<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997 COMMISSION FILE NO. 0-16102
EASTERN ENVIRONMENTAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
59-2840783
(I.R.S. Employer Identification No.)
1000 Crawford Place, Suite 400, Mount Laurel, NJ 08054
(Address of Principal Executive Offices)
Registrant's Telephone No., including area code: (609) 235-6009
Indicate by checkmark 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 report), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock:
As of November 10, 1997 22,070,733 Shares of Common Stock
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<PAGE>
Eastern Environmental Services, Inc.
Form 10-Q
Quarter Ended September 30, 1997
Contents Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1997
and June 30, 1997 1
Condensed Consolidated Statements of Operations for the three
months ended September 30, 1997 and 1996 (Restated) 3
Condensed Consolidated Statement of Stockholders' Equity
for the three months ended September 30, 1997 4
Condensed Consolidated Statements of Cash Flows for the
three months ended September 30, 1997 and 1996 (Restated) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 2 - Changes in Securities 13
Item 6 - Exhibits and Reports on Form 8-K 14
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eastern Environmental Services, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, June 30,
ASSETS 1997 1997
--------------- -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 16,833,766 $ 4,292,278
Accounts receivable, less allowance for
doubtful accounts of $2,332,000 and $1,599,000 19,187,277 13,508,730
Deferred income taxes 4,099,014 3,369,014
Prepaid expenses and other current assets 2,831,378 4,538,198
--------------- ------------
Total current assets 42,951,435 25,708,220
Property and equipment:
Land 11,383,091 6,973,871
Landfill sites 47,788,711 33,138,713
Buildings and leasehold improvements 8,424,866 7,112,761
Vehicles 23,035,286 18,923,388
Machinery and equipment 21,935,005 18,936,782
Furniture and fixtures 1,826,280 1,524,087
--------------- ------------
Total property and equipment 114,393,239 86,609,602
Accumulated depreciation and amortization 23,781,100 20,465,969
--------------- ------------
90,612,139 66,143,633
Excess cost over fair market value of net
assets acquired, net of $1,273,000 and
$875,000 accumulated amortization 60,671,451 60,302,159
Other intangible assets, net of $4,892,000 and
$3,460,000 accumulated amortization 13,816,644 6,079,686
Notes receivable from shareholders/officers 432,902 432,902
Other assets (including $533,000 of restricted
cash on deposit for landfill closure and
insurance bonding) 2,107,932 2,418,812
--------------- ------------
Total assets $210,592,503 $161,085,412
=============== ============
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
September 30, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1997
--------------- ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 9,282,029 $ 8,036,964
Accrued expenses and other current liabilities 10,597,623 10,421,694
Income taxes payable 2,040,623 387,342
Current portion of accrued
landfill closure and other environmental costs 2,028,000 2,228,000
Current portion of long-term debt 1,016,469 1,803,269
Current portion of capital lease obligations 1,143,329 1,249,769
Deferred revenue 2,733,977 2,432,897
-------------- ------------
Total current liabilities 28,842,050 26,559,935
Deferred income taxes 6,249,590 5,716,590
Long-term debt, net of current portion 8,791,482 59,303,672
Capital lease obligations, net of current portion 1,378,815 1,625,741
Accrued landfill closure and other environmental costs 7,415,162 6,891,219
Other liabilities 13,917,801 9,151,246
Stockholders' equity
Common stock, $.01 par value:
Authorized shares - 50,000,000
Issued and outstanding shares - 22,031,391
and 16,152,955 220,314 161,530
Additional paid-in capital 140,459,379 50,072,591
Retained earnings 3,394,169 1,679,147
--------------- ------------
144,073,862 51,913,268
Less treasury stock at cost - 39,100 common shares (76,259) (76,259)
--------------- ------------
Total stockholders' equity 143,997,603 51,837,009
--------------- ------------
Total liabilities and stockholders' equity $210,592,503 $161,085,412
=============== ============
</TABLE>
See accompanying notes.
2
<PAGE>
Eastern Environmental Services, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------
1997 1996
------------- --------------
(Restated)
<S> <C> <C>
Revenues $34,537,908 $13,870,895
Cost of revenues 21,921,935 10,554,700
Selling, general and administrative expenses 5,297,123 1,973,126
Depreciation and amortization 2,280,676 601,944
Merger costs 500,000 1,856,340
------------- --------------
Operating income (loss) 4,538,174 (1,115,215)
Interest expense, net (660,842) (94,625)
Other income (expense) 235,840 (9,467)
------------- --------------
Income (loss) before income taxes 4,113,172 (1,219,307)
Income tax expense - See Note 3 1,781,000 673,000
------------- --------------
Net income (loss) $ 2,332,172 $(1,892,307)
============= ==============
Earnings (loss) per share $0.11 $(.16)
============= ==============
Weighted average number of shares outstanding 21,843,487 11,986,982
============= ==============
</TABLE>
See accompanying notes.
3
<PAGE>
Eastern Environmental Services, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock Total
--------- ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance at
June 30, 1997 $161,530 $ 50,072,591 $1,679,147 $(76,259) $ 51,837,009
Exercise of
common stock
options and warrants 1,244 426,556 -- -- 427,800
Proceeds from sale of
5,175,000 shares
of common stock,
less commissions and
issuance expenses of
$6,421,919 51,750 85,382,581 -- -- 85,434,331
Common stock issued for
acquisition accounted for
as a pooling of interests 2,167 140,833 -- -- 143,000
Transactions of pooled
company (617,150) (617,150)
Common stock issued
in purchase acquisitions 3,623 4,436,818 -- -- 4,440,441
Net income -- -- 2,332,172 -- 2,332,172
--------- ------------ ---------- --------- ------------
Balance at
September 30, 1997 $220,314 $140,459,379 $3,394,169 $(76,259) $143,997,603
========= ============ ========== ========= ============
</TABLE>
See accompanying notes.
4
<PAGE>
Eastern Environmental Services, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------
1997 1996
--------------- ---------------
(Restated)
<S> <C> <C>
Operating activities
Net income (loss) $ 2,332,172 $(1,892,307)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 2,280,676 601,944
Provision for losses on receivables 237,350 40,000
Landfill closure costs 117,215 12,069
Deferred income taxes (197,000) 660,000
Gain on sale of property and equipment (44,746) --
Changes in operating assets and liabilities:
Accounts receivable (4,137,951) (1,163,195)
Accounts payable 667,076 (112,340)
Accrued expenses (2,187,310) 1,490,970
Income taxes 1,653,283 11,341
Deferred revenue 301,080 --
Prepaid expenses and other current assets 1,488,341 326,703
Other 311,988 (136,815)
--------------- ---------------
Net cash provided by (used in) operating activities 2,822,174 (161,630)
Investing activities
Acquisition of businesses, net of cash acquired (10,427,700) (410,000)
Proceeds from sale of property and equipment 55,157 --
Development of landfill sites (1,957,874) (154,542)
Purchase of property and equipment (5,285,722) (1,857,589)
Payments for intangibles (626,833) (452,302)
--------------- ---------------
Net cash used in investing activities (18,242,972) (2,874,433)
Financing activities
Proceeds from revolving line of credit, long-term debt
and capital lease obligations 3,650,000 837,230
Payments on revolving line of credit, long-term debt
and capital lease obligations (61,549,845) (531,141)
Payments on note payable to shareholder/officer -- (675)
Proceeds from issuance of common stock, net
of expenses and commissions 85,862,131 9,809,315
Cash dividends paid to former stockholders
of Donno Company, Inc. and affiliates -- (21,000)
--------------- ---------------
Net cash provided by financing activities 27,962,286 10,093,729
--------------- ---------------
Net increase in cash and cash equivalents 12,541,488 7,057,666
Cash and cash equivalents at beginning of period 4,292,278 1,916,487
--------------- ---------------
Cash and cash equivalents at end of period $ 16,833,766 $ 8,974,153
=============== ===============
</TABLE>
See accompanying notes.
5
<PAGE>
Eastern Environmental Services, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include
the accounts of Eastern Environmental Services, Inc. and its wholly owned
subsidiaries (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. These condensed consolidated
financial statements reflect all adjustments (consisting of normal recurring
accruals), which in the opinion of management, are necessary for a fair
presentation of results of operations for the interim periods presented. The
Company has restated the previously issued financial statements for the three
months ended September 30, 1996 to reflect the merger with the Donno Company,
Inc. and Affiliates ("Donno"), on January 31, 1997 which was accounted for using
the "pooling of interests" method. The results of operations for the period
ended September 30, 1997 are not necessarily indicative of the operating results
for the full year. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These interim financial
statements should be read in conjunction with the audited financial statements
and notes contained in the Company's Annual Report on Form 10-K for the year
ended June 30, 1997.
2. Business Combinations
From July 2, 1996 to September 30, 1997, the Company expanded its waste
collection and hauling operations through the acquisition of twenty two
businesses. The aggregate of these business acquisitions is significant to the
company. Eighteen of the twenty two acquisitions completed were accounted for
using the purchase method of accounting. Accordingly, assets acquired and
liabilities assumed have been recorded at their estimated fair values at the
dates of acquisition and their results of operations are included in the
accompanying condensed consolidated statements of operations since the date of
acquisition. The excess of purchase price over the estimated fair market value
of identifiable net assets acquired is being amortized on a straight-line basis
over forty years from the date of acquisition. The purchase price allocations
are based on preliminary estimates as of the acquisition dates and are finalized
within one year from the date of acquisition.
On July 9, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Reuben Smith Rubbish Removal Services, Inc.
("Reuben Smith") in exchange for 92,369 unregistered shares of the Company's
common stock and the assumption of $574,000 of debt. Reuben Smith, which
conducts a waste collection business in Atlantic City, New Jersey, was
integrated in to Super Kwik, the Company's southern New Jersey regional
collection operation. This transaction was accounted for as a purchase.
On August 15, 1997, the Company completed the purchase of all the stock of
Pappy's, Inc. ("Pappy's") for total consideration of approximately $12,000,000
in cash. Pappy's operates as the Oak Avenue Landfill and is permitted to accept
construction and demolition debris and other residual wastes. The facility is
located north of Baltimore, Maryland. In addition to local waste, Pappy's will
accept waste for the Company's various collection operations located in New
York, New Jersey, and Pennsylvania markets. This transaction was accounted for
as a purchase.
On August 20, 1997, the Company purchased all of the stock of Soil Remediation
of Philadelphia, Inc. ("SRP") in exchange for 270,000 unregistered shares of the
Company's common stock. SRP provides remediation services for petroleum
contaminated soil. This transaction was accounted for as a purchase.
6
<PAGE>
On August 14, 1997, the Company completed its merger with Waste X and
approximately 216,667 unregistered shares of the Company's common stock were
issued in exchange for all outstanding stock of Waste X. An additional issuance
of common stock of up to 30% of the total consideration given may be issuable
pending the resolution of certain contingencies. Waste X operates a municipal
solid waste collection business in the Miami and Ft. Lauderdale, Florida markets
and was integrated into the Company's South Florida regional operation. The
transaction has been accounted for using the pooling of interests method, and
accordingly, the accompanying condensed consolidated financial statements
include the accounts of Waste X for the three months ended September 30, 1997.
Periods prior to the consummation of the merger were not restated to include the
accounts and operations of Waste X as combined results are not materially
different from the results as presented.
Combined and separate results of operations of the Company and the Donno
Companies, for the restated prior period included in this report are as follows
(in thousands):
<TABLE>
<CAPTION>
Eastern
Three months ended Environmental Donno
September 30, 1996 Services, Inc. Companies Combined
-------------- --------- --------
<S> <C> <C> <C>
Revenues $ 10,584 $ 3,287 $ 13,871
Net income (loss) $ (1,950) $ 58 $ (1,892)
</TABLE>
3. Income Taxes
The Company has recorded an income tax provision of $1.8 million for the three
months ended September 30, 1997. This provision primarily relates to the
recording of federal and state tax liabilities at statutory rates, adjusted for
certain non-deductible items.
4. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual results could
differ from those estimates. Such estimates include the Company's accounting
for closure and post-closure obligations; amortization of landfill development
costs; and estimates of reserves such as the allowance for doubtful accounts
receivable, and the Company's estimate of merger costs.
5. Subsequent Events
On October 17, 1997, the Company entered into a Stock Purchase Agreement with
Delmarva Capital Technology Company to acquire all of the outstanding shares of
stock of Pine Grove, Inc., its wholly owned subsidiary which includes the
operations of Pine Grove Landfill, a 174 acre Subtitle D solid waste disposal
facility located in east central Pennsylvania and Pine Grove Hauling Company, an
integrated waste collection company, servicing residential and commercial
customers in the same market. Total consideration of approximately $46 million
will be funded from working capital, borrowings under the Company's revolving
credit facility, and possibly the assumption of approximately $12 million of
debt. The acquisition will be accounted for using the "purchase" method of
accounting. Closing of the purchase is subject to finalization of certain
conditions which the Company anticipates will be settled by November 30, 1997.
7
<PAGE>
Additionally, subsequent to September 30, 1997, the Company entered into a
Merger Agreement with the shareholders of Hamm's Sanitation, Inc., and H.S.S.,
Inc. ("Hamm's") for approximately 710,000 unregistered shares of common stock of
the Company and the assumption of up to $1,000,000 of debt in exchange for all
issued and outstanding stock of Hamm's. Hamm's provides municipal solid waste
collection services to approximately 21,000 commercial and residential customers
in several Northwestern New Jersey counties. The transaction is expected to be
accounted for under the "pooling of interests" method of accounting.
On October 27, 1997, the Company revised and expanded its Revolving Credit
Agreement, which among other items, increased the Company's borrowing capacity
from $100 million to $150 million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations for the Three Months ended September 30, 1997 Compared to
the Three Months Ended September 30, 1996
Revenues
The Company is a non-hazardous solid waste management company specializing in
the collection, transportation, and disposal of residential, industrial,
commercial, and special waste, principally in the eastern United States. The
Company's revenues for the three months ended September 30, 1997 were comprised
of approximately 82% solid waste collection and transportation operations,
approximately 9% solid waste disposal operations, and approximately 9% other
waste management services.
The Company's solid waste collection operations earn revenues from fees
collected from residential, commercial, and industrial collection and transfer
station customers. Solid waste collection is provided under two primary types of
arrangements depending on the customers being served. Collection services for
commercial and industrial customers are generally performed under one to three
year service agreements. Collection services for residential customers generally
are performed under contracts with, or franchises granted by, municipalities or
regional authorities that grant the Company rights to service all or a portion
of the residents in their jurisdictions, except in rural areas where the Company
usually contracts directly with the customer. Such contracts or franchises
generally range in duration from one to three years. Recently, some
municipalities have bid their residential collection contracts based on the
volume of waste collected versus the number of households serviced. Residential
collection fees are either paid by the municipalities out of tax revenues or
service charges or paid directly by residents receiving the services.
As part of its solid waste collection operations, the Company's five owned or
operated transfer stations receive solid waste collected primarily by its
various collection operations, compact the waste and transfer it to larger
vehicles for transport to landfills. This procedure reduces the Company's costs
by improving its use of collection personnel and equipment.
The Company's solid waste landfills earn revenues from disposal fees charged to
third parties and from disposal fees charged to the Company's collection and
transportation operations that dispose of solid waste at the Company's
landfills. These landfills receive solid waste from the Company's own collection
companies and transfer stations, as well as from independent collection
operators. For the three months ended September 30, 1997, approximately 20% of
the Company's revenue generated from collection operations represented solid
waste collected by the Company that was delivered for disposal at its own
landfills, and approximately 25% of the Company's revenue generated from
landfill disposal operations represented solid waste disposed of at the
Company's landfills that was delivered by the Company.
The Company's prices for solid waste collection, transportation, and disposal
services are typically determined by the volume, weight, or type of waste
collected, as well as other factors including the competitive pricing
environment. The Company's ability to pass on cost increases may be limited by
the terms of its contracts.
8
<PAGE>
Cost of Revenues
Cost of revenues consists primarily of tipping fees paid to third party
landfills, accruals for future landfill closure and post-closure costs, direct
labor and related taxes and benefits, subcontracted transportation and equipment
rental charges, maintenance and repairs of equipment and facilities,
environmental compliance costs and site maintenance costs for landfills, fuel,
and landfill assessment fees and taxes.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of management,
clerical and administrative salaries and costs and overhead, professional
services, facility rentals and associated costs, financial assurance bonding
premiums, landfill related financial assurance bonding premiums, and costs
relating to marketing and sales.
The Company capitalizes direct incremental costs associated with purchase
acquisitions. Indirect development and acquisition costs, such as executive
salaries, corporate overhead, public relations, and other corporate services and
overhead are expensed as incurred. The Company also charges as an expense any
unamortized capitalized expenditures relating to proposed acquisitions that will
not be consummated.
At September 30, 1997, capitalized costs related directly to proposed
acquisitions that were not yet consummated were $272,000. The Company
periodically reviews the future realization of these capitalized project costs
and makes provisions against capitalized costs that are associated with projects
that are not likely to be completed.
Depreciation and Amortization
Depreciation and amortization consists primarily of depreciation of buildings,
vehicles, and machinery and equipment, amortization of capitalized direct
landfill development costs, and amortization expense related to intangible
assets including goodwill. Property and equipment is depreciated over the
estimated useful lives of the assets using the straight line method. Intangible
assets, including goodwill, are amortized over their useful lives using the
straight line method.
Certain direct engineering, legal, permitting, construction, and other costs
associated with expansion of landfills, together with related interest costs,
are capitalized and are amortized over the estimated useful life of the site
using the unit of production method as airspace is consumed. Successful
permitting of additional landfill disposal capacity improves the Company's
profitability by increasing the airspace over which the Company may amortize
capitalized costs of the landfill. At September 30, 1997, capitalized costs
related directly to the acquisition and expansion of existing and future
landfills and cell development were $47.8 million.
The Company's policy is to charge as an expense any unamortized capitalized
expenditures and advances relating to any landfill that is permanently closed or
any landfill expansion project that is abandoned.
Merger Costs
In connection with acquisitions accounted for under the pooling of interests
method, the Company records various merger costs including transaction-related
expenses, contractual costs and certain transition costs including the cost to
bring the acquired assets into conformity with corporate safety and operational
standards.
9
<PAGE>
Other Income (Expense)
Other income and expense, which includes gains and losses on the sale of
equipment, has not historically been material to the Company's results of
operations.
Taxes
The tax provision of $1.8 million for the three months ended September 30, 1997,
principally relates to the recording of federal and state tax liabilities at
statutory rates, adjusted for certain non-deductible items. The tax provision
at September 30, 1996, principally relates to the completion of the merger with
Super Kwik, Inc., and reflects the recording of a deferred tax liability as of
the date of the merger, the date Super Kwik's S Corporation election was
terminated.
Results of Operations for the Three Months Ended September 30, 1997 Compared to
the Three Months Ended September 30, 1996.
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues relating to continuing
operations.
<TABLE>
<CAPTION>
Three Months Ended
September 30
------------
1997 1996
---- ----
(Restated)
<S> <C> <C>
Revenues 100.0 100.0
Cost of revenues 63.5 76.1
Selling, general and administrative expenses 15.3 14.2
Depreciation and amortization 6.6 4.3
Merger costs 1.5 13.4
---------- ----------
Operating income (loss) 13.1 (8.0)
Interest expense, net (1.9) (0.7)
Other income (expense) 0.7 --
---------- ----------
Income (loss) before income taxes 11.9 (8.7)
Income tax expense 5.1 4.9
---------- ----------
Net income (loss) 6.8 (13.6)
========== ==========
</TABLE>
10
<PAGE>
Revenues for the three months ended September 30, 1997, were $34.5 million
compared to $13.9 million for the three months ended September 30, 1996, an
increase of $20.6 million, or 148%. The principal factor affecting the increase
in revenues was the impact of acquisitions made in the past twelve months,
primarily consisting of R&A Bender, Inc., and several solid waste collection
companies in the New York and Florida markets, which contributed aggregate
revenues of $12.6 million for the three months ended September 30, 1997. The
acquisitions of Super Kwik, Inc. and Donno Company, Inc., which have been
accounted for as poolings of interests, contributed revenue of $10.6 million for
the three months ended September 30, 1997 compared to $9.3 million for the three
months ended September 30, 1996, an increase of $1.3 million. Additionally,
Apex Waste Services, Inc. contributed revenues of $4.5 million for the three
months ended September 30, 1997. Although this was accounted for as a pooling
of interests, it did not commence operations until October 1, 1996, thus it had
no impact on the revenues or expenses of the Company for the quarter ended
September 30, 1996.
Cost of revenues for the three months ended September 30, 1997, were $21.9
million compared to $10.6 million for the three months ended September 30, 1996,
an increase of $11.3 million. Cost of revenues as a percentage of revenues for
the three months ended September 30, 1997, was 63.5% compared to 76.1% for the
same period in fiscal 1997. This decrease in percentage was primarily due to (1)
the acquisition by the Company of three landfills, which operate at higher
margins than the Company's other operations, (2) economies of scale relating to
the Company's increase in size over the period, and (3) operating efficiencies.
Selling, general and administrative expenses for the three months ended
September 30, 1997, were $5.3 million compared to $2.0 million for the three
months ended September 30, 1996, an increase of $3.3 million or 165%. These
expenses as a percentage of revenues for the three months ended September 30,
1997, were 15.3% compared to 14.2% for the same period in fiscal 1997. The
slight increase as a percentage of revenues reflects the increased
infrastructure, including accounting, finance, legal and administration,
necessary to integrate the 22 acquisitions consummated over the past fifteen
months. This increase was partially offset by the elimination of redundant
overhead as acquisitions in certain geographic areas are consolidated.
Depreciation and amortization totaled $2.3 million, or 6.6% of revenues, for the
three months ended September 30, 1997, versus $602,000, or 4.3% of revenues, for
the same period in fiscal 1997. This increase was primarily due to increased
depreciation and landfill amortization as a result of businesses and assets
acquired as well as amortization of goodwill and other intangibles associated
with the acquisitions.
Merger costs incurred during the three months ended September 30, 1997, were
$500,000, all of which related to the acquisition of Waste X Services, Inc., a
solid waste collection company acquired on August 14, 1997, and accounted for as
a pooling of interests. Merger Costs for the same period in fiscal 1997 were
$1.9 million and related to the acquisition of Super Kwik, Inc.
The tax provision of $1.8 million for the three months ended September 30, 1997,
principally relates to the recording of federal and state tax liabilities at
statutory rates, adjusted for certain non-deductible items. The tax provision
at September 30, 1996, principally relates to the completion of the merger with
Super Kwik, Inc., and reflects the recording of a deferred tax liability as of
the date of the merger, the date Super Kwik's S Corporation election was
terminated.
Liquidity and Capital Resources
The Company's business requires substantial amounts of capital. The Company's
capital requirements include acquisitions, equipment purchases, and capital
expenditures for cell construction and expansion of its landfills. The Company
plans to meet these capital needs from various financing sources, including
borrowings, internally generated funds, and the issuance of common stock.
11
<PAGE>
As of September 30, 1997, the Company had working capital of $14.2 million,
including cash and cash equivalents of $16.8 million. For the first quarter of
fiscal 1998, net cash provided by operations was approximately $2.8 million, net
cash provided by financing activities was approximately $27.9 million (including
net proceeds of $85.4 from the Company's recently completed public offering of
common stock) and net cash used in investing activities was approximately $18.2
million resulting in an increase in cash and cash equivalents of $12.5 million
during this period. Capital expended during the period, included: (1) $11.1
million relating to acquisitions, (2) $5.3 million for the purchase of operating
equipment and real estate, and (3) $1.9 million related to the permitting and
development of landfill space.
On September 25, 1996, the Company entered into a revolving credit facility
with BankBoston, N.A. (formerly known as First National Bank of Boston) and Bank
of America Illinois to provide for borrowings up to $30 million (the "Credit
Facility"). The Credit Facility, which was increased to $50 million on January
27, 1997 and to $100 million on May 8, 1997 (revised in October 1997 to provide
borrowings up to $150 million pursuant to the revised and expanded credit
agreement), is available for repayment of debt, funding of acquisitions, working
capital, and for up to $15 million in letters of credit. As of November 10,
1997, approximately $5.4 million in letters of credit were outstanding under the
Credit Facility. Also, at November 10, 1997, there were no borrowings under the
Credit Facility as a result of the net proceeds of the recently completed public
offering being used to repay all outstanding indebtedness under the Credit
Facility.
At the Company's option, the interest rate on any loan under the Credit
Facility may be based on an adjusted prime rate or Eurodollar rate, as defined
in the loan agreement. On November 10, 1997, the applicable interest rate was
6.4%. The facility expires on October 2002. The Credit Facility requires the
payment of a commitment fee, payable in arrears, based in part on the unused
balance and provides for certain restrictions on, among other things, the
ability of the Company to incur borrowings, sell assets, acquire assets, make
capital expenditures or pay cash dividends. The facility also requires the
maintenance of certain financial ratios, including interest coverage ratios and
balance sheet and cash flow leverage ratios, and requires profitable operations.
The facility is collateralized by all the stock of the Company's subsidiaries,
whether now owned or hereafter acquired.
In August 1997, the Company completed a secondary public offering in which it
issued 5,175,000 shares of Common Stock at $17.75 per share. The net proceeds
of $85.4 million after deducting underwriting discounts, commissions and other
offering expenses were used to reduce outstanding debt under the Company's
revolving credit agreement by $57.5 million with the remainder to be used for
future acquisitions, capital expenditures and working capital. The Company has
invested the unused net proceeds in short-term interest bearing securities.
To date the Company has required substantial amounts of capital and it expects
to continue to expend substantial amounts to support its acquisition program and
the expansion of its disposal and transportation operations. The Company
estimates aggregate capital expenditures, exclusive of acquisitions of
businesses, of approximately $16.0 million for the year ending June 30, 1998.
The Company has addressed its capital needs through private and public offerings
of Common Stock and by establishing a revolving credit facility. The Company
believes that the revolving credit facility, the funds expected to be generated
from operations, the net proceeds of the recently completed public offering and
possible future equity offerings will provide adequate cash to fund the
Company's working capital and other cash needs for the foreseeable future.
The Company has financial obligations related to closure and post-closure
monitoring and maintenance of the Company's landfills. While the exact amount of
future closure and post-closure obligations cannot be determined, the Company
estimates that the costs of final closure of the currently permitted and
operating areas at the Company's landfills will be approximately $15.6 million,
of which $3.7 million has been accrued as of September 30, 1997. The Company
makes an accrual for these costs based on consumed airspace in relation to
Management's estimate of total available airspace of the landfills. In addition,
the Company has accrued $1.8 million for post-closure obligations as of
September 30, 1997.
12
<PAGE>
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, West Virginia, Pennsylvania and
Maryland disposal facilities. Bonds outstanding at September 30, 1997 were $1.6
million for the Kentucky landfill, $214,000 for the West Virginia landfill, $3.8
million for the Pennsylvania landfill and $220,000 for the Maryland landfill.
The bonds are collateralized by irrevocable letters of credit and trust fund
deposits. Additionally, the Company has on deposit $204,000 as financial
assurance for landfill closure and post-closure obligations for closed disposal
areas. The trust fund and the certificates of deposit are restricted from
current operations and are included within other noncurrent assets. The
Company's Kentucky landfill bonding requirement will increase by $3.0 million
for closure and $300,000 for post-closure of the expansion area permitted
October 14, 1996 (reissued February 26, 1997). The Company anticipates that the
West Virginia bonding requirements will substantially increase when West
Virginia's solid waste program is approved by the federal government. Financial
assurance requirements could increase to approximately $3.1 million for closure
and $3.7 million for post-closure monitoring and care. In connection with the
Illinois landfill, which the Company has exercised an option to acquire, the
Company has agreed to indemnify a surety providing financial assurance for
closure and post-closure care requirements for an unlined landfill located
adjacent to the Illinois landfill in the amount of $646,000 in the event the
owner of the adjacent landfill defaults on its closure and/or post-closure care
obligations. Additional collateral requirements may be imposed upon the Company
as a result of additional landfill acquisitions or changes in current
regulations which may adversely effect its profitability. The Company
anticipates providing financial assurance incrementally, as permitted by
regulations, over the life of a facility as disposal cells are constructed and
certified for acceptance of waste.
Seasonality and Inflation
The Company's revenues tend to be somewhat higher in the spring and summer
months. This is primarily attributable to the fact that (i) the volume of waste
relating to construction and demolition activities tends to increase in the
spring and summer months, and (ii) the volume of industrial and residential
waste in the regions in which the Company operates tends to decrease during the
winter months. In addition, particularly harsh weather conditions may affect the
Company's operations by interfering with collection, transportation, and
disposal operations, delaying the development of landfill capacity, and/or
reducing the volume of waste generated by the Company's customers.
The Company believes that inflation and changing prices have not had, and are
not expected to have, any material adverse effect on its results of operations
in the near future.
PART II
OTHER INFORMATION
Item 2. Changes in Securities
(c) Private Placements:
On July 9, 1997, Super Kwik, Inc., a wholly owned subsidiary of the
Company, acquired Reuben Smith Removal Service, Inc., pursuant to the
terms of an Asset Purchase Agreement. Consideration for the acquisition
included the assumption of approximately $574,000 of debt and the
issuance of 92,369 unregistered shares of common stock of the Company,
par value $.01 per share, to the sellers.
On August 14, 1997, the Company completed its merger with Waste X and
approximately 216,667 unregistered shares of the Company's common
stock, par value $.01 per share, were issued in exchange for all issued
and outstanding shares of Waste X. An additional issuance of common
stock of up to 30% of the total consideration given may be issuable
pending the resolution of certain contingencies.
13
<PAGE>
On August 20, 1997, the Company acquired all of the outstanding shares
of stock of Soil Remediation of Philadelphia, Inc., pursuant to the
terms of an Agreement for the Sale and Purchase of Stock.
Consideration for the acquisition included the issuance of 270,000
unregistered shares of common stock of the Company, par value $.01 per
share, to the sellers.
Under the Waste X private placements described above, the Company has
agreed to register the Shares for resale under the Securities Act of
1933 (the "Act") under certain conditions. The sale of the Shares was
exempt from the registration provisions of the Act pursuant to Section
4(2) of the Act and/or Regulation D promulgated under the Act for
transactions not involving a public offering, based on the fact that
the private placements were made to accredited investors who had access
to financial and other relevant data concerning the Company, its
financial condition, business and assets. The securities sold in the
private placements may not be reoffered or resold absent registration
under the Act or available exemptions from such registration
requirements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule (Electronic filed only)
(b) Current Reports on Form 8-K or 8-K/A:
On July 10, 1997, the Company filed a report on Form 8-K/A, dated July 2,
1996 related to the acquisition of Allied Environmental Services, Inc., to
adjust previously provided pro forma financial information and provide
certain other changes as requested by the Securities and Exchange
Commission ("SEC").
On July 10, 1997, the Company filed a report on Form 8-K/A, dated September
27, 1996 related to the acquisition of Super Kwik, Inc. and Waste
Maintenance Services, Inc., to adjust previously provided pro forma
financial information and provide certain other changes as requested by the
Securities and Exchange Commission ("SEC").
On July 10, 1997, the Company filed a report on Form 8-K/A, dated December
10, 1996 related to the acquisition of R&A Bender, Inc. and R&A Bender
Property, Ltd., to adjust previously provided pro forma financial
information and provide certain other changes as requested by the
Securities and Exchange Commission ("SEC").
On July 10, 1997, the Company filed a report on Form 8-K/A, dated January
31, 1997 related to the acquisition of the Donno Company, Inc., Suffolk
Waste Systems, Inc. and Residential Services, Inc. and N.R.T. Realty
Corporation, to adjust previously provided pro forma financial information
and provide certain other changes as requested by the Securities and
Exchange Commission ("SEC").
On July 10, 1997, the Company filed a report on Form 8-K/A, dated March 31,
1997 related to the acquisition of Apex Wastes Services, Inc., to adjust
previously provided pro forma financial information and provide certain
other changes as requested by the Securities and Exchange Commission
("SEC").
On July 11, 1997, and July 25, 1997, the Company filed reports on Form 8-
K/A, Amendment No. 1 and Amendment No. 2, respectively, dated May 12, 1997,
under Item 7, to provide audited financial statements of the businesses
acquired for the year ended December 31, 1996, certain unaudited interim
financial statements, unaudited pro forma financial information for the
year ended June 30, 1996, and the nine months ended March 31, 1997, with
respect to its acquisition of KC Waste Services, Inc., Curbside Leasing,
Inc., Waste Services, Inc., New York Waste Services, Inc. and Long Island
Waste Services, Inc.
14
<PAGE>
The Company filed a report on Form 8-K, dated August 15, 1997, under Item
2, to report the acquisition of Harford Disposal, Inc. and Pappy, Inc.
Financial statements of Pappy, Inc. and pro forma financial
information of the Company required under "Item 7. Financial Statements and
Exhibits" were filed on Form 8-K/A Amendment No. 1 on October 10, 1997.
The Company filed a report on Form 8-K, dated August 20, 1997, under Item
2, to report the acquisition of the outstanding shares of stock of Soil
Remediation of Philadelphia, Inc. ("SRP"). Financial statements of SRP and
pro forma financial information of the Company required under "Item 7.
Financial Statements and Exhibits" were filed on Form 8-K/A Amendment No. 1
on November 3, 1997.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
EASTERN ENVIRONMENTAL SERVICES, INC.
BY: /s/ Louis D. Paolino, Jr.
--------------------------------------------
Louis D. Paolino, Jr., Chairman
BY: /s/ Gregory M. Krzemien
----------------------------------------
Gregory M. Krzemien, Chief Financial Officer
DATE: November 13, 1997
16
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