<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 March 31, 2000
--------------
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 (I.R.S. Employer
of incorporation or organization) Identification Number)
14901 Quorum Drive, Suite 200 Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
(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. [X] Yes [ ] No
The number of outstanding shares of the registrant's common stock, par value
$.0001 per share, was 12,599,946 on May 15, 2000.
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 [X] No
<PAGE> 2
FORM 10-Q
INTRODUCTION
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" and in certain documents incorporated by reference herein
constitute "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 (together, the "Acts"). In addition, when used in this
Form 10-Q, the words "believes," "intends," "anticipates," "plans," "expects"
and similar expressions are intended to identify forward-looking statements. The
Company desires to take advantage of the "safe harbor" provisions of the Acts
and is including this special note 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 ("NLW") companies or the
acquisition of ancillary businesses, and to identify suitable acquisition
candidates at a reasonable cost, and to profitably operate and successfully
integrate acquired operations into the Company's other operations. 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.
2. 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 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 any compensation
pursuant to its rights to indemnification.
3. 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 NLW services.
4. 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.
5. The development of internal methods for disposition of NLW by
current and potential customers of the Company.
6. 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. In addition, approximately 44% of the Company's
outstanding common stock is held by affiliates.
7. The Company's ability to attract qualified management and retain
key personnel of acquired NLW service providers.
8. The Company's ability to secure the capital and the related costs
of such capital necessary to fund its future growth through acquisition and
development, as well as internal growth.
9. Changes in general economic conditions which may affect the demand
for the Company's liquid waste collection, processing and disposal
services.
10. Changes in weather conditions which may affect demand for the
Company's services.
11. The Company's ability to develop national and regional accounts
for our liquid waste management services and other marketing programs.
12. Change in demand for by-products we recover from certain liquid
waste streams.
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.
ii
<PAGE> 3
EarthCare Company and Subsidiaries
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheet - December 31, 1999 and March 31, 2000...1
Unaudited Consolidated Statement of Operations - Three months ended
March 31, 1999 and March 31, 2000.............................................2
Unaudited Consolidated Statement of Cash Flows - Three months ended
March 31, 1999 and March 31, 2000.............................................3
Notes to Unaudited 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 ..............................................11
Item 3. Defaults Upon Senior Securities ....................................11
Item 4. Submissions of Matters to a Vote of Security Holders ...............11
Item 5. Other Information ..................................................11
Item 6. Exhibits and Reports on Form 8-K....................................11
Signatures...................................................................12
</TABLE>
iii
<PAGE> 4
EARTHCARE COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
December 31, March 31,
1999 2000
------------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 282,003 $ 581,698
Accounts receivable, net of allowance for doubtful accounts
of $411,707 and $472,467 in 1999 and 2000, respectively 8,582,145 12,968,256
Prepaid expenses 1,882,654 3,219,815
Other current assets 15,375 15,375
------------- -------------
Total current assets 10,762,177 16,785,144
------------- -------------
Property and Equipment, Net 30,877,976 53,645,097
------------- -------------
Other Noncurrent Assets:
Intangibles, net 29,582,485 56,559,957
Other assets 3,938,054 6,645,616
------------- -------------
33,520,539 63,205,573
------------- -------------
$ 75,160,692 $ 133,635,814
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,873,594 $ 5,545,935
Accrued expenses 3,183,786 6,316,095
Current portion of long-term debt 278,434 244,845
------------- -------------
Total current liabilities 8,335,814 12,106,875
Long-Term Debt, Net of Current Portion 47,209,154 93,185,812
Stockholders' Equity:
Preferred stock, $.0001 par value; 30,000,000 shares
authorized, 0 shares issued and outstanding -- --
Common stock, $.0001 par value; 70,000,000 shares authorized,
11,250,793 and 12,599,946 shares issued and outstanding
in 1999 and 2000, respectively 1,124 1,259
Additional paid-in capital 37,661,401 48,247,247
Accumulated deficit (18,046,801) (19,905,379)
------------- -------------
Total stockholders' equity 19,615,724 28,343,127
------------- -------------
$ 75,160,692 $ 133,635,814
============= =============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements
1
<PAGE> 5
EARTHCARE COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE-MONTHS
ENDED
MARCH 31,
-----------------------------
1999 2000
------------ -------------
<S> <C> <C>
Revenues $ 7,815,637 $ 19,990,432
Expenses:
Cost of operations 5,366,251 12,910,062
General and administrative 1,526,962 4,670,054
Sales, marketing and development 607,149 1,371,041
Depreciation and amortization 344,565 1,161,915
------------ ------------
Income (loss) from operations (29,290) (122,640)
Other expense (income):
Interest 222,309 1,735,938
Other 23,244 --
------------ ------------
Net income (loss) $ (274,843) $ (1,858,578)
============ ============
Net income (loss) per share,
Basic and diluted $ (0.03) $ (0.16)
============ ============
Weighted average shares outstanding,
Basic and diluted 9,698,531 11,608,473
============ ============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements
2
<PAGE> 6
EARTHCARE COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE-MONTHS
ENDED
MARCH 31,
-----------------------------
1999 2000
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (loss) $ (274,843) $ (1,858,578)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 344,565 1,161,915
Loss on disposal of assets 23,244 --
Bad debt expense (37,737) 126,961
Noncash expenses -- 117,673
Changes in assets and liabilities, excluding effect of acquired
businesses:
Account receivable (328,291) (3,932,107)
Prepaid expenses (454,688) (478,730)
Other assets -- (30,505)
Accounts payable 241,500 (115,522)
Accrued expenses (503,823) 623,683
------------ ------------
Net cash provided by (used in) operating activities (990,073) (4,385,210)
Cash Flows From Investing Activities:
Capital expenditures (1,036,481) (1,921,003)
Business acquisitions (6,154,140) (37,004,926)
Proceeds for sale of assets -- 6,500
Issuance of notes receivable -- (814,025)
Collection of notes receivable -- 15,487
Other assets 74,228 154,688
------------ ------------
Net cash provided by (used in) investing activities (7,116,393) (39,563,279)
Cash Flows From Financing Activities:
Proceeds from long-term debt 7,199,183 47,737,500
Payments of long-term debt -- (2,020,941)
Payment of debt issue cost -- (1,468,375)
Exercise of stock options and warrants 36,057 --
------------ ------------
Net cash provided by (used in) financing activities 7,235,240 44,248,184
------------ ------------
Net increase (decrease) in cash and cash equivalents (871,226) 299,695
Cash and Cash Equivalents, Beginning of Period 1,039,594 282,003
------------ ------------
Cash and Cash Equivalents, End of Period $ 168,368 $ 581,698
============ ============
Supplemental Noncash Investing and Financing Activities:
Notes payable issued for business acquisitions $ 200,000 $ --
============ ============
Common stock issued for business acquisitions $ 5,625,000 $ 9,905,981
============ ============
Fair value of warrant issued for debt issuance costs $ 75,000 $ 680,000
============ ============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements
3
<PAGE> 7
EARTHCARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements for EarthCare Company ("EarthCare" or
the "Company") and subsidiaries as of March 31, 2000 and for the three-month
periods ended March 31, 1999 and 2000 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-K filed with the
Securities and Exchange Commission ("Form 10-K"). Certain reclassifications have
been made to prior period balances to conform to current period reporting.
2. INCOME PER SHARE
Income (loss) per common share is computed in accordance with Statement
of Financial Accounting Standards No. 128 ("FAS 128"). There is no difference
between actual weighted average shares outstanding, which are used in computing
basic income (loss) per share and diluted weighted average shares, which are
used in computing diluted income (loss) per share because the effect of
outstanding options and warrants would be anti-dilutive.
As of March 31, 1999, there were 628,077 options and warrants
outstanding at exercise prices ranging from $5.80 to $6.00, 1,385,904 options
and warrants outstanding at exercise prices ranging from $10 to $15 and 635,000
options outstanding at exercise prices ranging from $20 to $25 which were
excluded from the EPS calculation due to their anti-dilutive impact.
As of March 31, 2000, there were 838,977 options and warrants
outstanding at exercise prices ranging from $5.80 to $6.88, 1,712,154 options
and warrants outstanding at exercise prices ranging from $10.00 to $15.88 and
737,500 options outstanding at exercise prices ranging from $20 to $25 which
were excluded from the EPS calculation due to their anti-dilutive impact. In
addition, as of March 31, 2000, there were 460,271 contingently issuable shares
and 1,304,348 shares issuable for $6.663 per share on convertible debentures
which were excluded from the EPS calculation due to their anti-dilutive impact.
3. ACQUISITIONS
During the first three months of 2000, the Company acquired the following
businesses:
On February 15, 2000, the Company acquired all of the outstanding
capital stock of World Fuel Services Corporation's oil recycling services
division, International Petroleum Corporation ("IPC"). IPC operates major
recycling centers in Wilmington, DE, Plant City, FL and New Orleans, LA, and
satellite collection centers strategically located near its customer base. IPC
collects and receives, directly from customers, nonhazardous used oil, oil
filters and oily wastewater. The aggregate purchase price of $33,000,000 was
paid with $28,000,000 in cash and the balance in the form of 750,458 shares of
EarthCare common stock.
On April 19, 2000, World Fuel Services ("WFS") filed a Demand for
Arbitration against EarthCare. The demand requests damages in the approximate
amount of $3.7 million, plus interest, late fees, court costs and attorney's
fees. Pursuant to the provisions of a stock purchase agreement between WFS and
EarthCare dated January 12, 2000, the parties have agreed to arbitrate this
dispute in Miami-Dade County, Florida. Currently, the outcome of this dispute
cannot be determined.
On March 10, 2000, EarthCare acquired all of the outstanding capital
stock of All County Resource Management Corporation ("All County").
Headquartered in Vernon, New Jersey, All County provides collection,
transportation, treatment and disposal services to nonhazardous liquid waste
customers in Connecticut, Pennsylvania, New Jersey and New York. The aggregate
purchase price of $12,300,000 was paid with $7,800,000 in cash and the remainder
in the form of 598,686 shares of unregistered EarthCare common stock.
The Company funded the cash portions of the purchase price for IPC and
All County with borrowings under the Company's Credit Agreement and with
proceeds from the issuance of the Company's 12% subordinated notes, discussed in
note 4 below.
4
<PAGE> 8
The acquisitions of IPC and All County were accounted for using the
purchase method of accounting; accordingly, the purchase prices have been
allocated to the assets acquired and liabilities assumed based on their
respective fair values on the dates of acquisition. The resulting excess of
purchase prices over fair values of assets acquired and liabilities assumed was
recorded as goodwill. Goodwill recorded in the purchases of IPC and All County
was approximately $18,674,000 and $6,707,000, respectively.
The Company's unaudited pro forma consolidated results of operations for the
three month periods ended March 31, 1999 and 2000, shown below are presented
assuming that the IPC and All County acquisitions had been consummated on
January 1, 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 2000
---------- ----------
<S> <C>
Pro forma revenue 23,194,154 $ 24,291,753
Pro forma net income (loss) (853,750) (1,963,742)
Pro forma net income (loss) per share (0.07) $ (0.16)
</TABLE>
4. SIGNIFICANT EVENTS
In addition to the acquisitions discussed in Note 3, the following
significant events occurred during the three months ended March 31, 2000:
On February 15, 2000, the Company amended the terms of its revolving credit
agreement with Bank of America (the "Credit Agreement") to (i) increase the
borrowing capacity to $60 million and (ii) add two of the Company's primary
shareholders as guarantors of up to $10 million. In addition, on April 14, 2000
the Credit Agreement was amended again to (i) waive compliance with certain
covenants and modify certain covenants and (ii) increase the shareholder
guarantees to $20 million. On March 31, 2000, the Company had approximately $2.1
million available under the Credit Agreement.
On February 16, 2000, the Company completed a $20,000,000 private placement
of its 12% subordinated notes, due February 2008 (the "Notes"). The Company also
issued five-year warrants to purchase, at an exercise price of $6.663 per share,
400,000 shares of the Company's common stock with the Notes. The estimated fair
value of such warrants was approximately $680,000 on the date of issuance. The
Company's Credit Agreement with Bank of America was amended to allow for the
issuance of the Notes. The Notes accrue interest at 12% per annum from
the date of issuance, payable semi-annually on September 30 and March 30, in
each year commencing September 30, 2000. The Company may pay interest by issuing
shares of the Company's common stock in an aggregate principal amount equal to
interest due and payable on an interest payment date as provided in the note
agreement. In addition, the interest due and payable on September 30, 2000, may
be deferred to March 30, 2001, as provided in the note agreement. Approximately
75% of the Notes were purchased by two of the Company's primary shareholders.
On March 31, 2000, EarthCare entered into a management agreement with
Liberty Waste, Inc., a Florida corporation in the solid waste industry, to
provide management services such as accounting services, investment banking
advisory services, bid and bond advice, municipal contract assistance and
commercial banking services. EarthCare is entitled to receive a $500,000 fee
upon the execution of the management agreement, $250,000 of which was received
in April 2000, and will receive $75,000 per month thereafter for the services to
be provided under the management agreement through March 31, 2001.
5
<PAGE> 9
5. BUSINESS SEGMENTS
During 1999, the Company's operations were managed as one business
segment - nonhazardous liquid waste collection and disposal. As a result of the
reorganization during the latter part of the fourth quarter of 1999, the Company
began to manage its operations in three segmented businesses in 2000.
"EarthAmerica" includes lines of business that provide liquid waste services to
residential, restaurant and food service customers, as well as EarthCare's bulk
transportation and plumbing businesses. "EarthLiquids" includes the used oil and
oily wastewater business. "ISNetworld" is developing and will market an on-line
network that enables safety councils, on behalf of plants, to monitor and manage
safety and training requirements for the many contractors who work at major
industrial facilities throughout the country.
<TABLE>
<CAPTION>
March 31,
2000
-------------
<S> <C>
Revenues:
EarthAmerica $ 11,892,963
EarthLiquids 7,749,789
ISNetworld 67,680
Other 280,000
-------------
Total Revenues $ 19,990,432
=============
Operating Income:
EarthAmerica $ 4,150,962
EarthLiquids 2,640,152
ISNetworld 9,256
Other 280,000
-------------
Total Operating Income 7,080,370
General and Administrative Expenses 4,670,054
Sales, marketing and development expenses 1,371,041
Depreciation and Amortization 1,161,915
Interest expense 1,735,938
-------------
Net income (loss) $ (1,858,578)
=============
Identifiable Assets:
EarthAmerica $ 63,906,380
EarthLiquids 59,736,341
ISNetworld 1,869,800
-------------
Total identifiable assets 125,512,521
Corporate Assets 8,123,293
-------------
Total assets $ 133,635,814
=============
Capital Expenditures:
EarthAmerica $ 1,656,771
EarthLiquids 133,937
ISNetworld 101,394
Corporate assets 28,901
-------------
Total capital expenditures $ 1,921,003
=============
Depreciation and amortization:
EarthAmerica $ 667,494
EarthLiquids 356,578
ISNetworld 82,466
Corporate assets 55,377
-------------
Total depreciation and amortization $ 1,161,915
=============
</TABLE>
6
<PAGE> 10
ITEM 2 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 March 31, 2000 and the results of
operations of the Company for the three months ended March 31, 1999 and 2000.
This discussion and analysis should be read in conjunction with the unaudited
consolidated financial statements and notes thereto, and with the Company's
consolidated financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31, 1999.
OVERVIEW
EarthCare engages in services relating to the nonhazardous liquid waste
("NLW") industry. These services include bulk liquid waste transportation,
liquid waste collection, processing, treatment, disposal, maintenance, plumbing
and pumping of nonhazardous liquid waste. The customers of EarthCare include
restaurants, hospitals, military bases, office buildings, apartments, schools,
municipalities, industrial businesses, auto and truck service centers and single
family residences.
EarthCare intends to expand its business in the NLW industry through
internal growth from new programs, partnership and affiliate alliances and
development of technology and Internet information systems. Future acquisitions
may focus more on the oily water and used oil recycling business and will be
made with cash, shares of common stock or a combination of cash and common
stock.
The NLW industry serves a basic need - the collection, treatment and
disposal of NLW 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 services and industrial liquid waste transportation, processing and
disposal. 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 and variable costs such as wages and benefits, disposal
fees, supplies, maintenance and fuel.
RESULTS OF OPERATIONS
From its inception on March 19, 1997 through March 31, 2000, the
Company has acquired 19 businesses, including IPC and All County in the first
quarter 2000. As a result of the Company's numerous acquisitions in recent
years, including those in 1999 and 2000, the Company believes that the
period-to-period comparisons, although presented below, are not meaningful.
THREE MONTHS ENDED MARCH 31, 2000
REVENUES: Revenues were $19,990,432 for the three months ended March
31, 2000 compared to $7,815,637 for the comparable period in the prior year.
Current period revenues include revenues from each of the businesses acquired
during 1999 plus revenues from businesses acquired during the first three-months
of 2000 from the date of each 2000 acquisition. Revenues from 1999 acquisitions
which were completed after March 31, 1999, (primarily Reifsneider, Magnum and
Hulsey) and revenues from 2000 acquisitions (IPC and All County) contributed
approximately $12.2 million for the three months ended March 31, 2000.
COST OF OPERATIONS: Cost of operations for the three months ended March
31, 2000 was $12,910,062 compared with $5,366,251 for the comparable period in
the prior year. The dollar increase is due to the growth of the Company through
acquisitions, and as a percentage of revenue decreased to 64.6% in 2000 from
68.7% in 1999. Operating costs in the first quarter of 1999 and 2000 were
negatively affected by seasonality of the business, integration costs and repair
and maintenance costs associated with recent acquisitions.
GENERAL AND ADMINISTRATIVE EXPENSE: For the three months ended March
31, 2000, general and administrative expense was $4,670,054 compared with
$1,526,962 for the comparable period in the prior year. The increase in the
current period expense is primarily due to the growth of the Company through
1999 and 2000 acquisitions and integration costs associated with the
acquisitions in 2000. The increase also reflects decreases in 1998 bonus and
relocation accruals established during 1998 and reversed in the first quarter of
1999 due to changes in estimates.
7
<PAGE> 11
SALES, MARKETING AND DEVELOPMENT: For the three months ended March 31,
2000, sales, marketing and development expense totaled $ 1,371,041, as compared
to $607,149 in 1999. The 2000 amount reflects ongoing sales efforts from the
Company's traditional businesses, as well as marketing and development
activities related to new programs such as SeptiShield, SeptiMax and
RestaurantCare.com. These new programs reflect the Company's move in late 1999
to increase its focus on internal growth.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization was
$1,161,915 for the three months ended March 31, 2000 compared to $344,565 for
the comparable period of 1999. The increase is due to the 1999 and 2000
acquisitions.
INTEREST EXPENSE: Interest expense for the three months ended March 31,
2000 was $1,735,938, compared to $222,309 in the comparable 1999 period.
Interest was incurred at an average rate of approximately 10.3% during the three
months ended March 31, 2000 and 7.09% in the compared 1999 period. The increase
in interest expense resulted primarily from the debt incurred in connection with
the 1999 and 2000 acquisitions and the increase in the average borrowing rate.
INCOME TAX PROVISION: The Company recorded no benefit for income taxes
for the three months ended March 31, 1999 or 2000 due to continued losses
incurred by the Company. As the Company continues to grow, management will
evaluate the realizability of the loss carryforward and adjust the valuation
allowance accordingly.
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 March 31, 2000, the Company had cash of $581,698 and a working
capital of $4,678,269. During the three months ended March 31, 2000, the
Company's net cash used in operating activities totaled $4,385,210, of which
$1,858,578 was due to the net loss and $3,933,181 was due to changes in
operating assets and liabilities, excluding the effect of acquired businesses.
Such amounts were partially offset by non-cash charges of $1,406,549, excluding
the effect of required businesses, primarily depreciation and amortization of
goodwill.
The Company used $39,563,279 in investing activities during the three
months ended March 31, 2000. This amount is primarily composed of $37,004,926
related to the IPC and All County acquisitions and $1,921,003 related to other
capital expenditures.
Net cash provided by financing activities for the three months ended March
31, 2000 totaled $44,248,184. This amount reflects proceeds of $47,737,500 from
the issuance of long-term debt, partially offset by $2,020,941 in repayments of
long-term debt and $1,468,375 in debt issues costs.
The long term debt to equity ratio at December 31, 1999 and March 31, 2000
was 2.4 to 1 and 3.3 to 1, respectively. As a result of the amendment to the
Credit Agreement no long-term debt is due until 2003.
The Company has a revolving credit agreement with the Bank of America,
which as amended as of February 15, 2000 (the "Credit Agreement"), allows the
Company to borrow up to $60 million. The Company may 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 3.25%.
The Credit Agreement expires February 15, 2003, is collateralized by a first
lien on substantially all assets of the Company and requires the Company to
maintain certain financial covenants. As of March 31, 2000, the outstanding
balance under the Credit Agreement was $57,900,000. Two of the Company's primary
shareholders are guarantors of up to $10 million of the debt outstanding. In
addition, on April 14, 2000, the Credit Agreement was amended to waive
compliance with certain covenants, modify certain financial covenants and
increase the guaranty of the two primary shareholders to $20 million.
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) consist of
purchasing vehicles and equipment used in the operation of its businesses. At
March 31, 2000, the Company had approximately $2.1 million available for
borrowing under the Credit Agreement. At May 1, 2000, the Company had
approximately $1.2 million available for borrowing under the Credit Agreement.
8
<PAGE> 12
On October 11, 1999, the Company completed a $15 million private placement
of its 10% Convertible Debentures, due October 31, 2006 (the "Debentures"). As
of December 31, 1999, $13,962,500 of the Debentures were outstanding. The
remaining $1,037,500 of Debentures were issued in January 2000. The Company
incurred $867,000 in debt issuance costs associated with the Debentures, which
is being amortized over the term of the debt. The Credit Agreement with Bank of
America was amended to allow for the issuance of the Debentures. The debentures
accrue interest at 10% per annum from the date of issuance, payable quarterly
(i) for the first two years, through the issuance of additional Debentures at
the option of the Company, (ii) for the next two years, in cash, unless
prohibited by senior lender covenants (in which event the interest may be paid
by issuance of additional Debentures), and (iii) thereafter, in cash. The
Debentures are unsecured obligations of the Company and are subordinated in
right of payment to existing and future senior indebtedness of the Company. The
Debentures are convertible at any time at the election of the holder into shares
of Common Stock, at a price per share equal to $11.50 per share, subject to
downward adjustment based on certain antidilution provisions, as provided in the
Debenture agreement. In February 2000, the conversion price was reduced to
$6.663 per share as a result of warrants which were issued with the Company's
Notes, as discussed below. The Debentures not previously called or converted
will be due and payable on October 31, 2006. Approximately 33% was purchased by
two of the Company's primary shareholders.
On February 16, 2000, the Company completed a $20 million private placement
of its 12% Subordinated Notes, due February 2008 (the "Notes"). The Company also
issued warrants to purchase, at an exercise price of $6.663 per share, 400,000
shares of the Company's Common Stock with the Notes. The warrants are
exercisable for five years from the date of issuance. The estimated fair value
of such warrants was approximately $680,000 on the date of issuance. The Credit
Agreement with Bank of America was amended to allow for the issuance of the
Notes. The Notes accrue at 12% per annum from the date of issuance, payable
semi-annually on September 30 and March 30, in each year commencing on September
30, 2000. The Company may pay interest by issuing shares of common stock, in
aggregate principal amount equal to interest due and payable on an interest
payment date as provided in the note agreement. In addition, the interest due
and payable on September 30, 2000, may be deferred to March 30, 2001, as
provided in the note agreement. Approximately 75% of the Notes were purchased by
two of the Company's primary shareholders.
On February 15, 2000, the Company acquired all of the outstanding capital
stock of World Fuels Services Corporation's oil recycling services division,
International Petroleum Corporation ("IPC"). IPC operates major recycling
centers in Wilmington, Delaware, Plant City, Florida and New Orleans, Louisiana,
and satellite collection centers strategically located near its customer base.
IPC collects and receives, directly from customers, nonhazardous used oil, oil
filters and oily wastewater. The aggregate purchase price of $33.0 million was
paid with $28 million in cash and the balance in the form of 750,458 shares of
Earthcare common stock.
On March 10, 2000, EarthCare acquired all of the outstanding capital stock
of All County Resource Management Corporation ("All County"). Headquartered in
Vernon, New Jersey, All County provides collection, transportation, treatment
and disposal services to NLW customers in Connecticut, Pennsylvania, New Jersey
and New York. The aggregate purchase price of $12.3 million, was paid with $7.8
million in cash and the remainder in the form of 598,686 shares of unregistered
EarthCare common stock.
The Company believes that cash on hand, cash flows from operations, and
funds available under the Credit Agreement, will be adequate to meet the
Company's working capital needs and discretionary capital expenditures for 2000.
The Company intends to continue to pursue internal growth and strategic
acquisition opportunities. The timing, size or success of any acquisition 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 and/or preferred stock.
9
<PAGE> 13
YEAR 2000
Prior to 2000, the Company had conducted operations for less than two
years. The Company selected Year 2000 compliant hardware and software for its
computing needs and began implementation of these new systems during the fourth
quarter of 1998, which implementation was to ensure proper processing of
transactions relating to the Year 2000 and beyond. The company completed the
conversion of all systems in the fourth quarter of 1999 and incurred total costs
for its Year 2000 compliant hardware, systems and software of $932,000, $363,000
of which has been expensed.
Planning for the Year 2000 issue also focused on the systems of various
entities with which the Company interacts, including the Company's vendors and
customers. Even though the date is now past January 1, 2000, and we have not
experienced any immediate adverse impact from the transition to the year 2000,
we cannot provide any assurance that our suppliers and customers have not been
affected in a manner that is not yet apparent.
EarthCare will continue to monitor internal Year 2000 compliance issues
and the Year compliance of its suppliers and customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
10
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Eldredge Wastewater Management Company ("Eldredge") instituted an
arbitration proceeding before the American Arbitration Association
against EarthCare for an alleged breach of contract. EarthCare purchased
certain assets owned by Eldredge under the terms of an Asset Purchase
Agreement between EarthCare and Eldredge. As a condition of the closing
of the acquisition, EarthCare entered into a separate agreement with an
affiliate of Eldredge, for the disposal of oily wastes collected by
EarthCare within a defined territory. Eldredge alleged that EarthCare
breached such agreement in that EarthCare allegedly had not brought the
oily wastes collected within the area included within such agreement to
the affiliate for disposal. Arbitration proceedings for the claim were
completed in April 2000 but no decision has been rendered. EarthCare
zealously presented its position that it has not breached the agreement
and does not believe that a decision, even if favorable to Eldredge,
will have a material adverse effect on EarthCare's business or
operations.
On April 19, 2000, World Fuel Services ("WFS") filed a Demand for
Arbitration against EarthCare, which requests damages in the approximate
amount of $3.7 million plus interest, late fees, court costs and
attorneys fees, alleging breach of contract. Pursuant to the terms of
Stock Purchase Agreement between WFS and EarthCare dated as of January
12, 2000, the parties have agreed to arbitrate in Miami-Dade County,
Florida. EarthCare plans to zealously present its positions and does not
believe, at this point, that a decision, even if favorable to WFS will
have a material adverse effect on EarthCare's business or operations.
Additionally, from time to time, EarthCare may be or become involved in
litigation and claims arising out of the ordinary 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
27.1 Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K
EarthCare Company filed a report on Form 8-K on February 29, 2000, in
which the Company announced that it had entered into a stock purchase
agreement with World Fuel Services to acquire its oil recycling services
division, International Petroleum Corporation. EarthCare Company also
filed a report on Form 8-K on March 23, 2000, in which the Company
announced that it had entered into a stock purchase agreement with All
County Resources Management Corporation.
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: April 18, 2000
By: /s/ Harry Habets
----------------------------
Harry Habets,
President and Chief
Operating Officer
By: /s/ Dan Self
----------------------------
Dan Self,
Controller and Chief
Accounting Officer
12
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EARTHCARE
COMPANY FOR THE PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 581,698
<SECURITIES> 0
<RECEIVABLES> 13,440,723
<ALLOWANCES> 472,467
<INVENTORY> 0
<CURRENT-ASSETS> 16,785,144
<PP&E> 56,533,653
<DEPRECIATION> 2,888,556
<TOTAL-ASSETS> 133,635,814
<CURRENT-LIABILITIES> 12,106,875
<BONDS> 0
0
0
<COMMON> 1,259
<OTHER-SE> 28,341,868
<TOTAL-LIABILITY-AND-EQUITY> 133,635,814
<SALES> 0
<TOTAL-REVENUES> 19,990,432
<CGS> 0
<TOTAL-COSTS> 20,113,072
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,735,938
<INCOME-PRETAX> (1,858,578)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,858,578)
<EPS-BASIC> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
