<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1998.
REGISTRATION NO. 333-60483
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
Pre-Effective Amendment
No. 5 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
EARTHCARE COMPANY
(Exact Name of Registrant as Specified in Its Charter)
---------------
<TABLE>
<CAPTION>
DELAWARE 4953 58-2335973
<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
14901 QUORUM DRIVE, SUITE 200
DALLAS, TEXAS 75240
(972) 858-6025
(Address, including Zip Code, and Telephone Number, including
Area Code, of Registrant's Principal Executive Offices)
DONALD F. MOOREHEAD, JR.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
14901 QUORUM DRIVE, SUITE 200
DALLAS, TEXAS 75240
(972) 858-6025
(Name, Address, including Zip Code, and Telephone Number, including
Area Code, of Agent for Service)
COPIES TO:
LYNN S. SCOTT
KING & SPALDING
191 PEACHTREE STREET
ATLANTA, GEORGIA 30303-1763
(404) 572-4600
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(C)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
-------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement covers the registration of up to 8,026,979
shares of Common Stock, $0.0001 par value per share (the "Common Stock"), of
EarthCare Company (the "Company") for sale by certain selling stockholders. This
Registration Statement also covers the registration of 5,000,000 shares of
Common Stock of the Company to be issued from time to time as payment for all or
some portion of the purchase price for one or more acquisitions of companies,
businesses or assets complementary to the Company's existing business, or which
may be offered for sale or other distribution by persons who will acquire such
shares in the acquisitions of such companies, business or assets or by the
donees of such persons or by other persons acquiring such shares (the "Shelf
Registration"). The complete Prospectus relating to the offering of 8,026,979
shares (the "Offering Prospectus") immediately follows this Explanatory Note.
Following the Offering Prospectus are certain pages of the Prospectus relating
solely to the Shelf Registration (together with the remainder of the Prospectus
as modified as indicated below, the "Shelf Prospectus"), including an alternate
front and back cover page, a "Principal Stockholders" table in lieu of the table
entitled "Principal and Selling Stockholders", a section entitled "Selling
Stockholders" (which will be inserted immediately preceding the section entitled
"Description of Capital Stock") and a section entitled "Plan of Distribution".
The Shelf Prospectus will not include the information in the Prospectus Summary
under the heading "Securities To Be Offered", or the section of the Offering
Prospectus entitled "Use of Proceeds". All other sections of the Offering
Prospectus are to be used in the Shelf Prospectus.
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<PAGE> 3
PROSPECTUS, DATED DECEMBER 9, 1998
8,026,979 SHARES
EARTHCARE COMPANY
COMMON STOCK
---------------
This Prospectus relates to the offer and sale from time to time of up to
8,026,979 shares of common stock, $.0001 par value per share (the "Common
Stock"), of EarthCare Company, formerly known as Santi Group, Inc. ("EarthCare"
or the "Company") by the holders thereof named herein (collectively, the
"Selling Stockholders"). The 8,026,979 shares of Common Stock being offered
hereby by the Selling Stockholders (the "Offering") were issued primarily in
connection with certain private placements, in acquisitions of assets by the
Company (including 38,600 contingent shares), or in connection with the exercise
of options to acquire shares of Common Stock (the "Shares"). The Company is
registering the Shares to provide the Selling Stockholders with freely tradeable
securities, but the registration of the Shares does not necessarily mean that
any or all of such Shares will be offered by the Selling Stockholders. Issuance
of the 38,600 contingent shares is dependent upon the satisfaction of certain
conditions of the acquisition agreements relating thereto (the "Contingent
Shares"). See "Business -- Acquisitions" and "Principal and Selling
Stockholders." In addition, certain of the Selling Stockholders have agreed not
to sell all or some portion of their Shares before six to twelve months after
the date of this Prospectus. See "Plan of Distribution" and "Principal and
Selling Stockholders". The Company will not receive any of the proceeds from the
sale of shares by the Selling Stockholders.
The Common Stock is traded on the Nasdaq OTC Bulletin Board under
the symbol "ECUS." At November 23, 1998, the Company had 9,561,434 shares of
Common Stock outstanding. On November 23, 1998, the last reported sale price of
the approximately 1,434,133 shares Common Stock subject to trading on the Nasdaq
OTC Bulletin Board (of which 3,100 shares traded) was $15.50 per share.
The Selling Stockholders from time to time may offer and sell the
Shares held by them and registered hereunder directly or through agents or
broker-dealers on terms to be determined at each Selling Stockholder's
discretion at the time of sale. To the extent required, the names of any agent
or broker-dealer and applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in an
accompanying supplement to this Prospectus (a "Prospectus Supplement"). See
"Plan of Distribution." Each of the Selling Stockholders reserves the sole right
to accept or reject, in whole or in part, any proposed purchase of the Shares to
be made directly or through agents.
The Company will not receive any of the proceeds from the sale of
Shares by the Selling Stockholders but has agreed to bear the expenses of
registration of the Shares under Federal and state securities laws. See "Use of
Proceeds," "Principal and Selling Stockholders" and "Plan of Distribution."
The Selling Stockholders and any agents or broker-dealers that
participate with the Selling Stockholders in the distribution of Shares may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), and any commissions received by them and any
profit on the resale of the Shares may be deemed to be underwriting commissions
or discounts under the Securities Act.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN FACTORS RELATING
TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 4
Information contained herein is subject to completion or
amendment. A registration statement relating to these securities has been filed
with the Securities and Exchange Commission.
THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED
PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and the financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated, the terms
"Company" and "EarthCare" refer collectively to EarthCare Company, formerly
known as SanTi Group, Inc. and its subsidiaries, and all information in this
Prospectus reflects the reorganization of the Company's corporate structure
effected in May 1998 and the change of its name from SanTi Group, Inc. to
EarthCare Company effective September 21, 1998.
THE COMPANY
EarthCare Company ("EarthCare" or the "Company") engages in the following
services relating to the nonhazardous liquid waste ("NLW") industry: septic and
grease trap, pumping, and maintenance; sewer and drain cleaning; high pressure
water jetting; bulk liquid waste transportation; biosolids management; on-site
biotreatment systems and liquid waste processing and disposal. EarthCare's
customers include restaurants, hospitals, military bases, office buildings,
apartments, schools, municipalities, industrial businesses and single family
residences. Effective May 13, 1998, EarthCare merged with and into Microlytics,
Inc., a Delaware corporation ("Micro"), with Micro surviving the merger and
changing its name to SanTi Group, Inc. Effective September 21, 1998, SanTi
Group, Inc. changed its name to EarthCare. See "Business - Predecessor
Corporations" and "- The Merger and Name Changes." All references to SanTi or
the Company include its operating subsidiaries unless the context indicates
otherwise.
EarthCare intends to expand its presence in the NLW industry through
internal growth and acquisitions of local service providers throughout the
United States. The acquisitions will be made primarily with cash, shares of
Common Stock or a combination of cash and shares of Common Stock. The Company
believes these acquisitions, by consolidating smaller local service providers,
will create synergies and improve efficiencies in the area of NLW management.
THE NLW INDUSTRY
The Company estimates that the septic tank and grease trap business segment
of the U.S. domestic NLW industry generates approximately $20 billion in
revenues annually. There are approximately 25,000 service providers currently in
the NLW industry and, of these service providers, approximately 75% generate
less than $500,000 of annual revenues. The Company believes the NLW industry
will continue to grow based on increased waste from a growing population and
general economic conditions that are driving new building demand and the need
for NLW services.
Because the NLW industry is so highly fragmented, management believes the
industry has the potential for significant cost savings by the economies of
scale that may be realized in consolidation. These costs savings would include
efficiencies as a result of common billing, the coordination of advertising, the
elimination of duplicative professional and technical support providers, the
standardization and upgrading of equipment and the improvement of employee
training. EarthCare intends to determine lines of the NLW business in which an
acquired service provider is not currently engaged and assist the service
provider in expanding into those areas. There can be no assurance, however, that
EarthCare will be able to profitability consolidate service providers within the
NLW industry.
THE BUSINESS
EarthCare currently engages in each of the NLW businesses described above.
EarthCare's operating subsidiaries include: Bone-Dry Enterprises, Inc.; SanTi
Group of Florida, Inc.; SanTi Group of Pennsylvania, Inc.; and SanTi Group of
New York, Inc. Each subsidiary of EarthCare intends to acquire additional assets
from local service providers and act as an operating division of EarthCare in
the area in which it is located. These local operating divisions operate under
various tradenames, as described below.
Bone-Dry Enterprises, Inc. ("Georgia Group"). The Georgia Group is engaged
in NLW collection and hauling operations in the state of Georgia. The Georgia
Group operates under the following tradenames: Andrews Environmental, Bone-Dry
Enterprises ("Bone-Dry") and Quality Plumbing and Septic.
3
<PAGE> 6
SanTi Group of Florida, Inc. ("Florida Group"). The Florida Group is engaged
in NLW collection and hauling operations in the state of Florida. The Florida
Group operates under the following tradenames: Brownie Environmental Services,
Grease-Tec and A Rapid Rooter Sewer and Drain.
SanTi Group of Pennsylvania, Inc. ("Pennsylvania Group"). The Pennsylvania
Group is engaged in NLW collection and hauling operations in the state of
Pennsylvania. The Pennsylvania Group has one wholly owned subsidiary, Nutrecon,
Inc., which holds the operating permits and the leases for a facility acquired
from Ferrero Wastewater Management, Inc., in Ambler, Pennsylvania. The
Pennsylvania Group operates under the following tradenames: Ferrero Wastewater
Management and Eldredge Wastewater Management.
SanTi Group of New York, Inc. ("New York Group"). The New York Group is
engaged in NLW collection and hauling operations in the state of New York. The
New York Group operates under the following tradenames: RGM Liquid Waste Removal
and Devito Environmental.
The Company receives fees to collect, process and dispose of nonhazardous
liquid wastes. Collection fees charged to customers vary per gallon by waste
stream according to constituents of the waste, expenses associated with
processing the waste and competitive factors. Grease trap waste from restaurant
and other food processing and preparation facilities are transported to SanTi's
facilities in vacuum trucks, trailers and other transportable containers. SanTi
operates a fleet of vehicles to collect waste directly from generators and
receives waste from independent transporters servicing additional waste
generators. Using a variety of physical, chemical, thermal and other biological
techniques, the waste is broken down into constituent components. Water
extracted from the waste is pretreated and then discharged into the municipal
sanitary sewer system or applied to leased grasslands. Solid materials are dried
and disposed of in a solid waste landfill. At some locations where the Company
does not have pretreatment facilities, the waste is transported to private
pretreatment facilities, or, where permitted by local regulations, directly to
municipal or private wastewater treatment facilities.
EarthCare also engages in the business of biosolids management through the
reuse of organic materials. EarthCare provides transportation, treatment, site
monitoring, and land application to private companies. EarthCare's vehicles pick
up and transport biosolids to various sites. EarthCare also provides
professional management and consulting services for treatment of biosolids and
the monitoring and application onto leased grasslands of treated biosolids.
The Company benefits from federal, state and local regulations prohibiting
the disposal of grease trap waste and other waste in municipal collection and
treatment systems. Although restaurants, food processing and preparation
facilities and other industrial operations have produced such waste for many
years, regulations governing the management of NLW, and the enforcement of such
regulations, are becoming increasingly stringent. These requirements have
increased the value of EarthCare's services to its customers in recent years. As
federal, state and local regulations governing the disposal of NLW increase,
EarthCare believes the amount of NLW products delivered to third parties for
processing and disposal will continue to increase.
EarthCare will target the acquisition and integration of local service
providers in the NLW industry that EarthCare believes will be profitable
additions to the Company. EarthCare intends to focus on the integration of
entities acquired and to increase profits and productivity through operational
and efficiency improvements, standardization of procedures, equipment standards
and procurement procedures.
EarthCare intends to establish local operating facilities or service centers
throughout the United States, with initial service centers established in major
population centers. Acquired local service providers in these areas will be
converted to service centers. A service center manager at each location will be
responsible for the service center's overall performance. The manager will be
supported by supervisors responsible for one or more lines of business. The
manager will also be supported by maintenance managers responsible for the
maintenance and repair of all equipment. The service center managers will report
to district managers, who will typically have responsibility for eight to twelve
service center managers. The district managers will have general management
responsibility for their geographical areas.
EarthCare was incorporated in Delaware and its principal executive offices
are located at 14901 Quorum Drive, Suite 200, Dallas, Texas 75240. Its telephone
number at such offices is (972) 858-6025.
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SECURITIES TO BE OFFERED
This Prospectus relates to the offer and sale from time to time of up to
8,046,979 Shares by the Selling Stockholders, some of whom may be deemed
affiliates of the Company. The Company will not receive any of the proceeds from
the sale of the Shares but has agreed to bear the expenses of registration under
federal and state securities laws, in consideration for the agreement by the
Selling Stockholders to enter into agreements with the Company not to sell all
or a portion of their Shares for a six to twelve month period without the prior
written consent of the Company (the "Lock-Up Agreements"). The Lock-Up
Agreements provide that any waiver of the terms of a Lock-Up Agreement must be
approved by the unanimous decision of the non-employee directors of the Company.
The Lock-Up Agreements, in certain cases, extend the required holding period for
Selling Stockholders who are not affiliates of the Company. The Selling
Stockholders must pay any expenses or commissions on the sale of the Shares. The
registration of the Shares does not necessarily mean that any of the Shares not
subject to the Lock-Up Agreements will be offered or sold by the Selling
Stockholders or that Shares subject to the Lock-Up Agreements will be offered or
sold upon expiration of the applicable Lock-Up Agreement.
The Shares were issued primarily in connection with private placements,
upon the exercise of options to acquire shares of Common Stock, or as
consideration or partial consideration for the acquisition of assets of service
providers in the NLW industry.
RISK FACTORS
The acquisition of the Shares involves substantial risk. See "RISK FACTORS."
5
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------------------------------------- ---------------------------------------
PERIOD
PERIOD FROM FROM
PERIOD FROM NINE INCEPTION INCEPTION NINE
JANUARY 1, MONTHS (MARCH 19, (MARCH 19, MONTHS
YEAR ENDED DECEMBER 31, 1997 TO ENDED 1997) TO 1997) TO ENDED
-------------------------- DECEMBER SEPTEMBER 30, DECEMBER SEPTEMBER 30, SEPTEMBER
1995 1996 21, 1997 1997 31, 1997 1997 30, 1998
---- ---- -------- ---- -------- -------- ---------
STATEMENT OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $1,499,392 $1,832,043 $1,218,268 $928,631 $ 737,858 $ 479,249 $18,221,028
Operating Expenses:
Cost of Operations 615,069 785,996 625,892 466,449 406,638 178,680 12,984,116
General and
Administrative 754,580 757,655 646,273 485,408 521,372 149,855 5,651,192
Depreciation and
Amortization 94,948 122,296 121,496 96,363 127,338 91,848 953,924
---------- ---------- ---------- --------- ---------- ---------- -----------
Total Operating
expenses 1,464,597 1,665,947 1,393,661 1,048,220 1,055,348 420,383 19,589,232
---------- ---------- ---------- --------- ---------- ---------- -----------
Income (Loss) from
Operations 34,795 166,096 (175,393) (119,589) (317,490) 58,866 (1,368,204)
Interest Expense 45,475 70,868 22,077 19,419 104,494 50,817 456,872
Other Expense
(Income) 7,404 (2,500) (204,124) (195,959) 0 0 0
---------- ---------- ---------- --------- ---------- --------- -----------
Income (Loss)
Before Income
Taxes (18,084) 97,728 6,654 60,951 (421,984) 8,049 (1,825,076)
Income Tax Provision
(Benefit) (3,304) 39,094 4,334 23,283 (163,632) 1,078 (304,562)
---------- ---------- ---------- --------- ---------- ---------- -----------
Net Income (Loss) $ (14,780) $ 58,634 $ 2,320 $ 37,668 $ (258,352) $ 6,971 $(1,520,514)
========== ========== ========== ========= ========== ========== ===========
Net Income (Loss)
per share - Basic
and Diluted N/A N/A N/A N/A $ (0.13) N/A $ (0.19)
========== ========== ========== ======== ========== ========== ===========
Weighted average
shares outstanding -
Basic and Diluted N/A N/A N/A N/A 1,940,536 N/A 8,047,383
========== ========== ========== ======== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
At December 31,
------------------------- At December At September
1995 1996 31, 1997 30, 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Working capital (deficit) $(104,623) $ (130,188) (1,153,561) $ 1,955,044
Intangible assets(1) 0 0 1,473,489 18,843,354
Total assets 855,192 1,102,047 2,614,143 32,947,128
Long-term debt,
including current portion 437,735 539,859 303,955 10,457,032
Retained earnings (deficit) 211,807 270,441 (258,352) (1,778,866)
Total shareholders' equity 212,307 270,941 812,453 18,538,514
</TABLE>
(1) Intangibles, net consist primarily of goodwill and noncompete
agreements. Noncompete agreements are amortized over the lives of the
contracts. Goodwill is being amortized over 40 years. See Note 2 to
the Company's Consolidated Financial Statements.
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<PAGE> 9
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information in this Prospectus before purchasing the shares of Common
Stock offered hereby. Certain statements in this Prospectus are forward-looking
and are sometimes identified by the use of forward-looking words or phrases such
as "intends" or "intended," "will be positioned," "believes," "expects," is or
are "expected," "anticipates," and "anticipated." These forward-looking
statements are based on the Company's current expectations. To the extent any of
the information contained in this Prospectus constitutes a "forward-looking
statement" as defined in Section 27A(i)(1) of the Securities Act, the risk
factors set forth below are cautionary statements identifying important factors
that could cause actual results to differ materially from those in the
forward-looking statement. Section 27A(i)(1) does not apply to this offering.
OPERATING STRATEGY
EarthCare's ability to increase revenues of its existing operations and its
acquired service providers will be affected by various factors, including:
customer demand for NLW treatment and disposal services, EarthCare's ability to
expand the range of services offered to customers and EarthCare's ability to
develop national and regional accounts for its services and other marketing
programs necessary to attract new customers and attract and retain necessary
personnel. There can be no assurance that EarthCare's operating strategy will be
successful or that EarthCare will be able to generate cash flows adequate to
support its operations and internal growth.
RISK RELATED TO THE COMPANY'S ACQUISITION STRATEGY
The Company intends to grow significantly through the acquisition of
additional NLW service providers. The Company expects to face competition for
acquisition candidates, which may limit the number of acquisition opportunities
and may lead to higher acquisition prices. There can be no assurance that the
Company will be able to identify, acquire or manage additional businesses
profitably or to integrate successfully any acquired businesses into the Company
without substantial or material unanticipated costs, delays or other operational
or financial problems. Businesses acquired by the Company may have liabilities
that the Company does not discover or may be unable to discover during its
pre-acquisition investigations, including liabilities arising from environmental
contamination or non-compliance by prior owners with environmental laws or
regulatory requirements, and for which the Company, as a successor owner or
operator, may be responsible. Certain environmental liabilities, even if not
expressly assumed by the Company, may nonetheless be imposed on the Company
under certain legal principles of successor liability including those under the
Comprehensive Environmental Response Compensation and Liability Act. The Company
may be required under federal, state or local law to investigate and remediate
any contamination that may have resulted from the processing of any hazardous
substances by any of these businesses. Any indemnities or warranties, due to
their limited scope, amount, duration and the financial limitations of the
indemnitor or warrantor may not fully cover such liabilities. Further,
acquisitions involve a number of other special risks, including failure of the
acquired business to achieve expected results, diversion of management's
attention, failure to retain key personnel of the acquired business and risks
associated with unanticipated events, all of which could have a material adverse
effect on the Company's business, results of operations and earnings resulting
from increased goodwill amortization and interest cost and the costs resulting
from the issuance of securities could also have a material adverse effect. In
addition, if the Company is not able to successfully integrate the operations of
one or more of its acquired businesses, the benefits expected to be derived by
the Company from consolidating certain overhead functions such as cash
management, human resources, finance and insurance will not be realized. The
Company currently has no binding agreements to make acquisitions. See "Business
- -- Acquisitions" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
RISK RELATED TO ACQUISITION FINANCING
The Company's ability to acquire local NLW service providers at
economically attractive prices, integrate their operations and then grow their
operations profitably, will determine the Company's success. The Company intends
to continue to expand its market presence in its current locations and enter
other markets through acquisitions or the opening of new offices. The Company's
ability to continue its growth and attain profitability will depend on a number
of factors, including the availability of capital to fund acquisitions, existing
and emerging competition and the ability to maintain sufficient profit margins
despite cost increases and pricing pressures. The Company currently intends to
finance future acquisitions by using Common Stock, cash, or a combination of
Common Stock and cash. If Common Stock is issued in connection with future
acquisitions or earn-out provisions of completed acquisitions, purchasers of
Common Stock in this Offering may experience dilution in the earnings, cash flow
and net tangible book
7
<PAGE> 10
value of their stock. If the Common Stock does not maintain a sufficient market
value, or potential acquisition candidates are otherwise unwilling to accept
Common Stock as all or part of the consideration for the sale of their
businesses, the Company may be required to use more of its cash resources, if
available, or incur indebtedness in order to continue its acquisition program.
The Company has a $40 million credit facility (the "Credit Agreement") under
which the Company may borrow to fund acquisition and working capital
requirements; provided, however, that under the Credit Agreement, the banks'
consent is required in order for the Company to consummate certain acquisitions
and the Company is also constrained by the requirement to satisfy certain
financial covenants in order to incur indebtedness (including without
limitation, debt assumed in connection with acquisitions). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." IN ADDITION, THE COMPANY HAS PLEDGED THE STOCK
OF EACH OF ITS SUBSIDIARIES TO THE LENDER UNDER THE CREDIT AGREEMENT. THESE
SUBSIDIARIES REPRESENT SUBSTANTIALLY ALL OF THE COMPANY'S ASSETS, INCLUDING
ACCOUNTS RECEIVABLE. If the Company does not have sufficient cash resources to
pursue acquisitions, its growth could be limited unless it is able to obtain
additional capital through debt or equity financing. There can be no assurance
that the Company will be able to obtain the financing it will need in the near
future on terms the Company deems acceptable. The inability to acquire such
financing, if needed, could have a material adverse effect on the Company's
business, financial condition and results of operations.
LIMITED OPERATING HISTORY, ABSENCE OF COMBINED OPERATING HISTORY
The Company was organized in 1997 and began active operations at that time.
As a result, the Company has very little operating history as an integrated NLW
business to which investors may look to evaluate the Company's performance.
Since the Company began operations, it has completed nine acquisitions. There
can be no assurance that the Company will be able to successfully integrate the
operations of the acquired businesses or any subsequently acquired businesses or
to institute the necessary systems and procedures, including accounting and
financial reporting systems, to manage the entire combined enterprise on a
profitable basis. In addition, there can be no assurance that the Company's
management group will be able to effectively manage the combined entity or to
effectively implement the Company's acquisition program and internal growth
strategy. The Pro Forma Financial Statements of the Company cover periods when
the acquired businesses were not under common control or management and may not
be indicative of the Company's future financial or operating results. The
inability of the Company to integrate these acquired businesses successfully
would have a material adverse effect on the Company's business, results of
operations and financial condition, as well as its acquisition program. See
"Business -- Acquisitions" and "Management."
MARKET IMPACT OF OFFERING
This Prospectus relates to the sale of up to 8,026,979 Shares of Common
Stock by the Selling Stockholders. The Company will not receive any proceeds
from the sale of the Shares and has prepared this Prospectus at its cost in
return for the Selling Stockholders entering into the Lock-Up Agreements. Prior
to the registration of the Shares pursuant to this Prospectus, as of November
23, 1998, approximately 1,434,133 shares of Common Stock or approximately 15% of
the 9,561,434 issued and outstanding shares of Common Stock have been freely
tradeable. Pursuant to the terms of the Lock-Up Agreements, upon the effective
date of the registration statement of which this Prospectus is a part (the
"Effective Date"), an additional 766,807 of the Shares will be eligible for
immediate sale by the Selling Stockholders, an increase of approximately 54% in
the number of shares of Common Stock eligible for sale. Six months after the
Effective Date, an additional 1,377,813 of the Shares will be eligible for sale
by the Selling Stockholders, an increase of approximately 64% in the number of
shares of Common Stock eligible for sale. Nine months after the Effective Date,
an additional 1,710,322 of the Shares will be eligible for sale by the Selling
Stockholders, an increase of approximately 48% in the number of shares of Common
Stock eligible for sale. Twelve months after the Effective Date, an additional
4,133,437 of the Shares will be eligible for sale by the Selling Stockholders,
an increase of approximately 78% in the number of shares of Common Stock
eligible for sale. The sales of such significant blocks of stock, or even the
possibility of such sales, could adversely affect the prevailing market price of
and the trading market for the Common Stock and reduce the prices available in
the market. However, there can be no assurance that any or all of the Shares
will be offered for sale by the Selling Stockholders or that any or all of the
Contingent Shares will be issued.
HISTORY OF NET LOSSES
The Company has experienced operating losses since its inception, and, as
of September 30, 1998, the Company had an accumulated deficit of $1,778,866.
Although the Company anticipates that it will be profitable in the future, there
can be no assurance that the Company will actually achieve profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
8
<PAGE> 11
COMPETITION
EarthCare competes with a significant number of other NLW service
providers. Competitors compete primarily on the basis of proximity to collection
operations, fees charged and quality of service. EarthCare must compete with
area landfills that accept grease trap waste. Future technological changes and
innovations may result in a reduction in the amount of NLW generated, or in
alternative methods of treatment and disposal being developed. EarthCare also
faces competition from customers that may seek to enhance and develop their own
methods of disposal. Increased use of internal treatment and disposal methods
and other competitive factors may have a material adverse effect on EarthCare's
business, results of operation and financial condition.
EarthCare will be at a disadvantage in competing against service providers
that are better capitalized, have greater name recognition, have more background
and experience, have greater financial, technical, marketing and other resources
and skills, have better facilities and are able to provide services or products
at a lower cost than EarthCare. As the NLW industry is currently highly
fragmented, the addition of local NLW service providers is the only strategy by
which EarthCare may be able to penetrate existing markets. Even if the Company
is successful in consolidating local service providers in a given area, there
can be no assurance that new competitors will not enter the market due to the
low barriers to entry in the NLW industry. As a result of these competitive
factors, there can be no assurance that EarthCare's growth strategy will be
successful or that EarthCare will be able to generate cash flow adequate for its
operations and to support future acquisitions and internal growth.
GOVERNMENT REGULATIONS
EarthCare is subject to rules and regulations of various federal, state and
local governmental agencies. Environmental laws and regulations are, and will
continue to be, a principal factor affecting the marketability of the services
provided by EarthCare. Any changes in these laws or regulations may adversely
affect the operations of EarthCare by imposing additional regulatory compliance
costs on EarthCare, requiring the modification of or adversely affecting the
market for EarthCare's services. To the extent that demand for these services is
based upon the need to comply with these regulations, any modification to these
regulations may decrease the demand for these services and adversely affect
EarthCare's business condition and results of operations.
Additionally, if new environmental legislation or regulations are enacted
or existing legislation or regulations are amended or enforced differently,
EarthCare may be required to obtain additional operating permits, registrations
or approvals. The process of obtaining required permits, registrations or
approvals can be lengthy and expensive and the issuance of such permits or the
obtaining of such approvals may be subject to public opposition. There can be no
assurance that EarthCare will be able to meet the applicable regulatory
requirements.
The Resource Conservation and Recovery Act ("RCRA") is the principal
federal statute governing hazardous and solid waste generation, treatment,
storage and disposal. RCRA and state hazardous waste management programs govern
the handling and disposal of "hazardous waste." The U.S. Environmental
Protection Agency ("EPA") has issued regulations pursuant to RCRA. States have
also promulgated regulations under comparable state statutes that govern
hazardous waste generators, transporters and owners and operators of hazardous
waste treatment, storage and disposal facilities. These regulations impose
detailed operating, inspection, training and emergency preparedness and response
standards and requirements for the financial responsibility, manifesting of
wastes, record keeping and reporting, as well as treatment standards for any
hazardous wastes intended for land disposal.
NLW is currently exempt from the requirements of RCRA. The repeal or
modification of the RCRA exemption covering NLW, or the modification of
applicable regulations or interpretations regarding the treatment or disposal of
NLW, may require EarthCare to alter its method of treating and disposing of NLW.
EarthCare's current methods do not comply with the methods prescribed by the EPA
for treatment and/or disposal of waste as defined by RCRA. These potential
changes may result in decreased demand for EarthCare's services and could have a
material adverse effect on EarthCare's business.
The Comprehensive Environmental Response, Competition and Liability Act
("CERCLA") provides for immediate response and removal actions coordinated by
the EPA for releases of hazardous substances into the environment and authorizes
the government or private parties to respond to the release or potential release
of hazardous substances. The government may also order persons responsible for
the release to perform any necessary cleanup. Liability extends to the present
owners and operators of waste disposal facilities from which a release occurs,
persons who owned or operated the facilities at the time the substance was
released, persons who arranged for the disposal or treatment of hazardous
substances and waste transporters who selected such facilities for treatment or
disposal of hazardous substances. CERCLA creates strict, joint and several
liability for all costs of removal and remediation, other necessary response
costs and damages for injury to natural resources.
9
<PAGE> 12
Because the Company will be engaged in businesses that involve the
treatment and removal of nonhazardous liquid waste, EarthCare does not expect to
be subject to CERCLA. However, if EarthCare were to acquire a business that in
the past has disposed of hazardous waste or treated hazardous waste that falls
within the parameters of CERCLA, EarthCare may be held jointly and severally
liable for the costs of any damage or required cleanup of the site.
POTENTIAL ENVIRONMENTAL LIABILITY; INSUFFICIENCY OF INSURANCE
During the ordinary course of its operations, the Company has from time to
time received, and expects that it may in the future receive, citations or
notices from governmental authorities that its operations are not in compliance
with its permits or certain applicable regulations, including various
transportation, environmental or land use laws and regulations. The Company
generally seeks to work with the authorities to resolve the issues raised by
such citations or notices. There can be no assurance, however, that the Company
will always be successful in this regard, and the failure to resolve a
significant issue could result in one or more adverse consequences to the
Company described above.
While the Company maintains insurance, such insurance is subject to various
deductible and coverage limits and certain policies exclude coverage for damages
resulting from environmental contamination. There can be no assurance that
insurance will continue to be available to the Company on commercially
reasonable terms, that the possible types of liabilities that may be incurred by
the Company will be covered by its insurance, that the Company's insurance
carriers will be able to meet their obligations under their policies or that the
dollar amount of such liabilities will not exceed the Company's policy limits.
An uninsured claim, if successful and of significant magnitude, could have a
material adverse effect on the Company's business, results of operations and
financial condition.
RELIANCE ON MANAGEMENT AND KEY PERSONNEL
The Company is dependent on its management and key personnel and believes
that its success will depend upon the efforts and abilities of management and
such key personnel. Furthermore, the Company may be dependent on the management
and key personnel of companies that may be acquired in the future. If any of
these individuals do not continue in their positions with the Company, or if the
Company is unable to attract and retain other skilled employees, the Company's
business, financial condition and results of operations could be materially
adversely effected. Competition for qualified personnel is intense and there can
be no assurance that the Company will be able to continue to hire and retain
sufficiently qualified management and other personnel necessary to conduct its
business successfully.
EMPLOYEES
The acquisition and integration of additional NLW service providers should
result in a reduction of employees as duplicate administrative processes are
eliminated. EarthCare's ability to manage its growth effectively will require it
to continue to implement and improve its operational, financial and management
information systems and controls and to train, motivate and manage its
employees. EarthCare intends to continually review and upgrade its management
information systems and to hire additional management and other personnel in
order to maintain the adequacy of its operational, financial and management
controls. There can be no assurance, however, that EarthCare will be able to
meet these objectives.
CONTROL BY EXECUTIVE OFFICERS AND DIRECTORS
The Company's officers and directors currently beneficially own
approximately 54% of the issued and outstanding Common Stock. As a result, these
stockholders acting together would be able to control matters requiring the
approval of a majority of the stockholders, such as election of directors. The
voting power of these stockholders under certain circumstances could have the
effect of delaying or preventing a change in control of the Company. Raymond
Cash, vice chairman and a director of the Company, controls over 38% of the
issued and outstanding Common Stock, individually and through a voting trust of
which he is trustee. See "Management" and "Principal and Selling Stockholders."
Due to the Lock-Up Agreements, none of the Company's officers or directors will
be entitled to sell Shares and potentially decrease these ownership percentages
until six months after the date of this Prospectus, at which time these persons
may sell up to 25% of their Shares, although there can be no assurance that any
of these persons will sell any of their Shares. In addition, certain of the
Company's officers and directors hold options to acquire an aggregate of
1,325,000 shares of Common Stock, subject to vesting and other requirements. See
"Certain Transactions."
10
<PAGE> 13
BENEFITS OF OFFERING TO CERTAIN STOCKHOLDERS
The officers and directors of the Company beneficially own approximately
63% of the Shares subject to this Prospectus. The terms of the Lock-Up
Agreements prohibit these officers and directors from offering for sale any of
their Shares without the prior written consent of the Company until six months
after the date of this Prospectus, at which time, such persons will be entitled
to sell up to 25% of their Shares. After twelve months from the date of this
Prospectus, these officers and directors will be entitled to sell all of their
Shares and will not be subject to the volume limitations of Rule 144 promulgated
under the Securities Act that would apply to the Shares if the Registration
Statement of which this Prospectus is a part was not effective. There can be no
assurance that any of the officers or directors will sell any of their Shares
even when entitled to do so.
POSSIBLE ADVERSE IMPACT OF FUTURE EVENTS ON SHARE PRICE OF COMMON STOCK
Future sales of the Common Stock, including issuances of shares of Common
Stock in acquisitions, or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock. The Company is
registering an additional 5,000,000 shares of Common Stock to be used in
acquisitions of the assets of NLW service providers and intends to file a
Registration Statement on Form S-8 to register shares of Common Stock issuable
upon the exercise of options pursuant to its stock option plan. See "Plan of
Distribution". The market price of the Common Stock could be subject to
significant fluctuations in response to various factors and events, including
the issuance of shares in acquisitions, the liquidity of the market for the
Common Stock, differences between the Company's actual financial or operating
results and those expected by investors and analysts, changes in analysts'
recommendations or projections, new statutes or regulations or changes in
interpretations of existing statutes and regulations affecting the Company's
business, changes in general economic conditions or broad stock market
fluctuations.
SUBSTANTIAL WARRANTS, OPTIONS AND CONTINGENT AND ACQUISITION SHARES
As of November 23, 1998, the Company has issued outstanding warrants and
options to purchase up to 221,235 and 1,305,000 shares of Common Stock,
respectively. The weighted average exercise price for the options is $16.05 and
for the warrants is $7.43. The existence of such warrants and options may
hinder future financings by the Company and the exercise of such warrants and
options may dilute the interests of all stockholders. Possible future resale of
Common Stock issuable on the exercise of such warrants and options could
adversely affect the prevailing market price of the Common Stock. The Company
intends to file a Registration Statement on Form S-8 to register the shares of
Common Stock issuable upon the exercise of options. Further, the holders of
warrants and options may exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable to
the Company. In addition, 55,000 shares of Common Stock (in addition to the
Contingent Shares) may be issued as additional consideration for completed
acquisitions, subject to off-sets as provided in the agreements relating
thereto, and 5,000,000 shares of Common Stock may be issued as partial or full
consideration in additional acquisitions. See "Business -- Acquisitions."
ISSUANCE OF ADDITIONAL STOCK
The Company has authorized capital of 70,000,000 shares of Common Stock and
30,000,000 shares of Preferred Stock, $.0001 par value per share. As of November
30, 1998, 9,561,434 shares of Common Stock and no shares of Preferred Stock were
issued and outstanding, with an additional 1,593,224 shares of Common Stock
reserved for issuance on the exercise or conversion of warrants, options, and
other outstanding rights to acquire Common Stock. Subject to applicable state
law, the Company's board of directors has authority, without action or vote of
the stockholders, to issue all or part of the authorized but unissued shares of
Common Stock and Preferred Stock. Any such issuance will dilute the percentage
ownership of stockholders and may dilute the book value of the Company's Common
Stock.
POTENTIAL ANTI-TAKEOVER EFFECTS OF CERTIFICATE, BYLAWS, DELAWARE LAW AND THE
EMPLOYMENT AGREEMENTS
Certain provisions of Delaware law and certain provisions of the Company's
Certificate of Incorporation (the "Certificate") and the Company's Bylaws (the
"Bylaws") could delay or impede the removal of incumbent directors and could
make it more difficult for a third-party to acquire, or could discourage a
third-party from attempting to acquire, control of the Company. Such provisions
could limit the price that certain investors might be willing to pay in the
future for shares of the Company's Common Stock. The Certificate and Bylaws
impose various procedural and other requirements (including a staggered board of
directors, removal of directors only for cause and the issuance of Preferred
Stock as described below) that could make it more difficult for stockholders to
effect certain corporate actions. The Certificate gives the Company's Board of
Directors the authority to issue up to 30 million
11
<PAGE> 14
shares of Preferred Stock and to determine the price, rights, preferences and
restrictions, including the voting rights of such shares, without any further
vote or action by the Company's stockholders. The rights of holders of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock issued in the future. The Company has no current
plans to issue such Preferred Stock. The "business combinations" statute under
Delaware law may restrict certain business combinations by interested
stockholders. See "Description of Capital Stock - Certain Provisions of the
Articles, Bylaws and Delaware Law." The Company's executive officers have
entered into employment agreements with the Company which contain change in
control provisions. The change in control provisions may hinder, delay, deter or
prevent a tender offer, proxy contest or other attempted takeover because the
covered employees can terminate their employment in such event and receive
payments for 24 months to 60 months after termination pursuant to their
respective agreements. See "Management - Employment Agreements and Change of
Control Arrangements."
12
<PAGE> 15
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Shares of Common
Stock by the Selling Stockholders hereunder. The Company has agreed to pay the
expenses of this Offering as consideration for certain of the Selling
Stockholder's entering into the Lock-Up Agreements and anticipates that it will
incur costs of approximately $250,000 in connection with the Offering,
including filing fees, transfer agent costs, printing costs, listing fees and
legal and accounting fees.
DETERMINATION OF OFFERING PRICE
With respect to Shares offered by the Selling Stockholders, such Shares
shall be sold from time to time, subject to the Lock-Up Agreements, at such
prices as the Selling Stockholders shall determine may be in their best
interests and at which a willing buyer can be found. Such prices may not be
related to the assets, earnings, or book value of the Company or any other
recognized criteria of valuation. There can be no assurance that the Selling
Stockholders will sell any or all of the Shares subject to this Prospectus.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain future earnings to finance its
growth and development and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. Payment of any future dividends will depend
upon the future earnings and capital requirements of the Company and other
factors that the Board of Directors considers appropriate. Additionally, the
terms of the Company's Credit Agreement restrict the payment of cash dividends
on any of its capital stock.
DILUTION
At September 30, 1998, the tangible book value of the Company was approximately
$(305,000), or $(.03) per share of Common Stock. Net tangible book value per
share represents the amount of total tangible assets of the Company reduced by
the amount of its total liabilities, divided by the number of shares of Common
Stock outstanding. Assuming an existing price per share of $15.50 (EarthCare
closing stock price on November 23, 1998), then upon the sale of the Shares to
new investors, the new investors would incur immediate dilution of $15.53. The
following table illustrates the per share dilution:
<TABLE>
<S> <C>
Existing trading price per share $15.50
Net tangible book value per share (.03)
------
Assumed dilution to new investors $15.53
======
</TABLE>
The following table sets forth, with respect to (i) Selling Stockholders whose
Shares are being registered in this Offering (ii) stockholders who will hold
unregistered shares after this Offering and (iii) stockholders who currently
hold freely tradable shares, a comparison of the number of shares of Common
Stock acquired from the Company, the percentage of ownership of such shares, the
total cash consideration paid, the percentage of total cash consideration paid
and the average price per share.
<TABLE>
<CAPTION>
----------------------------------------------------------
SHARES CONSIDERATION
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selling Shareholders 8,008,379 84.0% $17,926,930 88.2% $2.24
Shares that will remain unregistered 105,000 1.1% 609,000 3.0% 5.80
Freely tradable shares 1,422,948 14.9% 1,781,450 8.8% 1.25
----------------------------------------------------------
9,536,327 100.0% $20,317,380 100.0%
==========================================================
</TABLE>
The preceding table assumes no exercise of any stock options or warrants
outstanding as of September 30, 1998. As of September 30, 1998, there were stock
options outstanding to purchase a total of 1,325,000 shares of Common Stock with
a weighted average exercise price of $15.77 per share, of which 0 were
exerciseable, and warrants outstanding to purchase a total of 242,868 shares of
Common Stock with a weighted average exercise price of $7.28 per share.
13
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data of the Company. The
selected financial data for the period from inception (March 19, 1997) to
December 31, 1997 are derived from the audited financial statements of the
Company, and the selected financial data for the years ended December 31, 1995
and 1996 and for the period from January 1, 1997 to December 21, 1997 are
derived from the audited financial statements of the Predecessor, Andrews
Environmental Services, Inc. The selected financial data for the nine month
period ended September 30, 1998 are derived from the unaudited financial
statements of the Company. The selected financial data for the years ended
December 31, 1993 and 1994 and for the nine month period ended September 30,
1997 are derived from the unaudited financial statements of the Predecessor. As
a result of acquisitions occurring in 1997 and 1998, the Company's historical
financial statements are not representative of the financial results expected
for future periods. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the consolidated financial statements of the Company and
Predecessor and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------------------------------------------------- -------------------------------------
PERIOD
PERIOD NINE PERIOD FROM FROM NINE
YEAR ENDED DECEMBER 31, FROM MONTHS INCEPTION INCEPTION MONTHS
----------------------------------------------- JANUARY 1, ENDED (MARCH 19, (MARCH 19, ENDED
1997 TO SEPTEMBER 1997) TO 1997) TO SEPTEMBER
DECEMBER 30, DECEMBER SEPTEMBER 30, 30,
1993 1994 1995 1996 21, 1997 1997 31, 1997 1997 1998
----------------------------------------------- -------- ---- -------- --------- ---------
STATEMENT OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $1,260,344 $1,327,348 $1,499,392 $1,832,043 $1,218,268 $ 928,631 $ 737,858 $479,249 $18,221,028
Operating Expenses:
Cost of Operations 329,101 573,516 615,069 785,996 625,892 466,449 406,638 178,680 12,984,116
General and
Administrative 763,420 597,569 754,580 757,655 646,273 485,408 521,372 149,855 5,651,192
Depreciation and
Amortization 158,605 115,397 94,948 122,296 121,496 96,363 127,338 81,848 953,924
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------- -----------
Total Operating
expenses 1,251,126 1,286,392 1,464,597 1,665,947 1,393,661 1,048,220 1,055,348 410,383 19,589,232
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------- -----------
Income (Loss) from
Operations 9,218 40,956 34,795 166,096 (175,393) (119,589) (317,490) 53,866 (1,368,204)
Interest Expense 40,407 42,453 45,475 70,868 22,077 19,419 104,494 50,817 456,872
Other Expense
(Income) 0 1,575 7,404 (2,500) (204,124) (199,959) 0 0 0
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------- -----------
Income (Loss)
Before Income
Taxes (31,189) (3,072) (18,084) 97,728 6,654 60,951 (421,984) 8,049 (1,825,076)
Income Tax Provision
(Benefit) 0 3,565 (3,304) 39,094 4,334 23,283 (163,632) 1,078 (304,562)
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------- -----------
Net Income (Loss) $ (31,189) $ (6,637) $ (14,780) $ 58,634 $ 2,320 $ 37,668 $ (258,352) $ 6,971 $(1,520,514)
========== ========== ========== ========== ========== ========== ========== ======== ===========
Net Income (Loss)
per share - Basic
and Diluted N/A N/A N/A N/A N/A N/A $ (0.13) $ (0.19)
========== ========== ========== ========== ========== ========== ========== ===========
Weighted average
shares outstanding -
Basic and Diluted N/A N/A N/A N/A N/A N/A 1,940,536 8,047,363
========== ========== ========== ========== ========== ========== ========== ===========
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
BALANCE SHEET DATA: AT DECEMBER 31,
-------------------------------------------- AT DECEMBER AT SEPTEMBER 30,
1993 1994 1995 1996 31, 1997 1998
-------- -------- --------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Working capital (deficit) $ 3,630 $ 63,686 $(104,623) $ (130,188) $ (1,153,561) $ 1,955,044
Intangible assets(1) 0 0 0 0 1,473,489 18,843,354
Total assets 484,464 814,102 855,192 1,102,047 2,614,143 32,947,128
Long-term debt, including current portion 316,532 457,237 437,735 539,859 303,955 10,457,032
Retained earnings (deficit) 55,280 226,587 211,807 270,441 (258,352) (1,778,866)
Total shareholders' equity 55,780 227,087 212,307 270,941 812,453 18,538,514
</TABLE>
(1) Intangibles, net consist primarily of goodwill and noncompete
agreements. Noncompete agreements are amortized over the lives of the
contracts. Goodwill is being amortized over 40 years. See Note 2 to the
Company's Consolidated Financial Statements.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Prospectus. This discussion contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may vary
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors."
OVERVIEW
EarthCare engages in businesses relating to the NLW industry.
These businesses include grease trap pumping, septic tank services (including
designing, pumping, installation and maintenance), sewer and drain cleaning
services; high pressure jetting services, portable toilet servicing; bulk liquid
waste transportation; on-site biotreatment systems; biosolids management; and
liquid waste processing and disposal. The customers of EarthCare include
restaurants, hospitals, military bases, office buildings, apartments, schools,
municipalities, industrial businesses and single family residences.
EarthCare intends to expand its business in the NLW industry
through internal growth and the acquisition of local service providers
throughout the United States. These acquisitions will be made with cash, shares
of Common Stock or a combination of cash and Common Stock. EarthCare's strategy
is to increase the efficiency and profitability of each of the acquisition
targets through operational and marketing synergies with EarthCare's existing
business operations.
The NLW industry serves a basic need - the collection, treatment and
disposal of food and septic waste. Demand for NLW services is driven primarily
by population and the general level of economic activity. Increasing regulation
at the federal, state and local level, as well as increased awareness of and
demand for, a safer and cleaner environment are creating the need for a more
professional and environmentally responsible NLW industry.
GENERAL
The Company derives the majority of its revenues from commercial and
residential septic services (including designing, pumping, installation and
maintenance) (approximately 59% of current revenues) and to a lesser extent
sewer and drain services (approximately 20% of current revenues). Collection
fees charged to customers vary per gallon by waste stream according to
constituents of the waste, expenses associated with processing the waste and
competitive factors. Cost of operations consist of fixed costs such as salaries
and benefits of vehicle operators and construction labor and variable costs such
as supplies, fuel and equipment rentals. General and administrative costs
consist primarily of compensation and related benefits for executives and
administrative staff, advertising, office rent, communications and professional
fees. Depreciation and amortization expense primarily relates to the
depreciation of capital assets, the amortization of excess cost over the fair
value of net assets acquired (goodwill) and other intangible assets. The
Company's policy is to amortize goodwill over a 40 year life.
From its inception on March 19, 1997 through November 23, 1998, the Company
has acquired nine businesses, all of which were accounted for using the purchase
method of accounting. In connection with these acquisitions the Company recorded
goodwill of approximately $17.4 million, which is being amortized over 40 years.
At September 30, 1998, the Company's balance sheet includes net goodwill of
$17.2 million. This amount represents 53% of total assets and 94% of
stockholders' equity. Goodwill arises when the purchase price and other related
costs for a business acquisition exceeds the fair value of the net assets
acquired. Generally accepted accounting principles require that goodwill be
amortized over the period benefited. The Company has reviewed all of the known
factors and related anticipated future cash flows in evaluating the amount of
goodwill recorded in conjunction with each business acquisition. From this
analysis, the Company has concluded that the anticipated future cash flows
associated with the recognized goodwill will continue indefinitely, and there is
no persuasive evidence that any material portion of it will dissipate over a
period shorter than 40 years. Prior to their acquisition by the Company, the
acquired businesses were managed as independent private businesses, and their
results of operations reflect different tax structures (S corporations and C
corporations), which have influenced, among other things, their historical
levels of owners' compensation. Certain owners who continued employment with the
Company agreed to reductions in their compensation and benefits in connection
with the acquisition of their businesses by the Company.
In connection with each of its acquisitions, the Company attempts to
implement a number of cost saving measures, including possible reductions in
management levels and other personnel, the implementation of centralized
management and cost controls and the elimination of duplicate collection routes.
RESULTS OF OPERATIONS
On March 20, 1997, the Company purchased certain assets of Andrews
Environmental, Inc. ("Andrews") associated with the Andrews grease disposal
business. On December 22, 1997, the Company acquired the remaining assets and
ongoing business of Andrews. For financial reporting purposes Andrews is
considered the predecessor to the Company (the "Predecessor"). As a result
16
<PAGE> 19
of the Company's recent acquisitions and the limited period of ownership of the
acquired businesses, the Company believes that the period-to-period comparisons
and percentage relationships within the periods set forth below are not
meaningful.
The following table sets forth the percentage of certain items in relation to
net revenue:
<TABLE>
<CAPTION>
Predecessor Successor
--------------------------------------------------------- -----------------------------------------
Period From Period From
Nine Inception Inception Nine
Year Period from months (March 19, (March 19, months
ended Year ended January 1, 1997 ended 1997) to 1997) to ended
December 31, December 31, to December 21, September 30, December 31, September 30, September 30,
1995 1996 1997 1997 1997 1997 1998
----------- ------------ --------------- ------------- ----------- ------------- -------------
REVENUES 100% 100% 100% 100% 100% 100% 100%
<S> <C> <C> <C> <C> <C> <C> <C>
EXPENSES
Cost of Operations 41 43 51 50 55 38 71
General and Administrative 50 41 53 52 71 31 31
Depreciation and
Amortization 7 7 10 10 17 19 5
---- --- --- ---- ---- ---- ----
TOTAL EXPENSES 98 91 114 113 143 88 107
---- --- --- ---- ---- ---- ----
INCOME (LOSS) FROM OPERATIONS 2 9 (14) (13) (43) 12 (7)
---- --- --- ---- ---- ---- ----
INTEREST EXPENSE 3 4 2 2 14 10 3
OTHER (INCOME) EXPENSE 0 0 (17) (22) 0 0 0
---- --- --- ---- ---- ---- ----
INCOME (LOSS) BEFORE INCOME
TAXES (1) 5 1 17 (57) 2 (10)
INCOME TAX PROVISION (BENEFIT) 0 2 1 3 (22) 1 (2)
---- --- --- ---- ---- ---- ----
NET INCOME (LOSS) (1%) 3% 0% 4% (35%) 1% (8%)
==== === === ==== ==== ==== ====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998
NET INCOME (LOSS): For the nine months ended September 30, 1998, the
Company reported a loss of ($1,520,514) on revenues of $18,221,028.
REVENUES: Revenues for the nine months ended September 30, 1998 consist of
revenues from each of the businesses acquired in 1997 plus revenues from
businesses acquired during the first three quarters of 1998 from the date of
each acquisition. The nine completed acquisitions contributed approximately
$17.0 million or 93% of revenues for the nine months ended September 30, 1998.
COST OF OPERATIONS: The operating margin for the nine months ended
September 30, 1998 was 28.7%.
GENERAL AND ADMINISTRATIVE: For the nine months ended September 30, 1998,
general and administrative expense includes non-recurring expenses associated
with the relocation of the corporate headquarters to Dallas, Texas; expenses
associated with registering the Company as a reporting company with the
Securities and Exchange Commission; and costs associated with the establishment
of the Company's management team.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization was $953,924
or 5.2% of revenues for the nine months ended September 30, 1998.
LOSS FROM OPERATIONS: The loss from operations of ($1,368,204) is primarily
the result of the high level of general and administrative expense.
INTEREST EXPENSE: Interest expense for the nine months ended September 30,
1998 was $454,769. Interest was incurred at an average rate of approximately
7.6% during the nine months ended September 30, 1998.
INCOME TAX BENEFIT: An income tax benefit of 39% of pretax loss has been
computed in accordance with SFAS No. 109 "Accounting for Income Taxes." The tax
benefit has been offset by a valuation allowance of $384,367. Realization of
the net tax benefit is dependent on the Company generating sufficient taxable
income in future periods. Although realization is not assured, management
believes it is more likely than not that the Company will generate taxable
income in future periods to permit usage of the estimated net operating loss
carry forward. To date, all acquisitions have been taxable asset purchases in
which the Company obtained a full basis in acquired tangible and intangible
assets. To the extent the Company makes future nontaxable acquisitions, the
Company's effective rate may differ significantly from its statutory rate due
to nondeductible goodwill amortization.
17
<PAGE> 20
PERIOD FROM INCEPTION (MARCH 19, 1997) TO DECEMBER 31, 1997
The financial statements of the Company for the period from inception (March
19, 1997) to December 31, 1997 reflect a net loss of $258,352 on revenues of
$737,858.
The Company completed three acquisitions in 1997: the grease division of
Andrews in March 1997, Atlanta Grease Trap in August 1997 and the remaining
assets of Andrews in December 1997. All three acquisitions have been accounted
for using purchase accounting and the results of operations of the acquired
businesses have been included in the consolidated financial statements from the
date of each acquisition.
REVENUES: Revenues for period from inception (March 19, 1997) to December 31,
1997 consist of revenues from each of the businesses acquired from the date of
each acquisition.
COST OF OPERATIONS: The operating margin was 45%.
GENERAL AND ADMINISTRATIVE: General and administrative expense has been and is
projected to be a significant percentage of revenues in the early stages of the
Company's growth. It is anticipated that as revenues grow from future
acquisitions, that general and administrative expense as a percentage of revenue
will decline. The amounts reported for general and administrative expense
include a number of costs associated with establishing the Company and hiring
employees.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization was $127,338 or 17%
revenues.
LOSS FROM OPERATIONS: The loss from operations is due primarily to the high
level of general and administrative expense as a percentage of revenue.
INTEREST EXPENSE: Interest expense of $104,494 was based on an average interest
rate of 13% over the period.
INCOME TAX BENEFIT: An income tax benefit of 39% of pretax loss was recorded for
the period from inception (March 19, 1997) to December 31, 1997.
PERIOD FROM JANUARY 1, 1997 TO DECEMBER 21, 1997 COMPARED TO YEAR ENDED
DECEMBER 31, 1996
REVENUES: Revenues decreased 34% to $1,218,268 in 1997 from $1,832,043 in 1996.
This decrease was primarily due to the sale of the grease business to EarthCare
in March 1997.
18
<PAGE> 21
COST OF OPERATIONS: Cost of operations decreased 20% to $625,892 in 1997 from
$785,996 in 1996. Cost of operations as a percentage of revenues increased to
51% in 1997 from 43% in 1996. The increase in cost of operations as a percentage
of revenues was due to the sale of the more profitable grease business in March
1997.
GENERAL AND ADMINISTRATIVE: General and administrative expense decreased to
$646,273 in 1997 from $757,655 in 1996, a decrease of 15%. The decrease in
general and administrative was a result of the sale of the grease business. As a
percentage of sales, general and administrative increased to 53% in 1997 from
41% in 1996. This increase occurred because certain general and administrative
expenses which supported both the grease business and the continuing business of
Andrews were relatively fixed in nature, and were not decreased as a result of
the sale of the grease business.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization remained relatively
constant, at approximately $122,000. The disposition of assets associated with
the grease business did not significantly effect depreciation, because the
majority of the assets sold had been fully depreciated.
LOSS (INCOME) FROM OPERATIONS: The loss from operations of $175,393 for 1997, as
compared to income from operations of $166,096 in 1996, was primarily due to the
loss of revenue from the sale of the grease business and the inability to reduce
expenses to the extent that revenue was diminished.
INTEREST EXPENSE: Interest expense decreased from $70,868 in 1996 to $22,077 in
1997, due to decreased capital expenditures in 1997, and the decrease in debt
and interest payments associated with certain assets sold in conjunction with
the grease business.
OTHER, NET: Other, net includes a gain on sale of assets of approximately
$240,000 recorded in connection with the sale of the grease business.
PROVISION FOR INCOME TAXES: The effective tax rate increased from 40% in 1996 to
65% in 1997 due to the low level of income in 1997 and the relatively fixed
nature of certain items which are not deductible for tax purposes.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES: Revenues increased 22.2% to $1,832,043 in 1996 from $1,499,392 in
1995. The increase was due to internal growth of the business.
COST OF OPERATIONS: Cost of operations increased 28% to $785,996 in 1996 from
$615,069 in 1995. The increase was a result of the higher level of revenue. Cost
of operations as a percentage of revenues increased to 43% in 1996 from 41% in
1995. The percentage increase was driven by additional overtime labor incurred
to generate a portion of the additional revenue.
GENERAL AND ADMINISTRATIVE: General and administrative expense remained
relatively stable. at $757,655 in 1996 and $754,580 in 1995. General and
administrative expenses have historically been a significant percentage of
revenues and relatively fixed in nature.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization increased to
$122,296 in 1996 from $94,948 in 1995. This is primarily due to acquisitions of
property and equipment during 1996 and 1995.
INCOME FROM OPERATIONS: The increase of income from operations from 1995 to 1996
of $131,310 was primarily due to the growth of the business and Andrew's ability
to maintain general and administrative expenses at a relatively stable level.
INTEREST EXPENSE: Interest expense increased from $45,475 in 1995 to $70,868 in
1996, due to the financing of capital expenditures in 1996 and late 1995.
PROVISION (BENEFIT) FOR INCOME TAXES: The effective tax rate changed from a
benefit of (19)% in 1995 to a provision of 40.0% in 1996 due to the low level of
income in 1995 and the relatively fixed nature of certain items which are not
deductible for tax purposes.
19
<PAGE> 22
SEASONALITY AND INFLATION
The Company's operations are affected by the weather. Rainy weather requires
more frequent septic and grease trap maintenance and snow cover or frozen
conditions prevent installation and need for servicing septic systems. Although
the Company experiences a certain degree of seasonality in its operations due to
weather, this seasonality is lessened through its operations in various
geographic areas.
The Company believes that inflation and changing prices have not had, and are
not expected to have, any material adverse effect on its results of operations
in the near future.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash of approximately $1.8 million and
working capital of $2.0 million.
On June 26, 1998 the Company entered into the $40 million revolving credit
agreement with Bank of America, which was amended as of September 30, 1998 (the
"Credit Agreement"). The Company may also obtain up to $5 million in letters of
credit, subject to availability under the Credit Agreement. Interest is payable
monthly at variable rates, depending on the Company's Funded Debt to EBITDA (as
defined in the Credit Agreement), but is capped at LIBOR plus 2.25%. The Credit
Agreement expires September 26, 2001, is secured by a first lien on
substantially all assets of the Company and requires the Company to maintain
certain financial covenants beginning September 30, 1998. As of September 30,
1998, the Company was in compliance with the financial covenants. In connection
with entering into the Credit Agreement, two existing lines of credit (the
"Prior Credit Facilities") with availability of $16.6 million were repaid and
canceled. As of September 30, 1998 the outstanding balance under the Credit
Agreement was $8,229,239. Availability of funds under the Credit Agreement is
limited by the requirement that the Company comply with various loan covenants.
The Company's primary requirements for capital (other than those related to
acquisitions) consists of purchasing vehicles and equipment used in the
operation of its businesses. During the nine months ended September 30, 1998,
the Company made $679,384 in capital expenditures. From March 19, 1997
(inception) through September 30, 1998, the Company acquired nine businesses
for an aggregate consideration of $19.8 million in cash, $2.3 million in seller
notes and 471,400 shares of Common Stock. In addition to the above amounts, the
acquisition agreements include contingent consideration totaling $1,608,900 in
cash and 93,600 shares of Common Stock. Funding of the cash portion of the
purchase prices was provided by borrowings under the Prior Credit Facilities
and proceeds from private sales of Common Stock. From March 19, 1997
(inception) through September 30, 1998, the Company received approximately $16.3
million in proceeds from private sales of Common Stock. The Company believes
that funds provided by operations, together with cash on hand and funds
available under the Credit Agreement, will be adequate to meet the Company's
anticipated capital expenditures for the remainder of 1998 and for 1999.
The Company intends to continue to pursue internal growth and acquisition
opportunities. The timing, size or success of any acquisitions effort and the
associated potential capital commitments are unpredictable. The Company
expects to fund future acquisitions primarily through a combination of cash on
hand, borrowings under the Credit Agreement and the issuance of shares of
Common Stock.
YEAR 2000
The Company has conducted operations for less than two years and has only
recently grown large enough to require sophisticated computing systems. A
complete review of all of the Company's computing needs has recently been
undertaken and completed, including various Year 2000 compliant computer
programs. The Company has selected Year 2000 compliant hardware and software
for its computing needs and anticipates beginning implementation of these new
systems during the fourth quarter of 1998, which implementation should ensure
proper processing of transactions relating to the Year 2000 and beyond. The
Company expects the conversion of all systems to be completed in the third,
quarter of 1999 and estimates the capital costs of the new Year 2000 compliant
hardware, systems and software to be under $1,000,000.
The Year 2000 issue is expected to affect the systems of various entities with
which the Company interacts, including the Company's vendors and customers.
There can be no assurance that the systems of other companies on which the
Company's systems rely will be timely converted or that a failure by another
Company's systems to be Year 2000 compliant would not have a material adverse
effect on the Company.
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<PAGE> 23
BUSINESS
GENERAL
EarthCare engages in the following businesses relating to the industry:
grease trap pumping and repair services; septic services (including designing,
pumping, installation and maintenance); sewer and drain cleaning services; high
pressure water jetting services; portable toilet servicing; bulk liquid waste
transportation; biosolids management; on-site biotreatment systems and liquid
waste processing and disposal. EarthCare's customers include restaurants,
hospitals, military bases, office buildings, apartments, schools,
municipalities, industrial businesses and single family residences. All
references to EarthCare or the Company include its operating subsidiaries unless
the context indicates otherwise.
EarthCare intends to expand its presence in the NLW industry through
internal growth and acquisitions of local service providers throughout the
United States. The acquisitions will be made primarily with cash, shares of
Common Stock or a combination of cash and shares of the Common Stock. The
Company believes that these acquisitions, by consolidating smaller local service
providers, will create synergies and improve efficiencies in the area of NLW
management.
THE NLW INDUSTRY
The Company estimates that the portable toilet, septic tank and grease trap
business segment of the U.S. domestic NLW industry generates approximately $20
billion in revenues annually. There are approximately 25,000 service providers
currently in the NLW industry and, of these service providers, approximately 75%
generate less than $500,000 of annual revenues. The Company believes the NLW
industry will continue to grow based on increased waste from a growing
population and general economic conditions that are driving new building demand
and the need for NLW services.
Because the NLW industry is so highly fragmented, management believes the
industry has the potential for significant cost savings by the economies of
scale that may be realized in consolidation. These costs savings would include
efficiencies as a result of common billing, the coordination of advertising, the
elimination of duplicative professional and technical support providers, the
standardization and upgrading of equipment and the improvement of employee
training. EarthCare intends to determine lines of the NLW business in which an
acquired service provider is not currently engaged and assist the service
provider in expanding into those areas. There can be no assurance, however, that
EarthCare will be able to profitability consolidate service providers within the
NLW industry.
OPERATIONS
EarthCare currently engages in each of the NLW businesses described above.
EarthCare's operating subsidiaries include: Bone-Dry Enterprises, Inc.; SanTi
Group of Florida, Inc.; SanTi Group of Pennsylvania, Inc.; and SanTi Group of
New York, Inc. Each subsidiary of EarthCare intends to acquire additional assets
from local service providers and act as an operating division of EarthCare in
the area in which it is located. These local operating divisions operate under
various tradenames, as described below.
Bone-Dry Enterprises, Inc. ("Georgia Group"). The Georgia Group is engaged
in NLW collection and hauling operations in the state of Georgia. The Georgia
Group operates under the following tradenames: Andrews Environmental, Bone-Dry
Enterprises ("Bone-Dry") and Quality Plumbing and Septic.
SanTi Group of Florida, Inc. ("Florida Group"). The Florida Group is
engaged in NLW collection and hauling operations in the state of Florida. The
Florida Group operates under the following tradenames: Brownie Environmental
Services, Grease-Tec and A Rapid Rooter Sewer and Drain.
SanTi Group of Pennsylvania, Inc. ("Pennsylvania Group"). The Pennsylvania
Group is engaged in NLW collection and hauling operations in the state of
Pennsylvania. The Pennsylvania Group has one wholly owned subsidiary, Nutrecon,
Inc., which holds the operating permits and the leases for a facility acquired
from Ferrero Wastewater Management, Inc., in Ambler, Pennsylvania. The
Pennsylvania Group operates under the following tradenames: Ferrero Wastewater
Management and Eldredge Wastewater Management.
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<PAGE> 24
SanTi Group of New York, Inc. ("New York Group"). The New York Group is
engaged in NLW collection and hauling operations in the state of New York. The
New York Group operates under the following tradenames: RGM Liquid Waste Removal
and Devito Environmental.
The Company receives fees to collect, process and dispose of nonhazardous
liquid wastes. Collection fees charged to customers vary per gallon by waste
stream according to constituents of the waste, expenses associated with
processing the waste and competitive factors. Grease trap waste from restaurant
and other food processing and preparation facilities are transported to SanTi's
facilities in vacuum trucks, trailers and other transportable containers. SanTi
operates a fleet of vehicles to collect waste directly from generators and
receives waste from independent transporters servicing additional waste
generators. Using a variety of physical, chemical, thermal and other biological
techniques, the waste is broken down into constituent components. Water
extracted from the waste is pretreated and then discharged into the municipal
sanitary sewer system or applied to leased grasslands. Solid materials are dried
and disposed of in a solid waste landfill. At some locations where the Company
does not have pretreatment facilities, the waste is transported to private
pretreatment facilities, or, where permitted by local regulations, directly to
municipal or private wastewater treatment facilities.
EarthCare also engages in the business of biosolids management through the
reuse of organic materials. EarthCare provides transportation, treatment, site
monitoring, and land application to private companies. EarthCare's vehicles pick
up and transport biosolids to various sites. EarthCare also provides
professional management and consulting services for treatment of biosolids and
the monitoring and application onto leased grasslands of treated biosolids.
The Company benefits from federal, state and local regulations prohibiting
the disposal of grease trap waste and other waste in municipal collection and
treatment systems. Although restaurants, food processing and preparation
facilities and other industrial operations have produced such waste for many
years, regulations governing the management of NLW, and the enforcement of such
regulations, are becoming increasingly stringent. These requirements have
increased the value of Earthcare's services to its customers in recent years. As
federal, state and local regulations governing the disposal of NLW increase,
SanTi believes the amount of NLW products delivered to third parties for
processing and disposal will continue to increase.
EarthCare will target the acquisition and integration of local service
providers in the NLW industry that SanTi believes will be profitable additions
to the Company. EarthCare intends to focus on the integration of entities
acquired and to increase profits and productivity through operational and
efficiency improvements, standardization of procedures, equipment standards and
procurement procedures.
EarthCare intends to establish local operating facilities or service
centers throughout the United States, with initial service centers established
in major population centers. Acquired local service providers in these areas
will be converted to service centers. A service center manager at each location
will be responsible for the service center's overall performance. The manager
will be supported by supervisors responsible for one or more lines of business.
The manager will also be supported by maintenance managers responsible for the
maintenance and repair of all equipment. The service center managers will report
to district managers, who will typically have responsibility for eight to twelve
service center managers. The district managers will have general management
responsibility for their geographical areas.
PREDECESSOR CORPORATIONS
SanTi Group, Inc. ("SGI"), a privately-held corporation, was incorporated
in Delaware on August 19, 1997 for the purpose of engaging, through its
operating subsidiaries, in the following businesses related to the NLW industry:
grease trap pumping, septic tank services (including designing, pumping,
installation, and maintenance); sewer and drain cleaning services; high pressure
jetting services; portable toilet servicing; bulk liquid waste transportation;
biosolids management; on-site biotreatment systems and liquid waste processing
and disposal. In December 1997, SGI acquired the assets of Bone-Dry in a share
exchange in which each share of Bone-Dry was exchanged for 1.3 shares of SGI.
Bone-Dry was formed in March 1997 to acquire businesses in the NLW industry. SGI
and Bone-Dry were primarily controlled by Mr. Raymond M. Cash, Vice Chairman of
the Board of Directors of the Company, and entities controlled by Mr. Cash.
Following a stock split effected in the form of a 0.25 per share stock dividend
effective January 30, 1998 (the "Stock Dividend"), SGI had approximately
8,088,379 shares of common stock, $.0001 par value per share (the"SGI Stock"),
issued and outstanding as of the date of the merger of SGI into Microlytics,
Inc., as described below.
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<PAGE> 25
Microlytics, Inc. ("Micro") was incorporated in Delaware in 1985 for the
purposes of engaging in the business of developing, manufacturing and marketing
electronic reference products, including computer software programs which
provided linguistic and information compression technology, bilingual
dictionaries and thesaurus products. In 1989, Micro operated as a wholly owned
subsidiary of Selectronics, Inc. ("Selectronics"). In 1995, Selectronics changed
its name to Microlytics, Inc. In the early 1990's, Micro began experiencing
financial difficulties as a result of the highly competitive nature of the
computer software industry. On November 27, 1996, Micro filed for protection
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the Western District of New York (the "Court"). In July of
1997, substantially all of the intangible assets of Micro and its subsidiary
were sold to Metro One Telecommunications, Inc. In August of 1997, substantially
all of the tangible assets of Micro were also sold. The proceeds of these sales
were held in a segregated trust account by the debtor's counsel prior to the
Court's confirmation of Micro's plan of reorganization.
In April of 1998, Micro filed a Plan of Reorganization (the "Plan") that
was approved by its stockholders, the creditor's committee and the Court.
Pursuant to the Plan, Micro effected a 1 for 400 reverse stock split,
distributed the proceeds from asset liquidations to its creditors, and
distributed shares and warrants to its creditors and stockholders. The Plan
provided for this reverse stock split prior to the merger of SGI and Micro, as
described below. Pursuant to the Plan, any shareholder of Micro as of April 30,
1998 who, as a result of the 1 for 400 reverse stock split, held less than 100
shares, had his or her shares rounded up to 100 shares. As of November 23, 1998,
after the 1 for 400 reverse stock split and rounding of shares, approximately
1,115,816 shares of Micro common stock were issued and outstanding. Also under
the Plan, Micro issued warrants for 500,000 shares of Micro common stock,
exercisable at $5.80 per share.
THE MERGER AND NAME CHANGES
On May 13, 1998, SGI was merged with and into Micro under an agreement and
plan of merger, with Micro surviving and changing its name to SanTi Group, Inc.
("the Merger"). Effective September 21, 1998, Santi Group, Inc. changed its name
to EarthCare Company by filing an amendment to its Certificate with the Delaware
Secretary of State. The Merger was subject to the approval of the Court. On the
effective date of the Merger, each issued and outstanding share of SGI Stock was
converted into one share of common stock of Micro (now EarthCare). These
exchange ratios were determined after the 1 for 400 reverse split of Common
Stock pursuant to the Plan. This exchange resulted in the receipt by SGI
stockholders of approximately 8,088,379 shares of Common Stock, representing
approximately 86.2% of the shares of Common Stock issued and outstanding on the
effective date of the Merger. As of August 28, 1998, after the issuance of
shares pursuant to the Plan, the Merger, the reverse split, and the exercise of
warrants to acquire 304,746 shares of Common Stock, EarthCare had 9,526,599
shares of Common Stock outstanding. All options to acquire shares of SGI Stock
were also converted into options to receive shares of Common Stock. As of
October 9, 1998, such options to acquire 3,750 shares of Common Stock were
vested and options to acquire 22,500 shares of Common Stock vest over the next
two years. EarthCare succeeded to all of the assets, liabilities and NLW
business of SGI.
ACQUISITIONS
EarthCare intends to expand its business in the NLW industry through
internal growth and the acquisition of local NLW service providers throughout
the United States. These acquisitions will be made with cash, shares of Common
Stock, or a combination of cash and shares of Common Stock. EarthCare's
acquisition strategy has been developed with the goal of increasing the
efficiency and profitability of acquisition targets through operational and
marketing synergies with EarthCare's existing business operations. EarthCare
will provide professional management to these acquired entities to eliminate
duplicative processes and procedures among the acquired businesses. The services
that EarthCare intends to provide to the acquired entities include: sales
management, accounts receivable and accounts payable management, debt
collection, financial reporting, tax management, advertising, purchasing, legal,
health and safety, environmental, human resources, training and capital.
Customer service representatives will also be provided. These services are
intended to allow the local managers to focus on the growth of regional
business.
Between March 1997 and September 1998, EarthCare (or Bone-Dry) completed
several acquisitions of NLW local service providers. These acquisitions
geographically extended EarthCare's processing operations to New York,
Philadelphia and Miami, and increased its market penetration in Georgia. The
total cost of the acquisitions, including contingent consideration, was
$21,374,120 in cash, $2,257,350 in notes to sellers and 565,000 shares of Common
Stock. In addition, EarthCare entered into one-year agreements with certain key
managers that include severance payments if terminated before expiration.
Andrews Environmental, Inc. ("Andrews"). In March 1997, Bone-Dry acquired a
portion of the assets of Andrews, operating as Andrews' grease disposal business
for $475,000 in cash and $257,350 in notes. The Company later issued 14,479
shares of Common Stock in settlement of these notes. Andrews was in the business
of commercial
23
<PAGE> 26
and governmental grease extraction, collection, and transportation services in
the state of Georgia. In December 1997, Bone-Dry acquired the remaining assets
of Andrews for $660,000 in cash and 21,400 shares of Common Stock. Contingent
consideration of 13,600 shares of Common Stock is payable within 90 days of the
first anniversary of the date of the purchase, net of offsets for losses, as
defined in the purchase agreement. These assets included customer accounts,
trucks and containers to be used in the NLW and septic waste collection,
transportation, management and disposal business. Andrews specializes in the
area of NLW and disposal in Georgia.
Atlanta Grease Trap ("Atlanta Grease"). In August 1997, Bone-Dry
acquired the assets of Atlanta Grease, for approximately $360,000 in cash.
Atlanta Grease was in the business of commercial and governmental grease
extraction, collection and transportation services in Georgia. The assets
acquired included customer accounts, software, and certain physical assets to be
used in the NLW and septic waste collection, transportation, management and
disposal business.
Ferrero Wastewater Management, Inc. ("Ferrero"). In January 1998,
the Pennsylvania Group acquired the assets of Ferrero for $2,240,100 in cash and
90,000 shares of Common Stock. Contingent consideration of $248,900 in cash and
10,000 shares of Common Stock will be paid in the fourth quarter of 1998. These
assets included customer accounts, trucks and containers to be used in the
business of NLW and septic waste collection, transportation and management and
disposal in the Ambler, Pennsylvania area. In connection with this asset
purchase, the Pennsylvania Group agreed to assume certain liabilities of
Ferrero, excluding any liability for environmental, health and safety
requirements and any taxes arising out of the asset purchase. All third party
liabilities were paid by Ferrero prior to the closing.
A Rapid Rooter Sewer and Drain Service, Inc. ("A Rapid"). In February
1998, the Florida Group acquired the assets of A Rapid for $3,300,000 in cash,
payment of existing debt totaling approximately $690,120 and 100,000 shares of
Common Stock. These assets included customer accounts, trucks, containers and
other assets used in the NLW collection and disposal business. A Rapid operates
primarily in the Miami/Dade, Broward and Palm Beach, Florida areas. In
connection with this asset purchase, the Florida Group agreed to assume certain
liabilities of A Rapid, excluding any liability for environmental, health and
safety requirements and any taxes arising out of the asset purchase. All third
party liabilities were paid by A Rapid prior to the closing.
Quality Plumbing & Septic ("Quality"). In February 1998, the Georgia
Group acquired the assets of Quality for $2,000,000 in cash. Contingent
consideration of $250,000 in cash was paid in June 1998 and 10,000 shares of
Common Stock were issued in July 1998. These assets included customer accounts,
trucks and containers and other assets to be used in the NLW collection and
disposal business in the Lithia Springs, Georgia area. In connection with this
asset purchase, the Georgia Group agreed to assume certain liabilities of
Quality, excluding any liability for environmental, health and safety
requirements and any taxes arising out of the asset purchase. All third party
liabilities were paid by Quality prior to the closing.
Seagraves, Inc.. ("Seagraves") and Grease-Tec, Inc. ("Grease-Tec").
The Florida Group acquired the assets of Seagraves and Grease-Tec in March 1998
for $3,250,000 in cash, a promissory note in the amount of $2,000,000 and 60,000
shares of Common Stock. A security interest in the assets of Seagraves and
Grease-Tec was granted to the sellers to secure the promissory note. These
assets included customer accounts, trucks, containers and other assets used in
the NLW collection and disposal business in the Orange County, Florida area.
Seagraves also operated under the names Brownie Environmental Services, Brownie
Sewer & Drain Cleaning Services and Brownie Septic Tank Contractors. In
connection with this asset purchase, the Florida Group agreed to assume certain
liabilities of Seagraves, excluding any environmental, health and safety
requirements and any taxes arising out of the asset purchase. All third party
liabilities were paid by Seagraves and Grease-Tec prior to the closing.
R.G.M. Liquid Waste Removal Corporation and Affiliates. ("RGM"). In
May 1998, the New York Group acquired certain assets of RGM and its affiliates
for $4,500,000 in cash and 105,000 shares of Common Stock. Contingent
consideration of $1,000,000 and 55,000 shares of Common Stock is payable one
year after the date of purchase, net of offsets for losses, as defined in the
purchase agreement. These assets included contract rights, customer accounts,
trucks and containers and other assets to be used in the NLW collection and
disposal business in the New York metropolitan area. In connection with this
asset purchase, the New York Group agreed to assume certain liabilities of RGM
and its affiliates, excluding any liability for environmental, health and safety
requirements and any taxes arising out of the asset purchase. RGM's affiliates
include: Devito Environmental Corporation ("Devito"), Advanced Transfer
Technology, Inc. ("ATT") and Envirotec Leasing and Rental Corporation
("Envirotec"). All third party liabilities were paid by RGM prior to the
closing.
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<PAGE> 27
Eldredge Wastewater Management, Inc ("Eldredge"). In May 1998, the
Pennsylvania Group acquired certain assets of Eldredge for $2,040,000 in cash
and 85,000 shares of Common Stock. Contingent consideration of $360,000 in cash
and 15,000 shares of Common Stock is payable 13 months after the date of
purchase, net of offsets for losses, as defined in the purchase agreement.
Eldredge was engaged in the collection and disposal of wastewater from
commercial, industrial and residential facilities related to food processing,
preparation and elimination and municipal liquid and sludge wastes. These assets
included customer accounts, trucks and containers and other assets to be used in
the NLW collection and disposal business in the Lancaster, Montgomery, Bucks and
Chester Counties of Pennsylvania and Sussex and New Castle, Delaware. In
connection with this asset purchase, the Pennsylvania Group agreed to assume
certain liabilities of Eldredge, excluding any environmental, health and safety
requirements and any taxes arising out of the asset purchase. All third party
liabilities were paid by Eldredge prior to the closing.
In connection with each acquisition, EarthCare may have assumed or
succeeded to certain liabilities of the acquired businesses, which may include
environmental liabilities except as described above. EarthCare has obtained
representations from the sellers of the acquired businesses that no undisclosed
liabilities exist and certain rights to indemnification from the sellers for any
liabilities. There can be no assurance, however, that undisclosed liabilities do
not exist or that EarthCare will receive full or partial compensation pursuant
to its rights to indemnification.
In addition to internal growth, the growth of EarthCare, to a significant
extent, will depend on its continued acquisition of NLW service providers.
EarthCare expects competition to exist in the industry to acquire these
candidates, which may limit the number of acquisition opportunities and may lead
to higher acquisition prices. Acquisitions of these entities entail various
risks, including failure of the acquired service providers to achieve expected
results, diversion of management's attention, failure to retain key personnel of
the acquired service providers and risks associated with unanticipated events
and liabilities. All of these risks may have an adverse effect on the ability of
EarthCare to acquire additional acquisition candidates and on its business
condition and results of operations. Any complementary businesses that are
acquired also may not be successfully integrated.
DEBT FINANCING
EarthCare obtained a revolving line of credit pursuant to the Credit
Agreement on June 26, 1998, which was amended as of June 30, 1998, from Bank of
America National Trust and Savings Association ("Bank of America"), acting as an
agent for various lending institutions, including Bank of America (collectively,
the "Banks"). Under this credit agreement, each of the lending institutions
agrees to make loans to, and to issue or participate in the issuance of letters
of credit for the account of EarthCare on a revolving basis during the term of
the agreement as requested by EarthCare. The total outstanding revolving credit
and the aggregate amount of all letters of credit outstanding are not to exceed
the commitment amount of $40,000,000. Various financial covenants in the Credit
Agreement restrict the Company's ability to draw on this line of credit. A
pledge agreement was executed concurrent with the Credit Agreement, requiring
EarthCare to pledge all shares of stock owned by EarthCare in each of its
subsidiaries (both current subsidiaries as well as any subsidiary formed in the
future), as security for the payment of all liabilities incurred under the
revolving line of credit. A security agreement provides for a continuing
security interest to the Banks in all of the subsidiaries' accounts receivable,
securities, chattel paper, computer hardware and software, contract rights,
deposit accounts, documents, general intangibles, goods, instruments,
intellectual property, money, commodities and all personal property. A stock
purchase warrant was also granted to Bank of America for the right to purchase
50,000 shares of Common Stock at a price of $13.00 per share, expiring on June
26, 2003. EarthCare anticipates that it will use this line of credit, alone or
in combination with shares of its Common Stock, to acquire local NLW service
providers, as well as for working capital.
COMPETITION
EarthCare competes with a significant number of other NLW service
providers. Competitors compete primarily on the basis of proximity to collection
operations, fees charged and quality of service. Future technological changes
and innovations may result in a reduction in the amount of NLW generated, or in
alternative methods of treatment and disposal being developed. EarthCare also
faces competition from customers that may seek to enhance and develop their own
methods of disposal. Increased use of internal treatment and disposal methods
and other competitive factors may have a material adverse effect on SanTi's
business, results of operation and financial condition.
EarthCare will be at a disadvantage in competing against service
providers that are better capitalized, have greater name recognition, have more
background and experience, have greater financial, technical, marketing and
other resources and skills, have better facilities and are able to provide
services or products at a lower cost than EarthCare. Because the NLW industry is
currently
25
<PAGE> 28
highly fragmented, the acquisition of local NLW service providers is the only
strategy by which EarthCare may be able to penetrate existing markets. As a
result of these competitive factors, there can be no assurance that EarthCare's
growth strategy will be successful or that EarthCare will be able to generate
cash flow adequate for its operations and to support future acquisitions and
internal growth.
EMPLOYEES
As of November 23, 1998, EarthCare had 242 employees. It is
anticipated that the acquisition and integration of additional NLW service
providers will add employees as acquisitions are made but that the number of
employees in acquired businesses may be reduced as duplicate administrative
processes are eliminated.
GOVERNMENT REGULATIONS
EarthCare is subject to rules and regulations of various federal,
state and local governmental agencies. Environmental laws and regulations are,
and will continue to be, a principal factor affecting the marketability of the
services provided by EarthCare. Any changes in these laws or regulations may
affect the operations of EarthCare by imposing additional regulatory compliance
costs on EarthCare, requiring the modification of or adversely affecting the
market for EarthCare's NLW services. To the extent that demand for these
services is based upon the need to comply with these regulations, any
modification to these regulations may increase the cost of or decrease the
demand for these services and adversely affect EarthCare's business condition
and results of operations.
Additionally, if new environmental legislation or regulations are
enacted or existing legislation or regulations are amended or enforced
differently, EarthCare may be required to obtain additional operating permits,
registrations or approvals. The process of obtaining a required permit,
registration or approval can be lengthy and expensive and the issuance of such
permit or the obtaining of such approval may be subject to public opposition.
There can be no assurance that EarthCare will be able to meet the applicable
regulatory requirements.
RCRA is the principal federal statute governing hazardous and solid
waste generation, treatment, storage and disposal. RCRA and state hazardous
waste management programs govern the handling and disposal of "hazardous waste."
The U.S. Environmental Protection Agency ("EPA") has issued regulations pursuant
to RCRA. States have also promulgated regulations under comparable state
statutes that govern hazardous waste generators, transporters and owners and
operators of hazardous waste treatment, storage and disposal facilities. These
regulations impose detailed operating, inspection, training and emergency
preparedness and response standards and requirements for the financial
responsibility, manifesting of wastes, record keeping and reporting, as well as
treatment standards for any hazardous wastes intended for land disposal.
NLW is currently exempt from the requirements of RCRA. The repeal or
modification of the RCRA exemption covering NLW, or the modification of
applicable regulations or interpretations regarding the treatment or disposal of
NLW, may require EarthCare to alter its method of treating and disposing of NLW.
SanTi's current methods do not comply with the methods prescribed by the EPA for
treatment and/or disposal of waste as defined by RCRA. These potential changes
may result in decreased demand for EarthCare's services or increased costs to
EarthCare and could have a material adverse effect on EarthCare's business.
CERCLA provides for immediate response and removal actions
coordinated by the EPA for releases of hazardous substances into the environment
and authorizes the government or private parties to respond to the release or
threatened release of hazardous substances. The government may also order
persons responsible for the release to perform any necessary cleanup. Liability
extends to the present owners and operators of waste disposal facilities from
which a release occurs, persons who owned or operated the facilities at the time
the substance was released, persons who arranged for the disposal or treatment
of hazardous substances and waste transporters who selected such facilities for
treatment or disposal of hazardous substances. CERCLA creates strict, joint and
several liability for all costs of removal and remediation, other necessary
response costs and damages for injury to natural resources.
As EarthCare will be engaged in businesses that involve the treatment
and removal of nonhazardous liquid waste, EarthCare should not be subject to
CERCLA. However, if EarthCare were to acquire a business that has disposed of
hazardous waste or treated hazardous waste that falls within the parameters of
CERCLA, SanTi may be held jointly and severally liable for the costs of any
damage or required cleanup of the site.
26
<PAGE> 29
PROPERTY
Neither EarthCare nor any of its subsidiaries currently own any real
property. EarthCare corporate offices are located in Dallas, Texas, and are
under a sublease from VHA Southwest, Inc., for a current rate of $12,953.33 per
month, expiring July 31, 2003.
The following properties are currently leased by EarthCare and its subsidiaries:
The following properties are leased by the Florida Group: (i) property
leased from William E. and Joan C. Rice for a term of two and one-half years,
commencing on February 13, 1998 at a rate of $4,000 per month; this lease is
guaranteed by SanTi (ii) property in Orlando, Florida, leased for $96,000
annually to be used for NLW business; the lease expires March 6, 2003 and is
guaranteed by SanTi.
The following properties are leased by the Georgia Group: (i) property in
Lithia Springs, Georgia; the lease expires August 16, 1998, is for a rate of
$2,500 per month and is used for NLW business (ii) property in Austell, Georgia
used for NLW business is leased under a sublease from BFI Services Group, Inc.
for a rate of $4,680 per month, terminating January 13, 2001 (iii) property
located in Gwinnett County, Georgia, formerly used by Andrews to conduct its NLW
business; the rate of the sublease is $2,200 per month for a monthly term, with
automatic renewal until receipt of tenant's written notice of termination.
The following properties are leased by the New York Group: (i) property in
Deer Park, New York, leased for $11,500 per month for NLW business; the lease
expires May 31, 1999 (ii) property in Deer Park, New York, leased for $2,000 per
month for NLW business; the lease expires May 31, 1999.
The following properties are leased by the Pennsylvania Group: (i)
property in Ambler, Pennsylvania, leased to Nutrecon, Inc. by Ambler Realty for
use by the Pennsylvania Group for NLW business, expiring on December 31, 1999;
the lease is for a monthly rate of $6,000 (ii) sublease from Eldredge
Associates, Inc., for all real property formerly utilized by Eldredge Associates
in operation of its NLW business in West Chester, Pennsylvania, at a rate of
$7,600 per month, terminating on May 7, 1999.
LEGAL PROCEEDINGS
There are currently no claims or suits against EarthCare or its operating
subsidiaries. EarthCare may become involved in litigation and claims arising out
of the ordinary course of its business.
MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Of the 9,561,434 shares of Common Stock issued and outstanding as of
November 23, 1998, approximately 1,434,133 shares are subject to
over-the-counter trading on the Nasdaq Market OTC Bulletin Board. Trading began
on the Nasdaq OTC Bulletin Board in June of 1998, at a closing price of $13 per
share. The closing price on November 23, 1998 for the approximately 1,412,836
shares of Common Stock subject to such trading, of which 3,100 shares traded,
was $15.50 and the average closing price of shares subject to such trading was
$15.3125. As of October 9, 1998, there were 1,038 beneficial and record
holders of the Common Stock.
EarthCare has contractual obligations to issue up to 93,600 additional
shares if the conditions relating to revenue guarantees contained in the
acquisition agreements with NLW service providers are met, of which 38,600
shares are included in the Shares. As of November 23, 1998, approximately
171,235 warrants to purchase shares of Common Stock with an exercise price of
$5.80 were outstanding. EarthCare has also issued a warrant to purchase 50,000
shares of Common Stock with an exercise price of $13.00 per share to Bank of
America pursuant to the Credit Agreement.
27
<PAGE> 30
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the directors and
executive officers of EarthCare as of November 23, 1998. The executive officers
will serve until their successors are appointed by the Board of Directors. The
terms of the directors are as set forth below.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Donald F. Moorehead, Jr. 47 Chief Executive Officer
Chairman of the Board (term expires 2001)
Terry W. Patrick 52 President and Chief Operating Officer
Director (term expires 2000)
James E. Farrell 39 Vice President and Chief Financial Officer
Raymond M. Cash 68 Vice Chairman of the Board
(term expires 2001)
Kenneth R. Peak 53 Director (term expires 1999)
William P. Hulligan 55 Director (term expires 2000)
Elroy "Gene" Roelke 67 Director (term expires 1999)
</TABLE>
Donald F. Moorehead, Jr., Chief Executive Officer and Chairman of the Board
of EarthCare, served as Vice Chairman and Chief Development Officer of USA Waste
Services, Inc. ("USA Waste") from May 1994 through August 1997. From October
1990 until May 1994, he served as Chairman of the Board and Chief Executive
Officer of USA Waste. Mr. Moorehead was also a founder of USA Waste. Mr.
Moorehead has served as Director for the Environmental Research and Education
Foundation since November of 1996. Mr. Moorehead serves on the Board of FYI,
Inc., a document and information outsourcing company, and United Road Services,
Inc., a towing and transport service company. Mr. Moorehead was a member of the
compensation committee for FYI, Inc.
Terry W. Patrick, President, Chief Operating Officer and Director of
EarthCare, served as Chief Operating Officer of Eastern Environmental, a solid
waste management company, from June 1996 to December 1997. From 1995 to April
1996, he served as President and was the founder of Chem-Mark Services, a
commercial chemical manufacturing and distributing company. From August 1993 to
August 1994, he served as President and Chief Executive Officer of EDM
Corporation, a subsidiary of USA Waste. From April 1990 to August 1993, he
served as President and Chief Operating Officer of USA Waste, Inc., a solid
waste management company.
James E. Farrell, Vice President and Chief Financial Officer since October
1998. From September 1997 to August 1998, Mr. Farrell served in Vice President
of Finance and Chief Financial Officer positions for Adams Golf Inc. From June
1995 to September 1997, Mr. Farrell served as a Manager for The Pittston Company
(a diversified holding company), where he was responsible for financial review
and reengineering in the security services and air freight divisions. From May
1994 to June 1995, Mr. Farrell was employed by ADT Security Systems, Inc. as
Manager of Planning & Marketing. Prior thereto, he served as Director of
Accounting for Brinks Home Security, Inc. from September 1986 to December 1993.
Mr. Farrell has over 17 years of business experience and is a Certified Public
Accountant.
Raymond M. Cash, Vice Chairman and Director of EarthCare, is a founder of
Sanifill, Inc. and Southern States Environmental Services, Inc. Mr. Cash is also
a founder of EarthCare. From 1997 to June 1998, he served as Chairman of the
Board and Chief Executive Officer of EarthCare. From 1993 to 1997, he served as
Chairman and President of Resource, Recovery, Transfer & Transportation, Inc.
Kenneth R. Peak, Director of EarthCare and Vice President and Chief
Financial Officer from June 1, 1998 to October 9, 1998. He is currently a
director of Cheniere Energy, Hogan Energy, and NL Industries, Inc. From 1991 to
1998, Mr. Peak has been the President of Peak Enernomics, Inc., a company
engaged in financial consulting activities to the oil and gas industry.
William P. Hulligan, Director of EarthCare, was employed by Waste
Management, Inc. from 1979 to November 1997. The last position he held at Waste
Management was Executive Vice President. Mr. Hulligan currently serves on the
Board of Directors for NSC Corporation and has been a board member of John
Carroll University since 1994.
28
<PAGE> 31
Elroy "Gene" Roelke, director of EarthCare, has served as the Chairman and
Founder of the Knollwood Mercantile Company from 1985 to the present. From 1989
to 1996, Mr. Roelke served as Senior Vice President and General Counsel of the
Renaissance Capital Group. Mr. Roelke also served as the administrator of the
Portfolio Management Division and as a director designee to portfolio companies.
Mr. Roelke also served as the President and Director of Island Marine Supply
Company and was managing partner for Roelke & Jordan in Dallas, Texas. Mr.
Roelke also served as a Director of Micro and as Chairman of the Board of Micro
in 1996. He is also a Director and member of the Audit Committee of Titogen
Medical, Inc.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning the
compensation of the chief executive officer of the Company.
<TABLE>
<CAPTION>
Annual Compensation Long-Term
------------------------------- Compensation
------------
Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Options/SARs Compensation
- --------------------------- ---- ------ ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Raymond Cash (1) 1997 $ 0 162,500(2)
Chief Executive Officer
</TABLE>
(1) Mr. Cash served in the indicated position from August 19, 1997 and resigned
from such position effective June 29, 1998.
(2) Mr. Cash exercised the options to acquire these shares effective April 30,
1998 at an exercise price of $.65 a share.
Option Grants in Last Fiscal Year
The following table sets forth certain information concerning option
grants to the chief executive officer during the last fiscal year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE OF ASSUMED
----------------------------------------------------------------------------- ANNUAL RATE OF STOCK
NUMBER OF PERCENT OF PRICE APPRECIATION
SECURITIES TOTAL OPTIONS FOR OPTION TERM
UNDERLYING GRANTED TO EXERCISE ----------------------
OPTIONS EMPLOYEES PRICE PER EXPIRATION
GRANTED IN FISCAL 1997 SHARE DATE 5% 10%
------- -------------- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Raymond Cash(1)..... 162,500 36% $0.65 12/4/00 $21,125 $42,250
</TABLE>
(1) Mr. Cash exercised the options to acquire these shares effective April 30,
1998.
29
<PAGE> 32
Aggregated Option Exercises in Last Fiscal Year and Option Values at December
31, 1997
The following table sets forth certain information concerning the
value of unexercised options held by the chief executive officer as of December
31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1997 AT DECEMBER 31, 1997 (1)
----------------- ------------------------
EXERCISABLE EXERCISABLE
----------------- ------------------------
<S> <C> <C>
Raymond Cash 162,500 $24,375
</TABLE>
- ------------------
(1) Based on a fair market value of $.80 per share as of December 31, 1997.
EMPLOYMENT AGREEMENTS
On June 1, 1998, Donald F. Moorehead and EarthCare entered into an
employment agreement. The agreement provides for Mr. Moorehead to serve in the
capacity of Chief Executive Officer and Chairman of the Board of EarthCare and
provides for a base salary of $150,000 annually. Mr. Moorehead has elected not
to take any salary until January 1, 1999, at the earliest. Mr. Moorehead will
also be eligible for an annual bonus, which will be a minimum 50% of his annual
salary. The agreement term is five years, with automatic renewal for twelve
month periods. Upon the merger, consolidation or other business combination of
EarthCare with another publicly traded or private entity where EarthCare is not
the surviving entity or upon the sale of substantially all of EarthCare's
assets, Mr. Moorehead is entitled to terminate the agreement and receive a
severance payment equal to the remaining salary and bonus for each of the
remaining years (or portions thereof) under the full term of the agreement. The
agreement also entitles Mr. Moorehead to participate in any stock option plan
instituted by EarthCare. The agreement contains a noncompetition and
nonsolicitation clause for the term of the agreement and for one year after
termination of Mr. Moorehead's employment.
On June 1, 1998, Terry Patrick and EarthCare entered into an employment
agreement which provides for Mr. Patrick to serve as President and Chief
Operating Officer of EarthCare and provides for a base salary of $150,000
annually. Mr. Patrick has elected not to take any salary until January 1, 1999,
at the earliest. Mr. Patrick will also be eligible for an annual bonus, which
will be a minimum of 50% of his annual salary. The agreement term is five years,
with automatic renewal for twelve month periods. Upon the merger, consolidation
or other business combination of EarthCare with another publicly traded or
private entity where EarthCare is not the surviving entity or upon the sale of
substantially all of EarthCare's assets, Mr. Patrick is entitled to terminate
the agreement and receive a severance payment equal to the remaining salary and
bonus for each of the remaining years (or portions thereof) under the full term
of the agreement. The agreement also entitles Mr. Patrick to participate in any
stock option plan instituted by EarthCare. The agreement contains a
noncompetition and nonsolicitation clause for the term of the agreement and for
one year after termination of Mr. Patrick's employment.
On June 1, 1998, Kenneth Peak and EarthCare entered into an employment
agreement which provides for Kenneth Peak to serve in the capacity of Vice
President and Chief Financial Officer of EarthCare and provides for a base
salary of $100,000 annually. Mr. Peak will also be eligible for an annual bonus,
which will be a minimum of 25% of his annual salary. The agreement term is two
years, with automatic renewal for twelve month periods. Upon the merger,
consolidation or other business combination of EarthCare with another publicly
traded or private entity where EarthCare is not the surviving entity or upon the
sale of substantially all of EarthCare's assets, Mr. Peak is entitled to
terminate the agreement and receive a severance payment equal to the remaining
salary and bonus for each of the remaining years (or portions thereof) under the
full term of the agreement. The agreement also entitles Mr. Peak to participate
in any stock option plan instituted by EarthCare. The agreement contains a
noncompetition and nonsolicitation clause for the term of the agreement and for
one year after the termination of Mr. Peak's employment. Effective October 9,
1998, Mr. Peak resigned as Vice President and Chief Financial Officer of the
Company and his employment agreement will terminate November 1, 1998.
On October 9, 1998, James E. Farrell and EarthCare entered into an
employment agreement. The agreement provides for Mr. Farrell to serve in the
capacity of Vice President and Chief Financial Officer of EarthCare and
provides for an annual base salary of $95,000. Mr. Farrell may receive an
annual bonus, as determined in the Company's discretion. The agreement term is
two years. Upon the termination of Mr. Farrell's employment without cause, Mr.
Farrell is entitled to receive all compensation to the date of such termination
plus severance pay equal to three months salary. The agreement also entitles
Mr. Farrell to participate in any stock option plan instituted by EarthCare.
The agreement contains a noncompetition and nonsolicitation clause for the term
of the agreement and for one year after termination of Mr. Farrell's employment.
DIRECTOR COMPENSATION
Non-employee directors are compensated $1,500 for each non-telephonic
meeting attended. All directors are reimbursed for any expenses incurred in
attending board or committee meetings. Each non-employee director receives an
option to acquire 25,000 shares upon appointment or election to the Board of
Directors. Messrs. Roelke and Hulligan each received options to acquire 25,000
shares on June 29, 1998.
30
<PAGE> 33
BOARD OF DIRECTORS
The Company's Board of Directors (the "Board") is divided into three
classes which consist, as nearly as practicable, of one-third of the total
number of directors serving on the Board. The Board may have up to fifteen
members, with the exact number set by resolution of the Board from time to time
pursuant to the Bylaws. The members of each class serve staggered three-year
terms following the initial terms. The initial terms of Class I, Class II and
Class III directors expire at the annual stockholders' meetings in 1999, 2000
and 2001, respectively, or until their successors are elected and duly
qualified. Messrs. Peak and Roelke are members of Class I; Messrs. Patrick and
Hulligan are members of Class II; and Messrs. Moorehead and Cash are members of
Class III. The Board has established three standing committees: (i) the
Compensation Committee, (ii) the Audit Committee, and (iii) the Executive
Committee.
The Audit Committee currently consists of two directors, Messrs. Roelke and
Hulligan. The Audit Committee selects the Company's auditors, reviews the audit
and has other authority customary for an audit committee.
Messrs. Hulligan (Chairman), Roelke and Cash are members of the
Compensation Committee. The Compensation Committee approves the bonus component
of the Employment Agreements and will administer stock option plans.
The Executive Committee is composed of Messrs. Moorehead (Chairman), Cash
and Patrick and is authorized by the Board to take all action that may be
delegated by the Board under Delaware law.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All of the members of the Board (Messrs. Rock Payne and Raymond Cash and
Ms. Joyce Bone) served as members of the Compensation Committee until June 29,
1998, at which time, the Board designated a Compensation Committee composed of
Messrs. Hulligan, Roelke and Cash. Mr. Cash is vice chairman of the Board and
was president and chief executive officer of the Company until June 29, 1998.
Transactions between Mr. Cash and the Company are described below under Certain
Transactions.
CERTAIN TRANSACTIONS
In 1997, Bone-Dry entered into a note payable agreement with an entity
controlled by EarthCare's majority owner and Vice Chairman of the Board of
Directors, Raymond M. Cash. The note was in the amount of $650,000, with an
interest rate of 13%. This entity received approximately $56,000 in interest
during 1997. This note was paid in full in December 1997. After the note was
paid in full, Mr. Cash purchased 990,000 shares of Bone-Dry for $650,000. After
the share exchange of Bone-Dry and SGI described previously and the Stock
Dividend, Mr. Cash received 1,608,750 shares of SGI Stock.
The Company periodically uses a plane owned by Mr. Cash for EarthCare
executives for corporate travel. A fee is charged for this use based upon pilot
time, fuel, depreciation and insurance. There is currently no contract for the
use of this plane for corporate travel.
On June 29, 1998, the Board granted options to Messrs. Moorehead, Patrick,
and Peak in the following amounts: (i) Mr. Moorehead: 175,000 options,
exercisable at $6.00 per share, 150,000 options, exercisable at $15.00 per
share, and 200,000 options exercisable at $25.00 per share; (ii) Mr. Terry
Patrick: options in amount and exercise price identical to Mr. Moorehead; and
(iii) Mr. Kenneth Peak: 50,000 options, exercisable at $6.00 per share, 50,000
options exercisable at $15.00 per share, and 100,000 options exercisable at
$25.00 per share. These options vest over a four year period beginning on the
first anniversary of the date of grant. The options will vest automatically,
however, upon any termination of employment of Mr. Moorehead, Mr. Patrick or Mr.
Peak upon the merger, consolidation or other business combination of EarthCare
with another publicly traded or private entity where EarthCare is not the
surviving entity or upon the sale of substantially all of EarthCare's assets.
Upon his resignation effective October 9, 1998, Mr. Peak forfeited the options
described above.
On October 9, 1998, the Board granted options to Mr. Farrell to acquire
70,000 shares of Common Stock, 35,000 options exercisable at $15.00 a share and
35,000 options exercisable at $25.00 a share. The options vest over a four year
period beginning on the first anniversary of the date of grant.
31
<PAGE> 34
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of November 23, 1998, by (i) each
person known by the Company to be a beneficial owner of more than 5% of the
Common Stock, (ii) each of the Company's directors and named executive officers,
(iii) all directors and executive officers as a group and (iv) each Selling
Stockholder. Unless otherwise specified, the named beneficial owner has sole
voting and investment power.
<TABLE>
<CAPTION>
Common Common Common Stock
Stock Beneficially Stock Beneficially
Owned Before the To Be Sold in Owned After
Offering(1) the Offering(2) the Offering(3)
----------- --------------- ---------------
Name of Beneficial Owner Number Percent Number Percent
- ------------------------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Raymond M. Cash(4)(10) 3,642,500 38% 3,642,500 -- *
Cash Family Limited 1,658,750 18% 1,658,750 -- *
Partnership(5)(10)
Donald F. Moorehead, Jr.(6)(10) 1,118,000 12% 975,000 143,000 *
Terry W. Patrick (7)(10) 320,000 3% 300,000 20,000
William P. Hulligan(10) 100,000 1% 100,000 -- *
Elroy Roelke (8)(10) 50,000 * 0 50,000 *
Kenneth R. Peak 0 * 0 -- *
James E. Farrell 0 * 0 -- *
David Towery(9) 6,000 * 6,000 -- *
Terry White(10) 18,750 * 18,750 -- *
Founders Equity Group, Inc. 153,125 2% 150,000 3,125 *
George O. Moorehead 250,000 3% 250,000 -- *
Stoli, Ltd. 175,000 2% 175,000 -- *
William R. Andrews(11) 32,379 * 32,379 -- *
J.D. Dawson (9) 3,500 * 3,500 -- *
Thomas Ferrero 100,000 1% 100,000 -- *
(10)(11)
A Rapid Rooter Sewer and Drain 100,000 1% 100,000 -- *
Service, Inc.(10)
Seagraves, Inc.(10) 60,000 * 60,000 -- *
Bernard Arkules(9) 10,000 * 10,000 -- *
David I. Arkules(9) 10,000 * 10,000 -- *
John Beardmore(9) 10,000 * 10,000 -- *
Boone Investors Group, LLC 50,000 * 50,000 -- *
</TABLE>
32
<PAGE> 35
<TABLE>
<S> <C> <C> <C> <C> <C>
Thomas C. Bowen 50,000 * 50,000 -- *
Edward L. Cash(9) 10,000 * 10,000 -- *
Eric W. Cash(9) 10,000 * 10,000 -- *
Karen C. Cash 139,050 1% 139,050 -- *
Environmental Opportunities Fund, 311,395 3% 311,395 -- *
L.P.
Environmental Opportunities Fund 38,605 * 38,605 -- *
(Cayman), L.P.
Daryl R. Griswold(9) 9,418 * 9,418 -- *
Lola E. (Gena) and Stewart F. Hard 70,000 * 70,000 -- *
Sharon Hurlburt 10,916 * 10,916 -- *
M. Beckmann Ltd. 20,000 * 20,000 -- *
Mantua Holdings Ltd.(9) 10,000 * 10,000 -- *
James McClure(9) 7,416 * 7,416 -- *
George O. Moorehead and Nancy 100,000 1% 100,000 -- *
Moorehead
John Neely(9) 10,000 * 10,000 -- *
Rock Payne(10) 100,000 1% 100,000 -- *
RCD Investments, Ltd. 100,000 1% 100,000 -- *
Joyce Bone(9) 3,500 * 3,500 -- *
Ellis Rubenstein and Harold 10,000 * 10,000 -- *
Rubenstein(9)
Robert Smith 160,000 2% 160,000 -- *
William C. Skuba 50,000 * 50,000 -- *
Joseph P. Tate 130,000 1% 130,000 -- *
Leon J. Watkins and M. Janie Watkins 20,000 * 20,000 -- *
Howell Waldrup(9) 5,000 * 5,000 -- *
Clark Ullom 150,000 2% 150,000 -- *
Eldredge Wastewater Management, 85,000 1% 85,000 -- *
Inc.(10)(11)
</TABLE>
33
<PAGE> 36
<TABLE>
<S> <C> <C> <C> <C> <C>
Sherri Spicer (9) 8,000 * 8,000 -- *
Bruce Slovin 12,000 * 12,000 -- *
Stephen D. Scott 32,000 * 32,000 -- *
Susan K. Keller(9) 6,000 * 6,000 -- *
Laura K. Sanders(9) 6,000 * 6,000 -- *
Katherine U. Sanders 24,000 * 24,000 -- *
Christine M. Sanders(9) 8,000 * 8,000 -- *
Bret D. Sanders(9) 6,000 * 6,000 -- *
Brad D. Sanders(9) 6,000 * 6,000 -- *
John M. O'Quinn 24,000 * 24,000 -- *
John I. Mundy 12,000 * 12,000 -- *
Ben T. Morris 16,000 * 16,000 -- *
Robert Larry Kinney(9) 4,000 * 4,000 -- *
Louis Del Homme 16,000 * 16,000 -- *
William M. Dearman 12,000 * 12,000 -- *
Charles L. Davis(9) 2,000 * 2,000 -- *
Morton A. Cohn 32,000 * 32,000 -- *
Michael S. Chadwick(9) 4,000 * 4,000 -- *
George L. Ball 16,000 * 16,000 -- *
Samuel A. Jones(9) 4,000 * 4,000 -- *
Bruce R. McMaken(9) 6,000 * 6,000 -- *
John E. Drury 32,000 * 32,000 -- *
Don A. Sanders 56,000 * 56,000 -- *
Robert Gist(10) 20,000 * 20,000 -- *
Quality Plumbing & Septic(10) 10,000 * 10,000 -- *
Thomas V. Chorey Jr.(9) 5,259 * 5,259 -- *
John L. Taylor, Jr.(9) 5,259 * 5,259 -- *
Susan Shivers Fink(9) 432 * 432 -- *
All officers and
Directors as a
group (7 persons) 5,230,000 54% 5,017,500 170,000 *
Total Common Stock in
the Offering(12) 8,026,979
* Less than one percent.
</TABLE>
34
<PAGE> 37
(1) Includes shares of Common Stock that may be acquired upon the exercise of
stock options exercisable within 60 days. Each person named above has sole
voting and dispositive power with respect to the all shares listed opposite such
person's name, unless indicated otherwise. Unless otherwise indicated, each
stockholder's address is 14901 Quorum Drive, Suite 200, Dallas, Texas 75240.
(2)Does not reflect the applicable Lock-Up Agreement that prohibits the sale of
all or a portion of certain Selling Stockholders' Shares for a six to twelve
month period. Except as indicated by footnotes (9) and (10), the Selling
Stockholders are entitled to sell 25% of their Shares upon the Effective Date
and the remainder of their Shares after nine months following the Effective
Date. There can be no assurance that any of the Selling Stockholders will offer
to sell or sell any or all of their Shares.
(3) Assumes that all Shares subject to this Prospectus are sold and does not
reflect the applicable Lock-Up Agreements.
(4) These shares are held in a voting trust of which Mr. Cash is trustee and has
sole voting power. Includes 1,251,534 shares held by Mr. Cash and 1,658,750
shares held by the Cash Family Limited Partnership which is controlled by an
entity controlled by Mr. Cash. Does not include 139,050 shares held by Mr.
Cash's wife, for which shares Mr. Cash disclaims beneficial ownership.
(5) Does not include 1,251,534 shares held by Mr. Cash or 732, 216 shares held
in a voting trust of which Mr. Cash is trustee and has sole voting power.
(6) Includes 210,000 shares held by Moorehead Property Company Ltd., a company
controlled by Mr. Moorehead.
(7) Includes 320,000 shares held by Beacon Holdings Limited, a family limited
partnership of which Mr. Patrick is a general partner.
(8) Includes warrants to acquires 25,000 shares of Common Stock that are
exercisable within 60 days.
(9) These Selling Stockholders are not parties to the Lock-Up Agreements and are
eligible sell their Shares upon the Effective Date.
(10) These Selling Stockholders are eligible to sell 25% of their Shares after
six months following the Effective Date and the remainder of their Shares after
twelve months following the Effective Date.
(11) Does not include shares of Common Stock included in the Shares that are
contingent consideration as follows: Andrews - 13,600 Shares issuable within 90
days after December 1998; Ferrero - 10,000 Shares issuable 270 days after
January 1998; and Eldredge - 15,0000 Shares issuable thirteen months after May
1998. Although these shares are included in the Shares, the issuance of such
Shares is contingent on the satisfaction of certain conditions included in the
acquisition agreements relating thereto and may be issued only if such
conditions are satisfied. If issued, these Shares will be subject to the Lock-Up
Agreements as applicable.
(12) Includes shares of Common Stock listed in the table above, except for
1,658,750 shares listed for the Cash Family Limited Partnership that are
included in the 3,642,500 listed for Raymond M. Cash as described in footnote
(4) above, and includes 38,600 shares not listed above that are described in
footnote (11) above.
DESCRIPTION OF SECURITIES
DESCRIPTION OF CAPITAL STOCK
EarthCare is authorized to issue 100,000,000 shares of capital stock.
Seventy million of these shares are common stock, $.0001 par value (the "Common
Stock"), entitled to one vote per share on any matter on which stockholders of
SanTi are entitled to vote and are entitled to participate in dividends and to
receive the remaining net assets of EarthCare upon dissolution, subject to the
rights of any existing holders of preferred stock having a liquidation
preference. Of these shares of Common Stock, 9,561,434 shares are currently
outstanding. The shares of Common Stock have no preemptive rights and no
subscription, redemption or conversion privileges. The holders of shares of
Common Stock do not have cumulative voting rights. All of the outstanding shares
of Common Stock are fully paid and nonassessable.
Thirty million of the authorized shares of capital stock are designated as
preferred stock, $.0001 par value per share. The Board will have the full power
and authority to fix the number of shares constituting a series and to fix the
relative rights and preferences of the shares of the series to the full extent
allowable by the law, with respect to dividends, redemptions, payment on
liquidation, sinking fund provisions, conversion privileges and voting rights.
CERTAIN PROVISIONS OF THE CERTIFICATE, BYLAWS AND DELAWARE LAW
Classification of Board of Directors. The Certificate and Bylaws
of the Company divide the Board of Directors into three classes, designated as
Class I, Class II and Class III, respectively, each class to be as nearly equal
in number as possible. The term of Class I, Class II and Class III directors
will expire at the 1999, 2000 and 2001 annual meetings of stockholders,
respectively, and in all cases directors elected will serve until their
respective successors are elected and qualified. At each annual meeting of
stockholders, directors will be elected to succeed those in the class whose
terms then expire, each elected director to serve for a term expiring at the
third succeeding annual meeting of stockholders after such director's election,
and until the director's successor is elected and qualified. Thus, directors
elected stand for election only once in three years. The Certificate provides
that directors may only be removed for cause.
Additional Directorships, Vacancies and Removal of Directors. The
Bylaws of the Company provide that the Board shall consist of up to fifteen
members, the exact number to be determined by resolution of the Board from time
to time. If one or more directors resigns, a majority of the directors then in
office have the power to fill the vacancy.
Anti-Takeover Effects. The foregoing provisions of the Articles
and Bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control of the Company. These provisions are intended to
enhance the continuity and stability of the Board and the policies formulated by
the Board and to discourage certain types of transactions that may involve an
actual or threatened change in control of the Company. These provisions are also
designed to reduce the
35
<PAGE> 38
vulnerability of the Company to an unsolicited acquisition proposal and to
discourage certain tactics that may be used in proxy fights, however, such
provisions may discourage third parties from making tender offers for the
Company's shares. As a result, the market price of the Common Stock may not
benefit from any premium that might occur in anticipation of a threatened or
actual change in control. Such provisions also may have the effect of preventing
changes in the management of the Company.
WARRANTS
In connection with financing provided to the Company in June 1998, the
Company issued to Bank of America a warrant to purchase 50,000 shares of Common
Stock at an exercise price of $13.00 per share. The Bank of America warrant is
exercisable at any time until June 2003. In connection with the Merger, the
Company issued warrants to purchase 500,000 shares of Common Stock, with
approximately 171,235 outstanding as of November 23, 1998.
STATUTORY BUSINESS COMBINATION PROVISION
As a Delaware corporation, the Company is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" of a publicly held Delaware corporation (defined
generally as a person together with affiliates and associates owns (or within
the prior three years, owned) 15% or more of a Delaware corporation's
outstanding voting stock) from engaging in a "business combination" (includes
mergers, asset sales and certain other transactions resulting in a financial
benefit to an interested stockholder) with the Corporation for three years
following the date such person became an interested stockholder unless: (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (ii) on
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide employees
with the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer); or (iii) following the
transaction in which such person became an interested stockholder, the business
combination was approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of 66 2/3% of the outstanding voting stock of the corporation not owned by the
interested stockholder. Under Section 203, the restrictions described above also
do not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who had not
been an interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.
INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law, the Company's
Certificate provides that directors of the Company will not be personally liable
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law,
relating to prohibited dividends, distributions and repurchases or redemptions
of stock, or (iv) for any transaction from which the director derives an
improper personal benefit. The Company's Certificate of Incorporation provides
that the Company shall indemnify its directors, officers, employees and other
agents, to the fullest extent provided by Delaware law. Specifically upon
request, the Company will advance expenses to any officer or director who was or
is a party to, or is threatened to be made a party to, any threatened, pending
or completed action, suit or proceeding, including civil, criminal,
administrative, investigative or otherwise, by reason of the fact that such
person is or was a director or officer of the Company, or is or was acting at
the request of the Company as a director, officer, partner, trustee, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise. This indemnification will not apply if the
indemnitee is adjudged liable to the Company , unless and only if the court in
which the action is brought determines the indemnitee is fairly and reasonably
entitled to indemnification by the Company. The Company may also purchase and
maintain insurance on the behalf of its directors and officers against any such
liability that may be asserted as a result of the director's or officer's
service in such a capacity.
36
<PAGE> 39
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Securities Transfer
Corporation.
PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale from time to time of the
Shares by the Selling Stockholders. The Company has registered the Shares for
sale to provide the Selling Stockholders with freely tradeable securities, but
registration of such shares does not necessarily mean that any of such shares
will be offered or sold by the Selling Stockholders. The Company will not
receive any proceeds from the offering of the Shares by the Selling
Stockholders.
The Shares may be sold from time to time to purchasers directly by any of
the Selling Stockholders subject to the Lock-Up Agreements between the Company
and certain of the Selling Stockholders, which prohibit such Selling
Stockholders from offering for sale or selling certain of their Shares for a six
to twelve month period. See "Principal and Selling Stockholders." Alternatively,
the Selling Stockholders may from time to time offer the Shares through dealers
or agents, who may receive compensation in the form of commissions from the
Selling Stockholders and/or the purchasers of Shares for whom they may act as
agent. Without limiting the foregoing, such sales may be in the form of
secondary distributions, exchange distributions, block trades, ordinary
brokerage transactions or a combination of such methods of sale. The Selling
Stockholders and any dealers or agents that participate in the distribution of
Shares may be deemed to be "underwriters" within the meaning of the Securities
Act and any profit on the sale of Shares by them and any commissions received by
any such dealers or agents might be deemed to be underwriting commissions under
the Securities Act.
At the time a particular offering of Shares is made, a Prospectus
Supplement, if required, will be distributed that will set forth the name and
names of any dealers or agents and any commissions and other terms constituting
compensation from the Selling Stockholders and any other required information.
The Shares may be sold from time to time at varying prices determined at the
time of sale or at negotiated prices.
In order to comply with the securities laws of certain states, if
applicable, the Shares may be sold only through registered or licensed brokers
or dealers. In addition, in certain states, the Shares may not be sold unless
they have been registered or qualified for sale in such state or an exemption
from such registration or qualification requirement is available and is complied
with.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by King & Spalding, Atlanta, Georgia.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, (the
"Commission"), a Registration Statement on Form S-1 (together with all
Amendments, schedules and exhibits thereto, the "Registration Statement") under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock, reference is made to the Registration Statement. Statements contained in
this Prospectus as to the contents of any contract, agreement, or other document
referred to are not necessarily complete, and in each instance reference is made
to the copy of such contract or
37
<PAGE> 40
other document filed as an exhibit to the Registration Statement. The
Registration Statement may be inspected without charge at the Commission's
principal offices in Washington, D.C., and copies of all or any part of the
Registration Statement, of which this Prospectus forms a part, each such
statement being qualified in all respects by such reference. The Registration
Statement may be inspected without charge at the public reference facilities
maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and the following regional offices of the
Commission: 13th Floor, Seven World Trade Center, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission, Washington, D.C. at prescribed rates. The
Registration Statement may also be obtained through the Commission's Internet
address at "http://www.sec.gov".
The Company's Form 10, that was filed on July 24, 1998 and amended on
September 2, 1998, September 30, 1998 and October 14, 1998, was declared
effective and the Company is subject to the informational reporting requirements
of the Securities Exchange Act of 1934, as amended, and, in accordance
therewith, is or will be filing reports, proxy statements and other information
with the Commission. Accordingly, the Company filed its Form 10-Q for the
quarter ended September 30, 1998 with the Commission on November 16, 1998.
38
<PAGE> 41
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PRO FORMA FINANCIAL STATEMENTS
EarthCare Company and Subsidiaries
Introduction to Unaudited Pro Forma Combined Financial Statements F-3
Pro Forma Combined Statements of Operations for the Year Ended
December 31, 1997 and the Nine Months Ended September 30, 1998
(Unaudited) F-5
Notes to Unaudited Pro Forma Combined Financial Statements F-7
HISTORICAL FINANCIAL STATEMENTS
EarthCare Company and Subsidiaries
Report of Independent Public Accountants F-10
Consolidated Balance Sheets F-11
Consolidated Statements of Operations F-12
Consolidated Statements of Stockholders' Equity F-13
Consolidated Statements of Cash Flows F-14
Notes to Consolidated Financial Statements F-15
The historical financial statements of certain acquired companies are
included in this filing since each acquiree will contribute significant revenue
to the Company. The operating results of these acquirees should not be
considered indicative of the Company's future operating results.
Andrews Environmental Services, Inc.
Report of Independent Public Accountants F-23
Balance Sheet F-24
Statements of Operations F-25
Statements of Stockholders' Equity F-26
Statements of Cash Flows F-27
Notes to Financial Statements F-28
Ferrero Wastewater Management, Inc.
Report of Independent Public Accountants F-32
Balance Sheets F-33
Statements of Operations F-34
Statements of Stockholders' Equity F-35
Statements of Cash Flows F-36
Notes to Financial Statements F-37
A Rapid Rooter Sewer & Drain Service, Inc.
Report of Independent Public Accountants F-41
Balance Sheets F-42
Statements of Operations F-43
Statements of Stockholders' Equity F-44
Statements of Cash Flows F-45
Notes to Financial Statements F-46
</TABLE>
F-1
<PAGE> 42
<TABLE>
<S> <C> <C>
Seagraves, Inc. (d.b.a. Brownie Environmental Services) and Grease-Tec, Inc.
Report of Independent Public Accountants F-50
Combined Balance Sheets F-51
Combined Statements of Operations F-52
Combined Statements of Stockholders' Equity F-53
Combined Statements of Cash Flows F-54
Notes to Combined Financial Statements F-55
RGM Liquid Waste Removal Corporation and Affiliates
Report of Independent Public Accountants F-59
Combined Balance Sheets F-60
Combined Statements of Operations F-61
Combined Statements of Stockholders' Equity F-62
Combined Statements of Cash Flows F-63
Notes to Combined Financial Statements F-64
Eldredge Wastewater Management, Inc.
Report of Independent Public Accountants F-71
Balance Sheets F-72
Statements of Operations F-73
Statements of Stockholder's Equity F-74
Statements of Cash Flows F-75
Notes to Financial Statements F-76
</TABLE>
F-2
<PAGE> 43
EARTHCARE COMPANY AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect to
the acquisitions by EarthCare Company ("EarthCare") of businesses during the
period from March 19, 1997 (inception) through May 8, 1998 (the "Acquired
Businesses"). The unaudited pro forma combined financial statements also give
effect to the merger with Microlytics, Inc. ("Microlytics") on May 13, 1998,
which has been accounted for as a capital transaction accompanied by a
recapitalization of EarthCare ("Recapitalization"). EarthCare, the Acquired
Businesses and Microlytics are hereafter referred to as the Company. The
Acquired Businesses are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
BUSINESS DATE ACQUIRED
- -----------------------------------------------------------------------------------------------------
<S> <C>
Grease business of Andrews Environmental Services, Inc. March 20, 1997
("Andrews Grease")
- -----------------------------------------------------------------------------------------------------
Atlanta Grease Trap Service, Inc. ("Atlanta Grease") August 27, 1997
- -----------------------------------------------------------------------------------------------------
Remaining business of Andrews Environmental Services, Inc. December 22, 1997
("Andrews Other")
- -----------------------------------------------------------------------------------------------------
Ferrero Wastewater Management, Inc. ("Ferrero") January 22, 1998
- -----------------------------------------------------------------------------------------------------
A Rapid Rooter Sewer & Drain Service, Inc. ("A Rapid") February 13, 1998
- -----------------------------------------------------------------------------------------------------
Quality Plumbing and Septic ("Quality") February 17, 1998
- -----------------------------------------------------------------------------------------------------
Seagraves, Inc. (d.b.a. Brownie Environmental Services, Inc.)
and Grease-Tec, Inc. ("Seagraves") March 6, 1998
- -----------------------------------------------------------------------------------------------------
RGM Liquid Waste Removal Corporation and Affiliates ("RGM") May 1, 1998
- -----------------------------------------------------------------------------------------------------
Eldredge Wastewater Management, Inc. ("Eldredge") May 8, 1998
- -----------------------------------------------------------------------------------------------------
</TABLE>
Andrews Grease and Andrews Other are hereafter referred to as "Andrews".
All of the above acquisitions were accounted for using the purchase method of
accounting. These statements are based on the historical financial statements of
the Acquired Businesses and the estimates and assumptions set forth below and in
the notes to the unaudited pro forma combined financial statements.
The unaudited pro forma combined statements of operations give effect to these
transactions as if they had occurred January 1, 1997.
EarthCare has preliminarily analyzed the savings that it expects to be realized
from reductions in salaries and certain benefits to the owners. To the extent
the owners of the Acquired Businesses have agreed prospectively to reductions in
salary, bonuses and benefits, these reductions have been reflected in the pro
forma combined statements of operations. With respect to other potential cost
savings, EarthCare cannot fully quantify these savings at this time. It is
anticipated that these savings will be partially offset by costs related to
EarthCare's corporate management and by the costs associated with being a public
company. These costs cannot be quantified accurately. Accordingly, only those
anticipated savings and costs that are factually supportable have been included
in the accompanying pro forma financial information of the Company.
F-3
<PAGE> 44
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what
EarthCare's results of operations would actually have been if such transactions
in fact had occurred on those dates and are not necessarily representative of
the EarthCare results of operations for any future period. Since the Acquired
Businesses were not under common control or management, historical combined
results may not be comparable to, or indicative of, future performance. The
unaudited pro forma combined financial statements should be read in conjunction
with the historical financial statements and notes thereto included elsewhere
herein. Also see "Risk Factors".
F-4
<PAGE> 45
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
EARTHCARE FERRERO A RAPID QUALITY SEAGRAVES RGM ELDREDGE
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 18,221,028 $257,982 $680,870 $194,786 $1,342,431 $4,108,953 $1,514,756
EXPENSES
Cost of operations 12,984,116 175,443 338,971 118,620 930,687 2,298,686 1,108,708
Selling, General and
Administrative Expense 5,651,192 73,399 244,591 61,894 350,137 1,066,890 385,582
Depreciation and
Amortization 953,924 23,334 41,476 5,179 32,886 211,454 68,311
----------- -------- -------- -------- --------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (1,368,204) (14,194) 55,832 9,093 28,721 531,923 (47,845)
Other expense (income):
Interest 454,769 5,913 11,148 1,684 8,659 (31,626) 11,959
Other 2,103 (33) (476) 60 (105,984) - (1,562)
----------- -------- -------- -------- --------- ---------- ----------
INCOME (LOSS) BEFORE TAXES (1,825,076) (20,074) 45,160 7,349 126,046 563,549 (58,242)
Provision (benefit)
for taxes (304,562) - - - -
287,410 (13,686)
----------- -------- -------- -------- --------- ---------- ----------
NET INCOME(LOSS) $(1,520,514) $(20,074) $ 45,160 $ 7,349 $ 126,046 $ 276,139 $ (44,556)
=========== ======== ======== ======== ========= ========== ==========
PRO FORMA NET LOSS
PER SHARE
Basic and Diluted $ (.19)
===========
PRO FORMA WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic and Diluted 8,047,383
===========
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
(Note 5)
<S> <C> <C>
Revenues $ - $26,320,806
EXPENSES 17,955,231
Cost of operations
Selling, General and
Administrative Expense (102,500)(d) 7,731,185
Depreciation and Amortization 240,079 (a) 1,576,643
---------- -----------
INCOME (LOSS) FROM OPERATIONS (137,579) (942,253)
Other expense (income):
Interest 60,000 (b) 674,454
Other 151,948 (c) (105,892)
---------- -----------
INCOME (LOSS) BEFORE TAXES (349,526) (1,510,814)
Provision (benefit)
for taxes (94,652)(e)
(136,315)(f) (261,805)
---------- -----------
NET INCOME(LOSS) $ (118,559) $(1,249,009)
========== ===========
PRO FORMA NET (LOSS)
PER SHARE
Basic and Diluted $ (.15)
===========
PRO FORMA WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic and Diluted 125,824 8,173,207
========== ===========
</TABLE>
F-5
<PAGE> 46
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
EARTHCARE ANDREWS ATLANTA GREASE FERRERO A RAPID QUALITY
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 737,858 $1,218,268 $ 198,255 $4,122,100 $4,629,655 $1,558,288
- --------
EXPENSES
Cost of operations 406,638 625,892 133,741 2,797,821 2,364,794 948,963
Selling, General and Administrative
Expenses 521,372 646,273 41,941 1,045,315 1,730,394 495,149
Depreciation and Amortization 127,338 121,496 220,432 319,001 41,529
--------- --------- ------------ --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (317,490) (175,393) 22,573 58,532 215,466 72,647
Other expense (income):
Interest 104,494 22,077 3,692 50,920 86,367 13,472
Other (204,124) (2,821) 27,413 476
--------- --------- ------------ --------- --------- ---------
INCOME (LOSS) BEFORE TAXES (421,984) 6,654 18,881 10,433 101,686 58,699
Provision (benefit) for taxes (163,632) 4,334
--------- --------- ------------ --------- --------- ---------
NET INCOME (LOSS) $(258,352) $ 2,320 $ 18,881 $ 10,433 $ 101,686 $ 58,699
========= ========= ============ ========= ========= =========
PRO FORMA NET LOSS PER SHARE
Basic and Diluted $ (.13)
=========
PRO FORMA WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic and Diluted 1,940,536
=========
<CAPTION>
PRO FORMA PRO FORMA
SEAGRAVES RGM ELDREDGE ADJUSTMENTS COMBINED
(Note 5)
<C> <C> <C> <C> <C> <C>
Revenues $6,924,493 $7,459,143 $4,074,248 $ - $30,922,308
- --------
EXPENSES
Cost of operations 4,868,591 4,485,210 2,841,432 - 19,473,082
Selling, General and Administrative
Expenses 1,636,989 2,407,013 1,081,150 (205,000)(d) 9,400,596
Depreciation and Amortization 248,938 394,420 192,534 1,063,889 (a) 2,729,577
--------- --------- --------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 169,975 172,500 (40,868) (858,889) (680,947)
Other expense (income):
Interest 36,425 (88,518) 34,828 124,621 (b) 548,484
160,106 (c)
Other (75,529) (73,276) (6,509) (334,370)
--------- --------- --------- ---------- ----------
INCOME (LOSS) BEFORE TAXES 209,079 334,294 (69,187) (1,143,616) (895,061)
Provision (benefit) for taxes 156,526 (17,957) 117,665 (e) (349,074)
(446,010)(f)
--------- --------- --------- ---------- ----------
NET INCOME (LOSS) $ 209,079 $ 177,768 $ (51,230) $ (815,271) $ (545,987)
========= ========= ========= ========== ==========
PRO FORMA NET LOSS PER SHARE
Basic and Diluted $ (0.23)
==========
PRO FORMA WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic and Diluted 460,652 2,401,188
========== ==========
</TABLE>
F-6
<PAGE> 47
EARTHCARE COMPANY AND ACQUIRED BUSINESSES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
1. BACKGROUND
EarthCare Company ("EarthCare") was formed to act as a consolidator of
nonharzardous liquid waste businesses. From its inception on March 19, 1997
through May 8, 1998, EarthCare has acquired nine businesses involved in the
nonhazardous liquid waste business ("Acquired Businesses").
2. HISTORICAL FINANCIAL STATEMENTS
The historical financial statements of the Acquired Businesses were derived from
the respective Acquired Businesses' financial statements. All Acquired
Businesses have a December 31 year-end, or their financial results have been
recast to a December 31 year-end, with the exception of RGM which has an October
31 year-end. The audited historical financial statements included elsewhere in
this Registration Statement have been included in accordance with Securities and
Exchange Commission (SEC) Staff Accounting Bulletin No. 80.
3. ACQUISITION OF ACQUIRED BUSINESSES
The acquisitions of the Acquired Businesses were financed by borrowings under
two credit agreements with total availability of $16.6 million and cash proceeds
of $16.3 million from sales of common stock. All acquisitions have been
accounted for using the purchase method of accounting.
The following table sets forth the consideration paid in (a) cash, (b) seller
notes and (c) value of common stock to the shareholders of the Acquired
Businesses:
<TABLE>
<CAPTION>
COMMON TOTAL
CASH SELLER NOTES STOCK CONSIDERATION
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Andrews $ 1,135,000 $ 257,350 $ 17,120 $ 1,409,470
Atlanta Grease 360,000 0 0 360,000
Ferrero 2,240,100 0 72,000 2,312,100
A Rapid 3,990,120 0 100,000 4,090,120
Quality 2,250,000 0 58,000 2,308,000
Seagraves 3,250,000 2,000,000 60,000 5,310,000
RGM 4,500,000 0 609,000 5,109,000
Eldredge 2,040,000 0 493,000 2,533,000
-----------------------------------------------------------------------
Total $19,765,220 $2,257,350 $1,409,120 $23,431,690
-----------------------------------------------------------------------
</TABLE>
F-7
<PAGE> 48
In addition to the above amounts, the agreements include contingent
consideration totaling $1,608,900 in cash and 93,600 shares of common stock.
These amounts are payable by the Company to the Acquired Businesses on various
dates specified by the agreements, contingent upon the meeting of certain goals
as defined in the agreements. For purposes of computing the estimated purchase
price for accounting purposes, the value of the common stock was determined
using an estimated fair value of $.80 - $1 per share for all acquisitions except
for RGM and Eldredge, for which the common stock was valued at $5.80 per share.
These per share prices are based on the offering prices of the Company's common
stock issued in private transactions occurring in January and April of 1998.
Based upon management's analysis of fair value, the historical carrying value of
the acquired assets approximates fair value, with the exception of property and
equipment, for which the carrying value has been increased by approximately
$800,000. The amount allocated to noncompete agreements and goodwill is
approximately $1.2 million and $17.4 million, respectively. Management of
EarthCare has not identified any other material tangible or identifiable
intangible assets of the Acquired Businesses to which a portion of the purchase
prices could reasonably be allocated.
4. RECAPITALIZATION
On May 13, 1998 EarthCare merged ("Merger") with Microlytics, Inc.
("Microlytics"). Under the terms of the Merger each outstanding share of
EarthCare common stock was exchanged for one share of Microlytics common stock.
Immediately prior to the merger, Microlytics had 1,115,816 shares of common
stock outstanding and warrants to purchase an additional 500,000 shares of
common stock at an exercise price of $5.80. The Merger resulted in the receipt
by EarthCare shareholders of approximately 8,088,379 shares of common stock,
representing approximately 86.2% of the Microlytics shares outstanding on the
effective date of the Merger. As a result of the Merger, EarthCare Company was
merged into Microlytics and Microlytics certificate of incorporation was amended
as of the effective date of the Merger to change Microlytics' name to Santi
Group, Inc. On September 21, 1998, Santi Group, Inc. changed its name to
EarthCare Company. For accounting purposes, the Merger has been accounted for as
a capital transaction accompanied by a recapitalization of EarthCare.
F-8
<PAGE> 49
5. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS:
(a) Reflects additional amortization of noncompete agreements using a weighted
average life of 2.2 years and goodwill using a 40 year life. Also includes
additional depreciation of property and equipment using a weighted average
remaining life of 5 years.
(b) Reflects additional interest expense on the $2.3 million in seller notes at
a weighted average annual rate of 6.2%.
(c) Reflects elimination of interest expense of Acquired Businesses net of
additional interest expense on $3.9 million in line of credit borrowings at
8.21%. The elimination of interest expense of the acquired businesses is
required as the Company assumed no debt in the purchase transactions. Additional
borrowings under the Company's line of credit of $3.9 million were required to
supplement equity proceeds from the sale of common stock to pay the cash portion
of the purchase prices.
(d) Adjusts compensation to the level that the owners of the Acquired Businesses
have contractually agreed to receive subsequent to the Acquisitions. The
employment agreements have terms of one to three years and include certain
severance provisions in the event of termination without cause.
(e) Reflects additional income tax provision (benefit) for state and federal
taxes at a combined statutory tax rate of 39% as certain Acquired Businesses
previously were taxed as Subchapter S Corporations.
(f) Reflects (benefit) for income taxes using the Company's combined statutory
tax rate of 39% for the tax effect of adjustments (a) thru (d).
F-9
<PAGE> 50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EarthCare Company:
We have audited the accompanying consolidated balance sheet of EARTHCARE COMPANY
(a Delaware corporation) AND SUBSIDIARIES as of December 31, 1997 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the period from inception (March 19, 1997) to December 31, 1997. 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 EarthCare Company and
subsidiaries as of December 31, 1997 and the results of their operations and
their cash flows for the period from inception (March 19, 1997) to December 31,
1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 2, 1998 (except for the last six
paragraphs of Note 10 as to which
the date is June 29, 1998)
F-10
<PAGE> 51
EARTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1997 1998
- ------------------------------------------------- ------------ -------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 195,552 $ 1,761,791
Accounts receivable, net of allowance for
doubtful accounts of $17,875 and $135,046 in
1997 and 1998, respectively 125,777 3,970,526
Prepaid expenses 81,089 292,809
Deferred income taxes 65,471 0
------------ -------------
Total current assets 467,889 6,025,126
------------ -------------
MACHINERY AND EQUIPMENT 593,416 6,511,831
Less accumulated depreciation (31,874) (581,879)
------------ -------------
561,542 5,929,952
------------ -------------
OTHER NONCURRENT ASSETS:
Intangibles, net 1,473,489 18,843,354
Deferred income taxes 98,161 624,060
Other assets 13,062 1,524,636
------------ -------------
1,584,712 20,992,050
------------ -------------
$ 2,614,143 $ 32,947,128
============ =============
LIABILITIES AND
STOCKHOLDERS' EQUITY
- -------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 37,774 $ 1,538,332
Accrued expenses 339,961 2,413,250
Lines of credit 1,120,000 0
Current portion of long-term debt 123,715 118,500
------------ -------------
Total current liabilities 1,621,450 4,070,082
------------ -------------
LONG-TERM DEBT, NET OF CURRENT PORTION 180,240 10,338,532
------------ -------------
COMMITMENTS (NOTE 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 30,000,000
shares authorized, 0 shares issued
and outstanding 0 0
Common stock, $.0001 par value; 70,000,000
shares authorized, 4,401,695 and 9,536,327
shares issued and outstanding in 1997 and
1998, respectively 441 954
Additional paid-in capital 1,070,364 20,316,426
Accumulated deficit (258,352) (1,778,866)
------------ -------------
Total stockholders' equity 812,453 18,538,514
------------ -------------
$ 2,614,143 $ 32,947,128
============ =============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-11
<PAGE> 52
EARTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM NINE-MONTH
INCEPTION INCEPTION PERIOD ENDED
(MARCH 19, 1997) TO (MARCH 19, 1997) TO SEPTEMBER 30,
DECEMBER 31, 1997 SEPTEMBER 30, 1997 1998
------------------ ------------------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
REVENUES $ 737,858 $ 479,249 $18,221,028
----------- ---------- -----------
EXPENSES:
Cost of operations 406,638 178,680 12,984,116
General and administrative 521,372 149,855 5,651,192
Depreciation and amortization 127,338 91,848 953,924
----------- ---------- -----------
Total expenses 1,055,348 420,383 19,589,232
----------- ---------- -----------
INCOME (LOSS) FROM OPERATIONS (317,490) 58,866 (1,368,204)
OTHER EXPENSE (INCOME):
Interest 104,494 50,817 456,872
----------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT (421,984) 8,049 (1,825,076)
INCOME TAX PROVISION (BENEFIT) (163,632) 1,078 (304,562)
----------- ---------- -----------
NET INCOME (LOSS) $ (258,352) $ 6,971 $(1,520,514)
=========== ========== ===========
(LOSS) PER SHARE:
Basic and diluted $ (.13) $ N/A $ (.19)
=========== ========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted 1,940,536 N/A 8,047,363
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-12
<PAGE> 53
EARTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 19, 1997 (INCEPTION) 1,115,816 $ 112 $ (112) $ 0 $ 0
Sale of common stock 3,250,000 325 789,675 0 790,000
Issuance of common stock in
settlement of notes payable 14,479 2 263,683 0 263,685
Issuance of common stock for
acquired business 21,400 2 17,118 0 17,120
Net loss 0 0 0 (258,352) (258,352)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 4,401,695 441 1,070,364 (258,352) 812,453
Sale of common stock 3,750,000 375 15,499,625 0 15,500,000
Issuance of common stock for
acquired businesses 450,000 45 1,391,955 0 1,392,000
Exercise of stock options 627,500 63 473,062 0 473,125
Exercise of warrants 307,132 30 1,781,420 0 1,781,450
Issuance of warrant
for debt issuance costs 0 0 100,000 0 100,000
Net loss 0 0 0 (1,520,514) (1,520,514)
------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1998 (UNAUDITED) 9,536,327 $ 954 $ 20,316,426 $ (1,778,866) $ 18,538,514
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-13
<PAGE> 54
EARTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM NINE-MONTH
INCEPTION INCEPTION PERIOD ENDED
(MARCH 19, 1997) TO (MARCH 19, 1997) TO SEPTEMBER 30,
DECEMBER 31, 1997 SEPTEMBER 30, 1997 1998
------------------- ------------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (258,352) $ 6,971 $ (1,520,514)
------------ ---------- ------------
Adjustments to reconcile net loss to net cash (used
in) provided by operating activities:
Depreciation and amortization 127,338 91,131 953,924
Changes in assets and liabilities, excluding
effects of acquired businesses:
Accounts receivable (125,777) (109,301) (3,844,749)
Other Current Assets (81,089) (73,533) (211,720)
Deferred income taxes (163,632) 0 (460,428)
Other assets (13,062) (2,000) (1,511,574)
Accounts payable 37,774 9,922 1,500,558
Accrued expenses 339,961 10,652 1,277,848
------------ ---------- ------------
Total adjustments 121,513 73,129 (2,296,141)
------------ ---------- ------------
Net cash used in operating
activities (136,839) (66,158) (3,816,655)
------------ ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (15,432) (7,417) (679,384)
Business acquisitions (1,531,337) (835,000) (18,825,374)
------------ ---------- ------------
Net cash used in investing activities (1,546,769) (842,417) (19,504,758)
------------ ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under lines of credit 1,120,000 360,000 (1,383,958)
Net borrowings from related party 0 650,000 0
Refinancing of debt 0 0 8,475,978
Payments of long-term debt (30,840) (14,254) (58,943)
Sale of common stock 790,000 10,000 15,500,000
Exercise of stock options 0 0 398,126
Exercise of warrants 0 0 1,856,449
------------ ---------- ------------
Net cash provided by financing activities 1,879,160 1,005,746 24,787,652
------------ ---------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 195,552 97,171 1,566,239
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 0 0 195,552
------------ ---------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 195,552 $ 97,171 $ 1,761,791
============ ========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 78,763 $ 60,070 $ 271,157
============ ========== ============
Cash paid for income taxes $ 0 $ 0 $ 0
============ ========== ============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Notes payable issued for business acquisitions $ 257,350 $ 257,350 $ 2,000,000
============ ========== ============
Notes payable issued for noncompete agreements $ 341,130 $ 341,130 $ 0
============ ========== ============
Common stock issued for business acquisitions $ 17,120 $ 0 $ 1,392,000
============ ========== ============
Common stock issued in settlement of notes payable $ 263,685 $ 0 $ 0
============ ========== ============
Warrant issued for debt issuance costs $ 0 $ 0 $ 100,000
============ ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-14
<PAGE> 55
EARTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND SEPTEMBER 30, 1998 (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
EarthCare Company, ("EarthCare" or the "Company") was incorporated on
August 19, 1997 as a Delaware corporation under the name SanTi Group,
Inc. On September 21, 1998, the Company's certificate of incorporation
was amended (the "Amendment") to change the Company's name from SanTi
Group, Inc. to EarthCare Company. All references to the Company
included in the consolidated financial statements and notes to
consolidated financial statements treat the Amendment as if it occurred
August 19, 1997.
The Company operates as a consolidator of the highly fragmented
nonhazardous liquid waste management industry through acquisition of
businesses with operating service centers that treat, process, and
recover nonhazardous liquid waste to serve a variety of customers from
private residences and municipalities to large industrial companies.
Bone-Dry Enterprises, Inc. ("Bone-Dry") was incorporated on March 19,
1997 as a Georgia corporation. On December 1, 1997, all shares of
Bone-Dry common stock were exchanged for EarthCare common stock. Since
the Company and Bone-Dry were under common ownership since their
respective dates of inception, the accompanying financial statements
are for the period from the inception of Bone Dry (March 19, 1997) to
December 31, 1997. The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
All material intercompany balances and transactions have been
eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less at the date of purchase as cash equivalents.
MACHINERY AND EQUIPMENT
Machinery and equipment are recorded at cost. Depreciation is provided
over the estimated useful lives of the assets using the straight-line
method. The estimated useful lives for machinery and equipment range
from five to seven years.
INTANGIBLES
As of December 31, 1997, intangibles consist primarily of goodwill of
$1,214,228 and noncompete agreements of $259,261 associated with
business acquisitions. Noncompete agreements are being amortized over
the lives of the
F-15
<PAGE> 56
contracts. Goodwill is being amortized over 40 years. Amortization
expense associated with intangibles was $95,464 for the period from
inception (March 19, 1997) to December 31, 1997.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived
assets, such as property and equipment and intangibles, to determine
whether any impairments are other than temporary. The Company assesses
impairment by determining whether the carrying value of such long-lived
assets will be recovered through undiscounted expected future cash
flows. No impairment losses have been recorded during the period from
inception (March 19, 1997) to December 31, 1997.
EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of
shares outstanding. Diluted earnings per share are based on the
weighted average number of shares outstanding and the dilutive effect
of stock options outstanding (using the treasury stock method) and
contingently issuable shares. For the period from inception (March 19,
1997) to December 31, 1997, outstanding options of 612,500 and
contingently issuable shares have been excluded from diluted weighted
average shares outstanding, as their impact was antidilutive.
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 and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements as of September 30, 1998, for the
period from inception (March 19, 1997) to September 30, 1997 and for
the nine month period ended September 30, 1998, are unaudited. In the
opinion of management, these financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the financial statements. The results of
operations for the nine month period ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the full
year.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income." SFAS No. 130 is designed to improve
the reporting of changes in equity from period to period. The Company
currently has no other comprehensive income items as defined by SFAS
No. 130.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131
requires that an enterprise disclose certain information about
operating segments. SFAS No. 131 is effective for financial
statements for the Company's fiscal year ending December 31, 1998.
The Company does not expect that SFAS No. 131 will require revision of
prior disclosures.
3. ACQUISITIONS
On March 20, 1997, Bone-Dry purchased certain assets of Andrews
Environmental Services, Inc. ("Andrews") associated with Andrews Grease
Disposal Business ("Andrews Grease"). Andrews Grease is in the business
of commercial and governmental grease
F-16
<PAGE> 57
extraction, collection, and transportation services primarily in the
state of Georgia. Consideration associated with the purchase was
$475,000 in cash and $257,350 in notes payable.
On August 27, 1997, Bone-Dry purchased Atlanta Grease Trap Service
("Atlanta Grease"), a Georgia sole proprietorship, for $360,000 in
cash. Atlanta Grease is in the business of commercial and governmental
grease extraction, collection, and transportation services in the state
of Georgia.
On December 22, 1997, Bone-Dry purchased substantially all of the
remaining assets of Andrews. Andrews is engaged in the nonhazardous
liquid waste and septic waste collection, transportation, management,
and disposal business primarily in the state of Georgia. Consideration
associated with the purchase was $660,000 in cash and 21,400 shares of
EarthCare common stock. Contingent consideration of 13,600 shares of
EarthCare common stock is payable within 90 days of the first
anniversary of the date of purchase, net of offsets for losses, as
defined in the purchase agreement.
The acquisitions of Andrews Grease, Atlanta Grease, and Andrews were
accounted for using the purchase method of accounting; accordingly, the
purchase prices have been allocated to the assets acquired based on
their respective fair values at the dates of acquisition. The resulting
excess of purchase prices over fair values of assets acquired was
recorded as goodwill. Goodwill recorded in the purchases of Andrews
Grease, Atlanta Grease, and Andrews was $482,350, $360,000, and
$349,136, respectively.
The Company's unaudited pro forma consolidated results of operations
for the period from inception (March 19, 1997) to December 31, 1997
shown below are presented assuming that the December 22, 1997
acquisition of Andrews had been consummated on March 19, 1997:
<TABLE>
<S> <C>
Pro forma revenue $1,778,126
Pro forma net (loss) (256,113)
Pro forma (loss) per share $ (.27)
</TABLE>
The Company's unaudited pro forma results of operations are presented
for informational purposes only and may not necessarily reflect the
future results of operations of the Company or what the results of
operations would have been had the Company owned and operated Andrews
as of March 19, 1997. The Company's acquisition of Atlanta Grease is
not significant for purposes of presenting pro forma information.
Subsequent to year-end, the Company acquired the following businesses:
- On January 22, 1998, the Company purchased Ferrero
Wastewater Management, Inc. ("Ferrero"), a
Pennsylvania corporation. Ferrero is engaged in the
nonhazardous liquid waste and septic waste
collection, transportation, management, and disposal
business in and around Ambler, Pennsylvania.
Consideration was $2,240,100 in cash and 90,000
shares of SanTi common stock. Contingent
consideration of $248,900 in cash and 10,000 shares
of EarthCare common stock will be paid in the fourth
quarter of 1998 in accordance with the terms of the
purchase agreement.
F-17
<PAGE> 58
- On February 13, 1998, the Company purchased A Rapid
Rooter Sewer & Drain Service, Inc. ("A Rapid"), a
Florida corporation. A Rapid is engaged in the
nonhazardous liquid waste and septic waste
collection, transportation, management, and disposal
business in and around Pompano Beach, Florida.
Consideration was $3,990,120 in cash and 100,000
shares of EarthCare common stock.
- On February 17, 1998, the Company purchased Quality
Plumbing and Septic, Inc. ("Quality"), a Georgia
corporation. Quality is engaged in the nonhazardous
liquid waste and septic waste collection,
transportation, management, and disposal business in
and around Douglasville, Georgia. Consideration was
$2,000,000 in cash. Contingent consideration of
$250,000 and 10,000 shares of EarthCare common stock
is payable 120 days after the date of purchase, net
of offsets for losses, as defined in the purchase
agreement. In June 1998, all contingent consideration
was paid to Quality in accordance with the purchase
agreement.
- On March 6, 1998, the Company purchased Seagraves,
Inc. (d/b/a Brownie Environmental) and Grease-Tec,
Inc. (collectively, "Seagraves"), two Florida
corporations. Seagraves is engaged in the
nonhazardous liquid waste and septic waste
collection, transportation, management, and disposal
business in and around Orlando, Florida.
Consideration was $3,250,000 in cash, a note payable
of $2,000,000, and 60,000 shares of EarthCare common
stock.
- On May 1, 1998, the Company purchased RGM Liquid
Waste Removal Corporation and Affiliates ("RGM"),
consisting of four New York corporations. RGM is
engaged in the nonhazardous liquid waste and septic
waste collection, transportation, management, and
disposal business in and around Long Island, New
York. Consideration was $4,500,000 in cash and
105,000 shares of EarthCare common stock. Contingent
consideration of $1,000,000 and 55,000 shares of
EarthCare common stock is payable 365 days after the
date of purchase, net of offsets for losses, as
defined in the purchase agreement.
- On May 8, 1998, the Company purchased Eldredge
Wastewater Management, Inc., a Pennsylvania
corporation. Eldredge is engaged in the nonhazardous
liquid waste and septic waste collection,
transportation, management, and disposal business in
and around Philadelphia, Pennsylvania. Consideration
was $2,040,000 in cash and 85,000 shares of EarthCare
common stock. Contingent consideration of $360,000
and 15,000 shares of EarthCare common stock is
payable 13 months after the date of purchase, net of
offsets for losses, as defined in the purchase
agreement.
4. LINE OF CREDIT
At December 31, 1997, the Company had a $6,600,000 revolving line of
credit (the "Revolver"). The Revolver has an interest rate of LIBOR
plus 2.25% (8.21% at December 31, 1997) and is secured by substantially
all assets of the Company. At December 31, 1997, $1,120,000 was
outstanding and $5,480,000 was available for future borrowings. The
F-18
<PAGE> 59
Revolver matures August 12, 1998, is renewable for successive one-year
periods, and is personally guaranteed by the majority owner of the
Company. Subsequent to year-end, the Company borrowed funds under the
majority owner's personal line of credit. These borrowings were used to
finance the Company's acquisitions of businesses discussed in Note 3.
In June 1998, the lines of credit were paid in full in conjunction with
the Company obtaining new financing from another bank (Note 10).
5. LONG-TERM DEBT
At December 31, 1997, long-term debt consisted of the following:
<TABLE>
<S> <C>
Subordinated notes payable to former owners of acquired
businesses, interest imputed at 8.1%, payable in various
installments through April 1, 2000, unsecured $ 303,955
Less current portion (123,715)
---------
$ 180,240
=========
</TABLE>
Future aggregate annual maturities of long-term debt are as follows as
of December 31, 1997:
<TABLE>
<S> <C>
1998 $123,715
1999 103,431
2000 76,809
--------
$303,955
========
</TABLE>
6. RELATED-PARTY TRANSACTIONS
In 1997, the Company entered into a note payable agreement with an
entity controlled by the Company's majority owner. The note was for
$650,000, had an interest rate of 13%, and was paid in full during
1997. In December 1997, after the note was paid in full, the related
party purchased 1,608,750 shares of EarthCare common stock for
$650,000.
In March 1997, the Company entered into a four-year consulting
agreement with a former owner of an acquired business. The Company paid
its obligation of $75,000 in full during 1997, as required by the
agreement, and is recognizing the expense over the life of the
agreement. For the period from inception (March 19, 1997) to December
31, 1997, consulting expense related to the agreement was $13,021 and
is included in general and administrative expenses in the accompanying
statement of operations.
During 1997, the Company entered into three noncompete agreements with
former owners of acquired businesses in exchange for notes payable
totaling $341,130. In connection with the December 22, 1997 purchase of
Andrews, one of the former owners of Andrews exchanged $263,685 of
outstanding notes payable, issued in connection with the March 1997
purchase of Andrews Grease, for 14,479 shares of EarthCare common
stock.
F-19
<PAGE> 60
LEASES
The Company leases office space and equipment from an entity controlled
by the Company's majority owner under a lease agreement which expires
January 31, 1998 and is renewable for successive one-month periods.
Rental expense under the lease was $11,690 for the period from
inception (March 19, 1997) to December 31, 1997.
7. STOCK-BASED COMPENSATION
In August 1997 and December 1997, the Company issued nonqualified stock
options to purchase 125,000 and 487,500 EarthCare common stock,
respectively, at $.65 per share, which represented the fair market
value as of the dates of grant as determined by the Company's board of
directors. The options are exercisable for a period of three years
beginning on the dates of grant. See Note 10 where exercised
subsequent to year end.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the stock options granted. Had
compensation cost for the Company's stock options granted been
determined consistent with the provisions of SFAS No. 123, the
Company's net loss would have been increased to the pro forma amount
indicated below for the period from inception (March 19, 1997) to
December 31, 1997.
<TABLE>
<S> <C>
Net (loss), as reported $(258,352)
Net (loss), pro forma (322,729)
Pro forma net (loss) per share (.35)
</TABLE>
The fair values of options granted were estimated on the date of grant
using the minimum value approach, an expected life of three years, and
risk-free interest rate of 5.88%.
8. INCOME TAXES
The accompanying financial statements include an income tax benefit
computed in accordance with SFAS No. 109, "Accounting for Income
Taxes." The following summarizes the components of the income tax
benefit:
<TABLE>
<S> <C>
Current provision $ 0
Deferred taxes 163,632
--------
Income tax benefit $163,632
========
</TABLE>
Reconciliation from the federal statutory rate to the actual income tax
benefit is as follows:
<TABLE>
<S> <C>
Statutory federal tax rate (34.0)%
State income taxes, net of federal tax benefit (5.0)
Other 2.3
-----
(36.7)%
=====
</TABLE>
F-20
<PAGE> 61
The sources of differences between the financial accounting and tax
bases of the Company's assets and liabilities which give rise to the
deferred tax asset and liabilities and the tax effects of each are as
follows as of December 31, 1997:
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 6,971
Intangibles 17,210
Accrued expenses 58,500
Net operating loss carryforward 107,471
---------
Total deferred tax assets 190,152
Deferred tax liability:
Depreciation (26,520)
---------
Net deferred tax asset $ 163,632
=========
</TABLE>
As of December 31, 1997, deferred tax assets include a net operating
loss carryforward of $275,566 which is available to offset future
taxable income through 2012. Realization of the net deferred tax asset
is dependent on generating sufficient taxable income in future periods.
Although realization is not assured, management believes it is more
likely than not that the net deferred tax asset will be realized.
9. ENVIRONMENTAL REGULATIONS
The Company is subject to extensive and evolving federal, state, and
local environmental laws and regulations that have been enacted in
response to technological advances and the public's increased concern
over environmental issues. The majority of the expenditures necessary
to comply with the environmental laws and regulations is made in the
normal course of business. The Company, to the best of its knowledge,
is in compliance, in all material respects, with the laws and
regulations affecting its operations.
10. SUBSEQUENT EVENTS
On January 12, 1998, a group of investors purchased 1,250,000 shares of
the Company's common stock for $.80 per share.
On January 30, 1998, the Company declared a 1.25-for-1 stock split
effected in the form of a stock dividend. All share amounts have been
restated for this stock split.
During March and April, 1998, the Company sold 2,500,000 shares of its
common stock through private offerings. Proceeds from the offerings
totaled $14.5 million.
In connection with certain 1998 acquisitions, the Company has entered
into employment agreements with 8 employees. Upon termination of
employment (other than voluntarily by the employee or by the Company
for cause or upon death of the employee), the Company is committed to
pay certain benefits, including specified monthly severance of not more
than $6,667 per month. The benefits are to be paid from the date of
termination to dates ranging from January 22, 1999 to March 6, 2001.
On April 30, 1998, certain employees of the Company exercised
options to purchase 612,500 shares at a price of $.65 per share.
On May 13, 1998, pursuant to a Plan of Reorganization in the United
States Bankruptcy Court, Microlytics, Inc. ("Microlytics") completed a
merger (the "Merger") with the Company. Under the terms of the Merger,
each outstanding share of EarthCare common stock was exchanged for one
share of Microlytics common stock. Immediately prior to the Merger,
Microlytics had 1,115,816 shares of common stock outstanding and
warrants to purchase an additional 500,000 shares with an exercise
price of $5.80, of which 250,000 were exercised immediately following
the Merger. The Merger resulted in the receipt by EarthCare
shareholders of approximately 8,088,379 shares of common stock,
F-21
<PAGE> 62
representing approximately 86.2% of the Microlytics shares outstanding
on the effective date of the Merger. As a result of the Merger,
EarthCare was merged into Microlytics and Microlytics' certificate of
incorporation was amended as of the effective date of the Merger to
change Microlytics' name to Santi Group, Inc. On September 21, 1998,
Santi Group, Inc. changed its name to EarthCare Company. The Merger was
accounted for as a capital transaction accompanied by a
recapitalization of EarthCare. All costs incurred in connection with
the Merger were expensed.
On June 1, 1998, the Company entered into employment agreements with
three executive officers which provide for minimum aggregate annual
compensation of $575,000. The agreements expire either June 1, 2000 or
June 1, 2003, and automatically renew for twelve month periods. Upon
termination of employment related to the change in control of the
Company, the Company is committed to immediately pay in full the
minimum compensation for each of the remaining years or portion
thereof.
On June 26, 1998, the Company entered into a $40 million revolving
credit facility with a bank. The Company may also obtain up to $5
million in letters of credit, subject to availability under the
facility. Interest is payable monthly at variable rates, depending on
the Company's current debt to cash flow ratio, but is capped at LIBOR
plus 2.5%. The facility expires June 26, 2001, is secured by a first
lien on substantially all assets of the Company and requires the
Company to maintain certain financial ratio covenants beginning
September 30, 1998. The Company granted the bank a five-year warrant to
purchase 50,000 shares of common stock at $13 per share in lieu of
issuance costs. The warrant was valued at $100,000 using the Black-
Scholes pricing model.
On June 29, 1998, three executive officers received options to purchase
an aggregate of 1,250,000 shares of common stock as follows; 400,000
exercisable at $6 per share, 350,000 exercisable at $15 per share and
500,000 exercisable at $25 per share.
In October 1998, the Company issued stock options to purchase 90,000
shares of Earthcare common stock at an exercise price of $15 per share,
which represented the fair market value as of the date of grant, as
determined by the Company's board of directors. Concurrently, the
Company issued additional stock options to purchase 90,000 shares of
Earthcare common stock at an exercise price of $25 per share. The
options are exercisable for a period of four years beginning on the
date of grant.
F-22
<PAGE> 63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Andrews Environmental Services, Inc.:
We have audited the accompanying balance sheet of ANDREWS ENVIRONMENTAL
SERVICES, INC. (a Georgia corporation) as of December 31, 1996 and the related
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1995 and 1996 and the period from January 1, 1997 to December
21, 1997. 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 audits.
We conducted our audits 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 audits provide 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 Andrews Environmental Services,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows for the years ended December 31, 1995 and 1996 and the period from January
1, 1997 to December 21, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
June 18, 1998
F-23
<PAGE> 64
ANDREWS ENVIRONMENTAL SERVICES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1996
- ------------------------------------------------------ ------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 14,414
Accounts receivable, net of allowance for
doubtful accounts of $9,300 177,166
Due from related party 51,202
Prepaid expenses and other 25,588
Deferred income taxes 3,575
----------
Total current assets 271,945
PROPERTY AND EQUIPMENT, NET 830,102
----------
$1,102,047
==========
<CAPTION>
LIABILITIES AND DECEMBER 31,
STOCKHOLDERS' EQUITY 1996
- ------------------------------------------------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 142,364
Accrued expenses 19,983
Income taxes payable 10,148
Current portion of long-term debt 229,638
----------
Total current liabilities 402,133
----------
LONG-TERM DEBT, NET OF CURRENT PORTION 310,221
----------
DEFERRED INCOME TAXES 118,752
----------
COMMITMENTS (NOTE 6)
STOCKHOLDERS' EQUITY:
Common stock, no par value, $.50 stated
value; 1,000,000 shares authorized, 1,000
shares issued and outstanding 500
Retained earnings 270,441
----------
Total stockholders' equity 270,941
----------
$1,102,047
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-24
<PAGE> 65
ANDREWS ENVIRONMENTAL SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 PERIOD FROM NINE-MONTH
------------------------ JANUARY 1, 1997 TO PERIOD ENDED
1995 1996 DECEMBER 21, 1997 SEPTEMBER 30, 1997
----------- ----------- ------------------ ------------------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 1,499,392 $ 1,832,043 $ 1,218,268 $ 928,631
----------- ----------- ----------- -----------
EXPENSES:
Cost of operations 615,069 785,996 625,892 466,449
General and administrative 754,580 757,655 646,273 485,408
Depreciation and amortization 94,948 122,296 121,496 96,363
----------- ----------- ----------- -----------
Total expenses 1,464,597 1,665,947 1,393,661 1,048,220
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 34,795 166,096 (175,393) (119,589)
----------- ----------- ----------- -----------
OTHER EXPENSE (INCOME):
Interest expense 45,475 70,868 22,077 19,419
Other, net 7,404 (2,500) (204,124) (199,959)
----------- ----------- ----------- -----------
52,879 68,368 (182,047) (180,540)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (18,084) 97,728 6,654 60,951
PROVISION (BENEFIT) FOR INCOME TAXES (3,304) 39,094 4,334 23,283
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (14,780) $ 58,634 $ 2,320 $ 37,668
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE> 66
ANDREWS ENVIRONMENTAL SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------ RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ -------- ---------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 1,000 $ 500 $ 226,587 $ 227,087
Net loss 0 0 (14,780) (14,780)
------ ------ --------- ---------
BALANCE, DECEMBER 31, 1995 1,000 500 211,807 212,307
Net income 0 0 58,634 58,634
------ ------ --------- ---------
BALANCE, DECEMBER 31, 1996 1,000 500 270,441 270,941
Purchase of treasury stock (585) (292) (136,108) (136,400)
Net income 0 0 2,320 2,320
------ ------ --------- ---------
BALANCE, DECEMBER 21, 1997 415 $ 208 $ 136,653 $ 136,861
====== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE> 67
ANDREWS ENVIRONMENTAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31 PERIOD FROM NINE-MONTH
---------------------- JANUARY 1, 1997 TO PERIOD ENDED
1995 1996 DECEMBER 21, 1997 SEPTEMBER 30, 1997
--------- --------- ------------------- ------------------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (14,780) $ 58,634 $ 2,320 $ 37,668
--------- --------- --------- ---------
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 94,948 122,296 121,496 96,363
Gain on sale of fixed assets 0 0 (204,124) (200,125)
Changes in assets and liabilities:
Accounts receivable 25,101 (72,882) 68,676 41,001
Prepaid expenses and other 9,233 13,694 (24,555) (9,299)
Due from related party 0 (51,202) (60,152) (48,790)
Deferred taxes (3,304) 28,946 (29,905) (15,107)
Accounts payable (14,990) 51,664 (11,633) 18,923
Accrued expenses 9,457 (579) 238 (1,868)
Income taxes payable 0 10,148 34,239 795
--------- --------- --------- ---------
Total adjustments 120,445 102,085 (105,720) (119,697)
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities 105,665 160,719 (103,400) (82,029)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (229,810) (249,024) (144,745) (88,150)
Proceeds from sales of fixed assets 56,358 0 425,000 425,000
--------- --------- --------- ---------
Net cash (used in) provided by
investing activities (173,452) (249,024) 280,255 336,850
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 206,075 321,504 194,679 97,340
Repayments of long-term debt (137,693) (219,380) (247,677) (229,129)
Purchase of treasury stock 0 0 (136,400) (136,400)
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities 68,382 102,124 (189,398) (268,189)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 595 13,819 (12,543) (13,368)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 0 595 14,414 14,414
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 595 $ 14,414 $ 1,871 $ 1,046
========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 45,475 $ 43,275 $ 38,352 $ 32,336
========= ========= ========= =========
Cash paid for income taxes $ 207 $ 1,644 $ 10 $ 10
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE> 68
ANDREWS ENVIRONMENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND BASIS OF PRESENTATION
Andrews Environmental Services, Inc. ("Andrews" or the "Company"), a Georgia
corporation, operates a service center that treats, processes, and recovers
nonhazardous liquid waste to serve a variety of customers from private
residences and municipalities to large industrial companies.
On March 20, 1997, certain assets of the Company associated with its grease
disposal business were sold to EarthCare Company ("EarthCare"). The grease
disposal business was primarily involved with commercial and governmental
grease extraction, collection, and transportation services. Consideration
associated with the sale was $475,000 in cash and $257,350 in notes
receivable. In conjunction with the sale, the Company recorded a gain on the
sale of fixed assets of $204,124 which is included in other income in the
accompanying statement of operations for the period from January 1, 1997 to
December 21, 1997.
On December 22, 1997, substantially all of the remaining property and
equipment and the ongoing business of the Company were sold to EarthCare.
Consideration was $660,000 in cash and 21,400 shares of EarthCare common
stock. Contingent consideration of 13,600 shares of EarthCare common stock is
receivable within 90 days of the first anniversary of the date of purchase,
net of offsets for losses, as defined in the sale agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit
risk consist principally of trade receivables. The Company's customers are
concentrated in one geographic region. No single customer accounted for a
significant amount of the Company's sales, and there are no significant
accounts receivable from a single customer. The Company reviews a customer's
credit history before extending credit. The Company establishes an allowance
for doubtful accounts based on factors surrounding the credit risk of
specific customers, historical trends, and other information.
F-28
<PAGE> 69
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over
the estimated useful lives of the assets using the straight-line method. The
estimated useful lives for machinery and equipment and office equipment range
from 5 to 7 years. The building is depreciated over an estimated useful life
of 40 years.
At December 31, 1996, property and equipment consisted of the following:
<TABLE>
<S> <C>
Machinery and equipment $ 1,040,874
Office equipment 29,385
Building 162,686
Land 2,000
-----------
1,234,945
Less accumulated depreciation (404,843)
-----------
$ 830,102
===========
</TABLE>
The Company periodically reviews the values assigned to property and
equipment to determine whether any impairments are other than temporary.
The Company assesses impairment by determining whether the carrying value of
such long-lived assets will be recovered through undiscounted expected future
cash flows. No impairment losses have been recorded in the accompanying
results of operations.
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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements for the nine-month period ended
September 30, 1997 are unaudited. In the opinion of the management of
Andrews, these financial statements reflect all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is designed to improve the reporting of changes in
equity from period to period. The Company currently has no other
comprehensive income items as defined by SFAS No. 130.
F-29
<PAGE> 70
3. LONG-TERM DEBT
At December 31, 1996, long-term debt consisted of the following:
<TABLE>
<S> <C>
Equipment loans, interest at varying rates between 8.5%
and 16.3%, interest and principal due in monthly
installments through 2002, secured by related equipment $ 453,094
Line of credit 83,789
Loan from stockholder (Note 4) 2,976
---------
539,859
Less current portion (229,638)
---------
$ 310,221
=========
</TABLE>
At December 31, 1996, the Company had a $100,000 revolving line of credit
(the "Revolver"). The Revolver has an interest rate of prime plus 2% (10.25%
at December 31, 1996). At December 31, 1996, $83,789 was outstanding and
$16,211 was available for future borrowings. The Revolver matures July 15,
1998, is renewable for successive one-year periods, is personally guaranteed
by the Company's majority stockholder, and is secured by substantially all
assets of the Company.
On December 21, 1997, in conjunction with the sale of the Company's remaining
assets (Note 1), the Revolver and all equipment loans were paid in full.
4. RELATED-PARTY TRANSACTIONS
The Company's majority stockholder advances monies to the Company from time
to time to maintain certain working capital levels, as needed. At December
31, 1996, the Company was indebted to the majority stockholder for $2,976,
which is included in current portion of long-term debt in the accompanying
balance sheet.
During 1997, the Company had repairs and maintenance performed on its trucks
by an entity owned by the Company's majority stockholder. For the period from
January 1, 1997 to December 21, 1997, the Company incurred $32,371 of expense
for these services, which is included in cost of operations in the
accompanying statement of operations.
The Company advances monies from time to time to an entity owned by the
Company's majority stockholder to enable that entity to maintain certain
levels of working capital. At December 31, 1996, the related entity owed the
Company $51,202, which is included in the accompanying balance sheet as due
from related party.
The Company performs services from time to time for an entity owned by a
stockholder of the Company. Revenues from this entity totaled $11,111,
$7,683, and $0 for the years ended December 31, 1995 and 1996 and for the
period from January 1, 1997 to December 21, 1997, respectively.
F-30
<PAGE> 71
5. INCOME TAXES
The accompanying financial statements reflect the provision (benefit) for
income taxes computed in accordance with the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
following summarizes the components of the income tax provision (benefit) for
the years ended December 31, 1995 and 1996 and for the period from January 1,
1997 to December 21, 1997:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current taxes $ 0 $ 10,148 $ 28,165
Deferred taxes (3,304) 28,946 (29,905)
-------- -------- --------
Provision (benefit) for income taxes $ (3,304) $ 39,094 $ (1,740)
======== ======== ========
</TABLE>
Reconciliation from the federal statutory rate to the actual provision
(benefit) for the years ended December 31, 1995 and 1996 and for the period
from January 1, 1997 to December 21, 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Statutory federal tax rate (34.0)% 34% 34.0%
State income taxes, net of federal tax benefit (4.0) 4 4.0
Other 19.7 2 27.1
-------- -------- --------
(18.3)% 40% 65.1%
======== ======== ========
</TABLE>
The components of the net deferred tax liability as of December 31, 1996 are
as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 3,530
Other 45
---------
Total deferred tax asset 3,575
Deferred tax liability:
Depreciation (118,752)
---------
Net deferred tax liability $(115,177)
=========
</TABLE>
6. ENVIRONMENTAL REGULATIONS
The Company is subject to extensive and evolving federal, state, and local
environmental laws and regulations that have been enacted in response to
technological advances and the public's increased concern over environmental
issues. The majority of the expenditures necessary to comply with the
environmental laws and regulations are made in the normal course of business.
The Company, to the best of its knowledge, is in compliance, in all material
respects, with the laws and regulations affecting its operations.
F-31
<PAGE> 72
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ferrero Wastewater Management, Inc.:
We have audited the accompanying balance sheets of FERRERO WASTEWATER
MANAGEMENT, INC. (a Pennsylvania corporation) as of December 31, 1996 and 1997
and the related statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. 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 audits.
We conducted our audits 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 audits provide 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 Ferrero Wastewater Management,
Inc. as of December 31, 1996 and 1997 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 20, 1998
F-32
<PAGE> 73
FERRERO WASTEWATER MANAGEMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
ASSETS 1996 1997
- ------------------------------------------------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,383 $ 40,201
Accounts receivable, net of allowance for
doubtful accounts of $50,000 in 1996 and 1997 308,187 379,852
Prepaid expenses and other 68,280 22,034
---------- ----------
Total current assets 383,850 442,087
PROPERTY AND EQUIPMENT, NET 698,934 903,774
OTHER ASSETS 11,740 26,477
---------- ----------
$1,094,524 $1,372,338
========== ==========
<CAPTION>
DECEMBER 31
LIABILITIES AND --------------------
STOCKHOLDERS' EQUITY 1996 1997
- ------------------------------------------------ ---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 350,879 $ 185,551
Accrued expenses 35,288 48,304
Due to stockholder 43,716 81,580
Current portion of long-term debt 109,802 128,454
---------- ----------
Total current liabilities 539,685 443,889
---------- ----------
LONG-TERM DEBT, NET OF CURRENT PORTION 244,566 607,743
---------- ----------
COMMITMENTS (NOTE 6)
STOCKHOLDERS' EQUITY:
Common stock, $100 par value; 250 shares
authorized, 50 shares issued and
outstanding 5,000 5,000
Retained earnings 305,273 315,706
---------- ----------
Total stockholders' equity 310,273 320,706
---------- ----------
$1,094,524 $1,372,338
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-33
<PAGE> 74
FERRERO WASTEWATER MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE-MONTH PERIOD FROM
--------------------------------------- PERIOD ENDED JANUARY 1, 1998 TO
1995 1996 1997 SEPTEMBER 30, 1997 JANUARY 22, 1998
---------- ----------- ----------- ------------------ ------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $2,864,459 $ 2,866,758 $ 4,122,100 $ 2,772,126 $ 257,982
---------- ----------- ----------- ----------- ---------
EXPENSES:
Cost of operations 1,693,181 1,913,700 2,797,821 1,881,544 175,443
General and administrative 722,523 773,286 1,045,315 702,978 73,399
Depreciation and amortization 253,874 287,742 220,432 170,530 23,334
---------- ----------- ----------- ----------- ---------
Total expenses 2,669,578 2,974,728 4,063,568 2,755,032 272,176
---------- ----------- ----------- ----------- ---------
INCOME (LOSS) FROM OPERATIONS 194,881 (107,970) 58,532 (17,074) (14,194)
---------- ----------- ----------- ----------- ---------
OTHER EXPENSE (INCOME):
Interest expense 51,226 48,024 50,920 37,370 5,913
Other, net 11,402 (22,404) (2,821) (1,466) (33)
---------- ----------- ----------- ----------- ---------
62,628 25,620 48,099 35,904 5,880
---------- ----------- ----------- ----------- ---------
NET INCOME (LOSS) $ 132,253 $ (133,590) $ 10,433 $ (18,830) $ (20,074)
========== =========== =========== =========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE> 75
FERRERO WASTEWATER MANAGEMENT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
------ ---------- -----
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $5,000 $ 362,610 $ 367,610
Distribution to stockholder 0 (56,000) (56,000)
Net income 0 132,253 132,253
------ --------- ---------
BALANCE, DECEMBER 31, 1995 5,000 438,863 443,863
Net (loss) 0 (133,590) (133,590)
------ --------- ---------
BALANCE, DECEMBER 31, 1996 5,000 305,273 310,273
Net income 0 10,433 10,433
------ --------- ---------
BALANCE, DECEMBER 31, 1997 5,000 315,706 320,706
Net (loss) 0 (20,074) (20,074)
------ --------- ---------
BALANCE, JANUARY 22, 1998 (UNAUDITED) $5,000 $ 295,632 $ 300,632
====== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-35
<PAGE> 76
FERRERO WASTEWATER MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE-MONTH PERIOD FROM
--------------------------------- PERIOD ENDED JANUARY 1, 1998 TO
1995 1996 1997 SEPTEMBER 30, 1997 JANUARY 22, 1998
--------- --------- --------- ------------------ ------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 132,253 $(133,590) $ 10,433 $ (18,830) $(20,074)
--------- --------- --------- --------- --------
Adjustments to reconcile net income (loss) to net
cash provided by operating
activities:
Depreciation and amortization 253,874 287,742 220,432 170,530 23,334
Loss (gain) on sale of fixed assets 8,402 (17,019) 0 0 0
Changes in assets and liabilities:
Accounts receivable 7,721 5,928 (71,665) (109,370) (10,844)
Prepaid expenses and other (9,850) (56,030) 46,246 27,623 0
Other assets 62,096 10,553 (14,737) (8,690) 12,977
Accounts payable 70,390 93,525 (165,328) 21,719 33,571
Accrued expenses 21,580 (21,295) 13,016 11,,405 2,670
--------- --------- -------- --------- --------
Total adjustments 414,213 303,404 27,964 113,217 61,708
--------- --------- -------- --------- --------
Net cash provided by operating
activities 546,466 169,814 38,397 94,387 41,634
--------- --------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 0 20,949 0 0 0
Capital expenditures (532,674) (158,843) (425,272) (425,272) 0
--------- --------- -------- --------- --------
Net cash used in investing
activities (532,674) (137,894) (425,272) (425,272) 0
--------- --------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 163,327 74,830 728,568 421,364 0
Payments of long-term debt (192,491) (157,972) (346,739) (154,438) (3,635)
Net borrowings from stockholder 15,500 28,216 37,864 56,576 (67,603)
Distribution to stockholder (56,000) 0 0 0 0
--------- --------- --------- --------- --------
Net cash (used in) provided by financing
activities (69,664) (54,926) 419,693 323,502 (71,238)
--------- --------- --------- --------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (55,872) (23,006) 32,818 (7,383) (29,604)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 86,261 30,389 7,383 7,383 40,201
--------- --------- --------- --------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30,389 $ 7,383 $ 40,201 $ 0 $ 10,597
========= ========= ========= ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 28,210 $ 43,389 $ 50,920 $ 37,458 $ 3,530
========= ========= ========= ========= ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment traded in for capital expenditures $ 0 $ 0 $ 41,464 $ 41,464 $ 0
========= ========= ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-36
<PAGE> 77
FERRERO WASTEWATER MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
Ferrero Wastewater Management, Inc. (the "Company") designs, constructs,
repairs, maintains, and operates on-site sewage disposal systems, primarily
in metropolitan Philadelphia, Pennsylvania.
Nutrecon, Inc. disposed of the waste collected by the Company. On January
1, 1997, the net assets of Nutrecon, Inc. were transferred to the Company.
Since the companies were under common ownership from their respective dates
of inception, the accompanying financial statements of the Company include
the accounts of Nutrecon, Inc. for all periods presented. All material
intercompany balances and transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less at the date of purchase as cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit
risk consist principally of trade receivables. The Company's customers are
concentrated in one geographic region and in one line of business. No
single customer accounted for a significant amount of the Company's sales,
and there are no significant accounts receivable from a single customer.
The Company reviews a customer's credit history before extending credit.
The Company establishes an allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical trends, and
other information.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over
the estimated useful lives of the assets using the straight-line method.
The estimated useful lives for
F-37
<PAGE> 78
machinery and equipment and office equipment range from five to seven
years. Buildings are depreciated over 20 years.
At December 31, 1996 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Machinery and equipment $ 1,803,675 $ 2,175,946
Buildings and improvements 308,071 349,941
Office equipment 78,236 82,445
----------- -----------
2,189,982 2,608,332
Less accumulated depreciation (1,491,048) (1,704,558)
----------- -----------
$ 698,934 $ 903,774
=========== ===========
</TABLE>
The Company periodically reviews the values assigned to property and
equipment to determine whether any impairments are other than temporary.
The Company assesses impairment by determining whether the carrying value
of such long-lived assets will be recovered through undiscounted expected
future cash flows. No impairment losses have been recorded in the
accompanying results of operations.
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 and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements for the nine-month period ended
September 30, 1997, and for the period from January 1, 1998 through
January 22, 1998 are unaudited. In the opinion of management, these
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
statements. The results of operations for the period from January 1, 1998
through January 22, 1998 are not necessarily indicative of future results
of the Company.
INCOME TAXES
The Company has elected, for federal and state income tax purposes, S
corporation tax status whereby income is taxed at the stockholder level.
Therefore, no deferred tax assets, liabilities, or provision for income
taxes is recorded.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 is designed to improve the reporting
of changes in equity from period to period. The Company currently has no
other comprehensive income items as defined by SFAS No. 130.
F-38
<PAGE> 79
3. LONG-TERM DEBT
At December 31, 1996 and 1997, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Loans from banks, interest at 9.25%, interest and principal due
in monthly payments through 2003; secured by substantially all
assets of the Company $ 184,251 $348,035
Equipment loans, interest at varying rates between
7.25% and 12.5%, interest and principal due in monthly
installments through 2003, secured by related equipment 170,117 388,162
--------- --------
354,368 736,197
Less current portion 109,802 128,454
--------- --------
$ 244,566 $607,743
========= ========
</TABLE>
Future aggregate annual maturities of long-term debt are as follows as of
December 31, 1997:
<TABLE>
<S> <C>
1998 $ 128,454
1999 122,456
2000 115,386
2001 103,520
2002 and thereafter 266,381
---------
$ 736,197
=========
</TABLE>
In February 1998, in conjunction with the sale of the business (Note 7),
all related long-term debt was paid in full.
4. RELATED-PARTY TRANSACTION
The Company's majority stockholder makes advances to the Company from time
to time to better manage cash flows and maintain adequate working capital.
At December 31, 1996 and 1997, the amounts owed to the majority stockholder
were $43,716 and $81,580, respectively. In February 1998, the amount owed
to the majority stockholder was paid in full (Note 7).
5. BENEFIT PLAN
Employees of the Company are eligible to participate in a
company-maintained salary reduction simplified employee pension plan (the
"Plan"). The Company has the option to contribute a profit-sharing portion
to the Plan each year. During the years ended December 31, 1995, 1996, and
1997, no such contributions were made.
F-39
<PAGE> 80
6. LEASES
The Company leases its facility under a noncancelable operating lease.
Rental expense during 1995, 1996, and 1997 was $84,943, $67,734, and
$72,000, respectively. Future minimum lease payments under the current
lease agreement are $72,000 per year through December 31, 1999.
7. SUBSEQUENT EVENT
On January 22, 1998, substantially all property and equipment and the
ongoing business of the Company were sold to EarthCare Company
("EarthCare") for $2,240,100 in cash and 90,000 shares of EarthCare common
stock. Contingent consideration of $248,900 in cash and 10,000 shares of
EarthCare common stock are receivable 270 days after the date of purchase,
net of offset for losses, as defined in the purchase agreement. Prior to
the closing, all related long-term debt was paid in full to convey the
assets to EarthCare free and clear of all encumbrances and liens.
F-40
<PAGE> 81
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To A Rapid Rooter Sewer & Drain Service, Inc.:
We have audited the accompanying balance sheets of A RAPID ROOTER SEWER & DRAIN
SERVICE, INC. (a Florida corporation) as of December 31, 1996 and 1997 and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. 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 audits.
We conducted our audits 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 audits provide 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 A Rapid Rooter Sewer & Drain
Service, Inc. as of December 31, 1996 and 1997 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 8, 1998
F-41
<PAGE> 82
A RAPID ROOTER SEWER & DRAIN SERVICE, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1996 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 134,110 $ 303,291
Accounts receivable, net of allowance for doubtful accounts of
$10,000 in 1996 and 1997 313,426 259,860
Loans to stockholders 76,787 134,257
Notes receivable 58,503 0
Prepaid expenses 16,090 16,090
---------- ----------
Total current assets 598,916 713,498
PROPERTY AND EQUIPMENT, NET 903,299 922,582
---------- ----------
$1,502,215 $1,636,080
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 99,935 $ 161,337
Accrued expenses 56,783 59,759
Current portion of long-term debt 251,695 269,278
---------- ----------
Total current liabilities 408,413 490,374
---------- ----------
LONG-TERM DEBT, NET OF CURRENT PORTION 551,542 590,380
---------- ----------
COMMITMENTS (NOTES 4 AND 5)
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 7,500 shares authorized, 100 shares
issued and outstanding 100 100
Additional paid-in capital 3,249 3,249
Retained earnings 538,911 551,977
---------- ----------
Total stockholders' equity 542,260 555,326
---------- ----------
$1,502,215 $1,636,080
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-42
<PAGE> 83
A RAPID ROOTER SEWER & DRAIN SERVICE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 NINE-MONTH PERIOD FROM
---------------------------------------------- PERIOD ENDED JANUARY 1, 1998 TO
1995 1996 1997 SEPTEMBER 30, 1997 FEBRUARY 13, 1998
----------- ----------- ---------- ------------------ ------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $ 4,201,989 $ 4,820,398 $4,629,655 $ 3,338,542 $ 680,870
----------- ----------- ---------- ----------- ---------
EXPENSES:
Cost of operations 2,139,783 2,270,988 2,364,794 1,705,303 338,971
General and administrative 1,564,497 1,702,588 1,730,394 1,248,709 244,591
Depreciation and amortization 233,730 291,293 319,001 206,472 41,476
----------- ----------- ---------- ----------- ---------
Total expenses 3,938,010 4,264,869 4,414,189 3,160,484 625,038
----------- ----------- ---------- ----------- ---------
INCOME FROM OPERATIONS 263,979 555,529 215,466 178,058 55,832
----------- ----------- ---------- ----------- ---------
OTHER EXPENSE (INCOME):
Interest expense 64,116 85,789 86,367 59,094 11,148
Other, net (33,597) (97,058) 27,413 (1,351) (476)
----------- ----------- ---------- ----------- ---------
30,519 (11,269) 113,780 57,743 10,672
----------- ----------- ---------- ----------- ---------
NET INCOME $ 233,460 $ 566,798 $ 101,686 $ 120,315 $ 45,160
=========== =========== ========== =========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-43
<PAGE> 84
A RAPID ROOTER SEWER & DRAIN SERVICE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 100 $ 3,249 $ 312,757 $ 316,106
Distributions to stockholders 0 0 (267,500) (267,500)
Net income 0 0 233,460 233,460
------ ---------- --------- ---------
BALANCE, DECEMBER 31, 1995 100 3,249 278,717 282,066
Distributions to stockholders 0 0 (306,604) (306,604)
Net income 0 0 566,798 566,798
------ ---------- --------- ---------
BALANCE, DECEMBER 31, 1996 100 3,249 538,911 542,260
Distributions to stockholders 0 0 (88,620) (88,620)
Net income 0 0 101,686 101,686
------ ---------- --------- ---------
BALANCE, DECEMBER 31, 1997 100 3,249 551,977 555,326
Distributions to stockholders 0 0 0 0
Net income 0 0 45,160 45,160
------ ---------- --------- ---------
BALANCE, FEBRUARY 13, 1998 (UNAUDITED) $ 100 $ 3,249 $ 597,137 $ 600,486
====== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-44
<PAGE> 85
A RAPID ROOTER SEWER & DRAIN SERVICE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 NINE-MONTH PERIOD FROM
------------------------------- PERIOD ENDED JANUARY 1, 1998 TO
1995 1996 1997 SEPTEMBER 30, 1997 FEBRUARY 13, 1998
--------- --------- --------- ------------------ ------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 233,460 $ 566,798 $ 101,686 $ 120,315 $ 45,160
--------- --------- --------- --------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 233,730 291,293 319,001 206,472 41,476
(Gain) loss on disposal of fixed assets (21,727) (74,606) (15,665) 27,177 0
Changes in assets and liabilities:
Accounts receivable 22,784 (89,315) 53,566 68,145 8,968
Notes receivable 0 (58,503) 58,503 29,252 0
Prepaid expenses and other 9,000 300 0 6,379 (1,573)
Accounts payable 8,486 (7,380) 61,402 (20,213) (37,949)
Accrued expenses 1,538 6,914 2,976 (24,355) 2,965
--------- --------- --------- --------- ---------
Total adjustments 253,811 68,703 479,783 333,283 13,887
--------- --------- --------- --------- ---------
Net cash provided by operating activities 487,271 635,501 581,469 453,598 59,047
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixed assets 97,652 83,658 54,766 0 0
Capital expenditures (788,903) (184,510) (341,859) (210,437) (291)
--------- --------- --------- --------- ---------
Net cash used in investing activities (691,251) (100,852) (287,093) (210,437) (291)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 729,528 169,407 306,333 184,699 0
Payments of long-term debt (315,906) (288,568) (285,438) (187,535) (30,160)
Net borrowings of stockholders 11,824 (66,061) (57,470) (119,191) (56,366)
Distributions to stockholders (267,500) (306,604) (88,620) 0 0
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities 157,946 (491,826) (125,195) (122,027) (86,526)
--------- --------- --------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (46,034) 42,823 169,181 121,134 (27,770)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 137,321 91,287 134,110 134,110 303,291
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 91,287 $ 134,110 $ 303,291 $ 255,244 $ 275,521
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 64,116 $ 85,789 $ 86,367 $ 64,425 $ 11,148
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-45
<PAGE> 86
A RAPID ROOTER SEWER & DRAIN SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
A Rapid Rooter Sewer & Drain Service, Inc. (the "Company") designs,
constructs, repairs, maintains, and operates on-site sewage disposal systems,
primarily in and around Pompano Beach, Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the date of purchase as cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit
risk consist principally of trade receivables. The Company's customers are
concentrated in one geographic region and in one line of business. No single
customer accounted for a significant amount of the Company's sales, and there
are no significant accounts receivable from a single customer. The Company
reviews a customer's credit history before extending credit. The Company
establishes an allowance for doubtful accounts based on factors surrounding
the credit risk of specific customers, historical trends, and other
information.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over
the estimated useful lives of the assets using the straight-line method. The
estimated useful lives for machinery and equipment and office equipment range
from five to seven years. Leasehold improvements are depreciated over the
shorter of the term of the lease or the useful life of the improvements.
F-46
<PAGE> 87
At December 31, 1996 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Machinery and equipment $ 1,840,443 $ 1,984,504
Office equipment 65,406 67,782
Leasehold improvements 19,473 19,473
----------- -----------
1,925,322 2,071,759
Less accumulated depreciation (1,022,023) (1,149,177)
----------- -----------
$ 903,299 $ 922,582
=========== ===========
</TABLE>
The Company periodically reviews the values assigned to property and
equipment to determine whether any impairments are other than temporary.
The Company assesses impairment by determining whether the carrying value of
such long-lived assets will be recovered through undiscounted expected
future cash flows. No impairment losses have been recorded in the
accompanying results of operations.
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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements as of February 13, 1998, for the
nine-month period ended September 30, 1997, and for the period from January
1, 1998 through February 13, 1998 are unaudited. In the opinion of
management, these financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
the financial statements. The results of operations for the period from
January 1, 1998 through February 13, 1998 are not necessarily indicative of
future results of the Company.
INCOME TAXES
For federal and state income tax purposes, the Company has elected S
corporation tax status whereby income is taxed at the stockholder level.
Therefore, no deferred tax assets, liabilities, or provision for income taxes
is recorded. Amounts are distributed to stockholders for making applicable
tax payments, and are included in distributions to stockholders in the
accompanying statements of stockholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is designed to improve the reporting of changes in
equity from period to period. The Company currently has no other
comprehensive income items as defined by SFAS No. 130.
F-47
<PAGE> 88
3. LONG-TERM DEBT
At December 31, 1996 and 1997, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Equipment loans, interest at varying rates
between 7.25% and 12.5%, interest and
principal due in monthly installments
through 2003, secured by related equipment $ 803,237 $ 859,658
Less current portion 251,695 269,278
----------- -----------
$ 551,542 $ 590,380
=========== ===========
</TABLE>
Future aggregate annual maturities of long-term debt are as follows as of
December 31, 1997:
<TABLE>
<S> <C>
1998 $269,278
1999 240,547
2000 181,433
2001 89,506
2002 and thereafter 78,894
--------
$859,658
========
</TABLE>
In February 1998, in conjunction with the sale of the business (Note 6), all
long-term debt was paid in full.
4. BENEFIT PLAN
The Company maintains a 401(k) plan for employees. The Company matches 25% of
employee contributions to the plan up to 5% of employee compensation. Company
contributions for the years ended December 31, 1995, 1996, and 1997 were
$7,581, $7,720, and $9,792, respectively.
5. RELATED-PARTY TRANSACTIONS
The Company's stockholders borrow from the Company from time to time to make
estimated tax payments on income taxed at the stockholder level. In addition,
the Company makes advances to stockholders from time to time to cover certain
expenses. At December 31, 1996 and 1997, the amounts owed to the Company from
stockholders were $76,767 and $134,257, respectively. In February 1998, the
outstanding balance was paid in full by the stockholders.
The Company leases its Pompano Beach facility from a related party. Rental
expense during 1995, 1996, and 1997 was $35,400, $36,000, and $39,614,
respectively. Future minimum lease payments under the current lease agreement
are $48,000 per year through August 31, 2000.
F-48
<PAGE> 89
6. SUBSEQUENT EVENT
On February 13, 1998, substantially all property and equipment and the
ongoing business of the Company were sold to EarthCare Company ("EarthCare")
for $3,990,120 in cash and 100,000 shares of EarthCare common stock. Prior
to the closing, all related long-term debt was paid in full to convey the
assets to EarthCare free and clear of all encumbrances and liens.
F-49
<PAGE> 90
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Seagraves, Inc. and Grease-Tec, Inc.:
We have audited the accompanying combined balance sheets of SEAGRAVES, INC. (a
Florida corporation d.b.a. Brownie Environmental Services) AND GREASE-TEC, INC.
(a Florida corporation) as of December 31, 1997 and 1996 and the related
combined statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. 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 audits.
We conducted our audits 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 audits provide 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 Seagraves, Inc. (d.b.a.
Brownie Environmental Services) and Grease-Tec, Inc. as of December 31, 1997
and 1996 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 14, 1998
F-50
<PAGE> 91
SEAGRAVES, INC.
(d.b.a. BROWNIE ENVIRONMENTAL SERVICES)
AND GREASE-TEC, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
ASSETS 1996 1997
=============================================== ========== ==========
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 145,724 $ 111,799
Accounts receivable, net of allowance for doubtful
accounts of $10,000 in 1996 and 1997 388,056 395,977
Prepaid expenses and other 53,899 77,028
---------- ----------
Total current assets 587,679 584,804
PROPERTY AND EQUIPMENT, NET 917,596 928,251
OTHER ASSETS 3,487 4,598
---------- ----------
$1,508,762 $1,517,653
========== ==========
<CAPTION>
DECEMBER 31
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
=============================================== ========== ==========
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 370,683 $ 360,289
Accrued expenses 228,449 206,191
Current portion of long-term debt 278,794 293,132
---------- ----------
Total current liabilities 877,926 859,612
---------- ----------
LONG-TERM DEBT:
Long-term debt, net of current portion 219,854 183,214
Related-party notes payable, net of current portion 15,902 94,658
---------- ----------
235,756 277,872
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY:
Common stock of Seagraves, Inc., $1 par value; 500
shares authorized, 100 shares issued and outstanding 100 100
Common stock of Grease-Tec, Inc., no par value; 10,000
shares authorized, 10,000 shares issued and outstanding 0 0
Retained earnings 394,980 380,069
---------- ----------
Total stockholders' equity 395,080 380,169
---------- ----------
$1,508,762 $1,517,653
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-51
<PAGE> 92
SEAGRAVES, INC.
(d.b.a. BROWNIE ENVIRONMENTAL SERVICES)
AND GREASE-TEC, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 NINE-MONTH PERIOD FROM
------------------------------------- PERIOD ENDED JANUARY 1, 1998
1995 1996 1997 SEPTEMBER 30, 1997 TO MARCH 6, 1998
========== ========== ========== =================== ================
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $5,500,041 $6,491,346 $6,924,493 $4,987,900 $1,342,431
---------- ---------- ---------- ---------- ----------
EXPENSES:
Cost of operations 3,873,919 4,626,757 4,868,591 3,482,756 930,687
Sales, general, and administrative 1,166,270 1,360,725 1,636,989 1,199,041 350,137
Depreciation and amortization 256,770 236,777 248,938 178,868 32,886
---------- ---------- ---------- ---------- ----------
Total expenses 5,296,959 6,224,259 6,754,518 4,860,665 1,313,710
---------- ---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 203,082 267,087 169,975 127,235 28,721
---------- ---------- ---------- ---------- ----------
OTHER EXPENSE (INCOME):
Interest expense 69,853 61,242 36,425 32,119 8,659
Other, net 23,219 (22,634) (75,529) (88,399) (105,984)
---------- ---------- ---------- ---------- ----------
93,072 38,608 (39,104) (56,280) (97,325)
---------- ---------- ---------- ---------- ----------
NET INCOME $ 110,010 $ 228,479 $ 209,079 $ 183,515 $ 126,046
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-52
<PAGE> 93
SEAGRAVES, INC.
(d.b.a. BROWNIE ENVIRONMENTAL SERVICES)
AND GREASE-TEC, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
GREASE-TEC, INC. SEAGRAVES, INC.
COMMON STOCK COMMON STOCK
--------------- -------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
------ ------ ------ ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 10,000 $0 100 $100 $ 168,167 $ 168,267
Distributions to stockholders 0 0 0 0 (17,000) (17,000)
Net income 0 0 0 0 110,010 110,010
------ -- --- ---- --------- ---------
BALANCE, DECEMBER 31, 1995 10,000 0 100 100 261,177 261,277
Distributions to stockholders 0 0 0 0 (94,676) (94,676)
Net income 0 0 0 0 228,479 228,479
------ -- --- ---- --------- ---------
BALANCE, DECEMBER 31, 1996 10,000 0 100 100 394,980 395,080
Distributions to stockholders 0 0 0 0 (223,990) (223,990)
Net income 0 0 0 0 209,079 209,079
------ -- --- ---- --------- ---------
BALANCE, DECEMBER 31, 1997 10,000 0 100 100 380,069 380,169
Distributions to stockholders 0 0 0 0 (32,000) (32,000)
Net income 0 0 0 0 126,046 126,046
------ -- --- ---- --------- ---------
BALANCE, MARCH 6, 1998 (UNAUDITED) 10,000 $0 100 $100 $ 474,115 $ 474,215
====== == === ==== ========= =========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-53
<PAGE> 94
SEAGRAVES, INC.
(d.b.a. BROWNIE ENVIRONMENTAL SERVICES)
AND GREASE-TEC, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 NINE-MONTH PERIOD FROM
------------------------------------- PERIOD ENDED JANUARY 1, 1998
1995 1996 1997 SEPTEMBER 30, 1997 TO MARCH 6, 1998
========= ========= ========== ================== ================
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 110,010 $ 228,479 $ 209,079 $ 183,515 $ 126,046
--------- --------- --------- --------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 256,770 236,777 248,938 178,868 32,886
(Gain) loss on sale of fixed assets (1,949) 21,805 (70,254) (70,254) (97,641)
Changes in assets and liabilities:
Accounts receivable 33,665 (97,202) (7,921) (69,623) (58,166)
Prepaid expenses and other (3,593) (4,838) (23,129) 4,017 54,520
Other assets 5,909 (2,010) (1,221) (613) 0
Accounts payable (34,634) 191,375 (10,394) (9,878) (67,605)
Accrued expenses 12,022 57,896 (22,258) (45,839) 54,363
--------- --------- --------- --------- ---------
Total adjustments 268,190 403,803 113,761 13,322 (81,643)
--------- --------- --------- --------- ---------
Net cash provided by operating activities 378,200 632,282 322,840 170,193 44,403
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 4,210 66,592 100,928 100,928 100,000
Capital expenditures (293,516) (509,292) (290,157) (204,648) (148,121)
--------- --------- --------- --------- ---------
Net cash used in investing activities (289,306) (442,700) (189,229) (103,720) (48,121)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 175,861 234,672 316,932 222,785 59,425
Payments of long-term debt (259,055) (329,545) (266,287) (213,178) (33,635)
Net borrowings from related party 99,459 17,947 5,809 (15,902) (94,658)
Distributions to stockholders (17,000) (94,676) (223,990) (123,460) (32,000)
--------- --------- --------- --------- ---------
Net cash (used in) provided by financing
activities (735) (171,602) (167,536) (129,755) (100,868)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 88,159 17,980 (33,925) (63,282) (104,586)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 39,585 127,744 145,724 145,724 111,799
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 127,744 $ 145,724 $ 111,799 $ 82,442 $ 7,213
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 72,074 $ 63,327 $ 37,838 $ 27,990 $ 7,095
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-54
<PAGE> 95
SEAGRAVES, INC.
(d.b.a. BROWNIE ENVIRONMENTAL SERVICES)
AND GREASE-TEC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
Seagraves, Inc. and Grease-Tec, Inc. (collectively, the "Company") design,
construct, repair, maintain, and operate on-site sewage disposal systems,
primarily in metropolitan Orlando, Florida. Seagraves, Inc. and
Grease-Tec, Inc. are under common ownership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of
Seagraves, Inc. and Grease-Tec, Inc. All significant intercompany accounts
have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less at the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of
credit risk consist principally of trade receivables. The Company's
customers are concentrated in one geographic region. No single customer
accounted for a significant amount of the Company's sales, and there are
no significant accounts receivable from a single customer. The Company
reviews a customer's credit history before extending credit. The Company
establishes an allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical trends, and
other information.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
F-55
<PAGE> 96
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided on
the straight-line basis using useful lives of 5 to 7 years for machinery
and equipment and office equipment and 20 years for building and
improvements.
At December 31, 1996 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
========== ==========
<S> <C> <C>
Machinery and equipment $1,705,843 $1,866,519
Buildings and improvements 361,183 391,780
Office equipment 89,153 101,715
---------- ----------
2,156,179 2,360,014
Less accumulated depreciation (1,238,583) (1,431,763)
---------- ----------
$ 917,596 $ 928,251
========== ==========
</TABLE>
The Company periodically reviews the values assigned to property and
equipment to determine whether any impairments are other than temporary.
The Company assesses impairment by determining whether the carrying value
of such long-lived assets will be recovered through undiscounted expected
future cash flows. No impairment losses have been recorded in the
accompanying results of operations.
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 and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements for the nine-month period ended
September 30, 1997 and for the period from January 1, 1998 through March
6, 1998 are unaudited. In the opinion of management, these financial
statements reflect all adjustments, consisting only of normal and
recurring adjustments, necessary for a fair presentation of the financial
statements. The results of operations for the period from January 1, 1998
through March 6, 1998 are not necessarily indicative of future results of
the Company.
INCOME TAXES
The Company has elected for federal and state income tax purposes S
corporation tax status, whereby income is taxed at the stockholder level.
Therefore, no deferred tax assets, liabilities, or provisions for income
taxes are recorded. Amounts are distributed to the stockholders for making
applicable tax payments.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 is designed to improve the reporting
of changes in equity from period to period. The Company currently has no
other comprehensive income items as defined by SFAS No. 130.
F-56
<PAGE> 97
3. LONG-TERM DEBT
At December 31, 1996 and 1997, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1997
========== ==========
<S> <C> <C>
Equipment loans, interest at varying rates between 8.5% and 11%,
interest and principal due in monthly installments through 2000,
secured by related equipment $351,278 $401,923
Related-party notes payable, interest at varying rates between
10% and 12%, interest and principal due in monthly
installments through 1999, unsecured 163,272 169,081
-------- --------
514,550 571,004
278,794 293,132
Less current portion -------- --------
$235,756 $277,872
======== ========
</TABLE>
Future aggregate annual maturities of long-term debt are as follows as of
December 31, 1997:
<TABLE>
<S> <C>
1998 $293,132
1999 192,387
2000 67,548
2001 13,418
2002 and thereafter 4,519
--------
$571,004
========
</TABLE>
In March 1998, in conjunction with the sale of the business (Note 5), all
long-term debt was paid in full.
4. RELATED-PARTY TRANSACTIONS
The Company's stockholders make loans to the Company from time to time to
purchase equipment. At December 31, 1996 and 1997, the amounts owed to
stockholders were $163,272 and $169,081, respectively. During fiscal years
1995, 1996, and 1997, the Company paid interest of $12,244, $13,031, and
$6,421, respectively, to stockholders. Subsequent to December 31, 1997,
the amounts owed to stockholders were paid in full.
The Company rents land and buildings from certain stockholders. Rent paid
to stockholders was $15,600, $20,000, and $48,336 in 1997, 1996, and 1995,
respectively.
F-57
<PAGE> 98
5. SUBSEQUENT EVENT
On March 6, 1998, substantially all property and equipment and the ongoing
business of the Company were sold to EarthCare Company ("EarthCare") for
$3,250,000 in cash, a $2,000,000 note receivable, and 60,000 shares of
EarthCare common stock. Prior to the closing, all related long-term debt
was paid in full to convey assets to EarthCare free and clear of all
encumbrances and liens.
F-58
<PAGE> 99
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RGM Liquid Waste Removal Corporation
and Affiliates:
We have audited the accompanying combined balance sheets of RGM LIQUID WASTE
REMOVAL CORPORATION AND AFFILIATES as of October 31, 1996 and 1997 and the
related combined statements of operations, stockholders' equity, and cash flows
for the years 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 audits.
We conducted our audits 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 audits provide 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 RGM Liquid Waste Removal
Corporation and Affiliates as of October 31, 1996 and 1997 and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
July 10, 1998
F-59
<PAGE> 100
RGM LIQUID WASTE REMOVAL CORPORATION
AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31
-----------------------------
ASSETS 1996 1997
- -------------------------------------- ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 581,017 $ 1,280,106
Marketable equity securities 490,318 580,017
Accounts receivable, net of
allowance for doubtful accounts
of $70,000, $49,000, and $80,000
in 1996, 1997, and 1998,
respectively 2,065,540 1,179,148
Note receivable 813,462 579,481
Prepaid expenses and other 37,032 41,342
----------- -----------
Total current assets 3,987,369 3,660,094
PROPERTY AND EQUIPMENT, NET 1,394,204 1,032,921
NOTE RECEIVABLE 579,482 0
OTHER ASSETS 81,585 124,579
----------- -----------
$ 6,042,640 $ 4,817,594
=========== ===========
<CAPTION>
October 31
LIABILITIES AND -----------------------------
STOCKHOLDERS' EQUITY 1996 1997
- -------------------------------------- ----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,274,689 $ 374,827
Accrued expenses 240,159 211,577
Due to related parties 484,263 506,713
Income taxes payable, net 324,496 281,566
Deferred income taxes 132,529 16,360
Current portion of long-term debt 281,264 133,741
----------- -----------
Total current liabilities 2,737,400 1,524,784
----------- -----------
LONG-TERM DEBT, NET OF CURRENT PORTION 353,724 82,827
----------- -----------
DUE TO STOCKHOLDERS 18,688 131,637
----------- -----------
DEFERRED INCOME TAXES 100,989 59,057
----------- -----------
COMMITMENTS AND
CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY:
Common stock (Note 2) 11,000 11,000
Unrealized depreciation of
investments (9,682) 0
Retained earnings 2,830,521 3,008,289
----------- -----------
Total stockholders' equity 2,831,839 3,019,289
----------- -----------
$ 6,042,640 $ 4,817,594
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-60
<PAGE> 101
RGM LIQUID WASTE REMOVAL CORPORATION
AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended October 31 NINE-MONTH PERIOD FROM
------------------------------- PERIOD ENDED NOVEMBER 1, 1997
1996 1997 JULY 31, 1997 TO MAY 1, 1998
------------ ------------ ---------------- ----------------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 10,104,213 $ 7,459,143 $ 5,531,485 $ 4,108,953
------------ ------------ ------------ ------------
EXPENSES:
Cost of operations 6,929,729 4,485,210 3,326,102 2,298,686
General and administrative 2,627,519 2,407,013 1,790,705 1,066,890
Depreciation and amortization 417,476 394,420 296,381 211,454
------------ ------------ ------------ ------------
Total expenses 9,974,724 7,286,643 5,413,188 3,577,030
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 129,489 172,500 118,297 531,923
------------ ------------ ------------ ------------
OTHER EXPENSE (INCOME):
Interest expense (income), net 65,497 (88,518) (58,298) (31,626)
Other, net 804,489 (73,276) (62,376) 0
------------ ------------ ------------ ------------
869,986 (161,794) (114,674) (31,626)
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME
TAXES (740,497) 334,294 232,971 563,549
(BENEFIT) PROVISION FOR
INCOME TAXES (425,210) 156,526 108,311 287,410
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (315,287) $ 177,768 $ 124,660 $ 276,139
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-61
<PAGE> 102
RGM LIQUID WASTE REMOVAL CORPORATION
AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
LOSSES ON
SECURITIES
COMMON AVAILABLE RETAINED
STOCK FOR SALE EARNINGS TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, NOVEMBER 1, 1995 $ 11,000 $ 0 $ 3,145,808 $ 3,156,808
Unrealized depreciation on
securities available for sale 0 (9,682) 0 (9,682)
Net loss 0 0 (315,287) (315,287)
----------- ----------- ----------- -----------
BALANCE, OCTOBER 31, 1996 11,000 (9,682) 2,830,521 2,831,839
Change in unrealized depreciation
on securities available for sale 0 9,682 0 9,682
Net income 0 0 177,768 177,768
----------- ----------- ----------- -----------
BALANCE, OCTOBER 31, 1997 11,000 0 3,008,289 3,019,289
Net income 0 0 276,139 276,139
----------- ----------- ----------- -----------
BALANCE, MAY 1, 1998 (UNAUDITED) $ 11,000 $ 0 $ 3,284,428 $ 3,295,428
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-62
<PAGE> 103
RGM LIQUID WASTE REMOVAL CORPORATION
AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31 NINE-MONTH PERIOD FROM
------------------------- PERIOD ENDED NOVEMBER 1, 1997
1996 1997 JULY 31, 1997 TO MAY 1, 1998
----------- ----------- ---------------- -----------------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (315,287) $ 177,768 $ 124,660 $ 276,139
----------- ----------- ----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation and amortization 417,476 394,420 296,381 211,454
Loss on sale of fixed assets 26,956 48 0 0
Changes in assets and liabilities:
Accounts receivable, net 508,139 886,392 404,611 (857,205)
Prepaid expenses and other (1,746) (4,310) 3,312 17,115
Other assets 109,680 (42,994) (10,994) (15,768)
Accounts payable (965,735) (899,862) (634,908) (80,162)
Accrued expenses 9,260 (28,582) (24,832) 535
Income tax payable 311,670 (42,931) (98,212) (232,801)
Deferred taxes (893,777) (158,101) (74,131) 829
----------- ----------- ----------- -----------
Total adjustments (478,077) 104,080 (138,773) (956,003)
----------- ----------- ----------- -----------
Net cash provided
by operating activities (793,364) 281,848 (14,113) (679,864)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Merco $ 3,603,192 $ 0 $ 0 $ 0
Note receivable from Merco (1,392,944) 813,463 606,044 447,751
Marketable securities (500,000) (80,017) (55,210) (33,148)
Capital expenditures (114,175) (33,184) (31,104) (6,332)
----------- ----------- ----------- -----------
Net cash provided by investing activities 1,596,073 700,262 529,670 408,271
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 27,364 0 0 0
Repayments of long-term debt (695,504) (418,420) (282,212) (216,568)
Net borrowing from related party 80,806 22,450 22,450 (42,344)
Net borrowing from stockholder 16,860 112,949 0 0
----------- ----------- ----------- -----------
Net cash used in financing activities (570,474) (283,021) (259,762) (258,912)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 232,235 699,089 255,795 (530,505)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 348,782 581,017 581,017 1,280,106
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 581,017 $ 1,280,106 $ 836,812 $ 749,601
=========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 112,328 $ 57,140 $ 46,621 $ 16,160
=========== =========== =========== ===========
Cash paid for income taxes $ 193,421 $ 368,767 $ 361,992 $ 305,088
=========== =========== =========== ===========
NONCASH INVESTING ACTIVITY:
Unrealized loss (gain) on securities
available for sale $ 9,682 $ (9,682) $ (9,682) $ 0
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-63
<PAGE> 104
RGM LIQUID WASTE REMOVAL CORPORATION
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
RGM Liquid Waste Removal Corporation ("RGM") and affiliates (collectively,
the "Company") is engaged in the removal of various waste materials. As
part of its normal operations, the Company enters into agreements of up to
four years with governmental, institutional, and commercial entities.
These agreements specify that the Company will remove various waste
materials at per unit prices. Billings are submitted as services are
provided.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of
Devito Environmental Corporation ("Devito"), Advanced Transfer Technology,
Inc. ("ATT"), and Envirotech Leasing & Rental Corporation ("Envirotech")
(collectively, the "Affiliates") since they have been under the same
ownership of RGM since their respective dates of inception. All material
intercompany accounts have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less at the date of purchase to be cash equivalents.
The carrying amounts of short-term investments approximate fair value.
Short-term investments consist of marketable equity securities and money
market funds. In accordance with the criteria specified by Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," these investments were
classified as available for sale.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of
credit risk consist principally of trade receivables. The Company's
customers are concentrated in one geographic region. No single customer
accounted for a significant amount of the Company's sales, and there are
no significant accounts receivable from a single customer. The Company
reviews a customer's credit history before extending credit. The Company
F-64
<PAGE> 105
establishes an allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical trends, and
other information.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided
using useful lives of five to ten years for machinery and equipment and
office equipment. Leasehold improvements are depreciated over the shorter
of the term of the lease or the useful life of the improvements.
At October 31, 1996 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Machinery and equipment $4,528,286 $4,478,562
Office equipment 25,955 42,140
Leasehold improvements 105,646 129,005
---------- ----------
4,659,887 4,649,707
Less accumulated depreciation (3,265,683) (3,616,786)
---------- ----------
$1,394,204 $1,032,921
========== ==========
</TABLE>
The Company periodically reviews the values assigned to property and
equipment to determine whether any impairments are other than temporary.
The Company assesses impairment by determining whether the carrying value
of such long-lived assets will be recovered through undiscounted expected
future cash flows. No impairment losses have been recorded in the
accompanying results of operations.
COMMON STOCK
No par value common stock of RGM and affiliates consists of the following
as of October 31, 1996 and 1997 and January 31, 1998:
<TABLE>
<CAPTION>
ISSUED AND
AUTHORIZED OUTSTANDING
---------- -----------
<S> <C> <C>
RGM 200 10
Devito 200 100
ATT 200 10
Envirotech 200 100
</TABLE>
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 and
disclosure of contingent assets and liabilities
F-65
<PAGE> 106
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements for the nine-month period ended July
31, 1997 is unaudited. In the opinion of management, these financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial
statements. The results of operations for the period from November 1, 1997
to May 1, 1998 are not necessarily indicative of future results of the
Company.
INCOME TAXES
For federal and state income tax purposes, two of the affiliates (the "S
corporations") have elected S corporation tax status whereby income is
taxed at the shareholder level. Therefore, no deferred tax assets,
liabilities, or provisions for income taxes is recorded. See Note 7 for
income tax information for the two affiliates which are C corporations
(the "C corporations").
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is designed to improve the reporting of changes in
equity from period to period. The Company currently has no other
comprehensive income items as defined by SFAS No. 130.
3. NOTE RECEIVABLE
From July 1992 to June 1996, the Company participated in the Merco Joint
Venture ("Merco"), which was accounted for using the equity method of
accounting. Merco contracts with the city of New York to receive,
transport, and dispose of dewatered sewage sludge. The Company's ownership
interest in Merco was 33 1/3%. At May 31, 1996, the Company's investment
in Merco was $2,439,761. On June 1, 1996, pursuant to a settlement
agreement between the Company and Merco, the joint venture agreed to pay
$1,650,000 for the Company's interest in Merco. In 1996, the Company
recognized a loss on the sale of the investment in the amount of $789,761,
which is included in other, net, in the accompanying statements of
operations. The settlement was in the form of a note receivable which is
payable in monthly installments of $74,625 through June 1998 and bears
interest at 8% per annum.
F-66
<PAGE> 107
4. LONG-TERM DEBT
At October 31, 1996 and 1997, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Equipment loans, interest at varying rates
between 7.75% and 12.38%, interest and
principal due in monthly installments
through August 2001, secured by related
equipment $595,272 $207,665
Capital lease obligations and other 39,716 8,903
-------- --------
634,988 216,568
Less current portion (281,264) (133,741)
-------- --------
$353,724 $ 82,827
======== ========
</TABLE>
Future aggregate annual maturities of long-term debt are as follows as of
October 31, 1997:
<TABLE>
<S> <C>
1998 $133,741
1999 71,468
2000 5,983
2001 5,376
--------
$216,568
========
</TABLE>
In May 1998, the Company repaid all long-term debt in full in conjunction
with the sale of the business (Note 9).
5. RELATED-PARTY TRANSACTIONS
The Company's stockholders make loans to the Company from time to time to
meet working capital needs and to purchase equipment. At December 31, 1996
and 1997, the amounts owed to stockholders were $18,688 and $131,637,
respectively. In May 1998, all amounts owed to stockholders were paid in
full in conjunction with the sale of the business (Note 9).
The Company is a guarantor of a loan entered by the stockholder in the
amount of $118,000. The loan was paid in full in May 1998 in conjunction
with the sale of the business (Note 9).
The Company leases its office facilities from related parties under
noncancelable operating leases on a month-to-month basis. Rent expense for
the years ended October 31, 1996 and 1997 was $406,558 and $396,991,
respectively, and is included in general and administrative expenses in
the accompanying statements of operations. Amounts owed to these related
parties for back rents at October 31, 1996 and 1997 were $456,475 and
$506,713, respectively.
F-67
<PAGE> 108
The Company performs waste removal services for an entity under the
control of one of the Company's stockholders. The related party also
provided waste treatment services to the Company. During 1996 and 1997,
revenue from the related party was $55,280 and $74,016, respectively.
Waste treatment services performed by the related party for RGM during
1996 and 1997 were $7,765 and $2,600, respectively. Net amounts due to the
related party at October 31, 1996 and 1997 were $40,061 and $0 and are
included in due to related parties in the accompanying balance sheets.
6. COMMITMENTS AND CONTINGENCIES
The Company has a defined contribution 401(k) plan (the "Plan") covering
substantially all of its full-time employees. The Company has the option
to contribute a profit-sharing portion to the Plan each year. During the
years ended October 31, 1996 and 1997, no such contributions were made.
Under the terms of a bargaining agreement with its union employees, one
of the affiliates is required to make contributions based on hours worked
to a union annuity fund. Contributions to this fund for the years ended
October 31, 1996 and 1997 were $18,336 and $64,323, respectively, and are
included in general and administrative expenses in the accompanying
statements of operations.
7. INCOME TAXES
The accompanying financial statements include income tax provisions
related to the C corporations computed in accordance with SFAS No. 109,
"Accounting for Income Taxes." The components of the income tax (benefit)
provision for the years ended October 31, 1996 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Current provision $ 468,567 $ 314,627
Deferred taxes (893,777) (158,101)
--------- ---------
Income tax (benefit) provision $(425,210) $ 156,526
========= =========
</TABLE>
F-68
<PAGE> 109
Reconciliation from the federal statutory rate to the actual income tax
benefit is as follows:
<TABLE>
<CAPTION>
1996 1997
----- ----
<S> <C> <C>
Statutory federal tax rate (34.0)% 34.0%
State and city income taxes, net of
federal tax benefit (8.0) 7.0
(Income) loss from the S corporations (9.2) 3.8
Other (6.2) 2.0
----- ----
(57.4)% 46.8%
===== ====
</TABLE>
The sources of differences between the financial accounting and tax bases
of the Company's assets and liabilities which give rise to the deferred
tax assets and liabilities and the tax effects of each are as follows as
of October 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 29,120 $ 20,384
Capital loss carryforward 59,805 38,206
--------- --------
Total deferred tax assets 88,925 58,590
--------- --------
Deferred tax liabilities:
Depreciation (121,027) (94,240)
Joint venture income (121,881) 0
Cash to accrual (79,535) (39,767)
--------- --------
Total deferred tax liabilities (322,443) (134,007)
--------- --------
Net deferred tax liability $(233,518) $(75,417)
========= ========
</TABLE>
8. ENVIRONMENTAL REGULATIONS
The Company is subject to extensive and evolving federal, state, and local
environmental laws and regulations that have been enacted in response to
technological advances and the public's increased concern over
environmental issues. The majority of the expenditures necessary to comply
with the environmental laws and regulations is made in the normal course
of business. The Company, to the best of its knowledge, is in compliance,
in all material respects, with the laws and regulations affecting its
operations.
9. SUBSEQUENT EVENT
On May 1, 1998, the Company sold substantially all property and equipment
and the ongoing business to EarthCare Company ("EarthCare") for $4,500,000
in cash and 105,000 shares of EarthCare common stock. Contingent
consideration of $1,000,000 in cash and 55,000 shares of EarthCare common
stock is receivable 365 days after the date of purchase, net of offsets
for losses, as defined in the purchase agreement. Prior to the closing,
all equipment
F-69
<PAGE> 110
loans and related-party payables were paid in full to convey assets to EarthCare
free and clear of all encumbrances and liens.
F-70
<PAGE> 111
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eldredge Wastewater Management, Inc.:
We have audited the accompanying balance sheets of ELDREDGE WASTEWATER
MANAGEMENT, INC. (a Pennsylvania corporation) as of December 31, 1996 and 1997
and the related statements of operations, stockholder's equity, and cash flows
for each of the three years in the period ended December 31, 1997. 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 audits.
We conducted our audits 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 audits provide 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 Eldredge Wastewater Management,
Inc. as of December 31, 1996 and 1997 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
June 19, 1998
F-71
<PAGE> 112
ELDREDGE WASTEWATER MANAGEMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
ASSETS 1996 1997
- ------------------------------------------ ---------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 79,129 $ 20,975
Accounts receivable, net of allowance
for doubtful accounts of $19,300 in
1996, 1997, and 1998 309,488 313,464
Related-party receivable 332,028 363,264
Prepaid expenses and other 13,363 13,774
---------- ----------
Total current assets 734,008 711,477
PROPERTY AND EQUIPMENT, NET 285,799 425,626
---------- ----------
$1,019,807 $1,137,103
========== ==========
<CAPTION>
DECEMBER 31
LIABILITIES AND -----------------------
STOCKHOLDER'S EQUITY 1996 1997
- ----------------------------------------- ---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 324,716 $ 353,165
Accrued expenses 35,630 41,010
Current portion of long-term debt 179,023 119,461
---------- ----------
Total current liabilities 539,369 513,636
---------- ----------
LONG-TERM DEBT, NET OF CURRENT PORTION 115,141 322,347
---------- ----------
DEFERRED INCOME TAXES 22,873 9,926
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTES 5
AND 6)
STOCKHOLDER'S EQUITY:
Common stock, no par value; 10,000
shares authorized, 4,000 shares
issued and outstanding in 1996
and 1997 1,000 1,000
Retained earnings 341,424 290,194
---------- ----------
Total stockholder's equity 342,424 291,194
---------- ----------
$1,019,807 $1,137,103
========== ==========
</TABLE>
F-72
<PAGE> 113
ELDREDGE WASTEWATER MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE-MONTH
YEARS ENDED DECEMBER 31 PERIOD ENDED PERIOD FROM
----------------------------------------- SEPTEMBER 30, JANUARY 1, 1998
1995 1996 1997 1997 TO MAY 8, 1998
----------- ----------- ----------- ------------ --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $ 3,800,950 $ 4,206,779 $ 4,074,248 $ 3,008,063 $ 1,514,756
----------- ----------- ----------- ----------- ------------
EXPENSES:
Cost of operations 2,641,298 3,094,579 2,841,432 2,142,431 1,108,708
General and administrative 1,033,326 999,328 1,081,150 776,777 385,582
Depreciation and amortization 177,427 176,250 192,534 142,979 68,311
----------- ----------- ----------- ----------- ------------
Total expenses 3,852,051 4,270,157 4,115,116 3,062,187 1,562,601
----------- ----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (51,101) (63,378) (40,868) (54,124) (47,845)
----------- ----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense, net (9,204) (35,505) (34,828) (32,080) (11,959)
Other 18,244 10,873 6,509 6,369 1,562
----------- ----------- ----------- ----------- -----------
9,040 (24,632) (28,319) (25,711) (10,397)
----------- ----------- ----------- ----------- -----------
LOSS BEFORE BENEFIT FROM INCOME TAXES (42,061) (88,010) (69,187) (79,835) (58,242)
INCOME TAX BENEFIT (10,056) (17,968) (17,957) (20,720) (13,686)
----------- ----------- ----------- ----------- -----------
NET LOSS $ (32,005) $ (70,042) $ (51,230) $ (59,115) (44,556)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-73
<PAGE> 114
ELDREDGE WASTEWATER MANAGEMENT, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
------ -------- -----
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $1,000 $443,471 $444,471
Net loss 0 (32,005) (32,005)
------ -------- --------
BALANCE, DECEMBER 31, 1995 1,000 411,466 412,466
Net loss 0 (70,042) (70,042)
------ -------- --------
BALANCE, DECEMBER 31, 1996 1,000 341,424 342,424
Net loss 0 (51,230) (51,230)
------ -------- --------
BALANCE, DECEMBER 31, 1997 1,000 290,194 291,194
Net Loss 0 (44,556) (44,556)
------ -------- --------
BALANCE, MAY 8, 1998 (UNAUDITED) $1,000 $245,638 $246,638
====== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-74
<PAGE> 115
ELDREDGE WASTEWATER MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 NINE-MONTH PERIOD FROM
----------------------------------- PERIOD ENDED JANUARY 1, 1998
1995 1996 1997 SEPTEMBER 30, 1997 TO MAY 8, 1998
--------- --------- --------- ------------------ ---------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (32,005) $ (70,042) $ (51,230) $ (59,115) $ (44,556)
--------- --------- --------- --------- ---------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 177,427 176,250 192,534 142,979 68,311
Deferred income taxes (11,539) (17,234) (12,947) (13,070) 17,355
Changes in assets and liabilities:
Accounts receivable 23,302 (39,202) (3,976) (2,741) (3,956)
Related-party receivable (401,156) 227,250 (31,236) (26,292) 72,159
Prepaid expenses and other (4,971) 25,550 (411) 1,626 3,774
Accounts payable (127,814) (43,273) 28,449 25,527 35,601
Accrued expenses 6,126 20,444 5,380 10,383 10,553
--------- --------- --------- --------- ---------
Total adjustments (338,625) 349,785 177,793 138,412 203,797
--------- --------- --------- --------- ---------
Net cash (used in) provided by
operating activities (370,630) 279,743 126,563 79,297 159,241
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (49,806) (72,516) (297,361) (205,063) (35,297)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 414,522 0 197,901 182,235 0
Repayments of long-term debt (91,397) (156,754) (85,257) (80,817) (39,733)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities 323,125 (156,754) 112,644 101,418 (39,733)
--------- --------- --------- --------- ---------
NET CHANGE IN CASH AND CASH
EQUIVALENTS (97,311) 50,473 (58,154) (24,348) 84,211
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 125,967 28,656 79,129 79,129 20,975
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 28,656 $ 79,129 $ 20,975 $ 54,781 $ 105,186
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 10,562 $ 33,466 $ 37,146 $ 33,674 $ 10,212
========= ========= ========= ========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment financed under capital lease
obligation $ 0 $ 0 $ 35,000 $ 35,000 $ 0
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-75
<PAGE> 116
ELDREDGE WASTEWATER MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
Eldredge Wastewater Management, Inc. (the "Company"), a Pennsylvania
corporation, is engaged in the design, construction, repair, and
maintenance of on-site sewage disposal systems. The Company's services are
sold to customers located primarily in the Delaware Valley of Southeastern
Pennsylvania. The Company is a wholly owned subsidiary of The Eldredge
Companies, Inc. ("The Eldredge Companies").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with purchased
maturities of three months or less at the date of purchase to be cash
equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over
estimated useful lives of five to ten years using the straight-line
method.
At December 31, 1996 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Property and equipment $ 1,925,838 $ 2,258,199
Less accumulated depreciation (1,640,039) (1,832,573)
----------- -----------
$ 285,799 $ 425,626
=========== ===========
</TABLE>
The Company periodically reviews the values assigned to property and
equipment to determine whether any impairments are other than temporary.
The Company assesses impairment by determining whether the carrying value
of such long-lived assets will be recovered through undiscounted expected
future cash flows. No impairment losses have been recorded in the
accompanying results of operations.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
F-76
<PAGE> 117
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 and
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements for the nine-month period ended
September 30, 1997 and for the period from January 1, 1998 to May 8, 1998
are unaudited. In the opinion of the management of the Company, these
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
statements. The results of operations for the period from January 1, 1998
to May 8, 1998, are not necessarily indicative of the future results of
the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 is designed to improve the reporting
of changes in equity from period to period. The Company currently has no
other comprehensive income items as defined by SFAS No. 130.
3. INCOME TAXES
The benefit from income taxes is summarized as follows for the years ended
December 31, 1995, 1996, and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current $ 1,483 $ (734) $ (5,010)
Deferred (11,539) (17,234) (12,947)
-------- -------- --------
$(10,056) $(17,968) $(17,957)
======== ======== ========
</TABLE>
Significant components of the Company's deferred income tax liability as
of December 31, 1996 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred income tax liability:
Property and equipment $18,361 $ 5,391
Other 4,512 4,535
------- -------
$22,873 $ 9,926
======= =======
</TABLE>
The operations of the Company are included in the consolidated federal
income tax return of The Eldredge Companies. All tax amounts above as well
as tax amounts included in the accompanying financial statements have been
reflected as if the Company filed separate state and federal tax returns.
F-77
<PAGE> 118
4. LONG-TERM DEBT
At December 31, 1996 and 1997, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Note payable to bank, interest at 9.75%, principal and interest
payable in monthly installments through September 1, 2001;
secured by substantially all property and equipment acquired
prior to April 1995 $ 258,499 $ 235,609
Equipment loans and capital lease obligation, interest at
varying rates between 7.75% and 10.75%, interest and principal
due in monthly installments through 2000; secured by related
equipment 35,665 173,948
Note payable to officer, interest at 12.5%, principal
and interest payable in monthly installments through
March 1, 2000; unsecured 0 32,251
--------- ---------
294,164 441,808
Less current portion (179,023) (119,461)
--------- ---------
$ 115,141 $ 322,347
========= =========
</TABLE>
Future aggregate annual maturities of long-term debt are as follows as of
December 31, 1997:
<TABLE>
<S> <C> <C>
1998 $119,461
1999 131,187
2000 127,197
2001 61,394
2001 2,569
--------
$441,808
========
</TABLE>
In May 1998, in conjunction with the sale of the business (Note 7), all
related long-term debt was paid in full.
F-78
<PAGE> 119
5. COMMITMENTS AND CONTINGENCIES
BENEFIT PLAN
The Company maintains a 401(k) plan for employees. The Company makes a
discretionary profit-sharing contribution to the plan based on estimated
company profitability. Company contributions for the years ended December
31, 1995, 1996, and 1997 were $0, $10,000, and $6,000, respectively.
ENVIRONMENTAL AND LEGAL MATTERS
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the
ultimate resolution of any such matters should not have a material adverse
effect on the Company's financial position or results of operations.
6. RELATED-PARTY TRANSACTIONS
The Company makes periodic cash transfers to (from) The Eldredge Companies
and its subsidiaries based on available cash. Additionally, the Company
receives certain administration services from its parent company, The
Eldredge Companies. Allocations of parent company direct costs related to
these services, totaled $189,188, $207,727, and $158,929 for the years
ended December 31, 1995, 1996, and 1997, respectively. These allocations
are included in general and administrative expense in the accompanying
statements of operations. The Company also receives certain management
services from other wholly owned subsidiaries of The Eldredge Companies.
Management fees, which are reflected in general and administrative expense
in the accompanying statements of operations, totaled $296,100, $247,392,
and $220,913 for the years ended December 31, 1995, 1996, and 1997,
respectively. The stockholders of The Eldredge Companies also served as
key officers of the Company during 1995, 1996, and 1997. Compensation paid
to one of these officers totaled $108,109, $104,067, and $103,879 for
1995, 1996, and 1997, respectively, and is included in general and
administrative expense in the accompanying statements of operations.
The Company leases its office space and equipment storage facilities from
a partnership owned by the stockholders of The Eldredge Companies. Rental
expense during the years ended December 31, 1995, 1996, and 1997 was
$21,400, $22,740, and $22,320, respectively.
The Company purchases certain equipment improvements from a wholly owned
subsidiary of The Eldredge Companies. These improvements relate primarily
to the Company's fleet of septic waste tanker trucks. For the years ended
December 31, 1995, 1996, and 1997, these equipment purchases totaled
$30,760, $4,174, and $123,218, respectively. In addition, this sister
company performs substantially all of the repair and maintenance services
on the company vehicles. For the years ended December 31, 1995, 1996, and
1997, these services totaled $159,273, $176,247, and $192,034,
respectively, and are reflected in cost of operations in the accompanying
statements of operations.
F-79
<PAGE> 120
7. SUBSEQUENT EVENT
On May 8, 1998, substantially all property and equipment and the ongoing
business of the Company was sold to EarthCare Company ("EarthCare") for
$2,040,000 in cash and 85,000 shares of EarthCare common stock. Contingent
consideration of $360,000 in cash and 15,000 shares of EarthCare common
stock is receivable 13 months after the date of purchase, net of offsets
for losses, as defined in the purchase agreement. Prior to the closing,
all outstanding long-term debt was paid in full to convey the assets free
and clear of all encumbrances and liens.
F-80
<PAGE> 121
<TABLE>
<CAPTION>
- ---------------------------------------------------- --------------------------------------------
<S> <C> <C>
NO DEALER, SALESPERSON OR OTHER PERSON HAS EarthCare
BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO Company
MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN
ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY 8,026,979 SHARES
SALE MADE HEREUNDER SHALL, UNDER ANY COMMON STOCK
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE ($.0001 PAR VALUE)
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE SUCH DATE.
-----------------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY...................................................
RISK FACTORS.........................................................
USE OF PROCEEDS......................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION.......................
BUSINESS............................................................. PROSPECTUS
MANAGEMENT...........................................................
CERTAIN TRANSACTIONS.................................................
PRINCIPAL AND SELLING STOCKHOLDERS...................................
DESCRIPTION OF SECURITIES ...........................................
PLAN OF DISTRIBUTION ................................................
LEGAL MATTERS........................................................
EXPERTS..............................................................
ADDITIONAL INFORMATION...............................................
---------------
------------------------------------------------------------- --------------------------------------------
</TABLE>
<PAGE> 122
[ALTERNATE COVER PAGE FOR SHELF PROSPECTUS]
PROSPECTUS DATED DECEMBER 9, 1998
5,000,000
EARTHCARE COMPANY
COMMON STOCK
(PAR VALUE $0.0001 PER SHARE)
---------------------
The 5,000,000 shares of common stock, $.0001 par value per share
(the "Common Stock"), covered by this Prospectus (the "Shares") may be issued by
EarthCare Company, formerly known as SanTi Group, Inc. (the "Company"), from
time to time in payment (or partial payment) of the purchase price for one or
more acquisitions of companies, business or assets complementary to the
Company's existing business. As of the date of this Prospectus, the Company has
not definitively identified any acquisition in which it may issue shares of
Common Stock covered by this Prospectus. At such time as the Company identifies
a specific acquisition in which such Shares will be issued, the Company will
amend or supplement this Prospectus and the Registration Statement of which this
Prospectus is a part to add information about the acquisition and the company,
business or assets being acquired if and to the extent required by applicable
rules and policies of the Securities and Exchange Commission (the "Commission").
This Prospectus also relates to the offer for sale or other
distribution of the Shares by persons (the "Selling Stockholders") who will
acquire such Shares in the acquisitions of such companies, businesses or assets.
Such Shares may be sold or distributed from time to time by or for the account
of the Selling Stockholders through underwriters or dealers, through brokers or
other agents, or directly to one or more purchasers, at market prices prevailing
at the time of sale or at prices otherwise negotiated. This Prospectus also may
be used, with the Company's prior consent, by donees of the Selling
Stockholders, or by other persons acquiring Shares and who wish to offer and
sell such Shares under circumstances requiring or making desirable its use. The
Company will receive no portion of the proceeds from the sale of the Shares
offered hereby and will bear certain expenses incident to their registration.
See "Selling Stockholders" and "Plan of Distribution."
It is expected that the terms of the acquisitions involving the
issuance of securities covered by this Prospectus will be determined by direct
negotiations with the owners or controlling persons of the businesses or assets
to be merged with or acquired by the Company. No underwriting discounts or
commissions will be paid, although finder's fees may be paid from time to time
with respect to specific mergers or acquisitions. Any person receiving any such
fees may be deemed to be an underwriter within the meaning of the Securities Act
of 1933, as amended (the "Securities Act").
The Common Stock is traded on the Nasdaq OTC Bulletin Board under
the symbol "ECUS". At November 23, 1998, the Company had 9,561,434 shares of
Common Stock outstanding. On November 23, 1998, the last reported sale price of
the approximately 1,434,133 shares of Common Stock subject to trading on the
Nasdaq OTC Bulletin Board (of which 3,100 shares traded) was $15.50 per share.
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN FACTORS RELATING TO AN
INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
A-1
<PAGE> 123
THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED
PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
A-2
<PAGE> 124
[ALTERNATE PAGE FOR SHELF PROSPECTUS]
PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the beneficial
ownership of the Common Stock as of November 23, 1998 by (i) each named
executive officer, (ii) each of the Company's directors, (iii) all executive
officers and directors as a group, and (iv) each person who beneficially owns
more than 5% of the Common Stock:
<TABLE>
<CAPTION>
Shares Beneficially Owned(1)
----------------------------
Name Number Percent
- ---- ------ -------
<S> <C> <C>
Raymond M. Cash (2) 3,642,500 38%
Cash Family Limited Partnership (3) 1,658,750 18%
Donald F. Moorehead, Jr. (4) 1,118,000 12%
Terry W. Patrick (5) 320,000 3%
James E. Farrell 0 *
Kenneth R. Peak 0 *
Elroy "Gene" Roelke (6) 50,000 *
William P. Hulligan 100,000 1%
All directors and executive officers as 5,230,000 54%
a group (7 persons)
</TABLE>
* Less than one percent.
(1) Includes shares of Common Stock that may be acquired upon the exercise of
stock options exercisable within 60 days. Each person named above has sole
voting and dispositive power with respect to the all shares listed opposite such
person's name, unless indicated otherwise. Unless otherwise indicated, each
stockholder's address is 14901 Quorum Drive, Suite 200, Dallas, Texas 75240.
(2) These shares are held in a voting trust of which Mr. Cash is trustee and has
sole voting power. Includes 1,251,534 shares held by Mr. Cash and 1,658,750
shares held by the Cash Family Limited Partnership which is controlled by an
entity controlled by Mr. Cash. Does not include 139,050 shares held by Mr.
Cash's wife, for which shares Mr. Cash disclaims beneficial ownership.
(3) Does not include 1,251,534 shares held by Mr. Cash or 732,216 shares held
in a voting trust of which Mr. Cash is trustee and has sole voting power.
(4) Includes 210,000 shares held by Moorehead Property Company Ltd., a company
controlled by Mr. Moorehead.
(5) Includes 320,000 shares held by Beacon Holdings Limited, a family limited
partnership of which Mr. Patrick is a general partner.
(6) Includes warrants to acquire 25,000 shares of Common Stock which are
exercisable within 60 days.
A-3
<PAGE> 125
[ALTERNATE PAGE FOR SHELF PROSPECTUS]
SELLING SHAREHOLDERS
This Prospectus relates to an aggregate of 5,000,000 shares of
Common Stock which may be offered for sale by the Company from time to time to
acquire one or more companies, businesses or assets in negotiated transactions
not involving any public offering. This Prospectus will be supplemented to
furnish the information necessary for the particular negotiated transaction and
the Registration Statement of which this Prospectus is a part will be amended,
where appropriate, to supply information concerning an acquisition if required
by Commission rules and policies. This Prospectus also relates to the offer for
sale or other distribution of Shares by persons who will acquire such shares in
connection with the acquisitions of businesses. Such Selling Stockholders will
be identified from time to time by filing supplements to this Prospectus.
A-4
<PAGE> 126
[ALTERNATE PAGE FOR SHELF PROSPECTUS]
PLAN OF DISTRIBUTION
Issuance of Shares by the Company
The Shares covered by this Prospectus may be issued by the Company
from time to time in payment of all or a portion the purchase price for one or
more acquisitions of companies, businesses or assets complementary to the
Company's existing business. The Company expects that the terms of acquisitions
in which the Shares will be issued by the Company will be determined by
negotiations between the Company and the owners of the companies, businesses or
assets to be acquired. It is anticipated that the Shares issued in any such
acquisition will be valued for purposes of such acquisition at a price
reasonably related to the market value of the Common Stock either at the time of
the execution of the definitive acquisition agreement or at the time of the
consummation of the acquisition.
As of the date of this Prospectus, the Company has not
definitively identified any acquisition in which it may issues Shares. At such
time as the Company identifies a specific acquisition in which Shares will be
issued, the Company will amend or supplement this Prospectus to add information
about the acquisition and the companies, businesses or assets being acquired if
and to the extent required by the applicable rules and policies of the
Commission.
No underwriting discounts or commissions will be paid in
connection with any acquisition contemplated hereby, although finder's fees may
be paid from time to time with respect to specific mergers or acquisitions. Any
persons receiving such fees may be deemed to be an underwriter within the
meaning of the Securities Act.
RESALE OF SHARES BY SELLING STOCKHOLDERS
This Prospectus also relates to the offer for sale or other
distribution of Shares by the Selling Stockholders who will acquire such shares
in the acquisitions of such companies, businesses or assets. The Selling
Stockholders may sell or distribute some or all of the Shares from time to time
through underwriters or dealers or brokers or other agents or directly to one or
more purchasers in transactions on any exchange on which such Shares are listed
for trading, in privately negotiated transactions, or in the over-the-counter
market, or in brokerage transactions, or in a combination of such transactions.
Such transactions may be effected by the Selling Stockholders at market prices,
at negotiated prices, or at fixed prices, which may be changed. Brokers,
dealers, agents or underwriters participating in such transactions as agent may
receive compensation in the form of discounts, concessions from the Selling
Stockholders (and, if they act as agent for the purchaser of such shares, from
such purchaser). Such discounts, concessions or commissions as to a particular
broker, dealer, agent or underwriter might be in excess of those customary in
the type of transaction involved. This Prospectus also may be used, with the
Company's consent, by donees of the Selling Stockholder, or by other persons
acquiring Shares and who wish to offer and sell such Shares under circumstances
requiring or making desirable its use. To the extent required, the Company will
file, during any period in which offers or sales are being made, one or more
supplements to this Prospectus to set forth the names of Selling Stockholders
and any other material information with respect to the plan of distribution not
previously disclosed.
The Selling Stockholders and any such underwriters, brokers,
dealers or agents that participate in such distribution may be deemed to be
"underwriters" within the meaning of the Securities Act, and any discounts,
commissions or concessions received by any such underwriters, brokers, dealers
or agents might be deemed to be underwriting discounts and commissions under the
Securities Act.
A-5
<PAGE> 127
<TABLE>
<CAPTION>
[Alternate Page For Shelf Prospectus]
- ---------------------------------------------------- --------------------------------------------
<S> <C> <C>
NO DEALER, SALESPERSON OR OTHER PERSON HAS EARTHCARE COMPANY
BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN
ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY 5,000,000 SHARES
SALE MADE HEREUNDER SHALL, UNDER ANY COMMON STOCK
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE ($.0001 PAR VALUE)
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE SUCH DATE.
-----------------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY...................................................
RISK FACTORS.........................................................
USE OF PROCEEDS......................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION.......................
BUSINESS............................................................. PROSPECTUS
MANAGEMENT...........................................................
CERTAIN TRANSACTIONS.................................................
PRINCIPAL AND SELLING STOCKHOLDERS...................................
DESCRIPTION OF SECURITIES ...........................................
PLAN OF DISTRIBUTION ................................................
LEGAL MATTERS........................................................
EXPERTS..............................................................
ADDITIONAL INFORMATION...............................................
---------------
------------------------------------------------------------- --------------------------------------------
</TABLE>
<PAGE> 128
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth an itemized statement of certain estimated
expenses incurred in connection with the issuance and distribution of the
securities being registered, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............................................. $82,204
Printing and engraving expenses................................................................. 20,000
Legal fees and expenses......................................................................... 40,000
Accounting fees and expenses.................................................................... 50,000
Registrar and Transfer Agent's fees and expenses................................................ 0
Miscellaneous................................................................................... 0
Total............................................. $
==========
192,204
</TABLE>
- ----------
All amounts except the Securities and Exchange Commission registration fee
are estimated. The Company intends to pay all expenses of registration with
respect to shares being sold by the Selling Stockholders hereunder, with the
exception of underwriting discounts and commissions.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that no director of the
corporation shall be personally liable to EarthCare or its stockholders for
monetary damages for breach of fiduciary duty as a director except for
liability: (i) for any breach of the director's duty of loyalty to EarthCare or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the General Corporation Law of the State of Delaware (or the corresponding
provision of any successor law or act), and (iv) for any transaction from which
the director derived an improper personal benefit.
EarthCare must indemnify, and upon request will advance expenses to any
officer or director who was or is a party to, or is threatened to be made a
party to, any threatened, pending or completed action, suit or proceeding,
including civil, criminal, administrative, investigative or otherwise, by reason
of the fact that such person is or was a director or officer of EarthCare, or is
or was acting at the request of EarthCare as a director, officer, partner,
trustee, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise. This indemnification will not
apply if the indemnitee is adjudged liable to EarthCare, unless and only if the
court in which the action is brought determines the indemnitee is fairly and
reasonably entitled to indemnification by EarthCare.
EarthCare may also purchase and maintain insurance on the behalf of its
directors and officers against any such liability that may be asserted as a
result of the director's or officer's service in such a capacity.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On March 19, 1997, Raymond Cash and Joyce Bone purchased a total of 16,250
shares of Common Stock (reflecting the Bone-Dry exchange and the Stock Dividend)
for $10,000. The proceeds from this sale were used to fund working capital.
On August 19, 1997, Raymond Cash purchased 1,625,000 of Common Stock for
$130,000. The proceeds from this purchase were used to acquire new service
providers and fund working capital needs of the Company.
II-1
<PAGE> 129
On December 1, 1997, the Cash Family Limited Partnership purchased
1,608,750 shares of Common Stock (reflecting the Bone-Dry exchange and the Stock
Dividend) for $650,000. The Cash Family Limited Partnership is controlled by an
entity controlled by Raymond Cash. The proceeds from this sale were used to
acquire new service providers.
On December 22, 1997, 14,479 shares of Common Stock were issued to Andrews
in exchange for the settlement of a note payable in the amount of $263,663.
On December 22, 1997, 21,400 shares were issued as consideration for
$17,120 of the acquisition price of Andrews.
On January 12, 1998, the Company sold 1,250,000 shares of Common Stock for
$1,000,000. The proceeds were used to acquire new service providers and fund
working capital needs of the Company.
On January 22, 1998, 90,000 shares of Common Stock were issued as
consideration for $72,000 of the acquisition price of Ferrero.
On February 13, 1998, 100,000 shares of Common Stock were issued as
consideration for $100,000 of the acquisition price of A Rapid.
On March 6, 1998, 60,000 shares of Common Stock were issued as
consideration for $60,000 of the acquisition price of Seagraves.
On April 2, 1998, the Company sold 2,000,000 shares of Common Stock for
$11,600,000. The proceeds raised by this private offering was used to acquire
new service providers and fund working capital needs of the Company.
On May 1, 1998, 105,000 shares of Common Stock were issued as consideration
for $609,000 of the acquisition price of RGM.
On May 4, 1998, the Company sold 500,000 shares of Common Stock for
$2,900,000. The proceeds raised by this private offering were used to acquire
new service providers and fund working capital needs of the Company.
On May 8, 1998, 85,000 shares of Common Stock were issued as consideration
for $493,000 of the acquisition price of Eldredge.
All of these shares of Common Stock were issued pursuant to Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act") in private
transactions not involving a public offering. These shares are subject to
restrictions on transferability and resale except as permitted under the
Securities Act and applicable state securities laws.
II-2
<PAGE> 130
ITEM 16. Exhibits and Financial Statement Schedules
(a) Exhibits (see Exhibit Index immediately preceding the exhibits for the
page number where each exhibit can be found):
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------ -----------------------
<S> <C>
2.0 Merger Agreement by and between Microlytics, Inc. and SanTi Group, Inc., dated March 6, 1998*
3.1 Certificate of Incorporation of the Company dated May 13, 1998*
3.2 Bylaws of the Company.*
4.1 Article IV of Registrant's Certificate of Incorporation
4.2 Article VI of Registrant's Certificate of Incorporation
5.1 Form of Opinion of King & Spalding*
9.1 Voting Trust Agreement*
10.1 Credit Agreement dated June 26, 1998 between SanTi Group, Inc., various financial institutions and
Bank of America National Trust Association as Agent*
10.2 Company Pledge Agreement dated as of June 26, 1998, between SanTi Group, Inc., and Bank of
America National Trust Association as Agent*
10.3 Security Agreement dated as of June 26, 1998, among SanTi, Inc., each subsidiary of SanTi Group,
Inc. and Bank of America National Trust Association as Agent*
10.4 Asset Purchase Agreement dated as of January 22, 1998 by and between SanTi Group of
Pennsylvania, Ferrero Wastewater Management, Inc., A. Thomas Ferrero, Jr. and A. Thomas Ferrero,
III*
10.5 Asset Purchase Agreement dated as of December 22, 1997 by and between Bone-Dry Enterprises,
Inc. Andrews Environmental Services, Inc. and W. Ronald Andrews*
10.6 Asset Purchase Agreement dated as of February 13, 1998 by and between SanTi Group of Florida,
Inc., A Rapid Rooter Sewer & Drain Service, Inc., William E. Rice, Joan E. Rice, Alfonse J.
Grunskis, Diane Rice Grunskis, Donald E. Rice and Ruth Ann Rice*
10.7 Asset Purchase Agreement dated as of February 17, 1998 by and between Bone-Dry Enterprises, Inc.,
Quality Plumbing & Septic, Ronda R. McMichael and Forney L. McMichael*
10.8 Asset Purchase Agreement dated as of March 6, 1998 by and between SanTi Group of Florida, Inc.
Seagraves, Inc., William D. Seagraves, Seaburn Seagraves and Angelina Seagraves*
10.9 Asset Purchase Agreement dated as of March 6, 1998 by and between SanTi Group of Florida, Inc.,
Grease-Tec, Inc., William D. Seagraves, Seaburn Seagraves and Angelina Seagraves*
10.10 Asset Purchase Agreement dated as of April 30, 1998 by and between SanTi Group of New York,
Inc., RGM Liquid Waste Removal Corporation, and Ralph G. Macchio*
10.11 Asset Purchase Agreement dated as of April 30, 1998 by and between SanTi Group of New York,
Inc., Devito Environmental Corporation, and Rosalie Macchio*
10.12 Asset Purchase Agreement dated as of April 30, 1998 by and between SanTi Group of New York,
Inc., Advanced Transfer Technology, Inc., and Steve Macchio*
</TABLE>
II-3
<PAGE> 131
<TABLE>
<S> <C>
10.13 Asset Purchase Agreement dated as of April 30, 1998 by and between SanTi Group of New York,
Inc., Envirotec Leasing and Rental Corporation, and Steve Macchio*
10.14 Asset Purchase Agreement dated as of May 8, 1998 by and between SanTi Group of Pennsylvania,
Inc., Eldredge Wastewater Management, Inc., Robert Eldredge, Curtis Eldredge, and John
Eldredge.*
10.15 Contract for Purchase and Sale of Certain Assets of Andrews Environmental Services, Inc. dated
March 20, 1997 among and between Bone-Dry Enterprises, Inc. and Andrews Environmental
Services, Inc.*
10.16 Employment Agreement between EarthCare Company and Terry Patrick dated June 1, 1998.*
10.17 Form of Lock-Up Agreement*
10.18 Employment Agreement between EarthCare Company and James E. Farrell dated October 9, 1998.*
21.0 Subsidiaries of EarthCare Company.*
23.1 Consent of King & Spalding (included in the opinion at Exhibit 5.1)*
23.2 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (for SEC use only)*
27.2 Financial Data Schedule (for SEC use only)*
</TABLE>
- ----------
* Previously filed.
(b) Financial Statement Schedules follow the signature page and are as follows:
Schedule II - Valuation and Qualifying Accounts for Andrews
Environmental Services, Inc.
Schedule II - Valuation and Qualifying Accounts for EarthCare Company
ITEM 17. Undertakings
Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a) (3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the
II-4
<PAGE> 132
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 133
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on December 4, 1998.
EARTHCARE COMPANY
By: /s/ Terry W. Patrick
-------------------------------------
President and Chief Operating Officer
Pursuant to the requirements of the Securities Act, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
* Chairman, Chief Executive Officer
- ---------------------------------- (Principal Executive Officer) and December 4, 1998
Donald F. Moorehead, Jr. Director
* Vice Chairman and Director December 4, 1998
- ----------------------------------
Raymond M. Cash
/s/ Terry W. Patrick President, Chief Operating Officer and December 4, 1998
- ---------------------------------- Director
Terry W. Patrick
/s/ Kenneth R. Peak Director December 4, 1998
- ----------------------------------
Kenneth R. Peak
Vice President and Chief Financial
/s/ James E. Farrell Officer December 4, 1998
- ---------------------------------- (Principal Financial and Principal
James E. Farrell Accounting Officer)
* Director December 4, 1998
- ----------------------------------
William P. Hulligan
* Director December 4, 1998
- ----------------------------------
Elroy Roelke
*By: /s/ Kenneth R. Peak
------------------------------
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 134
ANDREWS ENVIRONMENTAL SERVICES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND FOR
THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 21, 1997
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance
Beginning Costs and Other at End of
of Period Expenses Accounts Deductions* Period
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful accounts $ 0 $23,234 $ 0 $ (3,066) $20,168
YEAR ENDED DCEMBER 31, 1996:
Allowance for doubtful accounts 20,168 5,630 0 (16,498) 9,300
PERIOD FROM JANUARY 1, 1997
TO DECEMBER 21, 1997:
Allowance for doubtful accounts 9,300 26,828 0 (25,023) 11,105
</TABLE>
*Deductions represent the write-off of uncollectible receivables,
net of recoveries.
S-1
<PAGE> 135
SANTI GROUP, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD FROM INCEPTION (MARCH 19, 1997) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS* PERIOD
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $0 $17,875 $0 $0 $17,875
</TABLE>
* Deductions represent the write-off of uncollectible receivables, net of
recoveries.
S-2
<PAGE> 136
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------ -----------------------
<S> <C>
2.0 Merger Agreement by and between Microlytics, Inc. and SanTi Group, Inc., dated March 6, 1998*
3.1 Certificate of Incorporation of the Company dated May 13, 1998*
3.2 Bylaws of the Company.*
4.1 Article IV of Registrant's Certificate of Incorporation
4.2 Article VI of Registrant's Certificate of Incorporation
5.1 Form of Opinion of King & Spalding*
9.1 Voting Trust Agreement*
10.1 Credit Agreement dated June 26, 1998 between SanTi Group, Inc., various financial institutions
and Bank of America National Trust Association as Agent*
10.2 Company Pledge Agreement dated as of June 26, 1998, between SanTi Group, Inc., and Bank of
America National Trust Association as Agent*
10.3 Security Agreement dated as of June 26, 1998, among SanTi, Inc., each subsidiary of SanTi
Group, Inc. and Bank of America National Trust Association as Agent*
10.4 Asset Purchase Agreement dated as of January 22, 1998 by and between SanTi Group of
Pennsylvania, Ferrero Wastewater Management, Inc., A. Thomas Ferrero, Jr. and A. Thomas
Ferrero, III*
10.5 Asset Purchase Agreement dated as of December 22, 1997 by and between Bone-Dry Enterprises,
Inc. Andrews Environmental Services, Inc. and W. Ronald Andrews*
10.6 Asset Purchase Agreement dated as of February 13, 1998 by and between SanTi Group of
Florida, Inc., A Rapid Rooter Sewer & Drain Service, Inc., William E. Rice, Joan E. Rice,
Alfonse J. Grunskis, Diane Rice Grunskis, Donald E. Rice and Ruth Ann Rice*
10.7 Asset Purchase Agreement dated as of February 17, 1998 by and between Bone-Dry Enterprises,
Inc., Quality Plumbing & Septic, Ronda R. McMichael and Forney L. McMichael*
10.8 Asset Purchase Agreement dated as of March 6, 1998 by and between SanTi Group of Florida,
Inc. Seagraves, Inc., William D. Seagraves, Seaburn Seagraves and Angelina Seagraves*
10.9 Asset Purchase Agreement dated as of March 6, 1998 by and between SanTi Group of Florida,
Inc., Grease-Tec, Inc., William D. Seagraves, Seaburn Seagraves and Angelina Seagraves*
10.10 Asset Purchase Agreement dated as of April 30, 1998 by and between SanTi Group of New York,
Inc., RGM Liquid Waste Removal Corporation, and Ralph G. Macchio*
10.11 Asset Purchase Agreement dated as of April 30, 1998 by and between SanTi Group of New York,
Inc., Devito Environmental Corporation, and Rosalie Macchio*
10.12 Asset Purchase Agreement dated as of April 30, 1998 by and between SanTi Group of New York,
Inc., Advanced Transfer Technology, Inc., and Steve Macchio*
10.13 Asset Purchase Agreement dated as of April 30, 1998 by and between SanTi Group of New York,
Inc., Envirotec Leasing and Rental Corporation, and Steve Macchio*
</TABLE>
E-1
<PAGE> 137
<TABLE>
<S> <C>
10.14 Asset Purchase Agreement dated as of May 8, 1998 by and between SanTi Group of
Pennsylvania, Inc., Eldredge Wastewater Management, Inc., Robert Eldredge, Curtis Eldredge,
and John Eldredge.*
10.15 Contract for Purchase and Sale of Certain Assets of Andrews Environmental Services, Inc. dated
March 20, 1997 among and between Bone-Dry Enterprises, Inc. and Andrews Environmental
Services, Inc.*
10.16 Employment Agreement between EarthCare Company and Terry Patrick dated June 1, 1998.*
10.17 Form of Lock-Up Agreement*
10.18 Employment Agreement between EarthCare Company and James E. Farrell dated October 9, 1998.*
21.0 Subsidiaries of EarthCare Company.*
23.1 Consent of King & Spalding (included in the opinion at Exhibit 5.1)*
23.2 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (for SEC use only)*
27.2 Financial Data Schedule (for SEC use only)*
</TABLE>
*Previously filed.
E-2
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
December 7, 1998