THIS PAPER DOCUMENT IS BEING SUBMITTED PURSUANT TO
RULE 901(G) OF REGULATION S-T
September 16, 1996
VIA FEDERAL EXPRESS
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-1004
RE: QUARTERLY REPORT ON FORM 10-Q OF ERD WASTE CORP. COMMISSION
FILE NO. 33-76200
Dear Sir/Madam:
On behalf of ERD Waste Corp. (the "Company") and in accordance with Section
13 (a) (2) of the Securities Exchange Act of 1934, as amended, there are
enclosed herewith for filing eight (8) copies of the Company's Quarterly Report
on Form 10-Q for the quarter ending July 31, 1996 one of which has been manually
signed.
Please acknowledge receipt of the enclosed by stamping the enclosed copy of
this letter and returning the same to the undersigned in the envelope enclosed
for that purpose.
Sincerely,
Kathleen P. LeFevre
Chief Financial Officer
Enclosures:
cc: Richard Marlin, Esquire - Counsel to Company
Feldman, Radin & Co. C.P.A. - Accountants to Company
Joseph Wisneski, COO, President, Director
Robert M. Rubin - Chairman of the Board & CEO
Marc McMenamin - Director
D. David Cohen - Director
Carl Frischling - Director
Peter Reuter - Director
NASDAQ, Washington, D.C.
THIS PAPER DOCUMENT IS BEING SUBMITTED PURSUANT TO
RULE 901(G) OF REGULATION S-T
September 16, 1996
VIA FEDERAL EXPRESS
National Association of Securities
Dealers, Inc.
Attn: NASDAQ Reports Section
1735 K Street, N.W.
Washington, D.C. 20006-1506
RE: QUARTERLY REPORT ON FORM 10-Q OF ERD WASTE CORP.
Dear Sir/Madam:
On behalf of ERD Waste Corp. (the "Company") and in accordance with Section
13 (a) (2) of the Securities Exchange Act of 1934, as amended, there are
enclosed herewith for filing three (3) copies of the Company's Quarterly Report
on Form 10-Q for the quarter ending July 31, 1996, one of which has been
manually signed.
Please acknowledge receipt of the enclosed by stamping the enclosed copy of
this letter and returning the same to the undersigned in the envelope enclosed
for that purpose.
Sincerely,
Kathleen P. LeFevre
Chief Financial Officer
Enclosures:
cc: Richard Marlin, Esquire - Counsel to Company
Feldman, Radin Co. C. P. A. Accountants to Company
Joseph Wisneski, COO, President, Director
Robert M. Rubin - Chairman of the Board & CEO
Marc McMenamin - Director
D. David Cohen - Director
Carl Frischling - Director
Peter Reuter - Director
SEC, Washington, D.C.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1996
[ ] 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 33-76200
--------
ERD WASTE CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-3121813
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
Identification No.) Identification No.)
937 East Hazelwood Avenue, Bldg. 2, Rahway, NJ 07065
----------------------------------------------------
(Address of principal executive offices) Zip Code)
(908) 381-9229
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-----
Number of shares outstanding of the issuer's class of common stock, $.001
par value, as of September 12, 1996: 5,882,782
ERD WASTE CORP.
AND SUBSIDIARIES
Item 1 - Financial Statements.
---------------------
ERD Waste Corp. and Subsidiaries Consolidated Financial Statements
For the Six and Three Months Ended July 31, 1996 (Unaudited).
INDEX TO FINANCIAL STATEMENTS
PAGE #
Index to Financial Statements F-1
Consolidated Balance Sheets - July 31, 1996
(Unaudited) and January 31, 1996 F-2 to F-3
Consolidated Statements of Operations - for the
six months ended July 31, 1996 and 1995 (Unaudited) F-4
Consolidated Statements of Operations - for the
three months ended July 31, 1996 and 1995 (Unaudited) F-5
Consolidated Statements of Cash Flows - for the
six months ended July 31, 1996 and 1995 (Unaudited) F-6
Notes to Consolidated Financial Statements F-7 to F-9
F-1
ERD WASTE CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
July 31, January 31,
1996 1996
(Unaudited)
---------------------------
CURRENT ASSETS
Cash $ 64,544 $1,422,214
Restricted certificates of deposit 800,000 800,000
Accounts receivable 11,892,269 2,491,731
Inventory 430,868 160,636
Other current assets 3,080,057 168,393
---------- ----------
TOTAL CURRENT ASSETS 16,267,738 5,042,974
---------- ----------
PROPERTY AND EQUIPMENT
Cost 20,558,507 12,305,122
less: accumulated depreciation 1,562,117 617,547
---------- ----------
NET EQUIPMENT 18,996,390 11,687,575
---------- ----------
OTHER ASSETS
Restricted certificates of deposit 950,000 950,000
Goodwill, less accumulated amortization 9,882,097 1,031,628
Deferred income taxes 3,747,796 --
Covenant not to compete,
less amortization 223,998 316,938
Loan receivable-ENSA -- 500,000
Other 434,334 315,638
---------- ----------
TOTAL OTHER ASSETS 15,238,225 3,114,204
---------- ----------
TOTAL ASSETS $50,502,353 $19,844,753
========== ==========
The accompanying notes are an integral part of these financial statements.
F-2
ERD WASTE CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
July 31, January 31,
1996 1996
(Unaudited)
----------------------------
CURRENT LIABILITIES
Accounts payable $ 6,699,945 $ 1,868,743
Accrued expenses 5,502,235 1,130,420
Bank line of credit 4,000,000 --
Notes payable, current portion 2,025,892 1,271,667
Accrued income taxes 2,687,494 740,012
---------- ----------
TOTAL CURRENT LIABILITIES 20,915,566 5,010,842
LONG TERM DEBT, LESS CURRENT PORTION 9,714,131 1,244,488
DEFERRED INCOME TAXES -- 250,000
OTHER LIABILITIES 4,821,631 --
---------- ----------
TOTAL LIABILITIES 35,451,328 6,505,330
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, authorized 2,000,000
shares, $.001 par value; none issued
and outstanding -- --
Common stock, authorized 15,000,000
shares, $.001 par value; 5,882,782
and 5,832,782 shares issued and
outstanding, respectively 5,883 5,833
Additional paid in capital 10,556,601 10,356,651
Retained earnings 4,488,541 2,976,939
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 15,051,025 13,339,423
---------- ----------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $50,502,353 $19,844,753
========== ==========
The accompanying notes are an integral part of these financial statements.
F-3
ERD WASTE CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For Six For Six
Months Ended Months Ended
July 31, 1996 July 31, 1995
-------------------------------
REVENUES:
NET SALES $16,948,436 $4,904,949
INSURANCE PROCEEDS -- 500,000
---------- ---------
TOTAL REVENUES 16,948,436 5,404,949
COST OF SALES 9,308,667 1,797,291
---------- ---------
GROSS PROFIT 7,639,769 3,607,658
---------- ---------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,078,967 1,515,938
DEPRECIATION & AMORTIZATION 756,513 202,500
---------- ---------
4,835,480 1,718,438
---------- ---------
INCOME FROM OPERATIONS 2,804,289 1,889,220
---------- ---------
OTHER, NET 55,679 18,331
INTEREST EXPENSE ( 358,529) ( 8,395)
---------- ---------
TOTAL OTHER ( 302,850) 9,936
---------- ---------
INCOME BEFORE
INCOME TAXES 2,501,439 1,899,156
PROVISION FOR INCOME TAXES 989,837 721,000
--------- ---------
NET INCOME $1,511,602 $1,178,156
========= =========
INCOME PER SHARE
NET INCOME
PER COMMON SHARE $ 0.26 $ 0.23
========= =========
WEIGHTED AVERAGE NUMBER
OF SHARES 5,925,090 5,048,330
========= =========
The accompanying notes are an integral part of these financial statements.
F-4
ERD WASTE CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For Three For Three
Months Ended Months Ended
July 31, 1996 July 31, 1995
-----------------------------------
REVENUES:
NET SALES $12,964,031 $2,649,902
INSURANCE PROCEEDS -- 500,000
---------- ---------
TOTAL REVENUES 12,964,031 3,149,902
COST OF SALES 7,407,452 945,046
---------- ---------
GROSS PROFIT 5,556,579 2,204,856
---------- ---------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,990,423 878,514
DEPRECIATION & AMORTIZATION 615,851 100,500
---------- ---------
3,606,274 979,014
---------- ---------
INCOME FROM OPERATIONS 1,950,305 1,225,842
---------- ---------
OTHER, NET 60,728 18,331
INTEREST EXPENSE ( 358,529) ( 4,607)
---------- ----------
TOTAL OTHER ( 297,801) 13,724
---------- ----------
INCOME BEFORE
INCOME TAXES 1,652,504 1,239,566
PROVISION FOR INCOME TAXES 649,837 467,000
--------- ---------
NET INCOME $1,002,667 $ 772,566
========= =========
INCOME PER SHARE
NET INCOME
PER COMMON SHARE $ 0.17 $ 0.14
========= =========
WEIGHTED AVERAGE NUMBER
OF SHARES 5,942,400 5,558,250
========= =========
The accompanying notes are an integral part of these financial statements.
F-5
ERD WASTE CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended July 31,
1996 1995
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,511,602 $1,178,156
--------- ---------
Adjustment to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 756,513 202,500
Changes in assets and liabilities:
(Increase)Decrease in receivables (1,597,782) 156,156
(Increase)Decrease in prepaid expenses
and advances - (1,180,715)
(Increase) in inventory (270,232) -
(Increase)Decrease in other current
assets (1,725,522) (73,883)
(Increase)Decrease in other assets (711,321) (127,187)
Increase(Decrease) in accounts payable 123,576 (600,818)
Increase(Decrease) in accrued expenses 272,033 (123,414)
Increase(Decrease) in other liabilities (493,369) -
Increase(Decrease) in income taxes
payable 1,864,186 194,000
--------- ---------
Total adjustments and changes in assets and
liabilities (1,781,918) (1,553,361)
--------- ---------
NET CASH (USED) PROVIDED BY OPERATING
ACTIVITIES ( 270,316) (375,205)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in plant and equipment (1,409,000) (850,140)
Cash paid to acquire ENSA (7,756,557) -
--------- ---------
NET CASH (USED) FOR INVESTING ACTIVITIES (9,165,557) (850,140)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Common Stock - 12,471,810
Decrease in deferred registration costs - 201,011
Increase (Decrease) in debt 8,078,203 (8,660,717)
--------- ----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 8,078,203 4,012,104
--------- ----------
NET INCREASE (DECREASE) IN CASH (1,357,670) 2,786,759
CASH, at beginning of period 1,422,214 280,458
--------- ---------
CASH, at end of period $ 64,544 $3,067,217
========= =========
The accompanying notes are an integral part of these financial statements
F-6
ERD WASTE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation:
----------------------
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position, results
of operations, and cash flows for the periods presented. The results have been
determined on the basis of generally accepted accounting principles and
practices, applied consistently.
The condensed consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-KSB for the year ended
January 31, 1996, which is incorporated herein by reference.
Note 2 - Acquisition of Environmental Services of America, Inc. ("ENSA")
---------------------------------------------------------------
On May 5, 1996, ENSA Acquisition Corp. ("EAC"), a wholly owned subsidiary
of the Company, acquired approximately 93% of the Company's outstanding common
stock through a tender offer whereby the shareholders of ENSA received $1.66 for
each share owned. The Company intends to purchase the remaining outstanding
shares of ENSA in a subsequent "mop up". The total cost of the acquisition is
currently estimated at $10,000,000 which includes amounts paid to shareholders
of ENSA and related legal and other professional costs incurred in completing
the transaction. The transaction is accounted for as a purchase, and the
financial results of ENSA are reported prospectively beginning in May, 1996.
In connection with its execution of a merger agreement with ENSA, the
Company provided a $500,000 loan to ENSA for working capital purposes. In
addition, included in revenues for the quarter ended April 30, 1996, is a
$375,000 management fee due from ENSA for pre acquisition professional services
provided by the Company.
The net assets of ENSA at the time of acquisition, after adjustment for
environmental, accounts receivable, legal, and other reserves were $1,102,949.
The allocation of the purchase price and estimates of certain liabilities is
subject to revision.
Effective October 1, 1995, the Company acquired the assets and assumed
certain liabilities of Environmental Absorption Technologies, Inc., a
manufacturer of recyclable products used to absorb oil and petroleum spills.
The acquisition was recorded as a purchase. The initial purchase price of
approximately $592,000 was paid by the issuance of 45,282 shares of common
stock, cash of $343,000, and the assumption of specified liabilities.
The following summarized proforma financial information assumes the acquisitions
occurred at February 1, 1995, and does not purport to be indicative of what
would have occurred had the acquisitions been made as of that date:
Six Months Ended Six Months Ended
July 31, 1996 July 31, 1995
-----------------------------------------
Net sales $23,922,369 $24,269,036
========== ==========
Net income $ 443,916 $ 58,409
========== ==========
Income per common share $ .07 $ .01
========== ==========
F-7
ERD WASTE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 3 - Financing:
----------
In order to finance the purchase of ENSA in April, 1996, the Company
obtained a $7.5 million revolving credit facility (the "Revolving Facility")
from Chemical Bank (the "Bank") pursuant to a loan agreement (the "Loan
Agreement"), dated March 29,1996.
The Loan is secured by the granting of a first priority interest in all of
the Company's and the Subsidiaries' present and future accounts, contract
rights, chattel paper, general intangibles, instruments and documents then owned
or thereafter acquired, and in all machinery and equipment acquired by the
Company and the Subsidiaries after the date of the Loan Agreement.
The Revolving Facility will be available until April 1, 1998 (the
"Conversion Date"), at which time, all outstanding principal and accrued
interest under the Revolving Facility shall be due and payable. At that time,
the revolving loan will be converted into a term loan in an amount equal to the
lesser of the Bank's Commitment or the aggregate principal amount of Revolving
Loans then outstanding. The maturity date of the Term Loan is the third
anniversary date of the Conversion Date. The proceeds of the Term Loan are to
be used by ERD exclusively to satisfy obligations to the Bank under any
Revolving Loans existing at the Conversion Date.
Additionally, on June 6, 1996, the Company received an additional
$4,000,000 loan from its commercial lender. The proceeds of this loan were used
to fully pay and discharge all principal, interest, fees and other financial
obligations owed by ENSA to its commercial bank. The borrowing is secured by a
$4.4 million letter of credit by a separate corporation (the "Accommodating
Party") of which the Chairman and CEO of ERD is also the Chairman and CEO. In
consideration of the Accommodating Party obtaining the letter of credit, the
Company agreed to (i) pay interest and other charges to the Accommodating Party,
for so long as the Letter of Credit remains outstanding, in amounts equal to
amounts of interest or other charges paid by the Accommodating Party to
Citibank, N.A. in connection with the Letter of Credit or any payments made by
Citibank, N.A. thereunder; (ii) pay all fees and disbursements of the
Accommodating Party, including $10,000 of legal fees to the Accommodating
Party's counsel; and (iii) pay fair and adequate consideration to the
Accommodating Party. In initial discussions the Accommodating Party
contemplated the issuance by the Company of a number of shares of its common
stock tentatively set at 100,000. The Company intends to seek the appointment
of a qualified independent investment banker to determine whether or not the
contemplated issuance of common stock represents fair and adequate consideration
and whether or not a form of consideration other than common stock would be more
appropriate. As security for the obligations of the Company under the Financial
Accommodations Agreement, ENSA and certain of its subsidiaries have agreed to
grant to the Accommodating Party a security interest in all of their machinery
and equipment.
Note 4 - Loan From Principal:
--------------------
During the second quarter of fiscal 1997, the Company's President and
Chief Operating Officer loaned the Company $642,949. The advances are secured
by notes in the amount of $500,000 and $100,000 from the Company bearing an
interest rate comparable to the rate charged by its commercial bank. Interest
and principal are due in full at maturity on July 12, 1998 and on June 10, 1998
for the $500,000 note and the $100,000 note respectively.
F-8
ERD WASTE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 5 - Subsequent Event:
-----------------
On September 4, 1996, the Company received a complaint from the New York
State Department of Environmental Conservation ("NYSDEC") citing a number of the
alleged violations at the facility and its intent to close the facility. The
NYSDEC complaint seeks $500,000 in penalties, closure of the facility and
revocation of the facility's air pollution control and solid waste management
permits.
The Company believes that its operation have been in substantial compliance
and intends to vigorously contest the claims asserted by NYSDEC.
In the financial statements, no provision has been made for loss resulting
from potential closure of the facility or for expenses of the proceedings
relating thereto. The Company's net book value of property, plant, and
equipment at the facility at July 31, 1996 is $11,987,000. During the second
quarter of fiscal year 1996, the facility reported $1,692,183 (13 percent) in
sales and contributed $387,093 (23 percent) to net income before taxes.
Note 6 - Public Offering of Stock:
-------------------------
On May 17, 1995, the Company publicly offered two million shares of its
common stock for sale pursuant to the prospectus contained in the Registration
Statement. The closing took place on May 25, 1995. Proceeds of the offering,
net of Underwriters discounts and expenses related to the offering were $11.7
million. Debt, expenses and obligations of the Company totaling approximately
$10 million were paid from the proceeds; the remainder was used for working
capital and capital construction.
F-9
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
The Company is a diversified waste management company specializing in the
management and disposal of municipal solid waste, industrial and commercial non-
hazardous solid waste and hazardous waste and provides brokerage, advisory,
consulting and technical services to generators of waste. ERD incinerates
municipal solid wastes, and used oil filter fiber utilizing the steam produced
thereby to cogenerate electricity. The Company owns and operates three
strategically located RCRA part B permitted Treatment, Storage and Disposal
Facilities and provides environmental services including: consulting; technical
contracting; site remediation; indoor and outdoor air quality testing and
monitoring services and equipment; and technical support services related to all
of the foregoing. The Company also manufactures absorbent products for use in
various industrial, marine, automotive and janitorial applications.
The Company has grown primarily through acquisitions. Its operations are
conducted through the parent corporation and its wholly owned subsidiaries which
are summarized below:
Acquired
--------
ERD Waste Corp. ("ERD") Parent Corporation and
Operations for Specialty Waste - -
Environmental Waste Operates the Company's August, 1994
Incineration Inc. ("EWII") incinerator
ERD of Illinois, Inc. Brokerage and waste management August, 1994
("ERD-IL") consulting
Absorbent Manufacturing & Manufactures absorbent materials October, 1995
Technologies, Inc.("AMTI")
ERD Waste Corp. (Indiana) Own and operate transfer station October, 1995
("ERD-IN") in Indiana start up
On May 5, 1996, the Company acquired more than 90% of the capital stock of
Environmental Services of America, Inc., ("ENSA") and is conducting its
operations through the following wholly owned subsidiaries of ENSA:
Northeast Environmental Services, Inc. Part-B permitted treatment,
storage and disposal facility
Environmental Services of America-IN, Inc. Part-B permitted treatment,
storage and disposal facility
Environmental Services of America-MO, Inc. Part-B permitted treatment,
storage and disposal facility
ERD Environmental, Inc. Environmental consulting and
(formerly ENSA Environmental, Inc.) technical engineering, remediation,
and contracting
Tri-S, Incorporated Transportation services
1
RESULTS OF OPERATIONS:
The following table sets forth the operating data of the company as a
percentage of revenues for the periods indicated:
Six Months Ended Three Months Ended
July 31, July 31,
----------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 54.9 33.3 57.1 30.0
----- ----- ----- -----
Gross margin 45.1 66.7 42.9 70.0
----- ----- ----- -----
Selling, general and administrative
expenses 24.1 28.0 23.1 27.9
Depreciation and amortization 4.5 3.7 4.8 3.2
----- ----- ----- -----
28.6 31.7 27.9 31.1
----- ----- ----- -----
Income from operations 16.5 35.0 15.0 38.9
Other, net 1.7 ( 0.1) 2.3 0.5
----- ----- ----- -----
Income before income taxes 14.8 35.1 12.7 39.4
Provision for income taxes 5.9 13.3 5.0 14.9
----- ----- ----- -----
Net income 8.9% 21.8% 7.7% 24.5%
===== ===== ===== =====
Revenues: For the second quarter of fiscal 1997, revenues were
---------
$12,964,031, an increase of $9,814,129 over revenues from the same quarter of
the previous year. The increase in sales was primarily due to the May, 1996
acquisition of more that 90 percent of the outstanding common stock of
Environmental Services of America, Inc., which generated revenues of $9,041,101.
In addition, sales rose due to 1) growth in the Company's existing businesses,
and 2) the October 1995 acquisition of AMTI.
A summary of consolidated revenues by business segment is as follows:
Six Months Ended Six Months Ended
July 31,1996 July 31, 1995
------------------------------------
$ % $ %
--------- ----- --------- -----
ERD-Specialty Waste Div. $ 1,162,422 6.9% $ 836,638 17.1%
EWII 2,440,792 14.4% 2,551,304 52.0%
ERD-IL 2,200,824 13.0% 1,517,007 30.9%
AMTI 1,640,887 9.7% -- 0.0%
ERD-IN 462,410 2.7% -- 0.0%
TSD Facilities 3,003,863 17.7% -- 0.0%
Consulting 4,791,136 28.3% -- 0.0%
Remediation 1,246,102 7.3% -- 0.0%
---------- ----- --------- -----
$16,948,436 100.0% $4,904,949 100.0%
========== ===== ========= =====
2
Three Months Ended Three Months Ended
July 31,1996 July 31, 1995
---------------------------------------
ERD-Specialty Waste Div. $ 366,156 2.8% $ 457,790 17.3%
EWII 1,351,027 10.4% 1,394,465 52.6%
ERD-IL 1,113,419 8.6% 797,647 30.1%
AMTI 794,257 6.1% -- 0.0%
ERD-IN 298,071 2.3% -- 0.0%
TSD Facilities 3,003,863 23.2% -- 0.0%
Consulting 4,791,136 37.0% -- 0.0%
Remediation 1,246,102 9.6% -- 0.0%
---------- ----- --------- -----
$12,964,031 100.0% $2,649,902 100.0%
========== ===== ========= =====
Included in ERD Specialty Waste division first quarter revenues a $375,000
management fee due from ENSA for pre acquisition services provided by the
Company.
Cost of Sales: For the quarter ended July 31, 1996, cost of sales rose
---------------
$6,462,406. The increase is primarily due to the increased sales. In addition,
the businesses started and acquired by the Company over the last year operate
with higher direct costs as a percentage of sales compared to the Company's
other businesses.
Gross Profit: Compared to the same quarter of the prior year, gross profit
-------------
on sales increased $3,351,723 to $5,556,579 in the second quarter of fiscal
1997, as a result of the increase in sales. Gross profit margins declined,
however, from 70 percent of sales to 42.9 percent of sales. The decline in the
margin percentage was primarily due to the Company's new acquisitions which
operate at lower profit margins.
Selling, general, and administrative expenses: Selling, general, and
administrative expenses were $2,990,423 in the second quarter of fiscal 1997,
compared to $878,514 in the same quarter of the previous fiscal year. As a
percentage of sales, selling, general and administrative expenses declined from
27.9 percent in the second quarter of fiscal 1996 to 23.1 percent in the second
quarter of fiscal 1997.
The Company reduced operating expenses as a percentage of sales by staff
reductions, consolidation of duplicative administrative/accounting departments,
and the implementation of strict fiscal controls at the acquired entities.
Similar efforts are expected to continue.
Depreciation and amortization: Depreciation and amortization rose from
-------------------------------
$100,500 in the second quarter of fiscal 1996 to $615,851 in fiscal 1997. The
ENSA acquisition added approximately $8,800,000 to goodwill, which is being
amortized over 30 years. In addition, depreciation expense on assets acquired
from ENSA amounted to $328,000 for the quarter.
3
Interest expense: Interest expense rose $353,922 in the second quarter of
-----------------
fiscal 1997 as compared to the same quarter of fiscal 1996. The increase in
interest expense is primarily due to 1) additional bank borrowings of
$11,500,000 during the current quarter, and 2) indebtedness of ENSA of
approximately $1,039,000 which the Company assumed upon acquisition.
Net Income: For the six months ended July 31, 1996, net income was
-----------
$1,511,602 ($0.26 per share) as compared to $1,178,156 ($0.23 per share) for the
for six months ended July 31, 1995. Net income for the second quarter of fiscal
1997 was $1,002,667 ($0.17 per share), a 30 percent increase over net income of
$772,566 ($0.14 per share) for the second quarter of fiscal 1996.
The increase is primarily attributable to the increase in the Company's
revenues.
LIQUIDITY AND CAPITAL RESOURCES:
================================
On May 1, 1996 the Company completed the Offer for all outstanding shares
of ENSA Common Stock, securing over 90% of the outstanding shares of ENSA Common
Stock. On May 5, 1996, the Company paid $7,166,577 to the shareholders of ENSA
to complete the acquisition of the ENSA Common Stock purchased through the Offer
and the ENSA Preferred Stock acquired through the Stock Purchase Agreement.
Funds for the purchase were obtained from a $7.5 million revolving credit loan
(See Note 3 to the financial statements). An additional $520,000 will be
required to purchase the remaining outstanding capital stock of ENSA. In
addition, on June 6, 1996, the Company received an additional $4,000,000 loan
from its commercial lender. The proceeds were used to fully pay and discharge
all principal, interest, fees, and other financial obligations owed by ENSA to
its commercial bank. (See Note 3 to the financial statements.)
On July 31, 1996, the Company had a working capital shortfall of
$4,647,828, as compared to working capital of $32,132 at January 31, 1996.
Included in the working capital is a $4,000,000 short-term loan due in full on
June 2, 1997. Cash declined $1,357,670 over the six months to $64,544.
During the six months, the largest uses of cash were 1) the May 5, 1996
acquisition of Environmental Services of America and 2) capital expenditures of
$1,409,000, of which $564,000 were improvements at the Company's incinerator.
The Company is presently seeking other sources of funds needed to complete
the purchase of the remaining ENSA Common Stock, as well as to provide necessary
working capital for the Company. In addition, the Company plans an additional
approximately $1,500,000 of capital expenditures in the upcoming fiscal year.
Among the sources of funds being pursued by the Company are:
1) additional funding from commercial banks;
2) private placement of common stock;
3) replacement of restricted certificates of deposits with payment
bonds; and,
4) subordinated and/or convertible debt financing.
As discussed in Note 5 to the financial statements, the Company may be
subject to a penalty of $500,000 due to the action by the New York State
Department of Environmental Conservation. At this time, the Company cannot
determine the amount (if any) or the timing of the fine payment which may be
required with regard to the NYSDEC action.
It is not possible to estimate the impact that the NYSDEC action will have
on the Company's ability to obtain necessary financing.
Inflation
Inflation:
==========
Inflation has not been a material factor affecting the Company's business.
General operating expenses such as salaries and employee benefits are, however,
subject to normal inflationary pressures.
4
PART II - OTHER INFORMATION
Item 1 Legal Proceedings.
------------------
On September 4, 1996, the Company received a Complaint from the New York
State Department of Environmental Conservation ("NYSDEC") citing a number of
violations at the facility and its intent to close the facility. The NYSDEC
Complaint seeks $500,000 in penalties, closure of the facility and revocation of
the facility's air pollution control and solid waste management permits. The
Company believes that its facility has been in substantial compliance with
applicable regulations and its permits and will vigorously contest the claims
asserted by NYSDEC.
On June 14, 1996, Jon Colin, the former President and Chief Executive
Officer of ENSA, filed a Demand for Arbitration with the American Arbitration
Association in New York City seeking $675,000 in salary under an alleged
Employment Agreement and a declaration that a certain Stock Option Agreement is
valid and binding on the Company, and that options for 300,000 shares under that
Option Agreement, with an exercise price of $8.375 per share, be deemed fully
vested. The Demand also seeks interest, attorneys fees, and "compensatory
punitive damages". The Company has denied that the alleged Employment Agreement
and Stock Option Agreement are enforceable obligations of the Company and has
sought an order in the Supreme Court of the State of New York, New York County,
permanently enjoining the arbitration proceeding. Mr. Colin has opposed the
application for the injunction and a decision had not yet been made on the
application for the permanent injunction as of September 12, 1996.
On July 12, 1996, Mr. Colin filed another Demand for Arbitration with the
American Arbitration Association in Newark, New Jersey. This Demand for
Arbitration seeks termination benefits under an Employment Agreement allegedly
entered into on January 1, 1994 with ENSA in the amount of $400,000, along with
interest and attorneys fees. The Company believes that it has valid defenses
and counterclaims in respect of Mr. Colin's entitlement to such benefits
pursuant to that Employment Agreement.
A Complaint captioned 5200 Enterprises, Ltd. v. Hasnas, Empire Electric
----------------------------------------------------
Co., Wastex Industries, Inc. ENSI, Inc., Environmental Services, Inc.
- - --------------------------------------------------------------------------------
Enviropact, Inc., Enviropact Northeast, Inc., Professional Engineering
- - --------------------------------------------------------------------------------
Associates, Inc. and Elias was commenced in the Supreme Court of Kings County,
- - ---------------------------
New York on February 16, 1989. This is an action by the owner of a building
against the prior owner and all persons and companies hired by the prior owner
to clean up contamination existing on the property prior to sale and, in
connection therewith, to conduct certain tests. The suit contends that the
clean up and/or the testing, some of which was done by an ENSA subsidiary, was
conducted negligently, and that misrepresentations were made by the owner
concerning the true level of remaining contamination, and seeks $3.5 million.
The Company is defending the suit vigorously. The Company is also seeking
indemnity from co-defendants for any liability.
On July 11, 1996, Pappalardo Associates filed a Complaint in Superior
Court, Tolland County, Connecticut alleging that Tri-S, Inc. a subsidiary of
ENSA, failed to make timely payments of its monthly rent of $7,451 since May 1,
1996 under its lease of premises located at 25 Pinney St., Ellington,
Connecticut. The Complaint seeks possession of the premises along with payment
of fair rental value. Tri-S has disputed its obligations under the lease and is
negotiating a possible resolution of the dispute.
5
On June 2, 1995, Northeast Environmental Services, Inc. (NES), a subsidiary
of ENSA, and Robert Miller, its President, were charged with violation of New
York State's Environmental Conservation and Penal Laws in an indictment filed in
the Ontario County Court, Canastota, New York. The charges stem from NES's
transportation, between June and October 1992, of approximately 65 drums of
hazardous material from a facility of its customer in Rochester, New York, to
another facility of the customer located in Geneva, New York. Both NES and Mr.
Miller have denied any wrongdoing in connection with these shipments. The trial
is set for late September of 1996.
Item 2 Changes in Securities.
----------------------
None.
Item 3 Defaults Upon Senior Securities.
--------------------------------
None.
Item 4 Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
None.
Item 5 Other Information.
------------------
None.
Item 6 Exhibits and Reports on Form 8-K.
---------------------------------
a) Exhibits - None
b) Reports on Form 8-K
On July 11, 1996, the Company filed a form 8-K/A amending its
May 21, 1996 Report on Form 8-K, concerning the acquisition of Environmental
Services of America, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ERD WASTE CORP.
---------------
(Registrant)
September 16, 1996 s/s Joseph Wisneski
- - ------------------- --------------------------
Date Joseph Wisneski
President
September 16, 1996 s/s Kathleen P. LeFevre
- - ------------------- --------------------------
Date Kathleen P. LeFevre
Chief Financial Officer
6