997 by Encore Technologies, Inc. to the Company
10.18(5) License and Supply Agreement dated as of July 6, 1997 by
and between the Company and Encore Technologies, Inc.
10.19(7) 1998 Stock Option Plan
10.20(8) Note and Warrant Purchase Agreement dated as of August 25,
1998.
10.21(8) 12.00% Senior Subordinated Note Due August 25, 2003.
10.22(8) Common Stock Purchase Warrant Expiring August 25, 2003.
10.23(9) Credit Agreement dated as of December 2, 1998.
10.24(9) Promissory Note (and Libor Addendum thereto) dated as of
December 2, 1998.
10.25(9) Commercial Security Agreement dated as of December 2, 1998.
21.1(1) List of Subsidiaries
23.1(1) Consent of Ernst & Young LLP, Independent Auditors
23.2(1) Consent of Bigelow & Company, CPA, P.C., Independent
Auditors
27.1(1) Financial Data Schedule
- --------------
27
<PAGE>
(1) Filed herewith
(2) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 333-15883) filed with the Commission on November 8, 1996.
(3) Incorporated by reference to Amendment No. 3 to the Company's Registration
Statement on Form SB-2 (File No. 333-15883) filed with the Commission on
January 13, 1997.
(4) Incorporated by reference to Amendment No. 4 to the Company's Registration
Statement on Form SB-2 (File No. 333-15883) filed with the Commission on
January 16, 1997.
(5) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 333-39399) filed with the Commission on November 4, 1997.
(6) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 (File No. 333-39399) filed with the Commission on
November 21, 1997.
(7) Incorporated by reference to the Company's Periodic Report on Form 10-QSB
(File No. 001-12653) filed with the Commission on August 13, 1998.
(8) 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 documents).
(9) Incorporated by reference to the Company's Current Report on Form 8-K
(File No. 001-12653) filed with the Commission on December 30, 1998.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 7th day
of April, 1999.
ECO SOIL SYSTEMS, INC.
By: /s/ WILLIAM B. ADAMS
-------------------------------------
William B. Adams
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILLIAM B. ADAMS Chairman of the Board and April 7, 1999
- ---------------------------- Chief Executive Officer
William B. Adams (principal executive and
financial officer)
/s/ DOUGLAS M. GLOFF President, Chief Operating April 7, 1999
- ---------------------------- Officer and Director
Douglas M. Gloff
/s/ BRIAN CUDDYER Controller (principal April 7, 1999
- ---------------------------- accounting officer)
Brian Cuddyer
/s/ FRIDOLIN E. FACKLEMAYER Director April 7, 1999
- ----------------------------
Fridolin E. Facklemayer
/s/ EDWARD C. FORD Director April 7, 1999
- ----------------------------
Edward C. Ford
/s/ S. BART OSBORN Director April 7, 1999
- ----------------------------
S. Bart Osborn
/s/ WILLIAM S. POTTER Director April 7, 1999
- ----------------------------
William S. Potter
29
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................................................... F-2
Report of Bigelow & Company, CPA, P.C., Independent Auditors......................................... F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997......................................... F-4
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996........... F-5
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
December 31, 1998, 1997 and 1996................................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements........................................................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Eco Soil Systems, Inc.
We have audited the accompanying consolidated balance sheets of Eco Soil
Systems, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1998. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. We did not audit the
financial statements of Turf Specialty, Inc., a wholly-owned subsidiary, for
the period from its acquisition on May 31, 1996 to December 31, 1996, which
statement reflects total revenues of $3,867,000 for the period from May 31,
1996 to December 31, 1996, included in the consolidated results of operations
for the year ended December 31, 1996. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as
it relates to data included for Turf Specialty, Inc., for the period from May
31, 1996 to December 31, 1996, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report
of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Eco Soil Systems, Inc. at
December 31, 1998 and 1997, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
San Diego, California
March 9, 1999,
except for Note 4 and Note 8, as to which the date is
March 31, 1999
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Turf Specialty, Inc.
Londonderry, New Hampshire
We have audited the accompanying consolidated balance sheet of Turf
Specialty, Inc. (a wholly-owned subsidiary of Eco Soil Systems, Inc.) as of
December 31, 1996, and the related consolidated statements of income,
retained earnings, and cash flows for the seven months then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and consolidated disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the
first paragraph present fairly, in all material respects, the financial
position of Turf Specialty, Inc. as of December 31, 1996, and the results of
its operations and its cash flows for the seven months then ended in
conformity with generally accepted accounting principles.
BIGELOW & COMPANY
Certified Public Accountants, P.C.
By:
/s/ Marie C. McKay
Marie C. McKay
Certified Public Accountant
January 23, 1997
F-3
<PAGE>
ECO SOIL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
December 31,
-----------------------
1998 1997
------- ------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,410 $ 3,125
Short-term investments, available-for-sale - 3,000
Accounts receivable, net of allowance for doubtful accounts of $1,261 and $115
at December 31, 1998 and 1997, respectively 13,523 10,148
Finished goods inventory 10,475 4,515
Prepaid expenses and other current assets 6,288 536
-------- --------
Total current assets 33,696 21,324
Equipment under construction 2,823 1,072
Equipment under operating leases, net 8,019 6,735
Property and equipment, net 5,541 1,150
Intangible assets, net 14,571 6,515
Other assets 2,355 312
-------- --------
Total assets $ 67,005 $ 37,108
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
<S> <C> <C>
Current Liabilities:
Accounts payable $ 8,037 $ 2,492
Accrued expenses 7,061 2,151
Current portion of long-term obligations 178 1,273
-------- --------
Total current liabilities 15,276 5,916
Long-term obligations, net of current portion 22,620 1,412
Deferred rent 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 and 25,000,000 shares
authorized at December 31, 1998 and 1997, respectively; 17,064,576
and 15,320,923 shares issued and outstanding at December 31, 1998 and 1997,
respectively 85 77
Additional paid-in capital 51,485 43,708
Warrants 958 242
Notes receivable from shareholders (15) (282)
Accumulated deficit (23,970) (13,965)
-------- --------
Total shareholders' equity 28,543 29,780
-------- --------
Total liabilities and shareholders' equity $ 67,005 $ 37,108
-------- --------
-------- --------
</TABLE>
See accompanying notes
F-4
<PAGE>
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Revenues:
Turf Partners $61,336 $36,975 $ 12,116
Agricultural Supply 21,035 550 -
-------- ------- --------
Total revenues 82,371 37,525 12,116
Cost of revenues:
Turf Partners 44,657 25,944 7,705
Agricultural Supply 14,907 51 -
-------- ------- --------
Total cost of revenues 59,564 25,995 7,705
-------- ------- --------
Gross profit 22,807 11,530 4,411
Operating expenses:
Selling, general and administrative 25,405 11,277 6,601
Research and development 584 269 475
Amortization of intangibles 1,108 580 464
Special charges 3,875 - -
-------- ------- --------
Loss from operations (8,165) (596) (3,129)
Interest expense 2,494 579 1,069
Interest income (654) (97) (5)
-------- ------- --------
Net loss $(10,005) $(1,078) $ (4,193)
-------- ------- --------
-------- ------- --------
Net loss per share, basic and diluted $ (0.61) $ (0.10) $ (0.72)
-------- ------- --------
-------- ------- --------
Shares used in calculating net loss per share, basic and diluted 16,361 11,327 5,815
-------- ------- --------
-------- ------- --------
</TABLE>
See accompanying notes
F-5
<PAGE>
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
NOTE
ADDITIONAL RECEIVABLE
COMMON STOCK PAID-IN FROM ACCUMULATED
SHARES AMOUNT CAPITAL WARRANTS SHAREHOLDERS DEFICIT TOTAL
------ ------ ------- -------- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995................ 4,968,935 $25 $8,510 $ -- $ -- $(8,694) $(159)
Issuance of common stock in connection
with acquisitions ........................ 1,022,074 5 3,061 -- -- -- 3,066
Issuance of common stock.................. 138,583 1 387 -- -- -- 388
Issuance of warrants in connection with
debt..................................... -- -- -- 242 -- -- 242
Exercise of stock options................ 239,000 1 391 -- (192) -- 200
Conversion of debt....................... 237,998 1 381 -- -- -- 382
Net loss................................. -- -- -- -- -- (4,193) (4,193)
---------- ------- ---------- ------ --------- --------- ---------
Balance at December 31, 1996............... 6,606,590 33 12,730 242 (192) (12,887) (74)
Issuance of common stock in IPO, net of
issuance costs of $2,145................. 3,795,000 19 13,491 -- -- -- 13,510
Issuance of common stock follow-on
offering, net of issuance costs of
$1,756................................... 3,244,167 17 14,345 -- -- -- 14,362
Issuance of common stock in connection
with acquisitions........................ 25,000 -- 109 -- -- -- 109
Exercise of stock options and warrants... 1,058,036 5 1,081 -- (90) -- 996
Conversion of debt....................... 592,130 3 1,952 -- -- -- 1,955
Net loss................................. -- -- -- -- -- (1,078) (1,078)
---------- ------- ---------- ------ --------- --------- ---------
Balance at December 31, 1997............... 15,320,923 77 43,708 242 (282) (13,965) 29,780
Issuance of common stock in connection
with acquisitions........................ 531,880 2 3,656 -- -- -- 3,658
Shares in connection with earn-out
provisions of acquisitions............... 196,563 1 1,612 -- -- -- 1,613
Warrants issued in connection with
debt..................................... -- -- -- 788 -- -- 788
Repayments on notes receivable
from shareholders........................ -- -- -- -- 267 -- 267
Exercise of stock options and warrants... 1,015,210 5 2,509 (72) -- -- 2,442
Net loss................................. -- -- -- -- -- (10,005) (10,005)
---------- ------- ---------- ------ --------- --------- ---------
Balance at December 31, 1998............... 17,064,576 $85 $51,485 $958 $(15) $(23,970) $28,543
---------- ------- ---------- ------ --------- --------- ---------
---------- ------- ---------- ------ --------- --------- ---------
</TABLE>
See accompanying notes
F-6
<PAGE>
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................................... $ (10,005) $(1,078) $ (4,193)
Adjustments to reconcile net cash used in operating activities:
Depreciation and amortization............................................. 2,674 1,399 911
Amortization of debt issuance costs and discount on long-term debt........ 238 70 189
Provision for losses on accounts receivable............................... 1,521 12 89
Write-off of deferred debt issuance costs................................. 858 -- --
Special charges, non-cash portion......................................... 3,752 -- --
Deferred rent............................................................. 566 -- --
Loss on sale of property and equipment.................................... 69 -- --
Changes in operating assets and liabilities, net of effect of acquired
businesses:
Accounts receivable....................................................... 1,864 (8,102) 1,956
Inventories............................................................... (2,803) (2,432) 114
Prepaid expenses and other assets......................................... (4,475) 3 (472)
Accounts payable.......................................................... (2,925) (242) (2,932)
Accrued liabilities....................................................... 51 1,409 (292)
--------- --------- ---------
Net cash used in operating activities....................................... (8,615) (8,961) (4,630)
INVESTING ACTIVITIES
Cash received in acquisitions............................................... -- -- 1,656
Payments for acquired patents and licenses.................................. (644) (129) --
Payments related to acquired businesses, net of cash acquired............... (3,175) (1,408) (2,690)
Purchase of long-term investment............................................ (100) -- --
Proceeds from the sale of property and equipment............................ 383 -- --
Payments for equipment under operating leases............................... (1,998) (7,009) --
Equipment under construction................................................ (1,751) (799) --
Purchase of property and equipment.......................................... (2,284) (999) (748)
Proceeds from sale of equipment under operating leases...................... -- 1,325 --
Purchase of short-term investments.......................................... -- (3,000) --
Sale of short-term investments.............................................. 3,000 -- --
Proceeds from note receivable............................................... -- -- 595
--------- --------- ---------
Net cash used in investing activities....................................... (6,569) (12,019) (1,187)
FINANCING ACTIVITIES
Advances (to) from shareholders............................................. 267 (355) 179
Proceeds from subordinated debt............................................. 15,000 -- --
Proceeds from long-term obligations......................................... 31,115 8,221 6,442
Repayments of long-term obligations......................................... (31,588) (12,757) (1,135)
Payments on capital lease obligations....................................... -- (22) (107)
Net proceeds from issuance of common stock.................................. 2,442 28,868 588
Debt issuance costs......................................................... (1,767) -- --
--------- --------- ---------
Net cash provided by financing activities................................... 15,469 23,955 5,967
--------- --------- ---------
Net increase in cash........................................................ 285 2,975 150
Cash and cash equivalents at beginning of year.............................. 3,125 150 --
--------- --------- ---------
Cash and cash equivalents at end of year.................................... $ 3,410 $ 3,125 $ 150
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................................. $ 1,150 $ 708 $ 537
--------- --------- ---------
--------- --------- ---------
NON-CASH FINANCING ACTIVITIES
Common stock issued upon conversion of debt and shareholder advances........ -- $ 1,955 $ 382
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-7
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company develops, markets and sells proprietary biological and
traditional chemical products that provide solutions for a wide variety of turf
and crop maintenance problems in the golf and agricultural industries. The
Company has developed its patented BioJect system for the distribution of
naturally occurring microbes that complement or reduce the need for many
chemical products currently used in golf and agricultural markets. By fermenting
microbes at the customer's site and distributing them through the customer's
existing irrigation system, the BioJect system provides customers with cost
savings and mitigates the adverse environmental effects associated with chemical
products. The Company initially focused its sales and marketing efforts on the
golf market, and recently has entered the agricultural crop and ornamental
markets.
BASIS OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
including the allocation of the purchase price relating to acquired businesses,
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from the estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturity
of less than three months to be cash equivalents.
SHORT-TERM INVESTMENTS
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Debt and Equity Securities," the Company's short-term
investments are classified as available-for-sale. Available-for-sale securities
at December 31, 1997 are stated at cost, as the difference between cost and fair
value is immaterial. All of such securities matured in 1998.
CONCENTRATION OF CREDIT RISK
No individual customer accounted for more than 10% of revenues in 1998, 1997
and 1996, and the Company is not economically dependent upon any one customer.
The Company's Turf Partners segment serves a wide variety of customers,
primarily golf courses, who are geographically dispersed across the Northeast,
Midwest and Southwest regions of the United States. The Company's Agricultural
Supply segment serves a wide variety of customers, primarily growers, who are
concentrated principally in Mexico, and to a lesser extent, the Southwestern
United States.
F-8
<PAGE>
INVENTORIES
Inventories consist principally of non-proprietary chemical, fertilizer
and other turf maintenance products, golf course supplies, and irrigation and
other agricultural supplies. Such products are purchased from the
manufacturers and are carried at the lower of cost (first-in, first-out
method) or market.
EQUIPMENT UNDER CONSTRUCTION
Equipment under construction is related to the manufacture of new
BioJects. The BioJects are primarily constructed by independent third parties
during the third and fourth quarters of each year. The Company performs final
assembly and quality testing, generally in the first quarter of each year, and
the completed units are typically placed into service shortly following
completion.
EQUIPMENT UNDER OPERATING LEASES
Equipment under operating leases consists principally of BioJect equipment
leased under an initial one-year term with month-to-month renewal options and
is stated at cost. Depreciation is provided using the straight-line method over
seven years, the estimated service life of the equipment. Accumulated
depreciation and amortization of equipment under operating leases totaled
$972,000 and $276,000 at December 31, 1998 and 1997 respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line and accelerated methods over the estimated service lives of
the assets, generally ranging from 3 to 5 years. Equipment under capital leases
is amortized over the shorter of the estimated useful life of the assets or the
lease term and such amortization is included in depreciation in the accompanying
financial statements.
INTANGIBLE ASSETS
Intangible assets consist primarily of the excess of the purchase price over
the fair value of the assets acquired ("goodwill") related to the Company's
various acquisitions (see Note 2). Such intangible assets are generally being
amortized over a period of 15 years.
Certain of the Company's acquisitions involve earn-out payments which could
be payable to the former shareholders of the acquired businesses based on the
post-acquisition performance of the acquired businesses. The Company evaluates
such obligations in accordance with EITF 95-8, "Accounting for Contingent
Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase
Business Combination." To date, all such contingent consideration has been
treated as additional purchase price, due to various factors including, but not
limited to, the following: (i) the contingent consideration in certain cases is
payable to selling shareholders who were not employees of such businesses and
are not ongoing employees of the Company, (ii) the contingent consideration is
payable without regard to continuing employment of the selling shareholders, or
(iii) the compensation arrangements for selling shareholders who became
employees of the Company are at a reasonable level in comparison to that of
similar employees.
The earn-out payments are based on annual (calendar year) results. The
Company determines its obligations at the conclusion of the annual period.
Amounts payable in cash are included in accrued expenses. Amounts payable in
stock are included in shareholders' equity.
IMPAIRMENT OF ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" (SFAS 121), the Company recognizes and records impairment losses
on long-lived assets used in operations when indicators of impairment are
present and the estimated undiscounted cash flows to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of.
In the fourth quarter of 1998, the Company identified indicators that
goodwill related to two acquisitions made in prior years was impaired. The
indicators consisted of the resignation or termination of key management or
sales personnel of such businesses, greater than expected attrition in the
acquired customer bases, closure or relocation of the acquired
F-9
<PAGE>
distribution facilities, and other factors. The Company estimated it will not
likely realize positive future cash flows from these acquired businesses, and
therefore recorded a write-off of the goodwill related to such acquisitions (see
Note 9).
DEFERRED DEBT ISSUANCE COSTS
Included in other noncurrent assets are deferred debt issuance costs of
$1.5 million related to the Company's issuance of Senior Subordinated Notes
in August 1998 (see Note 4.) Such costs include fees paid to the placement
agent, legal fees, fees paid to the lenders, and the fair value of warrants
issued to the lenders. The costs are being amortized over the life of the
debt.
In November 1998, the Company terminated the line of credit entered into
in August 1998 and entered into a new line of credit (see Note 4.) All
deferred debt issuance costs related to the terminated line of credit,
totalling $858,000, were expensed at that time.
The amortization of deferred debt issuance costs is included in interest
expense.
DEFERRED RENT
Deferred rent consists of the gain on the sale/leaseback of the Company's
principal facility in San Diego, California, (see Note 7) which is being
amortized against rent expense on the straight line basis over the initial
term of the leaseback.
REVENUE RECOGNITION
Proprietary sales revenue in the Turf Partners segment is derived from the
rental of equipment, principally BioJects, the sale of microbial products used
in such equipment, and servicing of the equipment. Distributed sales revenue in
the Turf Partners segment is derived primarily from sales of purchased products,
and generally is concentrated more heavily in the second and third quarters of
the year. Revenue from the rental of equipment is recognized monthly in
accordance with the terms of the rental agreement, and revenue from the sale of
proprietary microbial products and distributed products is recognized upon
shipment.
Distributed sales revenue in the Agricultural Supply segment is derived
primarily from sales of purchased products, has historically not been very
seasonal, and is recognized upon shipment. Proprietary sales revenue in the
Agricultural Supply segment is derived from service contracts with growers. The
portion of the revenue which is specifically allocated within the contract to
installation of the Company's equipment and other up-front costs is
recognized as such installation is completed and costs are incurred, and
generally approximates the amount of such costs. The remainder of the
contract revenue is recognized on a straight-line basis over the growing
season, which is the period of service. The Company eventually intends to
rotate its proprietary equipment among a variety of customers and crops in
various areas of Mexico and the Southwestern United States to substantially
eliminate seasonality, but the Company has only recently begun this business
and there can be no assurance it will be successful at eliminating
seasonality.
The Company generally does not allow for sales returns, and returns have
historically been minimal.
The Company's export sales totaled $13,156,000, $4,842,000 and $543,000 for
the years ended December 31, 1998, 1997 and 1996 respectively. Such sales were
principally to customers in Mexico. All foreign transactions are denominated in
U.S. dollars.
COST OF REVENUES
In the Turf Partners segment, cost of proprietary sales revenue includes
the cost of the microbial products and depreciation on the rental equipment.
The cost of the service component is expensed as incurred in selling, general
and administrative expense.
In the Agricultural Supply segment, cost of proprietary sales revenues
includes the cost of the microbial products and depreciation on the equipment
used for delivery of the microbials. The cost of the service component is
expensed as incurred in selling, general and administrative expense.
F-10
<PAGE>
STOCK-BASED COMPENSATION
As permitted by the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), the Company has elected to
follow Accounting Principles Board Opinion No. 25 ("APB 25") and related
Interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized. Options granted to consultants and other non-employees
are valued in accordance with SFAS 123 and are expensed over the service period.
RESTRUCTURING CHARGES
Amounts accrued in connection with the Company's restructuring (see Note 9)
were measured and recorded in accordance with EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)."
NET LOSS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128), basic and diluted net loss per share is
calculated using the weighted average number of common shares outstanding.
Diluted net income per share is calculated using the weighted average number of
common shares outstanding plus the dilutive effect of outstanding options and
warrants, if any, using the treasury stock method.
GOVERNMENT REGULATIONS
Substantially all of the Company's facilities are subject to federal, state
and local regulations relating to the discharge of materials into the
environment. Compliance with these provisions has not had, nor does the Company
expect such compliance to have, any material effect upon the operations,
financial condition, capital expenditures, or competitive position of the
Company; however, there can be no assurance that compliance with such
regulations would not have a material effect upon the Company's future results
of operations or financial condition. Management believes that its current
practices and procedures for the control and disposition of such materials
comply with applicable federal and state requirements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
classifications.
2. RECENT ACQUISITIONS
In February 1997, the Company acquired certain assets of Turfmakers, Inc.
("TMI"), a turf maintenance products distributor located in Palm Springs,
California, for $1,225,000 cash and 25,000 shares of the Company's common stock
valued at $4.38 per share. The excess of the purchase price over the net
tangible assets acquired totaled $1,053,000, including approximately $45,000 for
legal and other costs incurred associated with the acquisition.
In March 1998, the Company acquired all the outstanding stock of Cannon Turf
Supply, Inc. ("CTS"), a turf maintenance products distributor located near
Indianapolis, Indiana, for $1,312,569 cash and 239,929 shares of the Company's
common stock valued at $5.47 per share. The Company also agreed to make certain
earn-out payments to the former shareholders of CTS, based on CTS' EBITDA for
the years ending December 31, 1998 and 1999. The 1998 earn-out value was
$980,000, which is payable in $448,000 cash and 61,108 shares of the Company's
common stock. The maximum dollar value of the 1999 earn-out payments is
$1,278,000. The excess of purchase price over the net tangible assets acquired
totaled $4,293,000, including the 1998 earn-out payment but excluding any
earn-out payment which may be earned in 1999, and also including approximately
$282,000 for legal and other costs incurred associated with the acquisition.
In March 1998, the Company acquired all the outstanding stock of Benham
Chemical Corporation ("BC"), a turf maintenance products distributor located
near Detroit, Michigan, for $802,440 cash.
In April 1998, the Company acquired all the outstanding stock of Agricultural
Supply, Inc. ("AS"), a distributor of agricultural micro-irrigation and soil
maintenance products located in Escondido, California, for $336,000 cash and
225,284 shares of the Company's common stock valued at $8.19 per share. The
Company also agreed to make certain earn-out payments to the former shareholders
of AS based on AS' EBITDA for the years ending December 31, 1998 and 1999. The
1998 earn-out value was $680,000, which is payable in 78,071 shares of the
Company's
F-11
<PAGE>
common stock. The maximum dollar value of the 1999 earn-out payments is
$770,565. The excess of purchase price over the net tangible assets acquired
totaled $2,462,000, including the 1998 earn-out payment but excluding any
earn-out payment which may be earned in 1999, and also including approximately
$282,000 for legal and other costs incurred associated with the transaction.
In June 1998, the Company acquired all the outstanding stock of Yuma
Sprinkler & Pipe Supply ("YSP"), a distributor of agricultural irrigation and
soil maintenance products located in Yuma, Arizona, for $280,000 cash and 66,667
shares of the Company's common stock valued at $7.50 per share. The Company
also agreed to make certain earn-out payments to the former shareholders of YSP
based on YSP's EBITDA for the years ending December 31, 1998 and 1999. The 1998
earn-out value was $400,000, payable in 45,908 shares of the Company's common
stock. The maximum dollar value of the 1999 earn-out payments is $400,000. The
excess of purchase price over the net tangible assets acquired totaled
$1,094,000, including the 1998 earn-out payment but excluding any earn-out
payment which may be earned in 1999, and also including approximately $92,000
for legal and other costs incurred associated with the transaction.
In June 1998, the Company acquired all the outstanding stock of Riegomex S.A.
de C.V. ("RM") for $45,943 cash.
In June 1998, the Company acquired the remaining fifty percent interest of
Agricultural Supply de Mexico ("ASM") which AS had not already owned for
$200,000 cash and agreed to pay an additional $1,100,000 in cash or stock, at
the option of the selling shareholders, over the next five years.
The results of operations of the acquired businesses are included in the
consolidated financial statements from the respective dates of acquisition.
Each of the acquisitions was accounted for as a purchase and, accordingly,
the purchase price has been allocated to the assets acquired and the liabilities
assumed based on the estimated fair market at the date of the acquisitions, as
follows (in thousands):
<TABLE>
<CAPTION>
TMI CTS BC AS ASM YSP RM
--- --- -- -- --- --- --
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS ACQUIRED:
Cash . . . . . . . . . . . . . . . . . . $ -- $ -- $ 12 $ 340 $ 35 $ 98 $ 97
Accounts receivable . . . . . . . . . . -- 1,863 1,785 2,840 1,260 350 --
Inventories. . . . . . . . . . . . . . . 287 1,606 1,021 1,271 351 569 --
Prepaids and other assets. . . . . . . . -- 363 80 621 (495) 40 1
Property and equipment . . . . . . . . . 40 375 255 621 623 371 55
Excess of purchase price over net
tangible assets . . . . . . . . . . . 1,053 4,293 1,328 3,242 893 1,094 645
------- ------- ------- ------- ------- ------- -------
Total assets acquired. . . . . . . . . . . 1,380 8,500 4,481 8,935 2,667 2,522 798
LIABILITIES ASSUMED:
Accounts payable . . . . . . . . . . . . -- 2,726 1,459 2,516 1,081 690 4
Accrued expenses . . . . . . . . . . . . -- 154 1,232 201 252 117 706
Notes payable. . . . . . . . . . . . . . -- 1,733 924 2,293 26 443 --
------- ------- ------- ------- ------- ------- -------
Total liabilities assumed. . . . . . . . . -- 4,613 3,615 5,010 1,359 1,250 710
------- ------- ------- ------- ------- ------- -------
NET ASSETS ACQUIRED. . . . . . . . . . . . $ 1,380 $ 3,887 $ 866 $ 3,925 $ 1,308 $ 1,272 $ 88
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
</TABLE>
The following unaudited pro forma results as of December 31, 1998 and 1997
assume the CTS, BC, AS, ASM, YSP and RM acquisitions occurred on January 1 of
the respective years. The results of operations of TMI prior to its
acquisition by the Company were not material and are not included in the
following unaudited pro forma results. The pro forma results have been
prepared utilizing the historical financial statements of the Company and the
acquired businesses.
F-12
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net sales (in thousands) $ 95,397 $ 97,000
Net loss (in thousands) (11,553) (2,612)
Net loss per share (.69) (.21)
</TABLE>
The unaudited pro forma results above give effect to pro forma adjustments
related to the amortization of the excess of the purchase price over the fair
value of the assets acquired, the increase in interest expense to reflect the
notes payable issued to effect the acquisitions, and related income tax
adjustments. This pro forma information is not necessarily indicative of the
actual results that would have been achieved had the above businesses been
acquired on January 1, 1998 or 1997, nor is it necessarily indicative of
future results.
3. BALANCE SHEET INFORMATION
Property and equipment consist of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Machinery and equipment . . . $ 4,266 $ 1,156
Vehicles. . . . . . . . . . . 2,416 851
Leasehold improvements. . . . 1,232 333
Furniture and fixtures. . . . 1,445 128
------- -------
9,359 2,468
Less accumulated depreciation
and amortization. . . . . . . (3,818) (1,318)
------- -------
$ 5,541 $ 1,150
------- -------
------- -------
</TABLE>
Intangible assets consist of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Excess of purchase price over fair value of
assets acquired (Note 2) . . . . $ 14,952 $ 7,254
Other intangibles . . . . . . . . . 649 408
--------- ---------
Subtotal . . . . . . . . . . . . . 15,601 7,662
Accumulated amortization. . . . . . (1,030) (1,147)
--------- ---------
Total . . . . . . . . . . . . . . . $ 14,571 $ 6,515
--------- ---------
--------- ---------
</TABLE>
F-13
<PAGE>
4. LONG-TERM DEBT
Long-term debt consists of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -----
<S> <C> <C>
12% Senior Subordinated Notes; Due 8/25/2003 $15,000 $ --
Revolving line of credit with a bank, Interest payable 7,442 --
monthly at the bank's prime rate plus .5% per annum (8.25%
at December 31, 1998), expiring April 28, 2000
10% secured promissory note with a bank; repaid in August
1998 -- 2,595
Capital lease obligations 269 --
Other 87 90
------- ------
22,798 2,685
Less amount due within one year 178 1,273
------- ------
Long-term debt $22,620 $1,412
------- ------
------- ------
</TABLE>
On August 25, 1998, the Company issued an aggregate of $15 million
principal amount of the Company's 12.00% Senior Subordinated Notes due 2003
(the "Notes") to two lenders. The Company also entered into a revolving line
of credit agreement with a bank that was subsequently terminated and replaced
with the line of credit described above ("the Agreement".)
Both the Notes and the Agreement contain certain restrictions and
limitations on the Company's operations including restrictions on capital
expenditures, sale of assets, lease liabilities, mergers or other forms of
business combinations, as well as the prohibition on the payments of cash
dividends. The Notes and the Agreement also contain certain covenants which
require the Company to maintain minimum levels of net worth, working capital,
and other financial ratios, as defined. As of December 31, 1998, the Company
was not in compliance with certain of these covenants. The lenders have
provided modifications to or waivers of such covenants which management
believes will enable the Company to remain in compliance through December 31,
1999.
Aggregate maturities of long-term debt as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999 $ 178
2000 7,552
2001 53
2002 13
2003 15,002
---------
TOTAL: $ 22,798
---------
---------
</TABLE>
5. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors is authorized, without any action by the Company's
shareholders, to issue up to 5,000,000 shares of undesignated preferred stock
and to fix the powers, preferences, rights and limitations of any such preferred
shares or any class or series thereof.
STOCK OPTION PLANS
In February 1992, the Company established the Stock Option Plan (the "1992
Plan") for employees and consultants which, as amended, provides for the grant
of options to purchase up to 1,100,000 shares of common
F-14
<PAGE>
stock, all of which options have been granted. Options granted under the 1992
Plan have a five-year term and vest ratably over a three-year period.
In December 1996, the Company established the 1996 Directors' Stock Option Plan
(the "1996 Directors' Plan") for its independent directors, which provides for
the grant of options to purchase up to 60,000 shares of common stock, all of
which options have been granted. Options granted under the 1996 Directors' Plan
have a ten-year term.
In June 1998, the Company established the 1998 Stock Option Plan of Eco-Soil
Systems, Inc. ("the 1998 Plan"). The 1998 Plan provides for the issuance of
up to 1,000,000 shares of common stock under incentive stock options and
nonqualified stock options. The exercise price of options shall be set by
the Company's Compensation Committee, provided that such price shall not be
less than 85% of the fair market value at the date of the grant, or 110% in
the case of any person possessing 10% combined voting power of all classes of
stock of the Company. In the case of incentive stock options, such price
shall not be less than 100% of the fair market value at the date of the
grant. The Company's Compensation Committee also shall determine the vesting
and other provisions of options granted under the 1998 Plan.
A summary of the Company's stock option activity and related information
for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------- -------- ---------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING--BEGINNING OF YEAR. . . 1,186,740 $4.06 719,791 $3.09 334,168 $2.25
GRANTED . . . . . . . . . . . . . 1,163,448 $6.82 634,900 $4.74 423,291 $3.60
EXERCISED . . . . . . . . . . . . (218,520) $3.12 (122,085) $2.00 (10,000) $2.00
FORFEITED/CANCELLED . . . . . . . (538,546) $5.81 (45,866) $3.68 (27,668) $2.25
------------- --------- -------
OUTSTANDING--END OF YEAR. . . . . . 1,593,122 $5.62 1,186,740 $4.06 719,791 $3.09
------------- --------- -------
EXERCISABLE--END OF YEAR. . . . . . 513,082 $4.06 398,191 $3.41 274,167 $2.26
------------- --------- -------
------------- --------- -------
</TABLE>
At December 31, 1998, options to purchase 29,381 shares of common stock
at a weighted average exercise price of $5.00 had been granted in excess of
the 1,000,000 shares initially authorized by the Board of Directors and
shareholders for issuance under the 1998 Plan. The Board of Directors has
authorized the excess grants and a 400,000 share increase in the number of
shares available for issuance under the 1998 Plan, subject to the approval of
shareholders at the next annual meeting of shareholders. The Company will
record deferred compensation at the time of shareholder approval for the
amount, if any, by which the fair market value of the stock on that date
exceeds the exercise prices of options granted in excess of the 1,000,000
share limit previously approved by the shareholders.
A summary of the company's stock options outstanding as of December 31,
1998, is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
RANGE OF OPTIONS WEIGHTED AVERAGE REMAINING OPTIONS WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
--------------- ------------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$3.00-3.875 206,291 $ 3.03 2.54 163,862 $ 3.01
$4.00-4.94 532,432 $ 4.09 3.00 238,212 $ 4.07
$5.00-10.875 854,399 $ 7.20 4.92 111,008 $ 5.58
--------- -------
1,593,122 513,082
--------- -------
--------- -------
</TABLE>
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, and has been determined as if the Company has accounted for its
employee stock plans under the fair value method of that statement. The fair
value for options granted in 1998 was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rates of 4.04% to 7.94%; dividend yield of 0%; volatility factor of
75.0%; and a weighted-average expected life of the option of three years. The
fair value for
F-15
<PAGE>
options granted in 1997 was estimated at the date of grant, using
the Black-Scholes method for option pricing with the following assumptions:
risk-free interest rates of 5.0% to 6.7%; dividend yield of 0%; volatility
factor of 72.6%; and a weighted-average expected life of the option of three
years. The fair value for options granted in 1996 was estimated at the date of
grant using the "minimum value" method with the following assumptions: risk-free
interest rate of 7.0%; dividend yield of 0%; and a weighted average expected
life of the option of three years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of such options. The
effects of applying SFAS 123 for pro forma disclosure purposes are not
likely to be representative of the effects on pro forma net loss or net income
in future years because they do not take into consideration pro forma
compensation expense related to grants made prior to 1996. The company's pro
forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31:
------------------
1998 1997 1996
------- ------- ---------
<S> <C> <C> <C>
Pro forma net loss. . . . . . . . . . . . . $(11,525) $(1,741) $(4,257)
------- ------- ---------
------- ------- ---------
Pro forma net loss per share, basic and
diluted . . . . . . . . . . . . . . . . . . $ (.70) $ (.15) $ (.73)
------- ------- ---------
------- ------- ---------
</TABLE>
OTHER OPTIONS AND WARRANTS
At various dates since 1991, the Company has issued options and warrants
outside of formal plans in connection with employment or consulting
agreements, debt or equity financing and the acquisition of technology or
marketing rights. As of December 31, 1998, options or warrants to purchase
4,106,289 shares of common stock were outstanding at a weighted average
exercise price of approximately $3 per share. Such options and warrants
generally are exercisable through 2003 or 2004.
SHARES RESERVED FOR FUTURE ISSUANCE
Shares have been reserved at December 31, 1998 for the following:
<TABLE>
<S> <C>
Stock option plans 1,593,122
Other options and warrants 4,106,289
---------
5,699,411
---------
---------
</TABLE>
6. INCOME TAXES
At December 31, 1998, the Company had federal and California tax net
operating loss carryforwards of approximately $17.1 million and $5.6 million,
respectively. The difference between the federal and California tax loss
carryforwards is primarily attributable to the fifty percent limitation on
California loss carryforwards. The federal tax loss carryforward will begin
expiring in 2003, unless previously utilized. California net operating
losses of $794,000 expired in 1998, and an additional California tax loss
carryforward will expire in 1999. In addition, the Company had federal and
California research tax credits of $112,000 and $63,000, respectively. The
tax credits will begin to expire in 2009.
Pursuant to Internal Revenue Code Sections 382 and 383, use of the
Company's net operating loss carryforwards is limited because of cumulative
changes in ownership of more than 50% which have occured. However, the
Company does not believe the limitations will have a material impact upon the
future utilization of these carryforwards.
Significant components of the Company's deferred tax assets as of
December 31, 1998 and 1997 are shown below. A valuation allowance of
$7,855,000 (of which $3,027,000 relates to 1998) has been provided, as the
realization of these assets is uncertain.
F-16
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards . . . $ 6,305 $ 4,552
Allowance for bad debt . . . . . . . . 433 47
Goodwill impairment. . . . . . . . . . 372 --
Deferred gain on sale/leaseback. . . . 231 --
Other, net . . . . . . . . . . . . . . 514 229
-------- --------
Total deferred tax assets. . . . . . . . 7,855 4,828
Valuation allowance for deferred tax
assets . . . . . . . . . . . . . . . . . (7,855) (4,828)
-------- --------
Net deferred tax assets. . . . . . . . . $ -- $ --
-------- --------
-------- --------
</TABLE>
The reconciliation of income tax computed at the federal statutory rates to
income tax expense is the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Tax at Statutory rate (3,502) (377)
Change in Valuation Allowance and other 3,502 377
---------- -----
0 0
---------- -----
---------- -----
</TABLE>
7. OPERATING LEASES
The Company leases its office facilities and certain equipment under
noncancelable operating lease agreements. Future minimum operating lease
payments as of December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999 . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,788
2000 . . . . . . . . . . . . . . . . . . . . . . . . . 1,310
2001 . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
2002 . . . . . . . . . . . . . . . . . . . . . . . . . 731
2003 . . . . . . . . . . . . . . . . . . . . . . . . . 604
Thereafter . . . . . . . . . . . . . . . . . . . . . . 2,867
-------
Total minimum lease payments . . . . . . . . . . . . $ 8,300
-------
-------
</TABLE>
Rent expense for the years ended December 31, 1998, 1997, and 1996 was
approximately $1,732,000, $581,000, and $268,000 respectively, including
$477,000, $151,000 and $90,000, respectively to related parties.
In June 1997, three officers and shareholders of the Company contracted to
buy land and acquired an option to build on land the building which currently
houses the Company's headquarters. In December 1997, the officers and
shareholders transferred the purchase option to the Company under an agreement
whereby the Company would exercise the purchase option, sell the building to an
independent party under a sale/leaseback transaction, and allocate a specific
portion of any gain on the sale to the officers and shareholders. In October
1998, the Company exercised the purchase option and acquired the building for
$2.4 million. In December 1998, the Company sold the building to an independent
party for a gain of $863,000 and signed a 10-year agreement to lease the
facility back from the independent party. In accordance with the original
transfer agreement, the Company allocated $282,000 of the gain to the officers
and shareholders. The remaining gain of $581,000 has been deferred and will be
recognized as a reduction of rent expense over the life of the lease.
In September 1997, the Company sold approximately $4.0 million of equipment
under operating leases to an unrelated investor group. The Company then leased
the equipment back under a 40-month lease agreement. The equipment is subleased
to end-users, generally under one-year initial lease terms with month-to-month
renewal options. In December 1997, $2.3 million of this equipment was
repurchased by the Company. Minimum operating lease payments at December 31,
1998 for the equipment remaining under the leaseback are as follows
(in thousands):
<TABLE>
<S> <C>
1999 . . . . . . . . . . . . . . . . . . . . . . . . . 503
2000 . . . . . . . . . . . . . . . . . . . . . . . . . 503
2001 . . . . . . . . . . . . . . . . . . . . . . . . . 84
------
$1,090
------
------
</TABLE>
8. LITIGATION
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"), has 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. While the
Company intends to vigorously defend itself against the lawsuit. Management
is unable to make an estimate of the amount or range of loss that could
result from an unfavorable outcome, if any.
From time to time the Company is involved in legal proceedings, claims and
litigations arising in the ordinary course of business. Management believes,
however, that the ultimate outcome of all pending litigation should not have
a material adverse effect on the Company's financial position or liquidity.
F-17
<PAGE>
9. SPECIAL CHARGES
During the fourth quarter of 1998, the Company incurred special charges of
$3.9 million as a result of the Company's action to reorganize certain of its
operations. The restructuring activities (shown below in tabular format)
primarily relate to: (a) reorganization of the Company into two separate
operating segments, Turf Partners and Agricultural Supply; b) the write-off of
impaired goodwill related to two businesses acquired in prior years and c) the
shutdown of its Aspen Consulting, Inc. subsidiary.
The Company expects the restructuring actions to be substantially complete
during the first half of fiscal 1999. A total of 28 employees were terminated
from almost all areas of the Company, with 12 having left the Company as of
December 31, 1998. The remaining employees will leave the Company during the
first half of fiscal 1999.
F-18
<PAGE>
Details of the restructuring charge (in thousands) are as follows:
<TABLE>
<CAPTION>
DESCRIPTION OF CHARGE: CASH/ AMOUNT CASH EXPENDED ACCRUED
- -------------------------------------- NON OF THROUGH LIABILITIES AT
CASH CHARGE DECEMBER 31, 1998 DECEMBER 31, 1998
---- ------ ----------------- -----------------
<S> <C> <C> <C> <C>
REORGANIZATION OF OPERATING STRUCTURE:
Severance of employees: Cash $ 338 $ 121 $ 217
Vacated lease facilities: Cash 55 -- 55
Write-downs of assets removed from
operations: Non-cash 93 -- --
Professional fees: Cash 59 2 57
Other: Cash 53 -- 53
------- --------------- ---------------
598 123 382
IMPAIRMENT LOSS ON CERTAIN ASSETS:
Goodwill related to Turf Products
subsidiary: Non-cash 1,487 -- --
Goodwill related to TurfMakers
subsidiary: Non-cash 919 -- --
------- --------------- ---------------
2,406 -- --
EXIT OF ASPEN CONSULTING OPERATIONS:
Severance of employees: Cash 143 -- 143
Write-downs of assets removed from
operations: Non-cash 575 -- --
Vacated lease facilities: Cash 84 -- 84
Other: Cash 69 -- 69
------- --------------- ---------------
871 -- 296
------- --------------- ---------------
Total Special Charges $3,875 $ 123 $ 678
------- --------------- ---------------
------- --------------- ---------------
</TABLE>
10. SEGMENT REPORTING
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.
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.
Business segment financial data for the year ended December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------
Agricultural Corporate
Turf Partners Supply and Other Total
-------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues.....................................$61,336 $21,035 $ - $ 82,371
Revenues from foreign customers (export
sales)..................................... 450 12,706 - 13,156
Interest expense............................. 100 302 2,092 2,494
Depreciation and amortization expense........ 1,527 666 481 2,674
Segment profit (loss)........................ 3,095 1,573 (14,673) (10,005)
Other significant non-cash items:
Special charges............................ 2,591 57 1,104 3,752
Segment assets............................... 35,266 24,728 7,011 67,005
</TABLE>
F-19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements" at page F-1.
<TABLE>
<CAPTION>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ECO SOIL SYSTEMS, INC.
DECEMBER 31, 1998
|--------------------Additions--------------------|
BALANCE AT CHARGED TO COSTS CHARGED TO BALANCE AT END
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
(-------------------------------------In thousands-------------------------------------)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts 115 1,521 400 (1) 775 (2) 1,261
Year Ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts 113 12 - 10 (2) 115
Year Ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts 24 89 - - 113
</TABLE>
(1) Charged to goodwill resulting from purchase price allocation.
(2) Uncollectible accounts writen off, net of recoveries.
F-20
<PAGE>
EXHIBIT 21.1
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
- ---- ------------------------------
<S> <C>
Agricultural Supply, Inc. Delaware
Aspen Consulting Companies, Inc. Colorado
Mitigation Services, Inc. Delaware
Turf Partners, Inc. Delaware
Yuma Acquisition Sub, Inc. Delaware
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-27509) pertaining to the 1992 Stock Option Plan
and 1996 Directors' Stock Option Plan of Eco Soil Systems, Inc. of our report
dated March 9, 1999, except for Note 4 and Note 8, as to which the date is
March 31, 1999, with respect to the consolidated financial statements of Eco
Soil Systems, Inc. included in its Annual Report (Form 10-K) for the year
ended December 31, 1998, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
San Diego, California
April 7, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF BIGELOW & COMPANY, CPA, P.C., INDEPENDENT AUDITORS
We consent to the use of our report dated January 23, 1997, with respect
to the financial statements of Turf Specialty, Inc., as a subsidiary of Eco
Soil Systems, Inc., which financial statements are not included in the Annual
Report (Form 10-K) of Eco Soil Systems, Inc., for the year ended December 31,
1998.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-27509) pertaining to the 1992 Stock Option Plan
and 1996 Directors' Stock Option Plan of Eco Soil Systems, Inc. of our report
dated January 23, 1997 with respect to the financial statements of Turf
Specialty, Inc., as a subsidiary of Eco Soil Systems, Inc. included in the
Annual Report (Form 10-K) of Eco Soil Systems, Inc. for the year ended
December 31, 1998, filed with the Securities and Exchange Commission.
BIGELOW & COMPANY
Certified Public Accountants, P.C.
Manchester, New Hampshire
April 7, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1997 DEC-31-1997
<PERIOD-START> OCT-01-1998 JAN-01-1998 OCT-01-1997 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1998 DEC-31-1997 DEC-31-1997
<CASH> 3,410 3,410 6,125 6,125
<SECURITIES> 0 0 0 0
<RECEIVABLES> 13,523 13,523 10,148 10,148
<ALLOWANCES> 1,261 1,261 115 115
<INVENTORY> 10,475 10,475 4,515 4,515
<CURRENT-ASSETS> 33,696 33,696 21,324 21,324
<PP&E> 16,383 16,383 8,957 8,957
<DEPRECIATION> 4,790 4,789 1,594 1,608
<TOTAL-ASSETS> 67,005 67,005 37,108 37,108
<CURRENT-LIABILITIES> 15,276 15,276 5,916 5,916
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 85 85 77 77
<OTHER-SE> 28,458 28,458 29,703 29,703
<TOTAL-LIABILITY-AND-EQUITY> 67,005 67,005 37,108 37,108
<SALES> 17,089 82,371 8,384 37,525
<TOTAL-REVENUES> 17,089 82,371 8,384 37,525
<CGS> 13,522 58,436 6,232 25,291
<TOTAL-COSTS> 13,522 58,436 6,232 25,291
<OTHER-EXPENSES> 13,419 31,196 4,007 12,830
<LOSS-PROVISION> 1,458 1,521 1 12
<INTEREST-EXPENSE> 1,715 2,494 78 579
<INCOME-PRETAX> (11,266) (9,101) (1,907) (1,078)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (11,266) (9,101) (1,907) (1,078)
<DISCONTINUED> 904 904 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (12,170) (10,005) (1,907) (1,078)
<EPS-PRIMARY> (.73) (.61) (.15) (.10)
<EPS-DILUTED> (.73) (.61) (.15) (.10)
</TABLE>
