<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ ---------------
Commission File Number: 000-24685
EarthCare Company
(Exact name of registrant as specified in its charter)
Delaware 58-2335973
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14901 Quorum Drive, Suite 200 75240
Dallas, Texas (Zip Code)
(Address of principal executive offices)
(972) 858-6025
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ ] Yes [X] No
The number of outstanding shares of the registrant's common stock, par value
$.0001 per share, was 9,538,870 on November 6, 1998.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes No X
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EarthCare Company and Subsidiaries
TABLE OF CONTENTS
PART I Item 1. FINANCIAL STATEMENTS Page
----
Condensed Consolidated Balance Sheets - December 31,
1997 and September 30, 1998 (unaudited) 1
Unaudited Condensed Consolidated Statements of
Operations - Three months and nine months ended
September 30, 1997 and September 30, 1998 2
Unaudited Condensed Consolidated Statements of Cash
Flows - Nine months ended September 30, 1997 and Nine
months ended September 30, 1998 3
Notes to Unaudited Condensed Consolidated Financial
Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submissions of Matters to a Vote of
Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
i
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FORWARD-LOOKING STATEMENTS
Statements contained in this report, which are not historical in
nature, are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements include, without
limitation, the statements regarding efforts to determine Year 2000 exposure and
the costs to bring the Company into Year 2000 compliance. Such forward-looking
statements include uncertainties and risks that could cause actual results to
differ materially from those documented in this report. These risks include the
Company's ability to grow through the acquisition and development of
non-hazardous liquid waste ("NLW") companies and the acquisition of ancillary
businesses; the Company's ability to identify and acquire at a reasonable cost
suitable acquisition candidates or to profitably operate or successfully
integrate acquired operations into the Company's other operations; the Company's
ability to minimize any potential liabilities, including environmental
liabilities, resulting from the acquisition of NLW service providers or to
obtain adequate insurance; the Company's ability to manage its growth and access
to capital; the Company's ability to comply with existing and future rules and
regulations of various federal, state and local governmental agencies; the
Company's ability to compete with other NLW service providers; changes in
general economic conditions that may affect the demand for the Company's
services; and other factors as may be identified from time to time in future
filings with the Securities and Exchange Commission or in other public
announcements, including those set forth on Exhibit 99.1 to this report. The
words "believe," "expect," "anticipate," "plan," and "intend" and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date such statements are made.
ii
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EARTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31, 1997 September 30, 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 --
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 taxes 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 --
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
----------- ------------
Stockholders' Equity:
Common stock, $.0001 par value: 70,000,000
shares authorized, 4,312,946 and 9,536,327
shares issued and outstanding in 1997 and
1998, respectively 432 953
Additional paid-in capital 1,070,373 20,316,427
Accumulated deficit (258,352) (1,778,866)
----------- ------------
Total stockholders' equity 812,453 18,538,514
----------- ------------
$ 2,614,143 $ 32,947,128
=========== ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
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EARTHCARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------ ------------------------------
1997 1998 1997 1998
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Revenue $ 234,107 $ 8,273,534 $ 479,249 $ 18,221,028
Expenses
Cost of Operations 93,623 5,723,970 178,680 12,984,116
Selling, General and Administrative Expense 83,233 1,894,944 149,865 5,651,192
Depreciation and Amortization 40,242 436,020 91,848 953,924
---------- ----------- ----------- ------------
Income (Loss) from Operations 17,009 218,600 58,866 (1,368,204)
Other Expense (Income)
Interest 7,875 180,727 50,817 454,769
Other -- 2,103 -- 2,103
---------- ----------- ----------- ------------
Income (Loss) Before Taxes 9,134 35,770 8,049 (1,825,076)
Provision (Benefit) for Taxes 1,501 13,974 1,078 (304,562)
---------- ----------- ----------- ------------
Net Income (Loss) $ 7,633 $ 21,796 $ 6,971 $ (1,520,514)
========== =========== =========== ============
Net Income (Loss) per Share
Basic $ 0.00 $ 0.00 $ 0.01 $ (0.19)
Diluted $ 0.00 $ 0.00 $ 0.01 $ (0.19)
Weighted Average Shares Outstanding
Basic 1,661,523 9,491,066 1,336,486 8,047,383
========== =========== ========== ===========
Diluted 1,661,523 9,932,957 1,336,486 8,047,383
========== =========== ========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
2
<PAGE> 6
EARTHCARE COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine-Month Period Ended Nine-Month Period Ended
September 30, 1997 September 30, 1998
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) $ 6,971 $ (1,520,514)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and Amortization 91,131 953,924
Changes in assets and liabilities, excluding
effect of acquired businesses:
Accounts receivable (109,301) (3,844,749)
Other current assets (73,533) (211,720)
Deferred income taxes -- (460,428)
Other assets (2,000) (1,411,574)
Accounts payable 9,922 1,500,558
Accrued expenses 10,652 1,277,848
----------- ------------
Total adjustments (73,129) (2,196,141)
Net cash used in operating activities (56,158) (3,716,655)
Cash Flows from Investing Activities:
Capital expenditures (7,417) (679,384)
Business acquisitions (835,000) (18,825,374)
----------- ------------
Net cash used in Investing activities (842,417) (19,504,758)
Cash Flows from Financing Activities:
Net borrowings (payments) under lines of credit 360,000 (1,383,958)
Net borrowings from related party 650,000 --
Refinancing of debt -- 8,475,978
Payments of long-term debt (14,254) (58,943)
Sales of common stock 10,000 15,500,000
Exercise of stock options -- 398,126
Exercise of warrants 1,856,449
----------- ------------
Net cash provided by financing activities 1,005,746 24,787,652
Net increase in cash and cash equivalents 97,171 1,566,239
Cash and Cash Equivalents, Beginning of Period 195,552
----------- ------------
Cash and Cash Equivalents, End of Period $ 97,171 $ 1,761,791
=========== ============
Supplemental Cash Flow Information
Cash paid for interest $ -- $ 271,157
=========== ============
Cash paid for income taxes $ -- $ --
=========== ============
Noncash Investing and Financing Activities:
Notes payable issued for business acquisitions $ 257,350 $ 2,000,000
=========== ============
Notes payable for noncompete agreements $ 341,130 $ 1,392,000
=========== ============
Warrant issued for debt issuance costs $ 100,000
=========== ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
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EARTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND SEPTEMBER 30, 1998 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements for EarthCare Company ("EarthCare" or the
"Company") and subsidiaries as of September 30, 1998 and for the three and nine
month periods ended September 30, 1997 and 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. Quarterly results of operations are not necessarily
indicative of the results that may be expected for the full year. These
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form 10 filed with the
Securities and Exchange Commission ("Form 10"). On September 21, 1998, the
Company's Certificate of Incorporation was amended to change the Company's name
from SanTi Group, Inc. to EarthCare Company.
2. ACQUISITIONS
During fiscal 1998, 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
EarthCare 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.
- 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
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<PAGE> 8
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.
3. SIGNIFICANT EVENTS
In addition to the acquisitions discussed in note 2, the following significant
events occurred during the nine months ended September 30, 1998:
On January 12, 1998, a group of investors purchased 1,250,000 shares
of the Company's common stock, par value $.0001 per share (the "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
Common Stock through private offerings. Proceeds from the offerings totaled
$14.5 million.
On April 30, 1998, certain employees of the Company exercised options
to purchase 612,500 shares of Common Stock at a price of $.65 per share.
On May 13, 1998, pursuant to a Plan of Reorganization approved by the
United States Bankruptcy Court, Microlytics, Inc. ("Microlytics") completed a
merger with the Company (the "Merger"). Pursuant to 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 1,027,066 shares
of common stock outstanding and outstanding warrants to purchase an additional
500,000 shares with an exercise price of $5.80 a share, 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,
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
with and 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 26, 1998, the Company entered into a $40 million revolving
credit facility with Bank of America. 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 2.25%. 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 issued Bank of America a
warrant to purchase 50,000 shares of Common Stock at $13 per share in lieu of
issuance costs. The warrant expires five years from the date of grant and was
valued at $100,000 using the Black-Scholes pricing model.
5
<PAGE> 9
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. Effective October 9, 1998, one executive officer
resigned and forfeited options to acquire 200,000 shares.
In October 1998 the Company issued stock options to certain key
employees to purchase 90,000 shares of Common Stock at $15.00 per share, which
represented the fair market value as of the dates of grant as determined by the
Company's board of directors and 90,000 shares of Common Stock at $25.00 a
share. The options are exercisable for a period of four years beginning on the
dates of grant.
6
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis is management's representation of the
financial position of the Company as of September 30, 1998 and the results of
operations of the Company for the three months and nine months ended September
30, 1997 and 1998. This discussion and analysis should be read in conjunction
with the unaudited condensed consolidated financial statements and notes
thereto, and with the Company's consolidated financial statements and notes
thereto included in the Form 10.
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.
GENERAL
The Company derives the majority of its revenues from commercial and residential
septic services (including designing, pumping, installation and maintenance)
(approximately 56% of current revenues) and to a lesser extent sewer and drain
services (approximately 18% 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.
RESULTS OF OPERATIONS
The following table sets forth operating results expressed as a percentage of
net sales for the periods indicated. All information is derived from the
accompanying unaudited condensed consolidated financial statements. Results for
any one or more periods are not necessarily indicative of annual results or
continuing trends.
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<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of operations 40.0 69.2 37.3 71.3
----- ----- ----- -----
Gross profit 60.0 30.8 62.7 28.7
Selling, General,
Administrative 35.5 22.9 31.2 31.0
Depreciation 17.2 5.3 19.2 5.2
----- ----- ----- -----
Operating income (loss) 7.3 2.6 12.3 (7.5)
Interest expense 3.4 2.2 10.6 2.5
Other income (expense) 0.0 0.0 0.0 0.0
----- ----- ----- -----
Income (loss) before income
taxes 3.9 .4 1.7 (10.0)
Provision (benefit)
for income tax .6 .1 0.2 (1.7)
----- ----- ----- -----
Net income (loss) 3.3 .3 1.5 (8.3)
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
As a result 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.
THREE MONTHS ENDED SEPTEMBER 30, 1998
NET INCOME: For the three months ended September 30, 1998, the Company reported
net income of $21,796 on revenues of $8,273,534.
REVENUES: Revenues of $8,273,534 for the three months ended September 30, 1998
consist of revenues from each of the businesses acquired in 1997 plus revenues
from businesses acquired during the first two quarters of 1998.
COST OF OPERATIONS: The operating margin for the three months ended September
30, 1998 was 30.8%.
GENERAL AND ADMINISTRATIVE: For the three months ended September 30, 1998,
general and administrative expense includes non-recurring 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 $436,020 or
5.3% of revenues for the three months ended September 30, 1998.
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INCOME FROM OPERATIONS: Income of $218,600 from operations was effected by a
high level of general and administrative expense.
INTEREST EXPENSE: Interest expense for the three months ended September 30, 1998
was $180,727. Interest was incurred at an average rate of approximately 7.3%
during the three months ended September 30, 1998.
INCOME TAX PROVISION: An income tax provision of 39% was recorded for the three
months ended September 30, 1998.
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.
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
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<PAGE> 13
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 $679,383 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.
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 first
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As of September 30, 1998, the Company did not have any pending
legal proceedings that separately or in the aggregate would be
likely to have a material adverse effect on the business or
results of operations of the Company. The Company may be in
the future, party to litigation or administrative proceedings
which arise in the normal course of its business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of
the Company's Registration Statement on Form
10 (Commission File No. 000-24685) as amended
3.2 Amended and Restated Bylaws of the Company
(incorporated by reference to Exhibit 3.2 of
the Company's Registration Statement on Form
10 (Commission File No. 000-24685) as
amended
27.1 Financial Data Schedule (For SEC use only)
99.1 Cautionary Statements
(b) Reports on Form 8-K.
None.
11
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 13, 1998 EARTHCARE COMPANY
By: /s/ Terry W. Patrick
-------------------------------------------
Terry W. Patrick, Chief Operating Officer
Date: November 13, 1998
By: /s/ James E. Farrell
-------------------------------------------
James E. Farrell, Vice President and Chief
Financial Officer
12
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of the Company's Registration
Statement on Form 10 (Commission File No. 000-24685) as
amended
3.2 Bylaws of the Company (incorporated by reference to Exhibit
3.2 of the Company's Registration Statement on Form 10
(Commission File No. 000- 24685) as amended
27.1 Financial Data Schedule (For SEC use only)
99.1 Cautionary Statements
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EARTHCARE
COMPANY FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 1,761,791 195,552
<SECURITIES> 0 0
<RECEIVABLES> 4,105,572 143,652
<ALLOWANCES> (135,046) (17,875)
<INVENTORY> 0 0
<CURRENT-ASSETS> 6,025,126 467,889
<PP&E> 6,511,831 593,416
<DEPRECIATION> (581,879) (31,874)
<TOTAL-ASSETS> 32,947,128 2,614,143
<CURRENT-LIABILITIES> 4,070,082 1,621,450
<BONDS> 0 0
0 0
0 0
<COMMON> 953 432
<OTHER-SE> 18,537,561 812,021
<TOTAL-LIABILITY-AND-EQUITY> 32,947,128 2,614,143
<SALES> 0 0
<TOTAL-REVENUES> 18,221,028 479,249
<CGS> 0 0
<TOTAL-COSTS> 12,984,116 178,680
<OTHER-EXPENSES> 6,607,219 241,703
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 454,769 50,817
<INCOME-PRETAX> (1,825,076) 8,049
<INCOME-TAX> (304,562) 1,078
<INCOME-CONTINUING> (1,520,514) 6,971
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,520,514) 6,971
<EPS-PRIMARY> (0.19) 0.01
<EPS-DILUTED> (0.19) 0.01
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q, including information set forth under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations," constitute "Forward-Looking Statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the "1933
Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the
"1934 Act"). The Company desires to take advantage of certain "safe harbor"
provisions of the 1933 Act and the 1934 Act and is including this exhibit to
enable the Company to do so. Forward-looking statements included in this Form
10-Q, or hereafter included in other publicly available documents filed with the
Securities and Exchange Commission, reports to the Company's stockholders and
other publicly available statements issued or released by the Company involve
known and unknown risks, uncertainties, and other factors which could cause the
Company's actual results, performance (financial or operating) or achievements
to differ materially from the future results, performance (financial or
operating) or achievements expressed or implied by such forward-looking
statements. The Company believes the following risks, uncertainties and other
factors could cause such material differences to occur:
1. The Company's ability to grow through the acquisition and development
of non-hazardous liquid waste companies or the acquisition of ancillary
businesses.
2. The Company's ability to identify suitable acquisition candidates or to
profitably operate or successfully integrate acquired operations into
the Company's other operations.
3. The Company's ability to acquire acquisition candidates at a reasonable
cost. The Company 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.
4. The Company's ability to minimize any potential liabilities, including
environmental liabilities, resulting from the acquisition of NLW
service providers or to obtain adequate insurance to mitigate any
potential exposure to the Company from these liabilities. The Company
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
the Company will receive full or partial compensation pursuant to its
rights to indemnification.
5. The Company's ability to manage its growth and access to capital.
6. The Company's ability to comply with existing and future 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 the Company. Changes in these laws or regulations may affect the
operations of the Company by imposing additional regulatory compliance
costs on the Company, requiring the modification of or adversely
affecting the market for the Company's non-hazardous liquid waste
("NLW") services.
7. The Company's ability to compete with other NLW service providers. The
NLW business is highly competitive and the entrance of new competitors
or the expansion of operations by existing competitors in the Company's
markets could adversely affect the Company's plans and results of
operations.
8. The development of internal methods for disposition of NLW by current
and potential customers of the Company.
14
<PAGE> 2
9. The Company's strategies, objectives, expectations and intentions are
subject to change at any time at the discretion of management and the
Board of Directors.
10. The Company's ability to attract qualified management and retain key
personnel of acquired NLW service providers.
11. Changes in general economic conditions that may affect the demand for
the Company's services.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures previously
made by the Company.
15
