10-Q 1 g65445e10-q.txt STAR SERVICES GROUP 9/30/00 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-28779 STAR SERVICES GROUP, INC. (Exact name of registrant as specified in its charter) ---------------

STAR SERVICES GROUP, INC. 2075 NORTH POWERLINE ROAD POMPANO BEACH, FLORIDA 33069 (954) 974-3800 (Address and Telephone Number of Principal Executive Offices and Principal Place of Business) --------------- 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 PRECEEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD AND THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] OR NO [ ] INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH ISSUER'S CLASS OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. CLASS OUTSTANDING ON OCTOBER 31, 2000 ----- ------------------------------- COMMON STOCK............................................8,163,010 ================================================================================ 2 TABLE OF CONTENTS

3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STAR SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements 2 4 STAR SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements 3 5 STAR SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Nine-month periods ended September 30, 2000 and 1999 (Information for nine-month periods ended September 30, 2000 and 1999 is unaudited)

See notes to consolidated financial statements 4 6 STAR SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to consolidated financial statements 5 7 STAR SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 AND 1999 1. UNAUDITED INTERIM FINANCIAL STATEMENTS These statements do not contain all information required by generally accepted accounting principles that are included in a full set of financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly the financial position of Star Services Group, Inc. and subsidiaries collectively called ("the Company") at September 30, 2000 and the results of its operations and its cash flows for the period then ended and for the period ended September 30, 1999. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes contained in the Company's Form 10-K for the year ended December 31, 1999. Results of operations for this period are not necessarily indicative of results to be expected for the full year. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Star Services Group, Inc. ("Star") and of its wholly-owned subsidiaries, Delta Recycling Corp. ("Recycling"), Delta Transfer Corp. ("Transfer"), Delrock Management Corp. ("Delrock"), Eastern Recycling, Inc. ("Eastern") and Delta Resources Corp. ("Resources"). Recycling, Transfer, Delrock, Eastern and Resources are collectively referred to as the "Subsidiaries". Significant intercompany accounts and transactions have been eliminated. On February 4, 1999, Star acquired 100% of the issued and outstanding capital stock of Recycling, Transfer, Delrock, Eastern and Resources, thereby making them wholly-owned subsidiaries of Star. Effective June 22, 1999, Star Services effected a business combination with Bailey & Baron, Inc., a publicly-held shell corporation. Under the terms of the agreement, the shell corporation, which had 1,000,000 common shares outstanding, issued 7,000,000 unregistered shares of its common stock in exchange for all of the outstanding common stock of Star Services. As a result of the transaction, the shareholders of Star Services received stock representing approximately 88% of the public shell corporation, thereby effecting a change in control of the public entity. Such business combination has been accounted for as a reverse acquisition. Under the accounting rules for a reverse acquisition, Star Services is considered the acquiring entity. As a result, historical financial information for periods prior to the date of the transaction is that of Star Services. However, the capital structure for all periods presented has been restated to reflect the capital structure of Bailey & Baron, Inc. as the legal acquirer. Goodwill was not recorded in the merger since the transaction was equivalent to the issuance of stock by Star Services for the net monetary assets of the public shell corporation. 6 8 2. EARNINGS (LOSS) PER SHARE Basic and diluted earnings (loss) per share are calculated as follows: Nine Months Ended September 30, ---------------------------- 2000 1999 ----------- ----------- Earnings Net Income (Loss) $ (180,018) $ (590,355) ----------- ----------- Income (loss) applicable to common shareholders $ (180,018) $ (590,355) =========== =========== Basic: Income (loss) applicable to common shareholders $ (180,018) $ (590,355) Weighted average shares outstanding during the period 8,144,268 6,646,016 Basic $ (0.02) $ (0.09) Diluted: Income (loss) applicable to common shareholders $ (180,018) $ (590,355) Weighted average shares outstanding during the period 8,144,268 6,646,016 Effect of dilutive securities: Stock Options 0 0 Diluted weighted common shares outstanding 8,144,268 6,646,016 Diluted $ (0.02) $ (0.09) 7 9 3. BUSINESS COMBINATIONS On March 20, 2000, Star Services Group, Inc. ("Star") acquired certain assets of Allied Rolloff Holdings, Inc. ("Allied"), a Florida corporation, pursuant to a Asset Purchase Agreement dated as of February 16, 2000 (the "Agreement"). Star acquired all of the containers, carts and compactors ("Containers"), five motor vehicles and all of the recycling equipment and radios located in the vehicles and equipment, including the radio base station ("Trucks and Joists"), all manual and automated billing systems, all computer hardware including printers, CPU's, keyboards ("Computers and Furniture"), all inventory of parts, tires and accessories, all trade secrets, proprietary rights, symbols, trademarks, logos, and tradenames, and all contractual rights of Allied with its customers. In addition, at the Closing, Star entered into Restrictive Covenant Agreements with Allied and its principals Raul Smith, ATF Holdings, Inc., Eduardo Cusco and Raul Sotolongo dated March 1, 2000 restricting among other activities, competing with Star for a period of five years from the closing. The purchase price was Nine Hundred Sixty Thousand Four Hundred Dollars ($960,400.00). The components of the purchase price are Two Hundred Thousand Dollars ($200,000.00) for trucks and joists, Three Hundred Ninety-Two Thousand Four Hundred Dollars ($392,400.00) for containers, Ten Thousand Dollars ($10,000.00) for computers and furniture, Fifty-Eight Thousand Dollars ($58,000.00) for restrictive covenants, and Three Hundred Thousand Dollars ($300,000.00) for goodwill. The funds required to pay for the purchased assets of Allied pursuant to the Asset Purchase Agreement were derived from the proceeds of a secured promissory note received in the amount of Five Hundred Thousand Dollars ($500,000.00). The remaining cash outflow of One Hundred Sixty Thousand Four Hundred Dollars ($160,400.00) was withdrawn from the Prudential money market account whose funds were generated from Star's private placement. In addition, Fifty-Nine Thousand Two Hundred and Sixty (59,260) shares of duly registered and freely transferable common stock of Star were issued to Allied. Such shares are to be held in escrow until the final purchase price is determined. The total purchase price was subject to adjustment based on revenues that were generated in the month of August 2000. There was no adjustment made as a result of the revenues. On October 27, 2000 the Company entered into a series of agreeements to acquire specified assets of Peerless Big Apple, Inc., Peerless Dade, Inc. and Peerless Miami Avenue, Inc., (together referred to as the "Peerless Group"). The Peerless Group is engaged in the business of waste collection, portable toilets, hauling, recycling, and transferring of demolition debris. In anticipation of a closing of these transactions, Star has entered into an operation and management contract. Completion of the acquistion is contingent upon certain conditions being satisfied including the delivery to Star of audited financial statements for the Peerless Group. The closing will add three additional material recovery facilities to the Company's operation. The purchase price for the assets is $9 million and is comprised of common stock, cash, the assumption of debt and the issuance of a promissory note. The total number of shares to be issued under the terms of the agreements is 1,595,000. Estimated revenues for the Peerless Group's latest fiscal period, for the assets being acquired by the Corporation are $6.7 million. 8 10 4. PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Depreciation is provided on the straight-line method over the following estimated useful lives: Years ----- Machinery and equipment......... 5-10 Office furniture and equipment..................... 5 Structures and improvements..... 5-39 Maintenance, repairs and renewals which neither materially add to the value of the equipment nor appreciably prolong its life are charged to expense as incurred. Gains or losses on dispositions of equipment are included in income. During March 2000, the Company exercised its purchase option and closed on the acquisition of the material recovery facility, which it had previously leased. The purchase price for the property was $4,000,000 which was paid as follows: $500,000 at closing and the remainder in two purchase promissory notes: one at $2,500,000 and the second at $1,000,000 each with interest at the rate of 8%. The promissory notes are for a term of 30 years and call for payments of $18,344 and $7,338 per month, respectively. On October 2, 2000, the Company purchased 2.4 acres of property adjacent to its Construction and Demolition Debris Recycling Facility in Pompano Beach, Florida for a purchase price of $650,000. The Company made a downpayment of $200,000 and issued a mortgage of $450,000 to the seller. The mortgage calls for an interest rate of 8 1/2% with monthly payments according to an amortized over 15 years and a balloon payment after 10 years. 5. RELATED PARTY TRANSACTIONS During the nine months ended September 30, 2000, Star derived $1,623,187 of revenue for disposal fees from and trucking services provided to J.R. Capital Corp, a related party corporation which is owned by the chairman of Star. During the nine months ended September 30, 2000, Star incurred $2,267,238 of costs for disposal fees at J.R. Capital's material recovery facilities. At September 30, 2000, accounts payable includes net payables to J.R. Capital of $800,109 and accounts receivable includes net receivables from J.R. Capital of $167,955. Such payables and receivables are satisfied in the ordinary course of business. Star paid accounting fees to a firm, which is owned, in part, by one of Star's significant shareholders. Such fees totalled $15,860 and $3,000 for the three months ended September 30, 2000 and 1999, respectively. Effective June 1999, Delta Tall Pines Corp. entered into an operating lease agreement with a related party for a material recovery facility in Palm Beach County, Florida. The lessor is a corporation which is owned by two of Star's principal shareholders and officers. The lease is for a 74-month term ending July 2005, at a monthly rental of $21,200. In addition, the Company is responsible for all real estate taxes and operating costs. Rent paid to the related party totalled $190,800 for the nine months ended September 30, 2000. Effective May 30, 2000, Delta Resources sold the customer list and some equipment both from the rolloff operations in Brevard County, Florida to Charles Greene, a former secretary of Star in exchange for a one year promissory note in the amount of $175,000. The transaction was entered into by Star in an effort to terminate all operations in Brevard County as a result of the legal proceedings discussed in the legal proceedings section of this filing. In October 2000, Jack Casagrande, Chief Executive Officer, Patrick F. Marzano, President and Dominick Marzano, brother of Patrick F. Marzano, each loaned the Company $400,000. The terms are interest only payments at 3% above prime per year payable monthly for a two year period. There will be a balloon payment due at the end of the two year period. Each loan is guaranteed by the corporation and secured by real estate owed by the corporation. 9 11 6. COSTS RELATED TO CLOSURE OF FACILITIES Effective March, 2000 the Company closed one of its MRF facilities located in Pompano Beach in order to consolidate operations. Costs related to closure of the facility in the amount of $58,328 represents a payment to the lessor of the property to buyout the remaining term of the lease of the facility. In January 2000, the Company was notified that a temporary injunction had been issued ordering that its Royal Oak Construction and Demolition Debris Landfill in Brevard County, Florida be closed. The injunction was based on local zoning laws. Additionally, two employees of its subsidiary Delta Resources, Charles Green and Susan Johnson, were arrested and charged with illegal dumping. Mr. Green is the former Secretary of the Company. The County has subsequently closed the facility and the Company is currently appealing that ruling. Costs equaling $609,122 for the nine months ending September 30, 2000 were incurred in order to properly shut down the facility. 7. INCOME TAXES Deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities for which income tax effects will be realized in future years. Valuation allowances, if any, are provided when the expected realization of deferred tax assets does not meet a "more likely than not" criterion. Deferred tax benefits of $87,935 were realized for the nine months ended September 30, 2000, as a result of the Company's net operating loss of approximately $267,953. Such loss is available to be carried forward through the year 2020 to offset future years' taxable income. Although realization is not assured, management believes that it is more likely than not that all of the deferred tax asset will be realized. The deferred tax asset has been classified as current based on the expected reversal date of the temporary difference. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements in this Quarterly Report on Form 10-Q concerning the Company's outlook or future economic performance: anticipated profitability, gross billings, commissions and fees, expenses or other financial items: and statements made or exceptions to any future events, conditions, performance or other matter are "forward looking statements: as that term is defined under the Federal Securities Laws. Forward-looking statements are subject to risks, uncertainties, and other factors which would cause actual results to differ materially from those stated in such statements. Such risks, and uncertainties and factors include but are not limited to, (i) that the company has grown rapidly and there can be no assurance that the Company will continue to be able to grow profitably or manage its growth, (ii) risks associated with acquisitions, (iii) competition, (iv) the Company's quarterly operating results have fluctuated in the past and are expected to fluctuate in the future, (v) the Company's business experiences seasonality, (vi) and the loss of services of certain key individuals could have a material adverse effect on the Company's business, financial condition or operating results. OVERVIEW The Company's primary objective is to become one of the leading companies in the environmental service industry in the eastern United States. The Company intends to implement an aggressive program of internal growth and acquisitions aimed at expanding the Company's existing market share and acquiring a number of additional, established operating entities. Star Services intends to grow through both acquisitions and internal growth. We expect a substantial part of our future growth to come from acquiring additional solid waste collection, transfer and disposal businesses. Additional acquisitions could continue to affect period-to-period comparisons of our operating results. We also expect to invest in collection vehicles and equipment, maintenance of existing equipment, and management information systems, which should supply the infrastructure to support our growth. We expect to fund future acquisitions through cash from operations, borrowings, the issuance of debt or equity and/or seller financing. We do not presently have any credit facility for acquisitions or any commitment for one. The Company operates in several segments of the environmental services industry: collection, recycling and disposal of construction and demolition debris, land clearing, yard waste debris, and source separated recyclable materials. Star Services' operations are carried out by Delta Recycling Corp., which was incorporated in Florida on August 26, 1997, Delrock Management Corp., which was incorporated in Florida on May 29, 1998, Delta Transfer Corp., which was incorporated in Florida on August 26, 1998, Eastern Recycling, Inc., which was incorporated in Florida on June 11, 1997, Delta Resources, which was incorporated in Florida on January 29, 1999, Delta Waste Corp., which was incorporated in Florida in January 1999 and Delta Tall Pines Corp., which was incorporated in Florida in April 1999. 10 12 Star Services operates MRFs which are licensed and regulated by the State of Florida Department of Environmental Protection and various county agencies. As MRFs, these facilities accept assorted loads of debris consisting of construction and demolition debris, land clearing, yard waste and source separated materials primarily from customers in the construction and demolition industry. The incoming loads are processed using semi-automated sorting system to separate recyclables from the waste stream. Additional loads are also supplied directly by the Company through its hauling operations. The reclaimed recyclables are shipped to end user markets for re-use. Star Services owns real estate used in conjunction with certain of its operations and also maintains a dredge and fill permit. Each of the above-described operations is performed by one or more of Star Services' subsidiaries. C&D debris enters the Company's facilities from its own roll-off collection operation (consisting of over 1,800 containers in Palm Beach, Miami-Dade and Broward Counties) and from other waste haulers. After the material is inspected at the entrance inspection station and gate house, as required by regulations of the Florida Department of Environmental Protection ("FDEP") and operational safety plans, the material is unloaded on the tipping floor. The material is then sorted to remove appropriately designated recycling materials, which are then placed in containers for storage or shipment to markets. The remaining material is then processed or disposed of in landfills or other facilities. Land clearing, yard waste and wood are processed in tub grinders or impact grinders to produce wood chips or mulch which is marketed as boiler fuel or cover material. Large concrete, rocks and other inert material are sent to designated tipping areas for future processing and/or disposed of in our adjoining permitted lakefill operations. The remaining material, consisting of dirt, fines, paper, plastics, metals, glass, drywall, broken concrete blocks, bricks, lumber, wood and the like, is stockpiled for removal or processed through additional screening and picking. The system first screens out fines which are stockpiled for landfill cover material, with the remaining material manually sorted to segregate recyclable material such as wood, plastic, glass, ferrous and non-ferrous metals, corrugated cardboard, paper, roofing and aggregate. The MRFs currently recycle approximately 70% to 90% of all waste that they receive. Effective October 1, 1999, the Delta Site Development Corp. acquired the business, and substantially all of the assets and liabilities, of Mario's Equipment Rental, Inc. ("Mario's"). As a result, the Company commenced operations of providing site development services, such as site clearing and grading. RESULTS OF OPERATIONS The following table reflects the Company's operating revenues for each of three months and nine months ended September 30, 2000 and 1999 for each of the Company's principal lines of business.

The following table presents, for the periods indicated, the various consolidated line items as a percentage of gross revenues.

11 13

THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1999 REVENUES Total revenues for the three months ended September 30 increased to $5,881,109 in 2000 from $3,358,381 in 1999. The increase of $2,522,728 was primarily attributable to increased volumes in industrial waste services and MRFs. The industrial waste services revenues increased due to the expansion of our rolloff operations in Broward and Dade Counties. The MRFs revenues increased due to increased activity. DIRECT COSTS Total direct costs for the three months ended September 30 increased to $4,036,230 in 2000 from $2,882,922 in 1999. The increase of $1,153,308 was principally due to increased volume, increased disposal costs and the cost of the hauling operations of Delta Recycling Corp. Direct costs as a percentage of revenues decreased to 68.63% for the three months ended September 30, 2000 from 85.84% for the three months ended September 30, 1999. 12 14 SELLING AND ADMINISTRATIVE Selling and administrative expenses for the three months ended September 30 increased to $1,147,513 in 2000 from $712,116 in 1999. The increase of $435,397 was due to the increase in administrative overhead required to manage the Company's growth. The largest increases came in the areas of administrative salaries, professional fees, occupancy costs and travel. As a percentage of revenues, selling and administrative expenses for the three months ended September 30 decreased to 19.51% in 2000 from 21.20% in 1999. STOCK-BASED COMPENSATION During February 1999, the Company issued 759,000 options to employees of the Company. The options vest over a four-year period. Stock-based compensation represents the portion of the total compensation expense to be recognized over the vesting period, which is attributable to the three month periods ended September 30, 2000 and September 30, 1999. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense for the three months ended September 30 increased to $321,211 in 2000 from $134,304 in 1999. The increase was the result of the purchase of over $5,900,000 of property and equipment during the three months ended March 31, 2000 and amortization of costs in excess of net assets acquired in business combinations. INTEREST INCOME AND EXPENSE Interest income for the three months ended September 30 decreased to $2,557 in 2000 from $27,533 in 1999. Interest expense for the three months ended September 30 increased to $178,155 in 2000 from $66,560 in 1999. The increased interest expense of $106,596 was a result of higher debt levels resulting from the purchase of additional property and equipment. Interest income earned for the three months ended September 30, 2000 and 1999 was earned on excess cash balances available as a result of proceeds from the Company's private placement. NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999 REVENUES Total revenues for the nine months ended September 30 increased to $16,604,876 in 2000 from $8,126,509 in 1999. The increase of $8,478,367 was primarily attributable to increased volumes in industrial waste services and MRFs. The industrial waste services revenues increased due to the expansion of our rolloff operations in Broward and Dade Counties. The MRFs revenues increased due to increased activity. DIRECT COSTS Total direct costs for the nine months ended September 30 increased to $11,573,091 in 2000 from $6,494,178 in 1999. The increase of $5,078,913 was principally due to increased volume, increased disposal costs and the cost of the hauling operations of Delta Recycling Corp. Direct costs as a percentage of revenues decreased to 69.70% for the nine months ended September 30, 2000 from 79.91% for the nine months ended September 30, 1999. SELLING AND ADMINISTRATIVE Selling and administrative expenses for the nine months ended September 30 increased to $3,131,897 in 2000 from $1,944,063 in 1999. The increase of $1,187,834 was due to the increase in administrative overhead required to manage the Company's growth. The largest increases came in the areas of administrative salaries, professional fees, occupancy costs and travel. As a percentage of revenues, selling and administrative expenses for the nine months ended September 30 decreased to 18.86% in 2000 from 23.92% in 1999. 13 15 STOCK-BASED COMPENSATION During February 1999, the Company issued 759,000 options to employees of the Company. The options vest over a four-year period. Stock-based compensation represents the portion of the total compensation expense to be recognized over the vesting period, which is attributable to the nine month periods ended September 30, 2000 and September 30, 1999. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense for the nine months ended September 30 increased to $888,621 in 2000 from $266,273 in 1999. The increase was the result of the purchase of over $5,900,000 of property and equipment during the nine months ended September 30, 2000 and amortization of costs in excess of net assets acquired in business combinations. INTEREST INCOME AND EXPENSE Interest income for the nine months ended September 30 decreased to $19,798 in 2000 from $52,777 in 1999. Interest expense for the nine months ended September 30 increased to $447,967 in 2000 from $167,960 in 1999. The increased interest expense of $280,007 was a result of higher debt levels resulting from the purchase of additional property and equipment. Interest income earned for the nine months ended September 30, 2000 and 1999 was earned on excess cash balances available as a result of proceeds from the Company's private placement. CONTRACTS Our revenues consist mainly of fees we charge customers for construction and demolition debris transfer, disposal and recycling services. A large part of our collection revenue comes from providing service to industrial, residential and commercial customers. These services are provided under contracts that generally last from one month to five years. The contracts provide a relatively stable source of revenue for Star Services. We typically determine the prices for our solid waste services by the collection frequency and level of service, route density, volume, weight and type of waste collected, type of equipment and containers furnished, the distance to the disposal or processing facility, the cost of disposal or processing, and prices charged by competitors for similar services. EXPENSES Direct costs include labor, fuel, equipment maintenance and tipping fees paid to third party disposal facilities, workers' compensation and vehicle insurance, the cost of materials we purchase for recycling, third party transportation expense, district and state taxes and permits, engineering and legal services. Selling and administrative expense includes management, clerical and administrative compensation and overhead costs associated with our marketing and sales force, professional services and community relations expenses. Depreciation and amortization expense includes depreciation of fixed assets over their estimated useful life using the straight line method and amortization of goodwill and other intangible assets using the straight line method. Star Services intends to capitalize some expenditures related to pending acquisitions or development projects, such as legal and engineering expenses. We intend to expense indirect acquisition costs, such as executive and corporate overhead, public relations and other corporate services. We charge against net income any unamortized capitalized expenditures and advances (net of any portion that we believe we may recover, through sale or otherwise) that relate to any operation that is permanently shut down and any pending acquisition or landfill development project that is not completed. We routinely evaluate all capitalized costs, and expense those related to projects that we believe are not likely to succeed. We will have material financial obligations relating to closure costs of any disposal facilities we may own or operate in the future. In such case, Star Services will accrue for those obligations, based on engineering estimates of consumption of permitted landfill airspace over the useful life of any such landfill. 14 16 LIQUIDITY AND CAPITAL RESOURCES The Company operates in an industry that requires a high level of capital investment. The Company's capital requirements primarily stem from its working capital needs for its ongoing operations, capital expenditures for new trucks and equipment and business acquisitions. The Company's strategy is to meet these capital needs first from internally generated funds and secondly from various financing sources available to the Company, including the incurrence of debt, and the issuance of its common stock. Currently the Company has no credit facilities in place and plans on seeking additional capital in the near future. As of September 30, 2000, the Company had a working capital deficit of $729,963 (a ratio of current assets to current liabilities of 0.84:1) and a cash balance of $251,414 which compares to a working capital surplus of $815,674 (a current ratio of 1.27:1) and a cash balance of $1,476,406 as of December 31, 1999. The main reason for the decrease in cash balances of $1,224,992 is as a result of the capital used for the downpayment for the purchase of the assets of Allied Roll Off Holdings, Inc. and the acquisition of the material recovery facility the Company had previously leased. For the nine months ended September 30, 2000, net cash provided by operating activities was $582,876 as compared to cash used in operating activities of $171,194 for the nine months ended September 30, 1999. For the nine months ended September 30, 2000, net cash used in financing activities was $1,187,394 as compared to net cash provided by financing activities of $2,891,049 for the nine months ended September 30, 1999. For the nine months ended September 30, 2000 there were no cash dividends paid. The Company expects to generate sufficient cash flow from its operations in 2000 and from shareholder loans to cover its anticipated working capital needs and moderate capital expenditures and acquisitions. During October 2000, three of the Company's shareholders loaned the Company a total of $1.2 million for a period of two years in order to address the Company's capital requirements. If the Company's cash flow from operations during 2000 is less than currently expected or if the Company decides to make substantial acquisitions, or if the Company's capital requirements increase, either due to strategic decisions or otherwise, the Company may elect to incur future indebtedness or issue equity securities to cover any additional capital needs. However, there can be no assurance that the Company will be successful in obtaining additional capital on acceptable terms through such debt incurrances or issuances of additional equity securities. INFLATION Inflation has not significantly affected our operations. Consistent with industry practice, many of our contracts allow us to pass through certain costs to our customers, including increases in landfill tipping fees and, in some cases, fuel costs. Therefore, we believe that we should be able to increase prices to offset many cost increases that result from inflation. However, competitive pressures may require us to absorb at least part of these cost increases, particularly during periods of high inflation. SEASONALITY Seasonality has not had a material effect on our operations and is not expected to have a material effect in the future. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to market risks, primarily related to changes in U.S. interest rates and, to a lesser extent, recyclable prices. The Company does not engage in financial transactions for trading and speculative purposes. COMMODITY RISK ON RESALE OF RECYCLABLES. We provide recycling services. The sale prices of and demand for recyclable waste products, particularly wastepaper, are frequently volatile and may affect our operating results. 15 17 PART II ITEM 1. LEGAL PROCEEDINGS Star Services is a party to various legal proceedings in the ordinary course of business and arising from the extensive governmental regulation of the solid waste industry. Management does not believe that these proceedings either individually or in the aggregate, are likely to have a material adverse effect on our business, financial condition, operating results or cash flows. In January 2000, the Company was notified that a temporary injunction had been issued ordering that its Royal Oak Construction and Demolition Debris Landfill in Brevard County, Florida be closed. The injunction was based on local zoning laws. Additionally, two employees of its subsidiary Delta Resources, Charles Green and Susan Johnson, were arrested and charged with illegal dumping. Mr. Green was a former Secretary of the Company. The County has subsequently closed the facility and the Company is currently appealing that ruling. ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a. The following exhibits are filed as part of this report: Exhibit Number Description ------ ----------- 27 Financial Data Schedule b. Exhibits and Reports on Form 8-K The Company filed a report of Form 8-K dated March 20, 2000, reporting an acquisition of assets under Item 2 thereof. The acquisition related to the Company's purchase of most of the assets of Allied Roll Off Holdings, Inc. ("Allied"). Financial statements of Allied were not required to be filed with Form 8-K. All other items of this report are inapplicable. 16 18 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. STAR SERVICES, INC.

STAR SERVICES GROUP INC 10-Q