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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-21975
ECO SOIL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEBRASKA 47-0709577
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10740 THORNMINT ROAD
SAN DIEGO, CA 92127
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(619) 675-1660
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.005 PAR VALUE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 15, 2000, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $65,023,097.
As of March 15, 2000, the number of shares outstanding of the Registrant's
Common Stock, $.005 par value, was: 18,583,728.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders of the
Registrant to be held July 17, 2000, which will be filed on or prior to
April 30, 2000.
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FORWARD-LOOKING STATEMENTS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Statements contained in this
document that are not based on historical fact are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. To
the extent statements in this report involve, without limitation, product
development and introduction plans, the Company's expectations for growth,
estimates of future revenue, expenses, profit, cash flow, balance sheet items,
sell-through or backlog, forecasts of demand or market trends for the Company's
various product categories and for the industries in which the Company operates
or any other guidance on future periods, these statement are forward-looking
statements. Forward-looking statements also may be identified by use of
forward-looking terminology such as "may," "will," "expect," "estimate,"
"anticipate," "believe," "continue" or similar terms, variations of those terms
or the negative of those terms. These risks and uncertainties include those
identified by the Company under the caption "Factors That Could Affect Future
Performance" in Item 1, and other risks identified from time to time in the
Company's filings with the Securities and Exchange Commission, press releases
and other communications. The Company assumes no obligation to update
forward-looking statements.
PART I
ITEM 1. BUSINESS
GENERAL
Eco Soil Systems, Inc. (the "Company") develops, markets and sells
proprietary biological and traditional chemical products that provide
solutions for a wide variety of turf and crop problems in the golf and
agricultural industries. The Company has developed a portfolio of microbial
programs to be applied via standard spray procedures in the case of the
FreshPack-TM- product line, or through the Company's patented BioJect(R)
system. These naturally occurring microbes complement or reduce the need
for many chemical products currently used in golf and agricultural markets.
The Environmental Protection Agency (EPA) has approved the BioJect as a
means of application for biopesticides and the BioJect is described as the
application method under the directions for use on the Company's EPA
registered exclusive microbial products. By fermenting microbes at or near
the customer's site and delivering them for distribution through the
customer's existing irrigation system via the BioJect, or through standard
application practices, customers can cost-effectively reap the benefits
associated with quality microbial products while mitigating the adverse
environmental effects associated with chemical products. The Company
initially focused its sales and marketing efforts on the golf market and in
1998 entered the agricultural crop and horticultural markets.
By utilizing microbes that occur naturally in the environment, Eco Soil's
microbial solutions overcome many of the problems associated with traditional
chemical products. Traditional chemical products require repeated applications,
which can lead to pest resistance and/or adverse environmental effects. The
Company's microbial programs reduce the frequency rate of chemical product
application, resulting in lower overall product and labor cost and increasing
the effectiveness of traditional chemical products. In addition, the Company
believes that the use of microbes, either FreshPack or distributed through the
BioJect system, provide environmental benefits as compared to chemical product
applications by limiting the exposure of humans to chemical products, reducing
residual pesticide contaminants in plants and soil, and minimizing groundwater
pollution.
Eco Soil's FreshPack and BioJect programs overcome many of the obstacles
that historically have hindered widespread use of microbes in the golf and
agricultural industries. Biological products generally have been perceived as
economically infeasible because of their short shelf life, rapid
deterioration upon exposure to light or heat, specialized transportation
requirements and need for daily, manual treatments. For large-scale
applications, the BioJect system preserves and protects the potency of
microbes, significantly reduces shipping costs, controls the concentration of
product and allows for automated daily application by fermenting microbes at
the customer's site and distributing them through the customer's existing
irrigation system. The Company's FreshPack products are fermented and shipped
overnight or by second day air to preserve their potency and have no special
transportation requirements.
The Company's FreshPack products are packaged and designed to deliver a
microbial-based program to the customer. The FreshPack products, which contain
certain microbes together with other soil amendments, are intended to address
several
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problems encountered by the Company's golf course customers by enhancing the
development of the root systems, reducing the level of soil alkalinity,
increasing the level of oxygen in the soil and increasing the porosity of the
soil. The FreshPack products are fermented centrally and then shipped via
overnight or second day delivery to the customer to be immediately applied to
the problem area of the course. The Company views its FreshPack product line as
an additional method of delivering microbial solutions to the customer.
Moreover, if the economics are such that the BioJect System is of greater value,
the FreshPack products serve as an introduction to the efficacy of the microbial
products prior to the customer's making the financial commitment to a BioJect
System. The Company intends to expand the usage of the FreshPack products
into the agricultural markets in the near future.
The Company generates recurring revenues both from the sale of its
FreshPack programs and by delivering programs through BioJect systems to
customers. The Company has entered into technology transfer agreements pursuant
to which it has obtained rights to certain microbes from leading biotechnology
companies and organizations such as Mycogen Corporation, Encore Technologies,
Inc. and the USDA and major universities such as Michigan State University,
Rutgers University and the University of California, Riverside. The Company
currently offers BioJect customers a menu of six microbial-based programs and
will continue to develop the library of approximately 2,500 microbes from the
Agrium acquisition.
In addition to its FreshPack, BioJect and related microbial product line,
the Company has historically sold a complete line of traditional chemical
fertilizers and pesticides and other turf maintenance products through
Company-owned dealers and distributors. These distributed products include
branded pesticides, fertilizers, seed, and other turf maintenance products
from major agricultural manufacturers.
The Company offers a complete program to the agriculture market consisting
of various soil analyses to establish a customized program regimen delivered
through the Company's proprietary equipment, the BioJect and CalJect. The
programs' goals are to utilize soil remediation and microbial activity to move
soil pH towards neutral, improve soil structure and infiltrate and release
nutrients through increased mineralization and organic matter degradation. The
Company performs the soil analysis at the beginning of the season, develops a
treatment regimen, installs and services the equipment at the customer's site
and provides the microbials and other soil additive products for the customer to
use throughout the crop's growing season. While the Company is redirecting its
agricultural efforts to focus primarily in the United States, approximately 50%
of its agriculture business in 1999 was derived from sales outside the United
States, primarily in Mexico.
RECENT DEVELOPMENTS
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 Turf
Partners' credit facility with Coast Business Credit (the "Coast Loan"). A
copy of the Amended and Restated Asset Purchase Agreement, dated as of April
5, 2000, among the Company, Turf Partners and Simplot is attached as Exhibit
10.28 hereto and incorporated by reference.
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 Loan 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 an amount equal to the average amount
outstanding under the Coast Loan during 2000.
The asset purchase agreement calls for Eco Soil and Simplot to enter
into separate agreements pursuant to which Simplot will sell Eco Soil
proprietary products into turf and agricultural markets and commence field
trials of Eco Soil's proprietary products on its potato fields. Under the
agreement relating to agricultural markets, Eco Soil's proprietary products
would be distributed through Simplot's Soil Builders organization, a
nationwide network of 85 agricultural retail stores.
HISTORY
Eco Soil was incorporated under Nebraska law in November 1987. The Company
initially marketed a program that developed blended fertilizers and soil
amendments to golf courses and to other residential and commercial customers in
the Lincoln, Nebraska area. In 1991, the Company decided that it needed a
broader strategic vision and, consequently, concentrated on the development of
biological inoculation service and nutrient programs. In the next several years,
the Company developed its BioJect, CleanRack-TM-, CalJect-TM- and SoluJect-TM-
systems for distribution to the turf maintenance industry. More recently, the
Company has added its FreshPack products to its line of microbial-based
programs. See Item 1: "Business."
STRATEGY
The Company's strategy is to expand its leadership position in the
distribution and sale of microbial products in the golf industry and to continue
to leverage its experience in this industry to further expand into the
agricultural crop market.
INCREASE PENETRATION OF GOLF MARKETS. The Company currently has an
installed base of BioJect systems dispersed among 16 states and 5 countries.
The Company intends to continue to focus its sales and marketing efforts on
increasing FreshPack program sales, the number of installations of its
BioJect system and expanding the number of menu items sold to each customer.
The Company also intends to utilize its installed base to further increase
the volume of sales of distributed products. The Company believes that by
providing a program on a monthly basis which includes the BioJect system and
the microbial products as opposed to an outright sale of the BioJect system
promotes a more rapid expansion of its customer base by relieving its
customers of having to make substantial capital investments. As a stand alone
proprietary product strategy and in order to increase awareness of the
effectiveness of biological products and to generate additional income, the
Company will continue to actively market its FreshPack products to golf
industry customers. The Company believes that as it demonstrates the
advantages of its proprietary products, the use of biological products in the
golf industry will become more widespread and the Company will be well
positioned to exploit new market opportunities.
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EXPAND INTO AGRICULTURAL MARKETS. The Company currently has installed
its proprietary products on more than 13,800 acres of farmland, with 11,300
acres in Mexico and the remaining in the United States. Although the Company
initially set its attention on golf applications for the BioJect system and
FreshPack products, the Company has begun to focus on the agricultural crop
and horticulture markets and expects these markets to be its primary area of
growth over the long term both for its BioJect System and FreshPack products.
By combining its proprietary BioJect and CalJect products in a single program
the Company has been successful in reducing the alkalinity of its customers'
soil, increasing the crops' nutrient uptake and reducing the number of
pathogens in the soil. When combined with micro-irrigation systems, the
Company's proprietary products have allowed customers to increase both the
quantity and quality of their fruit production. For growers that do not
utilize micro-irrigation, the Company is adapting its FreshPack product line
for specific application practices on a focus number of crops. Furthermore,
the Company intends to leverage its fermentation capabilities on a regional
basis by offering growers access to fresh microbial products fermented at
central locations, offering a low-cost hybrid of the BioJect and FreshPack
products.
The Company intends to market its products into the agricultural markets
principally through the acquisition of independent distributors of
micro-irrigation products and through its strategic partnership with J.R.
Simplot and other potential partnerships with established agricultural
companies such as the Cebeco Seeds Group. In April 1998, the Company
acquired Agricultural Supply, Inc. ("Agricultural Supply"), a distributor of
micro-irrigation products in Southern California and Mexico. The acquisition
of Agricultural Supply included a 50% interest in Agricultural Supply de
Mexico ("ASM"), Agricultural Supply's Mexican affiliate. In June 1998, the
Company acquired Controlled Irrigation International, Inc. (d.b.a. Yuma
Sprinkler and Pipe Supply) ("Yuma Sprinkler"), a distributor of
micro-irrigation products in Arizona and Mexico. Also in June 1998, the
Company acquired Riegomex S.A. de C.V. ("Riegomex") and the remaining 50%
interest in ASM. By purchasing additional dealers and distributors of
micro-irrigation products and hiring selected personnel, the Company believes
that it can develop an integrated sales force and penetrate the agricultural
markets with its proprietary products. To date, the Company has designed and
installed micro-irrigation systems on approximately 15,000 acres in the
United States and 66,000 acres in Mexico through its consolidated efforts.
The Company believes that this consolidation of agricultural micro-irrigation
dealers and distributors, like the consolidation of its turf dealers and
distributors, may improve the Company's ability to obtain volume discounts
from its suppliers.
INCREASE NUMBER OF MICROBIAL MENU ITEMS. In order to maximize the revenues
it generates from each BioJect system and from FreshPack sales, the Company
intends to expand the selection of microbes it offers to its customers. To this
end, the Company has entered into discussions with various leading biotechnology
companies and major universities to obtain rights to additional microbes. In
September of 1999, Eco Soil acquired the Agricultural Biological Division
(AgBio) of Canadian-based Agrium, Inc. This acquisition gave Eco Soil immediate
access to a variety of products, including four EPA-registered biochemical
insecticidal products for use in agriculture, one pending EPA-registered
biofungicide (AtEze-TM-) and several Rhizobium soil inoculants (RhizUp-TM-). In
addition, the acquisition included a microbiological collection in excess of
2,500 unique biocontrol and growth-promoting microorganisms. The Company also
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.
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PRODUCTS
PROPRIETARY PRODUCTS
The Company's proprietary products consist of (i) the BioJect system, which
automatically ferments and distributes microbes through irrigation systems, (ii)
the FreshPack line of products, which are packaged biological and soil
amendments,(iii) the CalJect and SoluJect systems, which permit the injection of
soil and water amendments into irrigation systems, and (iv) other proprietary
products, including the CleanRack system.
BIOJECT SYSTEM
The BioJect system permits the introduction of microbes into the soil with
the required frequency and in a cost-effective and environmentally safe manner.
Because biological products are subject to degradation upon exposure to high
temperatures, light or long storage periods, the introduction of these microbes
into the soil on a regular basis had not been economically feasible prior to the
development of the BioJect system. The BioJect system overcomes the traditional
problems associated with the introduction of microbes into the soil by
fermenting them at the customer's site during the day and then dispensing the
microbes into the customer's irrigation system automatically at night. The
BioJect system includes fermentation chambers, pumps, injectors and computer
controls that coordinate the scale-up of microbial products and their injection
into the customer's irrigation system. The BioJect system is equipped with
hardware and proprietary software that allow the user to select or pre-program
the microbe application rate and time of delivery through its user-friendly
control panel. The system also automatically controls the amount of nutrients,
dissolved oxygen, temperature and pH of the fermentation chamber to optimize the
scale-up of microbial populations from a starter culture.
The Company believes that its BioJect system will become the preferred
distribution vehicle for many microbial products because it is able to overcome
the poor shelf life characteristics that have previously prevented biological
products from being practical alternatives or complements to chemical products.
The BioJect system has been designed to apply up to three microbial
products at a time. The Company is the sole supplier of all of the consumables
(biologicals and media) that are required in its BioJect system, as well as
hardware maintenance services. The BioJect system is one of the Company's
primary products, and the Company intends to continue enhancing the capabilities
of and promoting the BioJect system to the golf industry and the expansion of
its BioJect system into the agricultural ornamental and crop industries.
The Company's installed base of BioJect systems experienced rapid growth
through 1998. New installations in 1999 declined due to an increased marketing
focus by the Company on its proprietary FreshPack products and the poor state of
the Mexican agricultural market. The Company's installed base of BioJect systems
is shown in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1993 1994 1995 1996 1997 1998 1999
---------- ---------- --------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of installed BioJect Systems.............. 46 79 171 238 290 458 418
</TABLE>
The Company has installed its BioJect systems for some of the most
famous and notable golf courses in the country, including the following:
- Bent Creek Country Club (PA) - Lancaster Country Club (PA)
- Chevy Chase Country Club (MD) - Medinah Country Club (IL)
- Country Club of Detroit (MI) - Rancho Bernardo Inn (CA)
- Del Mar Country Club (CA) - Siwanoy Country Club (NY)
- Four Seasons Resort Aviara (CA)
The Company offers a menu of six microbial products that can be delivered
through its BioJect system. The BioJect system has evolved from delivering
only bacteria of the Bacillus family to delivering a variety of microbial
products. The Company licenses and/or acquires such microbes from
universities and corporations. These products appear on the Company's
BioJect menu and complement or reduce the need for many chemical
fungicides, herbicides, insecticides and fertilizers. The consumable
product in each menu item is a microbe, and each microbe is cultured in the
BioJect system under a proprietary formula. Different microbes are used for
different applications due to their mode of action or
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performance characteristics.
Set forth below is a table showing the name of each of the Company's
microbial products, the Company's rights to the microbe, the source of the
microbe and the application for each microbe.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
MICROBE NAME SOURCE COMPANY'S RIGHTS USE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BACILLUS Spp. Chr. Hansen, Inc. Public Domain Improves soil porosity to enhance
plant growth
- -------------------------------------------------------------------------------------------------------------------------
AZOSPIRILLUM BRASILENSE Cd Encore Technologies, Exclusive worldwide Converts atmospheric nitrogen into
Inc. license for use through plant available form; growth promoter
("Encore") the BioJect system
- -------------------------------------------------------------------------------------------------------------------------
Pseudomonas aureofaciens Encore/Michigan State Assignment of rights Biofungicide to control certain
TX-1 (Spot-less-TM-) University granted to Encore under turfgrass diseases
exclusive worldwide
license from Michigan
State University
- -------------------------------------------------------------------------------------------------------------------------
XANTHOMONAS Mycogen Corporation/ Rights under worldwide Experimental Use Permit as a
CAMPESTRIS pv poa Michigan State license from Michigan selective postemergent biological
(Xpo-TM-) University State University acquired control of Poa annua
from Mycogen Corporation
(not salable in Japan)
- -------------------------------------------------------------------------------------------------------------------------
ATEZE Agrium, Inc. Eco Soil owns all rights Biofungicide and growth promoter.
Used with greenhouse plant and
vegetables. EPA application has been
filed
- -------------------------------------------------------------------------------------------------------------------------
RHIZUP Agrium, Inc. Owns trademark; buys Nitrogen fixing bacteria for legumes
organism from Liphatec
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has obtained exclusive rights to several microbes pursuant to a
license and supply agreement with Encore and certain assignments of intellectual
property made by Encore to the Company. The license and supply agreement
provides for an exclusive, worldwide, royalty-free license to use, sell and
distribute AZOSPIRILLUM BRASILENSE Cd for application through the BioJect
system. In addition, Encore has assigned to the Company all of Encore's rights
to media (proprietary material formulations used to promote fermentation and
multiplication of microbial products in the BioJect system) and rights to
PSEUDOMONAS AUREOFACIENS TX-1 (Spot-less) that Encore obtained under a license
agreement with Michigan State University.
In September of 1999, Eco Soil acquired the Agricultural Biological
Division (AgBio) of Canadian-based Agrium, Inc. This acquisition included both
RhizUp and AtEze products. RhizUp-TM- is a commercial product introduced to the
Canadian market four years ago that forms a symbiotic relationship with legumes
such as soybeans and peanuts. RhizUp-TM- allows for decreased nitrogen
fertilizer while supporting the growth of the plant. AtEze-TM- is a bacteria
known as Pseudomonas chlororaphis, which has been used as a biopesticide to
prevent fungal disease of vegetables and ornamental plants, including the
Rhizoctonia, Fusarium and Pythium species. The AtEze-TM- biofungicide has shown
efficacious field results against the primary fungal pathogens of these plants
and should enhance Eco Soil's position within the worldwide greenhouse market.
The purchase of the AgBio division provides Eco Soil with a microbiological
collection in excess of 2,500 unique biocontrol and growth-promoting
microorganisms. In addition to new products, Eco Soil was also able to retain
two of Agrium's key employees, including one senior scientist and one marketing
manager. To further increase the menu of items for use in its BioJect system,
the Company intends to enter into additional licensing agreements with leading
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biotechnology companies and major universities once new microbial products have
been proven effective. To meet the technical challenges associated with the task
of optimizing the scale-up of these distinct microbes within the BioJect system
and distributing them within the irrigation cycle, the Company has entered into
research and development agreements with companies specializing in the
fermentation of microbes.
To date, the Company has completed 34 field trials for its proprietary
products in turf through university collaborations for both the BioJect System
and FreshPack products. The following is a list of Universities through which
the Company has conducted these trials:
- - Clemson University - University of California, Riverside
- - Cornell University - University of Connecticut
- - Michigan State University - University of Illinois
- - North Carolina State University - University of Maryland
- - Ohio State University - University of Massachusetts
- - Purdue University - University of Missouri
- - Rutgers University - University of Rhode Island
- - University of Arizona
FRESHPACK PRODUCTS
The Company's FreshPack products are packaged and designed to deliver a
microbial-based program to the customer. The FreshPack products, which contain
certain microbes together with other soil amendments, are intended to address
several problems encountered by the Company's golf course customers by helping
them to develop stronger root systems, reduce the level of soil alkalinity,
increase the level of oxygen in the soil and increase the porosity of the soil.
The FreshPack products are fermented centrally and then shipped via overnight or
second day delivery to the customer to be immediately applied to the problem
area of the course.
Set forth below is a table showing the name of each of the Company's
FreshPack products, the individual products that make up each FreshPack program,
and the application for each program.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
FreshPack Name INDIVIDUAL PRODUCTS USE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
XPO Xanthomonas campestris pv. POANNUA Selective control of POA ANNUA
- -------------------------------------------------------------------------------------------------------------
RECHARGE Azospirillum brasilense CD, root Promotes root growth and brings
growth promoting bacteria, and life back into the soil LEX,
a microbial stimulant
- -------------------------------------------------------------------------------------------------------------
REOPEN Three species of BACILLUS Aides reduction of black layer in
bacteria, LEX and OxyPlus the soil profile and provides
plant-available oxygen and
eliminates anaerobic conditions
- -------------------------------------------------------------------------------------------------------------
REMOVE BACILLUS bacteria, LEX, Increases aeration and
Deliminate,a sodium reduction infiltration in soil, removes
agent, and calcium acetate sodium and introduces calcium
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The Company views its FreshPack product line as an additional method of
delivering microbial solutions to the customer. Moreover, if the economics are
such that the BioJect System is of greater value, the FreshPack products serve
as an introduction to the addition of a BioJect machine and the sale of
associated microbial products. The Company intends to expand the usage of
these products into the agricultural markets in the near future.
The Company has sold its FreshPack products to some of the most famous and
notable golf courses and turf customers in the world, including the following:
- - Chicago Bears - Newport Country Club (RI)
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- - Chicago White Sox - Raven Golf Club (AZ)
- - Atlantic Golf Club (NY) - San Diego Country Club (CA)
- - Brae Burn Country Club (MA) - Sleepy Hollow Country Club (NY)
- - Fairview Golf Club (PA) - Titlest Practice Facility (CA)
- - Four Seasons Golf Club (PA) - The Phoenician (AZ)
- La Costa Country Club (CA)
CALJECT AND SOLUJECT SYSTEMS
The Company's CalJect system permits the injection of soluble soil and
water amendments into irrigation systems. The Company's SoluJect system performs
the same function as the CalJect System and is installed principally at golf
courses because of the SoluJect system's smaller tank size. The Company has
developed ESSI Soluble Gypsum, a soil amendment, specifically for distribution
through the CalJect and SoluJect systems. ESSI Soluble Gypsum combats water
salinity, soil alkalinity and bicarbonate problems most often encountered by
golf courses and growers in the western United States and Mexico. The Company
believes that use of the CalJect and SoluJect systems and ESSI Soluble Gypsum
can reduce golf courses' and growers' water consumption and improve turf quality
and crop yields.
As golf courses and growers irrigate with poor quality water, salts
accumulate in their soils. These salts damage soil and roots, reducing turf
quality and crop yields. The Company believes that approximately 20% of water
used on golf courses in the western United States is used to leach the excess
salt that accumulates in the soil. Eliminating the need for such extra water
could mean significant savings for golf courses. In addition, alkaline soils
typically found in the western United States and Mexico harm turf and crops by
poisoning roots, blocking nutrient uptake and impeding water infiltration. The
CalJect and SoluJect systems provide for automatic application of water and soil
amendments through irrigation systems to address these problems.
The CalJect and SoluJect systems convert the Company's water and soil
amendment products, including ESSI Soluble Gypsum, into solution form and inject
them into an irrigation system. The Company designs and implements a customized
CalJect or SoluJect program for each of its customers based on soil and water
test results. The Company monitors the success of each program and prepares a
soil and water analysis for each customer. Independent consultants make on-going
recommendations based on the results of such analyses.
OTHER PROPRIETARY PRODUCTS
The Company also offers the CleanRack system, an equipment wash rack and
water treatment system that recycles contaminated equipment wash water, making
it suitable for recycling or discharge. The CleanRack system is designed to
decontaminate wash water so that it complies with applicable state and federal
environmental and safety regulations and is suitable for discharge or can be
safely recycled.
DISTRIBUTED PRODUCTS
In addition to the proprietary products described above, the Company also
sells a complete line of traditional chemical fertilizers and pesticides and
other turf maintenance products through Company-owned dealers and distributors.
In order to meet all of its customer's turf maintenance needs, the Company's
distributors keep in stock an inventory of branded pesticides, fertilizers,
seed, and other necessary products from many agricultural manufacturers. Such
products include fertilizers from Scotts Lebanon Chemical Corporation, The
Doggett Corp., Growth Products Ltd., Plant Marvel Laboratories, Inc., The
Andersons, Vicksburg Chemical Company, IMC Vigoro and pesticides from Bayer
Corporation, Novartis Corporation, PBI Gordon Corporation, Kincaid Enterprises,
Rhone-Poulenc AG Company and Rohm, Haas Company and Scotts Company. In the
agriculture industry, the Company sells a number of micro-irrigation products as
well as pumps and piping. These products are manufactured by T-Systems, Inc.,
Spears Manufacturing, Hydro Agri, and United Agriculture Products, Inc.
SALES AND DISTRIBUTION
The Company has focused on establishing sales and distribution capabilities
by acquiring independent product dealers and distributors and integrating them
into a single, nationwide sales organization to promote sales of the Company's
BioJect systems, FreshPack products and CalJect/SoluJect systems to golf courses
and agriculture. To date, the Company has acquired five independent golf product
distributors, which are located in New England, the Chicago metropolitan area,
Indianapolis,
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Detroit and the Palm Springs area. The Company also has hired sales and other
key personnel to establish a regional presence in Southern California and
Pennsylvania. The Company currently has 67 sales and marketing personnel divided
among three sales regions covering the Eastern, Midwestern and Western parts of
the United States. Each region has its own general manager responsible for
maintaining customer satisfaction and expanding the Company's customer base. The
Company has also acquired four distributors of micro-irrigation products, which
are located in Southern California and Arizona and have substantial operations
in Mexico. The Company currently has 11 sales people in the United States and 23
in Mexico in agriculture.
In December, 1998, the Company signed a contract with Scotts to exclusively
market and distribute fertilizer products to the golf course industry in 24
states. As a result, the Company hired 12 sales representatives formerly with
Scotts, who were integrated into the Turf Partners organization and produced
approximately $12.8 million in sales in 1999.
DISTRIBUTION TO GOLF MARKETS
In general, major golf course markets are represented by a single sales
organization that controls a significant portion of new product introductions
and subsequent penetrations into golf courses in their regions. Prior to the
Company's initial dealer acquisitions in May 1996, the Company sold its
proprietary products primarily through direct sales efforts and relationships
with certain regional dealers. By expanding its distribution capabilities using
full-service turf products dealers, the Company has been able to leverage
existing distributor relationships to more effectively sell its proprietary
products.
In early 1996, the Company initiated its strategy of consolidating its
golf distribution network through acquiring independent products distributors
and hiring key sales personnel. In May 1996, the Company acquired Turf
Products, Ltd. ("Turf Products"), a Chicago-based company that markets and
sells fertilizers, pesticides, grass seed and soil amendments to golf courses
throughout the greater Chicago metropolitan area, and Turf Specialty, Inc.
("Turf Specialty"), a New Hampshire-based company that markets and sells
similar products to golf courses and municipalities throughout the New
England region. In February 1997, the Company acquired substantially all of
the assets of Turfmakers, Inc. ("Turfmakers"), a turf products distributor in
the Palm Springs area. In March 1998, the Company acquired Cannon, an
Indianapolis-based company that markets and sells fertilizers, pesticides,
grass seed and soil amendments to golf courses throughout the Midwest, and
Benham, a Detroit-based company that markets and sells fertilizers,
pesticides, grass seed and soil amendments to golf courses throughout
Michigan. Prior to their consolidation into the Company's Turf Partners
subsidiary, Turf Products, Turf Specialty, Turfmakers, Cannon and Benham were
established in the turf maintenance industry for golf course markets in the
greater Chicago, New England, Palm Springs, Midwest and Michigan areas,
respectively. While other dealers in these markets generally compete for
market share through aggressive pricing, the Company has adopted a
value-added, customer service focus, which is essential for introducing
technologically advanced proprietary products such as the BioJect system. The
Company expects to increase its market penetration in the geographic areas
served by its dealers and distributors by hiring additional sales personnel
as well as opening satellite warehouses to serve new customers.
As of December 23, 1998, the Company consolidated its acquired turf market
distributors through merger and the name of the surviving entity was changed to
Turf Partners. Through Turf Partners, the Company serves the golf market in
three regions covering the eastern, Midwestern and western parts of the United
States. The Company believes that the establishment of the Company's regional
sales and distribution network will offer several benefits to the Company,
including (i) improved profitability due to increased sales of proprietary
products; (ii) improved overall financial results due to consolidated
operations; (iii) increased margins through volume discounts; and (iv) increased
visibility in golf markets and greater credibility in larger markets such as the
agricultural crop and ornamental industries.
Although the Company has focused on expanding sales through the
Company's acquired dealers and distributors, the Company maintains
relationships with three independent distributors. The Company supplements
the sales efforts of its acquired distributors, other regional distributors
and its direct sales force through seminars given by prominent university
researchers on the benefits and efficacy of microbial products and through
local and regional training sessions.
DISTRIBUTION TO AGRICULTURAL MARKETS
In early 1998, the Company initiated its strategy of consolidating its
agricultural distribution network through acquiring independent product
distributors and hiring key sales personnel. In April 1998, the Company acquired
Agricultural Supply (including a 50% interest in ASM), a distributor of
micro-irrigation products in Southern California and Mexico. In June
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1998, the Company acquired Yuma Sprinkler, a distributor of micro-irrigation
products in Arizona and Mexico. Also in June 1998, the Company acquired Riegomex
and the remaining 50% interest in ASM. By purchasing these distributors of
micro-irrigation products, the Company believes that it can rapidly develop an
integrated sales force that will allow it to penetrate the agricultural markets.
The Company intends to acquire additional dealers and distributors to hire
selected personnel and to integrate them into a single sales organization in
order to enhance the Company's ability to market and sell its proprietary
products and increase its penetration into the agricultural market.
RESEARCH AND DEVELOPMENT
The Company has not engaged in its own research and development with
respect to the discovery of microbial products. Instead, the Company has
obtained rights to microbial products that have been proven effective for
applications in the turf maintenance and agricultural crop and ornamental
industries. Much of the Company's in-house research and development effort is
targeted at determining which microbes will be suitable for distribution as
FreshPack products or through the BioJect system and the engineering of the
fermentation and product delivery features of the BioJect system. The Company
spent approximately $1,065,000, $584,000 and $269,000 on research and
development for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company believes its strategic objectives can best be met by combining its
in-house product development efforts with the licensing of technology and the
establishment of research collaborations with scientists at academic
institutions and at companies working in related fields. See "Factors That Could
Affect Future Performance--No Assurance that Rights to Additional Microbial
Products Will Be Acquired."
GOVERNMENT REGULATION
The Company is subject to laws and regulations administered by federal,
state and foreign governments, including those requiring registration or
approval of fertilizers, pesticides, water treatment products and product
labeling. Prior to 1998, the Company had only one registered pesticide with the
EPA, BACILLUS THURINGIENSIS and had marketed its microbial products only as soil
inoculants. In 1998, the Company received two EPA approvals. First, the Company
registered with the EPA PSEUDOMONAS AUREOFACIENS TX-1 (Spot-less) as a
biofungicide for use in turf across the United States and received EPA approval
of the BioJect as a means of application of the microbe. Second, the Company
received EPA approval to use XANTHOMONAS CAMPESTRIS pv poa (Xpo) as a
bioherbicide in Experimental Use Permit ("EUP") trials for use in turf across
the United States. In 1999, the Company applied for registration from the EPA
for its AtEze product acquired from Agrium. The Company believes its future
sales will be strengthened if the Company can secure approval of individual
microbes as pesticides.
In most countries, governmental authorities require registration of
pesticides before sales are allowed. In the United States, the EPA regulates
pesticides under the Federal Insecticide, Fungicide and Rodenticide Act
("FIFRA"). Pesticides are also regulated by the individual states such as
California, which has its own extensive registration requirements. In order to
market pesticide products outside the United States, the Company must receive
regulatory approval from the authorities of each applicable jurisdiction. In
addition, the EPA under the Federal Food, Drug and Cosmetic Act ("FFDCA")
establishes standards for residues in food to protect health.
Detailed and complex procedures must be followed in order to obtain
approvals under FIFRA to develop and commercialize a pesticide product. A
separate registration application must be submitted to the EPA for each
microbial product. Evaluation data for the registration include, but may not be
limited to, non-target organism testing, environmental data, product analysis
and residue chemistry, and toxicology (hazards to human beings and domestic
animals).
The EPA has established reduced testing requirements for registration of
microbial pesticides, which are set out in Subdivision M of the EPA's Pesticide
Assessment Guidelines. Microbial pesticides are currently subject to a
three-tier toxicology testing procedure, and a four-tier environmental
evaluation process. If results of toxicology and environmental Tier 1 tests do
not suggest health and safety concerns, then subsequent tier testing is not
required. Additional tests may be required, however, in response to any
questions which may arise during any tier of testing. Registration of the
Company's pesticidal products may take between twelve months and five years
including the time necessary for collection of the necessary product data. If
only Tier 1 testing is required, the cost of registration is typically less than
$500,000. In contrast, synthetic chemical pesticides require much more extensive
toxicology and environmental testing to verify product safety prior to receiving
registration, which the Company estimates can take a total of five to seven
years or longer and can cost $5 to $10 million or more.
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In July 1992, the EPA announced its "Reduced Risk Pesticide Policy"
initiative and is in the process of developing criteria for streamlining the
regulatory process. In June 1993, the Clinton Administration announced its
commitment to reduce the use of pesticides and promote sustainable agriculture
in the United States. The EPA, the United States Department of Agriculture (the
"USDA") and the Food and Drug Administration (the "FDA") are all considering
regulatory reforms. In testimony before Congress on September 21, 1993, the
administrators of the USDA, the FDA and EPA stated their intentions to work
jointly to reduce risk associated with pesticides and to facilitate the
availability of alternative effective pest control products. These policy
initiatives and legislative reviews could in the future accelerate the
registration of biopesticides meeting "reduced risk" criteria, but there can be
no assurance of the impact or timing of these initiatives.
FIFRA allows laboratory and greenhouse testing and, usually, small-scale
field-testing to be conducted prior to product registration, to evaluate product
efficacy and to gather data necessary to support an application. An Experimental
Use Permit ("EUP") must be obtained from the EPA to conduct large-scale
field-testing prior to product registration. An EUP is required for testing in
one or more land sites greater than ten cumulative acres. Issuance of an EUP
normally requires satisfactory completion of certain toxicology and
environmental studies. Field-testing of certain microbial agents may require the
approval of the Animal and Plant Health Inspection Service ("APHIS"), an office
of the USDA. APHIS approvals are granted on a site-specific basis, and
additional state approvals may also be required.
For marketing and use of its products outside the United States, the
Company will be subject to foreign regulatory requirements. Such requirements
vary widely from country to country. In some instances foreign government
approval may require different or additional testing data than that required by
the EPA. Failure to achieve such registration would prevent the Company from
marketing its unregistered products as pesticides in those jurisdictions where
approval is not granted. While the Company exports certain of its microbial
products outside the United States, it does not currently market any of its
products as pesticides in any foreign countries.
In addition, the Company is currently subject to the Occupational Safety
and Health Act, the National Environmental Policy Act, the Toxic Substance
Control Act, the Resource Conservation and Recovery Act, the Clean Air Act and
the Clean Water Act and may be subject to other present and potential future
federal, state or local regulations. From time to time, governmental authorities
review the need for additional laws and regulations for pesticide products that
could, if adopted, apply to the business of the Company. The Company is unable
to predict whether any such new regulations will be adopted or whether, if
adopted, they will adversely affect its business. See "Factors That Could Affect
Future Performance--Government Regulation."
PATENTS AND PROPRIETARY RIGHTS
The Company's success is dependent in large measure upon its ability to
obtain patent protection for its products and to maintain confidentiality and
operate without infringing upon the proprietary rights of third parties. The
Company has obtained both U.S. and foreign patents and is seeking additional
foreign patents covering both the process of automatically inoculating
irrigation water with biological products and the equipment, namely the
BioJect system, used in such process. Specifically, in 1993 the Company was
granted two U.S. patents that relate to the inoculation process and the
related equipment. In 1995, the Company was granted an additional patent
relating to the automatic inoculation of irrigation water through the use of
a BioJect system designed to "cleanse" itself so that it may grow, culture
and dispense distinct microbes or combinations of microbes on a daily basis.
The 1995 patent also expanded the scope of the invention to include
irrigation systems covering all types of vegetation, in addition to turf.
In addition to the patent applications described above, the Company has
registered or applied for or acquired registration of a number of trademarks
used in its business, and has obtained registered trademarks for the names
including the registration of the following trade names: BioJect, FreshPack,
CleanRack, ReOpen, ReMove, ReCharge, AtEze, RhizUp, EcoBac, and Deliminate.
The Company also relies on trade secrets and proprietary know-how. See
"Factors That Could Affect Future Performance -- Patents, Proprietary
Technology and Licenses."
MANUFACTURING AND SUPPLY
A majority of the parts and components utilized in the BioJect, CalJect and
SoluJect systems are standardized industrial components. The computer controls
and the fermentation tank used in the BioJect system are designed and
manufactured to Company specifications by third parties. The Company has no
contracts for supply of parts and components used in its
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systems. Instead, the Company submits purchase orders for such items as needed.
Parts and components are shipped directly to the Company's third-party
assemblers for assembly and testing, and the Company's product management team
oversees the assembly and testing process. The assemblers ship the completed
BioJect, CalJect and SoluJect systems to the Company's distributors or directly
to customers. The Company believes that it is not dependent on any single
manufacturer or source of supply.
FreshPack assembly operations are conducted at Company headquarters in San
Diego. In addition, in 1999, the Company began in-house fermentation of its
Xanthomonas product, Xpo-TM-.
The Company has established relationships with third party fermentation
specialists that prepare base cultures of microbes for fermentation and
distribution through the BioJect system. The Company maintains starter cultures
for each of its microbes to use for ongoing testing purposes and as a backup
culture supply.
The Company obtains distributed products directly from manufacturers. The
Company does not have any long-term distribution agreements with distributed
product manufacturers. The Company maintains an inventory of distributed
products and submits purchase orders on an as-needed basis. The Company is an
approved distributor for various well-known pesticide, fertilizer and seed
manufacturers, including IMC Vigoro, Bayer Corporation, Novartis Corporation and
Rhone-Poulenc AG Company.
COMPETITION
The Company's principal competitors with respect to its primary products
are described below:
BIOJECT SYSTEM. The Company's BioJect system competes against traditional
chemical insecticides and fungicides, chemical soil penetrants, acid injection
systems, and the direct, manual application of cultured microbial products.
Although the Company believes that none of its competitors offers an automated
means of regularly applying microbial products to turf and crops in an effective
manner, many of the Company's competitors have substantially greater financial,
technical and personnel resources than the Company and include such
well-established companies as Novartis Corporation, Rhone-Poulenc AG Company,
the Dow Chemical Company, Lesco, Inc., and The Toro Company, as well as a number
of smaller local and regional competitors. The Company competes against
traditional technologies on the basis of its delivery mechanism and
bioaugmentation expertise. An important factor in the long-term competitiveness
of the BioJect system may be the timing of and extent of the Company's
penetration into golf and agricultural markets compared to the market
penetration achieved by companies offering competing products for microbial
distribution. Such timing will be based on the effectiveness with which the
Company or the competition can complete product testing and approval processes
and supply quantities of its products to market. Competition among microbial
distribution products is expected to be based on, among other things, product
effectiveness, safety, reliability, cost, market capability and patent
protection.
FRESHPACK PRODUCTS. In addition to the competitors listed for the above
BioJect System, the FreshPack products compete directly with Sybron Biochemical,
maker of Green Releaf-TM- products and Plant Health Care, Inc., two companies
focused on the production of packaged microbial products for the turf market.
CALJECT SYSTEM AND SOLUJECT SYSTEM. The CalJect and SoluJect systems
compete against a number of products for applying gypsum onto soil to improve
water penetration through soil. At least one of the Company's competitors in the
market for gypsum distribution, Soil Solutions Corporation ("Soil Solutions"),
has greater name recognition in the soil amendments market and has significantly
more installed units. Soil Solutions' machine, like the Company's CalJect and
SoluJect systems, injects gypsum directly into customers' irrigation systems.
Competition among gypsum distribution products is based on, among other things,
cost, name recognition, product effectiveness and reliability.
DISTRIBUTED PRODUCTS. In markets for distributed products, the Company
competes against distributors of traditional chemical products. Many of these
competitors have substantially greater financial, technical and personnel
resources than the Company and include such well-established companies as Lesco,
Inc., Terra Companies, Inc., Con-Agra, Inc. and Wilbur-Ellis Company. The
Company competes on the basis of price, name recognition, convenience and
customer service with distributors of traditional chemical products. See
"Factors That Could Affect Future Performance--Competition."
PERSONNEL
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As of December 31, 1999, the Company had 387 full-time employees,
consisting of 30 in general management, 104 in sales and marketing, 45 in
customer service, 6 in research and development, 115 in warehouse and
operations and 93 in finance and general administrative activities. None of
the Company's employees is represented by a labor union or is covered by a
collective bargaining agreement. The Company has not experienced work
stoppages and believes that it maintains good relations with its employees.
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
You should carefully consider the following risk factors, in addition to
the other information included in this prospectus, before purchasing shares of
common stock of Eco Soil. Each of these risks could adversely affect our
business, operating results and financial condition, as well as adversely affect
the value of an investment in our common stock.
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT, AND WE
MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE. At December 31, 1999,
we had an accumulated deficit of $42.4 million. Our loss before interest,
depreciation and amortization for the year ended December 31, 1999 was $10.7
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.
IF WE ARE UNABLE TO SUCCESSFULLY ENTER NEW MARKETS, OUR BUSINESS WILL BE
ADVERSELY AFFECTED. Sales of our proprietary products recently have declined.
These 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.
Failure to reverse the decline in sales of proprietary products would have a
material adverse effect on our business, financial condition and results of
operations.
WE HAVE AN INDISPENSABLE NEED FOR CAPITAL, AND THE REPORT OF OUR
INDEPENDENT ACCOUNTANTS ACCOMPANYING OUR FINANCIAL STATEMENTS CONTAINS AN
EXPLANATORY PARAGRAPH REGARDING OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Primarily because of 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. 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, subject to various closing conditions
including approval of Eco Soil's shareholders, receipt of third-party consents
and expiration of the applicable Hart-Scott-Rodino Antitrust Act waiting period.
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 test. The
down payment also will be reduced by the amount, if any, by which the amount
outstanding on the Coast Loan 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 Loan during 2000. In addition,
we have entered into a Term Loan Agreement dated as of April 12, 2000 with
Simplot, under which Simplot will loan us $3,000,000, subject to certain closing
conditions, to provide working capital to Turf Partners pending the closing of
the asset sale.
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 on our financial
statements included herein includes an explanatory paragraph to this effect.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and Note 1 of our
Consolidated Financial Statements.
WE MAY NOT SATISFY ALL OF THE APPLICABLE FINANCIAL COVENANTS IN OUR DEBT
DOCUMENTS, AND IF WE DO NOT MEET THESE COVENANTS, WE WOULD BE IN DEFAULT AND OUR
OBLIGATIONS COULD BE DECLARED IMMEDIATELY DUE AND PAYABLE. 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 we and our subsidiaries 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 September 30, 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.
RESTRICTIONS IN OUR CONVERTIBLE DEBENTURES AND WARRANTS PURCHASE AGREEMENT
MAY IMPAIR OUR ABILITY TO RAISE ADDITIONAL EQUITY CAPITAL. 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 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.
IF WE FAIL TO MANAGE GROWTH EFFECTIVELY, OUR BUSINESS MAY SUFFER. We have
experienced significant growth. This growth has placed, and will continue to
place, significant strains on our resources. Our ability to manage future
growth, should it occur, will require us to implement and continually expand
operational and financial systems, recruit additional employees and train and
manage both current and new employees. In particular, our success depends in
large part on our ability to attract and retain qualified technical, sales,
financial and management personnel. We face competition for these persons from
other companies, academic institutions, government entities and other
organizations. We can give you no assurance that we will be
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successful in recruiting or retaining personnel of the requisite caliber or in
adequate numbers to enable us to conduct our business as we propose to conduct
it.
IF WE FAIL TO SUCCESSFULLY IMPLEMENT AND MAINTAIN OUR SALES AND
DISTRIBUTION NETWORK, WE MAY BE UNABLE TO SELL SUFFICIENT PRODUCTS TO MAKE A
PROFIT. We distribute and sell our products through distributors and dealers we
have acquired and through independent dealers and distributors. Achieving the
anticipated benefits of such acquisitions will depend on a variety of factors,
including whether the integration of such dealers and distributors with our
organization can be accomplished in an efficient and effective manner and
whether the acquired sales force can effectively sell our proprietary products.
Any failure to identify future hires or acquisition candidates properly, any
large expenditures on acquisitions that prove to be unprofitable or any
difficulties we encounter in selling our proprietary products through the
existing distribution system could have a material adverse effect on our
business, financial condition and results of operations.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE WHEN
NEEDED. The continuing commercialization of our products requires the commitment
of significant capital expenditures. We anticipate that we will require
additional funds to support the rigorous testing of our products, other costs of
obtaining government approval and for marketing of our products for agricultural
applications. We anticipate that we will seek to obtain additional funds in the
future through public or private equity or debt financing, collaborative or
other arrangements with corporate partners or from other sources. We can give
you no assurance that we will be able to obtain this additional financing on
desirable terms, or at all. If additional funds are not available, we may be
required to curtail our operations and marketing efforts in certain geographic
areas or for one or more of our product lines.
PATENTS AND OTHER PROPRIETARY RIGHTS PROVIDE UNCERTAIN PROTECTION OF OUR
PROPRIETARY INFORMATION AND OUR INABILITY TO PROTECT A PATENT OR OTHER
PROPRIETARY RIGHT MAY IMPACT OUR BUSINESS AND OPERATING RESULTS. Our success
will depend in large measure upon our ability to obtain and enforce patent
protection for our proprietary products, maintain confidentiality of our
trade secrets and know-how and operate without infringing upon the
proprietary rights of third parties. We have been granted three U.S. patents
for the technology relating to the BioJect system. We do not have foreign
patent protection with respect to the claims covered by the two U.S. patents
issued in 1993, and we are precluded from obtaining these foreign rights due
to the expiration of the period for filing such claims. However, in
connection with a U.S. patent granted in 1995, we applied for foreign patent
protection with respect to the BioJect system in selected countries. To date,
we have successfully patented the technology relating to the BioJect system
in several of these foreign countries. In addition, we have registered a
number of trademarks we use in our business, including "BioJect" and
"FreshPack" and have applied for registration of a number of additional
trademarks. We also rely on trade secrets and proprietary know-how. We
generally enter into confidentiality and nondisclosure agreements with our
employees and consultants and attempt to control access to and distribution
of our confidential documentation and other proprietary information.
Despite the precautions described above, it may be possible for a third
party to copy or otherwise use our products or technology without authorization,
or to develop similar products or technology independently. We can give you no
assurance that our patent or trademark applications will be granted, that the
way we protect our proprietary rights will be adequate or that our competitors
will not independently develop similar or competing products. Furthermore, there
can be no assurance that we are not infringing other parties' rights. If any of
our patents are infringed upon or if a third party alleges that we are violating
their proprietary rights, we may not have sufficient resources to prosecute a
lawsuit to defend our rights. In addition, an adverse determination in any
litigation could subject us to significant liabilities to third parties, require
us to seek licenses from or pay royalties to third parties or prevent us from
manufacturing, selling or using our products, any of which could have a material
adverse effect on our business, financial condition and results of operations.
Even if we prevailed in litigation to protect our intellectual property rights,
this litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, financial condition and
results of operations.
WE DEPEND ON THIRD PARTY CONTRACT MANUFACTURERS AND SUPPLIERS. We currently
do not have any manufacturing capability and rely on third parties to
manufacture our products and components. We have more than one supplier for the
manufacture of most of our products and components; however, we obtain some
products or components from only one source. Although we believe that we will be
able to contract production with alternate suppliers, we can give you no
assurance that this will be the case or that the need to contract with
additional suppliers will not delay our ability to have our products and
components manufactured. We can give you no assurance that existing or future
manufacturers will meet our requirements for quality, quantity and timeliness,
and any such failure could have a material adverse effect on our business,
financial condition and results of operations.
14
<PAGE>
WE MAY BE UNABLE TO ACQUIRE RIGHTS TO ADDITIONAL MICROBIAL PRODUCTS. We
plan to obtain the rights to additional microbial products. We currently do not
engage in our own research and development with respect to the discovery of
microbial products. As a result, we seek to license or acquire rights to
microbial products discovered by others. We can give you no assurance that we
will be successful in obtaining licenses for, or otherwise acquiring rights to,
additional microbial products on terms acceptable to us, or at all. If we fail
to acquire rights to additional products our business, financial condition and
results of operations could be materially adversely affected.
POTENTIAL PRODUCT LIABILITY OR ENVIRONMENTAL CLAIMS COULD ADVERSELY AFFECT
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. We may be exposed to product
liability or environmental liability resulting from the commercial use of our
products. We currently carry liability insurance, which covers, among other
things, product liability and environmental liability. A product liability,
environmental or other claim with respect to uninsured liabilities or in excess
of insured liabilities could have a material adverse effect on our business,
financial condition and results of operations.
We have obtained insurance of such types and in such amounts as we believe
is necessary, including casualty insurance and workers' compensation insurance.
However, we are exposed to certain risks that are not covered by our insurance
policies and our policies are subject to limits, exceptions and qualifications.
Consequently, we can give you no assurance that any losses will be covered by
insurance, that any covered losses will be fully insured against or that any
claim we make will be approved for payment by the insurer.
WE ARE SUBJECT TO ENVIRONMENTAL LIABILITY. The federal government and some
states have laws imposing liability 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. We also are subject to
certain other federal environmental laws, including the National Environmental
Policy Act, the Toxic Substance Control Act, the Resource Conservation and
Recovery Act, the Clean Air Act and the Clean Water Act and their state
equivalents and may be subject to other present and potential future federal,
state or local regulations. As noted above, we maintain insurance for
environmental claims which might result from the release of our products into
the environment, but there can be no assurance that any losses covered by
insurance will be adequately covered. Thus, a claim for environmental liability
could have a material adverse effect on the Company's business, financial
condition and results of operations.
OUR PRODUCTS ARE SUBJECT TO GOVERNMENTAL REGULATIONS AND APPROVALS. We are
subject to laws and regulations administered by federal, state and foreign
governments, including those requiring registration or approval of fertilizers,
pesticides, water treatment products and product labeling. Some of our current
products are subject to regulation by the EPA, the USDA and by certain state
environmental and agricultural departments. Prior to 1998, we had only one
registered pesticide with the EPA, BACILLUS THURINGIENSIS, and had marketed it
as well as other microbial products only as soil inoculants. In 1998, we
received two EPA approvals. First, we registered PSEUDOMONAS AUREOFACIENS TX-1
(Spot-less-TM-) with the EPA as a biofungicide for use in turf across the United
States and received EPA approval of the BioJect as a means of application of the
microbe. Second, we received EPA approval to use XANTHOMONAS CAMPESTRIS pv
poaannua (Xpo) as a bioherbicide in experimental use permit trials for use in
turf across the United States. We are in the final process of receiving EPA
approval on PSEUDOMONAS HORORAPHIS, STRAIN 63-28 (AtEze-TM-) for use as a
biofungicide on greenhouse and agricultural plants. We can give you no assurance
that we will obtain EPA approval for sales of additional microbial products as
biopesticides. In order to market a microbe as a pesticide, we must obtain EPA
approval of a particular product containing that microbe, including EPA approval
of the claims made in the product label and the method of application.
Registration of our microbial products as pesticides likely will be a lengthy
and expensive process that may or may not result in EPA approval. Without the
desired EPA approvals, we will not be able to market such unregistered microbes
as pesticides, and our sales efforts will be limited to discussions of the soil
inoculant features of the microbe. If the EPA determines that a microbial
product has no significant commercially valuable use other than use as a
pesticide, however, we will be precluded from selling the product entirely
unless it is approved by the EPA.
In addition, if we intend to sell a microbe 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 (food crop) at the time of harvest. We also may
petition the EPA for tolerance exemptions that would not limit the residues of
the microbial products on crops. If the EPA does not issue a tolerance
exemption, we would be required to obtain a separate tolerance for each food
product on which we intend to make our microbial pesticides available for use.
As a result,
15
<PAGE>
we would incur costly application fees for each tolerance. We can give you no
assurance that we will be successful in seeking such tolerances or tolerance
exemptions, and any failure to obtain such tolerances or exemptions would
prevent us from selling microbes as pesticides for use on crops.
We may be subject to regulation in foreign countries. Compliance with such
requirements likely would result in additional cost to us and delays in
introducing our products in such foreign countries.
Compliance with EPA and state environmental regulations as well as other
laws and regulations will increase our costs and time necessary to allow us to
operate successfully and may affect us in other ways not currently foreseeable.
In addition, more stringent requirements for regulation or environmental
controls may be imposed, which could have a material adverse effect on our
business, financial condition and results of operations.
THE INDUSTRY IN WHICH WE COMPETE IS EXTREMELY COMPETITIVE AND IF WE ARE NOT
ABLE TO COMPETE EFFECTIVELY OUR BUSINESS MAY SUFFER. The BioJect system and our
Fresh Pack products compete against traditional chemical insecticides and
fungicides, chemical soil penetrants, acid injection systems and the direct,
manual application of cultured microbial products. Many of our competitors have
substantially greater financial, technical and personnel resources than we do.
Our competitors include such well-established companies as Novartis Corporation,
Rhone-Poulenc AG Company, the Dow Chemical Company, O.M. Scotts & Sons, Inc.,
Lesco, Inc., and The Toro Company, as well as a number of smaller local and
regional competitors. We compete against traditional technologies on the basis
of our delivery mechanism and bioaugmentation expertise. We believe that the
long-term competitiveness of the BioJect system may be affected by the timing
and extent of our penetration into golf and agricultural markets compared to the
market penetration achieved by companies offering competing products for
microbial distribution. This timing, in turn, will be based on the effectiveness
with which we or the competition can complete product testing and approval
processes and supply products to the marketplace. Competition among microbial
distribution products is expected to be based on, among other things, product
effectiveness, safety, reliability, cost, market capability and patent
protection.
In markets for traditional chemical products, we compete against
well-established distributors of such products. Many of these competitors have
substantially greater financial, technical and personnel resources than us and
include such companies as Lesco, Inc., Terra Companies, Inc., Con-Agra, Inc. and
Wilbur-Ellis Company. We compete with distributors of traditional chemical
products on the basis of price, name recognition, convenience and customer
service.
OUR BUSINESS IS DEPENDENT IN LARGE PART UPON THE GROWTH AND CONTINUED
POPULARITY OF GOLF. Although we believe that golf markets will continue to grow,
a decrease in the number of golfers, reduced participation rates or reduced
consumer spending on golf could have a material adverse effect on our golf
course customers and, in turn, on us. Specifically, the success of efforts to
attract and retain members at private country clubs and the number of rounds
played at public golf courses historically have been dependent upon
discretionary spending by consumers, which may be adversely affected by general
and regional economic conditions. In addition, the construction of additional
golf courses is dependent upon growth in the number of golfers. If customer
tastes or economic conditions cause golf courses to reduce their budgets or slow
the development of additional golf courses, we may see a correlative decrease in
sales of the BioJect system and our other products.
OUR EFFORTS TO SELL OUR PROPRIETARY PRODUCTS FOR USE IN MICRO IRRIGATION
AND GREENHOUSE APPLICATIONS MIGHT NOT PROVE SUCCESSFUL. We recently have begun
selling our proprietary products to growers who will apply them to crops using
micro irrigation methods. In addition, we have formed a strategic relationship
with Cebeco Seeds Group to sell our proprietary products in European greenhouse
markets. Our proprietary products have not been widely applied using micro
irrigation methods or in greenhouses and we may not achieve significant market
share in these markets. We cannot provide any assurances that our revenues from
sales of our proprietary products for application using micro irrigation methods
or in greenhouses will exceed the sales, marketing and development costs we have
incurred in an effort to penetrate these markets.
OUR EFFORTS TO SELL OUR PRODUCTS OUTSIDE THE UNITED STATES HAVE HAD LIMITED
SUCCESS TO DATE AND MAY NOT BE SUCCESSFUL IN THE FUTURE. We have devoted
substantial resources to developing markets for our products outside the United
States, particularly in Mexico. In addition, our strategic relationship with
Cebeco Seeds Group calls for us to sell our proprietary products to the European
greenhouse markets. To date, our operations outside the United States have
generated limited revenues, which have not been sufficient to cover our costs in
seeking to penetrate foreign markets. While we are continuing to explore
opportunities to sell our products outside the United States, we can give you no
assurance that we will be successful. Our international sales efforts are
subject to risks associated with operations in foreign countries that may
increase our costs, lengthen our sales cycle and require significant management
attention. These risks include:
16
<PAGE>
- - fluctuations in currency exchange rates, which may make our products more
expensive;
- - general economic conditions in international markets;
- - political risks;
- - additional costs of compliance with local regulations, including costs
associated with unexpected changes in regulatory requirements resulting in
unanticipated costs and delays;
- - tariffs, export controls and other trade barriers; and
- - longer accounts receivable payment cycles and difficulties in collecting
accounts receivable.
The costs related to our international operations could adversely affect our
operations and financial results in the future.
OUR STOCK PRICE HAS BEEN AND WILL CONTINUE TO BE VOLATILE. Our common stock
currently is quoted on the Nasdaq National Market. The market price of our
common stock could be subject to significant fluctuations in response to
operating results and other factors. In addition, the stock market in recent
years has experienced extreme price and volume fluctuations that often have been
unrelated or disproportionate to the operating performance of companies. These
fluctuations, as well as general economic and market conditions, may adversely
affect the market price of our common stock. In addition, in the event the
listing of the common stock were discontinued for any reason, the liquidity and
price of our common stock would be adversely affected.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND ANY FAILURE TO MEET
FINANCIAL EXPECTATIONS MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND
RESULT IN A DECLINE IN OUR STOCK PRICE. Our operating results vary from quarter
to quarter as a result of seasonality and various factors. Virtually all of our
customers are located in the Northern Hemisphere and purchase greater quantities
of microbes and distributed products during the spring, summer and fall months.
As a result of low customer activity during the winter, we typically market the
BioJect system during the fourth and first quarters. As a result of these
marketing efforts, we typically receive orders during the first and second
quarters and install BioJect systems during the second and third quarters.
BioJect revenues generally occur in the second and third quarters of the year.
Because of this sales cycle, we expect to recognize a significant portion of our
revenues during our second and third quarters. Operating expenses have tended to
be independent of the quarterly sales cycle. As a result, operating expenses
generally represent a higher percentage of sales in the first and fourth
quarters as compared to the second or third quarters, and we may experience
losses in the first and fourth quarters. Accordingly, results for any quarter
are not necessarily indicative of results for any future period. The sales cycle
for the BioJect system also makes it difficult to predict the number of BioJect
systems that will be employed and the quantity of microbial products that we
will sell until we receive orders during the first half of the year. Sales of
our products also depend to some extent on the severity of weather patterns in
the geographic areas we serve. Given these factors, it is difficult for us to
accurately predict the level of demand for our products.
It is likely that in one or more future quarters our financial results will
fall below the expectations of analysts and investors. If this happens, the
trading price of our common stock would likely decrease. Many of the factors
that cause our quarter to quarter financial results to be unpredictable are
largely beyond our control.
LOSS OF KEY PERSONNEL COULD HURT OUR BUSINESS. We are dependent upon the
active participation of William B. Adams, the chairman of our board of directors
and our chief executive officer. The loss of the services of Mr. Adams could
have a material adverse effect upon our business, financial condition and
results of operations. We have entered into an employment agreement with Mr.
Adams, which provides for his continued employment with us through December 31,
2000. We do not have key person life insurance on any of our key employees.
A SMALL NUMBER OF SHAREHOLDERS MAY BE ABLE TO EXERCISE EFFECTIVE CONTROL
OVER US. As of December 31, 1999, our current principal shareholders and
management owned more than 25% of the outstanding shares of our common stock,
assuming the exercise of all outstanding options and warrants held by them and
no exercise of options or warrants held by others. Accordingly, even though we
currently have cumulative voting, the current principal shareholders and
management, if voting in concert, may have the ability to effectively control
the election of a majority of our directors or any other major decisions
involving our assets or us.
17
<PAGE>
WE HAVE A LARGE NUMBER OF OUTSTANDING WARRANTS AND OPTIONS, WHICH COULD
HARM OUR ABILITY TO ACQUIRE ADDITIONAL CAPITAL. As of December 31, 1999, there
were 7,073,291 shares of common stock subject to issuance pursuant to options
and warrants we previously issued. Holders of warrants and options are likely to
exercise them when, in all likelihood, we could obtain additional capital on
terms more favorable than those provided by the warrants and options. While the
warrants and options are outstanding, they may adversely affect the terms on
which we can obtain additional capital.
ANTI-TAKEOVER PROVISIONS OF OUR CHARTER AND NEBRASKA LAW COULD LIMIT THE
ABILITY OF ANOTHER PARTY TO ACQUIRE US, WHICH COULD CAUSE OUR STOCK PRICE TO
DECLINE. Certain provisions of our articles of incorporation, including
provisions creating a staggered board of directors, and certain provisions of
Nebraska law, including the Nebraska Shareholders Protection Act, could have the
effect of deterring or delaying a takeover or other change in control of Eco
Soil, could deny shareholders the receipt of a premium on their common stock and
could result in a decline in the market price of our common stock. In addition,
our board of directors is authorized, without any action by our shareholders, to
issue up to 5,000,000 shares of authorized but undesignated preferred stock and
to fix the powers, preferences, rights and limitations of this preferred stock
or any class or series thereof. Persons acquiring preferred stock could have
preferential rights with respect to voting, liquidation, dissolution or
dividends over existing shareholders.
ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO INVESTORS. We have
never paid or declared any cash dividends on our common stock and we do not
intend to pay dividends on our common stock in the foreseeable future. We are
currently prohibited from paying dividends by the terms of a loan agreement we
have with Coast Business Credit. We intend to retain any earnings for use in the
operation and expansion of our business.
ITEM 2. PROPERTIES
The Company's headquarters consist of 39,700 square feet located in San
Diego, California. The Company currently leases this building for warehouse,
sales and marketing, product development and administrative purposes. The
Company's lease for such space provides for base lease payments of $30,817 per
month, plus operating expenses, and expires in December 2008. The Company does
not own any real property.
Turf Partners leases office and warehouse space in various locations in the
U.S. including 28,500 square feet in the West region, 97,869 square feet in the
Midwest region and 69,945 square feet in the East region. Agricultural Supply
leases 33,659 square feet in California, 11,696 square feet in Arizona, 3,600
square feet in New Mexico and 28,900 square feet in Mexico.
Management believes that the properties leased by the Company and its
subsidiaries are generally in good operating condition.
ITEM 3. 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 April 24, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1999.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.005 par value per share, trades on The NASDAQ
National Market under the symbol "ESSI." From January 16, 1997, the date of the
Company's initial public offering, to December 3, 1997 the Company's Common
Stock traded on the NASDAQ SmallCap Market under the symbol "ESSI". The
following table sets forth for the periods indicated the high and low sale
prices for the Common Stock as reported by the NASDAQ National Market for the
period from January 1, 1998 to December 31, 1999.
<TABLE>
<CAPTION>
HIGH LOW
---------------------
<S> <C> <C>
1998
1st Quarter ...................................... $ 9.75 $ 5.00
2nd Quarter....................................... 12.375 9.375
3rd Quarter....................................... 11.625 5.375
4th Quarter....................................... 9.00 4.125
1999
1st Quarter ...................................... 8.688 5.75
2nd Quarter....................................... 7.313 4.438
3rd Quarter....................................... 8.063 5.25
4th Quarter....................................... 6.625 2.906
</TABLE>
As of March 15, 2000 there were approximately 18,583,728 shares of
Common Stock outstanding held by approximately 289 holders of record.
The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to pay dividends on its Common Stock in the
foreseeable future. The Company is currently prohibited from paying dividends by
the terms of loan agreements between the Company and their lenders. The Company
intends to retain any earnings for use in the operation and expansion of its
business.
RECENT SALES OF UNREGISTERED SECURITIES
In December 1999, the Company entered into Amendment No. 4 of the Note
and Warrant Purchase Agreement, dated as of August 25, 1998, as amended, by
and among the Company, Albion Alliance Mezzanine Fund, L.P. and Paribas
Capital Funding LLC (the "Purchasers"). Amendment No. 4 amends various
financial covenants and eliminates prepayment penalties. The Company issued an
aggregate of402,208 shares of its common stock and amended warrants held by
the Purchasers to increase the number of shares issuable upon the exercise of
such warrants by an aggregate of 399,961 shares of common stock as
consideration for the Purchasers' entering into Amendment No. 4.
The issuance of the Company's common stock and warrants in connection
with Amendment No. 4 was effected pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), taking into account the representations of the Purchasers
that they are accredited investors, that the Purchasers acquired the common
stock and warrants of the Company for their own accounts and not with a view
to any distribution thereof to the public and that the transaction was
completed without any general solicitation or advertising.
ITEM 6 SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
Item 7: "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements of the Company and
related notes thereto appearing elsewhere in this Report on Form 10-K.
19
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues $ 123,532 $ 82,371 $ 37,525 $ 12,116 $ 3,757
Cost of revenues 96,925 59,564 25,995 7,705 2,246
------------------------------------------------------------------------------
Gross profit 26,607 22,807 11,530 4,411 1,511
Operating expenses:
Selling, general and administrative 38,828 25,405 11,277 6,601 2,647
Research and development 1,065 584 269 475 413
Amortization 1,155 1,108 580 464 25
Special charges - 3,875 - - -
------------------------------------------------------------------------------
Loss from operations (14,441) (8,165) (596) (3,129) (1,574)
Interest expense 4,288 2,494 579 1,069 264
Interest income (323) (654) (97) (5) (2)
------------------------------------------------------------------------------
Net loss $ (18,406) $ (10,005) $ (1,078) $ (4,193) $ (1,836)
==============================================================================
Net loss per share, basic and diluted $ (1.05) $ (0.61) $ (0.10) $ (0.72) $ (0.35)
Shares used in calculating net loss
per share, basic and diluted 17,550 16,361 11,327 5,815 5,207
EBITDA (10,692) (5,491) 803 (2,218) (1,220)
EBITDA before special charges (10,692) (1,616) 803 (2,218) (1,220)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 1,228 $ 3,410 $ 3,125 $ 150 $ -
Working capital (deficit) (20,672) 18,420 15,408 (6,434) (1,324)
Total assets 82,555 67,005 37,108 12,886 3,981
Long-term obligations, net of current portion 1,482 22,620 1,412 1,847 911
Total shareholders' equity 16,027 28,543 29,780 (74) (159)
</TABLE>
EARNINGS BEFORE INTEREST, INCOME TAXES, DEPRECIATION AND AMORTIZATION
(EBITDA)
EBITDA is net income (loss) excluding interest income, interest expense,
depreciation and amortization expense. EBITDA before special charges is EBITDA
excluding special charges, a substantial portion of which are non-cash in nature
and all of which are expected to be infrequently occurring. While EBITDA should
not be constructed as a substitute for income (loss) from operations, net income
(loss) or cash flows from operating activities in analyzing the Company's
operating performance, financial condition or cash flows, the Company is
reporting EBITDA because it is commonly used by certain users of the Company's
financial statements to analyze and compare companies on the basis of operating
performance, leverage and liquidity and to determine a company's ability to
service debt.
20
<PAGE>
EBITDA is calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net loss $ (18,406) $ (10,005) $ (1,078) $ (4,193) $(1836)
Interest income (323) (654) (97) (5) (2)
Interest expense 4,288 2,494 579 1,069 264
Depreciation 2,594 1,566 819 447 329
Amortization 1,155 1,108 580 464 25
------------------------------------------------------------------
EBITDA (10,692) (5,491) 803 (2,218) (1,220)
Special Charges -- 3,875 -- -- --
------------------------------------------------------------------
EBITDA before special charges $ (10,692) $ (1,616) $ 803 $ (2,218) $(1,220)
==================================================================
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with Item 6:
"Selected Financial Data" and the Consolidated Financial Statements of the
Company, related notes thereto, and other financial data appearing elsewhere in
this Report on Form 10-K.
GENERAL
Eco Soil Systems, Inc. develops, markets and sells proprietary biological
and traditional chemical products that provide solutions for a wide variety of
turf and crop maintenance problems in the golf and agricultural industries. We
have developed our patented BioJect system for the distribution of naturally
occurring microbes that complement or reduce the need for many chemical products
currently used in golf and agricultural markets. By fermenting microbes at the
customer's site and distributing them through the customer's existing irrigation
system, the BioJect system provides customers with cost savings and mitigates
the adverse environmental effects associated with chemical products. We
initially focused our sales and marketing efforts on the golf course market, and
recently we entered the agricultural crop and ornamental markets.
Through 1995 our principal activities were the development, marketing and
sale of our proprietary BioJect systems and microbial products, primarily in the
golf course maintenance market. In 1996, we began to rapidly expand our sales
and marketing capabilities related to the BioJect system by hiring key personnel
and acquiring regional distributors whose sales representatives had established
relationships with potential BioJect customers in the golf course and turf
maintenance markets. In May 1996, we acquired two turf maintenance products
distributors located in New England and Illinois. In February 1997, we acquired
substantially all of the assets of a turf maintenance products distributor
located in Southern California. In March 1998, we acquired two additional turf
maintenance products distributors located in Indiana and Michigan. The
acquisition of these distributors significantly increased the volume of
distributed products we are selling and led to increased penetration of the
BioJect system within the golf industry. In December 1998, we consolidated these
subsidiaries into our Turf Partners business segment. Also in December 1998, we
signed a contract to exclusively market and distribute fertilizer products of
The Scotts Company (the "Scotts Contract") to the golf course industry in 24
states. The Scotts Contract also provides us with similar non-exclusive
distribution rights in five additional states. As a result, we hired 12 sales
representatives formerly with Scotts, who will now be actively marketing both
the Scotts products and all our other products in geographic areas previously
served by independent distributors. We incurred substantial costs in December
1998 to cancel or buy out our agreements with many of those distributors.
By 1997, we had developed agricultural applications for the BioJect system
and our related CalJect system and commenced generating revenues in the
agricultural market. In 1998, we began to rapidly expand our sales and marketing
capabilities in the agricultural market through the acquisition of four
independent distributors of micro-irrigation products in Southern California,
Arizona and Mexico. In December 1998, we consolidated these subsidiaries into
our Agricultural Supply business segment.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO 1998
21
<PAGE>
REVENUES
In 1999, our revenues were $123.5 million, an increase of 50.0% versus
$82.4 million in 1998. The increase in revenues reflects an increase in both
Turf Partners and Agricultural Supply segment revenues.
In 1999, Turf Partners revenues were $97.1 million, an increase of 58.4%
versus $61.4 million in 1998. The increase in Turf Partners revenues occurred
in all three operating regions of the U.S. Proprietary sales for Turf
Partners decreased to $5.8 million in 1999 from $7.2 million in 1998. The
decrease in proprietary sales was due to a decrease in BioJect usage as a
result of the following: (i) a reorganization in the fall of 1998 that
impaired sales momentum, (ii) integration of our sales force assumed from the
Scotts Company, (iii) new FreshPak programs challenged our sales force, while
providing the customer with a cheaper alternative to the BioJect, (iv) the
delay in approval of certain biocontrol products from the EPA, (v) customers
believed their improved turf, resulting from several seasons of BioJect
programs, could manage without a 1999 program and (vi) drought conditions in
the Midwest and Northeast. Distributed product sales increased to $91.3
million in 1999 from $54.1 million in 1998. The increase in distributed
revenue is due to the expansion of the Turf Partners business. During the
second quarter of 1999, Turf Partners completed the integration of the sales
force assumed from the Scotts Company in December 1998 and completed the
stocking of several new warehouses and realignment of its distribution
networks which extended market penetration to new geographic areas.
In 1999, our Agricultural Supply revenues were $26.4 million, an increase
of 25.3% versus $21.0 million in 1998. Agricultural Supply revenues were
affected favorably by a full year of operations from the 1998 acquisitions of
Agricultural Supply, Inc., Yuma Sprinkler & Pipe Supply and Riegomex S.A. de
C.V. Proprietary sales in Mexico and the U.S. increased to $1.7 million in 1999
from $1.5 million in 1998. Distributed sales for the Agricultural Supply
division increased to $24.7 million in 1999 from $19.6 million in 1998. The
increase in proprietary and distributed revenues was due to the 1998
acquisitions mentioned above and opening of new warehouses which extended market
penetration to new geographic areas.
GROSS PROFIT
In 1999, our gross profit was $26.6 million, an increase of 16.7% versus
$22.8 million in 1998. The increase in gross profit was due to the increase
in both Turf Partners and Agricultural Supply segment revenues. For 1999, our
gross margin was 21.5% versus 27.7% for 1998. The decrease in gross margin
was due to the mix of proprietary and distributed revenues in 1999.
Proprietary sales, which carry higher gross margins than distributed sales,
decreased while distributed sales increased in 1999.
In 1999, the gross profit on Turf Partners revenues was $19.6 million, an
increase of 17.3% versus $16.7 million in 1998. The increase in gross profit on
Turf Partners sales is directly related to the increase in distributed revenue.
In 1999, the gross margin on Turf Partners products was 20.1% versus 27.2% in
1998. The decrease in gross margin on Turf Partners sales was due to a decrease
in proprietary sales, heavy seed discounting in the West and lower than expected
fungicide sales in the East.
In 1999, the gross profit on Agricultural Supply segment sales was $7.0
million, an increase of 14.8%, versus $6.1 million for 1998. The increase in
gross profit on Agricultural Supply sales was directly related to the increase
in revenue, as previously discussed. The gross margin on Agricultural Supply
sales was 26.7%, versus 29.1% in 1998. The decrease in gross margin was due to
the mix of proprietary and distributed products in 1999. Proprietary sales,
which carry higher gross margins, than distributed sales, did not increase in
the same proportion that distributed sales did in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For 1999, selling, general and administrative ("SG&A") expense was $38.8
million, an increase of 52.8% versus $25.4 million for 1998. SG&A expense as a
percentage of revenues was 31.4% in 1999 compared to 30.8% in 1998. The increase
in SG&A expense was primarily due to additional overhead costs associated with
the opening of additional warehouses, integration of the Scotts' sales force and
expenses of the Company spent on marketing the Company's proprietary technology
as well as advancing strategic relationships to benefit the Company's future.
RESEARCH AND DEVELOPMENT EXPENSE
22
<PAGE>
In 1999, research and development expense was $1.1 million, an increase of
82.4%, versus $584,000 in 1998. The increase in research and development expense
was due to ongoing analysis and testing of proprietary technology by Eco Soil.
AMORTIZATION EXPENSE
For 1999, amortization expense was $1.2 million, an increase of 4.2% versus
$1.1 million for 1998. The increase in amortization expense is due to an
increase in the Company's goodwill directly related to the previously discussed
acquisitions, offset by a decrease in amortization expense related to goodwill
write-off associated with the previous acquisitions of Turf Products, Inc. and
Turfmakers, Inc. in December 1998.
23
<PAGE>
INTEREST EXPENSE
In 1999, interest expense was $4.3 million, an increase of 71.9% versus $2.5
million in 1998. The increase in interest expense reflects an increase in the
amount of debt outstanding, amortization of debt issuance costs and the
write-off of debt issuance of costs $48,000 related to the Company's credit
facility with Imperial Bank retired in July 1999.
NET LOSS
For the year ended December 31, 1999, net loss was $18.4 million or $1.05
per share compared to a net loss of $10.0 million or $.61 per share for the year
ended December 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997
REVENUES
In 1998, our revenues were $82.4 million, an increase of 119.5% versus
$37.5 million in 1997. The increase in revenues reflects an increase in both
Turf Partners and Agricultural Supply segment revenues.
In 1998, Turf Partners revenues were $61.3 million, an increase of
65.9% versus $36.9 million in 1997. The increase in Turf Partners revenues
occurred in all three operating regions of the U.S. as a result of (i) the
acquisitions of two turf maintenance products distributors in the Midwest, (ii)
the opening of two new warehouses in the West and (iii) increased sales from our
existing distribution facilities in the East.
In 1998, Agricultural Supply revenues were $21.0 million, compared to
$550,000 in 1997. Agricultural Supply revenues primarily increased due to (i)
the acquisitions of four distributors of micro-irrigation products in 1998 and
(ii) increased acreage under contract with our proprietary soil maintenance
programs.
24
<PAGE>
GROSS PROFIT
In 1998, our gross profit was $22.8 million, an increase of 97.8% versus
$11.5 million in 1997. The increase in gross profit was due to the increase in
both Turf Partners and Agricultural Supply segment revenues. For 1998, our gross
margin was 27.7% versus 30.7% for 1997. The gross margin on distributed products
is substantially lower than the gross margin on our proprietary products. In
1998, even though we experienced significant percentage growth in revenues from
our proprietary products, we experienced substantially greater increases in
total revenues from our distributed products. In 1998, the mix of distributed
products sold also slightly negatively affected gross margin.
In 1998, the gross profit on Turf Partners sales was $16.7 million, an
increase of 51.2% versus $11.0 million in 1997. The increase in gross profit on
Turf Partners sales is directly related to the increase in revenue, as
previously discussed. In 1998, the gross margin on Turf Partners products was
27.2% versus 29.8% in 1997. The decrease in gross margin was due to the factors
described previously.
For 1998, the gross profit on Agricultural Supply segment sales was $6.1
million, compared to $499,000 for 1997. The increase in gross profit on
Agricultural Supply sales was directly related to the increase in revenue. In
1998, the gross margin on Agricultural Supply sales was 29.1%, reflecting our
substantially larger volume of lower margin sales of irrigation products, versus
90.7% in 1997, which consisted solely of our higher margin proprietary soil
maintenance programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For 1998, selling, general and administrative ("SG&A") expense was $25.4
million, an increase of 125.3% versus $11.3 million for 1997. The increase in
SG&A expense was primarily due to additional overhead costs associated with the
previously discussed acquisitions, as well as expenses related to the buyout or
cancellation of certain exclusive distribution agreements which were driven by
the contract signed with Scotts as previously described. SG&A expense as a
percentage of revenues was 30.8% in 1998 compared to 30.1% in 1997. We realized
efficiencies in 1998 from the absorption of our administrative costs over a
larger volume of revenues, but such efficiencies were offset by increased costs
to support the rapid expansion of our business and costs related to the buyout
or cancellation of distribution agreements as described previously. While we
expect SG&A expense to continue to increase in 1999 as a result of expected
increases in revenues; we expect SG&A expense to decrease slightly as a
percentage of revenues, due to the efficiencies described previously.
RESEARCH AND DEVELOPMENT EXPENSE
In 1998, research and development expense was $584,000, compared to
$269,000 in 1997. The increase in research and development expense was due to
ongoing analysis and testing of potential products for the Agricultural Supply
and Turf Partners markets.
AMORTIZATION EXPENSE
For 1998, amortization expense was $1.1 million, an increase of 91.0%
versus $580,000 for 1997. The increase in amortization expense is due to an
increase in goodwill directly related to our recent acquisitions
SPECIAL CHARGES
During the fourth quarter of 1998, we recorded special charges of $3.9
million described above. Details of the special charges (in thousands)
through December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CASH CASH
CASH/ AMOUNT EXPENDED ACCRUED EXPENDED ACCRUED
NON OF THROUGH LIABILITIES AT THROUGH LIABILITIES AT
CASH CHARGE DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999 1999
DESCRIPTION OF CHARGE:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REORGANIZATION OF OPERATING STRUCTURE:
Severance of employees............ Cash $ 338 $ 121 $ 217 $ 334 $ 4
Vacated lease facilities.......... Cash 55 -- 55 4 51
Write-downs of assets removed Non-
from operations................... cash 93 -- -- -- --
Professional fees................. Cash 59 2 57 47 12
Other............................. Cash 53 -- 53 51 2
---------------------------------------------------------------------------
598 123 382 436 69
IMPAIRMENT LOSS ON CERTAIN ASSETS:
Goodwill related to Turf Non-
Products subsidiary............... cash 1,487 -- -- -- --
Goodwill related to TurfMakers Non-
subsidiary........................ cash 919 -- -- -- --
-------------------------------------------------------------------------------
2,406 -- -- --
-------------------------------------------------------------------------------
EXIT OF ASPEN CONSULTING OPERATIONS:
Severance of employees............ Cash 143 -- 143 124 19
Write-downs of assets removed Non-
from operations................... cash 575 -- -- -- --
Vacated lease facilities.......... Cash 84 -- 84 63 21
Other............................. Cash 69 -- 69 47 22
-------------------------------------------------------------------------------
871 -- 296 234 62
-------------------------------------------------------------------------------
TOTAL SPECIAL CHARGES.................. $3,875 $ 123 $ 678 $ 670 $ 131
===============================================================================
</TABLE>
25
<PAGE>
INTEREST EXPENSE
In 1998, interest expense was $2.5 million, an increase of 330.7% versus
$579,000 in 1997. The increase in interest expense reflects (i) an increase in
the amount of debt outstanding, (ii) additional interest costs of $858,000
associated with the replacement of a prior bank credit facility from Provident
Bank with a new facility from Imperial Bank and (iii) amortization of the
issuance costs associated with senior subordinated notes we issued in August
1998 and bank credit facility we entered into in August 1998.
26
<PAGE>
NET LOSS
For the year ended December 31, 1998, net loss was $10.0 million or $.61
per share compared to a net loss of $1.1 million or $.10 per share for the year
ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception from revenues from sales of
our products, sales of our common stock, borrowing from our principal
shareholders and other lenders and bank financing. Our operating and investing
activities used cash of $16.7 million during the year ended December 31, 1999.
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 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 December 31, 1999, Turf Partners had fully
utilized the availability under the Coast Working Capital Facility based on
its eligible inventory and receivables.
On June 30, 1999 The Company's wholly owned subsidiary Agricultural
Supply, Inc. entered into a credit agreement with First National Bank (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
December 31, 1999, 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.
The Company's Senior Subordinated Notes (the "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 December 31, 1999, 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 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. These liabilities include external debt of approximately $17
million to be assumed at closing.
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 Loan 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 amount equal to the average amount
outstanding under the Coast Loan during 2000.
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 product revenues, 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. See Note 1 to the
Consolidated Financial Statements.
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 February 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.
27
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's foreign sales are principally to Mexico. All foreign
transactions are denominated in U.S. dollars; therefore, the Company's exposure
to foreign currency fluctuations is minimal.
The Company is exposed to changes in interest rates from its 14% senior
subordinated notes, which are due in full in 2003. A hypothetical 100 basis
point adverse move (decrease) in interest rates along the entire interest rate
yield curve would adversely affect the net fair value of the notes by
approximately $412,000 as of December 31, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Please see Index to Consolidated Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
<PAGE>
PART III
As indicated in the following table, the information required to be
presented in Part III of this report is hereby incorporated by reference from
the Company's definitive Proxy Statement for its 2000 Annual Meeting of
Shareholders to be prepared in accordance with Schedule 14A and filed with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
covered by this report.
Material in Proxy Statement for 2000 Annual Meeting that is incorporated
herein by reference:
<TABLE>
<CAPTION>
ITEM NO. ITEM CAPTION PROXY STATEMENT CAPTION
-------- ------------ -----------------------
<S> <C> <C>
10. Directors and Executive Officers of the registrant. "Directors and Executive Officers"
11. Executive Compensation "Executive Compensation"
12. Security Ownership of Certain Beneficial Owners and "Security and Management Ownership
Management
13. Certain Relationships and Related Transactions "Certain Transactions"
</TABLE>
ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. Financial Statements:
(See "Index to Consolidated Financial Statements" at page F-1)
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
3. Exhibits:
The exhibits listed on the accompanying Exhibit Index are filed as
part of this Annual Report.
29
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1(4) Amended and Restated Articles of Incorporation
3.2(5) Articles of Correction to Amended and Restated Articles of
Incorporation
3.3(6) Articles of Amendment to Amended and Restated Articles of
Incorporation
3.4(4) Bylaws, as amended
4.1(2) Form of the Common Stock Certificate
10.1(3) 1992 Stock Option Plan
10.2(3) 1996 Directors' Stock Option Plan
10.3(3) Employment Agreement, dated May 21, 1991, as amended,
November 7, 1996 between the Company and William B. Adams
10.4(2) Distribution Agreement, dated August 2, 1996, between the
Company and Abbott Laboratories, Chemical and Agricultural
Products Division
10.5(7) 1998 Stock Option Plan
10.6(8) Note and Warrant Purchase Agreement dated as of August 25,
1998.
10.7(8) 12.00% Senior Subordinated Note Due August 25, 2003.
10.8(10) First Amendment to Note and Warrant Purchase Agreement
effective as of December 7, 1998.
10.9(11) Amendment No. 2 to Note and Warrant Purchase Agreement
dated as of June 30, 1999 among the Company, Albion Alliance
Mezzanine Fund, L.P. and Paribas Capital Funding LLC
(including form of amended promissory note).
10.10(11) Amended and Restated Guaranty Agreement dated as of June
30, 1999 made by Agricultural Supply, Inc., Aspen Consulting
Companies, Inc., Mitigation Services, Inc., Turf Partners,
Inc. and Yuma Acquisition Sub, Inc.
10.11(11) Loan and Security Agreement dated as of June 30, 1999 by and
between Turf Partners, Inc. and Coast Business Credit.
10.12(11) Loan Agreement dated as of June 30, 1999 between
Agricultural Supply, Inc., Sistemas y Equipos Agricolas, S.A.
de C.V. and Agricultural Supply de Mexico, S.A. de C.V.
and First National Bank.
10.13(11) Promissory Note made June 30, 1999 by Agricultural
Supply, Inc. in favor of First National Bank.
10.14(11) Term Loan and Security Agreement dated as of July 30, 1999
by and between Eco Soil Systems, Inc. and Coast Business
Credit.
10.15(12) 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.
10.16(12) 7% Senior Secured Convertible Debentures, dated as of
January 24, 2000, in favor of the investors listed on
Schedule 1 attached thereto.
10.17(12) Stock Purchase Warrant, dated as of January 24, 2000, issued
to the investors listed on Schedule 1 attached thereto.
10.18(12) Registration Rights Agreement, dated as of January 17, 2000,
between Eco Soil Systems, Inc. and the investors signatory
thereto.
10.19(12) 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.
10.20(12) 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.
10.21(12) 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.
10.22(12) 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.
10.23(12) Amended and Restated Common Stock Purchase Warrant expiring
August 25, 2005 in favor of Albion Alliance Mezzanine Fund
L.P.
10.24(12) Amended and Restated Common Stock Purchase Warrant expiring
August 25, 2005 in favor of Paribas Capital Funding LLC.
10.25(13) The Amended and Restated 1998 Stock Option Plan of Eco Soil
Systems, Inc.
10.26(14) The 1999 Equity Participation Plan of Eco Soil Systems, Inc.
10.27(15) The 1999 New Hire Stock Option Plan of Eco Soil Systems,
Inc.
10.28(1) Amended and Restated Asset Purchase Agreement dated as of
April 5, 2000 by and among the Company, Turf Partners, Inc.
and the J.R. Simplot Company.
21.1(1) List of Subsidiaries
23.1(1) Consent of Ernst & Young LLP, Independent Auditors
27.1(1) Financial Data Schedule
</TABLE>
- --------------------
30
<PAGE>
(1) Filed herewith
(2) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 333-15883) filed with the Commission on November 8, 1996.
(3) Incorporated by reference to Amendment No. 3 to the Company's Registration
Statement on Form SB-2 (File No. 333-15883) filed with the Commission on
January 13, 1997.
(4) Incorporated by reference to Amendment No. 4 to the Company's Registration
Statement on Form SB-2 (File No. 333-15883) filed with the Commission on
January 16, 1997.
(5) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 333-39399) filed with the Commission on November 4, 1997.
(6) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 (File No. 333-39399) filed with the Commission on
November 21, 1997.
(7) Incorporated by reference to the Company's Periodic Report on Form 10-QSB
(File No. 001-12653) filed with the Commission on August 13, 1998.
(8) Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 001-12653) filed with the Commission on September 11, 1998 (includes
Schedule 1 showing additional party to and differing terms of substantially
identical documents).
(9) Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 001-12653) filed with the Commission on December 30, 1998.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
(File No. 001-21975) filed with the Commission on May 17, 1999.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
(File No. 001-21975) filed with the Commission on August 16, 1999.
(12) Incorporated by reference to the Company's Current Report on Form 8-K
filed January 26,2000
(13) Incorporated by reference to Appendix A to the Company's Definitive
Proxy Statement for the 1999 Annual Meeting of Shareholders filed with
the Commission on April 30, 1999.
(14) Incorporated by reference to Appendix B to the Company's Definitive
Proxy Statement for the 1999 Annual Meeting of Shareholders filed with
the Commission on April 30, 1999.
(15) Incorporated by reference to the Company's Registration Statement on
From S-8 filed with the Commission on February 10, 2000.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 13th day of
April 2000.
ECO SOIL SYSTEMS, INC.
By: /s/ William B. Adams
-----------------------------------------
William B. Adams
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ William B. Adams Chairman of the Board and Chief Executive Officer April 13, 2000
------------------------------------------ (Principal executive officer)
William B. Adams
/s/ Dennis N. Sentz Chief Financial Officer April 13, 2000
------------------------------------------ (Principal financial officer and
Dennis N. Sentz Principal accounting officer)
/s/ Douglas M. Gloff April 13, 2000
------------------------------------------ Director
Douglas M. Gloff
/s/ Fridolin E. Fackelmayer Director April 13, 2000
------------------------------------------
Fridolin E. Fackelmayer
/s/ Robert W. O'Leary Director April 13, 2000
------------------------------------------
Robert W. O'Leary
Director April 13, 2000
------------------------------------------
S. Bart Osborn
/s/ William S. Potter Director April 13, 2000
------------------------------------------
William S. Potter
Director April 13, 2000
------------------------------------------
Edward N. Steel
</TABLE>
32
<PAGE>
ECO SOIL SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998......................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997........... F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997........... F-6
Notes to Consolidated Financial Statements........................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Eco Soil Systems, Inc.
We have audited the accompanying consolidated balance sheets of Eco Soil
Systems, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14 a. The
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Eco Soil
Systems, Inc. at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
The accompanying financial statements have been prepared assuming that Eco
Soil Systems, Inc. will continue as a going concern. As more fully described in
Note 1, the Company has incurred recurring operating losses and has a working
capital deficiency. In addition, the Company has obtained waivers from its
Senior Subordinated Note Holders through July 31, 2000. Additional waivers may
need to be obtained from the Senior Subordinated Note Holders subsequent to July
31, 2000 for the debt not to be considered in default. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
San Diego, California
March 3, 2000,
except for the last five paragraphs of Note 11,
as to which the date is April 12, 2000.
F-2
<PAGE>
ECO SOIL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
December 31,
----------------------
1999 1998
----------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................................. $ 1,228 $ 3,410
Accounts receivable, net of allowance for doubtful accounts of $2,204
and $1,261 at December 31, 1999 and 1998, respectively................ 21,675 13,523
Finished goods inventory................................................... 16,360 10,475
Prepaid expenses and other current assets.................................. 4,588 6,288
--------- ---------
Total current assets............................................................ 43,851 33,696
Equipment under construction.................................................... 5,041 4,731
Property and equipment, net..................................................... 14,450 11,652
Intangible assets, net.......................................................... 14,374 14,571
Other assets.................................................................... 4,839 2,355
--------- ---------
Total assets.................................................................... $ 82,555 $ 67,005
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................................... $ 24,438 $ 8,037
Accrued expenses........................................................... 5,809 7,061
Current portion of long-term obligations................................... 34,276 178
--------- ---------
Total current liabilities....................................................... 64,523 15,276
Long-term obligations, net of current portion................................... 1,482 22,620
Deferred gain on sale/leaseback of building..................................... 523 566
Commitments
Shareholders' equity:
Preferred stock
$.005 par value; 5,000,000 shares authorized; none issued and outstanding.. -- --
Common stock
$.005 par value; 50,000,000 shares authorized at December 31, 1999 and 1998;
18,349,965 and 17,064,576 shares issued and outstanding at December 31, 1999
and 1998, respectively..................................................... 92 85
Additional paid-in capital................................................. 55,578 51,485
Warrants................................................................... 2,733 958
Notes receivable from shareholders......................................... -- (15)
Accumulated deficit........................................................ (42,376) (23,970)
--------- ---------
Total shareholders' equity...................................................... 16,027 28,543
--------- ---------
Total liabilities and shareholders' equity...................................... $ 82,555 $ 67,005
========= =========
</TABLE>
See accompanying notes
F-3
<PAGE>
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Turf Partners........................................ $ 97,169 $ 61,336 $ 36,975
Agricultural Supply.................................. 26,363 21,035 550
-------- -------- --------
Total revenues................................... 123,532 82,371 37,525
Cost of revenues:
Turf Partners........................................ 77,599 44,657 25,944
Agricultural Supply.................................. 19,326 14,907 51
-------- -------- --------
Total cost of revenues........................... 96,925 59,564 25,995
Gross profit 26,607 22,807 11,530
Operating expenses:
Selling, general and administrative.................. 38,828 25,405 11,277
Research and development............................. 1,065 584 269
Amortization of intangibles.......................... 1,155 1,108 580
Special charges...................................... -- 3,875 --
-------- -------- --------
Loss from operations..................................... (14,441) (8,165) (596)
Interest expense......................................... 4,288 2,494 579
Interest income.......................................... (323) (654) (97)
-------- -------- --------
Net loss................................................. $(18,406) $(10,005) $ (1,078)
========= ======== ========
Net loss per share, basic and diluted.................... $ (1.05) $ (0.61) $ (0.10)
========= ======== ========
Shares used in calculating net loss per share, basic and
diluted.................................................. 17,550 16,361 11,327
========= ======== ========
</TABLE>
See accompanying notes
F-4
<PAGE>
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
NOTE
COMMON STOCK ADDITIONAL RECEIVABLE
----------------------- PAID-IN FROM ACCUMULATED
SHARES AMOUNT CAPITAL WARRANTS SHAREHOLDERS DEFICIT TOTAL
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.......... 6,606,590 $ 33 $12,730 $ 242 $(192) $(12,887) $ (74)
Issuance of common stock in IPO, net
of issuance costs of $2,145......... 3,795,000 19 13,491 -- -- -- 13,510
Issuance of common stock follow-on
offering, net of issuance costs of
$1,756.............................. 3,244,167 17 14,345 -- -- -- 14,362
Issuance of common stock in
connection with acquisitions........ 25,000 -- 109 -- -- -- 109
Exercise of stock options and
warrants............................ 1,058,036 5 1,081 -- (90) -- 996
Conversion of debt.................... 592,130 3 1,952 -- -- -- 1,955
Net loss.............................. -- -- -- -- -- (1,078) (1,078)
-------------------------------------------------------------------------------------
Balance at December 31, 1997.......... 15,320,923 77 43,708 242 (282) (13,965) 29,780
Issuance of common stock in
connection with acquisitions........ 531,880 2 3,656 -- -- -- 3,658
Shares issued in connection with
earn-out provisions of acquisitions. 196,563 1 1,612 -- -- -- 1,613
Warrants issued in connection with
debt................................ -- -- -- 788 -- -- 788
Repayment on notes receivable from
shareholders........................ -- -- -- -- 267 -- 267
Exercise of stock options and
warrants.......................... 1,015,210 5 2,509 (72) -- -- 2,442
Net loss............................ -- -- -- -- -- (10,005) (10,005)
-------------------------------------------------------------------------------------
Balance at December 31, 1998.......... 17,064,576 85 51,485 958 (15) (23,970) 28,543
Issuance of common stock in
connection with acquisitions........ 91,548 1 747 -- -- -- 748
Shares issued in connection
with debt......................... 402,208 2 1,273 -- -- -- 1,275
Warrants issued in connection with
debt.............................. -- -- -- 1,572 -- -- 1,572
Warrants issued for services
provided.......................... -- -- 74 206 -- -- 280
Repayment on notes receivable from
shareholders........................ -- -- -- -- 15 -- 15
Exercise of stock options
and warrants...................... 791,633 4 1,999 (3) -- -- 2,000
Net loss............................ -- -- -- -- -- (18,406) (18,406)
-------------------------------------------------------------------------------------
Balance at December 31, 1999 18,349,965 $ 92 $55,578 $2,733 $ -- $(42,376) $ 16,027
=====================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................. $(18,406) $(10,005) $(1,078)
Adjustments to reconcile net cash used in operating
activities:
Depreciation and amortization...................... 3,749 2,674 1,399
Amortization of debt issuance costs and discount
on long-term debt................................. 531 238 70
Provision for losses on accounts receivable....... 1,868 1,521 12
Write-off of deferred debt issuance costs......... -- 858 --
Special charges, non-cash portion................. -- 3,752 --
Deferred rent..................................... (43) 566 --
Loss on sale of property and equipment............ 103 69 --
Issuance of stock options/warrants for services... 280 -- --
Changes in operating assets and liabilities, net of
effect of acquired businesses:
Accounts receivable................................ (10,020) 1,864 (8,102)
Inventories........................................ (6,350) (2,803) (2,432)
Prepaid expenses and other assets.................. 1,141 (4,475) 3
Accounts payable................................... 16,502 (2,925) (242)
Accrued expenses................................... (1,249) 51 1,409
------------------------------------------------------
Net cash used in operating activities................ (11,894) (8,615) (8,961)
INVESTING ACTIVITIES
Payments for acquired patents and licenses........... (303) (644) (129)
Payments related to acquired businesses,
net of cash acquired............................... -- (3,175) (1,408)
Purchase of long-term investments.................... -- (100) --
Proceeds from the sale of property and equipment..... 136 383 1,325
Equipment under construction......................... (153) (1,751) (799)
Purchase of property and equipment................... (4,492) (4,282) (8,008)
Purchase of short-term investments................... -- -- (3,000)
Sale of short-term investments....................... -- 3,000 --
------------------------------------------------------
Net cash used in investing activities................ (4,812) (6,569) (12,019)
FINANCING ACTIVITIES
Advances (to) from shareholders...................... 15 267 (355)
Proceeds from subordinated debt...................... -- 15,000 --
Proceeds from long-term obligations.................. 4,313 31,115 8,221
Repayments of long-term obligations.................. (10,423) (31,588) (12,757)
Proceeds from short-term obligations................. 80,280 -- --
Repayments of short-term obligations................. (61,304) -- --
Payments on capital lease obligations................ -- -- (22)
Net proceeds from issuance of common stock........... 2,000 2,442 28,868
Debt issuance costs.................................. (357) (1,767) --
------------------------------------------------------
Net cash provided by financing activities............ 14,524 15,469 23,955
------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents........................................ (2,182) 285 2,975
Cash and cash equivalents at beginning of year....... 3,410 3,125 150
------------------------------------------------------
Cash and cash equivalents at end of year............. $ 1,228 $ 3,410 $ 3,125
======================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid...................................... $ 3,430 $ 1,150 $ 708
======================================================
NON-CASH FINANCING ACTIVITIES
Common stock issued upon conversion of debt and
shareholder allowances.......................... $ -- $ -- $ 1,955
======================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company develops, markets and sells proprietary biological and
traditional chemical products that provide solutions for a wide variety of turf
and crop maintenance problems in the golf and agricultural industries. The
Company has developed its patented BioJect system for the distribution of
naturally occurring microbes that complement or reduce the need for many
chemical products currently used in golf and agricultural markets. By fermenting
microbes at the customer's site and distributing them through the customer's
existing irrigation system, the BioJect system provides customers with cost
savings and mitigates the adverse environmental effects associated with chemical
products. The Company initially focused its sales and marketing efforts on the
golf market, and recently has entered the agricultural crop and ornamental
markets.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared on a going concern
basis, which contemplates, among other things, the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company's
recurring operating losses, working capital deficiency and violation of debt
covenants have caused substantial doubt regarding the Company's ability to
continue as a going concern. However, on April 5, 2000, the Company entered into
a Definitive Agreement with J.R. Simplot Company ("Simplot") for a purchase of
the Turf Partners subsidiary (see Note 11). 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 Loan 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 Loan during 2000. A portion of the proceeds will be utilized to retire
debt. Management anticipates that the Company's proprietary product line will
substantially benefit from the transaction because the Company expects that
these products will be sold through Simplot's turf and agricultural markets. We
have entered into a Term Loan Agreement dated as of April 12, 2000 with Simplot,
under which Simplot will loan the Company $3 million, subject to certain closing
conditions. Furthermore, the Company has obtained waivers for the violation of
the debt convenants that are valid until after the time in which the Simplot
transaction is expected to close. Management believes the Simplot transaction
will close prior to the expiration of the debt covenant waivers.
Management believes that the above-mentioned actions will allow the Company
to continue as a going concern. Accordingly, the consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recovered asset amounts or the amount and classification of
liabilities or any other adjustments that might be necessary should the Company
be unable to continue as a going concern.
BASIS OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
including the allocation of the purchase price relating to acquired businesses,
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from the estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturity
of less than three months to be cash equivalents.
CONCENTRATION OF CREDIT RISK
No individual customer accounted for more than 10% of revenues in 1999,
1998 and 1997, and the Company is not economically dependent upon any one
customer. The Company's Turf Partners segment serves a wide variety of
customers, primarily golf courses, who are geographically dispersed across
the Northeast, Midwest and Southwest regions of the United States. The
Company's Agricultural Supply segment serves a wide variety of customers,
primarily growers, who are concentrated principally in Mexico and, to a
lesser extent, the southwestern United States. The Company's Agricultural
Supply segment has approximately $13 million of net assets located throughout
various regions of Mexico. Also, the Company is not economically dependent
upon any one supplier.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments including cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses and long-term debt are
carried at cost, which management believes approximates the fair value.
F-7
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories consist principally of non-proprietary chemical, fertilizer and
other turf maintenance products, golf course supplies and irrigation and other
agricultural supplies. Such products are purchased from the manufacturers and
are carried at the lower of cost (first-in, first-out method) or market.
EQUIPMENT UNDER CONSTRUCTION
Equipment under construction is related to the manufacture of new BioJects.
The BioJects are constructed by independent third parties. The Company performs
final assembly and quality testing and the completed units are transferred to
property and equipment when placed into service.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line and accelerated methods over the estimated service lives of
the assets, generally ranging from 3 to 5 years. Equipment under capital leases
is amortized over the shorter of the estimated useful life of the assets or the
lease term, and such amortization is included in depreciation in the
accompanying financial statements.
Equipment placed in service consists principally of BioJect equipment stated
at cost. Depreciation is provided using the straight-line method over seven
years, the estimated service life of the equipment.
INTANGIBLE ASSETS
Intangible assets consist primarily of the excess of the purchase price over
the fair value of the assets acquired ("goodwill") related to the Company's
various acquisitions (see Note 2). Such intangible assets are generally being
amortized over a period of 15 years.
Certain of the Company's acquisitions involve earn-out payments which could
be payable to the former shareholders of the acquired businesses based on the
post-acquisition performance of the acquired businesses. The Company evaluates
such obligations in accordance with EITF 95-8, "Accounting for Contingent
Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase
Business Combination." To date, all such contingent consideration has been
treated as additional purchase price due to various factors including, but not
limited to, the following: (i) the contingent consideration in certain cases is
payable to selling shareholders who were not employees of such businesses and
are not ongoing employees of the Company, (ii) the contingent consideration is
payable without regard to continuing employment of the selling shareholders or
(iii) the compensation arrangements for selling shareholders who became
employees of the Company are at a reasonable level in comparison to that of
similar employees.
The earn-out payments are based on annual (calendar year) results. The
Company determines its obligations at the conclusion of the annual period.
Amounts payable in cash are included in accrued expenses. Amounts payable in
stock are included in shareholders' equity.
F-8
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" (SFAS 121), the Company recognizes and records impairment losses
on long-lived assets used in operations when indicators of impairment are
present and the estimated undiscounted cash flows to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of.
In the fourth quarter of 1998, the Company identified indicators that
goodwill related to two acquisitions made in prior years was impaired. The
indicators consisted of the resignation or termination of key management or
sales personnel of such businesses, greater than expected attrition in the
acquired customer bases, closure or relocation of the acquired distribution
facilities and other factors. The Company estimated it will not likely realize
positive future cash flows from these acquired businesses and, therefore,
recorded a write-off of the goodwill related to such acquisitions (see Note 9).
DEFERRED DEBT ISSUANCE COSTS
Included in other non-current assets are deferred debt issuance costs of
$1.5 million related to the Company's issuance of Senior Subordinated Notes in
August 1998 (see Note 4.)
In November 1998, the Company terminated the line of credit entered into on
August 1998 and entered into a new line of credit. Deferred debt issuance
costs related to the terminated line of credit; totaling $858,000, were
expensed at that time.
During 1999, the Company capitalized approximately $2.9 million of debt
issuance costs related to the restructuring of the Senior Subordinated Notes
and the Company's obtaining a term loan (see Note 4) from Coast Business Credit.
The amortization of deferred debt issuance costs is included in interest
expense.
DEFERRED RENT
Deferred rent consists of the gain on the sale/leaseback of the Company's
principal facility in San Diego, California (see Note 7), which is being
amortized against rent expense on the straight-line basis over the initial term
of the leaseback.
REVENUE RECOGNITION
Proprietary sales revenue in the Turf Partners segment is derived from the
rental of equipment, principally BioJects, the sale of microbial products used
in such equipment and servicing of the equipment. Distributed sales revenue in
the Turf Partners segment is derived primarily from sales of purchased products,
and generally is concentrated more heavily in the second and third quarters of
the year. Revenue from the rental of equipment is recognized monthly in
accordance with the terms of the rental agreement, and revenue from the sale of
proprietary microbial products and distributed products is recognized upon
shipment.
Distributed sales revenue in the Agricultural Supply segment is derived
primarily from sales of purchased products, has historically not been very
seasonal and is recognized upon shipment. Proprietary sales revenue in the
Agricultural Supply segment is derived from service contracts with growers. The
portion of the revenue which is specifically allocated within the contract to
installation of the Company's equipment and other up-front costs is recognized
as such installation is completed and costs are incurred, and generally
approximates the amount of such costs. The remainder of the contract revenue is
recognized on a straight-line basis over the growing season, which is the period
of service. The Company eventually intends to rotate its proprietary equipment
among a variety of customers and crops in various areas of Mexico and the
Southwestern
F-9
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
United States to substantially eliminate seasonality, but the Company has only
recently begun this business, and there can be no assurance it will be
successful at eliminating seasonality. The Company generally does not allow for
sales returns, and returns have historically been minimal.
The Company's export sales totaled $16,283,000, $13,156,000 and $4,842,000
for the years ended December 31, 1999, 1998 and 1997 respectively. Such sales
were principally to customers in Mexico. All foreign transactions are
denominated in U.S. dollars.
COST OF REVENUES
In the Turf Partners segment, cost of proprietary sales revenue includes the
cost of the microbial products and depreciation on the rental equipment. The
cost of the service component is expensed as incurred in selling, general and
administrative expense.
In the Agricultural Supply segment, cost of proprietary sales revenues
includes the cost of the microbial products and depreciation on the equipment
used for delivery of the microbials. The cost of the service component is
expensed as incurred in selling, general and administrative expense.
STOCK-BASED COMPENSATION
As permitted by the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), the Company has elected
to follow Accounting Principles Board Opinion No. 25 ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized. Options granted to consultants and other non-employees
are valued in accordance with SFAS 123 and EITF 96-18, and are expensed over
the service period.
RESTRUCTURING CHARGES
Amounts accrued in connection with the Company's restructuring (see Note 9)
were measured and recorded in accordance with EITF 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)."
NET LOSS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128), basic and diluted net loss per share is
calculated using the weighted average number of common shares outstanding.
Diluted net income per share is calculated using the weighted average number of
common shares outstanding plus the dilutive effect of outstanding options and
warrants, if any, using the treasury stock method.
GOVERNMENT REGULATIONS
Substantially all of the Company's facilities are subject to federal, state
and local regulations relating to the discharge of materials into the
environment. Compliance with these provisions has not had, nor does the Company
expect such compliance to have, any material effect upon the operations,
financial condition, capital expenditures or competitive position of the
Company; however, there can be no assurance that compliance with such
regulations would not have a material effect upon the Company's future results
of operations or financial condition.
F-10
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Management believes that its current practices and procedures for the
control and disposition of such materials comply with applicable federal and
state requirements.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to current-year
classifications.
2. ACQUISITIONS
In February 1997, the Company acquired certain assets of Turfmakers, Inc.
("TMI"), a turf maintenance products distributor located in Palm Springs,
California, for $1,225,000 cash and 25,000 shares of the Company's common stock
valued at $4.38 per share. The excess of the purchase price over the net
tangible assets acquired totaled $1,053,000, including approximately $45,000 for
legal and other costs incurred associated with the acquisition.
In March 1998, the Company acquired all the outstanding stock of Cannon
Turf Supply, Inc. ("CTS"), a turf maintenance products distributor located
near Indianapolis, Indiana, for $1,312,569 cash and 239,929 shares of the
Company's common stock valued at $5.47 per share. The Company also agreed to
make certain earn-out payments to the former shareholders of CTS, based on
CTS' EBITDA for the years ending December 31, 1998 and 1999. The 1998 earn-out
value was $980,000, which was paid with $448,000 in cash and 61,108 shares of
the Company's common stock. There was no earn-out value in 1999. The excess of
purchase price over the net tangible assets acquired totaled $4,293,000,
including the 1998 earn-out payment and also including approximately $282,000
for legal and other costs incurred associated with the acquisition.
In March 1998, the Company acquired all the outstanding stock of Benham
Chemical Corporation ("BC"), a turf maintenance products distributor located
near Detroit, Michigan, for $802,440 cash.
In April 1998, the Company acquired all the outstanding stock of
Agricultural Supply, Inc. ("AS"), a distributor of agricultural micro-irrigation
and soil maintenance products located in Escondido, California, for $336,000
cash and 225,284 shares of the Company's common stock valued at $8.19 per share.
The Company also agreed to make certain earn-out payments to the former
shareholders of AS based on AS' EBITDA for the years ending December 31, 1998
and 1999. The 1998 earn-out value was $680,000, which was paid with 78,071
shares of the Company's common stock. There was no earn-out value in 1999. The
excess of purchase price over the net tangible assets acquired totaled
$2,462,000, including the 1998 earn-out payment and also including approximately
$282,000 for legal and other costs incurred associated with the transaction.
In June 1998, the Company acquired all the outstanding stock of Yuma
Sprinkler & Pipe Supply ("YSP"), a distributor of agricultural irrigation and
soil maintenance products located in Yuma, Arizona, for $280,000 cash and
66,667 shares of the Company's common stock valued at $7.50 per share. The
Company also agreed to make certain earn-out payments to the former
shareholders of YSP based on YSP's EBITDA for the years ending December 31,
1998 and 1999. The 1998 earn-out value was $400,000, which was paid with
45,908 shares of the Company's common stock. There was no earn-out value in
1999. The excess of purchase price over the net tangible assets acquired
totaled $1,094,000, including the 1998 earn-out payment and also including
approximately $92,000 for legal and other costs incurred associated with the
transaction.
F-11
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
In June 1998, the Company acquired all the outstanding stock of Riegomex
S.A. de C.V. ("RM") for $45,943 cash.
In June 1998, the Company acquired the remaining fifty percent interest of
Agricultural Supply de Mexico ("ASM") which AS had not already owned for
$200,000 cash, and agreed to pay an additional $1,100,000 in cash or stock, at
the option of the selling shareholders, over the next five years.
On September 2, 1999, the Company issued 91,548 shares of the Company's
common stock to Agrium Inc. ("AG") pursuant to a Purchase Agreement dated as of
July 29, 1999 ("Agrium Asset Purchase Agreement"). Pursuant to the Agrium Asset
Purchase Agreement, the Company issued to AG 91,548 shares of the Company's
common stock valued at $7.10 per share and $350,000 in cash in exchange for
certain assets of AG. These assets consist of research equipment and the rights
and technology to certain product lines.
The results of operations of the acquired businesses are included in the
consolidated financial statements from the respective dates of acquisition.
Each of the acquisitions was accounted for as a purchase and, accordingly,
the purchase price has been allocated to the assets acquired and the liabilities
assumed based on the estimated fair market at the date of the acquisitions, as
follows (in thousands):
<TABLE>
<CAPTION>
TMI CTS BC AS ASM YSP RM AG
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS ACQUIRED:
Cash............................ $ -- $ -- $ 12 $ 340 $ 35 $ 98 $ 97 $ --
Accounts receivable ............ -- 1,863 1,785 2,840 1,260 350 -- --
Inventories..................... 287 1,606 1,021 1,271 351 569 -- --
Prepaids and other assets....... -- 363 80 621 (495) 40 1 800
Property and equipment.......... 40 375 255 621 623 371 55 200
Excess of purchase price over
net tangible assets............. 1,053 4,293 1,328 3,242 893 1,094 645 --
---------------------------------------------------------------------------------------
TOTAL ASSETS ACQUIRED............. 1,380 8,500 4,481 8,935 2,667 2,522 798 1,000
LIABILITIES ASSUMED:
Accounts payable................ -- 2,726 1,459 2,516 1,081 690 4 --
Accrued expenses................ -- 154 1,232 201 252 117 706 --
Notes payable................... -- 1,733 924 2,293 26 443 -- --
---------------------------------------------------------------------------------------
TOTAL LIABILITIES ASSUMED......... -- 4,613 3,615 5,010 1,359 1,250 710 --
========== ============================================================================
NET ASSETS ACQUIRED............... $1,380 $3,887 $ 866 $3,925 $1,308 $1,272 $ 88 $1,000
========== ============================================================================
</TABLE>
The following unaudited pro forma results as of December 31, 1998 assume
the CTS, BC, AS, ASM, YSP and RM acquisitions occurred on January 1, 1998.
The results of operations of TMI prior to its acquisition by the Company were
not material, and are not included in the following unaudited pro forma
results. The pro forma results have been prepared utilizing the historical
financial statements of the Company and the acquired businesses.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1998
---------------
<S> <C>
Net sales (in thousands).............................. $ 95,397
Net loss (in thousands)............................... (11,553)
Net loss per share.................................... (.69)
</TABLE>
F-12
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
The unaudited pro forma results above give effect to pro forma adjustments
related to the amortization of the excess of the purchase price over the fair
value of the assets acquired, the increase in interest expense to reflect the
notes payable issued to effect the acquisitions and related income tax
adjustments. This pro forma information is not necessarily indicative of the
actual results that would have been achieved had the above businesses been
acquired on January 1, 1998, nor is it necessarily indicative of future
results.
3. BALANCE SHEET INFORMATION
Property and equipment consist of the following at December 31, (in
thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------
<S> <C> <C>
Machinery and equipment................................................ $ 6,037 $ 4,266
Vehicles............................................................... 2,260 2,416
Leasehold improvements................................................. 1,934 1,232
Furniture and fixtures................................................. 1,397 1,445
Equipment placed in service............................................ 9,925 7,083
---------------------------
21,553 16,442
Less accumulated depreciation and amortization......................... (7,103) (4,790)
===========================
$ 14,450 $ 11,652
===========================
</TABLE>
Intangible assets consist of the following at December 31, (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------
<S> <C> <C>
Excess of purchase price over fair value of assets acquired (Note 2) .. $ 14,962 $ 14,952
Other intangibles...................................................... 1,584 649
---------------------------
16,546 15,601
Accumulated amortization............................................... (2,172) (1,030)
---------------------------
Total ................................................................. $ 14,374 $ 14,571
===========================
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following at December 31, (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------
<S> <C> <C>
14% Senior Subordinated Notes; due 8/25/2003........................... $ 15,000 $ 15,000
Revolving line of credit with a bank
Interest payable monthly at the bank's prime rate plus .5%
per annum (8.25% at December 31, 1998), expiring April 28,
2000....................................................... -- 7,442
Working capital facility
Based on eligible inventory and receivables, interest is
bank's prime rate plus 1.0% (9.50% at December 31, 1999),
expiring June 30, 2002................................. 12,585 --
Working capital facility
Based on eligible inventory and receivables, interest is
at the bank's prime rate plus .25% (8.75% at
December 31, 1999), expiring June 30, 2001............. 5,405 --
</TABLE>
F-13
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
---------------------------
<S> <C> <C>
Two-year term loan with a bank
Interest payable monthly at the bank's prime rate
plus 2.25% (10.75% at December 31, 1999); one-third
of principal is due in 2000, and the
remaining principal is due 7/30/2001.................... 2,230 --
Capital lease obligations.............................................. 488 269
Other.................................................................. 50 87
---------------------------
35,758 22,798
Less amount due within one year........................................ 34,276 178
---------------------------
Long-term debt......................................................... $ 1,482 $ 22,620
===========================
</TABLE>
On August 25, 1998, the Company issued an aggregate of $15 million principal
amount of the Company's Senior Subordinated Notes due 2003 (the "Notes")
to two lenders. The Company also entered into a revolving line of credit
agreement with a bank that was subsequently terminated and replaced with the
lines of credit described above. The revolving line of credit was paid in
full during 1999.
On June 30, 1999, the Company's wholly owned subsidiary Turf Partners, Inc.
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 and has an interest rate of prime rate plus 1.00%.
Turf Partners' accounts receivable, inventories, equipment, general intangibles
and stock secure the Coast Working Capital Facility.
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, two-year
credit facility based upon Agricultural Supply's eligible inventory and
receivables and has an interest rate of prime plus .25%.
On July 30, 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.
The 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 December 31,
1999, 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 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.
Aggregate maturities of long-term debt as of December 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000 $34,276
2001 1,248
2002 115
2003 101
2004 18
-------
TOTAL $35,758
=======
</TABLE>
F-14
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors is authorized, without any action by the Company's
shareholders, to issue up to 5,000,000 shares of undesignated preferred stock
and to fix the powers, preferences, rights and limitations of any such preferred
shares or any class or series thereof.
STOCK OPTION PLANS
In February 1992, the Company established the Stock Option Plan (the "1992
Plan") for employees and consultants which, as amended, provides for the grant
of options to purchase up to 1,100,000 shares of common stock, all of which
options have been granted. Options granted under the 1992 Plan have a five-year
term, and vest ratably over a three-year period.
In December 1996, the Company established the 1996 Directors' Stock Option
Plan (the "1996 Directors' Plan") for its independent directors, which provides
for the grant of options to purchase up to 60,000 shares of common stock, all of
which options have been granted. Options granted under the 1996 Directors' Plan
have a ten-year term.
In June 1998, the Company established the 1998 Stock Option Plan of
Eco-Soil Systems, Inc. (the "1998 Plan"). The 1998 Plan, as amended, provides
for the issuance of up to 1,600,000 shares of common stock under incentive
stock options and nonqualified stock options. The exercise price of options
shall be set by the Company's Compensation Committee, provided that such
price shall not be less than 85% of the fair market value at the date of the
grant, or 110% in the case of any person possessing 10% combined voting power
of all classes of stock of the Company. In the case of incentive stock
options, such price shall not be less than 100% of the fair market value at
the date of the grant. The Company's Compensation Committee also shall
determine the vesting and other provisions of options granted under the 1998
Plan.
In April 1999, the Company established the 1999 Equity Participation Plan
(the "1999 Equity Plan"). The 1999 Equity Plan provides for the issuance of up
to 1,600,000 shares of common stock under incentive stock options and
nonqualified stock options. The exercise price of options shall be set by the
Company's Compensation Committee, provided that such price shall not be less
than 85% of the fair market value at the date of the grant, or 110% in the case
of any person possessing 10% combined voting power of all classes of stock of
the Company. In the case of incentive stock options, such price shall not be
less than 100% of the fair market value at the date of the grant. The Company's
Compensation Committee also shall determine the vesting and other provisions of
options granted under the 1999 Equity Plan.
In June 1999, the Company established the 1999 New Hire Stock Option Plan
(the "1999 New Hire Plan"). The 1999 New Hire Plan provides for the issuance of
up to 1,000,000 shares of common stock under nonqualified stock options. The
Company's Compensation Committee shall set the exercise price of options,
provided that such price shall not be less than 85% of the fair market value at
the date of the grant. The Company's Compensation Committee shall determine the
vesting and other provisions of options granted under the 1999 New Hire Plan.
The Company granted options to purchase an aggregate of 1,378,059 shares
of common stock through various nonqualified stock option agreements from
May 1991 through April 1999 to consultants and employees. The exercise price,
vesting and other provisions are determined by the individual nonqualified stock
option agreement.
F-15
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity and related information for
the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of
year 2,975,459 $ 4.29 2,700,330 $ 3.37 2,802,506 $ 2.31
Granted.................. 2,480,299 $ 4.97 705,574 $ 7.55 696,898 $ 4.74
Exercised................ (538,720) $ 3.10 (328,203) 3.23 (710,303) $ 0.48
Forfeited/cancelled...... (235,083) $ 6.60 (102,242) $ 6.11 (88,771) $ 3.64
---------------- --------------- ---------------
Outstanding--end of year... 4,681,955 $ 4.67 2,975,459 $ 4.29 2,700,330 $ 3.37
================ =============== ===============
Exercisable--end of year... 2,023,988 $ 4.05 1,619,170 $ 3.33 1,514,333 $ 2.95
================ =============== ===============
</TABLE>
A summary of the Company's stock options outstanding as of December 31,
1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED REMAINING WEIGHTED
RANGE OF OPTIONS AVERAGE CONTRACTUAL OPTIONS AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE LIFE EXERCISABLE EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.00-3.875 1,349,759 $ 2.77 3.14 1,001,592 $ 2.68
$4.00-5.94 2,792,054 $ 4.89 4.49 776,421 $ 4.52
$6.00-11.44 540,142 $ 8.29 3.41 245,975 $ 8.10
---------------- --------------
4,681,955 2,023,988
================ ==============
</TABLE>
Pro forma information regarding net loss and net loss per share is
required by SFAS 123, and has been determined as if the Company has accounted
for its employee stock plans under the fair value method of that statement.
The fair value for options granted in 1999 was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions:
risk-free interest rates of 4.55% to 6.25%, dividend yield of 0%, volatility
factor of 79.0% and a weighted-average expected life of the option of three
years. The fair value for options granted in 1998 was estimated at the date
of grant using the Black-Scholes method for option pricing with the following
assumptions: risk-free interest rates of 4.04% to 7.94%, dividend yield of
0%, volatility factor of 75.0% and a weighted-average expected life of the
option of three years. The fair value for options granted in 1997 was
estimated at the date of grant, using the Black-Scholes method for option
pricing with the following assumptions: risk-free interest rate of 5.0% to
6.7%, dividend yield of 0%, volatility factor of 72.6% and a weighted average
expected life of the option of three years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate; in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-16
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of such options. The
effects of applying SFAS 123 for pro forma disclosure purposes are not likely to
be representative of the effects on pro forma net loss or net income in future
years because they do not take into consideration pro forma compensation expense
related to grants made prior to 1996. The Company's pro forma information
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31:
1999 1998 1997
--------------- ------------ -------------
<S> <C> <C> <C>
Pro forma net loss.................................. $ (21,502) $ (11,525) $ (1,741)
================ ============= ==============
Pro forma net loss per share, basic and diluted..... $ (1.23) $ (.70) $ (.15)
================ ============= ==============
</TABLE>
OTHER OPTIONS AND WARRANTS
At various dates since 1991, the Company has issued options and warrants
outside of formal plans in connection with debt or equity financing and the
acquisition of technology or marketing rights. As of December 31, 1999, warrants
to purchase 2,391,336 shares of common stock were outstanding at a weighted
average exercise price of approximately $3.62 per share. Such warrants generally
are exercisable through 2003 or 2004.
SHARES RESERVED FOR FUTURE ISSUANCE
Shares have been reserved at December 31, 1999 for the following:
<TABLE>
<S> <C>
Stock option plans............................................ 6,167,686
Warrants...................................................... 2,391,336
-----------
8,559,022
===========
</TABLE>
6. INCOME TAXES
At December 31, 1999, the Company had federal and California tax net
operating loss carryforwards of approximately $30.3 million and $11.3
million, respectively. The difference between the federal and California tax
loss carryforwards is primarily attributable to the fifty-percent limitation
on California loss carryforwards. The federal tax loss carryforward will
begin expiring in 2008, unless previously utilized. California net operating
losses of approximately $1 million expired in 1999, and approximately
$674,000 of California tax loss carryforward will expire in 2000. In
addition, the Company had federal and California research tax credits of
$218,000 and $121,000, respectively. The tax credits will begin to expire in
2009.
Pursuant to Internal Revenue Code Sections 382 and 383, use of the
Company's net operating loss and credit carryforwards are limited because of
cumulative changes in ownership of more than 50% which have occurred.
However, the Company does not believe the limitations will have a material
impact upon the future utilization of these carryforwards.
Significant components of the Company's deferred tax assets as of
December 31, 1999 and 1998 are shown below. A valuation allowance has been
provided as the realization of these assets is uncertain.
F-17
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........... $ 11,263 $ 6,305
Allowance for bad debt..................... 898 433
Goodwill impairment........................ 372 372
Deferred gain on sale leaseback............ 231 231
Research and development costs............. 297 152
Other, net................................. 1,360 362
------------ -------------
Total deferred tax assets..................... 14,421 7,855
Valuation allowance for deferred tax assets... (14,421) (7,855)
------------ -------------
Net deferred tax assets....................... $ -- $ --
============ =============
</TABLE>
The reconciliation of income tax computed at the federal statutory rates to
income tax expense is the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Tax at statutory rate......................... $(6,442) $(3,502)
Change in valuation allowance and other....... $ 6,442 $ 3,502
------------- -------------
-- --
------------- -------------
</TABLE>
7. OPERATING LEASES
The Company leases its office facilities and certain equipment under
noncancelable operating lease agreements. Future minimum operating lease
payments as of December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000................................ $2,385
2001................................ 1,945
2002................................ 1,336
2003................................ 903
2004................................ 683
Thereafter.......................... 2,424
-----------
Total minimum lease payments....... $9,676
===========
</TABLE>
Rent expense for the years ended December 31, 1999, 1998, and 1997 was
approximately $2,303,000, $1,732,000 and $581,000 respectively, including
$696,000, $477,000 and $151,000, respectively to related parties.
In June 1997, three officers and shareholders of the Company contracted to
buy land and acquired an option to build on land the building which currently
houses the Company's headquarters. In December 1997, the officers and
shareholders transferred the purchase option to the Company under an agreement
whereby the Company would exercise the purchase option, sell the building to an
independent party under a sale/leaseback transaction and allocate a specific
portion of any gain on the sale to the officers and shareholders. In October
1998, the Company exercised the purchase option and acquired the building for
$2.4 million. In December 1998, the Company sold the building to an independent
party for a gain of $863,000, and signed a 10-year agreement to lease the
facility back from the independent party. In accordance with the original
transfer agreement, the Company allocated $282,000 of the gain to the officers
and shareholders. The remaining gain of $581,000 has been deferred and will be
recognized as a reduction of rent expense over the life of the lease.
F-18
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. OPERATING LEASES (CONTINUED)
In September 1997, the Company sold approximately $4.0 million of equipment
under operating leases to an unrelated investor group. The Company then leased
the equipment back under a 40-month lease agreement. The equipment is subleased
to end-users, generally under one-year initial lease terms with month-to-month
renewal options. In December 1997, $2.3 million of this equipment was
repurchased by the Company. Minimum operating lease payments at December 31,
1999 for the equipment remaining under the leaseback are as follows (in
thousands):
<TABLE>
<S> <C>
2000........................ $ 503
2001........................ 84
-------
$ 587
=======
</TABLE>
8. LITIGATION
In November 1998, the Company executed a term sheet with the Palladin Group,
L.P. ("Palladin") concerning negotiations for a possible investment by Palladin
in certain new classes of securities of the Company which, at the time, the
Company was considering issuing to a certain fund managed by Palladin. The
Company subsequently terminated the negotiations in December 1998. An affiliate
of Palladin, Halifax Fund, L.P. ("Halifax"), filed a lawsuit on or about March
19, 1999 in San Diego Superior Court alleging that the termination violated the
duties owed by the Company to Halifax under the term sheet. The lawsuit sought
compensatory damages of approximately $2.6 million and punitive damages of
approximately $12.0 million. In July 1999, the Company executed Settlement and
Release Agreements with Halifax Fund, L.P., Palladin Group, L.P., Granite
Financial Group, Inc. and Midori Capital Corporation. These agreements mutually
release and discharge all claims arising from this litigation. The Company paid
termination charges and attorney's fees of $198,000 related to this settlement.
On November 24, 1999, a purported class action securities complaint was
file 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 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 April 24, 2000.
From time-to-time, the Company is involved in legal proceedings, claims and
litigation arising from the ordinary course of business. Management believes,
however, that the ultimate outcome of all pending litigation should not have
material adverse effect on the Company's financial position or liquidity.
9. SPECIAL CHARGES
During the fourth quarter of 1998, the Company incurred special charges of
$3.9 million as a result of the Company's action to reorganize certain of its
operations. The restructuring activities (shown below in tabular format)
primarily relate to: (a) reorganization of the Company into two separate
operating segments, Turf Partners and Agricultural Supply, b) the write-off of
impaired goodwill related to two businesses acquired in prior years and c) the
shutdown of its Aspen Consulting, Inc. subsidiary.
A total of 28 employees were terminated from almost all areas of the
Company, with 12 having left the Company as of December 31, 1998. Additional
employees left the Company during fiscal year 1999. The Company substantially
completed the restructuring actions during fiscal 1999. The remainder of the
accrued liabilities are anticipated to be recognized during fiscal 2000.
F-19
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SPECIAL CHARGES (CONTINUED)
Details of the restructuring charge (in thousands) are as follows:
<TABLE>
<CAPTION>
CASH/ CASH EXPENDED ACCRUED CASH ACCRUED
NON AMOUNT OF THROUGH LIABILITIES AT EXPENDED THROUGH LIABILITIES AT
CASH CHARGE DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
DESCRIPTION OF CHARGE: 1998 1998 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REORGANIZATION OF OPERATING
STRUCTURE:
Severance of employees............ Cash $ 338 $121 $217 $334 $ 4
Vacated lease facilities.......... Cash 55 -- 55 4 51
Write-downs of assets removed Non-
from operations................. cash 93 -- -- -- --
Professional fees................. Cash 59 2 57 47 12
Other............................. Cash 53 -- 53 51 2
-----------------------------------------------------------------------------------
598 123 382 436 69
IMPAIRMENT LOSS ON CERTAIN ASSETS:
Goodwill related to Turf Non-
Products subsidiary.............. cash 1,487 -- -- -- --
Goodwill related to TurfMakers Non-
subsidiary....................... cash 919 -- -- -- --
---------------------------------------------------------------------------------
2,406 -- -- -- --
---------------------------------------------------------------------------------
EXIT OF ASPEN CONSULTING OPERATIONS:
Severance of employees............ Cash 143 -- 143 124 19
Write-downs of assets removed Non-
from operations................. cash 575 -- -- -- --
Vacated lease facilities.......... Cash 84 -- 84 63 21
Other............................. Cash 69 -- 69 47 22
---------------------------------------------------------------------------------
871 -- 296 234 62
---------------------------------------------------------------------------------
TOTAL SPECIAL CHARGES............... $3,875 $123 $678 $670 $131
=================================================================================
</TABLE>
10. SEGMENT REPORTING
For purposes of analyzing and understanding the financial statements, the
Company's operations have been classified into the following business segments:
Turf Partners: This segment 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. In 1998, the Company actively commenced its
soil maintenance service business and acquired several distributors for
irrigation and other agri- cultural supplies, therefore creating this business
segment. Prior to 1998, agricultural operations were insignificant and were not
considered to be a separate segment.
During 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.
F-20
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SEGMENT REPORTING (CONTINUED)
segment. In 1998, 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 PROFIT (LOSS) SEGMENT ASSETS
------------------------- -------------------------- ---------------------------
FOR THE YEAR ENDED DECEMBER 31, AS OF DECEMBER 31,
------------------------------------------------------- ---------------------------
1999 1998 1999 1998 1999 1998
----------- ---------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Turf Partners $ 97,169 $61,336 $ (1,026) $ 3,095 $39,734 $35,266
Agricultural Supply 26,363 21,035 1,573 23,404 24,728
(901)
Corporate and Other - - (16,479) (14,673) 19,417 7,011
----------- ---------- ----------- ----------- ------------ -----------
Total $123,532 $82,371 $ (18,406) $ (10,005) $82,555 $67,005
=========== ========== =========== =========== ============ ===========
</TABLE>
11. SUBSEQUENT EVENTS
SENIOR SECURED CONVERTIBLE DEBENTURES
On January 24, 2000, the Company issued $4.5 million of principal amount
of Senior Secured Convertible 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
Debentures are secured by all of the Company's and certain subsidiaries'
tangible and intangible assets, which security interest is subject to the
prior liens of the Company's existing secured lenders. The holder of each
Debenture is entitled, at its option, to convert at any time the principal
amount of the Debenture or any portion thereof, together with accrued but
unpaid interest, into shares of the Company's common stock at a conversion
price equal to the lowest of (a) $3.00 (adjusted for subsequent stock splits
and the like) or (b) 90% of the three lowest closing bid prices on the
principal market during the fifteen consecutive trading days ending with the
last trading day prior to the date of conversion. In no event shall the
conversion price be less than $1.89384, subject to adjustment for any
subsequent stock split or the like. The Company may redeem the Debentures
upon at least seven business days notice to the investors.
The warrants are exercisable until January 24, 2005. The warrants have an
initial exercise price of $4.488 per share; however, the initial exercise price
is subject to adjustment on the 180th day after the date the warrants were
issued if the five day average of the closing bid prices of our common stock
calculated on such date is lower than the initial exercise price. In connection
with the transaction, the Company agreed to prepare and file a registration
statement covering the resale of the shares of common stock issuable upon the
conversion of the Debentures and upon the exercise of the warrants with the
Securities and Exchange Commission. The proceeds of the financing are being used
for working capital purposes.
SIMPLOT DEFINITIVE AGREEMENT
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 ("Simplot") 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 Turf Partners' credit facility with Coast Business Credit (the "Coast
Loan").
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 Loan 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 Loan during 2000.
SIMPLOT TERM LOAN
On April 12, 2000, Eco Soil and its Turf Partners subsidiary entered
into a Term Loan Agreement ("Simplot Term Loan"), under which Simplot will
loan the Company $3 million, subject to certain closing conditions, to
provide working capital to Turf Partners pending the sale of its assets to
Simplot. The Simplot Term Loan bears interest at a rate of 2.25% above Coast
Business Credit's prime rate per annum. The closing of the sale of Turf
Partners' assets to Simplot is expected to close during July 2000. Accrued
interest on the Simplot Term Loan will be offset against the down payment to
be made by Simplot upon the closing of the asset sale, and principal also
will be offset against the down payment to the extent such offset does not
cause the down payment to be less than $15 million. If any principal remains
outstanding after the closing of the asset sale, it will be offset against
amounts payable by Simplot to Eco Soil for (i) Eco Soil's sales of the
microbial products or services to Simplot after the closing date and (ii) the
balance of the purchase price for Turf Partners' assets, if any, to be paid
by Simplot in March 2001.
The Simplot Term Loan also states that Simplot will exercise its best
efforts to obtain, subject to certain conditions an at Eco Soil's cost, the
issuance of a stand-by letter of credit in the amount of not less than $2
million from an issuing bank reasonably acceptable to Coast Business Credit and
having terms reasonably acceptable to Coast Business Credit, Simplot, Eco Soil
and Turf Partners, that may be drawn upon by Coast Business Credit in the event
of a payment default by Eco Soil under the Term Loan Agreement dated as of July
30, 1999 between Eco Soil and Coast Business Credit between the date of the
Simplot Term Loan and the expiration of the letter of credit. The letter of
credit will expire on August 31, 2000 unless the sale of Turf Partners' assets
has been consummated by August 31, 2000 in which case the expiration of the
letter of credit will be extended to December 31, 2000.
F-21
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ECO SOIL SYSTEMS, INC.
DECEMBER 31, 1999
<TABLE>
<CAPTION>
|-------------Additions-----------|
BALANCE AT CHARGED TO COSTS CHARGED TO BALANCE AT END
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
(--------------------------------------IN THOUSANDS----------------------------------------)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts
1,261 1,868 - 925 (2) 2,204
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts
115 1,521 400 (1) 775 (2) 1,261
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts
113 12 - 10 (2) 115
</TABLE>
(1) Charged to goodwill.
(2) Uncollectible accounts written off, net of recoveries.
F-22
<PAGE>
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
by and between
TURF PARTNERS, INC.
as "Seller,"
ECO SOIL SYSTEMS, INC.
as "Parent,"
and
J.R. SIMPLOT COMPANY
as "Buyer"
Dated: April 5, 2000
<PAGE>
ASSET PURCHASE AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I. DEFINITIONS............................................................................................1
1.1 Defined Terms...................................................................................1
1.2 Other Defined Terms.............................................................................7
ARTICLE II. PURCHASE AND SALE OF ASSETS...........................................................................8
2.1 Transfer of Assets..............................................................................8
2.2 Assumption of Liabilities.......................................................................8
2.3 Excluded Liabilities............................................................................9
2.4 Purchase Price Calculation.....................................................................10
2.5 Payment of Purchase Price......................................................................10
2.6 Closing Balance Sheet..........................................................................11
2.7 Closing Costs; Transfer Taxes and Fees.........................................................12
2.8 Prorations.....................................................................................12
2.9 Allocation of Purchase Price...................................................................12
ARTICLE III. CLOSING.............................................................................................13
3.1 Closing........................................................................................13
3.2 Conveyances at Closing.........................................................................13
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF SELLER.............................................................14
4.1 Organization of Seller.........................................................................14
4.2 Subsidiaries...................................................................................14
4.3 Authorization..................................................................................14
4.4 No Adverse Change..............................................................................14
4.5 Assets.........................................................................................15
4.6 Leases.........................................................................................15
4.7 Contracts and Commitments......................................................................15
4.8 Permits........................................................................................16
4.9 Consents.......................................................................................16
4.10 No Conflict or Violation.......................................................................16
4.11 Financial Statements...........................................................................16
4.12 Books and Records..............................................................................17
4.13 Litigation.....................................................................................17
4.14 Labor Matters..................................................................................17
4.15 Liabilities....................................................................................17
4.16 Compliance with Law............................................................................18
4.17 No Brokers.....................................................................................18
4.18 No Other Agreements to Sell the Assets.........................................................18
4.19 Proprietary Rights.............................................................................18
4.20 Employee Benefit Plans.........................................................................19
i
<PAGE>
4.21 Tax Matters....................................................................................19
4.22 Insurance......................................................................................19
4.23 Accounts Receivable............................................................................20
4.24 Inventory......................................................................................20
4.25 Compliance With Environmental Laws.............................................................20
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF BUYER...............................................................22
5.1 Organization of Buyer..........................................................................22
5.2 Authorization..................................................................................22
5.3 Consents and Approvals.........................................................................22
5.4 No Brokers.....................................................................................22
ARTICLE VI. COVENANTS OF SELLER AND BUYER........................................................................23
6.1 Further Assurances.............................................................................23
6.2 No Solicitation................................................................................24
6.3 Notification of Certain Matters................................................................24
6.4 Investigation by Buyer.........................................................................25
6.5 Conduct of Business............................................................................26
6.6 Employee Matters...............................................................................27
6.7 Shareholder Approval...........................................................................28
6.8 Assumption of Leases...........................................................................29
6.9 Monthly Financial Statements...................................................................29
6.10 Board Approval.................................................................................29
6.11 Working Capital................................................................................30
ARTICLE VII. CONDITIONS TO SELLER'S OBLIGATIONS..................................................................30
7.1 Representations, Warranties and Covenants......................................................30
7.2 Consents; Regulatory Compliance and Approval...................................................30
7.3 No Actions or Court Orders.....................................................................30
7.4 Certificates...................................................................................30
7.5 Corporate Documents............................................................................30
7.6 Assumption Document............................................................................30
7.7 Ancillary Agreements...........................................................................31
7.8 Shareholder Approval...........................................................................31
7.9 Opinion of Counsel.............................................................................31
ARTICLE VIII. CONDITIONS TO BUYER'S OBLIGATIONS..................................................................31
8.1 Representations, Warranties and Covenants......................................................31
8.2 Consents; Regulatory Compliance and Approval..................................................31
8.3 Releases of Liens..............................................................................31
8.4 No Actions or Court Orders.....................................................................32
8.5 Certificates...................................................................................32
8.6 Material Changes...............................................................................32
8.7 Corporate Documents............................................................................32
8.8 Due Diligence Review...........................................................................32
8.9 Conveyancing Documents; Release of Encumbrances................................................32
8.10 Name Change....................................................................................33
ii
<PAGE>
8.11 Other Agreements...............................................................................33
8.12 Shareholder Approval...........................................................................33
8.13 Opinion of Counsel.............................................................................33
8.14 Employment of Rehired Employees................................................................33
ARTICLE IX. RISK OF LOSS; CONSENTS TO ASSIGNMENT.................................................................33
9.1 Risk of Loss...................................................................................33
9.2 Consents to Assignment.........................................................................34
ARTICLE X. ACTIONS BY SELLER AND BUYER AFTER THE CLOSING.........................................................34
10.1 Collection of Accounts Receivable and Letters of Credit........................................34
10.2 Books and Records; Tax Matters.................................................................34
10.3 Survival of Representations, Etc...............................................................35
10.4 Indemnifications...............................................................................35
10.5 Bulk Sales.....................................................................................37
10.6 Taxes..........................................................................................37
10.7 Operation of Business..........................................................................38
ARTICLE XI. MISCELLANEOUS........................................................................................38
11.1 Termination....................................................................................38
11.2 Assignment.....................................................................................39
11.3 Notices........................................................................................39
11.4 Choice of Law..................................................................................40
11.5 Entire Agreement; Amendments and Waivers.......................................................40
11.6 Multiple Counterparts..........................................................................40
11.7 Expenses.......................................................................................40
11.8 Invalidity.....................................................................................40
11.9 Titles; Gender.................................................................................41
11.10 Public Statements and Press Releases...........................................................41
11.11 Cumulative Remedies............................................................................41
11.12 Service of Process, Consent to Jurisdiction....................................................41
11.13 Attorneys' Fees................................................................................41
</TABLE>
iii
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
<S> <C>
A Facilities......................................................................... A-1
B Allocation of Purchase Price....................................................... B-1
C Bill of Sale....................................................................... C-1
D Assignment of Leases............................................................... D-1
E Assignment of Contract Rights...................................................... E-1
G Assumption of Certain Liabilities.................................................. G-1
H Opinion of Buyer's Counsel......................................................... H-1
I Opinion of Seller's Counsel........................................................ I-1
J 2000 Budget and Forecast........................................................... J-1
</TABLE>
Disclosure Schedule
Schedule 1.1 Additional Proprietary Products
Schedule 4.2 List of Subsidiaries
Schedule 4.6 List of Leased Real Property
Schedule 4.7 List of Contracts
Schedule 4.9 Third Party Consents
Schedule 4.13 Actions
Schedule 4.17 Broker Agreements
Schedule 4.20(c) Employee Plans
Schedule 4.20(d) Multiemployer Plans
Schedule 4.25 Exceptions to Environmental Compliance
iv
<PAGE>
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement, amended and restated as of April 5,
2000, is by and among J.R. Simplot Company, a Nevada corporation ("Buyer"), Turf
Partners, Inc., a Delaware corporation ("Seller"), and Eco Soil Systems, Inc., a
Nebraska corporation ("Parent").
RECITALS
A. Seller owns certain assets which it uses in the conduct of the
Business (as defined below). Seller is a wholly-owned subsidiary of Parent.
B. Buyer desires to purchase from Seller, and Seller desires to
sell to Buyer, such assets upon the terms and subject to the conditions of this
Agreement.
AGREEMENT
NOW THEREFORE, in consideration of the respective covenants and
promises contained herein and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereto agree
as follows:
ARTICLE I.
DEFINITIONS
1.1 DEFINED TERMS. As used herein, the terms below shall have the
following meanings. Any of such terms, unless the context otherwise requires,
may be used in the singular or plural, depending upon the reference.
"ACTION" shall mean any action, claim, suit, litigation,
proceeding, labor dispute, arbitral action, governmental audit, inquiry,
criminal prosecution, investigation or unfair labor practice charge or
complaint.
"AFFILIATE" shall have the meaning set forth in the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder.
"ANCILLARY AGREEMENTS" shall mean the Distribution Agreement, the
Soil Builders Agreement, the Field Trials Agreement and the Transitional
Services Agreement.
"ASSETS" shall mean all of the right, title and interest in and to
the business, properties, assets and rights of any kind, whether tangible or
intangible, real or personal that are used primarily in the Business whether
owned by Seller or in which Seller has any interest, including without
limitation all of Seller's right, title and interest in the following:
all accounts and notes receivable (whether current or noncurrent), refunds,
deposits, prepayments or prepaid expenses (including without limitation any
prepaid insurance premiums) of Seller other than intercompany receivables of
Seller which are owed by Parent or any entity which, on the Closing Date, is an
affiliate of Parent or Seller;
<PAGE>
(a) all cash and cash equivalents held by Seller;
(b) all Contract Rights, to the extent transferable;
(c) all Leases other than those Buyer does not elect to assume
pursuant to Section 6.8;
(d) all Leasehold Estates, to the extent transferable;
(e) all Leasehold Improvements;
(f) all Fixtures and Equipment;
(g) all Inventory;
(h) all Books and Records;
(i) all Proprietary Rights owned by the Business, to the
extent transferable;
(j) to the extent transferable, all Permits;
(k) all computers and, to the extent transferable software;
(l) all available supplies, sales literature, promotional
literature, customer, supplier and distributor lists, art work, display units,
telephone and fax numbers and purchasing records related to the Business;
(m) all rights under or pursuant to all warranties,
representations and guarantees made by suppliers in connection with the Assets
or services furnished to Seller pertaining to the Business or affecting the
Assets, to the extent such warranties, representations and guarantees are
assignable;
(n) all deposits and prepaid expenses of Seller; and
(o) all claims, causes of action, choses in action, rights of
recovery and rights of set-off of any kind, against any person or entity,
including without limitation any liens, security interests, pledges or other
rights to payment or to enforce payment in connection with products delivered by
Seller on or prior to the Closing Date;
but excluding therefrom the Excluded Assets.
"BALANCE SHEET" shall mean the audited consolidated balance sheet
of Seller at December 31, 1999 together with the notes thereon.
"BALANCE SHEET DATE" shall mean December 31, 1999.
"BOOKS AND RECORDS" shall mean (a) all records and lists of Seller
pertaining to the Assets, (b) all records and lists pertaining to the Business,
customers, suppliers or personnel
2
<PAGE>
of Seller, (c) all product, business and marketing plans of Seller and (d) all
books, ledgers, files, reports, plans, drawings and operating records of every
kind maintained by Seller, but excluding the originals of Seller's minute books,
stock books and tax returns.
"BUSINESS" shall mean Seller's business of selling Eco Soil BioJect
programs, FreshPack products, traditional chemical fertilizers and pesticides
and other turf maintenance products in golf course and turf markets.
"CLOSING DATE" shall mean a date two business days following the
satisfaction or waiver of all conditions to the obligations of Buyer and Seller
to consummate the transactions contemplated hereby (other than conditions with
respect to actions Buyer and Seller will take at the Closing itself) to be
agreed upon by Buyer and Seller, but not before July 15, 2000 or after August 1,
2000, or such other date as Buyer and Seller shall mutually agree upon.
"CODE" shall mean the Internal Revenue Code of 1986, as amended,
and the rules and regulations thereunder.
"CONFIDENTIALITY AGREEMENT" shall mean that certain Confidentiality
Agreement dated _______, ____ by and among Parent, Seller and Buyer.
"CONTRACT" shall mean any agreement, contract, note, loan, evidence
of indebtedness, purchase order, letter of credit, indenture, security or pledge
agreement, franchise agreement, undertaking, practice, covenant not to compete,
employment agreement, license, personal property lease, instrument, obligation
or commitment to which Seller is a party or is bound and which relates to the
Business or the Assets, whether oral or written, but excluding all Leases and
Employee Plans.
"CONTRACT RIGHTS" shall mean all of Seller's rights and obligations
under the Contracts listed on Schedule 4.7 and all supply contracts and customer
contracts, whether or not listed on Schedule 4.7.
"COPYRIGHTS" shall mean registered copyrights, copyright
applications and unregistered copyrights.
"COURT ORDER" shall mean any judgment, decision, consent decree,
injunction, ruling or order of any federal, state or local court or governmental
agency, department or authority that is binding on any person or its property
under applicable law.
"DEFAULT" shall mean (1) a breach of or default under any Contract
or Lease, (2) the occurrence of an event that with the passage of time or the
giving of notice or both would constitute a breach of or default under any
Contract or Lease, or (3) the occurrence of an event that with or without the
passage of time or the giving of notice or both would give rise to a right of
termination, renegotiation or acceleration under any Contract or Lease.
"DISCLOSURE SCHEDULE" shall mean a schedule executed and delivered
by Seller to Buyer as of the date hereof and updated as of the Closing Date
which sets forth the exceptions to the representations and warranties contained
in Article IV hereof and certain other information called for by this Agreement.
Unless otherwise specified, each reference in this Agreement to
3
<PAGE>
any numbered schedule is a reference to that numbered schedule which is included
in the Disclosure Schedule.
"DISTRIBUTION AGREEMENT" shall mean an agreement to be entered into
by Parent and Buyer on or prior to the Closing Date pursuant to which Buyer will
distribute Parent's proprietary products in turf markets.
"EBITDA" shall mean shall mean, for the Business (as conducted by
Seller prior to Closing Date and Buyer on and after the Closing Date) for a
given calendar year, the net income or loss earned or incurred by the Business
from continuing operations during such calendar year (as determined in
accordance with GAAP), subject to the following adjustments: (a) said net income
or loss shall be increased by the provision for income taxes recorded (in
accordance with GAAP) by the Business with respect to such calendar year or
decreased by the benefit from income taxes recorded (in accordance with GAAP) by
the Business for such calendar year; (b) said net income or loss shall be
increased by interest expense incurred by the Business for such calendar year
and decreased by interest income earned by the Business for such calendar year
(other than late charges received from customers); (c) said net income or loss
shall be increased by depreciation and/or amortization expenses or charges
recorded (in accordance with GAAP) by the Business for such calendar year with
respect to property, equipment, goodwill or other depreciable or amortizable
tangible or intangible assets; (d) said net income or loss shall be decreased by
the Business's revenue from the sale of BioJect, CleanRack and FreshPack
products and shall be increased by the costs of goods sold, salesperson expense
and any other expenses allocable to sales of BioJect, CleanRack and FreshPack
products; and (e) said net income or loss shall be decreased by the selling,
general and administrative expenses incurred by Parent on behalf of the Business
and up to $300,000 of such expenses incurred by Buyer on behalf of the Business.
"ENCUMBRANCE" shall mean any claim, lien, pledge, option, charge,
easement, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, conditional sales agreement,
encumbrance or other right of third parties, whether voluntarily incurred or
arising by operation of law, and includes, without limitation, any agreement to
give any of the foregoing in the future, and any contingent sale or other title
retention agreement or lease in the nature thereof.
"EXCLUDED ASSETS," notwithstanding any other provision of this
Agreement, shall mean the following assets of Seller which are not to be
acquired by Buyer hereunder:
(a) any right, title or interest of Seller in any BioJect
systems;
(b) any right, title or interest of Seller in any intellectual
property, including without limitation any patents or patent rights, copyrights
or trademarks, relating to BioJect systems, microbial products for use therein,
FreshPack products, CleanRack products and the other proprietary products listed
on Schedule 1.1 of the Disclosure Schedule;
(c) all Permits, to the extent not transferable;
4
<PAGE>
(d) all claims, causes of action, choses in action, rights of
recovery and rights of set-off of any kind against any person or entity arising
out of or relating to the Assets to the extent related to the Excluded
Liabilities;
(e) all intercompany receivables of Seller which are owed by
Parent or any entity which, on the Closing Date, is an affiliate of Parent or
Seller;
(f) all Leases Buyer elects not to assume pursuant to Section
6.8 hereof; and
(g) all Employee Plans and all assets relating to the Employee
Plans.
"FACILITIES" shall mean all plants, offices, manufacturing
facilities, stores, warehouses, improvements, administration buildings, and all
real property and related facilities which are identified or listed on Exhibit A
attached hereto.
"FIELD TRIALS AGREEMENT" shall mean the agreement to be entered
into by Parent and Simplot on or prior to the Closing Date pursuant to which
Simplot will conduct trials of Parent's proprietary products on its potato
fields.
"FINANCIAL STATEMENTS" shall mean the audited Balance Sheets dated
December 31, 1999, and the related unaudited statements of operations, changes
in stockholders' equity and cash flow for the year ended December 31, 1999.
"FIXTURES AND EQUIPMENT" shall mean all of the furniture, fixtures,
furnishings, machinery, automobiles, trucks, spare parts, supplies, equipment,
tooling, molds, patterns, dies and other tangible personal property owned by
Seller and used in connection with the Business, wherever located and including
any such Fixtures and Equipment in the possession of any of Seller's suppliers,
including all warranty rights with respect thereto.
"FORMER FACILITY" shall mean each plant, office, manufacturing
facility, store, warehouse, improvement, administrative building and all real
property and related facilities that was owned, leased or operated by Seller at
any time prior to the date hereof, but excluding any Facilities.
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and the rules and regulations thereunder.
"INVENTORY" shall mean all of Seller's inventory held for resale
and all of Seller's raw materials, work in process, finished products, wrapping,
supply and packaging items and similar items with respect to the Business, in
each case wherever the same may be located.
"LEASED REAL PROPERTY" shall mean all leased property described in
the Leases.
"LEASEHOLD ESTATES" shall mean all of Seller's rights and
obligations as lessee under the Leases.
5
<PAGE>
"LEASEHOLD IMPROVEMENTS" shall mean all leasehold improvements
situated in or on the Leased Real Property and owned by Seller.
"LEASES" shall mean all of the existing leases with respect to the
Facilities listed on Schedule 4.6 delivered in advance of Closing.
"LIABILITIES" shall mean any direct or indirect liability,
indebtedness, obligation, commitment, expense, claim, deficiency, guaranty or
endorsement of or by any person of any type, whether accrued, absolute,
contingent, matured, unmatured or other.
"MATERIAL ADVERSE EFFECT" or "MATERIAL ADVERSE CHANGE" shall mean
with respect to the Business or the Assets any significant and substantial
adverse effect or change in the condition (financial or other), business,
results of operations, assets, Liabilities or operations of the Business and/or
the Assets or on the ability of Seller to consummate the transactions
contemplated hereby, or any event or condition which would, with the passage of
time, constitute a "material adverse effect" or "material adverse change."
"NET TANGIBLE ASSETS" shall mean the Assets of Seller minus (i)
intangible assets such as goodwill, trademarks and other proprietary rights and
(ii) total liabilities. For purposes of the calculation of Net Tangible Assets,
(i) Seller's accounts receivable shall include the reserve for bad debts or
uncollectable amounts required by generally accepted accounting principles
consistently applied and (ii) inventory shall be valued at the lesser of cost or
market and shall exclude obsolete and non-sellable inventory.
"ORDINARY COURSE OF BUSINESS" or "ORDINARY COURSE" or any similar
phrase shall mean the ordinary course of the Business and consistent with
Seller's past practice.
"PATENTS" shall mean all patents and patent applications and
registered design and registered design applications.
"PERMITS" shall mean all licenses, permits, franchises, approvals,
authorizations, consents or orders of, or filings with, any governmental
authority, whether foreign, federal, state or local, or any other person,
necessary or desirable for the past, present or anticipated conduct of, or
relating to the operation of the Business.
"PURCHASED ASSETS" shall mean all of Seller's right, title and
interest in and to the Assets.
"REGULATIONS" shall mean any laws, statutes, ordinances,
regulations, rules, notice requirements, court decisions, agency guidelines,
principles of law and orders of any foreign, federal, state or local government
and any other governmental department or agency, including without limitation
Environmental Laws, energy, motor vehicle safety, public utility, zoning,
building and health codes, occupational safety and health and laws respecting
employment practices, employee documentation, terms and conditions of employment
and wages and hours.
"REPRESENTATIVE" shall mean any officer, director, principal,
attorney, agent, employee or other representative.
6
<PAGE>
"SOIL BUILDERS AGREEMENT" shall mean the agreement to be entered
into by Parent and Simplot Soil Builders on or prior to the Closing Date
pursuant to which Parent' s proprietary products will be sold in Soil Builders
stores.
"SUBSIDIARY" shall mean with respect to any person (a) any
corporation in an unbroken chain of corporations beginning with such person if
each of the corporations other than the last corporation in the unbroken chain
then owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain, (b) any
partnership in which such person, or a Subsidiary of such person, is a general
partner, (c) any partnership in which such person or a Subsidiary of such
person, possesses a 50% or greater interest in the total capital or total income
of such partnership; or (d) any limited liability company in which such person
controls membership interests of 50% or greater.
"TAX" shall mean any federal, state, local, foreign or other tax,
levy, impost, fee, assessment or other government charge, including without
limitation income, estimated income, business, occupation, franchise, property,
payroll, personal property, sales, transfer, use, employment, commercial rent,
occupancy, franchise or withholding taxes, and any premium, including without
limitation interest, penalties and additions in connection therewith.
"TAX RETURN" means any return, report or similar statement required
to be filed with respect to any Taxes (including any attached schedules),
including, without limitation, any information return, claim for refund, amended
return and declaration of estimated Tax.
"TRADEMARKS" shall mean the registered trademarks, registered
service marks, trademark and service mark applications and unregistered
trademarks and service marks listed on Schedule 4.19 of the Disclosure Schedule.
"TRANSITIONAL SERVICES AGREEMENT" shall mean an agreement to be
entered into by Buyer and Parent on the Closing Date pursuant to which Parent
will provide cash management, information technology and sales management
services to Buyer, which services shall be consistent with those historically
performed by Parent on behalf of Seller and for which Parent will charge Buyer a
service fee equal to Parent's costs of providing such services.
1.2 OTHER DEFINED TERMS. The following terms shall have the meanings
defined for such terms in the Sections set forth below:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Adjustment Amount 2.5(b)
Assumed Liabilities 2.2
Assumption Documents 3.2(b)
Bulk Sales Act 10.6
Claim 10.4(d)
Claim Notice 10.4(d)
Cleanup 4.25(a)(i)
Closing 3.1
Consultant 6.4(b)
Damages 10.4(a)
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<S> <C>
Employee Plan 4.20
Environmental Claim 4.25(a)(ii)
Environmental Laws 4.25(a)(iii)
ERISA 4.20(a)
Excluded Liabilities 2.3
Hazardous Materials 4.25(a)(iv)
June 30, 2000 Balance Sheet 2.5(a)
Net Book Value 2.5(b)
Permitted Encumbrances 4.5
Proprietary Rights 4.19(a)
Proxy Statement 6.7(a)
Proposed Acquisition Transaction 6.2(a)
Purchase Price 2.4
Rehired Employees 6.6(a)
Release 4.25(a)(v)
SEC 6.7(a)
Shareholders' Meeting 6.7(a)
</TABLE>
ARTICLE II.
PURCHASE AND SALE OF ASSETS
2.1 TRANSFER OF ASSETS. Upon the terms and subject to the conditions
contained herein, at the Closing, Seller will sell, convey, transfer, assign and
deliver to Buyer, and Buyer will acquire from Seller, the Purchased Assets, free
and clear of all Encumbrances other than Permitted Encumbrances, in exchange for
Buyer's payment to Seller of the Purchase Price provided below.
2.2 ASSUMPTION OF LIABILITIES. Upon the terms and subject to the
conditions contained herein, at the Closing, Buyer shall assume the following,
and only the following, Liabilities of Seller (the "Assumed Liabilities"):
(a) All Liabilities accruing, arising out of, or relating to events
or occurrences happening after the Closing Date under the Contracts, but not
including any Liability for any Default under any such Contract occurring on or
prior to the Closing Date;
(b) All Liabilities accruing, arising out of, or relating to events
or occurrences happening after the Closing Date under the Leases Buyer elects to
assume pursuant to Section 6.8, but not including any Liability for any Default
under any such Lease occurring on or prior to the Closing Date;
(c) Other than intercompany indebtedness (which is addressed in
Section 2.3(h)), all of Seller's accounts payable set forth on the Balance Sheet
or incurred after the Balance Sheet Date (i) in the ordinary course of business,
(ii) consistent with amounts historically incurred and (iii) in compliance with
the terms of this Agreement;
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(d) Seller's obligations under its Loan and Security Agreement,
dated June 30, 1999 between Seller and Coast Business Credit (the "Coast Loan");
and
(e) Sales Taxes payable with respect to product sold to customers
between July 1, 2000 and the to the Closing Date and all Taxes imposed on Seller
by law which Buyer has agreed pursuant to Section 2.7 below to pay.
2.3 EXCLUDED LIABILITIES. Notwithstanding any other provision of this
Agreement, except for the Assumed Liabilities expressly specified in Section
2.2, Buyer shall not assume, or otherwise be responsible for, any Liabilities of
Seller, whether liquidated or unliquidated, or known or unknown, whether arising
out of occurrences prior to, at or after the date hereof ("Excluded
Liabilities"), which Excluded Liabilities include, without limitation:
(a) Except as otherwise provided in Section 6.6, any Liability to
or in respect of any employees or former employees of Seller including without
limitation (i) any employment agreement, whether or not written, between Seller
and any person, (ii) any Liability under any Employee Plan at any time
maintained, contributed to or required to be contributed to by or with respect
to Seller or Parent or under which Seller or Parent may incur Liability, or any
contributions, benefits or Liabilities therefor, or any Liability with respect
to Seller's withdrawal or partial withdrawal from or termination of any Employee
Plan and (iii) any claim of an unfair labor practice, or any claim under any
state unemployment compensation or worker's compensation law or regulation or
under any federal or state employment discrimination law or regulation, which
shall have been asserted on or prior to the Closing Date or is based on acts or
omissions which occurred on or prior to the Closing Date;
(b) Any Liability of Parent or Seller in respect of any Tax (except
as contemplated by Section 2.2(e) above and Section 2.7 below);
(c) Any Liability arising from any injury to or death of any person
or damage to or destruction of any property, whether based on negligence, breach
of warranty, strict liability, enterprise liability or any other legal or
equitable theory arising from defects in products manufactured or from services
performed by or on behalf of Seller or any other person or entity on or prior to
the Closing Date;
(d) Any Liability of Seller arising out of or related to any Action
against Seller or any Action which adversely affects the Assets and which shall
have been asserted on or prior to the Closing Date or to the extent the basis of
which shall have arisen on or prior to the Closing Date;
(e) Any Liability of Parent or Seller resulting from entering into,
performing its obligations pursuant to or consummating the transactions
contemplated by, this Agreement (including without limitation any Liability of
Parent or Seller pursuant to Article X hereof);
(f) Any Liability related to any Former Facility or any Lease Buyer
elects not to assume pursuant to Section 6.8 hereof;
(g) Environmental Claims arising from occurrences prior to the
Closing Date; and
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(h) All intercompany payables of Seller which are owed by Seller to
Parent or any entity which, on the Closing Date, is an affiliate of Parent or
Seller.
2.4 PURCHASE PRICE CALCULATION. The purchase price for the Assets (the
"Purchase Price") shall be calculated as six (6) times the year 2000 EBITDA,
subject to the following adjustments. The adjustments in subparagraphs (a), (b)
and (c) below will be calculated from the June 30, 2000 balance sheet and are
hereafter referred to as the "Adjustment Amounts"; adjustment (e) will be
calculated from the audited December 31, 2000 balance sheet and prior months'
unaudited interim balance sheets.
The Purchase Price shall equal six (6) times the year 2000 EBITDA:
(a) less the amount, if any, of any accounts payable shown on the
June 30, 2000 balance sheet that are past due (which shall exclude intercompany
payables of Seller which are owed by Seller to Parent);
(b) less the amount, if any, shown on the June 30, 2000 balance
sheet to be due to salesmen for commissions or other incentive programs beyond
the normal arrears period of three months;
(c) less the amount, if any, shown on the June 30, 2000 balance
sheet by which Three Million Dollars ($3,000,000) exceeds the Net Tangible
Assets or plus the amount, if any, shown on the June 30, 2000 balance sheet by
which the Net Tangible Assets exceeds Three Million Dollars; and
(d) less the amount of the average balance outstanding on the Coast
Loan over the period from January 1, 2000 to December 31, 2000. This amount will
be calculated by averaging the amounts of the Coast Loan balance shown on each
month-end balance sheet for the year.
2.5 PAYMENT OF PURCHASE PRICE.
(a) DOWN PAYMENT. On the Closing Date, Buyer will pay to Seller the
amount of Twenty Million Dollars ($20,000,000) reuced or increased, as the case
may be, by (i) adjustments (a) through (d) of Section 2.4 (the "Adjustment
Amounts") above as they can best be calculated from the unaudited June 30, 2000
balance sheet and (ii) a reduction equal to the product derived from the
following formula:
13.5 x [actual EBITDA - (.75 x budgeted EBITDA)]
in the event the EBITDA of the Business through June 30, 2000 is less than
seventy-five percent of the budgeted $3,100,000. The aggregate amount of any
reductions required by the preceding sentence shall not exceed Five Million
Dollars ($5,000,000). This down payment will also be reduced by the amount, if
any, by which the amount outstanding on the Coast Loan exceeds Seventeen Million
Dollars ($17,000,000) on June 30, 2000.
(b) BALANCE. On March 1, 2001, Buyer will pay to Seller the
difference, if any, between the Purchase Price and the down payment described in
Section 2.5(a). In addition, the
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final payment of the Purchase Price will be adjusted to reflect any differences
in the adjustment amounts set forth in Section 2.4 above indicated by
differences between the unaudited June 30, 2000 balance sheet used on Closing
Date, and the final audited version of the June 30, 2000 balance sheet. Seller
will have no obligation to make any refund to Buyer if the down payment made
pursuant to Section 2.5(a) exceeds the final Purchase Price.
2.6 CLOSING BALANCE SHEET.
(a) On or before August 15, 2000, Seller shall prepare and deliver
to Buyer, (i) an audited balance sheet as of June 30, 2000 (the "Closing Balance
Sheet") and (ii) a reasonably detailed calculation of the Adjustment Amounts.
The Closing Balance Sheet shall be prepared by Seller's personnel in accordance
with generally accepted accounting principles, as applied in preparation of the
Balance Sheet, and shall fairly and accurately present the Assets, Liabilities
(including reserves) and financial position of the Business, with respect to the
Assets, as of June 30, 2000.
(b) DISPUTED ADJUSTMENT AMOUNT. If the Adjustment Amounts
calculated by Seller from the Closing Balance sheet indicates a larger down
payment should have been paid at Closing, Buyer shall remit any additional down
payment to Seller, unless Buyer disagrees with Seller's calculations. If Buyer
shall disagree with the Adjustment Amounts after receiving the Closing Balance
Sheet and Seller's calculation of the Adjustment Amounts, it shall notify Seller
of such disagreement in writing specifying in detail the particulars of such
disagreement within ten (10) days after Buyer's receipt of the Closing Balance
Sheet. Buyer and Seller shall use their best efforts for a period of ten (10)
calendar days after Buyer's delivery of the notice contemplated by the preceding
sentence (or such longer period as Buyer and Seller shall mutually agree upon)
to resolve any disagreements raised by Buyer with respect to the calculation of
the Adjustment Amounts. If, at the end of such period, Buyer and Seller are
unable to resolve such disagreements, Ernst & Young LLP and Arthur Andersen LLP,
independent auditors of Seller and Buyer, respectively, shall jointly select a
third independent auditor of recognized national standing to resolve any
remaining disagreements. The determination by such third independent auditor
shall be final, binding and conclusive on the parties. Buyer and Seller shall
use their best efforts to cause such third independent auditor to make its
determination within thirty (30) calendar days of accepting its selection. The
fees and expenses of such third independent auditor shall be borne by Buyer and
Seller equally. Buyer and Seller shall use the Closing Balance Sheet as
determined pursuant to this paragraph (b) to reconcile the Adjustment Amounts as
appropriate to reflect differences between the unaudited and audited June 30,
2000 balance sheets.
(c) STATEMENT OF OPERATIONS. On or before February 15, 2001, Buyer
shall prepare and deliver to Seller, (i) an audited statement of operations of
the Business for the period July 1, 2000 to December 31, 2000 and (ii) a
reasonably detailed calculation of EBITDA for the Business for such year. The
audited statement of operations shall be prepared by Buyer's personnel in
accordance with generally accepted accounting principles and shall fairly and
accurately present the results of operations of the Business for the period July
1, 2000 to December 31, 2000.
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(d) DISPUTED PURCHASE PRICE CALCULATION. If Seller shall disagree
with the EBITDA calculation after receiving the audited statement of operations
from Buyer, it shall notify Buyer of such disagreement in writing specifying in
detail the particulars of such disagreement within ten (10) days after Seller's
receipt of the audited statement of operations. Buyer and Seller shall use their
best efforts for a period of ten (10) calendar days after Seller's delivery of
the notice contemplated by the preceding sentence (or such longer period as
Buyer and Seller shall mutually agree upon) to resolve any disagreements raised
by Seller with respect to the calculation of EBITDA. If, at the end of such
period, Buyer and Seller are unable to resolve such disagreements, Ernst & Young
LLP and Arthur Andersen LLP, independent auditors of Seller and Buyer,
respectively, shall jointly select a third independent auditor of recognized
national standing to resolve any remaining disagreements. The determination by
such third independent auditor shall be final, binding and conclusive on the
parties. Buyer and Seller shall use their best efforts to cause such third
independent auditor to make its determination within thirty (30) calendar days
of accepting its selection. The fees and expenses of such third independent
auditor shall be borne by Buyer and Seller equally. On March 1, 2001, Buyer
shall pay to Seller the balance of the Purchase Price contemplated by Section
2.5(b) based on the EBITDA calculation proposed by Buyer if a dispute continues
to exist, and Buyer shall pay the remainder of the balance of the Purchase
Price, if any, following resolution of such dispute in accordance herewith.
2.7 CLOSING COSTS; TRANSFER TAXES AND FEES. Buyer shall be responsible
for any documentary and transfer taxes and any sales, use or other taxes imposed
by reason of the transfers of Purchased Assets provided hereunder and any
deficiency, interest or penalty asserted with respect thereto. Buyer shall pay
the fees and costs of recording or filing all applicable conveyancing
instruments described in Section 3.2(a). Buyer shall pay all costs of applying
for new Permits and obtaining the transfer of existing Permits which may be
lawfully transferred.
2.8 PRORATIONS. All rent, utilities and other lease charges with
respect to Leases assumed by Buyer shall be prorated between Buyer and Seller as
of the Closing Date. Such proratidons shall, insofar as feasible, be determined
and paid at the Closing, with best efforts to achieve final settlement of such
prorations within 30 days after the Closing. Seller shall be responsible for
payment of all unpaid rent, common area maintenance expenses and real property
taxes through the Closing Date.
2.9 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated
among Purchased Assets in the manner required by Section 1060 of the Code and
regulations thereunder.
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ARTICLE III.
CLOSING
3.1 CLOSING. The Closing of the transactions contemplated herein (the
"Closing") shall be held at 9:00 a.m. local time on the Closing Date at the
offices of Latham & Watkins, 701 B Street, Suite 2100, San Diego, California
92101, unless the parties hereto otherwise agree.
3.2 CONVEYANCES AT CLOSING.
(a) INSTRUMENTS AND POSSESSION. To effect the sale and transfer
referred to in Section 2.1 hereof, Seller will, at the Closing, execute and
deliver to Buyer:
(i) one or more bills of sale, in the form attached hereto as
Exhibit C, conveying in the aggregate all of Seller's owned personal property
included in the Purchased Assets;
(ii) subject to Section 9.2, Assignments of Lease in the form
attached hereto as Exhibit D with respect to the Leases;
(iii) subject to Section 9.2, Assignments of Contract Rights,
each in the form of Exhibit E attached hereto, with respect to the Contract
Rights;
(iv) Assignments of Trademarks and other Proprietary Rights
(including an assignment of all of Seller's rights, title and interest to the
name "Turf Partners," and all variations thereof), a schedule of which shall be
provided at Closing, in recordable form to the extent necessary to assign such
rights;
(v) all cash and cash equivalents of the Business; and
(vi) such other instruments as shall be reasonably requested
by Buyer to vest in Buyer title in and to the Purchased Assets in accordance
with the provisions hereof.
(b) ASSUMPTION DOCUMENT. Upon the terms and subject to the
conditions contained herein, at the Closing Buyer shall deliver to Seller an
instrument of assumption substantially in the form attached hereto as Exhibit G,
evidencing Buyer's assumption, pursuant to Section 2.2, of the Assumed
Liabilities (the "Assumption Document").
(c) FORM OF INSTRUMENTS. To the extent that a form of any document
to be delivered hereunder is not attached as an exhibit hereto, such documents
shall be in form and substance, and shall be executed and delivered in a manner,
reasonably satisfactory to Buyer.
(d) CERTIFICATES. Buyer and Seller shall deliver the certificates,
opinions of counsel and other matters described in Articles VII and VIII.
(e) CONSENTS. Subject to Section 9.2, Seller shall deliver all
Permits and any other third party consents required for the valid transfer of
the Purchased Assets as contemplated by this Agreement.
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ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer as follows, except
as otherwise set forth on the Disclosure Schedule, which representations and
warranties are, as of the date hereof, and will be, as of the Closing Date, true
and correct:
4.1 ORGANIZATION OF SELLER. Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
with full corporate power and authority to conduct the Business as it is
presently being conducted and to own and lease its properties and assets. Seller
is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where the character of its properties owned or
leased or the nature of its activities make such qualification necessary, except
where the failure to be so qualified or in good standing would not have a
material adverse effect on the Purchased Assets or the Business. Copies of the
Certificate of Incorporation and Bylaws of Seller, and all amendments thereto,
heretofore delivered to Buyer are accurate and complete as of the date hereof.
4.2 SUBSIDIARIES. Except as set forth in Schedule 4.2, Seller does not
have any Subsidiaries. Other than as listed on Schedule 4.2, Seller has no
direct or indirect stock or other equity or ownership interest (whether
controlling or not) in any corporation, association, partnership, joint venture
or other entity.
4.3 AUTHORIZATION. Seller has all requisite corporate power and
authority to execute and deliver this Agreement and the Ancillary Agreements, to
consummate the transactions contemplated hereby and thereby and to perform its
obligations hereunder and thereunder. No other corporate proceedings on the part
of Parent or Seller are necessary to authorize this Agreement and the Ancillary
Agreements and the transactions contemplated hereby and thereby, except for the
approval of the boards of directors of Seller and Parent as contemplated by
Section 6.10 hereof, the approval by Parent as the sole stockholder of Seller
and approval of Parent's shareholders contemplated by Section 6.7 hereof. This
Agreement has been duly executed and delivered by Parent and Seller and upon
approval by the boards of directors of Seller and Parent will be, a legal, valid
and binding obligation of Parent and Seller enforceable against them in
accordance with its terms.
4.4 NO ADVERSE CHANGE. Since the Balance Sheet Date:
(a) there has been no actual or threatened adverse change in the
financial condition or results of operation, the Business or the Assets or any
event, condition or state of facts, in either case that is, or would result in a
material adverse change in the Assets or the Business;
(b) there has not been any sale or other disposition, except in the
ordinary course of business of any of the Assets, or any Encumbrance placed on
the Assets; and
(c) Seller has operated the Business in the ordinary course so as
to preserve the Business intact, to keep available to the Business the services
of Seller's employees, and to
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preserve the Business and the goodwill of Seller's suppliers, customers,
distributors and others having business relations with it.
4.5 ASSETS. Excluding the Leased Real Property, Seller has and will
transfer good and marketable title to the Purchased Assets and upon the
consummation of the transactions contemplated hereby, Buyer will acquire good
and marketable title to all of the Purchased Assets, free and clear of any
Encumbrances, except for minor liens which in the aggregate are not substantial
in amount, do not materially detract from the value or transferability of the
property or assets subject thereto or interfere with the present use and have
not arisen other than in the ordinary course of business ("Permitted
Encumbrances").
4.6 LEASES. Schedule 4.6 contains a list of all real property leased by
Seller. Except as set forth on Schedule 4.6, the properties of Seller are not
subject to any mortgage, encumbrance, or lien of any kind except minor
encumbrances not of a financial nature, which do not materially interfere with
the use of the property in the conduct of the business of Seller. Each lease is
in full force and effect and permits Seller with the right to lease the subject
property through the stated terms thereof. Seller, and to the best of Seller's
knowledge, the other parties to each such Lease have complied in all material
respects with the provisions thereof, no party is in Default thereunder and no
notice of any claim of Default has been given to Seller.
4.7 CONTRACTS AND COMMITMENTS.
(a) CONTRACTS. Schedule 4.7 sets forth a complete and accurate list
of all Contracts of the following categories:
(i) Contracts not made in the ordinary course of business;
(ii) Employment contracts and severance agreements, including
without limitation Contracts (A) to employ or terminate executive officers or
other personnel and other contracts with present or former officers, directors
or shareholders of Seller or (B) that will result in the payment by, or the
creation of any Liability to pay on behalf of Buyer or Parent or Seller any
severance, termination, "golden parachute," or other similar payments to any
present or former personnel following termination of employment or otherwise as
a result of the consummation of the transactions contemplated by this Agreement;
(iii) Labor or union contracts;
(iv) Contracts involving future expenditures or Liabilities,
actual or potential, in excess of $200,000 and not cancelable (without
Liability) within 30 calendar days;
(v) Promissory notes, loans, agreements, indentures, evidences
of indebtedness, letters of credit, guarantees, or other instruments relating to
an obligation to pay money, individually in excess of or in the aggregate in
excess of $100,000, whether Seller shall be the borrower, lender or guarantor
thereunder or whereby any Assets are pledged (excluding credit provided by
Seller in the ordinary course of business to purchasers of its products); and
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(vi) Contracts containing covenants limiting the freedom of
Seller or any officer, director or stockholder of Seller, to engage in any line
of business or compete with any person.
Seller has delivered to Buyer true, correct and complete copies of all of the
Contracts listed on Schedule 4.7, including all amendments and supplements
thereto.
(b) ABSENCE OF DEFAULTS. All of the Contracts and Leases to which
Seller is party or by which it or any of the Purchased Assets is bound or
affected are valid, binding and enforceable in accordance with their terms.
Seller has fulfilled, or taken all action necessary to enable it to fulfill when
due, all of its material obligations under each of such Contracts and Leases.
Seller, and to the best of Seller's knowledge, the other parties to such
Contracts and Leases have complied in all material respects with the provisions
thereof, no party is in Default thereunder and no notice of any claim of Default
has been given to Seller.
4.8 PERMITS. Seller has, and at all times has had, all Permits required
under any Regulation (including Environmental Laws) in the operation of its
Business or in the ownership of the Assets, and owns or possesses such Permits
free and clear of all Encumbrances, except such Permits the failure of which to
obtain would not have a material adverse effect on the Purchased Assets or the
Business. Seller is not in Default, nor has it received any notice of any claim
of Default, with respect to any such Permit, except where such Default would not
have a material adverse effect on the Purchased Assets or the Business.
4.9 CONSENTS. Other than in connection with or in compliance with the
provisions of the HSR Act, and except as disclosed on Schedule 4.9 hereto, no
notice to, declaration, filing or registration with, or Permit from, any
domestic or foreign governmental or regulatory body or authority, or any other
person or entity, is required to be made or obtained by Parent or Seller in
connection with the execution, delivery or performance of this Agreement and the
consummation of the transactions contemplated hereby.
4.10 NO CONFLICT OR VIOLATION. Neither the execution, delivery or
performance of this Agreement nor the consummation of the transactions
contemplated hereby, nor compliance by Parent or Seller with any of the
provisions hereof, will (a) violate or conflict with any provision of the
Certificate of Incorporation or Bylaws of Parent or Seller, (b) violate,
conflict with, or result in or constitute a Default under, or result in the
termination of, or accelerate the performance required by, or result in a right
of termination or acceleration under, or result in the creation of any
Encumbrance upon any of the Purchased Assets under, any of the terms, conditions
or provisions of any Contract, Lease or Permit, (i) to which Seller is a party
or (ii) by which the Purchased Assets are bound, (c) violate any Regulation or
Court Order, (d) impose any Encumbrance on the Purchased Assets or the Business,
except in the case of each of clauses (a), (b), (c) and (d) above, for such
violations, Defaults, terminations, accelerations or creations of Encumbrances
which, in the aggregate would not have a material adverse effect on the Assets,
the Business or on the ability of Parent or Seller to consummate the
transactions contemplated hereby.
4.11 FINANCIAL STATEMENTS. Seller has heretofore delivered to Buyer the
Financial Statements. The Financial Statements, all subsequent interim financial
statements, the unaudited
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June 30, 2000 balance sheet and the Closing Balance Sheet previously provided by
Seller to Buyer or which Seller will provide to Buyer pursuant hereto (a) are
and will be in accordance with the books and records of Seller, (b) have been
and will be prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods covered thereby and (c) fairly and
accurately present and will present the assets, Liabilities (including all
reserves) and financial position of Seller as of the respective dates thereof
and the results of operations and changes in cash flows for the periods then
ended, subject only to normal year-end adjustments with respect to any interim
financial statements. The Balance Sheet has been audited by Ernst & Young LLP,
independent certified public accountants, whose report thereon is included with
such Financial Statements.
4.12 BOOKS AND RECORDS. Seller has made and kept (and given Buyer
access to) Books and Records and accounts, which, in reasonable detail,
accurately and fairly reflect the activities of Seller. The minute books of
Seller previously delivered to Buyer accurately and adequately reflect all
action previously taken by the stockholders, board of directors and committees
of the board of directors of Seller. The copies of the stock book records of
Seller previously delivered to Buyer are true, correct and complete, and
accurately reflect all transactions effected in Seller's stock through and
including the date hereof. Seller has not engaged in any transaction, maintained
any bank account or used any corporate funds except for transactions, bank
accounts and funds which have been and are reflected in the normally maintained
books and records of Seller.
4.13 LITIGATION. Except as set forth on Schedule 4.13, there are no
Actions pending, or to the best of Seller's knowledge, threatened or anticipated
(a) against, related to or affecting (i) Seller, the Business or the Assets
(including with respect to Environmental Laws), (ii) any officers or directors
of Seller as such, or (iii) any stockholder of Seller in such stockholder's
capacity as a stockholder of Seller, (b) seeking to delay, limit or enjoin the
transactions contemplated by this Agreement (c) that involve the risk of
criminal liability, or (d) in which Seller is a plaintiff, including any
derivative suits brought by or on behalf of Seller. Seller is not in Default
with respect to or subject to any Court Order, and there are no unsatisfied
judgments against Seller, the Business or the Assets.
4.14 LABOR MATTERS. Seller is not a party to any labor agreement with
respect to its employees with any labor organization, union, group or
association and there are no employee unions (nor any other similar labor or
employee organizations) under local statutes, custom or practice. Seller has not
experienced any attempt by organized labor or its representatives to make Seller
conform to demands of organized labor relating to its employees or to enter into
a binding agreement with organized labor that would cover the employees of
Seller. There is no labor strike or labor disturbance pending or, to the best of
Seller's knowledge, threatened against Seller nor is any grievance currently
being asserted, and Seller has not experienced a work stoppage or other labor
difficulty, and is not and has not engaged in any unfair labor practice.
4.15 LIABILITIES. Other than Excluded Liabilities, Seller has no
material Liabilities due or to become due, except (a) Liabilities which are set
forth or reserved for on the Balance Sheet, which have not been paid or
discharged since the Balance Sheet Date, (b) Liabilities arising in the ordinary
course of business under Contracts, Leases, Permits and other business
arrangements described in the Disclosure Schedule (and under those Contracts,
Leases and
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Permits which are not required to be disclosed on the Disclosure Schedule) and
(c) Liabilities incurred since the Balance Sheet Date in the ordinary course of
business and in accordance with this Agreement (none of which relates to any
Default under any Contract or Lease, breach of warranty, tort, infringement or
violation of any Regulation or Court Order or arose out of any Action) and none
of which, individually or in the aggregate, has or would have a material adverse
effect on the Business or the Assets.
4.16 COMPLIANCE WITH LAW. Seller and the conduct of the Business have
not violated and are in compliance with all Regulations and Court Orders
relating to the Assets or the Business or operations of Seller, except where the
violation or failure to comply, individually or in the aggregate, would not have
a material adverse effect on the Assets or the Business.
4.17 NO BROKERS. Except as set forth on Schedule 4.17, neither Parent,
Seller nor any of their respective officers, directors, employees, shareholders
or affiliates has employed or made any agreement with any broker, finder or
similar agent or any person or firm which will result in the obligation of Buyer
or any of its affiliates to pay any finder's fee, brokerage fees or commission
or similar payment in connection with the transactions contemplated hereby.
4.18 NO OTHER AGREEMENTS TO SELL THE ASSETS. Neither Parent nor Seller
nor any of their respective officers, directors, shareholders or affiliates have
any commitment or legal obligation, absolute or contingent, to any other person
or firm other than the Buyer to sell, assign, transfer or effect a sale of any
of the Assets (other than inventory in the ordinary course of business), to sell
or effect a sale of a majority of the capital stock of Seller, to effect any
merger, consolidation, liquidation, dissolution or other reorganization of
Seller, or to enter into any agreement or cause the entering into of an
agreement with respect to any of the foregoing.
4.19 PROPRIETARY RIGHTS.
(a) Schedule 4.19 lists all of Seller's rights in or to federal,
state and foreign registrations of trademarks and of other marks, trade names or
other trade rights, and all pending applications for any such registrations and
all of Seller's copyrights and all pending applications therefor, whether or not
registered, that are used by or on behalf of Seller in connection with its
business (collectively, "Proprietary Rights"). Seller has no patents, or pending
patents.
(b) No person has a right to receive a royalty or similar payment
in respect of any Proprietary Rights whether or not pursuant to any contractual
arrangements entered into by Seller. Neither Parent nor Seller has any licenses
granted, sold or otherwise transferred by or to it nor other agreements to which
it is a party, relating in whole or in part to any of the Proprietary Rights.
(c) Seller owns and has the sole right to use each of the
Proprietary Rights. Except as set forth on Schedule 4.19 and except for
applications pending, all of the trademarks listed on the Disclosure Schedule
have been duly issued and except as set forth on the Disclosure Schedule, all of
the other Proprietary Rights exist, are registered and are subsisting. None of
the Proprietary Rights is involved in any pending or threatened litigation.
Seller has not received any notice of invalidity or infringement of any rights
of others with respect to such Proprietary Rights. Seller has taken all
reasonable and prudent steps to protect the Proprietary Rights from
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infringement by any other firm, corporation, association or person. To the
knowledge of Seller, no other firm, corporation, association or person (i) has
the right to use any such trademarks on the goods on which they are now being
used in Seller's market area either in identical form or in such near
resemblance thereto as to be likely, when applied to the goods of any such firm,
corporation, association or person, to cause confusion with the trademarks or to
cause a mistake or to deceive, (ii) has notified Seller that it is claiming any
ownership of or right to use such Proprietary Rights, or (iii) is infringing
upon any such Proprietary Rights in any way. To the knowledge of Seller,
Seller's use of the Proprietary Rights is not infringing upon or otherwise
violating the rights of any third party in or to such Proprietary Rights, and no
proceedings have been instituted against or notices received by Seller that are
presently outstanding alleging that Seller's use of the Proprietary Rights
infringes upon or otherwise violates any rights of a third party in or to such
Proprietary Rights. All of the Proprietary Rights are valid and enforceable
rights of Seller in Seller's market area and will not cease to be valid and in
full force and effect by reason of the execution, delivery and performance of
this Agreement or the consummation of the transactions contemplated by this
Agreement.
4.20 EMPLOYEE BENEFIT PLANS.
(a) With respect to each employee benefit plan as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), maintained by Parent or Seller (each an "Employee Plan") covering any
employee of Seller, none of such Employee Plans maintained or contributed to by
Seller or any of its subsidiaries is subject to Title I of ERISA.
(b) Except as set forth on Schedule 4.20(c) of the Disclosure
Schedule, with respect to all Employee Plans maintained by Seller or any of its
subsidiaries, individually and in the aggregate, there are no material funded
benefit obligations for which contributions have not been made or properly
accrued and there are no material unfunded obligations which have not been
accounted for by reserves.
(c) Except as set forth on Schedule 4.20(d), Seller is not a party
or has contributed to any Multiemployer Plan as defined in Section 3(37) of
ERISA.
4.21 TAX MATTERS. Seller and Parent have filed all state, local and
federal tax returns in timely manner or extensions for filing have been obtained
and any taxes owing pursuant to such returns have been fully paid. Neither
Seller nor Parent are presently under audit with respect to any such returns.
Seller and Parent are current on all employee withholding tax remittances and
all such remittances owing for the period ending June 30, 2000 shall be paid
prior to or at Closing.
4.22 INSURANCE. All insurance coverage applicable to Seller, the
Business and the Assets is in full force and effect, insures Seller in
reasonably sufficient amounts against all risks usually insured against by
persons operating similar businesses or properties of similar size in the
localities where such businesses or properties are located, provides coverage as
may be required by applicable Regulation and by any and all Contracts to which
Seller is a party and has been issued by insurers of recognized responsibility.
There is no Default under any such coverage nor has there been any failure to
give notice or present any claim under any such coverage in a due
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and timely fashion, which Default or failure to give notice or present any claim
would have a material adverse effect on the Purchased Assets or the Business.
There are no outstanding unpaid premiums except in the ordinary course of
business and no notice of cancellation or nonrenewal of any such coverage has
been received. All products liability, general liability and workers'
compensation insurance policies maintained by Seller have been occurrence
policies and not claims made policies.
4.23 ACCOUNTS RECEIVABLE. The accounts receivable set forth on the
Balance Sheet, and all accounts receivable arising since the Balance Sheet Date,
represent bona fide claims of Seller against debtors for sales, services
performed or other charges arising on or before the date hereof, and all the
goods delivered and services performed which gave rise to said accounts were
delivered or performed in accordance with the applicable orders, Contracts or
customer requirements. Said accounts receivable are subject to no defenses,
counterclaims or rights of setoff and are fully collectible in the ordinary
course of business without cost in collection efforts therefor, except to the
extent of the appropriate reserves for bad debts on accounts receivable as set
forth on the Balance Sheet and, in the case of accounts receivable arising since
the Balance Sheet Date, to the extent of a reasonable reserve rate for bad debts
on accounts receivable which is not greater than the rate reflected by the
reserve for bad debts on the Balance Sheet.
4.24 INVENTORY. The Inventory as set forth on the Balance Sheet or
arising since the Balance Sheet Date was acquired and has been maintained in
accordance with the regular business practices of Seller, consists of new and
unused items of a quality and quantity usable or saleable in the ordinary course
of business within the past six months, and is valued at reasonable amounts
based on the normal valuation policy of Seller at prices equal to the lower of
cost or market value on a first-in-first-out basis. None of such Inventory is
obsolete, unusable, slow moving, damaged or unsalable in the ordinary course of
business, except for such items of Inventory which have been written down to
realizable market value, or for which adequate reserves have been provided, in
the Balance Sheet.
4.25 COMPLIANCE WITH ENVIRONMENTAL LAWS.
(a) As used in this Agreement:
(i) "Cleanup" means all actions required to (A) cleanup,
remove, treat or remediate Hazardous Materials in the indoor or outdoor
environment; (B) prevent the Release of Hazardous Materials so that they do not
migrate, endanger or threaten to endanger public health or welfare of the indoor
or outdoor environment; (C) perform pre-remedial studies and investigations and
post-remedial monitoring and care; or (D) respond to any government requests for
information or documents in any way relating to cleanup, removal, treatment or
remediation or potential cleanup, removal, treatment or remediation of Hazardous
Materials in the indoor or outdoor environment.
(ii) "Environmental Claim" means any claim, action, cause of
action, investigation or notice (written or oral) by any Person alleging
potential liability (including, without limitation, potential liability for
investigatory costs, Cleanup costs, governmental response costs, natural
resources damages, property damages, personal injuries, or penalties) arising
out of, based on or resulting from (A) the presence, or Release into the indoor
or outdoor
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environment, of any Hazardous Materials at any location, whether or not owned or
operated by Seller, or (B) circumstances forming the basis of any violation, or
alleged violation, of any Environmental Law.
(iii) "Environmental Laws" means all federal, state, local and
foreign laws and regulations relating to pollution or protection of human health
or the environment, including without limitation, laws relating to Releases or
threatened Releases of Hazardous Materials into the indoor or outdoor
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata) or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, Release,
disposal, transport or handling of Hazardous Materials and all laws and
regulations with regard to recordkeeping, notification, disclosure and reporting
requirements respecting Hazardous Materials, and all laws relating to endangered
or threatened species of fish, wildlife and plants and the management or use of
natural resources.
(iv) "Hazardous Materials" means all substances defined as
Hazardous Substances, Oils, Pollutants or Contaminants in the National Oil
and Hazardous Substances Pollution Contingency Plan, 40 C.F.R. Section 300.5,
or defined as such by, or regulated as such under, any Environmental Law.
(v) "Release" means any release, spill, emission, discharge,
leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching
or migration into the indoor or outdoor environment (including, without
limitation, ambient air, surface water, groundwater and surface or subsurface
strata) or into or out of any property, including the movement of Hazardous
Materials through or in, the air, soil, surface water, groundwater or property.
(b) Except as set forth on Schedule 4.25, Seller is in
compliance in all material respects with all applicable Environmental Laws
(which compliance includes, but is not limited to, the possession by Seller
of all material Permits and other governmental authorizations required under
applicable Environmental Laws, and compliance with the terms and conditions
thereof). Seller has not received any communication (written or oral),
whether from a governmental authority, citizens group, employee or otherwise,
that alleges that Seller is not in such compliance, and there are no past or
present (or, to the knowledge of Seller, future) actions, activities,
circumstances, conditions, events or incidents that may prevent or interfere
with such compliance in the future. All Permits and other governmental
authorizations currently held by Seller pursuant to applicable Environmental
Laws are identified in Schedule 4.25.
(c) Except as set forth on Schedule 4.25, there is no material
Environmental Claim pending or overtly threatened against Seller or, to the
knowledge of Seller, against any Person whose liability for any Environmental
Claim Seller has or may have retained or assumed either contractually or by
operation of law.
(d) Except as set forth on Schedule 4.25, to the knowledge of
Seller, there are no past or present actions, activities, circumstances,
conditions, events or incidents, including, without limitation, the Release,
emission, discharge, presence or disposal of any Hazardous Material, which are
reasonably likely to form the basis of any material Environmental Claim
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against Seller or against any Person whose liability for any Environmental Claim
Seller has or may have retained or assumed either contractually or by operation
of law.
(e) Except as set forth on Schedule 4.25, to the knowledge of
Seller, Seller has not, and no other Person has, Released, placed, stored,
buried or dumped Hazardous Materials or any other wastes produced by, or
resulting from, any business, commercial or industrial activities, operations or
processes, on, beneath or adjacent to any property currently or formerly owned,
operated or leased by Seller.
(f) Except as set forth on Schedule 4.25, Seller has delivered or
otherwise made available for inspection to Simplot true, complete and correct
copies and results of any reports, studies, analyses, tests or monitoring
possessed or initiated by Seller pertaining to Hazardous Materials in, on,
beneath or adjacent to any property currently or formerly owned, operated or
leased by Seller, or regarding Seller's compliance with applicable Environmental
Laws.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows, which
representations and warranties are, as of the date hereof, and will be, as of
the Closing Date, true and correct, to Parent and Seller as follows:
5.1 ORGANIZATION OF BUYER. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Nevada.
5.2 AUTHORIZATION. Buyer has all requisite corporate power and
authority, and has taken all corporate action necessary, to execute and deliver
this Agreement and the Ancillary Agreements, to consummate the transactions
contemplated hereby and thereby and to perform its obligations hereunder and
thereunder. No other corporate proceedings on the part of Buyer are necessary to
authorize this Agreement and the Ancillary Agreements and the transactions
contemplated hereby and thereby. This Agreement has been duly executed and
delivered by Buyer and is a legal, valid and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms.
5.3 CONSENTS AND APPROVALS. Other than in connection with or in
compliance with the provisions of the HSR Act, no notice to, declaration, filing
or registration with, or authorization, consent or approval of, or permit from,
any domestic or foreign governmental or regulatory body or authority, or any
other person or entity, is required to be made or obtained by Buyer in
connection with the execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby.
5.4 NO BROKERS. Neither Buyer nor any of its officers, directors,
employees, shareholders or affiliates has employed or made any agreement with
any broker, finder or similar agent or any person or firm which will result in
the obligation of Seller or Parent or any of their respective affiliates to pay
any finder's fee, brokerage fees or commission or similar payment in connection
with the transactions contemplated hereby.
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ARTICLE VI.
COVENANTS OF SELLER AND BUYER
Parent, Seller and Buyer each covenant with the other as follows:
6.1 FURTHER ASSURANCES. Upon the terms and subject to the conditions
contained herein, the parties agree, both before and after the Closing, (i) to
use all reasonable efforts to take, or cause to be taken, all actions and to do,
or cause to be done, all things necessary, proper or advisable to consummate and
make effective the transactions contemplated by this Agreement, (ii) to execute
any documents, instruments or conveyances of any kind which may be reasonably
necessary or advisable to carry out any of the transactions contemplated
hereunder, and (iii) to cooperate with each other in connection with the
foregoing. Without limiting the foregoing, the parties agree to use their
respective best efforts (A) to obtain all necessary waivers, consents and
approvals from other parties to the Contracts and Leases to be assumed by Buyer;
PROVIDED, HOWEVER that Buyer shall not be required to make any payments,
commence litigation or agree to modifications of the terms thereof in order to
obtain any such waivers, consents or approvals, (B) to obtain all necessary
Permits as are required to be obtained under any Regulations, (C) to defend all
Actions challenging this Agreement or the consummation of the transactions
contemplated hereby, (D) to lift or rescind any injunction or restraining order
or other Court Order adversely affecting the ability of the parties to
consummate the transactions contemplated hereby, (E) to give all notices to, and
make all registrations and filings with third parties, including without
limitation submissions of information requested by governmental authorities, and
(F) to fulfill all conditions to this Agreement; PROVIDED, HOWEVER, neither
Buyer nor Seller shall be obligated to take or perform any such actions after
August 31, 2000. As soon as practical after the execution and delivery of this
Agreement, but no later than twenty (20) days after such execution and delivery,
Buyer and Seller shall make all filings required under the HSR Act, and Buyer
and Seller will promptly file any supplemental or additional information which
may reasonably be requested in connection therewith pursuant to the HSR Act, and
will comply in all material respects with the requirements of the HSR Act. Each
Party shall use its reasonable efforts to resolve objections, if any, which may
be asserted with respect to the purchase and sale of the Purchased Assets under
the HSR Act, the Sherman Act, as amended, the Clayton Act, as amended, the
Federal Trade Commission Act, as amended, and any other federal, state or
foreign law or, regulation or decree designed to prohibit, restrict or regulate
actions for the purpose or effect of monopolization or restraint of trade
(collectively "Antitrust Laws"). Notwithstanding the foregoing, in no event
shall Buyer or Seller have an obligation to continue to seek to resolve
objections under Antitrust Laws on or after August 31, 2000 if such party wishes
to exercise its rights to terminate this Agreement pursuant to Section
11.1(a)(ii) and such party otherwise has complied in all material respects with
its obligations under this Agreement, including under this Section 6.1. Seller
shall reimburse Buyer for one-half of the filing fee promptly following Buyer's
and Seller's making the filings required under the HSR Act. In addition, Seller
will commence all action required under this Section 6.1 by a date which is
early enough to allow the transactions contemplated hereunder to be consummated
by the Closing Date.
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6.2 NO SOLICITATION.
(a) NO SOLICITATION. From the date hereof through the Closing or
the earlier termination of this Agreement, each of Parent, Seller and their
Representatives shall not, and shall cause each of their respective shareholders
or Representatives (including without limitation investment bankers, attorneys
and accountants), not to, directly or indirectly, enter into, solicit, initiate
or continue any discussions or negotiations with, or encourage or respond to any
inquiries or proposals by, or participate in any negotiations with, or provide
any information to, or otherwise cooperate in any other way with, any
corporation, partnership, person or other entity or group, other than Buyer and
its Representatives, concerning any sale of all or a portion of the Purchased
Assets or the Business, or of any shares of capital stock of Seller, or any
merger, consolidation, liquidation, dissolution or similar transaction involving
Seller unless such proposed transaction relates to an acquisition of Parent as
an entirety, proposed by a third party, and not solicited by Parent or its
Representatives (each such transaction being referred to herein as a "Proposed
Acquisition Transaction"). Seller and its subsidiaries shall not, directly or
indirectly, through any officer, director, employee, representative, agent or
otherwise, solicit, initiate or encourage the submission of any proposal or
offer from any person (including, without limitation, a "person" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) or entity
relating to any Proposed Acquisition Transaction or participate in any
negotiations regarding, or furnish to any other person any information with
respect to Seller or any of its subsidiaries for the purposes of, or otherwise
cooperate in any way with, or assist or participate in, facilitate or encourage,
any effort or attempt by any other person to seek or effect a Proposed
Acquisition Transaction. Seller hereby represents that it is not now engaged in
discussions or negotiations with any party other than Buyer with respect to any
of the foregoing. Seller shall notify Buyer promptly (orally and in writing) if
any such written offer, or any inquiry or contact with any person with respect
thereto, is made and shall provide Buyer with a copy of such offer and shall
keep Buyer informed on the status of any negotiations regarding such offer.
Seller agrees not to release any third party from, or waive any provision of,
any confidentiality or standstill agreement to which Seller is a party.
(b) NOTIFICATION. Seller will immediately notify Buyer if any
discussions or negotiations are sought to be initiated, any inquiry or proposal
is made, or any information is requested with respect to any Proposed
Acquisition Transaction and notify Buyer of the terms of any proposal which it
may receive in respect of any such Proposed Acquisition Transaction, including
without limitation the identity of the prospective purchaser or soliciting
party.
6.3 NOTIFICATION OF CERTAIN MATTERS. From the date hereof through the
Closing, Seller shall give prompt notice to Buyer of (a) the occurrence, or
failure to occur, of any event which occurrence or failure would be likely to
cause any representation or warranty contained in this Agreement or in any
exhibit or schedule hereto to be untrue or inaccurate in any material respect
and (b) any material failure of Parent, Seller, or any of their respective
affiliates, or of any of their respective shareholders or Representatives, to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it under this Agreement or any exhibit or schedule hereto;
PROVIDED, HOWEVER, that such disclosure shall not be deemed to cure any breach
of a representation, warranty, covenant or agreement or to satisfy any
condition. Seller shall promptly notify Buyer of any Default, the threat or
commencement of any Action, or any
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development that occurs before the Closing that could in any way materially
affect Seller, the Assets or the Business.
6.4 INVESTIGATION BY BUYER. Subject to the Confidentiality Agreement,
from the date hereof through the Closing Date:
(a) Seller shall, and shall cause its officers, directors,
employees and agents to, afford the Representatives of Buyer and its affiliates
complete access at all reasonable times to the Assets for the purpose of
inspecting the same, and to the officers, employees, agents, attorneys,
accountants, properties, Books and Records and Contracts of Seller, and shall
furnish Buyer and its Representatives all financial, operating and other data
and information as Buyer or its affiliates, through their respective
Representatives, may reasonably request.
(b) (i) Buyer shall have the right, at its sole cost and expense
to (A) conduct tests of the soil surface or subsurface waters and air quality
at, in, on, beneath or about the Leased Real Property, and such other procedures
as may be recommended by an independent environmental consultant selected by
Buyer (the "Consultant") based on its reasonable professional judgment, in a
manner consistent with good engineering practice, (B) inspect records, reports,
permits, applications, monitoring results, studies, correspondence, data and any
other information or documents relevant to environmental conditions or
environmental noncompliance, and (C) inspect all buildings and equipment at the
Leased Real Property, including without limitation the visual inspection of the
Facilities for asbestos-containing construction materials; PROVIDED, in each
case, such tests and inspections shall be conducted only (1) during regular
business hours; and (2) in a manner which will not unduly interfere with the
operation of the Business and/or the use of, access to or egress from the Leased
Property.
(ii) Buyer's right to conduct tests, inspect records and
other documents, and visually inspect all buildings and equipment at the Leased
Real Property shall also be subject to the following terms and conditions:
(A) All testing performed on Buyer's behalf shall be
conducted by the Consultant;
(B) Seller shall have the right to accompany the
Consultant as it performs testing;
(C) Except as otherwise required by law, any information
concerning the Leased Real Property gathered by Buyer or the Consultant as the
result of, or in connection with, the testing shall be kept confidential in
accordance with subsection (D) below and shall not be revealed to, or discussed
with, anyone other than Representatives of Buyer or Representatives of Seller or
Parent who agree to comply with the provisions of subsection (D) below; and
(D) In the event that any party to this Agreement or any
party set forth in subsection (C) above is requested or required to disclose
information described in subparagraph (b)(i), Buyer shall provide Seller or
Seller shall provide Buyer, as the case may be, with prompt notice of such
request so that Seller or Buyer, as the case may be, may seek an appropriate
protective order or waiver by the other party's compliance with this Agreement.
If,
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in the absence of a protective order or the receipt of a waiver hereunder, such
party is nonetheless, in the opinion of its counsel, compelled to disclose such
information to any tribunal or else stand liable for contempt or suffer other
censure or penalty, such party will furnish only that portion of the information
which is legally required and will exercise its reasonable efforts to obtain
reliable assurance that confidential treatment will be afforded to the disclosed
information. The requirements of this subparagraph shall not apply to
information in the public domain or lawfully acquired on a nonconfidential basis
from others.
6.5 CONDUCT OF BUSINESS. From the date hereof through the Closing,
Seller shall, except as contemplated by this Agreement, or as consented to by
Buyer in writing, operate the Business in the ordinary course of business and
substantially in accordance with past practice and will not take any action
inconsistent with this Agreement or with the consummation of the Closing.
Without limiting the generality of the foregoing, Seller shall not, except as
specifically contemplated by this Agreement or as consented to by Buyer in
writing:
(a) change or amend the Certificate of Incorporation or Bylaws of
Seller;
(b) enter into, extend, materially modify, terminate or renew any
Contract or Lease, except in the ordinary course of business;
(c) sell, assign, transfer, convey, lease, mortgage, pledge or
otherwise dispose of or encumber any of the Assets, or any interests therein,
except in the ordinary course of business and, without limiting the generality
of the foregoing, Seller will produce, maintain and sell inventory consistent
with its past practices;
(d) incur any Liability for long-term interest bearing
indebtedness, guarantee the obligations of others, indemnify others or, except
in the ordinary course of business, incur any other Liability;
(e) (i) take any action with respect to the grant of any bonus,
severance or termination pay (otherwise than pursuant to policies or agreements
of Seller in effect on the date hereof that are described on the Disclosure
Schedule) or with respect to any increase of benefits payable under its
severance or termination pay policies or agreements in effect on the date hereof
or increase in any manner the compensation or fringe benefits of any employee or
pay any benefit not required by any existing Employee Plan or policy;make any
change in the key management structure of Seller, including without limitation
the hiring of additional officers or the termination of existing officers;
(ii) adopt, enter into or amend any Employee Plan, agreement
(including without limitation any collective bargaining or employment
agreement), trust, fund or other arrangement for the benefit or welfare of any
employee, except for any such amendment as may be required to comply with
applicable Regulations or which does not increase in any material respects the
benefits made available to employees under such Employee Plan; or
(iii) fail to maintain all Employee Plans in accordance with
applicable Regulations;
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(f) acquire by merger or consolidation with, or merge or
consolidate with, or purchase substantially all of the assets of, or otherwise
acquire any material assets or business of any corporation, partnership,
association or other business organization or division thereof;
(g) declare, set aside, make or pay any dividend or other
distribution in respect of Seller's capital stock;
(h) enter into, renew, modify or revise any agreement or
transaction with Parent or any of its affiliates other than for the transfer of
cash in accordance with Parent's ordinary course cash management practices;
(i) make any income tax election or settlement or compromise with
tax authorities;
(j) fail to comply in any material respect with all Regulations
applicable to it, the Assets and the Business;
(k) issue, repurchase or redeem or commit to issue, repurchase or
redeem, any shares of Seller's capital stock, any options or other rights to
acquire such stock or any securities convertible into or exchangeable for such
stock;
(l) fail to use its best efforts to (i) retain the Seller's
employees and (ii) maintain the Business so that such employees will remain
available to Seller on and after the Closing Date, (iii) maintain existing
relationships with suppliers, customers and others having business dealings with
Seller and (iv) otherwise to preserve the goodwill of the Business so that such
relationships and goodwill will be preserved on and after the Closing Date;
(m) enter into any agreement, or otherwise become obligated, to do
any action prohibited hereunder; or
(n) transfer any cash or cash equivalents to Parent (whether by
loan, dividend or otherwise) except for remittances of proceeds received from
sales of proprietary products.
6.6 EMPLOYEE MATTERS.
(a) Buyer shall extend offers of employment to all of the employees
of Seller effective as of the Closing Date, which offers shall be on terms and
conditions substantially similar to the current terms and conditions of
employment by Seller. Seller shall cooperate with and use its commercially
reasonably efforts to assist Buyer in its efforts to secure satisfactory
employment arrangements with the employees of Seller. Employees of Seller who
become employees of Buyer as of the Closing Date are referred to herein as
"Rehired Employees."
(b) Buyer agrees that, with respect to all of its employee benefit
programs and arrangements covering or otherwise benefiting any of the Rehired
Employees on or after the Closing Date, service with Seller and its affiliates
shall be counted for purposes of determining any period of eligibility to
participate or to vest in benefits to the same extent such service was counted
under Seller's employee programs, except that service with Seller shall not be
taken into account with respect to calculation of pension payments under Buyer's
pension plan.
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(c) Except to the extent required by law, Seller shall not pay
Rehired Employees their accrued and unused vacation, and Buyer shall provide,
without duplication of benefits, all Rehired Employees with vacation time rather
than cash in lieu of vacation time for all vacation earned and unpaid through
the Closing Date.
(d) Buyer shall provide a medical plan as of the Closing Date so as
to ensure uninterrupted coverage of all Rehired Employees. Such medical plan
shall grant credit for amounts paid by employees during the applicable plan year
beginning prior to the Closing Date, shall not exclude pre-existing conditions
and shall provide for medical benefits substantially consistent with the
Seller's medical plan in effect prior to the Closing Date.
(e) From and after the Closing Date until December 31, 2000, Buyer
shall provide employee benefits and compensation to the Rehired Employees which
are substantially similar to those provided by Seller immediately prior to the
Closing Date. Without limiting the foregoing, Buyer shall continue in effect the
2000 compensation plan for Seller's salesmen, which was announced in January
2000.
(f) Nothing contained in this Agreement shall confer upon any
Rehired Employee any right with respect to continuance of employment by Buyer,
nor shall anything herein interfere with (i) the right of Buyer to terminate the
employment of any of the Rehired Employees at any time, with or without cause,
or (ii) restrict Buyer in the exercise of its independent business judgment in
modifying any of the terms and conditions of the employment of the Rehired
Employees provided that Buyer continues to provide employee benefits and
compensation to the Rehired Employees which are substantially similar to those
provided by Seller through December 31, 2000.
(g) Seller shall not, directly or indirectly, hire or offer
employment to or seek to hire or offer employment to any Rehired Employee after
the Closing Date or any employee of Buyer or any successor or affiliate of Buyer
which is engaged in the Business, unless Buyer first terminates the employment
of such employee or gives its written consent to such employment or offer of
employment.
6.7 SHAREHOLDER APPROVAL.
(a) As soon as reasonably practicable after execution of this
Agreement, Parent shall prepare and file with the Securities and Exchange
Commission (the "SEC") a proxy statement seeking Parent's shareholders' approval
of, among other things, the sale of the Purchased Assets to Buyer (the "Proxy
Statement"), and shall use its reasonable efforts to cause SEC review of the
Proxy Statement to be completed as promptly as practicable. Buyer shall
cooperate in the preparation and filing of the Proxy Statement and shall furnish
all information concerning Buyer as Parent may reasonably request in connection
with such action. Parent shall call an annual or special meeting of its
shareholders (the "Shareholders' Meeting"), to be held as soon as reasonably
practicable after the SEC indicates that it has no further comments on the Proxy
Statement, for the purpose of Parent's shareholders voting upon the approval of
the sale of the Purchased Assets to Buyer.
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(b) In connection with the Shareholders' Meeting, the Board of
Directors of Parent shall recommend to its stockholders the approval of the
matters submitted for approval unless withdrawal of such recommendation is
required in order for the Board of Directors of Parent to comply with its
obligations to Parent shareholders under applicable law. If Parent or its
Representatives provides information to or negotiates with a third party that
makes an unsolicited bid to acquire Parent in its entirety in accordance with
Section 6.2(a) hereof and the Board of Directors subsequently withdraws its
recommendation of the transactions contemplated hereby on the basis that it
cannot, in a manner consistent with its duties to shareholders under applicable
law, continue to recommend the transactions contemplated hereby in light of the
existence of such other transaction, Parent shall pay to Buyer upon the earlier
of (i) Buyer's, Seller's and Parent's mutually agreeing to terminate this
Agreement in light of such other transaction; (ii) termination of this Agreement
by Buyer pursuant to clause (ii) or (iii) of Section 11.1(a) hereof or (iii)
Parent's shareholders failing to approve the transactions contemplated hereby at
the Shareholders' meeting: (1) a break-up fee in the amount of $250,000 plus
Buyer's actual expenses incurred with respect to its environmental due
diligence, and (2) a topping fee equal to five percent (5%) of the acquisition
price offered by such third party attributable to the assets of Seller.
Additionally, any interim financing provided by Buyer to Seller or Parent, if
any, shall be repaid immediately upon termination of this Agreement.
(c) Subject to the provisions of this Section 6.7, the Board of
Directors and officers of Parent shall use their reasonable efforts to obtain
such shareholders' approval.
6.8 ASSUMPTION OF LEASES. Buyer shall be obligated to assume all Leases
to the extent transferable other than those that relate to Facilities where
Buyer has identified material environmental contingencies. At least five (5)
business days prior to the Closing Date, Buyer shall deliver to Seller a list of
the Leases, if any, which Buyer will not assume in connection with the purchase
and sale of the Purchased Assets. The Leases so designated by Buyer will be
deemed Excluded Assets and the Liabilities of Seller thereunder will be deemed
Excluded Liabilities for purposes of this Agreement. Buyer shall remove the
Purchased Assets located at the Facilities covered by the Leases not assumed by
Buyer within 30 days after the Closing Date. Buyer shall reimburse Seller for
its costs under the Leases not assumed by Buyer from the Closing Date until the
Purchased Assets are removed from such Facilities. To the extent that Buyer
reasonably determines not to assume the Leases for certain Facilities pursuant
to this Section 6.8 and the elimination of such Facilities materially adversely
affects the value of the Purchased Assets taken as a whole, Seller and Buyer
shall negotiate in good faith an appropriate adjustment to the Purchase Price.
6.9 MONTHLY FINANCIAL STATEMENTS. Seller shall prepare and deliver to
Buyer as promptly as practicable following the end of each month (beginning with
March 2000 and ending with the last full month prior to the Closing Date)
unaudited monthly balance sheets as of the end of each such month and statements
of operations for such month and for the period from January 1, 2000 through the
end of such month.
6.10 BOARD APPROVAL. This Agreement is subject to the approval of the
boards of directors of Seller and Parent. Each of Seller and Parent will hold a
meeting of its board or will take action by written consent of its board on or
prior to March 28, 2000. Seller and Parent will deliver certified copies of
their board resolutions to Buyer on or prior to March 30, 2000.
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6.11 WORKING CAPITAL. This Agreement is subject to Parent and/or Seller
obtaining sufficient additional commitments for loans or other sources of cash
to satisfy Parent's and Seller's working capital needs through the Closing Date.
ARTICLE VII.
CONDITIONS TO SELLER'S OBLIGATIONS
The obligations of Seller to consummate the transactions
provided for hereby are subject, in the reasonable discretion of Seller, to the
satisfaction, on or prior to the Closing Date, of each of the following
conditions, any of which may be waived by Seller:
7.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations and
warranties of Buyer contained in this Agreement shall be true and correct in all
material respects at and as of the date of this Agreement and at and as of the
Closing Date, except as and to the extent that the facts and conditions upon
which such representations and warranties are based are expressly required or
permitted to be changed by the terms hereof, and Buyer shall have performed and
satisfied in all material respects all agreements and covenants required hereby
to be performed by it prior to or on the Closing Date.
7.2 CONSENTS; REGULATORY COMPLIANCE AND APPROVAL. All consents,
approvals and waivers from governmental authorities and other parties necessary
to permit Seller to transfer the Assets to Buyer as contemplated hereby shall
have been obtained, unless the failure to obtain any such consent, approval or
waiver would not have a material adverse effect upon the Purchased Assets or
Seller. Seller shall be satisfied that all approvals required under any
Regulations to carry out the transactions contemplated by this Agreement shall
have been obtained and that the parties shall have complied with all Regulations
applicable to the purchase and sale of the Purchased Assets and Buyer's
assumption of the Assumed Liabilities. The applicable waiting period, including
any extension thereof, under the HSR Act shall have expired.
7.3 NO ACTIONS OR COURT ORDERS. No Action by any governmental authority
or other person shall have been instituted or threatened which questions the
validity or legality of the transactions contemplated hereby and which could
reasonably be expected to damage Buyer, the Assets or the Business materially if
the transactions contemplated hereby are consummated, including without
limitation any material adverse effect on the right or ability of Buyer to own,
operate, possess or transfer the Purchased Assets after the Closing. There shall
not be any Regulation or Court Order that makes the purchase and sale of the
Business or the Assets contemplated hereby illegal or otherwise prohibited.
7.4 CERTIFICATES. Buyer shall furnish Seller with such certificates of
its officers and others to evidence compliance with the conditions set forth in
this Article VII as may be reasonably requested by Seller.
7.5 CORPORATE DOCUMENTS. Seller shall have received from Buyer
resolutions adopted by the board of directors of Buyer approving this Agreement,
the Ancillary Agreements and the transactions contemplated hereby or thereby,
certified by Buyer's corporate secretary.
7.6 ASSUMPTION DOCUMENT. Buyer shall have executed the Assumption
Document.
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7.7 ANCILLARY AGREEMENTS. Buyer shall have executed and delivered the
Ancillary Agreements to which Buyer is a party.
7.8 SHAREHOLDER APPROVAL. The shareholders of Parent shall have
approved this Agreement and the sale of the Purchased Assets, as and to the
extent required by Nebraska law, by the provisions of Parent's certificate of
incorporation or by the rules of the Nasdaq National Market.
7.9 OPINION OF COUNSEL. Seller shall have received the opinion of
counsel to Buyer covering the matters set forth on Exhibit H hereto.
ARTICLE VIII.
CONDITIONS TO BUYER'S OBLIGATIONS
The obligations of Buyer to consummate the transactions provided
for hereby are subject, in the reasonable discretion of Buyer, to the
satisfaction, on or prior to the Closing Date, of each of the following
conditions, any of which may be waived by Buyer:
8.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations and
warranties of Seller contained in this Agreement shall be true and correct in
all material respects at and as of the date of this Agreement and at and as of
the Closing Date, except as and to the extent that the facts and conditions upon
which such representations and warranties are based are expressly required or
permitted to be changed by the terms hereof, and Seller shall have performed and
satisfied in all material respects all agreements and covenants required hereby
to be performed by it prior to or on the Closing Date.
8.2 CONSENTS; REGULATORY COMPLIANCE AND APPROVAL. All Permits,
consents, approvals and waivers from governmental authorities and other parties
necessary to the consummation of the transactions contemplated hereby and for
the operation of the Business by Buyer (including, without limitation, all
required third party consents to the assignment of the Leases and Contracts to
be assumed by Buyer) shall have been obtained. Buyer shall be reasonably
satisfied that all approvals required under any Regulations to carry out the
transactions contemplated by this Agreement shall have been obtained and that
the parties shall have complied with all Regulations applicable to the purchase
and sale of the Purchased Assets and Buyer's assumption of the Assumed
Liabilities. The applicable waiting period, including any extension thereof,
under the HSR Act shall have expired.
8.3 RELEASES OF LIENS. Without limiting the condition set forth in
Section 8.2, any liens on the Purchased Assets arising under or by virtue of
Parent's Senior Subordinated Notes due 2000 and the Note and Warrant Purchase
Agreement related thereto (the "Note Purchase Agreement"), Parent's 7% Senior
Secured Convertible Debentures due January 24, 2001 and the Convertible
Debentures and Warrants Purchase Agreement (the "Debenture Purchase Agreement")
and the Security Agreement related thereto, and the Term Loan and Security
Agreement, dated as of July 30, 1999 between Parent and Coast Business Credit
(the "Parent Coast Loan") shall have been released. In addition, the holders of
the Senior Subordinated Notes shall have waived compliance with all covenants
that would limit or prohibit the transactions
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contemplated hereby and, through the Closing Date, all financial covenants
contained in the Note Purchase Agreement, the holders of the Convertible
Debentures shall have waived compliance with all covenants that would limit
or prohibit the transactions contemplated hereby and, through the Closing
Date, all financial covenants under the Debenture Purchase Agreement and
related agreements (other than covenants with respect to registration rights)
and Coast shall have waived compliance with all covenants that would limit or
prohibit the transactions contemplated hereby and, through the Closing Date,
all financial covenants under the Parent Coast Loan. The holders of the
Senior Subordinated Notes and the holders of the Convertible Debentures also
shall have amended their agreements with Parent so that Parent's obligations
to issue shares of its common stock or warrants to them will arise only if
the Senior Subordinated Notes have not been repaid in full on or before July
31, 2000.
8.4 NO ACTIONS OR COURT ORDERS. No Action by any governmental authority
or other person shall have been instituted or threatened which questions the
validity or legality of the transactions contemplated hereby and which could
reasonably be expected to damage Buyer, the Assets or the Business materially if
the transactions contemplated hereby are consummated, including without
limitation any material adverse effect on the right or ability of Buyer to own,
operate, possess or transfer the Purchased Assets after the Closing. There shall
not be any Regulation or Court Order that makes the purchase and sale of the
Business or the Assets contemplated hereby illegal or otherwise prohibited.
8.5 CERTIFICATES. Parent and Seller shall furnish Buyer with such
certificates of its officers and others to evidence compliance with the
conditions set forth in this Article VIII as may be reasonably requested by
Buyer.
8.6 MATERIAL CHANGES. Since the Balance Sheet Date, there shall not
have been any material adverse change with respect to the Business or the
Assets.
8.7 CORPORATE DOCUMENTS. Buyer shall have received from Seller
resolutions adopted by the boards of directors of Parent and Seller and
resolutions of Parent, for itself and as the shareholder of Seller, approving
this Agreement and the Ancillary Agreements and the transactions contemplated
hereby and thereby, certified by Parent's and Seller's corporate secretary, as
applicable.
8.8 DUE DILIGENCE REVIEW. Buyer and its Representatives shall have
conducted a due diligence review of Seller's Books and Records, Financial
Statements, and other records and accounts of the Business, and in the
reasonable discretion of Buyer, Buyer shall be satisfied on the basis of such
review that there has been no material breach of the representations and
warranties or the pre-closing covenants of Parent or Seller made pursuant to
this Agreement.
8.9 CONVEYANCING DOCUMENTS; RELEASE OF ENCUMBRANCES. Seller shall have
executed and delivered each of documents described in Section 3.2 hereof so as
to effect the transfer and assignment to Buyer of all right, title and interest
in and to the Purchased Assets and Seller shall have filed (where necessary) and
delivered to Buyer all documents necessary to release the Assets from all
Encumbrances, which documents shall be in a form reasonably satisfactory to
Buyer's counsel.
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8.10 NAME CHANGE. Seller shall have filed an amendment to its
Certificate of Incorporation to change its corporate name so as not to include
the words "Turf Partners" or any other name or mark that has such a near
resemblance thereto as may be likely to cause confusion or mistake to the
public, or to otherwise deceive the public. Such amendment shall be in a form
acceptable for filing with the Secretary of State of the State of Delaware.
8.11 OTHER AGREEMENTS. Parent and Seller shall have executed and
delivered the Ancillary Agreements
8.12 SHAREHOLDER APPROVAL. The shareholders of Parent shall have
approved this Agreement and the sale of the Purchased Assets, as and to the
extent required by Nebraska law, by the provisions of Parent's certificate of
incorporation or by the rules of the Nasdaq National Market.
8.13 OPINION OF COUNSEL. Buyer shall have received the opinion of
counsel to Seller covering the matters set forth on Exhibit I hereto.
8.14 EMPLOYMENT OF REHIRED EMPLOYEES. Buyer shall have received
acceptances of employment from Rehired Employees sufficient in Buyer's
reasonable discretion to operate the Business after Closing in the same manner
as run by Seller prior to Closing.
ARTICLE IX.
RISK OF LOSS; CONSENTS TO ASSIGNMENT
9.1 RISK OF LOSS. From the date hereof through the Closing Date, all
risk of loss or damage to the property included in the Assets shall be borne by
Seller, and thereafter shall be borne by Buyer. If any portion of the Assets is
destroyed or damaged by fire or any other cause on or prior to the Closing Date,
other than use, wear or loss in the ordinary course of business, Seller shall
give written notice to Buyer as soon as practicable after, but in any event
within five (5) calendar days of, discovery of such damage or destruction, the
amount of insurance, if any, covering such Assets and the amount, if any, which
Seller is otherwise entitled to receive as a consequence. Prior to the Closing,
Buyer shall have the option, which shall be exercised by written notice to
Seller within ten (10) calendar days after receipt of Seller's notice or if
there is not ten (10) calendar days prior to the Closing Date, as soon as
practicable prior to the Closing Date, of (a) accepting such Assets in their
destroyed or damaged condition in which event Buyer shall be entitled to the
proceeds of any insurance or other proceeds payable with respect to such loss
and subject to Section 10.4(f), to such indemnification for any uninsured
portion of such loss pursuant to Section 10.4, and the full Purchase Price shall
be paid for such Assets, (b) excluding such Assets from this Agreement, in which
event the Purchase Price shall be reduced by the amount allocated to such
Assets, as mutually agreed between the parties or (c) if the destruction or
damage of a portion of the Assets has a material adverse effect on the Business
or the Purchased Assets taken as a whole, terminating this Agreement in
accordance with Section 11.1. If Buyer accepts such Assets, then after the
Closing, any insurance or other proceeds shall belong, and shall be assigned to,
Buyer without any reduction in the Purchase Price; otherwise, such insurance
proceeds shall belong to Seller.
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9.2 CONSENTS TO ASSIGNMENT. Anything in this Agreement to the contrary
notwithstanding, this Agreement shall not constitute an agreement to assign any
Contract, Lease, Permit or any claim or right or any benefit arising thereunder
or resulting therefrom if an attempted assignment thereof, without the consent
of a third party thereto, would constitute a Default thereof or in any way
adversely affect the rights of Buyer thereunder. If such consent is not
obtained, or if an attempted assignment thereof would be ineffective or would
affect the rights thereunder so that Buyer would not receive all such rights,
Seller will cooperate with Buyer, in all reasonable respects, to provide to
Buyer the benefits under any such Contract, Lease, Permit or any claim or right,
including without limitation enforcement for the benefit of Buyer of any and all
rights of Seller against a third party thereto arising out of the Default or
cancellation by such third party or otherwise.
ARTICLE X.
ACTIONS BY SELLER AND BUYER
AFTER THE CLOSING
10.1 COLLECTION OF ACCOUNTS RECEIVABLE AND LETTERS OF CREDIT. At the
Closing, Buyer will acquire hereunder, and thereafter Buyer or its designee
shall have the right and authority to collect for Buyer's or its designee's
account, all receivables, letters of credit and other items which constitute a
part of the Assets, and Seller shall within forty-eight (48) hours after receipt
of any payment in respect of any of the foregoing, properly endorse and deliver
to Buyer any letters of credit, documents, cash or checks received on account of
or otherwise relating to any such receivables, letters of credit or other items.
Seller shall promptly transfer or deliver to Buyer or its designee any cash or
other property that Seller may receive in respect of any deposit, prepaid
expense, claim, contract, license, lease, commitment, sales order, purchase
order, letter of credit or receivable of any character, or any other item,
constituting a part of the Assets.
10.2 BOOKS AND RECORDS; TAX MATTERS.
(a) BOOKS AND RECORDS. Each party agrees that it will cooperate
with and make available to the other party, during normal business hours, all
Books and Records, information and employees (without substantial disruption of
employment) retained and remaining in existence after the Closing which are
necessary or useful in connection with any tax inquiry, audit, investigation or
dispute, any litigation or investigation or any other matter requiring any such
Books and Records, information or employees for any reasonable business purpose.
The party requesting any such Books and Records, information or employees shall
bear all of the out of pocket costs and expenses (including without limitation
attorneys' fees, but excluding reimbursement for salaries and employee benefits)
reasonably incurred in connection with providing such Books and Records,
information or employees. All information received pursuant to this Section
10.2(a) shall be subject to the terms of the Confidentiality Agreement.
(b) COOPERATION AND RECORDS RETENTION. Seller and Buyer shall (i)
each provide the other with such assistance as may reasonably be requested by
any of them in connection with the preparation of any return, audit, or other
examination by any taxing authority or judicial or administrative proceedings
relating to Liability for Taxes, (ii) each retain and provide the other with any
records or other information that may be relevant to such return, audit
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or examination, proceeding or determination, and (iii) each provide the other
with any final determination of any such audit or examination, proceeding, or
determination that affects any amount required to be shown on any tax return of
the other for any period. Without limiting the generality of the foregoing,
Buyer and Seller shall each retain, until the applicable statutes of limitations
(including any extensions) have expired, copies of all tax returns, supporting
work schedules, and other records or information that may be relevant to such
returns for all tax periods or portions thereof ending on or before the Closing
Date and shall not destroy or otherwise dispose of any such records without
first providing the other party with a reasonable opportunity to review and copy
the same.
(c) PAYMENT OF LIABILITIES. Following the Closing Date, Seller
shall pay promptly when due all of the debts and Liabilities of Seller,
including any Liability for Taxes, other than Assumed Liabilities; PROVIDED,
HOWEVER, this covenant shall not apply to that portion (or all) of any debt that
Seller is contesting in good faith.
10.3 SURVIVAL OF REPRESENTATIONS, ETC. All of the representations,
warranties, covenants and agreements made by each party in this Agreement or in
any attachment, exhibit, the Disclosure Schedule, certificate, document or list
delivered by any such party pursuant hereto shall survive the Closing for a
period of (and claims based upon or arising out of such representations,
warranties, covenants and agreements may be asserted at any time before the date
which shall be) one year following the Closing (except with respect to the
representations and warranties set forth Sections 4.20, 4.21 and 4.25 which
shall survive until the expiration of the applicable statute of limitations
(with extensions) with respect to the matters addressed in such sections. Each
party hereto shall be entitled to rely upon the representations and warranties
of the other party set forth in this Agreement. The termination of the
representations and warranties provided herein shall not affect the rights of a
party in respect of any Claim made by such party in a writing received by the
other party prior to the expiration of the applicable survival period provided
herein.
10.4 INDEMNIFICATIONS.
(a) BY PARENT AND SELLER. Parent and Seller, jointly and severally,
shall indemnify, save and hold harmless Buyer, its affiliates and subsidiaries,
from and against any and all costs, losses (including without limitation
diminution in value), Taxes (other than Taxes which Buyer has agreed to pay
pursuant to Sections 2.2(e) and 2.7), Liabilities, obligations, damages,
lawsuits, deficiencies, claims, demands, and expenses (whether or not arising
out of third party claims), including without limitation interest, penalties,
costs of mitigation, losses in connection with any Environmental Law (including
without limitation any clean-up or remedial action), lost profits and other
losses resulting from any shutdown or curtailment of operations, damages to the
environment, attorneys' fees and all amounts paid in investigation, defense or
settlement of any of the foregoing (herein, "Damages"), incurred in connection
with, arising out of, resulting from or incident to (i) any breach of any
representation or warranty or the inaccuracy of any representation, made by
Parent or Seller in or pursuant to this Agreement; (ii) any breach of any
covenant or agreement made by Seller in or pursuant to this Agreement; (iii) any
Excluded Liability or (iv) any Liability imposed upon Buyer by reason of Buyer's
status as transferee of the Business or the Purchased Assets.
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The term "Damages" as used in this Section 10.4 is not limited to
matters asserted by third parties against Seller or Buyer, but includes Damages
incurred or sustained by Seller or Buyer in the absence of third party claims.
Payments by Buyer of amounts for which Buyer is indemnified hereunder, and
payments by Seller of amounts for which Seller is indemnified, shall not be a
condition precedent to recovery. Seller's obligation to indemnify Buyer, and
Buyer's obligation to indemnify Seller, shall not limit any other rights,
including without limitation rights of contribution which either party may have
under statute or common law.
(b) BY BUYER. Buyer shall indemnify and save and hold harmless
Parent, Seller, and their respective affiliates and subsidiaries from and
against any and all Damages incurred in connection with, arising out of,
resulting from or incident to (i) any breach of any representation or warranty
or the inaccuracy of any representation, made by Buyer in or pursuant to this
Agreement; (ii) any breach of any covenant or agreement made by Buyer in or
pursuant to this Agreement; or (iii) from and after the Closing, any Assumed
Liability.
(c) COOPERATION. The indemnified party shall cooperate in all
reasonable respects with the indemnifying party and such attorneys in the
investigation, trial and defense of such lawsuit or action and any appeal
arising therefrom; PROVIDED, HOWEVER, that the indemnified party may, at its own
cost, participate in the investigation, trial and defense of such lawsuit or
action and any appeal arising therefrom. The parties shall cooperate with each
other in any notifications to insurers.
(d) DEFENSE OF CLAIMS. If a claim for Damages (a "Claim") is to be
made by a party entitled to indemnification hereunder against the indemnifying
party, the party claiming such indemnification shall, subject to Section 10.3,
give written notice (a "Claim Notice") to the indemnifying party as soon as
practicable after the party entitled to indemnification becomes aware of any
fact, condition or event which may give rise to Damages for which
indemnification may be sought under this Section 10.4. If any lawsuit or
enforcement action is filed against any party entitled to the benefit of
indemnity hereunder, written notice thereof shall be given to the indemnifying
party as promptly as practicable (and in any event within fifteen (15) calendar
days after the service of the citation or summons). The failure of any
indemnified party to give timely notice hereunder shall not affect rights to
indemnification hereunder, except to the extent that the indemnifying party
demonstrates actual damage caused by such failure. After such notice, if the
indemnifying party shall acknowledge in writing to the indemnified party that
the indemnifying party shall be obligated under the terms of its indemnity
hereunder in connection with such lawsuit or action, then the indemnifying party
shall be entitled, if it so elects at its own cost, risk and expense, (i) to
take control of the defense and investigation of such lawsuit or action, (ii) to
employ and engage attorneys of its own choice to handle and defend the same
unless the named parties to such action or proceeding include both the
indemnifying party and the indemnified party and the indemnified party has been
advised in writing by counsel that there may be one or more legal defenses
available to such indemnified party that are different from or additional to
those available to the indemnifying party, in which event the indemnified party
shall be entitled, at the indemnifying party's cost, risk and expense, to
separate counsel of its own choosing, and (iii) to compromise or settle such
claim, which compromise or settlement shall be made only with the written
consent of the indemnified party, such consent not to be unreasonably withheld.
If the indemnifying party fails to assume the defense of such claim within
fifteen (15) calendar days after receipt of the Claim Notice, the indemnified
party against which such claim has been
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asserted will (upon delivering notice to such effect to the indemnifying party)
have the right to undertake, at the indemnifying party's cost and expense, the
defense, compromise or settlement of such claim on behalf of and for the account
and risk of the indemnifying party; PROVIDED, HOWEVER, that such Claim shall not
be compromised or settled without the written consent of the indemnifying party,
which consent shall not be unreasonably withheld. In the event the indemnified
party assumes the defense of the claim, the indemnified party will keep the
indemnifying party reasonably informed of the progress of any such defense,
compromise or settlement. The indemnifying party shall be liable for any
settlement of any action effected pursuant to and in accordance with this
Section 10.4 and for any final judgment (subject to any right of appeal), and
the indemnifying party agrees to indemnify and hold harmless an indemnified
party from and against any Damages by reason of such settlement or judgment.
(e) BUYER'S RIGHT OF OFFSET. Anything in this Agreement to the
contrary notwithstanding, Buyer may withhold and set off against any amounts
otherwise due Seller any amount as to which Seller is obligated to indemnify
Buyer pursuant to any provision of this Section 10.4.
(f) BROKERS AND FINDERS. Pursuant to the provisions of this Section
10.4, each of Buyer and Seller shall indemnify, hold harmless and defend the
other party from the payment of any and all broker's and finder's expenses,
commissions, fees or other forms of compensation which may be due or payable
from or by the indemnifying party, or may have been earned by any third party
acting on behalf of the indemnifying party in connection with the negotiation
and execution hereof and the consummation of the transactions contemplated
hereby.
(g) LIMITATIONS. Neither Buyer nor Seller shall be liable to the
other under this Section 10.4 for any Damages until either any individual amount
otherwise due the party being indemnified exceeds One Hundred Thousand Dollars
($100,000) or the aggregate amount otherwise due the party being indemnified
exceeds an accumulated total of Two Hundred Thousand Dollars ($200,000). Claims
for indemnification with respect to fraud, intentional misrepresentation or the
cause or knowledge of a deliberate or willful breach of any representations,
warranties or covenants under this Agreement or in any certificate, schedule or
exhibit delivered pursuant hereto shall not be subject to any of the limitations
set forth in this Article X.
10.5 BULK SALES. It may not be practicable to comply or attempt to
comply with the procedures of the "Bulk Sales Act" or similar law of any or all
of the states in which the Assets are situated or of any other state which may
be asserted to be applicable to the transactions contemplated hereby.
Accordingly, to induce Buyer to waive any requirements for compliance with any
or all of such laws, Seller hereby agrees that the indemnity provisions of
Section 10.4 hereof shall apply to any Damages of Buyer arising out of or
resulting from the failure of Seller or Buyer to comply with any such laws.
10.6 TAXES. Subject to Section 2.7, Parent and Seller shall pay, or
cause to be paid, when due all Taxes for which Seller is or may be liable or
that are or may become payable with respect to all taxable periods ending on or
prior to the Closing Date.
37
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10.7 OPERATION OF BUSINESS. From the Closing Date through December 31,
2000, Buyer shall operate the Business using the Purchased Assets as a separate
business unit in accordance with the budget and forecast for the Business
attached hereto as Exhibit J. Buyer also shall maintain separate, auditable
financial statements for the Business following the Closing Date.
ARTICLE XI.
MISCELLANEOUS
11.1 TERMINATION.
(a) TERMINATION. This Agreement may be terminated at any time prior
to Closing:
(i) By mutual written consent of Buyer and Seller;
(ii) By Buyer or Seller if the Closing shall not have occurred
on or before August 31, 2000; PROVIDED HOWEVER, that this provision shall not be
available to Buyer if Seller has the right to terminate this Agreement under
clause (iv) of this Section 11.1, and this provision shall not be available to
Seller if Buyer has the right to terminate this Agreement under clause (iii) of
this Section 11.1;
(iii) By Buyer if there is a material breach of any
representation or warranty set forth in Article IV hereof or any covenant or
agreement to be complied with or performed by Parent or Seller pursuant to the
terms of this Agreement or the failure of a condition set forth in Article VIII
to be satisfied (and such condition is not waived in writing by Buyer) on or
prior to the Closing Date, or the occurrence of any event which results or would
result in the failure of a condition set forth in Article VIII to be satisfied
on or prior to the Closing Date, provided that Buyer may not terminate this
Agreement prior to the Closing if Seller has not had an adequate opportunity to
cure such failure;
(iv) By Seller if there is a material breach of any
representation or warranty set forth in Article V hereof or of any covenant or
agreement to be complied with or performed by Buyer pursuant to the terms of
this Agreement or the failure of a condition set forth in Article VII to be
satisfied (and such condition is not waived in writing by Seller) on or prior to
the Closing Date, or the occurrence of any event which results or would result
in the failure of a condition set forth in Article VII to be satisfied on or
prior to the Closing Date; PROVIDED that, Seller may not terminate this
Agreement prior to the Closing Date if Buyer has not had an adequate opportunity
to cure such failure;
(v) By Buyer if Seller and Parent have not obtained the board
approvals contemplated by Section 6.10 hereof; or
(vi) By Seller if it has not obtained commitments for
additional working capital, as contemplated by Section 6.11, on or before March
28, 2000.
(b) IN THE EVENT OF TERMINATION. In the event of termination of
this Agreement:
38
<PAGE>
(i) Each party will redeliver all documents, work papers and
other material of any other party relating to the transactions contemplated
hereby, whether so obtained before or after the execution hereof, to the party
furnishing the same;
(ii) The provisions of the Confidentiality Agreement shall
continue in full force and effect; and
(iii) No party hereto shall have any Liability to any other
party to this Agreement, except as stated in subsections (i), (ii) and (iii) of
this Section 11.1(b), except for any willful breach of this Agreement occurring
prior to the proper termination of this Agreement. The foregoing provisions
shall not limit or restrict the availability of specific performance or other
injunctive relief to the extent that specific performance or such other relief
would otherwise be available to a party hereunder.
11.2 ASSIGNMENT. Neither this Agreement nor any of the rights or
obligations hereunder may be assigned by any party without the prior written
consent of the other parties; except that Buyer may, without such consent,
assign all such rights to any lender as collateral security and assign all such
rights and obligations to a wholly-owned subsidiary (or a partnership controlled
by Buyer) or subsidiaries of Buyer or to a successor in interest to Buyer which
shall assume all obligations and Liabilities of Buyer under this Agreement.
Subject to the foregoing, this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns, and no other person shall have any right, benefit or obligation under
this Agreement as a third party beneficiary or otherwise.
11.3 NOTICES. All notices, requests, demands and other communications
which are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally delivered;
when transmitted if transmitted by telecopy, electronic or digital transmission
method; the day after it is sent, if sent for next day delivery to a domestic
address by recognized overnight delivery service (E.G., Federal Express); and
upon receipt, if sent by certified or registered mail, return receipt requested.
In each case notice shall be sent to:
If to Parent or Seller, addressed to:
Eco Soil Systems, Inc.
10740 Thornmint Road
San Diego, CA 92177
Attention: William B. Adams
With a copy to:
Latham & Watkins
701 "B" Street
Suite 2100
San Diego, California 92101
Attention: Robert E. Burwell
39
<PAGE>
If to Buyer, addressed to:
J. R. Simplot Company
999 Main Street, Suite 1300
Boise, Idaho 83702
Attention: Ray Sasso
With a copy to:
J.R. Simplot Company
999 Main Street, Suite 1300
Boise, Idaho 83702
Attention: General Counsel
or to such other place and with such other copies as either party may designate
as to itself by written notice to the others.
11.4 CHOICE OF LAW. This Agreement shall be construed, interpreted and
the rights of the parties determined in accordance with the laws of the State of
California (without reference to the choice of law provisions of California
law).
11.5 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement, the
Ancillary Agreements, together with all exhibits and schedules hereto and
thereto (including the Disclosure Schedule), and the Confidentiality Agreement
constitute the entire agreement among the parties pertaining to the subject
matter hereof and supersedes all prior agreements, understandings, negotiations
and discussions, whether oral or written, of the parties. This Agreement may not
be amended except by an instrument in writing signed on behalf of each of the
parties hereto. No amendment, supplement, modification or waiver of this
Agreement shall be binding unless executed in writing by the party to be bound
thereby. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provision hereof (whether or not
similar), nor shall such waiver constitute a continuing waiver unless otherwise
expressly provided.
11.6 MULTIPLE 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.
11.7 EXPENSES. Except as otherwise specified in this Agreement, each
party hereto shall pay its own legal, accounting, out-of-pocket and other
expenses incident to this Agreement and to any action taken by such party in
preparation for carrying this Agreement into effect.
11.8 INVALIDITY. In the event that any one or more of the provisions
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
40
<PAGE>
11.9 TITLES; GENDER. The titles, captions or headings of the Articles
and Sections herein, and the use of a particular gender, are for convenience of
reference only and are not intended to be a part of or to affect or restrict the
meaning or interpretation of this Agreement.
11.10 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 not unreasonably
withhold any such consent or clearance.
11.11 CUMULATIVE REMEDIES. All rights and remedies of either party
hereto are cumulative of each other and of every other right or remedy such
party may otherwise have at law or in equity, and the exercise of one or more
rights or remedies shall not prejudice or impair the concurrent or subsequent
exercise of other rights or remedies.
11.12 SERVICE OF PROCESS, CONSENT TO JURISDICTION.
(a) SERVICE OF PROCESS. Each parties 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 California law.
(b) 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 Southern District of California or, if such court does not have
jurisdiction or will not accept jurisdiction, in any court of general
jurisdiction in the County of San Diego, California; (2) consents to the
jurisdiction or any such court in any such suit, action or proceeding; and (3)
waives any objection which such Shareholder may have to the laying of venue of
any such suit, action or proceeding in any such court.
11.13 ATTORNEYS' FEES. If any party to this Agreement brings an action
to enforce its rights under this Agreement, the prevailing party shall be
entitled to recover its costs and expenses, including without limitation
reasonable attorneys' fees, incurred in connection with such action, including
any appeal of such action.
41
<PAGE>
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 day and year first above written.
PARENT: BUYER:
ECO SOIL SYSTEMS, INC. J.R. SIMPLOT COMPANY
By: /s/ William B. Adams By: /s/ Stephen A. Beebe
------------------------------- ---------------------------------
Name: William B. Adams Name: Stephen A. Beebe
-------------------------- ----------------------------
Its: Chairman/CEO Its: President and CEO
--------------------------- -----------------------------
SELLER:
TURF PARTNERS, INC.
By: /s/ William B. Adams
-------------------------------
Name: William B. Adams
--------------------------
Its: Chairman/CEO
---------------------------
42
<PAGE>
EXHIBIT 21.1
- -------------------------------------------------------------------------------
NAME JURISDICTION OF INCORPORATION
- -------------------------------------------------------------------------------
Agricultural Supply, Inc. Delaware
- -------------------------------------------------------------------------------
Aspen Consulting Companies, Inc. Colorado
- -------------------------------------------------------------------------------
Mitigation Services, Inc. Delaware
- -------------------------------------------------------------------------------
Turf Partners, Inc. Delaware
- -------------------------------------------------------------------------------
Yuma Acquisition Sub. Inc. Delaware
- -------------------------------------------------------------------------------
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8) pertaining to the 1992 Stock Option Plan, 1996 Directors' Stock
Option Plan, the amended and restated 1998 Stock Option Plan of Eco Soil
Systems, Inc., the 1999 Equity Participation Plan of Eco Soil Systems, Inc.,
the 1999 New Hire Stock Option Plan of Eco Soil Systems, Inc. and options
granted pursuant to non-statutory stock option agreements of our report dated
March 3, 2000, except for the last five paragraphs of Note 11, as to which
the date is April 12, 2000, with respect to the consolidated financial
statements and schedule of Eco Soil Systems, Inc. included in its Annual
Report (Form 10-K) for the year ended December 31, 1999, filed with the
Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
San Diego, California
April 13, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000876103
<NAME> ECO SOIL SYSTEMS INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,228
<SECURITIES> 0
<RECEIVABLES> 21,675
<ALLOWANCES> 2,204
<INVENTORY> 16,360
<CURRENT-ASSETS> 43,851
<PP&E> 26,594
<DEPRECIATION> 7,103
<TOTAL-ASSETS> 82,555
<CURRENT-LIABILITIES> 64,523
<BONDS> 0
0
0
<COMMON> 92
<OTHER-SE> 15,935
<TOTAL-LIABILITY-AND-EQUITY> 82,555
<SALES> 123,532
<TOTAL-REVENUES> 123,532
<CGS> 96,925
<TOTAL-COSTS> 96,925
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,868
<INTEREST-EXPENSE> 4,288
<INCOME-PRETAX> (18,406)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,406)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,406)
<EPS-BASIC> (1.05)
<EPS-DILUTED> (1.05)
</TABLE>
