-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VSzA5LB7dxsYlRzAP1p5CiODn6y3yq7wRc+5Hjfd7bDebcVC9i627nZ4spkf9AaL tG5SZ6tkqwUuJsCVeC7lDQ== 0000950134-01-505951.txt : 20010830 0000950134-01-505951.hdr.sgml : 20010830 ACCESSION NUMBER: 0000950134-01-505951 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010829 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EARTHCARE CO CENTRAL INDEX KEY: 0001057489 STANDARD INDUSTRIAL CLASSIFICATION: HAZARDOUS WASTE MANAGEMENT [4955] IRS NUMBER: 582335973 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24685 FILM NUMBER: 1726052 BUSINESS ADDRESS: STREET 1: 7200 BISHOP ROAD CITY: AUSTELL STATE: GA ZIP: 30168 BUSINESS PHONE: 7704498844 MAIL ADDRESS: STREET 1: 14901 QUORUM DRIVE STREET 2: SUITE 200 CITY: DALLAS STATE: TX ZIP: 75240 FORMER COMPANY: FORMER CONFORMED NAME: SANTI GROUP INC /GA DATE OF NAME CHANGE: 19980720 10-Q 1 d90003e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2001 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________. Commission File Number: 000-24685 EARTHCARE COMPANY (Exact name of registrant as specified in its charter) Delaware 58-2335973 (State of incorporation or organization) (IRS employer identification number) 14901 Quorum Drive, Suite 200, Dallas, Texas 75254-6717 (Address of principal executive office) (Zip code)
972-858-6025 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the registrant has filed all documents and reports required by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [ ] Yes [X] No The number of outstanding shares of the registrant's common stock, par value $.0001 per share, was 18,152,961 on August 27, 2001. ================================================================================ 2 EARTHCARE COMPANY INDEX TO CONTENTS
DESCRIPTION OF CONTENTS PAGE NUMBER - ----------------------- ----------- Introduction............................................................................ 3 PART I - Financial Information Item 1 - Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets at June 30, 2001 (unaudited) and December 31, 2000.............................................. 7 Condensed Consolidated Statements of Operations for the six-month periods ended June 30, 2001 and 2000 (unaudited)..................... 8 Condensed Consolidated Statements of Operations for the three-month periods ended June 30, 2001 and 2000 (unaudited)................... 9 Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2001 and 2000 (unaudited)..................... 10 Notes to Condensed Consolidated Financial Statements (unaudited)................... 11 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 22 Item 3 - Quantitative and Qualitative Disclosures About Market Risk..................... 32 PART II - Other Information Item 1 - Legal Proceedings.............................................................. 32 Item 2 - Changes in Securities.......................................................... 33 Item 3 - Defaults Upon Senior Securities................................................ 33 Item 4 - Submission of Matters to a Vote of Security Holders............................ 33 Item 5 - Other Information.............................................................. 33 Item 6 - Exhibits and Reports on Form 8-K............................................... 42 Signature............................................................................... 42
2 3 FORM 10-Q INTRODUCTION BUSINESS EarthCare Company ("EarthCare") is a publicly traded company whose common stock is currently traded on the OTC Bulletin Board under the symbol "ECCO.OB". EarthCare and its subsidiaries are engaged in three non-hazardous waste divisions. Our EarthCare Solid Waste division provides collection, transfer and disposal of non-hazardous solid waste in Hillsborough County, Florida, the adjoining counties and Palm Beach County, Florida. Our EarthAmerica division provides non-hazardous liquid waste collection, processing, treatment, disposal, bulk transportation, pumping, plumbing and maintenance services from its operating locations in New York, New Jersey, Pennsylvania, Florida, Georgia and Texas. Our EarthLiquids division provides non-hazardous used oil and oily wastewater recovery and treatment services in Florida, Delaware, Louisiana, Maryland, New Jersey and Pennsylvania. EarthLiquids also sells refined oil derived from used oil and oily wastewater. BACKGROUND OF BUSINESS PLAN EarthCare was created to become a leading national non-hazardous waste company through strategic acquisitions of companies that provide non-hazardous liquid waste pumping services. From our inception in 1997 through 2000, we completed 15 acquisitions of companies providing pumping and other non-hazardous liquid waste services, including plumbing, bulk hauling, industrial solid digest waste, and portable toilets. As we assumed control of these companies and integrated their operations into our EarthAmerica division, we discovered that the EarthAmerica service centers' level of business and revenue depended on customers calling us for service. The level of revenue from these lines of business was inconsistent and was greatly affected by factors such as weather, advertising and effective service center management. EarthCare's and EarthAmerica's management teams determined that a significant portion of the newly acquired companies' operating results was generated by non-pumping services. A significant proportion of this non-pumping business was reactionary, meaning that when a customer called for service, EarthAmerica would react and provide the needed service. When customer call volume declined, our operating results were negatively affected. While certain lines of business, such as the bulk hauling and industrial digest services, maintained a steady volume of profitable business, other lines of business, such as plumbing, construction and portable toilets, declined and were not profitable. Furthermore, frequent turnover in management, supervisory, sales and customer service personnel negatively affected the operating results of our EarthAmerica division. During the first half of 2000, EarthAmerica's management devised a plan to change the way in which we provide residential septic and restaurant grease trap services. Rather than wait for a customer to call for service, EarthAmerica service centers would proactively offer these services on a regularly scheduled basis. To enact these plans, EarthAmerica invested significantly in various sales and marketing efforts, many of which were not successful. During the second half of 2000, EarthAmerica's management refined its plans and settled on two basic approaches. An EarthAmerica sales force, with performance based compensation, was developed to market services and maintain relations with restaurant customers. In our residential septic line of business, we focused our sales and marketing efforts on new home construction and real estate agents. In addition, as customers called the EarthAmerica service centers for septic service, we offered annual service plans to handle their septic pumping and maintenance needs. While this approach to restaurant and residential customers appears to have the potential to succeed, these programs are still early in their implementation and have not had an appreciable positive effect on our profitability. During 1999, our management team believed that EarthAmerica's restaurant and residential services could be expanded nationally by acquiring other non-hazardous liquid waste companies. As a 3 4 result, we identified the used oil recycling and processing business as one that might complement EarthAmerica's existing lines of business. In 1999 and 2000, we completed the acquisitions of International Petroleum Corporation and Magnum Environmental and integrated these operations into our EarthLiquids division. To date, these acquisitions have not provided any additional growth for the EarthAmerica restaurant and residential service, although the EarthLiquids division has been a profitable division. In order to finance the EarthAmerica and EarthLiquids acquisitions, the EarthAmerica sales and marketing efforts and the EarthAmerica operating losses, we relied on a combination of senior and subordinated debt. During 1999 and 2000, our operating results, primarily due to the negative operating results of EarthAmerica, were not adequate to service our debt. While we were able to service cash interest expense during this period, we were not able to meet the financial performance requirements of our senior credit facility with Bank of America, N.A. and Fleet Bank, N.A. (the "senior lenders"). For each quarter from December 31, 1999 through June 30, 2001, we were not in compliance with the financial covenants required by our senior lenders. During the second quarter of 2000, Donald Moorehead, our Chairman, and Raymond Cash, our Vice Chairman, agreed to personally guarantee $20 million of the amounts owed under our senior credit facility. In addition, each of these individuals was required to provide liquid collateral to our senior lenders because we were not able to raise additional capital by the end of the third quarter of 2000 as required by the credit facility. At that time, Donald Moorehead agreed to guarantee an additional $40 million of our senior credit facility. During the fourth quarter of 2000, Donald Moorehead provided approximately $17 million in liquid collateral to the senior lenders, Raymond Cash provided $10 million of liquid collateral, and a private investor provided $3 million of liquid collateral. During the third and fourth quarters of 2000, we paid down $8 million on our senior credit facility. This $8 million was financed by selling $5 million of common stock and $3 million of convertible preferred stock to Donald Moorehead. During the third quarter of 2000, our executive management team and Board of Directors discussed strategic plans for EarthCare and agreed that the non-hazardous solid waste industry provided a line of business that could generate more consistent revenues, cash flows and earnings than the non-hazardous liquid waste industry, specifically the EarthAmerica division. Our executive management team has extensive experience in the solid waste industry and a proven track record of managing profitable operations. In our Form 10-Q for the third quarter of 2000, we disclosed our intent to focus our future management and financial resources on the non-hazardous solid waste industry and to explore strategic and financing alternatives for our non-hazardous liquid waste lines of business. In July 2000, we acquired a minority interest in Liberty Waste, Inc., a non-hazardous solid waste collection, transfer and disposal company operating in Hillsborough County, Florida by issuing 356,000 shares of our common stock to certain minority shareholders of Liberty Waste. In December 2000, we completed the acquisition of Liberty Waste, Inc. by issuing 520,100 shares of our common stock and by exchanging $5,915,000 of our 10% convertible preferred stock for an equal amount of Liberty Waste's subordinated debt. We also assumed the senior debt and equipment and mortgage notes payable of Liberty Waste. Following the acquisition, Liberty Waste changed its name to EarthCare Resource Management of Florida, Inc. During 2000, EarthCare recognized as income approximately $702,000 in management fees paid by Liberty Waste. These fees helped support the ongoing operations of EarthCare. On August 1, 2001, the name of this subsidiary was changed to Earth Resource Management of Florida is financed as a stand-alone subsidiary of EarthCare and is not a party to our senior credit facility. EarthCare and Earth Resource Management of Florida have agreed not to guarantee each other's debt and not to provide permanent financing to each other as long as there are amounts outstanding under EarthCare's senior credit facility. 4 5 RECENT DEVELOPMENTS On August 27, 2001, we executed a fourth amendment to our senior credit facility. As part of the agreed upon terms for the fourth amendment, we will be required to comply with certain covenants, including the following: o maintaining monthly EBITDA (earnings before interest, taxes, depreciation and amortization) for all of our operations, excluding our solid waste division, of $350,000 during July 2001 and $400,000 per month thereafter, o selling our EarthLiquids division by September 30, 2001, and o selling the business units comprising our EarthAmerica division at varying dates from September 30, 2001 to October 31, 2001. Since we are required to use the proceeds from the sale of our EarthLiquids division and the sale of our EarthAmerica business units to repay our senior credit facility and since we expect these sales to be completed during the next twelve months, we have classified the outstanding balance under our senior credit facility as a current liability. If we are unable to complete the sale of our EarthAmerica business units and our EarthLiquids division by the required dates in the fourth amendment, we will be required to explore other sources of financing to repay our senior credit facility. Other sources of financing would include refinancing our senior credit facility, seeking new debt or equity financing or selling our Solid Waste division. Our senior lenders also waived our lack of compliance with certain restrictive covenants in our third amendment, including the monthly EBITDA requirement and the requirement to sell our EarthAmerica division by certain dates. As part of the fourth amendment, we have agreed to an increase in the interest rate payable on our senior debt to prime plus three percent. The prime rate as of August 27, 2001 was 6.5%. Payment of interest at prime plus 1.5% is due in cash at the end of each month, while the payment of interest at 1.5% is deferred until we complete the sale of our EarthLiquids division. Following the sale of our EarthLiquids division, payment of interest at prime plus 3% is required each month. The fees to the banks for the third and fourth amendments, amounting to $750,000, are deferred until we complete the sale of the EarthLiquids division. On August 8, 2001, we completed the sale of our plumbing and industrial pumping businesses in Georgia to a private company, Tempered Air Systems, and a private individual, John Hulsey, for $1.0 million in cash and a $300,000 note payable. In addition, we obtained a release from Mr. Hulsey from his employment contract and his contingent consideration agreement. We recognized a loss of approximately $2.7 million on the sale of these businesses. The expected loss on the sale of these businesses was recorded in the fourth quarter of 2000 as part of the expected loss on the sale of the EarthAmerica division. On August 6, 2001, we announced an agreement to sell the assets of our EarthLiquids division to USFilter for $35 million in cash at closing and up to $5 million in additional consideration contingent on the future financial performance of the EarthLiquids division. We expect that we will complete this transaction by the end of the third quarter of 2001, subject to normal terms and conditions, including due diligence, stockholder approval and completion of a definitive agreement. Donald Moorehead, our Chairman, Raymond Cash, our Vice Chairman, and certain significant stockholders have orally indicated their intent to vote in favor of this transaction. We have received oral commitments to vote over 70% of our common and preferred stock in favor of this transaction. We are currently negotiating with several strategic buyers for the sale of the remaining EarthAmerica business units. Although we expect to complete these transactions by the end of October 2001, we cannot provide any assurance that these transactions will be completed by such date nor can we provide any assurance that we will be able to complete such transactions at prices that are favorable to EarthCare. 5 6 On June 5, 2001, our common stock was delisted from the Nasdaq National Market because, among other reasons, our common stock had not traded above the minimum $5 bid price, did not have a current market capitalization exceeding $35 million, and had not had a market value for shares held by non-affiliates exceeding $15 million. On April 2, 2001, we acquired the equipment and intangible assets of Palm Carting, Inc., a non-hazardous solid waste collection company located in Palm Beach County, Florida for $350,000 in cash and future consideration of up to $250,000 to be paid in shares of our common stock if certain revenue targets are met, with the number of shares based upon the closing price of our common stock on the dates of measurement. In addition, we assumed $1.1 million of existing notes payable for equipment. Had we acquired this collection operation on January 1, 2001 or 2000, our pro forma results of operations would not have been significantly different from the results of operations disclosed herein. On March 5, 2001, we entered into an agreement to acquire all of the outstanding shares of LandComp Corporation, which owns and operates a solid waste landfill in LaSalle County, Illinois. As an inducement to enter into this transaction, we loaned $1,055,000 to LandComp and agreed to a series of option payments that give EarthCare the right to complete this acquisition by the end of September 2001, which amounted to $745,000 as of June 30, 2001. At the closing of this transaction, we expect to issue approximately 3,500,000 shares of our common stock. The completion of this acquisition is subject to normal terms and conditions, including EarthCare obtaining a letter of credit of $5.3 million as stand-by financing for an existing industrial revenue bond and EarthCare obtaining a $2.75 million closure and post-closure bond required by the State of Illinois. EarthCare expects to complete this acquisition during the third quarter of 2001 after the sale of the EarthLiquids division. During the third quarter of 2000, our management group and Board of Directors decided to focus our future management and financial resources principally on the non-hazardous solid waste business in an effort to build a stronger company with more predictable revenue, earnings and cash flows. As part of this change of focus, we sold our environmental compliance software company, Allen Tate Commercial Software LLP, during the fourth quarter of 2000 to a private company owned by William Addy, one of our executive officers. We began exploring certain financing and strategic alternatives for our EarthAmerica and EarthLiquids divisions. On April 12, 2001, our Board of Directors approved a plan to sell both divisions. In their report on the December 31, 2000 consolidated financial statements of EarthCare, our independent accountants expressed substantial doubt about our ability to continue as a going concern. We believe that EarthCare is a going concern. We believe that we have implemented a plan that will allow EarthCare to continue as a going concern focused on the solid waste industry. Our plans to improve the cash flow from operations and reduce our debt level are discussed herein and include the steps shown below: o reducing operating expenses (in addition to personnel reductions that have occurred in the fourth quarter of 2000), including the integration of certain management and administrative functions; o managing working capital to improve cash flow from operating activities; o selling our EarthAmerica business units and EarthLiquids division; o refinancing certain existing debt, and o raising additional debt and equity capital. We can provide no assurance that we will be successful implementing the changes necessary to accomplish these objectives, or if we are successful, that the changes will help us improve our cash flow and reduce our debt. 6 7 PART I - FINANCIAL INFORMATION ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS EARTHCARE COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2001 2000 -------------- -------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,815,235 $ 1,784,361 Accounts receivable, net of allowance for doubtful accounts of $641,000 and $610,000, respectively 2,878,725 2,450,983 Prepaid expenses and other current assets 1,623,567 734,866 Net assets of discontinued operations 53,131,523 56,801,400 -------------- -------------- Total current assets 59,449,050 61,771,610 Property, plant and equipment, net 17,525,110 15,472,481 Intangible assets, net 7,526,099 7,311,210 Other long-term assets 6,759,937 4,050,065 -------------- -------------- Total assets $ 91,260,196 $ 88,605,366 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 3,707,993 $ 2,099,158 Accrued liabilities 13,709,253 15,972,512 Current portion of long-term debt 66,689,528 63,177,353 -------------- -------------- Total current liabilities 84,106,774 81,249,023 Long-term debt 40,509,943 38,965,666 Commitments and contingencies Mandatorily redeemable convertible preferred stock 10,880,641 10,800,248 Stockholders' equity (deficit): Preferred stock, $.0001 par value; 30,000,000 shares authorized, none issued -- -- Common stock, $.0001 par value; 70,000,000 shares authorized, 18,061,086 and 14,569,348 shares issued, respectively 1,806 1,457 Additional paid-in capital 64,301,540 60,013,157 Accumulated deficit (108,540,508) (102,424,185) -------------- -------------- Total stockholders' equity (deficit) (44,237,162) (42,409,571) -------------- -------------- Total liabilities and stockholders' equity (deficit) $ 91,260,196 $ 88,605,366 ============== ==============
See accompanying notes to condensed consolidated financial statements. 7 8 EARTHCARE COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Six months ended June 30, 2001 2000 2000 ------------ ------------ ------------ Historical Pro Forma Historical Revenues $ 11,773,192 $ 8,736,799 $ 560,000 Expenses: Cost of operations 7,855,544 6,040,524 -- Selling, general and administrative 3,757,090 6,756,490 5,438,777 Depreciation and amortization 1,016,018 872,081 53,046 ------------ ------------ ------------ Operating expenses 12,628,652 13,669,095 5,491,823 ------------ ------------ ------------ Operating loss (855,460) (4,932,296) (4,931,823) Interest expense 3,789,080 948,237 519,250 ------------ ------------ ------------ Loss from continuing operations (4,644,540) $ (5,880,533) (5,451,073) ============ Discontinued operations: Income (loss) from discontinued operations: EarthAmerica (1,814,039) (1,155,176) EarthLiquids 422,719 1,030,971 Allen Tate -- (850,201) ------------ ------------ Loss from discontinued operations (1,391,320) (974,406) ------------ ------------ Net loss (6,035,860) (6,425,479) Dividends and accretion of discount on 10% preferred (80,463) -- ------------ ------------ Net loss available to common stockholders $ (6,116,323) $ (6,425,479) ============ ============ Net loss per share - basic and diluted: Continuing operations $ (0.30) $ (0.37) $ (0.45) Discontinued operations (0.09) -- (0.08) ------------ ------------ ------------ Net loss $ (0.39) $ (0.37) $ (0.53) ============ ============ ============ Weighted average number of common shares 15,834,778 15,834,778 12,098,619
See accompanying notes to condensed consolidated financial statements. 8 9 EARTHCARE COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended June 30, 2001 2000 2000 ------------ ------------ ------------ Historical Pro Forma Historical Revenues $ 6,158,604 $ 4,635,181 $ 280,000 Expenses: Cost of operations 4,174,657 3,063,462 -- Selling, general and administrative 1,896,176 5,804,392 4,333,986 Depreciation and amortization 483,269 443,741 -- ------------ ------------ ------------ Operating expenses 6,554,102 9,311,595 4,333,986 ------------ ------------ ------------ Operating loss (395,498) (4,676,414) (4,053,986) Interest expense 2,459,359 554,942 348,455 ------------ ------------ ------------ Loss from continuing operations (2,854,857) $ (5,231,356) (4,402,441) ============ Discontinued operations: Income (loss) from discontinued operations: EarthAmerica -- (792,001) EarthLiquids -- 916,850 Allen Tate -- (289,309) ------------ ------------ Loss from discontinued operations -- (164,460) ------------ ------------ Net loss (2,854,857) (4,566,901) Dividends and accretion of discount on 10% preferred (42,817) -- ------------ ------------ Net loss available to common stockholders $ (2,897,674) $ (4,566,901) ============ ============ Net loss per share - basic and diluted: Continuing operations $ (0.17) $ (0.31) $ (0.38) Discontinued operations -- -- (0.01) ------------ ------------ ------------ Net loss $ (0.17) $ (0.31) $ (0.39) ============ ============ ============ Weighted average number of common shares 16,986,644 16,986,644 11,608,473
See accompanying notes to condensed consolidated financial statements. 9 10 EARTHCARE COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, ------------------------------ 2001 2000 ------------ ------------ (Unaudited) Cash flows from operating activities: Net loss $ (6,035,860) $ (6,425,479) Adjustments to reconcile loss to net cash provided (used) in operating activities: Depreciation and amortization 1,016,018 53,046 Non cash interest expense 2,974,339 2,407,766 Changes in assets and liabilities, excluding effects of acquired businesses: Accounts receivable (489,742) (252,871) Other current assets (888,701) 255,281 Other assets (499,192) 259,576 Accounts payable 1,608,835 (862,170) Accrued expenses and other, net (309,004) 696,569 Net change from discontinued operations 2,580,963 (1,884,614) ------------ ------------ Net cash provided (used) in operating activities (42,344) (5,752,896) ------------ ------------ Cash flows from investing activities: Capital expenditures (949,947) (77,885) Business acquisitions (1,137,584) -- Issuance of notes receivable (1,055,000) -- Net change from discontinued operations 1,098,914 (42,873,274) ------------ ------------ Net cash used in investing activities (2,043,617) (42,951,159) ------------ ------------ Cash flows from financing activities: Borrowings under Senior Credit Facility and other debt 6,100,000 32,600,000 Payments on Senior Credit Facility and other debt (7,723,200) (6,613,508) Proceeds from issuance of 10% debentures -- 1,037,500 Proceeds from issuance of 12% debentures -- 20,000,000 Proceeds from issuance of bridge loans 4,000,000 -- Payment of debt issue costs and other (250,000) (1,468,375) Sale and other issuances of common stock 35 3,880,069 Net change from discontinued operations (10,000) (38,982) ------------ ------------ Net cash provided (used) by financing activities 2,116,835 49,396,704 ------------ ------------ Net increase in cash and cash equivalents 30,874 692,649 Cash and cash equivalents, beginning of period 1,784,361 281,995 ------------ ------------ Cash and cash equivalents, end of period $ 1,815,235 $ 974,644 ============ ============ Supplemental cash flow information: Cash paid for interest $ 4,655,425 $ 2,005,444 ============ ============
See accompanying notes to condensed consolidated financial statements. 10 11 EARTHCARE COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (Unaudited) 1. BUSINESS AND BASIS OF PRESENTATION EarthCare Company ("EarthCare") is a publicly traded company whose common stock is currently traded on the OTC Bulletin Board under the symbol "ECCO.OB". EarthCare and its subsidiaries are engaged in three non-hazardous waste divisions. Our EarthCare Solid Waste division provides collection, transfer and disposal of non-hazardous solid waste in Hillsborough County, Florida, the adjoining counties and Palm Beach County, Florida. Our EarthAmerica division provides non-hazardous liquid waste collection, processing, treatment, disposal, bulk transportation, pumping, plumbing and maintenance services from its operating locations in New York, New Jersey, Pennsylvania, Florida, Georgia and Texas. Our EarthLiquids division provides non-hazardous used oil and oily wastewater recovery and treatment services in Florida, Delaware, Louisiana, Maryland, New Jersey and Pennsylvania. EarthLiquids also sells refined oil derived from used oil and oily wastewater. We have restated our consolidated financial statements for the three-month and six-month periods ended June 30, 2000 to reflect the discontinued operations of our EarthAmerica, EarthLiquids and Allen Tate divisions. Our discontinued operations are discussed further in Note 3. CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements comprise the accounts of EarthCare and its wholly owned subsidiaries. We have eliminated all significant intercompany transactions and balances in consolidation. RECLASSIFICATIONS We have reclassified certain amounts in the balance sheet at December 31, 2000 and the statements of operations for the three month and six month periods ended June 30, 2000, none of which affect the net loss for those periods, in order to be consistent with the presentation of the June 30, 2001 financial statements. 2. RECENT DEVELOPMENTS During the third quarter of 2000, our management group and Board of Directors decided to focus our future management and financial resources principally on the non-hazardous solid waste business in an effort to build a stronger company with more predictable revenue, earnings and cash flows. As part of this change of focus, we sold our environmental compliance software company, Allen Tate Commercial Software LLP, during the fourth quarter of 2000 to a private company owned by William Addy, one of our executive officers. We began exploring certain financing and strategic alternatives for our EarthAmerica and EarthLiquids divisions. On April 12, 2001, our Board of Directors approved a plan to sell both divisions. On August 6, 2001, we announced an agreement to sell our EarthLiquids division to U.S. Filter for $35 million in cash at closing and up to $5 million in additional consideration contingent on future financial performance of the EarthLiquids division. We expect that we will complete this transaction by the end of the third quarter of 2001, subject to normal terms and conditions, including completion of due diligence, stockholder approval and execution of a definitive agreement. Donald Moorehead, our Chairman, Raymond Cash, our Vice Chairman, and certain significant stockholders have orally indicated that they will vote in favor of this transaction. We have received oral commitments to vote over 70% of our common and preferred stock in favor of this transaction. On August 8, 2001, we completed the sale of our plumbing and industrial pumping businesses in Georgia to a private company, Tempered Air Systems, and a private individual, John Hulsey, for $1.0 million in cash and a $300,000 note payable. In addition, we obtained a release from Mr. Hulsey from his employment contract and his contingent consideration agreement. We recognized a loss of approximately 11 12 EARTHCARE COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (Unaudited and continued) $2.7 million on the sale of these businesses. The expected loss on the sale of these businesses was recorded in the fourth quarter of 2000 as part of the expected loss on the sale of the EarthAmerica Division. We are currently negotiating with several strategic buyers for the sale of the remaining EarthAmerica business units. Although we expect to complete these transactions by the end of October 2001, we cannot provide any assurance that these transactions will be completed by such date nor can we provide any assurance that we will be able to complete such transactions at prices that are favorable to EarthCare. On June 5, 2001, our common stock was delisted from the Nasdaq National Market because, among other reasons, our common stock had not traded above the minimum $5 bid price, did not have a current market capitalization exceeding $35 million, and had not had a market value for shares held by non-affiliates exceeding $15 million. In their report on the December 31, 2000 consolidated financial statements, our independent accountants expressed substantial doubt about our ability to continue as a going concern. We believe that EarthCare is a going concern. We believe that we have implemented a plan that will allow EarthCare to continue as a going concern focused on the solid waste industry. Our plans to improve the cash flow from operations and reduce our debt level are discussed herein and include the steps shown below: o reducing operating expenses (in addition to personnel reductions that have occurred in the fourth quarter of 2000), including the integration of certain management and administrative functions; o managing working capital to improve cash flow from operating activities; o selling our EarthAmerica business units and EarthLiquids divisions; o refinancing certain existing debt, and o raising additional debt and equity capital. We can provide no assurance that we will be successful implementing the changes necessary to accomplish these objectives, or if we are successful, that the changes will help us improve our cash flow and reduce our debt. 12 13 EARTHCARE COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (Unaudited and continued) 3. DISCONTINUED OPERATIONS On April 12, 2001, our Board of Directors approved a plan to sell our EarthAmerica and our EarthLiquids divisions. We are currently negotiating to sell our EarthAmerica division's business units to several strategic buyers and our EarthLiquids divisions to one strategic buyer and we expect to complete these sales, subject to normal terms and conditions, during the third and fourth quarters of 2001. If we are unable to sell these two divisions, we will pursue other buyers for these business units and division, as required by our senior lenders. We have reported the net assets of these two divisions in our condensed consolidated balance sheets as "net assets of discontinued operations." We have reported the operating results of our EarthAmerica, EarthLiquids and Allen Tate divisions in our condensed consolidated statement of operations as "net income (loss) from discontinued operations" for the period prior to the measurement date, as the results of operations after the measurement date are included in the estimated loss on the sale of these divisions. We have presented below a summary of the net assets of the discontinued operations as of June 30, 2001 and December 31, 2000:
June 30, 2001 December 31, 2000 ------------- ----------------- Accounts receivable $ 10,677,739 $ 11,654,143 Prepaid expenses and other current assets 2,484,362 2,363,465 Property, plant and equipment, net 52,286,212 54,461,874 Intangible assets, net 56,168,776 56,730,800 Other assets 208,880 47,908 Accounts payable (5,580,446) (5,766,653) Accrued liabilities (4,759,936) (3,856,433) Estimated loss on the planned sale of EarthAmerica (29,012,921) (30,453,044) - excludes $1,438,400 and $1,590,000 of liabilities that were included in the estimated loss on sale of EarthAmerica and are reflected as current liabilities on the balance sheets at June 30, 2001 and December 31, 2000, respectively Estimated loss on the planned sale of EarthLiquids (29,341,143) (28,380,660) ------------ ------------ Net assets of discontinued operations $ 53,131,523 $ 56,801,400 ============ ============
13 14 EARTHCARE COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (Unaudited and continued) We have presented below a summary of the operating results from the discontinued operations for the three month and six month periods ended June 30, 2001 and 2000:
Six months ended June 30, Three months ended June 30, ------------------------------ ------------------------------ 2001 2000 2001 2000 ------------ ------------ ------------ ------------ EarthAmerica: Net sales $ 21,287,846 $ 25,121,326 $ 11,106,327 $ 13,133,620 Cost of operations 14,086,079 16,259,630 7,096,142 8,422,887 Selling, general and administrative expense 5,527,297 6,063,548 2,756,326 3,007,273 Depreciation and amortization expense 898,302 1,641,980 -- 974,487 ------------ ------------ ------------ ------------ Operating income (loss) 776,168 1,156,168 1,253,859 728,973 Interest and other expense 2,216,291 2,311,344 879,943 1,520,974 Income included in the accrual for loss on sale (373,916) -- (373,916) -- ------------ ------------ ------------ ------------ Income (loss) from discontinued operations $ (1,814,039) $ (1,155,176) $ -- $ (792,001) ============ ============ ============ ============ EarthLiquids: Net sales $ 20,100,950 $ 17,240,671 $ 9,417,159 $ 9,490,882 Cost of operations 13,525,119 10,967,377 6,542,435 5,857,738 Selling, general and administrative expense 3,016,868 2,462,646 1,448,208 1,043,717 Depreciation and amortization expense 740,470 1,269,990 -- 913,411 ------------ ------------ ------------ ------------ Operating income 2,818,493 2,540,658 1,426,516 1,676,016 Interest and other expense 1,858,010 1,509,687 888,752 759,166 Income included in the accrual for loss on sale (537,764) -- (537,764) -- ------------ ------------ ------------ ------------ Income from discontinued operations $ 422,719 $ 1,030,971 $ -- $ 916,850 ============ ============ ============ ============ Allen Tate: Net sales $ 72,158 $ 4,478 Cost of operations -- -- Selling, general and administrative expense 671,281 149,427 Depreciation and amortization expense 178,149 95,683 ------------ ------------ Operating loss (777,272) (240,632) Interest and other expense 72,929 48,677 ------------ ------------ Loss from discontinued operations $ (850,201) $ (289,309) ============ ============ Total: Net sales $ 41,388,796 $ 42,434,155 $ 20,523,486 $ 22,628,980 Cost of operations 27,611,198 27,227,007 13,638,577 14,280,625 Selling, general and administrative expense 8,544,165 9,197,475 4,204,534 4,200,417 Depreciation and amortization expense 1,638,772 3,090,119 -- 1,983,581 ------------ ------------ ------------ ------------ Operating income 3,594,661 2,919,554 2,680,375 2,164,357 Interest and other expense 4,074,301 3,893,960 1,768,695 2,328,817 Income included in the accrual for loss on sale (911,680) (911,680) ------------ ------------ ------------ ------------ Loss from discontinued operations $ (1,391,320) $ (974,406) $ -- $ (164,460) ============ ============ ============ ============
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies we have followed to prepare the condensed consolidated financial statements are consistent with the accounting policies described in EarthCare's notes to consolidated financial statements in EarthCare's Annual Report on Form 10-K/A for the year ended December 31, 2000. INTERIM FINANCIAL INFORMATION The accompanying interim financial statements and information are unaudited. We have omitted or condensed certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles, although we believe that the disclosures included herein are adequate to make the information presented not misleading. You should read these interim financial statements in conjunction with EarthCare's consolidated financial statements for the year ended December 31, 2000. We have included in the interim financial statements all adjustments, consisting 14 15 EARTHCARE COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (Unaudited and continued) only of normal recurring adjustments, necessary for a fair presentation of EarthCare's financial position, its results of operations and its cash flows. We do not believe that the operating results for any particular interim period are necessarily indicative of the operating results for a full year. We derived the financial information as of December 31, 2000 from our audited financial statements, which are included in EarthCare's Annual Report on Form 10-K/A for the year ended December 31, 2000. INCOME (LOSS) PER SHARE AND WEIGHTED SHARES We have not presented separate basic and diluted net loss per share information because the incremental shares used to determine net loss per share would be anti-dilutive. There is no difference between the basic and diluted weighted average shares for the periods presented. For the three-month and six month periods ended June 30, 2001 and 2000, we excluded the following potentially dilutive common stock equivalents from our calculations of diluted shares:
Six and three months ended June 30, ----------------------------------- 2001 2000 ------------ ------------ Common stock equivalents: Stock options and warrants 3,332,739 3,266,814 Contingently issuable shares 200,428 460,271 Shares issuable upon conversion of: 10% Debentures 16,700,006 2,397,678 10% Preferred 12,300,000 -- Sagemark Loan 1,428,571 -- Shares issuable to pay interest on 12% Debentures 747,944 2,471,366 ------------ ------------ 34,709,688 8,596,129 ============ ============
PRO FORMA STATEMENT OF OPERATIONS In order to facilitate a comparison of our results from our continuing solid waste operations for the three month and six month periods ended June 30, 2001, we have included an unaudited pro forma statement of operations for our continuing solid waste operations for the three month and six month periods ended June 30, 2000. The pro forma statement of operations for the three month and six month periods ended June 30, 2000 included the historical results of operations of Earth Resource Management of Florida, our wholly owned solid waste subsidiary in Florida, which is a part of our EarthCare Solid Waste division, and our corporate office. In addition, we have included adjustments for the following items as if we had acquired Earth Resource Management of Florida on January 1, 2000: o Amortization of goodwill from our preliminary purchase price allocation and o Elimination of the management fee from EarthCare Resource of Florida to EarthCare. 5. ACQUISITIONS On April 2, 2001, we acquired the equipment and intangible assets of Palm Carting, Inc., a non-hazardous solid waste collection company located in Palm Beach County, Florida for $350,000 in cash and future consideration of up to $250,000 to be paid in shares of our common stock if certain revenue targets are met, with the number of shares based upon the closing price of our common stock on the dates of measurement. In addition, we assumed $1.1 million of existing notes payable for equipment. Had we 15 16 EARTHCARE COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (Unaudited and continued) acquired this collection operation on January 1, 2001 or 2000, our pro forma results of operations would not have been significantly different from the results of operations disclosed herein. On March 5, 2001, we entered into an agreement to acquire all of the outstanding shares of LandComp Corporation ("LandComp"). LandComp owns and operates a solid waste landfill in LaSalle County, Illinois. As an inducement to enter into this acquisition, we loaned $1,055,000 to LandComp and also agreed to a series of option payments that give EarthCare the right to complete this acquisition by the end of September 2001, which option payments amounted to $745,000 as of June 30, 2001. At the closing of this acquisition, we expect to issue approximately 3,500,000 shares of our common stock. The completion of this acquisition is subject to normal terms and conditions, including EarthCare obtaining a letter of credit of $5.3 million as stand-by financing for an existing industrial revenue bond and EarthCare obtaining a $2.75 million closure post-closure bond required by the State of Illinois. EarthCare expects to complete this acquisition during the third quarter of 2001 after the sale of the EarthLiquids division. 6. DEBT As of June 30, 2001 and December 31, 2000, our debt consisted of the following:
June 30 December 31, 2001 2000 ------------ ------------ EarthCare senior credit facility $ 50,500,000 $ 52,000,000 Earth Resource Management of Florida senior debt 7,731,372 7,817,693 Earth Resource Management of Florida bridge loans 4,000,000 -- Earth Resource Management of Florida subordinated debt 3,000,000 3,000,000 12% debentures 20,000,000 20,000,000 10% debentures 17,535,006 16,696,765 Earth Resource Management of Florida notes payable and other debt 4,433,093 2,628,561 ------------ ------------ Total debt 107,199,471 102,143,019 Less current portion 66,689,528 63,177,353 ------------ ------------ Long-term debt $ 40,509,943 $ 38,965,666 ============ ============
Senior credit facility Under our senior credit facility, we may borrow up to $49.5 million at prime (6.5% as of August 27, 2001) plus 3%. The prime rate is based on the published rate of Bank of America N.A. On August 27, 2001, we executed a fourth amendment to our senior credit facility with our senior lenders. As part of the agreed upon terms for the fourth amendment, we will be required to comply with certain covenants, including the following: o maintaining monthly EBITDA (earnings before interest, taxes, depreciation and amortization) for all our operations, excluding our solid waste division, of $350,000 during July of 2001 and $400,000 per month thereafter, o selling our EarthLiquids division by September 30, 2001, and o selling our EarthAmerica business units at varying dates from September 30, 2001 to October 31, 2001. Since we are required to use the proceeds from the sale of our EarthLiquids division and the sale of our EarthAmerica business units to repay our senior credit facility and since we expect these sales to be completed during the next twelve months, we have classified the outstanding balance under our senior credit facility as a current liability. If we are unable to complete the sale of our EarthAmerica business units and our EarthLiquids division by the required dates in the fourth amendment, we will be required to explore other sources of financing to repay our senior credit facility. Other sources of financing would 16 17 EARTHCARE COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (Unaudited and continued) include refinancing our senior credit facility, seeking new debt or equity financing or selling our Solid Waste division. Our senior lenders also waived our lack of compliance with certain restrictive covenants in our third amendment, including the dates by which we were to sell our EarthAmerica division and our level of monthly EBITDA. As part of the fourth amendment, we agreed to pay interest to the banks at prime plus 3%. Payment of interest at prime plus 1.5% is due in cash at the end of each month, while the payment of interest at 1.5% is deferred until we sell our EarthLiquids division. Following the sale of the EarthLiquids division, payment of interest at prime plus 3% is required each month. The fees to the banks for the third and fourth amendments, amounting to $750,000, are deferred until we complete the sale of the EarthLiquids division. We have entered into various short-term fixed-interest rate swap contracts covering $30,000,000 of our senior credit facility. We record and pay interest expense at the fixed rate of 10.0%. Fees associated with these swap contracts are charged to interest expense as incurred. 12% debentures On February 16, 2000, we completed a $20,000,000 private placement of our 12% subordinated debentures, due March 30, 2008, including issuance of warrants to purchase 400,000 shares of our common stock. We placed the 12% debentures with the following related parties: o Donald Moorehead, Chairman and Chief Executive Officer - $7,500,000, o Moorehead Charitable Remainder Trust, for which Donald Moorehead is the trustee - $1,500,000, o Cash Family Limited Partnership, an affiliate of Raymond Cash, Vice Chairman - $7,500,000, o Founders Equity Group, - $1,000,000, o George Moorehead, brother of Donald Moorehead - $1,500,000, and o An individual investor who has provided collateral for our senior credit facility - $1,000,000. The 12% debentures mature March 30, 2008 and accrue interest at 12% per year from the date of the sale, payable semi-annually on September 30 and March 30 of each year. The first interest payment due September 30, 2000 was deferred to March 31, 2001, and in return for such deferral, we issued additional warrants to purchase 400,000 shares of our common stock. We may pay interest on the 12% debentures by issuing our common stock. The number of shares issued is determined by dividing the interest payable by the closing price of our common stock on the day the interest is paid. On March 31, 2001, we determined that 3,090,966 shares of EarthCare's common stock were to be issued at a market value of $1.047 per share for the first interest payment on the 12% debentures. We issued these shares on April 25, 2001. 10% debentures On October 11, 1999, we completed a $15,000,000 private placement of our 10% convertible subordinated debentures, due October 31, 2006. We placed $7,887,000 of our 10% debentures with the following related parties: o Donald Moorehead, Chairman and Chief Executive Officer, and his immediate family - $3,537,000, o Raymond Cash, Vice Chairman - $2,000,000, o George Moorehead, brother of Donald Moorehead - $1,250,000, o Certain principals of the investment bank, Sanders Morris Harris, and their immediate families - $1,075,000, and o Founders Equity Group, an investment bank to whom Donald Moorehead provided debt financing - $25,000. Interest is payable quarterly at the rate of 10% per year on the 10% debentures. From the closing through October 2001, interest is payable in kind by issuing additional 10% debentures. For the two years 17 18 EARTHCARE COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (Unaudited and continued) ending October 2003, interest may be paid in cash if permitted by our senior lenders, otherwise interest is payable in additional debentures. For the last three years, interest is payable in cash. The holders of the 10% debentures may convert the 10% debentures into shares of our common stock at a rate of $1.05 per share. Based on the balance of the 10% debentures at June 30, 2001, if the holders converted their 10% debentures, they would receive 16,700,006 shares of our common stock. On March 31, 2001, we issued an additional $411,701 of our 10% debentures as interest payments. On June 30, 2001, we issued an additional $426,540 of our 10% debentures as interest payments. We may call the 10% debentures at any time, and we are required to redeem the 10% debentures on October 31, 2006. Earth Resource Management of Florida senior debt We have a revolving line of credit and a mortgage note payable agreement with CIB Marine Bank. We may borrow up to $6,000,000 under the revolving line of credit based on certain asset levels. We pay interest at prime plus 1 1/2% monthly in cash. In addition, we are obligated to make monthly payments of $55,600 on the mortgage note payable. We have provided CIB Marine with a security interest in all of the assets of Earth Resource Management of Florida, except for the stock of and the assets owned by Earth Resource Management of South Florida, Inc. and EarthCare Acquisition Sub, Inc., both wholly owned subsidiaries of Earth Resource Management of Florida. In addition, we have provided CIB Marine with a security interest in 57% of the outstanding common stock of Earth Resource Management of Florida. We have provided our senior lenders with a security interest in 43% of the outstanding common stock of Earth Resource Management of Florida. We are obligated to maintain an EBITDA to debt service coverage of 1.25 for each year. We did not comply with certain covenants in the Earth Resource Management of Florida senior debt agreement relating to certain financial ratios for the year ended December 31, 2000 and the quarter ended June 30, 2001. The Earth Resource Management of Florida debt owed to CIB Marine was due June 30, 2001 and we have included the Earth Resource Management of Florida debt to CIB Marine in the current portion of long-term debt. We are currently negotiating with CIB Marine for a longer term financing agreement. Earth Resource Management of Florida subordinated debt On December 4, 2000, we borrowed $3,000,000 pursuant to a new subordinated loan from Donald Moorehead, our Chairman, as part of a related financing transaction. At the same time, our Chairman borrowed $3,000,000 from a private lender. The terms of our subordinated loan are identical to the terms of the loan from the private lender to our Chairman. We used the proceeds from this loan to pay down our senior credit facility. We are obligated to pay interest at the rate of 24% per year under this loan. We were also obligated to pay $150,000 in fees and an additional $218,000 in interest because we did not repay this loan in April 2001. We paid the $150,000 placement fee in June 2001 to a private individual who arranged this loan. As of August 10, 2001, we have not paid the late fee or the additional interest. We have paid the regularly scheduled interest on this subordinated loan on a timely basis. Our Chairman has personally guaranteed the loan to the private lender. Earth Resource Management of Florida - Other Debt We have several separate notes payable used to finance vehicle and equipment purchases. The vehicles and equipment that were financed collateralize all the notes. We pay interest on these notes ranging from 5.5% to 21% per year. Our Chairman guarantees one of the notes payable. In November 2000, we obtained a mortgage note payable for $400,000 to finance the acquisition of our principal operating location in Tampa, Florida. We pay interest monthly at a rate of 9.75% per year and the land and building in Tampa, Florida collateralize the mortgage note payable. 18 19 EARTHCARE COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (Unaudited and continued) Earth Resource Management of South Florida - bridge loans On March 5, 2001, Earth Resource Management of South Florida obtained a $2,500,000 loan in a private placement by Sanders Morris Harris, an investment-banking firm. We agreed to pay interest at 14% per year payable monthly in cash. Because we did not repay the Sanders bridge loan on April 30, 2001, we pay interest at a rate of 18% per year payable monthly in cash. We issued the private lenders 100,000 shares of our common stock at the time of the loan closing. For each month after April 30, 2001 that any amount remains payable under the Sanders bridge loan, we are obligated to issue an additional 100,000 shares of our common stock. Because we have not repaid the Sanders bridge loan by the required date, as of August 10, 2001, we have issued 400,000 shares of our common stock to the holders of the Sanders bridge loan. Our Chairman has personally guaranteed the Sanders bridge loan and has provided collateral of $500,000. In addition, we have provided the common stock of Earth Resource Management of South Florida and EarthCare Acquisition Sub as collateral for the Sanders bridge loan. We have also provided a security interest in all the assets of Earth Resource Management of South Florida and EarthCare Acquisition Sub. On April 11, 2001, Earth Resource Management of South Florida obtained a $1,500,000 convertible loan from Sagemark Capital in a private placement. The Sagemark loan may be converted into our common stock at a current conversion price of $1.05 per share, which conversion price is protected against dilution. Our Chairman is a limited partner in Sagemark Capital. Our Chairman does not control Sagemark Capital and does not have any beneficial ownership in the shares into which the loan may be converted. We agreed to pay interest at 14% per year payable monthly in cash. In addition, we issued to the lender a warrant to purchase 680,000 shares of our common stock at $0.001 per share. The remainder of the warrant vests equally over a four-month period ending October 1, 2001. Our Chairman has personally guaranteed the Sagemark loan and we have agreed not to pledge any additional assets of Earth Resource Management of South Florida or EarthCare Acquisition Sub. 7. STOCKHOLDERS' EQUITY COMMON STOCK As part of the closing of the Sanders bridge loan in March 2001, we issued 100,000 shares of common stock to the holders of the Sanders bridge loan. Since March 2001, we have issued an additional 400,000 shares to the same holders because we had not fully repaid the Sanders bridge loan by April 30, 2001. In addition, in January 2001, we issued 766 shares of our common stock to a holder of our 10% debentures in connection with the conversion of $2,756 of our 10% debentures. OPTIONS From January 1, 2001 through June 30, 2001, options to purchase 50,000 shares of our common stock were cancelled in connection with the resignation of an employee. WARRANTS As of August 10, 2001, warrants to purchase 2,399,404 shares of our common stock were outstanding at an average exercise price of $1.71. 19 20 EARTHCARE COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (Unaudited and continued) 8. SEGMENT INFORMATION During 2001, our continuing operations consisted of our solid waste collection, transfer and disposal activities, which constitute a single segment. As a result, we have not provided separate segment disclosures. 9. PROPERTY, PLANT AND EQUIPMENT Our property, plant and equipment consists of the following as of June 30, 2001 and December 31, 2000:
June 30, December 31, 2001 2000 ------------ ------------ Land $ 5,833,676 $ 5,708,800 Machinery and equipment 10,308,679 8,377,499 Buildings and improvements 1,125,346 1,124,552 Office equipment 938,240 124,906 Construction-in-progress 347,274 136,724 ------------ ------------ 18,553,215 15,472,481 Less accumulated depreciation (1,028,105) -- ------------ ------------ $ 17,525,110 $ 15,472,481 ============ ============
10. ACCRUED LIABILITIES Our accrued liabilities consist of the following as of June 30, 2001 and December 31, 2000:
June 30 December 31, 2001 2000 ------------ ------------ Payroll, bonuses, payroll taxes and benefits $ 1,133,203 $ 835,166 Interest 412,379 2,634,107 Insurance 3,128,988 3,274,679 Severance, legal and indemnification 1,943,065 4,340,170 Environmental matters 3,149,206 2,791,075 Other 3,942,412 2,097,315 ------------ ------------ Total accrued liabilities $ 13,709,253 $ 15,972,512 ============ ============
11. RELATED PARTY TRANSACTIONS Included in other assets at June 30, 2001 and December 31, 2000 is a $500,000 note receivable due from Solid Waste Ventures, Inc., a private company that is owned 100% by a private investor and which is in part financed by Donald Moorehead, our Chairman and Chief Executive Officer. Solid Waste Ventures was the former majority owner of Earth Resource Management of Florida. Accounts receivable at June 30, 2001 and December 31, 2000 included approximately $62,998 and $24,000, respectively, due from ISN Software, a private company owned in part by William Addy, our 20 21 EARTHCARE COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (Unaudited and continued) Vice President and one of our directors. During the three and six month periods ended June 30, 2001, we incurred fees of $202,500 and $405,000, respectively, for information services provided by ISN Software. In addition during the three and six month periods ended June 30, 2001, we incurred costs of $407,000 and $361,000, respectively, for telecommunication charges and employees leased by ISN Software from EarthCare, which costs were billed to ISN Software. 21 22 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS EarthCare Company ("EarthCare") is a publicly traded company whose common stock is currently traded on the OTC Bulletin Board under the symbol "ECCO.OB". EarthCare and its subsidiaries are engaged in three non-hazardous waste divisions. Our EarthCare Solid Waste division provides collection, transfer and disposal of non-hazardous solid waste in Hillsborough County, Florida, the adjoining counties and Palm Beach County, Florida. Our EarthAmerica division provides non-hazardous liquid waste collection, processing, treatment, disposal, bulk transportation, pumping, plumbing and maintenance services from its operating locations in New York, New Jersey, Pennsylvania, Florida, Georgia and Texas. Our EarthLiquids division provides non-hazardous liquid waste used oil and oily wastewater recovery and treatment services in Florida, Delaware, Louisiana, Maryland, New Jersey and Pennsylvania. EarthLiquids also sells refined oil derived from used oil and oily wastewater. RECENT DEVELOPMENTS On August 27, 2001, we executed a fourth amendment to our senior credit facility. As part of the agreed upon terms for the fourth amendment, we will be required to comply with certain covenants, including the following: o maintaining monthly EBITDA (earnings before interest, taxes, depreciation and amortization) for all of our operations, excluding our solid waste division, of $350,000 during July 2001 and $400,000 per month thereafter, o selling our EarthLiquids division by September 30, 2001, and o selling the business units comprising our EarthAmerica division at varying dates from September 30, 2001 to October 31, 2001. Since we are required to use the proceeds from the sale of our EarthLiquids division and the sale of our EarthAmerica business units to repay our senior credit facility and since we expect these sales to be completed during the next twelve months, we have classified the outstanding balance under our senior credit facility as a current liability. If we are unable to complete the sale of our EarthAmerica business units and our EarthLiquids division by the required dates in the fourth amendment, we will be required to explore other sources of financing to repay our senior credit facility. Other sources of financing would include refinancing our senior credit facility, seeking new debt or equity financing or selling our Solid Waste division. Our senior lenders also waived our lack of compliance with certain restrictive covenants in our third amendment, including the monthly EBITDA requirement and the requirement to sell our EarthAmerica division by certain dates. As part of the fourth amendment, we have agreed to an increase in the interest rate payable on our senior debt to prime plus three percent. The prime rate as of August 27, 2001 was 6.5%. Payment of interest at prime plus 1.5% is due in cash at the end of each month, while the payment of interest at 1.5% is deferred until we complete the sale of our EarthLiquids division. Following the sale of our EarthLiquids division, payment of interest at prime plus 3% is required each month. The fees to the banks for the third and fourth amendments, amounting to $750,000, are deferred until we complete the sale of the EarthLiquids division. On August 8, 2001, we completed the sale of our plumbing and industrial pumping businesses in Georgia to a private company, Tempered Air Systems, and a private individual, John Hulsey, for $1.0 million in cash and a $300,000 note payable. In addition, we obtained a release from Mr. Hulsey from his employment contract and his contingent consideration agreement. We recognized a loss of approximately $2.7 million on the sale of these businesses. The expected loss on the sale of these businesses was recorded in the fourth quarter of 2000 as part of the expected loss on the sale of the EarthAmerica division. 22 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) On August 6, 2001, we announced an agreement to sell the assets of our EarthLiquids division to U.S. Filter for $35 million in cash at closing and up to $5 million in additional consideration contingent on the future financial performance of the EarthLiquids division. We expect that we will complete this transaction by the end of the third quarter of 2001, subject to normal terms and conditions, including due diligence, stockholder approval and completion of a definitive agreement. Donald Moorehead, our Chairman, Raymond Cash, our Vice Chairman, and certain significant stockholders have orally indicated their intent to vote in favor of this transaction. We have received oral commitments to vote over 70% of our common and preferred stock in favor of this transaction. We are currently negotiating with several strategic buyers for the sale of the remaining EarthAmerica business units. Although we expect to complete these transactions by the end of October 2001, we cannot provide any assurance that these transactions will be completed by such date nor can we provide any assurance that we will be able to complete such transactions at prices that are favorable to EarthCare. On June 5, 2001, our common stock was delisted from the Nasdaq National Market because, among other reasons, our common stock had not traded above the minimum $5 bid price, did not have a current market capitalization exceeding $35 million, and had not had a market value for shares held by non-affiliates exceeding $15 million. On April 2, 2001, we acquired the equipment and intangible assets of Palm Carting, Inc., a non-hazardous solid waste collection company located in Palm Beach County, Florida for $350,000 in cash and future consideration of up to $250,000 to be paid in shares of our common stock if certain revenue targets are met, with the number of shares based upon the closing price of our common stock on the dates of measurement. In addition, we assumed $1.1 million of existing notes payable for equipment. Had we acquired this collection operation on January 1, 2001 or 2000, our pro forma results of operations would not have been significantly different from the results of operations disclosed herein. On March 5, 2001, we entered into an agreement to acquire all of the outstanding shares of LandComp Corporation, which owns and operates a solid waste landfill in LaSalle County, Illinois. As an inducement to enter into this transaction, we loaned $1,055,000 to LandComp and agreed to a series of option payments that give EarthCare the right to complete this acquisition by the end of September 2001, which amounted to $745,000 as of June 30, 2001. At the closing of this transaction, we expect to issue approximately 3,500,000 shares of our common stock. The completion of this acquisition is subject to normal terms and conditions, including EarthCare obtaining a letter of credit of $5.3 million as stand-by financing for an existing industrial revenue bond and EarthCare obtaining a $2.75 million closure post-closure bond required by the State of Illinois. EarthCare expects to complete this acquisition during the third quarter of 2001 after the sale of the EarthLiquids division. During the third quarter of 2000, our management group and Board of Directors decided to focus our future management and financial resources principally on the non-hazardous solid waste business in an effort to build a stronger company with more predictable revenue, earnings and cash flows. As part of this change of focus, we sold our environmental compliance software company, Allen Tate Commercial Software LLP, during the fourth quarter of 2000 to a private company owned by William Addy, one of our executive officers. We began exploring certain financing and strategic alternatives for our EarthAmerica and EarthLiquids divisions. On April 12, 2001, our Board of Directors approved a plan to sell both divisions. In their report on the December 31, 2000 consolidated financial statements, our independent accountants expressed substantial doubt about our ability to continue as a going concern. We believe that EarthCare is a going concern. We believe that we have implemented a plan that will allow EarthCare to continue as a going concern focused on the solid waste industry. Our plans to improve the cash flow from operations and reduce our debt level are discussed herein and include the steps shown below: 23 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) o reducing operating expenses (in addition to personnel reductions that have occurred in the fourth quarter of 2000), including the integration of certain management and administrative functions; o managing working capital to improve cash flow from operating activities; o selling our EarthAmerica and EarthLiquids divisions; o refinancing certain existing debt, and o raising additional debt and equity capital. We can provide no assurance that we will be successful implementing the changes necessary to accomplish these objectives, or if we are successful, that the changes will help us improve our cash flow and reduce our debt. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2001 VS. SIX MONTHS ENDED JUNE 30, 2000 AND THREE MONTHS ENDED JUNE 30, 2001 VS. THREE MONTHS ENDED JUNE 30, 2000 The results of operations are discussed in three sections: (i) historical results of continuing operations; (ii) pro forma results of continuing operations; and (iii) historical results of discontinued operations. During the discussion of results of operations and liquidity and capital resources, references to 2001 and 2000 are for the six- and the three-month periods ended June 30, 2001 and 2000, respectively. HISTORICAL RESULTS OF CONTINUING OPERATIONS Our historical results of continuing operations are directly affected by our acquisition of Earth Resource Management of Florida on December 30, 2000. For our discussion of the results of operations, EarthCare's Solid Waste Division consists of the solid waste operations of Earth Resource Management of Florida in Hillsborough County, Florida, the surrounding counties, and our solid waste operations in Palm Beach County, Florida. Six months ended June 30, 2001 versus six months ended June 30, 2000 Our revenues increased by $11.2 million from 2000 to 2001, including an increase of $11.7 million due to the acquisition of Earth Resource Management of Florida, offset in part by a reduction of $560,000 in management fees from Earth Resource Management of Florida during 2000, which did not recur in 2001. The increase in cost of operations relates solely to the acquisition of Earth Resource Management of Florida. EarthCare's selling, general and administrative expense decreased by $1.3 million, or 25.1%, from $5.4 million in 2000 to $4.1 million in 2001. Earth Resource Management of Florida's selling, general and administrative expense increased by $1.7 million in 2001 as a result of this acquisition. EarthCare's corporate selling, general and administrative expense decreased from $5.4 million in 2000 to $2.0 million in 2001. During the second quarter of 2000, we recorded $3.0 million of charges relating to severance, asset impairment, acquisition and other costs, which costs did not recur in 2001. In addition, we reduced our corporate operating costs by $400,000. Interest expense increased by $3.3 million from 2000 to 2001 as a result of the assumption of Earth Resource Management of Florida's debt, interest incurred on our bridge loans and the interest incurred on EarthCare's 10% debentures. In addition, the interest allocated to the discontinued operations during the second quarter of 2001 was reduced. During the second quarter of 2001, the allocation of interest was based on the expected net proceeds from the sale of the discontinued operations. During the first quarter of 2001 and during the first six months of 2000, the interest expense allocated to discontinued operations was based on the total debt outstanding. This change in allocation method resulted in a higher allocation of interest expense to continuing operations. Due to the loss generated through June 30, 2001, no tax provision was recorded. Three months ended June 30, 2001 versus three months ended June 30, 2000 Our revenues increased by $5.9 million from 2000 to 2001, including an increase of $6.2 million due to the acquisition of Earth Resource Management of Florida, offset in part by a reduction of $280,000 in management fees from Earth Resource Management of Florida during 2000, which did not recur in 2001. The increase in cost of operations relates solely to the acquisition of Earth Resource Management of 24 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Florida. EarthCare's selling, general and administrative expense decreased by $2.1 million, or 49.0%, from $4.3 million in 2000 to $2.2 million in 2001. Earth Resource Management of Florida's selling, general and administrative expense increased by $1.0 million in 2001 as a result of this acquisition. EarthCare's corporate selling, general and administrative expense decreased by $3.1 million in 2001, from $4.3 million in 2000 to $1.3 million in 2001. During the second quarter of 2000, we recorded $3.0 million of charges relating to severance, asset impairment, acquisition and other costs, which costs did not recur in 2001. In addition, we reduced our corporate operating costs by $300,000. Interest expense increased by $2.1 million from 2000 to 2001 as a result of the assumption of Earth Resource Management of Florida's debt, interest incurred on our bridge loans and the interest incurred on EarthCare's 10% debentures In addition, the interest allocated to the discontinued operations during the second quarter of 2001 was reduced. During the second quarter of 2001, the allocation of interest was based on the expected net proceeds from the sale of the discontinued operations. During the first quarter of 2000, the interest expense allocated to discontinued operations was based on the total debt outstanding. This change in allocation method resulted in a higher allocation of interest expense to continuing operations. Due to the loss generated through June 30, 2001, no tax provision was recorded. PRO FORMA RESULTS OF CONTINUING OPERATIONS On a pro forma basis, the results of continuing operations are summarized below as a percentage of revenue.
Six months ended June 30, Three months ended June 30, ------------------------------ ------------------------------ 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Historical Pro Forma Historical Pro Forma Revenues 100.0% 100.0% 100.0% 100.0% ------------ ------------ ------------ ------------ Operating expenses: Cost of operations 66.7% 69.1% 67.8% 66.1% Selling, general and administrative expense 31.9% 77.3% 30.8% 125.2% Depreciation and amortization 8.6% 10.0% 7.8% 9.6% ------------ ------------ ------------ ------------ Total operating expenses 107.2% 156.4% 106.4% 200.9% ------------ ------------ ------------ ------------ Operating loss (7.2)% (56.4)% (6.4)% (100.9)% Interest expense 32.2% 10.9% 39.9% 12.0% ------------ ------------ ------------ ------------ Loss before income tax provision (39.4)% (67.3)% (46.3)% (112.9)% Income tax provision 0.0% 0.0% 0.0% 0.0% ------------ ------------ ------------ ------------ Net loss (39.4)% (67.3)% (46.3)% (112.9)% ------------ ------------ ------------ ------------
The pro forma statement of operations for 2000 included the historical results of operations of Earth Resource Management of Florida and our corporate office. In addition, we have included adjustments for the following items as if we had acquired Earth Resource Management of Florida on January 1, 2000: o Amortization of goodwill from our preliminary purchase price allocation and o Elimination of the management fee from Earth Resource Management of Florida to EarthCare. Six months ended June 30, 2001 versus six months ended June 30, 2000 - pro forma Revenue increased by $3.1 million, or 34.8%, from $8.7 million in 2000 to $11.8 million in 2001, which increase is primarily attributable to an increase in the volume of our commercial collection and disposal services and to a lesser extent to a price increase for our services. Our cost of operations increased by $1.9 million, or 30.0%, from $6.0 million in 2000 to $7.9 million in 2001, which increase is 25 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) directly attributable to the increased volume during 2001. As a percentage of revenue, our cost of operations declined by 2.4% from 69.1% in 2000 to 66.7% in 2001. We accomplished this reduction in large part due to improved route efficiencies as we expanded our commercial customer base. Selling, general and administrative expense decreased by $2.7 million, from $6.8 million in 2000 to $4.1 million in 2001. Earth Resource Management of Florida's selling, general and administrative expense increased $400,000, from $1.3 million in 2000 to $1.7 million in 2001 due to increases in sales personnel and sales commissions associated with the increase in volume and due to increased operating costs associated with implementing an organization infrastructure in Florida to manage Earth Resource Management of Florida's solid waste business. EarthCare's corporate selling, general and administrative expense decreased from $5.4 million in 2000 to $2.0 million in 2001. During the second quarter of 2000, we recorded $3.0 million of charges relating to severance, asset impairment, acquisition and other costs, which costs did not recur in 2001. In addition, we reduced our corporate operating costs by $400,000. Interest expense increased by $2.8 million, or 299.6%, from $948,000 in 2000 to $3.8 million in 2001, due to the higher level of EarthCare and Earth Resource Management of Florida debt outstanding after the first quarter of 2001 and the outstanding bridge loans. In addition, the interest allocated to the discontinued operations during the second quarter of 2001 was reduced. During the second quarter of 2001, the allocation of interest was based on the expected net proceeds from the sale of the discontinued operations. During the first quarter of 2001 and during the first six months of 2000, the interest expense allocated to discontinued operations was based on the total debt outstanding. This change in allocation method resulted in a higher allocation of interest expense to continuing operations. Three months ended June 30, 2001 versus three months ended June 30, 2000 - pro forma Revenue increased by $1.5 million, or 32.9%, from $4.6 million in 2000 to $6.2 million in 2001, which increase is primarily attributable to an increase in the volume of our commercial collection and disposal services and to a lesser extent to a price increase for our services. Our cost of operations increased by $1.0 million, or 31.7%, from $3.2 million in 2000 to $4.2 million in 2001, which increase is directly attributable to the increased volume during 2001. As a percentage of revenue, our cost of operations declined by 2.4% from 69.1% in 2000 to 66.7% in 2001. We accomplished this reduction in large part due to improved route efficiencies as we expanded our commercial customer base. Selling, general and administrative expense decreased by $2.7 million, from $6.8 million in 2000 to $4.1 million in 2001. Earth Resource Management of Florida's selling, general and administrative expense increased $400,000, from $1.3 million in 2000 to $1.7 million in 2001 due to increases in sales personnel and sales commissions associated with the increase in volume and due to increased operating costs associated with implementing an organization infrastructure in Florida to manage Earth Resource Management of Florida's solid waste business. EarthCare's corporate selling, general and administrative expense decreased from $5.4 million in 2000 to $2.0 million in 2001. During the second quarter of 2000, we recorded $3.0 million of charges relating to severance, asset impairment, acquisition and other costs, which costs did not recur in 2001. In addition, we reduced our corporate operating costs by $400,000. Interest expense increased by $1.9 million, or 343.2%, from $555,000 in 2000 to $2.5 million in 2001, due to the higher level of EarthCare and Earth Resource Management of Florida debt outstanding after the first quarter of 2001 and the outstanding bridge loans. In addition, the interest allocated to the discontinued operations during the second quarter of 2001 was reduced. During the second quarter of 2001, the allocation of interest was based on the expected net proceeds from the sale of the discontinued operations. During the first quarter of 2000, the interest expense allocated to discontinued operations was based on the total debt outstanding. This change in allocation method resulted in a higher allocation of interest expense to continuing operations. HISTORICAL RESULTS OF DISCONTINUED OPERATIONS Summaries of the historical results of discontinued operations for our EarthAmerica and EarthLiquids divisions are presented on page 14 of this report. The results of each division are discussed separately. We have not discussed the operating results of our Allen Tate division as this operation was sold in October 2000. 26 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) EarthAmerica Six months ended June 30, 2001 versus six months ended June 30, 2000 EarthAmerica's revenue decreased by $3.8 million, or 15.3%, from $25.1 million in 2000 to $21.3 million in 2001, which decline was due primarily to lower revenues from our plumbing services ($3.0 million) and our septic pumping services ($1.0 million). In addition, at the end of February 2001, our revenues decreased by $1.3 million due to the sale of our service center in Pompano, Florida. Revenues from our restaurant grease trap services increased by $1.4 million from 2000 to 2001. Revenue from our service center in Vernon, New York increased by $1.5 million primarily as a result of the acquisition of this service center in April 2000. EarthAmerica's cost of operations decreased by $2.2 million, or 13.4%, from $16.3 million in 2000 to $14.1 million in 2001 primarily as a result of the changes in revenue described above. As a percentage of revenue, the cost of operations increased from 64.7% in 2000 to 66.2% in 2001, due primarily to the revenue mix during the respective periods. EarthAmerica's selling, general and administrative expense decreased by $536,000, or 8.8%, from $6.0 million in 2000 to $5.5 million in 2001, due to reductions in personnel and sales and marketing costs. As a percentage of revenue, selling, general and administrative expense increased by 1.9% from 24.1% in 2000 to 26.0% in 2001 because a high proportion of these costs are fixed and do not vary directly with changes in revenue. Depreciation and amortization expense decreased $744,000. During the second quarter of 2001, there was no depreciation and amortization expense as such expenses are not recognized for discontinued operations after the measurement date for recording the value of the discontinued operations, which date was deemed to be March 31, 2001. Interest expense decreased by $95,000, due to a combination of a higher level of debt outstanding during 2001 and the additional allocated debt needed to finance the operating results of EarthAmerica during 2000 and 2001, offset by a reduction interest expense due to a change in the method by which interest was allocated as described in the discussion of historical operating results. Three months ended June 30, 2001 versus three months ended June 30, 2000 EarthAmerica's revenue decreased by $2.0 million, or 15.4%, from $13.1 million in 2000 to $11.1 million in 2001, which decline was due primarily to lower revenues from our plumbing services ($1.4 million). In addition, at the end of February 2001, our revenues decreased by $800,000 due to the sale of our service center in Pompano, Florida. Revenues from our restaurant grease trap services increased by $400,000 from 2000 to 2001. EarthAmerica's cost of operations decreased by $1.3 million, or 15.8%, from $8.4 million in 2000 to $7.1 million in 2001 primarily as a result of the changes in revenue described above. As a percentage of revenue, the cost of operations remained relatively constant decreasing from 64.1% in 2000 to 63.9% in 2001. EarthAmerica's selling, general and administrative expense decreased by $251,000, or 8.3%, from $3.0 million in 2000 to $2.8 million in 2001, due to reductions in personnel and sales and marketing costs. As a percentage of revenue, selling, general and administrative expense increased by 1.9% from 22.9% in 2000 to 24.8% in 2001 because a high proportion of these costs are fixed and do not vary directly with changes in revenue. Depreciation and amortization expense decreased $974,000. During the second quarter of 2001, there was no depreciation and amortization expense as such expenses are not recognized for discontinued operations after the measurement date for recording the value of the net assets of discontinued operations, which date was deemed to be March 31, 2001. Interest expense decreased by $641,000, or 42.1%, in 2001 from $1.5 million in 2000 to $880,000 in 2001 due to a combination of a higher level of debt outstanding during 2001 and the additional allocated debt needed to finance the operating results of EarthAmerica during 2000 and 2001, offset by a reduction interest expense due to a change in the method by which interest was allocated as described in the discussion of historical operating results. 27 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) EarthLiquids Six months ended June 30, 2001 versus six months ended June 30, 2000 EarthLiquids' revenue increased by $2.9 million, or 16.6%, from $17.2 million in 2000 to $20.1 million in 2001, which increase was due to various factors, including: (i) an additional month of revenue during 2001 since International Petroleum Corporation was not acquired until February 1, 2000; (ii) 20% increase in the average price of our refined oil products as a result of overall market increases in oil and gas pricing; and (iii) offset, in part, by a 12% decrease in the volume of refined oil sold. EarthLiquids' cost of operations increased by $2.5 million, or 23.3%, from $11.0 million in 2000 to $13.5 million in 2001 primarily due to higher costs for used and virgin oil collected and purchased. As a percentage of revenue, the cost of operations increased by 3.7% from 63.6% in 2000 to 67.3% in 2001. The volume of oil sold decreased, but since many of the operating costs are fixed in nature, there was not a corresponding decrease in operating costs. EarthLiquids' selling, general and administrative expense increased by $554,000 or 22.5%, from $2.5 million in 2000 to $3.0 million in 2001, due primarily to the acquisition of International Petroleum Corporation. As a percentage of revenue, selling, general and administrative expense decreased by 0.7% from 14.3% in 2000 to 15.0% in 2001 because a high proportion of these costs are fixed and do not directly vary with a change in revenue. Depreciation and amortization expense decreased $529,000. During the second quarter of 2001, there was no depreciation and amortization expense as such expenses are not recognized for discontinued operations after the measurement date for recording the value of the net assets of the discontinued operations, which date was deemed to be March 31, 2001. Interest expense increased by $348,000 due to a combination of a higher level of debt outstanding during 2001 offset by the cash flow generated by EarthLiquids which reduced its allocated debt. This increase was offset by a reduction interest expense due to a change in the method by which interest was allocated as described in the discussion of historical operating results. Three months ended June 30, 2001 versus three months ended June 30, 2000 EarthLiquids' revenue decreased by $74,000, from $9.5 million in 2000 to $9.4 million in 2001, which decrease was due to a 12.5% decrease in the volume of refined oil products sold offset by a 12% increase in the average sales price. As a percentage of revenue, the cost of operations increased by 7.8% from 61.7% in 2000 to 69.5% in 2001. The volume of oil sold decreased, but since many of the operating costs are fixed in nature, there was not a corresponding decrease in operating costs. EarthLiquids' selling, general and administrative expense increased by $404,000, or 38.8%, from $1.0 million in 2000 to $1.4 million in 2001, primarily due to an increase in sales and marketing personnel since the end of the second quarter of 2000. As a percentage of revenue, selling, general and administrative expense increased by 4.4% from 11.0% in 2000 to 15.4% in 2001 for the same reasons. Depreciation and amortization expense decreased $913,000. During the second quarter of 2001, there was no depreciation and amortization expense as such expenses are not recognized for discontinued operations after the measurement date for recording the net assets value for discontinued operations, which date was deemed to be March 31, 2001. Interest expense increased by $130,000 due to a combination of a higher level of debt outstanding during 2001. This increase was offset by the cash flow generated by EarthLiquids, which reduced its allocated debt, and by a reduction interest expense due to a change in the method by which interest was allocated as described in the discussion of historical operating results. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW - OPERATING ACTIVITIES During the six month period ended June 30, 2001, we used $42,000 in cash for all our operating activities. We generated $2.6 million in cash from our discontinued EarthAmerica and EarthLiquids divisions. We used $2.6 million in cash from our continuing EarthCare Solid Waste and corporate operations. We incurred a loss of $4.6 million from our continuing operations. Our EarthCare Solid Waste operations generated adequate cash to fund its operating needs and service its debt, while our EarthLiquids and EarthAmerica divisions provided sufficient cash flow needed to fund our corporate operations. 28 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) During the six month period ended June 30, 2000, we used $5.8 million in cash for all our operating activities. We used $1.9 million in cash from our discontinued EarthAmerica and EarthLiquids divisions and funded these needs with borrowings under our debt agreements. We used $3.9 million in cash for our continuing EarthCare Solid Waste and corporate operations. We incurred a loss of $5.5 million from our continuing operations. In order for EarthCare to continue to meet its current obligations prior to selling the EarthAmerica and EarthLiquids divisions, the operating results and cash flows for its EarthAmerica and its EarthLiquids divisions must remain at or improve from the levels attained during the first six months of 2001. During the six month period ended June 30, 2001, we have generated cash from our discontinued operations to support the needs of our discontinued operations, to fund our corporate costs and to service interest payments on our debt. During the first six months of 2001, we have continued to aggressively manage the working capital of EarthCare in order to help generate an adequate level of cash for operating needs and to service our debt. We have deferred certain capital expenditures that are not critical to support known revenue, maintenance or safety needs. Working capital deficiency As of June 30, 2001, we had a working capital deficiency of approximately $24.7 million. Because the fourth amendment to our senior credit facility will require us to sell our EarthAmerica business units and our EarthLiquids division, because we anticipate that we will sell both of these divisions during the year ending December 31, 2001 and because of our non-compliance with certain covenants in our senior credit facility, we have included the entire outstanding balance of our senior credit facility as current indebtedness. Our working capital deficiency includes $53.1 million of net assets for our discontinued EarthAmerica and EarthLiquids divisions and includes $50.5 million of debt outstanding under our senior credit facility. Our working capital deficiency will likely increase following the sale of the EarthAmerica and EarthLiquids divisions. The current portion of long-term debt at June 30, 2001, includes the following amounts that management intends to refinance during 2001 on a long-term basis or repay during 2001 from other sources of cash financing, but we can provide no assurance that we will be able to do so: o $7.8 million due to one of Earth Resource Management of Florida's senior lenders - we are currently negotiating with this senior lender to refinance this debt on a long-term basis. o $4.0 million in bridge loans - that we expect to refinance with alternate sources of debt or equity capital. We also expect to repay one of these loans following the sale of our EarthAmerica business units and our EarthLiquids division. o $3.0 million in subordinated debt due to Donald Moorehead, our Chairman - which is in turn owed by Mr. Moorehead to a third party. This debt is not secured by any assets of EarthCare. Because we did not repay this debt in full on June 13, 2001, we will incur interest at an annual rate of 24% payable monthly in cash. We intend to repay this obligation during 2001 with alternate sources of debt or equity capital. As of June 30, 2001, our accrued liabilities amounted to $13.7 million and included the following items that are not expected to be paid during 2001 or are intended to be refinanced during 2001 on a long-term basis, but have been classified as current liabilities for the reasons described: o $2.3 million for insurance - which represents insurance premium assessments due as the result of insurance audits. We are currently negotiating a payment plan for this liability, which if successfully negotiated would allow us to repay this amount over two to four years. o $3.1 million in accrued environmental remediation costs - which amount consists primarily of environmental liabilities accrued for as part of the acquisition of EarthLiquids' subsidiary, International Petroleum Corporation. At the time the purchase price was finalized, we recorded a reserve for the estimated remediation costs associated with various sites, as the amount was estimable 29 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) and probable of being paid. We have not been able to determine when such liability will be discharged and, as a result, have included the liability as a current liability. If we are unable to refinance our debt that is due during 2001 or if we are unable to defer the payment of our insurance or environmental liabilities mentioned above with cash during 2001, and if the cash flows from our operating activities are not adequate to fund these cash requirements, we will be unable to maintain our current operations without obtaining alternate sources of debt or equity capital, significantly reducing our operating expense or selling certain of our operating assets. Although we intend to refinance some of our debt that is due during 2001 and we intend to defer cash payments on our insurance and environmental liabilities during 2001, we can provide no assurance that we will be able to do so. Assuming that we have sold our EarthAmerica business units and the EarthLiquids division, our company will consist of our EarthCare Solid Waste division and our corporate office. In order to continue our operations, we will be required to either amend our existing senior credit facility or seek new senior debt financing to finance our ongoing operations and our strategic and acquisition growth plans in the non-hazardous solid waste industry. We also intend to raise additional equity or debt capital to support our growth plans. We can provide no assurance that we will be able to raise the capital necessary to support our non-hazardous solid waste growth plans. If we are unable to raise the necessary capital we will continue to operate our EarthCare Solid Waste division and focus on internal growth funded by our operating cash flow. If our operating cash flow from our Solid Waste Division is not adequate to fund our internal growth, we will be required to reduce our operating expenses, most likely with personnel reductions and reductions in our corporate general and administrative expense. We may also be required to sell certain operating assets. CASH FLOW - INVESTING ACTIVITIES During the six month period ended June 30, 2001, we used $2.0 million in cash for all our investing activities. We used $950,000 for capital expenditures for equipment for our EarthCare Solid Waste Division and to transfer certain assets from our discontinued operations. We used $350,000 to acquire Palm Carting. We used $1.1 million for an inducement note receivable from LandComp in connection with a planned acquisition of this landfill company. We also used $745,000 as consideration to the LandComp shareholders for the option to acquire LandComp. We collected $400,000 on January 5, 2001 as repayment of an advance on December 30, 2000 to Donald Moorehead, our Chairman and Chief Executive Officer. We generated $1.1 million in cash from our discontinued operations, primarily from the sale of our EarthAmerica service center in Pompano, Florida and the sale of certain surplus assets, offset by capital expenditures in our EarthLiquids division. During the six month period ended June 30, 2000, we used $43.0 million in cash for all our investing activities. We used $42.9 million for our discontinued operations for business acquisitions and capital expenditures. We used $30.0 million in cash to acquire the International Petroleum Corporation companies from World Fuel Services. We used $7.8 million in cash to acquire All County Resource Management Corporation, which became our EarthAmerica division's Vernon, New Jersey service center. We used the $4.2 million principally for capital expenditures for our EarthAmerica and EarthLiquids divisions. We used $928,000 in cash to fund a note receivable for a deep injection well project that was part of our EarthAmerica division. CASH FLOW - FINANCING ACTIVITIES During the six month period ended June 30, 2001, we generated $2.1 million in cash from our financing activities. We repaid a net amount of $1.6 million, primarily to reduce our senior credit facility and Earth Resource Management of Florida debt. We generated $5.3 million from the following sources: (i) $950,000 by selling the assets of our EarthAmerica Pompano operation at the end of February 2001; (ii) $400,000 from the repayment of our note receivable from Donald Moorehead; and (iii) $4.0 million from our bridge loans. We raised $2.5 million of cash through a private placement of the Sanders bridge loan, 30 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) the proceeds from which were used to finance the note receivable to LandComp, to pay acquisition option fees to the LandComp shareholders and to provide working capital for Earth Resource Management of Florida. In April 2001, we completed the acquisition of a collection company in Florida and used $350,000 from the Sanders bridge loan to finance this acquisition. In April 2001, we obtained a $1.5 million bridge loan from Sagemark Capital and used the net proceeds plus funds generated by our operating activities to pay $1.75 million to World Fuel Services as settlement of an arbitration dispute. During the six month period ended June 30, 2000, we generated $49.4 million in cash from our financing activities. We borrowed a net amount of $26.0 million under our senior credit facility. We completed the private placement of our 10% debentures and raised $1.0 million. We also completed a private placement of our 12% debentures and raised $20.0 million. The proceeds from borrowings under our senior credit facility and our 10% and 12% debentures were used to pay debt issuance costs and to finance our operating and investing activities during 2000. In addition, we raised $3.9 million in net cash proceeds from the sale of approximately 600,000 shares of common stock, which net proceeds were used to repay a loan from Donald Moorehead and to fund our working capital needs. SEASONALITY AND INFLATION Our EarthAmerica division's operating results are subject to variations in the weather patterns in the Northeastern and Southeastern regions. In the Northeastern region, revenue and operating results will tend to be lower during the fourth quarter and first quarter of each year due to the effect of winter weather. In the Southeastern region, revenue and operating results will tend to be higher during the fourth and first quarter of each year due to the influx of seasonal inhabitants to this region in the fall and winter months. The Southeastern region revenue and operating results during the second, third and fourth quarters of each year will also be directly affected by the amount of rainfall in the region. Our EarthLiquids division is subject to variations in the prices of virgin and used oil products. Our pricing for our refined products varies in relation to the prices for virgin oil and natural gas products. To the extent that the pricing for virgin oil products varies over time, the revenues we generate from the sales of used oil products will also vary and may have a significant effect on the results of our operations. In addition, our cost to operate our vehicles in the EarthAmerica, EarthLiquids and EarthCare Solid Waste divisions is directly affected by the prices of diesel fuel, finished oil and other refined petroleum products. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statements of Financial Accounting Standards Nos. 141, Business Combinations, and 142, Goodwill and Other Intangible Assets. The accounting standard relating to business combinations is required to be adopted for reporting periods ending after June 30, 2001 and we will comply with this standard as and when we complete any business combinations. The accounting standard related to goodwill and other intangible assets is required to be adopted for fiscal years beginning after December 15, 2001. We intend to adopt this new accounting standard beginning in our fiscal year 2002; however, we have not yet evaluated the effect of adopting this new accounting standard. 31 32 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our senior credit facility and our Earth Resource Management of Florida senior debt bear interest rates that are based on the prime-lending rate, as published at various times by our banks. A portion of our combined outstanding balance of our senior credit facility and all our Earth Resource Management of Florida senior debt and amounted to approximately $27.8 million as of August 10, 2001. If the prime lending rate moves up or down by 1%, we will incur an increase or a decrease in annual interest expense of approximately $278,000. In addition, we are obligated to issue 100,000 shares of common stock for each month after April 2001 that the Sanders bridge loan is not fully repaid. To date we have issued 400,000 shares to the holders of the Sanders bridge loan. The remainder of our debt is set at fixed rates and is not subject to changes in interest rates. Under the terms of our 10% convertible preferred stock and certain of our warrants, we are obligated, under certain conditions, to reduce the conversion price for these securities if we issued common stock for less than $3.60 per share or we issued any convertible debt instrument or equity security with a conversion or exercise price of less than $3.60 per share. On April 25, 2001, we issued 3,090,966 shares of EarthCare's common stock to pay the interest due on our 12% debentures. As a result of this issuance, the conversion price for our 10% convertible preferred stock and certain of our warrants was reduced to $1.047, the closing price on March 30, 2001, the date on which the number of shares was calculated. This change in conversion price from $3.60 to $1.05 increased the number of shares into which the 10% convertible preferred stock may convert from 3,587,500 to 12,300,000. If the conversion price for the 10% convertible preferred stock is lowered by $0.25 to $0.797, the number of shares that would be issued upon conversion of the 10% convertible preferred stock is 16,204,517, an increase of 3,869,273. Our Sagemark loan contains conversion rights that allow the holder to convert the face amount of this instrument, $1,500,000, into our common stock at a conversion price of $1.05. If the holder elects to convert this debt instrument, we would be obligated to issue 1,428,571 additional shares of common stock. The conversion price is protected against dilution. If the conversion price were lowered by $0.25 to $0.797, then we would be obligated to issue 1,882,058 shares of common stock if the holder elected to convert this debt instrument, which represents an increase of 453,487 shares or 31.7%. Our 12% debentures provide for semi-annual payments of interest at 12%, payable in shares of our common stock on March 30 and September 30. On March 31, 2001, we determined that 3,090,966 shares of our common stock be required for the first interest payment on our 12% debentures at a market value per share of $1.047. These shares were issued on April 25, 2001. If the market price of our common stock remains at $1.047 on September 30, 2001, the next date when an interest payment is due on the 12% debentures, we will be obligated to issue 1,146,132 shares on or shortly after September 30, 2001. If the market price of our common stock is $0.25 lower at September 30, 2001, or $0.797, we will be obligated to issue 1,505,646 shares of our common stock for the next interest payment, an increase of 359,514 shares. We have 1,375,435 warrants outstanding as of June 30, 2001 with an exercise price of $1.05 per common share and dilution protection. If we reduce the conversion price on any of our convertible securities or we issue common stock at a price less than $1.05, the exercise price of the warrants will be reduced to the new conversion or issuance price. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS Except as noted below, there have been no significant changes to ongoing litigation matters since the filing of our Annual Report on Form 10-K/A on or about July 9, 2001. Additionally, from time to time, EarthCare is or may become involved in litigation and claims arising out of the ordinary course of business. 32 33 In May 2001, the lawsuit filed by Sewer Management, Inc. against EarthCare Company related to the use of the trade name EarthCare and its derivatives was dismissed. ITEM 2 - CHANGES IN SECURITIES None. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES On August 27, 2001, we executed a fourth amendment to our senior credit facility with our senior lenders. As part of the agreed upon terms for the fourth amendment, we will be required to comply with certain covenants, including the following: o maintaining monthly EBITDA (earnings before interest, taxes, depreciation and amortization) for all our operations, except for our solid waste division, ranging from $350,000 during July of 2001 and $400,000 per month thereafter, o selling our EarthLiquids division by September 30, 2001, and o selling our EarthAmerica business units at varying dates from September 30, 2001 to October 31, 2001. Since we are required to use the proceeds from the sale of our EarthLiquids division and the sale of our EarthAmerica business units to repay our senior credit facility and since we expect these sales to be completed during the next twelve months, we have classified the outstanding balance under our senior credit facility as a current liability. If we are unable to complete the sale of our EarthAmerica business units and our EarthLiquids division by the required dates in the fourth amendment, we will be required to explore other sources of financing to repay our senior credit facility. Other sources of financing would include refinancing our senior credit facility, seeking new debt or equity financing or selling our Solid Waste division. Our senior lenders also waived our lack of compliance with certain restrictive covenants in our third amendment, including the monthly EBITDA requirement and the dates by which we were required to sell our EarthAmerica division. As part of the fourth amendment, we agreed to pay interest to the banks at prime plus 3%. The prime rate as of August 27, 2001 is 6.5%. Payment of interest at prime plus 1.5% is due in cash at the end of each month, while the payment of interest at 1.5% is deferred until we sell our EarthLiquids division. Following the sale of our EarthLiquids division, payment of interest at prime plus 3% is required each month. The fees to the banks for the third and fourth amendments, amounting to $750,000, are deferred until we complete the sale of the EarthLiquids division. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5 - OTHER INFORMATION CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS Certain statements in this Form 10-Q, including, without limitation, information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in certain documents on file with the Securities and Exchange Commission constitute "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (together, the "Acts"). In addition, when used in this Form 10-Q, we intend the words "may," "believe," "intend," "anticipate," "plan," "expect" and similar expressions to identify forward-looking statements. We desire to take advantage of the "safe-harbor" provisions of the Acts and are including this special note to enable us to do so. Forward-looking statements included in this Form 10-Q, or hereafter included in other publicly available statements issued or released by us involve known and unknown risks, uncertainties, and other factors which could cause our 33 34 actual results, performance (financial or operating) or achievements to differ materially from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. We believe the following risks, uncertainties and other factors could cause such material differences to occur: WE HAVE RECENTLY CHANGED OUR OPERATING STRATEGY FOCUS AND OUR ACQUISITION FOCUS. During the third quarter of 2000, our management group and Board of Directors decided to focus EarthCare's future management and financial resources principally on the non-hazardous solid waste industry in an effort to build a stronger company with more predictable revenue, earnings and cash flow. We will continue to support our EarthAmerica and EarthLiquids divisions as we explore financial and strategic alternatives, but we believe that the non-hazardous solid waste industry provides a better opportunity for profitable growth and improvement in shareholder value. If we are not able to execute successfully our strategy in the non-hazardous solid waste industry, you could suffer a permanent decline in the value of your common stock. FAILURE TO COMPLY WITH COVENANTS AND CONDITIONS OF OUR SENIOR CREDIT FACILITY MAY ADVERSELY AFFECT OUR BUSINESS. Our senior credit facility requires us to comply with certain financial covenants. For each of the last six quarters, we have not complied with certain of these covenants in our senior credit facility and have been required to negotiate amendments to the senior credit facility. On August 27, 2001, we executed a fourth amendment to our senior credit facility with our senior lenders. As part of the agreed upon terms for the fourth amendment, we will be required to comply with certain covenants, including the following: o maintaining monthly EBITDA (earnings before interest, taxes, depreciation and amortization) for all our operations, except for our solid waste division, of $350,000 during July 2001 and $400,000 per month thereafter, o selling our EarthLiquids division by September 30, 2001, and o selling our EarthAmerica business units at varying dates from September 30, 2001 to October 31, 2001. Our senior lenders also waived our lack of compliance with certain restrictive covenants in our third amendment, including the monthly EBITDA requirement and the dates by which we were required to sell our EarthAmerica division and our level of monthly EBITDA. As part of the fourth amendment, we agreed to pay interest to the banks at prime plus 3%. The prime rate as of August 27, 2001 is 6.5%. Payment of interest at prime plus 1.5% is due in cash at the end of each month, while the payment of interest at 1.5% is deferred until we sell our EarthLiquids division. Following the sale of EarthLiquids division, payment of interest at prime plus 3% is required each month. The fees to the banks for the third and fourth amendments, amounting to $750,000, are deferred until we complete the sale of the EarthLiquids division. We cannot provide any assurance that we will be able to meet the new monthly EBITDA requirements or that we will be able to complete the sales of the EarthAmerica business units or the EarthLiquids division by the prescribed dates. If we are unable to meet these covenant requirements, we will again be in default under our senior credit facility and we will be required to negotiate another amendment to our senior credit facility. We cannot assure you that we will be able to sell the EarthAmerica business units or the EarthLiquids division for amounts that will allow us to fully repay our senior lenders. We cannot provide any assurance that our senior lenders will agree to another amendment and they may decide to pursue other courses of action in order to pay down the senior credit facility. Our failure to comply with these covenants could allow our senior lenders to accelerate the date for repayment of debt incurred under our senior credit facility, which would materially and adversely affect our business and financial results. 34 35 WE MAY NOT BE ABLE TO COMPLETE THE SALE OF OUR EARTHAMERICA BUSINESS UNITS AND EARTHLIQUIDS DIVISION. We are currently negotiating with one strategic buyer for the sale of our EarthLiquids division and with five several buyers for the sale of the business units comprising our EarthAmerica division. Although we are negotiating acquisition agreements to sell our EarthAmerica business units and our EarthLiquids division, for any one of a number of reasons, these transactions may not be completed on satisfactory terms or at all. OUR COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ NATIONAL MARKET. Our common stock has been delisted from trading on the Nasdaq National Market because our common stock did not meet the requirements for continued listing. Delisting may negatively impact the value of our common stock as securities trading on the over the counter market is typically less liquid and trades with larger variations between the bid and ask price. WE MAY NOT HAVE ENOUGH CAPITAL OR BE ABLE TO RAISE ENOUGH ADDITIONAL CAPITAL ON SATISFACTORY TERMS TO MEET OUR CAPITAL REQUIREMENTS. Continued operations may and future growth will require additional capital. We expect to finance our continuing operations with our cash flow. We expect to finance future acquisitions through cash from operations, to the extent available. We may need to finance our current operations and our future acquisitions with borrowings under our existing or future credit facilities, issuing additional equity or debt securities and/or seller financing. Our common stock price may make acquisition candidates unwilling to accept shares of our common stock as part of the consideration for acquisitions. If our common stock does not reach a sufficient market value, we may have to use more of our cash or borrowings under our credit facilities to fund acquisitions. Using cash for acquisitions limits our financial flexibility and makes us more likely to seek additional capital through future debt or equity financings. If available cash from operations and borrowings under the senior credit facility are not sufficient to fund acquisitions, we may need additional equity and/or debt financing. If we seek more debt, our interest expense would increase and we may have to agree to financial covenants that limit our operations and financial flexibility. We may not be able to issue equity securities on favorable terms or at all. If we are successful in raising more equity, we could dilute the ownership interests of our then-existing stockholders. If we are unable to obtain additional equity and/or debt financing on attractive terms, our rate of growth through acquisitions could decline. We will also need to make substantial capital expenditures to develop or acquire new landfills, transfer stations, vehicles and equipment, other facilities and to maintain such properties. WE MAY NOT BE ABLE TO OBTAIN ADEQUATE FINANCING TO EXECUTE OUR INTERNAL GROWTH. We plan to pursue internal growth in the non-hazardous solid waste business by expanding into geographic territories where we do not currently have any operations. These efforts will require continued financing from equity and/or debt sources. As we execute our internal growth strategy, we cannot give any assurance that our cash flow from operations and our available debt capital will be adequate to finance our growth strategy. To the extent that we are not able to obtain adequate equity or debt capital, adequate cash flow from operations or a favorable market price for our common stock, we may not be able to execute successfully our internal growth strategy. WE HAVE A LIMITED OPERATING HISTORY AND AN ABSENCE OF COMBINED OPERATING HISTORY. We were organized in 1997 and began active operations at that time. As a result, we have very little operating history as an integrated non-hazardous liquid waste and non-hazardous solid waste business to which investors may look to evaluate our performance. Since we began operations, we have completed twenty acquisitions. We cannot provide assurance that we will be able to institute the necessary systems and procedures, including accounting and financial reporting systems, to manage the entire combined enterprise on a profitable basis. In addition, we cannot assure you that we will be able to effectively 35 36 manage the combined entity or to effectively implement our acquisition program and internal growth strategy. WE HAVE A HISTORY OF NET LOSSES. We have experienced operating losses since our inception, and, as of June 30, 2001, we had an accumulated deficit of approximately $108.5 million. We incurred a net loss of approximately $64.4 million on the planned sale of our discontinued EarthAmerica, EarthLiquids and Allen Tate operations, and we incurred a net loss of approximately $13.4 million from their operations during the year ended December 31, 2000. During the six months ended June 30, 2001, we incurred a loss from our discontinued operations of $1.4 million and a loss from our continuing operations of $4.6 million. We cannot provide assurance that we will actually achieve profitability. OUR EXECUTIVE OFFICERS AND DIRECTORS CONTROL APPROXIMATELY 54% OF THE VOTING POWER FOR EARTHCARE. As of June 30, 2001, our executive officers and directors control over 54% of the voting power of our common and preferred stock. As a result, this group may be able to control matters requiring the approval of a majority of the stockholders, such as election of directors. The voting power of these stockholders under certain circumstances could have the effect of delaying or preventing a change in control of EarthCare. Donald Moorehead, our Chairman and Chief Executive Officer, and Raymond Cash, our Vice Chairman and a director, together control over 53% the voting power. In addition, our officers and directors hold options to acquire approximately 413,332 shares of common stock, subject to vesting and other requirements. YOU WILL EXPERIENCE DILUTION IF WE ISSUE ADDITIONAL SHARES OF OUR COMMON STOCK OR OUR PREFERRED STOCK. Investors will experience dilution if we issue common stock as consideration for acquisitions and on the exercise of outstanding stock options and warrants. We currently have 18,152,961 shares of our common stock outstanding. Our authorized capital consists of 70,000,000 shares of common stock and 30,000,000 shares of preferred stock. We may make additional primary public or private offerings of our common stock or our preferred stock in the future. We have 3,365,233 options and warrants outstanding and have the ability to issue an additional 834,171 options under our current stock option plan. These future issuances will cause additional dilution. YOU MAY SUFFER SUBSTANTIAL DILUTION FROM FUTURE CONVERSION OF OUR 10% CONVERTIBLE PREFERRED STOCK IF THE CONVERSION PRICE IS LOWERED BELOW $1.05 PER SHARE. Our 10% convertible preferred stock contains conversion rights that allow the holders of such instruments to convert the face amount of the instruments into our common stock at a conversion price of $1.05 per share. If we issue common stock for less than $1.05 per share or we issue any convertible debt instrument or equity security with a conversion or exercise price of less than $1.05 per share, the conversion price for our 10% convertible preferred stock will be reduced as a result of these provisions. At the current conversion price of $1.05, we would be obligated to issue 12,300,000 shares of our common stock if the 10% convertible preferred stock were converted. If the conversion price were reduced to $0.75 per share, we would be obligated to issue an additional 4,920,000 shares of our common stock. YOU WILL SUFFER DILUTION AS WE PAY INTEREST ON OUR 12% DEBENTURES. Our 12% debentures provide for semi-annual payments of interest at 12% per year, payable in shares of our common stock on March 30 and September 30 of each year. We may pay interest on the 12% debentures by issuing our common shares. The number of common shares issued is determined by dividing the interest payable by the closing price of our common stock on the day the interest is paid. On March 31, 2001, we were obligated to issue 3,090,966 shares of our common stock as the first interest payment on our 12% debentures at a market value per share of $1.047. If the market price of our common stock is $1.00 36 37 lower at the time of the next scheduled interest payments on September 30, 2001 and March 30, 2002, we will be obligated to issue approximately 48.8 million additional shares above the approximately 2.3 million shares we would issue if the market price per common share remained at the $1.047 price on March 31, 2001. YOU WILL SUFFER ADDITIONAL DILUTION AS LONG AS THE SANDERS BRIDGE LOAN IS NOT REPAID. We did not repay the Sanders bridge loan on its original due date of April 30, 2001. As a result, we are obligated to issue 100,000 shares of our common stock to the holders of the Sanders bridge loan for each month that the Sanders bridge loan is not repaid in full. To date, we have issued 400,000 shares to the holders of the Sanders bridge loan under this obligation. This will lead to a dilution in your current ownership percentage. WE MAY HAVE DIFFICULTY EXECUTING OUR STRATEGY. Our strategy includes generating internal growth. Whether we can execute our strategy depends on several factors, including the availability of capital to support our continuing operations, the success of existing and emerging competitors, the availability of acquisition candidates, our ability to maintain profit margins in the face of competitive pressures, our ability to continue to recruit, train and retain qualified employees and the strength of demand for our services. Our ability to increase revenues and generate adequate cash flows to support our operations and internal growth could be adversely affected by these factors. OUR RAPID GROWTH SINCE INCEPTION MAY STRAIN OUR MANAGEMENT, OPERATIONAL, FINANCIAL AND OTHER RESOURCES. Since our inception, we have acquired twenty businesses in our non-hazardous liquid waste and non-hazardous solid waste business segments. To maintain and manage our growth, we may need to expand our management information systems capabilities and our operations and financial systems and controls. We may also need to attract, train, motivate, retain and manage senior managers, technical professionals and other employees. Failure to do any of these things could materially and adversely affect our business and financial results. WE MAY BE UNABLE TO COMPETE EFFECTIVELY WITH GOVERNMENTAL SERVICE PROVIDERS AND LARGER, WELL-CAPITALIZED COMPANIES. The non-hazardous liquid waste and non-hazardous solid waste industries are highly competitive and fragmented and require substantial labor and capital resources. Some of the markets in which we compete or will likely compete are served by one or more large national solid or liquid waste companies, as well as by numerous regional and local solid and liquid waste companies of varying sizes and resources, some of which have accumulated substantial goodwill in their markets. We also compete with counties, municipalities and other waste districts that maintain their own waste collection and disposal operations. These operators may have financial advantages over us because of their access to user fees and similar charges, tax revenues and tax-exempt financing. Some of our competitors are also better capitalized, have greater name recognition or are able to provide services at a lower cost. OUR GROWTH AND FUTURE FINANCIAL PERFORMANCE DEPEND SIGNIFICANTLY ON OUR ABILITY TO INTEGRATE ACQUIRED BUSINESSES INTO OUR ORGANIZATION AND OPERATIONS. Part of our strategy is to achieve economies of scale and operating efficiencies by growing through acquisitions. We may not achieve these goals unless we combine effectively the operations of acquired businesses with our existing operations. Our senior management team may not be able to integrate our completed and future acquisitions. Any difficulties we encounter in the integration process could affect materially and adversely our business and financial results. 37 38 TIMING AND STRUCTURE OF DISPOSITIONS AND ACQUISITIONS MAY CAUSE FLUCTUATIONS IN OUR QUARTERLY RESULTS. We are not always able to control the timing of our dispositions and acquisitions. Obtaining third party consents and regulatory approvals, completing due diligence on the acquired businesses, and finalizing transaction terms and documents are not entirely within our control and may take longer than we anticipate, causing certain transactions to be delayed. Our inability to complete acquisitions and dispositions in the time frames that we expect may adversely affect our business, financial condition and operating results WE MAY LOSE CONTRACTS THROUGH COMPETITIVE BIDDING, EARLY TERMINATION OR GOVERNMENTAL ACTION. We derive a substantial portion of our non-hazardous solid waste revenue at EarthCare Solid Waste from services provided under an exclusive municipal contract. We also intend to bid on additional municipal contracts and franchise agreements. Many of these will be subject to competitive bidding at some time in the future. However, we may not be the successful bidder. In addition, some of our customers may terminate their contracts with us before the end of the contract term. If we were not able to replace revenues from contracts lost through competitive bidding or early termination or from the renegotiation of existing contracts with other customers within a reasonable time period, the lost revenues could materially and adversely affect our business and financial results. OUR GROWTH MAY BE LIMITED BY THE INABILITY TO MAKE ACQUISITIONS ON ATTRACTIVE TERMS. Although we have identified numerous acquisition candidates that we believe are suitable, we may not be able to acquire them at prices or on terms and conditions favorable to us. As a result, our growth could be limited. WE COMPETE FOR ACQUISITION CANDIDATES WITH OTHER PURCHASERS, MOST OF WHICH HAVE GREATER FINANCIAL RESOURCES THAN EARTHCARE. Other companies have adopted, or possibly will adopt, our strategy of acquiring and consolidating regional and local non-hazardous solid waste and non-hazardous liquid waste businesses. We expect that increased consolidation in the non-hazardous liquid waste and non-hazardous solid waste industries will increase competitive pressures. Increased competition for acquisition candidates may make fewer acquisition opportunities available to us, and may cause us to make acquisitions on less attractive terms, such as higher purchase prices. Acquisition costs may increase to levels beyond our financial capability or to levels that would adversely affect our operating results and financial condition. Our ongoing ability to make acquisitions will depend in part on the relative attractiveness of our common stock as consideration for potential acquisition candidates. This attractiveness may depend largely on the relative market price and capital appreciation prospects of our common stock compared to the common stock of our competitors. If the market price of our common stock were to remain at current levels or decline further over a prolonged period of time, we could find it difficult to make acquisitions on attractive terms. WE FACE SIGNIFICANT COMPETITION IN THE MARKETS IN WHICH WE OPERATE. We compete with a significant number of other non-hazardous solid waste and non-hazardous liquid waste companies. We compete primarily on the basis of proximity to collection operations, fees charged and quality of service. We also compete with other landfills and disposal sites. Future technological changes and innovations may result in a reduction in the amount of non-hazardous liquid waste generated or in alternative methods of treatment and disposal being developed. We also compete with customers who may seek to enhance or develop their own methods of disposal. We may be at a disadvantage competing against other companies 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 or are able to provide services or products at a lower cost than us. In the currently highly fragmented non-hazardous liquid waste industry, there is a low barrier to entry and we may 38 39 not be able to penetrate existing markets. Even if we are successful at penetrating the markets in which we operate and implementing our new programs, we cannot be assured that new competitors will not enter the markets. If we are not able to compete effectively in the markets in which we operate, we could suffer material and adverse effects on our business and financial results. WE DEPEND ON THE SERVICES OF THE MEMBERS OF OUR SENIOR MANAGEMENT TEAM, AND THE DEPARTURE OF ANY OF THOSE PERSONS MIGHT MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL RESULTS. We do not currently maintain any "key man" life insurance on any of our senior managers. Key members of our management team have entered into employment agreements with us with terms ranging from one to three years. We may not be able to enforce these agreements. We are dependent on the services of management and key personnel and we believe that our success will depend upon the efforts and abilities of management and such key personnel. Furthermore, we may be dependent on the management and key personnel of companies that we may acquire in the future. If any of these individuals do not continue in their position with us or if we are unable to attract and retain other skilled employees, our business, financial condition and operating results may be affected materially. The competition for qualified personnel is intense, and we cannot assure you that we will be able to continue to hire and retain sufficiently qualified management and key personnel needed to operate our businesses successfully. Our executive officers have orally indicated that they will waive the change of control provisions in their employment agreements when we sell our EarthLiquids division. WE MAY ENCOUNTER POTENTIAL ENVIRONMENTAL LIABILITIES THAT OUR INSURANCE MAY NOT COVER. During the ordinary course of our operations, we have from time to time received, and expect that we may in the future receive, citations or notices from governmental authorities that our operations are not in compliance with our permits or certain applicable regulations, including various transportation, environmental or land use laws and regulations. We generally seek to work with the authorities to resolve the issues raised by such citations or notices. There can be no assurance, however, that we will always be successful in this regard, and the failure to resolve a significant issue could result in adverse consequences to us. While we maintain 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 us on commercially reasonable terms, that the possible types of liabilities that may be incurred by us will be covered by our insurance, that our insurance carriers will be able to meet their obligations under their policies or that the dollar amount of such liabilities will not exceed our policy limits. An uninsured claim, if successful and of significant magnitude, could have a material adverse effect on our business, results of operations and financial condition. WE MAY NEED TO HIRE ADDITIONAL EMPLOYEES IF WE ACQUIRE NEW NON-HAZARDOUS SOLID WASTE COMPANIES. When we complete acquisitions of non-hazardous solid waste companies, there may be opportunities for a reduction of employees as duplicate administrative processes are eliminated. However, we may need to hire additional employees to implement our acquisition strategy and our internal growth strategy. In order to continue to grow effectively and efficiently, we will need to implement and improve our operational, financial and management information systems and controls and to train, motivate and manage our employees. We intend to review continually and upgrade our management information systems and to hire additional management and other personnel in order to maintain the adequacy of its operational, financial and management controls. There can be no assurance, however, that we will be able to meet these objectives. 39 40 VARIOUS EVENTS, INCLUDING SOME BEYOND OUR CONTROL, MAY NEGATIVELY AFFECT THE VALUE OF OUR STOCK. The market price of our common stock could be subject to significant fluctuations in response to various factors and events, including the issuance of shares in acquisitions, the liquidity of the market for the common stock, differences between our actual financial or operating results and those expected by investors and analysts, changes in analysts' recommendations or projections, new statutes or regulations or changes in interpretations of existing statutes and regulations affecting our business, changes in general economic conditions or broad stock market fluctuations. EXTENSIVE AND EVOLVING ENVIRONMENTAL LAWS AND REGULATIONS MAY ADVERSELY AFFECT OUR BUSINESS. Environmental laws and regulations have been enforced more and more stringently in recent years because of greater public interest in protecting the environment. These laws and regulations impose substantial costs on us and affect our business in many other ways, including as described below. In addition, federal, state and local governments may change the rights they grant to and the restrictions they impose on solid and liquid waste services companies, and some changes could have a material adverse effect on us. WE MAY BE UNABLE TO OBTAIN AND MAINTAIN LICENSES OR PERMITS AND ZONING, ENVIRONMENTAL AND/OR OTHER LAND USE APPROVALS THAT WE NEED TO OWN AND OPERATE OUR LANDFILL AND OUR OPERATING SITES. These licenses or permits and approvals are difficult and time-consuming to obtain and renew, and elected officials and citizens' groups frequently oppose them. Failure to obtain and maintain the permits and approvals we need to own or operate our landfill and non-hazardous liquid waste and non-hazardous solid waste operating sites, including increasing their capacity, could materially and adversely affect our business and financial condition. EXTENSIVE REGULATIONS THAT GOVERN THE DESIGN, OPERATION AND CLOSURE OF LANDFILLS MAY ADVERSELY AFFECT OUR BUSINESS. These regulations include the Subtitle D Regulations that establish minimum federal requirements adopted by the U.S. Environmental Protection Agency in October 1991 under Subtitle D of the Resource Conservation and Recovery Act of 1976. If we fail to comply with these regulations, we could be required to undertake investigatory or remedial activities, curtail operations or close a landfill or operating site temporarily or permanently. Future changes to those regulations may require us to modify, supplement or replace equipment or facilities at substantial costs. If regulatory agencies fail to enforce these regulations vigorously or consistently, our competitors whose facilities do not comply with the Subtitle D Regulations or their state counterparts could obtain an advantage over us. Our financial obligation arising from any failure to comply with these regulations could materially and adversely affect our business and financial results. WE MAY BE SUBJECT IN THE NORMAL COURSE OF BUSINESS TO JUDICIAL AND ADMINISTRATIVE PROCEEDINGS INVOLVING FEDERAL, STATE OR LOCAL AGENCIES OR CITIZENS' GROUPS, WHICH COULD ADVERSELY AFFECT OUR BUSINESS. Governmental agencies might impose fines or penalties on us. They might also attempt to revoke or deny renewal of our operating permits, franchises or licenses for violations or alleged violations of environmental laws or regulations, or to require us to remediate potential environmental problems relating to waste that we or our predecessors collected, transported, disposed of or stored. Individuals or community groups might also bring actions against us in connection with our operations. Any adverse outcome in these proceedings could have a material adverse effect on our business and financial results and create adverse publicity about us. 40 41 OUR GROWTH IN THE NON-HAZARDOUS SOLID WASTE INDUSTRY MAY BE LIMITED BY OUR INABILITY TO OBTAIN NEW LANDFILLS AND EXPAND OUR EXISTING LANDFILL. We currently own and operate one landfill in Florida. Our ability to grow may depend in part on our ability to acquire, lease and expand landfills and develop new landfill sites. We may not be able to obtain new landfill sites or expand the permitted capacity of our landfill when necessary. IN SOME AREAS IN WHICH WE MAY OPERATE, SUITABLE LAND FOR NEW SITES OR EXPANSION OF EXISTING LANDFILL SITES MAY BE UNAVAILABLE. Operating permits for landfills in Florida and in states in which we plan to operate must generally be renewed at least every five years. It has become increasingly difficult and expensive to obtain required permits and approvals to build, operate and expand solid waste management facilities, including landfills and transfer stations. The process often takes several years, requires numerous hearings and compliance with zoning, environmental and other requirements and permitting and approval are often resisted by citizen, public interest or other groups. We may not be able to obtain or maintain permits we require to expand, and such permits may contain burdensome terms and conditions. Even when granted, final permits to expand are often not approved until the remaining permitted disposal capacity of a landfill is very low. Local laws and ordinances also may affect our ability to obtain permits to expand landfills. If we were to exhaust our permitted capacity at a landfill, our ability to expand internally could be limited, and we could be required to cap and close that landfill and forced to dispose of collected waste at more distant landfills or at landfills operated by our competitors. The resulting increased costs could materially and adversely affect our business and financial results. OUR ACCRUALS FOR LANDFILL CLOSURE AND POST-CLOSURE COSTS MAY BE INADEQUATE. We could be required to pay closure and post-closure costs of landfills and any disposal facilities that we own or operate. We currently accrue for future closure and post-closure costs of our owned landfill for a term of 30 years after final closure of the landfill, based on engineering estimates of consumption of permitted landfill airspace over the useful life of the landfill. Our obligations to pay closure or post-closure costs may exceed the amount we accrued and reserved and other amounts available from funds or reserves established to pay such costs. This could materially and adversely affect our business and financial results. WE MAY INCUR ADDITIONAL CHARGES RELATED TO CAPITAL EXPENDITURES. In accordance with generally accepted accounting principles, we capitalize some expenditures and advances relating to acquisitions, pending acquisitions and landfill development projects. We expense indirect acquisition costs such as executive salaries, general corporate overhead, public affairs and other corporate services as we incur those costs. We charge against earnings any unamortized capitalized expenditures and advances, net of any amount that we estimate we will recover, through sale or otherwise that relate to any operation that is permanently shut down, any pending acquisition that is not consummated and any landfill development project that we do not expect to complete. Therefore, we might incur charges against earnings in future periods that could materially and adversely affect our business and financial results. WE HAVE A SUBSTANTIAL NUMBER OF OPTIONS AND WARRANTS OUTSTANDING WHICH MAY DILUTE YOUR OWNERSHIP. We have outstanding options to purchase 965,829 shares of common stock at an average price of $9.95 per share and we have outstanding warrants to purchase 2,399,404 shares of common stock at an average price of $1.71 per share. These outstanding options and warrants may deter investors from providing future equity or debt investments to us. These outstanding options and warrants, if exercised, would also dilute your current ownership. To the extent that such options and warrants are exercised and sold in the future, the timing of such sale may adversely affect the prevailing market price for our common stock. The holders of the outstanding options and warrants may exercise and sell their shares at a time 41 42 when we would otherwise be able to obtain additional equity capital on terms more favorable to us. We have filed a Registration Statement on Form S-8 to register the shares of common stock issuable upon the exercise of options. PROVISIONS IN OUR CHARTER AND BYLAWS MAY DETER CHANGES IN CONTROL THAT COULD BENEFIT OUR STOCKHOLDERS. Certain provisions of Delaware law and certain provisions of our certificate of incorporation and bylaws could delay or impede the removal of incumbent directors and could make it more difficult for a third-party to acquire or could discourage a third-party from attempting to acquire, control of EarthCare. Such provisions could limit the price that investors might be willing to pay in the future for shares of EarthCare's common stock. The certificate and bylaws impose various procedural and other requirements (including a staggered board of directors, removal of directors only for cause and the issuance of preferred stock as described below) that could make it more difficult for stockholders to effect certain corporate actions. The certificate gives EarthCare's board of directors the authority to issue up to 30 million shares of preferred stock and to determine the price, rights, preferences and restrictions, including the voting rights of such shares, without any further vote or action by EarthCare's stockholders. The rights of holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock issued in the future. We may issue preferred stock in the future as part of our efforts to raise equity capital. The "business combinations" statute under Delaware law may restrict certain business combinations by interested stockholders. We have entered into employment agreements with our executive officers that contain change in control provisions. The change in control provisions may hinder, delay, deter or prevent a tender offer, proxy contest or other attempted takeover because the covered employees can terminate their employment in such event and receive payments for 24 months to 60 months after termination pursuant to their respective agreements. The foregoing review of significant factors should not be construed as exhaustive or as an admission regarding the adequacy of disclosures previously made by us. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Fourth Amendment to Credit Agreement with Bank of America, N.A. 99.1 Press release relating to the sale of our plumbing business in Georgia. 99.2 Press release relating to the planned sale of our EarthLiquids division to USFilter. 99.3 Press release relating to operating results for the second quarter of 2001 and to our planned Annual Shareholder Meeting on October 11, 2001 (b) Reports on Form 8-K None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 27, 2001 By: /s/ William W. Solomon, Jr. ---------------------------------------------------------------- Vice President, Chief Financial Officer and Principal Accounting Officer 42 43 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.1 Fourth Amendment to Credit Agreement with Bank of America, N.A. 99.1 Press release relating to the sale of our plumbing business in Georgia. 99.2 Press release relating to the planned sale of our EarthLiquids division to USFilter. 99.3 Press release relating to operating results for the second quarter of 2001 and to our planned Annual Shareholder Meeting on October 11, 2001
EX-10.1 3 d90003ex10-1.txt 4TH AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10.1 FOURTH AMENDMENT AND WAIVER TO CREDIT AGREEMENT THIS FOURTH AMENDMENT AND WAIVER TO CREDIT AGREEMENT (the "Agreement") is being executed and delivered as of August 14, 2001, by and among EarthCare Company, a Delaware corporation (the "Borrower"), the Borrower's Subsidiaries named as signatories hereto, Mr. Raymond M. Cash ("Mr. Cash"), and Mr. Donald F. Moorehead, Jr. ("Mr. Moorehead" and, together with Mr. Cash and such Subsidiary signatories, collectively, the "Guarantors"), the financial institutions from time to time party to such Credit Agreement referred to and defined below (collectively, the "Banks"), and Bank of America, N.A., as representative of the Banks (in such capacity, the "Administrative Agent"). Undefined capitalized terms used herein shall have the meanings ascribed to such terms in such Credit Agreement referred to below. WITNESSETH: WHEREAS, the Borrower, the Banks, the Administrative Agent have entered into that certain Amended and Restated Credit Agreement dated as of February 15, 2000 (as heretofore amended pursuant to amendment agreements dated as of April 14, 2000, October 31, 2000 and April 16, 2001, the "Credit Agreement"), pursuant to which, among other things, the Banks have agreed to provide, subject to the terms and conditions contained therein, certain loans to the Borrower; WHEREAS, in connection with the Credit Agreement, the Borrower and certain of the Guarantors have executed and delivered in favor of the Administrative Agent and the Banks certain Loan Documents pursuant to which such Guarantors have guaranteed the Borrower's Obligations under the Credit Agreement and the Borrower and such Guarantors have granted liens and security interests in certain of their properties as security for their respective obligations under the Loan Documents; WHEREAS, certain Events of Default have occurred as a result of (collectively, the "Existing Defaults"): (i) the Borrower's failure to comply with its minimum Adjusted EBITDA covenant set forth in Section 10.6.7 of the Credit Agreement with respect to each of the periods ending as of the last day of the months January 2001 through May 2001, (ii) the Borrower's failure to comply with each of the financial covenants set forth in Sections 10.6.1 through 10.6.5 with respect to the Computation Period ended June 30, 2001, (iii) the Borrower's failure to complete sales of the EarthLiquids Subsidiaries or the EarthAmerica Subsidiaries in accordance with the requirements of Section 12.1.12 of the Credit Agreement, (iv) the Borrower's failure to pay the amendment fees due on June 30, 2001 pursuant to Section 5.7 of the Third Amendment, Waiver and Consent dated as of April 16, 2001 to the Credit Agreement (hereinafter, the "Third Amendment"), (v) the Borrower's failure cause Mr. Moorehead to provide certain lien perfection documentation to the Administrative Agreement pursuant to Section 5.8 of the Third Amendment, (vi) the Borrower's breach of representations and warranties set forth in Sections 9.15(a) and 9.15(c) of the Credit Agreement, and compliance 2 with Section 10.4 of the Credit Agreement, with respect to the matters described in Exhibit A hereto, (vii) the Borrower's failure, prior to the effectiveness of this Agreement, to timely comply with the requirements of Sections 10.1.7 and 10.13 of the Credit Agreement with respect to certain Subsidiaries of the Borrower, or the requirements of Section 5.6 of the Second Amendment dated as of February 15, 2000 to the Credit Agreement with respect to certain parcels of real property, and (viii) the failure, prior to the effectiveness of this Agreement, by Mr. Moorehead and Mr. Cash to comply with the requirement to deliver to the Administrative Agent collateral security for their obligations under the Individual Guaranty and that certain Additional Guaranty dated as of October 31, 2000 executed by Mr. Moorehead in favor of the Administrative Agent and the Banks (as heretofore amended, the "Additional Guaranty") or any security documentation with respect thereto; and WHEREAS, the Borrower and the Guarantors have requested that the Banks waive, and subject to the terms and conditions of this Agreement the Banks have agreed to waive, the Existing Defaults. NOW, THEREFORE, in consideration of the foregoing premises, the terms and conditions stated herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, the Guarantors, the Banks and the Administrative Agent hereby agree as follows: 1. Amendment to Credit Agreement. Subject to the satisfaction of each of the conditions set forth in Paragraph 3 of this Agreement, the Credit Agreement is hereby amended as follows (section and schedule references used herein shall refer to sections and schedules of the Credit Agreement): (a) Section 1.1 is amended to add the following new definitions in their respective alphabetical locations: "Adjusted EBITDA" means EBITDA calculated without including any financial results from ERMFI. "EarthLiquids Payment Date" means the earlier of (i) September 30, 2001 and (ii) the consummation of the sale or other disposition of the EarthLiquids Subsidiaries. (b) Section 1.1 is further amended to delete the definition of "Floating Rate Margin" in its entirety and to replace such definition with the following definition: "Floating Rate Margin" means 3.00% per annum at all times from and after July 31, 2001. (c) Section 2.2 is amended to add the following new subsection to the end of such section: 2.2.4 Elimination of Eurodollar Option. Notwithstanding anything in this section or Agreement to the contrary, from and after the April 16, 2001, the 2 3 Company shall have no right to borrow or continue, or to convert Loans into, Eurodollar Rate Loans. (d) Section 4.2 is amended to delete in its entirety the first sentence of such section and to replace such sentence with the following sentence: Accrued interest on each Floating Rate Loan shall be payable in arrears on the last Business Day of each calendar month and at maturity; provided, however, that the payment of a portion of such interest accrued with respect to each Floating Rate Loan during the period commencing July 31, 2001 and ending on the EarthLiquids Payment Date in an amount calculated at the rate of 1.50% per annum on the daily outstanding principal balance of such Floating Rate Loan during such period shall be deferred during such period and become due and payable in full on the EarthLiquids Payment Date, with the remaining portion of such accrued interest with respect to such Floating Rate Loan payable in arrears on the last Business Date of each calendar month ending during such period. (e) Section 5 is amended to add the following new subsection to the end of such section: 5.4 Amendment Fees. The Company agrees to pay, on the EarthLiquids Payment Date, an amendment fee in the amount of $400,000 to Bank of America and an amendment fee in the amount of $400,000 to Fleet National Bank. The Company shall have no further obligation to pay the amendment fees otherwise due and payable to such Banks pursuant to Section 5.5 of the Second Amendment dated as of October 31, 2000 to this Agreement. (f) Section 6.2(b)(i) is deleted in its entirety and replaced with the following provision: On each date on which the Commitment Amount is reduced pursuant to Section 6.1.3, the Company shall prepay the Loans in an amount equal to 100% of the Net Cash Proceeds received by the Company or any Subsidiary from the Asset Sale or issuance of equity or Debt giving rise to such Commitment Amount reduction. The foregoing provisions shall be applicable notwithstanding the provisions of Section 5.5 of the Third Amendment dated as of April 16, 2001 to this Agreement, the latter of which provisions shall be of no further force or effect. (g) Section 10.6.7 is amended to be deleted in its entirety and to be replaced with the following: 10.6.7 Minimum EBITDA. Not permit Adjusted EBITDA for any of the following calendar months to be less than the corresponding amounts set forth below opposite such months: 3 4
Calendar Month Minimum Amount -------------- -------------- June 2001 $350,000 July 2001 $350,000 August 2001 and each calendar month thereafter $400,000;
provided, however, that, following the sale or other disposition of all, or each sale of any material part, of the EarthAmerica Subsidiaries, the foregoing minimum required amounts shall be reduced to amounts determined by Required Lenders, in their sole determination, as indicated by written notification thereof delivered to the Company by the Required Banks. Such determination shall be based upon the Required Lenders' estimate, as determined solely by such Lenders, of the portion of the minimum amounts of Adjusted EBITDA set forth above which were attributable to the Subsidiaries or portions thereof subject to such sale or disposition as of the date such minimum amounts were initially established pursuant to the Fourth Amendment and Waiver to this Agreement. (h) Section 10.6 is further amended to add the following new subsection to the end of such section: 10.6.7 Suspension of Financial Covenants. Notwithstanding the foregoing, the covenants set forth in Sections 10.6.1 through 10.6.5 will not be applicable until the Computation Period ended December 31, 2001, except that such covenants shall continue to apply for purposes of (a) the definition of "Release Date" (other than the covenant contained in Section 10.6.3) and (b) Section 10.11(c)(4). (i) Section 10.11 is amended to delete the phrase "or sell, transfer, convey or lease all or any substantial part of its assets" set forth therein and to replace such phrase with the following phrase: or sell, transfer, convey or lease all or any of its property (other than the sale of its inventory in the ordinary course of business) (j) Section 10.11 is further amended to delete in its entirety clause (d) thereof and to replace such clause with the reference: "[intentionally omitted]." (k) Section 10.13 is amended to add the following provisions to the end of such section: Without limiting the foregoing, (a) on or before September 15, 2001, the Company shall have provided to the Administrative Agent schedules describing the information described on Exhibit B to the Fourth Amendment and Waiver dated as of August 14, 2001 with respect to this Agreement (in each case in form and scope acceptable to the Administrative Agent in its reasonable discretion), accompanied by a certificate by an executive officer of the Company as to the accuracy and completeness in all material respects of such information as of a date no earlier than such Fourth Amendment and (b) as soon as practicable after its delivery of the information described in the immediately preceding clause (a), but in any event within fifteen (15) days following the Administrative Agent's request therefor, the Company shall execute, deliver and provide, 4 5 or cause to be executed, delivered and provided (whether by a Subsidiary, Guarantor or otherwise), all documentation and instruments requested by the Administrative Agent with respect to the Loan Documents (including, without limitation, the Individual Guaranty or Additional Guaranty), and take such actions or cause such actions to be taken, in each case pursuant to the foregoing provisions of this section as a consequence of the information delivered to the Administrative Agent pursuant to the immediately preceding clause (a) hereof or otherwise requested by the Administrative Agent with respect to its counsel's legal review of the Loan Documents. (l) Section 12.1.12 is deleted in its entirety and replaced with the following provision: 12.1.12 Sale of Certain Business Units. The Company shall fail to consummate, pursuant to terms, conditions and definitive documentation acceptable to the Required Lenders: (i) the sale of the EarthLiquids Subsidiaries on or before September 30, 2001, (ii) the sale of the portable toilet business on or before October 15, 2001, (iii) the sale of EarthCare Company of New York or its operating assets and liabilities on or before October 31, 2001, (iv) the sale of all the assets and liabilities comprising the bulk hauling line of business of Reifsneider Transportation, Inc. on or before October 31, 2001, (v) the sale of the common stock or the operating assets and liabilities of the EarthAmerica restaurant grease trap, septic, confined space and ancillary lines of business on or before October 31, 2001, unless the sale described in the immediately following clause shall have occurred on or before such date pursuant to the provisions of such clause, or (vi) the sale of ERMFI on or before October 31, 2001, unless the sale described in the immediately preceding clause shall have occurred on or before such date pursuant to the provisions of such clause. (m) Schedule 1.1 is amended to delete each reference therein to "the Floating Rate Margin" and each corresponding percentage with respect to such term in the table contained in such schedule. 2. Waiver. Subject to the satisfaction of each of the conditions set forth in Paragraph 3 of this Agreement, the Required Banks hereby waive (a) each of the Existing Defaults and (b) any failure, after the effectiveness of this Agreement, by Mr. Moorehead or Mr. Cash to comply with the requirements to deliver to the Administrative Agent collateral security for their obligations under the Individual Guaranty and the Additional Guaranty in addition to that theretofore so delivered by Mr. Moorehead and Mr. Cash; provided, however, that, in the event there shall have occurred any Event of Default, other than the Existing Defaults and other than any other Events of Default which shall have been waived in writing prior to the date hereof, such requirements shall thereupon once again become immediately effective pursuant to the terms of the Individual Guaranty and Additional Guaranty and the other Loan Documents to which Mr. Moorehead or Mr. Cash is a party (including, without limitation, this Agreement) and such collateral shall be thereupon immediately provided to the Administrative Agent by Mr. Moorehead and Mr. Cash pursuant to documentation acceptable to the Administrative Agent. 3. Conditions Precedent to Effectiveness of Amendment and Waiver. The provisions of Paragraphs 1 and 2 of this Agreement shall become effective as of the date 5 6 hereof upon the Administrative Agent's receipt of each of the following (provided, however, that the amendment to the definition of "Floating Rate Margin" set forth in Paragraph 1 hereof shall be retroactively effective as of July 31, 2001) originally-executed (or facsimilies of originally-executed) counterparts of this Agreement executed and delivered by duly authorized officers of the Company, each Guarantor and each of the Banks. 4. Representations, Warranties and Covenants. (a) The Borrower hereby represents and warrants that this Agreement, and the Credit Agreement as amended by this Agreement, constitute the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms. Each Guarantor hereby represents and warrants that each Loan Document to which it is a party (as amended, supplemented, reaffirmed, restated or otherwise modified) constitutes the legal, valid and binding obligations of such Guarantor enforceable against such Guarantor in accordance with its terms. (b) Each of the Borrower and the Guarantors hereby represents and warrants that its execution, delivery and performance of this Agreement and other Loan Documents to which it is a party have been duly authorized by all proper organization action, do not violate any provision of its organization documents (if applicable), will not violate any law, regulation, court order or writ applicable to it, and will not require the approval or consent of any governmental agency, or of any other third party under the terms of any contract or agreement to which the Borrower or any of the Borrower's Subsidiaries is bound (which has not been previously obtained). (c) The Borrower hereby represents and warrants that, after giving effect to the provisions of this Agreement, (i) no Default or Event of Default has occurred and is continuing or will have occurred and be continuing and (ii) all of the representations and warranties of the Borrower contained in the Credit Agreement and in each other Loan Document (other than representations and warranties which, in accordance with their express terms, are made only as of an earlier specified date) are, and will be, true and correct as of the date of the Borrower's execution and delivery hereof or thereof in all material respects as though made on and as of such date. 5. Reaffirmation, Ratification and Acknowledgment; Reservation. (a) The Borrower and each Guarantor hereby (i) ratifies and reaffirms all of its payment and performance obligations, contingent or otherwise, and each grant of security interests and liens in favor of the Administrative Agent, under each Loan Document (as amended, supplemented or otherwise modified by, among other things, this Agreement) to which it is a party, (ii) agrees and acknowledges that such ratification and reaffirmation is not a condition to the continued effectiveness of such Loan Documents and (iii) agrees that neither such ratification and reaffirmation, nor the Administrative Agent's, or any Bank's solicitation of such ratification and reaffirmation, constitutes a course of dealing giving rise to any obligation or condition requiring a similar or any other ratification or reaffirmation from the Borrower or such Guarantors with respect to any subsequent modifications to the Credit Agreement or the other Loan Documents. As modified hereby, the Credit Agreement is in all respects ratified and confirmed, and the 6 7 Credit Agreement as so modified by this Agreement shall be read, taken and so construed as one and the same instrument. Each of the Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. Except as expressly set forth in this Agreement, neither the execution, delivery nor effectiveness of this Agreement shall operate as a waiver of any right, power or remedy of the Administrative Agent or the Banks, or of any Default or Event of Default, under any of the Loan Documents, all of which rights, powers and remedies, with respect to any such Default or Event of Default or otherwise, are hereby expressly reserved by the Administrative Agent and the Lenders. This Agreement shall constitute a Loan Document for purposes of the Credit Agreement. (b) The Borrower, the Guarantors, the Banks and the Administrative Agent hereby agree to and acknowledge each of the following with respect to the Individual Guaranty and the Additional Guaranty, notwithstanding anything in such Loan Documents, any other Loan Documents, or this Agreement, to the contrary (with all other terms of such documents being hereby reaffirmed and ratified): (i) the maximum liability (exclusive of interest, costs and expenses) of Messrs. Moorehead and Cash pursuant to the Individual Guaranty, as provided in the third paragraph thereof, is $20,000,000, which liability is borne jointly and severally by such Guarantors; (ii) it is agreed that the "Maximum Principal Liability Amount" of Mr. Moorehead under and as defined in the fifth paragraph of the Additional Guaranty, shall deemed to be currently $30,000,000 (subject to further adjustment with respect to asset sales consummated after the date hereof, subject to the terms of the Additional Guaranty); (iii) subject to Paragraph 2 of this Agreement, the aggregate minimum value of collateral required to be maintained by Messrs. Cash and Moorehead pursuant to the Individual Guaranty is $10,000,000 and the Banks' security interest in such collateral shall be perfected; (iv) subject to Paragraph 2 of this Agreement, the aggregate minimum value of collateral required to be maintained by Mr. Moorehead pursuant to the Additional Guaranty is $11,400,000 and the Banks' security interest in such collateral shall be perfected; (v) all collateral granted by Mr. Cash shall be allocated to the collateral required as security for the Individual Guaranty, the first $11,400,000 of collateral granted by Mr. Moorehead shall be allocated to the collateral required as security for the Additional Guaranty, and all other collateral granted by Mr. Moorehead shall be allocated to the collateral required as security for the Individual Guaranty; (vi) Mr. Cash shall continue to maintain, in the Goldman Sachs brokerage account he pledged to the Administrative Agent pursuant to that certain Security Agreement dated as of November 30, 2000, marketable securities having an aggregate value in excess of $9,500,000 as of the last day of each month; and 7 8 (vii) Mr. Moorehead shall continue to maintain, and cause to be maintained, in the Sanders Morris Harris brokerage accounts pledged to the Administrative Agent by Mr. Moorehead, Ms. Shelley B. Moorehead and Moorehead Property Company, Ltd., pursuant to those certain Security Agreements dated as of February, 2001, marketable securities having an aggregate value in excess of $4,000,000 as of the last day of each month (subject to Paragraph 2 of this Agreement), and agrees that, notwithstanding anything in such Security Agreements to the contrary, until such Security Agreements shall have been terminated, no such collateral (or proceeds, income, interest or dividends) shall be withdrawn or transferred from such account without the prior written consent of the Administrative Agreement. 6. Release and Indemnification. The Borrower and each of the Guarantors hereby acknowledges and confirms that (i) it does not have any grounds, and hereby agrees not to challenge (or to allege or to pursue any matter, cause or claim arising under or with respect to), in any case based upon acts or omissions of the Administrative Agent or any of the Banks occurring prior to the date hereof or facts otherwise known to it as of the date hereof, the effectiveness, genuiness, validity, collectibility or enforceability of the Credit Agreement or any of the other Loan Documents, the obligations of the Borrower or any Guarantor under the Loan Documents, the Liens securing such obligations, or any of the terms or conditions of any Loan Document (it being understood that such acknowledgement and confirmation does not preclude the Borrower or the Guarantors from challenging the Administrative Agent's or any Bank's interpretation of any term or provision of the Credit Agreement or other Loan Document) and (ii) it does not possess (and hereby forever waives, remises, releases, discharges and holds harmless the Banks, the Administrative Agent and their respective affiliates, stockholders, directors, officers, employees, attorneys, agents and representatives and each of their respective heirs, executors, administrators, successors and assigns (collectively, the "Indemnified Parties") from and against, and agrees not to allege or pursue) any action, cause of action, suit, debt, claim, counterclaim, cross-claim, demand, defense, offset, opposition, demand and other right of action whatsoever, whether in law, equity or otherwise (which it, all those claiming by, through or under it, or its successors or assigns, have or may have) against the Indemnified Parties, or any of them, by reason of, any matter, cause or thing whatsoever, with respect to events or omissions occurring or arising on or prior to the date hereof and relating to the Credit Agreement or any of the other Loan Documents (including, without limitation, with respect to the payment, performance, validity or enforceability of the obligations of the Borrower or any Guarantor under the Loan Documents, the Liens securing such obligations or any or all of the terms or conditions of any Loan Document) or any transaction relating thereto; provided, however, that neither the Borrower nor any Guarantor hereby releases or holds harmless any Indemnified Party for actions or omissions by any such Indemnified Party constituting, or losses or expenses directly resulting from, the gross negligence or willful misconduct of such Indemnified Party. 7. Governing Law. This Agreement shall be governed by and construed in accordance with the laws and decisions of the State of Illinois (but without giving effect to any other conflicts of law provisions). 8. Counterparts. This Agreement may be executed in counterparts, each of which shall be an original and all of which together shall constitute one and the same agreement among the parties. 8 9 9. Section Titles. The section titles contained in this Agreement are and shall be without substance, meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 10. Agent's Expense. The Company hereby agrees to reimburse the Agent for all reasonable out-of-pocket expenses, including, without limitation, attorneys' and paralegals fees, it has heretofore or hereafter incurred or incurs in connection with the preparation, negotiation and execution of this Agreement or any document, instrument, agreement delivered pursuant to this Agreement, in each case on or before the earlier of the "EarthLiquids Payment Date" (as proposed to be defined in Paragraph 1 hereof) or the occurrence of any Event of Default, other than the Existing Defaults and other than any other Events of Default which shall have been waived in writing prior to the date hereof. **** 9 10 IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year first above written. EARTHCARE COMPANY, as Borrower By: -------------------------------- Name: ------------------------------ Title: ----------------------------- BANK OF AMERICA, N.A., as Administrative Agent By: -------------------------------- Name: Title: BANK OF AMERICA, N.A., as a Bank By: -------------------------------- Name: Title: FLEET NATIONAL BANK, as a Bank By: -------------------------------- Name: Title: RAYMOND M. CASH, as a Guarantor, ---------------------- DONALD F. MOOREHEAD, JR., as a Guarantor ----------------------- Signature Page to Amendment No.4 11 Agreed, Acknowledged and Consented to as of this 14th day of August, 2001: ALL COUNTY RESOURCE MANAGEMENT CORP. BONE-DRY ENTERPRISES, INC. BREHMS CESSPOOL SERVICE INC. EARTHAMERICA COMPANY EARTHAMERICA DISTRIBUTORS, INC. EARTHCARE COMPANY OF PENNSYLVANIA EARTHCARE COMPANY OF NEW YORK EARTHCARE COMPANY OF TEXAS EARTHLIQUIDS COMPANY EC ACQUISITIONS, INC. INTERNATIONAL ENVIRONMENTAL SERVICES, INC. INTERNATIONAL PETROLEUM CORPORATION INTERNATIONAL PETROLEUM CORP. OF DELAWARE INTERNATIONAL PETROLEUM CORP. OF GEORGIA INTERNATIONAL PETROLEUM CORP. OF LA. INTERNATIONAL PETROLEUM CORPORATION OF LAFAYETTE INTERNATIONAL PETROLEUM CORP. OF MARYLAND INTERNATIONAL PETROLEUM CORP. OF PA. LIQUID WASTE CONTROL SYSTEMS, INC. MAGNUM ENVIRONMENTAL SERVICES, INC. MAGNUM PROPERTY DEVELOPMENT CORPORATION REIFSNEIDER TRANSPORTATION, INC. SUB-SURFACE LIQUID INJECTION COMPANY, INC. MAGNUM EAST COAST PROPERTIES, LTD. MAGNUM NORTHEAST PROPERTIES, LTD. MAGNUM WEST COAST PROPERTIES, LTD. MAGNUM WORLD ENTERPRISES, INC.] each as a Guarantor, By: ------------------------------- Name: as authorized representative Signature Page to Amendment No.4 12 EXHIBIT A TO FOURTH AMENDMENT AND WAIVER New Orleans Environmental Matters The New Orleans plant of EarthCare's EarthLiquids division is currently conducting an internal audit to assess whether the New Orleans plant personnel complied with environmental policies and procedures prescribed by EarthCare and its EarthLiquids division. As of August 14, 2001, EarthCare is not able to estimate the probability that it will incur any costs associated with any environmental matters that may be discovered as part of this internal audit. In addition, although EarthCare has estimated a range of costs associated with certain corrective actions, EarthCare is not able to currently estimate the actual costs that may be incurred. As of August 14, 2001, EarthCare has determined that the former general manager of the New Orleans plant, Richard Lane, who is also the former President of International Petroleum Corporation of Louisiana, Inc., did not comply with the environmental policies and procedures prescribed by EarthCare and its EarthLiquids division. Specifically, he directed New Orleans plant employees to offload used oil and oily waste water from tanker trailers to storage tanks at the New Orleans plant before a sample of the used oil and oily waste water was tested and analyzed. As of August 14, 2001, EarthCare has also determined that the chemical testing equipment used at the New Orleans plant was not properly calibrated or functioning and may not have provided accurate test results for used oil and oily waste water samples. EarthCare has corrected this deficiency through a recalibration of the machines and, if needed, replacement of the machines or parts thereto. As of August 14, 2001, EarthCare has notified the Louisiana Department of Environmental Quality (LDEQ) of its internal audit. EarthCare plans to update LDEQ on the results of its findings on or about August 16, 2001." Exhibits 13 EXHIBIT B TO FOURTH AMENDMENT AND WAIVER Due Diligence Request The Borrower shall have provided to the Administrative Agent schedules describing the following information with respect to the Borrower and its Subsidiaries, accompanied by a certificate by an executive officer as to the accuracy and completeness in all material respects of such schedules as of a date no earlier than the August 14, 2001 (in each case in form and scope acceptable to the Administrative Agent in its reasonable discretion): (i) the legal names, forms of legal organization, and jurisdictions of organization of each Subsidiary; (ii) the number of authorized and outstanding units of equity interests of each Subsidiary (including, without limitation, all options, warrants and convertible interests with respect thereto), and the names of each owner of such units and number of units owned by each such owner; (iii) the address of each location of inventory and equipment (other than mobile goods) of the Borrower and each Subsidiary, on an entity-by-entity basis, including, without limitation, with respect to goods held by consignees, bailees and other third parties, except in each case to the extent that the book value of all inventory and equipment at any single such location is less than $25,000 and the aggregate book value of all inventory and equipment located at all such de minimus locations is less than $250,000; (iv) a description of all mobile goods owned by the Borrower and each Subsidiary, on an entity-by-entity basis, together with registration numbers thereof, if any, and identifying the state of each of such registrations, except in each case to the extent that the book value of any such item is less than $25,000 and the aggregate book value of all such de minimus items is less than $250,000; (v) a description of all United States federally registered (and applications therefor) patents, trademarks, service marks and copyrights owned or licensed by the Borrower and each Subsidiary, on an entity-by-entity basis, together with registration numbers and dates of such registrations (or applications); (vi) the address of each location of real property owned or leased by the Borrower and each Subsidiary, on an entity-by-entity basis (and indicating as to whether each such property is owned in fee simple or leased), together with the names and addresses of each lessor and sublessor with respect to each such leased location and the names and addresses of each mortgagee with respect to each such owned location; Exhibits 14 (vii) a listing of all deposit accounts and lockboxes owned by the Borrower and each Subsidiary, on an entity-by-entity basis, together with a brief description of the type of account or lockbox (e.g. concentration, disbursement or payroll), the name and address of the financial institution at which each such deposit account or lockbox is located or maintained and the account numbers thereof; and (viii) a listing of all promissory notes and other instruments evidencing Debt or other obligations owing to the Borrower and each Subsidiary, on an entity-by-entity basis, together with a brief description of the instrument, the amount outstanding with respect thereto, the name and address of the payor thereunder, and the basic terms thereof. **** Exhibits EX-99.1 4 d90003ex99-1.txt PRESS RELEASE-SALE OF PLUMBING BUSINESS IN GEORGIA 1 EXHIBIT 99.1 FOR IMMEDIATE RELEASE #01-16 Contact: Bill Solomon Vice President, Chief Financial Officer Tel: (972) 858-6025 bsolomon@earthcareus.com EARTHCARE ANNOUNCES THE PLANNED SALE OF GEORGIA PLUMBING BUSINESS Dallas, TX, July 30, 2001 - EarthCare Company (OTC/BB: ECCO) announced that it has entered into an agreement to sell its plumbing businesses in Atlanta and Gainesville, Georgia to John Hulsey and a private company, Tempered Air Systems, which is owned by Mr. Hulsey. As part of this transaction, EarthCare's EarthAmerica division will retain the restaurant grease trap line of business in Gainesville, Georgia. The transaction is expected to close by the middle of August. The anticipated sales price for this transaction is approximately $1.3 million. EarthCare intends to use the cash proceeds from this transaction to reduce its senior bank debt. The completion of this transaction and the final purchase price are subject to normal terms and conditions, including finalization of a definitive agreement and completion of due diligence. Don Moorehead, Chairman and Chief Executive Officer of EarthCare, stated, "We wish John Hulsey well with this business. We look forward to our continued partnership with another of his companies, LHR Farms, as our liquid waste disposal site. We believe that this transaction will allow EarthAmerica to focus on its restaurant grease trap and residential septic lines of business in the greater Atlanta and Gainesville markets." John Hulsey, owner of Tempered Air Systems and LHR Farms, stated, "I am looking forward to the growth and service opportunities in the Gainesville market and the future vendor relationship with EarthAmerica. This transaction reflects my personal interest in serving the customers in of the Gainesville market." EarthCare Company is a nonhazardous waste services company with business units serving the solid and liquid waste needs of a variety of residential, commercial, municipal and industrial customers. EarthAmerica, a division of EarthCare, focuses on septic tank services and restaurant grease trap services. These services are provided within several service programs including SeptiMax(SM), SeptiMaxPlus(SM), SeptiShield(SM), TrapCare(SM), Trap&LineCare(SM), and TotalCare(SM). All programs provide for regular, scheduled service with convenient payment plans. In addition, restaurant customers benefit from online account management and information through our RestaurantCare.com(SM) internet-based customer portal. 2 Statements made in this press release that express EarthCare's or management's intentions, plans, beliefs, expectations or predictions of future events are forward-looking statements. The words "believe," "expect," "intend," "estimate," "anticipate," "will" and similar expressions are intended to further identify such forward-looking statements. It is important to note that the company's actual results or performance could differ materially from those anticipated or projected in such forward-looking statements. Other factors that could cause EarthCare's actual results or performance to differ materially include risks and uncertainties relating to EarthCare's financial condition, market demand and acceptance of EarthCare's services, competition, as well as the risks discussed under the heading "Risk Factors" in EarthCare's annual report on Form 10-K/A for the year ended December 31, 2000 and quarterly report on Form 10-Q/A for the quarter ended March 31, 2001, as filed with the Securities and Exchange Commission. The forward-looking statements contained herein represent the judgment of EarthCare as of the date of this press release, and EarthCare expressly disclaims any intent, obligation or undertaking to update or revise such forward-looking statements to reflect any change in EarthCare's expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. ### EX-99.2 5 d90003ex99-2.txt PRESS RELEASE-PLANNED SALE OF EARTHLIQUIDS 1 EXHIBIT 99.2 FOR IMMEDIATE RELEASE #01-17 Contact: Bill Solomon Vice President, Chief Financial Officer Tel: (972) 858-6025 bsolomon@earthcareus.com EARTHCARE ANNOUNCES THE PLANNED SALE OF ITS EARTHLIQUIDS DIVISION TO USFILTER Dallas, TX, August 6, 2001 - EarthCare Company (OTC/BB: ECCO) announced that it has entered into a letter of intent agreement to sell its EarthLiquids division to USFilter. The transaction is expected to close by the end of the third quarter of 2001. The expected sales price for this transaction is approximately $35 million in cash and a future cash earnout of up to $5 million, with the earnout based on specific financial performance. EarthCare intends to use the cash proceeds from this transaction to reduce its senior bank debt. The completion of this transaction and the final purchase price are subject to normal terms and conditions, including negotiating a definitive agreement and completion of due diligence. In addition, EarthCare will obtain shareholder approval for the transaction. EarthCare's directors, officers, and certain significant shareholders, including Don Moorehead, EarthCare's Chairman, and Raymond Cash, EarthCare's Vice Chairman, who together control over 50% of the voting power for EarthCare, have indicated that they plan to vote in favor of this transaction. EarthLiquids' business is focused on used oil recovery and oily wastewater management. Through the earlier acquisition of Magnum Environmental Services and International Petroleum Corporation, EarthLiquids has become one of the largest national companies in the 1.3 billion gallon waste oil recovery industry. EarthLiquids' fleet of over 140 waste transport trucks collects and transports used oil and oily wastewater primarily to its own processing facilities. In addition, third party collection companies deliver their used oil and oily wastewater to EarthLiquids' facilities for processing. Recovered oil is sold into a variety of applications that displace in part the need for virgin crude oil and reduce dependence on imported oil. Don Moorehead, Chairman and CEO of EarthCare, said, "We believe that the sale of EarthLiquids to U.S. Filter will provide EarthLiquids with the needed financial strength and market position to continue its successful growth. We are also pleased that this transaction will allow us to reduce our debt and focus on our strategic growth plans." EarthCare Company is a nonhazardous waste services company with business units serving the solid and liquid waste needs of a variety of residential, commercial, municipal and industrial customers. Statements made in this press release that express EarthCare's or management's intentions, plans, beliefs, expectations or predictions of future events are forward-looking statements. The words "believe," "expect," "intend," "estimate," "anticipate," "will" and similar expressions are intended to further identify such forward-looking statements. It is important to note that the company's actual results or performance could differ materially from those anticipated or 2 projected in such forward-looking statements. Other factors that could cause EarthCare's actual results or performance to differ materially include risks and uncertainties relating to EarthCare's financial condition, market demand and acceptance of EarthCare's services, competition, as well as the risks discussed under the heading "Risk Factors" in EarthCare's annual report on Form 10-K/A for the year ended December 31, 2000 and quarterly report on Form 10-Q/A for the quarter ended March 31, 2001, as filed with the Securities and Exchange Commission. The forward-looking statements contained herein represent the judgment of EarthCare as of the date of this press release, and EarthCare expressly disclaims any intent, obligation or undertaking to update or revise such forward-looking statements to reflect any change in EarthCare's expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. ### EX-99.3 6 d90003ex99-3.txt PRESS RELEASE-OPERATING RESULTS FOR 2ND QUARTER 1 EXHIBIT 99.3 FOR IMMEDIATE RELEASE #01-18 Contact: Bill Solomon Vice President, Chief Financial Officer Tel: (972) 858-6025 bsolomon@earthcareus.com EARTHCARE ANNOUNCES OPERATING RESULTS FOR 2001 SECOND QUARTER, WITH 33% HIGHER SOLID WASTE REVENUES; EARTHCARE SCHEDULES ANNUAL STOCKHOLDERS' MEETING FOR THURSDAY, OCTOBER 11, 2001 Dallas, TX, August 27, 2001 - EarthCare Company (OTC Bulletin Board: ECCO.OB) today announced its operating results for the second quarter of 2001. EarthCare reported revenue from its EarthCare Solid Waste Division of $6.2 million for the second quarter of 2001, a 33% increase over the pro forma revenues for the same quarter last year. For the first six months of 2001, EarthCare reported Solid Waste revenues of $11.8 million, a 35% increase over the pro forma revenues for the same period last year. EarthCare's operating loss during the second quarter of 2001 was $395,000, a 92% improvement over its pro forma operating loss of $4.6 million for the same quarter last year. EarthCare's operating loss during the first six months of 2001 was $855,000, an 83% improvement from its pro forma operating loss of $4.9 million for the same quarter last year. The improvement in the operating loss was due to improved operating results of the company's Solid Waste Division and reduced corporate expenses. The Company reported a net loss from continuing operations of $2.9 million in the second quarter of 2001, or $0.17 per share, as compared to a pro forma loss from continuing operations of $5.2 million in the second quarter of 2000, or $0.31 per share. For the first six months of 2001, the Company reported a net loss from continuing operations of $4.6 million, or $0.30 per share, as compared to a pro forma loss from continuing operations of $5.9 million, or $0.37 per share, from the same period in 2000. The higher 2001 loss was primarily impacted by increased interest expense due to higher levels of debt outstanding during 2001. The pro forma results of operations for 2000 consist of EarthCare's Solid Waste Division in Florida and its corporate office and exclude its discontinued EarthLiquids and EarthAmerica divisions On a historical basis, EarthCare reported an operating loss from continuing operations of $4.1 million in the first quarter of 2000 and a net loss from continuing operations of $4.4 million, or $0.38 per share, in the first quarter of 2000. On a historical basis for the first six months of 2000, EarthCare reported an operating loss from continuing operations of $4.9 million and a net loss from continuing operations of $5.5 million, or $0.45 per share. EarthCare's continuing operations in the first quarter of 2000 consisted only of its corporate office. The operating results for its discontinued EarthLiquids and EarthAmerica divisions are not included in these operating results. Donald Moorehead, Chairman and Chief Executive Officer of EarthCare stated, "We are continuing our efforts to restructure our debt and equity capital and with our plans to sell our EarthAmerica and EarthLiquids divisions. We recently announced the planned sale of our EarthLiquids oil recycling division to US Filter, and we also sold our plumbing operations in Georgia." 2 EarthCare also announced that it will hold its 2001 Annual Stockholder Meeting on Thursday, October 11, 2001 at 10:00 a.m. at its corporate office located at 14901 Quorum Drive, Suite 200, Dallas, Texas. EarthCare plans to mails the proxy for its 2001 Annual Stockholder Meeting on or about August 24, 2001. EarthCare also announced that it has executed a fourth amendment with its senior lenders. The fourth amendment extended the deadlines for selling the EarthAmerica and EarthLiquids divisions and established future minimum monthly EBITDA levels. Statements made in this press release that express EarthCare's or management's intentions, plans, beliefs, expectations or predictions of future events, including preliminary estimates of financial results and guidance for future periods, are forward-looking statements. The words "believe," "expect," "intend," "estimate," "anticipate," "will" and similar expressions are intended to further identify such forward-looking statements. It is important to note that the company's actual results or performance could differ materially from those anticipated or projected in such forward-looking statements. Other factors that could cause EarthCare's actual results or performance to differ materially include risks and uncertainties relating to EarthCare's financial condition, market demand and acceptance of EarthCare's services, competition, as well as the risks discussed under the heading "Risk Factors" in EarthCare's annual report on Form 10-K for the year ended December 31, 2000, as filed with the Securities and Exchange Commission. The forward-looking statements contained herein represent the judgment of EarthCare as of the date of this press release, and EarthCare expressly disclaims any intent, obligation or undertaking to update or revise such forward-looking statements to reflect any change in EarthCare's expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. -----END PRIVACY-ENHANCED MESSAGE-----