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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the
- --- Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
Transition report pursuant to Section 13 or 15(d) of the Exchange Act.
- --- For the transition period from ___________ to ___________
Commission File Number: 0-21975
ECO SOIL SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
NEBRASKA 47-0709577
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10740 THORNMINT ROAD
SAN DIEGO, CALIFORNIA 92127
(Address, Including Zip Code, of Principal Executive Offices)
(619) 675-1660
(Registrant's Telephone Number, Including Area Code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of May 4, 2000, 18,597,299 shares
of the Registrant's Common Stock, $.005 par value per share, were outstanding.
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INDEX
ECO SOIL SYSTEMS, INC.
FORM 10-Q
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure of Market Risk 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 3. Defaults upon Senior Securities 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
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PART I
ITEM 1. FINANCIAL INFORMATION
ECO SOIL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(unaudited) (note)
----------- ------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,224 $ 1,228
Accounts receivable, net of allowance for doubtful accounts of $1,893
and $2,204 at March 31, 2000 and December 31, 1999, respectively 23,362 21,675
Inventories 15,881 16,360
Prepaid expenses and other current assets 5,605 4,588
----------- -----------
Total current assets 46,072 43,851
Equipment under construction 5,037 5,041
Property and equipment, net 14,180 14,450
Intangible assets, net 14,075 14,374
Other assets 7,559 4,839
----------- -----------
Total assets $ 86,923 $ 82,555
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 26,364 $ 24,438
Accrued expenses 4,769 5,809
Current portion of long-term obligations 40,384 34,276
----------- -----------
Total current liabilities 71,517 64,523
Long-term obligations, net of current portion 1,049 1,482
Deferred gain on sale/leaseback of building 509 523
Other 672
-
Shareholders' equity:
Preferred stock
$.005 par value; 5,000,000 shares authorized; - -
none issued and outstanding
Common stock
$.005 par value; 50,000,000 shares authorized at March 31, 2000 and
December 31, 1999, 18,584,966 and 18,349,965 shares issued and
outstanding at March 31, 2000 and December 31, 1999, respectively 93 92
Additional paid-in capital 57,389 55,578
Warrants 4,126 2,733
Accumulated deficit (48,432) (42,376)
----------- -----------
Total shareholders' equity 13,176 16,027
----------- -----------
Total liabilities and shareholders' equity $ 86,923 $ 82,555
=========== ===========
</TABLE>
See accompanying notes
Note: The Balance Sheet at December 31, 1999 is derived from the audited
financial statements at that date, but does not include all of the
disclosures required by generally accepted accounting principles.
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ECO SOIL SYSTEMS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Revenues:
Turf Partners $ 12,527 $ 11,659
Agricultural Supply 5,864 5,593
------------ ------------
Total revenues 18,391 17,252
Cost of revenues:
Turf Partners 9,222 9,252
Agricultural Supply 4,247 4,063
------------ ------------
Total cost of revenues 13,469 13,315
Gross profit 4,922 3,937
Operating expenses:
Selling, general and administrative 8,561 7,768
Research and development 114 93
Amortization of intangibles 293 309
------------ ------------
Loss from operations (4,046) (4,233)
Interest expense 2,027 710
Interest income 17 143
------------ ------------
Net loss $ (6,056) $ (4,800)
============ ============
Net loss per share, basic and diluted $ (0.33) $ (0.28)
------------ ------------
Shares used in calculating net loss per share, basic
and diluted 18,535 17,182
============ ============
</TABLE>
See accompanying notes.
4
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ECO SOIL SYSTEMS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss (6,056) (4,800)
Adjustments to reconcile net cash used in operating activities:
Depreciation and amortization 1,063 868
Amortization of debt issuance costs and discount on long term debt 813 82
Deferred rent (15)
Provision for losses on accounts receivable 134 77
Loss/(gain) on sale of property and equipment 17 (16)
Issuance of stock options/warrants for services 51 204
Changes in operating assets and liabilities,
net of effect of acquired businesses:
Accounts receivable (1,930) (5,034)
Inventories 298 (4,209)
Prepaid expenses and other assets (724) 144
Accounts payable 1,941 10,012
Accrued expenses (410) (1,031)
----------- ----------
Net cash used in operating activities (4,818) (3,703)
INVESTING ACTIVITIES:
Proceeds from the sale of property and equipment - 36
Purchase of property and equipment (308) (1,466)
----------- ----------
Net cash used in investing activities (308) (1,430)
FINANCING ACTIVITIES:
Advances (to) from shareholders - 5
Proceeds from short-term obligations 19,184 -
Repayments from short-term obligations (13,411) -
Proceeds from long-term obligations - 2,349
Repayments of long-term obligations (100) (64)
Net proceeds from issuance of common stock 44 325
Debt Issunce Costs (595) -
----------- ----------
Net cash provided by financing activities 5,122 2,615
----------- ----------
Net decrease in cash (4) (2,518)
Cash and cash equivalents at beginning of period 1,228 3,410
----------- ----------
Cash and cash equivalents at end of period $ 1,224 $ 892
=========== ==========
</TABLE>
See accompanying notes
5
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ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of Eco Soil Systems, Inc. (the "Company"), all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair statement of the results for the three-month periods ended March 31, 2000
and 1999 have been made. The results of operations for the three-month period
ended March 31, 2000 are not necessarily indicative of the results to be
expected for the full fiscal year. For further information, refer to the audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999.
2. NET LOSS PER SHARE
In accordance with Financial Accounting Standards Board Statement No. 128,
"Earnings per share" ("SFAS 128"), basic earnings per share is calculated by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of the Company such as common stock
which may be issuable upon exercise of outstanding stock options and warrants.
These shares are excluded when their effects are antidilutive.
3. SEGMENT INFORMATION
For purposes of analyzing and understanding the financial statements, the
Company's operations have been classified into the following business segments:
TURF PARTNERS: This segment enters into contracts with golf courses or turf
maintenance service businesses, or distributors that sell to those end-user
markets to manage the health and productivity of their soil during the golf
season. The contracts require 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 throughout the season. This segment also wholesales and distributes a
wide range of traditional chemical and turf maintenance products and golf course
supplies to the above-mentioned market.
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.
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3. SEGMENT REPORTING (CONTINUED)
During the second quarter of 1999, Turf Partners and Agricultural Supply
entered into lease agreements with the Company for the proprietary BioJect
systems. Therefore, the revenues, profits and asset values related to the
BioJect systems are reported in the Corporate segment. In the first quarter of
1999, these inter-company lease agreements did not exist; therefore, the
revenues, gross profit and asset values were reported in the Turf Partners and
Agricultural Supply segments, respectively.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. The Company
allocates resources and evaluates the performance of segments based on net
profit or loss.
<TABLE>
<CAPTION>
REVENUES SEGMENT LOSSES SEGMENT ASSETS
-------- -------------- --------------
FOR THE THREE MONTHS ENDED MARCH 31, MARCH 31,
------------------------------------ ---------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
TURF PARTNERS $ 12,527 $ 11,659 $ (1,489) $ (1,645) $ 40,016 $ 41,945
AGRICULTURAL SUPPLY 5,864 5,593 (128) (26) 23,722 25,083
CORPORATE AND OTHER - - (4,439) (3,129) 23,185 7,072
--------- -------- --------- --------- -------- --------
TOTAL $ 18,391 $ 17,252 $ (6,056) $ (4,800) $ 86,923 $ 74,100
========= ======== ========= ========= ======== ========
</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in this Management's Discussion and Analysis
that are not related to historical results are forward-looking statements.
Actual results may differ materially from those projected or implied in the
forward-looking statements. Further, certain forward-looking statements are
based upon assumptions of future events, which may not prove to be accurate.
These forward-looking statements involve risks and uncertainties including but
not limited to those referred to in "Item 5. Other Information. Factors That
Could Affect Future Performance."
This information should be read in conjunction with the financial
statements and notes thereto included in Item 1 of this report for the quarter
ended March 31, 2000. Additionally, the financial statements and notes thereto
and Management's Discussion and Analysis in the Company's Annual Report on Form
10-K for the year ended December 31, 1999 will provide additional information.
In addition to other endeavors, the Company develops, markets and sells
proprietary biological and traditional chemical products to two principal
segments: the turf and golf management market ("Turf Partners") and the
agricultural and crop market ("Agricultural Supply").
FIRST QUARTER ENDED MARCH 31, 2000 COMPARED TO FIRST QUARTER ENDED
MARCH 31, 1999
RESULTS OF OPERATIONS
REVENUES
For the first quarter of 2000, our revenues were $18.4 million, an increase
of 6.6% versus $17.3 million for the first quarter of 1999. The increase in
revenues reflects an increase in both Turf Partners and Agricultural Supply
segment revenues.
For the first quarter of 2000, our Turf Partners revenues were $12.5
million, an increase of 7.4% versus $11.7 million for the first quarter of 1999.
Proprietary sales for Turf Partners increased to $352,000 during the first
quarter of 2000 from $346,000 during the first quarter of 1999. Distributed
sales increased from $12.2 million for the first quarter of 2000 from $11.3
million during the first quarter of 1999. The increase in distributed sales is
due to the integration of the former Scotts' salesmen into the sales force,
which had not been accomplished in the first quarter of 1999.
For the first quarter of 2000, our Agricultural Supply revenues were $5.9
million, an increase of 4.8% versus $5.6 million for the first quarter of 1999.
Proprietary sales for Agricultural Supply increased to $940,000 during the first
quarter of 2000 from $199,000 during the first quarter of 1999. The increase in
proprietary revenues was primarily due to our first deliveries of our new RhizUp
product. Distributed sales decreased to $4.9 million during the first quarter of
2000 compared to $5.4 million for the first quarter of 1999. The decrease in
distributed sales was due to poor climate conditions in our agricultural
markets.
GROSS PROFIT
For the first quarter of 2000, our gross profit was $4.9 million, an
increase of 25.0% versus $3.9 million for the first quarter of 1999. The
increase in gross profit was due to the increase in both Turf Partners and
Agricultural Supply segment revenues. For the first quarter of 2000, our gross
margin was 26.8% versus 22.8% for the first quarter of 1999. The increase in
gross margin is attributed to a greater mix of proprietary sales, resulting in
part from the new "Focus Products" sales commission program in the Turf
Partners business, that rewards for the sale of higher margin products.
For the first quarter 2000, the gross profit on Turf Partners revenues was
$3.3 million, an increase of 37.3% versus $2.4 million for the first quarter
1999. The increase in gross profit on Turf Partners revenues is related to the
increase in distributed revenues. For the first quarter of 2000, the gross
margin on Turf Partners products was 26.4%
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versus 20.7% for the first quarter of 1999. The increase in gross margin is due
to the new sales commission program discussed above.
For the first quarter 2000, the gross profit on the Agricultural Supply
revenues was $1.6 million, an increase of 5.7% versus $1.5 million for the first
quarter 1999. For the first quarter 2000, the gross margin on the Agricultural
Supply sales was 27.6% versus 27.4% for the first quarter 1999. The gross margin
associated with the increased sales of proprietary products was offset by the
lower margin distributed sales. Gross margin on distributed sales was
negatively impacted due to lower inventory rebates (applied against cost of
goods sold) in the first quarter 2000 compared to the first quarter 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For the first quarter 2000, selling, general and administrative ("SG&A")
expense was $8.6 million, an increase of 10.1% versus $7.8 million for the first
quarter of 1999. SG&A expense as a percentage of revenues was 46.6% for the
first quarter 2000 compared to 45.0% for the first quarter 1999. The increase in
SG&A was primarily due to additional overhead related to opening new locations
in our Agricultural Supply segment, the additional personnel costs associated
with the Scotts' sales force that was integrated in the second quarter of 1999
and additional costs related to corporate personnel.
RESEARCH AND DEVELOPMENT
For the first quarter of 2000, research and development expense was
$114,000, compared to $93,000 for the first quarter of 1999. The increase in
research and development expense is due to ongoing analysis and testing of
proprietary technology by Eco Soil, particularly the microbes obtained from
Agrium in September 1999.
AMORTIZATION EXPENSE
For the first quarter of 2000, amortization expense was $293,000, compared
to $309,000 for the first quarter of 1999.
INTEREST EXPENSE
For the first quarter of 2000, interest expense was $2.0 million, an
increase of 186.0% versus $710,000 for the first quarter 1999. The increase in
interest expense reflects an increase in the amount of debt outstanding and
amortization of debt issuance costs.
NET LOSS
For the first quarter of 2000, net loss was $6.1 million or $0.33 per share
compared to a net loss of $4.8 million or $0.28 per share for the first quarter
of 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception from revenues from sales of
our products, sales of our common stock, borrowings from our principal
shareholders and debt financing. For the first quarter of 2000, our operating
and investing used cash of $5.1 million.
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 Senior Subordinated Notes due 2003 pursuant to Note and Warrant
Purchase Agreements dated as of August 25, 1998 between Albion Alliance
Mezzanine Fund and us and between Paribas Capital Funding LLC and us. We have
entered into a series of amendments of the Note and Warrant Purchase Agreements,
which have, among other things, changed the rate of interest payable on the
notes, eliminated prepayment penalties on the notes and revised financial
covenants.
On June 30, 1999, our Turf Partners subsidiary entered into a credit
agreement with Coast Business Credit (the "Coast Working Capital Facility"). The
Coast Working Capital Facility is a $25 million three-year credit facility
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based upon Turf Partners' eligible inventory and receivables and has an interest
rate of prime rate plus 1.00%. On July 2, 1999, the Company drew down on the
facility and paid all amounts due under and terminated a line of credit with
Imperial Bank. As of March 31, 2000, Turf Partners had fully utilized the
availability under the Coast Working Capital Facility based on its eligible
inventory and receivables. However, based on an increased advance rate and loan
limit on inventory, an additional $3 million in working capital will be
available in the second quarter.
On June 30, 1999 The Company's wholly owned subsidiary Agricultural Supply,
Inc. entered into a credit agreement with First National Bank (the "FNB Working
Capital Facility"). The FNB Working Capital Facility is a $10 million;
three-year credit facility based upon Agricultural Supply's eligible inventory
and receivables and has an interest rate of prime plus .25%. As of March 31,
2000, Agricultural Supply had fully utilized the availability under the FNB
Working Capital Facility based on its eligible inventory and receivables.
On July 31, 1999, the Company obtained a $2.5 million, two-year term loan
from Coast Business Credit (the "Coast Term Loan"). The Coast Term Loan bears
interest at Coast's prime rate plus 2.25%, payable monthly. One third of the
principal must be repaid in level monthly payments during the first year of the
term, with the remainder due in level monthly payments during the second year of
the term. The Coast Term Loan is secured by substantially all of the assets of
the parent Company, and has been guaranteed by Turf Partners.
On January 24, 2000, the Company issued $4.5 million of Senior Secured
Convertible Debentures (the "Debentures") and warrants to purchase 356,436
shares of common stock. The Debentures are due January 24, 2001 and bear
interest at a rate of 7% per annum, which is due quarterly beginning March 31,
2000, and is payable in cash or common stock at our option.
The Company's Senior Subordinated Notes (the "Notes"), the Debentures, the
Coast Term Loan and the respective working capital facilities 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, the Coast Term Loan and the respective working
capital facilities 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 March 31, 2000, the Company was not in compliance with
certain of these covenants. First National Bank has provided a waiver of such
covenants through March 31, 2000. Also, Coast Business Credit and the lenders
for the Notes have provided waivers of such covenants through July 31, 2000.
Management expects to be in compliance with covenants on the Coast Term Loan and
respective working capital facilities after the waivers expire and to remain in
compliance through December 31, 2000. However, there can be no assurance that
the Company will remain in compliance, and therefore, the Company has classified
the debt associated with the Notes as current in the accompanying balance sheet.
The Company has entered into a definitive agreement to sell substantially
all of the assets of its Turf Partners subsidiary to the J.R. Simplot Company
for a purchase price equal to six times Turf Partners 2000 EBITDA (earnings
before interest, taxes, depreciation and amortization) from sales of distributed
products, subject to certain adjustments. Simplot also will assume liabilities
associated with existing vendor payables, contracts and leases, and will assume
amounts outstanding under the Coast Working Capital Facility.
The transaction is expected to close during July 2000, subject to certain
customary closing conditions, including the approval of Eco Soil shareholders,
the receipt of various third party consents and the expiration of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act. At the closing,
Simplot will make a down payment of $20 million, subject to an adjustment of up
to $5 million if: (a) Turf Partners' net tangible assets at June 30, 2000 are
more or less than $3 million, (b) if Turf Partners has not generated at least
75% of the EBITDA it has projected for the first six months of 2000 or (c) if
Turf Partners fails to satisfy other balance sheet tests. The down payment also
will be reduced by the amount, if any, by which the amount outstanding on the
Coast Working Capital Facility exceeds $17 million.
Simplot will pay the balance of the purchase price in March 2001 based on
an audited balance sheet as of June 30, 2000 and statements of operations for
the year ended December 31, 2000. The final purchase price will be subject to
adjustment based on the same balance sheet factors that apply in July 2000 and
will be reduced by the an amount equal to the average amount outstanding under
the Coast Working Capital Facility during 2000.
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We have entered into a Term Loan Agreement dated as of April 12, 2000 with
Simplot, under which Simplot will loan us $3 million, subject to certain closing
conditions, to provide working capital to Turf Partners pending the closing of
the asset sale.
The Company intends to finance its future operations and growth through a
combination of cash flows from operations, borrowings available under lines of
credit and public or private debt or equity financing. In the event that the
sale of Turf Partners assets to Simplot is not consummated, Eco Soil will need
to obtain additional financing to repay the term loan from Simplot and other
outstanding long-term debt and to finance continuing operating losses. In such
event, there can be no assurance that Eco Soil will be successful in obtaining
additional financing on acceptable terms or at all, which would result in a
material adverse effect on the Company's ability to meet its business objectives
and continue as a going concern.
YEAR 2000
In prior periods, we discussed the nature and progress of our plans to
become Year 2000 ready. During the fourth quarter of 1999, we completed the
upgrading of our existing computer software and information technology ("IT")
systems. In addition, we completed the testing of our utility systems (heat,
light, telephones, etc.) and other non-IT systems. Through April 2000, we have
experienced no significant disruptions in critical IT and non-IT systems and
believe those systems responded to the Year 2000 date change. The Company
expensed a minimal amount of funds in connection with testing and remediating of
our systems. The Company is not aware of any material problems resulting from
Year 2000 issues, either with our products, our internal systems or the products
and services of third parties. The Company will continue to monitor our IT and
non-IT systems and those of our suppliers and vendors throughout Year 2000.
If significant yet to be identified Year 2000 issues arise, we may
experience significant problems that could have a material adverse affect on our
financial condition and results of operations. Litigation regarding Year 2000
issues is possible. It is uncertain whether, or to what extent, we may be
affected by such litigation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's foreign sales are principally to Mexico. All foreign
transactions are denominated in U.S. dollars; therefore, the Company's exposure
to foreign currency fluctuations is minimal.
The Company is exposed to changes in interest rates from the Notes and
Debentures, which are due in full in 2003 and 2001, respectively. 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 these
debt instruments by approximately $409,000 as of March 31, 2000.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 24, 1999, a purported class action securities complaint was
filed against the Company and three of its officers and/or directors, William B.
Adams, Douglas M. Gloff and Mark. D. Buckner, by Edward Wissinger. The suit is
allegedly brought by Mr. Wissinger on behalf of all purchasers of Eco Soil
common stock during the period from April 13, 1999 (the date Eco Soil filed its
Annual Report on Form 10-K for the year ended December 31, 1998 with the
Securities and Exchange Commission) and November 3, 1999 (the date on which Eco
Soil issued its quarterly earnings release for the three months ended September
30, 1999). The complaint alleges that defendants failed to sufficiently identify
certain risks associated with the Company's agricultural business in Mexico,
thereby artificially inflating the Company's stock price. The Company and the
individual defendants believe the allegations are without merit and are
defending the case vigorously. The Company and the individual defendants filed a
motion to dismiss the complaint on December 28, 1999, which is scheduled to be
heard June 19, 2000.
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 3. DEFAULTS UPON SECURITIES
The Company's Notes, the Coast Term Loan and the respective working capital
facilities 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, the Coast Term Loan
and the respective working capital facilities 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 March 31, 2000, the
Company was not in compliance with certain of these covenants. First National
Bank has provided a waiver of such covenants through March 31, 2000. Also, Coast
Business Credit and the lenders for the Notes have provided waivers of such
covenants through July 31, 2000. Management expects to be in compliance with
covenants on the Coast Term Loan and respective working capital facilities after
the waivers expire and continuing through December 31, 2000. However, there can
be no assurance that the Company will remain in compliance and therefore, the
Company has classified the debt associated with the Notes as current in the
accompanying balance sheet.
ITEM 5. OTHER INFORMATION
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
This report contains certain forward-looking statements about the business
and financial condition of the Company, including various statements contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The actual results of the Company could differ materially from any
forward-looking statements contained herein. The following information sets
forth certain factors that could cause the actual results to differ materially
from those contained in the forward-looking statements. For a more detailed
discussion of the factors that could cause actual results to differ, see "Item
1: Business -- Factors That Could Affect Future Performance" in the Company's
Form 10-K for the fiscal year ended December 31, 1999.
At March 31, 2000, we had an accumulated deficit of $48.4 million. Our loss
before interest, depreciation and amortization for the quarter ended March 31,
2000 was $3.0 million. We have historically experienced losses due to
significant expenditures for product development, sales, marketing and
administrative costs, as well as amortization costs associated with our
acquisitions of turf and agricultural products dealers.
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Our proprietary 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 our efforts to increase sales of proprietary products to turf
and agricultural crop and ornamental markets will prove successful, that
marketing partnerships will be established and will become successful, or that
our intended customers will purchase our systems and products instead of
competing products. In addition, there can be no assurance that we will be able
to obtain significant customer satisfaction or market share with our proprietary
products.
Due to our history of operating losses and because we may not be able to
satisfy financial covenants contained in our long-term debt instruments, there
is substantial doubt about our ability to continue as a going concern unless we
are able to obtain additional equity financing. We anticipate that without
additional financing we would likely run out of cash to fund our operations
during the third quarter of 2000. As noted in the "Liquidity and Capital
Resources" section, we and our wholly owned subsidiary Turf Partners, Inc. have
entered into an Amended and Restated Asset Purchase Agreement pursuant to which
Turf Partners will sell substantially all of its assets to the J.R. Simplot
Company. Also, we have entered into a Term Loan Agreement dated as of April 12,
2000 with Simplot, under which Simplot will loan us $3 million, subject to
certain closing conditions, to provide working capital to Turf Partners pending
the closing of the asset sale. Furthermore, an additional $3 million will be
available form the Coast Working Capital Facility in the second quarter. We
currently do not have any arrangements to obtain other sources of financing. We
also cannot give you any assurance that the sale of Turf Partners' assets will
be completed. In the event that the sale of Turf Partners assets to Simplot is
not consummated, we will need to obtain additional financing to repay the loan
from Simplot and other outstanding long-term debt and to finance continuing
operating losses. In such event, there can be no assurance that Eco Soil will be
successful in obtaining additional financing on acceptable terms or at all,
which would result in a material adverse effect on our ability to meet our
business objectives and continue as a going concern. If we were unable to secure
such financing, we would at a minimum be forced to revise our 2000 operating
plan. The report of independent accountants in our financial statements for the
period ended December 31, 1999, filed on Form 10-K with the Commission, includes
an explanatory paragraph to this effect.
We have received a term loan and our subsidiaries have received lines of
credit from financial institutions, and we have received debt financing from
institutional investors through the issuance of convertible debentures and
senior subordinated notes. The loan documents to which we and our subsidiaries
are parties, including the senior subordinated notes, contain restrictions on
our activities and financial covenants with which our subsidiaries and we must
comply. Among other things, the financial covenants require us and our
subsidiaries to satisfy net worth requirements, debt service coverage ratios and
other financial tests. In the past, we have obtained waivers and an amendment of
the senior subordinated notes to remain in compliance with the financial
covenants and avoid default. For example, for the quarter ended December 31,
1999, our failure to comply with these covenants resulted in a default under the
senior subordinated notes, which was subsequently waived by the note holders.
There can be no assurance that we and our subsidiaries will satisfy all of the
applicable financial covenants in future quarters. To the extent we or any of
our subsidiaries does not satisfy these requirements, we would be in default and
our obligations could be declared immediately due and payable. To avoid a
default, we may be required to obtain waivers from third parties, which might
not be granted. A default on indebtedness from one lender could result in the
acceleration of indebtedness from other lenders. In addition, we also can give
no assurance that our cash flow and capital resources will be sufficient to
repay our indebtedness or that we will be successful in obtaining alternate
financing. In the event we or any of our subsidiaries is unable to repay debts,
we may be forced to delay the expansion of our business, sell some of our
assets, obtain additional equity capital or refinance or restructure our debt,
any of which could have a material adverse effect on our business, prospects and
financial condition.
Our agreement with the holders of our 7% Senior Convertible Debentures
prohibits us from selling any shares of our capital stock or securities
convertible into shares of our capital stock for a period of 180 days after
January 24, 2000 except (i) pursuant to the exercise of outstanding warrants, or
options issued pursuant to any shareholder-approved stock option plan, (ii) to
any strategic partner, the purpose of which is not primarily to raise money, or
(iii) the sale of shares of common stock at a price of not less than $2.50 per
share with warrant coverage of up to 40% for aggregate proceeds of up to
$3,500,000. In addition, until 12 months after January 24, 2000, we must give
such holders (i) a right of first refusal to purchase shares of our capital
stock or capital stock equivalents on the same terms on which we are prepared to
sell them to other investors and (ii) if such holders do not exercise their
right of first refusal, the further right to exchange their convertible
debentures and warrants for an equivalent dollar amount of the
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<PAGE>
new securities we offer. These restrictions may impair our ability to raise
equity capital on terms satisfactory to us, if at all--particularly during the
first 180 days after January 24, 2000. During such 180-day period, we would be
able to sell equity securities only pursuant to one of the exceptions listed
above or with the consent of the holders of our convertible debentures. Our
inability to raise needed funds would have a material adverse effect on our
business, financial condition and results of operations.
We have received a notice from the Nasdaq Stock Market that our net
tangible assets at December 31, 1999 did not meet Nasdaq's $4,000,000 net
tangible assets requirement for continued listing on the Nasdaq National Market.
Accordingly, Nasdaq has advised us that it is reviewing our eligibility for
continued listing. For Nasdaq purposes, net tangible assets equal total assets
minus total liabilities minus goodwill minus redeemable securities. Based on a
review of our Annual Report on Form 10-K, Nasdaq calculated our net tangible
assets at December 31, 1999 to be $3,044,089. If Nasdaq were to apply the same
calculation to our March 31, 2000 balance sheet, our net tangible assets would
be even less. Nasdaq has asked us to submit a specific plan to achieve and
sustain compliance with all Nasdaq National Market listing requirements. We
intend to submit such a plan, in which we will point out, among other things,
that completion of the pending sale of the assets of our Turf Partners
subsidiary to Simplot would bring us back into compliance with the net tangible
assets requirement. If Nasdaq determines that our plan does not adequately
address Nasdaq's concerns, Nasdaq may immediately send a formal notice of
deficiency and commence the delisting process. If Nasdaq were to begin delisting
proceedings against us, it could reduce the level of liquidity currently
available to our stockholders. If our common stock were delisted, the price of
the common stock would, in all likelihood, decline. In addition, it would be an
event of default under our Convertible Subordinated Debentures if our shares
were delisted from Nasdaq.
If our common stock is delisted from the Nasdaq National Market, we could
apply to have the common stock quoted on the Nasdaq SmallCap Market. The Nasdaq
SmallCap Market has a similar set of criteria for initial and continued
quotation. We may not, however, meet the requirements for initial or continued
quotation on the Nasdaq SmallCap Market. If we were not able to meet the
requirements of the Nasdaq SmallCap Market, trading of our common stock could be
conducted on an electronic bulletin board established for securities that do not
meet the Nasdaq SmallCap Market listing requirements, in what is commonly
referred to as the "pink sheets."
Distribution and sales of the Company's products have historically occurred
through direct sales efforts and independent dealers and distributors. The
Company has initiated a strategy of attempting to establish a nationwide
distribution system for its products through the acquisition of various
independent dealers and distributors. Any failure to identify acquisition
candidates properly, any large expenditures on acquisitions that prove to be
unprofitable, or any inability to sell the Company's proprietary products
through the acquired distribution system could have a material adverse effect on
the Company's business, financial position and results of operations.
The Company's success will be dependent in large measure upon its ability
to obtain and enforce patent protection for its products, maintain
confidentiality of its trade secrets and know-how and operate without infringing
upon the proprietary rights of third parties. Despite precautions taken by the
Company, it may be possible for a third party to copy or otherwise obtain or use
the Company's products or technology without authorization, or to develop
similar products or technology independently.
The Company plans to acquire the rights to additional microbial products.
The Company does not engage in its own research and development with respect to
microbial products. Although the Company is actively seeking to obtain licenses
for additional microbial products, there can be no assurance that the Company
will be successful in obtaining any such licenses on terms acceptable to the
Company, if at all.
In September of 1999, Eco Soil acquired the Agricultural Biological
Division (AgBio) of Canadian-based Agrium, Inc. Among other things, the
acquisition included a microbiological collection in excess of 2,500 unique
biocontrol and growth-promoting microorganisms. Eco Soil has increased its
research and development efforts to determine which microbes will be suitable
for distribution through the BioJect system or as a new FreshPack product. We
may not be successful, however, in identifying microbes that will be suitable
for commercial deployment or in creating products comprised of these microbes.
Even if we do identify product candidates, we will need to obtain EPA approvals
of the products to market them as pesticides. In order to market a microbial
product as a pesticide, we must obtain EPA approval of a particular product
containing that microbe, including EPA approval of the claims
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<PAGE>
made in the product label and the method of application. In addition, if a
microbe is sold as a pesticide for use on crops, we 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
at the time of harvest. Registration of microbial products as pesticides is a
lengthy and expensive process that may or may not result in EPA approval. Also,
third parties may develop superior products or have proprietary rights that
preclude us from marketing our products. If research and testing is not
successful or we fail to obtain regulatory approval, we may be unable to sell
products based on the microbes we obtained from Agrium or any other microbes.
The Company may be exposed to liability resulting from the commercial
use of its products. Such liability might result from claims made directly by
customers or others manufacturing such products on behalf of the Company. The
Company currently carries product liability insurance. There can be no
assurance, however, that such product liability insurance will adequately
protect the Company against any product liability claim. A product liability
or other claim with respect to uninsured liabilities or in excess of insured
liabilities could have a material adverse effect on the business and
prospects of the Company.
Some states have laws imposing liability on certain parties for the release
of fertilizers and other agents into the environment in certain manners or
concentrations. Such liability could include, among other things, responsibility
for cleaning up the damage resulting from such a release. In addition, the
federal Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), commonly known as the "Superfund" law, and other applicable laws
impose liability on certain parties for the release into the environment of
hazardous substances, which might include fertilizers and water treatment
chemicals. The Company is also subject to certain other environmental laws,
including the Environmental Protection Act, the Toxic Substance Control Act, the
Resource Conservation and Recovery Act, the Clean Air Act and the Clean Water
Act and may be subject to other present and potential future federal, state or
local regulations. The Company does not currently maintain insurance for any
environmental claims, which might result from the release of its products into
the environment in a manner or in concentrations not permitted by law. Thus, a
claim for environmental liability could have a material adverse effect on the
Company.
The Company competes for market share with a number of companies that
manufacture and market chemical compounds. In addition, a number of companies
are developing biological and organic products for turf maintenance and
agricultural applications. Many of these competitors have substantially greater
capital resources, research and development staffs and facilities than the
Company, and many of these competitors have extensive experience in turf
maintenance and agriculture. The fields of biotechnology and related
technologies in which the Company is engaged have undergone rapid and
significant technological changes. The Company expects that the technologies
associated with its research and development will continue to develop rapidly.
There can be no assurance that the Company will be able to establish itself in
such fields or, if established, that it will be able to maintain a competitive
position. Further, there can be no assurance that the development by others of
new or improved processes or products will not make the Company's products and
processes less competitive or obsolete.
The Company is dependent upon the active participation of William B. Adams,
its Chairman of the Board and Chief Executive Officer. The loss of the services
of Mr. Adams could have a material adverse effect upon the Company's future
operations. The Company's success depends in large part on its ability to
attract and retain qualified scientific, financial and management personnel. The
Company faces competition for such persons from other companies, academic
institutions, government entities and other organizations. There can be no
assurance that the Company will be successful in recruiting or retaining
personnel of the requisite caliber or in adequate numbers to enable it to
conduct its business as proposed.
15
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits:
10.1 (2) Convertible Debentures and Warrant Purchase Agreement, dated as of
January 17, 2000, by and among Eco Soil Systems, Inc.,
Agricultural Supply, Inc., Turf Partners, Inc., Sistemas Y Equipos
Agricolas, S.A. de C.V., Agricultural Supply de Mexico, S.A. de
C.V. and the investors signatory thereto.
10.2 (2) 7% Senior Secured Convertible Debentures, dated as of January 24,
2000, in favor of the investors listed on Schedule 1 attached
thereto.
10.3 (2) Stock Purchase Warrant, dated as of January 24, 2000, issued to
the investors listed on Schedule 1 attached thereto.
10.4 (2) Registration Rights Agreement, dated as of January 17, 2000,
between Eco Soil Systems, Inc. and the investors signatory
thereto.
10.5 (2) Security Agreement, dated as of January 17, 2000, by and among Eco
Soil Systems, Inc., Agricultural Supply, Inc., Turf Partners,
Inc., Sistemas Y Equipos Agricolas, S.A. de C.V., Agricultural
Supply de Mexico, S.A. de C.V. and BH Capital Investments, L.P.,
for itself and in trust, as agent for Excalibur Limited
Partnership, Gundyco in trust for RSP 550-98866-19 and MB Capital
Partners.
10.6 (2) Amendment No. 3 to Note and Warrant Purchase Agreement, dated as
of November 12, 1999 among the Company, Albion Alliance Mezzanine
Fund, L.P. and Paribas Capital Funding LLC.
10.7 (2) Amendment No. 4 to Note and Warrant Purchase Agreement, dated as
of December 21, 1999 among the Company, Albion Alliance Mezzanine
Fund, L.P. and Paribas Capital Funding LLC.
10.8 (2) Amendment No. 5 to Note and Warrant Purchase Agreement, dated as
of January 21, 2000 among the Company, Albion Alliance Mezzanine
Fund, L.P. and Paribas Capital Funding LLC.
10.9 (1) Term Loan Agreement dated as of April 12, 2000 among Turf
Partners, Inc. and Eco Soil Systems, Inc. and J.R. Simplot
Company.
10.10(1) Amendment No. 4 to Loan and Security Agreement, dated as of
May 4, 2000 among Turf Partners, Inc. and Coast Business Credit.
27.1 (1) Financial Data Schedule
- --------------------
(1) Filed herewith.
(2) Incorporated by reference to the Company's Current Report on Form 8-K filed
January 26, 2000.
(B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K (File No. 001-21975) under
Item 5 thereof on January 26, 2000, relating to the issuance of $4.5 million of
principal amount of Senior Secured Convertible Debentures and warrants to
purchase 356,436 shares of common stock.
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Eco Soil Systems, Inc.
Date: May 15, 2000 By: /s/ WILLIAM B. ADAMS
--------------------
William B. Adams
Chairman and Chief Executive Officer
Date: May 15, 2000 By: /s/ DENNIS N. SENTZ
-------------------
Dennis N. Sentz
Chief Financial Officer
(Principal financial officer and
Principal accounting officer)
17
<PAGE>
EXHIBIT 10.9
TERM LOAN AGREEMENT
AMONG
TURF PARTNERS, INC.
AND
ECOSOIL SYSTEMS, INC.
"BORROWERS"
AND
J. R. SIMPLOT COMPANY
"SIMPLOT"
DATED AS OF APRIL 12, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1. DEFINED TERMS AND RULES OF INTERPRETATION........................1
A. DEFINED TERMS.......................................................1
B. RULES OF INTERPRETATION.............................................3
SECTION 2. LETTER OF CREDIT COMMITMENT......................................4
2.1 ISSUANCE OF LETTER OF CREDIT.....................................4
2.2 PAYMENT OF LETTER OF CREDIT EXPENSES.............................4
2.3 REPAYMENT OF AMOUNTS DRAWN ON LETTER OF CREDIT...................4
2.4 CONDITIONS TO ISSUANCE OF LETTER OF CREDIT.......................5
SECTION 3. TERM LOAN........................................................5
3.1 AMOUNT...........................................................5
3.2 INTEREST.........................................................6
3.3 PRINCIPAL........................................................6
3.4 USE OF PROCEEDS..................................................7
3.5 CONDITIONS TO TERM LOAN ADVANCE..................................7
SECTION 4. BORROWERS' COVENANTS.............................................8
4.1 FURNISH FINANCIAL STATEMENTS.....................................9
4.2 REORGANIZATION, SALE OF ASSETS, CHANGE OF NAME...................9
4.3 MAINTENANCE OF EXISTENCE.........................................9
4.4 MAINTENANCE OF RECORDS...........................................9
4.5 MAINTENANCE AND PROPERTIES.......................................9
4.6 CONDUCT OF BUSINESS.............................................10
4.7 MAINTENANCE OF INSURANCE........................................10
4.8 COMPLIANCE WITH LAWS............................................10
4.9 RIGHT OF INSPECTION.............................................10
4.10 ENVIRONMENTAL...................................................10
4.11 AGING OF ACCOUNTS AND PAYABLES REPORT...........................10
4.12 DEBT............................................................11
4.13 EXTENSION OF CREDIT.............................................11
4.14 REPAYMENT OF COAST TERM LOAN....................................11
SECTION 5. REPRESENTATIONS AND WARRANTIES..................................11
5.1 INCORPORATION, GOOD STANDING, AND DUE QUALIFICATION.............11
5.2 CORPORATE POWER AND AUTHORITY...................................11
5.3 LEGALLY ENFORCEABLE AGREEMENT...................................12
5.4 FINANCIAL STATEMENTS............................................12
5.5 LABOR DISPUTE AND ACTS OF GOD...................................12
5.6 OTHER AGREEMENTS................................................12
5.7 LITIGATION......................................................13
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
5.8 NO DEFAULT ON OUTSTANDING JUDGMENTS OR ORDERS...................13
5.9 OWNERSHIP AND LIENS.............................................13
5.10 ERISA...........................................................13
5.11 OPERATION OF BUSINESS...........................................14
5.12 TAXES...........................................................14
5.13 ENVIRONMENT.....................................................14
SECTION 6. EVENTS OF DEFAULT...............................................14
SECTION 7. REMEDIES UPON DEFAULT...........................................15
7.1 NO LIMITATION ON REMEDIES.......................................16
7.2 NO COURSE OF DEALING............................................16
7.3 CONSENT TO RELIEF FROM AUTOMATIC STAY...........................16
SECTION 8. MISCELLANEOUS...................................................17
8.1 NOTICES.........................................................17
8.2 GOVERNING LAW...................................................18
8.3 TIME IS OF THE ESSENCE..........................................18
8.4 ATTORNEY FEES...................................................18
8.5 ENTIRE AGREEMENT................................................18
8.6 SUCCESSORS AND ASSIGNS..........................................18
8.7 PREPARATION OF AGREEMENT........................................19
8.8 HEADINGS........................................................19
8.9 CONSTRUCTION....................................................19
8.10 SEVERABILITY....................................................19
8.11 COUNTERPARTS....................................................19
8.12 PUBLIC STATEMENTS AND PRESS RELEASES............................19
8.13 SERVICE OF PROCESS, CONSENT TO JURISDICTION.....................20
</TABLE>
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<PAGE>
AGREEMENT
THIS AGREEMENT is made and entered into as of the 12th day of April, 2000,
by and among TURF PARTNERS, INC., a Delaware corporation ("Turf Partners"), and
ECO SOIL SYSTEMS, INC., a Nebraska corporation ("ESSI"), jointly and severally
(Turf Partners and ESSI are sometimes collectively referred to herein as
"Borrowers") and J. R. SIMPLOT COMPANY, a Nevada corporation, and a wholly-owned
subsidiary to be formed under the laws of the State of Idaho intended to be
named SIMPLOT TURF PARTNERS ACQUISTION COMPANY (collectively, "Simplot").
RECITALS
1. Borrowers and Simplot made and entered into an Asset Purchase
Agreement dated March 27, 2000 and an Amended and Restated Asset Purchase
Agreement dated as of April 5, 2000 (collectively, the "Purchase Agreement"),
pursuant to which Turf Partners shall sell substantially all of its assets to
Simplot in or around July 2000.
2. Borrowers have need for additional financing between the date of the
Purchase Agreement and the closing date under the Purchase Agreement and have
requested Simplot provide certain of such additional financing.
3. Simplot has agreed to provide for the extension of a loan to Borrowers
as more particularly set forth herein, in order to accommodate Turf Partners'
operation of its business as contemplated by the Purchase Agreement and to
accommodate ESSI's operation of its business.
NOW, THEREFORE, in consideration of the provisions contained herein and the
recitals set forth above, which are a material part of this Agreement, the
parties agree as follows:
SECTION 1. DEFINED TERMS AND RULES OF INTERPRETATION.
A. DEFINED TERMS.
As used in this Agreement, terms defined in the recitals or elsewhere
in this Agreement shall have the meanings so assigned, and additionally, the
following terms shall have the following meanings:
1.1 AGREEMENT means this Agreement.
1.2 BORROWER'S BOOKS means all of the Borrowers' books and records
including, but not limited to: minute books; ledgers; records indicating,
summarizing, or evidencing the Borrower's assets, liabilities, and accounts; all
information relating to the Borrowers' business operations or financial
condition; and all computer programs, disk or tape files, printouts, runs, and
AGREEMENT - 1
<PAGE>
other computer-prepared information and the equipment containing such
information.
1.3 BUSINESS DAY means any day other than a Saturday, Sunday, or other
day, on which commercial banks in Idaho are authorized or required to close
under the laws of the state of Idaho.
1.4 CLOSING DATE shall have the same meaning as is ascribed to such
term in the Purchase Agreement.
1.5 CODE means the Idaho Uniform Commercial Code. Any and all terms
used in this Agreement that are defined in the Code and not otherwise
specifically defined herein shall be construed and defined in accordance with
the meaning and definition described to such terms under the Code.
1.6 COLLATERAL means all property securing the Obligations pursuant to
the Security Agreements.
1.7 DOWN PAYMENT shall have the same meaning as is ascribed to such
term in the Purchase Agreement.
1.8 EVENT OF DEFAULT means the occurrence of any one of the events set
forth in Section 6 of this Agreement.
1.9 GAAP means the generally accepted accounting principles as set
forth in the opinions and pronouncements of the Accounting Principles Board and
of the American Institute of Certified Public Accountants, and the statements
and pronouncements of the Financial Accounting Standards Board that are
applicable to the circumstances as of the date of determination, consistently
applied.
1.10 INSOLVENCY PROCEEDING means any proceeding commenced by or
against any person or entity under any provision of the Federal Bankruptcy Code,
as amended, or under any other bankruptcy or insolvency law, including, but not
limited to assignments for the benefit of creditors, formal or informal
moratoriums, compositions, or extensions generally with its creditors.
1.11 JUDICIAL OFFICER OR ASSIGNEE means any trustee, receiver,
controller, custodian, assignee for the benefit of creditors, or any other
person or entity having powers or duties like or similar to the powers and
duties of a trustee, receiver, controller, custodian, or assignee for the
benefit of creditors.
1.12 LOAN DOCUMENTS means collectively this Agreement, the Term Note,
the Security Agreement and any other concurrent agreements entered into between
Borrowers, or either of them, and/or Simplot in connection with this Agreement,
and any amendments or supplements to any of the foregoing, but not including the
Purchase Agreement or the Ancillary Agreements (as
AGREEMENT - 2
<PAGE>
defined in the Purchase Agreement)
1.13 OBLIGATIONS means the Term Note and any and all loans, advances,
overdrafts, debts, liabilities, lease payments, guarantees, covenants, and
duties owing by Borrowers, or either of them, to Simplot of any kind and
description arising under the Loan Documents; any debt, liability, or obligation
owing by Borrowers, or either of them, to others that Simplot may have obtained
by assignment or otherwise; any interest not paid when due; and all Simplot
Expenses.
1.14 PERSON means any individual, partnership, corporation, trust or
other entity.
1.15 PRIME RATE means that variable rate of interest identified as
"Prime Rate" in that certain Term Loan and Security Agreement by and between
ESSI, as borrower, and Coast Business Credit, as lender, dated as of June 30,
1999.
1.16 SATISFACTION DATE means March 1, 2001, and is the date on which
the Term Loan must be satisfied.
1.17 SECURITY AGREEMENT means that certain Security Agreement between
Borrower and Simplot executed and delivered in accordance with the requirements
of this Agreement in form and substance reasonably acceptable to Simplot.
1.18 SIMPLOT EXPENSES means all costs or expenses required to be paid
by Borrowers under this Agreement or under any of the other Loan Documents that
are paid or advanced by Simplot; filing, recording, publication, and search fees
paid or incurred by Simplot in the connection with Simplot's transactions with
Borrowers; costs and expenses incurred by Simplot to correct any default or
enforce any provision of the Loan Documents, or in gaining possession of,
maintaining, handling, preserving, preparing for sale, and/or advertising to
sell the Collateral, whether or not a sale is consummated; reasonable attorney's
fees, costs, and expenses incurred by Simplot in advising, structuring,
drafting, reviewing, amending, terminating, enforcing, defending, or concerning
the Loan Documents or any portion thereof, irrespective of whether suit is
brought.
1.19 TERM LOAN means the term loan advanced to Borrowers pursuant
hereto.
1.20 TERM NOTE means the Term Note executed in connection herewith, in
substantially the same form as EXHIBIT 1.20.
B. RULES OF INTERPRETATION.
The following rules of interpretation shall apply to this Agreement,
the exhibits hereto, and any other documents made or delivered pursuant to or in
connection with this Agreement, unless otherwise expressly provided for herein
or therein, and unless the context hereof or thereof clearly requires otherwise:
AGREEMENT - 3
<PAGE>
A reference to any document or agreement shall include such document
or agreement as amended, modified, or supplemented from time to time in
accordance with its terms, and if a term is said to have a meaning assigned to
such term in another document or agreement and the meaning of such term therein
is amended, modified, or supplemented, then the meaning of such term herein
shall be deemed automatically amended, modified, or supplemented in a like
manner. References to the plural include the singular; the singular, the plural;
the whole, the part; and the part, the whole. The words "include," "includes,"
and "including" are not limiting. A reference to any person or entity includes
its successors, heirs, and permitted assigns. Where the character or amount of
any asset or liability or item of income or expense is required to be determined
or any consolidation or other accounting computation is required to be made for
purposes of this Agreement, or any exhibit hereto, or any certificate, report,
or other document or instrument made or delivered pursuant to or in connection
with this Agreement, such determination or computation shall be done in
accordance with GAAP, except where such principles are inconsistent with the
express requirements hereof or of such exhibit, certificate, report, document,
or instrument.
SECTION 2. LETTER OF CREDIT COMMITMENT.
2.1 ISSUANCE OF LETTER OF CREDIT.
Simplot agrees to exercise best efforts to obtain the issuance of a
stand-by Letter of Credit in the amount of not less than $2,000,000 from an
issuing bank reasonably acceptable to Coast Business Credit and having terms
reasonably acceptable to Coast Business Credit, Simplot and Borrowers, that may
be drawn upon by Coast Business Credit in the event of a payment default by ESSI
under the terms of that certain Term Loan Agreement dated as of July 30, 1999
between ESSI and Coast Business Credit (the "Coast Term Loan"), between the date
hereof and the expiry date of said letter of credit. The letter of credit shall
expire on August 31, 2000 unless the transactions contemplated by the Purchase
Agreement have been consummated by August 31, 2000 in which case the expiry date
of the letter of credit shall automatically extend to December 31, 2000.
2.2 PAYMENT OF LETTER OF CREDIT EXPENSES.
All monies paid by Simplot to obtain the issuance of the Letter of
Credit are Simplot Expenses hereunder.
2.3 REPAYMENT OF AMOUNTS DRAWN ON LETTER OF CREDIT.
In the event the beneficiary of the Letter of Credit makes any draw
thereunder, Borrowers shall be obligated to immediately repay to Simplot the
amounts drawn, together with interest thereon at the rate of Prime Rate, plus
six and one quarter percent (6.25%). In an effort to recoup such amounts,
Simplot shall be entitled to (a) withhold any amounts due Turf Partners from the
Down Payment on the Closing Date (provided that such withholding shall not
exceed an amount that would cause the proceeds of the Down Payment paid to Turf
Partners to be less than $15
AGREEMENT - 4
<PAGE>
million) or the balance of the Purchase Price on the Satisfaction Date, and (b)
withhold any amounts due ESSI after the Closing Date for microbial products or
services sold by ESSI to Simplot after the Closing Date.
2.4 CONDITIONS TO ISSUANCE OF LETTER OF CREDIT.
The obligation of Simplot to obtain the issuance of the letter of
credit is subject to the following conditions precedent:
A. Simplot shall have received a resolution duly adopted by each
Borrower's board of directors authorizing the execution, delivery, and
performance of the Loan Documents and the transactions contemplated
thereby.
B. Simplot shall have received copies of executed documents
evidencing:
(i) the modification of that certain Loan and Security Agreement
between Turf Partners and Coast Business Credit dated June 30,
1999 (the "Revolver") to increase the seasonal limit on the
inventory loan by $2.5 million during the period April 2000-June
2000;
(ii) the modification of the Revolver to adjust the advance rate for
inventory to 65% from 55%; and
(iii) an intercreditor agreement among Coast Business Credit and
Simplot in form and substance satisfactory to Simplot under which
Coast will partially assign its security interests in the
collateral securing the Term Loan to Simplot to secure repayment
of amounts advanced under the letter of credit.
C. There shall not have occurred any material adverse effect with
respect to the financial condition or business operations (including
the voluntary or involuntary filing of a petition in bankruptcy) of
either Borrower.
D. All legal matters incident to the transactions hereby contemplated
shall be reasonably satisfactory to Simplot.
E. Simplot shall have received such other approvals, opinions, or
documents as Simplot may reasonably request.
SECTION 3. TERM LOAN.
3.1 AMOUNT.
AGREEMENT - 5
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Simplot agrees to extend to Borrowers the sum of Three Million Dollars
($3,000,000) on a date not later than two business days following satisfaction
of the conditions set forth at Section 3.5 below.
3.2 INTEREST.
Interest shall accrue on the principal outstanding on the Term Loan at a
rate of two and one-quarter percent (2.25%) above Prime Rate. All interest
chargeable under this Agreement shall be computed on the basis of a 365-day year
for actual days elapsed. Interest shall be due and payable on the Closing Date
and, if any principal remains outstanding after the Closing Date, on the
Satisfaction Date. In the event the Borrowers fail to pay principal and accrued
interest on the Satisfaction Date or Simplot's demand therefore as provided in
Section 3.3 below, interest shall increase to Prime Rate plus six and one
quarter percent (6.25%) per annum, effective on the tenth day following the
Satisfaction Date.
3.3 PRINCIPAL.
Borrowers shall repay principal and accrued interest outstanding on the
Term Loan and any other Obligations on the Closing Date by Simplot offsetting
principal and accrued interest owing under the Term Loan against the Down
Payment due from Simplot pursuant to the Purchase Agreement, so long as the
effect of such offset will not reduce the Down Payment to less than Fifteen
Million Dollars ($15,000,000). In the event there remains any principal or
interest owing on the Term Loan or any other Obligations owing pursuant to this
Agreement after the Closing Date, then Simplot shall be entitled to withhold any
amounts due ESSI after the Closing Date for microbial products or services sold
by ESSI to Simplot after the Closing Date and apply such amounts withheld to the
Obligations owing thereunder. Borrowers will repay all outstanding Obligations
in full on the Satisfaction Date. In the event that (i) the Closing Date is
later than August 31, 2000, (ii) the conditions to Simplot's obligation to close
the transactions contemplated by the Purchase Agreement are not satisfied by
August 31, 2000, or (iii) the Purchase Agreement is terminated, then all
Obligations owing hereunder shall be due and payable in full upon Simplot's
demand.
AGREEMENT - 6
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3.4 USE OF PROCEEDS.
The proceeds of the Term Loan shall be used by Borrowers for the following
purposes in the following order: (1) to satisfy past due accounts payable of
Turf Partners, (2) to satisfy amounts owing from Turf Partners for sales
commissions, and (3) for Turf Partners' working capital needs.
3.5 CONDITIONS TO TERM LOAN ADVANCE.
The obligation of Simplot to advance the Term Loan is subject to the
following conditions precedent:
A. Borrowers shall have executed and delivered the Term Note to
Simplot.
B. Borrowers shall have executed and delivered the Security
Agreement and any financing statements reasonably required to
perfect the security interest therein granted to Simplot.
C. Simplot shall have received a certificate of good standing with
respect to each Borrower stating that the Borrower is in good
standing, as of a date reasonably contemporaneous with the date
of this Agreement, under the laws of its state of incorporation.
D. Simplot shall have received a certified copy of each
Borrower's articles of incorporation and bylaws.
E. Simplot shall have received a resolution duly adopted by each
Borrower's board of directors authorizing the execution,
delivery, and performance of the Loan Documents and the
transactions contemplated thereby.
F. Simplot shall have received copies of executed documents
evidencing:
(iv) the modification of that certain Loan and Security Agreement
between Turf Partners and Coast Business Credit dated June
30, 1999 (the "Revolver") to increase the seasonal limit on
the inventory loan by $2.5 million during the period April
2000-June 2000;
(v) the modification of the Revolver to adjust the advance rate
for inventory to 65% from 55%;
(vi) the sale and leaseback of BioJect systems between ESSI and
Imperial Bank;
(vii) the consent of Coast Business Credit, the parties to that
certain Note and Warrant Purchase Agreement with ESSI dated
as of August 25,
AGREEMENT - 7
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1998 and the parties to that certain Convertible Debentures
and Warrants Purchase Agreement with ESSI and its
subsidiaries dated as of January 17, 2000 to the
transactions contemplated hereby; and
(viii) an intercreditor agreement among Coast Business Credit and
Simplot in form and substance satisfactory to Simplot under
which Coast will partially assign its security interests in
the collateral securing the Term Loan to Simplot to secure
repayment of amounts advanced under the letter of credit.
G. Simplot shall have received an opinion from Borrowers' counsel in
form and substance satisfactory to Simplot on the matters set
forth in Sections 5.1, 5.2, and 5.3 below.
H. The representations and warranties of Borrower in Section 5
hereof shall be true on and as of the date of the making of such
advance with the same force and effect as if made on and as of
such date.
I. There shall not have occurred any material adverse effect with
respect to the financial condition or business operations
(including the voluntary or involuntary filing of a petition in
bankruptcy) of either Borrower.
J. All legal matters incident to the transactions hereby
contemplated shall be reasonably satisfactory to Simplot.
K. Simplot shall have received such other approvals, opinions, or
documents as Simplot may reasonably request.
SECTION 4. BORROWERS' COVENANTS.
Until the payment in full of the Obligations and the performance of all
other obligations of Borrowers hereunder, Borrowers agree that unless Simplot
shall otherwise consent in writing, Borrowers will comply with the following.
AGREEMENT - 8
<PAGE>
4.1 FURNISH FINANCIAL STATEMENTS.
Each Borrower will furnish Simplot:
1. Within 90 days after the end of each fiscal year of Borrower, copies
of balance sheets of Borrower, as at the close of such fiscal year and
statements of income of Borrower for such year prepared by a certified
public accountant satisfactory to Simplot;
2. By the 20th day of each month hereafter, beginning on April 20, 2000,
a financial statement of income for the prior month; and
3. From time to time, such further information regarding the business,
affairs, and financial condition of Borrowers as Simplot may
reasonably request.
All financial statements delivered hereunder shall be prepared on the basis
of GAAP consistently applied.
4.2 REORGANIZATION, SALE OF ASSETS, CHANGE OF NAME.
Except as required by the Purchase Agreement, each Borrower will not (1)
incorporate, merge or consolidate with or into any corporation, or sell, lease,
transfer, or otherwise dispose of all or any substantial part of its assets,
whether now owned or hereafter acquired, or (2) change its corporate name,
except with the prior written authorization of Simplot.
4.3 MAINTENANCE OF EXISTENCE.
Each Borrower will preserve and maintain its corporate existence and good
standing in the jurisdiction of its incorporation, and qualify and remain
qualified as a foreign corporation in each jurisdiction where each qualification
is required.
4.4 MAINTENANCE OF RECORDS.
Each Borrower will keep adequate records and books of account, in which
complete entries will be made in accordance with GAAP consistently applied,
reflecting all financial transactions of Borrower.
4.5 MAINTENANCE AND PROPERTIES.
Each Borrower will maintain, keep, and preserve all of its properties
(tangible and intangible) necessary or useful in the proper conduct of its
business in good working order and condition, ordinary wear and tear excepted.
AGREEMENT - 9
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4.6 CONDUCT OF BUSINESS.
Each Borrower will conduct its business in the ordinary course of business.
4.7 MAINTENANCE OF INSURANCE.
Each Borrower will maintain insurance with financially sound and reputable
insurance companies or associations in such amounts and covering such risks as
are usually carried by companies engaged in the same or similar business, which
insurance may provide for reasonable deductibility from coverage thereof.
4.8 COMPLIANCE WITH LAWS.
Each Borrower will comply in all material respects with all applicable
laws, rules, regulations, and orders, such compliance to include, without
limitation, paying before the same becomes delinquent all taxes, assessments,
and governmental charges imposed upon it or upon its properties, and remitting
to all governmental agencies all employment taxes withheld from employees'
paychecks.
4.9 RIGHT OF INSPECTION.
Each Borrower will at any reasonable time and from time to time, permit
Simplot or any agent or representative of Simplot to examine and make copies of
and abstracts from Borrower's books and visit the properties of Borrower and
discuss the affairs, finances, and accounts of Borrower with any of its
respective officers and directors and Borrower's independent accountants.
4.10 ENVIRONMENTAL.
Each Borrower will be and remain in compliance with the provisions of all
federal, state, and local environmental, health and safety laws, codes, and
ordinances, and all rules and regulations issued thereunder, and will notify
Simplot immediately of any notice of a hazardous discharge or environmental
complaint received from any governmental agency or any other party, or of any
hazardous discharge from or affecting its properties (whether owned or leased)
and will immediately contain and remove the same in compliance with all
applicable laws.
4.11 AGING OF ACCOUNTS AND PAYABLES REPORT.
Each Borrower shall provide to Simplot no later than the 15th day of each
month following execution of this Agreement, (i) a summary and aging report of
its accounts receivable in form reasonably satisfactory to Simplot, and (ii) a
listing of accounts payable in form reasonably satisfactory to Simplot.
AGREEMENT - 10
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4.12 DEBT.
Neither Borrower will incur any debts other than (1) debt existing on the
date of this Agreement or contemplated by the terms of agreements in place on
the date hereof (2) normal trade credit in the ordinary course of business; and
(3) those debts contemplated by this Agreement.
4.13 EXTENSION OF CREDIT.
Neither Borrower will make any advance or loan, except for (1) normal
intercompany trade credit and (2) an intercompany loan from ESSI to its
wholly-owned subsidiary Agricultural Supply, Inc. in an amount not to exceed $1
million.
4.14 REPAYMENT OF COAST TERM LOAN
ESSI shall make all payments on the Coast Term Loan as required by its
terms; provided however, that ESSI shall satisfy all amounts owing on the Coast
Term Loan on or before December 15, 2000.
SECTION 5. REPRESENTATIONS AND WARRANTIES.
In order to induce Simplot to enter into this Agreement, each Borrower
hereby makes the following representations and warranties which shall survive
the execution and delivery of this Agreement.
5.1 INCORPORATION, GOOD STANDING, AND DUE QUALIFICATION.
Borrower is a corporation duly organized, validly existing, and in good
standing under the laws of the state of Delaware (for Turf Partners) or Nebraska
(for ESSI), and has the corporate power and authority to own its assets and to
transact the business in which it is now engaged or proposed to be engaged in
and is duly qualified as a foreign corporation and in good standing under the
laws of each other jurisdiction in which such qualification is required, except
where the failure to be qualified will not have a material adverse effect on
such Borrower's operations (financial or otherwise) or its ability to perform
its obligations hereunder.
5.2 CORPORATE POWER AND AUTHORITY.
The execution, delivery, and performance by Borrower of the Loan Documents
to which it is a party have been duly authorized by all necessary corporate
action and do not and will not (1) require any consent or approval of the
stockholders of such corporation; (2) contravene such corporation's charter or
bylaws; (3) violate any provision of any law, rule, regulation (including,
without limitation, regulations U and X of the Board of Governors of the Federal
Reserve System), order, writ, judgment, injunction, decree, determination, or
award presently in effect having applicability to Borrower; (4) result in a
breach of or constitute a default under any indenture or
AGREEMENT - 11
<PAGE>
loan or credit agreement or any other material agreement, lease, or instrument
to which Borrower is a party or by which it or its properties may be bound or
affected; (5) result in, or require, the creation or imposition of any lien upon
or with respect to any of the properties now owned or hereafter acquired by
Borrower; and (6) cause Borrower to be in default under any such law, rule,
regulation, order, writ, judgment, injunction, decree, determination, or award
or any such indenture, agreement, lease, or instrument.
5.3 LEGALLY ENFORCEABLE AGREEMENT.
This Agreement is, and each of the other Loan Documents when delivered
under this Agreement will be, legal, valid, and binding obligations of Borrower,
enforceable against Borrower in accordance with their respective terms, except
to the extent that such enforcement may be limited by applicable bankruptcy,
insolvency, and other similar laws affecting creditors' rights generally.
5.4 FINANCIAL STATEMENTS.
The balance sheets and statements of income of Borrower heretofore
furnished to Simplot are complete and correct and fairly present the financial
condition of Borrower as at such dates and the results of operations of Borrower
for the periods covered by such statements, all in accordance with GAAP
consistently applied, and since the date of delivery of such financial
statements, there has been no material adverse change in the condition
(financial or otherwise), business, or operations of Borrower. There are no
liabilities of Borrower, fixed or contingent, which are material, but are not
reflected in the financial statements, other than liabilities arising in the
ordinary course of business since the date of such financial statements. No
information, exhibit, or report furnished by Borrower to Simplot in connection
with the negotiation of this Agreement contained any material misstatement of
fact or omitted to state a material fact or any fact necessary to make this
statement contained therein not materially misleading.
5.5 LABOR DISPUTE AND ACTS OF GOD.
Neither the business nor the properties of Borrower are affected by any
fire, explosion, accident, strike, lockout, or other labor dispute, drought,
storm, hail, earthquake, embargo, act of God or of the public enemy, or other
casualty (whether or not covered by insurance), materially and adversely
affecting such business or properties or the operation of Borrower.
5.6 OTHER AGREEMENTS.
Borrower is not a party to any indenture, loan, or credit agreement, or to
any lease or other agreement or instrument or subject to any charter or
corporate restriction which could have a material adverse effect on the
business, properties, assets, operations, or conditions, financial or otherwise,
of Borrower except for provisions that would require ESSI to issue shares of
common stock or warrants to holders of its Senior Subordinated Notes and
Convertible Debentures under certain circumstances, or the ability of Borrower
to carry out its obligations under the Loan
AGREEMENT - 12
<PAGE>
Documents to which it is a party. Borrower is not in default in any respect in
the performance, observance, or fulfillment of any of the obligations,
covenants, or conditions contained in any agreement or instrument material to
its business to which it is a party, except as such default may have been waived
and the copy(ies) of the waiver(s) given to Simplot.
5.7 LITIGATION.
There is no pending or, to the best knowledge of Borrower, threatened
action or proceeding against or affecting Borrower before any court, government
agency or arbitrator, which may, in any one case or in the aggregate, materially
adversely affect the financial condition, operations, properties, or business of
Borrower or the ability of Borrower to perform its obligations under the Loan
Documents, except for a securities class action lawsuit pending in the United
States District Court for the Southern District of California and captioned
Wissinger v. Eco Soil Systems, Inc. et al., No. 99CV2504-B(JAH).
5.8 NO DEFAULT ON OUTSTANDING JUDGMENTS OR ORDERS.
Borrower has satisfied all judgments, and Borrower is not in default with
respect to any judgment, writ, injunction, decree, rule, or regulation of any
court, arbitrator, or federal, state, municipal, or other governmental
authority, commission, board, bureau, agency, or instrumentality, domestic or
foreign.
5.9 OWNERSHIP AND LIENS.
Borrower has title to, or valid leasehold interests in, all of its
properties and assets, real and personal, including the properties and assets
and leasehold interests reflected in the financial statements referred to in
Section 5.4 (other than any properties or assets disposed of in the ordinary
course of business), and none of the properties and assets owned by Borrower and
none of its leasehold interests is subject to any lien except liens in favor of
(1) Coast Business Credit, BH Capital Investments, L.P., MB Capital Partners,
Excalibur Limited. Partnership, Gundyco. in trust for RSP 550-98866-19, all in
effect on the date hereof, and (2) purchase money liens on inventory and
equipment, liens on goods consigned to Borrowers and liens arising from leases
of equipment and vehicles, all as in effect on the date hereof and as may arise
in the ordinary course of business during the term of this Agreement (all of the
foregoing liens identified in subprovisions (1) and (2) being referred to herein
as "Permitted Liens").
5.10 ERISA.
Borrower is in compliance in all material respects with all applicable
provisions of ERISA. Neither a reportable event nor a prohibited transaction
under ERISA has occurred and is continuing with respect to any plan and Borrower
has incurred no liability to the Pension Benefit Guarantee Corporation under
ERISA.
AGREEMENT - 13
<PAGE>
5.11 OPERATION OF BUSINESS.
Borrower possesses all licenses, permits, franchises, patents, copyrights,
trademarks, and trade names or rights thereto, to conduct their respective
businesses substantially as now conducted and as presently proposed to be
conducted, and Borrower is not in violation of any valid rights of others with
respect to any of the foregoing.
5.12 TAXES.
Borrower has filed all tax returns (federal, state, and local) required to
be filed and have paid all taxes, assessments, and governmental charges and
levies thereon to be due, including interest and penalties, and no such amounts
are in dispute or subject of an audit.
5.13 ENVIRONMENT.
Borrower has duly complied with, and its businesses, operations, assets,
equipment, property, leaseholds or other facilities are in compliance with, the
provisions of all federal, state, and local environmental, health, and safety
laws, codes, and ordinances, and all rules and regulations promulgated
thereunder. Borrower has received no notice of, and neither knows of nor
suspects, facts which may constitute any violations of any federal, state, or
local environmental, health, or safety laws, codes, or ordinances and any rules
or regulations promulgated thereunder with respect to its businesses,
operations, assets, equipment, property, leaseholds, or other facilities.
SECTION 6. EVENTS OF DEFAULT.
Each of the following constitutes an Event of Default hereunder:
6.1 Borrowers' failure to pay when due principal and interest or any
installment of principal and/or interest under the Term Note;
6.2 Borrowers' failure to pay when due any sum that Borrower is required
to pay, or to perform when due any obligation Borrowers are required to perform,
or to observe any obligation required to be observed by Borrowers under this
Agreement or the other Loan Documents;
6.3 The entry of a decree or order by a court of competent jurisdiction
for relief with respect to Borrowers, or either of them, under Title 11 of the
United States Code or any other applicable federal, state, or foreign bankruptcy
law or similar law appointing a receiver, liquidator, assignee, trustee,
custodian, sequestrator, conservator, or similar official of Borrowers, ordering
the liquidation or winding up of the affairs of Borrower;
6.4 The filing by Borrowers, or either of them, of a petition or answer or
consent
AGREEMENT - 14
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seeking relief under Title 11 of the United States Code or any other
applicable federal, state, or foreign bankruptcy law or other similar law, or
the consent by Borrowers to the institution of proceedings thereunder or to the
filing of any such petition or the appointment of or taking possession by a
receiver, liquidator, assignee, trustee, custodian, sequestrator, conservator,
or similar official of Borrowers, of any part of the property of Borrowers;
6.5 Borrowers' providing of any false representation or breach of any
warranty made in this Agreement or the Loan Documents, including any statement
or certificate given in connection therewith;
6.6 Any sale, transfer, or other disposition of any property that secures
the Obligations (other than sales of inventory and obsolete equipment in the
ordinary course of business), or Borrowers' interest in any such property,
including the consensual or nonconsensual creation of any lien thereon (other
than Permitted Liens), without the prior written approval of Simplot;
6.7 Any loss, theft, or destruction of, or damage to, any substantial
portion of the Collateral for which there is either no insurance coverage or for
which, in the reasonable opinion of Simplot, there is insufficient insurance
coverage;
6.8 Any levy, seizure, or attachment upon the Collateral by any third
party, or the filing of any claim and delivery action or foreclosure action
concerning the Collateral;
6.9 The filing or commencement of any judicial or nonjudicial foreclosure
action with respect to any mortgage or deed of trust on property on which any
Collateral constituting fixtures is located;
6.10 The filing or recording of any material judgment against Borrowers
which may attach to any of the Collateral where such judgment is not stayed or
satisfied within thirty (30) days of its filing or recording;
6.11 Any default in a material agreement to which either Borrower is a
party with third parties resulting in a right by such third parties to
accelerate the maturity of such Borrower's indebtedness;
6.12 This Agreement and the Loan Documents shall at any time after their
execution and delivery and for any reason cease (1) to create a valid and
perfected security interest in and to the Collateral, or (2) to be in full force
and effect, or (3) this Agreement and the Loan Documents shall be declared null
and void, or (4) the validity or enforceability of this Agreement and the Loan
Documents shall be contested by Borrower, or (5) Borrower shall deny it has any
liability or obligation under this Agreement or the Loan Documents.
SECTION 7. REMEDIES UPON DEFAULT.
AGREEMENT - 15
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7.1 NO LIMITATION ON REMEDIES.
Upon the occurrence of any Event of Default, Simplot at its sole option and
without notice, may exercise all those rights and remedies at law or equity
allowed by applicable law. Any such rights and remedies are cumulative and may
be exercised in any order deemed appropriate by Simplot.
7.2 NO COURSE OF DEALING.
No course of dealing heretofore or hereafter between Borrowers and Simplot,
or any failure or delay on the part of Simplot in exercising any rights or
remedies under this Agreement or existing by law, shall operate as a waiver of
any right or remedy of Simplot, and no single or partial exercise of any right
or remedy hereunder shall operate as a waiver or preclusion to the exercise of
any other right or remedy Simplot may have in regard to said indebtedness.
7.3 CONSENT TO RELIEF FROM AUTOMATIC STAY.
Each Borrower hereby agrees that, in consideration of the recitals and
covenants contained herein, and for other good and valuable consideration, in
the event either Borrower (by its own action, or the action of any of its
creditors) shall, on or before the Satisfaction Date, (1) file with any
bankruptcy court of competent jurisdiction or be the subject of any petition for
relief under Title 11 of the United States Code, as amended, (2) be the subject
of any order for relief issued under such Title 11 of the United States Code, as
amended, (3) file or be the subject of any petition seeking any reorganization,
arrangement, composition, readjustment, liquidation, dissolution, or similar
relief under any present or future federal or state act or law relating to
bankruptcy, insolvency, or other relief for debtors, (4) have sought or
consented to or acquiesced in the appointment of any trustee, receiver,
conservator, or liquidator, or (5) be the subject of any order, judgment, or
decree entered by any court of competent jurisdiction, approving a petition
filed against such party for any reorganization, arrangement, composition,
readjustment, liquidation, dissolution, or similar relief under any present or
future federal or state act or law relating to bankruptcy, insolvency, or relief
for debtors, Simplot shall thereupon be entitled to relief from any automatic
stay imposed by Section 362 of Title 11 of the United States Code, as amended,
or otherwise, on or against the exercise of the rights and remedies otherwise
available to Simplot as provided in the Loan Documents, and as otherwise
provided by law, and each Borrower hereby waives the benefits of such automatic
stay and consents and agrees to raise no objection to such relief.
AGREEMENT - 16
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SECTION 8. MISCELLANEOUS.
8.1 NOTICES.
All notices or demands by any party relating to this Agreement or the Loan
Documents shall be in writing and personally served, delivered by an express
delivery service, or sent by regular United States mail, postage prepaid, to
Borrower, Guarantor, or Simplot, as the case may be, at the addresses set forth
below. The parties hereto may change the address at which they are to receive
notices hereunder by notice in writing in the foregoing manner given to the
others. All notices or demands sent in accordance with this Section 11.1 shall
be deemed received on the earlier of the date of actual receipt or five days
after the deposit thereof in the mail.
If to Turf Partners: Turf Partners, Inc.
10740 Thornmont Rd.
San Diego, CA 92127
Attn: William B. Adams
With a copy to: Robert E. Burwell
LATHAM & WATKINS
701 B Street, Suite 2100
San Diego, CA 92101-8197
If to ESSI: Eco Soil Systems, Inc.
10740 Thornmont Rd
San Diego, CA 92127
Attn: William B. Adams
With a copy to: Robert E. Burwell
LATHAM & WATKINS
701 B Street, Suite 2100
San Diego, CA 92101-8197
If to Simplot: J. R. Simplot Company
P. O. Box 27 (zip 83707)
999 Main Street, Suite 1300
Boise, Idaho 83702
Attention: Chief Financial Officer
AGREEMENT - 17
<PAGE>
With a copy to: J. R. Simplot Company
P. O. Box 27 (zip 83707)
999 Main Street, Suite 1300
Boise, Idaho 83702
Attention: General Counsel
8.2 GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the state of Idaho.
8.3 TIME IS OF THE ESSENCE.
Time is of the essence in the performance or observation of all obligations
and agreements hereunder.
8.4 ATTORNEY FEES.
Each Borrower agrees to pay on demand all costs and expenses incurred by
Simplot in connection with either Borrower's default hereunder, including but
not limited to the reasonable fees and outofpocket expenses of counsel for
Simplot (including allocable costs of in-house counsel) with respect to advising
Simplot as to its rights under the Loan Documents and all costs and expenses, if
any, in connection with the enforcement of any of the Loan Documents, including
without limitation, attorney fees and costs at trial, on appeal, or in
bankruptcy proceedings.
8.5 ENTIRE AGREEMENT.
This Agreement constitutes the final expression of the parties' agreements
regarding these loans and their restructuring and supersedes all prior or
contemporaneous negotiations, understandings, and agreements between the
parties, whether oral or written. Any prior oral promises, representations,
waivers, and courses of conduct are not relied upon and are of no further
effect. This Agreement may not be altered or amended in any manner except by
writing signed by Simplot and Borrowers.
8.6 SUCCESSORS AND ASSIGNS.
This Agreement shall bind all of the parties hereto and their respective
heirs, personal representatives, successors, and assigns; provided, however,
this Agreement shall not be assigned by either Borrower without Simplot's prior
written consent.
AGREEMENT - 18
<PAGE>
8.7 PREPARATION OF AGREEMENT.
Borrowers acknowledge that they had legal representation in negotiating and
executing this Agreement.
8.8 HEADINGS.
Headings and paragraph numbers have been set forth herein for convenience
only. Unless the contrary is compelled by the context, everything contained in
each paragraph applies equally to this entire Agreement.
8.9 CONSTRUCTION.
Neither this Agreement nor any uncertainty or ambiguity herein shall be
construed or resolved against Simplot or Borrowers, whether under any rule of
construction or otherwise. On the contrary, this Agreement has been reviewed by
all parties and shall be construed and interpreted according to the ordinary
meaning of the words used so as to fairly accomplish the purposes and intentions
of all parties hereto.
8.10 SEVERABILITY.
Each provision of this Agreement shall be severable from every other
provision of this Agreement for the purpose of determining the legal
enforceability of any specific provision.
8.11 COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
8.12 PUBLIC STATEMENTS AND PRESS RELEASES
The parties hereto covenant and agree that, except as provided for
hereinbelow, each will not from and after the date hereof make, issue or release
any public announcement, press release, statement or acknowledgment of the
existence of, or reveal publicly the terms, conditions and status of, the
transactions provided for herein, without the prior written consent of the other
party as to the content and time of release of and the media in which such
statement or announcement is to be made; PROVIDED, HOWEVER, that in the case of
announcements, statements, acknowledgments or revelations which either party is
required by law to make, issue or release, the making, issuing or releasing of
any such announcement, statement, acknowledgment or revelation by the party so
required to do so by law shall not constitute a breach of this Agreement if such
party shall have given, to the extent reasonably possible, not less than two (2)
calendar days prior notice to the other party, and shall have attempted, to the
extent reasonably possible, to clear such announcement, statement,
acknowledgment or revelation with the other party. Each party hereto agrees that
it will
AGREEMENT - 19
<PAGE>
not unreasonably withhold any such consent or clearance.
8.13 SERVICE OF PROCESS, CONSENT TO JURISDICTION.
SERVICE OF PROCESS. Each party hereto irrevocably consents to the
service of any process, pleading, notices or other papers by the mailing of
copies thereof by registered, certified or first class mail, postage prepaid, to
such party at such party's address set forth herein, or by any other method
provided or permitted under Idaho law.
CONSENT AND JURISDICTION. Each party hereto irrevocably and unconditionally
(1) agrees that any suit, action or other legal proceeding arising out of this
Agreement may be brought in the United States District Court for the District of
Idaho or, if such court does not have jurisdiction or will not accept
jurisdiction, in any court of general jurisdiction in Ada County, Idaho; (2)
consents to the jurisdiction or any such court in any such suit, action or
proceeding; and (3) waives any objection which such party may have to the laying
of venue of any such suit, action or proceeding in any such court.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on their respective behalf, by their respective officers thereunto
duly authorized, all as of the 12th day of April, 2000.
SIMPLOT:
J. R. SIMPLOT COMPANY
By /s/ Dennis R. Mogensen
----------------------------------
Its Senior Vice President and CFO
----------------------------------
(signatures continued on following page)
AGREEMENT -20
<PAGE>
BORROWERS:
TURF PARTNERS, INC.
By /s/ William B. Adams
----------------------------------
Its CEO
----------------------------------
ECO SOIL SYSTEMS, INC.
By /s/ William B. Adams
----------------------------------
Its Chairman and CEO
----------------------------------
AGREEMENT -21
<PAGE>
AMENDMENT NUMBER FOUR TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER FOUR TO LOAN AND SECURITY AGREEMENT, dated as of
May 4, 2000 (this "Amendment"), amends that certain Loan and Security
Agreement, dated as of June 30, 1999 (as amended from time to time, the "Loan
Agreement"), by and between TURF PARTNERS, INC., a Delaware corporation
("Borrower"), on the one hand, and COAST BUSINESS CREDIT, a division of
Southern Pacific Bank, a California corporation ("Coast"), on the other hand.
All initially capitalized terms used in this Amendment shall have the
meanings ascribed thereto in the Loan Agreement unless specifically defined
herein.
RECITALS
WHEREAS, Borrower and Coast wish to amend the Loan Agreement pursuant to
the terms and provisions set forth in this Amendment; and
NOW, THEREFORE, the parties hereto agree as follows:
AMENDMENT
Section 1. AMENDMENT TO SECTION 2.1(b) OF THE SCHEDULE. Section 2.1(b)
of the Schedule to the Loan Agreement is hereby amended by deleting such
Section in its entirety and replacing it with the following:
(b) Inventory Loans in an amount not to exceed the lesser of:
(1) (i) 55% of the value of Borrower's Eligible Inventory
(as defined in Section 1 of the Agreement) during the
calendar period from October 1 through May 30, except
for the month of May 2000 during which 65% will apply,
and (ii) 65% of the value of Borrower's Eligible
Inventory during the calendar period from June 1
through September 30; with Borrower's Eligible
Inventory is to be calculated at the lower of cost or
market value and determined on a first-in, first-out
basis, OR
(2) Six Million Dollars ($6,000,000) provided, however,
such amount will be temporarily increased each
calendar year to: (i) Seven Million Dollars
($7,000,000) during the months of March, April and
May, except for May 2000 during which the sublimit
will be $8,000,000; (ii) Eight Million Dollars
($8,000,000) during the month of June; (iii) Nine
Million Dollars ($9,000,000) during the month of
July; and (iv) Ten Million Dollars ($10,000,000)
during the months of August and September.
1
<PAGE>
Section 2. CONDITIONS PRECEDENT. The effectiveness of this Amendment is
expressly conditioned upon the receipt by Coast of the following:
(a) a modification fee in the amount of Twenty-Five Thousand
Dollars ($25,000); and
(b) a fully-executed copy of this Amendment.
Section 3. ENTIRE AGREEMENT. The Loan Agreement, as amended hereby,
embodies the entire agreement and understanding between the parties hereto
and supersedes all prior agreements and understandings relating to the
subject matter hereof. Borrower represents, warrants and agrees that in
entering into the Loan Agreement and consenting to this Amendment, it has not
relied on any representation, promise, understanding or agreement, oral or
written, of, by or with, Coast or any of its agents, employees, or counsel,
except the representations, promises, understandings and agreements
specifically contained in or referred to in the Loan Agreement, as amended
hereby.
Section 4. CONFLICTING TERMS. In the event of a conflict between the
terms and provisions of this Amendment and the terms and provisions of the
Loan Agreement, the terms of this Amendment shall govern. In all other
respects, the Loan Agreement, as amended and supplemented hereby, shall
remain in full force and effect.
Section 5. MISCELLANEOUS. This Amendment shall be governed by and
construed in accordance with the laws of the State of California. This
Amendment may be executed in any number of counterparts, all of which taken
together shall constitute one agreement, and any party hereto may execute this
Amendment by signing such counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective officers thereunto duly authorized as of
the date first above written.
BORROWER:
TURF PARTNERS, INC.,
a Delaware corporation
By /s/ William B. Adams
-----------------------------------
President
By /s/ D. N. Sentz
-----------------------------------
Secretary
COAST:
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By /s/ Phillip Goessler
------------------------------------
Title Vice President
--------------------------------
2
<PAGE>
CONSENT OF GUARANTOR
The undersigned, as guarantor of the Obligations (as defined in that
certain Loan and Security Agreement, dated as of June 30, 1999, (as amended,
together with all supplements, addenda, exhibits and schedules thereto, the
"Agreement"), entered into by and between Coast Business Credit, a division
of Southern Pacific Bank, a California corporation ("Coast"), and Turf
Partners, Inc., a Delaware corporation ("Borrowers"), under its Continuing
Guaranty, dated as of June 30, 1999, entered into by the undersigned (the
"Guaranty"), hereby acknowledges notice of the foregoing Amendment Number
Four to Loan and Security Agreement, dated as of May 4, 2000 (the
"Amendment"), between Coast and Borrower, consents to the terms contained
therein, and agrees that its Continuing Guaranty shall remain in full force
and effect.
Dated as of May 4, 2000 ECO SOIL SYSTEMS, INC.,
a Nebraska corporation
By /s/ D. N. Sentz
------------------------------
Title CFO and SECRETARY
--------------------------
3
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<PAGE>
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<NAME> ECO SOIL SYSTEMS, INC.
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<S> <C>
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0
0
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