<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended June 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For transition period from to Commission File No. 0-16102
EASTERN ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-2840783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Crawford Place, Suite 101, Mount Laurel, NJ 08054
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (609) 235-6009
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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
--- ---
Indicated by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the last sale price of the Registrant's Common Stock at the
close of business on September 25, 1996, was approximately $40,530,000.
There were no shares of Class A Common Stock, par value $.01 per share, of the
Registrant outstanding as of September 25, 1996. The number of shares of Common
Stock, par value $.01 per share, of the Registrant outstanding as of September
25, 1996 was 9,220,208.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement to be filed with the
Commission in connection with the 1996 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Eastern Environmental Services, Inc. ("EESI" or the "Company") is a waste
services company specializing in the collection, transportation and disposal of
non-hazardous residential, commercial, industrial and special waste principally
in the eastern United States. The Company currently owns three landfills located
in West Virginia, Kentucky and South Carolina and has the right to construct and
operate a municipal solid waste landfill in Illinois under a management
agreement. The Company has recently received a permit required in order to
construct the Illinois landfill, and a draft permit to construct an expansion
cell at its Kentucky landfill. The Company's special waste hauling operation
serves the eastern United States and is a source of waste for the Company's
landfills. The Company also provides roll off container services from its West
Virginia and South Carolina landfills. EESI, as of June 30, 1996, has five
active operating subsidiaries. The Company has a diversified customer base with
no individual customer comprising more than 10% of the Company's revenue or
income during fiscal 1996. The company employs approximately 112 persons. Of the
Company's revenues for the fiscal year ended June 30, 1996, approximately 52%
was attributable to transportation operations and approximately 48% was
attributable to landfill operations.
The Company was formed as a Delaware Corporation in April 1987, began its
asbestos waste hauling in 1988, and acquired its West Virginia landfill in
August 1989. The Company's Kentucky landfill was acquired in July 1990 and its
South Carolina landfill in November 1990. The Company also finalized a
management agreement and obtained a construction permit in 1995 to develop an
Illinois landfill. The Company's strategy is to expand its waste disposal,
collection and waste transportation capabilities by further developing its
existing landfills and hauling operations, and by acquiring and developing
additional landfills, waste collection and hauling operations and other waste-
related businesses with high potential for integration of services.
The Company discontinued and sold substantially all of the operating assets of
its asbestos abatement and laboratory services subsidiaries during the fiscal
year ending June 30, 1994. As a result of increasing competition and price
compression in both these markets, management decided to exit these businesses
and focus on expanding the Company's waste disposal and transportation
capabilities. See "Discontinued Operations" below.
There has been a recent change in directors and management control of the
Company. The Company's former Board of Directors was replaced on June 20, 1996.
William C. Skuba, formerly the Company's Chairman of the Board and Chief
Executive Officer, sold a portion of his holdings of the Company's Common Stock
on June 20, 1996 to Louis D. Paolino, Jr.,
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George O. Moorehead, The Environmental Opportunities Fund and The Environment
Opportunities Fund (Cayman). Simultaneous with the sale, Mr. Paolino, Jr., Mr.
Moorehead, and Kenneth Leung became the Company's directors. The President of
the Company is Mr. Paolino, and the Chief Operating Officer of the Company,
appointed on June 20, 1996, is Terry W. Patrick.
Eastern Environmental Services, Inc. operates in the non-hazardous solid waste
segment of the waste management industry. The waste management industry has
been, and continues to be, a fragmented industry with numerous local, private
and municipal operators servicing relatively centralized areas. In recent years
the industry has experienced significant consolidation perpetuated by increased
regulation and enforcement of collection and disposal activities. Regulations
governing the disposal of solid waste, which became effective in late 1993, have
led to a variety of requirements applicable to landfill disposal sites,
including the construction of liners and the installation of leachate collection
systems, groundwater monitoring systems, and methane gas recovery systems. The
regulations also required enhanced control systems to monitor the waste streams
disposed of at landfills, extensive post-closure monitoring of sites, and
financial assurances that landfill operators will be able to comply with the
stringent regulations. The result of these regulatory requirements has been
increased costs throughout the various segments of the industry, with
particularly significant increases for landfill operators.
Compliance with the regulations currently in effect for the non-hazardous solid
waste industry requires significant capital expenditures. Many industry
participants have found the increased costs difficult, if not impossible to
bear. A large number of smaller, independent operators have decided to either
close down their operation or sell them to financially stronger operators. Some
municipalities have chosen to discontinue, or are considering discontinuing
their operations and turning the management of solid waste services over to
private concerns. The increased costs associated with the new industry
regulations have caused consolidation and acquisition activity within the
industry.
Strategy
--------
The Company's overall strategy is to capitalize on the above described
consolidation within the solid waste management industry. The Company's
expansion strategy consists of the following key components:
. Expanding through acquisitions of disposal and collection operations
principally in the Eastern United States. The Company believes it can
strengthen its position as a regional provider of integrated waste
management services in large markets that are currently fragmented.
. Increasing revenues and enhancing overall profitability through
acquisitions which increase the Company's integration with the Company's
existing operations. These acquisitions involve adding collection
operations, transfer stations or landfills that are
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geographically complementary to existing operations and that allow the
Company to implement operating efficiencies and increase asset
utilization.
. Increasing administrative and operating efficiencies and improve
profitability in existing operations and acquired businesses. Management's
goal is to realize the benefits of its acquisition strategy.
The Company's expansion plans for fiscal 1997 include the construction of the
infrastructure and initial disposal space at the Kentucky landfill (subject to
final permit approval) and the Illinois landfill and the acquisition of
collection, hauling, and disposal operations meeting the Company's acquisition
criteria. Significant acquisitions completed subsequent to June 30, 1996 or
currently under agreement include the following:
Allied Environmental Services, Inc. and Affiliates. On July 2, 1996, the
- --------------------------------------------------
Company acquired substantially all of the assets and assumed certain liabilities
of Allied Environmental Services, Inc. and its affiliated corporations
("Allied") in exchange for 116,667 unregistered shares of the Company's common
stock. Allied was founded in 1991 and in the business of arranging for the
transportation and disposal of contaminated soils and special waste products.
Allied provided its services on a nation-wide basis. The assets of Allied were
acquired by a newly formed subsidiary of the Company, Allied Waste Services,
Inc. Allied Waste Services, Inc. is using the assets of Allied to continue the
business formerly conducted by Allied. As of September 1996, Allied Waste
Services, Inc. had 13 employees of which 10 are located in a Long Island, New
York office and 3 in a San Rafael, California office.
K Hydraulics, Inc. On July 27, 1996, the Company purchased certain assets of K
- ------------------
Hydraulics, Inc. ("K") in exchange for 33,333 unregistered shares of the
Company's common Stock. "K" conducted a municipal solid waste collection
business in Philadelphia, Pennsylvania performing principally long-haul
transportation of municipal and other special waste products. The assets
acquired consisted of collection accounts, seven (7) trucks and miscellaneous
equipment. The assets and business acquired were consolidated into the
operations of NHD, Inc., the Company's long-haul waste transportation company.
Eastern Waste of Philadelphia, Inc. Eastern Waste of Philadelphia, Inc.
- -----------------------------------
("Eastern Waste") recently acquired all of the assets of Tri-County Disposal &
Recycling, Inc. ("Tri-County") and National Ecosystems, Inc. ("National"). Tri-
County and National conducted municipal solid waste collection businesses in the
Philadelphia, Pennsylvania area which Eastern Waste is continuing using the
acquired assets. On August 1, 1996 the Company entered into an agreement
("Eastern Waste Agreement") under which the Company purchased the assets of
Eastern Waste for 391,250 unregistered shares of the Company's common stock. As
of August 1, 1996, Eastern Waste had fifteen (15) employees, twelve (12) roll
off and rear loader trucks and over three hundred (300) containers of various
sizes principally in the Philadelphia, Pennsylvania market.
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Olney Sanitary System
- ---------------------
On September 17, 1996, the company purchased certain assets of Olney Sanitary
System ("Olney") for $400,000 in cash. The assets were acquired by a newly
formed subsidiary of the Company, Olney Sanitary System, Inc. Olney operates
eight (8) rear load collection trucks with over 500 containers and has thirteen
(13) employees servicing approximately 3,500 customers in the southeast Illinois
market. The waste collected by Olney will be disposed of at the Company's
Illinois landfill upon construction of its initial disposal space.
The above acquisitions will be accounted for using the purchase method of
accounting.
Merger. On September 27, 1996, the Company finalized a Merger Agreement for the
- -------
acquisition of all the outstanding stock of two New Jersey municipal solid waste
collection companies, Super Kwik, Inc. and Waste Maintenance Services, Inc.
("Collection Companies"). The acquisition is anticipated to be accounted for
using the "pooling of interest" method of accounting. The Collection Companies
have been merged into a wholly owned subsidiary of the Company in exchange for
2,307,692 shares of the Company's common stock. The Company will be obligated to
register the common stock.
The Collection Companies' waste collection operations are located principally in
Voorhees, New Jersey and consist of over 60 collection vehicles serving more
than 25,000 residential customers and 4,500 commercial customers in 9 Southern
and Central New Jersey counties and Philadelphia, Pennsylvania. The Collection
Companies generated in excess of $20,400,000 in gross revenues for the year
ending December 31, 1995.
Landfills
- ---------
The Company owns three solid waste landfills. The landfills are located in West
Virginia, Kentucky and South Carolina. The Company is also a party to a
management agreement to permit, construct and operate a proposed solid waste
landfill in Illinois. Information concerning the landfills is set forth in the
following table.
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Table 1
EESI Landfills
--------------
June 30, 1996
<TABLE>
<CAPTION>
Total Approximate Acreage Approximate
Total Disposal Current of Expansion Life
Location Acres Acres Capacity (1) Expansion Area Capacity In Years (2)
- -------- ----- -------- ------------ -------------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
West Virginia (3) 145 45 4,840,993 N/A N/A 24
Kentucky (4) 142 0 0 42 5,600,000 20
South Carolina (5) 73 39 3,614,238 N/A N/A 25
Illinois (6) 95 0 5,700,000 42 0 20
</TABLE>
- -----------------------
(1) Approximate cubic yards of airspace; total yards of airspace does not
represent total yards of actual waste space because daily,
intermediate, and final soil cover takes up some airspace (thus
reducing the airspace available for waste disposal).
(2) Approximate figures based on existing volume limitations and
anticipated operations. Life expectancy will decrease with increases
in the rate of waste disposed. Figures are based on current permitted
capacity at the West Virginia and South Carolina landfills, on the
expansion capacity for the Kentucky landfill and expected permit
capacity in Illinois.
(3) Currently permitted to accept up to 9,999 tons per month of municipal
and residential waste, construction and demolition debris, commercial
and non-hazardous industrial waste, auto fluff, shredded tires, non-
infectious medical waste, petroleum contaminated soil, and asbestos
waste from anywhere within the continental United States and Canada.
(4) The expansion area, if and when permitted, will be able to accept
municipal, commercial and residential waste from 10 counties at any
one time chosen from an 18 county area within Kentucky and portions of
Tennessee within 75 miles of the facility subject to certain host
county restrictions and will also be permitted to accept non-hazardous
industrial and commercial waste (special waste) from specific
generators on a case-by-case basis from Kentucky and states contiguous
to Kentucky. The expansion area, if and when permitted, will be
allowed to accept asbestos waste from anywhere in the United States
during the initial three-year period; from Kentucky and states
contiguous to Kentucky during years four and five and from Kentucky
only in year six and the period thereafter. A draft construction
permit for the expansion area was received on May 6, 1996, and is
currently under appeal. There can be no assurance that the expansion
area approval will be obtained. See "- Kentucky" below.
(5) Currently permitted to accept up to 122,400 in-place cubic yards per
year of asbestos, construction and demolition debris, plastic,
fiberglass, trees, limbs, cardboard, paper and tires from anywhere
within the continental United States. This site may also accept
limited additional industrial and special wastes that meet certain
minimum testing requirements as approved by the State on a case-by-
case basis. See "-South Carolina" below.
(6) Expected permitted capacity to accept residential, commercial,
municipal, industrial and special waste. See "- Illinois" below.
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West Virginia. The Company purchased its landfill in Clarksburg, West Virginia
- -------------
in August 1989. See Table 1, EESI Landfills, above for information concerning
--------------
permitted waste streams, acreage, current capacity, life expectancy and other
data relating to the Company's West Virginia landfill.
The Company's West Virginia Subtitle D landfill is currently used for disposal
of local MSW, along with asbestos from independent waste haulers, asbestos from
the Company's hauling operation, construction and demolition debris, shredded
tires and other special and non-hazardous industrial wastes. MSW disposal
represented approximately 70%, 75% and 58% of the West Virginia landfill's
volume during the years ended June 30, 1996, 1995 and 1994, respectively, while
asbestos disposal represented approximately 12%, 15%, and 39% of the volume
during the years ended June 30, 1996, 1995 and 1994, respectively. The Company's
West Virginia landfill is divided into a separate composite lined disposal area
for MSW and special waste and a clay lined disposal area for asbestos and
construction and demolition debris which by design are integrally connected to
provide for a consolidated operation.
The Company is required by West Virginia regulations to operate in accordance
with increased regulatory constraints and requirements. The Company has
developed approximately 2.7 acres of non-MSW waste area to-date and
approximately 5.5 acres of MSW area. The Company plans to develop further
disposal acreage as needed.
Kentucky. The Company purchased its landfill in Pulaski County, Kentucky in July
- --------
1990. See Table 1, EESI Landfills, above for information concerning permitted
--------------
waste streams, acreage, current capacity, expansion capacity, life expectancy
and other data relating to the Company's Kentucky landfill.
Until June 30, 1995, the Company's Kentucky landfill was primarily used for
disposal of local MSW and petroleum contaminated soil, and to a significantly
less extent, asbestos, sludge, glass, ash and other special waste. The Company
holds an exclusive disposal franchise until February, 2002 for disposal of solid
waste generated within Pulaski County, Kentucky. MSW represented approximately
80% and 84% of the Kentucky landfill's total volume for the years ended June 30,
1995 and 1994, respectively prior to operating a temporary transfer station at
the site.
The Kentucky landfill operated under Kentucky's "transition standards" allowing
operation in the existing landfill area until June 30, 1995. As of June 30,
1995, the Company ceased placing waste in the disposal area and began operation
of a transfer station. Management had made a strategic decision to limit the
amount of waste accepted at its Kentucky landfill each month commencing in
January 1993 in order to extend the life expectancy of the existing disposal
area to June 30, 1995, which has resulted in a reduction of revenues generated
at this facility to approximately 25% of previous normal operation revenue
levels. This reduction in volume had a continued material adverse effect on the
Company's financial performance until June 30, 1995, when the landfill ceased
accepting waste. If the Company should receive State approval to build
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and operate the expansion area described below, the amount of waste accepted at
this facility may, over time, be returned to fully operational levels as in
effect prior to 1993.
The Company received local approval for its 42 acre expansion area at its
Kentucky landfill from the local Solid Waste Management Board in December 1994
and has recently received a draft construction permit from the Kentucky Natural
Resources and Environmental Protection Cabinet on May 6, 1996 to construct the
landfill's expansion area. The draft permit is currently under an adjudicatory
appeal. An Agreed Order between the Company, the Cabinet and the petitioners has
been signed which will allow the Cabinet to issue a final permit.
With the landfill temporarily closed as of July 1, 1995, the Company implemented
an alternative to provide for disposal of local solid waste through the use of a
transfer station, through transportation and disposal with local haulers and
nearby landfills. The Company ceased operating the transfer station on July 1,
1996. Commencing July 1, 1996, the Company has diverted the waste streams under
the Pulaski County, Kentucky franchise agreement to a non-affiliated waste
company while maintaining its franchise agreement. If the State permit is
obtained, the Company will be required by Kentucky regulations to operate this
expansion area in accordance with increased regulatory requirements. The Company
expects to construct disposal acreage on an as needed basis. Although the
Company expects to receive a State permit for the Kentucky expansion area, there
can be no assurance that it will be obtained.
South Carolina. The Company purchased its landfill in Eastover (near Columbia),
- --------------
South Carolina in November 1990. See Table 1, EESI Landfills, above for
--------------
information concerning permitted waste streams, acreage, capacity, life
expectancy and other data relating to the Company's South Carolina landfill.
The Company received renewal of its existing permit on November 19, 1993. The
Company's South Carolina landfill is primarily used for disposal of local
construction and demolition debris, plastic, fiberglass, trees, limbs, tires,
cardboard, paper and certain other non-hazardous industrial wastes along with
asbestos from independent waste haulers and from the Company's waste hauling
operation. Construction and demolition debris disposal represented 73%, 46% and
36% of the South Carolina landfill's volume during the years ended June 30,
1996, 1995, and 1994, respectively, while approximately 27%, 54% and 64%,
respectively, were derived from the disposal of other special wastes. The
Company is limited to accepting up to 122,400 in-place cubic yards per year of
waste. The Company may seek to increase this limit from time to time, which
would require local zoning and state regulatory approvals. There can be no
assurance that such approvals will be obtained.
According to draft regulations which may become effective in fiscal 1997, the
South Carolina facility may be required to operate in accordance with increased
regulatory requirements. See "Risk Factors - Regulation".
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Illinois. The Company received a final development permit on January 12, 1996,
- --------
from the Illinois Environmental Protection Agency approving development of a new
municipal and non-hazardous special waste landfill in Illinois. The landfill
consists of 42 acres of disposal space containing approximately 5,700,000 cubic
yards of airspace.
The Company is currently in the stage of planning construction of the erected
disposal cell and is expected to be operational in the second half of fiscal
1997. The Company has the right to operate the landfill under a management
agreement in exchange for the payment of a royalty to the landfill's owner of
record. The management agreement provides the Company the right to develop,
construct and operate the municipal solid waste landfill, retaining any profits
generated from operations, subject to paying the owner of the landfill a royalty
based on average tonnage disposal rate achieved. The management agreement also
requires the owner's local waste collection businesses and transfer stations to
dispose of their waste exclusively at the landfill once it is operational,
provided the landfill offers competitive pricing. The Company has an option to
purchase the landfill property exercisable any time over forty years upon the
payment of a nominal cash payment and a continuing royalty. The Company has
incurred and capitalized legal, engineering, and other permitting costs totaling
approximately $355,000 through June 30, 1996 with respect to the Illinois
landfill.
Waste Hauling. The Company's special waste hauling subsidiary transports waste
- -------------
to Company-owned landfills and non-affiliated landfills. The Company formed its
first hauling operation in 1988 and as of June 30, 1996 operates a fleet of
approximately 280 trailers and 20 tractors that it owns, leases or operates
under arrangements with independent owner/operators. The Company offers roll-off
container service (industrial dumpsters) and has satellite trucking terminals at
two of the Company's landfills. The Company is expanding its operations to
include the hauling of other special wastes, including shredded and lead
contaminated construction and demolition debris. In many states, hauling of
these wastes requires special permits, which the Company has obtained or is in
the process of obtaining.
Until June 30, 1995, the Company also operated a residential and commercial
waste collection and portable sanitation business in Beaufort County and Jasper
County, South Carolina, and Chatham County, Georgia, which it purchased in
August 1992. The Company integrated certain of the assets of this business into
its South Carolina landfill and sold the remainder of the operation.
Marketing and Sales.
The Company employs a sales staff. The sales staff and the general managers of
each operation and the officers of the Company solicit waste for the Company's
disposal and hauling operations. Potential customers are contacted through
direct mailings, telemarketing, advertising in national trade journals, exhibits
and participation at trade shows, personal visits, community involvement,
referrals and projects listed in various construction reports. The Company has
also obtained customers through recommendations and referrals from existing
customers. The Company
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maintains a database of contractors, haulers, and commercial entities for
continual solicitation of business. The Company is attempting to increase its
landfill and waste hauling revenues and client base and to diversify its mix of
generators and waste streams by systematically identifying potential customers.
Competition.
The solid waste industry is highly competitive and the Company believes that
industry consolidation will increase competitive pressures. The Company's
landfills compete with municipalities, numerous small local firms, regional
firms and large national waste management companies. Although a portion of the
waste transported by the Company's waste hauling operations is disposed of at
the Company's landfills, the Company's landfills currently receive the majority
of their revenues from non-affiliated waste generators and haulers. Competition
among landfills is based primarily upon proximity of the landfill to the waste
generator, price, service, condition of the landfill and permit approvals for
particular wastes. Many of the Company's competitors have greater capital
resources and municipalities generally have financial advantages such as tax
revenues and tax exempt financing which induce public ownership of landfills in
certain states. Increased competition among regional and national landfill
companies and local municipalities may adversely affect the Company's profit
margins in the future.
The Company's waste hauling and collection operations compete with small
transporters and large volume waste hauling firms located in the northeastern,
mid-Atlantic and southeastern states. Competition among waste haulers is based
primarily upon price and the quality and timeliness of service. Many of the
Company's competitors have greater capital resources than the Company and
increased competition among regional and national waste haulers may adversely
affect profit margins in the future.
Regulation.
General
-------
The solid waste industry is subject to extensive federal, state, and local
environmental regulations pertaining to public health and the environment that
affect the siting, design, construction, operation, closure and post-closure
care of the Company's landfills, the availability of waste for disposal and
other matters. These regulations are complex and continually evolving, and the
Company will, from time to time, be required to make significant capital and
operating expenditures in response to these changes. Although the Company
believes it is in material compliance with current regulatory requirements,
there can be no assurance that the Company will not incur liability for
violations of federal, state and local environmental regulations. The Company
also may be subject to actions brought by individuals or community groups in
connection with the permitting, licensing or expansion of its operations,
alleged violations of such permits and licenses or other matters. If any of the
occurrences described above were to happen,
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the Company's operating results and financial condition could be adversely
affected. See Item 1. "Business Permits and Licenses".
State Law
---------
On October 1, 1993, the Company's West Virginia landfill received a permit to
construct its expansion area. The Company completed construction and
certification of the first disposal cell of the expansion area on June 30, 1994.
The Company concurrently ceased accepting waste in the old landfill and
commenced accepting waste in the newly permitted and constructed disposal area.
The Company operates its expansion area under the more stringent federal and
state requirements. The West Virginia landfill can continue to operate under its
newly issued permit with renewal every five years. The Company estimates the
remaining life of the newly permitted area at approximately 24 years based on
anticipated operating volumes.
Current Kentucky law required the Kentucky landfill to cease operations in its
existing disposal area on June 30, 1995 because this area did not meet the new
required standards. As the Company continued to pursue a final state permit for
the expansion area at the site, a program was implemented on June 30, 1995 to
transfer and dispose of waste to an alternate location. The suspension of
disposal of waste at the landfill and the operation of a transfer station had an
adverse effect on the Company's operating results. The Company discontinued its
transfer station operating on July 1, 1996. See ITEM 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Cost of Revenues
----------------
and Gross Profit".
- ------------------
The planned development of the Illinois landfill is expected to begin in the
second half of fiscal 1997. The landfill will be operated under the more
stringent federal and state requirements enacted over recent years. The capital
costs to meet the federal and state requirements will be substantial and similar
to those expended for the Company's West Virginia landfill in its MSW area as
described below. The landfill is expected to operate for 20 years under
projected operating levels.
The current expansion at the West Virginia landfill, the planned expansion at
the Kentucky landfill, and the planned development of the Illinois landfill
require the installation of liners, additional groundwater monitoring wells,
leachate collection and treatment systems, methane gas monitoring and venting
systems and other environmental protection measures. The capital costs for
installation of these regulatory compliance measures and preparation of the
expansion areas are substantial, although the Company will only construct
portions of its expansion areas on an as-needed basis to accommodate its
anticipated waste volumes. The Company has expended approximately $265,000 per
acre (for compacted clay liners and excavating in the non-MSW areas) and
$360,000 per acre (for compacted clay and synthetic liners and excavating in the
MSW areas) in West Virginia exclusive of the overall permitting, engineering,
design, legal and hydrogeological costs of permitting the site. These amounts
are based on current regulations and technology and on construction costs
incurred to date. The state and federal regulatory requirements affecting the
planned expansions have changed frequently in the past, and material
11
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additional changes could occur. Although substantial changes are currently not
expected, any such changes could result in an increase in the cost of regulatory
compliance at the landfills and thereby adversely effect the Company's operating
results.
The Company will also incur costs in connection with the state regulatory
requirements governing closure and post-closure monitoring and maintenance of
the current operating areas and future expansion areas of its landfill sites.
The costs of closing current permitted operating areas of the Company's
landfills if all acreage is used is estimated to be approximately $3,725,000 in
West Virginia, approximately $1,250,000 in Kentucky and approximately $918,000
in South Carolina (under draft South Carolina regulations expected to become
effective in fiscal 1997, as discussed below). Closure costs for the Kentucky
expansion area are expected to be approximately $3,100,000. Post-closure care
and monitoring obligations at both the West Virginia and Kentucky sites will add
additional expenditures of $27,000 to $120,000 per year per site over the 30-
year period following closure. Closure and post-closure care costs for the
proposed Illinois landfill are expected to be similar to those for the West
Virginia and Kentucky landfills. The Company expects post-closure care to cost
$10,000 per year for the 30 years following closure at the South Carolina
landfill. These amounts are only estimates based on current and proposed
regulatory requirements. There can be no assurance that additional closure and
post-closure requirements will not be mandated. Although substantial changes in
applicable regulatory requirements are currently not expected, any such changes
could result in an increase in the cost of regulatory compliance at the
landfills and thereby adversely affect the Company's operating results.
In 1993, the South Carolina Department of Health and Environmental Control
initiated proposed new regulations governing industrial waste landfills, which
includes the Company's South Carolina facility. If passed in the proposed form,
these regulations would impose additional operating, reporting and record-
keeping requirements on the Company's South Carolina landfill as well as
significant new closure, post-closure and design requirements. To operate after
the effective date of the proposed regulations, the Company may need to upgrade
the landfill's design. The type of upgrades required would depend on the type of
industrial wastes the Company would choose to accept for disposal. If the
Company would accept only a limited class of industrial wastes (referred to in
the proposed regulations as "Class 1" wastes), the Company would only need to
design and install a groundwater monitoring program. The Company believes all
wastes it currently accepts at the South Carolina landfill are considered Class
1 wastes. If the Company wished to accept a broader class of industrial wastes
(referred to as "Class 2" or "Class 3" wastes), it would need to install a clay
liner (Class 2) or a clay and synthetic liner (Class 3) plus a leachate
collection system. A Class 3 facility would also be subject to additional
closure requirements and related costs. If the regulations are finalized in
substantially the form proposed, the Company will determine the projected cost
and benefit of being able to accept Class 1, Class 2 or Class 3 wastes, and
choose the appropriate design for the facility, which may include separate
disposal areas for separate classes of wastes. However, these regulations are
only in draft form, and final regulations may have additional or substantially
different requirements. The regulations are expected to become effective in
fiscal 1997.
12
<PAGE>
The rates that the Company may charge at its West Virginia landfill for the
disposal of MSW are regulated by the West Virginia Public Service Commission
("PSC"). Effective June 30, 1994, the Company increased its MSW disposal rate
from $22.50 per ton to $28.25 per ton (net of tonnage taxes) upon receipt of
waste on its composite lined disposal area pursuant to a revised tariff with the
PSC based upon a Company filed rate case.
The adoption of rate regulation of waste disposal in Kentucky, Illinois or South
Carolina, or in other states in which the Company may own landfills in the
future, could materially adversely affect the Company.
The Company's landfills and related waste collection operations also may be
affected by the trend toward state and local laws requiring the development of
waste reduction and recycling programs. For example, many states (including West
Virginia, Kentucky, South Carolina, and Illinois where the Company's existing
and proposed landfills are located) have enacted laws that require counties to
adopt comprehensive plans to reduce the volume of solid waste deposited in
landfills through waste planning, composting, recycling or other programs. Some
states, including South Carolina, West Virginia, Kentucky, and Illinois have
adopted legislation that prohibits the disposal of yard waste, tires and other
items in landfills. The development of such programs could reduce the volume of
landfill waste and thereby have a material adverse effect on the Company.
Additionally, the Company expects to grow by acquiring existing landfills,
transfer stations, and collection operations. Although the Company conducts due
diligence investigations of the past waste management practices of the
businesses that it acquires, it can have no assurance that, through its
investigation, it will identify all potential environmental problems or risks.
As a result, the Company may have acquired, or may in the future acquire,
landfills that have unknown environmental problems and related liabilities. The
Company will be subject to similar risks and uncertainties in connection with
the acquisition of closed facilities that had been operated by businesses
acquired by the Company. The Company seeks to mitigate the foregoing risks by
obtaining environmental representations and indemnities from the sellers of the
businesses that it acquires. However, there can be no assurance that the Company
will be able to recover on any such indemnities if an environmental liability
exists.
Federal Law
-----------
At the Federal level, landfill owners and operators and waste haulers are
subject to potential response costs and liabilities that may arise under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"). CERCLA among other things, imposes strict, joint and several
liability on present and former owners or operators of facilities, as well as
the waste generator and the transporter (if the transporter selected the
facility), if a release of a hazardous substance occurs or is threatened at or
from the facility. All of those persons may be subject to liability for response
costs and for damages to natural resources, whether or not they are responsible
for the release of a hazardous substance or have complied with all relevant laws
and regulations. Asbestos is listed as a hazardous substance under CERCLA,
however asbestos is not considered a hazardous waste under the Resource
Conservation and Recovery Act ("RCRA") described below. In the event of a
release or threat
13
<PAGE>
of release of hazardous substances from the Company's landfills or these other
facilities, the Company could be liable to the government or third parties for
response costs or natural resource damages under CERCLA. Under the authority of
CERCLA and its regulations, detailed requirements apply to the manner and degree
of remediation of facilities and sites where hazardous substances have been or
are threatened to be released into the environment.
Liability under CERCLA is not intentional disposal of "hazardous wastes," as
defined under RCRA. It can be founded upon the release or threatened release,
even as a result of lawful, unintentional, and non-negligent action.
Consequently, if there is a release or threatened release of hazardous
substances into the environment from a site currently or previously owned or
operated by the Company, the Company could be liable under CERCLA for the cost
of removing such hazardous substances at the site, remediation of impacted soil
or groundwater, and for damages to natural resources, even if those substances
were deposited at the Company's facilities before the Company acquired or
operated them. The costs of a CERCLA cleanup can be very substantial. Given the
current absence of environmental impairment liability insurance by the Company,
a finding of such liability could have a material adverse impact on the
Company's business and financial condition.
The Resource Conservation and Recovery Act ("RCRA") comprehensively regulates
the transportation and disposal of solid and hazardous waste. Hazardous waste is
regulated under Subtitle C of RCRA, while solid waste is regulated under
Subtitle D. Pursuant to RCRA, the Company could be compelled to abate any
imminent and substantial endangerment to public health or welfare or the
environment caused by the past or present handling of solid or hazardous waste
at any of its facilities. Although the Company attempts to accept only non-
hazardous waste and maintains hazardous waste exclusion plans at its landfills,
it may be difficult for the Company to screen fully and effectively for certain
types of non-regulated hazardous waste. For example, the United States
Environmental Protection Agency ("EPA") has estimated that one to three percent
of all household waste is waste which would otherwise be considered hazardous
and there can be no assurance that household hazardous waste will not be present
at Company landfills.
RCRA regulations developed under Subtitle D set forth criteria for solid waste
disposal practices. Failure to satisfy these criteria constitutes open dumping
which is prohibited by RCRA and most state laws. According to these regulations,
if the disposal activity has certain specified effects on such environmental
resources as floodplains, endangered species, surface water, groundwater and
air, the disposal activity may constitute illegal open dumping. The Company
conducts monitoring at all of its landfill sites and believes that its landfills
do not exceed any current open dumping standards; however, there can be no
assurance that future monitoring will not reveal conditions that may call for
remediation.
Subtitle D regulations, which became effective in late 1993, mandate the
following for MSW landfills: groundwater monitoring to detect contamination;
corrective action to clean up contamination; methane gas monitoring and
controls; natural and synthetic liners; leachate collection systems; final cover
systems; restrictions on landfilling of liquids; restrictions on
14
<PAGE>
locating landfills; site specific plans for closure and post-closure; financial
responsibility mechanisms for closure, post-closure, and groundwater corrective
action; a 30-year post-closure responsibility period; and a program to detect
and prevent disposal of RCRA hazardous waste and PCBs.
The EPA may enforce the Subtitle D regulations if it determines that a state has
not adopted an adequate permit program to ensure compliance with EPA's Subtitle
D standards. Many states, including West Virginia, Kentucky, and Illinois have
already adopted regulations that the Company believes meet or exceed the
requirements of the Subtitle D regulations in most respects. Kentucky, Illinois
and West Virginia regulations have already been completely or partially
certified by EPA. The Company believes it is in compliance with these
regulations.
The Subtitle D regulations apply only to MSW landfills. Thus, the Company's
South Carolina landfill is currently not affected since it is not permitted to
accept MSW. However, increased regulatory conditions at the South Carolina
landfill are anticipated as all types of waste disposal practices are being
continually reevaluated.
Congress frequently considers amendments to RCRA and CERCLA and new bills and
laws governing solid waste. While specific requirements which would be created
in the event any such legislation is passed cannot be predicted, it is likely
that solid waste and industrial solid waste will be subject to increased
regulation and that alternative means of disposal will be encouraged.
The Federal Clean Water Act established rules regulating the discharge of
pollutants from a variety of sources, including landfills, into streams or other
surface waters. Whenever pollutants from the Company's landfills may be
discharged into surface waters through a point source (e.g. a drainage channel,
ditch, pipe or similar conveyance), this act requires the Company to apply for
and obtain discharge permits, conduct periodic sampling and monitoring and,
under certain circumstances, reduce the quantity of pollutants in those
discharges via treatment or management practices. This act may regulate the
discharge of materials as varied as the constituents of storm water runoff or
landfill leachate released to surface water channels. The Federal Clean Water
Act provides civil, criminal, and administrative penalties for violations of its
provision. In most states, implementation of this program is delegated by the
federal government to the state. In Kentucky, the Company has received a state
permit governing its surface water discharge. The Company has received a NPDES
(National Pollution Discharge Elimination System) permit for its newly permitted
and constructed West Virginia expansion area governing surface water discharges.
In addition, the City of Fairmont and the Grant-Union Public Service District in
West Virginia have received permit approval to allow disposal of leachate from
the West Virginia landfill. The City of Jamestown in Kentucky accepts leachate
from the Kentucky landfill. In South Carolina, the Company is regulated for
storm water discharge under the state's General Permit for Storm Water
Discharges Associated with Industrial Activity. The Company has been issued a
Notice of Coverage under a General NPDES permit for its Illinois operation to
allow storm water discharges from the proposed landfill activity.
15
<PAGE>
The Clean Air Act provides for federal, state and local regulation of emissions
of air pollutants into the atmosphere and has been construed by the EPA to apply
to the operation of landfills. Asbestos is considered to be a hazardous air
pollutant under the Clean Air Act. When the Company's landfills accept asbestos-
containing waste, they also are governed by federal EPA regulations promulgated
pursuant to the Clean Air Act. These regulations require that there be no
visible emissions to the outside air from the disposal site or that the
asbestos-containing material be covered daily (or if the site is continuously
operated, at least once every 24 hours). Further, unless a natural barrier
adequately deters access by the general public, warning signs and fencing must
be installed or the asbestos waste must be covered daily. In an effort to track
asbestos waste, federal regulations require active asbestos waste disposal sites
to record the location of all asbestos waste and retain waste shipment records
for at least two years. In addition to federal regulation, many states and
localities have programs for approving and licensing asbestos disposal sites.
The Company believes it is in compliance with these regulations.
In 1991, the EPA proposed guidelines for new source performance standards
regulating the emission of air pollutants from solid waste landfills. The
regulations, as revised, are expected to be finalized in early 1997. If the
proposed regulations are adopted by the EPA, they must be implemented by the
states. These guidelines, combined with the new permitting programs established
under the 1990 Clean Air Act Amendments, will likely subject solid waste
landfills to new permitting requirements and, in some instances, require
installation of methane gas recovery systems. The Clean Air Act Amendments could
also result in the imposition of strict requirements on many activities that
have heretofore been largely unregulated, as well as imposing more stringent
requirements on, among other activities, motor vehicle emissions. These costs
are not anticipated to adversely affect the Company.
The Occupational Safety and Health Act of 1970 (the "OSHA Act") authorizes the
Occupational Safety and Health Administration to promulgate occupational safety
and health standards. Several of these standards, including standards for
notices of hazards, safety in excavation and demolition work, and the handling
of asbestos, may apply to the Company's operations.
Permits and Licenses
--------------------
The Company's landfills operate under permits which must be renewed
periodically, and the Company must also obtain permits to expand its operating
areas and to expand the types or sources of wastes for disposal at its
landfills. Obtaining permits for expansion is expensive and time consuming and
is typically subject to state and local government approval, the availability of
which cannot be predicted. There can be no assurance that renewals and expansion
permits will be obtained. The inability of the Company to obtain renewals of
existing permits or to obtain expansion permits as needed for any of its
landfill sites would have a material adverse effect on the Company's business
and financial condition.
The Company's permit in West Virginia allows the landfill to accept up to 9,999
tons per month of MSW, construction and demolition debris, commercial and non-
hazardous industrial and
16
<PAGE>
special waste, shredded tires, petroleum contaminated soil and non-infectious
medical waste from anywhere within the continental United States and Canada.
Increasing the permitted monthly tonnage would require reclassification of the
landfill from a Class B to a Class A landfill, which would also increase the
level of local control over the landfill. The West Virginia permit expires in
October 1998 and must be renewed every five years.
The Company received approval of a Host Agreement and local approval for its 42
acre expansion area at its Kentucky landfill from the local Solid Waste
Management Board in December 1994 and has recently received a draft construction
permit from the Kentucky Natural Resources and Environmental Protection Cabinet
on May 6, 1996 to construct the landfill's expansion area. The draft permit is
currently under adjudicatory appeal. An Agreed Order to dismiss the appeal
between the Company, the Cabinet and the Petitioners is currently being drafted;
however, there can be no assurance that a final permit will be obtained. Due to
the difficulty and time constraints on permitting, the Kentucky landfill did not
have the expansion area in operation by July 1, 1995, the date it was required
to cease accepting waste in the existing area. The Company operated a permitted
transfer station from July 1, 1995 to July 1, 1996 to service the waste needs of
the local host county under the Company's waste disposal franchise agreement
expiring in the Year 2002. The suspension of waste disposal at the Kentucky
landfill and the operation of the transfer station generated a higher operating
loss at the site than existed prior to the suspension of waste disposal. To
reduce its operating losses, the Company on July 1, 1996 transferred its
exclusive waste disposal franchise for Pulaski County, Kentucky solid waste to a
waste facility of another waste company. The Company will resume disposal of
Pulaski County, Kentucky solid waste under the franchise agreement which does
not expire until February 2002, when and if the Company receives its final
permit for the construction of its Kentucky expansion cell and has constructed
the cell.
The Company's permit in South Carolina allows the landfill to accept and dispose
of up to 122,400 cubic yards of in-place waste per calendar year, including
asbestos, construction and demolition debris, plastic, fiberglass, trees, limbs,
tires, cardboard and paper from anywhere within the continental United States.
The Company may seek to increase this limit from time to time, which would
require local zoning and state regulatory approvals. There can be no assurance
that such approvals will be obtained. The permit requires an environmental
compliance review every 5 years. The most recent environmental compliance review
was performed and the permit was renewed on November 18, 1993.
The Company recently received a development permit from the Illinois
Environmental Protection Agency approving development of a new municipal and
non-hazardous special waste landfill in Illinois. The landfill consists of 42
acres and approximately 5,700,000 cubic yards of airspace. The Company has the
right to operate the landfill under a management agreement in exchange for the
payment of a royalty to the landfill's owner of record. The Company has an
option to purchase the landfill within the next forty years for consideration
consisting of nominal cash and a continuing royalty. The Company has incurred
and capitalized legal, engineering, and other permitting costs totalling
approximately $355,000 through June 30, 1996. Construction costs,
17
<PAGE>
closure and post-closure costs will be comparable with those of the Company's
West Virginia landfill previously described.
The Company's waste hauling operations holds various federal, state and local
permits to transport MSW, special, and hazardous wastes.
Insurance and Bonding
The Company carries comprehensive general liability insurance for all its
operations on a claims made basis with a primary limit of $1,000,000 per
occurrence and an umbrella limit of $1,000,000 in the aggregate for all
occurrences in the one-year policy period. The Company also carries
comprehensive automobile insurance on all Company vehicles with a primary limit
of $1,000,000 per occurrence, subject to a deductible of $10,000 per occurrence.
The Company has employer liability coverage with a combined limit of $1,000,000.
The Company does not currently maintain environmental impairment liability
insurance coverage. If the Company were to incur liability for environmental or
other damage, the cost could be substantial and in excess of policy limits,
outside the terms of coverage, or subject to certain policy exclusions.
Consequently, the Company's business or its financial condition could be
materially adversely affected by an environmental claim or other claim. The
Company is currently in the process of finalizing selection of new and expanded
insurance coverages, including environmental impairment liability insurance,
which will provide greater coverage than current insurance coverage.
The Company carries workers compensation insurance as required by law. The
Company is currently self-insured through a program approved by the Pennsylvania
State Workers Compensation Insurance Fund for potential workers compensation
claims for Pennsylvania resident employees. The Company currently maintains a
$300,000 performance bond as collateral for the program which was reduced from
$500,000. The $300,000 bond at June 30, 1996 was secured by a $117,000 U.S.
Government treasury security deposit in a trust fund administered by the bonding
company. An excess insurance policy for workers compensation is maintained which
provides medical benefit coverage per incident in excess of $120,000, $60,000
and $50,000 in the first, second and third years, respectively, from the date of
occurrence. The Company utilizes the services of an independent claims
management consultant to control the cost of the self-insured program. The
Company maintains workers compensation insurance through state funds for its
West Virginia resident employees and its Kentucky resident employees and through
a national insurance company for residents in all other states. While the level
of claims and the cost of maintaining this coverage have been minimal to date,
there is no assurance that future claims will not have a material adverse effect
on the future profitability or financial condition of the Company.
The Company is required to post a form of financial assurance at two of its
existing landfills to ensure proper closure and post-closure monitoring and
maintenance. West Virginia currently requires that the Company post financial
assurance of $168,000 for closure and post-closure care of up to 30 years for
the closed disposal area and $214,000 for the newly permitted expansion
18
<PAGE>
area. The West Virginia financial assurance is secured at June 30, 1996 by
certificates of deposit totalling $196,000 including accumulated earnings on the
deposits for the closed disposal area and a $214,000 closure bond for the
expansion area. The closure bond required no collateral. The Company anticipates
that the West Virginia bonding requirements will substantially increase in 1997
when the State's solid waste program is to be fully approved by the Federal
government. Financial assurance requirements for the newly permitted expansion
area may increase to approximately $3,000,000 for closure and $3,600,000 for
post-closure care.
Kentucky has required $1,321,607 of financial assurance for the closure of the
existing permitted area of the Kentucky landfill and $314,571 for the 30-year
post-closure period. The Kentucky financial assurance for closure and post-
closure monitoring of the current area at June 30, 1996 is secured by payment
bonds totalling $1,636,179. The closure bond of $1,321,607 is collateralized by
a $626,000 irrevocable letter of credit. The post-closure bond of $314,571 is
collateralized by a $119,596 U.S. Government treasury security deposit in a
trust fund administered by the bonding company. Similar additional bonding
requirements will be imposed to secure closure and post-closure obligations at
the expansion area of the Company's Kentucky landfill.
Some of the Company's hauling and collection contracts require performance and
payment bonds to guarantee project completion. In addition, certain states may
require collateral bonds to secure compliance with hazardous waste hauling
requirements. Although such bonds are restricted in availability, the Company
has established relationships with surety companies that currently meet its
bonding needs. There is no assurance, however, that these relationships will
continue or that the Company will not be forced to seek alternative sources for
bonding. Continuation of bonding is contingent upon the Company's performance
record and credit-worthiness which is reviewed on a regular basis.
The inability to maintain the Company's insurance program and bonding capacity
or a sizable increase in rates would have a material adverse impact on the
Company's business and may preclude it from obtaining or retaining landfill
operating permits. The Company also is subject to the risk of potential claims
in excess of policy limits, claims relating to projects performed during periods
not covered by insurance, or claims made after the expiration of the policy
coverage period. Asbestos-related illnesses, such as asbestosis, lung cancer,
mesothelioma and other cancers, may not become apparent until many years after
exposure. From May 15, 1985 through April 28, 1988, the Company carried claims
made general liability coverage when quality occurrence insurance was difficult
to obtain. Because of the long-term nature of asbestos-related illnesses, any
claims presented on the basis of exposure during that three-year period of time
may not be covered by insurance. If the Company were to incur liability for
asbestos-related illnesses, which were not covered by insurance, its financial
condition and results of operations could be materially adversely affected.
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<PAGE>
Factors Influencing Future Results and Accuracy of Forward-Looking Statements
In the normal course of its business, the Company, in an effort to help keep its
shareholders and the public informed about the Company's operations, may from
time to time issue certain statements that contain or may contain forward-
looking information. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of such
plans or strategies, projected or anticipated benefits from acquisitions made by
or to be made by the Company, or projections involving anticipated revenues,
earnings or other aspects of operating results. Such statements are subject to a
number of factors that tend to influence the accuracy of the statements and the
projections upon which the statements are based. As noted elsewhere in this
report, all phases of the company's operations are subject to a number of
uncertainties, risks and other influences, many of which, could materially
affect the results of the Company's operations and whether forward-looking
statements made by the Company ultimately prove to be accurate.
Other Factors Influencing Future Results
Need for Additional Capital
---------------------------
The Company estimates that it requires approximately $5,000,000 to construct the
infrastructure and initial disposal space at the Illinois and Kentucky sites,
which the Company has available as a result of the completion of a $10,000,000
private offering of its stock on August 9, 1996. The Company expects additional
capital expenditures of approximately $4,610,000 in fiscal 1997 for existing
operations, excluding the $5,000,000 in costs to construct disposal space at the
Company's Illinois and Kentucky landfills. The Company's operations to date have
required substantial amounts of working capital and the Company expects to
expend substantial funds to support the contiuned expansion of its disposal and
transportation operations through the acquisition and integration of collection,
transportation, and disposal operations. The Company's further capital
requirements may be satisfied through future debt incurrences or issuances of
equity securities. There can be no assurances that the Company will be
successful in obtaining such additional capital.
History of Operating Losses
---------------------------
The Company has experienced losses from fiscal 1992 through fiscal 1995 and
reported a net loss of $0.63 per share for the year ended June 30, 1996. In
recent years, the Company has incurred increases in expenses associated with
meeting federal, state and local regulatory requirements affecting its business.
While the Company expects to have profitable operations in the future, there can
be no assurance that the Company will realize revenues and gross profits
sufficient to achieve or sustain profitability on a quarterly or annual basis in
the future. In the event it fails to do so, the Company's operations could be
adversely affected.
20
<PAGE>
Limited Availability of Favorable Acquisitions
----------------------------------------------
In conjunction with the expansion of its current operations, the Company plans
to expand its business operations through the acquisition of additional
landfills, waste hauling operations and other waste-related businesses. The
success of the Company is largely dependent on its ability to complete such
acquisitions at reasonable prices, obtain and comply with applicable
governmental permits and approvals and then expand and integrate newly acquired
operations with the Company's existing operations. Landfills have become
increasingly scarce and valuable, and intense competition for existing landfill
sites could result in prices for acquisitions that may be difficult to justify
or that may be beyond the Company's financial resources. Many of the Company's
competitors for such acquisitions have substantially greater financial resources
than the Company. Accordingly, there can be no assurance as to the number or
timing of the Company's acquisitions or as to the availability of financing
necessary to complete an acquisition. Should the Company be unable to make
acquisitions, the Company's expansion plans and the Company's operating results
could be adversely impacted.
Dependence on Key Personnel
---------------------------
The Company's overall operations are dependent upon the services of its
executive officers, including Mr. Paolino, its Chairman of the Board, Chief
Executive Officer and President, and Mr. Patrick, its Executive Vice President
and Chief Operating Officer. The loss of Mr. Paolino, Mr. Patrick or other
executive officers' services could have a material adverse effect on the
Company.
Waste Reduction Programs
------------------------
The Company's landfills and related waste collection operations may be affected
by the trend toward state and local laws requiring the development of waste
reduction and recycling programs. For example, many states (including West
Virginia, Kentucky, South Carolina and Illinois, where the Company's existing
and proposed landfills are located) have enacted laws that require counties to
adopt comprehensive plans to reduce the volume of solid waste deposited in
landfills through waste planning, composting, recycling or other programs. Some
states, including South Carolina, West Virginia, Kentucky and Illinois have
adopted legislation that prohibits the disposal of yard waste, tires and other
items in landfills. The development of such programs could reduce the volume of
landfill waste and thereby have a material adverse effect on the Company.
Patents, Trademarks, Licenses and Copyrights
The Company has registered its Company logo, the phrase "Experience and
Technology for a Safer Environment", and the Company's symbol on the Nasdaq
National Market ("EESI") with the U.S. Patent and Trademark Office as service
marks.
21
<PAGE>
Employees
As of September 25, 1996, the Company had 112 permanent full-time employees, of
which 98 were employed in landfills and waste hauling and collection operations
and 14 in corporate operations. The Company has no union contracts or collective
bargaining agreements covering its employees. The Company believes that its
employee relations are good.
ITEM 2. PROPERTY AND EQUIPMENT
The Company leases administrative offices in Drums, Pennsylvania and its
corporate headquarters located in Mount Laurel, New Jersey. The Drums,
Pennsylvania office currently houses the administrative staff of its special
waste hauling operation. The Company leases a landfill operations administrative
office in West Virginia. Total rent expense paid to lease non-owned Company
facilities during the year ended June 30, 1996 was $13,000.
The Company owns two facilities in Northeastern Pennsylvania which previously
served as the operations building for the waste hauling company and operational
headquarters of its laboratory services operation prior to their discontinuance.
The Company currently leases these two facilities to unrelated parties under
lease agreements. Both facilities, which are currently being marketed for sale,
are held subject to a mortgage, with a balance of $670,629 at June 30, 1996. The
Company recently sold the land and building it now leases in Drums, Pennsylvania
to a corporation owned by William Skuba, the former President of the Company, in
exchange for Mr. Skuba's assumption of a mortgage encumbering the property in
the amount of $246,520, which exceeded the current appraised fair market value
of the property. The Company also recently sold an office and garage facility
located in Jasper County, South Carolina to William Skuba for $122,000, which
the Company believes equaled or exceeded the current fair market value of the
property sold.
A description of the Company's landfill properties is contained above under ITEM
1. "Business -Continuing Operations - Landfills".
ITEM 3. LEGAL PROCEEDINGS
In February, 1995, Battle Ridge Companies ("Battle Ridge") filed a complaint
against the Company and certain other defendants in the Circuit Court of
Harrison County, West Virginia (No. 95-C-106) alleging that Battle Ridge is
entitled to additional payment for excavation and development work performed at
the Company's West Virginia landfill. The complaint sought contract damages of
at least $460,000, a $100,000 project bonus, $1 million in punitive damages, as
well as interest, consequential damages and attorney's fees. The Company filed a
counterclaim against Battle Ridge claiming that Battle Ridge breached its
contract with the Company and is required to pay liquidated and other damages to
the Company. Although the Company believed that it had substantial defenses to
the allegations in the complaint, it decided to settle the
22
<PAGE>
litigation pursuant to a settlement agreement entered into on June 24, 1996,
pursuant to which the Company paid Battle Ridge $287,500 in exchange for which
all claims were released.
The Company is not currently involved in any other material litigation,
including material litigation arising from federal, state or local provisions
that have been enacted for the purpose of protecting the environment.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security-holders, through the solicitation
of proxies or otherwise, during the fourth quarter of the fiscal year ended June
30, 1996.
23
<PAGE>
PART II
ITEM 5. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market and quoted
on the Nasdaq National Market under the trading symbol "EESI".
The following table sets forth, for the fiscal quarters indicated, the high and
low sale prices per share for the Company's Common Stock, as reported on the
Nasdaq National Market System for the fiscal years ended June 30, 1996 and 1995.
The sale prices reflect inter-dealer quotations, do not include retail markups,
markdowns or commissions and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year Ended June 30, 1996
First Quarter............. 2 1/4 1 1/2
Second Quarter............ 2 1/4 1 1/2
Third Quarter............. 1 3/4 1
Fourth Quarter............ 7 1/8 1 1/4
Fiscal Year Ended June 30, 1995
First Quarter............. 1 7/16 1
Second Quarter............ 1 5/16 3/4
Third Quarter............. 1 1/2 7/8
Fourth Quarter............ 1 3/4 7/8
</TABLE>
As of September 25, 1996, the Company had 307 holders of record and
approximately 1,300 beneficial owners of its Common Stock.
The Company has never paid dividends to its stockholders. The Board of Directors
of the Company does not anticipate the payment of any dividends in the
foreseeable future. Declaration of dividends in the future, if any, would be
subject to the discretion of the Board of Directors, which may consider factors
such as the Company's results of operations, financial condition, capital needs
and acquisition strategy, among other considerations. Payment of dividends is
also restricted by the Company's loan agreements with its primary lenders.
24
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following Selected Consolidated Financial Information of the Company
was derived from the Company's Consolidated Financial Statements. This
Selected Consolidated Financial Information should be read in conjunction
with the Consolidated Financial Statements and the related notes of the
Company and Management's Discussion and Analysis of Financial Condition
and Results of Operations included under ITEM 7. of this Form 10-K.
<TABLE>
<CAPTION>
Fiscal Years Ended June 30
--------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data: (in thousands, except per share data)
Revenues........................... $ 7,632 $ 8,651 $ 8,481 $ 8,684 $ 7,911
Cost of revenues................... 6,857 7,430 6,138 5,451 4,201
-------- -------- -------- -------- --------
Gross profit....................... 775 1,221 2,343 3,233 3,710
Selling, General and
administrative expenses....... 3,853 3,150 3,442 4,157 3,976
Non-recurring charges.............. - - - 1,157 -
-------- -------- -------- -------- --------
Operating (loss) income............ (3,078) (1,929) (1,099) (2,081) (266)
Interest expense................... (153) (226) (75) (229) (298)
Other (expense) income............. (269) 365 155 123 117
-------- -------- -------- -------- --------
Loss from continuing
operations before income taxes
and cumulative effect of change
in accounting for income taxes..... (3,500) (1,790) (1,019) (2,187) (447)
-------- -------- -------- -------- --------
Income taxes (benefit)............. ( - ) (242) (296) (715) (9)
------- ------- ------- ------- -------
Net loss from continuing
operations before cumulative
effect of accounting change........ $(3,500) $(1,548) $ (723) $(1,472) $ (438)
======== ======== ======== ======== ========
Net loss from continuing
operations before cumulative
effect of accounting change per
share.............................. $ (.63) $ (.35) $ (.17) $ (.34) $(.10)
Weighted average number of shares
outstanding...................... 5,572 4,398 4,390 4,392 4,513
Balance Sheet Data:
Cash and cash equivalents.......... $ 617 $ 567 $ 786 $ 735 $ 2,433
Working capital.................... (1,558) (1,480) (334) 2,199 5,106
Total Assets....................... 15,565 16,009 17,468 16,792 19,115
Short-term debt (including
current maturities of
Long-term debt).................. 326 1,116 947 957 723
Long-term debt, net of
current portion.................. 2,257 1,783 1,994 2,248 2,915
Stockholders' equity............... 6,246 8,385 9,606 9,804 12,837
</TABLE>
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes included under ITEM 14 of this Form 10-K
and the Selected Consolidated Financial Information included under ITEM 6.
Introduction
The Company is a waste services company specializing in the collection, disposal
and transportation of non-hazardous residential, commercial, industrial and
special waste primarily in the eastern United States. New management has
increased the Company's focus on growth and expansion through strategic
acquisitions within the eastern United States. Management is focused on
furthering the Company's transition to a solid waste management company and
believes that the Company's resources will best be utilized in that capacity.
The Company's goal is to expand its current disposal facilities and its long-
haul transportation operations and landfill and hauling operations through
acquisitions.
The Company's landfill revenues are comprised primarily of disposal fees charged
directly to third parties or through the Company's hauling operations. The
Company's revenues from its hauling operations consist of transportation and
disposal fees from residential, commercial and industrial customers.
Cost of revenues consist primarily of direct labor and the related taxes and
benefits, fuel, maintenance and repairs of equipment and facilities,
subcontracted transportation and equipment rental charges, tipping fees paid to
third party landfills, landfill fees and taxes, amortization of capitalized
direct landfill development costs and accruals for future landfill closure and
post-closure costs. Certain direct landfill development expenses are capitalized
and depreciated over the estimated useful life of the site utilizing the unit of
production method as air space is consumed, and include acquisition,
engineering, legal, upgrading, construction, and permitting costs paid to
outside parties. All indirect development expenses, such as administrative
salaries and general corporate overhead are expensed in the period when
incurred. At June 30, 1996, capitalized costs directly related to expansion of
existing and future landfills and cell development were $2,701,000. All of these
capitalized costs are included as a balance sheet line item and are discussed in
Note 1 ("Accounting Policies - Property and Equipment") of Notes to Consolidated
Financial Statements. The Company periodically reviews the future realization of
these capitalized project costs.
Selling, general and administrative costs consist primarily of management
salaries, clerical and administrative costs, professional services, facility
rentals and related insurance costs, financial assurance bonding premiums, and
costs related to marketing and sales.
26
<PAGE>
The following table presents the percentage each item in the Consolidated
Statements of Income bears to total revenues relating to continuing operations.
<TABLE>
<CAPTION>
Fiscal Years Ended June 30
---------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Revenues......................... 100.0 100.0 100.0
Cost of revenues................. 89.8 85.9 72.4
------ ------ ------
Gross profit..................... 10.2 14.1 27.6
Selling, general and
administrative expenses........ 50.5 36.4 40.6
------ ------ ------
Operating loss................... (40.3) (22.3) (13.0)
Other (expense) income........... ( 5.5) 1.6 1.0
------ ------ ------
Loss before income taxes
from continuing operations..... (45.8) (20.7) (12.0)
Income taxes (benefit)........... ( - ) (2.8) (3.5)
------ ------ ------
Net loss from
continuing operations.......... (45.8) (17.9) (8.5)
Depreciation and amortization included
in above costs................. 20.2 26.5 19.0
</TABLE>
Revenues
Revenues decreased 12% from $8,651,000 in fiscal 1995 to $7,633,000 in fiscal
1996. The most significant factor affecting the decrease in revenues was the
closure at June 30, 1995 of the Company's unprofitable collection operation in
Beaufort County, South Carolina which resulted in a decrease in revenue of
$615,000 as compared to the prior year. Additionally, revenue increases of
$149,000 or 8% at the Company's West Virginia landfill were offset by declines
in revenues of $67,000 or 4%, $250,000 or 37%, and $194,000 or 5%, respectively,
at the Company's South Carolina landfill, Kentucky landfill, and the Company's
long-haul transportation operations. No revenues have been generated by the
Illinois landfill.
The decrease in the South Carolina landfill's revenues reflects an increase of
4% in disposal revenues, offset by decreased subcontracted hauling services with
improved sales integration with the Company's long-haul transportation
operations and continued growth in the landfill based roll-off collection
operations. This disposal revenue volume growth included a 72%
27
<PAGE>
increase in construction and demolition debris volumes partially offset by a 4%
and 100% decrease in acceptance of asbestos and paper products, respectively, in
fiscal 1996. The disposal revenue increase at this facility, especially within
the construction and demolition debris waste stream, reflects an increase in
marketing and sales efforts with contractors and directly with waste generators.
The Company's West Virginia landfill's revenues included a $55,000 or 4%
increase in municipal solid waste (MSW) revenues, an 11% decline in asbestos
revenues, and a near 100% increase in construction and demolition debris,
contaminated soils, sludges and other industrial waste streams. The 4% increase
in MSW relates directly to a 4% increase in volume reflective of the increase in
availability of MSW as certain privately and municipally owned landfills
continue to close as a result of an inability for these facilities to comply
with the federal Subtitle D regulations and state regulations requiring more
sophisticated liner systems and an increase in MSW disposal rates and the
Company's efforts in transfer station operations. The West Virginia Public
Service Commission ("PSC") approved a new tariff relating to MSW fees pursuant
to a rate case filed by the Company which on July 1, 1994 allowed for an
increase in the MSW rate the Company may charge from $22.50 per ton to $28.25
per ton which was consistent for fiscal 1996 and 1995. The increase in
contaminated soils and sludges and other industrial waste streams is directly
related to an aggressive marketing and sales campaign to attract waste streams
which the landfill was not allowed to accept prior to installing the more
sophisticated liner system which commenced accepting waste on July 1, 1994.
Management expects continued landfill closures in its market territory during
fiscal 1997.
Revenue growth at the West Virginia landfill and disposal revenue growth at the
South Carolina landfill was offset by a 37% or $250,000 decline in revenues at
the Company's Kentucky landfill. As a result, monthly revenues at the Company's
Kentucky facility have been reduced in several incremental steps since January
1, 1993, to the fiscal 1996 level of approximately $40,000 per month. As of June
30, 1995, the Company ceased placing waste in the disposal area and commenced
operations of a newly permitted transfer station. The transfer station attempted
to assure that the municipal solid waste disposal needs of the local communities
served under the Company's ten year waste disposal franchise would continue to
be satisfied on a monthly basis until the expansion permit could be secured and
the first disposal cell constructed. The Company operated the transfer station
at a revenue level of approximately $40,000 per month thus assuming continued
operating losses at this facility through June 30, 1996. A draft permit from the
Kentucky Natural Resources and Environmental Protection Cabinet was received on
May 6, 1996 to construct the Kentucky landfill's expansion area. This draft
permit is currently under adjudicatory appeal. On July 1, 1996, the Company
ceased operating the transfer station to minimize operating losses and in
cooperation with local authorities directed the waste streams under the Pulaski
Grading, Kentucky franchise agreement to a non-affiliated waste company placing
the Company waste disposal franchise in abeyance until the Company receives its
final permit and constructs its initial disposal cell.
28
<PAGE>
Revenues from the Company's long-haul transportation operations decreased by
$194,000 or 5% to $4,088,000 in 1996. The decrease in revenues in the Company's
long-haul transportation operations were impacted by the severe weather
conditions in the third quarter ended March 31, 1996, but partially offset by
increased involvement in hauling soils and lead contaminated construction and
demolition debris which typically carries a more favorable profit margin than
other waste hauling services. The Company generated revenues of $514,000 in
hauling and disposal of lead contaminated construction and demolition debris as
compared to $97,000 in the prior year. Management is currently focusing on
temporarily utilizing non-affiliated landfills for disposal of waste as
management focuses on acquisitions of additional disposal facilities which
geographically compliment the Company's long-haul transportation markets and on
hauling certain freight commodities to minimize empty miles, increase market
share, gross revenues and overall profitability.
Total revenues increased $170,000 or 2% from 1994 to 1995. This overall increase
was the result of increased revenues of $309,000 or 21% at the Company's South
Carolina landfill offset by declines in revenues of $27,000 or 1%, $446,000 or
39%, and $290,000 or 6%, respectively, at the Company's West Virginia landfill,
Kentucky landfill, and the Company's hauling operations. The noted increases in
South Carolina were directly related to improved sales and marketing efforts.
The decrease in revenues at the Company's Kentucky landfill was directly related
to the self-imposed volume limitations discussed above.
Cost of Revenues and Gross Profit
Cost of revenues in fiscal 1996 decreased from fiscal 1995 by approximately
$573,000 or 8% to $6,857,000. Cost of revenues as a percent of revenues
increased from 86% in 1995 to 90% in 1996. This increase is largely the result
of several unusual charges including an additional operating charge of $900,000
to accrue for certain closure and post-closure monitoring costs relating to the
Kentucky landfill (see further discussions below.) Excluding the above-noted
unusual items in fiscal 1996 and the below-noted unusual items in fiscal 1995,
cost of revenues as a percent of revenues decreased from 81% in 1995 to 78% in
1996. This percentage decrease was due primarily to the closure at June 30, 1995
of the Company's unprofitable hauling operations in Beaufort County, South
Carolina; a decrease in labor costs at the West Virginia landfill with the
reduction in asbestos handling and cost efficiencies of increased integration of
the South Carolina landfill with the Company's long-haul transportation company.
These positive developments were partially offset by relatively fixed operating
costs with current average waste acceptances of approximately 63% of allowable
waste acceptance volume in fiscal 1996 and increased leachate management costs
due to the severe weather in the third quarter at the Company's West Virginia
landfill. Increased waste disposal costs to non-affiliated landfills were also
incurred to increase logistic efficiencies at the Company's long-haul
transportation company. During fiscal 1995, the Board of Directors of the
Company made a decision to exit the Beaufort County, South Carolina local waste
collection business as a result of limited integration with the Company's
landfill and continued operating losses resulting from significant competitive
pressures. This business was sold in fiscal 1995 through several asset sale
transactions with certain assets
29
<PAGE>
transferred to the Company's South Carolina landfill. These negative
developments were only partially offset by continued favorable growth in profit
margins at the Company's South Carolina landfill due to the increased landfill
revenues and volume at that facility.
Provisions for total closure and post-closure monitoring costs at all landfills,
excluding the $900,000 adjustment noted above, were $106,000 and $282,000 for
1996 and 1995, respectively. The reduction in costs from 1995 to 1996 was
principally the result of an overall decrease in waste volume in 1996 with
closure of the Company's Kentucky landfill partially offset by an increase in
volume at the Company's South Carolina and West Virginia landfills in fiscal
1996.
Cost of revenues increased $1,292,000 or 21% from 1994 to 1995 and increased as
a percent of revenues from 72% to 86% from 1994 to 1995. The increases in 1993
and 1994 in cost of revenues were the result of lower margins due to continuing
increased competition; the higher recognition of closure and post-closure costs
for the Company's landfills; the result of the significant self imposed decrease
in volume at the Company's Kentucky landfill with fairly static daily operating
costs; and the less favorable impact of the growth within the Company's hauling
operations which provides less lucrative operating margins than landfill
operations.
Selling, General and Administrative Expenses ("SG&A")
Selling, general and administrative expenses increased $703,000 or 22% from
$3,150,000 in 1995 to $3,853,000 in 1996. SG&A expenses as a percent of revenues
increased from 36% in 1995 to 51% in 1996. SG&A expenses include substantially
all corporate overhead costs including the costs relating to the accounting,
finance, legal and engineering departments as well as the SG&A costs
specifically attributed to the landfill and waste hauling operations. This
increase in SG&A costs contain approximately $879,000 of unusual costs incurred
in connection with the Company's change in control, a write-off of $70,000 of
deferred costs relating to certain acquisitions no longer being pursued by the
Company, and a $133,000 increase in certain contingency reserves. (See Unusual
Operating Costs below) Excluding these unusual costs in fiscal 1996 and certain
unusual costs in fiscal 1995, SG&A expenses remain relatively stable as a
percent of revenues with a slight decrease from 35% in 1995 and 33% in 1996 as a
result of the Company's on-going cost-containment programs. The Company also
experienced an increase in bonding and banking fees relating to providing
financial assurance for closure and post closure costs for the Company's
landfills.
SG&A expenses decreased $292,000 or 8% from $3,442,000 in 1994 to $3,150,000 in
1995. This decrease resulted primarily from an approximate 23% reduction in
corporate administrative salaries as part of the Company's continuing cost
containment programs in all divisions.
30
<PAGE>
Unusual Operating Costs
Unusual costs of approximately $2,692,000 were included in fiscal 1996 results
of operations. A charge of $900,000 to cost of revenues to accrue for certain
closure and post-closure monitoring costs was recorded for the Kentucky landfill
as a valuation allowance for possible impairment of this asset as the Company is
working on finalizing the draft permit which is currently being adjudicated.
Additionally, charges totalling approximately $879,000 were charged to SG&A
expenses relating to the change in control of the Company. Of the $879,000
charge, $672,000 relates to recorded severance costs, $97,000 reflects
management's estimate of various transition costs in moving the Company's
corporate offices, and $110,000 relates to certain legal and other professional
costs incurred in completing the transaction. Additionally, management refined
its estimates of necessary reserves against past due receivables, outstanding
contingencies, and deferred acquisition costs, and increased such reserves by
$221,000, $133,000, and $70,000, respectively. Finally, management made a
decision to replace certain of its equipment utilized in the landfill and
hauling operations as well as selling certain real estate previously used in
operations and currently being leased to unrelated parties. A charge of $489,000
was recorded to other expense to write down these assets held for sale to
estimated net realizable value.
Unusual operating costs of $532,000 were included in fiscal 1995 results of
operations. A total charge to cost of revenues of $339,000 relates to the
Company's cessation of waste acceptance at the Kentucky landfill on June 30,
1995, and the Company's decision to simultaneously permit and operate a waste
transfer facility to continue to service the waste needs of the local host
county under the waste disposal franchise agreement previously awarded to the
Company expiring in the year 2002. Of the $339,000 of unusual operating costs,
$150,000 reflects the Company's estimate of operating losses at the Kentucky
facility through fiscal 1996, while the first disposal cell is constructed
following the anticipated approval of the expansion permit, and $189,000
reflects a noncash charge to write-off remaining capitalized costs relating to a
disposal cell closed on June 30, 1995. Additionally, a charge of $78,000 was
recorded in the fourth quarter of fiscal 1995 to reduce the remaining net assets
of the Company's waste collection business located in Beaufort County, South
Carolina, to their estimated net realizable value at June 30, 1995. The $78,000
charge includes a write-down of $58,000 for certain operating assets,
receivables, and supplies inventory and the establishment of a reserve at June
30, 1995, for anticipated operating loss on final divestiture of assets of
$20,000. During fiscal 1995, the Board of Directors of the Company made a
strategic decision to exit the local hauling business in Beaufort County as a
result of limited integration with the Company's landfill operation and
continued operating losses resulting from significant competitive pressures. The
majority of the operating assets of this business were sold in fiscal 1995
through several asset sale transactions. Finally, the Company refined its
estimate of necessary reserves against past due receivables resulting in a
charge to operations of $118,000.
31
<PAGE>
Interest Expense
Interest expense decreased 32% or $73,000 to $153,000 from 1995 to 1996 and
increased $151,000 to $226,000 from 1994 to 1995. The decrease during 1996
resulted from a slight reduction in average borrowing rates and an increase in
capitalized interest costs relating to construction of the disposal cell at the
Company's West Virginia landfill and finalization of permitting work at the
Company's Kentucky landfill. The increase during 1995 resulted from a slight
increase in interest rates and a reduction in the amount of interest expense
capitalized in fiscal 1995. Interest expense capitalized was $84,000, $48,000
and $139,000 in fiscal 1996, 1995 and 1994, respectively. Additionally, total
debt outstanding decreased by $316,000 from June 30, 1995 to June 30, 1996.
Other (Expense) Income
Other expenses in fiscal 1996 of $269,000 as compared to other income of
$366,000 in 1995 is largely the result of the $489,000 charge to write down
certain assets held for sale as noted above.
Other income increased $210,000 in fiscal 1995 compared to fiscal 1994 largely
as a result of recognition of a gain on the sale of certain assets of the
Company's local waste collection business in South Carolina and the recording of
additional consideration earned as part of the sale of the Company's asbestos
abatement and laboratory testing operations.
Income Taxes
The Company's effective income tax rate, including both federal and state taxes,
was 13% for fiscal 1995 with no tax benefit recorded in the current year. The
effective tax rate for the prior year is less than the federal and state
statutory rates primarily due to a valuation allowance recorded reducing the
current and prior year tax benefit of net operating loss carryforwards due to a
lack of certainty of realization of these loss carryforwards in future years as
a result of recent historic reported operating losses.
Liquidity and Capital Resources
At June 30, 1996, current liabilities of $4,529,000 exceeded current assets of $
2,971,000, which includes cash and cash equivalents of $617,000. The Company
recorded a $316,000 net reduction in short and long term debt, realized
$1,362,000 of net proceeds from the issuance of common stock, and increased
accounts payable and accrued expenses by $844,000 largely as a result of accrued
costs relating to the Company's change in control. A significant portion of
working capital expended during the period, approximately $2,092,000, was used
to fund the acquisition of property and equipment, including $1,869,000 related
to the permitting and development of landfill space and $223,000 for the
purchase of operating equipment.
32
<PAGE>
The Company's operations to date have required substantial amounts of working
capital and the Company expects to expend substantial funds to support the
expansion of its disposal and transportation operations. Significant working
capital will be required to construct initial disposal space at the Company's
Illinois landfill for which the Company recently received a development permit.
Likewise, capital will be required to construct initial disposal space at the
Company's Kentucky landfill should the Company receive a final permit at this
facility during fiscal 1997 as anticipated. The Company has currently addressed
this capital need through completion of a private placement of the Company's
stock on August 9, 1996 in which the Company issued 2,500,000 shares of its
common stock at $4 per share pursuant to stock subscription agreements with
various accredited investors. Net proceeds, after deducting agent fees and
related costs, were $9,350,000. The Company also issued 125,000 shares of its
common stock at $4.00 per share to Bank of America at substantially the same
terms as the August 9, 1996 private placement. The shares sold in the private
placement and to Bank of America are not registered, and registration rights do
not require registration of the shares for two years. Finally, the company
completed the merger with Super Kwik, Inc. and Waste Maintenance Services, Inc.
of September 27, 1996 which is anticipated to have a positive impact on cash
flow and liquidity in fiscal 1997.
In September 1995, the Company entered into a four-year secured term loan with
First Union National Bank ("First Union") which provided for borrowings of
$1,350,000. A portion of the funds ($900,000) was utilized to refinance the
remaining balance of the $3,000,000 refinancing term loan with CoreStates Bank,
N.A. ("CoreStates"). The remaining funds under the loan ($450,000) were
disbursed to the Company in October 1995 and utilized for working capital needs.
The Company maintained a $1,500,000 secured working capital and letter of credit
revolving credit facility with CoreStates.
On September 25, 1996 the Company consumated a new revolving credit facility
with two major banks, the First National Bank of Boston and Bank of America to
provide for borrowings up to $30,000,000 for repayment of certain debt, funding
of acquisitions, and to provide for up to $10,000,000 in standby letters of
credit. On the date of closing, a portion of this facility was utilized to
refinance the remaining balance of the First Union term loan and the CoreStates
revolving credit facility. At the Company's option, the interest rate on any
loan under the revolving credit facility will be based on an adjusted prime rate
or Eurodollar rate, as defined in the agreement. The facility matures three
years from the anniversary date of its closing. The revolving credit facility,
among other conditions, requires the payment of a 3/8 of 1% commitment fee on
the unused balance, payable in arrears, and provides for certain restrictions on
the ability of the Company, to incur borrowings, sell assets, or pay cash
dividends. The facility also requires the maintenance of certain financial
ratios, including interest coverage ratios, leverage ratios and profitable
operations. The facility is collateralized by all the stock of the Company's
subsidiaries, whether now owned or hereafter acquired.
The Company will have material financial obligations related to closure and
post-closure costs at its landfills. While the exact amount of these future
obligations cannot be determined, the Company estimates that the costs for final
closure of the currently
33
<PAGE>
permitted areas at the West Virginia and Kentucky landfills, if all acreage is
used, will be approximately $4,643,000, of which $ 1,807,000 has been accrued as
of June 30, 1996. The Company estimates that the costs of post-closure
monitoring of groundwater, methane gas and other required procedures for the
currently permitted areas will approximate $27,000 to $120,000 per year for 30
years after closure at each of its Kentucky and West Virginia sites. As of June
30, 1996, the Company has accrued $1,006,000 for post-closure obligations
representing 20% of the present value of such future estimated cash outlay. The
Company recognizes these costs either on the unit-of production method based on
consumed airspace as the landfills are filled or as a function of time,
depending on the circumstances under which the permitted landfill is permitted
to operate. The Company recently initiated the accrual of closure and post-
closure costs for its South Carolina landfill on a similar basis as for its
other landfills as a result of recently proposed State regulations. Closure and
post-closure costs are estimated at $465,000 and $10,000 per year for 30 years,
respectively. As of June 30, 1996, the Company has accrued $79,000 and $66,000
for closure and post-closure, respectively. The Company maintains a bonding
facility pursuant to certain statutory requirements regarding financial
assurance for the closure and post-closure monitoring cost requirements for its
Kentucky and West Virginia disposal facilities. Bonds outstanding at June 30,
1996, total $1,321,608 and $314,572, as closure and post-closure financial
assurance, respectively, for the Company's Kentucky landfill and $214,000 as
closure financial assurance for the Company's West Virginia facility. The bonds
are collateralized by irrevocable letters of credit of $626,000 and trust fund
deposits of $119,596. Additionally, the Company has on deposit $196,429 as
financial assurance for landfill closure and post-closure for the closed
disposal area at its West Virginia disposal facility. The trust fund and the
certificates of deposit are restricted from current operations and are included
within other non-current assets. The Company anticipates that the West Virginia
bonding requirements will substantially increase as the State's solid waste
program is approved by the federal government. Financial assurance requirements
could increase to approximately $3,000,000 for closure and $3,600,000 for post-
closure monitoring and care. Additional collateral requirements will be imposed
upon the Company which will affect profitability of the Company. The Company
anticipates providing financial assurance incrementally over the life of the
facility as disposal cells are constructed and certified for acceptance of
waste. Additionally, the Company anticipates that prior to issuance of its
Kentucky expansion permit, additional closure and post-closure financial
assurance mechanisms will be required. The amounts are approximated at
$3,300,000 for closure and $300,000 for post-closure. Proposed changes to the
current Kentucky post-closure financial assurance regulations are pending and
the post-closure requirements could increase to $3,000,000. Under the current
financial assurance program, incremental posting of financial assurance over the
life of the facility as disposal cells are constructed and certified for
acceptance of waste is allowed. The Company's inability to continue to obtain
bonds or letters of credit in sufficient amounts or at acceptable rates would
have a material adverse impact on the Company's business and may preclude it
from obtaining or retaining landfill operating permits.
34
<PAGE>
Inflation, Seasonality and Prevailing Economic Conditions
Inflation has not had a significant impact on the Company's operations to date.
Since the Company has few long-term fixed price contracts, the Company believes
it should be able to continue to pass through to its customers most cost
increases resulting from inflation.
The level of renovation, construction and demolition activity affects the
Company's operations and is typically higher in the spring and summer months.
The Company's municipal solid waste operations are less influenced by
seasonality and these operations have grown as a percentage of the Company's
business during 1995 and 1996. As the Company expands and its waste streams
continue to diversify, the Company expects the seasonality of its revenues to
diminish.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors and consolidated financial statements are
included in Part IV, ITEM 14. of this Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and executive officers appearing in the
sections entitled "Election of Directors" and "Executive Officers" in the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission in connection with the Company's 1996 annual meeting of
stockholders ("Proxy Statement") is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the section of the Proxy Statement entitled
"Executive Compensation" is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the section of the Proxy Statement entitled
"Security Ownership of Certain Beneficial Owners and Management" is incorporated
herein by this reference.
35
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section of the Proxy Statement entitled
"Certain Transactions" is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a) Financial Statement Schedule:
The Financial Statement Schedule listed in the accompanying Index to Financial
Statement Schedule on page F-1 is filed as part of this Annual Report on
Form 10-K. All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and; therefore, have
been omitted.
(b) Current Reports on Form 8-K:
1. The Company filed a report on Form 8-K, dated June 21, 1996, under
Item 1, to report a change in control of the Registrant.
2. The Company filed a report on Form 8-K, dated July 2, 1996, under Item
2, to report the acquisition of substantially all of the assets of Allied
Environmental Services, Inc., and Allied Environmental Services West, Inc.
(c) Exhibits
The following Exhibits are filed as part of this report (exhibits marked
with an asterisk have been previously filed with the Commission and are
incorporated herein by this reference):
* 3.1 Certificate of Incorporation of the Company (Exhibit 3.1 to the
Company's Registration Statement on Form S-1, Registration No. 33-14918
filed on June 9, 1987, as subsequently amended on August 4, 1987 and
August 11, 1987 (collectively, the "1987 Registration Statement")).
* 3.2 Amendment to Certificate of Incorporation of the Company (Exhibit 3.2 to
the 1987 Registration Statement).
* 3.3 By-Laws (Exhibit 3.3 to the 1987 Registration Statement).
* 10.2 1987 Stock Option Plan (Exhibit 10.9 to the 1987 Registration
Statement).
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<PAGE>
* 10.3 1988 Employee Stock Bonus Plan (Described on pp. 5-11 of the Prospectus
included in the Company's Registration Statement on Form S-8,
Registration No. 33-25155 fled on October 24, 1988).
* 10.4 1988 Employee Stock Purchase Plan (described on pp. 4-8 of the
Prospectus included in Post Effective Amendment No. 2 to the Company's
Registration Statement on Form S-8, Registration No. 33-21251 filed on
May 4, 1990).
* 10.5 1991 Stock Option Plan (Exhibit 10.10 to 1991 Form 10-K).
* 10.6 License Agreement dated as of July 1, 1990, between Eastern
Environmental Services of the Northeast, Inc. and GPAC, Inc. (Exhibit
10.7(a) to the 1987 Registration Statement).
* 10.7 Letter Agreement dated June 26, 1987, between the Company and Thomas M.
Yanette (Exhibit 10.10 to the 1987 Registration Statement).
* 10.10 Agreement between Pulaski County Solid Waste Management District and
Pulaski Landfill, Inc., dated February 1992 (Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1992 (the "1992 Form 10-K")).
* 10.18 Asset Purchase Agreement between Advanced Analytical Laboratories,
Inc., GCI Environmental Advisory, Inc. and the Company dated October
22, 1993 (Exhibit 1 to the Company's Current Report on Form 8-K dated
October 22, 1993 (the "1993 Form 8-K")).
* 10.19 Agreement Not to Compete among Advanced Analytical Laboratories, Inc.,
GCI Environmental Advisory, Inc. and the Company dated October 22, 1993
(Exhibit 2 to the 1993 Form 8-K).
* 10.20 Commercial Lease between Advanced Analytical Laboratories, Inc. and GCI
Environmental Advisory, Inc. dated October 22, 1993 (Exhibit 3 to the
1993 Form 8-K).
* 10.21 Purchase Agreement among PDG, Inc., Eastern Environmental Services of
the Northeast, Inc. and Eastern Environmental Services of the
Southeast, Inc. dated December 29, 1993 (Exhibit 1 to the Company's
Current Report on Form 8-K dated January 31, 1994 (the "1994
Form 8-K")).
* 10.22 Agreement Not to Compete among PDG, Inc., Eastern Environmental
Services of the Northeast, Inc. and Eastern Environmental Services of
the Southeast, Inc. dated January 31, 1994 (Exhibit 2 to the 1994
Form 8-K).
37
<PAGE>
* 10.24 Mortgage and Note agreement dated November 18, 1994, between the
Company, its subsidiary, WRN Properties, Inc. and First Federal Savings
and Loan Association of Hazleton. (Exhibit 10.24 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1995 (the
"1995 Form 10-K")).
* 10.25 Sixth Amendment to Loan Documents dated September 26, 1995, between the
Company, its subsidiaries and CoreStates Bank, N.A. (Exhibit 10.25 to
the "1995 Form 10-K")
* 10.26 Indemnification Agreement dated April 18, 1995 between Eastern
Environmental Services, Inc. and William C. Skuba (Pursuant to
instruction 2 to Item 601 of Regulation S-K, the Indemnification
Agreements, which are substantially identical in all material respects
except as to the parties thereto, between the Company and the following
individuals are not being filed: Gregory M. Krzemien, Michael A.
Fioravante, Timothy W. Sweeney, Stephen C. Stamos, Jr., and Robert J.
Powell). (Exhibit 10.26 to the "1995 Form 10-K").
* 10.27 Term Loan Agreement dated September 26, 1995, between the Company, its
subsidiaries and First Fidelity Bank, N.A. (Exhibit 10.27 to
the "1995 Form 10-K").
* 10.28 Landfill Management Agreement by and between Lawrence County Disposal
Centre, Inc. ("LCDC"), Gary Simmons, individually and as sole
shareholder of LCDC, Big T Disposal, Inc. ("Big T"), Sandra F. Simmons,
individually and as sole shareholder of Big T, and S&S Grading of
Illinois, Inc. ("S&S") dated April 20, 1995. (Exhibit 10.28 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996 (the "March 1996 Form 10-Q")).
* 10.29 Amendment dated February 29, 1996 to Severance Agreement dated August
20, 1993, by and between Eastern Environmental Services, Inc. and
William C. Skuba (Pursuant to instruction 2 to Item 601 of
Regulation S-K, the Amendments to the Severance Agreements, which are
substantially identical in all material respects except as to the
parties thereto, between the Company and the following individuals are
not being filed: Gregory M. Krzemien and Michael A. Fioravante).
(Exhibit 10.29 to the "March 1996 Form 10-Q").
* 10.30 Severance Agreement dated as of June 20, 1996 between Eastern
Environmental Services, Inc. and William C. Skuba. (Exhibit 10.1 to the
Company's Current Report on Form 8-K dated June 21, 1996, (the "June
1996 Form 8-K")).
* 10.31 Consulting Agreement dated as of June 20, 1996 between Eastern
Environmental Services, Inc. and William C. Skuba. (Exhibit 10.2 to the
June 1996 Form 8-K).
* 10.32 Registration Rights Agreement dated as of June 20, 1996 between Eastern
Environmental Services, Inc. and William C. Skuba. (Exhibit 10.3 to the
June 1996 Form 8-K).
38
<PAGE>
* 10.33 Agreement for the sale and purchase assets dated June 27, 1996 between
Allied Waste Services, Inc. and Global Spill Management, Inc., Allied
Environmental Services, Inc., Allied Environmental Services West, Inc.,
Stuart H. Berry and Alan Hershkowitz. (Exhibit 10.1 to the Company's
Current Report on Form 8-K dated July 2, 1996).
10.34 Employment Agreement between the Company and Louis D. Paolino, Jr.,
dated June 20, 1996.
10.35 Employment Agreement between the Company and Terry Patrick dated
June 20, 1996.
10.36 Employment Agreement between the Company and Robert M. Kramer dated
June 20, 1996.
10.37 Employment Agreement between the Company and Gregory Krzemien dated
June 26, 1996.
10.38 1996 Stock Option Plan.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
- ---------------------
* Incorporated by reference
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
EASTERN ENVIRONMENTAL SERVICES, INC.
By: /s/ Louis D. Paolino, Jr.
----------------------------
Louis D. Paolino, Jr.
Chairman of the Board,
Chief Executive Officer,
and President
DATED the 27 day of September, 1996.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated:
Name Title Date
- ---- ----- ----
/s/ Louis D. Paolino, Jr. Chairman of the Board, 9/27/96
- ----------------------------- Chief Executive Officer,
Louis D. Paolino, Jr. and President
/s/ Terry W. Patrick Chief Operating Officer, 9/27/96
- ----------------------------- Executive Vice President
Terry W. Patrick
/s/ Robert M. Kramer Secretary, Vice-President, and 9/27/96
- ----------------------------- General Counsel
Robert M. Kramer
/s/ Gregory M. Krzemien Chief Financial Officer 9/27/96
- ----------------------------- and Treasurer
Gregory M. Krzemien
40
<PAGE>
/s/ Michael P. Nameth Chief Accounting Officer 9/27/96
- -----------------------------
Michael P. Nameth
/s/ George O. Moorehead Director 9/27/96
- -----------------------------
George O. Moorehead
/s/ Kenneth C. Leung Director 9/27/96
- -----------------------------
Kenneth C. Leung
41
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit
No.
10.34 Employment Agreement between the Company and Louis D. Paolino, Jr.,
dated June 20, 1996.
10.35 Employment Agreement between the Company and Terry Patrick dated
June 20, 1996.
10.36 Employment Agreement between the Company and Robert M. Kramer dated
June 20, 1996.
10.37 Employment Agreement between the Company and Gregory Krzemien dated
June 26, 1996.
10.38 1996 Stock Option Plan.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
42
<PAGE>
Eastern Environmental Services, Inc.
Consolidated Financial Statements
and Other Financial Information
Years ended June 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors..........................................F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets.............................................F-3
Consolidated Statements of Operations...................................F-5
Consolidated Statements of Stockholders' Equity.........................F-6
Consolidated Statements of Cash Flows...................................F-8
Notes to Consolidated Financial Statements.............................F-10
Other Financial Information
Report of Independent Auditors on Other Financial Information..........F-28
Valuation and Qualifying Accounts......................................F-29
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Eastern Environmental Services, Inc.
We have audited the accompanying consolidated balance sheets of Eastern
Environmental Services, Inc. and subsidiaries as of June 30, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Eastern
Environmental Services, Inc. and subsidiaries at June 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Reading, Pennsylvania
September 27, 1996
F-2
<PAGE>
Eastern Environmental Services, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
1996 1995
--------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 617,398 $ 566,771
Accounts receivable, less allowance for
doubtful accounts of $413,000
and $455,000 1,272,138 1,381,469
Deferred income taxes 372,445 168,186
Tax refund receivable 74,467 152,871
Prepaid expenses and other current assets 634,548 769,987
--------------------------
Total current assets 2,970,996 3,039,284
Property and equipment:
Land 54,017 148,852
Landfill sites 12,673,250 10,804,589
Buildings and leasehold improvements 901,114 1,446,640
Vehicles 1,411,256 1,658,513
Machinery and equipment 1,610,711 3,512,070
Furniture and fixtures 631,639 639,075
--------------------------
Total property and equipment 17,281,987 18,209,739
Accumulated depreciation and amortization 6,363,421 6,829,458
--------------------------
10,918,566 11,380,281
Assets held for sale 859,262 517,659
Intangible assets, net of $3,200,000
and $3,057,000 accumulated amortization 311,014 453,450
Other assets (including $433,000 and
$545,000 of restricted cash on deposit
for landfill closure and insurance
bonding) 505,173 618,274
--------------------------
Total assets $15,565,011 $16,008,948
==========================
</TABLE>
F-3
<PAGE>
Eastern Environmental Services, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
1996 1995
---------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Short-term borrowings $ - $ 350,000
Accounts payable 1,945,343 1,686,861
Accrued expenses 1,329,579 743,584
Note payable to shareholder/officer - 42,457
Income taxes payable 57,739 59,506
Current portion of accrued landfill
closure and other environmental
costs 870,000 870,000
Current portion of long-term debt 325,852 766,240
---------------------------
Total current liabilities 4,528,513 4,518,648
Deferred income taxes 444,797 240,538
Long-term debt 2,256,816 1,782,715
Accrued landfill closure and other
environmental costs 2,088,457 1,082,246
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares -
6,077,658 and 3,168,104 60,777 31,681
Class A common stock (convertible to
common stock), $.01 par value:
Authorized shares - 10,000,000
Issued and outstanding shares -
0 and 1,591,201 - 15,912
Additional paid-in capital 9,020,714 7,672,228
Retained earnings (deficit) (2,758,804) 741,239
---------------------------
6,322,687 8,461,060
Less treasury stock at
cost - 39,100 common shares 76,259 76,259
---------------------------
Total stockholders' equity 6,246,428 8,384,801
---------------------------
Total liabilities and stockholders'
equity $15,565,011 $16,008,948
===========================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Eastern Environmental Services, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended June 30
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Revenues $ 7,632,503 $ 8,650,945 $ 8,480,955
Cost of revenues 6,857,418 7,430,228 6,138,295
------------------------------------------
Gross profit 775,085 1,220,717 2,342,660
Selling, general, and
administrative expenses 3,853,145 3,149,863 3,442,193
------------------------------------------
Operating loss (3,078,060) (1,929,146) (1,099,533)
Interest expense (153,428) (226,463) (75,132)
Other (expense) income (268,555) 365,888 155,933
------------------------------------------
Loss from continuing operations
before income taxes (3,500,043) (1,789,721) (1,018,732)
Income tax benefit - (242,171) (295,759)
------------------------------------------
Loss from continuing operations (3,500,043) (1,547,550) (722,973)
Discontinued operations:
Gain on disposal of discontinued
operations, net of applicable income
taxes of $260,784 - - 525,309
------------------------------------------
Net loss $(3,500,043) $(1,547,550) $ (197,664)
==========================================
Loss per share
Continuing operations $(.63) $(.35) $ (.17)
Discontinued operations - - .12
------ ------ ------
Net loss $(.63) $(.35) $ (.05)
==========================================
Weighted average number of shares
outstanding 5,571,953 4,398,232 4,390,205
==========================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Eastern Environmental Services, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Number of Shares Par Value
-------------------------------------------
Class A Class A
Common Common Common Common
Stock Stock Stock Stock
-------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1993 2,838,104 1,591,201 $28,381 $ 15,912
Net loss - - - -
-------------------------------------------
Balance at June 30, 1994 2,838,104 1,591,201 28,381 15,912
Exercise of common stock options 30,000 - 300 -
Issuance of common stock 300,000 - 3,000 -
Net loss - - - -
-------------------------------------------
Balance at June 30, 1995 3,168,104 1,591,201 31,681 15,912
Exercise of common stock options 140,000 - 1,400 -
Exercise of common stock warrants 303,353 - 3,034 -
Issuance of common stock 875,000 - 8,750 -
Conversion of common stock 1,591,201 (1,591,201) 15,912 (15,912)
Net loss - - - -
-------------------------------------------
Balance at June 30, 1996 6,077,658 - $60,777 $ -
===========================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
<TABLE>
<CAPTION>
Additional Retained
Paid-In Earnings Treasury
Capital (Deficit) Stock Total
- --------------------------------------------------------
<S> <C> <C> <C>
$7,349,278 $ 2,486,453 $(76,259) $ 9,803,765
- (197,664) - (197,664)
- --------------------------------------------------------
7,349,278 2,288,789 (76,259) 9,606,101
25,950 - - 26,250
297,000 - - 300,000
- (1,547,550) - (1,547,550)
- --------------------------------------------------------
7,672,228 741,239 (76,259) 8,384,801
141,100 - - 142,500
424,312 - - 427,346
783,074 - - 791,824
- - - -
- (3,500,043) - (3,500,043)
- --------------------------------------------------------
$9,020,714 $(2,758,804) $(76,259) $ 6,246,428
========================================================
</TABLE>
F-7
<PAGE>
Eastern Environmental Services, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Operating activities
Loss from continuing operations $(3,500,043) $(1,547,550) $ (722,973)
Adjustments to reconcile loss from continuing
operations to net cash provided by operating
activities of continuing operations:
Depreciation and amortization 1,541,099 2,289,066 1,612,706
Provision for losses on receivables 258,431 199,271 107,970
Landfill closure costs 1,006,211 281,619 312,360
Non-cash severance and transition costs 740,827 - -
Non-cash compensation expense 138,173 - -
Deferred income taxes - (214,000) 62,560
Loss on write-down of assets held for sale 402,616 - -
Loss (gain) on sale of property and equipment 41,678 (41,428) (3,487)
Changes in operating assets and liabilities:
Accounts receivable (149,100) 341,757 (224,070)
Tax refund receivable 78,404 (9,404) 471,826
Prepaid expenses 633,535 365,946 276,198
Other assets 1,616 (10,660) 69,937
Accounts payable 258,482 (468,497) 1,121,253
Billings in excess of costs and estimated earnings - - (58,373)
Accrued expenses (139,005) 116,113 (247,417)
Income taxes payable (1,767) (43,761) 103,267
----------------------------------------
Net cash provided by operating activities of
continuing operations 1,311,157 1,258,472 2,881,757
Net cash provided by discontinued operations - - 1,533,360
</TABLE>
See accompanying notes.
F-8
<PAGE>
Eastern Environmental Services, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended June 30
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Investing activities
Development of landfill sites $(1,868,661) $(1,361,955) $(3,836,701)
Proceeds from sale of property
and equipment 200,876 348,035 498,990
Purchase of property and equipment (223,460) (483,389) (462,663)
Payments received on notes receivable - 279,383 193,012
Landfill closure and insurance
bonding deposits 111,485 (18,145) 83,398
-----------------------------------------
Net cash used in investing activities (1,779,760) (1,236,071) (3,523,964)
Financing activities
Proceeds from revolving line of credit
and long-term debt 450,000 525,000 215,383
Payments on revolving line of credit
and long-term debt (1,249,983) (1,135,086) (1,055,592)
Net (payments) borrowings on note
payable to shareholder/officer (42,457) 42,457 -
Proceeds from issuance of common stock,
less expenses of $83,176 and $0 1,361,670 326,250 -
-----------------------------------------
Net cash provided by (used in)
financing activities 519,230 (241,379) (840,209)
-----------------------------------------
Net increase (decrease) in cash and
cash equivalents 50,627 (218,978) 50,944
Cash and cash equivalents at
beginning of year 566,771 785,749 734,805
-----------------------------------------
Cash and cash equivalents at end of
year $ 617,398 $ 566,771 $ 785,749
=========================================
</TABLE>
See accompanying notes.
F-9
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements
June 30, 1996
1. Accounting Policies
Basis of Presentation
Eastern Environmental Services, Inc. (the Company) is engaged in the business of
providing integrated solid waste management services, consisting of collection,
transportation, and disposal services through nonhazardous waste disposal
facilities and waste hauling operations. The Company's customers include
municipal, commercial, industrial, and residential customers, both local and
national companies in various geographic regions throughout principally the
Eastern United States.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
regarding the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Property and Equipment
Property and equipment is stated on the basis of cost. Expenditures for major
additions and improvements are capitalized, while minor repairs and maintenance
are charged to expense as incurred. The Company provides depreciation over the
estimated useful lives of assets using the straight-line method for
substantially all its property and equipment except for landfill sites.
Landfill site costs include expenditures for acquisition of land and related
airspace, in addition to, engineering, permitting, legal, and certain direct
site preparation costs which management believes are recoverable. Landfill site
costs for facilities currently in use are generally depreciated based upon
consumed airspace using the unit-of-production method of airspace filled during
the fiscal year in relation to estimates of total available airspace.
F-10
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Property and Equipment (continued)
Annually, the Company prepares topographic analyses of the sites, using various
survey techniques to confirm airspace utilization during the current year and
remaining capacity. Engineering, legal, and other costs associated with the
expansion of permitted capacity of existing sites are deferred until receipt of
all necessary operating permits. Such costs are capitalized and amortized after
receipt of the necessary operating permits. The Company reviews the realization
of landfill development projects on a periodic basis. The portion of landfill
sites currently under development for future expansion and thus excluded from
depreciation totaled $2,701,000 and $1,341,000 at June 30, 1996 and 1995,
respectively.
The Company capitalizes interest costs as part of the cost of developing
landfill sites and constructing disposal space. Interest costs of $84,000,
$48,000, and $139,000, were capitalized in fiscal 1996, 1995, and 1994,
respectively.
Intangible Assets
Intangible assets consist principally of goodwill, noncompete agreements, and
waste collection and hauling contracts acquired in the acquisition of landfill
sites and a waste collection operation. Goodwill, noncompete agreements, and
waste collection and hauling contracts are currently being amortized over a
period of five to nine years. Amortization of intangible assets was $142,000,
$195,000, and $242,000 in 1996, 1995, and 1994, respectively.
F-11
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Landfill Closure, Post-Closure, and Other Environmental Costs
Accrued landfill closure and other environmental costs include the cost of
closure and post-closure monitoring and maintenance of landfills, as well as,
environmental and remediation costs all of which are estimated based on
currently available facts, existing technology and interpretation of presently
enacted laws and regulations. Landfill post-closure costs represent management's
estimate of the current value of the future obligation associated with
maintaining and monitoring the landfill for generally a 30-year period
subsequent to the closure of the landfill. The Company estimates the future cost
of closure and post-closure costs based on its interpretation of the U.S.
Environmental Protection Agency's Subtitle D technical standards. The Company
periodically updates its estimates of future closure and post-closure costs with
the impact of changes in estimates accounted for on a prospective basis. The
Company recognizes these costs on the unit-of-production method based on
consumed airspace in relation to management's estimate of total available
airspace. Environmental costs relating to remediation work is accrued and
charged to income in the period the potential environmental liability is known.
Statement of Cash Flows
For the purposes of reporting cash flows, cash and cash equivalents consists of
money market accounts and certificates of deposit with original maturities of
three months or less.
Noncash investing and financing activities of the Company excluded from the
statement of cash flows include property and equipment additions financed by
debt of $21,500, $109,420, and $267,237 and financed insurance premiums of
$462,196, $458,387, and $309,575 for fiscal years 1996, 1995, and 1994,
respectively. In fiscal 1996 and 1994, the Company also sold property and
equipment in exchange for a note receivable of $39,500 and $449,236,
respectively.
Revenue and Cost Recognition
The Company recognizes revenues upon receipt and acceptance of waste material at
its landfills and upon collection of waste material at its waste collection and
hauling operations.
F-12
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Earnings Per Share
Earnings per share are computed based on the weighted average number of common
shares outstanding including the effect of stock options and warrants, if
dilutive.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, investments in closure trust funds, trade
payables and debt instruments. The book value of cash and cash equivalents,
trade receivables, investments in closure trust funds and trade payables are
considered to be representative of their respective fair values. The carrying
value of the Company's long-term debt is similar to fair value based on current
rates and terms.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. The Company will adopt SFAS 121 in the first quarter of fiscal
1997 and, based upon current circumstances, does not believe the effect of the
adoption will be material.
SFAS No. 123, "Accounting for Stock-Based Compensation," is effective for
fiscal years beginning after December 15, 1995. SFAS 123 provides companies with
a choice to follow the provisions of SFAS 123 in determining stock-based
compensation expense or to continue with the provisions of APB 25, "Accounting
for Stock Issued to Employees." The Company expects to continue to follow APB 25
with respect to its Stock Option Plans and will provide disclosures as required
by SFAS 123 in the June 30, 1997 notes to the financial statements.
F-13
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Reclassification
Certain amounts in the 1995 and 1994 financial statements have been reclassified
to conform to their 1996 presentation.
2. Accounts Receivable
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains an allowance for doubtful
accounts at a level that management believes is sufficient to cover potential
credit losses.
3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
<TABLE>
<CAPTION>
June 30
1996 1995
--------------------
<S> <C> <C>
Insurance $264,217 $258,584
Non-trade receivables 112,722 308,475
Performance bonds 66,329 42,136
Other 191,280 160,792
--------------------
$634,548 $769,987
====================
</TABLE>
4. Debt
The Company has a $1,500,000 secured revolving credit facility with CoreStates
Bank, N.A. (CoreStates or the Bank), that provides for working capital,
equipment purchases and performance letters of credit. The revolving credit
facility, which is subject to periodic reviews by the Bank, expires October 31,
1996.
Borrowings under the revolving credit facility are limited to the Company's
qualified trade accounts receivable as defined in the credit agreement less
outstanding performance letters of credit. Interest is payable monthly at the
Bank's prime rate plus 1/4%. The weighted average interest rate was 9.70% and
9.32% in fiscal 1996 and 1995,
F-14
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements (continued)
4. Debt (continued)
respectively. Performance letters of credit outstanding in the amount of
$921,000 reduced the borrowing capacity under the revolving credit facility to
$579,000 at June 30, 1996. Borrowings outstanding on the revolving credit
facility at June 30, 1996, were $237,500. The Company is required to pay
quarterly a fee at an annual rate of 1/2% of the average daily unused amount of
the revolving credit facility.
The CoreStates credit arrangement contains warranties and financial covenants to
maintain certain levels of working capital and tangible net worth; to meet
certain fixed charge, leverage, and cash flow ratios; and to attain certain
quarterly performance levels. In addition, the credit arrangement requires the
Company to follow certain written approval procedures for borrowing under the
Company's secured revolving credit facility and imposes restrictions on capital
expenditures based upon the Company's cash flow from operations and the
liquidation of certain assets the Company holds for sale.
The CoreStates credit arrangement is secured by first mortgage liens on certain
mortgaged properties and a pledge by the Company of all of the issued and
outstanding capital stock of certain of its landfill subsidiaries.
The Company has a four-year secured term loan with First Union National Bank,
N.A. ("First Union") which provides for borrowings up to $1,350,000. The term
loan is payable in equal monthly principal installments through September 1999,
plus interest at a fixed rate of 7.03%, and is secured by a first lien security
interest in the equipment and vehicles of the Company. The agreement contains
certain affirmative and negative covenants similar to those of the CoreStates
credit arrangement including requirements to maintain certain levels of tangible
net worth, certain debt coverage and working capital ratios. For the year ended
June 30, 1996, the Company was not in compliance with substantially all of the
covenants of the loan agreement. First Union has waived all items of non-
compliance as of June 30, 1996.
On September 25, 1996, the Company entered into a new revolving credit facility
with two major banks, the Bank of Boston and Bank of America, which provides for
borrowings of up to $30,000,000 for repayment of certain debt, funding of
acquisitions, and includes up to $10,000,000 of standby letters of credit
availability. At the Company's option, the interest rate on any loan under the
revolving credit facility will be based on an adjusted prime rate or Eurodollar
rate, as defined in the agreement. The facility matures
F-15
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements (continued)
4. Debt (continued)
three years from the anniversary date of its closing. The revolving credit
facility, among other conditions, requires the payment of a 3/8 of 1% commitment
fee on the unused balance, payable in arrears, and provides for certain
restrictions on the ability of the Company, to incur borrowings, sell assets, or
pay cash dividends. The facility also requires the maintenance of certain
financial ratios, including interest coverage ratios, leverage ratios, and
profitable operations. The facility is collateralized by all the stock of the
Company's subsidiaries, whether now owned or hereafter acquired. A portion of
the credit facility was utilized to refinance the remaining balance of the
CoreStates Bank, N.A. revolving credit facility, and the note payable to First
Union National Bank. Accordingly, certain debt has been classified as long-term
to reflect the term of the new credit facility.
<TABLE>
<CAPTION>
Debt consists of the following:
June 30
1996 1995
------------------------
<S> <C> <C>
CoreStates Bank, N.A. term loan $ - $1,150,000
CoreStates Bank, N.A. revolving
credit facility, refinanced in
September 1996. 237,500 -
Note payable to Pennsylvania
National Bank in monthly
installments of $6,092, including
interest at 8-1/4%, secured by real
estate, due September 2013. 670,629 687,521
Note payable to First Union National
Bank in monthly installments of
$28,125 plus interest at 7.03%,
refinanced in September 1996. 1,096,875 -
Note payable to First Federal
Savings in monthly installments of
$3,521, including interest at
9.25%, secured by real estate, due
November 1999. 246,520 263,398
Machinery and equipment notes payable,
secured by equipment, with various
maturities payable through April
2000, interest rates ranging from
9.25% to 12%, payable monthly in
installments ranging from
$599 to $4,199. 142,271 219,852
Other 188,873 228,184
------------------------
2,582,668 2,548,955
Less current portion 325,852 766,240
------------------------
$2,256,816 $1,782,715
========================
</TABLE>
F-16
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements (continued)
4. Debt (continued)
Maturities of long-term debt are as follows: 1997-$326,000; 1998-$68,000;
1999-$58,000; 2000-$1,544,000; 2001 and thereafter--$587,000.
Interest paid on all indebtedness was $249,000, $226,000, and $217,000 for
fiscal 1996, 1995, and 1994, respectively.
5. Accrued Expenses
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
June 30
1996 1995
----------------------
<S> <C> <C>
Accrued compensation $ 221,037 $ 65,110
Workers' compensation 117,382 67,981
Damage claims 277,609 187,000
Accrued professional fees 91,500 40,938
Miscellaneous taxes 74,941 110,820
Operating loss accrual - 170,000
Accrued severance costs 380,084 -
Accrued transition costs 97,000 -
Other 70,026 101,735
----------------------
$1,329,579 $743,584
======================
</TABLE>
6. Accrued Landfill Closure and Other Environmental Costs
The Company owns three solid waste landfills, all of which are permitted and two
of which are operating. The Company will have financial obligations related to
closure and post-closure monitoring and maintenance of these currently permitted
and operating landfills. While the exact amount of future closure and post-
closure obligations cannot be determined, the Company has developed procedures
to estimate these total projected costs based on currently available facts,
existing technology, and presently enacted laws and regulations. Accordingly,
the Company will continue to periodically review and
F-17
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements (continued)
6. Accrued Landfill Closure and Other Environmental Costs (continued)
update underlying assumptions and projected costs and record required
adjustments. As of June 30, 1996, the Company estimates that the costs of final
closure of the currently permitted and operating areas at the Company's three
landfills will be approximately $5,893,000, of which $1,886,000 has been accrued
as of June 30, 1996. The Company estimates that the costs of post-closure
monitoring of groundwater and methane gas and other required maintenance
procedures for the currently permitted and expansion areas will approximate
$27,000-$120,000 per year for 30 years after closure at each of the Company's
two municipal solid waste accepting facilities and $10,000 per year for 30 years
after closure at the Company's industrial landfill site. The Company has accrued
$1,073,000 for post-closure obligations as of June 30, 1996, representing 20% of
the present value of such future cash outlays.
Funding of closure and post-closure obligations are estimated as follows: 1997-
$870,000; 1998-$722,000,1999-$0; 2000-$0; 2001 and thereafter-$9,100,000.
The Company maintains a bonding facility pursuant to certain statutory
requirements regarding financial assurance for the closure and post-closure
monitoring cost requirements for its Kentucky and West Virginia disposal
facilities. Bonds outstanding at June 30, 1996, total $1,322,000 and $315,000,
as closure and post-closure financial assurance, respectively, for the Company's
Kentucky landfill and $214,000 as closure financial assurance for the Company's
West Virginia facility. The bonds are collateralized by irrevocable letters of
credit of $626,000 and trust fund deposits of $120,000. Additionally, the
Company has on deposit $196,000 as financial assurance for landfill closure and
post-closure for the closed disposal area of its West Virginia disposal
facility. The trust fund and cash deposits are restricted from current
operations and are included within other noncurrent assets.
F-18
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements (continued)
7. Common Stock and Stock Plans
Each share of the Company's Common Stock is entitled to one vote.
In 1996, William C. Skuba, the former President, Chief Executive Officer,
Chairman of the Board, and controlling shareholder, sold 500,000 shares of the
Company's common stock ("Skuba Stock") at a price of $2.00 per share to a group
of investors ("Purchasers") pursuant to a Stock Purchase Agreement dated as of
May 8, 1996 by and among Mr. Skuba and the Purchasers (the "Stock Purchase
Agreement").
Pursuant to the Stock Purchase Agreement, Mr. Skuba also converted all of his
Class A common stock of the Company which carried four votes per share into
common stock which carries one vote per share. Mr. Skuba also granted to the
purchasers an irrevocable proxy over his remaining 1,111,101 shares of common
stock for a period to expire on the earlier of June 20, 1997 or the date upon
which Mr. Skuba disposes of such remaining shares.
In fiscal 1995, the Company, through a private placement, issued 300,000 shares
of its common stock for cash of $1.00 per share or $300,000, pursuant to stock
subscription agreements with two individual accredited investors. In fiscal
1996, the Company, through additional private placements of stock with
accredited investors, issued an additional 875,000 shares of its common stock
for cash of $1.00 per share or $875,000. Certain of the private placements of
stock contain warrants to purchase a total of 525,000 additional shares of
common stock at an exercise price of $1.50 per share expiring three years from
the date of grant. As of June 30, 1996, 150,000 of these warrants have been
exercised. The Company registered these securities in February of 1996.
The Company's Stock Option Plans provide for the grant of incentive stock
options or non-qualified stock options to directors, officers or employees of
the Company. Under the Option Plans, as amended, 700,000 shares are reserved
effective January 1, 1991, for issuance upon the exercise of such options.
Incentive stock options have an exercise price of at least 100% of the fair
market value of the common stock at the date of grant (or 110% of fair market
value in the case of employees or officers holding ten percent or more of the
voting stock of the Company). Non-qualified options have an exercise price of
not less than 90% of the fair market value of the common stock at the date of
grant. The options generally expire five years from the date of grant and are
generally exercisable after two years based upon graduated vesting schedules.
F-19
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements (continued)
7. Common Stock and Stock Plans (continued)
In August 1996, the Company's shareholders approved the 1996 Stock Option Plan
providing for the granting of incentive stock options or non-qualified stock
options to directors, officers, or employees of the Company. Under this plan,
2,500,000 shares are reserved for issuance. Incentive stock options have an
exercise price consistent with the provisions of the previously existing plans.
Non-qualified options have an exercise price which is determined by the Stock
Option Committee ("the Committee") in its discretion. The options generally
expire ten years from the date of grant and are exercisable based upon graduated
vesting schedules as determined by the Committee. 575,000 options have been
granted under this Plan (subject to shareholders' approval) as of June 30, 1996.
An additional 210,000 options were granted subsequent to year end.
Options outstanding have been granted to officers and employees to purchase
common stock at prices ranging from $.87 to $8.00 per share. A summary of the
option transactions are as follows:
<TABLE>
<CAPTION>
Year ended June 30
1996 1995 1994
----------------------------------
<S> <C> <C> <C>
Options outstanding, beginning of period 366,900 417,200 482,800
Options granted 687,433 20,000 45,000
Options exercised (140,000) (30,000) -
Exercise price $.87-$1.87 $.87 -
Options cancelled (1,000) (40,300) (110,600)
----------------------------------
Options outstanding, end of period 913,333 366,900 417,200
==================================
Options exercisable 338,333 350,650 337,450
==================================
Options available for grant 2,113,667 300,100 279,800
==================================
</TABLE>
The Company's Employee Stock Bonus Plan and Employee Benefit Stock Purchase Plan
(the Employee Plans) are for eligible employees. Shares are awarded under the
Employee Stock Bonus Plan at the Company's discretion based on the employees'
performance. Under the Employee Benefit Stock Purchase Plan, employees may
purchase common shares at a purchase price of 85% of the fair market value at
the date of purchase. A total of 450,000 common shares are reserved under the
Employee Plans. At June 30, 1996, 27,311 shares have been issued under these
plans.
F-20
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements (continued)
7. Common Stock and Stock Plans (continued)
At June 30, 1996, the Company has 500,250 warrants outstanding and exercisable
to purchase shares of Common Stock which are exercisable at the discretion of
the Board of Directors at prices between $.87 and $3.56 expiring at various
dates through 2001.
8. Income Taxes
At June 30, 1996, the Company has net operating loss carryforwards for federal
and state income tax purposes of $4,365,000 and $15,000, respectively, that
expire through 2011. However, due to a change in control, these net operating
loss carryforwards may be limited for federal and state income tax purposes. For
financial reporting purposes, a valuation allowance has been recognized to
offset the deferred tax assets related to those carryforwards.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
June 30
1996 1995
--------------------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ (566,198) $ (539,897)
Other, net (123,583) (113,507)
--------------------------
Total deferred tax liabilities (689,781) (653,404)
Deferred tax assets:
Allowance for doubtful accounts 158,915 176,810
Discontinued operations accrual - 68,260
Reserve for loss on assets held for sale 255,933 122,767
Net operating loss carryforwards 1,484,833 642,216
AMT credit 24,376 24,376
Reserve for severance and transition costs 269,232 -
Other, net 68,140 36,623
--------------------------
Total deferred assets 2,261,429 1,071,052
Valuation allowance for deferred tax
assets (1,644,000) (490,000)
--------------------------
Net deferred tax assets 617,429 581,052
--------------------------
Net deferred tax liabilities $ (72,352) $ (72,352)
==========================
</TABLE>
F-21
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
Significant components of the provision for income taxes (benefit) attributable
to continuing operations are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------
<S> <C> <C> <C>
Current
Federal $ - $ - $(309,317)
State - (28,171) (49,002)
------------------------------
- (28,171) (358,319)
Deferred
Federal - (66,052) 177,955
State - (8,838) 47,711
Operating loss carryforward - (139,110) (163,106)
------------------------------
- (214,000) 62,560
------------------------------
Provision for income taxes (benefit) $ - $(242,171) $(295,759)
==============================
</TABLE>
The reconciliation of income tax attributable to continuing operations computed
at the U.S. federal statutory tax rates to income tax expense is:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
Tax at U.S. statutory rates $(1,190,015) $(608,505) $(346,369)
State income taxes, net of
federal tax benefit - (24,426) (16,076)
Nondeductible amortization 24,918 24,918 24,918
Valuation allowance for
deferred tax assets 1,154,000 340,000 -
Other 11,097 25,842 41,768
-------------------------------------
Provision for income taxes (benefit) $ - $(242,171) $(295,759)
=====================================
</TABLE>
Net income tax refunds received in fiscal 1996, 1995, and 1994 were $71,000,
$23,000, and $875,000, respectively.
F-22
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements (continued)
9. Commitments and Contingencies
The Company is obligated under various operating leases, primarily for certain
office facilities and transportation equipment. Lease agreements frequently
include renewal options and require that the Company pay for taxes, insurances,
and maintenance expense. Future minimum lease payments under operating leases
with initial or remaining noncancellable lease terms in excess of one year as of
June 30, 1996, are as follows: 1997-$335,000, 1998-$316,000, 1999-$199,000,
2000-$152,000, and 2001-$81,000. Total rental expense relating to continuing
operations under operating leases was approximately $353,000, $411,000, and
$388,000 for fiscal 1996, 1995, and 1994, respectively.
The Company maintains general liability insurance with limits of $1,000,000.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
consolidated financial position or results of operations.
10. Assets Held For Sale
Assets held for sale, including the assets relating to operations discontinued
in fiscal 1993, have been included in the consolidated balance sheets, and have
been reclassified to identify them separately at the lower of cost or net
realizable value. Assets held for sale are as follows:
<TABLE>
<CAPTION>
June 30
1996 1995
--------------------
<S> <C> <C>
Property and equipment, net $859,262 $517,659
====================
</TABLE>
F-23
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements (continued)
11. Unusual Operating Costs
Unusual operating costs of $2,692,000 were included in the fourth quarter of
fiscal 1996 results of operations. A charge of $900,000 to cost of revenues to
accrue for certain closure and post closure monitoring costs was recorded for
the Kentucky landfill as a valuation allowance for possible impairments of this
asset as the Company is working on finalizing the draft permit which is
currently being adjudicated. Additionally, charges totalling approximately
$879,000 were charged to selling, general and administrative expenses relating
to the change in control of the Company. Of the $879,000 charge; $672,000
relates to recorded severance costs; $97,000 reflects management's estimate of
various transition costs in moving the Company's corporate offices; and $110,000
relates to certain legal and other professional costs incurred in completing the
transaction. Additionally, in the fourth quarter; management refined its
estimates of necessary reserves against past due receivables; outstanding
contingencies; and deferred acquisitions costs and increased such reserves by
$221,000, $133,000, and $70,000, respectively. Finally, in the fourth quarter,
management made a decision to replace certain of its equipment utilized in the
landfill and hauling operations, in addition to selling certain real estate
previously used in operations and currently being leased to unrelated parties. A
charge of $489,000 was recorded to other expenses to write down these assets
held for sale to estimated net realizable value.
Unusual operating costs of $532,000 were included in the fourth quarter of
fiscal 1995 results of operations. A total charge to cost of revenues of
$339,000 relates to the Company's cessation of waste acceptance at the Kentucky
landfill on June 30, 1995, and the Company's decision to simultaneously permit
and operate a waste transfer facility to continue to service the waste needs of
the local host county under the ten-year waste disposal franchise agreement
previously awarded to the Company expiring in the year 2002. Of the $339,000 of
unusual operating costs, $150,000 reflects the Company's estimate of operating
losses at the Kentucky facility through fiscal 1996, while the first disposal
cell is constructed following approval of the expansion permit, and $189,000
reflects a noncash charge to write-off remaining capitalized costs relating to a
disposal cell closed on June 30, 1995.
F-24
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements (continued)
11. Unusual Operating Costs (continued)
Additionally, a charge of $78,000 was recorded in the fourth quarter of fiscal
1995 to reduce the remaining net assets of All Waste Refuse Services, Inc.
(AWRS), the Company's waste collection business located in Beaufort County,
South Carolina, to their estimated net realizable value at June 30, 1995. The
$78,000 charge includes a write-down of $58,000 for certain operating assets,
receivables, and supplies inventory and the establishment of a reserve at
June 30, 1995, for anticipated operating loss on final divestiture of assets of
$20,000. During fiscal 1995, the Board of Directors of the Company made a
decision to exit the local hauling business in Beaufort County as a result of
limited integration with the Company's landfill operation and continued
operating losses resulting from significant competitive pressures. The majority
of the operating assets of AWRS were sold in fiscal 1995 through several asset
sale transactions.
Also in 1995, the Company refined its estimate of necessary reserves against
past due receivables resulting in a charge to operations of $118,000.
12. Related Party Transactions
In connection with the consummation of the Stock Purchase Agreement (see Note
7), the Company entered into a series of agreements with Mr. Skuba, including a
Severance Agreement that provided Mr. Skuba $259,600 of compensation. The
Company also entered into an agreement of sale with Mr. Skuba for certain real
estate and equipment of the Company. The Company has recorded a reserve for the
estimated loss on the sale of these assets of $156,000.
The Company has entered into an agreement to lease office space from a company
that is controlled by one of the directors of the Company. The lease is for a
period of five years and provides for a monthly rental of $6,250 subject to
annual increases derived from increases in the Consumer Price Index.
F-25
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements (continued)
13. Subsequent Events
Subsequent to June 30, 1996, the Company acquired the assets of four waste
hauling and transportation companies in separate transactions. The Company
issued a total of 541,250 unregistered shares of the Company's common stock,
paid cash of $400,000, and assumed certain liabilities and debt to effect the
four separate transactions. Each of these transactions will be accounted for
using the purchase method of accounting.
On August 9, 1996, the Company completed a private placement ("Placement") of
2,500,000 shares of its common stock at $4 per share with various accredited
investors for the purpose of raising funds to construct disposal space at the
Company's landfills, to provide for closure of certain filled disposal areas,
and to provide working capital. Net proceeds, after deduction of agent fees and
related costs, were $9,350,000. The shares sold in the private placement are not
registered, and registration rights do not commence for two years.
The Company also issued 125,000 shares of its common stock at $4 per share to a
bank at substantially the same terms as the August 9, 1996 Placement.
Additionally, subsequent to June 30, 1996, the Company increased its authorized
shares of common stock from 20,000,000 to 50,000,000 shares.
On September 27, 1996, the Company acquired all of the stock of a residential
and commercial waste collection and recycling operation (Super Kwik, Inc.) and
related companies in exchange for approximately 2,300,000 shares of the
Company's common stock. This combination is anticipated to be accounted for
using the pooling of interests method of accounting.
The following unaudited consolidated pro forma information presents the
revenues, net loss, and loss per share as if the acquisition of Super Kwik had
occurred at the beginning of the years presented. Pro forma revenues, net loss,
and loss per share are not necessarily indicative of the revenues, net loss, and
loss per share that would have occurred had the
F-26
<PAGE>
Eastern Environmental Services, Inc.
Notes to Consolidated Financial Statements (continued)
13. Subsequent Events (continued)
merger occurred at the beginning of the years presented or the results which may
occur in the future.
<TABLE>
<CAPTION>
Year ended June 30
1996 1995 1994
--------------------------------------------
<S> <C> <C> <C>
(Unaudited)
Revenues $ 28,190,000 $ 27,446,000 $ 24,453,000
Loss from continuing
operations (3,119,000) (893,000) (424,000)
Loss per share (0.40) (0.13) (0.06)
</TABLE>
The preceeding unaudited consolidated pro forma information does not contain any
adjustments to conform the accounting policies of Super Kwik to that of the
Company. Super Kwik currently uses a modified cash method of accounting for
income taxes. The Company has not completed its review of Super Kwik's tax
accounts, and therefore is unable to record any adjustment to income taxes for
purposes of the pro forma information. Management does not believe that amounts
to record other adjustments to conform accounting policies will be significant.
14. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1996
Revenues $2,270,292 $1,912,493 $1,531,180 $ 1,918,538 $ 7,632,503
Gross profit 577,469 419,850 330,856 (553,090) 775,085
Net income (loss) $ 3,191 $ (189,054) $ (297,431) $(3,016,749) $(3,500,043)
Loss per share $- $(.03) $(.06) $(.54) $(.63)
=================================================================
Year ended June 30, 1995
Revenues $2,470,835 $2,046,955 $2,106,708 $ 2,026,447 $ 8,650,945
Gross profit 427,465 376,482 430,386 (13,616) 1,220,717
Net loss $ (192,881) $ (200,342) $ (272,883) $ (881,444) $(1,547,550)
Loss per share $(.04) $(.05) $(.06) $(.20) $(.35)
=================================================================
</TABLE>
F-27
<PAGE>
Report of Independent Auditors on Other Financial Information
Board of Directors and Stockholders
Eastern Environmental Services, Inc.
The audited consolidated financial statements of the Company and our report
thereon are presented in the preceding section of this report. The following
financial information is presented for purposes of additional analysis and is
not a required part of the financial statements of the Company. Such information
has been subjected to the auditing procedures applied in our audit of the
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the financial statements taken as a whole.
Reading, Pennsylvania /s/ Ernst & Young LLP
September 27, 1996
F-28
<PAGE>
Eastern Environmental Services, Inc.
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
--------------------
Balance Charged Charged Balance
at to to at
Beginning Cost and Other Deductions End
of Expenses Accounts of
Periods Periods
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1994
Allowance for doubtful
accounts (deducted
from accounts receivable) $222,000 $108,000 $ - $ 5,000 $325,000
=====================================================
Year ended June 30, 1995
Allowance for doubtful
accounts (deducted
from accounts receivable) $325,000 $199,000 $ - $ 69,000 $455,000
=====================================================
Year ended June 30, 1996
Allowance for doubtful
accounts (deducted from
accounts receivable) $455,000 $258,000 $ - $300,000 $413,000
=====================================================
</TABLE>
F-29
<PAGE>
Exhibit 10.34
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement ("Agreement") is executed and delivered as of
June 20, 1996, by and between Eastern Environmental Services, Inc., a Delaware
corporation ("Company"), and Louis D. Paolino, Jr., an individual ("Employee").
RECITALS
--------
The Company conducts a diversified waste management business, including,
without limitation, waste hauling operations, landfills and other waste
management, recycling and waste testing operations ("Business"). The Employee
is an executive with extensive experience in the waste industry. The Company
desires to hire Employee as its President and Chief Executive Officer and the
Employee desires to accept the position offered.
The position of the Employee with the Company will give the Employee access
to and familiarity with confidential information and business methods used in
the operation of the Business. During the course of Employee's employment,
Employee will become familiar with and aware of information as to the specific
manner of doing business and the customers of the Company and the Company's
future plans. Employee has and will have knowledge of trade secrets of the
Company which are valuable assets of the Company.
Employee recognizes that the business of the Company is dependent upon a
number of trade secrets and confidential business information, including
customer lists, customer data and operational information. The protection of
these trade secrets is
-1-
<PAGE>
of critical importance to the Company. The Company will sustain great loss and
damage if, for whatever reason, during the term of this Agreement or Employee's
employment with Company and for a period following the termination of this
Agreement or Employee's employment, Employee should violate the provisions of
paragraph 4 of this Agreement. Further, Employee acknowledges that any such
violation would cause irreparable harm to Company and that Company would be
entitled, without limitation, to injunctive relief to remedy such violation.
NOW, THEREFORE, in consideration of Ten Dollars ($10), and the mutual
promises, terms and conditions set forth herein and the performance of each, the
parties hereby agree as follows:
1. Services.
--------
(a) Company hereby employs Employee as its President and Chief Executive
Officer. Additional or different duties, titles or positions may be assigned to
Employee or may be taken from Employee from time to time by the Company's Board
of Directors ("Board"); provided, that the Employee consents to such changes.
(b) Employee hereby accepts employment upon the terms and conditions
contained in this Agreement. Employee shall faithfully adhere to, execute and
fulfill all directions and policies established by the Board, to the extent such
instructions do not violate applicable laws.
(c) Employee shall not, during the term of his employment hereunder,
without the prior written consent of Company, be engaged in any other business
activity pursued for gain, profit or other
-2-
<PAGE>
pecuniary advantage, if such activity prevents the Employee from fulfilling his
duties and responsibilities under this Agreement. Employee may make personal
investments and conduct his personal business affairs, including, without
limitation, participating in the management of businesses which the Employee
owns directly or through affiliated entities, as long as such investments do not
violate the terms of Paragraph 4.
2. Compensation.
------------
(a) For all services to be rendered by Employee to Company, Company shall
pay Employee an annual salary at the rate of One Hundred Fifty Thousand
($150,000) Dollars per year, payable in accordance with Company's normal payroll
procedures. The Company, at its discretion, may from time to time grant bonuses
and raises to the Employee.
(b) The Employee shall be granted stock options ("Options") exercisable for
Two Hundred Fifty Thousand (250,000) shares of the Company's common stock at a
per share exercise price equal to 110% of the lowest bid price of the Company's
common stock on June 20, 1996, the day that Employee and Company agreed to the
terms of this Agreement. The Options shall be granted under the Company's 1996
Stock Option Plan. The Options shall be granted on the date this Agreement is
executed by the Company. The Options shall vest over the four year term of this
Agreement, one fourth of the Options shall vest on the on each anniversary date
of this Agreement's execution. The Options shall be fully vested on the last
day of this Agreement's term. Notwithstanding the prior sentence the
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Options shall all vest immediately, upon a Change of Control, as hereafter
defined in Paragraph 2(e) below.
(c) To the extent that Company, from time to time in its sole discretion,
offers or provides any of the following to its employees, then Employee, on an
equal basis with such other employees, shall be entitled to: (i) participation
in all, if any, life, health, medical, hospital, accident and disability
insurance programs of Company in existence for the benefit of the Company's
executives and for which Employee qualifies; (ii) participation in all, if any,
pension, retirement, profit sharing or stock purchase plans for which Employee
qualifies; and (iii) participation in any other employee benefits which Company
accords to its employees.
(d) During the term of Employee's employment with Company, Employee shall
be entitled to reimbursement for reasonable business expenses incurred on behalf
of Company. Employee shall be paid a monthly car allowance of Five Hundred
($500.) Dollars a month.
(e) For purposes of this Agreement, a "Change of Control" shall mean the
occurrence of any of the events set forth in items (i) through and including
(iv) below.
(i) There shall be a "Change of Control", upon the acquisition in one
or more transactions by any "Person", (as the term "Person" is used for purposes
of Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended
(the 1934 Act")) of "Beneficial Ownership" (as the term beneficial ownership is
used for purposes of Rule 13d-3 promulgated under the 1934 Act) of fifty percent
(50%) or more of the combined voting power of the Company's
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then outstanding voting securities (the "Voting Securities"). For purposes of
this Paragraph 2(e), the Voting Securities acquired directly from the Company by
any Person shall be excluded from the determination of such Person's Beneficial
Ownership of Voting Securities (but such Voting Securities shall be included in
the calculation of the total number of Voting Securities then outstanding). For
purposes of this Paragraph 2(e) the acquisition of Employee of the Beneficial
Ownership of 50% percent or more of the Voting Securities shall not be a Change
of Control.
(ii) There shall be a "Change of Control", upon approval by
shareholders of the Company of: (A) a merger, reorganization or consolidation
involving the Company, if the shareholders of the Company immediately before
such merger, reorganization or consolidation do not or will not own directly or
indirectly immediately following such merger, reorganization or consolidation,
more than fifty percent (50%) of the combined voting power of the outstanding
voting securities of the corporation resulting from or surviving such merger,
reorganization or consolidation in substantially the same proportion as their
ownership of the Voting Securities immediately before such merger,
reorganization or consolidation, or (B) (1) a complete liquidation or
dissolution of the company or (2) an agreement for the sale or other disposition
of all or substantially all of the assets of the Company.
(iii) There shall be a "Change of Control", upon acceptance by
shareholders of the Company of shares in a share exchange, if the shareholders
of the Company immediately before
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<PAGE>
such share exchange do not or will not own directly or indirectly immediately
following such share exchange more than fifty percent (50%) of the combined
voting power of the outstanding voting securities of the corporation resulting
from or surviving such share exchange in substantially the same proportion as
the ownership of the Voting Securities outstanding immediately before such share
exchange.
(iv) There shall be a "Change of Control", upon the current directors
of the Company, Louis Paolino Jr., George Moorehead and Kenneth Leung, no longer
constituting a majority of the Company's Board of Directors.
3. Term. The term of this Agreement shall begin on the date of this
----
Agreement and continue for a term of four (4) years. Employee's employment under
this Agreement may be terminated during the term hereof only as set forth in
Paragraph 7 of this Agreement.
4. Noncompetition Covenants.
------------------------
(a) Employee agrees that the noncompetition covenants contained in this
Paragraph 4 are a material and substantial part of this Agreement.
(b) Employee covenants that during Employee's employment with Company and
for two years following the termination of Employee's employment (regardless of
the reason for the termination) the Employee shall not, directly or indirectly,
without the prior express written consent of Company, do any of the things set
forth in item (i) through (v) below.
(i) engage, as an officer, director, shareholder, owner,
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partner, joint venturer, agent, or in a managerial capacity, whether as an
employee, independent contractor, consultant or advisor, or as a sales
representative, in the waste disposal industry, including, without limitation,
waste hauling, waste disposal, land filling, handling demolition waste, handling
special waste, collecting or disposing of municipal special waste, and recycling
waste, in each case within fifty (50) miles of any Company business operation
(the "Territory");
(ii) call upon any person who is, at the time of the contact, an
employee of Company or its affiliates within the Territory, if the employee
serves the Company in a managerial capacity and if the purpose and intent of the
contact is to entice such employee away from or out of the employ of Company or
its affiliates;
(iii) call upon any person or entity, which is, at the time of the
contact, a customer of the Company or its affiliates within the Territory, for
the purpose of soliciting or selling any of the services which are the services
offered by the Company within the Territory;
(iv) disclose the identity of the customers of Company or its
affiliates, whether in existence or proposed, to any person, firm, partnership,
corporation or other entity whatsoever, for any reason or purpose whatsoever,
except if approved by the Board or if compelled to do so by a governmental
agency, Court Order or subpoena; or
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(v) promote, or assist, financially or otherwise, any person, firm,
partnership, corporation or other entity whatsoever to do any of the above.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit Employee from acquiring as an investment not more than ten percent of
the capital stock of a competing business, the stock of which is traded on a
national securities exchange or over-the-counter.
For the purposes of this Agreement, the term "affiliates" shall mean one or
more of: (a) each subsidiary of Company, and (B) each other entity under the
direct or indirect control of the Company.
(c) The Company will sustain significant losses and damages, if Employee
breaches the covenants in this Paragraph 4. There is no adequate monetary
remedy for the immediate and irreparable damage that would be caused to Company
by Employee's breach of its non-competition covenants. Employee agrees that, in
the event of a breach by him of the foregoing covenants, such covenants may be
enforced by Company by, without limitation, injunctions and restraining orders.
(d) It is agreed by the parties that the covenants in this Paragraph 4
impose a reasonable restraint on Employee in light of the activities and
business of Company on the date of the execution of this Agreement and the
future plans of Company.
(e) The covenants in this Paragraph 4 are severable and separate, and the
unenforceability of any specific covenant shall
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not affect the provisions of any other covenant. If any court of competent
jurisdiction shall determine that the scope, time or territorial restrictions
set forth are unreasonable, then it is the intention of the parties that such
restrictions be enforced to the fullest extent which the court deems reasonable,
and the Agreement shall thereby be reformed.
(f) The covenants in this Paragraph 4 shall be construed as independent of
any other provision of this Agreement and the existence of any claim or cause of
action of Employee against Company whether predicated on this Agreement, or
otherwise, shall not constitute a defense to the enforcement by Company of such
covenants. It is specifically agreed that the duration of the noncompetition
covenants stated above shall be computed by excluding from such computation all
time during which Employee is in violation of any provision of this Paragraph 4
and all time during which there is pending in any court of competent
jurisdiction any action (including any appeal from any judgment) brought by any
person, whether or not a party to this Agreement, in which action Company seeks
to enforce the agreements and covenants of Employee or in which any person
contests the validity of such agreements and covenants or their enforceability
or seeks to avoid their performance or enforcement. Provided that, no such
exclusion shall include the period of time within which Employee has ceased
violating this paragraph, whether or not as a result of being in compliance with
Court injunction or doing so voluntarily, and whether or not any action is
pending against Employee.
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5. Return of Company Property. All correspondence, reports, charts,
--------------------------
products, records, designs, patents, plans, manuals, "field guides," memoranda,
advertising materials, lists and other data or property collected by or
delivered to Employee by or on behalf of the Company or its representatives,
customers and government entities (including, without limitation, customers
obtained for Company by Employee), and all other materials compiled by Employee
which pertain to the business of Company shall be and shall remain the property
of Company, shall be subject at all times to the Company's discretion and
control and shall be delivered promptly to Company upon request at any time and
without request upon completion or other termination of Employee's employment
hereunder.
6. Inventions. Employee shall disclose promptly to Company any and all
----------
conceptions and ideas for inventions, improvements, and valuable discoveries,
whether patentable or not, which are conceived or made by Employee solely or
jointly with another during the period of employment which are related to the
business or activities of the Company. Employee hereby assigns and agrees to
assign all his interests therein to Company or its nominee. Whenever requested
to do so by Company, Employee shall execute any and all applications,
assignments or other instruments that Company shall deem necessary to apply for
and obtain Letters Patent of the United States or any foreign country or to
otherwise protect Company's interest therein. These obligations shall continue
beyond the termination of employment with respect to inventions, improvements
and valuable discoveries, whether patentable or not,
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<PAGE>
conceived, made or acquired by Employee during the period of employment, and
shall be binding upon Employee's heirs, assigns, executors, administrators and
other legal representatives.
7. Termination; Rights of Termination.
----------------------------------
(a) Employee's employment under this Agreement may be terminated during the
term hereof upon the occurrence of any of the items set forth below. If
Employee's employment under this Agreement is terminated for any of the reasons
set forth below, Employee shall be entitled to receive, and shall immediately be
paid in full, one months annual salary that would have been paid under Paragraph
2(a) above, if this Agreement had not been terminated. If in any one or more of
the following items occur this Agreement shall be terminated as follows:
(i) Automatically upon the death of Employee.
(ii) Automatically upon the resignation of the Employee, occurring
when no Change of Control occurred or if the Change of Control occurred more
than one year after the resignation.
(iii) By Company upon written notice to Employee in the event of:
(A) Employee's breach of this Agreement;
(B) Employee's inability to perform his duties under this
Agreement because of illness or physical or mental disability or other
incapacity which continues for a period of 90 days; or
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(C) Employee's theft or fraud with respect to the business or
affairs of Company or if Employee is convicted of a crime involving
fraud or theft.
If the Agreement is terminated by the Company, the Employee shall be
provided with a written notice of termination which shall state the reason for
Employee's termination.
(b) Employee's employment under this Agreement may be terminated during
the term hereof upon the occurance of any of the items set forth below. If
Employee's employment under this Agreement is terminated for any of the reasons
set forth below, Employee shall be entitled to receive, and shall immediately be
paid in full, two years annual salary that would have been paid under Paragraph
2(a) above, if this Agreement had not been terminated. If in any one or more of
the following items occur this Agreement shall be terminated as follows:
(i) Automatically upon the resignation of the Employee, within one
year of a Change of Control.
(ii) By Company upon written notice to Employee in the event of:
(A) Employee's unsatisfactory performance of his duties or other
obligations hereunder, as determined in good faith by the Board; or
(B) The Company's merger, consolidation, or other business
combination with another entity where the Company is not the surviving
entity or the Company's sale of substantially all its assets.
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<PAGE>
If the Agreement is terminated by the Company, the Employee shall be
provided with a written notice of termination which shall state the reason for
Employee's termination.
(c) In the event of termination of Employee's employment under this
Agreement for any reason provided in paragraph 7(a) or 7(b), all rights and
obligations of Company and Employee under this Agreement shall cease
immediately, except that Employee's obligations under this subparagraph and
paragraphs 4, 5, 6, and 9 herein and Company's obligations to pay the amounts to
be paid under Paragraph 7(a) or 7(b), as applicable, and the Company's
obligations under Paragraph 10 shall survive such termination. After such
termination Employee shall have no right to receive any compensation hereunder,
except as set forth in Paragraph 7(a) or 7(b).
8. Authority. Employee shall be authorized to obligate the Company in
---------
accordance with the Company's policies and procedures from time to time in
effect.
9. Representations of Employee. Employee represents and warrants to
---------------------------
Company that he is not subject to any restriction or noncompetition covenant in
favor of a former employer or any other person or entity, and that the execution
of this Agreement by Employee and his provision of services to Company and the
performance of his obligations hereunder will not violate or be a breach of any
agreement with a former employer or any other person or entity. Further,
Employee agrees to indemnify Company for any claim, including, but not limited
to, attorneys' fees and expenses
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<PAGE>
of investigation, by any such third party that such third party may now have or
may hereafter come to have against Company based upon or arising out of any
noncompetition agreement or invention and secrecy agreement between Employee and
such third party.
10. Indemnification and Insurance
-----------------------------
(a) Subject to applicable law, for a period of six (6) years following
completion of the Term, the Company will: (1) indemnify Employee and his heirs
and representatives to the extent provided in the Company's Certificate of
Incorporation in effect on the date of this Agreement and will not amend, reduce
or limit rights of indemnity afforded to them or the ability of the Company to
indemnify them, not hinder, delay or make more difficult the exercise of such
rights of indemnity and (ii) maintain director and officer liability insurance
coverage providing Employee with coverage (1) at least as favorable as the
policies in effect immediately prior to the date hereof covering the Company's
directors and officers or (2) as favorable as is available at a cost to the
Company of up to 125% of the premiums currently being paid by the Company.
(b) If any claim is (or claims are) made against Employee and his heirs
and representatives, including legal counsel, arising from Employee's services
as a director, officer and employee of the Company, within six (6) years from
the expiration of the Term, the provisions of this Paragraph 10 respecting the
Company's Certificate of Incorporation shall continue in effect until the final
disposition of all such claims.
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<PAGE>
(c) The Company agrees to provide written notice to Employee immediately
upon learning of any claim or threatened claim against Executive by any third
party relating to or arising out of the business of the Company or Employee's
prior service as a director, officer or controlling shareholder of the Company.
The Company further agrees to provide to Executive any complaints and other
relevant documentation related to such claims immediately upon receipt of such
documentation.
(d) Employee agrees that he will cooperate with and assist the Company,
as is reasonably requested by the Company, in its defense of any action or
proceeding against the Company, its directors, officers, employees or affiliates
arising out of or in any way related to any transactions, events or other
matters which occurred during the period of his employment with the Company, to
the extent that such cooperation and assistance will not impair Employee's legal
rights or remedies or increase the likelihood that Employee will incur any
liabilities as a result thereof. This Agreement shall not preclude Employee
from testifying in such action or proceeding. In the event that Employee does
cooperate with and assist the Company in its defenses of such an action or
proceeding, the Company agrees to reimburse Employee for all reasonable expenses
incurred by Employee in providing such assistance.
11. Complete Agreement. This Agreement is the final, complete and
------------------
exclusive statement and expression of the agreement between Company and
employee, it being understood that there are no
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<PAGE>
oral representations, understandings or agreements covering the same subject
matter as this Agreement. This Agreement supersedes, and cannot be varied,
contradicted or supplemented by evidence of any prior or contemporaneous
discussions, correspondence, or oral or written agreements of any kind. This
Agreement may be modified, altered or otherwise amended only by a written
instrument executed by both Company and Employee.
12. No Waiver; Remedies Cumulative. No waiver by the parties hereto of any
------------------------------
default or breach of any term, condition or covenant of this Agreement shall be
deemed to e a waiver of any subsequent default or breach of the same or any
other term, condition or covenant contained herein. No right, remedy or
election given by any term of this Agreement shall be deemed exclusive but each
shall be cumulative with all other rights, remedies and elections available at
law or in equity.
13. Assignment; Binding Effect. Employee understands that he has been
--------------------------
selected by Company on the basis of his personal qualifications, experience and
skills. This Agreement is not assignable. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and Company's successors.
14. Notice. All notices or other communications required or permitted
------
hereunder shall be in writing and may be given by depositing the same in the
United States mail, addressed to the party to be notified, postage prepaid and
registered or certified with return receipt requested, by overnight courier or
by delivering the same in person to such party.
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<PAGE>
To Company: President
1000 Crawford Place
Mt. Laurel, N.J. 08054
with a copy to:
Robert M. Kramer & Assoc., P.C.
1150 First Avenue, Suite 900
King of Prussia, PA 19406
To Employee: Louis D. Paolino, Jr.
500 East Mantua Ave.
Wenonah, N.J. 08090
Notice shall be deemed given and effective the day personally delivered, the day
after being sent by overnight courier and three days after the deposit in the U.
S. mail of a writing addressed as above and sent first class mail, certified,
return receipt requested, or when actually received, if earlier. Either party
may change the address for notice by notifying the other party of such change in
accordance with this paragraph 14.
15. Severability; Headings. If any portion of this Agreement is held
----------------------
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in any way to describe, interpret, define or limit the extent or intent of this
Agreement or of any part hereof.
16. Governing Law. This Agreement shall in all respects be construed in
-------------
accordance with the laws of the Commonwealth of Pennsylvania.
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<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
By:
--------------------------------
Terry Patrick, Vice President
--------------------------------
Louis D. Paolino, Jr.
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<PAGE>
Exhibit 10.35
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement ("Agreement") is executed and delivered as of
June 20, 1996 and between Eastern Environmental Services, Inc., a Delaware
corporation ("Company"), and Terry Patrick, an individual ("Employee").
RECITALS
--------
The Company conducts a diversified waste management business, including,
without limitation, waste hauling operations, landfills and other waste
management, recycling and waste testing operations ("Business"). The Employee
is an executive with extensive experience in the waste industry. The Company
desires to hire Employee as an Executive Vice President and Chief Operations
Officer and the Employee desires to accept the position offered.
The position of the Employee with the Company will give the Employee access
to and familiarity with confidential information and business methods used in
the operation of the Business. During the course of Employee's employment,
Employee will become familiar with and aware of information as to the specific
manner of doing business and the customers of the Company and the Company's
future plans. Employee has and will have knowledge of trade secrets of the
Company which are valuable assets of the Company.
Employee recognizes that the business of the Company is dependent upon a
number of trade secrets and confidential
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<PAGE>
business information, including customer lists, customer data and operational
information. The protection of these trade secrets is of critical importance to
the Company. The Company will sustain great loss and damage if, for whatever
reason, during the term of this Agreement or Employee's employment with Company
and for a period following the termination of this Agreement or Employee's
employment, Employee should violate the provisions of paragraph 3 of this
Agreement. Further, Employee acknowledges that any such violation would cause
irreparable harm to Company and that Company would be entitled, without
limitation, to injunctive relief to remedy such violation.
NOW, THEREFORE, in consideration of Ten Dollars ($10), and the mutual
promises, terms and conditions set forth herein and the performance of each, the
parties hereby agree as follows:
1. Services.
--------
(a) Company hereby employs Employee as its Executive Vice President and
Chief Operations Officer. Additional or different duties, titles or positions
may be assigned to Employee or may be taken from Employee from time to time by
the President of Company; provided, that the Employee consents to such changes.
(b) Employee hereby accepts employment upon the terms and conditions
contained in this Agreement. Employee shall faithfully adhere to, execute and
fulfill all directions and policies established by the Company, to the extent
such instructions do not violate applicable laws.
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<PAGE>
(c) Employee shall not, during the term of his employment hereunder,
without the prior written consent of Company, be engaged in any other business
activity pursued for gain, profit or other pecuniary advantage, if such activity
interferes with Employee's duties and responsibilities under this Agreement.
Employee's employment is for a full time position. Employee may make personal
investments in such form or manner as will neither require his services in the
operation or affairs of the enterprises in which such investments are made nor
violate the terms of Paragraph 3.
2. Compensation.
------------
(a) For all services to be rendered by Employee to Company, Company shall
pay Employee an annual salary at the rate of One Hundred Fifty Thousand
($150,000) Dollars per year, payable in accordance with Company's normal payroll
procedures. The Company, at its discretion, may from time to time grant bonuses
and raises to the Employee.
(b) The Employee shall be granted stock options ("Options") exercisable for
One Hundred Fifty Thousand (150,000) shares of the Company's common stock at a
per share exercise price equal to the lowest bid price of the Company's common
stock on June 20, 1996, the day that Employee and Company agreed to the terms of
this Agreement. The Options shall be granted under the Company's incentive
stock option plan. The Company's incentive stock option plan currently does not
have sufficient shares available under it to grant the Options. The Options
shall be granted as soon as the Company's stock option plan can be amended. The
Options shall vest
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<PAGE>
over the four year term of this Agreement, one fourth of the Options shall vest
on each anniversary date of this Agreement. Notwithstanding the prior sentence
the Options shall all vest immediately, if the Company's board of directors
accepts a binding agreement of a merger, consolidation or other business
combination in which the Company is not the surviving entity.
(c) To the extent that Company, from time to time in its sole discretion,
offers or provides any of the following to its employees, then Employee, on an
equal basis with such other employees, shall be entitled to: (i) participation
in all, if any, life, health, medical, hospital, accident and disability
insurance programs of Company in existence for the benefit of its employees and
for which Employee qualifies; (ii) participation in all, if any, pension,
retirement, profit sharing or stock purchase plans for which Employee qualifies;
and (iii) participation in any other employee benefits which Company accords to
its employees.
(d) During the term of Employee's employment with Company, Employee shall
be entitled to reimbursement for reasonable business expenses incurred on behalf
of Company, to the extent that Company provides such reimbursement to its
employees who are employed in the same capacity as Employee.
3. Noncompetition Covenants.
------------------------
(a) Employee agrees that the noncompetition covenants contained in this
Paragraph 3 are a material and substantial part of this Agreement.
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<PAGE>
(b) Employee covenants that during Employee's employment with Company and
for one year following the termination of Employee's employment (regardless of
the reason for the termination) the Employee shall not, directly or indirectly,
without the prior express written consent of Company, do any of the things set
forth in item (i) below. Employee covenants that during Employee's employment
with Company and for two years following the termination of Employee's
employment (regardless of the reason for the termination) the Employee shall
not, directly or indirectly, without the prior express written consent of
Company, do any of the things set forth in items (ii) through (vi) below.
(i) engage, as an officer, director, shareholder, owner, partner, joint
venturer, agent, or in a managerial capacity, whether as an employee,
independent contractor, consultant or advisor, or as a sales
representative, in the waste disposal industry, including, without
limitation, waste hauling, waste disposal, land filling, handling
demolition waste, handling special waste, collecting or disposing of
municipal special waste, and recycling waste, in each case within seventy-
five (75) miles of any Company business operation (the "Territory");
(ii) call upon any person who is, at that time, within the Territory,
an employee of Company or its affiliates in a managerial capacity, for the
purpose or with the intent of enticing such employee away from or out of
the employ of Company or its affiliates;
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<PAGE>
(iii) call upon any person or entity, which is, at that time, or
which has been, within one year prior to that time, a customer of the
Company or its affiliates within the Territory, for the purpose of
soliciting or selling any of the services which are the services offered by
the Company within the Territory;
(iv) call upon any prospective acquisition candidate located within the
Territory, on his own behalf or on behalf of any competitor of Company or
its affiliates, which candidate was known to Employee as an acquisition
candidate of the Company or Company's affiliates;
(v) disclose the identity of the customers of Company or its
affiliates, whether in existence or proposed, to any person, firm,
partnership, corporation or other entity whatsoever, for any reason or
purpose whatsoever, except if compelled to do so by a governmental agency,
Court Order or subpoena; or
(vi) promote, or assist, financially or otherwise, any person, firm,
partnership, corporation or other entity whatsoever to do any of the above.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit Employee from acquiring as an investment not more than two percent of
the capital stock of a competing business, the stock of which is traded on a
national securities exchange or over-the-counter.
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<PAGE>
For the purposes of this Agreement, the term "affiliates" shall mean one or
more of: (a) each subsidiary of Company, and (B) each other entity under the
direct or indirect control of the Company.
(c) The Company will sustain significant losses and damages as a result of
the breach by Employee of the covenants in this Paragraph 3. There is no
adequate monetary remedy for the immediate and irreparable damage that would be
caused to Company by Employee's breach of its non-competition covenants.
Employee agrees that, in the event of a breach by him of the foregoing
covenants, such covenants may be enforced by Company by, without limitation,
injunctions and restraining orders.
(d) It is agreed by the parties that the covenants in this Paragraph 3
impose a reasonable restraint on Employee in light of the activities and
business of Company on the date of the execution of this Agreement and the
future plans of Company.
(e) The covenants in this Paragraph 3 are severable and separate, and the
unenforceability of any specific covenant shall not affect the provisions of any
other covenant. If any court of competent jurisdiction shall determine that the
scope, time or territorial restrictions set forth are unreasonable, then it is
the intention of the parties that such restrictions be enforced to the fullest
extent which the court deems reasonable, and the Agreement shall thereby be
reformed.
(f) The covenants in this Paragraph 3 shall be construed as independent of
any other provision of this Agreement and the
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<PAGE>
existence of any claim or cause of action of Employee against Company whether
predicated on this Agreement, or otherwise, shall not constitute a defense to
the enforcement by Company of such covenants. It is specifically agreed that
the duration of the noncompetition covenants stated above shall be computed by
excluding from such computation all time during which Employee is in violation
of any provision of this Paragraph 3 and all time during which there is pending
in any court of competent jurisdiction any action (including any appeal from any
judgment) brought by any person, whether or not a party to this Agreement, in
which action Company seeks to enforce the agreements and covenants of Employee
or in which any person contests the validity of such agreements and covenants or
their enforceability or seeks to avoid their performance or enforcement.
Provided that, no such exclusion shall include the period of time within which
Employee has ceased violating this paragraph, whether or not as a result of
being in compliance with Court injunction or doing so voluntarily, and whether
or not any action is pending against Employee.
4. Return of Company Property. All correspondence, reports, charts,
--------------------------
products, records, designs, patents, plans, manuals, "field guides," memoranda,
advertising materials, lists and other data or property collected by or
delivered to Employee by or on behalf of the Company or its representatives,
customers and government entities (including, without limitation, customers
obtained for Company by Employee), and all other materials compiled by Employee
which pertain to the business of Company shall be and shall remain
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<PAGE>
the property of Company, shall be subject at all times to the Company's
discretion and control and shall be delivered promptly to Company upon request
at any time and without request upon completion or other termination of
Employee's employment hereunder.
5. Inventions. Employee shall disclose promptly to Company any and all
----------
conceptions and ideas for inventions, improvements, and valuable discoveries,
whether patentable or not, which are conceived or made by Employee solely or
jointly with another during the period of employment or within one year
thereafter and which are related to the business or activities of the Company.
Employee hereby assigns and agrees to assign all his interests therein to
Company or its nominee. Whenever requested to do so by Company, Employee shall
execute any and all applications, assignments or other instruments that Company
shall deem necessary to apply for and obtain Letters Patent of the United States
or any foreign country or to otherwise protect Company's interest therein.
These obligations shall continue beyond the termination of employment with
respect to inventions, improvements and valuable discoveries, whether patentable
or not, conceived, made or acquired by Employee during the period of employment
or within one year thereafter, and shall be binding upon Employee's heirs,
assigns, executors, administrators and other legal representatives.
6. Term; Termination; Rights of Termination. The term of this Agreement
----------------------------------------
shall begin on the date of this Agreement and continue for a term of four (4)
years. Employee's employment under
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<PAGE>
this Agreement may be terminated during the term hereof in any one or more of
the following ways:
(a) Automatically upon the death or resignation of Employee.
(b) By Company upon written notice to Employee in the event of:
(i) Employee's breach of this Agreement;
(ii) Employee's unsatisfactory performance of his duties or other
obligations hereunder, as determined in good faith by the Company;
(iii) The Company's merger, consolidation, or other business combination
with another entity where the Company is not the surviving entity or the
Company's sale of substantially all its assets;
(iv) Default of the Company in performing its obligations under
contracts with other persons or entities, if directly or indirectly caused
by Employee;
(v) Employee's inability to perform his duties under this Agreement
because of illness or physical or mental disability or other incapacity
which continues for a period of 90 days;
(vi) Employee's fraud with respect to the business or affairs of
Company or if Employee is convicted of a crime.
If the Agreement is terminated by the Company, the Employee shall be provided
with a written notice of termination which shall state the reason for Employee's
termination.
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<PAGE>
(c) Upon termination of Employee's employment under Paragraph 6(b)(ii),
Employee shall be entitled to receive, and shall immediately be paid in full,
two months annual salary that would have been paid under Paragraph 2(a) above,
if the Agreement had not been terminated. Upon termination of Employee's
employment under Paragraph 6(b)(iii), Employee shall be entitled to receive, and
shall immediately be paid in full, an amount equal to two years annual salary
and the bonuses paid during the most recent two years, plus Company shall
continue all of Employee's insurance benefits for two years after the date of
termination.
(d) In the event of termination of Employee's employment under this
Agreement for any reason provided in paragraph 6(a) or 6(b), all rights and
obligations of Company and Employee under this Agreement shall cease
immediately, except that Employee's obligations under this subparagraph and
paragraphs 3, 4, 5, and 8 herein and Company's obligations under paragraph 6(c)
shall survive such termination. After such termination Employee shall have no
right to receive any compensation hereunder, except as set forth in paragraph
6(c).
7. Authority. Employee may take orders from customers of the Company in
---------
accordance with the standard Company form of agreement and all Company policies
and procedures from time to time in effect and at all times subject to
acceptance by Company. Employee does not have any power or authority to
contract for, bind or commit Company in any manner, unless given express
permission in advance. Without limiting the generality of the foregoing
statement, but as
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illustrative of its intent, Employee shall not have or exercise or purport to
have any powers or rights to make, explain, amplify or modify any warranties as
may be contained in said standard Company form of agreement.
8. Representations of Employee. Employee represents and warrants to
---------------------------
Company that he is not subject to any restriction or noncompetition covenant in
favor of a former employer or any other person or entity, and that the execution
of this Agreement by Employee and his provision of services to Company and the
performance of his obligations hereunder will not violate or be a breach of any
agreement with a former employer or any other person or entity. Further,
Employee agrees to indemnify Company for any claim, including, but not limited
to, attorneys' fees and expenses of investigation, by any such third party that
such third party may now have or may hereafter come to have against Company
based upon or arising out of any noncompetition agreement or invention and
secrecy agreement between Employee and such third party.
9. Complete Agreement. This Agreement is the final, complete and
------------------
exclusive statement and expression of the agreement between Company and
employee, it being understood that there are no oral representations,
understandings or agreements covering the same subject matter as this Agreement.
This Agreement supersedes, and cannot be varied, contradicted or supplemented by
evidence of any prior or contemporaneous discussions, correspondence, or oral or
written agreements of any kind. This Agreement may be modified,
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altered or otherwise amended only by a written instrument executed by both
Company and Employee.
10. No Waiver; Remedies Cumulative. No waiver by the parties hereto of any
------------------------------
default or breach of any term, condition or covenant of this Agreement shall be
deemed to be a waiver of any subsequent default or breach of the same or any
other term, condition or covenant contained herein. No right, remedy or
election given by any term of this Agreement shall be deemed exclusive but each
shall be cumulative with all other rights, remedies and elections available at
law or in equity.
11. Assignment; Binding Effect. Employee understands that he has been
--------------------------
selected by Company on the basis of his personal qualifications, experience and
skills. This Agreement is not assignable. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and Company's successors.
12. Notice. All notices or other communications required or permitted
------
hereunder shall be in writing and may be given by depositing the same in the
United States mail, addressed to the party to be notified, postage prepaid and
registered or certified with return receipt requested, by overnight courier or
by delivering the same in person to such party.
To Company: President
1000 Crawford Place
Mt. Laurel, N.J. 08054
with a copy to:
Robert M. Kramer & Assoc., P.C.
1150 First Avenue, Suite 900
King of Prussia, PA 19406
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<PAGE>
To Employee: Terry Patrick
5705 Seville Court
Plano, Texas 75093
Notice shall be deemed given and effective the day personally delivered, the day
after being sent by overnight courier and three days after the deposit in the
U.S. mail of a writing addressed as above and sent first class mail, certified,
return receipt requested, or when actually received, if earlier. Either party
may change the address for notice by notifying the other party of such change in
accordance with this paragraph 12.
13. Severability; Headings. If any portion of this Agreement is held
----------------------
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in any way to describe, interpret, define or limit the extent or intent of this
Agreement or of any part hereof.
14. Governing Law. This Agreement shall in all respects be construed in
-------------
accordance with the laws of the Commonwealth of Pennsylvania.
EASTERN ENVIRONMENTAL SERVICES, INC.
By: /s/ Louis D. Paolino, Jr.
--------------------------------------
Louis D. Paolino, Jr. President
/s/ Terry Patrick
-----------------------------------------
Terry Patrick
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<PAGE>
Exhibit 10.36
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement ("Agreement") is executed and delivered as of
June 20, 1996, by and between Eastern Environmental Services, Inc., a Delaware
corporation ("Company"), and Robert M. Kramer, an individual ("Employee").
RECITALS
--------
The Company conducts a diversified waste management business, including,
without limitation, waste hauling operations, landfills and other waste
management, recycling and waste testing operations ("Business"). The Employee
is a lawyer with extensive experience representing clients in the waste
industry. The Company desires to hire Employee as its Vice President and
General Counsel and the Employee desires to accept the position offered.
The position of the Employee with the Company will give the Employee access
to and familiarity with confidential information and business methods used in
the operation of the Business. During the course of Employee's employment,
Employee will become familiar with and aware of information as to the specific
manner of doing business and the customers of the Company and the Company's
future plans. Employee has and will have knowledge of trade secrets of the
Company which are valuable assets of the Company.
Employee recognizes that the business of the Company is dependent upon a
number of trade secrets and confidential business information, including
customer lists, customer data and operational information. The protection of
these trade secrets is
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of critical importance to the Company. The Company will sustain great loss and
damage if, for whatever reason, during the term of this Agreement or Employee's
employment with Company and for a period following the termination of this
Agreement or Employee's employment, Employee should violate the provisions of
paragraph 4 of this Agreement. Further, Employee acknowledges that any such
violation would cause irreparable harm to Company and that Company would be
entitled, without limitation, to injunctive relief to remedy such violation.
NOW, THEREFORE, in consideration of Ten Dollars ($10), and the mutual
promises, terms and conditions set forth herein and the performance of each, the
parties hereby agree as follows:
1. Services.
--------
(a) Company hereby employs Employee as its Vice President and General
Counsel. Additional or different duties, titles or positions may be assigned to
Employee or may be taken from Employee from time to time by the Company's
President or Board of Directors ("Board"); provided, that the Employee consents
to such changes.
(b) Employee hereby accepts employment upon the terms and conditions
contained in this Agreement. Employee shall faithfully adhere to, execute and
fulfill all directions and policies established by the Board, to the extent such
instructions do not violate applicable laws.
(c) Employee shall not, during the term of his employment hereunder,
without the prior written consent of Company, be engaged in any other competing
business activity pursued for gain, profit
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<PAGE>
or other pecuniary advantage. Company acknowledges that Employee is engaged in
the private practice of law through Robert M. Kramer & Associates, P.C. and the
Company acknowledges that Employee may remain employed by Robert M. Kramer &
Associates, P.C.; provided, that Employee devotes an average of sixty (60) hours
a month on duties assigned to Employee by the President of the Company.
Employee may make personal investments and conduct his personal business
affairs, including, without limitation, participating in the management of
businesses which the Employee owns directly or through affiliated entities, as
long as such investments do not violate the terms of Paragraph 4.
2. Compensation.
------------
(a) For all services to be rendered by Employee to Company, Company shall
pay Employee an annual salary at the rate of One Hundred Twenty Five Thousand
($125,000) Dollars per year, payable in accordance with Company's normal payroll
procedures. The Company, at its discretion, may from time to time grant bonuses
and raises to the Employee.
(b) The Employee shall be granted stock options ("Options") exercisable for
One Hundred Seventy Five Thousand (175,000) shares of the Company's common stock
at a per share exercise price equal to the lowest bid price of the Company's
common stock on June 20, 1996, the day that Company and Employee agreed to the
terms of this Agreement. The Options shall be granted under the Company's 1996
Stock Option Plan. The Options shall be granted on the date this Agreement is
executed by the Company. The Options shall vest over
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<PAGE>
the term of this Agreement, one fourth of the Options shall vest on each
anniversary date of this Agreement's execution. The Options shall be fully
vested on the last day of this Agreement's term. Notwithstanding the prior
sentence the Options shall all vest immediately, upon a Change of Control, as
hereafter defined in Paragraph 2(e) below.
(c) To the extent that Company, from time to time in its sole discretion,
offers or provides any of the following to its employees, then Employee, on an
equal basis with such other employees, shall be entitled to: (i) participation
in all, if any, life, health, medical, hospital, accident and disability
insurance programs of Company in existence for the benefit of the Company's
executives and for which Employee qualifies; (ii) participation in all, if any,
pension, retirement, profit sharing or stock purchase plans for which Employee
qualifies; and (iii) participation in any other employee benefits which Company
accords to its employees.
(d) Employee shall be providing his services to the Company from the King
of Prussia offices of Robert M. Kramer & Associates, P.C. During the term of
Employee's employment with Company, Employee shall be entitled to reimbursement
for reasonable business expenses incurred on behalf of Company, including,
without limitation, federal express mail delivery charges, copying charges and
facsimile phone transmission charges incurred by Employee in the conduct of his
duties to the Company. Employee shall be paid a monthly car allowance of Five
Hundred ($500.) Dollars a month.
(e) For purposes of this Agreement, a "Change of Control"
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<PAGE>
shall mean the occurrence of any of the events set forth in items (i) through
and including (iv) below.
(i) There shall be a "Change of Control", upon the acquisition in one or
more transactions by any "Person", (as the term "Person" is used for purposes of
Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the
1934 Act")) of "Beneficial Ownership" (as the term beneficial ownership is used
for purposes of Rule 13d-3 promulgated under the 1934 Act) of fifty percent
(50%) or more of the combined voting power of the Company's then outstanding
voting securities (the "Voting Securities"). For purposes of this Paragraph
2(e), the Voting Securities acquired directly from the Company by any Person
shall be excluded from the determination of such Person's Beneficial Ownership
of Voting Securities (but such Voting Securities shall be included in the
calculation of the total number of Voting Securities then outstanding). For
purposes of this Paragraph 2(e) the acquisition of Employee of the Beneficial
Ownership of 50% percent or more of the Voting Securities shall not be a Change
of Control.
(ii) There shall be a "Change of Control", upon approval by shareholders
of the Company of: (A) a merger, reorganization or consolidation involving the
Company, if the shareholders of the Company immediately before such merger,
reorganization or consolidation do not or will not own directly or indirectly
immediately following such merger, reorganization or consolidation, more than
fifty percent (50%) of the combined voting power of the outstanding voting
securities of the corporation resulting from or
-5-
<PAGE>
surviving such merger, reorganization or consolidation in substantially the same
proportion as their ownership of the Voting Securities immediately before such
merger, reorganization or consolidation, or (B) (1) a complete liquidation or
dissolution of the company or (2) an agreement for the sale or other disposition
of all or substantially all of the assets of the Company.
(iii) There shall be a "Change of Control", upon acceptance by
shareholders of the Company of shares in a share exchange, if the shareholders
of the Company immediately before such share exchange do not or will not own
directly or indirectly immediately following such share exchange more than fifty
percent (50%) of the combined voting power of the outstanding voting securities
of the corporation resulting from or surviving such share exchange in
substantially the same proportion as the ownership of the Voting Securities
outstanding immediately before such share exchange.
(iv) There shall be a "Change of Control", upon the current directors of
the Company, Louis Paolino, Jr., George Moorehead and Kenneth Leung, no longer
constituting a majority of the Company's Board of Directors.
3. Term. The term of this Agreement shall begin on the date of this
----
Agreement and continue for a term of four (4) years. Employee's employment under
this Agreement may be terminated during the term hereof only as set forth in
Paragraph 7 of this Agreement.
4. Noncompetition Covenants.
------------------------
(a) Employee agrees that the noncompetition covenants
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<PAGE>
contained in this Paragraph 4 are a material and substantial part of this
Agreement.
(b) Employee covenants that during Employee's employment with Company and
for two years following the termination of Employee's employment (regardless of
the reason for the termination) the Employee shall not, directly or indirectly,
without the prior express written consent of Company, do any of the things set
forth in item (i) through (iv) below.
(i) call upon any person who is, at the time of the contact, an employee
of Company or its affiliates within the Territory, if the employee serves the
Company in a managerial capacity and if the purpose and intent of the contact is
to entice such employee away from or out of the employ of Company or its
affiliates;
(ii) call upon any person or entity, which is, at the time of the
contact, a customer of the Company or its affiliates within the Territory, for
the purpose of soliciting or selling any of the services which are the services
offered by the Company within the Territory;
(iii) disclose the identity of the customers of Company or its
affiliates, whether in existence or proposed, to any person, firm, partnership,
corporation or other entity whatsoever, for any reason or purpose whatsoever,
except if approved by the Board or if compelled to do so by a governmental
agency, Court Order or subpoena; or
(iv) promote, or assist, financially or otherwise, any
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<PAGE>
person, firm, partnership, corporation or other entity whatsoever to do any of
the above.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit Employee from acquiring as an investment not more than ten percent of
the capital stock of a competing business, the stock of which is traded on a
national securities exchange or over-the-counter.
For the purposes of this Agreement, the term "affiliates" shall mean one or
more of: (a) each subsidiary of Company, and (B) each other entity under the
direct or indirect control of the Company.
(c) The Company will sustain significant losses and damages, if Employee
breaches the covenants in this Paragraph 4. There is no adequate monetary
remedy for the immediate and irreparable damage that would be caused to Company
by Employee's breach of its non-competition covenants. Employee agrees that, in
the event of a breach by him of the foregoing covenants, such covenants may be
enforced by Company by, without limitation, injunctions and restraining orders.
(d) It is agreed by the parties that the covenants in this Paragraph 4
impose a reasonable restraint on Employee in light of the activities and
business of Company on the date of the execution of this Agreement and the
future plans of Company.
(e) The covenants in this Paragraph 4 are severable and separate, and the
unenforceability of any specific covenant shall not affect the provisions of any
other covenant. If any court of competent jurisdiction shall determine that the
scope, time or
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<PAGE>
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
(f) The covenants in this Paragraph 4 shall be construed as independent of
any other provision of this Agreement and the existence of any claim or cause of
action of Employee against Company whether predicated on this Agreement, or
otherwise, shall not constitute a defense to the enforcement by Company of such
covenants. It is specifically agreed that the duration of the noncompetition
covenants stated above shall be computed by excluding from such computation all
time during which Employee is in violation of any provision of this Paragraph 4
and all time during which there is pending in any court of competent
jurisdiction any action (including any appeal from any judgment) brought by any
person, whether or not a party to this Agreement, in which action Company seeks
to enforce the agreements and covenants of Employee or in which any person
contests the validity of such agreements and covenants or their enforceability
or seeks to avoid their performance or enforcement. Provided that, no such
exclusion shall include the period of time within which Employee has ceased
violating this paragraph, whether or not as a result of being in compliance with
Court injunction or doing so voluntarily, and whether or not any action is
pending against Employee.
5. Return of Company Property. All correspondence, reports, charts,
--------------------------
products, records, designs, patents, plans, manuals, "field guides," memoranda,
advertising materials, lists and other data or
-9-
<PAGE>
property collected by or delivered to Employee by or on behalf of the Company or
its representatives, customers and government entities (including, without
limitation, customers obtained for Company by Employee), and all other materials
compiled by Employee which pertain to the business of Company shall be and shall
remain the property of Company, shall be subject at all times to the Company's
discretion and control and shall be delivered promptly to Company upon request
at any time and without request upon completion or other termination of
Employee's employment hereunder.
6. Inventions. Employee shall disclose promptly to Company any and all
----------
conceptions and ideas for inventions, improvements, and valuable discoveries,
whether patentable or not, which are conceived or made by Employee during the
period of employment which are related to the business or activities of the
Company. Employee hereby assigns and agrees to assign all his interests therein
to Company or its nominee. Whenever requested to do so by Company, Employee
shall execute any and all applications, assignments or other instruments that
Company shall deem necessary to apply for and obtain Letters Patent of the
United States or any foreign country or to otherwise protect Company's interest
therein. These obligations shall continue beyond the termination of employment
with respect to inventions, improvements and valuable discoveries, whether
patentable or not, conceived, made or acquired by Employee during the period of
employment, and shall be binding upon Employee's heirs, assigns, executors,
administrators and other legal representatives.
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<PAGE>
7. Termination; Rights of Termination.
----------------------------------
(a) Employee's employment under this Agreement may be terminated during the
term hereof upon the occurrence of any of the items set forth below. If
Employee's employment under this Agreement is terminated for any of the reasons
set forth below, Employee shall be entitled to receive, and shall immediately be
paid in full, three (3) months annual salary that would have been paid under
Paragraph 2(a) above, if this Agreement had not been terminated. If in any one
or more of the following items occur this Agreement shall be terminated as
follows:
(i) Automatically upon the death of Employee.
(ii) Automatically upon the resignation of the Employee, occurring when
no Change of Control occurred, or if the Change of Control occurred more than
one year after the resignation.
(iii) By Company upon written notice to Employee in the event of:
(A) Employee's breach of this Agreement;
(B) Employee's inability to perform his duties under this Agreement
because of illness or physical or mental disability or other incapacity
which continues for a period of 90 days; or
(C) Employee's theft or fraud with respect to the business or
affairs of Company or if Employee is convicted of a crime involving fraud
or theft.
If the Agreement is terminated by the Company, the Employee shall be
provided with a written notice of termination which shall
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<PAGE>
state the reason for Employee's termination.
(b) Employee's employment under this Agreement may be terminated during
the term hereof upon the occurance of any of the items set forth below. If
Employee's employment under this Agreement is terminated for any of the reasons
set forth below, Employee shall be entitled to receive, and shall immediately be
paid in full, two (2) years annual salary that would have been paid under
Paragraph 2(a) above, if this Agreement had not been terminated. If in any one
or more of the following items occur this Agreement shall be terminated as
follows:
(i) Automatically upon the resignation of the Employee, within one year
of a Change of Control.
(ii) By Company upon written notice to Employee in the event of:
(A) Employee's unsatisfactory performance of his duties or other
obligations hereunder, as determined in good faith by the Board; or
(B) The Company's merger, consolidation, or other business combination
with another entity where the Company is not the surviving entity or the
Company's sale of substantially all its assets.
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<PAGE>
If the Agreement is terminated by the Company, the Employee shall be
provided with a written notice of termination which shall state the reason for
Employee's termination.
(c) In the event of termination of Employee's employment under this
Agreement for any reason provided in paragraph 7(a) or 7(b), all rights and
obligations of Company and Employee under this Agreement shall cease
immediately, except that Employee's obligations under this subparagraph and
paragraphs 4, 5, 6, and 9 herein and Company's obligations to pay the amounts to
be paid under Paragraph 7(a) or 7(b), as applicable, shall survive such
termination. The right of Employee to exercise any vested Options shall survive
the term and the termination of this Agreement by two years. After the
termination of this Agreement Employee shall have no right to receive any salary
payable hereunder, except as set forth in Paragraph 7(a) or 7(b), as applicable.
8. Authority. Employee shall be authorized to obligate the Company in
---------
accordance with the Company's policies and procedures from time to time in
effect, and as authorized by the Board or the President of the Company.
9. Representations of Employee. Employee represents and warrants to
---------------------------
Company that he is not subject to any restriction or noncompetition covenant in
favor of a former employer or any other person or entity, and that the execution
of this Agreement by Employee and his provision of services to Company and the
performance of his obligations hereunder will not violate or be a
breach of any agreement with a former employer or any other person
-13-
<PAGE>
or entity. Further, Employee agrees to indemnify Company for any claim,
including, but not limited to, attorneys' fees and expenses of investigation, by
any such third party that such third party may now have or may hereafter come to
have against Company based upon or arising out of any noncompetition agreement
or invention and secrecy agreement between Employee and such third party.
10. Complete Agreement. This Agreement is the final, complete and
------------------
exclusive statement and expression of the agreement between Company and
Employee, it being understood that there are no oral representations,
understandings or agreements covering the same subject matter as this Agreement.
This Agreement supersedes, and cannot be varied, contradicted or supplemented by
evidence of any prior or contemporaneous discussions, correspondence, or oral or
written agreements of any kind. This Agreement may be modified, altered or
otherwise amended only by a written instrument executed by both Company and
Employee.
11. No Waiver; Remedies Cumulative. No waiver by the parties hereto of
------------------------------
any default or breach of any term, condition or covenant of this Agreement shall
be deemed to e a waiver of any subsequent default or breach of the same or any
other term, condition or covenant contained herein. No right, remedy or election
given by any term of this Agreement shall be deemed exclusive but each shall be
cumulative with all other rights, remedies and elections available at law or in
equity.
12. Assignment; Binding Effect. Employee understands that he has been
--------------------------
selected by Company on the basis of his personal
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<PAGE>
qualifications, experience and skills. This Agreement is not assignable. This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and Company's successors.
13. Notice. All notices or other communications required or permitted
------
hereunder shall be in writing and may be given by depositing the same in the
United States mail, addressed to the party to be notified, postage prepaid and
registered or certified with return receipt requested, by overnight courier or
by delivering the same in person to such party.
To Company: President
1000 Crawford Place
Mt. Laurel, N.J. 08054
To Employee: Robert M. Kramer
1150 First Avenue, Suite 900
King of Prussia, Penna. 19406
Notice shall be deemed given and effective the day personally delivered, the day
after being sent by overnight courier and three days after the deposit in the U.
S. mail of a writing addressed as above and sent first class mail, certified,
return receipt requested, or when actually received, if earlier. Either party
may change the address for notice by notifying the other party of such change in
accordance with this paragraph 13.
14. Severability; Headings. If any portion of this Agreement is held
----------------------
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
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<PAGE>
paragraph headings herein are for reference purposes only and are not intended
in any way to describe, interpret, define or limit the extent or intent of this
Agreement or of any part hereof.
15. Governing Law. This Agreement shall in all respects be construed in
-------------
accordance with the laws of the Commonwealth of Pennsylvania.
EASTERN ENVIRONMENTAL SERVICES, INC.
By:/s/ Louis D. Paolino, Jr.
-------------------------------------
Louis D. Paolino, Jr., President
/s/ Robert M. Kramer
--------------------------------------
Robert M. Kramer
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<PAGE>
Exhibit 10.37
June 26, 1996
Mr. Gregory M. Krzemien
109 Burrell Blvd.
Allentown, PA 18104
Dear Mr. Krzemien:
In recognition of your contribution to the growth and success of Eastern
Environmental Services, Inc. (the "Company"), we are pleased to offer to you
("Executive") continued employment with the Company as Chief Financial Officer
and Treasurer, subject to the following terms of this letter agreement (the
"Agreement").
1. Term. Subject to the terms and conditions hereinafter set forth,
----
Executive shall be employed for a term commencing on the date hereof and
expiring eighteen (18) months after the date hereof unless such employment is
earlier terminated as provided in Section 7 herein (the "Term"). If this
Agreement is not terminated prior to the expiration of the Term, the Term of the
Agreement shall continue on a month to month basis after the expiration of the
eighteen (18) month Term, until either party to this Agreement notifies the
other party in writing that this Agreement has been terminated. After the
initial 18 month Term, either party may terminate this Agreement for any or no
reason with written notice to the other party.
2. Duties. During the Term, Executive shall devote his best efforts and
------
substantially all of his business time and services to the Company. Executive
shall perform such duties and services which are consistent with the duties he
currently performs for the Company and as the Board of Directors (the "Board"),
the Chairman of the Board, the Chief Executive Officer, the President or such
other person designated by the foregoing shall reasonably request.
Notwithstanding the foregoing, during the Term, Executive shall be permitted to
consult with William C. Skuba ("Skuba") on matters related to certain business
opportunities acquired now or in the future by Skuba from the Company provided
that such work shall be at such times and in such manner as shall not
unreasonably interfere with the performance of his duties and responsibilities
to the Company under this Agreement.
1
<PAGE>
3. Annual Salary. Executive hereby agrees to accept as compensation for
-------------
all services rendered by Executive in any capacity hereunder during the term an
annual salary at the annual rate of [$90,000] commencing on the date hereof (the
"Annual Salary"). The Annual Salary shall be payable in cash (i.e. by ordinary
check) in approximately equal installments at such intervals as are consistent
with the Company's pay periods for regular salaried executive employees. The
Annual Salary may be further increased from time to time upon the approval of
the Company's President. The Annual Salary shall be inclusive of all applicable
income, social security and other taxes and charges which are required by law to
be withheld by the Company but shall be in addition to the Benefits (as defined
below) and any severance compensation payable as described below.
4. Benefits. During the Term, Executive shall be entitled to the benefits
--------
(the "Benefits") set forth on Schedule A attached hereto.
----------
5. Non-Compete; Other Agreements.
-----------------------------
5.1. Non-Competition Agreement. All agreements and understandings
-------------------------
between Executive and the Company, whether oral or written, which in any way
restricted the ability of Executive to compete with the Company, whether during
the Term or thereafter, and which were in effect at any time prior to the
execution and delivery of this Agreement are hereby terminated and of no further
force and effect. Neither party shall have any further rights or obligations
under such agreements.
5.2. Reaffirmation of Indemnity Agreement and Termination of Severance
-----------------------------------------------------------------
Agreement. Executive and the Company hereby agree that the Indemnity Agreement
- ---------
dated April 18, 1995 between Executive and the Company (the "Indemnity
Agreement") shall continue in full force and effect in accordance with its terms
and that the Severance Agreement dated August 20, 1993, as amended on February
29, 1996, between Executive and the Company (the "Severance Agreement") shall
terminate and be of no further force and effect. In consideration for the
termination of the Severance Agreement, the Company agrees: (i) to provide such
severance benefits in such amounts and in such manner as set forth in Section 7
hereof and (ii) on the date hereof, to: (a) issue to Executive 6,885 shares of
the Company's unregistered stock ("Unregistered Common Stock"), (b) grant to the
Executive stock options to purchase a further 8,607 shares of the Company's
registered Common Stock at a per share exercise price of $6.25 and 7,500 shares
of the Company's registered Common Stock at a per share exercise price of $8.00,
each under either the Company's 1987 Stock Option Plan or 1991 Stock Option Plan
to be
2
<PAGE>
immediately exercisable and to expire five (5) years from the date hereof, and
(c) the Company will include on its next S 3 registration Statement the
Unregistered Common Stock being issued under this Agreement.
6. Confidential Information. Executive agrees that, for a period of
------------------------
eighteen (18) months following the expiration or termination of Executive's
employment with the Company pursuant to this Agreement, Executive shall keep
secret and retain in strictest confidence, and shall not use for Executive's
benefit or the benefit of others, directly or indirectly, any proprietary,
confidential or secret matters relating to the Company including, without
limitation, financial information, trade secrets, customer lists, details of
client or consultant contracts, pricing policies, operational methods, marketing
plans or strategies, product development techniques or plans, business
acquisition plans, new personnel acquisition plans, methods of manufacture,
technical processes, designs and design projects or any other entity which may
hereafter become an affiliate thereof, learned, acquired or developed by
Executive while employed by the Company. In the event that Executive or any of
his representatives becomes legally compelled to disclose any of the
proprietary, confidential or secret information of the Company, Executive will
provide the Company with prompt written notice so that the Company may seek a
protective order or other appropriate remedy.
7. Termination. Executive's employment hereunder may be terminated during
-----------
the Term as described below.
7.1. Resignation, Death or Disability.
--------------------------------
(a) In the event of the resignation, death or Disability (as
defined below) of Executive during the Term, Executive's employment hereunder
shall be terminated and the Company shall pay to Executive or Executive's
executors, legal representatives or administrators, all accrued and unpaid
Annual Salary and Benefits through the date of such termination, together with
such other payments as may be provided in this Section 7.1 below.
(b) Except as set forth above in this Section 7.1, and except for
any salary and other benefits accrued, vested and unpaid as of the date of his
death or Disability, the Company shall not be under any further obligation to
the Employee or his heirs or personal representatives after the date of the
Employee's death or Disability pursuant to this Agreement.
(c) In the event that Executive resigns his employment, he shall
receive the following severance payments:
3
<PAGE>
(i) if Executive resigns within the first eight months of the date hereof, he
shall receive thirty days after such resignation a lump sum payment in cash
equal to six months of his Annual Salary, (ii) if Executive resigns after eight
months of the date hereof but before eighteen months of the date hereof, he
shall receive thirty days after such resignation a lump sum payment in cash
equal to two (2) months of his Annual Salary, and (iii) if Executive resigns
thereafter, he shall receive no severance payment.
(d) The exercisability of the stock options following the death of
Executive is governed by the terms of the relevant stock options plan and stock
option agreement under which the stock options were granted.
(e) A "Disability" shall be deemed to occur if Executive is unable
to perform his duties and responsibilities hereunder to the full extent required
by this Agreement by reasons of illness, injury or incapacity for a period of
more than 90 consecutive days or more than 180 days in the aggregate, during any
one-year period during the Term.
7.2. Termination For Cause.
---------------------
(a) The Company may terminate Executive's employment hereunder at
any time for "Cause" upon written notice to Executive. For purposes of this
Agreement, "Cause" shall mean: (i) the occurrence of any of the following
material violations: (A) alcohol abuse or use of controlled substances during
employment hours, (B) except where nonperformance is caused by a resignation,
Disability or death, Executive's refusal or inability to competently perform his
material obligations under this Agreement or (C) other conduct of Executive
involving any type of disloyalty to the Company or any of its affiliates or
subsidiaries or gross negligence or willful misconduct with respect to the
Company or any of its affiliates or subsidiaries, including without limitation
fraud, embezzlement, theft or proven dishonesty in the course of his employment
or a conviction of a felony or a misdemeanor involving moral turpitude or the
entering of a plea of guilty or nolo contendere to a felony and (C) the failure
---- ----------
by Executive to cure such material violation within thirty (30) days of
receiving written notice by the Board of such material violation.
(b) If the Company exercises the right to terminate Executive's
employment with Company for Cause, the Company's obligation to Executive shall
be limited solely to the payment of accrued and unpaid Annual Salary and
Benefits through the date of such termination, except, if the termination is
4
<PAGE>
within the first eight months of this Agreement's term the Company shall also
pay the lump sum benefit set forth in 7.1 (c)(i).
(c) The Company shall have such rights and remedies as may be
available to it for any breach by the Employee of this Agreement or otherwise.
7.3. Termination Without Cause.
-------------------------
(a) At any time, the Company may terminate Executive's employment
hereunder for a reason not constituting Cause by giving written notice to
Executive thirty (30) days prior to such termination.
(b) If Executive is terminated without Cause, the Executive shall be
entitled to payment of (i) all accrued and unpaid Annual Salary and Benefits
through the date of such termination and (ii) a lump sum amount equal to the
greater of six months of his Annual Salary or the balance of his Annual Salary
for the remainder of the Term.
(c) For purposes of this Section 7.3, Executive shall be deemed to
have been terminated without Cause if Executive terminates his employment with
the Company following either (i) a reduction in Executive's Annual Salary or
Benefits; (ii) a change required by the Company in the workplace at which
Executive is required to perform his services more than (2) times per calendar
week in order effectively to provide such services and such new workplace is
other than in Drums, Pennsylvania or Mount Laurel, New Jersey and is more than
ninety (90) minutes driving time one way from Executive's residence in
Allentown, Pennsylvania; or (iii) a material change in the duties and
responsibilities of Executive which change is required by the Company.
7.4 Change of Control.
-----------------
(a) In the event of a Change of Control (as defined below) while
Executive is an employee of the Company, the Company agrees to pay to Executive
a lump sum within thirty days after the Change of Control an amount equal to his
Annual Salary.
(b) For purposes of this Section 7.4, a "Change of Control" shall
mean the occurrence of any of the following events:
(i) the acquisition in one or more transactions by any "Person"
(as the term person is used for
5
<PAGE>
purposes of Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended (the "1934 Act")) of "Beneficial Ownership" (as the term beneficial
ownership is used for purposes of Rule 13d-3 promulgated under the 1934 Act) of
thirty-five percent (35%) or more of the combined voting power of the Company's
then outstanding voting securities (the "Voting Securities"), provided that for
purposes of this Section 5.1, the Voting Securities acquired directly from the
Company by any Person shall be excluded from the determination of such Person's
Beneficial Ownership of Voting Securities (but such Voting Securities shall be
included in the calculation of the total number of Voting Securities then
outstanding); or
(ii) Approval by shareholders of the Company of: (A) a merger,
reorganization or consolidation involving the Company if the shareholders of the
Company immediately before such merger, reorganization or consolidation do not
or will not own directly or indirectly immediately following such merger,
reorganization or consolidation, more than thirty-five percent (35%) of the
combined voting power of the outstanding voting securities of the corporation
resulting from or surviving such merger, reorganization or consolidation in
substantially the same proportion as their ownership of the Voting Securities
immediately before such merger, reorganization or consolidation, or (B) (1) a
complete liquidation or dissolution of the Company or (2) an agreement for the
sale or other disposition of all or substantially all of the assets of the
Company; or
(iii) Acceptance by shareholders of the Company of shares in a
share exchange if the shareholders of the Company immediately before such share
exchange do not or will not own directly or indirectly immediately following
such share exchange more than thirty-five percent (35%) of the combined voting
power of the outstanding voting securities of the corporation resulting from or
surviving such share exchange in substantially the same proportion as the
ownership of the Voting Securities outstanding immediately before such share
exchange.
(iv) Notwithstanding the foregoing, a Change of Control shall
not be deemed to occur solely because thirty-five percent (35%) or more of the
then outstanding Voting Securities is acquired by any or all of Louis D.
Paolino, Jr., George Moorehead, Environmental Opportunities Fund, L.P. and
Environmental Opportunities Fund (Cayman), L.P.
9. Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
and be binding upon the Company and Executive and their respective successors,
executors, administrators, heirs and/or permitted assigns; provided, however,
-------- -------
that neither
6
<PAGE>
Executive nor the Company may make any assignments of this Agreement or any
interest herein, by operation of law or otherwise, without the prior written
consent of the other party, except that, without such consent, the Company may
assign this Agreement to any successor to all or substantially all of its assets
and business by means of liquidation, dissolution, merger, consolidation,
transfer of assets, or otherwise.
10. Notice. Any notice or communication required or permitted under this
------
Agreement shall be made in writing and (i) sent by overnight courier, (ii)
mailed by certified or registered mail, return receipt requested or (iii) sent
by telecopier, addressed to the addresses of the parties set forth on page 1
hereof or to such other address as either party may from time to time duly
specify by notice given to the other party in the manner specified above.
11. Entire Agreement; Amendments. This Agreement sets forth the
----------------------------
understanding of the parties hereto relating to the subject matter hereof, and
except as set forth in Section 5.2 hereof merges and supersedes all prior and
contemporaneous discussions, agreements and understandings of every nature
between the parties hereto relating to the employment of Executive with the
Company. This Agreement may not be changed or modified, except by an agreement
in writing signed by each of the parties hereto.
12. Waiver. Any waiver by either party of any breach of any term or
------
condition in this Agreement shall not operate as a waiver of any other breach of
such term or condition or of any other term or condition, nor shall any failure
to enforce any provision hereof operate as a waiver of such provision or of any
other provision hereof or constitute or be deemed a waiver or release of any
other rights, in law or in equity.
13. Governing Law. Notwithstanding any contrary choice of laws
-------------
principles, this Agreement shall be governed by and construed in accordance with
the substantive laws of the Commonwealth of Pennsylvania, applicable to
contracts executed and performed within the Commonwealth of Pennsylvania.
14. Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or the effectiveness or validity of any provision in any
other jurisdiction, and this Agreement will be
7
<PAGE>
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
15. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, and all of which
together shall be deemed to be one and the same instrument.
Please indicate your acceptance of employment and your agreement to
render services to the Company subject to the terms set forth above by executing
and returning the enclosed copy of this letter.
Sincerely,
EASTERN ENVIRONMENTAL
SERVICES, INC.
By:
----------------------------
Name:
Title:
Agreed to and Accepted:
- --------------------------
Gregory M. Krzemien
8
<PAGE>
SCHEDULE A
EMPLOYEE BENEFITS
1. Automobile. Executive shall be paid $400 per month during the Term as an
----------
automobile allowance. Such automobile allowance shall be in addition to and not
in lieu of any reimbursement of toll and gas expenses for business travel (which
shall include travel between home and any offices of the Company other than
those presently located in Drums, Pennsylvania) pursuant to Section 3 below).
2. Nonaccountable Travel Expense Allowance. Executive shall be paid $75
---------------------------------------
per week during the Term as a nonaccountable travel expense allowance.
3. Expense Reimbursement. Executive shall be entitled to receive
---------------------
reimbursement from the Company for all reasonable out-of-pocket expenses
incurred by Executive in performing his duties under the Agreement, in
accordance with the expense reimbursement policy established from time to time
by the Company, upon presentation of expense statements or vouchers and such
other supporting information as may be required pursuant to any expense
reimbursement policy adopted by the Company and in force from time to time.
4. Vacation; Sick Leave. Executive shall be entitled to paid vacation time
--------------------
and sick leave in accordance with such general policies as may be in effect from
time to time for management employees.
5. Payment for Professional Education Courses. The Company shall pay for
------------------------------------------
Executive's continuing professional education course in order to maintain his
license as a Certified Public Accountant as well as for any master's decree or
other post-baccalaureate courses which Executive may elect to take during the
Term.
6. Hotel Accommodations. In the event Executive worked for the Company for
--------------------
eleven (11) hours or more on a particular day, the Company shall provide
Executive with hotel accommodations for that evening and shall pay all of
Executive's reasonable lodging and meal expenses.
7. Stock Options. Executive shall be eligible for stock options under the
-------------
Company's stock option plans based on Executive's performance of his duties.
9
<PAGE>
8. Bonuses. Executive shall be eligible for bonuses based on Executive's
-------
performance of his duties.
9. Other Benefits. Executive shall be entitled, if and to the extent
--------------
eligible, to participate in any group life, hospitalization or disability
insurance plan, health program, pension plan, similar benefit plan or other so-
called "fringe benefits" of the Company, which may be no less favorable to
Executive than the terms offered to such other senior executives of the Company
during the Term.
10
<PAGE>
Exhibit 10.38
EASTERN ENVIRONMENTAL SERVICES, INC.
1996 STOCK OPTION PLAN
ARTICLE I
General
-------
1.1 Purpose. This incentive stock option and nonqualified stock option
-------
plan (the "Plan") is established to promote the interests of Eastern
Environmental Services, Inc. (the "Corporation") and its stockholders by
enabling the Corporation, through the granting of stock options, to attract and
retain personnel for the Corporation and its subsidiaries, and to provide
additional incentive to such personnel to increase their stock ownership in the
Corporation. It is intended that those options issued pursuant to the
provisions of the Plan relating to incentive stock options shall constitute
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and the regulations promulgated thereunder, or
any statute or regulation of similar import.
1.2 Administration.
--------------
(a) The incentive stock option and nonqualified stock option
provisions of the Plan shall be administered by the Board of Directors of the
Corporation, and the Board of Directors may delegate such administration to a
committee appointed by the Board of Directors of the Corporation (the
"Committee"). The Committee shall consist of not less than two (2) nor more than
five (5) persons, each of whom shall be a member of the Corporation's Board of
Directors. The Board of Directors may from time to time remove members from, or
add members to, the Committee. Vacancies on the Committee, howsoever caused,
shall be filled by the Board of Directors. In the event that the Board of
Directors elects not to delegate such administration to the Committee, all
references herein to the Committee shall be deemed to refer to the Board of
Directors.
(b) The Committee shall select one of its members as chairman, and
shall hold meetings at such time and places as it may determine. The acts of a
majority of the Committee at which a quorum is present, or acts reduced to or
approved in writing by a majority of the members of the Committee, shall be
valid acts of the Committee.
1
<PAGE>
(c) Subject to the provisions of the Plan, the Committee shall have
full authority, in its discretion: (1) to determine the employees of the
Corporation and its subsidiaries to whom stock options shall be granted; (2) to
determine the time or times at which stock options shall be granted; (3) to
determine whether an eligible employee shall be granted an incentive stock
option, a nonqualified stock option or any combination thereof; (4) to determine
the option price of the shares subject to each stock option; (5) to determine
the time or times when each stock option becomes exercisable and the duration of
any stock option period; and (6) to interpret the Plan and the stock options
granted hereunder, and to prescribe, amend and rescind rules and regulations
with respect thereto. The interpretation and construction by the Committee of
any provision of the Plan over which it has discretionary authority or of any
option granted hereunder shall be final and conclusive.
(d) No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any stock option
granted hereunder.
1.3 Eligible Employees. A stock option may be granted to any employee or
------------------
members of the Board of Directors of the Corporation or of a subsidiary (who may
or may not be an officer or member of the Board of Directors). With respect to
the incentive stock options granted under the Plan, employees who cannot qualify
for the benefits of incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended, may not be granted incentive stock options.
1.4 Stock Subject to the Plan.
-------------------------
(a) The stock subject to the stock options under the Plan shall be
shares of common stock of the Corporation, par value $0.01 per share, which
shares may be, in whole or in part, either authorized but unissued shares or
issued shares held in the treasury. The aggregate number of shares that may be
issued upon the exercise of stock options granted under the Plan shall not
exceed 2,500,000 shares of common stock, which limitation shall be subject to
adjustment as provided in Article IV of the Plan.
(b) If a stock option is surrendered or for any other reason ceases to
be exercisable in whole or in part, the shares of common stock that are subject
to such option, but as to which the option has not been exercised, shall again
become available for offering under the Plan.
1.5 Termination of Options.
----------------------
(a) Unless sooner terminated as provided in this Plan, each stock
option shall be exercisable for the period of time as shall be determined by the
Committee and set forth in each stock
2
<PAGE>
option agreement evidencing a stock option ("Option Agreement"), and shall be
void and unexercisable thereafter.
(b) Except as otherwise provided herein or in an Option Agreement,
upon the termination of the optionee's employment with the Company for any
reason, stock options exercisable on the date of termination of employment shall
be exercisable by the optionee (or in the case of the optionee's death
subsequent to termination of employment, by the optionee's executor(s) or
administrator(s)) for a period of three (3) months from the date of the
optionee's termination of employment.
(c) Except as otherwise provided herein or in an Option Agreement,
upon the termination of the optionee's employment due to disability or death,
the stock options held by such optionee shall be exercisable for a period of
twelve (12) months commencing on the date of the optionee's termination of
employment. If the Optionee is mentally disabled or dead, the stock options may
be exercised, as applicable, by the Optionee's legal guardian, by his
executor(s) or administrator(s).
(d) Stock options may be terminated at any time by agreement between
the Company and the optionee.
1.6 Forfeiture. Notwithstanding any other provision of this Plan, if the
----------
optionee's employment is terminated by the Company and the Board makes a good
faith determination that the optionee (i) has breached any material term or
provision of the optionee's employment agreement, or (ii) engaged in any type of
disloyalty to the Company, including without limitation, fraud, embezzlement,
theft, or dishonesty in the course of his employment, (iii) has been convicted
of a felony, (iv) has disclosed any proprietary information of the Company
without the consent of the Company, or (v) has breached the terms of any written
confidentiality agreement or any non-competition agreement with the Company in
any material respect, all unexercised stock options held by such optionee shall
terminate upon the date of such a finding.
1.7 Method of payment. Each stock option shall state the method of
-----------------
payment of the stock option price upon the exercise of the stock option. The
method of payment stated in the stock option shall include payment (a) in United
States dollars in cash or by check, bank draft or money order payable to the
order of the corporation, or (b) in the discretion of and in the manner
determined by the Committee, by the delivery of shares of common stock of the
Corporation already owned by the optionee, or (c) by any other legally
permissible means acceptable to the Committee at the time of grant of the stock
option, or (d) in the discretion of the Committee, through a combination of (a),
(b) and (c) of this paragraph 1.7. If the option price is paid in whole or in
part through the delivery of shares of common stock, the decision of the
Committee with respect to the fair market value of such shares
3
<PAGE>
shall be final and conclusive.
1.8 Term and Exercise of Options. No stock option shall be exercisable
----------------------------
either in whole or in part prior to the date it is vested. No stock option
shall be exercisable after the expiration of ten (10) years from the date it is
vested; or, in the case of a 10% stockholder, no stock option shall be
exercisable after the expiration of five (5) years from the date it is vested.
Not less than one hundred (100) shares may be exercised at any one time unless
the number exercised is the total number at the time exercisable under the stock
option.
Within the limits described above, the Committee may impose additional
requirements on the exercise of stock options, including, but without
limitation, the number of shares covered by the stock option that become
eligible to be exercised in any year and the expiration date of the stock
option. Subject to the provisions of the Plan and any of the terms and
conditions the Committee deems appropriate, the Committee in its discretion also
may accelerate the time at which a stock option may be exercised if, under
previously established exercise terms, such stock option was not immediately
exercisable in full.
1.9 Rights as a Stockholder. An optionee shall have no rights as a
-----------------------
stockholder with respect to any shares covered by his ISO until the date of the
issuance of a stock certificate to him for such shares after exercise of the
stock option. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distributions
or other rights for which the record date is prior to the date such stock
certificate is issued, except as provided in Article IV.
1.10 Modification, Extension and Renewal of Options. Subject to the terms
----------------------------------------------
and conditions and within the limitations of the Plan, the committee may modify,
extend or renew outstanding stock options granted under the Plan, or accept the
surrender of outstanding stock options (to the extent not theretofore exercised)
and authorize the granting of new options in substitution therefor (to the
extent not theretofore exercised). Notwithstanding the foregoing, however, no
modification of any stock option shall, without the consent of the optionee,
alter or impair any of the rights or obligations under any stock option
theretofore granted under the Plan.
1.11 Listing and Registration of Shares. Each stock option shall be
----------------------------------
subject to the requirement that if at any time the Committee shall determine, in
its discretion, that the listing, registration or qualification of the shares
covered thereby upon any securities exchange or under any state or federal laws,
or the consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of, or in connection with, the granting of such stock
option or the issuance or purchase of
4
<PAGE>
shares thereunder, such ISO may not be exercised unless and until such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Committee.
Notwithstanding anything in the Plan to the contrary, if the provisions of this
paragraph 1.11 become operative, and if, as a result thereof, the exercise of an
stock option is delayed, then and in that event, the term of the stock option
shall not be affected.
1.12 Other Provisions. The stock option certificates or agreements
----------------
authorized under the Plan shall contain such other provisions, including,
without limitation, restrictions upon the exercise of the stock option, as the
Committee shall deem advisable. Any such certificate or agreement shall contain
such limitations and restrictions upon the exercise of the stock option as shall
be necessary in order that such incentive stock option will be an incentive
stock option as defined in Section 422 of the Internal Revenue Code of 1986, as
amended, or to conform to any change in the law.
ARTICLE II
Terms and Conditions of Incentive Stock Options
-----------------------------------------------
Any incentive stock option ("ISO") granted pursuant to the Plan shall be
authorized by the Committee and shall be evidenced by certificates or agreements
in such form as the committee from time to time shall approve, which
certificates or agreements shall comply with and be subject to the terms and
conditions hereinafter specified.
2.1 Number of Shares. Each ISO shall state the number of shares to which
----------------
it pertains.
2.2 Option Price. Each ISO shall state the option price, which price
------------
shall be determined by the Committee in its discretion. In no event, however,
shall such price be less than 100% of the fair market value of the shares of
common stock of the Corporation (determined under Article IV of the Plan) on the
date of the granting of the ISO; or, in the case of an individual who owns (at
the time the option is granted) more than 10% of the total combined voting power
of all classes of stock of the Corporation or of a parent or subsidiary
corporation (a "10% stockholder"), shall such price be less than 110% of such
fair market value.
2.3 Additional Limitations on Exercise of Options. An optionee may hold
---------------------------------------------
and exercise more than one ISO, but only on the terms and subject to the
restrictions hereafter set forth. The aggregate fair market value (determined
as of the time an ISO is granted) of the common stock of the Corporation with
respect to which ISOs are exercisable for the first time by any employee in
5
<PAGE>
any calendar year under the Plan and under all other incentive stock option
plans of the Corporation and any parent and subsidiary corporations of the
Corporation (as those terms are defined in Section 425 of the Internal Revenue
Code of 1986, as amended) shall not exceed $100,000.
2.4 Notice of Grant of Option. Upon the granting of any ISO to an
-------------------------
employee, the Committee shall promptly cause such employee to be notified of the
fact that such ISO has been granted. The date on which the Committee approves
the grant of an ISO shall be considered to be the date on which such ISO is
granted.
2.5 Assignment.
----------
(a) No stock option shall be transferable by the optionee otherwise
than by will or the laws of descent and distribution.
(b) During the lifetime of the optionee, the stock option shall be
exercisable only by him and shall not be assignable or transferable and no other
person shall acquire any rights therein.
ARTICLE III
Terms and Conditions of Nonqualified Stock Options
--------------------------------------------------
Any nonqualified stock option ("NSO") granted pursuant to the Plan shall be
authorized by the Committee and shall be evidenced by certificates or agreements
in such form as the Committee from time to time shall approve, which
certificates or agreements shall comply with an d be subject to the terms and
conditions hereinafter specified.
3.1 Number of Shares. Each NSO shall state the number of shares to which
----------------
it pertains.
3.2 Option Price. Each NSO shall state the option price, which price
------------
shall be determined by the Committee in its discretion.
3.3 Assignment.
----------
(a) No NSO shall be transferable by the optionee otherwise than by
will or the laws of descent and distribution.
(b) During the lifetime of the optionee, the NSO shall be exercisable
only by him and shall not be assignable or transferable and no other person
shall acquire any rights therein.
6
<PAGE>
3.4 Notice of Grant of Option. Upon the granting of any NSO to an
-------------------------
employee, the Committee shall promptly cause such employee to be notified of the
fact that such NSO has been granted. The date on which the Committee approves
the grant of an NSO shall be considered to be the date on which such NSO is
granted.
3.5 Rights as a Stockholder. An optionee shall have no rights as a
-----------------------
stockholder with respect to any shares covered by his NSO until the date of the
issuance of a stock certificate to him for such shares after exercise of the
NSO. No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other rights
for which the record date is prior to the date such stock certificate is issued,
except as provided in Article IV.
ARTICLE IV
Miscellaneous
-------------
4.1 Stock Adjustments.
-----------------
(a) In the event of any increase or decrease in the number of issued
shares of common stock of the Corporation resulting from a stock split or other
division or consolidation of shares or the payment of a stock dividend (but only
on the common stock) or any other increase or decrease in the number of such
shares effected without any receipt of consideration by the Corporation, then,
in any such event, the number of shares of common stock that remain available
under the Plan, the number of shares of common stock covered by each outstanding
option, and the purchase price per share of common stock covered by each
outstanding option shall be proportionately and appropriately adjusted for any
such increase or decrease.
(b) Subject to any required action by the stockholders, if any change
occurs in the shares of common stock of the Corporation by reason of any
recapitalization, reorganization, merger, consolidation, split-up, combination
or exchange of shares, or of any similar change affecting the shares of common
stock of the Corporation, then, in any such event, the number and type of shares
covered by each outstanding option, and the purchase price per share of common
stock covered by each outstanding option, shall be proportionately and
appropriately adjusted for any such change. A dissolution or liquidation of the
corporation shall cause each outstanding option to terminate.
(c) In the event of a change in the common stock of the Corporation as
presently constituted that is limited to a change of all of its authorized
shares with par value into the same number of shares with a different par value
or without par value, the shares
7
<PAGE>
resulting from any change shall be deemed to be shares of common stock within
the meaning of the Plan.
(d) To the extent that the foregoing adjustments relate to stock or
securities of the Corporation, such adjustments shall be made by, and in the
discretion of, the Committee, whose determination in that respect shall be
final, binding and conclusive; provided, however, that any ISO granted pursuant
to this Plan shall not be adjusted in a manner that causes such ISO to fail to
continue to qualify as an incentive stock option within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended.
(e) Except as hereinabove expressly provided in this paragraph 4.1, an
optionee shall have no rights by reason of any division or consolidation of
shares of stock of any class or the payment of any stock dividend or any other
increase or decrease in number of shares of stock of any class or by reason of
any dissolution, liquidation, merger or consolidation, or spin-off of assets or
stock of another corporation; and any issuance by the Corporation of shares of
stock of any class, securities convertible into shares of stock of any class or
warrants or options for shares of stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of common stock subject to the option.
(f) The grant of any option pursuant to the Plan shall not affect in
any way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capita or business
structure or to merge or to consolidate, or to dissolve, to liquidate, to sell,
or to transfer all or any part of its business or assets.
4.2 Fair Market Value of Stock. For purposes of this Plan, the "fair
--------------------------
market value of the shares of the common stock of the Corporation" shall mean a
price, on the date of grant of any ISO no lower than the low of the day and as
high as established by the Committee. The price of the Corporation's common
stock shall be as reported on the Composite Tape, or if not reported thereon,
then such price as reported in the trading reports of the principal securities
exchange in the United States on which such stock is listed, or if such stock is
not listed on a securities exchange in the United States, the closing price on
the over-the-counter market as reported by the NASDAQ (NASDAQ), or NASDAQ's
successor, or if not reported on NASDAQ, the fair market value of such stock as
determined by the Committee in good faith and based on all relevant factors.
4.3 Term of the Plan. The ISOs and NSOs may be granted pursuant to the
----------------
provisions of the Plan from time to time within a period of ten (10) years from
the date the Plan is adopted by the
8
<PAGE>
Board of Directors of the Corporation, or the date the Plan is approved by the
stockholders, whichever is earlier.
4.4 Amendment of the Plan. The Board of Directors of the Corporation may,
---------------------
insofar as permitted by law, from time to time, with respect to any shares at
the time not subject to stock options, suspend, discontinue or terminate the
Plan or revise or amend it in any respect whatsoever. However, the Plan may
not, without the approval of the stockholders, be amended in any manner that
will cause incentive stock options issued under it to fail to meet the
requirements of incentive stock options as defined in Section 422 of the
Internal Revenue Code of 1986, as amended.
4.5 Incentive Stock Option Plan. Except as provided in the Plan, the Plan
---------------------------
shall not affect the terms and conditions of any incentive stock options
heretofore or hereafter granted to any employee of the Corporation under any
incentive stock option plan of the Corporation or any parent or subsidiary
corporation; nor shall the Plan affect any of the rights of any employee to whom
such incentive stock option or options have been granted.
4.6 Application of Funds. The proceeds received by the Corporation from
--------------------
the sale of common stock pursuant to stock options will be used for general
corporate purposes.
4.7 No Obligation to Exercise. The granting of any stock option under the
-------------------------
Plan shall impose no obligation upon any optionee to exercise such stock option.
4.8 No Implied Rights to Employees. The existence of the Plan, and the
------------------------------
granting of options under the Plan, shall in no way give any employee the right
to continued employment, give any employee the right to receive any options or
any additional options under the Plan, or otherwise provide any employee any
rights not specifically set forth in the Plan or in any options granted under
the Plan.
9
<PAGE>
EXHIBIT 21
SUBSIDIARIES
------------
The following is a list of the Company's subsidiaries. Omitted from the
list are certain subsidiaries which are inactive an are being dissolved, and
which, if considered in the aggregate as a single subsidiary, would not
constitute a "significant subsidiary" as defined in Regulation S-2.
<TABLE>
<CAPTION>
Company State of Incorporation
------- ----------------------
<S> <C>
NHD, Inc. Pennsylvania
Eastern Real Property, Inc. ("ERP") Florida
S & S Grading, Inc.
(f/k/a "S & S Landfill, Inc.") West Virginia
WRN Properties, Inc.,
a subsidiary of ERP Pennsylvania
Pulaski Grading, Inc.
(f/k/a "Pulaski Landfill, Inc.") Kentucky
Carolina Grading, Inc. South Carolina
All Waste Refuse Services, Inc. South Carolina
A.W.S. of Virginia Incorporated Virginia
</TABLE>
<PAGE>
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (Registration No. 33-25155, filed on October 24, 1988), the
Registration Statement on Form S-8 (Post-Effective Amendment No. 2 to
Registration No. 33-21251, filed on May 4, 1990), the Registration Statement on
Form S-8 (Registration No. 33-37374, filed on October 18, 1990), the
Registration Statement on Form S-8 (Registration No.33-45250, filed on January
27, 1992), and the Registration Statement on Form S-3 (Registration No. 333-
00283, filed on February 14, 1996) of Eastern Environmental Services, Inc. of
our reports dated September 27, 1996, on the consolidated financial statements
and financial statement schedule of Eastern Environmental Services, Inc.
included in the Annual Report (Form 10-K) for the year ended June 30, 1996.
/s/ ERNST & YOUNG LLP
Reading, Pennsylvania
September 27, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 617,398
<SECURITIES> 0
<RECEIVABLES> 1,685,138
<ALLOWANCES> 413,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,970,996
<PP&E> 17,281,987
<DEPRECIATION> 6,363,421
<TOTAL-ASSETS> 15,565,011
<CURRENT-LIABILITIES> 4,528,513
<BONDS> 2,582,668
0
0
<COMMON> 60,777
<OTHER-SE> 6,185,651
<TOTAL-LIABILITY-AND-EQUITY> 15,565,011
<SALES> 7,632,503
<TOTAL-REVENUES> 7,632,503
<CGS> 6,857,418
<TOTAL-COSTS> 6,857,418
<OTHER-EXPENSES> 4,121,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 153,428
<INCOME-PRETAX> (3,500,043)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,500,043)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,500,043)
<EPS-PRIMARY> (.63)
<EPS-DILUTED> 0
</TABLE>
