1
================================================================================
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, 2000
[ ] 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)
(858) 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. []
As of April 16, 2001, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $9,075,262.
As of April 16, 2001, the number of shares outstanding of the
Registrant's Common Stock, $.005 par value, was: 19,645,144.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
the definitive Proxy Statement for the 2001 Annual Meeting of Shareholders of
the Registrant, which will be filed on or prior to April 30, 2001.
================================================================================
2
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 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 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
2
3
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 three microbial-based programs and
will continue to develop the library of approximately 2,500 microbes from the
Agrium acquisition.
Through the Agricultural Supply subsidiary, 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 47% of its agriculture
business in 1999 was derived from sales outside the United States, primarily in
Mexico. In 2000 the agricultural business in Mexico was reduced due to store
closings and tighter credit policies, but this was partly offset by the addition
of sales to Cargill in Canada. In total, approximately 40% of the agricultural
business in 2000 was outside the United States.
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 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.
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 Simplot crops in 2001.
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.
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.
3
4
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
has initiated a new strategy to sell or lease the Bioject to the end user. This
program was test marketed in the fourth quarter 2000 and rolled out nationally
in February 2001. The idea of reducing the operating budget of the Golf Course
customer by "unbundling" the program cost into a one time capital or "lease to
own" cost and reduced annual microbial and service costs drives this new
strategy.
As a stand alone proprietary product strategy and in order to increase
awareness of the effectiveness of biological products and to generate new
Bioject customers, 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.
The Simplot distribution agreement that resulted from the sale of the
Turf Partners business on July 28, 2000, covers about 7,000 golf courses in the
United States. The Company is in the process of locating other distributors,
particularly in the Southern United States, to try to reach the other 9,000 golf
courses that are not presently able to purchase the proprietary products. In the
fourth quarter 2000 the Company continued the development of its e-commerce
platform that would allow distributors and other customers to order proprietary
products directly from the Company via the Internet.
Expand into Agricultural Markets. Although the Company initially set its
attention on golf applications for the BioJect system and FreshPack products,
the Company has added focus on the agricultural crop and horticulture markets
and expects the these markets to be an important 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 its independent dealers, strategic partnership with Simplot
and other potential partnerships with established agricultural companies such as
the Joint Development Agreement announced on February 12, 2001 with the Cargill
Corporation. 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 working with 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. In the 2nd Quarter 2000 the Company did a restructuring of
the agricultural business that included closing the AG Supply corporate office
and two unprofitable store locations in the U.S. in addition, three unprofitable
store locations were closed in Mexico and the Mexican organization reduced from
three regions to one in order to reduce administrative costs. Offsetting the
loss of revenues from the store closings was the addition of the Cargill
business and strategic development effort in Canada.
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 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
4
5
product. In 2000 the Company has expanded the products offered for sale to
include applications in the Sod Farm and Municipal / Governmental markets with
some encouraging early successes.
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 BioRack system , Specialty Chemical products
and drip irrigation design services.
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 is shown in the
following table:
DECEMBER 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ----
Number of installed BioJect Systems 79 171 238 290 458 418 341
The Company's installed base of BioJect systems experienced rapid growth
through 1998. Installed systems declined in 1999 and 2000 due to an increased
marketing focus by the Company on its proprietary FreshPack products and the
poor state of the Mexican agricultural market.
5
6
The Company has installed its BioJect systems for some of the most
famous and notable golf courses in the country, including the following:
- Westchester Country Club (NY) - Lancaster Country Club(PA)
- Chevy Chase Country Club (MD) - Medinah Country Club(IL)
- Winged Foot Golf Club (NY) - Rancho Bernardo Inn(CA)
- Del Mar Country Club (CA) - Siwanoy Country Club(NY)
- Four Seasons Resort Aviara (CA) - Club at Pelican Bay(FL)
The Company offers a menu of six microbial products that can be
delivered through its BioJect system. The BioJect system has evolved from
delivering only bacteria of the Bacillus family to delivering a variety of
microbial products. The Company licenses and/or acquires such microbes from
universities and corporations. These products appear on the Company's BioJect
menu and complement or reduce the need for many chemical fungicides, herbicides,
insecticides and fertilizers. The consumable product in each menu item is a
microbe, and each microbe is cultured in the BioJect system under a proprietary
formula. Different microbes are used for different applications due to their
mode of action or performance characteristics.
Set forth below is a table showing the name of each of the Company's
microbial products, the Company's rights to themicrobe, the source of the
microbe and the application for each microbe.
MICROBE NAME SOURCE COMPANY'S RIGHTS USE
------------ ------ ---------------- ---
Bacillus Spp. Chr. Hansen, Inc. Public Domain Improves soil porosity to enhance
plant growth
Azospirillum brasilense Cd Encore Technologies, Inc. Exclusive worldwide license for Converts atmospheric nitrogen into
("Encore") use through the BioJect system plant available form; growth
promoter
Pseudomonas aureofaciens Encore/Michigan State Assignment of rights granted to Biofungicide to control certain
TX-1 (Spot-less(TM)) University Encore under exclusive turfgrass diseases
worldwide license from Michigan
State University
Xanthomonas Mycogen Corporation/ Rights under worldwide Experimental Use Permit as a
campestris pv poa Michigan State University license from Michigan State selective postemergent biological
(Xpo(TM)) University acquired from Mycogen control of Poa annua
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 organism Nitrogen fixing bacteria for legumes
from Liphatec
The Company has obtained 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 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.
6
7
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
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.
7
8
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.
FRESHPACK NAME INDIVIDUAL PRODUCTS USE
-------------- ------------------- ---
XPO Xanthomonas campestris pv. Poannua Selective control of Poa annua
RECHARGE Azospirillum brasilense CD, root growth Promotes root growth and brings life
promoting bacteria, and LEX, a back into the soil
microbial stimulant
REOPEN Three species of Bacillus bacteria, LEX Aids reduction of black layer in the
and OxyPlus soil profile and provides
plant-available oxygen and eliminates
anaerobic conditions
REMOVE Bacillus bacteria, LEX, Deliminate, a Increases aeration and infiltration in
sodium reduction agent, and calcium soil, removes sodium and introduces
acetate calcium
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)
- 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.
8
9
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 BioRack system, an equipment wash rack and
water treatment system that recycles contaminated equipment wash water, making
it suitable for recycling or discharge. The BioRack 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 maintenance products through Company-owned dealers and distributors.
In order to meet all of its customers maintenance needs, the Company's
distributors keep in stock an inventory of branded pesticides, fertilizers,
seed, and other necessary products from many agricultural manufacturers. 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. The Company has hired sales and other
key personnel to establish a presence in the areas not served by Simplot. 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 16
in Mexico in agriculture.
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
9
10
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.
On July 28, 2000, the Company completed the Asset Sale. 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 parts of the U.S. that Simplot does not have a presence, the
Company has hired salesmen to locate and work with new distributors in order to
complete it's national distribution network.
DISTRIBUTION TO AGRICULTURAL MARKETS
In early 1998, the Company initiated its strategy of consolidating its
agricultural distribution network through acquiring independent product
distributors and hiring key sales personnel. In April 1998, the Company acquired
Agricultural Supply (including a 50% interest in ASM), a distributor of
micro-irrigation products in Southern California and Mexico. In June 1998, the
Company acquired Yuma Sprinkler, a distributor of micro-irrigation products in
Arizona and Mexico. Also in June 1998, the Company acquired Riegomex and the
remaining 50% interest in ASM. By purchasing these distributors of
micro-irrigation products, the Company believes that it can rapidly develop an
integrated sales force that will allow it to penetrate the agricultural markets.
The Company intends to 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 $608,000, $1,065,000 and $584,000 on research and
development for the years ended December 31, 2000, 1999 and 1998, 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
10
11
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.
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."
11
12
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. The USA patents
have a duration of seventeen years and the remaining duration depends on the
date of the patent, but those that the company now relies on to produce revenue
would have a duration in excess of nine years. See "Factors That Could Affect
Future Performance -- Patents, Proprietary Technology and Licenses."
MANUFACTURING AND SUPPLY
A majority of the parts and components utilized in the BioJect, CalJect
and SoluJect systems are standardized industrial components. The computer
controls and the fermentation tank used in the BioJect system are designed and
manufactured to Company specifications by third parties. The Company has no
contracts for supply of parts and components used in its systems. Instead, the
Company submits purchase orders for such items as needed. Parts and components
are shipped directly to the Company's third-party assemblers for assembly and
testing, and the Company's product management team oversees the assembly and
testing process. The 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.
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
12
13
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
As of December 31, 2000, the Company had 163 full-time employees,
consisting of 11 in general management, 40 in sales and marketing, 32 in
customer service, 6 in research and development, 32 in warehouse and operations
and 42 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 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 of our need to
refinance our working capital line of credit with the First National Bank of San
Diego, there is substantial doubt about our ability to continue as a going
concern unless we are able to obtain additional debt and/or equity financing. We
anticipate that without additional financing we would likely run out of cash to
fund our operations during the second quarter of 2001.
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 December 31, 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 $5.2 million.
On March 21, 2001 the Company entered into a Change in Terms Agreement with FNB
that extended the working capital facility to March 31, 2001 and waived the
covenant violations as of December 31, 2000. The Change in Terms Agreement
further prohibits the Company from making any payments to subordinated debt
holders, thereby putting the Company in default under its Term Loan Agreement
with J.R. Simplot Company, its Convertible Subordinated Debentures and its
Amended Senior Subordinated Notes. The extension provided by the Change in Terms
Agreement expired on March 31, 2001.
13
14
On December 11, 2000, the Company entered into Amendment No. 1 to the
Convertible Debentures and Warrants Purchase Agreement pursuant to which the
Company sold the Convertible Subordinated Debentures, which amendment extended
the maturity of a portion of the debentures to January 24, 2002. On March 7,
2001, the Company entered into Amendment No. 2 in which the Company agreed to
repay in cash $1,500,000 in principal plus a 10% premium required under the
terms of the Convertible Subordinated Debentures on or before March 30, 2001. In
connection with Amendment No. 2, the Company issued warrants to purchase 500,000
shares of the Company's common stock with an exercise price of $1.10 per share
to the holders of the Convertible Subordinated Debentures. Amendment No. 2
further provides that if the $1.5 million principal repayment is not made on or
before March 30, 2001, the Company must issue warrants to purchase an additional
200,000 shares at the same $1.10 strike price and seek to enter into an
additional extension agreement.
We can give you no assurances that the Company will obtain
additional extensions and waivers from FNB, the holders of the Convertible
Subordinated Debentures or its other debt holders. We currently do not have any
arrangements to obtain other sources of financing. 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. 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 have a history of operating losses and an accumulated deficit, and we
may not achieve or maintain profitability in the future. At December 31, 2000,
we had an accumulated deficit of $46.6 million. Our loss from continuing
operations for the year ended December 31, 2000 was $10.8 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 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. Furthermore, the
Company has begun selling and leasing Biojects to the end user, this is a new
strategy and there can be no assurance that the Company will be successful with
this new strategy.
The market price of our common stock has fallen below the level required
for continued listing on The Nasdaq Stock Market, and we may be delisted. As of
March 28, 2001 our stock price had been less than $1 for 30 consecutive trading
days, putting the Company in violation of Nasdaq qualification standards for
continued listing. The Company has been notified by Nasdaq that it has until
July 2, 2001 to raise its stock price above $1 for 10 consecutive trading days
or be subject to de-listing following a de-listing hearing. We cannot give you
any assurances that the Company's stock price will increase above $1 or, if not,
that the Company will prevail in its de-listing hearing and thereby be able to
avoid de-listing from the Nasdaq National Market.
If Nasdaq were to delist our common stock, it would reduce the level of
liquidity currently available to our stockholders. If our common stock were
delisted, the price of the common stock would, in all likelihood, decline. In
addition, it would be an event of default under our Convertible Subordinated
Debentures if our shares were delisted from Nasdaq. If our common stock is
delisted from the Nasdaq National Market, we could apply to have the common
stock quoted on the Nasdaq SmallCap Market. The Nasdaq SmallCap Market has a
similar set of criteria for initial and continued quotation. We may not,
however, meet the requirements for initial or continued quotation on the Nasdaq
SmallCap Market. If we were not able to meet the requirements of the Nasdaq
SmallCap Market, trading of our common stock could be conducted on an electronic
bulletin board established for securities that do not meet the Nasdaq SmallCap
Market listing requirements, in what is commonly referred to as the "pink
sheets."
14
15
We are dependent on sales to J.R. Simplot Company. On July 28, 2000, we
completed the sale of substantially all of the assets of our Turf Partners
subsidiary to the J.R.Simplot Company (the "Asset Sale"). In connection with the
Asset Sale, we 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 products during the first two years of the five-year agreement. In the
second agreement, Simplot agreed to distribute our proprietary products in
Simplot's Soilbuilders stores. We and Simplot also entered into a field trials
agreement pursuant to which Simplot will pay us to perform Field Trials of the
Company's BioJect system and microbials on selected Simplot crops in 2001. Since
the Asset Sale, our revenues have been concentrated on sales to Simplot. Simplot
distributes our products in the upper Midwest, Northeast and Southwest. For the
fiscal year 2000, sales to Simplot accounted for 11% of revenues, and we expect
sales to Simplot to comprise a significantly greater percentage of our sales
during 2001. As a result, any reduction in purchases by Simplot for any reason
or delay in payment of amounts owed to us by Simplot for product would have a
material adverse effect on our business and results of operations.
If we fail to manage growth effectively, our business may suffer. 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 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.
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 "Fresh Pack" 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.
15
16
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.
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
16
17
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, 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. Our proprietary products have not been widely applied
using micro irrigation methods or in greenhouses
17
18
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 where the Company has significant receivables,
inventory and fixed assets held in the name of its subsidiary Agricultural
Supply de Mexico. In addition, our strategic relationship with The Cargill
Corporation calls for us to sell our proprietary products to the Canadian
market. 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:
- 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.
18
19
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 do not have an employment agreement with Mr. Adams. We
can give you no assurance that Mr. Adams will continue to be employed by the
Company.
A small number of shareholders may be able to exercise effective control
over us. As of December 31, 2000, 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.
We have a large number of outstanding warrants and options, which could
harm our ability to acquire additional capital. As of December 31, 2000, there
were 10,413,497 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.
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. Simplot Partners
sub-leases a portion of the building for $13,189 per month. The Company does not
own any real property.
The Company leases office and warehouse space in various locations in
the U.S. including Agricultural Supply leases 20,449 square feet in California,
24,096 square feet in Arizona and 63,709 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 March 12, 2001, an arbitrator formally ruled on an arbitration case
between the Company and John C. Wells, William Wells and John Pothoff ("former
owners") of Agricultural Supply, Inc., which was purchased by the Company in
1998. The result of the arbitration was that the Company was awarded an
indemnification of $465,000 for uncollectible receivables included in the assets
purchased from the former owners. However, the former owners were awarded an
earn-out for the fiscal year 1999 of $449,000. The earn-out will be paid by
offsetting it with the indemnification, plus a combination of cash and Company
Common Stock. The earn-out is classified as an adjustment to the purchase price,
effective January 1, 2000. Therefore, amortization of $53,000 was recognized in
the fourth quarter of fiscal year 2000 operating results.
19
20
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, 2000.
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.
HIGH LOW
--------- ---------
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
2000
1st Quarter ............... 5.750 3.063
2nd Quarter ............... 3.438 1.063
3rd Quarter ............... 2.031 0.938
4th Quarter ............... 1.563 0.531
As of April 16, 2001 there were approximately 19,645,144 shares of
Common Stock outstanding held by approximately 245 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 its lenders. The Company
intends to retain any earnings for use in the operation and expansion of its
business.
20
21
ITEM 6 SELECTED FINANCIAL DATA
The following selected financial data of 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. The
data presented below has been restated to reflect the Revenues and Expenses
excluding the Turf Partners distribution business sold to Simplot on July 28,
2000.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues $ 34,433 $ 33,469 $ 29,420 $ 14,924 $ 5,463
Cost of revenues 24,678 25,201 19,194 7,381 2,543
-------- -------- -------- -------- --------
Gross profit 9,755 8,268 10,226 7,543 2,920
Operating expenses:
Selling, general and administrative 15,219 17,764 14,558 6,844 5,170
Research and development 608 1,065 584 269 475
Amortization 629 540 455 166 464
Special charges 1,155 -- 1,280 -- --
Legal settlement -- 198 -- -- --
-------- -------- -------- -------- --------
Loss from operations (7,856) (11,299) (6,651) 264 (3,189)
Interest expense 3,408 1,315 1,570 577 996
Interest income 158 268 479 97 --
Income taxes 156 -- -- -- --
-------- -------- -------- -------- --------
Loss from continuing operations (11,262) (12,346) (7,742) (216) (4,185)
Loss from discontinued operations (10,185) (6,060) (2,263) (862) (8)
Gain on sale of discontinued operations 21,358 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) before extraordinary item (89) (18,406) (10,005) (1,078) (4,193)
Loss from extraordinary item (3,820) -- -- -- --
-------- -------- -------- -------- --------
Net loss before cumulative effect (3,909) (18,406) (10,005) (1,078) (4,193)
Loss from cumulative effect (752) -- -- -- --
-------- -------- -------- -------- --------
Net loss $ (4,661) $(18,406) $(10,005) $ (1,078) $ (4,193)
======== ======== ======== ======== ========
Loss per share of common stock, basic and
diluted:
Income (loss) from continuing operations $ (0.60) $ (0.70) $ (0.47) $ (0.02) $ (0.72)
Loss from discontinued operations 0.60 (0.35) (0.14) (0.08) --
Loss from extraordinary item (0.20) -- -- -- --
Loss from cumulative effect (0.04) -- -- -- --
-------- -------- -------- -------- --------
Net loss $ (0.24) $ (1.05) $ (0.61) $ (0.10) $ (0.72)
======== ======== ======== ======== ========
Shares used in calculating net loss per share,
basic and diluted 18,680 17,550 16,361 11,327 5,815
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 903 $ 131 $ 759 $ 2,918 $ 73
Working capital (deficit) 856 (15,967) 9,693 10,303 (5,927)
Total assets 35,394 43,191 39,334 23,248 9,013
Long term obligations, net of current portion 3,251 1,307 22,438 1,392 1,826
Total shareholders' equity $ 15,982 $ 16,027 $ 28,543 $ 29,779 $ (74)
21
22
EARNINGS BEFORE INTEREST, INCOME TAXES, DEPRECIATION AND AMORTIZATION
(EBITDA)
EBITDA is net income (loss) excluding interest income, interest expense,
depreciation and amortization expense. While EBITA should not be construed as a
substitute for income (loss) from operations, net income (loss) or cash flows
from operating activities in analyzing the Company's operating performance,
financial condition or cash flows, the Company is reporting EBITDA because it is
commonly used by certain users of the Company's financial statements to analyze
and compare companies on the basis of operating performance, leverage and
liquidity and to determine a company's ability to service debt.
EBITDA of continuing operations is calculated as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Net loss from continuing operations $(11,262) $(12,346) $ (7,742) $ (216) $ (4,184)
Interest income (158) (269) (479) (97) --
Income Taxes 156 -- -- -- --
Interest expense 3,408 1,315 1,570 577 996
Depreciation 2,440 2,146 980 692 383
Amortization 629 540 455 166 464
-------- -------- -------- -------- --------
EBITDA $ (4,787) $ (8,614) $ (5,216) $ 1,122 $ (2,341)
======== ======== ======== ======== ========
Cash Flow:
Operating Activities $ (8,175) $(11,894) $ (8,615) $ (9,759) $ (4,630)
Investing Activities 18,968 (4,812) (6,569) (11,220) (1,187)
Financing Activities (10,845) 14,524 15,469 2,975 150
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. Unless otherwise noted, the discussion refers to
continuing operations.
GENERAL
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. The Company's 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 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.
22
23
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 Simplot crops in 2001.
Following the Asset Sale the Company began invoicing the Bioject
customers directly and paying a commission to the Simplot salesmen for renewed
microbial and service contracts and the sale of Bioject units.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO 1999
REVENUES
In 2000, revenues from continuing operations were $34.4 million, an
increase of 2.9% versus $33.5 million in 1999. The overall increase in revenues
reflects an increase in our proprietary revenues which was offset by a decrease
in our distributed revenues. The increase/decrease in revenues in 2000 can be
primarily attributed to changes in quantities sold.
In 2000, proprietary revenues were $11.4 million, an increase of 32.8%
versus $8.6 million in 1999. The increase in proprietary revenues is due to
initial deliveries of our new RhizUp(TM) product, increased sales of our
specialty chemical line of products and an increase in the sales of
FreshPack(TM) products compared to 1999. In 2000, distributed revenues were
$23.0 million, a decrease of 7.4% versus $24.9 million for 1999. The decrease in
distributed revenues is primarily due to the closing of five unprofitable stores
that were operated by the Company's Agricultural Supply subsidiary.
GROSS PROFIT
In 2000, the Company's gross profit was $9.8 million, an increase of 18%
versus $8.3 million in 1999. In 2000, the Company's gross margin was 28% versus
25% in 1999. The increase in gross margin was due to a better mix of the high
margin proprietary sales vs the lower margin distributed sales in 2000 compared
to 1999. It is the strategy of the Company to continue this trend by emphasizing
the high margin proprietary products in its allocation of marketing and sales
resources. The gross margins of the distributed products were also impacted
negatively by the liquidity problems of the Company that prohibited the taking
of cash and volume purchase discounts and rebates.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
In 2000, SG&A expense was $15.2 million, a decrease of 14.3% versus
$17.8 million in 1999. SG&A expense as a percentage of revenues was 44.2% in
2000 compared to 53.1% 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. The Company closed
unprofitable stores and eliminated redundant positions between the Eco Soil and
Ag Supply businesses in 2000. The Company expects the cost reduction efforts to
continue until each store and business unit is individually profitable.
RESEARCH AND DEVELOPMENT
In 2000, R&D expense was $608,000, a decrease of 42.9% versus $1.1
million in 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
In 2000, amortization expense was $629,000, an increase of 16.4% versus
$540,000 in 1999. The increase is primarily due to amortization associated with
additional goodwill capitalized in 2000 as a result of an adjustment to the
purchase price of the Agricultural Supply subsidiary.
23
24
INTEREST EXPENSE
In 2000, interest expense was $3.4 million, an increase of 159.2% versus
$1.3 million in 1999. The increase is primarily due to the amortization of
additional $2.0 million of non-cash debt issuance costs incurred in 2000
associated with the warrants and beneficial conversion option granted to the
Convertible Debenture and the Senior Subordinated Note holders.
NET LOSS FROM CONTINUING OPERATIONS
In 2000, net loss from continuing operations was $11.3 million or $0.60
per share versus a net loss of $12.3 million or $0.70 per share in 1999.
LOSS FROM EXTRA ORDINARY ITEM
In 2000 the Company incurred an extraordinary, non-cash charge of $3.8
million for the write-off of the debt issuance costs related to the early
retirement of its Senior Subordinated Notes from the proceeds of the Asset Sale.
LOSS FOR CUMULATIVE EFFECT IN ACCOUNTING FOR WARRANTS ISSUED WITH CONVERTIBLE
DEBT.
In the fourth quarter 2000 the Company incurred a charge of $0.75
million to comply with the position taken by the Securities and Exchange
Commission on November 16, 2000 that applied retro-actively to the Convertible
Debentures that the Company issued in January 2000 (see Note 1).
YEAR ENDED DECEMBER 31, 1999 COMPARED TO 1998
REVENUES
In 1999, our revenues were $33.5 million, an increase of 13.8% versus
$29.4 million in 1998. The increase in revenues reflects an increase in
distributed revenues offset by a decrease in proprietary revenues. . The
increase/decrease in revenues in 2000 can be primarily attributed to changes in
quantities sold.
In 1999, proprietary sales were $8.6 million, a decrease of 1.3% versus
$8.7 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) new FreshPack programs challenged our
sales force, while providing the customer with a cheaper alternative to the
BioJect, (iii) the delay in approval of certain biocontrol products from the
EPA, (iv) customers believed their improved turf, resulting from several seasons
of BioJect programs, could manage without a 1999 program and (v) drought
conditions in the Midwest and Northeast. However, the decreases noted above were
offset with sales from the introduction of the Company's proprietary liquid
fertilizer line of products.
In 1999, distributed sales were $24.9 million, an increase of 20.0%
versus $20.7 million in 1998. The increase was due to a full years activity of
the 1998 acquisition of Agricultural Supply and the opening of new warehouses,
which extended market penetration to new geographic areas.
GROSS PROFIT
In 1999, our gross profit was $8.3 million, a decrease of 19.1% versus
$10.2 million for 1998. The decrease in gross profit was primarily due to a
decrease in proprietary sales. In 1999, our gross margin was 24.7% versus 49.3%
for 1998. The decrease in gross margin is attributed 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
In 1999, selling, general and administrative ("SG&A") expense was $17.8
million, an increase of 22% versus $14.6 million in 1998. SG&A expense as a
percentage of revenues was 49.5% in 1999 and 1998. The increase in SG&A expense
was primarily
24
25
due to additional overhead costs associated with the opening of additional
warehouses 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
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 the
Company.
AMORTIZATION EXPENSE
In 1999, amortization expense was $540,000, an increase of 18.8% versus
$455,000 in 1998. The increase in amortization expense is due to a full year of
amortization related to the 1998 acquisitions of Agricultural Supply, Inc.,
offset by the absence of amortization related to the Aspen Consulting
operations, which was written-off in 1998.
INTEREST EXPENSE
In 1999, interest expense was $1.3 million, a decrease of 15.8% versus
$1.6 million in 1998. The decrease is the net result of the following: (i)
included in the 1998 interest expense are charges related to the replacement of
a prior bank credit facility from Provident Bank with a new facility from
Imperial Bank and (ii) additional interest expense associated with the increase
in debt outstanding during 1999.
NET LOSS FROM CONTINUING OPERATIONS
For the year ended December 31, 1999, net loss from continuing
operations was $12.3 million or $.71 per share compared to a net loss of $7.7
million or $.47 per share for the year ended December 31, 1998.
SPECIAL CHARGES
During the fourth quarter of 1998, the Company recorded the special
charges of $3.9 million described above. Approximately $2.6 million of the
special charges related to the discontinued operations. Details of the special
charges (in thousands) through December 31, 2000 are as follows:
Details of the restructuring charge (in thousands) are as follows:
DESCRIPTION OF CHARGE:
CASH ACCRUED CASH ACCRUED
EXPENDED LIABILITIES EXPENDED LIABILITIES
CASH/ THROUGH AT THROUGH AT
NON AMOUNT OF DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
CASH CHARGE 1999 1999 2000 2000
-------- --------- ------------ ------------ ------------ ------------
REORGANIZATION OF OPERATING STRUCTURE:
Severance of employees ................ Cash $ 338 $ 334 $ 4 $ 4 --
Vacated lease facilities .............. Cash 55 4 51 51 --
Write-downs of assets removed from
operations .......................... Non-cash 93 -- -- -- --
Professional fees ..................... Cash 59 47 12 12 --
Other ................................. Cash 53 51 2 2 --
------ ------ ------ ------ ----
598 436 69 69 --
IMPAIRMENT LOSS ON CERTAIN ASSETS:
Goodwill related to Turf Products
subsidiary .......................... Non-cash 1,487 -- -- -- --
Goodwill related to TurfMakers
subsidiary .......................... Non-cash 919 -- -- -- --
------ ------ ------ ------ ----
2,406 -- -- -- --
------ ------ ------ ------ ----
EXIT OF ASPEN CONSULTING OPERATIONS:
Severance of employees ................ Cash 143 124 19 19 --
Write-downs of assets removed from
operations .......................... Non-cash 575 -- -- -- --
Vacated lease facilities .............. Cash 84 63 21 21 --
Other ................................. Cash 69 47 22 22 --
====== ====== ====== ====== ====
871 234 62 62 --
------ ------ ------ ------ ----
TOTAL SPECIAL CHARGES ....................... $3,875 $ 670 $ 131 $ 131 --
====== ====== ====== ====== ====
25
26
During the fiscal year of 2000, the Company incurred a restructuring
charge of $1.2 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 fiscal year 2001.
Details of the restructuring charge (in thousands) are as follows:
CASH EXPENDED ACCRUED
THROUGH LIABILITIES AT
CASH/ AMOUNT OF DECEMBER 31, DECEMBER 31,
DESCRIPTION OF CHARGE: NON-CASH CHARGE 2000 2000
---------------------- -------- --------- ------------- ---------------
REORGANIZATION OF AGRICULTURAL SUPPLY
OPERATING STRUCTURE:
Severance of employees ........... Cash $ 247 $ 176 $ 71
Vacated lease facilities ......... Cash 63 58 5
Write-downs of assets removed from Non-cash
operations ..................... 812 812 --
Professional fees ................ Cash 23 21 2
Other ............................ Cash 10 10 --
------ ------ ------
$1,155 $1,077 $ 78
====== ====== ======
The following is a summary of revenue and net operating losses (in thousands)
for the locations that were closed:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
------- ------- -------
Revenues $ 630 $ 1,742 $ 268
======= ======= =======
Loss from operations
$ (892) $(1,059) $(1,606)
======= ======= =======
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 net cash used in
operating activities was $8.2 million and cash provided from investing
activities was $18.7 million attributable to the net proceeds from the Asset
Sale, together they provided net cash of $10.5 million during the year ended
December 31, 2000.
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. On July 28, 2000, the Company retired $14 million of
the Notes from the proceeds of the Asset Sale. Also, 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 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. As a result of the retirement, the Company wrote-off $3.8 million of
unamortized debt issuance costs associated with the Notes.
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 was 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
26
27
December 31, 1999, Turf Partners had fully utilized the availability under the
Coast Working Capital Facility based on eligible inventory and receivables. On
July 28, 2000 at the closing of the Asset Sale the Coast Business Credit working
capital facility was assumed by Simplot.
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 eligible inventory and receivables. 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 December 31, 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 $5.2 million.
On March 21, 2001 the Company entered into a Change in Terms Agreement with FNB
that extended the working capital facility to March 31, 2001 and waived the
covenant violations as of December 31, 2000. The Change in Terms Agreement
further prohibits the Company from making any payments to subordinated debt
holders, thereby putting the Company in default with the Debentures (discussed
below) and the Amended Notes. The Company has not obtained extensions and
waivers from its debt holders beyond March 31, 2001 but is in the process of
negotiating further extensions at this time.
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. effective January 5, 2001 Coast Business Credit
drew on the Letter of Credit provided by Simplot as part of the Asset Sale and
Term Loan agreement (discussed below). As a result, the debt to Coast Business
Credit has been retired and the Company owes Simplot $1.2 million plus interest
pursuant to Term Loan Agreement. Any draw on the Letter of Credit must be repaid
from the proceeds of proprietary sales to Simplot, no time frame for the
repayment is specified. The Company is negotiating a mutually acceptable
repayment schedule with Simplot. Until the draw on the Letter of Credit is
repaid, Simplot has the primary secured position on all assets of Eco Soil
except for the Biojects that are pledged under the First National Bank working
capital facility.
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 were originally 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. On December 11,
2000, the Company and the Debenture holders entered into Amendment No. 1 of the
Debentures Agreement, which modified the maturity of the Debentures to $1.5
million (plus 10% premium thereon) due on January 24, 2001 and $2.9 million due
January 24, 2002.. On March 7, 2000, the Company and the Debenture holders
entered into Amendment No. 2 of the Debentures Agreement, which called for a
closing prior to March 31, 2001 at which the maturity of the Debentures would be
modified to $1.5 million (plus a 10% premium thereon) due on March 31, 2001 and
$2.9 million due January 24, 2002. In connection with Amendment No. 2, the
Debenture holders were issued additional warrants to purchase 500,000 shares of
common stock with an exercise price of $1.10 per share. In addition, as part of
the Amendment No. 2, the Company agreed that if the Company did not make the
March 31, 2001 payment, the Debenture holders would be entitled to additional
warrants to purchase an additional 200,000 shares of common stock with an
exercise price of $1.10 per share. The contemplated closing did not occur, so
the maturity of the Debentures has not changed. In addition, the Company did not
meet the March 31, 2001 payment requirement. As a result the Company is required
to issue the additional 200,000 warrants to the Debenture holders.
On April 12, 2000, the Company entered into a Term Loan Agreement ("Term
Loan") with Simplot. The $3 million Term Loan was paid to the Company in July
2000 and used for working capital purposes. The Term Loan was repaid in the same
month, July 2000, from the proceeds of the Asset Sale, described above.
27
28
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 December 31, 2000, the Company was not in
compliance with certain of these covenants. Since the Coast Term Loan was
paid-off by Simplot, a waiver for non-compliance was not required. First
National Bank provided a waiver of such covenants through March 31, 2001.
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. During 2001 the Company also
intends to sell or lease all of the Biojects it presently has in service to the
end user. This change in strategy will increase cash flows from operations over
the previous method of renting the Biojects. There can be no assurance that Eco
Soil will be successful in selling the Biojects or 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.
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's working capital
facility with First National Bank is based on the prime rate of interest. A 200
basis point change in the prime rate of interest for one year would change the
interest the Company would pay on the $5.2 million loan balance of $104,000 per
year.
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
29
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 2001 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 2001 Annual Meeting that is incorporated
herein by reference:
ITEM NO. ITEM CAPTION PROXY STATEMENT CAPTION
-------- ------------ -----------------------
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"
PART IV
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
30
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 17th day of
April 2001.
ECO SOIL SYSTEMS, INC.
By: /s/ William B. Adams
--------------------------------------
William B. Adams
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ William B. Adams Chairman of the Board and Chief Executive Officer April 17, 2001
---------------------------------- (Principal executive officer)
William B. Adams
/s/ Max D. Gelwix Chief Operating Officer April 17, 2001
----------------------------------
Max D. Gelwix
/s/ Dennis N. Sentz Chief Financial Officer April 17, 2001
---------------------------------- (Principal financial officer & Principal
Dennis N. Sentz accounting officer)
/s/ William S. Potter Director April 17, 2001
----------------------------------
William S. Potter
/s/ Edward N. Steel Director April 17, 2001
----------------------------------
Edward N. Steel
/s/ Allan R. Lyons Director April 17, 2001
----------------------------------
Allan R. Lyons
30
31
ECO SOIL SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of McGladrey & Pullen, LLP, Independent Auditors ............................................ F-2
Report of Ernst & Young, LLP, Independent Auditors ................................................. F-3
Consolidated Balance Sheets as of December 31, 2000 and 1999 ....................................... F-4
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 ......... F-5
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998 ................................................................. F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 ......... F-7
Notes to Consolidated Financial Statements ......................................................... F-8
F-1
32
REPORT OF MCGLADREY & PULLEN, LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Eco Soil Systems, Inc.
San Diego, California
We have audited the accompanying balance sheet of Eco Soil Systems, Inc. as of
December 31, 2000 and the related statements of operations, shareholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eco Soil Systems, Inc. as of
December 31, 2000, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
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 limited working
capital. In addition, the Company is currently seeking a new credit facility to
replace the expired facility with the current lender. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management plans in regard to these matters are also discussed 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 amount
and classification of liabilities that may result from the outcome of this
uncertainty.
/s/ MCGLADREY & PULLEN, LLP
San Diego, California
March 14, 2001
F-2
33
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Eco Soil Systems, Inc.
We have audited the accompanying consolidated balance sheet of Eco Soil
Systems, Inc. as of December 31, 1999, and the related consolidated statements
of operations, shareholders' equity and cash flows for each of the two years in
the period ended December 31, 1999. Our audits also included the financial
statement schedule listed in the Index at Item 14 (a) for each of the two years
in the period ended December 31, 1999. 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 the consolidated results of its
operations and its cash flows for each of the two 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.
San Diego, California
March 3, 2000
F-3
34
ECO SOIL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Current Assets:
Cash and cash equivalents $ 903 $ 131
Accounts receivable, net of allowance for doubtful accounts of $773 and
$1,546 at December 31, 2000 and December 31, 1999, respectively 4,031 5,131
Inventories 10,254 5,681
Prepaid expenses and other current assets 987 3,078
-------- --------
Total current assets 16,175 14,021
Equipment under construction 5,870 5,042
Property and equipment, net 4,978 12,790
Intangible assets, net 6,597 6,726
Debt issuance costs, net 282 4,075
Note Receivable-Long Term 1,064 --
Other assets 428 537
Net non-current assets of discontinued operations -- 9,358
-------- --------
Total assets $ 35,394 $ 52,549
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,103 $ 4,710
Accrued expenses 2,303 3,661
Current portion of long-term obligations 8,913 21,617
Net current liabilities of discontinued operations -- 4,704
-------- --------
Total current liabilities 15,319 34,692
Long-term obligations, net of current portion 3,251 1,307
Deferred gain on sale/leaseback of building 465 523
Other 377 --
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, 2000 and
December 31, 1999, 18,915,547 (including 36,320 issuable shares) and
18,349,965 shares issued and outstanding at December 31, 2000 and
December 31, 1999, respectively 96 92
Additional paid-in capital 58,713 55,578
Warrants 4,362 2,733
Accumulated deficit (47,037) (42,376)
-------- --------
16,134 16,027
Treasury stock (112) --
Note Receivable-Shareholders (40) --
-------- --------
Total shareholders' equity 15,982 16,027
-------- --------
Total liabilities and shareholders' equity $ 35,394 $ 52,549
======== ========
See accompanying notes.
F-4
35
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
-------- -------- --------
Revenues:
Proprietary Products .................... $ 11,379 $ 8,571 $ 8,681
Distributed Products .................... 23,054 24,898 20,739
-------- -------- --------
Total revenues .................. 34,433 33,469 29,420
Cost of revenues:
Proprietary Products .................... 5,530 6,245 4,352
Distributed Products .................... 19,148 18,956 14,842
-------- -------- --------
Total cost of revenues .......... 24,678 25,201 19,194
Gross profit ..................................... 9,755 8,268 10,226
Operating expenses:
Selling, general and administrative ..... 15,219 17,764 14,558
Research and development ................ 608 1,065 584
Amortization of intangibles ............. 629 540 455
Special charges ......................... 1,155 -- 1,280
Legal Settlement ........................ -- 198 --
-------- -------- --------
Loss from operations ............................. (7,856) (11,299) (6,651)
Interest expense ................................. 3,408 1,315 1,569
Interest income .................................. 158 268 479
Income taxes ..................................... 156 -- --
-------- -------- --------
Loss from continuing operations .................. (11,262) (12,346) (7,742)
Loss from discontinued operations ................ (10,185) (6,060) (2,263)
Gain on sale of discontinued operations
(less applicable income taxes of $80) ............ 21,358 -- --
-------- -------- --------
Net income (loss) before extraordinary item ...... (89) (18,406) (10,005)
Loss from extraordinary item ..................... (3,820) -- --
-------- -------- --------
Net loss before cumulative effect ................ (3,909) (18,406) (10,005)
Cumulative effect of change in accounting for
warrants issued with convertible debt ............ (752) -- --
-------- -------- --------
Net loss ......................................... $ (4,661) $(18.406) $(10,005)
======== ======== ========
Loss per share of common stock, basic and diluted:
Income (loss) from continuing operations ......... $ (0.60) $ (0.70) $ (0.47)
Income (loss) from discontinued operations ....... 0.60 (0.35) (0.14)
Loss from extraordinary item ..................... (0.20) -- --
Cumulative effect ................................ (0.04) -- --
-------- -------- --------
Net Loss ......................................... $ (0.24) $ (1.05) $ (0.61)
======== ======== ========
Shares used in calculating income (loss) per share
basic and diluted: ............................... 18,680 17,550 16,361
======== ======== ========
See accompanying notes
F-5
36
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
COMMON STOCK ADDITIONAL
------------------------------ PAID-IN
SHARES AMOUNT CAPITAL WARRANTS
----------- ----------- ----------- -----------
Balance at December 31, 1997 .......................... 15,320,923 77 $ 43,708 242
Issuance of common stock in connection with
acquisitions ...................................... 531,880 2 3,656 --
Shares issued in connection with earn-out
provisions of acquisitions ........................ 196,563 1 1,612 --
Warrants issued in connection with debt ........... -- -- -- 788
Repayment on notes receivable from shareholders ... -- -- -- --
Exercise of stock options and warrants ............ 1,015,210 5 2,509 (72)
Net loss .......................................... -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1998 .......................... 17,064,576 85 $ 51,485 958
Issuance of common stock in connection with
acquisitions ...................................... 1,548 1 747 --
Shares issued in connection with debt ............. 402,208 2 1,273 --
Warrants issued in connection with debt ........... -- -- -- 1,572
Warrants issued for services provided ............. -- -- 74 206
Repayment on notes receivable from shareholders ... -- -- -- --
Exercise of stock options and warrants ............ 791,633 4 1,999 (3)
Net loss .......................................... -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1999 .......................... 18,349,965 $ 92 $ 55,578 $ 2,733
Redemption of common stock previously issued ...... (42,146) -- (121) --
Shares issued in connection with debt ............. 372,837 1 1,034 --
Warrants issued in connection with debt ........... -- -- -- 1,629
Notes receivable from shareholders ................ -- -- -- --
Stock purchase .................................... -- -- -- --
Exercise of stock options and warrants ............ 198,571 -- 45 --
Beneficial conversion feature ..................... -- -- 1,706 --
Issuance of stock options ......................... -- -- 442 --
Other ............................................. 36,320 3 29 --
Net loss .............................................. -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 2000 .......................... 18,915,547 $ 96 $ 58,713 $ 4,362
=========== =========== =========== ===========
NOTE
RECEIVABLE
FROM ACCUMULATED TREASURY
SHAREHOLDERS DEFICIT STOCK TOTAL
------------ ----------- ----------- -----------
Balance at December 31, 1997 .......................... $ (282) $ (13,965) $ 29,780
Issuance of common stock in connection with
acquisitions ...................................... -- -- -- 3,658
Shares issued in connection with earn-out
provisions of acquisitions ........................ -- -- -- 1,613
Warrants issued in connection with debt ........... -- -- -- 788
Repayment on notes receivable from shareholders ... 267 -- -- 267
Exercise of stock options and warrants ............ -- -- -- 2,442
Net loss .......................................... -- (10,005) -- (10,005)
----------- ----------- ----------- -----------
Balance at December 31, 1998 .......................... $ (15) $ (23,970) -- $ 28,543
Issuance of common stock in connection with
acquisitions ...................................... --
-- 748
Shares issued in connection with debt ............. -- -- -- 1,275
Warrants issued in connection with debt ........... -- -- -- 1,572
Warrants issued for services provided ............. -- -- -- 280
Repayment on notes receivable from shareholders 15 -- -- 15
Exercise of stock options and warrants ............ -- -- -- 2,000
Net loss .......................................... -- (18,406) -- (18,406)
----------- ----------- ----------- -----------
Balance at December 31, 1999 .......................... $ -- $ (42,376) $ -- $ 16,027
Redemption of common stock previously issued ...... -- -- -- (121)
Shares issued in connection with debt ............. -- -- -- 1,035
Warrants issued in connection with debt ........... -- -- -- 1,629
Notes receivable from shareholders ................ (40) -- -- (40)
Stock purchase .................................... -- -- (112) (112)
Exercise of stock options and warrants ............ -- -- -- 45
Beneficial conversion feature ..................... -- -- -- 1,706
Issuance of stock options ......................... -- -- -- 442
Other ............................................. -- -- -- 32
Net loss .............................................. -- (4,661) -- (4,661)
----------- ----------- ----------- -----------
Balance at December 31, 2000 .......................... $ (40) $ (47,037) $ (112) $ 15,982
=========== =========== =========== ===========
See accompanying notes.
F-6
37
ECO SOIL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
-------- -------- --------
OPERATING ACTIVITIES:
Net loss from continuing operations $(11,262) $(12,346) $ (7,742)
Adjustments to reconcile net cash used in
operating activities: --
Depreciation and amortization 3,068 2,706 2,233
Amortization of debt issuance costs and discount on long-term debt 1,988 528 238
Deferred Rent (14) (43) 566
Provision for losses on accounts receivable 938 1,478 1,113
Loss/(gain) on sale of property and equipment 73 103 69
Issuance of stock options/warrants for services 656 280 --
Special charges, non-cash portion -- -- 3,752
Gain on redemption of common stock (121) -- --
Changes in operating assets and liabilities (1,911) (1,633) (10,027)
-------- -------- --------
Net cash used in operating activities of continuing
operations (6,585) (8,927) (9,798)
Net cash (used in) provided by operating activities
of discontinued operations (1,593) (2,967) 1,183
-------- -------- --------
Net cash used in operating activities (8,178) (11,894) (8,615)
INVESTING ACTIVITIES:
Net proceeds from Asset Sale 18,968 -- --
Proceeds from the sale of property and equipment 585 126 383
Proceeds from sale of patent rights 100 -- --
Payments related to acquired businesses, net of cash acquired -- -- (3,175)
Payments for equipment under operating leases -- -- (1,998)
Purchase of long-term investments -- -- (100)
Sale of short-term investments -- -- 3,000
Equipment under construction -- (153) (1,751)
Purchase of property and equipment (591) (4,119) (1,678)
Purchase of patents and licenses (321) (303) (644)
-------- -------- --------
Net cash provided by (used in) investing activities of continuing operations 18,741 (4,449) (5,963)
Net cash used in investing activities of discontinued operations (43) (363) (606)
-------- -------- --------
Net cash provided by (used in) investing activities 18,698 (4,812) (6,569)
FINANCING ACTIVITIES:
Advances (to) from shareholders -- 15 267
Proceeds from subordinated debt -- -- 15,000
Proceeds from short-term obligations 7,457 37,444 --
Repayments of short-term obligations (17,778) (31,056) --
Proceeds from long-term obligations -- 4,313 31,115
Repayments of long-term obligations (937) (10,417) (28,931)
Net proceeds from issuance of common stock 47 2,000 2,442
Debt issuance costs (588) (357) (1,767)
Purchase of treasury stock (111) -- --
-------- -------- --------
Net cash (used in) provided by financing activities of continuing operations (11,910) 1,942 18,126
Net cash provided by (used in) financing activities of discontinued operations 1,065 12,582 (2,657)
-------- -------- --------
Net cash (used in) provided by financing activities (10,845) 14,524 15,469
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (325) (2,182) 285
Cash and cash equivalents at beginning of period of continuing operations 131 761 2,918
(Increase) decrease in cash and cash equivalents of discontinued operations 1,097 1,552 (2,444)
-------- -------- --------
Cash and cash equivalents at end of period of continuing operations $ 903 $ 131 $ 759
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,118 $ 2,622 $ 1,055
Warrants issued relating to debt issuance cost $ 1,381 $ 1,572 --
Warrants issued in connection with debt for services provided $ 248 $ 206 --
Bioject Systems reclassified from PP&E to Inventory $ 5,800 --
Shares of common stock issued in connection with debt $ 1,035 -- --
See accompanying notes
F-7
38
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
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's sales and marketing are focused on the golf market,
agricultural crop and ornamental markets.
Basis of Presentation
As of December 31, 2000, 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. 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. As of the filing date the Company is seeking to obtain credit
approval for a new multi-year working capital facility. The working capital
facility at First National Bank is only extended on a month-to-month basis. The
Company anticipates significant new cost reduction efforts and the addition of
new distribution in the southern United States that will improve the operating
cash flows. The Company believes that those actions, the new three year
$10,000,000 working capital facility, if obtained, coupled with the sale of the
Biojects will provide adequate working capital for the next year and beyond.
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. The consolidated financial
statements have been restated to reflect the results of the Turf Partners
business as a discontinued operation. See Note 3.
F-8
39
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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,
on-going analysis of recoverability of goodwill, valuation of warrants (by using
the Black-Scholes method), 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
and 1998. However, since July 28, 2000, when the Company sold the assets of Turf
Partners, Inc. (see Note 3) to the J.R. Simplot Company ("Simplot"), the Company
now has a concentration of risk in this new distributor that covers the upper
Midwest, Northeast and Southwest. For the fiscal year 2000, sales to Simplot
accounted for 11% of revenues. During the latter part of 2000, the Company added
new sales and marketing personnel to develop new distribution in the areas of
the U.S. that are not represented by Simplot.
Also, the Company serves a wide variety of agricultural customers,
primarily growers, who are concentrated principally in the southwestern U.S.
and, to a lesser extent, in Mexico. The Company's Agricultural Supply segment
has approximately $6.5 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, notes receivable, accrued expenses and long-term
debt are carried at cost, which management believes approximates the fair value.
The Company has determined that the long-term debt's cost approximates fair
value since the maturities are less than two years.
Inventories
Inventories are carried at the lower of cost (first-in, first-out
method) or market. Inventories attributable to continuing operations at the end
of the respective years consist of the following (in thousands):
2000 1999
-------- --------
BioJect systems $ 5,787 $-
Other inventory 4,842 5,971
-------- --------
10,629 5,971
Less reserves (375) (290)
-------- --------
$ 10,254 $ 5,681
======== ========
In 2000, BioJect systems previously leased to customers were
transferred, at their net book value, from property, plant and equipment to
inventory. The Company anticipates selling theses systems during fiscal year
2001. Other inventories consist primarily of proprietary products,
non-proprietary chemical, fertilizer and irrigation equipment and other
agricultural supplies.
Equipment Under Construction
Equipment under construction is comprised of BioJect systems that are
completed or near completion. Units classified in this category have not been
placed into service at a customer site. Independent third parties construct the
BioJects and the Company performs final assembly and quality testing.
F-9
40
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
using the straight-line and accelerated methods over the estimated service lives
of the assets, generally ranging from 3 to 5 years. Equipment under capital
leases is amortized over the shorter of the estimated useful life of the assets
or the lease term, and such amortization is included in depreciation in the
accompanying financial statements.
Intangible Assets
Intangible assets consist primarily of the excess of the purchase price
over the fair value of the assets acquired ("goodwill") related to the Company's
various acquisitions (see Note 2). Such intangible assets are generally being
amortized over a period of 10 years.
Certain of the Company's acquisitions involved earn-out payments which
were and some currently are payable to the former shareholders of the acquired
businesses based on the post-acquisition performance of the acquired businesses.
The Company evaluates such obligations in accordance with EITF 95-8, "Accounting
for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise
in a Purchase Business Combination." To date, all such contingent consideration
has been treated as additional purchase price due to various factors including,
but not limited to, the following: (i) the contingent consideration in certain
cases is payable to selling shareholders who were not employees of such
businesses and are not ongoing employees of the Company, (ii) the contingent
consideration is payable without regard to continuing employment of the selling
shareholders or (iii) the compensation arrangements for selling shareholders who
became employees of the Company are at a reasonable level in comparison to that
of similar employees.
The earn-out payments are based on annual (calendar year) results. The
Company determines its obligations at the conclusion of the annual period.
Amounts payable in cash are included in accrued expenses. Amounts payable in
stock are included in shareholders' equity.
Impairment of Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" (SFAS 121), the Company recognizes and records impairment losses
on long-lived assets used in operations when indicators of impairment are
present and the estimated undiscounted cash flows to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. Management
has evaluated long-lived assets for impairment and does not believe there is any
impairment as of December 31, 2000.
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 11).
Deferred Debt Issuance Costs
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 was 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 6) from Coast Business Credit.
During 2000, the Company capitalized and amortized approximately $2.3
million of debt issuance costs related to the Convertible Subordinated
Debentures (the "Debentures").
The deferred debt issuance costs are amortized using a method
approximating the interest method and is included in interest expense.
F-10
41
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred Rent
Deferred rent consists of the gain on the sale/leaseback of the
Company's principal facility in San Diego, California (see Note 9), which is
being amortized against rent expense on the straight-line basis over the initial
term of the leaseback.
Revenue Recognition
Proprietary sales revenue is derived primarily from the sale and rental
of Bioject equipment and related microbial and service contracts, Fresh Pack and
Specialty Chemical products, recognized upon shipment or performance of the
service. In addition, the Agricultural Supply subsidiaries in the U.S. and
Mexico, design drip irrigation systems. This design work is included in the
proprietary sales when payment is received from the customer.
Distributed sales revenue is derived primarily from sales of purchased
products to the Company's Agricultural customers, which has historically not
been very seasonal and is recognized upon shipment.
The Company generally does not allow for sales returns, and returns have
historically been minimal.
The Company's export sales totaled $13,167,000, $16,283,000 and
$13,156,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Such sales were principally to customers in Mexico. All foreign transactions are
denominated in U.S. dollars.
Cost of Revenues
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.
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.
Special Charges
Amounts accrued in connection with the Company's restructuring (see Note
11) 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.
The Company has warrants, options and convertible debt who's effect on
weighted average shares has not been included as they are anti-dilutive due to
the losses reported.
F-11
42
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Government Regulations
Substantially all of the Company's facilities are subject to federal,
state and local regulations relating to the discharge of materials into the
environment. Compliance with these provisions has not had, nor does the Company
expect such compliance to have, any material effect upon the operations,
financial condition, capital expenditures or competitive position of the
Company; however, there can be no assurance that compliance with such
regulations would not have a material effect upon the Company's future results
of operations or financial condition.
Management believes that its current practices and procedures for the
control and disposition of such materials comply with applicable federal and
state requirements.
Accounting Changes
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements. The Company adopted SAB 101 in the fourth quarter of 2000.
The adoption of SAB 101 did not have a material impact on the financial position
or the results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- an interpretation of APB
Opinion 25," ("Interpretation No. 44") which is generally effective July 1,
2000. Interpretation No. 44 clarifies the application of APB Opinion 25 for
certain matters, specifically (a) the definition of an employee for purposes of
applying APB Opinion 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The adoption of Interpretation No. 44 resulted in a charge of
$431,000 to the continuing operations, which was applicable to stock options
effectively reissued and maintained by the former Turf Partners employees.
The Emerging Issues Task Force is currently discussing Issue No. 00-27,
Application of EITF Issue No. 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," to
Certain Convertible Instruments ("Issue 00-27"). The Securities and Exchange
Commission's position that certain of the components of Issue 00-27 should be
applied to all transactions subject to Issue 98-5, including those transactions
for which a commitment date occurred before November 16, 2000. Therefore, in the
fourth quarter 2000, the Company applied the components of Issue 00-27
applicable to the 7% Senior Secured Convertible Debentures that were issued in
January 2000. The proceeds were reallocated between the Debentures and the
associated warrants based on the relative fair values before measuring the
amount of the beneficial conversion feature. As a result, the Company recognized
a cumulative effect adjustment of $752,000 in the fourth quarter of 2000.
Reclassifications
Certain prior-year amounts have been reclassified to conform to
current-year classifications.
2. ACQUISITIONS
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's 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. As of December 31, 2000, an earn-out of
$449,000 was accrued in connection with the fiscal year 1999 (see Note 13). The
excess of purchase price over the net tangible assets acquired totaled
$2,911,000, including the 1998 and 1999 earn-out payment and also including
approximately $282,000 for legal and other costs incurred associated with the
transaction.
F-12
43
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
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. In June 2000, 42,146 shares of
common stock initially issued in connection with the YSP acquisition were
redeemed in settlement of an indemnification claim against the former
shareholders. The redemption of shares was valued at the current market value on
the date of the redemption and was credited to operations.
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 adjusted 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):
AS ASM YSP RM AG
------- ------- ------- ------- -------
ASSETS ACQUIRED:
Cash ............................................. $ 340 $ 35 $ 98 $ 97 $ --
Accounts receivable .............................. 2,840 1,260 350 -- --
Inventories ...................................... 1,271 351 569 -- --
Prepaids and other assets ........................ 621 (495) 40 1 800
Property and equipment ........................... 621 623 371 55 200
Excess of purchase price over net tangible assets .. 3,691 893 1,094 645 --
------- ------- ------- ------- -------
TOTAL ASSETS ACQUIRED .............................. 9,384 2,667 2,522 798 1,000
LIABILITIES ASSUMED:
Accounts payable ................................. 2,516 1,081 690 4 --
Accrued expenses ................................. 201 252 117 706 --
Notes payable .................................... 2,293 26 443 -- --
------- ------- ------- ------- -------
TOTAL LIABILITIES ASSUMED .......................... 5,010 1,359 1,250 710 --
------- ------- ------- ------- -------
NET ASSETS ACQUIRED ................................ $ 4,374 $ 1,308 $ 1,272 $ 88 $ 1,000
======= ======= ======= ======= =======
F-13
44
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
The following unaudited pro forma results as of December 31, 1998 assume
the AS, ASM, YSP and RM acquisitions occurred on January 1, 1998. The pro forma
results have been prepared utilizing the historical financial statements of the
Company and the acquired businesses and has been adjusted to reflect the fact
that certain businesses were sold in 2000.
YEAR ENDED
DECEMBER 31,
1998
------------
Net sales (in thousands) .......... $ 41,062
Net loss (in thousands) .......... 8,444)
Net loss per share ................ (.51)
In addition in 1998, the Company acquired two businesses that are included in
discontinued operations. These businesses had an aggregate purchase price of
$4.6 million.
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. 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 $23.0 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.
The results of the discontinued operations (in thousands) were as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
-------- -------- --------
Revenues $ 39,727 $ 90,252 $ 53,175
Cost of revenues 31,650 72,057 40,655
-------- -------- --------
Gross profit 8,076 18,195 12,520
Operating expenses:
Selling, general and administrative 13,567 20,721 10,785
Amortization of intangibles 354 615 654
Special charges -- -- 2,595
-------- -------- --------
Loss from operations (5,845) (3,141) (1,514)
Interest expense 4,086 2,919 749
Income taxes 254 -- --
-------- -------- --------
Net Loss $(10,185) $ (6,060) $ (2,263)
======== ======== ========
F-14
45
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DISCONTINUED OPERATIONS (CONTINUED)
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 to the discontinued operations totaled $2.8
million, $2.2 million and $832,000 for the years ended December 31, 2000, 1999
and 1998, 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 $907,000,
$2.5 million and $0 for the years ended December 31, 2000, 1999 and 1998,
respectively. Also, the Company recognized an aggregate special charge of $3.9
million in fiscal year 1998 (see Note 11); of this amount, $2.6 million was
directly attributable to the discontinued operations, therefore, this amount was
allocated to the discontinued operations.
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 $80,000 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. 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.
Approximately $1,035,000 of the debt issuance costs relates to the January 2000
transactions in which the Company issued 372,837 shares of common stock to the
Note Holders in connection with a waiver that was provided to the Company for
the Asset Sale. The unamortized portion of the original value was included in
the $3.8 million of unamortized debt issuance cost written off.
5. BALANCE SHEET INFORMATION
Property and equipment attributable to the continuing operations
consists of the following at December 31, (in thousands):
2000 1999
-------- --------
Machinery and equipment ................ $ 2,682 $ 4,793
Vehicles ............................... 839 919
Leasehold improvements ................. 1,156 1,059
Furniture and fixtures ................. 847 1,113
Equipment placed in service ............ 3,623 9,925
-------- --------
9,147 17,809
Less accumulated depreciation
and amortization ...................... (4,169) (5,019)
-------- --------
$ 4,978 $ 12,790
======== ========
F-15
46
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. BALANCE SHEET INFORMATION (CONTINUED)
Intangible assets attributable to the continuing operations consist of the
following at December 31, (in thousands):
2000 1999
------- -------
Excess of purchase price over fair value of assets acquired ..... $ 6,334 $ 5,886
Other intangibles ............................................... 1,588 1,584
------- -------
7,922 7,470
Accumulated amortization ........................................ (1,325) (744)
------- -------
Total ........................................................... $ 6,597 $ 6,726
======= =======
6. LONG-TERM DEBT
Long-term debt attributable to the continuing operations consists of the
following at December 31, (in thousands):
2000 1999
------- -------
14% Senior Subordinated Notes
Interest and principal payable monthly,
due 1/28/2002 (as amended July 28, 2000) ................ $ 1,050 $15,000
Working capital facility
Based on eligible inventory and receivables,
interest is at the bank's prime rate plus 1.5%
(11.0% and 11.57% for the Domestic and Foreign
facility, respectively, at December 31, 2000), expiring
June 30, 2001 ........................................... 5,215 5,404
Two-year term loan with a bank
Interest payable monthly at the bank's
prime rate plus 2.25%(11.75% at
December 31, 2000); principal is due
July 30, 2001 ........................................... 1,133 2,230
7% Senior Secured Convertible Debentures
Interest payable quarterly, due January 2001 ............ 4,435 --
Other ..................................................... 331 290
------- -------
12,164 22,924
Less amount due within one year ........................... 8,913 21,617
------- -------
Long-term debt ............................................ $ 3,251 $ 1,307
======= =======
F-16
47
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
On August 25, 1998, the Company issued an aggregate of $15.0 million
principal amount of the Company's Senior Subordinated Notes due 2003 (the
"Notes") to two lenders secured by substantially all the assets of Eco Soil
Systems, Inc. and subsidiaries. On July 28, 2000, the Company retired $14.0
million of the Notes from the proceeds of the Asset Sale. Also, 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 the Notes not paid
on July 28, 2000. The Amended Notes are unsecured and 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. As a result of the retirement, the Company
wrote-off $3.8 million of unamortized debt issuance costs associated with the
Notes.
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 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. This facility is secured by substantially all the assets of
Agricultural Supply and Agricultural Supply de Mexico and by all Biojects owned
by the Company.
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. Effective January 5, 2001, Coast Business Credit
drew on the Letter of Credit provided by Simplot as part of the Asset Sale and
Term Loan Agreement (discussed below). As a result, the debt to Coast Business
Credit has been retired and the Company owes Simplot $1.2 million pursuant to
the Term Loan Agreement that must be repaid from the future purchase of
proprietary products by Simplot Partners.
On January 24, 2000, the Company issued $4.5 million of Senior Secured
Convertible Debentures (the "Debentures") and warrants to purchase 356,436
shares of common stock. The conversion price of the Debentures is the lower of
90% of the three lowest closing bid prices on the Principal Market during the
fifteenth consecutive Trading Days ending with the last Trading Day prior to the
date of conversion and $1.25. At the initial commencement date, the Company
recorded $954,000 for beneficial conversion features. The Debentures were
originally 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 Asset Sale. Effective
January 24, 2001, the Company and the Debenture holders entered into Amendment
No. 1 of the Debentures Agreement, which called for a closing at which the
maturity of the Debentures would be modified to $1.5 million (plus 10% premium
thereon) due on January 24, 2001 and $2.9 million due January 24, 2002. The
closing did not take place (see Note 13).
On April 12, 2000, the Company entered into a Term Loan Agreement ("Term
Loan") with Simplot. The $3 million Term Loan was obtained in July 2000 and used
for working capital purposes. The Term Loan was repaid from the proceeds of the
Asset Sale, described above.
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 December 31, 2000, the Company was not in
compliance with certain of these covenants. Since the Coast Term Loan was
paid-off by Simplot, a waiver for non-compliance was not required. First
National Bank provided a waiver of such covenants through March 31, 2001.
However, there can be no assurance that the Company will remain in compliance.
F-17
48
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
Aggregate maturities of long-term debt as of December 31, 2000 are as follows
(in thousands):
2001 $ 8,913
2002 3,123
2003 65
2004 34
2005 19
Thereafter 10
-------
TOTAL $12,164
=======
7. 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-18
49
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
In June 2000, the Company established the 2000 Employee Stock Option Plan (the
"2000 Employee Plan"). The 2000 Employee Plan provides for the issuance of up to
800,000 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 2000 Employee Stock Option Plan.
Under the 2000 Employee Plan, there were 448,500 options granted and
outstanding, as of December 31, 2000, that will vest based on performance
criteria of Simplot salespersons. The options have a five-year life and an
exercise price of $2.22. In February 2001, the performance related options
were fully vested by the Board of Directors.
A summary of the Company's stock option activity and related information
for the years ended December 31 is as follows:
2000 1999 1998
-------------------- -------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- ---------
Outstanding-beginning of Year .................. 4,681,955 $4.67 2,975,459 $4.29 2,700,330 $3.37
Granted ....................................... 1,281,800 $1.97 2,480,299 $4.97 705,574 $7.55
Exercised ..................................... (15,000) $3.00 (538,720) $3.10 (328,203) $3.23
Forfeited/cancelled ........................... (1,804,763) $4.70 (235,083) $6.60 (102,242) $6.11
--------- --------- ---------
Outstanding-end of year ........................ 4,143,992 $3.70 4,681,955 $4.67 2,975,459 $4.29
========= ========= =========
Exercisable-end of year ........................ 2,481,543 $3.90 2,023,988 $4.05 1,619,170 $3.33
========= ========= =========
Fair value per option of options granted
in current year .............................. $1.46 $3.45 $5.15
A summary of the Company's stock options outstanding as of December 31,
2000 is as follows:
WEIGHTED AVERAGE
RANGE OF OPTIONS WEIGHTED AVERAGE REMAINING OPTIONS WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- -----------------
.72-2.99 1,673,110 $ 1.99 $ 3.83 856,278 $ 2.19
3.00-5.99 2,096,436 $ 4.26 $ 2.18 1,340,088 $ 4.12
6.00-11.44 374,446 $ 8.16 $ 2.40 285,177 $ 8.02
--------- ---------
4,143,992 2,481,543
========= =========
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 2000 was estimated at the date of grant using
the Black-Scholes option pricing model with the following assumptions: risk-free
interest rates of 5.21% to 6.77%, dividend yield of 0%, volatility factor of
93.1% and a weighted-average expected life of the option of five years.
F-19
50
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
The fair value for options granted in 1999 was estimated at the date of
grant using the Black-Scholes method for option pricing with the following
assumptions: risk-free interest rates of 4.55% 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 Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective assumptions can materially affect the fair value estimate; in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of such options. The
effects of applying SFAS 123 for pro forma disclosure purposes are not likely to
be representative of the effects on pro forma net loss or net income in future
years because they do not take into consideration pro forma compensation expense
related to grants made prior to 1996. The Company's pro forma information
follows ( in thousands, except per share data):
YEAR ENDED DECEMBER 31:
2000 1999 1998
---------- ---------- ----------
Pro forma net loss from continuing operations .............. $ (15,344) $ (15,441) $ (9,261)
========== ========== ==========
Pro forma net loss per share, basic and diluted ............ $ (0.83) $ (0.88) $ (0.57)
========== ========== ==========
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, 2000, warrants
to purchase 3,153,883 shares of common stock were outstanding at a weighted
average exercise price of approximately $2.77 per share. Such warrants generally
are exercisable through 2004 or 2005. During the year ending December 31, 2000,
the Company issued 561,436 of warrants with a fair value of $ 1.6 million. The
fair value was determined using the Black-Scholes option pricing model with the
following assumptions: risk free interest rates of 5.21% to 6.77%, dividend
yield of 0% volatility factor of .93.1% and a weighted-average expected life of
the option of five years, and was recorded in debt issue costs. In June 2000,
the Company repriced 486,436 warrants resulting in an incremental charge
of $143,000.
Shares Reserved for Future Issuance
Shares have been reserved at December 31, 2000 for the following:
Stock option plans ........... 7,259,614
Warrants ..................... 3,153,883
----------
10,413,497
==========
8. INCOME TAXES
At December 31, 2000, the Company had federal and California tax net operating
loss carryforwards of approximately $26 million and $7 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
$674,000 expired in 2000, and approximately $1.9 million of California tax loss
carryforward will expire in 2001. In addition, the Company had federal and
California research tax credits of $234,000 and $130,000, respectively. The tax
credits will begin to expire in 2009.
F-20
51
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Pursuant to Internal Revenue Code Sections 382 and 383, use of the
Company's net operating loss and credit carry forwards 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 carry-forwards.
Significant components of the Company's deferred tax assets as of December 31,
2000 and 1999 are shown below. A valuation allowance has been provided as the
realization of these assets is uncertain.
DECEMBER 31,
-------------------------
2000 1999
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards ........... $ 10,195 $ 11,263
Allowance for bad debt ..................... 86 898
Deferred gain on sale leaseback ............ 190 231
Research and development costs ............. 374 297
Other, net ................................. 640 1,360
-------- --------
Total deferred tax assets ........................ 11,485 14,049
Valuation allowance for deferred tax assets ...... (11,485) (14,049)
-------- --------
Net deferred tax assets .......................... $ -- $ --
======== ========
The reconciliation of income tax computed at the federal statutory rates
to income tax expense is the following:
DECEMBER 31,
-----------------------
2000 1999
------- -------
(IN THOUSANDS)
Tax at statutory rate ....................... $(3,887) $(6,442)
Change in valuation allowance ......... ..... 2,564 6,442
Effect of lower rates and other ............. 1,479
------- -------
$ 156 $ --
======= =======
9. OPERATING LEASES
The Company leases its office facilities and certain equipment under
noncancelable operating lease agreements. Future minimum operating lease
payments attributable to the continuing operations as of December 31, 2000 are
as follows (in thousands):
2001 ................................. $ 962
2002 ................................. 593
2003 ................................. 371
2004 ................................. 264
2005 ................................. 454
Thereafter ........................... 1,412
------
Total minimum lease payments ......... $4,056
======
Rent expense attributable to the continuing operations for the years
ended December 31, 2000, 1999, and 1998 was approximately $919,000, $849,000 and
$1,026,000 respectively, including $449,000, $433,000 and $351,000, respectively
to related parties.
F-21
52
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. OPERATING LEASES (CONTINUED)
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.
10. 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
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 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.
11. SPECIAL CHARGES
During the fourth quarter of 1998, the Company incurred special charges,
related to the continuing and discontinued operations, 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 were recognized during fiscal 2000.
F-22
53
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SPECIAL CHARGES (CONTINUED)
Details of the restructuring charge (in thousands) are as follows:
CASH ACCRUED CASH ACCRUED
EXPENDED LIABILITIES EXPENDED LIABILITIES
THROUGH AT THROUGH AT
CASH/ AMOUNT DECEMBER DECEMBER DECEMBER DECEMBER
DESCRIPTION OF CHARGE: NON CASH OF CHARGE 31, 1999 31, 1999 31, 2000 31, 2000
---------------------- -------- --------- -------- ----------- -------- -----------
REORGANIZATION OF OPERATING STRUCTURE:
Severance of employees ................................. Cash $ 338 $ 334 $ 4 $ 4 --
Vacated lease facilities ............................... Cash 55 4 51 51 --
Write-downs of assets removed from operations .......... Non-cash 93 -- -- -- --
Professional fees ...................................... Cash 59 47 12 12 --
Other .................................................. Cash 53 51 2 2 --
------ ------ ------ ------ ----
598 436 69 69 --
IMPAIRMENT LOSS ON CERTAIN ASSETS:
Goodwill related to Turf Products subsidiary ........... Non-cash 1,487 -- -- -- --
Goodwill related to TurfMakers subsidiary .............. Non-cash 919 -- -- -- --
------ ------ ------ ------ ----
2,406 -- -- -- --
------ ------ ------ ------ ----
EXIT OF ASPEN CONSULTING OPERATIONS:
Severance of employees ................................. Cash 143 124 19 19 --
Write-downs of assets removed from operations .......... Non-cash 575 -- -- -- --
Vacated lease facilities ............................... Cash 84 63 21 21 --
Other .................................................. Cash 69 47 22 22 --
------ ------ ------ ------ ----
871 234 62 62 --
------ ------ ------ ------ ----
TOTAL SPECIAL CHARGES ..................................... $3,875 $ 670 $ 131 $ 131 --
====== ====== ====== ====== ====
During the fiscal year of 2000, the Company incurred a restructuring
charge of $1.2 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 paid during the fiscal year 2001.
Details of the restructuring charge (in thousands) are as follows:
CASH EXPENDED THROUGH DECEMBER 31, 2000
CASH ACCRUED
EXPENDED LIABILITIES
THROUGH AT
CASH/ AMOUNT DECEMBER DECEMBER
DESCRIPTION OF CHARGE: NON CASH OF CHARGE 31, 2000 31, 2000
---------------------- -------- --------- -------- -----------
REORGANIZATION OF AGRICULTURAL
SUPPLY OPERATING STRUCTURE:
Severance of employees ............................ Cash $ 247 $ 176 $ 71
Vacated lease facilities .......................... Cash 63 58 5
Write-downs of assets removed from operations ..... Non-cash
812 812 --
Professional fees ................................. Cash 23 21 2
Other ............................................. Cash 10 10 --
------ ------ ------
$1,155 $1,077 $ 78
====== ====== ======
F-23
54
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SPECIAL CHARGES (CONTINUED)
The following is a summary of revenue and net operating losses (in thousands)
for the locations that were closed:
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
-------- -------- --------
Revenues $ 630 $ 1,742 $ 268
======== ======== ========
Loss from operations $ (892) $ (1,059) $ (1,606)
======== ======== ========
12. SEGMENT REPORTING
For purposes of analyzing and understanding the financial statements,
the Company's continuing operations have been classified into the following
business segments:
Proprietary: This segment enters into contracts with golf courses, turf
maintenance service businesses and agricultural growers, or distributors that
sell to those end-user markets to manage the health and productivity of their
soil during their respective type of 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.
Distributed: This segment distributes a wide range of irrigation and
other agricultural supplies to growers.
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.
REVENUES OPERATING PROFIT (LOSS) SEGMENT ASSETS
-------------------------------- ---------------------------------- --------------------------------
FOR THE YEAR ENDED DECEMBER 31, AS OF DECEMBER 31,
---------------------------------------------------------------------- --------------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- -------- -------- -------- --------
Proprietary $ 11,379 $ 8,571 $ 8,681 $ 2,820 $ (2,135) $ 391 $ 13,888 $ 15,204 $ 18,113
Distributed 23,054 24,898 20,739 (4,788) (1,287) 1,177 15,654 18,702 12,306
Corporate -- -- -- (9,294) (8,924) (9,310) 5,852 9,285 17,178
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 34,433 $ 33,469 $ 29,420 $(11,262) $(12,346) $ (7,742) $ 35,394 $ 43,191 $ 47,597
======== ======== ======== ======== ======== ======== ======== ======== ========
Depreciation that is separately identified to proprietary and distributed
segments are charged to those segments. All other general and administrative
costs are recognized by corporate. Foreign assets are included in segment
assets.
13. SUBSEQUENT EVENTS
Former Owners Indemnification
On March 12, 2001, an arbitrator formally ruled on an arbitration case
between the Company and John C. Wells, William Wells and John Pothoff ("former
owners") of Agricultural Supply, Inc., which was purchased by the Company in
1998. The result of the arbitration was that the Company was awarded an
indemnification of $465,000 for uncollectible receivables included in the assets
purchased from the former owners. However, the former owners were awarded an
earn-out for the fiscal year 1999 of $449,000. The earn-out will be paid by
offsetting it with the indemnification plus a combination of cash and Company
Common Stock. The earn-out is classified as an adjustment to the purchase price,
effective January 1, 2000. Therefore, amortization of $53,000 was recognized in
the fiscal year 2000 operating results.
Debentures Amendment No. 2
On March 7, 2001, the Company and the Debenture holders entered into
Amendment No. 2 of the Debentures Agreement, called for a closing at which the
maturity of the Debentures would be modified to $1.5 million (plus a 10% premium
thereon) due on March 31, 2001 and $2.9 million due January 24, 2002. The
closing did not take place, and as a result, the maturity date of the Debentures
has not been changed. In connection with Amendment No. 2, the Debenture holders
were issued additional warrants to purchase an aggregate of 100,000 shares of
common stock with an exercise price of $1.10 per share. In addition, as part of
the Amendment No. 2 the Company agreed that if it did not make the March 31,
2001 payment, the Debenture holders would be entitled to additional warrants to
purchase an aggregate of 200,000 shares of common stock with an exercise price
of $1.10 per share. The Company did not meet the March 31, 2001 payment
requirement, therefore, the additional 200,000 warrants will be issued to the
Debenture holders.
F-24
55
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
1999 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
Revenue $ 5,938 $ 8,536 $ 10,755 $ 8,239 $ 33,468
Loss from continuing operations (2,614) (1,358) (1,925) (6,449) (12,345)
Income (loss) from discontinued operations (2,187) 2,413 1,022 (7,308) (6,060)
Net Income (loss) $ (4,801) $ 1,055 $ (903) $(13,757) $(18,406)
Basic EPS
Continuing operations $ (0.15) $ (0.08) $ (0.11) $ (0.36) $ (0.70)
Discontinued operations (0.13) 0.14 0.06 (0.42) (0.35)
Net Income (loss) $ (0.28) $ 0.06 $ (0.05) $ (0.78) $ (1.05)
Significant 4th Quarter adjustments
1. Losses in Japan
2. Adjustments to Inventory Reserves
3. Bad debts in Mexico
2000
Revenue $ 6,215 $ 7,794 $ 11,666 $ 8,758 $ 34,433
Income (loss) from continuing operations (3,389) (3,090) 699 (5,482) (11,262)
Income (loss) from discontinued operations (2,829) (1,495) 16,148 (652) 11,172
Loss from extraordinary item -- -- (3,820) -- (3,820)
Cumulative effect of accounting change -- -- -- (752) (751)
Net Income (loss) $ (6,218) $ (4,585) $ 13,029 $ (6,887) $ (4,661)
Basic EPS
Income (loss) from continuing operations $ (0.18) $ (0.17) $ 0.04 $ (0.29) $ (0.60)
Income (loss) from discontinued operations (0.15) (0.08) 0.86 (0.03) .60
Loss from extraordinary item -- (0.20) -- (0.20)
Cumulative effect of accounting change -- -- (0.04) (0.04)
Net Income (loss) $ (0.33) $ (0.25) $ 0.70 $ (0.36) $ (0.24)
Significant 4th Quarter Adjustments
1. E-Commerce costs incurred
2. Legal and Professional fees incurred
as a result of arbitration
3. Increases in bad debt reserves
F-25
56
ADDITIONS
--------------------------
CHARGED TO
BALANCE AT COSTS BALANCE AT
BEGINNING AND CHARGED TO END
DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD
----------- ---------- ----------- -------------- ---------- ----------
(In thousands)
Year ended December 31, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts 1,546 535 -- 1,308 $ 773
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts 826 1,487 -- 767 $ 1,546
Year ended December 31, 1998: Deducted from asset accounts:
Allowance for doubtful accounts 96 528 202 $ 826
F-26
57
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1(4) Amended and Restated Articles of Incorporation
3.2(5) Articles of Correction to Amended and Restated Articles of
Incorporation
3.3(6) Articles of Amendment to Amended and Restated Articles of
Incorporation
3.4(4) Bylaws, as amended
4.1(2) Form of the Common Stock Certificate
10.1(3) 1992 Stock Option Plan
10.2(3) 1996 Directors' Stock Option Plan
10.3(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
58
EXHIBIT NO. DESCRIPTION
----------- -----------
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(16) 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.
10.29(17) Term Loan Agreement dated as of April 12, 2000 among Turf
Partners, Inc. and Eco Soil Systems, Inc. and J.R. Simplot
Company.
10.30(17) Amendment No. 4 to Loan and Security Agreement, dated as of May
4, 2000 among Turf Partners, Inc. and Coast Business Credit.
10.31(21) Change in Terms Agreement, dated June 1, 2000, among
Agricultural Supply, Inc. and First National Bank
10.32(21) Commercial guaranty dated June 1, 2000, by Agricultural Supply,
Max Gelwix and William B. Adams.
10.33(18) 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.
10.34(20) 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.
10.35(20) Amended Senior Subordinated Note due January 28, 2002, dated as
of July 28, 2000 among the Company and Paribas Capital Funding
LLC.
10.36(20) Amended and Restated Common Stock Purchase Warrant expiring
August 25, 2005 in favor of Paribas Capital Funding LLC.
10.37(20) Amended Senior Subordinated Note due January 28, 2002, dated as
of July 28, 2000 among the Company and Albion Alliance Mezzanine
Fund, L.P.
10.38(20) Amended and Restated Common Stock Purchase Warrant expiring
August 25, 2005 in favor of Albion Alliance Mezzanine Fund, L.P.
10.39(20) Distribution and License Agreement dated July 28, 2000 between
J.R. Simplot Company and the Company.
10.40(19) 2000 Employee Stock Option Plan of Eco Soil Systems, Inc.
10.41(1) Amendment No. 2 to the Convertible Debentures and Warrant
Purchase Agreement, dated as of March 7, 2001, among Eco Soil
Systems, Inc., Agricultural Supply, Inc., Sistemas Y Equipos
Agricolas, S.A. de C.V. and Agricultural Supply de Mexico, S.A.
de C.V. (including Form of Amended and Restated 7% Senior
Secured Convertible Debenture).
10.42(1) Stock Purchase Warrant (with schedule of warrant holders)
21.1(1) List of Subsidiaries
23.1(1) Consent of McGladrey & Pullen, LLP, Independent Auditors
23.2(1) Consent of Ernst & Young LLP, Independent Auditors
(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.
59
(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
Form S-8 filed with the Commission on February 10, 2000.
(16) Incorporated by reference to the Company's Annual Report on Form 10-K
(File No. 001-21975) filed with the Commission on April 14, 2000.
(17) 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.
(18) 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.
(19) Incorporated by reference to the Company's Registration Statement on
Form S-8 filed with the Commission on July 31, 2000
(20) 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.
(21) Incorporated by reference to the Company's Periodic Report on Form 10-Q
(File No. 001-21975) filed with the Commission on November 14, 2000.