ITEM 1. BUSINESS
GENERAL
EarthCare Company ("EarthCare" or the "Company") engages in the following services relating to the nonhazardous liquid waste ("NLW") industry: biosolids management, bulk liquid waste transportation, liquid waste processing and disposal, maintenance and pumping. EarthCare's customers include restaurants, hospitals, military bases, office buildings, apartments, schools, municipalities, industrial businesses and single family residences. Effective May 13, 1998, EarthCare merged with and into Microlytics, Inc., a Delaware corporation ("Micro"), with Micro surviving the merger and changing its name to SanTi Group, Inc. Effective September 21, 1998, SanTi Group, Inc. changed its name to EarthCare. All references to EarthCare or the Company include its operating subsidiaries unless the context indicates otherwise. EarthCare intends to expand its presence in the NLW industry through internal growth and acquisitions of local service providers throughout the United States. The Company believes acquisitions, by consolidating smaller local service providers, will create synergies and improve efficiencies in the area of NLW management.
THE NLW INDUSTRY
The Company estimates that the septic tank and grease trap business segment of the U.S. domestic NLW industry generates approximately $20 billion in revenues annually. There are approximately 25,000 service providers currently in the NLW industry and, of these service providers, approximately 75% generate less than $500,000 of annual revenues. The Company believes the NLW industry will continue to grow based on increased waste from a growing population and general economic conditions that are driving new building demand and the need for NLW services.
Because the NLW industry is so highly fragmented, management believes the industry has the potential for significant cost savings by the economies of scale that may be realized in consolidation. These costs savings would include efficiencies as a result of common billing, the coordination of advertising, the elimination of duplicative professional and technical support providers, the standardization and upgrading of equipment and the improvement of employee training. EarthCare intends to determine lines of the NLW business in which an acquired service provider is not currently engaged and, if appropriate, assist the service provider in expanding into those areas. There can be no assurance, however, that EarthCare will be able to profitability consolidate service providers within the NLW industry.
THE COMPANY
EarthCare currently engages in each of the NLW businesses described above. EarthCare's operating subsidiaries include: Bone-Dry Enterprises, Inc.; EarthCare Company of Florida, Inc.; EarthCare Company of Pennsylvania, Inc.; and EarthCare Company of New York, Inc. Each subsidiary intends to acquire additional assets from local service providers and act as an operating division of EarthCare in the area in which it is located. These local operating divisions operate under various tradenames, as described below.
Bone-Dry Enterprises, Inc. ("Georgia Group"). The Georgia Group is engaged in NLW collection and hauling operations in the state of Georgia. The Georgia Group operates under the following tradenames: Andrews Environmental, Bone-Dry Enterprises ("Bone-Dry") and Quality Plumbing and Septic.
EarthCare Company of Florida, Inc. ("Florida Group"). The Florida Group is engaged in NLW collection and hauling operations in the state of Florida. The Florida Group operates under the following tradenames: Brownie Environmental Services and A Rapid Rooter Sewer and Drain.
EarthCare Company of Pennsylvania, Inc. ("Pennsylvania Group"). The Pennsylvania Group is engaged in NLW collection and hauling operations in the state of Pennsylvania. The Pennsylvania Group has one wholly owned subsidiary, Nutrecon, Inc., which holds the operating permits and the leases for a facility acquired from Ferrero Wastewater Management, Inc., in Ambler, Pennsylvania. The Pennsylvania Group
operates under the following tradenames: Ferrero Wastewater Management and Eldredge Wastewater Management.
EarthCare Company of New York, Inc. ("New York Group"). The New York Group is engaged in NLW collection and hauling operations in the state of New York. The New York Group operates under the following tradenames: RGM Liquid Waste Removal and Devito Environmental.
DESCRIPTION OF BUSINESS
The Company receives fees to collect, process and dispose of nonhazardous liquid wastes. Collection fees charged to customers vary per gallon by waste stream according to constituents of the waste, expenses associated with processing the waste and competitive factors. Grease trap waste from restaurant and other food processing and preparation facilities is transported to EarthCare's facilities in vacuum trucks, trailers and other transportable containers. EarthCare operates a fleet of vehicles to collect waste directly from generators and receives waste from independent transporters servicing additional waste generators. Using a variety of physical, chemical, thermal and other biological techniques, the waste is broken down into constituent components. Water extracted from the waste is pretreated and then discharged into the municipal sanitary sewer system or applied to leased grasslands. Solid materials are dried and disposed of in a solid waste landfill. At some locations where the Company does not have pretreatment facilities, the waste is transported to private pretreatment facilities, or, where permitted by local regulations, directly to municipal or private wastewater treatment facilities.
EarthCare also engages in the business of biosolids management through the reuse of organic materials. EarthCare provides transportation, treatment, site monitoring, and land application to private companies. EarthCare's vehicles pick up and transport biosolids to various sites. EarthCare also provides professional management and consulting services for treatment of biosolids and the monitoring and application onto leased grasslands of treated biosolids.
The Company benefits from federal, state and local regulations prohibiting the disposal of grease trap waste and other waste in municipal collection and treatment systems. Although restaurants, food processing and preparation facilities and other industrial operations have produced such waste for many years, regulations governing the management of NLW, and the enforcement of such regulations, are becoming increasingly stringent. These requirements have increased the value of EarthCare's services to its customers in recent years. As federal, state and local regulations governing the disposal of NLW increase, EarthCare believes the amount of NLW products delivered to third parties for processing and disposal will continue to increase.
EarthCare intends to target the acquisition and integration of local service providers in the NLW industry that EarthCare believes will be profitable additions to the Company. EarthCare intends to focus on the integration of entities acquired to increase profits and productivity through operational and efficiency improvements and standardization of procedures, equipment and procurement procedures.
EarthCare intends to establish local operating facilities or service centers throughout the United States, with initial service centers established in major population centers. Acquired local service providers in these areas will be converted to service centers. A service center manager at each location will be responsible for the service center's overall performance.
PREDECESSOR CORPORATIONS
SanTi Group, Inc. ("SGI"), a privately-held corporation, was incorporated in Delaware on August 19, 1997, for the purpose of engaging, through its operating subsidiaries, in the following businesses related to the NLW industry: grease trap pumping, septic tank services (including designing, pumping, installation, and maintenance); sewer and drain cleaning services; high pressure jetting services; portable toilet servicing; bulk liquid waste transportation; biosolids management; on-site biotreatment systems and liquid waste processing and disposal. In December 1997, SGI acquired the assets of Bone-Dry in a share exchange in which each share of Bone-Dry was exchanged for 1.3 shares of SGI. Bone-Dry was formed in March 1997 to acquire businesses in the NLW industry. SGI and Bone-Dry were primarily controlled by Mr. Raymond M. Cash,
Vice Chairman of the Board of Directors of the Company, and entities controlled by Mr. Cash. Following a stock split effected in the form of a 0.25 per share stock dividend effective January 30, 1998 (the "Stock Dividend"), SGI had approximately 8,088,379 shares of common stock, $.0001 par value per share (the "SGI Stock"), issued and outstanding as of the date of the merger of SGI into Micro, as described below.
Micro was incorporated in Delaware in 1985 for the purposes of engaging in the business of developing, manufacturing and marketing electronic reference products, including computer software programs which provided linguistic and information compression technology, bilingual dictionaries and thesaurus products. In 1989, Micro operated as a wholly owned subsidiary of Selectronics, Inc. ("Selectronics"). In 1995, Selectronics changed its name to Microlytics, Inc. In the early 1990's, Micro began experiencing financial difficulties as a result of the highly competitive nature of the computer software industry. On November 27, 1996, Micro filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Western District of New York (the "Court"). In July of 1997, substantially all of the intangible assets of Micro and its subsidiary were sold to Metro One Telecommunications, Inc. In August of 1997, substantially all of the tangible assets of Micro were also sold. The proceeds of these sales were held in a segregated trust account by the debtor's counsel prior to the Court's confirmation of Micro's plan of reorganization.
In April of 1998, Micro filed a Plan of Reorganization (the "Plan") that was approved by its stockholders, the creditor's committee and the Court. Pursuant to the Plan, Micro effected a 1 for 400 reverse stock split, distributed the proceeds from asset liquidations to its creditors, and distributed shares and warrants to its creditors and stockholders. The Plan provided for this reverse stock split prior to the merger of SGI and Micro, as described below. Pursuant to the Plan, any shareholder of Micro as of April 30, 1998 who, as a result of the 1 for 400 reverse stock split, held less than 100 shares, had his or her shares rounded up to 100 shares. Also under the Plan, Micro issued warrants for 500,000 shares of Micro common stock, exercisable at $5.80 per share.
THE MERGER AND NAME CHANGES
On May 13, 1998, SGI was merged with and into Micro under an agreement, and plan of merger, with Micro surviving and changing its name to SanTi Group, Inc. (the "Merger"). Effective September 21, 1998, SanTi Group, Inc. changed its name to EarthCare Company by filing an amendment to its Certificate of Incorporation with the Delaware Secretary of State. The Merger was subject to the approval of the Court. On the effective date of the Merger, each issued and outstanding share of SGI stock was converted into one share of common stock of Micro (now EarthCare). These exchange ratios were determined after the 1 for 400 reverse split of Common Stock pursuant to the Plan. This exchange resulted in the receipt of SGI stockholders of approximately 8,088,379 shares of Common Stock, representing approximately 86.2% of the shares of Common Stock issued and outstanding on the effective date of the Merger. All options to acquire shares of SGI stock were also converted into options to receive shares of Common Stock. EarthCare succeeded to all of the assets, liabilities and NLW business of SGI.
ACQUISITIONS
EarthCare intends to expand its business in the NLW industry through internal growth and the acquisition of local NLW service providers throughout the United States. These acquisitions will be made with cash, shares of Common Stock, or a combination of cash and shares of Common Stock. EarthCare's acquisition strategy has been developed with the goal of increasing the efficiency and profitability of acquisition targets through operational and marketing synergies with EarthCare's existing business operations. EarthCare will provide professional management to these acquired entities to eliminate duplicative processes and procedures among the acquired businesses. The services that EarthCare intends to provide to the acquired entities include: sales management, accounts receivable and accounts payable management, debt collection, financial reporting, tax management, advertising, purchasing, legal, health and safety, environmental, human resources and training. Customer service representatives will also be provided. These services are intended to allow the local managers to focus on the growth of regional business.
Between March 1997 and December 1998, EarthCare (or Bone-Dry) completed several acquisitions of NLW local service providers. These acquisitions geographically extended EarthCare's processing operations to New York, Philadelphia and Miami, and increased its market penetration in Georgia. The total cost of the acquisitions, including contingent consideration, was $21,374,120 in cash, $2,257,350 in notes to sellers and 565,000 shares of Common Stock. In addition, EarthCare entered into one-year agreements with certain key managers that include severance payments if terminated before expiration.
Andrews Environmental, Inc. ("Andrews"). In March 1997, Bone-Dry acquired a portion of the assets of Andrews, operating as Andrews' grease disposal business for $475,000 in cash and $257,350 in notes. The Company later issued 14,479 shares of Common Stock in settlement of these notes. Andrews was in the business of commercial and governmental grease extraction, collection, and transportation services in the state of Georgia. In December 1997, Bone-Dry acquired the remaining assets of Andrews for $660,000 in cash and 21,400 shares of Common Stock. Contingent consideration of 13,600 shares of Common Stock was paid in December 1998.
Atlanta Grease Trap ("Atlanta Grease"). In August 1997, Bone-Dry acquired the assets of Atlanta Grease, for approximately $360,000 in cash. Atlanta Grease was in the business of commercial and governmental grease extraction, collection and transportation services in Georgia.
Ferrero Wastewater Management, Inc. ("Ferrero"). In January 1998, the Pennsylvania Group acquired the assets of Ferrero for $2,240,100 in cash and 90,000 shares of Common Stock. Contingent consideration of $248,900 in cash and 10,000 shares of Common Stock was paid in the fourth quarter of 1998.
A Rapid Rooter Sewer and Drain Service, Inc. ("A Rapid"). In February 1998, the Florida Group acquired the assets of A Rapid for $3,300,000 in cash, payment of existing debt totaling approximately $690,120 and 100,000 shares of Common Stock.
Quality Plumbing & Septic ("Quality"). In February 1998, the Georgia Group acquired the assets of Quality for $2,000,000 in cash. Contingent consideration of $250,000 in cash was paid in June 1998 and 10,000 shares of Common Stock were issued in July 1998.
Seagraves, Inc. ("Seagraves") and Grease-Tec, Inc. ("Grease-Tec"). The Florida Group acquired the assets of Seagraves and Grease-Tec in March 1998 for $3,250,000 in cash, a promissory note in the amount of $2,000,000 and 60,000 shares of Common Stock. A security interest in the assets of Seagraves and Grease-Tec was granted to the sellers to collateralize the promissory note.
R.G.M. Liquid Waste Removal Corporation and Affiliates. ("RGM"). In May 1998, the New York Group acquired certain assets of RGM and its affiliates for $4,500,000 in cash and 105,000 shares of Common Stock. Contingent consideration of $1,000,000 and 55,000 shares of Common Stock may be payable one year after the date of purchase.
Eldredge Wastewater Management, Inc ("Eldredge"). In May 1998, the Pennsylvania Group acquired certain assets of Eldredge for $2,040,000 in cash and 85,000 shares of Common Stock. Contingent consideration of $360,000 in cash and 15,000 shares of Common Stock may be payable 13 months after the date of purchase.
In connection with each acquisition, EarthCare may have assumed or succeeded to certain liabilities of the acquired businesses, which may include environmental liabilities except as described above. EarthCare has obtained representations from the sellers of the acquired businesses that no undisclosed liabilities exist and certain rights to indemnification from the sellers for any liabilities. There can be no assurance, however, that undisclosed liabilities do not exist or that EarthCare will receive full or partial compensation pursuant to its rights to indemnification.
RECENT ACQUISITIONS
On March 1, 1999, EarthCare acquired all of the outstanding capital stock of Reifsneider Transportation Inc. ("Reifsneider"), a Pennsylvania corporation, in exchange for an aggregate consideration of $10,325,000, paid in cash, common stock, and seller note payable to the former shareholder of Reifsneider. Reifsneider is a
commercial and industrial liquid waste transportation and disposal services company servicing customers in eastern Pennsylvania, Delaware, Maryland, New Jersey and New York. The Company currently intends to operate Reifsneider in substantially the same manner as it was operated prior to the acquisition. The Company funded the cash portion of the purchase price with $5,250,000 in borrowings under the Company's revolving credit facility with Bank of America National Trust and Savings Association (the "Credit Agreement"), issued 350,000 shares of EarthCare's common stock pursuant to its registration statement on Form S-1 and delivered a $200,000 note payable to the former shareholder of Reifsneider.
COMPETITION
EarthCare competes with a significant number of other NLW service providers. Competitors compete primarily on the basis of proximity to collection operations, fees charged and quality of service. EarthCare must compete with area landfills that accept grease trap waste. Future technological changes and innovations may result in a reduction in the amount of NLW generated, or in alternative methods of treatment and disposal being developed. EarthCare also faces competition from customers that may seek to enhance and develop their own methods of disposal. Increased use of internal treatment and disposal methods and other competitive factors may have a material adverse effect on EarthCare's business, results of operation and financial condition.
EarthCare will be at a disadvantage in competing against service providers that are better capitalized, have greater name recognition, have more background and experience, have greater financial, technical, marketing and other resources and skills, have better facilities and are able to provide services or products at a lower cost than EarthCare. As the NLW industry is currently highly fragmented, the addition of local NLW service providers is the only strategy by which EarthCare may be able to penetrate existing markets. Even if the Company is successful in consolidating local service providers in a given area, there can be no assurance that new competitors will not enter the market due to the low barriers to entry in the NLW industry. As a result of these competitive factors, there can be no assurance that EarthCare's growth strategy will be successful or that EarthCare will be able to generate cash flow adequate for its operations and to support future acquisitions and internal growth.
In addition to internal growth, the growth of EarthCare, to a significant extent, will depend on its continued acquisition of NLW service providers. EarthCare expects competition to exist in the industry to acquire these candidates, which may limit the number of acquisition opportunities and may lead to higher acquisition costs. Acquisitions of these entities entail various risks, including failure of the acquired service providers to achieve expected results, diversion of management's attention, failure to retain key personnel of the acquired service providers and risks associated with unanticipated events and liabilities. All of these risks may have an adverse effect on the ability of EarthCare to make additional acquisitions and on its business condition and results of operations. Any complementary businesses that are acquired also may not be successfully integrated.
CUSTOMERS
EarthCare's customers include restaurants, hospitals, military bases, office buildings, apartments, schools, municipalities, industrial businesses and single family residences. No customers accounted for more than ten percent of EarthCare's revenues during 1998.
GOVERNMENT REGULATIONS AND ENVIRONMENTAL MATTERS
EarthCare is subject to rules and regulations of various federal, state and local governmental agencies. Environmental laws and regulations are, and will continue to be, a principal factor affecting the marketability of the services provided by EarthCare. Any changes in these laws or regulations may adversely affect the operations of EarthCare by imposing additional regulatory compliance costs on EarthCare, requiring the modification of or adversely affecting the market for EarthCare's services. To the extent that demand for these services is based upon the need to comply with these regulations, any modification to these regulations may
decrease the demand for these services and adversely affect EarthCare's business condition and results of operations.
Additionally, if new environmental legislation or regulations are enacted or existing legislation or regulations are amended or enforced differently, EarthCare may be required to obtain additional operating permits, registrations or approvals. The process of obtaining required permits, registrations or approvals can be lengthy and expensive and the issuance of such permits or the obtaining of such approvals may be subject to public opposition. There can be no assurance that EarthCare will be able to meet the applicable regulatory requirements.
The Resource Conservation and Recovery Act ("RCRA") is the principal federal statute governing hazardous and solid waste generation, treatment, storage and disposal. RCRA and state hazardous waste management programs govern the handling and disposal of "hazardous waste." The U.S. Environmental Protection Agency ("EPA") has issued regulations pursuant to RCRA. States have also promulgated regulations under comparable state statutes that govern hazardous waste generators, transporters and owners and operators of hazardous waste treatment, storage and disposal facilities. These regulations impose detailed operating, inspection, training and emergency preparedness and response standards and requirements for the financial responsibility, manifesting of wastes, record keeping and reporting, as well as treatment standards for any hazardous wastes intended for land disposal.
NLW is currently exempt from the requirements of RCRA. The repeal or modification of the RCRA exemption covering NLW, or the modification of applicable regulations or interpretations regarding the treatment or disposal of NLW, may require EarthCare to alter its method of treating and disposing of NLW. EarthCare's current methods do not comply with the methods prescribed by the EPA for treatment and/or disposal of waste as defined by RCRA. These potential changes may result in decreased demand for EarthCare's services and could have a material adverse effect on EarthCare's business.
The Comprehensive Environmental Response, Competition and Liability Act ("CERCLA") provides for immediate response and removal actions coordinated by the EPA for releases of hazardous substances into the environment and authorizes the government or private parties to respond to the release or potential release of hazardous substances. The government may also order persons responsible for the release to perform any necessary cleanup. Liability extends to the present owners and operators of waste disposal facilities from which a release occurs, persons who owned or operated the facilities at the time the substance was released, persons who arranged for the disposal or treatment of hazardous substances and waste transporters who selected such facilities for treatment or disposal of hazardous substances. CERCLA creates strict, joint and several liability for all costs of removal and remediation, other necessary response costs and damages for injury to natural resources.
Because the Company will be engaged in businesses that involve the treatment and removal of nonhazardous liquid waste, EarthCare does not expect to be subject to CERCLA. However, if EarthCare were to acquire a business that in the past has disposed of hazardous waste or treated hazardous waste that falls within the parameters of CERCLA, EarthCare may be held jointly and severally liable for the costs of any damage or required cleanup of the site.
During the ordinary course of its operations, the Company has from time to time received, and expects that it may in the future receive, citations or notices from governmental authorities that its operations are not in compliance with its permits or certain applicable regulations, including various transportation, environmental or land use laws and regulations. The Company generally seeks to work with the authorities to resolve the issues raised by such citations or notices. There can be no assurance; however, that the Company will always be successful in this regard, and the failure to resolve a significant issue could result in adverse consequences to the Company.
INSURANCE
While the Company maintains insurance, such insurance is subject to various deductible and coverage limits and certain policies exclude coverage for damages resulting from environmental contamination. There
can be no assurance that insurance will continue to be available to the Company on commercially reasonable terms, that the possible types of liabilities that may be incurred by the Company will be covered by its insurance, that the Company's insurance carriers will be able to meet their obligations under their policies or that the dollar amount of such liabilities will not exceed the Company's policy limits. An uninsured claim, if successful and of significant magnitude, could have a material adverse effect on the Company's business, results of operations and financial condition.
EMPLOYEES
As of December 31, 1998, EarthCare had 192 employees. It is anticipated that the acquisition and integration of additional NLW service providers will add employees as acquisitions are made but that the number of employees in acquired businesses may be reduced as duplicate processes are eliminated.
INCORPORATION AND EXECUTIVE OFFICE
EarthCare was incorporated in Delaware on August 19, 1997. Its principal executive offices are located at 14901 Quorum Drive, Suite 200, Dallas, Texas 75240. Its telephone number at such offices is (972) 858-6025.
ITEM 2.
ITEM 2. PROPERTIES
As of December 31, 1998, neither EarthCare nor any of its subsidiaries currently own any real property. EarthCare's corporate offices are located in Dallas, Texas, and are under a sublease from VHA Southwest, Inc., for a current rate of $12,953.33 per month, expiring July 31, 2003.
The following properties are leased by the Florida Group: (i) property leased from William E. and Joan C. Rice for a term of two and one-half years, commencing on February 13, 1998 at a rate of $4,000 per month and guaranteed by EarthCare (ii) property in Orlando, Florida, leased for $84,000 annually; the lease expires March 6, 2003 and is guaranteed by EarthCare.
The Georgia Group is leasing property in Austell, Georgia, under a sublease from BFI Services Group, Inc., for a rate of $4,680 per month, terminating on January 13, 2001.
The following properties are leased by the New York Group: (i) property in Deer Park, New York, leased for $11,500 per month; the lease expires May 31, 1999, and (ii) property in Deer Park, New York, leased for $2,000 per month; the lease expires May 31, 1999.
The following properties are leased by the Pennsylvania Group: (i) property in Ambler, Pennsylvania, leased to Nutrecon, Inc. by Ambler Realty, expiring on December 31, 1999; the lease is for a monthly rate of $6,000 (ii) sublease from Eldredge Associates, Inc., for all real property formerly utilized by Eldredge Associates at a rate of $7,600 per month, terminating on May 7, 1999.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1998, there were no material claims or suits against EarthCare or its operating subsidiaries. EarthCare may become involved in litigation and claims arising out of the ordinary course of its business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers and key employees are as follows:
Donald F. Moorehead, Jr., Chief Executive Officer and Chairman of the Board of EarthCare since June 1998. Mr. Moorehead served as Vice Chairman and Chief Development Officer of USA Waste Services, Inc. ("USA Waste") from May 1994 through August 1997. From October 1990 until May 1994, he served as Chairman of the Board and Chief Executive Officer of USA Waste. Mr. Moorehead was also a founder of USA Waste. Mr. Moorehead has served as Director for the Environmental Research and Education Foundation since November of 1996. Mr. Moorehead serves on the board of FYI, Inc., a document and information outsourcing company, and United Road Services, Inc., a towing and transport service company. Mr. Moorehead was a member of the compensation committee for FYI, Inc.
Terry W. Patrick, President, Chief Operating Officer and Director of EarthCare since June 1998. Mr. Patrick served as Chief Operating Officer of Eastern Environmental, a solid waste management company, from June 1996 to December 1997. From August 1994 to April 1996, he managed personal investments and served as President and was the founder of Chem-Mark Services, a commercial chemical manufacturing and distributing company. From August 1993 to August 1994, he served as President and Chief Executive Officer of EDM Corporation, a subsidiary of USA Waste. From April 1990 to August 1993, he served as President and Chief Operating Officer of USA Waste, Inc., a solid waste management company.
James E. Farrell, Vice President and Chief Financial Officer since October 1998. From September 1997 to August 1998, Mr. Farrell served in Vice President of Finance and Chief Financial Officer positions at Adams Golf Inc. From June 1995 to September 1997, Mr. Farrell served as a Manger for The Pittston Company (a diversified holding company), where he was responsible for financial review and reengineering in the security services and air freight divisions. From May 1994 to June 1995, Mr. Farrell was employed by ADT Security Systems, Inc. as Manager of Planning & Marketing. Prior thereto, he served as Director of Accounting for Brinks Home Security, Inc. from September 1986 to December 1993. Mr. Farrell has over 17 years of business experience and is a Certified Public Accountant.
Earl Mikolitch, Vice President of Operations since July 1998. Mr. Mikolitch served as Vice President of Operations at Waste Management, Inc. (and its predecessors) from January 1992 to July 1998. From January 1989 to January 1992, he served as Executive Vice President of Browning Ferris Industries, Europe.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION
The Common Stock has been listed on the Nasdaq OTC Bulletin Board since June 1998. The shares subject to trading on the Nasdaq OTC Bulletin Board represent approximately 27% of the total outstanding shares of Common Stock. The trading symbol for the Common Stock is "ECUS." The closing price for the Common Stock on March 12, 1999 was $14.4375 per share.
The following table sets forth, for the periods indicated, the high and low closing prices for the Common Stock as reported by NASDAQ. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
As of March 12, 1999, there were 1,003 record holders of the Common Stock.
EarthCare has contractual obligations to issue up to 70,000 additional shares of common stock if the conditions relating to revenue guarantees contained in certain acquisition agreements with NLW service providers are met. As of March 12, 1999, approximately 168,077 warrants to purchase shares of Common Stock with an exercise price of $5.80 were outstanding. EarthCare has also issued a warrant to purchase 50,000 shares of Common Stock with an exercise price of $13.00 per share to Bank of America pursuant to the Credit Agreement and has options outstanding to various employees, officers and directors, and other non-employees to purchase a total of 2,082,950 shares of Common Stock at exercise prices ranging from $5.00 to $25.00 per share.
The Company has not declared or paid any cash dividends on its Common Stock. The Company currently intends to retain future earnings to finance its growth and development and, therefore, does not anticipate paying cash dividends in the foreseeable future. Payment of any future dividends will depend upon the future earnings and capital requirements of the Company and other factors that the Board of Directors considers appropriate. Additionally, the terms of the Company's Credit Agreement restrict the payment of cash dividends on any of its capital stock.
RECENT SALES OF UNREGISTERED SECURITIES
On March 19, 1997, Raymond Cash and Joyce Bone purchased a total of 16,250 shares of Common Stock (reflecting the Bone-Dry exchange and the Stock Dividend) for $10,000. The proceeds from this sale were used to fund working capital.
On August 19, 1997, Raymond Cash purchased 1,625,000 of Common Stock for $130,000. The proceeds from this purchase were used to acquire new service providers and fund working capital needs of the Company.
On December 1, 1997, the Cash Family Limited Partnership purchased 1,608,750 shares of Common Stock (reflecting the Bone-Dry exchange and the Stock Dividend) for $650,000. The Cash Family Limited Partnership is controlled by an entity controlled by Raymond Cash. The proceeds from this sale were used to acquire new service providers.
On December 22, 1997, 14,479 shares of Common Stock were issued to Andrews in exchange for the settlement of a note payable in the amount of $263,663.
On December 22, 1997, 21,400 shares were issued as consideration for $17,120 of the acquisition price of Andrews.
On January 12, 1998, the Company sold 1,250,000 shares of Common Stock for $1,000,000. The proceeds were used to acquire new service providers and fund working capital needs of the Company.
On January 22, 1998, 90,000 shares of Common Stock were issued as consideration for $72,000 of the acquisition price of Ferrero.
On February 13, 1998, 100,000 shares of Common Stock were issued as consideration for $100,000 of the acquisition price of A Rapid.
On March 6, 1998, 60,000 shares of Common Stock were issued as consideration for $60,000 of the acquisition price of Seagraves.
On April 2, 1998, the Company sold 2,000,000 shares of Common Stock for $11,600,000. The proceeds raised by this private offering were used to acquire new service providers and fund working capital needs of the Company.
On May 1, 1998, 105,000 shares of Common Stock were issued as consideration for $609,000 of the acquisition price of RGM.
On May 4, 1998, the Company sold 500,000 shares of Common Stock for $2,900,000. The proceeds raised by this private offering were used to acquire new service providers and fund working capital needs of the Company.
On May 8, 1998, 85,000 shares of Common Stock were issued as consideration for $493,000 of the acquisition price of Eldredge.
All of these shares of Common Stock were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") in private transactions not involving a public offering. These shares were registered under a Registration Statement on Form S-1 that was declared effective by the Securities and Exchange Commission on December 9, 1998. These shares are subject to lock-up agreements and to restrictions on transferability and resale except as permitted under the Securities Act and applicable state securities laws.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company. The selected financial data for the period from inception (March 19, 1997) to December 31, 1997 and for the year ended December 31, 1998, are derived from the audited financial statements of the Company. The selected financial data for the years ended December 31, 1995 and 1996 and for the period from January 1, 1997 to December 21, 1997 are derived from the audited financial statements of the predecessor of the Company, Andrews. The selected financial data for the year ended December 31, 1994 is derived from the unaudited financial statements of the Predecessor. As a result of acquisitions occurring in 1997 and 1998, the Company's historical financial statements are not representative of the financial results expected for future periods. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated financial statements of the Company and Predecessor and notes thereto included elsewhere herein.
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(1) Intangibles, net, consist primarily of goodwill and noncompete agreements. Noncompete agreements are amortized over the lives of the contracts. Goodwill is being amortized over 40 years. See Note 2 to EarthCare's Consolidated Financial Statements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
EarthCare engages in businesses relating to the NLW industry. These businesses include grease trap pumping, septic tank services (including designing, pumping and maintenance), sewer and drain cleaning services; high pressure jetting services, portable toilet servicing; bulk liquid waste transportation; on-site biotreatment systems; biosolids management; and liquid waste processing and disposal. The customers of EarthCare include restaurants, hospitals, military bases, office buildings, apartments, schools, municipalities, industrial businesses and single family residences.
EarthCare intends to expand its business in the NLW industry through internal growth and the acquisition of local service providers throughout the United States. These acquisitions will be made with cash, shares of Common Stock or a combination of cash and Common Stock. EarthCare's strategy is to increase the efficiency and profitability of each of the acquisition targets through operational and marketing synergies with EarthCare's existing business operations.
The NLW industry serves a basic need -- the collection, treatment and disposal of food and septic waste. Demand for NLW services is driven primarily by population and the general level of economic activity. Increasing regulation at the federal, state and local level, as well as increased awareness of and demand for, a safer and cleaner environment are creating the need for a more professional and environmentally responsible NLW industry.
GENERAL
The Company derives the majority of its revenues from commercial and residential septic services (including designing, pumping and maintenance) (approximately 59% of current revenues) and to a lesser extent sewer and drain services (approximately 20% of current revenues). Collection fees charged to customers vary per gallon by waste stream according to constituents of the waste, expenses associated with processing the waste and competitive factors. Cost of operations consist of fixed costs such as salaries and benefits of vehicle operators and construction labor and variable costs such as supplies, fuel and equipment rentals. General and administrative costs consist primarily of compensation and related benefits for executives and administrative staff, advertising, office rent, communications and professional fees. Depreciation and amortization expense primarily relates to the depreciation of capital assets, the amortization of excess cost over the fair value of net assets acquired (goodwill) and other intangible assets. The Company's policy is to amortize goodwill over a 40-year life.
From its inception on March 19, 1997 through December 31, 1998, the Company has acquired nine businesses, all of which were accounted for using the purchase method of accounting. In connection with these acquisitions the Company recorded goodwill of approximately $19.9 million, which is being amortized over 40 years. At December 31, 1998, the Company's balance sheet includes net goodwill of $19.5 million. This amount represents 59% of total assets and 103% of stockholders' equity. Goodwill arises when the purchase price and other related costs for a business acquisition exceed the fair value of the net assets acquired. Generally accepted accounting principles require that goodwill be amortized over the expected benefit period. The Company has reviewed all of the known factors and related anticipated future cash flows in evaluating the amount of goodwill recorded in conjunction with each business acquisition. From this analysis, the Company has concluded that the anticipated future cash flows associated with the recognized goodwill will continue indefinitely, and there is no persuasive evidence that any material portion of it will dissipate over a period shorter than 40 years. Prior to their acquisition by the Company, the acquired businesses were managed as independent private businesses, and their results of operations reflect different tax structures (S corporations and C corporations), which have influenced, among other things, their historical levels of owners' compensation. Certain owners who continued employment with the Company agreed to reductions in their compensation and benefits in connection with the acquisition of their businesses by the Company.
In connection with each of its acquisitions, the Company attempts to implement a number of cost saving measures, including possible reductions in management levels and other personnel, the implementation of centralized management and cost controls and the elimination of duplicate collection routes.
RESULTS OF OPERATIONS
On March 20, 1997, the Company purchased certain assets of Andrews associated with the Andrews grease disposal business. On December 22, 1997, the Company acquired the remaining assets and ongoing business of Andrews. For financial reporting purposes Andrews is considered the predecessor to the Company (the "Predecessor"). As a result of the Company's recent acquisitions and the limited period of ownership of the acquired businesses, the Company believes that the period-to-period comparisons and percentage relationships within the periods set forth below are not meaningful.
The following table sets forth the percentage of certain items in relation to net revenue:
Year Ended December 31, 1998
Net Income (Loss): For the year ended December 31, 1998, the Company reported a loss of $1,429,092 on revenues of $25,690,672.
Revenues: Revenues for the year ended December 31, 1998, consist of revenues from each of the businesses acquired in 1997 plus revenues from businesses acquired during 1998 from the date of each acquisition. The nine completed acquisitions contributed approximately $24.2 million or 94% of revenues for the year ended December 31, 1998.
Cost of Operations: Cost of operations consist of fixed costs such as salaries and benefits of vehicle operators and construction labor and variable costs such as supplies, fuel and equipment rentals. The operating margin for the year ended December 31, 1998, was 30%.
General and Administrative: For the year ended December 31, 1998, general and administrative expense totaling $7,509,375 includes non-recurring expenses associated with the relocation of the corporate headquarters to Dallas, Texas; expenses associated with registering the Company as a reporting company with
the Securities and Exchange Commission; and costs associated with the establishment of the Company's management team.
Depreciation and Amortization: Depreciation and amortization was $1,348,357 or 5% of revenues for the year ended December 31, 1998.
Loss from Operations: The loss from operations of $1,074,096 is primarily the result of the high level of general and administrative expense.
Interest Expense: Interest expense for the year ended December 31, 1998 was $657,455. Interest was incurred at an average rate of approximately 7.2% during the year ended December 31, 1998.
Income Tax Benefit: An income tax benefit of 38% of pretax loss has been computed in accordance with SFAS No. 109 "Accounting for Income Taxes." The tax benefit has been offset by a valuation allowance of $223,423. Realization of the net tax asset is dependent on the Company generating sufficient taxable income in future periods. During 1998, a determination was made by management that it is not likely that a portion of the deferred tax asset will be realized, accordingly, a valuation allowance has been recorded. As the Company continues to grow through acquisitions, management will evaluate the realizability of this asset and adjust the valuation allowance accordingly. To date, all acquisitions have been taxable asset purchases in which the Company obtained a full basis in acquired tangible and intangible assets. To the extent the Company makes future nontaxable acquisitions, the Company's effective rate may differ significantly from its statutory rate due to nondeductible goodwill amortization.
Period from Inception (March 19, 1997) to December 31, 1997
The financial statements of the Company for the period from inception (March 19, 1997) to December 31, 1997 reflect a net loss of $258,352 on revenues of $737,858.
The Company completed three acquisitions in 1997: the grease division of Andrews in March 1997, Atlanta Grease Trap in August 1997 and the remaining assets of Andrews in December 1997. All three acquisitions have been accounted for using purchase accounting and the results of operations of the acquired businesses have been included in the consolidated financial statements from the date of each acquisition.
Revenues: Revenues for period from inception (March 19, 1997) to December 31, 1997 consist of revenues from each of the businesses acquired from the date of each acquisition.
Cost of Operations: The operating margin was 45%.
General and Administrative: General and administrative expense has been and is projected to be a significant percentage of revenues in the early stages of the Company's growth. It is anticipated that as revenues grow from future acquisitions, that general and administrative expense as a percentage of revenue will decline. The amounts reported for general and administrative expense include a number of costs associated with establishing the Company and hiring employees.
Depreciation and Amortization: Depreciation and amortization was $127,338 or 17% revenues.
Loss from Operations: The loss from operations is due primarily to the high level of general and administrative expense as a percentage of revenue.
Interest Expense: Interest expense of $104,494 was based on an average interest rate of 13% over the period.
Income Tax Benefit: An income tax benefit of 39% of pretax loss was recorded for the period from inception (March 19, 1997) to December 31, 1997.
Period from January 1, 1997 to December 21, 1997 Compared to Year Ended December 31, 1996
Revenues: Revenues decreased 34% to $1,218,268 in 1997 from $1,832,043 in 1996. This decrease was primarily due to the sale of the grease business to EarthCare in March 1997.
Cost of Operations: Cost of operations decreased 20% to $625,892 in 1997 from $785,996 in 1996. Cost of operations as a percentage of revenues increased to 51% in 1997 from 43% in 1996. The increase in cost of operations as a percentage of revenues was due to the sale of the more profitable grease business in March 1997.
General and Administrative: General and administrative expense decreased to $646,273 in 1997 from $757,655 in 1996, a decrease of 15%. The decrease in general and administrative was a result of the sale of the grease business. As a percentage of sales, general and administrative increased to 53% in 1997 from 41% in 1996. This increase occurred because certain general and administrative expenses which supported both the grease business and the continuing business of Andrews were relatively fixed in nature, and were not decreased as a result of the sale of the grease business.
Depreciation and Amortization: Depreciation and amortization remained relatively constant, at approximately $122,000. The disposition of assets associated with the grease business did not significantly affect depreciation, because the majority of the assets sold had been fully depreciated.
Loss (Income) from Operations: The loss from operations of $175,393 for 1997, as compared to income from operations of $166,096 in 1996, was primarily due to the loss of revenue from the sale of the grease business and the inability to reduce expenses to the extent that revenue was diminished.
Interest Expense: Interest expense decreased from $70,868 in 1996 to $22,077 in 1997, due to decreased capital expenditures in 1997, and the decrease in debt and interest payments associated with certain assets sold in conjunction with the grease business.
Other, Net: Other, net includes a gain on sale of assets of approximately $240,000 recorded in connection with the sale of the grease business.
Provision for Income Taxes: The effective tax rate increased from 40% in 1996 to 65% in 1997 due to the low level of income in 1997 and the relatively fixed nature of certain items which are not deductible for tax purposes.
SEASONALITY AND INFLATION
The Company's operations are affected by the weather. Rainy weather requires more frequent septic and grease trap maintenance and dry weather reduces the 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 December 31, 1998, the Company had cash of approximately $1.0 million and working capital of $938,120. During the year ended December 31, 1998, the Company's net cash used in operating activities totalled $1,470,683, of which $1,429,090 was due to the net loss and $1,246,540 was due to changes in account balances of operating assets and liabilities. Such amounts were partially offset by non-cash charges of $1,204,947, primarily depreciation and amortization of goodwill.
The Company used $21,460,495 in investing activities during the year ended December 31, 1998. This amount is composed of $20,416,428 related to the 1998 business acquisitions and $1,044,067 related to other capital expenditures.
Net cash provided by financing activities for the year ended December 31, 1998 totalled $23,775,220. This amount includes proceeds of $15,500,000 from the sale of common stock and $2,383,987 from the exercise of stock options and warrants. The balance provided by financing activities of $5,891,233 relates to net borrowings.
On June 26, 1998 the Company entered into the $40 million revolving Credit Agreement with Bank of America, which was amended as of September 30, 1998. The 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 2.25%. The Credit Agreement expires September 26, 2001, is secured by a first lien on substantially all assets of the Company and requires the Company to maintain certain financial covenants beginning September 30, 1998. As of December 31, 1998, the Company was in compliance with the financial covenants. In connection with entering into the Credit Agreement, two existing lines of credit (the "Prior Credit Facilities") with availability of $16.6 million were repaid and canceled. As of December 31, 1998, the outstanding balance under the Credit Agreement was $7,418,126. Availability of funds under the Credit Agreement is limited by the requirement that the Company comply with various loan covenants on a quarterly basis. The Company's primary requirements for capital (other than those related to acquisitions) consists of purchasing vehicles and equipment used in the operation of its businesses. During the year ended December 31, 1998, the Company made $1,044,067 in such capital expenditures. The Company believes that funds provided by operations, together with cash on hand and funds available under the Credit Agreement, will be adequate to meet the Company's anticipated capital expenditures for 1999.
The Company intends to continue to pursue internal growth and acquisition opportunities. The timing, size or success of any acquisitions effort and the associated potential capital commitments are unpredictable. The Company expects to fund future acquisitions primarily through a combination of cash on hand, borrowings under the Credit Agreement and the issuance of shares of Common Stock.
YEAR 2000
The Company has conducted operations for less than two years and has only recently grown large enough to require sophisticated computing systems. A complete review of all of the Company's computing needs has recently been undertaken and completed, including various Year 2000 compliant computer programs. The Company has selected Year 2000 compliant hardware and software for its computing needs and began implementation of these new systems during the fourth quarter of 1998, which implementation should ensure proper processing of transactions relating to the Year 2000 and beyond. The Company expects the conversion of all systems to be completed in the fourth quarter of 1999 and estimates the total capital costs of the new Year 2000 compliant hardware, systems and software to be under $1,000,000. As of December 31, 1998, approximately $400,000 in Year 2000 costs have been incurred, all of which has been capitalized.
The Year 2000 issue is expected to affect the systems of various entities with which the Company interacts, including the Company's vendors and customers. There can be no assurance that the systems of other companies on which the Company's systems rely will be timely converted or that a failure by another Company's systems to be Year 2000 compliant would not have a material adverse effect on the Company.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, together with the reports thereon, begin on page.
ITEM 9.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information contained under the heading "Information concerning Directors" in the Company's Proxy Statement for its annual meeting of stockholders to be held on May 6, 1999 is incorporated herein by reference. See Item 4A of Part I hereof for information regarding the Company's executive officers.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the Company's Proxy Statement for the Company's 1999 annual meeting of stockholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the Company's Proxy Statement for the Company's 1999 annual meeting of stockholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the Company's Proxy Statement for the Company's 1999 annual meeting of stockholders.
PART IV
ITEM 14.
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
(1) Financial statements of EarthCare Company and Subsidiaries are listed on the Index to Financial Information on page of this report.
(2) Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts for EarthCare Company
(3) Exhibits:
(b) Reports filed on Form 8-K during the fourth quarter of 1998:
Form 8-K dated December 16, 1998, reporting a change in the Company's accountants.
EARTHCARE COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE PERIOD FROM INCEPTION (MARCH 19, 1997) TO DECEMBER 31, 1998
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* Deductions represent the write-off of uncollectible receivables, net of recoveries.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registration has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on March 23(RD), 1999.
EARTHCARE COMPANY
By: /s/ TERRY W. PATRICK ---------------------------------- Terry W. Patrick President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated.
INDEX TO FINANCIAL INFORMATION
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of EarthCare Company
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations and stockholders' equity and cash flows present fairly, in all material respects, the financial position of EarthCare Company and Subsidiaries at December 31, 1998, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. In addition, in our opinion, the accompanying financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma February 13, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EarthCare Company:
We have audited the accompanying consolidated balance sheet of EARTHCARE COMPANY (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1997 and the related consolidated statements of operations, stockholders' equity, and cash flows for the period from inception (March 19, 1997) to December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of EarthCare Company and subsidiaries as of December 31, 1997 and the results of their operations and their cash flows for the period from inception (March 19, 1997) to December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia April 2, 1998 (except for the fourth paragraph of Note 1 as to which the date is June 29, 1998)
EARTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
The accompanying notes are an integral part of these consolidated financial statements.
EARTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
EARTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
EARTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these consolidated statements.
EARTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION
EarthCare Company, ("EarthCare" or the "Company") was incorporated on August 19, 1997 as a Delaware corporation under the name SanTi Group, Inc. On September 21, 1998, the Company's certificate of incorporation was amended (the "Amendment") to change the Company's name from SanTi Group, Inc. to EarthCare Company. All references to the Company included in the consolidated financial statements and notes to consolidated financial statements treat the Amendment as if it occurred August 19, 1997.
EarthCare engages in the following services relating to the nonhazardous liquid waste ("NLW") industry: biosolids management, bulk liquid waste transportation, liquid waste processing and disposal, maintenance and pumping. EarthCare's customers include restaurants, hospitals, military bases, office buildings, apartments, schools, municipalities, industrial businesses and single family residences.
Bone-Dry Enterprises, Inc. ("Bone-Dry") was incorporated on March 19, 1997 as a Georgia corporation. On December 1, 1997, all shares of Bone-Dry common stock were exchanged for EarthCare common stock. Since the Company and Bone-Dry were under common ownership since their respective dates of inception, the accompanying financial statements are for the period from the inception of Bone Dry (March 19, 1997) to December 31, 1997. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, EarthCare Company of Florida, Inc., EarthCare Company of Pennsylvania, Inc., and EarthCare Company of New York, Inc. All material intercompany balances and transactions have been eliminated.
On May 13, 1998, SanTi Group, Inc. ("SGI") was merged with and into Microlytics, Inc. ("Micro") under an agreement and plan of merger, with Micro surviving and changing its name to SanTi Group, Inc. ("the Merger"). The Merger was subject to the approval of the United States Bankruptcy Court for the Western District of New York. On the effective date of the Merger, each issued and outstanding share of SGI Stock was converted into one share of common stock of Micro (now EarthCare). These exchange ratios were determined after the 1 for 400 reverse split of Common Stock pursuant to a Plan of Reorganization. Immediately prior to the Merger, Micro had 1,115,816 shares of common stock outstanding and warrants to purchase an additional 500,000 shares with an exercise price of $5.80, of which 250,000 were exercised immediately following the Merger. This exchange resulted in the receipt by SGI stockholders of approximately 8,088,379 shares of Common Stock, representing approximately 86.2% of the shares of Common Stock issued and outstanding on the effective date of the Merger. The Merger was accounted for as a capital transaction accompanied by a recapitalization of EarthCare. All costs incurred in connection with the Merger were expensed.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three months or less at the date of purchase as cash equivalents. The Company maintains its cash in bank deposit accounts, which at times may exceed the federal insurance limits. As of December 31, 1998, the Company had cash in banks totaling $711,000 in excess of federal depository insurance limits.
ACCOUNTS RECEIVABLE
Accounts receivable represent short-term credit granted to the Company's customers for which collateral is generally not required. Credit risk on receivables is considered by management to be limited due to the variety of industries served and geographic dispersion of customers.
EARTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided on the straight-line basis using useful lives of 5 to 7 years for machinery and equipment and office equipment and 20 years for buildings and improvements. Leasehold improvements are depreciated over the shorter of the term of the lease or the useful life of the improvements. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in operations.
INTANGIBLES
As of December 31, 1997 and 1998, intangibles consisted of the following:
Noncompete agreements were entered into in connection with certain of the Company's acquisitions and were valued based on the estimated benefit to be derived from such noncompete agreements. Noncompete agreements are being amortized over the lives of the contracts. Goodwill arises when the purchase price and other related costs for a business acquisition exceed the fair value of the net assets acquired. Goodwill is being amortized over 40 years. Amortization expense associated with intangibles was $95,464 for the period from inception (March 19, 1997) to December 31, 1997 and was $572,426 for the year ended December 31, 1998.
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived assets, such as property and equipment and intangibles, to determine whether any impairments are other than temporary. The Company assesses impairment by determining whether the carrying value of such long-lived assets will be recovered through undiscounted expected future cash flows. No impairment losses were recorded during the period from inception (March 19, 1997) to December 31, 1997 or during the year ended December 31, 1998.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
ADVERTISING COSTS
The Company expenses advertising costs over the period that the benefit is received. Advertising expense was approximately $9,000 and $974,000 during 1997 and 1998, respectively.
EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of shares outstanding. Diluted earnings per share are based on the weighted average number of shares outstanding and the dilutive effect of stock options and warrants outstanding (using the treasury stock method) and contingently issuable shares. For the period from inception (March 19, 1997) to December 31, 1997, outstanding options of 612,500 and contingently issuable shares have been excluded from diluted weighted average shares outstanding, as their impact was antidilutive. Such antidilutive options and warrants of 2,304,009 and 70,000 contingently issuable
EARTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares have been excluded from diluted weighted average shares outstanding for the year ended December 31, 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. ACQUISITIONS
In fiscal year 1997, the Company acquired the following businesses:
On March 20, 1997, Bone-Dry purchased certain assets of Andrews Environmental Services, Inc. ("Andrews") associated with Andrews Grease Disposal Business ("Andrews Grease"). Andrews Grease is in the business of commercial and governmental grease extraction, collection, and transportation services primarily in the state of Georgia. Consideration associated with the purchase was $475,000 in cash and $257,350 in notes payable.
On August 27, 1997, Bone-Dry purchased Atlanta Grease Trap Service ("Atlanta Grease"), a Georgia sole proprietorship, for $360,000 in cash. Atlanta Grease is in the business of commercial and governmental grease extraction, collection, and transportation services in the state of Georgia.
On December 22, 1997, Bone-Dry purchased substantially all of the remaining assets of Andrews. Andrews is engaged in the nonhazardous liquid waste and septic waste collection, transportation, management, and disposal business primarily in the state of Georgia. Consideration associated with the purchase was $660,000 in cash and 21,400 shares of EarthCare common stock. Contingent consideration of 13,600 shares of EarthCare common stock was paid in December 1998.
The acquisitions of Andrews Grease, Atlanta Grease, and Andrews were accounted for using the purchase method of accounting; accordingly, the purchase prices have been allocated to the assets acquired based on their respective fair values at the dates of acquisition. The resulting excess of purchase prices over fair values of assets acquired was recorded as goodwill. Goodwill recorded in the purchases of Andrews Grease, Atlanta Grease, and Andrews was $482,350, $360,000, and $349,136, respectively.
In fiscal year 1998, the Company acquired the following businesses:
On January 22, 1998, the Company purchased Ferrero Wastewater Management, Inc. ("Ferrero"), a Pennsylvania corporation. Ferrero is engaged in the nonhazardous liquid waste and septic waste collection, transportation, management, and disposal business in and around Ambler, Pennsylvania. Consideration was $2,240,100 in cash and 90,000 shares of SanTi common stock. Contingent consideration of $248,900 in cash and 10,000 shares of EarthCare common stock was paid in the fourth quarter of 1998 in accordance with the terms of the purchase agreement.
On February 13, 1998, the Company purchased A Rapid Rooter Sewer & Drain Service, Inc. ("A Rapid"), a Florida corporation. A Rapid is engaged in the nonhazardous liquid waste and septic waste collection, transportation, management, and disposal business in and around Pompano Beach, Florida. Consideration was $3,990,120 in cash and 100,000 shares of EarthCare common stock.
On February 17, 1998, the Company purchased Quality Plumbing and Septic, Inc. ("Quality"), a Georgia corporation. Quality is engaged in the nonhazardous liquid waste and septic waste collection, transportation, management, and disposal business in and around Douglasville, Georgia. Consideration
EARTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
was $2,000,000 in cash. Contingent consideration of $250,000 and 10,000 shares of EarthCare common stock was paid in June 1998.
On March 6, 1998, the Company purchased Seagraves, Inc. (d/b/a Brownie Environmental) and Grease-Tec, Inc. (collectively, "Seagraves"), two Florida corporations. Seagraves is engaged in the nonhazardous liquid waste and septic waste collection, transportation, management, and disposal business in and around Orlando, Florida. Consideration was $3,250,000 in cash, a note payable of $2,000,000, and 60,000 shares of EarthCare common stock.
On May 1, 1998, the Company purchased RGM Liquid Waste Removal Corporation and Affiliates ("RGM"), consisting of four New York corporations. RGM is engaged in the nonhazardous liquid waste and septic waste collection, transportation, management, and disposal business in and around Long Island, New York. Consideration was $4,500,000 in cash and 105,000 shares of EarthCare common stock. Contingent consideration of $1,000,000 and 55,000 shares of EarthCare common stock may be payable 365 days after the date of purchase.
On May 8, 1998, the Company purchased Eldredge Wastewater Management, Inc., a Pennsylvania corporation. Eldredge is engaged in the nonhazardous liquid waste and septic waste collection, transportation, management, and disposal business in and around Philadelphia, Pennsylvania. Consideration was $2,040,000 in cash and 85,000 shares of EarthCare common stock. Contingent consideration of $360,000 and 15,000 shares of EarthCare common stock may be payable 13 months after the date of purchase.
The acquisitions completed in fiscal 1998 were accounted for using the purchase method of accounting; accordingly, the purchase prices have been allocated to the assets acquired based on their respective fair values at the dates of acquisition. The resulting excess of purchase prices over fair values of assets acquired was recorded as goodwill. Goodwill recorded in 1998 totalled $18,606,450.
The Company's unaudited pro forma consolidated results of operations for the years ended December 31, 1997 and 1998, shown below are presented assuming that the 1997 and 1998 acquisitions had been consummated on January 1, 1997:
The Company's unaudited pro forma results of operations are presented for informational purposes only and may not necessarily reflect the future results of operations of the Company or what the results of operations would have been had the Company owned and operated the acquired businesses as of the beginning of each respective period.
EARTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
At December 31, 1997 and 1998, property and equipment consisted of the following:
Depreciation expense was $31,874 and $775,931 during 1997 and 1998, respectively.
5. LINES OF CREDIT AND LONG-TERM DEBT
At December 31, 1997, the Company had a $6,600,000 revolving line of credit (the "Revolver"). The Revolver had an interest rate of LIBOR plus 2.25% (8.21% at December 31, 1997) and was collateralized by substantially all assets of the Company. At December 31, 1997, $1,120,000 was outstanding and $5,480,000 was available for future borrowings. The Revolver matured on August 12, 1998, was renewable for successive one-year periods, and was personally guaranteed by Raymond Cash, the majority owner of the Company at December 31, 1997. During 1998, the Company borrowed funds under the majority owner's personal line of credit. These borrowings were used to finance the Company's acquisitions of businesses discussed in Note 3. In June 1998, the two lines of credit were paid in full in conjunction with the Company obtaining new financing from Bank of America.
On June 26, 1998, the Company entered into the $40 million revolving credit agreement with Bank of America, which was amended as of September 30, 1998 (the "Credit Agreement"). The Company may obtain up to $5 million in letters of credit, subject to availability under the Credit Agreement. Interest is payable monthly at variable rates, depending on the Company's Funded Debt to EBITDA (as defined in the Credit Agreement), but is capped at LIBOR plus 2.25%. The Credit Agreement expires September 26, 2001, is collateralized by a first lien on substantially all assets of the Company and requires the Company to maintain certain financial covenants beginning September 30, 1998. As of December 31, 1998, the Company was in compliance with the financial covenants. In connection with entering into the Credit Agreement, the two existing lines of credit discussed above (the "Prior Credit Facilities") with availability of $16.6 million were repaid and canceled. As of December 31, 1998, the outstanding balance under the Credit Agreement was $7,418,126. Availability of funds under the Credit Agreement is limited by the requirement that the Company comply with various loan covenants on a quarterly basis.
EARTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, long-term debt consisted of the following:
Future aggregate annual maturities of long-term debt are as follows as of December 31, 1998.
6. RELATED-PARTY TRANSACTIONS
In 1997, the Company entered into a note payable agreement with an entity controlled by the Company's majority owner. The note was for $650,000, had an interest rate of 13%, and was paid in full during 1997. In December 1997, after the note was paid in full, the related party purchased 1,608,750 shares of EarthCare common stock for $650,000.
In March 1997, the Company entered into a four-year consulting agreement with a former owner of an acquired business. The Company paid its obligation of $75,000 in full during 1997, as required by the agreement, and is recognizing the expense over the life of the agreement. For the period from inception (March 19, 1997) to December 31, 1997, consulting expense related to the agreement was $13,021 and is included in general and administrative expenses in the accompanying statement of operations. For 1998 the expense was $18,750.
During 1997, the Company entered into three noncompete agreements with former owners of acquired businesses in exchange for notes payable totaling $341,130. In connection with the December 22, 1997 purchase of Andrews, one of the former owners of Andrews exchanged $263,685 of outstanding notes payable, issued in connection with the March 1997 purchase of Andrews for 14,479 shares of EarthCare common stock.
The Company leased office space and equipment from an entity controlled by the Company's majority owner under a lease agreement which expired January 31, 1998. The office space was leased for an additional period terminating on April 3, 1998. Rental expense under the lease was $8,262 for 1998 and $11,690 for the period from inception (March 19, 1997) to December 31, 1997.
In connection with the 1998 acquisitions, the Company entered into employment agreements with 8 employees. Upon termination of employment (other than voluntarily by the employee, by the Company for
EARTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cause or upon death of the employee), the Company is committed to pay certain benefits, including specified monthly severance of not more than $6,667 per employee per month. The benefits are to be paid from the date of termination to dates ranging from January 22, 1999 to March 6, 2001.
The Company leases office space from various entities controlled by stockholders and employees who are former owners of companies acquired during 1998. The leases are typically structured on a one-year term with annual renewal options from three to nine years. Total lease expense related to such leases totaled approximately $337,000 in 1998.
On June 1, 1998, the Company entered into employment agreements with three executive officers which provide for minimum aggregate annual compensation of $575,000. The agreements expire either June 1, 2000 or June 1, 2003, and automatically renew for additional twelve-month periods. Upon termination of employment related to a change in control of the Company, the Company is committed to immediately pay the minimum compensation for each of the remaining years or portions thereof.
7. STOCKHOLDERS' EQUITY
Preferred Stock -- The Company has 30,000,000 authorized shares of $0.001 par value of preferred stock. The preferred stock may, by resolution of the board of directors, be issued in different series, and the series may vary as to dividend rights, preferences, conversion privileges, voting rights, participation in earnings and redemption. No shares of preferred stock were outstanding at December 31, 1997 or 1998.
Private Placements -- On January 12, 1998, a group of investors purchased 1,250,000 shares of the Company's common stock for $0.80 per share. On January 30, 1998, the Company declared a 1.25-for-1 stock split effected in the form of a stock dividend. All share amounts have been restated for this stock split. During March and April, 1998, the Company sold 2,500,000 shares of its common stock through private offerings. Proceeds from the 1998 offerings totaled $15,500,000.
Stock-Based Compensation -- In August 1997 and December 1997, the Company issued nonqualified stock options to purchase 125,000 and 487,500 shares of EarthCare common stock, respectively, at $.65 per share, which represented the fair market value as of the dates of grant, as determined by the Company's board of directors. The options were exercisable for a period of three years beginning on the dates of grant.
In April 1998, the Company issued stock options to purchase 131,250 shares of EarthCare common stock at $5.00 per share. The estimated fair value as of the date of grant was $5.80 per share. In June 1998, the Company issued stock options to purchase 1,725,000 shares of EarthCare common stock at prices ranging from $6.00 to $25.00 per share. The estimated fair value as of the date of grant was $6.00 per share. In October and December 1998, the Company issued stock options to purchase 267,200 and 277,000 shares of EarthCare common stock, respectively, at prices ranging from $15.00 to $25.00 per share. The estimated fair value as of the dates of grant was $15.00 per share. All of the options granted during 1998 vest ratably over four years, except for the 131,250 options issued in April 1998 which vest over three years, and 250,000 options issued in December 1998 which vested immediately upon grant.
Incentive Stock Option Plan -- Effective September 22, 1998, the board of directors of the Company adopted an incentive stock option plan (the "Plan"), which provides for the issuance of options to purchase up to 1,500,000 shares of common stock to key employees and Directors. The incentive stock options granted under the Plan are generally exercisable for a period of ten years from the date of the grant, except that the term of an incentive stock option granted under the Plan to a stockholder owning more than 10% of the outstanding common stock must not exceed five years and the exercise price of an incentive stock option granted to such a stockholder must not be less than 110% of the fair market value of the common stock on the date of grant. As of December 31, 1998, options to purchase 815,000 shares of common stock had been issued under the Plan which are included in the options granted in 1998, as discussed above. No non-qualified options have been issued under the Plan.
EARTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes warrant and option activity for 1998 for both the employee options and other non-employee warrants and options:
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock options granted to employees at fair market value at the date of grant. Had compensation cost for the Company's employee stock options been determined consistent with the provisions of SFAS No. 123, the Company's net loss would have been increased to the pro forma amount indicated below for the period from inception (March 19, 1997) to December 31, 1997 and for the year ended December 31, 1998.
The fair values of options granted were estimated on the date of grant using the minimum value approach in 1997 and the Black-Scholes Model in 1998. The Company's stock volatility was 110% in 1998, based on 1998 stock performance. The Company's dividend yield was estimated to remain at zero, the options granted had an expected life of three to five years, and risk-free interest rates ranging from 4.70% to 5.88%. The weighted average estimated fair value of employee stock options granted during 1997 and 1998 was $.0.11 and
EARTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$5.23 per share, respectively. The estimated fair value of options granted during 1997 and 1998 totaled $64,377 and $8,184,352, respectively.
8. INCOME TAXES
The accompanying financial statements include an income tax benefit computed in accordance with SFAS No. 109, "Accounting for Income Taxes." The following summarizes the components of the income tax benefit:
Reconciliation from the federal statutory rate to the actual income tax benefit is as follows:
The sources of differences between the financial accounting and tax bases of the Company's assets and liabilities which give rise to the deferred tax asset and liabilities and the tax effects of each are as follows as of December 31, 1998 and 1997:
As of December 31, 1997 and 1998, deferred tax assets include a net operating loss carryforward of $276,566 and $2,268,755, respectively, which is available to offset future taxable income through 2012. Realization of the net deferred tax asset is dependent on generating sufficient taxable income in future periods. During 1998, the Company recorded a valuation allowance of $223,423. As the Company continues to grow through acquisitions, management will evaluate the realizability of these assets and adjust the valuation allowance accordingly.
EARTHCARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ENVIRONMENTAL REGULATIONS
The Company is subject to extensive and evolving federal, state, and local environmental laws and regulations that have been enacted in response to technological advances and the public's increased concern over environmental issues. The majority of the expenditures necessary to comply with the environmental laws and regulations is made in the normal course of business. The Company, to the best of its knowledge, is in compliance, in all material respects, with the laws and regulations affecting its operations.
10. LEASE COMMITMENTS
The Company leases certain buildings, autos and machinery and equipment under noncancelable operating leases. Under certain of these leases, the Company is required to pay property taxes, insurance, repairs and other costs related to the leased property. At December 31, 1998, future minimum lease payments under noncancelable operating leases are $622,576 in 1999; $453,126 in 2000; $365,798 in 2001; $353,344 in 2002 and $148,215 in 2003. Total rent expense for all leases was $11,690 and $604,413 in 1997 and 1998, respectively.
11. SUBSEQUENT EVENT (UNAUDITED)
On March 1, 1999, EarthCare acquired all of the outstanding capital stock of Reifsneider Transportation Inc. ("Reifsneider"), a Pennsylvania corporation, in exchange for an aggregate consideration of $10,325,000 paid in cash, common stock, and seller note payable to the former shareholder of Reifsneider. Reifsneider is a commercial and industrial liquid waste transportation and disposal services company servicing customers in eastern Pennsylvania, Delaware, Maryland, New Jersey and New York. The Company currently intends to operate Reifsneider in substantially the same manner as it was operated prior to the acquisition. The Company funded the cash portion of the purchase price with $5,250,000 in borrowings under the Credit Agreement, issued 350,000 shares of EarthCare common stock and delivered a $200,000 note payable to the former shareholder of Reifsneider.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Andrews Environmental Services, Inc.
We have audited the accompanying balance sheet of ANDREWS ENVIRONMENTAL SERVICES, INC. (a Georgia corporation) as of December 31, 1996 and the related statements of operations, stockholders' equity, and cash flows for the year ended December 31, 1996 and the period from January 1, 1997 to December 21, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Andrews Environmental Services, Inc. as of December 31, 1996 and the results of its operations and its cash flows for the year ended December 31, 1996 and the period from January 1, 1997 to December 21, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia June 18, 1998
ANDREWS ENVIRONMENTAL SERVICES, INC.
BALANCE SHEET
ASSETS
The accompanying notes are an integral part of these financial statements.
ANDREWS ENVIRONMENTAL SERVICES, INC.
STATEMENT OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
ANDREWS ENVIRONMENTAL SERVICES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements.
ANDREWS ENVIRONMENTAL SERVICES, INC.
STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
ANDREWS ENVIRONMENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Andrews Environmental Services, Inc. ("Andrews" or the "Company"), a Georgia corporation, operates a service center that treats, processes, and recovers nonhazardous liquid waste to serve a variety of customers from private residences and municipalities to large industrial companies.
On March 20, 1997, certain assets of the Company associated with its grease disposal business were sold to EarthCare Company ("EarthCare"). The grease disposal business was primarily involved with commercial and governmental grease extraction, collection, and transportation services. Consideration associated with the sale was $475,000 in cash and $257,350 in notes receivable. In conjunction with the sale, the Company recorded a gain on the sale of fixed assets of $204,124 which is included in other income in the accompanying statement of operations for the period from January 1, 1997 to December 21, 1997.
On December 22, 1997, substantially all of the remaining property and equipment and the ongoing business of the Company were sold to EarthCare. Consideration was $660,000 in cash and 21,400 shares of EarthCare common stock. Contingent consideration of 13,600 shares of EarthCare common stock is receivable within 90 days of the first anniversary of the date of purchase, net of offsets for losses, as defined in the sale agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit risk consist principally of trade receivables. The Company's customers are concentrated in one geographic region. No single customer accounted for a significant amount of the Company's sales, and there are no significant accounts receivable from a single customer. The Company reviews a customer's credit history before extending credit. The Company establishes an allowance for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the assets using the straight-line method. The estimated useful lives for machinery and equipment and office equipment range from 5 to 7 years. The building is depreciated over an estimated useful life of 40 years.
ANDREWS ENVIRONMENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, property and equipment consisted of the following:
The Company periodically reviews the values assigned to property and equipment to determine whether any impairments are other than temporary. The Company assesses impairment by determining whether the carrying value of such long-lived assets will be recovered through undiscounted expected future cash flows. No impairment losses have been recorded in the accompanying results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 is designed to improve the reporting of changes in equity from period to period. The Company currently has no other comprehensive income items as defined by SFAS No. 130.
3. LONG-TERM DEBT
At December 31, 1996, long-term debt consisted of the following:
At December 31, 1996, the Company had a $100,000 revolving line of credit (the "Revolver"). The Revolver has an interest rate of prime plus 2% (10.25% at December 31, 1996). At December 31, 1996, $83,789 was outstanding and $16,211 was available for future borrowings. The Revolver matures July 15, 1998, is renewable for successive one-year periods, is personally guaranteed by the Company's majority stockholder, and is secured by substantially all assets of the Company.
ANDREWS ENVIRONMENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On December 21, 1997, in conjunction with the sale of the Company's remaining assets (Note 1), the Revolver and all equipment loans were paid in full.
4. RELATED-PARTY TRANSACTIONS
The Company's majority stockholder advances monies to the Company from time to time to maintain certain working capital levels, as needed. At December 31, 1996, the Company was indebted to the majority stockholder for $2,976, which is included in current portion of long-term debt in the accompanying balance sheet.
During 1997, the Company had repairs and maintenance performed on its trucks by an entity owned by the Company's majority stockholder. For the period from January 1, 1997 to December 21, 1997, the Company incurred $32,371 of expense for these services, which is included in cost of operations in the accompanying statement of operations.
The Company advances monies from time to time to an entity owned by the Company's majority stockholder to enable that entity to maintain certain levels of working capital. At December 31, 1996, the related entity owed the Company $51,202, which is included in the accompanying balance sheet as due from related party.
The Company performs services from time to time for an entity owned by a stockholder of the Company. Revenues from this entity totaled $7,683 and $0 for the year ended December 31, 1996 and for the period from January 1, 1997 to December 21, 1997, respectively.
5. INCOME TAXES
The accompanying financial statements reflect the provision (benefit) for income taxes computed in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The following summarizes the components of the income tax provision (benefit) for the years ended December 31, 1995 and 1996 and for the period from January 1, 1997 to December 21, 1997:
Reconciliation from the federal statutory rate to the actual provision (benefit) for the year ended December 31, 1996 and for the period from January 1, 1997 to December 21, 1997 is as follows:
ANDREWS ENVIRONMENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax liability as of December 31, 1996 are as follows:
6. ENVIRONMENTAL REGULATIONS
The Company is subject to extensive and evolving federal, state, and local environmental laws and regulations that have been enacted in response to technological advances and the public's increased concern over environmental issues. The majority of the expenditures necessary to comply with the environmental laws and regulations are made in the normal course of business. The Company, to the best of its knowledge, is in compliance, in all material respects, with the laws and regulations affecting its operations.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Ferrero Wastewater Management, Inc.:
In our opinion, the accompanying statements of operations and stockholders' equity and cash flows present fairly, in all material respects, the results of operations and cash flows of Ferrero Wastewater Management, Inc. for the period from January 1, 1998 to January 21, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma January 15, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ferrero Wastewater Management, Inc.:
We have audited the accompanying balance sheets of FERRERO WASTEWATER MANAGEMENT, INC. (a Pennsylvania corporation) as of December 31, 1996 and 1997 and the related statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ferrero Wastewater Management, Inc. as of December 31, 1996 and 1997 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia March 20, 1998
FERRERO WASTEWATER MANAGEMENT, INC.
BALANCE SHEET
ASSETS
The accompanying notes are an integral part of these financial statements.
FERRERO WASTEWATER MANAGEMENT, INC.
STATEMENT OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
FERRERO WASTEWATER MANAGEMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements.
FERRERO WASTEWATER MANAGEMENT, INC.
STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
FERRERO WASTEWATER MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION
Ferrero Wastewater Management, Inc. (the "Company") designs, constructs, repairs, maintains, and operates on-site sewage disposal systems, primarily in metropolitan Philadelphia, Pennsylvania.
Nutrecon, Inc. disposed of the waste collected by the Company. On January 1, 1997, the net assets of Nutrecon, Inc. were transferred to the Company. Since the companies were under common ownership from their respective dates of inception, the accompanying financial statements of the Company include the accounts of Nutrecon, Inc. for all periods presented. All material intercompany balances and transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three months or less at the date of purchase as cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit risk consist principally of trade receivables. The Company's customers are concentrated in one geographic region and in one line of business. No single customer accounted for a significant amount of the Company's sales, and there are no significant accounts receivable from a single customer. The Company reviews a customer's credit history before extending credit. The Company establishes an allowance for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the assets using the straight-line method. The estimated useful lives for machinery and equipment and office equipment range from five to seven years. Buildings are depreciated over 20 years.
At December 31, 1996 and 1997, property and equipment consisted of the following:
The Company periodically reviews the values assigned to property and equipment to determine whether any impairments are other than temporary. The Company assesses impairment by determining whether the carrying value of such long-lived assets will be recovered through undiscounted expected future cash flows. No impairment losses have been recorded in the accompanying results of operations.
FERRERO WASTEWATER MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INCOME TAXES
The Company has elected, for federal and state income tax purposes, S corporation tax status whereby income is taxed at the stockholder level. Therefore, no deferred tax assets, liabilities, or provision for income taxes is recorded.
3. LONG-TERM DEBT
At December 31, 1996 and 1997, long-term debt consisted of the following:
Future aggregate annual maturities of long-term debt are as follows as of December 31, 1997:
In February 1998, in conjunction with the sale of the business (Note 7), all related long-term debt was paid in full.
4. RELATED-PARTY TRANSACTION
The Company's majority stockholder makes advances to the Company from time to time to better manage cash flows and maintain adequate working capital. At December 31, 1996 and 1997, the amounts owed to the majority stockholder were $43,716 and $81,580, respectively. In February 1998, the amount owed to the majority stockholder was paid in full (Note 7).
FERRERO WASTEWATER MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. BENEFIT PLAN
Employees of the Company are eligible to participate in a company-maintained salary reduction simplified employee pension plan (the "Plan"). The Company has the option to contribute a profit-sharing portion to the Plan each year. During the years ended December 31, 1996 and 1997, and the period from January 1, 1998 to January 21, 1998, no such contributions were made.
6. LEASES
The Company leases its facility under a noncancelable operating lease. Rental expense during 1996 and 1997, and for the period from January 1, 1998 to January 21, 1998, was $67,734, $72,000 and $7,738, respectively. Future minimum lease payments under the current lease agreement are $72,000 per year through December 31, 1999.
7. SUBSEQUENT EVENT
On January 22, 1998, substantially all property and equipment and the ongoing business of the Company were sold to EarthCare Company ("EarthCare") for $2,240,100 in cash and 90,000 shares of EarthCare common stock. Contingent consideration of $248,900 in cash and 10,000 shares of EarthCare common stock are receivable 270 days after the date of purchase, net of offset for losses, as defined in the purchase agreement. Prior to the closing, all related long-term debt was paid in full to convey the assets to EarthCare free and clear of all encumbrances and liens.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of A Rapid Rooter Sewer & Drain Service, Inc.:
In our opinion, the accompanying statements of operations and stockholders' equity and cash flows present fairly, in all material respects, the results of operations and cash flows of A Rooter Rapid Sewer & Drain Service, Inc. for the period from January 1, 1998 to February 12, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma January 22, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To A Rapid Rooter Sewer & Drain Service, Inc.:
We have audited the accompanying balance sheets of A RAPID ROOTER SEWER & DRAIN SERVICE, INC. (a Florida corporation) as of December 31, 1996 and 1997 and the related statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of A Rapid Rooter Sewer & Drain Service, Inc. as of December 31, 1996 and 1997 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia May 8, 1998
A RAPID ROOTER SEWER & DRAIN SERVICE, INC.
BALANCE SHEET
ASSETS
The accompanying notes are an integral part of these financial statements.
A RAPID ROOTER SEWER & DRAIN SERVICE, INC.
STATEMENT OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
A RAPID ROOTER SEWER & DRAIN SERVICE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements.
A RAPID ROOTER SEWER & DRAIN SERVICE, INC.
STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
A RAPID ROOTER SEWER & DRAIN SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
A Rapid Rooter Sewer & Drain Service, Inc. (the "Company") designs, constructs, repairs, maintains, and operates on-site sewage disposal systems, primarily in and around Pompano Beach, Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three months or less at the date of purchase as cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit risk consist principally of trade receivables. The Company's customers are concentrated in one geographic region and in one line of business. No single customer accounted for a significant amount of the Company's sales, and there are no significant accounts receivable from a single customer. The Company reviews a customer's credit history before extending credit. The Company establishes an allowance for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the assets using the straight-line method. The estimated useful lives for machinery and equipment and office equipment range from five to seven years. Leasehold improvements are depreciated over the shorter of the term of the lease or the useful life of the improvements.
At December 31, 1996 and 1997, property and equipment consisted of the following:
The Company periodically reviews the values assigned to property and equipment to determine whether any impairments are other than temporary. The Company assesses impairment by determining whether the carrying value of such long-lived assets will be recovered through undiscounted expected future cash flows. No impairment losses have been recorded in the accompanying results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
A RAPID ROOTER SEWER & DRAIN SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INCOME TAXES
For federal and state income tax purposes, the Company has elected S corporation tax status whereby income is taxed at the stockholder level. Therefore, no deferred tax assets, liabilities, or provision for income taxes is recorded. Amounts are distributed to stockholders for making applicable tax payments, and are included in distributions to stockholders in the accompanying statements of stockholders' equity.
3. LONG-TERM DEBT
At December 31, 1996 and 1997, long-term debt consisted of the following:
Future aggregate annual maturities of long-term debt are as follows as of December 31, 1997:
In February 1998, in conjunction with the sale of the business (Note 6), all long-term debt was paid in full.
4. BENEFIT PLAN
The Company maintains a 401(k) plan for employees. The Company matches 25% of employee contributions to the plan up to 5% of employee compensation. Company contributions for the years ended December 31, 1996 and 1997 were $7,720 and $9,792, respectively. Company contributions for the period January 1, 1998 to February 12, 1998 were $939.
5. RELATED-PARTY TRANSACTIONS
The Company's stockholders borrow from the Company from time to time to make estimated tax payments on income taxed at the stockholder level. In addition, the Company makes advances to stockholders from time to time to cover certain expenses. At December 31, 1996 and 1997, the amounts owed to the Company from stockholders were $76,767 and $134,257, respectively. During the period from January 1, 1998 to In February 12, 1998, $56,366 of the outstanding balance was paid by the stockholders. Subsequent to February 12, 1998, the remaining balance was paid in full by the stockholders.
The Company leases its Pompano Beach facility from a related party. Rental expense during 1996 and 1997 was $36,000 and $39,614, respectively. Rental expense from January 1, 1998 to February 12, 1998 was
A RAPID ROOTER SEWER & DRAIN SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$6,000. Future minimum lease payments under the current lease agreement are $48,000 per year through August 31, 2000.
6. SUBSEQUENT EVENT
On February 13, 1998, substantially all property and equipment and the ongoing business of the Company were sold to EarthCare Company ("EarthCare") for $3,990,120 in cash and 100,000 shares of EarthCare common stock. Prior to the closing, all related long-term debt was paid in full to convey the assets to EarthCare free and clear of all encumbrances and liens.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Seagraves, Inc. and Grease-Tec, Inc.:
In our opinion, the accompanying combined statements of operations and stockholders' equity and cash flows present fairly, in all material respects, the results of operations and cash flows of Seagraves, Inc. and Grease-Tec, Inc. for the period from January 1, 1998 to March 5, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma January 27, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Seagraves, Inc. and Grease-Tec, Inc.:
We have audited the accompanying combined balance sheets of SEAGRAVES, INC. (a Florida corporation d.b.a. Brownie Environmental Services) AND GREASE-TEC, INC. (a Florida corporation) as of December 31, 1997 and 1996 and the related combined statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Seagraves, Inc. (d.b.a. Brownie Environmental Services) and Grease-Tec, Inc. as of December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia May 14, 1998
SEAGRAVES, INC. (D.B.A. BROWNIE ENVIRONMENTAL SERVICES) AND GREASE-TEC, INC.
COMBINED BALANCE SHEET
ASSETS
The accompanying notes are an integral part of these combined financial statements.
SEAGRAVES, INC. (D.B.A. BROWNIE ENVIRONMENTAL SERVICES) AND GREASE-TEC, INC.
COMBINED STATEMENT OF OPERATIONS
The accompanying notes are an integral part of these combined financial statements.
SEAGRAVES, INC. (D.B.A. BROWNIE ENVIRONMENTAL SERVICES) AND GREASE-TEC, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these combined financial statements.
SEAGRAVES, INC. (D.B.A. BROWNIE ENVIRONMENTAL SERVICES) AND GREASE-TEC, INC.
COMBINED STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these combined financial statements.
SEAGRAVES, INC. (D.B.A. BROWNIE ENVIRONMENTAL SERVICES) AND GREASE-TEC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Seagraves, Inc. and Grease-Tec, Inc. (collectively, the "Company") design, construct, repair, maintain, and operate on-site sewage disposal systems, primarily in metropolitan Orlando, Florida. Seagraves, Inc. and Grease-Tec, Inc. are under common ownership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of Seagraves, Inc. and Grease-Tec, Inc. All significant intercompany accounts have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit risk consist principally of trade receivables. The Company's customers are concentrated in one geographic region. No single customer accounted for a significant amount of the Company's sales, and there are no significant accounts receivable from a single customer. The Company reviews a customer's credit history before extending credit. The Company establishes an allowance for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided on the straight-line basis using useful lives of 5 to 7 years for machinery and equipment and office equipment and 20 years for building and improvements.
At December 31, 1996 and 1997, property and equipment consisted of the following:
The Company periodically reviews the values assigned to property and equipment to determine whether any impairments are other than temporary. The Company assesses impairment by determining whether the carrying value of such long-lived assets will be recovered through undiscounted expected future cash flows. No impairment losses have been recorded in the accompanying results of operations.
SEAGRAVES, INC. (D.B.A. BROWNIE ENVIRONMENTAL SERVICES) AND GREASE-TEC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INCOME TAXES
The Company has elected for federal and state income tax purposes S corporation tax status, whereby income is taxed at the stockholder level. Therefore, no deferred tax assets, liabilities, or provisions for income taxes are recorded. Amounts are distributed to the stockholders for making applicable tax payments.
3. LONG-TERM DEBT
At December 31, 1996 and 1997, long-term debt consisted of the following:
Future aggregate annual maturities of long-term debt are as follows as of December 31, 1997:
In March 1998, in conjunction with the sale of the business (Note 5), all long-term debt was paid in full.
4. RELATED-PARTY TRANSACTIONS
The Company's stockholders make loans to the Company from time to time to purchase equipment. At December 31, 1996 and 1997, the amounts owed to stockholders were $163,272 and $169,081, respectively. During fiscal years 1996 and 1997, the Company paid interest of $13,031 and $6,421, respectively, to stockholders. Subsequent to December 31, 1997, the amounts owed to stockholders were paid in full. Interest paid to stockholders from January 1, 1998 to March 5, 1998 was $68.
SEAGRAVES, INC. (D.B.A. BROWNIE ENVIRONMENTAL SERVICES) AND GREASE-TEC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company rents land and buildings from certain stockholders. Rent paid to stockholders was $20,000 and $15,600 in 1996 and 1997, respectively. Rent paid to stockholders from January 1, 1998 to March 5, 1998 was $8,965.
5. SUBSEQUENT EVENT
On March 6, 1998, substantially all property and equipment and the ongoing business of the Company were sold to EarthCare Company ("EarthCare") for $3,250,000 in cash, a $2,000,000 note receivable, and 60,000 shares of EarthCare common stock. Prior to the closing, all related long-term debt was paid in full to convey assets to EarthCare free and clear of all encumbrances and liens.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of RGM Liquid Waste Removal Corporation and Affiliates
In our opinion, the accompanying combined statements of operations and stockholders' equity and cash flows present fairly, in all material respects, the results of operations and cash flows of RGM Liquid Waste Removal Corporation and Affiliates for the period from November 1, 1997 to April 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma January 14, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RGM Liquid Waste Removal Corporation and Affiliates:
We have audited the accompanying combined balance sheets of RGM LIQUID WASTE REMOVAL CORPORATION AND AFFILIATES as of October 31, 1996 and 1997 and the related combined statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of RGM Liquid Waste Removal Corporation and Affiliates as of October 31, 1996 and 1997 and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia July 10, 1998
RGM LIQUID WASTE REMOVAL CORPORATION AND AFFILIATES
COMBINED BALANCE SHEET
ASSETS
The accompanying notes are an integral part of these combined financial statements.
RGM LIQUID WASTE REMOVAL CORPORATION AND AFFILIATES
COMBINED STATEMENT OF OPERATIONS
The accompanying notes are an integral part of these combined financial statements.
RGM LIQUID WASTE REMOVAL CORPORATION AND AFFILIATES
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these combined financial statements.
RGM LIQUID WASTE REMOVAL CORPORATION AND AFFILIATES
COMBINED STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these combined financial statements.
RGM LIQUID WASTE REMOVAL CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
RGM Liquid Waste Removal Corporation ("RGM") and affiliates (collectively, the "Company") is engaged in the removal of various waste materials. As part of its normal operations, the Company enters into agreements of up to four years with governmental, institutional, and commercial entities. These agreements specify that the Company will remove various waste materials at per unit prices. Billings are submitted as services are provided.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of Devito Environmental Corporation ("Devito"), Advanced Transfer Technology, Inc. ("ATT"), and Envirotech Leasing & Rental Corporation ("Envirotech") (collectively, the "Affiliates") since they have been under the same ownership of RGM since their respective dates of inception. All material intercompany accounts have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents.
The carrying amounts of short-term investments approximate fair value. Short-term investments consist of marketable equity securities and money market funds. In accordance with the criteria specified by Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," these investments were classified as available for sale.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit risk consist principally of trade receivables. The Company's customers are concentrated in one geographic region. No single customer accounted for a significant amount of the Company's sales, and there are no significant accounts receivable from a single customer. The Company reviews a customer's credit history before extending credit. The Company establishes an allowance for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using useful lives of five to ten years for machinery and equipment and office equipment. Leasehold improvements are depreciated over the shorter of the term of the lease or the useful life of the improvements.
RGM LIQUID WASTE REMOVAL CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
At October 31, 1996 and 1997, property and equipment consisted of the following:
The Company periodically reviews the values assigned to property and equipment to determine whether any impairments are other than temporary. The Company assesses impairment by determining whether the carrying value of such long-lived assets will be recovered through undiscounted expected future cash flows. No impairment losses have been recorded in the accompanying results of operations.
COMMON STOCK
No par value common stock of RGM and affiliates consists of the following as of October 31, 1996 and 1997:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INCOME TAXES
For federal and state income tax purposes, two of the affiliates (the "S corporations") have elected S corporation tax status whereby income is taxed at the shareholder level. Therefore, no deferred tax assets, liabilities, or provisions for income taxes is recorded. See Note 7 for income tax information for the two affiliates which are C corporations (the "C corporations").
3. NOTE RECEIVABLE
From July 1992 to June 1996, the Company participated in the Merco Joint Venture ("Merco"), which was accounted for using the equity method of accounting. Merco contracts with the city of New York to receive, transport, and dispose of dewatered sewage sludge. The Company's ownership interest in Merco was 33 1/3%. At May 31, 1996, the Company's investment in Merco was $2,439,761. On June 1, 1996, pursuant to a settlement agreement between the Company and Merco, the joint venture agreed to pay $1,650,000 for the Company's interest in Merco. In 1996, the Company recognized a loss on the sale of the investment in the
RGM LIQUID WASTE REMOVAL CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
amount of $789,761, which is included in other, net, in the accompanying statements of operations. The settlement was in the form of a note receivable which is payable in monthly installments of $74,625 through June 1998 and bears interest at 8% per annum.
4. LONG-TERM DEBT
At October 31, 1996 and 1997, long-term debt consisted of the following:
Future aggregate annual maturities of long-term debt are as follows as of October 31, 1997:
In May 1998, the Company repaid all long-term debt in full in conjunction with the sale of the business (Note 9).
5. RELATED-PARTY TRANSACTIONS
The Company's stockholders make loans to the Company from time to time to meet working capital needs and to purchase equipment. At December 31, 1996 and 1997, the amounts owed to stockholders were $18,688 and $131,637, respectively. In May 1998, all amounts owed to stockholders were paid in full in conjunction with the sale of the business (Note 9).
The Company is a guarantor of a loan entered by the stockholder in the amount of $118,000. The loan was paid in full in May 1998 in conjunction with the sale of the business (Note 9).
The Company leases its office facilities from related parties under noncancelable operating leases on a month-to-month basis. Rent expense for the years ended October 31, 1996 and 1997 was $406,558 and $396,991 and $184,617 for the period from November 1, 1997 to April 30, 1998. Such amounts are included in general and administrative expenses in the accompanying statement of operations. Amounts owed to these related parties for back rents at October 31, 1996 and 1997 were $456,475 and $506,713, respectively.
The Company performs waste removal services for an entity under the control of one of the Company's stockholders. The related party also provided waste treatment services to the Company. During 1996 and 1997, revenue from the related party was $55,280 and $74,016, respectively. There was no such revenue for the period from November 1, 1997 to April 30, 1998. Charges for waste treatment services performed by the related party for RGM during 1996 and 1997 were $7,765 and $2,600, respectively. There were no such charges for the period from November 1, 1997 to April 30, 1998. Net amounts due to the related party at
RGM LIQUID WASTE REMOVAL CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
October 31, 1996 and 1997 were $40,061 and $0 and are included in due to related parties in the accompanying balance sheet.
6. COMMITMENTS AND CONTINGENCIES
The Company has a defined contribution 401(k) plan (the "Plan") covering substantially all of its full-time employees. The Company has the option to contribute a profit-sharing portion to the Plan each year. During the years ended October 31, 1996 and 1997, and during the period from November 1, 1997 to April 30, 1998, no such contributions were made.
Under the terms of a bargaining agreement with its union employees, one of the affiliates is required to make contributions based on hours worked to a union annuity fund. Contributions to this fund for the years ended October 31, 1996 and 1997 were $18,336 and $64,323, respectively, and $9,667 for the period from November 1, 1997 to April 30, 1998. Such contributions are included in general and administrative expenses in the accompanying statement of operations.
7. INCOME TAXES
The accompanying financial statements include income tax provisions related to the C corporations computed in accordance with SFAS No. 109, "Accounting for Income Taxes." The components of the income tax (benefit) provision for the years ended October 31, 1996 and 1997, and for the period from November 1, 1997 to April 30, 1998, are summarized as follows:
Reconciliation from the federal statutory rate to the actual income tax benefit is as follows:
The reconciliation of the federal statutory tax rate for the period from November 1, 1997 to April 30, 1998 would not be meaningful, as the tax provision relates to RGM which is a C-Corporation and combined taxable income reflects total pretax losses of the S-Corporations. RGM's effective tax rate for the period from November 1, 1997 to April 30, 1998 was 42%, which differs from the federal statutory rate due to state and city income taxes.
RGM LIQUID WASTE REMOVAL CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The sources of differences between the financial accounting and tax bases of the Company's assets and liabilities which give rise to the deferred tax assets and liabilities and the tax effects of each are as follows as of October 31, 1996 and 1997:
8. ENVIRONMENTAL REGULATIONS
The Company is subject to extensive and evolving federal, state, and local environmental laws and regulations that have been enacted in response to technological advances and the public's increased concern over environmental issues. The majority of the expenditures necessary to comply with the environmental laws and regulations is made in the normal course of business. The Company, to the best of its knowledge, is in compliance, in all material respects, with the laws and regulations affecting its operations.
9. SUBSEQUENT EVENT
On May 1, 1998, the Company sold substantially all property and equipment and the ongoing business to EarthCare Company ("EarthCare") for $4,500,000 in cash and 105,000 shares of EarthCare common stock. Contingent consideration of $1,000,000 in cash and 55,000 shares of EarthCare common stock is receivable 365 days after the date of purchase, net of offsets for losses, as defined in the purchase agreement. Prior to the closing, all equipment loans and related-party payables were paid in full to convey assets to EarthCare free and clear of all encumbrances and liens.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Eldredge Wastewater Management, Inc.
In our opinion, the accompanying statements of operations and stockholders' equity and cash flows present fairly, in all material respects, the results of operations and cash flows of Eldredge Wastewater Management, Inc. for the period from January 1, 1998 to May 7, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma January 15, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eldredge Wastewater Management, Inc.:
We have audited the accompanying balance sheets of ELDREDGE WASTEWATER MANAGEMENT, INC. (a Pennsylvania corporation) as of December 31, 1996 and 1997 and the related statements of operations, stockholder's equity, and cash flows for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Eldredge Wastewater Management, Inc. as of December 31, 1996 and 1997 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia June 19, 1998
ELDREDGE WASTEWATER MANAGEMENT, INC.
BALANCE SHEET
ASSETS
The accompanying notes are an integral part of these financial statements.
ELDREDGE WASTEWATER MANAGEMENT, INC.
STATEMENT OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
ELDREDGE WASTEWATER MANAGEMENT, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
The accompanying notes are an integral part of these financial statements.
ELDREDGE WASTEWATER MANAGEMENT, INC.
STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
ELDREDGE WASTEWATER MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Eldredge Wastewater Management, Inc. (the "Company"), a Pennsylvania corporation, is engaged in the design, construction, repair, and maintenance of on-site sewage disposal systems. The Company's services are sold to customers located primarily in the Delaware Valley of Southeastern Pennsylvania. The Company is a wholly owned subsidiary of The Eldredge Companies, Inc. ("The Eldredge Companies").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with purchased maturities of three months or less at the date of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over estimated useful lives of five to ten years using the straight-line method.
At December 31, 1996 and 1997, property and equipment consisted of the following:
The Company periodically reviews the values assigned to property and equipment to determine whether any impairments are other than temporary. The Company assesses impairment by determining whether the carrying value of such long-lived assets will be recovered through undiscounted expected future cash flows. No impairment losses have been recorded in the accompanying results of operations.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
ELDREDGE WASTEWATER MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INCOME TAXES
The benefit from income taxes is summarized as follows for the years ended December 31, 1996, 1997 and for the period from January 1, 1998 to May 7, 1998:
Significant components of the Company's deferred income tax liability as of December 31, 1996 and 1997 are summarized as follows:
The operations of the Company are included in the consolidated federal income tax return of The Eldredge Companies. All tax amounts above as well as tax amounts included in the accompanying financial statements have been reflected as if the Company filed separate state and federal tax returns.
4. LONG-TERM DEBT
At December 31, 1996 and 1997, long-term debt consisted of the following:
ELDREDGE WASTEWATER MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future aggregate annual maturities of long-term debt are as follows as of December 31, 1997:
In May 1998, in conjunction with the sale of the business (Note 7), all related long-term debt was paid in full.
5. COMMITMENTS AND CONTINGENCIES
BENEFIT PLAN
The Company maintains a 401(k) plan for employees. The Company makes a discretionary profit-sharing contribution to the plan based on estimated company profitability. Company contributions for the years ended December 31, 1996 and 1997 were $10,000 and $6,000, respectively. There were no such contributions for the period from January 1, 1998 to May 7, 1998.
ENVIRONMENTAL AND LEGAL MATTERS
The Company is subject to various claims and legal actions which arise in the ordinary course of business. In the opinion of management, the ultimate resolution of any such matters should not have a material adverse effect on the Company's financial position or results of operations.
6. RELATED-PARTY TRANSACTIONS
The Company makes periodic cash transfers to (from) The Eldredge Companies and its subsidiaries based on available cash. Additionally, the Company receives certain administration services from its parent company, The Eldredge Companies. Allocations of parent company direct costs related to these services, totaled $207,727 and $158,929 for the years ended December 31, 1996 and 1997, respectively, and $67,486 for the period from January 1, 1998 to May 7, 1998. These allocations are included in general and administrative expense in the accompanying statement of operations. The Company also receives certain management services from other wholly owned subsidiaries of The Eldredge Companies. Management fees, which are reflected in general and administrative expense in the accompanying statement of operations, totaled $247,392 and $220,913 for the years ended December 31, 1996 and 1997, respectively, and $55,551 for the period from January 1, 1998 to May 7, 1998. The stockholders of The Eldredge Companies also served as key officers of the Company during 1996 and 1997. Compensation paid to one of these officers totaled $104,067 and $103,879 for 1996 and 1997, respectively, and $43,333 for the period from January 1, 1998 to May 7, 1998. Such amounts are included in general and administrative expense in the accompanying statement of operations. The Company leases its office space and equipment storage facilities from a partnership owned by the stockholders of The Eldredge Companies. Rental expense during the years ended December 31, 1996 and 1997 was $22,740, and $22,320, respectively, and $9,300 for the period from January 1, 1998 to May 7, 1998.
The Company purchases certain equipment improvements from a wholly owned subsidiary of The Eldredge Companies. These improvements relate primarily to the Company's fleet of septic waste tanker trucks. For the years ended December 31, 1996 1997, these equipment purchases totaled $4,174 and $123,218, respectively, and $26,464 for the period from January 1, 1998 to May 7, 1998. In addition, this sister company performs substantially all of the repair and maintenance services on the company vehicles. For the years ended
ELDREDGE WASTEWATER MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996 and 1997, these services totaled $176,247 and $192,034, respectively, and $77,800 for the period from January 1, 1998 to May 7, 1998. These amounts are reflected in cost of operations in the accompanying statement of operations.
7. SUBSEQUENT EVENT
On May 8, 1998, substantially all property and equipment and the ongoing business of the Company was sold to EarthCare Company ("EarthCare") for $2,040,000 in cash and 85,000 shares of EarthCare common stock. Contingent consideration of $360,000 in cash and 15,000 shares of EarthCare common stock is receivable 13 months after the date of purchase, net of offsets for losses, as defined in the purchase agreement. Prior to the closing, all outstanding long-term debt was paid in full to convey the assets free and clear of all encumbrances and liens.
INDEX TO EXHIBITS