<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the Exchange Act.
For the transition period from ___________ to ___________
Commission File Number: 0-21975
ECO SOIL SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
NEBRASKA 47-0709577
---------- ------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10740 THORNMINT ROAD
SAN DIEGO, CALIFORNIA 92127
(Address, Including Zip Code, of Principal Executive Offices)
(858) 675-1660
(Registrant's Telephone Number, Including Area Code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 1, 2000, 18,879,227
shares of the Registrant's Common Stock, $.005 par value per share, were
outstanding.
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INDEX
ECO SOIL SYSTEMS, INC.
FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 3
Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure of Market Risk 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submissions of Matters to a Vote of Security Holders 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 22
</TABLE>
2
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ECO SOIL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,048 $ 131
Accounts receivable, net of allowance for doubtful accounts of $1,102 and
$1,546 at September 30, 2000 and December 31, 1999, respectively 6,014 5,131
Inventories 5,609 5,681
Prepaid expenses and other current assets 1,936 3,078
-------- --------
Total current assets 15,607 14,021
Equipment under construction 5,393 5,042
Property and equipment, net 11,199 12,790
Intangible assets, net 6,306 14,374
Debt issuance costs 909 4,075
Other assets 1,684 537
Net non-current assets of discontinued operations -- 1,710
-------- --------
Total assets $ 41,098 $ 52,549
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,088 $ 4,710
Accrued expenses 1,825 3,661
Current portion of long-term obligations 13,292 21,617
Net current liabilities of discontinued operations -- 4,704
-------- --------
Total current liabilities 18,205 34,692
Long-term obligations, net of current portion 589 1,307
Deferred gain on sale/leaseback of building 480 523
Other 162 --
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 September 30, 2000 and
December 31, 1999, 18,704,535 and 18,349,965 shares issued and
outstanding at September 30, 2000 and December 31, 1999, respectively 96 92
Additional paid-in capital 57,413 55,578
Warrants 4,401 2,733
Treasury stock (100) --
Accumulated deficit (40,148) (42,376)
-------- --------
Total shareholders' equity 21,662 16,027
-------- --------
Total liabilities and shareholders' equity $ 41,098 $ 52,549
======== ========
</TABLE>
See accompanying notes.
Note: The Balance Sheet as of December 31, 1999 is derived from the audited
financial statements at that date, but does not include all of the disclosures
required by generally accepted accounting principles.
3
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ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Proprietary $ 4,179 $ 2,874 $ 7,609 $ 6,082
Distributed 7,487 7,881 18,066 19,147
-------- -------- -------- --------
Total revenues 11,666 10,755 25,675 25,229
Cost of revenues:
Proprietary 1,089 1,750 2,894 4,164
Distributed 6,612 5,778 14,515 13,479
-------- -------- -------- --------
Total cost of revenues 7,701 7,528 17,409 17,643
Gross profit 3,965 3,227 8,266 7,586
Operating expenses:
Selling, general and administrative 2,395 4,162 9,556 11,235
Research and development 191 516 460 768
Amortization of intangibles 142 271 433 864
Restructuring charges 5 -- 1,123 --
Legal settlement -- -- -- 198
-------- -------- -------- --------
Income (loss) from operations 1,232 (1,722) (3,306) (5,479)
Interest expense 568 261 2,502 694
Interest income 35 58 121 183
Income taxes -- -- 92 --
-------- -------- -------- --------
Income (loss) from continuing operations 699 (1,925) (5,779) (5,990)
Income (loss) from discontinued operations (4,928) 1,022 (9,252) 1,342
Gain on sale of discontinued operations (less
applicable income taxes of $270) 21,076 -- 21,076 --
-------- -------- -------- --------
Net Income (loss) before extraordinary item 16,847 (903) 6,045 (4,648)
Loss from extraordinary item (3,818) -- (3,818) --
-------- -------- -------- --------
Net Income (loss) $ 13,029 $ (903) $ 2,227 $ (4,648)
======== ======== ======== ========
Income (loss) per share of common stock, basic:
Income (loss) from continuing operations $ 0.04 $ (0.11) $ (0.31) $ (0.34)
Income from discontinued operations 0.86 0.06 0.63 0.07
Loss from extraordinary item (0.20) -- (0.20) --
-------- -------- -------- --------
Net Income (loss) $ 0.70 $ (0.05) $ 0.12 $ (0.27)
======== ======== ======== ========
Income (loss) per share of common stock, diluted:
Income from continuing operations $ 0.04
Income from discontinued operations 0.83
Loss from extraordinary item (0.20)
--------
Net Income $ 0.67
========
Shares used in calculating income (loss) per
share, basic 18,705 17,647 18,621 17,392
======== ======== ======== ========
Shares used in calculating income (loss) per
share, diluted 19,499 17,647 18,621 17,392
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
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ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
--------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss from continuing operations $ (5,779) $ (5,990)
Adjustments to reconcile net cash used in operating activities:
Depreciation and amortization 2,384 2,320
Amortization of debt issuance costs and discount on long-term debt 1,356 336
Deferred rent (44) --
Provision for losses on accounts receivable 152 376
Loss/(gain) on sale of property and equipment 73 93
Issuance of stock options/warrants for services 214 242
Gain on redemption of common stock (121) --
Other (268) --
Changes in operating assets and liabilities (4,662) (5,602)
-------- --------
Net cash used in operating activities of continuing operations (6,695) (8,225)
Net cash used in operating activities of discontinued operations (2,119) (3,949)
-------- --------
Net cash used in operating activities (8,814) (12,174)
INVESTING ACTIVITIES:
Net proceeds from Asset Sale 18,968 --
Proceeds from the sale of property and equipment 509 117
Proceeds from sale of patent rights 100 --
Purchase of property and equipment (542) (3,656)
Purchase of patents and licenses (283) (275)
-------- --------
Net cash provided by (used in) investing activities of continuing operations 18,752 (3,814)
Net cash provided by (used in) investing activities of discontinued operations (43) (350)
-------- --------
Net cash provided by (used in) investing activities 18,709 (4,164)
FINANCING ACTIVITIES:
Advances (to) from shareholders -- 15
Proceeds from short-term obligations 7,149 36,400
Repayments of short-term obligations (15,960) (30,932)
Proceeds from long-term obligations -- 4,242
Repayments of long-term obligations (688) (10,252)
Net proceeds from issuance of common stock 47 2,057
Debt issuance costs (588) (125)
Purchase of treasury stock (100) --
-------- --------
Net cash (used in) provided by financing activities of continuing operations (10,140) 1,405
Net cash provided by financing activities of discontinued operations 1,065 17,476
-------- --------
Net cash (used in) provided by financing activities (9,075) 18,881
-------- --------
Net increase in cash 820 2,543
Cash and cash equivalents at beginning of period of continuing operations 131 761
(Increase) decrease in cash and cash equivalents of discontinued operations 1,097 (3,234)
-------- --------
Cash and cash equivalents at end of period of continuing operations $ 2,048 $ 70
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,980 $ 1,953
======== ========
</TABLE>
See accompanying notes.
5
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ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of Eco Soil Systems, Inc. (the "Company"), all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair statement of the results for the three-month periods ended September 30,
2000 and 1999 have been made. The results of operations for the three-month and
nine-month periods ended September 30, 2000 are not necessarily indicative of
the results to be expected for the full fiscal year. For further information,
refer to the audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
2. NET INCOME/(LOSS) PER SHARE
In accordance with Financial Accounting Standards Board Statement No. 128,
"Earnings per share" ("SFAS 128"), basic earnings (loss) per share is calculated
by dividing net earnings (loss) by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of the Company such as
common stock which may be issuable upon exercise of outstanding stock options
and warrants. These shares are excluded when their effects are antidilutive.
3. DISCONTINUED OPERATIONS
On July 28, 2000, the Company completed the sale of substantially all of the
assets of its Turf Partners subsidiary (the "Asset Sale") to the J.R. Simplot
Company ("Simplot"). At the closing of the Asset Sale, Simplot made a cash
payment of $23 million and assumed Turf Partners' existing long-term debt and
vendor payables totaling $37.3 million. Simplot also assumed Turf Partners'
outstanding contracts and leases. The Asset Sale was consummated pursuant to an
Amended and Restated Asset Purchase Agreement dated April 5, 2000, as amended by
a First Amendment to Amended and Restated Asset Purchase Agreement dated June 9,
2000.
6
<PAGE> 7
The unaudited results of the discontinued operations (in thousands) were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues $ 5,760 $ 33,088 $ 42,127 $ 76,539
Cost of revenues 5,472 25,867 32,763 58,567
-------- -------- -------- --------
Gross profit 288 7,221 9,364 17,972
Operating expenses:
Selling, general and administrative 3,668 5,444 14,112 14,820
Amortization of intangibles 51 -- 354 --
-------- -------- -------- --------
Income (loss) from operations (3,431) 1,777 (5,102) 3,152
Interest expense 1,497 755 4,086 1,810
Income taxes -- -- 64 --
-------- -------- -------- --------
Net income (loss) $ (4,928) $ 1,022 $ (9,252) $ 1,342
======== ======== ======== ========
</TABLE>
For the periods presented, the Company borrowed funds from institutional
lenders and accredited investors to provide working capital for the parent
company and its subsidiaries. The interest expense associated with this debt was
originally recorded by the parent company, but a portion of interest expense
associate with this debt has been allocated to the discontinued operations noted
above. Interest expense allocated by the parent company to the discontinued
operations totaled $1.3 million and $466,000 for the three months ended
September 30, 2000 and 1999, respectively, and $2.8 million and $1.5 million for
the nine months ended September 30, 2000 and 1999, respectively. Also, selling,
general and administrative expenses that were recorded by the parent company but
were specifically an expense of the discontinued operations have been allocated
to the discontinued operations as shown above. The amount of selling, general
and administrative expenses allocated by the parent company to the discontinued
operations totaled $154,000 and $126,000 for the three months ended September
30, 2000 and 1999, respectively, and $1.4 million and $522,000 for the nine
months ended September 30, 2000 and 1999, respectively.
Due to the gain on the sale of the discontinued operations, the tax basis for
calculating Alternative Minimum Tax resulted in an estimated payable of $270,000
for the fiscal year 2000.
The historical consolidated balance sheets reflect the assets and liabilities
of discontinued operations as current or non-current assets based on the
original classification of the accounts, except that current liabilities are
netted against current assets and non-current liabilities are netted against
non-current assets.
4. RESTRUCTURING CHARGES
During the second quarter of 2000, the Company incurred a restructuring
charge of $1.1 million as a result of the closure of five operating locations of
the Agricultural Supply subsidiary located in the United States and Mexico.
A total of 25 employees were terminated from these locations. The remaining
accrued liabilities associated with these operations are expected to be
recognized during the fourth quarter of 2000 and the first quarter of 2001.
7
<PAGE> 8
Details of the restructuring charge (in thousands) are as follows:
<TABLE>
<CAPTION>
CASH
EXPENDED ACCRUED
CASH/ AMOUNT THROUGH LIABILITIES AT
DESCRIPTION OF NON- OF SEPTEMBER 30, SEPTEMBER 30,
CHARGE: CASH CHARGE 2000 2000
-------- -------- ------------- --------------
<S> <C> <C> <C> <C>
REORGANIZATION OF
AGRICULTURAL SUPPLY
OPERATING STRUCTURE:
Severance of employees ......... Cash $ 247 $ 157 $ 90
Vacated lease facilities ....... Cash 63 18 45
Write-downs of assets
removed from operations ...... Non-cash 780 780 --
Professional fees .............. Cash 23 17 6
Other .......................... Cash 10 10 --
-------- -------- --------
$ 1,123 $ 982 $ 141
======== ======== ========
</TABLE>
The following is a summary of revenue and net operating losses (in thousands)
for the locations that were closed:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES $ 95 $ 611 $ 611 $ 1,154
======== ======== ======== ========
INCOME (LOSS) FROM
OPERATIONS $ (50) $ (526) $ (154) $ (529)
======== ======== ======== ========
</TABLE>
5. Extraordinary Item
From the proceeds of the Asset Sale, the Company retired $14 million of the
Senior Subordinated Notes ("Notes"). The remaining $1 million (of the original
issuance of $15 million), plus accrued interest, was converted into an amended
Senior Subordinated Note. As a result, the Company wrote-off $3.8 million of
unamortized debt issuance costs associated with the Notes.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this Management's Discussion and Analysis
that are not related to historical results are forward-looking statements.
Actual results may differ materially from those projected or implied in the
forward-looking statements. Further, certain forward-looking statements are
based upon assumptions of future events, which may not prove to be accurate.
These forward-looking statements involve risks and uncertainties including but
not limited to those referred to in "Item 5. Other Information. Factors That
Could Affect Future Performance."
This information should be read in conjunction with the financial statements
and notes thereto included in Item 1 of this report for the quarter ended
September 30, 2000. Additionally, the financial statements and notes thereto and
Management's Discussion and Analysis in the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 will provide additional information.
OVERVIEW
The Company develops, markets and sells proprietary biological products,
and their delivery systems, for the golf and agricultural industries. The
Company's most unique delivery system is the BioJect(R), a patented and
EPA-approved device that stimulates and dispenses biological products through
irrigation systems. Our proprietary products are sold both direct and through
traditional distribution channels into the turf market and through direct sales
along with irrigation products into the agricultural market.
On July 28, 2000, the Company completed the sale of substantially all of the
assets of its Turf Partners subsidiary (the "Asset Sale") to the J.R. Simplot
Company ("Simplot"). At the closing of the Asset Sale, Simplot made a cash
payment of $23 million and assumed Turf Partners' exiting long-term debt and
vendor payables totaling $37.3 million. Simplot also assumed Turf Partners'
outstanding contracts and leases. The Asset Sale was consummated pursuant to an
Amended and Restated Asset Purchase Agreement dated April 5, 2000, as amended by
a First Amendment to Amended and Restated Asset Purchase Agreement dated June 9,
2000.
In connection with the Asset Sale, the Company entered into two distribution
agreements with Simplot. In the first agreement, a Distribution and License
Agreement, Simplot agreed to purchase and distribute a minimum of $5 million of
the Company's proprietary FreshPack(TM) products during the first two years of
the five-year agreement. In the second agreement, Simplot agreed to distribute
the Company's proprietary products in Simplot's Soilbuilders stores. The Company
and Simplot also entered into a field trials agreement pursuant to which Simplot
will pay the Company to perform Field Trials of the Company's BioJect(R) system
and microbials on selected crops in 2001.
THIRD QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO THIRD QUARTER ENDED SEPTEMBER
30, 1999
RESULTS OF OPERATIONS
REVENUES
For the third quarter of 2000, our revenues were $11.7 million, an increase
of 8.5% versus $10.8 million for the third quarter of 1999.
For the third quarter of 2000, our proprietary revenues were $4.2 million,
an increase of 45.4% versus $2.9 million for the third quarter of 1999. The
increase in proprietary revenues is due to an increase in design fees associated
with irrigation system sales in Mexico, initial sales of our specialty chemical
line of products and increased deliveries of FreshPack(TM) in the third quarter
of 2000 compared to the third quarter of 1999. Distributed revenues were $7.5
million, a decrease of 5% versus $7.9 million for the third quarter of 1999. The
decrease in
9
<PAGE> 10
distributed revenues is due to the closing of five unprofitable stores that were
part of the Company's Agricultural Supply subsidiary.
GROSS PROFIT
For the third quarter of 2000, our gross profit was $4.0 million, an
increase of 22.9% versus $3.2 million for the third quarter of 1999. The
increase in gross profit was primarily due to the increase in proprietary
revenues. For the third quarter of 2000, our gross margin was 34% versus 30% for
the third quarter of 1999. The increase in gross margin is attributed to a
greater mix of proprietary sales with a higher margin than distributed sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For the third quarter 2000, selling, general and administrative ("SG&A")
expense was $2.4 million, a decrease of 42.5% versus $4.2 million for the third
quarter of 1999. SG&A expense as a percentage of revenues was 21% for the third
quarter of 2000 compared to 39% for the comparable period in 1999. The decrease
in the SG&A is primarily due to the overall cost control efforts employed by
the Company and the restructuring actions taken by the Company in the second
quarter of 2000.
RESEARCH AND DEVELOPMENT
For the third quarter of 2000, research and development ("R&D") expense was
$191,000, a decrease of 63% versus $516,000 for the third quarter of 1999. The
decrease in R&D is due to the Company being more selective in the R&D programs
that are being supported.
AMORTIZATION EXPENSE
For the third quarter of 2000, amortization expense was $142,000, a decrease
of 47.3% versus $271,000 for the third quarter of 1999. The decrease is
primarily due to the fact that in the third quarter of 2000, the amortization of
the Turf Partners' goodwill is included in the loss from discontinued
operations.
INTEREST EXPENSE
For the third quarter of 2000, interest expense was $568,000, an increase of
118% versus $261,000 for the third quarter 1999. The increase in interest
expense is primarily due to amortization of additional debt issuance costs
acquired in the first half of 2000.
NET INCOME/LOSS FROM CONTINUING OPERATIONS
For the third quarter of 2000, net income was $699,000 or $.04 per share
compared to a net loss of $1.9 million or $ .11 per share for the third quarter
of 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
REVENUES
For the first nine months of 2000, revenues were $25.7 million, an increase
of 1.8% versus $25.2 million for the first nine months of 1999.
For the first nine months of 2000, proprietary revenues were $7.6 million,
an increase of 25.1% versus $6.1 million for the first nine months of 1999. The
increase in proprietary revenues is due to initial deliveries of our new
RhizUp(TM) product, initial sales of our specialty chemical line of products and
an increase in the sales of FreshPack(TM) products compared to the first nine
months of 1999. Distributed revenues were $18.1 million, a decrease of 5.6%
versus $19.1 million for the first nine months of 1999. The decrease in
distributed revenues is due to the closing of five unprofitable stores that were
part of the Company's Agricultural Supply subsidiary.
10
<PAGE> 11
GROSS PROFIT
For the first nine months of 2000, the Company's gross profit was $8.3
million, an increase of 9% versus $7.6 million for the first nine months of
1999. For the first nine months of 2000, the Company's gross margin was 32%
versus 30% for the first nine months of 1999. The increase in gross margin was
due to a better mix of proprietary and distributed sales during the first nine
months of 2000 compared to 1999. However, the effect of this increase was not
fully realized due to the loss of cash discounts as a result of the Company's
liquidity problems in the first half of 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For the first nine months of 2000, SG&A expense was $9.6 million, a decrease
of 14.2% versus $11.2 million for the first nine months of 1999. SG&A expense as
a percentage of revenues was 38% for the nine months ended September 30, 2000
compared to 45% for the comparable period in 1999. The decrease in the SG&A is
primarily due to the overall cost control efforts employed by the Company and
the restructuring actions taken by the Company in the second quarter of 2000.
RESEARCH AND DEVELOPMENT
For the first nine months of 2000, R&D expense was $460,000, a decrease of
40% versus $768,000 during the first nine months of 1999. The decrease in R&D is
due to the Company being more selective in the R&D programs that are being
supported.
AMORTIZATION EXPENSE
For the first nine months of 2000, amortization expense was $433,000, a
decrease of 50% versus $864,000 during the first nine months of 1999. The
decrease is primarily due to the fact that the amortization of the Turf
Partners' goodwill, for the first nine months of 2000, is included in the loss
from discontinued operations.
INTEREST EXPENSE
For the first nine months of 2000 interest expense was $2.5 million, an
increase of 260% versus $694,000 during the first nine months of 1999. The
increase is primarily due to the amortization of additional debt issuance costs
incurred in the first half of 2000.
NET LOSS FROM CONTINUING OPERATIONS
For the nine months ended September 30, 2000 net loss was $5.8 million or
$.31 per share versus net loss of $6.0 million or $.34 per share for the nine
months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception from revenues from sales of
our products, sales of our common stock and debt financing. For the nine months
ended September 30, 2000, our operating and investing activities of the
continuing operations provided cash of $12.1 million.
On August 25, 1998, we completed a financing transaction providing us with
$15 million in gross proceeds. We issued an aggregate of $15 million principal
amount of our Senior Subordinated Notes ("Notes") due 2003 pursuant to Note and
Warrant Purchase Agreements dated as of August 25, 1998 between Albion Alliance
Mezzanine Fund and us and between Paribas Capital Funding LLC (the "Lenders")
and us. We have entered into a series of amendments of the Note and Warrant
Purchase Agreements, which have, among other things, changed the rate of
interest payable on the Notes, eliminated prepayment penalties on the notes and
revised financial covenants.
11
<PAGE> 12
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. Simplot assumed the Coast Working Capital Facility in connection with the
Asset Sale completed on July 28, 2000.
On June 30, 1999, the Company's wholly owned subsidiary Agricultural Supply,
Inc. entered into a credit agreement with First National Bank (the "FNB Working
Capital Facility"). The FNB Working Capital Facility is a $10 million three-year
credit facility based upon Agricultural Supply's eligible inventory and
receivables and has an interest rate of prime plus .25%. Effective June 1, 2000,
the following changes were made to the terms of the FNB Working Capital
Facility: (a) fixed assets (BioJect(R) system units) were added to the
description of collateral, (b) maturity date changed to December 31, 2000, (c)
interest rate was changed to Prime plus 1.5%, and (d) personal guarantees were
provided by key executives. As of September 30, 2000, of the $6.5 million
availability (based on eligible receivables, inventory and fixed assets,) under
the FNB Working Capital Facility, Agricultural Supply had borrowed $6.465
million.
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, except certain BioJect(R) system units that were released
and included as collateral to the FNB Working Capital Facility. As a condition
of the Asset Sale, a Simplot Letter of Credit, expiring on December 31, 2000,
secured the principal balance of the Coast Term Loan. It is the intention of the
Company to repay the remaining balance of the Coast Term Loan on or before
December 31, 2000 from the remaining proceeds of the Asset Sale and/or other
credit facilities.
On January 24, 2000, the Company issued $4.5 million of Senior Secured
Convertible Debentures (the "Debentures") and warrants to purchase 356,436
shares of common stock. The Debentures are due January 24, 2001 and bear
interest at a rate of 7% per annum, which is due quarterly beginning March 31,
2000, and is payable in cash or common stock at our option. In June 2000, the
Company reduced the exercise price of the warrants to purchase 356,436 shares of
common stock to $1.00 and issued additional warrants to purchase an aggregate of
75,000 shares of common stock with an exercise price of $2.50 per share to the
Debenture holders in connection with obtaining the Debenture holders' consent to
the Term Loan from Simplot described below.
The Company's Coast Term Loan and the FNB Working Capital Facility 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 Coast Term Loan and the FNB Working Capital
Facility 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 September 30, 2000, the Company was not in compliance with
certain of these covenants. Coast Business Credit and First National Bank
provided a waiver of such covenants through September 30, 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 Coast Term Loan as
current in the accompanying balance sheet.
We entered into a Term Loan Agreement dated as of April 12, 2000 with
Simplot. The $3 million Term Loan was obtained in July 2000 and used for working
capital purposes. As stated below, the Term Loan was repaid from the proceeds of
the Asset Sale.
On July 28, 2000, the Company closed the Asset Sale and received proceeds of
$23 million from Simplot. The proceeds were used to: (1) retire $14 million in
principal amount of the Notes, (2) repay the $3 million Term Loan from Simplot,
and (3) pay $1.1 million of closing fees. The remaining proceeds of
approximately $5 million will be used for working capital purposes.
On July 28, 2000, the Company amended the Note and Warrant Purchase
Agreements with the Lenders to eliminate financial covenants. The Company
replaced the Notes with amended Senior Subordinated Notes (the "Amended Notes")
with an aggregate principal amount of $1.4 million covering the principal and
accrued interest of
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<PAGE> 13
the Notes not paid on July 28, 2000. The Amended Notes bear interest at an
annual rate of 14% and are due on January 28, 2002. Monthly payments of $87,000
in the aggregate began on August 28, 2000.
In addition, the Company intends to finance its future operations and growth
through a combination of cash flows from operations, borrowings available under
lines of credit and public or private debt or equity financing.
We believe that the net proceeds from the sale of Turf Partners' assets,
together with our existing cash balances, current performance and present plans,
will be sufficient to finance our operations, make planned capital expenditures
and fund future growth.
YEAR 2000
During the fourth quarter of 1999, we upgraded our existing computer
software and information technology ("IT") systems and tested our utility
systems (heat, light, telephones, etc.) and other non-IT systems to ensure their
Year 2000 readiness. Through October 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 is not aware of any material
problems resulting from Year 2000 issues, either with our products, our internal
systems or the products and services of third parties. The Company will continue
to monitor our IT and non-IT systems and those of our suppliers and vendors
throughout Year 2000.
If significant yet to be identified Year 2000 issues arise, we may
experience significant problems that could have a material adverse affect on our
financial condition and results of operations. Litigation regarding Year 2000
issues is possible. It is uncertain whether, or to what extent, we may be
affected by such litigation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's foreign sales are principally to Mexico. All foreign
transactions are denominated in U.S. dollars; therefore, the Company's exposure
to foreign currency fluctuations is minimal.
The Company is exposed to change in interest rates from its FNB Working
Capital Facility and the Coast Term Loan, which are due in December 2000. A
hypothetical 100 basis point adverse move in interest rates along the entire
interest rate yield curve would adversely affect the net fair value of the FNB
Working Capital Facility and the Coast Term Loan by $20,000, in the aggregate.
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<PAGE> 14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 24, 1999, a purported class action securities complaint was filed
against the Company and three of its officers and/or directors, William B.
Adams, Douglas M. Gloff and Mark. D. Buckner, by Edward Wissinger. The suit was
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 alleged 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. On July 11, 2000, the
Court dismissed without prejudice the class action complaint. The Court found
that the plaintiff had failed to allege sufficient facts to state a claim in
light of the heightened pleading standards applicable to the allegations made in
the complaint. Under the Court's order, the plaintiff was granted an opportunity
to amend his complaint at any time within 30 days of the Court's order to
attempt to state a cognizable claim. The parties subsequently entered into a
stipulation to voluntarily dismiss the action, which was entered by the court on
September 5, 2000.
From time to time, the Company is involved in legal proceedings, claims and
litigation arising in the ordinary course of business, the outcome of which, in
the opinion of management, would not have a material, adverse effect on the
Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The FNB Working Capital Facility and the Coast Term Loan contain certain
restrictions and limitations on the operations of the Agricultural Supply
subsidiary and the Company, respectively, 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 FNB Working Capital Facility and the Coast Term Loan also contain
certain covenants which require the Agricultural Supply subsidiary and the
Company, respectively, to maintain minimum levels of net worth, working capital
and other financial ratios, as defined. As of September 30, 2000, the Company
was not in compliance with certain of these covenants. FNB and Coast Business
Credit provided a waiver of such covenants through September 30, 2000.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 27, 2000, the Company held an Annual Meeting of Shareholders at
which the following proposals were voted on by shareholders:
1. Election of one director for a three-year term to expire at the 2003
Annual Meeting of Shareholders.
<TABLE>
<CAPTION>
Nominee For Against Withheld
------- --------------------------------------------
<S> <C> <C> <C>
Edward N. Steel 17,152,332 - 239,149
</TABLE>
In addition to Mr. Steel, the following directors continued in
office: William B. Adams, William S. Potter and Max D. Gelwix.
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<PAGE> 15
2. To approve the Amended and Restated Asset Purchase Agreement, dated
April 5, 2000, as amended by the First Amendment to Amended and
Restated Asset Purchase Agreement, dated as of June 9, 2000, by and
among Eco Soil, its subsidiary Turf Partners, Inc. ("Turf Partners")
and J.R. Simplot Company ("Simplot"), pursuant to which Turf Partners
will sell substantially all of its assets to Simplot.
<TABLE>
<CAPTION>
For Against Abstained Broker Non-Votes
-----------------------------------------------------------------
<S> <C> <C> <C>
12,017,836 88,173 53,201 5,232,271
</TABLE>
ITEM 5. OTHER INFORMATION
On November 10, 2000, the Company entered into a Memo of Understanding
("MOU") with the Debenture holders. Subject to the completion of definitive
documentation, the Company and Debenture holders have tentatively agreed to the
following modifications to the existing issuance that would become effective on
January 24, 2001: (a) the maturity date of the debt will be extended one year to
January 24, 2002, (b) the minimum conversion price of $1.89384 for conversion of
the debt to the Company's stock will be removed, (c) the maximum conversion
price of $3.00 for conversion of the debt to the Company's stock will be reset
as of January 24, 2001 using the same process as in the original issuance
(average of previous five days closing price but no lower than $1.50), (d) the
Company will repay up to $2 million of principal amount of the Debentures on
January 24, 2001, (e) conversions of the debt to the Company's stock will be
limited in any given month to the greater of $175,000 or 10% of the average
cumulative trading volume of the preceding month, and (f) the Company will have
the option to redeem outstanding Debentures at conversion value upon 10 market
days notice. As consideration for the modifications, the Company has tentatively
agreed to issue to the Debenture holders an aggregate of 400,000 warrants with
an exercise price of $1.25, which will expire five years after their grant date
and will provide piggyback registration rights to the Debenture holders. In
addition, the Company has tentatively agreed to register additional shares, if
needed, to provide for the conversion of all of the unpaid Debentures to stock
prior to the new maturity date.
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
This report contains certain forward-looking statements about the business
and financial condition of the Company, including various statements contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The actual results of the Company could differ materially from any
forward-looking statements contained herein. The following information sets
forth certain factors that could cause the actual results to differ materially
from those contained in the forward-looking statements. For a more detailed
discussion of the factors that could cause actual results to differ, see "Risk
Factors" in the Company's Annual Report on Form 10-K for the year ended December
31, 1999 and its Proxy Statement dated June 26, 2000 for its 2000 Annual Meeting
of Shareholders.
At September 30, 2000, we had an accumulated deficit of $40.1 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 previous acquisitions of turf and agricultural
products dealers.
On April 5, 2000, we, and our subsidiary Turf Partners, entered into an
Amended and Restated Asset Purchase Agreement, as amended by a First Amendment
to Asset Purchase Agreement dated June 9, 2000, with the J.R. Simplot Company
pursuant to which Simplot acquired substantially all of Turf Partners' assets
(the "Asset Sale"). We completed the Asset Sale on July 28, 2000. Due to the
Asset Sale, our business is substantially smaller. It is expected that a large
portion of our sales will now be generated through the sale and distribution of
our proprietary products to turf and agricultural markets, as well as irrigation
products through our Agricultural Supply distribution network. The agricultural
products and supply business does not historically represent a large portion of
our business or revenues. The growth of our proprietary and other products sales
in agricultural markets depends heavily upon the strength of the domestic and
international agricultural economies. If these economies weaken, demand for our
proprietary and other products may decline and our business or future financial
results could suffer. We also intend to sell proprietary products into turf
markets through Simplot's distribution channels, including those acquired in the
asset sale, pursuant to the distribution agreements between Eco Soil and Simplot
entered into in connection with closing the asset sale. Sales of our products
through Simplot's distribution channels may not result in sales equal to those
historically recorded by Turf Partners.
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<PAGE> 16
In the purchase agreement that governed the Asset Sale, we agreed to
indemnify Simplot for the breach of our representations and warranties contained
in the purchase agreement and for other matters. For example, an indemnification
claim by Simplot might result if representations Turf Partners or we made in the
purchase agreement are later proved to be materially incorrect. If Simplot makes
significant indemnification claims against us in the future, these claims could
materially and adversely affect our financial condition and results of
operations.
Our proprietary products remain in the early stages of market introduction
and are subject to the risks inherent in the commercialization of new product
concepts, particularly with respect to agricultural applications. There can be
no assurance that our efforts to increase sales of proprietary products to turf
and agricultural crop and ornamental markets will prove successful, that
marketing partnerships will be established and will become successful, or that
our intended customers will purchase our systems and products instead of
competing products. In addition, there can be no assurance that we will be able
to obtain significant customer satisfaction or market share with our proprietary
products.
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, the report of independent accountants in our financial statements
for the period ended December 31, 1999, filed on Form 10-K with the Commission,
includes an explanatory paragraph regarding our ability to continue as a going
concern unless we are able to obtain additional equity financing. We believe
that the net proceeds from the sale of Turf Partners' assets, together with our
existing cash balances, current performance and present plans, will be
sufficient to finance our operations, make planned capital expenditures and fund
future growth.
We have received a term loan and our Agricultural Supply subsidiary has
received a line of credit from financial institutions, and we have received debt
financing from institutional investors through the issuance of convertible
debentures and senior subordinated notes. Some of the loan documents to which
Agricultural Supply and we are parties, contain restrictions on our activities
and financial covenants with which Agricultural Supply and we must comply. Among
other things, the financial covenants require us and Agricultural Supply to
satisfy net worth requirements, debt service coverage ratios and other financial
tests. In the past, we have obtained waivers to remain in compliance with the
financial covenants and avoid default. There can be no assurance that
Agricultural Supply or we will satisfy all of the applicable financial covenants
in future quarters. To the extent Agricultural Supply or we do 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 the event that our cash flow and capital resources are
not sufficient to repay our indebtedness or we are unsuccessful in obtaining
alternate financing, Agricultural Supply or we may be unable to repay our debts.
As a result, 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.
The Company has been working with its lenders to establish a multi-year term
loan collateralized by the receivables, inventory and fixed assets of the
Company separate from the FNB Working Capital Facility that is in place for
financing the Agricultural Supply subsidiary. The FNB Working Capital Facility
expires December 31, 2000 and there is no assurance that the FNB Working Capital
Facility will be renewed or that the new term loan will be funded. The
occurrence of one or both of these risks may impair our ability to obtain
alternate financing on terms satisfactory to us, if at all, and/or we may need
to sell assets to raise cash to retire debt, either of which could have a
material adverse effect on our business and financial condition.
We finance our operations in Mexico in part through the FNB Working Capital
Facility that requires foreign credit insurance coverage for any borrowings
against eligible receivables denominated in U.S. dollars from Mexican customers.
If we are unable to maintain our present foreign credit insurance or obtain new
insurance coverage we may need to sell assets and further reduce our Mexican
operations in order to repay the $1.2 million loan advanced by FNB against these
assets which could have a material adverse effect on the business of our
Agricultural Supply subsidiary and the financial condition of the Company.
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 prior to 12 months after January
24, 2000 without giving 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. Our inability to raise
needed funds would have a material adverse effect on our business, financial
condition and results of operations.
The Nasdaq National Market requires, among other things, that the bid price
for the Company's common stock remain in excess of
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<PAGE> 17
$1 for the Company to maintain its listing on the Nasdaq National Market. Given
current market conditions, no assurance can be given that this standard will be
met. If the Company's stock price falls below $1, the Company will not be in
compliance with all of Nasdaq's listing requirements. In such a case, Nasdaq
could send a formal notice of deficiency and commence the delisting process. If
Nasdaq were to begin delisting proceedings, it could reduce the level of
liquidity currently available to our shareholders. If our common stock were
delisted, the price of the common stock would, in all likelihood, decline. In
addition, it would be an event of default under the Convertible Subordinated
Debentures if our shares were delisted from Nasdaq.
The Company has commenced an arbitration proceeding against the former
owners of an acquired business relating to uncollected accounts receivable and
notes receivable. The former owners have made a counterclaim that they are
entitled to an earn out payment based on the performance of the business for the
1999 calendar year, which, if successful, would result in an adjustment to the
purchase price paid for the business. The Company disputes the allegations of
the former owners. If the former owners were to prevail in the arbitration, it
could have a material adverse effect on our financial condition and results of
operations.
We distribute and sell our products through agricultural products
distributors and dealers we have acquired and through independent dealers and
distributors. We sold our turf products distribution business to Simplot in the
Asset Sale. Pursuant to distribution agreements with Simplot, we will continue
to sell some of our products through the distribution network that was sold, but
we may not achieve the same level of sales through the distribution network now
owned by Simplot. Any failure to identify future distributors or acquisition
candidates properly, any large expenditures on acquisitions that prove to be
unprofitable or any difficulties encountered 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.
The Company has decided to offer its BioJect(R) customers the opportunity
to purchase the BioJect(R) units either for cash or through a non-recourse
private label leasing program. This new initiative could result in accelerating
the revenue stream from the hardware while requiring the customer to obtain
service, parts and microbes exclusively from the Company for the life of the
equipment. The initial test market of the BioJect(R) sale program was positively
received and it is the intent of the Company to market the program nationally
beginning in the fourth quarter of 2000. We have limited experience in selling
BioJect systems to our customers, and we do no yet know the level of customer
demand for purchasing these systems. As a result, our efforts to sell the
BioJect systems and to lease them to customers through our private label leasing
program may not be successful.
We increased our minority investment in Eco Soil Japan during the quarter.
The success of new product introductions, an eCommerce effort and the ability of
the Company to attract Japanese investors in Eco Soil Japan will determine the
viability of this joint marketing effort.
The Company has historically used the "Black Scholes" method of valuing
warrants issued in connection with financings. We are concerned that this method
does not consider certain market conditions of "micro-cap" companies and has
resulted in a very high effective non-cash interest cost to the company. We have
decided to engage the services of a valuation firm to determine the market value
of Eco Soil warrants in order to more accurately value warrants issued by the
Company. Our receipt and use of the valuation report may not have a materially
positive effect on our balance sheet or results of operations.
We presently have an R&D initiative in Microbial Genomics ("MG") to exploit
existing Company technology through a collaboration of scientists at two major
Universities and the USDA. Other companies have indicated that their research
would also be aided by MG and in order to share the costs and benefits of these
efforts we intend to create a new company to be named MG, Inc. as a vehicle for
other companies to invest in this development. The Company's Board of Directors
has approved up to $1 million in support to MG, Inc. over the next five years as
part of the Company's R&D budget. It is anticipated that this research will
require in excess of $5 million of total financing. In addition to the Eco Soil
and other companies investment, MG, Inc. will be pursuing a private placement to
raise the additional funding needed to complete the project as rapidly as
possible. MG, Inc.'s efforts to raise additional capital may not prove
successful, which would impair its ability to conduct its R&D activities.
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<PAGE> 18
Currently, the Company has a 100% ownership of software platform that is
designed to provide an eCommerce solution for golf course management and
procurement activity (referred to as "eCo" for eCommerce). To access the 17,000
U.S. golf courses and their management, and the estimated $15 billion in U.S.
golf course commerce, eCo has partnered with leading suppliers of golf course
maintenance products, such as Simplot and the Toro Company. Simplot is the
largest distributor of turf maintenance products in the U.S. with an extensive
nationwide network of owned dealers and distributors and solid, established
relationships through its 80 plus sales force at approximately 8,000 golf
courses. Through its partnership with Simplot, the Company will have direct
access to over 8,000 courses and their management, and more importantly, will
bring to those customers a complete eCommerce solution combined with the
fulfillment capabilities of the leading distributor of golf course maintenance
products in the country. eCo's site will serve as the only e-based method of
procurement for all Simplot customers, and will be leveraged as the platform
from which eCo will introduce its extensive product offering.
eCo is focusing on the course superintendent, and the corresponding
superintendent relationships developed by Simplot sales force, as its point of
penetration. Beyond having access to a vast product catalogue from Simplot, the
Toro Company, and additional product vendors such as Eagle One, superintendents
entering the site will be provided with high-quality technical content and
integrated course management tools. These proprietary tools include the eCo's
online Agronomic Plan and site management solution, GCS(TM), the number one
selling solution of its kind in the U.S., with over 1,500 active users and
extensive brand recognition. The Agronomic Plan and GCS(TM) solution will be
integrated with the site's order center, automating many superintendent tasks,
streamlining the operations of the superintendent, and providing reporting and
compliance information. Common business operations and necessities, such as
application scheduling, budgeting, inventory management, access to product
material safety data sheets and labels, and any and all site management
processes are included in the order center integration and provide the
superintendent with a practical incentive to fully utilize the system and
purchase products and services online.
eCo's proprietary technology and product offering, existing and in
development, are designed to have application beyond the golf market. It is the
intention of eCo to fully extract the value of its products in several markets
over time, including parks and recreation, horticulture, landscaping, and
athletic field maintenance. While these markets are initially secondary to golf
in order of rollout, they represent a substantial opportunity to eCo and will be
pursued in the future. It is the intent of the Company to obtain financing for
eCo through a private placement for the eCo subsidiary. The first round of
financing is anticipated in the fourth quarter of 2000 and would dilute the
Company's holding by up to 40 percent. eCo's efforts to raise additional capital
may not prove successful, which would impair its ability to implement its
technology and launch its operations. In addition, the eCo concept is unproven
and may not prove successful if its intended users do not use the system to
purchase products online or if difficulties arise in providing product to
fulfill orders.
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. No assurance can be given that we
will be successful in recruiting or retaining personnel of the requisite caliber
or in adequate numbers to enable us to conduct our business as we propose it to
be conducted.
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(R) 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(R) system in selected countries. To date, technology
relating to the BioJect(R) system has been successfully patented in several of
these foreign countries. In addition, we have registered a number of trademarks
used in our business, including "BioJect(R)" and "FreshPack(TM)" and we 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. No assurance can be
given 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 currently do not have any manufacturing capability and we 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, no
assurance can be given 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. No assurance can be given 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.
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<PAGE> 19
We do not engage in our own research and development with respect to the
discovery of new microbial products. Therefore, we plan to acquire the rights to
additional microbial products from third parties. Although we are actively
seeking to obtain licenses for additional microbial products, there can be no
assurance that we will be successful in obtaining any such licenses on terms
acceptable to us, if at all.
In September of 1999, we acquired the Agricultural Biological Division
(AgBio) of Canadian-based Agrium, Inc. Among other things, the acquisition
included a microbiological collection in excess of 2,500 unique biocontrol and
growth-promoting microorganisms. We have increased our research and development
efforts to determine which microbes will be suitable for distribution through
the BioJect(R) system or as a new FreshPack(TM) product. We may not be
successful, however, in identifying microbes that will be suitable for
commercial deployment or in creating products comprised of these microbes. Even
if new product candidates are identified, EPA approvals of the products will be
required to market them as pesticides. In order to market a microbial product as
a pesticide, we must obtain EPA approval of a particular product containing that
microbe, including EPA approval of the claims made in the product label and the
method of application. In addition, if a microbe is sold as a pesticide for use
on crops, a tolerance level must be set by the EPA, which would define the
acceptable limit on the amount of microbes that could be present on a given raw
agricultural commodity at the time of harvest. Registration of microbial
products as pesticides is a lengthy and expensive process that may or may not
result in EPA approval. Also, third parties may develop superior products or
have proprietary rights that preclude us from marketing our products. If
research and testing is not successful or if we fail to obtain regulatory
approval, we may be unable to sell products based on the microbes obtained from
Agrium or any other microbes.
We may be exposed to liability resulting from the commercial use of our
products. Such liability might result from claims made directly by customers or
others manufacturing such products on our behalf. We currently carry product
liability insurance. There can be no assurance, however, that such product
liability insurance will adequately protect us against any product liability
claim. A product liability or other claim with respect to uninsured liabilities
or in excess of insured liabilities could have a material adverse effect on our
business and prospects.
The federal government and some states have laws imposing liability on
certain parties for the release of fertilizers and other agents into the
environment in certain manners or concentrations. Such liability could include,
among other things, responsibility for cleaning up the damage resulting from
such a release. In addition, the federal Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA), commonly known as the "Superfund" law,
and other applicable laws impose liability on certain parties for the release
into the environment of hazardous substances, which might include fertilizers
and water treatment chemicals. We are also subject to certain other
environmental laws, including the Environmental Protection Act, the Toxic
Substance Control Act, the Resource Conservation and Recovery Act, the Clean Air
Act and the Clean Water Act and may be subject to other present and potential
future federal, state or local regulations. We do not currently maintain
insurance for any environmental claims, which might result from the release of
our products into the environment in a manner or in concentrations not permitted
by law. Thus, a claim for environmental liability could have a material adverse
effect on our business.
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 we
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(R) 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. No
assurance can be given that EPA approval will be received 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
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product entirely unless it is approved by the EPA. In addition, we may be
subject to regulation in foreign countries. Compliance with such requirements
likely would result in additional cost and delays in introducing our products in
such foreign countries.
The BioJect(R) system and our FreshPack(TM) 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, Astra-Zeneca, 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(R) 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.
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 our business. 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(R) system and our other products.
We began 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. Revenues from sales of our
proprietary products for applications using micro irrigation methods or in
greenhouses may not exceed the sales, marketing and development costs we have
incurred in an effort to penetrate these markets.
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, no
assurance can be given that these efforts 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:
- 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;
- longer accounts receivable payment cycles and difficulties in
collecting accounts receivable; and
- costs and availability of foreign credit insurance.
The costs related to out international operations could adversely affect our
operations and financial results in the future.
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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 was discontinued for any
reason, the liquidity and price of our common stock would be adversely affected.
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(R)
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(R) systems during the second and third quarters. BioJect(R)
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 the 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(R) system also makes it difficult to predict the number of
BioJect(R) systems that will be employed and the quantity of microbial products
that will be sold 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 serves. Given these factors, it is difficult
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.
We are dependent upon the active participation of William B. Adams, our
Chairman of the Board and Chief Executive Officer. The loss of the services of
Mr. Adams could have a material adverse effect upon our future operations. Our
success depends in large part on our ability to attract and retain qualified
scientific, financial and management personnel. We face competition for such
persons from other companies, academic institutions, government entities and
other organizations. There can be no assurance that we will be successful in
recruiting or retaining personnel of the requisite caliber or in adequate
numbers to enable us to conduct our business as proposed.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits:
<TABLE>
<S> <C>
3.1(3) Amended and Restated Articles of Incorporation
3.2(4) Articles of Correction to Amended and Restated Articles of
Incorporation
3.3(5) Articles of Amendment to Amended and Restated Articles of
Incorporation
3.4(3) Bylaws, as amended
4.1(2) Form of the Common Stock Certificate
10.1(6) Amended and Restated Asset Purchase Agreement dated April 5,
2000 by and among the Company, Turf Partners, Inc. and J.R.
Simplot Company.
10.2(7) Term Loan Agreement dated as of April 12, 2000 among Turf
Partners, Inc. and Eco Soil Systems, Inc. and J.R. Simplot
Company.
10.3(1) Change in Terms Agreement, dated June 1, 2000, among
Agricultural Supply, Inc. and First National Bank
10.4(1) Commercial guaranty dated June 1, 2000, by Agricultural
Supply, Max Gelwix and William B. Adams.
10.5(8) First Amendment to Amended and Restated Asset Purchase
Agreement dated June 9, 2000 by and among the Company, Turf
Partners, Inc. and J.R. Simplot Company.
10.6(9) Amendment No. 6 to Note and Warrant Purchase Agreement, dated
as of July 28, 2000 among the Company, Albion Alliance
Mezzanine Fund, L.P. and Paribas Capital Funding LLC.
10.7(9) Amended Senior Subordinated Note due January 28, 2002, dated
as of July 28, 2000 among the Company and Paribas Capital
Funding LLC.
10.8(9) Amended and Restated Common Stock Purchase Warrant expiring
August 25, 2005 in favor of Paribas Capital Funding LLC.
10.9(9) Amended Senior Subordinated Note due January 28, 2002, dated
as of July 28, 2000 among the Company and Albion Alliance
Mezzanine Fund, L.P.
10.10(9) Amended and Restated Common Stock Purchase Warrant expiring
August 25, 2005 in favor of Albion Alliance Mezzanine Fund,
L.P.
10.11(9) Distribution and License Agreement dated July 28, 2000 between
J.R. Simplot Company and the Company.
27.1(1) Financial Data Schedule
</TABLE>
--------------------------------------------------------------------------------
(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. 4 to the Company's Registration
Statement on Form SB-2 (File No. 333-15883) filed with the Commission on
January 16, 1997.
(4) 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.
(5) 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.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
(File No. 001-12653) filed with the Commission on April 14, 2000.
(7) Incorporated by reference to the Company's Periodic Report on Form 10-Q
(File No. 001-21975) filed with the Commission on May 15, 2000.
(8) Incorporated by reference to the Company's Current Report on Form 8-K
(File No. 001-12653) filed with the Commission on June 19, 2000.
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(9) Incorporated by reference to the Company's Periodic Report on Form 10-Q
(File No. 001-21975) filed with the Commission on August 14, 2000.
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K (File No. 001-21975) under
Item 4 thereof on September 29, 2000, which reported that the Company changed
its certifying accountant.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Eco Soil Systems, Inc.
Date: November 14, 2000 By: /s/ WILLIAM B. ADAMS
------------------------------------
William B. Adams
Chairman and Chief Executive
Officer
Date: November 14, 2000 By: /s/ DENNIS N. SENTZ
------------------------------------
Dennis N. Sentz
Chief Financial Officer
(Principal financial officer and
Principal accounting officer)
24
