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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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)
<TABLE>
<S> <C>
Delaware 58-233973
(State of incorporation or organization) (IRS employer identification number)
14901 Quorum Drive, Suite 200, Dallas, Texas 75240
(Address of principal executive office) (Zip code)
</TABLE>
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 14,575,723 on November 9, 2000.
APPLICABLE ONLY TO ISSUER INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
PRECEDING FIVE YEARS.
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
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EARTHCARE COMPANY
INDEX TO CONTENTS
<TABLE>
<CAPTION>
DESCRIPTION OF CONTENTS PAGE NUMBER
----------------------- -----------
<S> <C>
Introduction ..................................................................... 3
PART I - Financial Information
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999 ....................................................... 5
Condensed Consolidated Statements of Operations for the
Three- and Nine-Months ended September 30, 2000 and 1999 ................ 6
Condensed Consolidated Statements of Cash Flows for the
Nine-Month Periods ended September 30, 2000 and 1999 .................... 7
Notes to Condensed Consolidated Financial Statements ........................ 8
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................................... 13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk .............. 19
PART II - Other Information
Item 1 - Legal Proceedings ....................................................... 19
Item 2 - Changes in Securities ................................................... 19
Item 3 - Defaults Upon Senior Securities ......................................... 20
Item 4 - Submission of Matters to a Vote of Security Holders ..................... 20
Item 5 - Other Information ....................................................... 20
Item 6 - Exhibits and Reports on Form 8-K ........................................ 20
Signature ........................................................................ 20
</TABLE>
2
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FORM 10-Q
INTRODUCTION
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q, including, without limitation,
information set forth under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in certain documents on file
with the Securities and Exchange Commission 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, we intend the
words "may," "believe," "intend," "anticipate," "plan," "expect" and similar
expressions to identify forward-looking statements. We desire to take advantage
of the "safe-harbor" provisions of the Acts and are including this special note
to enable us to do so. Forward-looking statements included in this Form 10-Q, or
hereafter included in other publicly available statements issued or released by
us involve known and unknown risks, uncertainties, and other factors which could
cause our 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. We believe the following risks, uncertainties and other factors
could cause such material differences to occur:
1. Our ability to compete with other non-hazardous liquid waste ("NLW") and
non-hazardous solid waste ("NSW") service providers. The NLW and NSW
businesses are highly competitive and the entrance of new competitors or
the expansion of operations by existing competitors in our markets could
adversely affect our plans and results of operations.
2. Our ability to profitably grow our existing operations, including growth at
current and future company owned locations.
3. The development of internal methods for disposition of NLW and NSW by
current and potential customers of the Company.
4 Our ability to grow through the acquisition and development of NLW and NSW
companies or businesses, to identify suitable acquisition candidates at a
reasonable cost, to operate profitably and to integrate acquired operations
successfully into our other operations. We expect 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.
5. Our ability to minimize any potential liabilities, including environmental
liabilities, resulting from the acquisition of NLW and NSW service
providers, or to obtain adequate insurance to mitigate any potential
exposure to us from these liabilities. We have obtained representations
from the sellers of acquired businesses that no undisclosed liabilities
exist, and we have obtained certain rights to indemnification from the
sellers for any liabilities. There can be no assurance, however, that
undisclosed liabilities do not exist or that we will receive any
compensation pursuant to our rights to indemnification.
6. Our 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 we provide. Changes in these laws or
regulations may affect our operations by imposing additional regulatory
compliance costs on us, requiring the modification of or adversely
affecting the market for our NLW and NSW services.
7. Our strategies, objectives, expectations and intentions are subject to
change at any time at the discretion of management and the Board of
Directors. Our officers and directors currently beneficially own
approximately 45% of our common stock and, as a result, this group may be
able to control matters requiring the approval of a majority of the
stockholders, such as election of directors. The voting power of these
shareholders under certain circumstances could have the effect of delaying
or preventing a change in control of the Company.
3
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8. Our ability to attract qualified management and retain key personnel of
acquired NLW and NSW service providers.
9. Our ability to secure the capital and the related costs of such capital
necessary to fund our future growth through acquisition and development, as
well as internal growth.
10. Changes in general economic conditions that may affect the demand for our
liquid waste collection, processing and disposal services.
11. Changes in weather conditions that may affect demand for our services.
12. Our ability to develop national and regional accounts for our liquid waste
management services and other marketing programs.
13. 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 us.
4
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EARTHCARE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ -- $ 282,003
Accounts receivable, net of allowance for doubtful
accounts of $1,552,000 and $412,000, respectively .......... 14,272,490 8,582,145
Prepaid expenses and other current assets .................... 4,442,355 1,898,029
------------- -------------
Total current assets ....................................... 18,714,845 10,762,177
Property, plant and equipment, net .............................. 56,449,869 30,877,976
Intangible assets, net .......................................... 56,106,065 29,582,485
Other long-term assets .......................................... 8,381,361 3,938,054
------------- -------------
Total assets .......................................... $ 139,652,140 $ 75,160,692
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 8,832,279 $ 4,873,594
Accrued expenses ............................................. 8,370,060 3,183,786
Current portion of long-term debt ............................ 186,405 278,434
------------- -------------
Total current liabilities .................................. 17,388,744 8,335,814
Long-term debt .................................................. 90,898,381 47,209,154
Stockholders' equity:
Preferred stock, $.0001 par value; 30,000,000 shares
authorized, no shares issued and outstanding ............... -- --
Common stock, $.0001 par value; 70,000,000 shares
authorized, 14,575,723 and 11,250,792 shares
issued, respectively ....................................... 1,458 1,125
Additional paid-in capital ................................... 59,830,548 37,661,400
Accumulated deficit .......................................... (28,466,991) (18,046,801)
------------- -------------
Total stockholders' equity ................................. 31,365,015 19,615,724
------------- -------------
Total liabilities and stockholders' equity ............ $ 139,652,140 $ 75,160,692
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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EARTHCARE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues .............................................. $ 22,187,880 $ 10,933,644 $ 65,182,035 $ 28,800,754
Expenses:
Cost of operations ................................ 14,869,204 6,704,556 42,096,211 18,517,914
General and administrative ........................ 4,980,089 2,334,750 16,641,787 5,966,075
Sales, marketing and development .................. 1,763,019 819,528 4,737,576 2,151,248
Depreciation and amortization ..................... 1,714,805 782,552 4,857,970 1,721,988
------------ ------------ ------------ ------------
Operating expenses ............................. 23,327,117 10,641,386 68,333,544 28,357,225
------------ ------------ ------------ ------------
Income (loss) from operations ......................... (1,139,237) 292,258 (3,151,509) 443,529
Interest expense and other:
Interest expense .................................. 2,758,591 581,461 7,171,801 1,209,773
Other ............................................. 96,883 46,961 96,883 250,820
------------ ------------ ------------ ------------
2,855,474 628,422 7,268,684 1,460,593
------------ ------------ ------------ ------------
Loss before income taxes .............................. (3,994,711) (336,164) (10,420,193) (1,017,064)
Income tax provision (benefit) ........................ -- -- -- (53,000)
------------ ------------ ------------ ------------
Loss before extraordinary item ........................ (3,994,711) (336,164) (10,420,193) (964,064)
Extraordinary item - gain on early retirement
of debt (net of income taxes of $53,000) .......... -- -- -- 86,817
------------ ------------ ------------ ------------
Net loss .............................................. $ (3,994,711) $ (336,164) $(10,420,193) (877,247)
Net loss per share - basic and diluted:
Loss before extraordinary item .................... $ (0.29) $ (0.03) $ (0.82) $ (0.10)
Extraordinary item ................................ -- -- -- 0.01
------------ ------------ ------------ ------------
Net loss .......................................... $ (0.29) $ (0.03) $ (0.82) $ (0.09)
============ ============ ============ ============
Weighted average number of common shares .............. 13,545,218 10,487,586 $ 12,644,300 $ 10,118,276
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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EARTHCARE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
---------------------------------------
September 30, 2000 September 30, 1999
------------------ ------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $(10,420,193) $ (877,247)
Adjustments to cash flows for non-cash items:
Depreciation and amortization ................................... 4,857,970 1,721,988
Loss on disposal of assets ...................................... -- 250,820
Deferred income tax provision (benefit) ......................... -- (10,677)
Gain on early extinguishment of debt ............................ -- (139,817)
Other non-cash expenses ......................................... 4,587,296 36,665
Changes in current assets and liabilities, excluding
the effects of acquired businesses:
Accounts receivable ............................................. (6,150,664) (2,486,828)
Prepaid expenses and other current assets ....................... (1,676,907) (1,032,127)
Accounts payable ................................................ 3,270,822 100,854
Accrued expenses and other activity ............................. 1,358,069 2,027,785
------------ ------------
Cash used for operating activities .......................... (4,173,607) (408,584)
------------ ------------
Cash flows from investing activities:
Capital expenditures .............................................. (6,767,343) (3,639,828)
Businesses acquired ............................................... (37,454,678) (26,609,589)
Issuance of notes receivable ...................................... (1,385,447) (475,645)
Collection of notes receivable .................................... 17,877 37,831
Other activity .................................................... (321,095) (284,296)
------------ ------------
Cash used for investing activities .......................... (45,910,686) (30,971,527)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt ...................................... 60,346,948 35,769,733
Payments on long-term debt ........................................ (17,956,283) (6,267,071)
Payment of debt issue costs ....................................... (1,468,375) --
Sale of common stock .............................................. 8,880,000 --
Exercise of stock options and warrants and other activity ......... -- 1,104,822
------------ ------------
Cash provided by financing activities ....................... 49,802,290 30,607,484
------------ ------------
Net decrease in cash and cash equivalents ............................. (282,003) (772,627)
Cash and cash equivalents, beginning of period ........................ 282,003 1,039,594
------------ ------------
Cash and cash equivalents, end of period .............................. $ -- $ 266,967
============ ============
Supplemental non-cash investing and financing activities:
Notes payable issued for businesses acquired ...................... $ -- $ 200,000
Common stock issued for businesses acquired ....................... $ 10,045,981 $ 7,829,150
Fair value of warrants issued for debt issue costs and
other services rendered ..................................... $ 1,036,003 $ 217,743
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
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EARTHCARE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. BUSINESS AND BASIS OF PRESENTATION
EarthCare Company ("EarthCare" or the "Company") and its subsidiaries
primarily engage in services related to non-hazardous liquid waste ("NLW") and
non-hazardous solid waste ("NSW"). We are organized in three business segments:
EarthAmerica, EarthLiquids and EarthCare. EarthAmerica provides NLW collection,
processing, treatment, disposal, bulk transportation, pumping, plumbing and
maintenance services from its operating locations in New York, New Jersey,
Pennsylvania, Florida, Georgia and Texas. EarthAmerica serves customers
consisting of single family residences, restaurants, auto and truck service
centers, industrial businesses, office buildings, apartments, schools,
municipalities, hospitals and military bases. EarthLiquids' operating locations
in Florida, Delaware, Maryland and Louisiana provide used oil and oil wastewater
collection, disposal and processing services for commercial and governmental
customers consisting primarily of auto and truck service centers and industrial
and government facilities. EarthLiquids' operating locations also process and
refine used oil products for resale to commercial customers. EarthCare, through
its 44% owned investment in EarthCare Resource Management of Florida, Inc.
("EarthCare Florida"), provides NSW collection, hauling, transfer and disposal
services to residential and commercial customers in the greater Tampa, Florida
market.
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements comprise the accounts of
EarthCare and its wholly owned subsidiaries. We have eliminated all significant
intercompany transactions and balances in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies we have followed to prepare the
condensed consolidated financial statements are consistent with the accounting
policies described in the Company's notes to consolidated financial statements
in the Company's Annual Report to Shareholders and Form 10-K for the year ended
December 31, 1999.
INTERIM FINANCIAL INFORMATION
The accompanying interim financial statements and information are
unaudited. We have omitted or condensed certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles, although we believe that the disclosures
included herein are adequate to make the information presented not misleading.
You should read these interim financial statements in conjunction with the
Company's consolidated financial statements for the year ended December 31,
1999. We have included in the interim financial statements all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's financial position, its results of operations and
its cash flows. We do not believe that the operating results for any particular
interim period are necessarily indicative of the operating results for a full
year.
We derived the financial information for the year ended December 31,
1999 from our audited financial statements for the same year that are included
in the Company's 1999 Annual Report to Shareholders.
INCOME (LOSS) PER SHARE AND WEIGHTED SHARES
We have not presented separate basic and diluted net loss per share
information because the incremental shares used to determine net loss per share
would be anti-dilutive. There is no difference between the basic and diluted
weighted average shares for the periods presented.
8
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EARTHCARE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
SOFTWARE DEVELOPMENT COSTS
We capitalize the internal software development costs related to
software products to be sold or to be used to support our operations.
Capitalized costs include internal and external programming labor costs.
Capitalized software costs related to ISNetworld's software products will be
amortized over the expected useful lives of the software products. We also
capitalize the internal and external software costs, consisting primarily of
internal programming labor costs and external contract programming, for our
operating software systems. Such costs will be amortized over the expected
useful lives of the software, currently expected to be five years. As of
September 30, 2000, the software products were completed. Amortization of the
capitalized costs will begin in the fourth quarter of 2000 as the products are
sold and used by EarthCare.
3. ACQUISITIONS
Our acquisitions during 2000 have been accounted for following the
purchase method, except for our investment in EarthCare Florida. We allocated
the aggregate acquisition cost to the net assets acquired based on the fair
market value of such net assets. We allocated the excess of the aggregate
acquisition cost over the fair market value of the tangible net assets acquired
to goodwill and are amortizing the goodwill over a 20 year useful life. We
included the operating results of such companies in our historical results of
operations for all periods following the acquisitions. We account for our
investment in EarthCare Florida on the equity method. Our share of EarthCare
Florida's loss for the three months ended September 30, 2000 is included in the
condensed consolidated statement of operating results as other expense in the
interest and other expense category.
On February 15, 2000, we acquired all of the outstanding capital stock
of World Fuel Services Corporation's oil recycling services division,
International Petroleum Corporation ("IPC"). IPC became part of our EarthLiquids
segment and operates used oil, used oil filters and oily wastewater collection
and refining plants in Florida, Delaware and Louisiana. We acquired IPC for
$28,000,000 in cash and issued 750,458 shares of EarthCare's common stock. We
recorded goodwill of approximately $18,674,000 for the IPC acquisition.
On March 10, 2000, we acquired all of the outstanding capital stock of
All County Resource Management Corporation ("All County"), an NLW collection,
treatment, transportation and disposal services company located in New Jersey.
All County is part of our EarthAmerica segment. We acquired All County for
$7,800,000 in cash and 598,686 shares of EarthCare's common stock. We recorded
goodwill of approximately $6,707,000 for the All County acquisition.
On July 7, 2000, we acquired approximately 44% of the outstanding
common stock of EarthCare Florida by issuing 356,000 shares of our common stock.
We acquired the EarthCare Florida common stock from all of EarthCare Florida's
minority shareholders except the shares owned by EarthCare Florida's president.
The remaining 520,100 outstanding shares of EarthCare Florida are owned by Solid
Waste Ventures, Inc. (450,100 shares) and EarthCare Florida's president (70,000
shares). We have agreed to acquire the remaining outstanding shares of EarthCare
Florida on a one for one basis using shares of our common stock as
consideration. In addition, we intend to repay debt in the approximate amount of
$8.9 million payable by EarthCare Florida to Solid Waste Ventures through the
issuance of shares of our common stock. EarthCare Florida has annualized
revenues of approximately $19.0 million. EarthCare Florida provides residential
and commercial collection, hauling and transfer services in Tampa, Florida and
surrounding counties. In addition, EarthCare Florida owns a construction and
demolition landfill in Hillsborough County, Florida.
EarthCare Florida employs approximately 125 people. Approximately 60
trucks and vehicles are used to service the collection, hauling, transfer and
disposal operations. EarthCare Florida's construction and demolition landfill is
situated on 280 acres in Balm, Florida. In addition, EarthCare Florida owns two
transfer stations in Tampa, Florida and Clearwater, Florida that handle
construction and demolition solid waste. EarthCare Florida was awarded a
franchise by Hillsborough County in Florida to collect
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EARTHCARE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
approximately one-third of the residential solid waste and to provide commercial
collection services to any commercial customers in the county. EarthCare Florida
disposes of its collected residential solid waste at a municipally owned
landfill in Hillsborough County.
Solid Waste Ventures owns approximately 51% of EarthCare Florida and a
controlling interest in a company in Missouri that collects, hauls and disposes
of solid waste. Solid Waste Ventures is a privately held holding company which
is 100% owned by an individual who is not an affiliate of EarthCare Company.
Donald Moorehead, our CEO and chairman of the board of directors, has provided
debt financing of approximately $13.3 million to Solid Waste Ventures to finance
growth and development. This financing is secured by all of the assets of Solid
Waste Ventures, including its interest in EarthCare Florida. Approximately $8.5
million of the financing was provided for the benefit of EarthCare Florida.
EarthCare intends to repay the subordinated debt of EarthCare Florida to Solid
Waste Ventures through the issuance of shares of EarthCare common stock upon the
completion of the EarthCare Florida acquisition.
The following table presents the pro forma results of operations as if
all the acquisitions since December 31, 1998 had occurred at the beginning of
the periods presented. Pro forma adjustments reflect additional amortization
expense since the goodwill and intangible assets are amortized for a full
period. Pro forma adjustments also reflect additional interest expense due to
the related debt being outstanding for a full period. Income taxes have not been
provided within the pro forma operating results due to the pro forma net losses.
Such pro forma results do not purport to be indicative of what would have
occurred had the businesses actually been acquired as of those dates or results
which may occur in the future.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ........................................... $ 26,694,106 $ 25,536,329 $ 82,166,582 $ 76,493,820
Net loss ........................................... $ (4,337,673) $ (1,660,085) $(11,288,355) $ (4,509,174)
Net loss per share ................................. $ (0.29) $ (0.12) $ (0.75) $ (0.33)
</TABLE>
4. DEBT
In October 2000, EarthCare and its banking group amended our credit
agreement. As part of the amendment, the total amount available to borrow was
reduced by $5.0 million to a maximum amount of $55.0 million. This reduction
occurred in conjunction with our sale to Mr. Moorehead of 1.0 million shares of
EarthCare common stock for $5.0 million in cash. In addition, the amendment
revised the restrictive financial covenants contained in the credit agreement
through September 30, 2001. EarthCare will be required to maintain monthly
EBITDA (earnings before interest, taxes, depreciation and amortization) of
$500,000. Other restrictive financial covenant ratios such as bank debt to
EBITDA, total debt to EBITDA and debt to capitalization will not apply until
September 30, 2001. In conjunction with this amendment, Mr. Moorehead and
Raymond Cash, a director and controlling shareholder of EarthCare, agreed to
provide collateral equal to $35.0 million by December 31, 2000. On October 31,
2000, Mr. Cash provided the first $5.0 million of collateral. On November 30,
2000, $10.0 million of additional collateral will be due with an additional
$20.0 million of collateral due on December 31, 2000. In addition, Mr. Moorehead
agreed to personally guarantee $40.0 million of the outstanding borrowings under
the credit agreement, which guarantee supplements a $20.0 million guarantee by
Messrs. Moorehead and Cash that was already in place under our credit agreement.
As part of the amendment to the credit agreement, the banking group
waived EarthCare's lack of compliance with certain restrictive covenants in the
credit agreement as of June 30, 2000 and September 30, 2000. As a result, the
amounts outstanding under the credit agreement have been classified as long-term
debt.
10
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EARTHCARE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
In February 2000, we completed a $20.0 million private placement of
EarthCare's 12% subordinated notes ("Notes") that are due in February 2008 and
issued warrants to purchase over a five year period up to 400,000 shares of
EarthCare's common stock at an exercise price of $6.67 per share. We determined
that the estimated fair value of the warrants was approximately $680,000 at the
time of the private placement. We included the value of the warrants in other
long-term assets and are amortizing the value over the term of the Notes. The
Notes accrue interest at 12% per year from the date of issuance with the
interest payable semi-annually on March 30 and September 30. We may pay the
interest by issuing shares of EarthCare's common stock in an amount equal to the
interest payable. We elected to defer the payment of interest on September 30,
2000 until March 30, 2001. As of September 30, 2000, EarthCare did not exercise
its option to prepay the Notes and, as a result, EarthCare will issue warrants
to purchase an additional 400,000 shares of EarthCare's common stock at an
exercise price of $6.67. Mssrs. Moorehead and Cash purchased 75% of the Notes.
5. STOCKHOLDERS' EQUITY
SALE OF COMMON STOCK
In September 2000, we completed the sale to Mr. Moorehead of 1,000,000
shares of common stock for $5,000,000 in cash in a private placement
transaction. The proceeds from this sale of common stock were used to repay
$5,000,000 outstanding under our credit agreement.
In June 2000, we completed the sale of 599,700 shares of common stock
for $4,000,000 in a private placement. In addition, we issued warrants to
purchase 200,000 shares of common stock at $7.00 per share. We used the net
proceeds of $3,880,000 to repay a loan of $1,840,000 from Mr. Moorehead and to
repay amounts outstanding under our credit agreement.
OPTIONS AND WARRANTS
As of September 30, 2000, there were 1,969,161 options and warrants
outstanding at exercise prices ranging from $5.37 to $7.81 and 845,529 options
and warrants outstanding at exercise prices ranging from $10.00 to $15.88.
As of September 30, 1999, there were 443,077 options and warrants
outstanding at exercise prices ranging from $5.80 to $6.00, 1,836,404 options
and warrants outstanding at exercise prices ranging from $10.00 to $16.00, and
755,000 options outstanding at exercise prices ranging from $20.00 to $25.00.
In July 2000, we issued 20,000 shares in connection with a contingent
earn out obligation in connection with one of our acquisitions. We also issued
50,000 warrants with a market value of $205,000 at an exercise price of $7.81 in
connection with the settlement of litigation relating to employment matters.
6. SEGMENT INFORMATION
During 1999, we managed the operations of the Company as one business
segment - NLW collection and disposal. Beginning in 2000, as a result of certain
acquisitions and improvements in the management organization, we manage
EarthCare's business in two segments: EarthAmerica and EarthLiquids. Following
the completion of our acquisition of all of the common stock of EarthCare
Florida, we will report a third new segment, solid waste. We present below
certain summary financial information related to these segments.
11
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EARTHCARE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 2000 September 30, 2000
------------------ -----------------
(Unaudited)
<S> <C> <C>
Revenue
EarthAmerica ...................................... $ 12,615,586 $ 37,718,761
EarthLiquids ...................................... 9,418,371 26,677,193
Other ............................................. 153,923 786,081
------------ ------------
Total revenue ............................... $ 22,187,880 $ 65,182,035
============ ============
Operating income:
EarthAmerica ...................................... $ 4,086,053 $ 13,019,489
EarthLiquids ...................................... 3,138,529 9,340,083
Other ............................................. 94,094 726,252
------------ ------------
Total operating income ...................... 7,318,676 23,085,824
General and administrative expenses ............... 4,980,089 16,641,787
Sales, marketing and development expenses ......... 1,763,019 4,737,576
Depreciation and amortization ..................... 1,714,805 4,857,970
Interest and other ................................ 2,855,474 7,268,6841
------------ ------------
Net loss .................................... $ (3,994,711) $(10,420,193)
============ ============
</TABLE>
<TABLE>
<CAPTION>
September 30, 2000
------------------
<S> <C>
Identifiable assets:
EarthAmerica .......................................... $ 65,974,920
EarthLiquids .......................................... 61,850,189
Other ................................................. 11,827,031
------------
Total assets .................................... $139,652,140
============
</TABLE>
<TABLE>
<CAPTION>
Depreciation and
Capital expenditures amortization
-------------------- ----------------
<S> <C> <C>
Other information for the nine months ended September 30, 2000:
EarthAmerica .............................................. $5,229,215 $2,519,207
EarthLiquids .............................................. 763,753 1,956,359
Other ..................................................... 774,375 382,404
---------- ----------
Total ............................................... $6,767,343 $4,857,970
========== ==========
</TABLE>
7. SEVERANCE, ASSET RECOVERY, ACQUISITION AND OTHER COSTS
During the three months ended June 30, 2000, we recorded a charge to
operations of $2,954,000 that relates to various matters and events that
occurred during the period and included this charge in general and
administrative expenses. This presentation affects the comparability of the
operating results for the periods shown and, partly as a result, we have
included additional disclosure about the nature of the charges. We negotiated
severance and employment settlement agreements with four former employees
resulting in our recording $1,151,000 to cover the costs of these agreements.
During the second quarter we reviewed the carrying value of our trade accounts
receivable and determined that a charge of $1,125,000 was necessary to properly
state the trade accounts receivable at their recoverable value. In addition, we
reviewed the carrying value of certain other current assets and current
liabilities and determined that write-downs and additional accruals of $678,000
were necessary. As part of this amount, we charged to operations $190,000 of
acquisition costs that related to acquisition efforts that will not result in
completed acquisitions.
12
<PAGE> 13
EARTHCARE COMPANY
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
We have established three business units under which we conduct
business: EarthAmerica(TM), EarthLiquids(SM), and EarthCare(SM). A description
of each business unit follows.
EARTHAMERICA. EarthAmerica is focused on the rapidly growing market for
septic tank services and restaurant grease trap services. These services are
provided within several service programs including SeptiMax(SM),
SeptiMaxPlus(SM), SeptiShield(SM), TrapCare(SM), Trap&LineCare(SM), and
TotalCare(SM). All programs provide for regular, scheduled service with
convenient payment plans. In addition, restaurant customers benefit from online
account management and information through our RestaurantCare.com(SM)
internet-based customer portal. EarthAmerica generally receives fees to collect,
process, treat and dispose of these non-hazardous liquid wastes. Collection fees
charged to customers vary by waste stream according to constituents of the
waste, expenses associated with collecting and processing the waste and
competitive factors. EarthAmerica operates a fleet of vehicles to collect waste
directly from customers and receives some waste from independent transporters
servicing additional waste generators. In addition, EarthAmerica utilizes
EarthAmerica branded distributors to provide service in some areas. At most
locations, EarthAmerica does not have pretreatment or treatment facilities. The
waste is transported to private pretreatment facilities, or, where permitted by
local regulations, directly to municipal or private wastewater treatment
facilities.
EARTHLIQUIDS. EarthLiquids is focused on used oil recovery and oily
wastewater management. Through the acquisition of Magnum Environmental Services,
Inc. and International Petroleum Corporation, EarthLiquids has become the second
largest competitor in the 1.3 billion gallon waste oil recovery industry. Our
fleet of over 100 waste transport trucks collect and transport used oil and oily
wastewaters largely to our own processing facilities. In addition, third party
collection companies deliver their used oil and oily wastewaters to our
facilities for processing. Recovered oil is sold into a variety of applications
that generally displace the need for virgin crude oil.
EARTHCARE. EarthCare is focused on building a solid waste company that
combines the best practices of the non-hazardous solid wastes (NSW) industry
with technology and innovation to create a national NSW company. Currently, this
business unit is composed of EarthCare Resource Management of Florida, Inc.
("EarthCare Florida") whose operations are largely concentrated in the Tampa
area. EarthCare Florida owns a construction and demolition landfill. We expect
to grow this business unit through acquisition and internal growth both in
Florida and throughout North America. In the future, we expect that customers of
this business unit will benefit from online account management and information
through our CommercialCare.com(SM) internet-based customer portal, a customer
service tool that is being developed. This business unit generally receives fees
to collect, process, treat and dispose of NSW. Collection fees charged to
customers vary by waste stream according to constituents of the waste, expenses
associated with collecting and processing the waste, and competitive factors.
This business unit operates a fleet of approximately 60 vehicles to collect
waste directly from customers and also receives waste from independent
companies.
We have NLW operations in Delaware, Florida, Georgia, Louisiana,
Maryland, New Jersey, New York, Pennsylvania and Texas. In addition to serving
customers in these states, we also provide services to customers in Alabama,
Connecticut, Massachusetts, Mississippi, Virginia and West Virginia.
We do not currently provide all of our NLW services from every
operating location. Septic tank, grease trap and bulk transportation services
are provided by operations located near Atlanta and Gainesville, Georgia,
several cities in Florida, Northern New Jersey, Eastern Pennsylvania and on Long
Island, New York. We own wastewater treatment plants that provide treatment and
disposal services for NLW customers in Orlando, Florida and Beacon, New York.
Plumbing services are provided from operations in the Atlanta and Gainesville,
Georgia markets and in Orlando and Pompano Beach, Florida.
We have expanded our operations to include the oily wastewater and used
oil-recycling business through our acquisition of Magnum Environmental, Inc. in
September 1999 and the acquisition of
13
<PAGE> 14
EARTHCARE COMPANY
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
International Petroleum Corporation in February 2000. These services are
provided by operations based in Wilmington, Delaware, several cities in Florida
and New Orleans, Louisiana. Satellite collection centers for these operations
are also located in Maryland, New Jersey, and Pennsylvania.
RESULTS OF OPERATIONS
The results of operations, as a percentage of revenue, are summarized
in the table below for the three- and nine-month periods ended September 30,
2000 and 1999 and the three month period ended June 30, 2000.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, Three months
----------------- ----------------- ended June 30,
2000 1999 2000 1999 2000
------ ------ ------ ------ --------------
<S> <C> <C> <C> <C> <C>
Revenues ........................................... 100.00% 100.00% 100.00% 100.00% 100.00%
Expenses:
Cost of operations ............................. 67.0% 61.3% 64.6% 64.3% 62.2%
General and administrative ..................... 22.4% 21.4% 21.0% 20.7% 17.6%
Sales, marketing and development ............... 7.9% 7.5% 7.3% 7.5% 7.0%
Severance, asset recovery, acquisition
and other ................................ -- -- 4.5% -- 12.8%
Depreciation and amortization .................. 7.7% 7.2% 7.5% 6.0% 8.6%
------ ------ ------ ------ ------
Operating expenses ....................... 105.0% 97.4% 104.9% 98.5% 108.2%
------ ------ ------ ------ ------
Income (loss) from operations ...................... (5.0)% 2.6% (4.9)% 1.5% (8.2)%
Interest expense and other:
Interest expense ............................... 12.4% 5.3% 11.0% 4.2% 11.6%
Other .......................................... 0.4% 0.4% 0.1% 0.9% 0.0%
------ ------ ------ ------ ------
12.8% 5.7% 11.1% 5.1% 11.6%
------ ------ ------ ------ ------
Income (loss) before income taxes .................. (17.8)% (3.1)% (16.0)% (3.6)% (19.8)%
====== ====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
1999 AND VERSUS THREE MONTHS ENDED JUNE 30, 2000
REVENUE
Revenue amounted to $22.2 million for the third quarter of 2000, which
represented an increase of $11.3 million or 102.9% over the same quarter in
1999. The businesses we acquired since June 30, 1999 accounted for approximately
$7.2 million of the increase while our revenue from existing operations
increased by approximately $4.1 million during this period due to higher
revenues from EarthAmerica's existing operations in the Northeast and to its oil
recycling operations in Florida.
Revenue decreased by $0.8 million or 3.5% from the second quarter of
2000 to the third quarter of 2000. Our revenue from existing operations declined
due primarily to lower revenues in our EarthAmerica operations in Georgia and
Florida which have been negatively affected by lower than normal rainfalls in
those regions and by an unsuccessful annual series of yellow page
advertisements. Our new yellow page advertisements for the upcoming year have
been revised and, to date, have been generating increased call volume from our
customers. We expect this trend to continue to improve over the next year. In
addition, revenues from our existing EarthLiquids operations also declined due
to lower supplies of used oil that led to lower sales of finished oil products.
COST OF OPERATIONS
Cost of operations amounted to $14.9 million for the third quarter of
2000, which represented an increase of $8.2 million or 121.8% over the same
quarter in 1999. This increase is primarily related to the
14
<PAGE> 15
EARTHCARE COMPANY
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
acquisitions completed since June 30, 1999 (approximately $5.7 million). Cost of
operations from existing operations accounted for the remainder of the increase.
As a percentage of revenue, cost of operations increased from 61.3% in 1999 to
67.0% in 2000 primarily as a result of the effect of the acquisitions completed
in our EarthLiquids segment.
Cost of operations increased by $0.6 million or 4.3% during the third
quarter of 2000 from the second quarter of 2000. Cost of operations from
existing operations increased due to higher labor and fuel costs and a shortage
of used oil for our EarthLiquids operation. As a percentage of revenue, cost of
operations rose from 62.2% during the second quarter of 2000 to 67.0% during the
third quarter of 2000, primarily as a result of these higher operating costs.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense, excluding severance, asset
recovery, acquisition and other costs described below, amounted to $5.0 million
for the third quarter in 2000, which represented an increase of $2.6 million or
112.6% over the same period in 1999. Approximately one-half of this increase is
due to the acquisitions completed since June 30, 1999 while the remainder
relates to the increase in the size of our infrastructure as EarthCare has
increased in size. General and administrative expense for the third quarter of
2000 was $0.9 million higher than the second quarter of 2000 due in part to a
higher level of non-capitalized software development costs during the third
quarter and in part to higher levels of travel and training costs associated
with the implementation of a new operating system for EarthAmerica. As a
percentage of revenue, general and administrative expenses increased to 22.4% in
the third quarter of 2000 versus 21.4% in the third quarter of 1999.
SALES, MARKETING AND DEVELOPMENT EXPENSE
Sales, marketing and development expense amounted to $1.8 million for
the third quarter of 2000, which represented an increase of $1.0 million or
117.3% over the same quarter in 1999. This increase is primarily related to the
acquisitions completed since June 30, 1999. As a percentage of revenue, sales
and marketing expense increased from 7.4% in 1999 to 7.9% in 2000 primarily
because the companies acquired since June 30, 1999 had a proportionately larger
sales and marketing infrastructure to support their level of revenue. Sales,
marketing and development expense for the third quarter of 2000 was $0.2 million
higher than the second quarter of 2000 due partly to the increased size and
scope of our sales and marketing organization to increase our sales efforts and
implement new marketing programs for our residential and restaurant service
programs.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization amounted to $1.7 million for the third
quarter of 2000, which represented an increase of $0.9 million or 119.1% from
the same quarter in 1999. This increase is related to the acquisitions completed
by EarthCare since June 30, 1999.
INTEREST AND OTHER EXPENSE
Interest expense amounted to $2.8 million for the third quarter of
2000, which represented an increase of $2.2 million or 374.4% from the same
quarter in 1999. We incurred additional debt, including our revolving line of
credit and subordinated debentures, in order to finance acquisitions that we
completed after June 30, 1999. Interest expense for the third quarter of 2000
was $0.1 million or 4.7% higher than the second quarter of 2000 due to a greater
utilization of our credit facility and higher prime interest rates. Other
expense in 2000 represents our equity interest in the net loss of EarthCare
Florida for the three months ended September 30, 2000.
15
<PAGE> 16
EARTHCARE COMPANY
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INCOME TAXES
We did not provide for income taxes during 2000. EarthCare generated a
tax loss during the periods and we have not recognized the future benefit of the
tax loss.
NINE MONTHS ENDED SEPTEMBER 30, 2000 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1999
REVENUE
Revenue amounted to $65.2 million during the nine months ended
September 30, 2000, which represented an increase of $36.4 million or 126.3%
over the same period in 1999. Although the businesses we acquired since December
31, 1998 accounted for substantially all this increase, we have realized a $3.2
million decline in revenue from existing operations due primarily to the lower
than normal rainfalls in 2000 and the lack of a successful yellow page
advertising program in 2000.
COST OF OPERATIONS
Cost of operations amounted to $42.1 million during the nine months
ended September 30, 2000, which represented an increase of $23.6 million or
127.3% over the same period in 1999 due to our acquisitions completed since
December 31, 1998. As a percentage of revenue, cost of operations rose slightly
from 64.3% in 1999 to 64.6% in 2000 due primarily to the effect of businesses
acquired and, to a lesser extent, to higher fuel and labor costs.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense, excluding severance, asset
recovery, acquisition and other costs described above, amounted to $13.7 million
for the nine months ended September 30, 2000, which represented an increase of
$7.7 million or 129.4% over the same period in 1999. This increase is
principally due to the acquisitions completed since December 31, 1998
(approximately $4.1 million). In addition, we increased the size of our existing
corporate and regional management infrastructure as EarthCare has grown during
this period
SEVERANCE, ASSET RECOVERY, ACQUISITION AND OTHER COSTS
During the three months ended June 30, 2000, we recorded a charge to
operations of $2,954,000 that relates to various matters and events that
occurred during the period and included this charge in general and
administrative expenses. This presentation affects the comparability of the
operating results for the periods shown and, partly as a result, we have
included additional disclosure about the nature of the charges. We negotiated
severance and employment settlement agreements with four former employees
resulting in our recording $1,151,000 to cover the costs of these agreements.
During the second quarter we reviewed the carrying value of our trade accounts
receivable and determined that a charge of $1,125,000 was necessary to properly
state the trade accounts receivable at their recoverable value. In addition, we
reviewed the carrying value of certain other current assets and current
liabilities and determined that write-downs and additional accruals of $678,000
were necessary. As part of this amount, we charged to operations $190,000 of
acquisition costs that related to acquisition efforts that will not result in
completed acquisitions.
SALES, MARKETING AND DEVELOPMENT EXPENSE
Sales, marketing and development expense amounted to $4.7 million for
the nine months ended September 30, 2000, which represented an increase of $2.6
million or 120.2% over the same period in 1999. This increase is partly related
to the acquisitions completed since December 31, 1998 (approximately $1.4
million). In addition, we increased the size and scope of our sales and
marketing organization to increase our sales efforts and to implement new
marketing programs for our residential and
16
<PAGE> 17
EARTHCARE COMPANY
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
restaurant service programs. As a percentage of revenue, sales and marketing
expense decreased from 7.5% in 1999 to 7.3% in 2000, primarily because the
companies acquired since December 31, 1998. This change reflects the effects of
integrating the businesses we acquired offset by the increased sales and
marketing efforts to support the residential and restaurant service programs. In
addition, our rate of internal revenue growth exceeded the rate at which we
increased our sales and marketing organization.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization amounted to $4.9 million for the nine
months ended September 30, 2000, which represented an increase of $3.1 million
or 182.1% from the same period in 1999. This increase is related to the
acquisitions completed by EarthCare since December 31, 1998.
INTEREST EXPENSE
Interest expense amounted to $7.2 million for the nine months ended
September 30, 2000, which represented an increase of $6.0 million or 492.8% from
the same period in 1999. We incurred additional debt, including our revolving
line of credit and subordinated debentures, in order to finance acquisitions
that we completed after December 31, 1998 and in order to fund our operating
cash flow needs and capital expenditures.
INCOME TAXES
We did not provide for income taxes during 2000. EarthCare generated a
tax loss during the periods and we have not recognized the future benefit of the
tax loss.
LIQUIDITY AND CAPITAL RESOURCES
In October 2000, EarthCare and its banking group amended our credit
agreement. As part of the amendment, the total amount available to borrow was
reduced by $5.0 million to a maximum amount of $55.0 million. This reduction
occurred in conjunction with our sale to Mr. Moorehead of 1.0 million shares of
EarthCare common stock for $5.0 million in cash. In addition, the amendment
revised the restrictive financial covenants contained in the credit agreement
through September 30, 2001. EarthCare will be required to maintain monthly
EBITDA (earnings before interest, taxes, depreciation and amortization) of
$500,000. Other restrictive financial covenant ratios such as bank debt to
EBITDA, total debt to EBITDA and debt to capitalization will not apply until
September 30, 2001. In conjunction with this amendment, Mr. Moorehead and
Raymond Cash, a director and controlling shareholder of EarthCare, agreed to
provide collateral equal to $35.0 million by December 31, 2000. On October 31,
2000, Mr. Cash provided the first $5.0 million of collateral. On November 30,
2000, $10.0 million of additional collateral will be due with an additional
$20.0 million of collateral due on December 31, 2000. In addition, Mr. Moorehead
agreed to personally guarantee $40.0 million of the outstanding borrowings under
the credit agreement, which guarantee supplements a $20.0 million guarantee by
Messrs. Moorehead and Cash that was already in place under our credit agreement.
As part of the amendment to the credit agreement, the banking group waived
EarthCare's lack of compliance with certain restrictive covenants in the credit
agreement as of June 30, 2000 and September 30, 2000. As a result, the amounts
outstanding under the credit agreement have been classified as long-term debt.
As of September 30, 2000, we had $500,000 available to borrow under our
$55.0 million revolving line of credit.
We expect to generate cash flows from operating activities during the
remainder of 2000 and in 2001. We also expect that cash flows will be sufficient
to enable us to service our debt and to fund needed capital expenditures. Our
expected level of capital expenditures for the remainder of 2000 will range from
$2.0 million to $3.0 million. Our current credit agreement limits the amount of
capital expenditures for the twelve months ending June 30, 2001 to $3.0 million.
If our operating results for the remainder of 2000 do
17
<PAGE> 18
EARTHCARE COMPANY
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
not generate adequate cash flows to service our debt and fund our capital
expenditures, we will evaluate other courses of actions. These would include,
but are not necessarily limited to, limiting our capital expenditures, reducing
the level of our operating costs, disposing of certain assets and evaluating the
future of certain locations that may not be performing according to
expectations. In addition, during the next twelve months we plan to continue to
evaluate sources of additional debt or equity financing
During the nine months ended September 30, 2000, we used $4.2 million
in cash for operating activities. The growth in our accounts receivable of
approximately $6.2 million outpaced our ability to increase our accounts payable
vendor financing (approximately $3.3 million). The cash need for operating
activities was also directly affected by the weaker operating results during the
nine months ended September 30, 2000 as discussed earlier. We funded this use of
cash with borrowings under our credit agreement and with the private sales of
common stock.
During the third quarter of 2000, we generated approximately $0.8
million in cash from our operating activities as compared to our use of
approximately $0.5 million during the second quarter of 2000 and our use of
approximately $4.4 million during the first quarter of 2000. This improvement
was a result of our improved management of working capital, in particular
improved collections of accounts receivable, while still improving our accounts
payable vendor financing.
We used $45.9 million in cash for investing activities during the nine
months ended September 30, 2000. We acquired two businesses, All County and IPC,
for approximately $37.5 million in cash and other consideration, including
shares of EarthCare common stock. In addition, we used $6.8 million in cash to
purchase property and equipment and to fund software development. We also
invested $1.4 million as an increase in a note receivable to fund an investment
in a company that is developing a NLW disposal site.
We generated $49.8 million in cash from financing activities during the
nine months ended September 30, 2000. We generated $42.4 million in cash from a
net increase in our long-term debt. We issued the remainder of our 10%
subordinated debentures ($1.0 million), issued our 12% subordinated notes ($20.0
million) and borrowed a net amount of $21.4 million under our credit agreement.
The proceeds from the debt were used to fund the businesses we acquired, to pay
for the debt issuance costs, to finance our capital expenditures and to fund our
operating cash flow needs. We used $1.5 million to pay for debt issue costs in
connection with our 10% subordinated debentures, our 12% subordinated notes and
the amendment to our credit agreement. In June 2000, we sold 599,700 shares of
common stock in a private placement and received net proceeds of $3.9 million.
We used the proceeds to repay a loan of $1.8 million from Mr. Moorehead. In July
2000, we used the remaining proceeds to reduce amounts outstanding under our
credit agreement. In September 2000, we sold 1,000,000 shares of common stock in
a private placement to our Chairman for cash and used the proceeds to repay $5.0
million of our outstanding borrowings under our credit agreement.
SEASONALITY AND INFLATION
Our EarthAmerica segment's operating results are subject to variations
in the weather patterns in the Northeastern and Southeastern regions. In the
Northeastern region, revenue and operating results will tend to be lower during
the fourth quarter and first quarter of each year due to the effect of winter
weather. In the Southeastern region, revenue and operating results will tend to
be higher during the fourth and first quarter of each year due to the influx of
seasonal inhabitants to this region in the fall and winter months. The
Southeastern region revenue and operating results during the second, third and
fourth quarters of each year will also be directly affected by the amount of
rainfall in the region.
Our EarthLiquids segment is subject to variations in the prices of
virgin and used oil products. Our pricing for our oil products varies in
relation to the prices for virgin oil and natural gas products. To the extent
that the pricing for virgin oil products varies over time, the revenues we
generate from the sales of used oil products will also vary and may have a
significant effect on the results of our operations. In addition, the cost to
operate all of our vehicles is directly affected by the prices of diesel fuel
and other finished oil and gasoline products.
17
<PAGE> 19
EARTHCARE COMPANY
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We believe that seasonality, inflation and changing prices, except to
the extent disclosed above, have not had and are not expected to have, any
material adverse effect on our results of operations in the near future.
FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statements of
Financial Accounting Standards No. 133, 137 and 138, all related to the
accounting for derivative instruments and derivative activities, that are
effective for annual reporting periods beginning after June 15, 2000. We are
required to adopt these standards during our fiscal year ending December 31,
2001. The Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101, Revenue Recognition, that is required to be adopted beginning with the
quarterly reporting period ended December 31, 2000. We are in the process of
evaluating the effects, if any, of adopting these new pronouncements.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's revolving line of credit provides for interest to be
charged at the prime rate or at a LIBOR rate plus a margin of 3.25%. We have
entered into interest rate swap agreements that have fixed the interest rate for
$30.0 million of our revolving line of credit. Based on the Company's current
level of outstanding revolving line of credit that is subject to variable
interest rates, a 1.0% increase in interest rates would result in a $0.3 million
annual change in interest expense. The remainder of the Company's debt is at
fixed interest rates that are not subject to changes in interest rates. We have
$16.4 million in outstanding convertible debentures, all of which may be
converted into approximately 2.733 million shares of common stock at a rate of
$6.00 per share. For every $1.00 that the share price of the Company's common
stock rises above $6.00, the holders of the debentures, if they converted their
debentures to common stock, would benefit by approximately $2.7 million. We do
not own, nor are we obligated under, other significant debt or equity securities
that would be affected by fluctuations in market risk. We do not hold or issue
derivative financial instruments for speculation or trading purposes.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Except as noted below, there have been no significant changes to
ongoing litigation matters during the quarterly reporting period ended September
30, 2000. Additionally, from time to time, EarthCare is or may become involved
in litigation and claims arising out of the ordinary course of business.
In April 2000, World Fuel Services ("WFS") filed a demand for
arbitration against EarthCare alleging breach of contract, which requests
damages in the approximate amount of $3.7 million plus interest, late fees,
court costs and attorneys fees. In accordance with terms of an acquisition
agreement, the parties have agreed to arbitrate this matter in Miami-Dade
County, Florida. EarthCare has zealously presented its position 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, financial condition, results of
operations or cash flows. Arbitration proceedings are currently scheduled to
occur from November 2000 through March 2001.
ITEM 2 - CHANGES IN SECURITIES
None.
19
<PAGE> 20
EARTHCARE COMPANY
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
During the third quarter of 2000, we hired two new executive officers.
In July 2000, we hired William W. Solomon, Jr. as our Vice President and Chief
Financial Officer and in September 2000 we hired Peter H. Trembath as our Vice
President and General Counsel.
William W. Solomon, Jr., age 44, has served as Vice President and Chief
Financial Officer of EarthCare since July 5, 2000. Mr. Solomon previously served
as Executive Vice President, Chief Financial Officer and Treasurer of Precept
Business Services, Inc., from June 1998 to June 2000. Precept Business Services
engaged primarily in the distribution of office products and also provided
executive transportation services. From August 1996 to May 1998, Mr. Solomon
served as Vice President and Corporate Controller of American Pad & Paper
Company, a manufacturer of paper based office products, in Dallas, Texas. From
August 1994 to July 1996, Mr. Solomon served as a Senior Audit Manager for
PricewaterhouseCoopers in Dallas, Texas, and from November 1992 to July 1994,
Mr. Solomon served as a Senior Audit Manager for BDO Seidman in Grand Rapids,
Michigan. Mr. Solomon received his B.A. degree in Business Administration -
Accounting from Washington State University in 1978 and is a certified public
accountant.
Peter H. Trembath, age 48, has served as Vice President and General
Counsel of EarthCare since September 11, 2000. Mr. Trembath previously served as
Senior Vice President, General Counsel and Secretary of Precept Business
Services, Inc. from July 12, 1999 through September 8, 2000. From January 1999
through June 1999, Mr. Trembath was engaged in the private practice of law and
acted as an independent consultant. From November 1993 to December 1998, Mr.
Trembath served as Vice President, Secretary and General Counsel of Benson
Eyecare Corporation, a manufacturer, retailer and wholesaler of prescription and
non-prescription eyewear and related products, and then its successor, Lumen
Technologies, Inc. (f/k/a BEC Group, Inc.), which was engaged principally in the
manufacture and sale of specialty lighting products. Both Benson and Lumen were
publicly held corporations listed on the Nasdaq National Market. He also served
from March 1997 to December 1998 as Vice President, Secretary and General
Counsel of Bolle, Inc., a Nasdaq listed company and manufacturer and distributor
of designer sunglasses, sport eyewear and goggles, which was spun off by Lumen
Technologies in March of 1997. Prior to November 1993, Mr. Trembath served for a
number of years as Vice President, Secretary and General Counsel of BMC
Industries, Inc., an NYSE listed corporation engaged in the manufacture and
distribution of ophthalmic lenses and precision etched electronic parts. Mr.
Trembath received his A. B. and M.A. degrees in European history from The
University of Michigan. He received his J.D. degree from The University of
Michigan Law School in 1982.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
99.1 Second Amendment to the Amended and Restated Credit Agreement,
dated as of October 31, 2000 among EarthCare Company, various
financial institutions, and Bank of America, N.A., as
administrative agent.
(b) Reports on Form 8-K
None.
SIGNATURE
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 11, 2000
By: /s/ William W. Solomon, Jr.
-------------------------------------------
Vice President, Chief Financial Officer and
Principal Accounting Officer
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
99.1 Second Amendment to the Amended and Restated Credit Agreement, dated
as of October 31, 2000 among EarthCare Company, various financial
institutions, and Bank of America, N.A., as administrative agent.
</TABLE>
