<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 28, 1997
REGISTRATION NO. 333-27245
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
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 NUMBER)
----------------
LOUIS D. PAOLINO, JR.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
1000 CRAWFORD PLACE, SUITE 101
MT. LAUREL, NEW JERSEY 08054
1000 CRAWFORD PLACE, SUITE 101 (609) 235-6009
MT. LAUREL, NEW JERSEY 08054 (NAME, ADDRESS, INCLUDING ZIP CODE,
(609) 235-6009 AND TELEPHONE
(ADDRESS, INCLUDING ZIP CODE, AND NUMBER, INCLUDING AREA CODE, OF AGENT
TELEPHONE NUMBER, FOR SERVICE)
INCLUDING AREA CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES)
----------------
COPIES TO:
H. JOHN MICHEL, JR., ESQUIRE STEPHEN P. FARRELL, ESQUIRE
DRINKER BIDDLE & REATH LLP MORGAN LEWIS & BOCKIUS LLP
1345 CHESTNUT STREET 101 PARK AVENUE
PHILADELPHIA, PENNSYLVANIA 19107-3496 NEW YORK, NEW YORK 10178-0060
(215) 988-2700 (212) 309-6000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 28, 1997
PROSPECTUS
4,500,000 SHARES
LOGO
COMMON STOCK
--------
All of the 4,500,000 shares offered hereby are being sold by the Company. The
Company's Common Stock is traded on the Nasdaq National Market under the symbol
"EESI." The reported last sale price of the Company's Common Stock on the
Nasdaq National Market on July 9, 1997 was $18.25 per share. See "Price Range
of Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -----------------------------------------------------
Total(3) $ $ $
- -----------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) For information regarding indemnification of the several Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $1,275,000 payable by the Company.
(3) The Company has granted the several Underwriters a 30-day option to
purchase up to 675,000 additional shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the Price to Public, Underwriting Discounts and Commissions, and
Proceeds to Company will be $ , $ , and $ , respectively.
--------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as, and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1997 at the office of Smith Barney Inc., 333 West 34th Street, New York, New
York 10001.
--------
SMITH BARNEY INC.
OPPENHEIMER & CO., INC.
SANDERS MORRIS MUNDY
PACIFIC GROWTH EQUITIES, INC. VAN KASPER & COMPANY
, 1997
<PAGE>
[MAP OF EASTERN UNITED STATES INDICATING THE LOCATION OF THE COMPANY'S
COLLECTION, TRANSPORTATION, AND DISPOSAL OPERATIONS APPEARS HERE]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M UNDER THE SECURITIES ACT. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus and other information incorporated by
reference herein. Unless otherwise noted, all financial information and share
and per share data in this Prospectus (i) assume no exercise of the
Underwriters' over-allotment option and (ii) exclude 3,368,155 shares of Common
Stock issuable upon exercise of outstanding options and warrants at July 9,
1997. As used in this Prospectus, the term the "Company" includes Eastern
Environmental Services, Inc. and its subsidiaries, unless the context otherwise
indicates.
THE COMPANY
Eastern Environmental Services, Inc. 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. In June 1996, control of the Company was acquired by a
group of investors who repositioned the Company for the purpose of implementing
an aggressive acquisition program in the solid waste industry. The Company
appointed a new Board of Directors, hired a new management team with an average
of 17 years of experience in the waste management industry, raised a total of
approximately $10.0 million through two private placements of Common Stock, and
established a credit facility principally for acquisitions. Since July 1996,
the Company has acquired 18 solid waste management businesses, and thereby
entered new markets in Florida, Illinois, New Jersey, New York, and
Pennsylvania. The businesses acquired operated 16 solid waste collection and
transportation operations, three solid waste transfer and processing
facilities, two landfills, and one special waste services operation. The
Company also has acquired the right to operate a transfer station in Long
Island, New York. Largely as a result of these acquisitions, during the nine
months ended March 31, 1997, the Company's revenues increased by 80.7% (from
$29.0 million to $52.4 million) and its results of operations (excluding merger
costs and related tax provisions incurred as a result of such acquisitions)
increased from a net loss of $541,000 for the nine months ended March 31, 1996
to net income of $4.0 million for the nine months ended March 31, 1997.
The Company currently operates solid waste collection and transportation
operations in southern Florida, southeastern Illinois, southern New Jersey, the
greater metropolitan New York City area, eastern and southcentral Pennsylvania
(including Philadelphia), and South Carolina, and owns a landfill in each of
Florida, Kentucky, Pennsylvania, South Carolina, and West Virginia. The Company
has also exercised an option to acquire, subject to regulatory approval, land
in Illinois upon which it has received the necessary permits to construct a
landfill. Of the Company's revenues for the nine months ended March 31, 1997,
approximately 80.3% was attributable to solid waste collection and
transportation operations, approximately 8.3% was attributable to solid waste
disposal operations, and approximately 11.4% was attributable to other waste
management services. The Company currently provides solid waste collection
services to approximately 30,000 commercial and industrial customers and
approximately 144,000 residential customers.
The Company's objective is to expand the geographic scope of its operations
and to become one of the leading providers of non-hazardous solid waste
management in each market that it serves. The Company's strategy to achieve
this objective is to capitalize on the continuing consolidation of the solid
waste management industry by (i) identifying and penetrating new markets and
expanding its operations in its existing markets through tuck-in acquisitions
that are combined with existing operations, (ii) increasing profitability by
integrating its operations and achieving economies of scale, and (iii)
achieving internal growth. The Company's management philosophy is to retain
senior management of acquired companies and implement centralized financial and
administrative controls.
The Company believes that significant opportunities exist to acquire
additional solid waste collection, transportation, and disposal businesses in
the eastern United States and to develop within its existing markets. As part
of its acquisition program, the Company reviews acquisition opportunities on an
ongoing basis and is currently in various stages of negotiating the acquisition
of additional solid waste management businesses.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.... 4,500,000 shares
Common Stock to be outstanding after
the Offering.......................... 20,706,224 shares(1)
Use of proceeds........................ To repay outstanding indebtedness
under the Company's revolving credit
facility, which may be reborrowed, and
for future acquisitions, capital
expenditures, and working capital. See
"Use of Proceeds."
Nasdaq National Market symbol.......... EESI
</TABLE>
- --------
(1) Based upon the shares of Common Stock outstanding at July 9, 1997. Excludes
3,368,155 shares of Common Stock issuable upon exercise of outstanding
options and warrants at July 9, 1997 and an additional 359,264 shares
reserved for issuance pursuant to future option grants under the Company's
stock option plans. See "Description of Capital Stock," "Shares Eligible
for Future Sale," and "Underwriting."
RISK FACTORS
An investment in the Common Stock involves significant risks. See "Risk
Factors" beginning on page 6 of this Prospectus for a discussion of certain
factors that should be considered by prospective purchasers of the Common Stock
offered hereby.
4
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL AS ADJUSTED
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1997(1)
----------------- -----------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 52,409 $77,938
Cost of revenues.......................... 38,027 54,346
Selling, general and administrative
expenses................................. 9,245 14,780
Merger costs(2)........................... 3,337 3,337
---------- ----------
Operating income.......................... 1,800 5,475
Interest expense.......................... (1,526) (578)
Other income.............................. 461 794
---------- ----------
Income from continuing operations before
income taxes............................. 735 5,691
Income tax expense........................ (940) (1,461)
---------- ----------
Net (loss) income from continuing
operations............................... $ (205) $ 4,230
========== ==========
Net (loss) earnings per share from
continuing operations.................... $ (.02) $ .21
========== ==========
Weighted average number of shares
outstanding.............................. 13,316,698 20,404,446(3)
========== ==========
OTHER DATA:
Cash flow from operating activities....... $ 2,989
Cash flow from investing activities....... $(39,534)
Cash flow from financing activities....... $ 38,676
EBITDA(4)................................. $ 4,874 $10,321
EBITDA margin(5).......................... 9.3% 13.2%
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA AS ADJUSTED
MARCH 31, 1997(6) MARCH 31, 1997(6)(7)
----------------- --------------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............... $ (923) $ 35,633
Total assets............................ 121,954 158,510
Long term debt, less current portion.... 43,207 3,431
Total liabilities....................... 77,679 37,901
Total stockholders' equity.............. 44,275 120,609
</TABLE>
- --------
(1) The pro forma financial information reflects significant acquisitions by
the Company since July 1, 1996, which include Allied Waste Services, Inc.
and its affiliates, R&A Bender, Inc. and its affiliates, and Waste
Services, Inc. and its affiliates, as well as Golden Gate Carting, Co. Inc.
and Coney Island Rubbish Removal, Inc. which have closed into escrow, as if
such acquisitions had occurred on July 1, 1996. It also includes operating
data for predecessor operations of Apex Waste Services, Inc. for the three
month period ended September 30, 1996. The pro forma financial information
has been further adjusted to give effect to the Offering and the
application of the estimated net proceeds therefrom as if the Offering had
occurred on July 1, 1996. See "Business--Acquisition Program" and Unaudited
Pro Forma Financial Information and notes thereto included elsewhere in
this Prospectus.
(2) Merger costs incurred during the nine months ended March 31, 1997 of $3,337
relating to the acquisition of Super Kwik, Inc. and its affiliates, Donno
Company, Inc. and its affiliates, and Apex Waste Services, Inc. include the
transaction costs and costs of integrating operations. Additionally, the
tax provision for this same period includes $904 reflecting the recording
of a deferred tax provision as of the date of the respective mergers, at
which time the pooled entities' S Corporation elections were terminated.
(3) Weighted average number of shares outstanding has been calculated on a pro
forma basis after the shares issued in the Offering.
(4) EBITDA represents operating income plus depreciation and amortization.
EBITDA does not represent and should not be considered as an alternative to
net income or cash flow from operations as determined by generally accepted
accounting principles. Further, EBITDA does not necessarily indicate
whether cash flow will be sufficient for items such as working capital,
capital expenditures, or to react to changes in the Company's industry or
economic changes generally. The Company believes that EBITDA is a
frequently used measure that provides additional information for
determining its ability to meet debt service requirements and that it is
one of the indicators upon which the Company, its lenders, and certain
investors assess the Company's financial performance and its capacity to
service debt. The Company therefore interprets the trends that EBITDA
depicts as one measure of the Company's operating performance. Because
EBITDA is not calculated by all companies and analysts in the same fashion,
the EBITDA measures presented by the Company may not necessarily be
comparable to other similarly titled measures of other companies.
Therefore, in evaluating EBITDA data, investors should consider, among
other factors: the non-GAAP nature of EBITDA data; actual cashflows; the
actual availability of funds for debt service, capital expenditures and
working capital; and the comparability of the Company's EBITDA data to
similarly titled measures reported by other companies.
(5) EBITDA margin represents EBITDA expressed as a percentage of revenues.
(6) The pro forma financial information reflects significant acquisitions by
the Company since March 31, 1997, which include Waste Services, Inc. and
its affiliates, as well as Golden Gate Carting, Co. Inc. and Coney Island
Rubbish Removal, Inc. which have closed into escrow, as if such
acquisitions had occurred as of March 31, 1997. See "Business--Acquisition
Program" and Unaudited Pro Forma Financial Information and notes thereto
included elsewhere in this Prospectus.
(7) Adjusted to reflect the sale of 4,500,000 shares of Common Stock offered by
the Company hereby at an assumed public offering price of $18.25 per share
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock being offered by this Prospectus
involves a high degree of risk. In addition, this Prospectus contains forward-
looking statements that involve risks and uncertainties. Discussions
containing such forward-looking statements may be found in the material set
forth under "Prospectus Summary," "Risk Factors," "The Company," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business," as well as in this Prospectus generally. The Company's actual
results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including those set forth
in the following risk factors and elsewhere in this Prospectus. Accordingly,
prospective investors should consider carefully the following risk factors, in
addition to the other information concerning the Company and its business
contained in this Prospectus and in those documents incorporated by reference
in this Prospectus, before purchasing the shares of Common Stock offered
hereby.
HISTORY OF LOSSES; WORKING CAPITAL DEFICITS; CONTINUING CHARGES
The Company has recorded net losses to common stockholders of approximately
$55,000, $4.4 million (including $2.8 million in unusual items principally
related to the Company's June 1996 change of control), and $205,000 (including
$4.2 million of merger costs and related tax provisions incurred as a result
of acquisitions) during the fiscal years ended June 30, 1995 and 1996 and
during the nine months ended March 31, 1997, respectively, and had working
capital deficits at June 30, 1996 and March 31, 1997 of approximately $1.9
million and $700,000, respectively. In connection with the financing of its
acquisitions and business growth, the Company has incurred, and anticipates
that it will continue to incur, significant debt and interest charges under
its revolving credit facility. In addition, the Company will continue to
recognize a significant amount of goodwill amortization charges in connection
with its acquisitions of collection and transportation businesses and transfer
stations that are accounted for under the "purchase" method of accounting.
Such goodwill is amortized over a period of 40 years depending on the business
acquired, resulting in an annual non-cash charge to earnings during that
period. As the Company continues to pursue its acquisition program, its
financial position and results of operations may fluctuate significantly from
period to period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
LIMITED OPERATING HISTORY IN REGARD TO SIGNIFICANT ASSETS
In June 1996, control of the Company was acquired by a group of investors,
and the Company appointed a new Board of Directors, hired a new management
team, and implemented an aggressive acquisition program. Since July 1996, the
Company has acquired 18 solid waste management businesses. Of these
acquisitions, the nine completed by March 31, 1997 collectively contributed
approximately $47.3 million or 90.3% of the Company's revenues for the nine
months ended March 31, 1997 and approximately $69.8 million or 78.1% of the
Company's assets at March 31, 1997. Because of the Company's relatively
limited operating history with respect to these businesses, no assurances can
be given that the Company will be able to replicate or improve upon their
historical financial performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Acquisition Program."
ABILITY TO MANAGE GROWTH
The Company's strategy of growing primarily through acquisitions has placed,
and is expected to continue to place, significant burdens on the Company's
management and on its operational and other resources. The Company will need
to attract, train, motivate, retain, and supervise its senior managers,
technical professionals and other employees. Any failure to expand its
management information system capabilities, to implement and improve its
operational and financial systems and controls or to recruit appropriate
additional personnel in an efficient manner and at a pace consistent with the
Company's business growth could have a material adverse effect on the
Company's business and results of operations. See "Business--Strategy," "--
Acquisition Program," and "--Competition."
6
<PAGE>
DEPENDENCE ON ACQUISITIONS FOR GROWTH
The rate of future growth and profitability of the Company is largely
dependent on its ability to identify and acquire additional solid waste
collection, transportation, and disposal businesses. This strategy involves
risks inherent in assessing the values, strengths, weaknesses, risks, and
profitability of acquisition candidates, including adverse short-term effects
on the Company's reported operating results, diversion of management's
attention, dependence on retaining, hiring and training key personnel, and
risks associated with unanticipated problems or latent liabilities. There can
be no assurance that acquisition opportunities will be available, that the
Company will have access to the capital required to finance potential
acquisitions, that the Company will continue to acquire businesses or that any
business acquired by the Company will be integrated successfully into the
Company's operations or prove profitable. See "Business--Acquisition Program."
AVAILABILITY OF ACQUISITION TARGETS
Increased competition for acquisition candidates may result in fewer
acquisition opportunities being made available to the Company as well as less
advantageous acquisition terms which may increase acquisition costs to levels
that are beyond the Company's financial capability or that may have an adverse
effect on the Company's business and results of operations. Accordingly, no
assurance can be given as to the number or timing of the Company's
acquisitions or as to the availability of financing necessary to complete an
acquisition. The Company also believes that a significant factor in its
ability to consummate acquisitions following the Offering will be the
attractiveness of the Common Stock as an investment to potential acquisition
candidates. Such attractiveness may, in large part, be dependent upon the
market price and capital appreciation prospects of the Common Stock compared
to the equity securities of the Company's competitors. Many of the Company's
competitors for acquisitions are larger, more established companies with
significantly greater capital resources than the Company and whose equity
securities may be more attractive than the Common Stock. To the extent the
Common Stock is less attractive to acquisition candidates, the Company's
acquisition program may be adversely affected. See "Business--Acquisition
Program."
ABILITY TO INTEGRATE ACQUIRED BUSINESSES AND ACHIEVE OPERATING EFFICIENCIES
The Company is in the process of combining the businesses and assets that it
has acquired since July 1996 into an integrated operating structure. This
process may require, among other things, changes in the operating methods and
strategies of these separate businesses. The future growth and profitability
of the Company will be substantially dependent upon its ability to operate
recently acquired companies, as well as additional businesses that may be
acquired in the future, and integrate them in the Company's operations. The
Company's strategy is to achieve economies of scale and operating efficiencies
through increases in its size resulting from acquisitions. There can be no
assurance that the Company's efforts to integrate acquired operations will be
effective or that expected efficiencies and economies of scale will be
realized. The failure to achieve any of these results could have a material
adverse effect on the Company's business and results of operations. See
"Business--Strategy."
POTENTIAL LIABILITIES ASSOCIATED WITH ACQUISITIONS
The businesses acquired by the Company may have liabilities that the Company
does not discover or may be unable to discover during its pre-acquisition
investigations, including liabilities arising from environmental contamination
or non-compliance by prior owners with environmental laws or regulatory
requirements, and for which the Company, as a successor owner or operator, may
be responsible. Certain environmental liabilities, even if expressly not
assumed by the Company, may nonetheless be imposed on the Company under
certain legal theories of successor liability, including particularly under
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended ("CERCLA" or " Superfund"). The businesses acquired by the Company
handled and stored petroleum, motor oil, and other hazardous substances at
their facilities. In the past, there may have been releases of these hazardous
substances into the soil or groundwater. The Company may be required under
federal, state, or local law to investigate and remediate this contamination.
See "Business--Government Regulation." Any indemnities or warranties, due to
their limited scope, amount, duration, the financial limitations of the
indemnitor or warrantor, or other reasons, may not fully cover such
liabilities.
7
<PAGE>
NEED FOR ADDITIONAL CAPITAL; POTENTIAL DILUTION
The Company's acquisition program required a steady increase in capital,
which is expected to continue in the future as the Company pursues its
strategy. The Company has used with respect to completed acquisitions and
intends to use with respect to future acquisitions a combination of Common
Stock, cash, and the assumption of debt as consideration. In the event the
Company issues Common Stock to make future acquisitions, purchasers of Common
Stock in the Offering may experience dilution in the net tangible book value
per share of Common Stock. To the extent the Company is unable to use Common
Stock to make future acquisitions, its ability to grow may be adversely
affected. The Company's capital requirements also include working capital
needs to maintain daily operations and significant capital expenditures for
cell construction and expansion of its landfills, closure and post-closure
care costs associated with its landfills, equipment purchases, and debt
repayment obligations and/or financial assurance obligations. To the extent
that cash available under the Company's credit facility and internally
generated cash are not sufficient to meet the Company's capital needs, the
Company will be required to raise additional funds through significant
additional equity and/or debt financing. No assurance can be given that
additional funding will be available on terms favorable to the Company.
DEPENDENCE ON KEY PERSONNEL
In June 1996, the Company appointed a new Board of Directors and hired a new
management team. The Company's operations are substantially dependent upon the
services of its executive officers, particularly Louis D. Paolino, Jr., the
Chairman of the Board, Chief Executive Officer, and President of the Company,
and Terry W. Patrick, the Chief Operating Officer and an Executive Vice
President of the Company. The loss of the services of Mr. Paolino, Mr. Patrick
or one or more of the other executive officers of the Company could have a
material adverse effect on the Company's business and results of operations.
All of the Company's executive officers have entered into employment
agreements with the Company, most of which contain noncompetition agreements.
The Company does not maintain key-man life insurance policies on its executive
officers. See "Management."
DEPENDENCE ON THIRD PARTY LANDFILLS
A substantial portion of the solid waste collected by the Company is
delivered to third party landfills under informal arrangements or without
long-term contracts. If these third parties increase their disposal fees and
the Company is unable to pass along such increase to its customers, or if
these third parties discontinue their arrangements with the Company and the
Company is unable to locate alternative disposal sites, the Company's business
and results of operations would be materially adversely affected.
EXTENSIVE PERMITTING AND LICENSING REQUIREMENTS
The Company is required to obtain and maintain in effect various federal,
state, and local permits and licenses in connection with its solid waste
collection and transportation operations. The Company is also required to
obtain and maintain in effect various facility permits and other governmental
approvals, including those related to zoning, environmental, and land use, in
order to develop and operate a landfill, a transfer station, or a waste
hauling operation, and is required to obtain additional permits and approvals
to expand its existing landfill operations. These permits and approvals are
difficult, time consuming, and costly to obtain, may be subject to community
opposition, opposition by various local elected officials or citizens,
regulatory delays and other uncertainties, and may be dependent upon the
Company's facilities being included in state or local solid waste management
plans and the Company's entering into satisfactory host agreements with local
communities. In addition, operating permits may be subject to modification,
renewal, or revocation by the issuing agencies after issuance, which may
increase the Company's obligations and reopen opportunities for opposition
relating to the permits. Moreover, from time to time, regulatory agencies may
impose moratoria on, or otherwise delay, the review or granting of these
permits or approvals or such agencies may modify the procedures or increase
the stringency of the standards applicable to the review or granting of such
permits or approvals.
There can be no assurance that the Company will be successful in obtaining
and maintaining in effect the permits and approvals required for the
successful operation and growth of its business, including permits and
approvals required for the development of additional disposal capacity needed
to replace existing capacity that becomes exhausted. The failure of the
Company to obtain or maintain in effect a permit or approval significant to
its business would have a material adverse effect on the Company's business
and results of operations. See "Business--Permits and Licenses."
8
<PAGE>
POTENTIAL PENNSYLVANIA LANDFILL RESTRICTIONS
The Company's Pennsylvania landfill operation, acquired by the Company in
December 1996, has been in existence since 1972. From 1972 to 1988, the 110-
acre area of the landfill which received waste or was authorized by state
permits to receive waste had either received all necessary local zoning
approvals or was not required by local ordinance to receive a zoning permit or
other approval to operate. In 1988, the Company received a state expansion
permit for a 32-acre lined expansion area increasing the size of the permitted
disposal area to 142 acres as well as a conditional use zoning approval from
the local township. In 1990, the township, however, adopted a new zoning
ordinance which limited the height of municipal waste landfills to 35 feet
above the original land contour. The landfill, as permitted in 1988 and as
currently designed and permitted, exceeds 35 feet in certain areas. The
Company has maintained that the current permitted area is an existing
nonconforming use and is not subject to the 35 foot height limitation imposed
by the 1990 ordinance. However, if the township seeks to impose this
limitation, and is successful, the existing permitted capacity of the
Company's Pennsylvania landfill would be materially affected. See "Business--
Services--Waste Disposal."
KENTUCKY LANDFILL OBLIGATIONS
The Company ceased operations at its Kentucky landfill on June 30, 1995
because the existing permitted disposal area did not meet current state law
design requirements. From June 30, 1995 to June 30, 1996, the Company operated
a transfer station at the landfill site and disposed of waste at an alternate
location. The Company simultaneously pursued a final state permit for an
expansion area designed to meet the new state standards. The suspension of
landfill operations and the diversion of waste to an alternate location had an
adverse effect on the Company's operating results and the Company discontinued
its transfer station operation on July 1, 1996. The Company received a final
permit to construct its expansion area on October 14, 1996. The planned
development of the expansion area is currently expected to begin in the fall
of 1997. The initial capital costs required to meet the new state requirements
are anticipated to be approximately $3.3 million. The final permit issued for
the Kentucky landfill expansion area incorporated the requirements contained
in an October 8, 1996 Agreed Order which settled an administrative appeal
filed by the Somerset Pulaski County Concerned Citizens Group. Prior to actual
construction of the expansion area, the Company is required to complete an
additional hydrogeologic investigation to confirm the adequacy of the
groundwater monitoring program approved in the final permit. Any negative
results of this investigation could have a material adverse effect on the
permitted disposal capacity at the Kentucky landfill expansion area and cause
a delay in reopening the landfill.
The final permit issued for the Kentucky landfill expansion area also
requires closure of the original disposal area, which ceased operations on
June 30, 1995, by August 15, 1997. The Company will commence but does not
expect to complete closure of this area by that date. Failure to complete
closure activities by such date would result in a violation of the final
permit and could result in the assessment of penalties and/or a forfeiture of
the existing $1.3 million payment bond posted by the Company to assure a
proper closure of this area.
GOVERNMENT REGULATION
The Company is subject to extensive and evolving federal, state, and local
environmental laws and regulations that have become increasingly stringent in
recent years as a result of greater public interest in protecting the
environment. These laws and regulations affect the Company's business in many
ways including the ways set forth below and under "Business--Government
Regulation," and will continue to impose substantial costs on the Company.
The design, operation, and closure of landfills is extensively regulated.
These regulations include, among others, the regulations establishing minimum
federal requirements adopted by the United States Environmental Protection
Agency (the "EPA") in October 1991 under Subtitle D (the "Subtitle D
Regulations") of the Resource Conservation and Recovery Act of 1976 ("RCRA").
The Subtitle D Regulations, which generally became effective in October 1993,
include location restrictions, facility design standards, operating criteria,
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closure and post-closure requirements, financial assurance requirements,
groundwater monitoring requirements, groundwater remediation standards, and
corrective action requirements. In addition, the Subtitle D Regulations
require that new landfill units meet more stringent liner design criteria
(typically, composite soil and synthetic liners or two or more synthetic
liners) designed to keep leachate out of groundwater and have extensive
collection systems to collect leachate for treatment prior to disposal.
Groundwater monitoring wells must also be installed at virtually all landfills
to monitor groundwater quality and, indirectly, the effectiveness of the
leachate collection system operation. Most states have adopted extensive
landfill regulations that have been updated or replaced with new regulations
consistent with, or more stringent than, the Subtitle D Regulations. Failure
to comply with these regulations could require the Company to undertake
investigatory or remedial activities, to curtail or modify operations, or to
close a landfill temporarily or permanently. Future changes in federal or
state regulations may require the Company to modify, supplement, or replace
equipment or facilities at costs that may be substantial. The failure of
regulatory agencies to enforce these regulations vigorously or consistently
may give an advantage to competitors of the Company whose facilities do not
comply with the Subtitle D Regulations or its state counterparts. The
Company's ultimate financial obligations related to any failure to comply with
these regulations could have a material adverse effect on the Company's
business and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The Company is also regulated under the Federal Water Pollution Control Act
of 1972 (the "Clean Water Act"), and the Clean Air Act, as amended in 1990
(the "Clean Air Act"). The Clean Water Act regulates the discharge of
pollutants from a variety of sources, including landfills, into streams or
other surface waters. The Clean Air Act, including the 1990 amendments,
provides for federal, state, and local regulation of emissions of air
pollutants into the atmosphere, including emissions resulting from landfill
operations. The EPA recently promulgated new standards regulating air
emissions of certain regulated pollutants from municipal solid waste
landfills. These standards, combined with the new permitting programs
established under the 1990 Clean Air Act amendments, likely will subject four
of the Company's landfills to new permitting requirements and may require the
installation of gas recovery systems. In addition to these requirements, the
Company's landfills are subject to Clean Air Act regulations regulating the
handling and disposal of asbestos-containing materials. The Company's
continued compliance with these existing and future regulations may impose a
significant expense upon the Company which could have a material adverse
effect on the Company's business and results of operations.
In addition, most states and municipalities in which the Company operates or
may operate have adopted laws or requirements which limit or ban certain
categories of waste or mandate the disposal or recycling of local refuse.
These recycling laws and requirements have the effect of reducing landfill
disposal tonnage. Additionally, certain permits and approvals, as well as
state and local regulations, may seek to limit a landfill to accepting waste
that originates from specified geographic areas or seek to restrict the
importation of out-of-state waste. Generally, such legislative or regulatory
restrictions have not withstood judicial challenges. However, from time to
time, federal legislation is proposed which would allow individual states to
prohibit the disposal of out-of-state waste or to limit the amount that could
be imported for disposal. This legislation would also authorize in certain
instances local governmental units to mandate the flow of waste to certain
designated facilities. Although, to date, no such federal legislation has been
enacted, if such federal legislation should be enacted in the future, states
in which the Company operates landfills could act to limit or prohibit the
importation of out-of-state waste or require the Company's collection
operations to utilize certain designated sites. Such federal or state actions
could have an adverse effect on the Company's landfills that receive a
significant portion of waste originating from other states and on the
Company's collection operations. See "Business--Government Regulation--Flow
Control/Interstate Waste Restrictions."
REGULATION BY NEW YORK CITY TRADE WASTE COMMISSION
In 1996, the New York City Council enacted Local Law 42 ("Local Law 42") in
order to control the corrupting influence of organized crime on the waste
hauling industry. Local Law 42 created the Trade Waste Commission (the "TWC")
and established rules for licensing and regulating the operations of the
commercial and industrial waste industry in New York City. The law prohibits
the collection, disposal, or transfer of
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commercial and industrial waste without a license issued by the TWC and
requires TWC approval of all acquisitions or other business combinations
proposed by all licensees. Each acquisition, sale, or merger transaction
generally must be submitted for review by the TWC 30 days before the
transaction takes effect, although the amount of time required for review
depends on the complexity of the transaction and the need to investigate the
background of the principals involved. In considering applications for
licenses, which are now only temporary licenses, the TWC closely examines the
backgrounds of the applicant and the applicant's principals for any history of
criminal and other unlawful activity or involvement with members of organized
crime. The license issued to the Company by the TWC for the Company's New York
City collection operations is only a temporary license that is subject to
revocation by the TWC and there is no assurance that the Company will be
issued a permanent license. The TWC also sets maximum rates for the industry
and establishes operational requirements. In May 1997, the TWC lowered the
maximum collection rates that may be charged by licensed companies. The
Company's New York City collection operations are subject to Local Law 42,
which could preclude or materially impact the Company's operations in this
region, the time and cost of completing future acquisitions in this region,
and the rates which may be charged for collection services.
POSSIBLE LEGAL ACTION
Companies in the solid waste management business, including the Company, are
frequently subject in the normal course of business to judicial and
administrative proceedings involving federal, state, or local agencies or
citizen groups. These governmental agencies may seek to impose fines or
penalties on the Company or to revoke or deny renewal of the Company's
operating permits or licenses for violations or alleged violations of
environmental laws or regulations or require that the Company make
expenditures to remediate potential environmental problems relating to waste
disposed of or stored by the Company or its predecessors, or resulting from
its or its predecessors' transportation and collection operations. Any adverse
outcome in these proceedings could have an adverse effect on the Company's
business and results of operations and may subject the Company to adverse
publicity. The Company may also be subject to actions brought by local
governments, individuals, or community groups in connection with the
permitting or licensing of its operations, any alleged violation of such
permits or licenses, or other matters. See "Potential Environmental Liability"
below and "Business--Legal and Administrative Proceedings."
POTENTIAL ENVIRONMENTAL LIABILITY
GENERAL. The Company is subject to liability for any environmental damage
that its solid waste facilities may cause to neighboring landowners,
particularly as a result of the contamination of drinking water sources or
soil, including damage resulting from the conditions existing prior to the
acquisition of such facilities by the Company. The Company also may be subject
to liability from any off-site environmental contamination caused by
pollutants or hazardous substances whose transportation, treatment, or
disposal was arranged by the Company or its predecessors. Any substantial
liability for environmental damage incurred by the Company could have a
material adverse effect on the Company's business and results of operations.
See "Business--Government Regulation."
CERCLA imposes strict, joint, and several liability on the present owners
and operators of facilities from which a release of hazardous substances into
the environment has occurred, as well as any party that owned or operated the
facility at the time of disposal of the hazardous substances regardless of
when the hazardous substance was first detected. Similar liability is imposed
upon the generators of waste that contains hazardous substances and hazardous
substance transporters that select the treatment, storage, or disposal site.
All such persons, who are referred to as potentially responsible parties
("PRPs"), generally are jointly and severally liable for the expense of
investigation, cleanup, and natural resource damages relating to environmental
contamination, regardless of whether they exercised due care and complied with
all relevant laws and regulations.
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These costs can be substantial. Liability can be based upon the existence of
even very small amounts of the more than 700 "hazardous substances" listed by
the EPA and is not limited to the disposal of "hazardous wastes," as
statutorily defined. It is likely that hazardous substances have in the past
come to be located in landfills which the Company has been associated as an
owner or operator or as a result of its solid waste collection operations.
Moreover, the Company's solid waste collection operations may have transported
hazardous substances in the past and may do so on occasion in the future.
The National Emission Standards for Hazardous Air Pollutants ("NESHAPs")
regulate the collection, packaging, transportation, and disposal of asbestos-
containing material. NESHAPs regulate visible emissions of asbestos fibers to
outside air and require emissions controls and appropriate work practices.
Asbestos is listed as a hazardous substance under CERCLA. A few states have
classified asbestos as hazardous waste and require appropriate handling and
disposal practices. The Company transports and disposes of asbestos-containing
materials. There can be no assurance that the Company will not face claims
resulting from environmental liabilities relating to these and other materials
in its solid waste management operations.
PENNSYLVANIA LANDFILL. Prior to 1990, the Company's Pennsylvania landfill
disposed of municipal solid waste in an unlined disposal area. This unlined
area was operated by the former owner and has caused localized ground water
contamination. As a condition to a recent permit modification, the Company has
agreed to remove all waste from unlined areas to remove the source of
contamination and relocate the waste to a Subtitle D approved disposal area at
the landfill. For the period of trash relocation, the Company will operate a
groundwater removal and treatment system which has received a permit for the
associated surface water discharge. Relocation of trash began in April 1997,
is coordinated with new pad construction, and is scheduled to be completed in
fiscal year 2008. At March 31, 1997, the Company had accrued $4.5 million for
such relocation and removal costs. An additional condition of the permit
modification requires groundwater monitoring of five private water supply
wells off-site. Low levels of volatile organic compounds have been detected in
two of these private water supply wells. The Company does not believe that
this off-site contamination is related to the Company's on-site groundwater
contamination. Nevertheless, the Company voluntarily has supplied one private
residence with a carbon treatment unit on its water supply; the other private
residence is on bottled water. The Company has not established a specific
financial reserve for potential costs relating to this remediation or any
additional potential liabilities associated with this contamination. The
Company currently believes that ultimate resolution of these matters should
not have a material adverse effect on the Company's business or results of
operations. However, there can be no assurance that the Company's ultimate
financial obligations related to these matters will not have a material
adverse effect on the Company's business and results of operations.
KENTUCKY LANDFILL. The permit issued October 14, 1996 (reissued February 26,
1997) for the Company's Kentucky landfill approved corrective action measures
to abate a ground water discharge containing vinyl chloride at an off-site
spring. The corrective action requires the installation of three vertical gas
wells. This corrective action has been completed by the Company and the
Company is monitoring the spring on a quarterly basis. On December 30, 1994,
the Company received a notice of intent to sue from a neighbor of the Kentucky
landfill for an alleged unauthorized discharge of hazardous substances
resulting in damage to the neighboring property. No lawsuit has been
initiated. The Company believes any lawsuit by this neighboring landowner
would lack merit and vigorously would defend such a lawsuit. The Company
currently believes that ultimate resolution of these matters should not have a
material adverse effect on the Company's business or results of operations.
However, there can be no assurance that the Company's ultimate financial
obligations related to these matters will not have a material adverse effect
on the Company's business and results of operations.
ILLINOIS LANDFILL. The Company has received all required permits to
construct the new Illinois landfill, but intends to delay such construction
until a closure permit for an adjacent unlined landfill is issued. The Company
currently anticipates commencement of construction of the new landfill in the
fall of 1997 and commencement of operations in the spring of 1998 upon
issuance of an operating permit. The Company estimates that the cost of
construction of the initial landfill area will be $1.7 million.
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Although the Company is not the owner or operator of the adjacent unlined
landfill and therefore disclaims financial responsibility for its closure and
any other potential liability associated therewith, the Company has contracted
with the owner to facilitate and partially fund closure. As part of the
Company's Landfill Management Agreement to operate the new Illinois landfill,
the Company agreed to contribute up to a maximum of $365,000 towards closure
of the adjacent unlined landfill. In addition, the Company has entered into an
agreement with a surety providing financial assurance for the closure and
post-closure care requirements for the adjacent unlined landfill pursuant to
which the Company agreed to indemnify the surety 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. The Company believes that the ultimate
resolution of this matter should not have a material adverse effect on its
business and results of operations. However, there can be no assurance that
the Company's ultimate financial obligations related to these matters,
including a significant delay in commencement of operations of the new
landfill area, will not have a material adverse effect on the Company's
business and results of operations.
WEST VIRGINIA LANDFILL. The Company has been advised by the State regulatory
agency that the Company's West Virginia landfill is in violation of regulatory
requirements and its permit relating to stabilization of a slope area and
closure of a portion of the landfill. The State regulatory agency has not
issued a formal notice of violation. The Company submitted a schedule for a
phased closure on July 1, 1997, and advised the State regulatory agency that
it will commence closure activities by August 15, 1997, and submit a slope
stabilization plan by October 1, 1997. The costs associated with these
activities are estimated to be $348,000. Although the State could assess
penalties and/or cause a forfeiture of the Company's closure bond, the Company
believes that such activities are unlikely. The Company believes that the
ultimate resolution of this matter will not have a material adverse effect on
the Company's business or results of operations. However, there can be no
assurance that the Company's ultimate financial obligations related to this
matter will not have a material adverse effect on the Company's business and
results of operations.
SUPERFUND LIABILITY. One of the Company's solid waste collection
subsidiaries, is a defendant, along with approximately 350 other defendants,
in a private cost recovery action under various state statutory and common law
theories for allegedly sending waste to a landfill now undergoing a remedial
clean-up. The suit seeks reimbursement of an unspecified amount for soil and
groundwater remediation. The case is in the early stages of discovery and
neither the total potential remediation costs nor the Company's allocable
share of liability has been quantified. Based on information available to the
Company, the subsidiary did not contribute a significant proportion of the
waste to the site and any waste that was transported by the subsidiary to the
site appears to have been construction and demolition waste and municipal
solid waste. To date, one of the Company's insurance carriers has agreed to
provide defense up to the policy limits of $70,000, which the Company expects
will be sufficient to cover its liability, and four other carriers are
expected to be placed on notice. Given the limited quantities of waste
potentially transported to the landfill, the nature of the waste sent to the
site, the availability of insurance coverage, and other potential defenses,
the resolution of the action should not have a material adverse effect on the
Company's business and results of operations. No assurance can be given,
however, that the Company's ultimate financial obligations related to this
matter will not have a material adverse effect on the Company's business and
results of operations.
The same subsidiary is also a party to a Superfund litigation, which has
been settled by substantially all of the defendants. The Company is being
defended in this action by one of its insurance carriers, which did not accept
a $13,000 settlement offer. Because the settlement offer was not accepted, the
Company could be subject to claims for any deficiency between the amount
contributed by all settling parties and the actual costs of remediating the
site. While the Company has no reason to believe that any such claims will be
asserted and no meaningful basis to estimate the amount of such claims, no
assurances can be given that they would not be brought or that the amount
claimed would not be substantial. Were any such claim to be asserted, the
Company would expect to vigorously assert all available defenses and believes
that its liability, if any, would either be covered by insurance or, under
applicable law, the responsibility of the carrier because of its failure to
accept settlement. However, no assurances can be given that insurance proceeds
would cover the entire amount of the
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claim or that the Company would prevail in any action against the carrier.
Accordingly, there can be no assurance that the Company's ultimate financial
obligations related to this matter will not have a material adverse effect on
the Company's business and results of operations.
POTENTIAL INADEQUACY OF ACCRUALS FOR CLOSURE AND POST-CLOSURE COSTS
The Company has material financial obligations relating to closure and post-
closure costs of the landfills it operates. While the precise amounts of these
future obligations cannot be determined, at March 31, 1997 the Company
estimated the total costs (on a current dollar as opposed to a discounted
present value basis) to be approximately $13.6 million for final closure of
its landfills, of which $3.2 million has been accrued as of March 31, 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. Post-closure monitoring costs pursuant to applicable regulations
(generally for a term of 30 to 40 years after final closure) are estimated at
$7.5 million. At March 31, 1997, the Company had accrued $1.5 million for such
projected post-closure costs. The Company will provide additional accruals
based on engineering estimates of consumption of permitted landfill airspace
over the useful lives of its landfills. There can be no assurance that the
Company's ultimate financial obligations for actual closing or post-closing
costs will not exceed the amount then accrued and reserved or amounts
otherwise receivable pursuant to insurance policies or trust funds. Such a
circumstance could have a material adverse effect on the Company's business
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Business-Closure and Post-Closure Obligations," and Note 7 of
Notes to Consolidated Financial Statements.
ABILITY TO MEET BONDING REQUIREMENTS
The Company is required to post a form of financial assurance at its
landfills to ensure proper closure and post-closure monitoring and
maintenance. Additionally, some of the Company's collection and transportation
contracts require performance and payment bonds to guarantee project
completion and certain states may require collateral bonds to secure
compliance with hazardous waste transportation requirements. The Company's
ability to meet these bonding requirements is contingent upon the Company's
performance record and creditworthiness. Any inability by the Company to
maintain bonding capacity or a sizable increase in payment could have a
material adverse impact on the Company's business and results of operations.
See "Business--Insurance and Bonding."
LIMITS ON INSURANCE COVERAGE
The Company carries insurance covering its assets and operations, including
pollution liability coverage. Specifically, each of the Company's landfills
has pollution liability coverage of $5.0 million per occurrence or $5.0
million in the aggregate subject to a $500,000 deductible per occurrence.
Nevertheless, there can be no assurance that the Company's insurance will
provide sufficient coverage in the event an environmental claim was made
against the Company or that the Company will be able to maintain in place such
insurance at reasonable costs. An uninsured or underinsured claim against the
Company of sufficient magnitude could have a material adverse effect on the
Company's business and results of operations. The Company also is subject to
the risk of claims by employees and others made after the expiration of the
policy coverage period, including asbestos-related illnesses (such as
asbestosis, lung cancer, mesothelioma, and other cancers), which 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.
Any claims presented on the basis of exposure during that period may not be
covered by insurance and any liability resulting therefrom could,
consequently, have an adverse effect on the Company's business and results of
operations. See "Business--Insurance and Bonding."
WASTE REDUCTION PROGRAMS
Alternatives to landfill disposal, such as recycling, incineration, and
composting, are increasingly being used. There also has been an increasing
trend at the state and local levels to mandate recycling and waste reduction
at the source and to prohibit the disposal of certain types of wastes at
landfills. Many states (including
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states in which the Company operates) 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 Florida, Illinois, Kentucky, Pennsylvania, South
Carolina, and West Virginia) have adopted legislation that prohibits the
disposal of yard waste, tires, and other items in landfills. These
developments could result in a reduction in the volume of waste destined for
landfills in certain areas, which may affect the Company's ability to operate
its landfills at their full capacity and/or affect the prices that can be
charged for landfill disposal services. Such effects could have a material
adverse effect on the Company's business and results of operations.
COMPETITION
The solid waste management industry is highly competitive and the Company
believes that industry consolidation will increase competitive pressures even
further. The Company competes with several large national waste management
companies, including Waste Management, Inc. (formerly WMX Technologies, Inc.),
Browning-Ferris Industries, Inc., U.S.A. Waste Services, Inc., United Waste
Systems, Inc., and Allied Waste Industries, Inc. A number of these competitors
have significantly greater financial, technical, marketing, and other
resources than the Company. The Company also competes with numerous well-
established smaller, local, or regional firms, some of which have accumulated
substantial goodwill. In addition, municipalities that operate their own waste
collection and disposal facilities often enjoy the benefits of tax-exempt
financing and may control the disposal of waste collected within their
jurisdictions. Increased competition from these companies or municipalities
could have a material adverse effect on the Company's business and results of
operations. See "Business--Competition."
At July 9, 1997, the Company provided residential collection services under
56 municipal contracts with terms ranging between one to five years. As is
customary in the waste management industry, such contracts come up for
competitive bidding periodically and there is no assurance that the Company
will be the successful bidder and will be able to retain such contracts. If
the Company is unable to replace any contract lost through the competitive
bidding process with a comparable contract within a reasonable time period or
to use any surplus equipment in other service areas, the Company's business
and results of operations could be adversely affected.
SEASONALITY; ECONOMIC CONDITIONS
The Company's revenues tend to be somewhat lower in the winter 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 which could
have a material adverse effect on the Company's business and results of
operations.
The Company's business is affected by general economic conditions, both
nationally and in the geographic regions in which the Company's operations are
currently located. There can be no assurance that a national or local economic
downturn will not result in a reduction in the volume of waste being
collected, transported, and disposed of by the Company and/or the prices that
the Company can charge for its services.
ANTI-TAKEOVER PROVISIONS; SEVERANCE AGREEMENTS
The Company's Certificate of Incorporation authorizes the Board of Directors
to issue up to 10,000,000 shares of Class A Common Stock, of which 8,319,799
shares are available for issuance as of the date of this Prospectus. Holders
of Class A Common Stock are entitled to four votes for each share held on all
matters submitted to a vote of the stockholders. The issuance of Class A
Common Stock could have the effect of delaying or preventing a change in
control of the Company without further action by the stockholders. As of the
date of this Prospectus, no shares of Class A Common Stock were outstanding,
and the Company has no present plans to issue any shares of Class A Common
Stock in the future. See "Description of Capital Stock--Common Stock
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and Class A Common Stock." In the future, the Company may adopt other charter
provisions, such as authorizing the Board of Directors to issue undesignated
preferred stock, that also may have an anti-takeover effect.
In addition, certain of the Company's executive officers that have entered
into employment agreements with the Company will be entitled to receive
certain bonuses in cash or Common Stock upon a change in control of the
Company in such amounts that, in the aggregate, could have an adverse effect
on the Company's liquidity and capital resources. Accordingly, such provisions
could discourage or prevent bids to takeover the Company and decrease values
that would otherwise be obtained by stockholders for their Common Stock. See
"Management--Employment Agreements" and "Description of Capital Stock--Anti-
Takeover Provisions."
The Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which prohibits the Company from engaging in
a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. The application of Section 203 also could have the effect
of delaying or preventing a change in control of the Company without further
action by the stockholders. See "Description of Capital Stock--Anti-Takeover
Provisions."
CONTROL BY MANAGEMENT
At July 9, 1997, executive officers and directors of the Company as a group
beneficially owned 5,948,233 shares or approximately 27.7% of the outstanding
Common Stock after giving effect to the Offering. As a result, these existing
stockholders, if acting together, will be able to influence significantly the
election of individuals to the Board of Directors and the outcome of other
matters submitted for stockholder consideration. See "Principal Stockholders."
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been and is likely to continue to
be highly volatile. Factors such as fluctuations in the Company's quarterly
revenues and operating results, the Company's on-going acquisition program,
governmental regulations, market conditions for waste management stocks in
general, and economic conditions generally may have a significant impact on
the market price of the Common Stock. In addition, as the Company pursues its
acquisition program, it may agree to issue shares of Common Stock that will
generally become available for resale which may have an impact on the market
price of the Common Stock. See "Price Range of Common Stock," "Business--
Acquisition Program," and "Shares Eligible for Future Sale."
SHARES ELIGIBLE FOR FUTURE SALE; SUBSEQUENT REGISTRATIONS
Sales in the public market of substantial amounts of Common Stock could have
an adverse effect on the market price of the Common Stock and may make it more
difficult for the Company to sell its equity securities in the future at times
and prices that it deems appropriate. Upon completion of the Offering, the
Company will have outstanding 20,706,224 shares of Common Stock. Of these
shares, approximately 10,634,084 shares of Common Stock, including the
4,500,000 shares of Common Stock being sold in the Offering, will generally be
tradeable without restriction or limitation under the Securities Act, except
for any shares owned by "affiliates" of the Company, which will be subject to
the resale limitations under Rule 144 of the Securities Act. The remaining
approximately 10,072,140 outstanding shares of Common Stock held by existing
stockholders are "restricted securities" and may not be sold in a public
distribution except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption therefrom, including that provided
by Rule 144. Of these restricted securities, 6,016,422 shares will be saleable
in the public market 180 days following the date of this Prospectus subject to
compliance with Rule 144. At July 9, 1997, there were outstanding options and
warrants to purchase a total of 3,368,155 shares of Common Stock and an
additional 359,264 shares reserved for issuance pursuant to future option
grants under the Company's stock option plans. In addition, in connection with
certain of the Company's acquisitions, the Company has held back a certain
portion of the purchase price
16
<PAGE>
that was payable in Common Stock to generally secure the sellers'
indemnification obligations to the Company under the acquisition agreements.
Such Common Stock will be issued to the sellers upon the occurrence of certain
events and/or the satisfaction of certain liabilities by the sellers. At July
9, 1997, a total of 481,059 shares of unissued Common Stock were subject to
such hold backs. See "Shares Eligible for Future Sale."
Certain stockholders of the Company that hold restricted securities have
registration rights for an aggregate of up to 7,800,980 shares of Common Stock
and an additional 788,464 shares of Common Stock issuable upon exercise of
warrants. The Company expects that 45 days after completion of the Offering
5,825,694 of such shares will be covered by an effective registration
statement permitting such shares to be resold by certain of such stockholders.
Of the 5,825,694 shares to be included in such registration statement,
4,886,790 shares will be subject to restrictions on transferability as
described in the next paragraph. The Company has agreed to pay substantially
all expenses incident to such registration statement, other than underwriting
discounts and commissions. If such stockholders cause a large number of shares
to be sold in the market, such sales could have an adverse effect on the
market price for the Common Stock. See "Shares Eligible for Future Sale."
The foregoing notwithstanding, the Company and the directors and certain
executive officers and stockholders of the Company who owned an aggregate of
2,879,917 shares of Common Stock and options and warrants to purchase
1,873,254 shares of Common Stock at July 24, 1997, have agreed, except for
certain limited exceptions, not to sell, offer to sell, solicit an offer to
buy, contract to sell, grant any option to purchase or otherwise transfer or
dispose of, any shares of Common Stock, or any securities convertible into or
exercisable or exchangeable for Common Stock for at least 120 days after the
date of this Prospectus without the prior written consent of Smith Barney Inc.
In addition, the other executive officers and certain other employees and
stockholders of the Company who owned an aggregate of 6,943,272 shares of
Common Stock and options and warrants to purchase 1,255,001 shares of Common
Stock at July 24, 1997 also have agreed to such transferability restrictions,
except that the restrictive period is for 90 days following the date of this
Prospectus. See "Shares Eligible for Future Sale" and "Underwriting."
The Company intends to register two million shares of Common Stock under the
Securities Act not earlier than 30 days after the date of this Prospectus for
its use in connection with future acquisitions. These shares generally will be
freely tradable after their issuance by persons not affiliated with the
Company; however, resales of these shares during the 180-day period following
the date of the related shelf registration statement would require the prior
written consent of Smith Barney Inc.
IMMEDIATE AND SUBSTANTIAL DILUTION
Investors purchasing shares of Common Stock in the Offering will experience
immediate and substantial dilution in the net tangible book value of their
shares of approximately $13.62 per share from an assumed public offering price
of $18.25 per share. In the event the Company issues additional shares of
Common Stock in the future, purchasers of Common Stock in the Offering may
experience further dilution in the net tangible book value per share of the
Common Stock. See "Dilution."
LACK OF CASH DIVIDENDS ON COMMON STOCK
The Company does not expect to pay any cash dividends on the Common Stock in
the foreseeable future. Any cash otherwise available for such dividends will
be reinvested in the Company's business. In addition, the Company's credit
facility agreement prohibits the payment of cash dividends without prior bank
approval. See "Dividend Policy."
17
<PAGE>
THE COMPANY
Eastern Environmental Services, Inc. was incorporated in the State of
Delaware in April 1987. The Company's operations initially consisted of
asbestos abatement, which included asbestos waste hauling and laboratory
services. The Company subsequently expanded its solid waste management
services by acquiring landfills in West Virginia, Kentucky, and South Carolina
in August 1989, July 1990, and November 1990, respectively. In June 1994, the
Company discontinued and sold substantially all of the operating assets of its
asbestos abatement and laboratory services subsidiaries so that it could focus
on expanding its solid waste collection, transportation, and disposal
operations and other solid waste management services.
In June 1996, control of the Company was acquired by Louis D. Paolino, Jr.,
George O. Moorehead, Environmental Opportunities Fund, L.P., and Environmental
Opportunities Fund (Cayman), L.P. In connection therewith, William C. Skuba,
formerly the Company's Chairman of the Board, Chief Executive Officer, and
President, converted 1,591,201 shares of Class A Common Stock, which entitles
the holder thereof to four votes per share on all matters submitted to a vote
of stockholders, to Common Stock, sold a total of 500,000 shares of Common
Stock to the aforementioned individuals and limited partnerships, and then
resigned as a director and an officer of the Company. Immediately thereafter,
the Company implemented an aggressive acquisition program in the solid waste
industry, appointed a new Board of Directors, and hired a new management team
with an average of 17 years of experience in the waste management industry.
Additionally, the Company raised a total of approximately $10.0 million
through two private placements of Common Stock in the summer of 1996 and
established a $30.0 million revolving credit facility (which was subsequently
increased to $100.0 million in May 1997), principally for acquisitions.
Since July 1996, the Company has acquired 18 solid waste management
businesses, and thereby entered new markets in Florida, Illinois, New Jersey,
New York, and Pennsylvania. The businesses acquired operated 16 solid waste
collection and transportation operations, three solid waste transfer and
processing facilities, two landfills, and one special waste services
operation. The Company has also acquired the right to operate a transfer
station in Long Island, New York. In addition, the Company exercised an option
to acquire, subject to regulatory approval, land in Illinois upon which it has
received the necessary permits to construct a landfill. The Company believes
that significant opportunities exist to acquire additional solid waste
collection, transportation, and disposal businesses in the eastern United
States and to develop within its existing markets. As part of its acquisition
program, the Company reviews acquisition opportunities on an ongoing basis and
is currently in various stages of negotiating the acquisition of additional
solid waste management businesses. There can be no assurance that any of such
acquisition negotiations will result in the actual acquisition of additional
solid waste management businesses.
The Company's principal executive offices are located at 1000 Crawford
Place, Suite 101, Mt. Laurel, New Jersey 08054, and its telephone number is
(609) 235-6009.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,500,000 shares of
Common Stock offered hereby are estimated to be $76.3 million ($88.0 million
if the Underwriters' over-allotment option is exercised in full), based on an
assumed public offering price of $18.25 per share after deduction of the
underwriting discounts and commissions and estimated offering expenses.
Approximately $57.7 million of the net proceeds to the Company will be used
to repay all of the Company's then outstanding indebtedness under its credit
facility. The remainder of the net proceeds will be used for future
acquisitions, capital expenditures, and working capital. Pending specific
application, the Company intends to invest any unused portion of the net
proceeds in short-term investment-grade interest bearing securities. After
repayment of the credit facility, the Company will be able to redraw on the
credit facility as needed for future acquisitions and for working capital. The
credit facility provides for borrowing capacity, including letters of credit,
of up to $100.0 million (approximately $57.7 million and $4.2 million in
letters of credit were outstanding at July 25, 1997), presently bears interest
based on an adjusted prime rate or Eurodollar rate (the applicable interest
rate was 8.75% at July 25, 1997), and matures on April 30, 2000. The bank
indebtedness was incurred primarily to fund acquisitions, including 18 solid
waste management businesses between July 1996 and July 1997, and for working
capital. For a description of the Company's acquisition program, see
"Business--Acquisition Program."
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends in the foreseeable
future and intends to retain all working capital and earnings, if any, for use
in the Company's operations and in the expansion of its business. Any future
determination with respect to the payment of dividends will be at the
discretion of the Board of Directors and will depend upon, among other things,
the Company's results of operations, financial condition and capital
requirements, the terms of any then existing indebtedness, general business
conditions, and such other factors as the Board of Directors deems relevant.
The Company's credit facility prohibits the payment of cash dividends without
prior bank approval.
19
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is included for quotation on the Nasdaq National Market
under the symbol EESI. The sale prices reflect inter-dealer quotations, do not
include retail markups, markdowns, or commissions, and do not necessarily
represent actual transactions. Prospective purchasers of the Common Stock are
urged to obtain current market quotations. The following table sets forth for
the periods indicated the high and low sale prices for the Common Stock as
reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<S> <C> <C>
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
YEAR ENDED JUNE 30, 1996:
First Quarter............................................ $ 2 1/4 $ 1 1/4
Second Quarter........................................... 2 1/4 1 1/2
Third Quarter............................................ 1 3/4 1
Fourth Quarter........................................... 7 1/8 1 1/4
YEAR ENDED JUNE 30, 1997:
First Quarter............................................ $ 7 1/16 $ 5
Second Quarter........................................... 10 3/8 6 1/2
Third Quarter............................................ 14 1/8 8 3/8
Fourth Quarter........................................... 18 1/8 11 3/8
YEAR ENDING JUNE 30, 1998:
First Quarter (through July 9)........................... $19 1/2 $15 1/4
</TABLE>
For a recent reported sale price of the Common Stock, see the cover page of
this Prospectus.
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) at
March 31, 1997, (ii) on a pro forma basis to reflect the acquisition of Waste
Services, Inc. and its affiliates, as well as Coney Island Rubbish Removal,
Inc. and Golden Gate Carting, Co. Inc. which have closed into escrow, as if
such acquisitions had occurred at March 31, 1997, and (iii) on a pro forma as
adjusted basis to reflect the sale by the Company of 4,500,000 shares of
Common Stock in the Offering at an assumed public offering price of $18.25 and
the application of the estimated net proceeds therefrom, after deducting the
estimated underwriting discounts and commissions and offering expenses.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents............... $ 3,907 $ 3,907 $ 40,463
========== ========== ===========
Long-term debt, less current
portion(1)............................. $ 33,981 $ 43,207 $ 3,431
Stockholders' equity:
Common Stock, $.01 par value,
50,000,000 shares authorized;
14,095,834 shares issued; 15,544,675
shares issued pro forma; 20,044,675
shares issued pro forma as
adjusted(2).......................... 141 155 200
Additional paid-in capital.............. 27,927 44,864 121,153
Retained deficit........................ (668) (668) (668)
---------- ---------- -----------
27,400 44,351 120,685
Less treasury stock at cost (39,100
shares)................................ (76) (76) (76)
---------- ---------- -----------
Total stockholders' equity.......... 27,324 44,275 120,609
---------- ---------- -----------
Total capitalization................ $ 61,305 $ 87,482 $ 124,040
========== ========== ===========
</TABLE>
- --------
(1) The Company's long-term debt primarily reflects obligations of the Company
relating to its credit facility. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
(2) Excludes 3,073,155 shares of Common Stock issuable upon exercise of
outstanding options and warrants at March 31, 1997, an additional 706,764
shares reserved for issuance pursuant to future option grants under the
Company's stock option plans, and 10,000,000 shares of authorized Class A
Common Stock, of which no shares were issued or outstanding at March 31,
1997.
21
<PAGE>
DILUTION
The net tangible book value of the Company at March 31, 1997 was
approximately $9.8 million, or $.70 per share. Net tangible book value per
share is determined by dividing the net tangible book value before the
Offering by the number of shares of Common Stock outstanding before the
Offering. For purposes of calculating the net tangible book value as adjusted
for the Offering at March 31, 1997, the calculation gives effect to the sale
of 4,500,000 shares of Common Stock offered by the Company hereby (after
deducting the estimated underwriting discounts and commissions and Offering
expenses). Net tangible book value per share as adjusted is determined by
dividing the number of shares of Common Stock outstanding after the Offering
into the net tangible book value after the Offering. Dilution is determined by
subtracting net tangible book value per share as adjusted for the Offering
from the amount of cash paid by a new investor for one share of Common Stock.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share............................... $18.25
Net tangible book value per share before the Offering........ .70
Increase in net tangible book value per share attributable to
new investors............................................... 3.93
----
Net tangible book value per share as adjusted.................. 4.63
------
Dilution per share to new investors............................ $13.62
======
</TABLE>
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents (i) summary consolidated financial data of the
Company as of the dates and for the periods indicated, (ii) unaudited interim
consolidated financial data of the Company as of the date and for the period
indicated, (iii) summary pro forma consolidated financial data of the Company
as of the date and for the periods indicated, after giving effect to the
events described below and in the Unaudited Pro Forma Financial Information
and notes thereto included elsewhere in this Prospectus, and (iv) summary pro
forma balance sheet information as of March 31, 1997 after giving effect to
the events described below and in the Unaudited Pro Forma Financial
Information and notes thereto included elsewhere in this Prospectus. The
financial information as of June 30, 1995, June 30, 1996, March 31, 1997, and
for each of the three years in the period ended June 30, 1996 and the nine
months ended March 31, 1997 has been derived from the Company's audited
financial statements. The financial information derived from the Company's
unaudited consolidated financial statements for the nine months ended March
31, 1996 includes all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of financial position and results of
operations as of the date and for the period indicated. The summary pro forma
information does not purport to represent what the Company's results actually
would have been if such events had occurred at the dates indicated, nor does
such information purport to project the results of the Company for any future
period. The selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations," the Consolidated Financial Statements and notes thereto and
the Unaudited Pro Forma Financial Information and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA AS ADJUSTED
-------------------------- -----------
NINE NINE
NINE MONTHS FISCAL YEAR MONTHS MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31, ENDED ENDED ENDED
------------------------------- --------------------- JUNE 30, MARCH 31, MARCH 31,
1994(1) 1995(1) 1996(1) 1996(1) 1997(2)(3) 1996(4) 1997(4) 1997(5)
--------- --------- --------- --------- ---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........... $ 37,314 $ 40,802 $ 39,519 $ 29,021 $ 52,409 $ 100,191 $ 77,938 $ 77,938
Cost of revenues... 30,380 33,686 33,417 23,666 38,027 74,715 54,346 54,346
Selling, general
and administrative
expenses.......... 7,110 7,226 9,775 5,666 9,245 20,568 14,780 14,780
Merger costs(6).... -- -- -- -- 3,337 -- 3,337 3,337
--------- --------- --------- --------- ---------- ---------- ---------- ----------
Operating (loss)
income............ (176) (110) (3,673) (311) 1,800 4,908 5,475 5,475
Interest expense... (372) (580) (629) (417) (1,526) (4,154) (2,965) (578)
Other income
(expense)......... 226 488 (131) 187 461 267 794 794
--------- --------- --------- --------- ---------- ---------- ---------- ----------
(Loss) income from
continuing
operations before
income taxes...... (322) (202) (4,433) (541) 735 1,021 3,304 5,691
Income tax
(benefit)
expense........... (229) (147) (10) -- 940 (9) 940 1,461
--------- --------- --------- --------- ---------- ---------- ---------- ----------
Net (loss) income
from continuing
operations........ $ (93) $ (55) $ (4,423) $ (541) $ (205) $ 1,030 $ 2,364 $ 4,230
========= ========= ========= ========= ========== ========== ========== ==========
Net (loss) earnings
per share from
continuing
operations........ $ (0.01) $ (0.01) $ (0.49) $ (0.06) $ (0.02) $ 0.09 $ 0.15 $ 0.21
========= ========= ========= ========= ========== ========== ========== ==========
Weighted average
number of shares
outstanding....... 7,836,332 7,844,359 9,018,080 8,930,968 13,316,698 11,869,909 (7) 15,904,446 (7) 20,404,446 (8)
========= ========= ========= ========= ========== ========== ========== ==========
OTHER DATA:
Cash flow from
operating
activities........ $ 4,478 $ 4,714 $ 2,431 $ 2,371 $ 2,989
Cash flow from
discontinued
operations........ $ 1,533 -- -- -- --
Cash flow from
investing
activities........ $ (4,623) $ (5,029) $ (5,082) $ (3,842) $ (39,534)
Cash flow from
financing
activities........ $ (1,557) $ 1,396 $ 1,455 $ 835 $ 38,676
EBITDA(9).......... $ 2,686 $ 3,555 $ (779) $ 2,043 $ 4,874 $ 11,758 $ 10,321 $ 10,321
EBITDA margin(10).. 7.2% 8.7% (2.0%) 7.0% 9.3% 11.7% 13.2% 13.2%
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA AS ADJUSTED
JUNE 30, 1995(1) JUNE 30, 1996(1) MARCH 31, 1997 MARCH 31, 1997(11) MARCH 31, 1997(11)(12)
---------------- ---------------- -------------- ------------------ ----------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit).............. $ 452 $(1,853) $ (700) $ (923) $ 35,633
Total assets............ 28,299 28,786 89,353 121,954 158,510
Long term debt, less
current portion........ 5,160 6,308 33,981 43,207 3,431
Total liabilities....... 14,559 18,365 62,029 77,679 37,901
Total stockholders'
equity................. 13,740 10,421 27,324 44,275 120,609
</TABLE>
- -------
SELECTED FINANCIAL DATA FOOTNOTES
(1) Subsequent to June 30, 1996, the Company acquired Super Kwik, Inc. and its
affiliates ("Super Kwik") and Donno Company, Inc. and its affiliates
("Donno") in two separate transactions. Each of these business
combinations was accounted for as a pooling of interests and, accordingly,
the Company's consolidated financial statements were restated for all
periods prior to the acquisition to include the results of operations,
financial position and cash flows of Super Kwik and Donno.
(2) The acquisitions of Allied Waste Services, Inc. and its affiliates
("Allied") and R&A Bender, Inc. and its affiliates ("Bender") were
effective on July 2, 1996 and December 10, 1996, respectively. Both of
these acquisitions were accounted for as purchases. Accordingly, their
results of operations are included from the effective dates of the
acquisitions.
(3) The acquisition of Apex Waste Services, Inc. ("Apex") occurred on March
31, 1997 and was accounted for as a pooling of interests. Apex was formed
on October 1, 1996 as a result of the acquisition from the former owners
of certain assets of Waste Management, Inc. which was accounted for as a
purchase; accordingly, the results of operations are included only from
the date of inception of Apex.
(4) The pro forma financial information reflects significant acquisitions by
the Company since July 1, 1996, which include Allied, Bender, and Waste
Services, Inc. and its affiliates ("WSI"), as well as Golden Gate Carting,
Co. Inc. ("Golden Gate") and Coney Island Rubbish Removal, Inc. ("Coney
Island") which have closed into escrow, as if such acquisitions had
occurred as of the beginning of the period presented. It also includes
operating data for predecessor operations of Apex for the three month
period ended September 30, 1996. See "Business--Acquisition Program" and
Unaudited Pro Forma Financial Information and notes thereto included
elsewhere in this Prospectus.
(5) Adjusted to give effect to the Offering and the application of the
estimated proceeds therefrom, as described in "Use of Proceeds," as if the
Offering had occurred on July 1, 1996.
(6) Merger costs incurred during the nine months ended March 31, 1997 of
$3,337,000 relating to the acquisition of Super Kwik, Donno, and Apex
include the transaction costs and costs of integrating operations.
Additionally, the tax provision for this same period includes $904,000
reflecting the recording of a deferred tax provision as of the date of the
respective mergers, at which time the pooled entities' S Corporation
elections were terminated.
(7) Weighted average number of shares outstanding has been calculated on a pro
forma basis prior to the shares issued in the Offering.
(8) Weighted average number of shares outstanding has been calculated on a pro
forma basis after the shares issued in the Offering.
(9) EBITDA represents operating income plus depreciation and amortization.
EBITDA does not represent and should not be considered as an alternative
to net income or cash flow from operations as determined by generally
accepted accounting principles. Further, EBITDA does not necessarily
indicate whether cash flow will be sufficient for items such as working
capital, capital expenditures, or to react to changes in the Company's
industry or economic changes generally. The Company believes that EBITDA
is a frequently used measure that provides additional information for
determining its ability to meet debt service requirements and that it is
one of the indicators upon which the Company, its lenders, and certain
investors assess the Company's financial performance and its capacity to
service debt. The Company therefore interprets the trends that EBITDA
depicts as one measure of the Company's operating performance. Because
EBITDA is not calculated by all companies and analysts in the same
fashion, the EBITDA measures presented by the Company may not necessarily
be comparable to other similarly titled measures of other companies.
Therefore, in evaluating EBITDA data, investors should consider, among
other factors: the non-GAAP nature of EBITDA data; actual cashflows; the
actual availability of funds for debt service, capital expenditures and
working capital; and the comparability of the Company's EBITDA data to
similarly titled measures reported by other companies.
(10) EBITDA margin represents EBITDA expressed as a percentage of revenues.
(11) The pro forma financial information reflects significant acquisitions by
the Company since March 31, 1997, which include WSI, as well as Golden
Gate and Coney Island which have closed into escrow, as if such
acquisitions had occurred as of March 31, 1997. See "Business--
Acquisition Program" and Unaudited Pro Forma Financial Information and
notes thereto included elsewhere in this Prospectus.
(12) Adjusted to reflect the sale of 4,500,000 shares of Common Stock offered
by the Company hereby at an assumed public offering price of $18.25 per
share and the application of the estimated net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
OVERVIEW
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 nine months ended March 31, 1997 were attributable
approximately 80.3% to solid waste collection and transportation operations,
approximately 8.3% to solid waste disposal operations, and approximately 11.4%
to 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 a one to
three year service agreement. 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. 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
company-owned 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. Over the nine months ended March 31, 1997, approximately
6.1% 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 25.9% 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, and 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.
COST OF REVENUES
Cost of revenues consist primarily of tipping fees paid to third party
landfills, amortization of capitalized direct landfill development costs,
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.
25
<PAGE>
Certain direct engineering, legal, permitting, construction, and other costs
associated with expansion of landfills, together with related interest
expense, are capitalized 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
extending the time period over which the Company may amortize capitalized
costs of the landfill. The Company's policy is to charge against net income
any unamortized capitalized expenditures and advances relating to any landfill
that is permanently closed or any landfill expansion project that is not
completed.
The Company capitalizes direct incremental costs associated with
acquisitions. Indirect development and acquisition costs, such as executive
and corporate overhead, public relations, and other corporate services and
overhead are expensed as incurred. The Company also charges against net income
any unamortized capitalized expenditures relating to proposed acquisitions
that are not consummated. Property and equipment is depreciated over the
estimated useful life of the assets using the straight line method.
At March 31, 1997, capitalized costs related directly to the acquisition and
expansion of existing and future landfills and cell development were $30.6
million and capitalized costs related directly to proposed acquisitions that
are not consummated were $451,000. 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 probable of
completion.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist primarily of
management, clerical and administrative salaries and costs and overhead,
amortization expense related to intangible assets, professional services,
facility rentals and associated costs, financial insurance bonding premiums,
landfill related financial assurance bonding premiums, and costs relating to
marketing and sales.
MERGER COSTS
In connection with acquisitions accounted for under the pooling of interests
method, the Company records various merger costs including transaction-related
expenses and costs to bring the acquired assets into conformity with corporate
safety and operational standards.
OTHER INCOME (EXPENSE)
Other income and expense, which is composed primarily of interest income and
gains and losses on sales of equipment, has not historically been material to
the Company's results of operations.
TAXES
The Company had a net operating loss carryforward for federal income tax
purposes of approximately $4.3 million at June 30, 1996 of which $601,000 was
utilized through March 31, 1997. After the Company utilizes the remaining net
operating loss carryforward, which may occur during fiscal 1998, the Company
will record a provision for taxes at statutory rates.
ACQUISITION PROGRAM
The Company has implemented an aggressive acquisition program to expand its
operations by acquiring solid waste collection, transportation, and disposal
businesses, principally in the eastern United States. Approximately $47.3
million or 90.3% of the Company's revenues for the nine months ended March 31,
1997 and approximately $69.8 million or 78.1% of the Company's assets at March
31, 1997 resulted from these nine acquisitions consummated by the Company
between July 1996 and March 1997. Of these nine acquisitions, six have been
accounted for under the purchase method of accounting and three have been
accounted for under the pooling of interests method of accounting.
26
<PAGE>
With respect to the six acquisitions that have been accounted for under the
purchase method of accounting, goodwill is amortized over a period of 40
years, resulting in an annual non-cash charge to earnings during the
amortization period. Accordingly, if the Company completes additional
acquisitions which are accounted for under the purchase method of accounting,
its financial position and results of operations may fluctuate significantly
from period to period, as a result of additional non-cash charges relating to
goodwill. Amortization expense of goodwill was $223,000 for the nine months
ended March 31, 1997.
In connection with each of its acquisitions, the Company attempts to
implement a number of cost saving measures, including reductions (in certain
instances) in management levels and other personnel, the imposition of
centralized management and cost controls, and the elimination of duplicative
collection routes.
Because of the relative importance of acquired businesses and assets to the
Company's financial performance, the Company does not believe that its
historical financial statements are necessarily indicative of future
performance.
RECENT DEVELOPMENTS
On May 12, 1997, the Company acquired Waste Services, Inc. and its
affiliates ("WSI") in consideration of 1,159,982 shares of Common Stock and
the assumption of $6.2 million of debt, subject to adjustment upon the
occurrence of certain events. The Company also entered into definitive
agreements to acquire Coney Island Rubbish Removal, Inc. ("Coney Island") and
Golden Gate Carting, Co. Inc. ("Golden Gate"), which have been closed into
escrow pending the satisfaction of certain conditions, including the approval
of the transactions by the New York City Trade Waste Commission, in
consideration of 131,359 shares of Common Stock and the assumption of $50,273
of debt, and 157,500 shares of Common Stock and the assumption of $3.0 million
of debt, respectively, subject to adjustment upon the occurrence of certain
events. Although the Company believes that the Trade Waste Commission will
approve the acquisitions, no assurance can be given to that effect. The
acquisitions of WSI, Coney Island, and Golden Gate will be accounted for under
the purchase method of accounting. These companies provide principally
commercial waste collection services in Brooklyn, New York and had total
revenues of $16.6 million for the nine months ended March 31, 1997.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE
NINE MONTHS ENDED MARCH 31, 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>
NINE MONTHS ENDED
MARCH 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Revenues............................................... 100.0% 100.0%
Cost of revenues....................................... 81.6 72.6
Selling, general and administrative expenses........... 19.5 17.6
Merger costs........................................... -- 6.4
-------- --------
Operating (loss) income................................ (1.1) 3.4
Interest expense....................................... (1.4) (2.9)
Other income........................................... .6 .9
-------- --------
(Loss) income before income taxes...................... (1.9) 1.4
Income taxes........................................... -- (1.8)
-------- --------
Net loss from continuing operations.................... (1.9)% (.4)%
======== ========
</TABLE>
Revenues for the nine months ended March 31, 1997 were $52.4 million
compared to $29.0 million for the nine months ended March 31, 1996, an
increase of $23.4 million or 80.7%. The principal factor affecting the
increase in revenues was the impact of acquisitions, primarily of Allied Waste
Services, Inc., K Hydraulic Truck Services, Inc., R & A Bender, Inc., Bayside
of Marion, Inc., Olney Sanitary Systems, Inc., and their respective
affiliates, which contributed aggregate revenues of $12.5 million for the nine
months ended March 31, 1997. The
27
<PAGE>
acquisition of Super Kwik, Inc. and its affiliates ("Super Kwik") and Donno
Company, Inc. and its affiliates ("Donno"), which have been accounted for
under the pooling of interests method, contributed revenue of $26.5 million
for the nine months ended March 31, 1997 compared to $23.3 million for the
nine months ended March 31, 1996, an increase of $3.2 million. Additionally,
the acquisition of Apex Waste Services, Inc. ("Apex"), which has been
accounted for under the pooling of interests method, contributed revenues of
$8.6 million since its inception of operations on October 1, 1996.
Cost of revenues for the nine months ended March 31, 1997 were $38.0 million
compared to $23.7 million for the nine months ended March 31, 1996, an
increase of $14.3 million. Cost of revenues as a percentage of revenues for
the nine months ended March 31, 1997 was 72.6% compared to 81.6% for the same
period in fiscal 1996. Cost of revenues as a percentage of revenues decreased
during this period primarily due to the acquisition by the Company of two
landfills, which operated at relatively higher margins than the Company's
other operations and due to the operating efficiencies imposed on previously
private acquired companies. A portion of the decrease was also attributable to
economies of scale relating to the Company's increase in size over the period.
Selling, general and administrative expenses for the nine months ended March
31, 1997 were $9.2 million compared to $5.7 million for the nine months ended
March 31, 1996, an increase of $3.5 million. These expenses as a percentage of
revenues for the nine months ended March 31, 1997 were 17.6% compared to 19.5%
for the same period in fiscal 1996. These reductions as a percentage of
revenue reflect certain cost savings related to economies of scale in
restructuring the Company's insurance programs and overall efficiencies gained
through integrating acquisitions partially offset by increases in corporate
functions, including accounting, finance, legal and administration, in
connection with providing these services.
Merger costs incurred during the nine months ended March 31, 1997 were a
total of $3.3 million relating to the acquisitions of Super Kwik, Donno, and
Apex. Merger costs include $835,000 of transactions costs and $2.5 million of
costs related to integrating operations.
Interest expense for the nine months ended March 31, 1997 was $1.5 million
compared to $417,000 for the nine months ended March 31, 1996, an increase of
$1.1 million. This increase is principally the result of borrowings under the
Company's credit facility for the purchase of R&A Bender, Inc. and increased
interest expense related to Super Kwik for the purchase of real estate and an
increase in equipment financing over the prior year.
Other income for the nine months ended March 31, 1997 was $461,000 compared
to $187,000 for the nine months ended March 31, 1996, an increase of $274,000.
This increase in other income included a $140,000 increase in interest income,
reflecting earnings on the net proceeds from private placements of Common
Stock in the summer of 1996, and a $126,000 increase in gains from
dispositions of fixed assets.
The tax provision for the nine months ended March 31, 1997 included $904,000
relating to the completion of the mergers with Super Kwik, Donno, and Apex.
The provision reflects the recording of a deferred tax provision as of the
date of the respective mergers, at which time the pooled entities' S
corporation elections were terminated. The remainder of the tax provision
relates to state income taxes. An effective tax rate lower than the federal
and state statutory rates in the year is primarily due to the use of net
operating loss carryforwards.
28
<PAGE>
RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1996 COMPARED TO THE YEAR
ENDED JUNE 30, 1995
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues relating to continuing
operations.
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
-------------
1995 1996
----- -----
<S> <C> <C>
Revenues................................................... 100.0% 100.0%
Cost of revenues........................................... 82.6 84.6
Selling, general and administrative expenses............... 17.7 24.7
----- -----
Operating loss............................................. (.3) (9.3)
Interest expense........................................... (1.4) (1.6)
Other income (expense)..................................... 1.2 (.3)
----- -----
Loss before income taxes................................... (.5) (11.2)
Income taxes............................................... .4 --
----- -----
Net loss from continuing operations........................ (.1)% (11.2)%
===== =====
</TABLE>
Revenues for the year ended June 30, 1996 were $39.5 million compared to
$40.8 million for the year ended June 30, 1995, a decrease of $1.3 million or
3.2%. The principal factors affecting the reduction in revenues were a
decrease in collection revenues at Donno due primarily to the discontinuation
of a subcontract from a solid waste services company for collection services
in New York City and the termination of a contract to operate a transfer
station in Hempstead, Long Island, the closure of the Company's collection
operations in South Carolina, and declines in revenues at the Company's
landfills in South Carolina and Kentucky. During the year ended June 30, 1995
Donno benefitted from a one-time contract termination settlement of $660,000.
Increased revenues at Super Kwik, due primarily to acquisitions completed in
January and November 1995 and at the Company's West Virginia landfill, offset
part of the decline in revenues.
Cost of revenues for the year ended June 30, 1996 were $33.4 million
compared to $33.7 million for the year ended June 30, 1995, a decrease of
$268,000. The principal factors affecting the reduction in cost of revenues
for the year ended June 30, 1996 were reduced operating costs at Donno
primarily due to the discontinuation of a collection services contract in New
York City and the termination of a contract to operate a transfer station in
Hempstead, Long Island, and the Company's discontinued collection operation at
the South Carolina landfill. Cost of revenues increased at Super Kwik due to
acquisitions completed in January and November 1995. Cost of revenues as a
percentage of revenues for the year ended June 30, 1996 was 84.6% compared to
82.6% for the same period in fiscal 1995 and increased during 1996 primarily
due to a charge of $900,000 for closure and post-closure monitoring costs
relating to the Company's Kentucky landfill, and a one-time contract
termination settlement of $660,000 at Donno which was included in revenues
during the year ended June 30, 1995.
Selling, general and administrative expenses for the year ended June 30,
1996 were $9.8 million compared to $7.2 million for the year ended June 30,
1995, an increase of $2.6 million. These expenses as a percentage of revenues
for the year ended June 30, 1996 were 24.7% compared to 17.7% for the same
period in 1995. The increase in these expenses resulted primarily from $1.8
million of additional salary and benefit expenses, rent, bad debt expense, a
one-time sales tax claim and professional fees in connection with the sale of
Super Kwik to the Company, and the recording of $879,000 of unusual costs,
including primarily severance and office relocation costs in connection with
the Company's change in control in June 1996.
Interest expense for the year ended June 30, 1996 was $629,000 compared to
$580,000 for the year ended June 30, 1995, an increase of $49,000. This
increase was primarily due to additional interest expense at Super
29
<PAGE>
Kwik, partially offset by reduced interest expense in connection with
borrowings under the Company's credit facility.
Other income (expense) for the year ended June 30, 1996 was a loss of
$131,000 compared to income of $488,000 for the year ended June 30, 1995, a
decrease of $619,000. This decrease in other income was primarily due to a
$489,000 one-time write down to estimated net realizable value of landfill,
hauling and real estate assets no longer considered integral to the operation
of the Company after its change of control in June 1996.
The Company's effective tax rate, including both federal and state taxes,
was 72.8% for fiscal 1995 with a minimal tax benefit being recorded in 1996.
In 1995, the Company's effective tax rate was higher than the federal
statutory rates primarily due to income generated from Super Kwik and Donno
which were taxed under Subchapter S of the Internal Revenue Code. In 1996, the
effective tax rate was less than the federal and state statutory rates
primarily due to a valuation allowance offsetting the current 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
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.
As of March 31, 1997, the Company had working capital deficit of $700,000,
including cash and cash equivalents of $3.9 million. For the first nine months
of fiscal 1997, net cash provided by operations was approximately $3.0
million, with net cash from financing activities of approximately $38.7
million, including net proceeds of $10.0 million from private placements of
Common Stock and net cash from investing activities of approximately $39.5
million. A significant portion of the capital expended during the period,
approximately $39.8 million, was used to fund the acquisition of property and
equipment, including $34.2 million relating to acquisitions of businesses,
$3.7 million for the purchase of operating equipment and real estate, and $1.9
million related to the permitting and development of landfill space.
The Company to date 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 of approximately $10.9
million for the year ending June 30, 1997, of which $5.5 million has already
been expended through March 31, 1997, and $17.8 million for the year ending
June 30, 1998. The Company has addressed its capital need through private
placements of Common Stock which generated net proceeds of $10.0 million in
the nine months ended March 31, 1997 and by establishing a revolving credit
facility. The Company believes that the revolving credit facility, the funds
expected to be generated from operations, and the anticipated net proceeds of
the Offering will provide adequate cash to fund the Company's working capital
and other cash needs for the foreseeable future.
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 $30.0 million (the
"Credit Facility"). The Credit Facility, which was increased to $50.0 million
on January 27, 1997 and to $100.0 million on May 8, 1997, is available for
repayment of debt, funding of acquisitions, working capital, and for up to
$15.0 million in standby letters of credit. As of July 25, 1997, $57.7 million
and $4.2 million in letters of credit were outstanding under the Credit
Facility. The net proceeds of the Offering will be 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. As of July 25, 1997, the applicable interest rate was
8.75%. The facility expires on April 30, 2000. The Credit Facility requires
the payment of a commitment fee based
30
<PAGE>
in part on the unused balance, payable in arrears, 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.
The Company will have financial obligations related to closure and post-
closure monitoring and maintenance of the currently permitted and operating
landfills. While the exact amount of future 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 $13.6 million, of which $3.2 million has been accrued as of
March 31, 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. The Company has accrued $1.5 million for post-closure
obligations as of March 31, 1997. 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 and Pennsylvania disposal facilities. Bonds outstanding at March
31, 1997 were $1.6 million for the Kentucky landfill, $214,000 for the West
Virginia landfill, and $3.6 million for the Pennsylvania landfill. The bonds
are collateralized by irrevocable letters of credit and trust fund deposits.
Additionally, the Company has on deposit $408,000 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. The Company has also 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, which the Company has exercised an option to acquire, 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 will be imposed upon the Company which will adversely effect its
profitability. The Company anticipates providing financial assurance
incrementally 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 lower in the winter 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.
RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," which is required to be adopted for fiscal
periods ending after December 15, 1997 (fiscal 1998 for the Company). At that
time, the Company will be required to change the method currently used to
compute earnings per share. Under the new standard, the dilutive effect of
stock options and stock warrants will be excluded from basic earnings per
share. If earnings per share had been calculated under the new requirements,
the effect would not have been material to the periods presented.
In October 1996, the AICPA issued SOP 96-1, Environmental Remediation
Liabilities. The SOP provides guidance with respect to the recognition,
measurement, and disclosure of environmental remediation liabilities. The
Company will adopt SOP 96-1 in the first quarter of fiscal 1998 and, based on
current circumstances, does not believe the effect of such adoption will be
material.
31
<PAGE>
BUSINESS
GENERAL
Eastern Environmental Services, Inc. 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. In June 1996, control of the Company
was acquired by a group of investors who repositioned the Company for the
purpose of implementing an aggressive acquisition program in the solid waste
industry. The Company appointed a new Board of Directors, hired a new
management team with an average of 17 years of experience in the waste
management industry, raised a total of approximately $10.0 million through two
private placements of Common Stock, and established a credit facility
principally for acquisitions. Since July 1996, the Company has acquired 18
solid waste management businesses, and thereby entered new markets in Florida,
Illinois, New Jersey, New York, and Pennsylvania. The businesses acquired
operated 16 solid waste collection and transportation operations, three solid
waste transfer and processing facilities, two landfills, and one special waste
services operation. The Company also has acquired the right to operate a
transfer station in Long Island, New York. Largely as a result of these
acquisitions, during the nine months ended March 31, 1997, the Company's
revenues increased by 80.7% (from $29.0 million to $52.4 million) and its
results of operations (excluding merger costs and related tax provisions
incurred as a result of such acquisitions) increased from a net loss of
$541,000 for the nine months ended March 31, 1996 to net income of $4.0
million for the nine months ended March 31, 1997.
The Company currently operates solid waste collection and transportation
operations in southern Florida, southeastern Illinois, southern New Jersey,
the greater metropolitan New York City area, eastern and southcentral
Pennsylvania (including Philadelphia), and South Carolina, and owns a landfill
in each of Florida, Kentucky, Pennsylvania, South Carolina, and West Virginia.
The Company has also exercised an option to acquire, subject to regulatory
approval, land in Illinois upon which it has received the necessary permits to
construct a landfill. Of the Company's revenues for the nine months ended
March 31, 1997, approximately 80.3% was attributable to solid waste collection
and transportation operations, approximately 8.3% was attributable to solid
waste disposal operations, and approximately 11.4% was attributable to other
waste management services. The Company currently provides solid waste
collection services to approximately 30,000 commercial and industrial
customers and approximately 144,000 residential customers.
The Company believes that significant opportunities exist to acquire
additional solid waste collection, transportation, and disposal businesses in
the eastern United States and to develop within its existing markets. As part
of its acquisition program, the Company reviews acquisition opportunities on
an ongoing basis and is currently in various stages of negotiating the
acquisition of additional solid waste management businesses.
INDUSTRY OVERVIEW
According to the Environmental Business Journal, an industry trade
publication, the United States non-hazardous solid waste collection and
disposal industry generated estimated revenues of approximately $32.5 billion
in 1995. In recent years, the industry has experienced significant
consolidation. The Company believes that this consolidation has been caused
primarily by four factors: (i) increasingly stringent environmental regulation
and enforcement, especially with regard to landfill operations as a result of
Subtitle D Regulations; (ii) competition from other larger companies that have
developed or achieved economies of scale; (iii) an industry model that
emphasizes providing both collection and disposal capabilities; and (iv) the
continuing privatization by some municipalities of their collection or
disposal operations.
The overall consequences have been significant increases in the technical
and managerial expertise necessary to operate profitably, significant
increases in costs and capital requirements, and significant increases
32
<PAGE>
in the competitive advantages enjoyed by larger and well capitalized
companies. Many smaller companies and municipalities have found the increased
costs difficult to bear, and the requisite technical and managerial
sophistication difficult to obtain. As a result, a large number of smaller
operators and municipalities have either closed or sold their operations. The
Company anticipates that these trends will continue, and possibly intensify,
in the near-term future.
STRATEGY
The Company's objective is to expand the geographic scope of its operations
and to become one of the leading providers of non-hazardous solid waste
management in each market that it serves. The Company's strategy to achieve
this objective is to capitalize on the continuing consolidation of the solid
waste management industry by (i) identifying and penetrating new markets and
expanding its operations in its existing markets through tuck-in acquisitions
that are combined with existing operations, (ii) increasing profitability by
integrating its operations and achieving economies of scale, and (iii)
achieving internal growth. The Company's management philosophy is to retain
senior management of acquired companies and implement centralized financial
and administrative controls.
EXPANSION THROUGH ACQUISITIONS. The Company has implemented an aggressive
acquisition program to expand its operations by acquiring solid waste
collection, transportation, and disposal companies, principally in the eastern
United States. The principal components of the Company's acquisition strategy
are as follows:
. Enter Markets. The Company typically seeks to enter a new market by
acquiring one or several solid waste collection and transportation
operations that can be served by a Company-owned landfill or transfer
station or in which there are expected to be sufficient disposal
alternatives to ensure competitive disposal pricing. The Company may also
acquire solid waste landfills in its targeted new markets with
significant additional current and permitted capacity and thereafter
acquire nearby solid waste collection and transfer station operations so
as to secure a captive waste stream for internal disposal into the
acquired landfill.
. Expansion of Market Share and Services. After its initial entry into a
new market, the Company continually seeks to expand its market share and
services through (i) the acquisition of solid waste management businesses
and operations that can be integrated with the Company's existing
operations without increases in infrastructure or that complement the
Company's existing services and (ii) expansion into adjacent markets.
Such acquisitions may involve adding collection operations, transfer
stations, collection routes, and landfill capacity which allow the
Company to expand market share and increase asset utilization by
eliminating duplicative management, administrative, and operational
functions.
INCREASING PRODUCTIVITY AND OPERATING EFFICIENCY. The Company believes that
it can reduce the total operating expenses of owned and acquired businesses by
imposing centralized financial controls, consolidating certain functions
performed separately by each business prior to its acquisition by the Company,
and consolidating collection routes, equipment, and personnel through tuck-in
acquisitions. In addition, the Company is implementing programs to take
advantage of certain economies of scale in such areas as the purchase of
equipment, vehicles, parts and tools, vehicle and equipment maintenance, data
processing, financing arrangements, employee benefits, insurance and bonding,
and communications. Through the integration of certain of its solid waste
collection, transportation, and disposal operations, the Company believes that
it will be able to capture profits that would otherwise be paid to third
parties as tipping and other fees.
INTERNAL GROWTH. The Company believes that it can achieve internal growth,
principally from additional sales into its current markets, by providing
superior and improved service and through its existing marketing efforts. The
Company also intends to selectively implement price increases when competitive
advantages and appropriate market conditions exist.
33
<PAGE>
ACQUISITION PROGRAM
Given the large size and fragmentation of the United States solid waste
industry, the Company believes that there are numerous potential acquisition
candidates, both within the markets that it currently serves and in other
eastern United States markets, meeting its acquisition criteria. The Company
targets fragmented markets in the eastern United States (i) that are served by
a Company-operated landfill, a landfill that the Company believes that it can
acquire, or in which collection companies can use comparably priced third
party disposal facilities, (ii) in which the Company can become one of the
leading providers of solid waste management services through strategic
acquisitions, (iii) where management believes additional complementary
acquisitions can be effected so as to obtain the market share necessary to
achieve economies of scale, and (iv) that have sufficient population density
to permit the Company to operate efficiently. The Company is continually
analyzing and engaging in discussions concerning potential acquisitions.
The Company's senior management spends a substantial portion of its time
identifying acquisition candidates, conducting due diligence investigations,
and other evaluations in connection with acquisitions, and negotiating and
consummating acquisitions. All material acquisitions are subject to the
approval of the Board of Directors of the Company. Since June 1996, the
Company has analyzed a substantially greater number of companies than it has
acquired. In considering a potential acquisition, the Company examines a large
number of factors, including historical operating results, competition in the
market served, the availability of disposal facilities or whether disposal
facilities that can be acquired on satisfactory terms, possible synergies with
existing operations or through complementary acquisitions, the types of
services provided, the reputation of the entity, and the entity's customers,
accounts receivable, personnel, environmental and legal liability, capital
needs, regulatory compliance, and workplace productivity. Because the solid
waste management industry remains localized, a key component of the Company's
acquisition strategy for new markets entrance is to identify businesses with
proven management that can be retained following the acquisition.
The Company evaluates each acquisition on a number of industry measures,
including population density of the market served by the acquired entity and
the acquired entity's market share. Prior to consummating an acquisition, the
Company generally develops a pro forma budget which includes capital needs,
cash flow analysis, and operating details giving effect to synergies,
reductions, and eliminations expected to be achieved in the acquisition, and
which serves as the Company's principal financial tool in evaluating
acquisitions.
While the Company's typical acquisition target is a privately held
collection or transportation company or disposal facility, the Company
believes that there are currently significant opportunities to acquire solid
waste collection, transportation, and disposal operations, as well as
particular collection routes and lines of businesses from larger publicly held
companies as these companies restructure certain of their operations.
An integration plan is developed for each business prior to its acquisition.
In connection with each of its acquisitions, the Company seeks to maintain and
increase the profitability of the acquired company by imposing centralized
financial controls, consolidating certain functions performed separately by
each business prior to its acquisition by the Company, and consolidating
collection routes, equipment, and personnel. In addition, the Company
implements programs to take advantage of certain economies of scale in such
areas as the purchase of equipment, vehicles, parts and tools, vehicle and
equipment maintenance, data processing, financing arrangements, employee
benefits, insurance and bonding, and communications. During the period
immediately following the acquisition, the Company closely monitors the
operations of the acquired business to assure conformity to the pre-closing
budget and pro forma analyses, and where deviations develop, to take
corrective action.
As consideration for future acquisitions the Company intends to continue to
use combinations of Common Stock, cash and assumption of indebtedness. The
consideration for each future acquisition will vary on a case-by-case basis
depending on the financial interests of the Company and the historic operating
results and future prospects of the business to be acquired. The Company
expects to finance future acquisitions through funds provided by operations,
with lines of credit available under its credit facility, and from the
proceeds of future equity and debt financings. See "Shares Eligible for Future
Sale."
34
<PAGE>
COMPLETED ACQUISITIONS. Since July 1996, the Company has acquired 18 solid
waste management businesses. The businesses acquired operated 16 solid waste
collection and transportation operations, three solid waste transfer and
processing facilities, two landfills, and one special waste services
operation. These acquisitions are detailed below:
COMPLETED ACQUISITIONS
JULY 1996--JULY 1997
<TABLE>
<CAPTION>
DATE ACQUIRED
COMPANY (ACCOUNTING METHOD) MARKET PRINCIPAL BUSINESS
- ------- ------------------- ------ ------------------
<S> <C> <C> <C>
Reuben Smith Rubbish July 9, 1997 Southern New Jersey Solid waste
Removal (Purchase) collection
Service, Inc.
A-1 Carting Corporation June 18, 1997 Southern Florida Solid waste
(Purchase) collection
Ameri Carting, Inc. June 18, 1997 Southern Florida Solid waste
(Purchase) collection
Waste Services, Inc., et May 12, 1997 Brooklyn, New York Solid waste
al. (Purchase) collection
C & R Waste Removal, May 10, 1997 Southern Florida Solid waste
Inc. (Purchase) collection
Combined Waste Services, May 10, 1997 Southern Florida Solid waste
Inc. (Purchase) collection
Environmental Waste May 10, 1997 Southern Florida Solid waste
Systems Inc. (Purchase) collection
Environmental Waste May 10, 1997 Southern Florida Solid waste
Systems of Palm Beach, (Purchase) collection
Inc.
Big T Disposal, Inc. April 11, 1997 Southeastern Illinois Solid waste
(Purchase) collection and
transfer station
Apex Waste Services, March 31, 1997 Scranton, Solid waste
Inc. (Pooling of Pennsylvania collection; transfer
Interests) station and
processing
Donno Company, Inc., et January 31, Long Island, New York Solid waste
al. 1997 collection and
(Pooling of transfer station
Interests)
R&A Bender, Inc., et al. December 10, Southcentral Solid waste
1996 Pennsylvania collection and
(Purchase) landfill (municipal
solid waste)
Bayside of Marion, Inc. November 5, Central Florida Landfill
1996 (construction &
(Purchase) demolition)
Super Kwik, Inc., et al. September 27, Southern New Jersey Solid waste
1996 collection
(Pooling of
Interests)
Olney Sanitary System, September 17, Southeastern Illinois Solid waste
Inc. 1996 collection
(Purchase)
Eastern Waste of August 1, 1996 Philadelphia, Solid waste
Philadelphia, Inc., et (Purchase) Pennsylvania collection
al.
K Hydraulic Truck July 27, 1996 Philadelphia, Solid waste
Services, Inc. (Purchase) Pennsylvania transportation
Allied Waste Services, July 2, 1996 New York, New Jersey, Arranges for the
Inc., et al. (Purchase) Pennsylvania, transportation of
California construction and
demolition waste and
disposal of soil and
special waste
products
</TABLE>
On May 1, 1997, the Company signed a 13-year agreement to operate the Long
Island, New York Sanitary District No. 1's transfer station, which is located
near John F. Kennedy International Airport. The Company has purchased all of
the rights to operate the facility, including the processing of the District's
450 tons per day of municipal solid waste.
35
<PAGE>
PENDING ACQUISITIONS. The Company has entered into definitive agreements to
acquire Golden Gate Carting, Co. Inc. ("Golden Gate") and Coney Island Rubbish
Removal, Inc. ("Coney Island"), solid waste collection companies located in
Brooklyn, New York, for approximately $4.4 million and $1.2 million,
respectively. The acquisitions have been closed into escrow pending the
satisfaction of certain conditions, including the approval of the New York
City Trade Waste Commission (the "TWC"). The Company currently operates Golden
Gate and Coney Island under management agreements that have been approved by
the TWC. The management agreements will stay in place, at the Company's
option, until the TWC approves the acquisitions. Although the Company believes
that the TWC will approve the acquisitions, no assurance can be given to that
effect.
The Company believes that significant opportunities exist to acquire
additional solid waste collection, transportation, and disposal businesses in
the eastern United States and to develop its existing markets. As part of its
acquisition program, the Company reviews acquisition opportunities on an
ongoing basis and is currently in various stages of negotiating the
acquisition of additional solid waste management businesses. There can be no
assurance that any of such acquisition negotiations will result in the actual
acquisition of additional solid waste management businesses.
SERVICES
The Company's services include solid waste collection, transportation,
disposal, and certain other waste management services.
WASTE COLLECTION AND TRANSPORTATION. The Company currently provides solid
waste collection services to approximately 30,000 commercial and industrial
customers and approximately 144,000 residential customers. The Company
contracts with local generators of solid waste and transfers the waste to a
Company-owned or third party landfill or incinerator for disposal or to a
transfer station for additional handling. After compacting and/or separating
at a Company-owned transfer station, the Company directs waste to its own
landfill, to a third party landfill, or to an incinerator.
Solid waste collection is provided under two primary types of arrangements
depending on the customer being served. Collection services for commercial and
industrial customers are generally performed under one to three year service
agreements and fees are determined by such factors as collection frequency,
the type of collection equipment furnished, the type, volume, and weight of
the solid waste collected, the distance to the disposal facility, and the cost
of disposal, although in certain instances the Company may contract for a
specific job. 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 five years. Recently, some
municipalities have bid their residential collection contracts based on the
volume of waste collected. Residential collection fees are either paid by the
municipalities out of tax revenues or service charges or paid directly by
residents receiving the service.
As part of its waste collection services, the Company provides steel
containers to most of its commercial and industrial customers to store their
solid wastes. These containers range in size from one to eight cubic yards and
are designed to be lifted mechanically and emptied into a collection vehicle's
compaction hopper. The Company also offers roll-off containers (industrial
dumpsters) that range in size from eight to 45 cubic yards. The use of
containers enables the Company to service most of its commercial and
industrial customers with collection vehicles operated by a single employee.
The Company's solid waste collection activities also include the ownership
of transfer stations in Long Island, New York, Scranton, Pennsylvania,
Somerset, Kentucky, and southeastern Illinois, and the operation of an
additional transfer station in Long Island, New York. The Company's transfer
stations receive solid waste collected primarily from its collection
operations, compact the waste and transfer the waste to larger Company-owned
vehicles for transport to landfills. This procedure reduces the Company's
costs by improving its utilization of collection personnel and equipment and
also extends the scope of its solid waste transportation services. During the
nine months ended March 31, 1997, approximately 77.6% of the solid waste
disposed of at the Company's transfer stations was delivered by the Company
and approximately 22.4% was delivered by third parties.
36
<PAGE>
In response to the increasing public environmental awareness and expanding
federal and state regulations pertaining to waste recycling, the Company also
has developed recycling as a component of its solid waste collection services.
However, the Company does not presently intend to expand its recycling
operations, except as necessary to comply with applicable law.
The Company also provides solid waste transportation services for Company-
owned and third party landfills. At July 9, 1997, the Company maintained a
fleet of approximately 178 trailers owned or leased by the Company, or
operated under arrangements with independent owners/operators, and has
satellite trucking terminals at two of its landfills. The Company is expanding
its operations to include the transportation of other non-hazardous wastes,
including shredded and lead contaminated construction and demolition debris.
In many states, the transportation of these wastes requires special permits,
which the Company has obtained or is in the process of obtaining.
Waste collection and transportation services generated revenues of $35.8
million and $42.1 million for the year ended June 30, 1996 and for the nine
months ended March 31, 1997, respectively, representing approximately 90.7%
and 80.3%, respectively, of the Company's total revenue for such periods.
WASTE DISPOSAL. The Company owns five non-hazardous solid waste landfills,
of which four are currently operational and the other one is expected to be
operational in the spring of 1998. The Company has also exercised an option to
acquire, subject to regulatory approval, land in Illinois upon which it has
received the necessary permits to construct a landfill. Disposal services
generated revenues of $3.7 million and $4.3 million for the year ended June
30, 1996 and for the nine months ended March 31, 1997, respectively,
representing approximately 9.3% and 8.3%, respectively, of the Company's total
revenue for such periods.
The following table summarizes certain information concerning the Company's
landfills:
COMPANY LANDFILLS
<TABLE>
<CAPTION>
TOTAL PERMITTED APPROXIMATE UNUSED APPROXIMATE LIFE
LOCATION TOTAL ACRES DISPOSAL ACRES PERMITTED CAPACITY(1) IN YEARS(2)
- -------- ----------- --------------- --------------------- ----------------
<S> <C> <C> <C> <C>
Ocala, Florida.......... 31 31 1.6 million 15
Bridgeport,
Illinois(3)............ 95 42 5.7 million 20
Somerset, Kentucky(4)... 244 42 5.5 million 20
Chambersburg,
Pennsylvania........... 278 142 14.3 million 35
Eastover, South
Carolina............... 73 39 3.1 million 25
Clarksburg, West
Virginia............... 145 45 4.8 million 24
</TABLE>
- --------
(1) Approximate cubic yards of airspace at March 31, 1997; total yards of
airspace does not represent total yards of actual waste volume because
daily, intermediate, and final soil cover consumes some airspace (thus
reducing the airspace available for waste disposal).
(2) Approximate figures based on existing volume limitations, anticipated
operations, and current permitted capacity at March 31, 1997. Life
expectancy will decrease with increases in the rate of waste disposed.
(3) In May 1997 the Company exercised an option to purchase the Illinois
landfill. The transfer of ownership of the Illinois landfill is subject to
the consent of Lawrence County, Illinois pursuant to the host agreement
with the current owner. The landfill is approved to accept municipal solid
waste and industrial and non-hazardous special waste and construction is
planned for the fall of 1997. The landfill is expected to be operational
in the spring of 1998.
(4) The Kentucky landfill received its final state construction permit on
October 14, 1996 (reissued February 26, 1997) and construction is planned
for the fall of 1997. The landfill is expected to be operational in the
spring of 1998.
----------------
37
<PAGE>
Florida Landfill. Purchased in November 1996, this landfill is located near
Ocala, Florida and is currently permitted to accept Florida Class III landfill
debris, which includes asbestos, construction and demolition debris, yard
trash, waste tires, carpet, cardboard, glass, plastic, and other non-
putrescible (i.e., non-food) materials approved by the Florida Department of
Environmental Protection that are not expected to produce leachate and which
do not pose a threat to public health or the environment.
Illinois Landfill. In May 1997 the Company exercised an option to purchase
this landfill. The transfer of ownership of the Illinois landfill is subject
to the consent of Lawrence County, Illinois pursuant to the host agreement
with the current owner. This landfill is located in southeastern Illinois and
is expected to be operational in the spring of 1998 upon completion of
construction and receipt of a state operating permit. The landfill is approved
to accept municipal solid waste and industrial and non-hazardous special
waste.
Kentucky Landfill. Purchased in July 1990, this landfill is located in
southcentral Kentucky and is currently permitted to accept municipal solid
waste from the surrounding 18 county area of Kentucky. The facility also may
accept commercial and industrial special waste approved by the State of
Kentucky on a case-by-case basis, and asbestos. The landfill is expected to
begin operations in the spring of 1998. The site also includes a permitted
transfer station.
Pennsylvania Landfill. Purchased in December 1996, this landfill is located
near Chambersburg, Pennsylvania and is currently permitted to accept up to 821
tons of waste per day, with a permitted quarterly average of 657 tons per day,
of municipal solid waste and non-hazardous industrial waste, petroleum
contaminated soil, and asbestos waste from anywhere in the United States.
South Carolina Landfill. Purchased in November 1990, this landfill is
located near Columbia, South Carolina and is currently permitted to accept up
to 122,400 in-place cubic yards per year of asbestos, construction and
demolition debris (excluding "white goods," such as household appliances),
plastic, fiberglass, trees, limbs, cardboard, paper, and tires from anywhere
within the continental United States. This site may also accept limited other
industrial and special wastes that meet certain minimum testing requirements
as approved by the State of South Carolina on a case-by-case basis.
West Virginia Landfill. Purchased in August 1989, this landfill is located
in northcentral West Virginia and is currently permitted to accept up to 9,999
tons per month of municipal solid waste, construction and demolition debris,
non-hazardous industrial waste, shredded tires, non-infectious medical waste,
petroleum contaminated soil, and asbestos waste from anywhere within the
continental United States and Canada.
OTHER WASTE MANAGEMENT SERVICES. The Company provides other waste management
services, most of which are provided on demand or are project-based, and
provide additional waste volumes to the Company's landfills. These other
integrated waste services include the transportation and disposal of non-
hazardous contaminated soils and similar materials, the removal and
transportation of special waste products, including asbestos, and arranging
for the transportation of construction and demolition waste and disposal of
soil and special waste products. Other waste management services generated
revenues of $6.0 million for the nine months ended March 31, 1997,
representing approximately 11.4% of the Company's total revenue for such
period. Revenues from other waste management services will fluctuate based on
the demand for such services.
OPERATIONS MANAGEMENT
The Company's financial, budgeting, and purchasing functions are centrally
managed, and at the conclusion of each acquisition, the Company typically
places financial personnel with the acquired entity to centralize authority
and financial reporting. The Company's day-to-day management, however, is
conducted on a decentralized basis, with the management of each operating
location responsible for local operations, profitability, the integration of
acquisitions, and growth, subject to the Company's overall business plan and
budget. Certain of the Company's corporate functions, including environmental
compliance, and purchasing and marketing expertise, are centralized and shared
among locations to improve productivity, lower operating costs, and stimulate
internal growth. Permits and other governmental approvals for the Company's
operations,
38
<PAGE>
including those related to zoning, environmental, and land use, are handled by
local engineers under the supervision of local and senior officers. While
local management operates with a high degree of autonomy, the Company's senior
officers monitor local operations and require conformance to its accounting,
purchasing, marketing, and internal control policies, particularly with
respect to financial matters. The performance of local management is reviewed
by the Company's executive officers on a regular basis.
The Company currently has a total of 18 operating locations in the eastern
United States. The acquisition by the Company of a solid waste management
business that will serve a new market area will operate as a separate
operating location. Solid waste management businesses acquired by the Company
that are located within an existing market are consolidated or "tucked-in"
with the Company's existing operations in such market.
MARKETING
Because of the local nature of the solid waste management industry, the
Company's marketing program is designed and implemented at the local level,
usually by experienced management retained by the Company from its acquired
businesses, under direct supervision of senior management. The Company
emphasizes providing quality services as well as customer satisfaction and
retention and believes that it will attract customers in the future because of
its reputation for quality service. The Company markets its services to a
broad spectrum of commercial, industrial, and residential customers, and has a
diverse customer base, with no single customer accounting for more than five
percent of the Company's revenues for the nine months ended March 31, 1997.
The Company does not believe that the loss of any single consumer would have a
material adverse effect on the Company's business or results of operations.
PROPERTY AND EQUIPMENT
The principal fixed assets used by the Company are its landfills which are
described under "Business--Services--Waste Disposal." The five landfills
currently owned by the Company are situated on sites owned by the Company.
The Company leases approximately 6,000 square feet of office space in Mt.
Laurel, New Jersey for its principal executive offices under a lease expiring
in June 2001. The Company owns real estate, buildings, and other physical
properties that it employs in substantially all of its solid waste collection
and transportation operations.
At July 9, 1997, the Company owned or leased approximately 650 items of
equipment including waste collection vehicles and related support vehicles, as
well as bulldozers, compactors, earth movers, and related heavy equipment and
vehicles used in landfill operations. At July 9, 1997, the Company also had
approximately 31,000 steel containers in use, ranging from one to 45 cubic
yards. The Company believes that its vehicles, equipment, and operating
properties are well maintained and adequate for its current operations.
However, the Company expects to make substantial investments in additional
equipment and property for expansion, for replacement of assets, and in
connection with future acquisitions.
COMPETITION
The solid waste management industry is highly competitive and the Company
believes that industry consolidation will increase competitive pressures even
further. The Company competes with several large national waste management
companies, including Waste Management, Inc. (formerly WMX Technologies, Inc.),
Browning-Ferris Industries, Inc., U.S.A. Waste Services, Inc., United Waste
Systems, Inc., and Allied Waste Industries, Inc. A number of these competitors
have significantly greater financial, technical, marketing, and other
resources than the Company. The Company also competes with numerous well-
established smaller, local, or regional firms, some of which have accumulated
substantial goodwill. In addition, municipalities that operate their own waste
collection and disposal facilities often enjoy the benefits of tax-exempt
financing and may control the disposal of waste collected within their
jurisdictions. Increased competition from these companies or municipalities
could have a material adverse effect on the Company's business and results of
operations.
39
<PAGE>
The Company competes for waste disposal business on the basis of tipping
fees, geographical location, and quality of operations. The Company's ability
to obtain landfill business may be limited by the fact that some major
collection companies also own or operate landfills, to which they send their
waste. The Company competes for collection accounts primarily on the basis of
price and the quality of its services. Intense competition is encountered for
both quality of service and pricing. From time to time, competitors may reduce
the price of their services and accept lower profit margins in an effort to
expand or maintain market share or to win competitively bid contracts.
At July 9, 1997, the Company provided residential collection services under
56 municipal contracts with terms ranging between one to five years. As is
customary in the waste management industry, such contracts come up for
competitive bidding periodically and there is no assurance that the Company
will be the successful bidder and will be able to retain such contracts. If
the Company is unable to replace any contract lost through the competitive
bidding process with a comparable contract within a reasonable time period or
to use any surplus equipment in other service areas, the Company's business
and results of operations could be adversely affected. However, during the
year ended June 30, 1996 and the nine months ended March 31, 1997, no one
commercial customer or municipal contract accounted for more than five percent
of the total revenue of the Company.
Increased public environmental awareness and certain mandated state
regulations have resulted in increased recycling efforts in many different
areas of the country that are currently, and will in the future, reduce the
amount of solid waste destined for landfills. However, such increased public
environmental awareness and certain mandated state regulations have also
increased the waste stream by programs of mandatory collection, disposal, and
clean-up programs. In addition, the Company could face competition from
companies engaged in waste incineration and other alternatives to landfill
disposal. Although the Company believes that landfills will continue to be the
primary depository for solid waste well into the future, there can be no
assurance that recycling, incineration, and other waste reduction efforts will
not affect future landfill disposal volumes. The effect, if any, on such
volumes could also vary between different regions of the country as well as
within individual market areas in each region.
LEGAL AND ADMINISTRATIVE PROCEEDINGS
The Company is routinely involved in certain legal and administrative
proceedings. All such proceedings arise in the ordinary course of business and
the Company believes that although the outcome of such proceedings cannot be
predicted with certainty, the cost of settlement or judgments arising from
such proceedings will not have a material adverse effect on the Company's
business or results of operations. However, a significant judgment against the
Company or the imposition of a significant fine or penalty or any shortfall in
the Company's insurance coverage could have a material adverse effect upon the
Company's business or results of operations. See "Risk Factors--Potential
Environmental Liability."
Companies in the solid waste management business, including the Company, are
frequently subject in the normal course of business to judicial and
administrative proceedings involving federal, state or local agencies or
citizen groups. These governmental agencies may seek to impose fines or
penalties on the Company or to revoke or deny renewal of the Company's
operating permits or licenses for violations or alleged violations of
environmental laws or regulations or require that the Company make
expenditures to remediate potential environmental problems relating to waste
disposed of or stored by the Company or its predecessors, or resulting from
its or its predecessors' transportation and collection operations. Any adverse
outcome in these proceedings could have an adverse effect on the Company's
business and results of operations and may subject the Company to adverse
publicity. The Company may also be subject to actions brought by local
governments, individuals or community groups in connection with the permitting
or licensing of its operations, any alleged violation of such permits or
licenses or other matters. See "--Government Regulation."
40
<PAGE>
EMPLOYEES
At July 9, 1997, the Company had approximately 780 full-time employees, of
which approximately 610 were employed in collection, transfer and disposal
operations, 130 in clerical, administrative, and sales positions and 40 in
management. Approximately 250 of the Company's employees at four operating
locations are covered by collective bargaining agreements. Management has not
experienced a work stoppage and considers its employee relations to be good.
GOVERNMENT REGULATION
INTRODUCTION. The Company is subject to extensive and evolving federal,
state, and local environmental laws and regulations. These regulations not
only strictly regulate the conduct of the Company's operations but also are
related directly to the demand for many of the services offered by the
Company.
These regulations are administered by the United States Environmental
Protection Agency ("EPA") and various other federal, state and local
environmental, zoning, health, and safety agencies. The Company believes that
it is currently in substantial compliance with applicable federal, state, and
local laws, permits, orders, and regulations. The Company believes that there
will continue to be increased regulation, legislation, and regulatory
enforcement actions related to the solid waste management industry. As a
result, the Company attempts to anticipate future regulatory requirements and
to plan accordingly to remain in compliance with the regulatory framework.
In order to develop and operate a landfill, a transfer station, and most
other solid waste management facilities, the Company typically must go through
several governmental review processes and obtain one or more permits and often
zoning or other land use approvals. Obtaining these permits and zoning or land
use approvals is difficult, time consuming, and expensive, and is often
opposed and appealed by various local elected officials and citizens' groups.
Once obtained, operating permits generally must be periodically renewed and
are subject to modification and revocation by the issuing agency.
The Company's operating facilities are subject to a variety of operational,
monitoring, site maintenance, closure, post-closure, and financial assurance
obligations which change from time to time and which could give rise to
increased capital expenditures and operating costs. In connection with the
Company's expansion of its existing or any newly acquired landfills, it is
often necessary to expend considerable time, effort, and money in complying
with the governmental review and permitting process necessary to maintain or
increase the capacity of these landfills. Governmental authorities have broad
authority to enforce compliance with these laws and regulations and to obtain
injunctions or impose civil or criminal penalties in the case of violations.
Failure to correct the problems to the satisfaction of the government
authorities could lead to curtailed operations, fines, and penalties or even
closure of a landfill or other facility. See "Risk Factors--Government
Regulation" for a discussion of certain of the material risks and liabilities
applicable to the Company and investment therein relating to governmental
regulation.
The principal federal, state, and local statutes and regulations applicable
to the Company's various operations are as follows:
THE RESOURCE CONSERVATION AND RECOVERY ACT OF 1976. The Resource
Conservation Act of 1976 ("RCRA") regulates the generation, treatment,
storage, handling, transportation, and disposal of solid waste and requires
states to develop programs to ensure the safe disposal of solid waste. RCRA
divides solid waste into two groups, hazardous and non-hazardous. Wastes are
generally classified as hazardous if they: (i) either (a) are specifically
included on a list of hazardous wastes or (b) exhibit certain hazardous
characteristics; and (ii) are not specifically designated as non-hazardous.
Wastes classified as hazardous under RCRA are subject to much stricter
regulation than wastes classified as non-hazardous. Among the wastes that are
specifically designated as non-hazardous waste are household waste and
"special" waste, including items such as petroleum contaminated soils,
asbestos, foundry sand, shredder fluff, and most non-hazardous industrial
waste products.
In October 1991, the EPA adopted regulations governing solid waste landfills
("Subtitle D Regulations"). The Subtitle D Regulations, which generally became
effective in October 1993, include location restrictions, facility design
standards, operating criteria, closure and post-closure requirements,
financial assurance
41
<PAGE>
requirements, groundwater monitoring requirements, groundwater remediation
standards, and corrective action requirements. In addition, the Subtitle D
Regulations require that new landfill units meet more stringent liner design
criteria (typically, composite soil and synthetic liners or two or more
synthetic liners) designed to keep leachate out of groundwater and have
extensive collection systems to collect leachate for treatment prior to
disposal. Groundwater monitoring wells must also be installed at virtually all
landfills to monitor groundwater quality and, indirectly, the effectiveness of
the leachate collection system operation. The Subtitle D Regulations also
require, where threshold test levels are present, that methane gas generated
at landfills be controlled in a manner that protects human health and the
environment. Each state is required to revise its landfill regulations to meet
these requirements or such requirements will be automatically imposed upon it
by the EPA. Each state is also required to adopt and implement a permit
program or other appropriate system to ensure that landfills within the state
comply with Subtitle D Regulation criteria. A majority of the states in which
the Company currently operates or into which the Company may enter have
adopted regulations or programs as stringent as, or more stringent than, the
Subtitle D Regulations that have been approved by the EPA. Since the Company's
operating landfills are believed by the Company to be in compliance in all
material respects with such laws, the Company believes that all of its present
landfill operations meet or exceed the Subtitle D Regulations, where
applicable, in all material aspects.
THE FEDERAL WATER POLLUTION CONTROL ACT OF 1972. The Federal Water Pollution
Control Act of 1972, as amended (the "Clean Water Act"), establishes rules
regulating the discharge of pollutants from a variety of sources, including
solid waste disposal sites and transfer stations, into waters of the United
States. If runoff or collected leachate from the Company's landfills or
transfer stations is discharged into surface waters, the Clean Water Act would
require the Company to apply for and obtain a discharge permit, conduct
sampling and monitoring and, under certain circumstances, reduce the quantity
of pollutants in such discharge. Also, virtually all landfills are required to
comply with federal storm water regulations issued in November 1990, which are
designed to prevent possibly contaminated landfill storm water runoff from
flowing into surface waters. The Company believes that its facilities are in
compliance in all material respects with Clean Water Act requirements,
particularly as they apply to treatment and discharge of leachate and storm
water. The Company has secured or has applied for the required discharge
permits under the Clean Water Act or comparable state-delegated programs.
THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT OF
1980. The Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA"), establishes a regulatory and remedial program
intended to provide for the investigation and cleanup of facilities where
there has been, or is threatened, a release of any hazardous substance into
the environment. CERCLA's primary mechanism for remedying such problems is to
impose strict joint and several liability for cleanup of facilities on current
owners and operators of the site, former owners and operators of the site at
the time of the disposal of the hazardous substances, as well as the
generators of the hazardous substances and the transporters who arranged for
disposal or transportation of the hazardous substances. The costs of CERCLA
investigation and cleanup can be substantial. Liability under CERCLA does not
depend upon the existence or disposal of "hazardous waste" as defined by RCRA,
but can be founded upon the existence of even very small amounts of the more
than 700 "hazardous substances" listed by the EPA, many of which can be found
in household waste. If the Company were to be found to be liable under CERCLA,
the enforcing agency could hold the Company completely responsible for all
investigative and remedial costs even if other responsible parties may also be
liable. CERCLA also authorizes the imposition of a lien in favor of the United
States upon all real property subject to, or affected by, a remedial action
for all costs for which a party is liable. CERCLA provides a responsible party
with the right to bring legal action against other responsible parties for
their allocable share of investigative and remedial costs. The Company's
ability to get others to reimburse it for their allocable share of such costs
would be limited by the Company's ability to find other responsible parties
and prove the extent of their responsibility and the financial resources of
such other parties.
The Company handles and stores petroleum, motor oil, and other hazardous
substances at its facilities. In the past, there may have been historical
releases of these hazardous substances into the soil or ground water. The
Company may be required under federal, state, or local environmental law to
investigate and remediate this contamination.
42
<PAGE>
Pennsylvania Landfill. Prior to 1990, the Company's Pennsylvania landfill
disposed of municipal solid waste in an unlined disposal area. This unlined
area was operated by the former owner and has caused localized ground water
contamination. As a condition to a recent permit modification, the Company has
agreed to remove all waste from unlined areas to remove the source of
contamination and relocate the waste to a Subtitle D approved disposal area at
the landfill. For the period of trash relocation, the Company will operate a
groundwater removal and treatment system which has received a permit for the
associated surface water discharge. Relocation of trash began in April 1997,
is coordinated with new pad construction, and is scheduled to be completed in
fiscal year 2008. At March 31, 1997, the Company had accrued $4.5 million for
such relocation and removal costs. An additional condition of the permit
modification requires groundwater monitoring of five private water supply
wells off-site. Low levels of volatile organic compounds have been detected in
two of these private water supply wells. The Company does not believe that
this off-site contamination is related to the Company's on-site groundwater
contamination. Nevertheless, the Company has voluntarily supplied one private
residence with a carbon treatment unit on its water supply; the other private
residence is on bottled water. The Company has not established a specific
financial reserve for potential costs relating to this remediation or any
additional potential liabilities associated with this contamination. The
Company currently believes that ultimate resolution of these matters should
not have a material adverse effect on the Company's business or results of
operations. However, there can be no assurance that the Company's ultimate
financial obligations related to these matters will not have a material
adverse effect on the Company's business and results of operations.
Kentucky Landfill. The permit issued October 14, 1996 (reissued February 26,
1997) for the Company's Kentucky landfill approved corrective action measures
to abate a ground water discharge containing vinyl chloride at an off-site
spring. The corrective action requires the installation of three vertical gas
wells. This corrective action has been completed by the Company and the
Company is monitoring the spring on a quarterly basis. On December 30, 1994
the Company received a notice of intent to sue from a neighbor of the Kentucky
landfill for an alleged unauthorized discharge of hazardous substances
resulting in damage to the neighboring property. No lawsuit has been
initiated. The Company believes any lawsuit by this neighboring landowner
would lack merit and vigorously would defend such a lawsuit. The Company
currently believes that ultimate resolution of these matters should not have a
material adverse effect on the Company's business or results of operations.
However, there can be no assurance that the Company's ultimate financial
obligations related to these matters will not have a material adverse effect
on the Company's business and results of operations.
Superfund Liability. One of the Company's solid waste collection
subsidiaries, is a defendant, along with approximately 350 other defendants,
in a private cost recovery action under various state statutory and common law
theories for allegedly sending waste to a landfill currently undergoing a
remedial clean-up. The suit seeks reimbursement of an unspecified amount for
soil and groundwater remediation. The case is in the early stages of discovery
and neither the total potential remediation costs nor the Company's allocable
share of liability has been quantified. Based on information available to the
Company, the subsidiary did not contribute a significant proportion of the
waste to the site and any waste that was transported by the subsidiary to the
site appears to have been construction and demolition waste and municipal
solid waste. To date, one of the Company's insurance carriers has agreed to
provide defense up to the policy limits of $70,000, which the Company expects
will be sufficient to cover its liability, and four other carriers are
expected to be placed on notice. Given the limited quantities of waste
potentially transported to the landfill, the nature of the waste sent to the
site, the availability of insurance coverage, and other potential defenses,
the resolution of the action should not have a material adverse effect on the
Company's business and results of operations. No assurance can be given,
however, that the Company's ultimate financial obligations related to this
matter will not have a material adverse effect on the Company's business and
results of operations.
The same subsidiary is also a party to a Superfund litigation, which has
been settled by substantially all of the defendants. The Company is being
defended in this action by one of its insurance carriers, which did not accept
a $13,000 settlement offer. Because the settlement offer was not accepted, the
Company could be subject to claims for any deficiency between the amount
contributed by all settling parties and the actual costs of remediating the
site. While the Company has no reason to believe that any such claims will be
asserted and no meaningful basis to estimate the amount of such claims, no
assurances can be given that they would not be
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brought or that the amount claimed would not be substantial. Were any such
claim to be asserted, the Company would expect to vigorously assert all
available defenses and believes that its liability, if any, would either be
covered by insurance or, under applicable law, the responsibility of the
carrier because of its failure to accept settlement. However, no assurances
can be given that insurance proceeds would cover the entire amount of the
claim or that the Company would prevail in any action against the carrier.
Accordingly, there can be no assurance that the Company's ultimate financial
obligations related to this matter will not have a material adverse affect on
the Company's business and results of operations.
THE CLEAN AIR ACT, AS AMENDED IN 1990. The Clean Air Act, as amended in 1990
("Clean Air Act") provides for regulation, through state implementation of
federal requirements, of the emission of air pollutants from certain landfills
based upon the date of the landfill construction and volume per year of
emissions of regulated pollutants. The EPA has recently promulgated new
standards regulating air emissions of certain regulated pollutants (methane
and non-methane organic compounds) from municipal solid waste landfills.
Landfills located in areas with air pollution problems may be subject to even
more extensive air pollution controls and emissions limitations. The EPA and
the states in which the Company operates also have adopted regulations under
Title V of the Clean Air Act requiring permits for certain disposal
facilities. This may require one or more of the Company's landfills to install
passive or active gas collection systems. In addition, the National Emission
Standards for Hazardous Air Pollutants ("NESHAPs") regulate the collection,
packaging, transportation, and disposal of asbestos-containing material.
NESHAPs regulate visible emissions of asbestos fibers to outside air and
requires emissions controls and appropriate work practices. Asbestos is listed
as a hazardous substance under CERCLA. A few states have classified asbestos
as hazardous waste and require appropriate handling and disposal practices.The
Company transports and disposes of asbestos containing materials. There can be
no assurance that the Company will not face claims resulting from
environmental liabilities relating to these and other materials with respect
to its solid waste management operations.
The federal statutes described above contain provisions authorizing, under
certain circumstances, the institution of lawsuits by private citizens to
enforce the provisions of these statutes.
THE OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970. The Occupational Safety and
Health Act of 1970, as amended ("OSHA"), authorizes the Occupational Safety
and Health Administration to promulgate occupational safety and health
standards. Various of those promulgated standards, including standards for
notices of hazards, safety in excavation and the handling of asbestos, may
apply to certain of the Company's operations. OSHA regulations set forth
requirements for the training of employees handling, or who may be exposed in
the work place to, concentrations of asbestos-containing materials that exceed
specified action levels. The OSHA regulations also set standards for employee
protection, including medical surveillance, the use of respirators, protective
clothing and decontamination units, during asbestos demolition, removal, or
encapsulation as well as its storage, transportation, and disposal. In
addition, OSHA specifies a maximum permissible exposure level for airborne
asbestos in the workplace. The Company has no direct involvement in asbestos
removal or abatement projects. However, asbestos-containing waste materials
are accepted at certain of the Company's landfills that are authorized to
accept such materials, and some of the Company's collection businesses receive
asbestos-containing waste materials which have already been packaged and
labeled. These packages are loaded onto the Company's vehicles by employees of
the asbestos abatement contractors for transportation to and disposal at the
Company's authorized landfills. Accordingly, OSHA regulations designed to
minimize employees' exposure to airborne asbestos fibers and provide employees
with proper training and protection generally apply to the Company's
operations in the transportation, handling, and disposal of the asbestos
waste. The Company's employees are trained to respond appropriately in the
event there is an accidental spill or release of the packaged asbestos-
containing materials during transportation or landfill disposal.
FLOW CONTROL/INTERSTATE WASTE RESTRICTIONS. Certain permits and approvals
may limit the types of waste that may be accepted at a landfill or the
quantity of waste that may be accepted at a landfill during a given time
period. In addition, certain permits and approvals, as well as certain state
and local regulations, may seek to limit a landfill to accepting waste that
originates from specified geographic areas or seek to restrict the importation
of
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out-of-state waste or otherwise discriminate against out-of-state waste.
Generally, such legislative or regulatory restrictions on the importation of
out-of-state waste have not to date withstood judicial challenge. However,
from time to time, federal legislation is proposed which would allow
individual states to prohibit the disposal of out-of-state waste or to limit
the amount of out-of-state waste that could be imported for disposal and would
require states, under certain circumstances, to reduce the amounts of waste
exported to other states. Although no such federal legislation has to date
been enacted, if such federal legislation should be enacted in the future,
states in which the Company operates landfills could act to limit or prohibit
the importation of out-of-state waste. Such state actions could adversely
affect the Company's landfills within those states that receive a significant
portion of waste originating from other states. These restrictions may also
result in higher disposal costs for the Company's collection operations. If
the Company were unable to pass such higher costs through to its customers,
the Company's business and results of operations could be adversely affected.
In addition, certain states and localities may for economic and other
reasons restrict the exportation of waste from their jurisdiction or require
that a specified amount of waste be disposed at facilities within their
jurisdiction. In 1994, the United States Supreme Court held unconstitutional,
and therefore invalid, a local ordinance that sought to impose flow controls
on taking waste out of the locality. However, certain state and local
jurisdictions continue to seek to enforce such restrictions through
legislation or contractually and, in certain cases, the Company may elect not
to challenge such restrictions based upon various considerations. In addition,
the aforementioned federal legislation that has from time to time been
proposed could, if enacted, allow states and localities to impose certain flow
control restrictions. These restrictions could result in the volume of waste
going to landfills being reduced in certain areas, which may adversely affect
the Company's ability to operate its landfills at their full capacity and/or
reduce the prices that can be charged for landfill disposal services. These
restrictions may also result in higher disposal costs for the Company's
collection operations. If the Company were unable to pass such higher costs
through to its customers, the Company's business and results of operations
could be adversely affected.
The Company's Kentucky landfill is subject to a host county agreement which
limits the origin and type of waste the landfill may accept for disposal. The
landfill is restricted to accept only municipal, commercial and residential
waste from 10 counties at any one time chosen from an 18 county area within
Kentucky, and areas of Tennessee within 75 miles of the landfill. The landfill
is also permitted to accept non-hazardous industrial and commercial special
waste from specific generators on a case-by-case basis from Kentucky and from
states contiguous to Kentucky. Once the landfill commences operations, it may
accept asbestos from anywhere in the United States for an initial three-year
period; from Kentucky and states contiguous to Kentucky during years four and
five; and, from Kentucky in year six and the period thereafter. Such host
county or host municipal restrictions could have a material adverse effect on
the Company's landfills that receive a significant portion of their waste
originating from other states, and in the Company's collection operations
which transport waste interstate. See "Business--Government Regulations--Flow
Control/Interstate Waste Restrictions."
NEW YORK CITY TRADE WASTE COMMISSION. In 1996, the New York City Council
enacted Local Law 42 ("Local Law 42") in order to control the corrupting
influence of organized crime on the waste hauling industry. Local Law 42
created the Trade Waste Commission ("TWC") and established rules for licensing
and regulating the operations of the commercial and industrial waste industry
in New York City. The law prohibits the collection, disposal or transfer of
commercial and industrial waste without a license issued by the TWC and
requires TWC approval of all acquisitions or other business combinations
proposed by all licensees. Each acquisition, sale, or merger transaction
generally must be submitted for review by the TWC 30 days before the
transaction takes effect, although the amount of time required for review
depends on the complexity of the transaction and the need to investigate the
background of the principals involved. In considering applications for
licenses, which are now only temporary licenses, the TWC closely examines the
backgrounds of the applicant and the applicant's principals for any history of
criminal and other unlawful activity or involvement with members of organized
crime. The license issued to the Company by the TWC for the Company's New York
City collection operations is only a temporary license that is subject to
revocation by the TWC and there is no assurance that the Company will be
issued a permanent license. The TWC also sets maximum rates for the industry
and establishes operational requirements. In May 1997 the TWC lowered the
maximum collection rates
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that may be charged by licensed companies. The Company's New York City
collection operations are subject to Local Law 42, which could preclude or
materially impact the Company's operations in this region, the time and cost
of completing future acquisitions in this region, and the rates which may be
charged for collection services.
PUBLIC UTILITY REGULATION. The rates that the Company may charge at its West
Virginia landfill for the disposal of municipal solid waste are regulated by
the West Virginia Public Service Commission ("PSC"). Effective June 30, 1994,
the Company received authorization from the PSC based on a revised tariff to
increase its municipal waste disposal rate from $22.50 per ton to $28.25 per
ton (net of taxes) upon receipt of waste on its composite lined disposal area.
Pursuant to this same tariff, the rate for municipal solid waste disposal will
gradually increase to $38.93 per ton. The adoption of rate regulation in other
states in which the Company owns landfills could have an adverse effect on the
Company's business and results of operations.
STATE AND LOCAL REGULATIONS. Each state in which the Company currently
operates, or may operate in the future, has laws and regulations governing the
generation, storage, treatment, handling, transportation, and disposal of
solid waste, water and air pollution and, in most cases, the siting, design,
operation, maintenance, closure and post-closure maintenance of landfills and
other solid waste management facilities. In addition, many states have
programs that require investigation and clean up of sites containing hazardous
materials in a manner comparable to or more stringent than CERCLA. These
statutes impose requirements for investigation and cleanup of contaminated
sites and liability for costs and damages associated with such sites, and some
provide for the imposition of liens on property owned by responsible parties.
Furthermore, many municipalities also have ordinances, local laws, and
regulations affecting the Company's operations. These include zoning and
health measures that limit solid waste management activities to specified
sites or activities.
The permits or other land use approvals with respect to a landfill, as well
as state or local laws and regulations, may (i) limit a landfill to accepting
waste that originates from a specified geographic area, (ii) specify the
quantity of waste that may be accepted at the landfill during a given time
period, and (iii) specify the types of waste that may be accepted at the
landfill. Once an operating permit for a landfill is obtained, it is generally
necessary to renew the permit periodically. These restrictions could result in
the volume or types of waste going to landfills being reduced in certain
areas, which may materially adversely affect the Company's ability to operate
its landfills at their full capacity and/or affect the prices that can be
charged for solid waste disposal services. These restrictions may also result
in higher operating costs for the Company. If the Company is unable to pass
such increased costs to its customers, the Company's business and results of
operations could be materially adversely affected.
In 1996, the South Carolina Department of Health and Environmental Control
proposed new regulations governing industrial waste landfills, which includes
the Company's South Carolina landfill. If passed in proposed form, these
regulations would impose additional operating, reporting, and record-keeping
requirements on the Company's South Carolina landfill as well as 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
continue to accept the limited classes of waste it currently accepts at its
South Carolina landfill (referred to in the proposed regulations as "Class 1"
wastes), the Company would only need to design and install a ground water
monitoring program. If the Company were 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") including a leachate collection system. If the regulations are finalized
in substantially the form proposed, the Company will determine the projected
costs 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. These regulations are only in
draft form, and final regulations expected to become effective in 1997 may
have additional or substantially different requirements that could have a
material adverse effect on the Company's business and results of operations.
The Company's Pennsylvania landfill operation, acquired by the Company in
December 1996, has been in existence since 1972. From 1972 to 1988, the 110-
acre area of the landfill which received waste or was
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authorized by state permits to receive waste had either received all necessary
local zoning approvals or was not required by local ordinance to receive a
zoning permit or other approval to operate. In 1988, the Company received a
state expansion permit for a 32-acre lined expansion area increasing the size
of the permitted disposal area to 142 acres as well as a conditional use
zoning approval from the local township. In 1990, the township, however,
adopted a new zoning ordinance which limited the height of municipal waste
landfills to 35 feet above the original land contour. The landfill, as
permitted in 1988 and as currently designed and permitted, exceeds 35 feet in
certain areas. The Company has maintained that the current permitted area is
an existing nonconforming use and is not subject to the 35 foot height
limitation imposed by the 1990 ordinance. However, if the township seeks to
impose this limitation, and is successful, the existing permitted capacity of
the Company's Pennsylvania landfill would be materially affected.
Alternatives to landfill disposal, such as recycling, incineration, and
composting, are increasingly being used. There also has been an increasing
trend at the state and local levels to mandate recycling and waste reduction
at the source and to prohibit the disposal of certain types of wastes at
landfills. Many states (including states in which the Company operates) 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 Florida,
Illinois, Kentucky, Pennsylvania, South Carolina, and West Virginia) have
adopted legislation that prohibits the disposal of yard waste, tires, and
other items in landfills. These developments could result in a reduction in
the volume of waste destined for landfills in certain areas, which may affect
the Company's ability to operate its landfills at their full capacity and/or
affect the prices that can be charged for landfill disposal services. Such
effects could have a material adverse effect on the Company's business and
results of operations.
PERMITS AND LICENSES
The Company is required to obtain and maintain in effect various federal,
state, and local permits and licenses in connection with its solid waste
collection and transportation operations. The Company is also required to
obtain and maintain in effect various facility permits and other governmental
approvals, including those related to zoning, environmental and land use, in
order to develop and operate a landfill, transfer station, or a waste hauling
operation, and is required to obtain additional permits and approvals to
expand its existing landfill operations. These permits and approvals are
difficult, time consuming and costly to obtain, may be subject to community
opposition, opposition by various local elected officials or citizens,
regulatory delays and other uncertainties, and may be dependent upon the
Company's facilities being included in state or local solid waste management
plans and the Company's entering into satisfactory host agreements with local
communities. In addition, operating permits may be subject to modification,
renewal, or revocation by the issuing agencies after issuance, which may
increase the Company's obligations and reopen opportunities for opposition
relating to the permits. Moreover, from time to time, regulatory agencies may
impose moratoria on, or otherwise delay, the review or granting of these
permits or approvals or such agencies may modify the procedures or increase
the stringency of the standards applicable to the review or granting of such
permits or approvals.
There can be no assurance that the Company will be successful in obtaining
and maintaining in effect the permits and approvals required for the
successful operation and growth of its business, including permits and
approvals required for the development of additional disposal capacity needed
to replace existing capacity that becomes exhausted. The failure of the
Company to obtain or maintain in effect a permit or agreement significant to
its business would have a material adverse effect on the Company's business
and results of operations.
Kentucky Landfill. The Company ceased operations at its Kentucky landfill on
June 30, 1995 because the existing permitted disposal area did not meet
current state law design requirements. From June 30, 1995 to June 30, 1996,
the Company operated a transfer station at the landfill site and disposed of
waste at an alternate location. The Company simultaneously pursued a final
state permit for an expansion area designed to meet the new state standards.
The suspension of landfill operations and the diversion of waste to an
alternate location had an adverse effect on the Company's operating results
and the Company discontinued its transfer station operation on July 1, 1996.
The Company received a final permit to construct its expansion area on October
14, 1996. The
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planned development of the expansion area is currently expected to begin in
the fall of 1997. The initial capital costs required to meet the new state
requirements are anticipated to be approximately $3.3 million. The final
permit issued for the Kentucky landfill expansion area incorporated the
requirements contained in an October 8, 1996 Agreed Order which settled an
administrative appeal filed by the Somerset Pulaski County Concerned Citizens
Group. Prior to actual construction of the expansion area, the Company is
required to complete an additional hydrogeologic investigation to confirm the
adequacy of the groundwater monitoring program approved in the final permit.
Any negative results of this investigation could have a material adverse
effect on the permitted disposal capacity at the Kentucky landfill expansion
area and cause a delay in reopening the landfill.
The final permit issued for the Kentucky landfill expansion area also
requires closure of the original disposal area, which ceased operations on
June 30, 1995, by August 15, 1997. The Company will commence but does not
expect to complete closure of this area by that date. Failure to complete
closure activities by such date would result in a violation of the final
permit and could result in the assessment of penalties and/or a forfeiture of
the existing $1.3 million payment bond posted by the Company to assure a
proper closure of this area.
Illinois Landfill. The Company has received all required permits to
construct the new Illinois landfill, but intends to delay such construction
until a closure permit for an adjacent unlined landfill is issued. The Company
currently anticipates commencement of construction of the new landfill in the
fall of 1997 and commencement of operations in the spring of 1998 upon
issuance of an operating permit. The Company estimates that the cost of
construction of the initial landfill area will be $1.7 million.
Although the Company is not the owner or operator of the adjacent unlined
landfill and therefore disclaims financial responsibility for its closure and
any other potential liability associated therewith, the Company has contracted
with the owner to facilitate and partially fund closure. As part of the
Company's Landfill Management Agreement to operate the Illinois landfill, the
Company agreed to contribute up to a maximum of $365,000 towards closure of
the adjacent unlined landfill. In addition, the Company has entered into an
agreement with a surety providing financial assurance for the closure and
post-closure care requirements for the adjacent unlined landfill pursuant to
which the Company agreed to indemnify the surety 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. The Company believes that the ultimate
resolution of this matter should not have a material adverse effect on its
business and results of operations. However, there can be no assurance that
the Company's ultimate financial obligations related to these matters,
including a significant delay in commencement of operations of the new
landfill area, will not have a material adverse effect on the Company's
business and results of operations.
West Virginia Landfill. The Company has been advised by the State regulatory
agency that the Company's West Virginia landfill is in violation of regulatory
requirements and its permit relating to stabilization of a slope area and
closure of a portion of the landfill. The State regulatory agency has not
issued a formal notice of violation. The Company submitted a schedule for a
phased closure on July 1, 1997, and advised the State regulatory agency that
it will commence closure activities by August 15, 1997 and submit a slope
stabilization plan by October 1, 1997. The costs associated with these
activities are estimated to be $348,000. Although the State could assess
penalties and/or cause a forfeiture of the Company's closure bond, the Company
believes that such activities are unlikely. The Company believes that the
ultimate resolution of this matter will not have a material adverse effect on
the Company's business or results of operations. However, there can be no
assurance that the Company's ultimate financial obligations related to this
matter will not have a material adverse effect on the Company's business and
results of operations.
CLOSURE AND POST-CLOSURE OBLIGATIONS
The Company will also incur costs in connection with state regulatory
requirements governing closure and post-closure monitoring and maintenance of
the inactive areas, the current operating areas and future expansion areas at
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 $128,000 in Florida, approximately $8.0 million in Pennsylvania,
and approximately $465,000 in South Carolina (pursuant to the draft South
Carolina regulations
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expected to become effective in fiscal 1997). Closure costs for the completed
areas at the West Virginia landfill are estimated to be approximately
$700,000. Closure costs for the remaining areas are estimated to be
approximately $3.0 million. Closure costs for the original permit area at the
Kentucky landfill which ceased operations on June 30, 1995 are estimated to be
approximately $1.3 million. Closure costs for the Kentucky landfill expansion
area which received a final permit on October 14, 1996 (reissued February 26,
1997) are estimated to be approximately $3.0 million. Post-closure care and
monitoring obligations at the Kentucky, Pennsylvania and West Virginia
landfills will add additional expenditures of $90,000 to $125,000 per year per
landfill over the 30-year period following closure. Closure and post-closure
care costs for the Illinois landfill are expected to be similar to those for
the Kentucky and West Virginia landfills. The Company expects post-closure
care to cost $13,000 to $16,000 per year per landfill for the 30 years
following closure at the South Carolina landfill and the Florida landfill. The
Company has also agreed to indemnify a surety providing financial assurance
for closure and post-closure care requirements for the unlined landfill
adjacent to the new Illinois landfill in the event the owner defaults on its
closure and post-closure obligations. 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 not
currently expected, any such changes could result in an increase in the cost
of regulatory compliance and thereby could have a material adverse effect on
the Company's business and results of operations.
INSURANCE AND BONDING
The Company carries insurance covering its assets and operations, including
pollution liability coverage. Specifically, each of the Company's landfills
has pollution liability coverage of $5.0 million per occurrence or $5.0
million in the aggregate subject to a $500,000 deductible per occurrence.
Nevertheless, there can be no assurance that the Company's insurance will
provide sufficient coverage in the event an environmental claim was made
against the Company or that the Company will be able to maintain in place such
insurance at reasonable costs. An uninsured or underinsured claim against the
Company of sufficient magnitude could have a material adverse effect on the
Company's business and results of operations. The Company also is subject to
the risk of claims by employees and others made after the expiration of the
policy coverage period, including asbestos-related illnesses (such as
asbestosis, lung cancer, mesothelioma, and other cancers), which 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.
Any claims presented on the basis of exposure during that period may not be
covered by insurance and any liability resulting therefrom could,
consequently, have an adverse effect on the Company's business and results of
operations.
The Company is required to post a form of financial assurance at its
landfills to ensure proper closure and post-closure monitoring and
maintenance. Additionally, some of the Company's collection and transportation
contracts require performance and payout bonds to guarantee project completion
and certain states may require collateral bonds to secure compliance with
hazardous waste transportation requirements. The Company's ability to meet
these bonding requirements is contingent upon the Company's performance record
and creditworthiness. Any inability by the Company to maintain bonding
capacity or a sizable increase in rates would have a material adverse impact
on the Company's business and results of operations.
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, Pennsylvania and West Virginia
disposal facilities. 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 area. The West Virginia financial assurance is secured at March 31,
1997 by certificates of deposit totalling $202,000 including accumulated
earnings on the deposits for the closed disposal area and a $214,000 closure
bond for the expansion area. The Company anticipates that the West Virginia
bonding requirements will substantially increase in 1997 when the West
Virginia solid waste program is approved by the EPA under Subtitle D
Regulations. Financial assurance requirements for the newly permitted area may
increase to approximately $3.1 million for closure and $3.7 million for post-
closure care. The funds for this additional financial assurance are currently
being escrowed through a $1.37 per ton surcharge on municipal
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solid waste disposal imposed through the Company's tariff approved by the West
Virginia Public Service Commission.
Pennsylvania requires a total closure and post-closure amount of
approximately $5.3 million for financial assurance of its currently permitted
area. The financial assurance is provided through a payment bond of $3.6
million and a phased 10-year cash collateral deposit of $189,070 per year. The
bond is collateralized by a $500,000 irrevocable letter of credit and other
covenants with the bonding company.
Kentucky has required approximately $1.3 million of financial assurance for
the closure of the original permitted area which ceased operations on June 30,
1995 and approximately $315,000 for the 30-year post-closure period. The
financial assurance for this area is secured by payment bonds totalling
approximately $1.6 million. The closure bond of approximately $1.3 million is
collateralized by a $626,000 irrevocable letter of credit and the post-closure
bond of $315,000 is collateralized by a $126,000 United States Government
security deposit in a trust fund.
Florida has required $127,884 of financial assurance for the closure of the
landfill's currently permitted areas and $480,000 for the 30-year post-closure
period. The mechanism of financial assurance is provided by a phased
collateral escrow account which is funded over the life of the landfill. The
current amount funded through December 1996 is approximately $79,800.
Illinois requires a demonstration of financial assurance prior to the
initiation of landfilling operations. No amounts are currently funded but
closure costs are estimated at approximately $1.9 million and post-closure
costs are estimated at approximately $1.9 million. The actual amounts required
as the financial assurance may be less depending on landfill sequencing and
the areas that remain to be properly closed.
If the Company was unable to obtain surety bonds or letters of credit in
sufficient amounts or at acceptable rates, it would be unable to remain in
compliance with Subtitle D Regulations or comparable state requirements, and,
among other things, may be precluded from entering into additional municipal
solid waste collection contracts or obtaining or retaining landfill operating
permits. See "Risk Factors--Potential Inadequacy of Accruals for Closure and
Post-Closure Costs."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors currently consists of three members. The
Company intends to increase the size of its Board of Directors by four
members, to a total of seven. Of the four new members one will be a non-
employee. The following table sets forth information regarding the current
directors and certain executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Louis D. Paolino, Jr............... 40 Chairman of the Board, President, and
Chief Executive Officer
Terry W. Patrick................... 51 Executive Vice President and Chief
Operating Officer
Gregory M. Krzemien................ 38 Chief Financial Officer and Treasurer
Robert M. Kramer................... 44 General Counsel, Executive Vice
President and Secretary
John W. Poling..................... 51 Vice President--Finance
Dennis M. Grimm.................... 47 Vice President--Operations
George O. Moorehead................ 44 Director
Kenneth Chuan-kai Leung............ 53 Director
</TABLE>
LOUIS D. PAOLINO, JR. has served as Chairman of the Board, President, and
Chief Executive Officer of the Company since June 1996. Mr. Paolino has over
14 years of experience in the solid waste management industry. From 1989 to
June 1996, Mr. Paolino was President of Soil Remediation of Philadelphia,
Inc., a company engaged in the business of treating contaminated soil and
which was sold to U.S.A. Waste Services Inc., a waste management corporation,
in September 1993. From September 1993 to June 1996, Mr. Paolino served as
Vice President of U.S.A. Waste Services, Inc. Mr. Paolino currently serves as
President of Blue Pointe, Inc., the lessor of the Company's executive offices
in Mt. Laurel, New Jersey. He also served on the Board of Directors of Metal
Management, Inc., formerly known as General Parametrics Corp., a publicly
traded company, from November 1995 to January 1996. Mr. Paolino received a
B.S. degree in Civil Engineering from Drexel University.
TERRY W. PATRICK has served as Executive Vice President and Chief Operating
Officer of the Company since June 1996. Mr. Patrick has over 25 years of
experience in the waste management industry. From September 1995 to June 1996,
Mr. Patrick was involved with personal investments and ownership of a chemical
manufacturing and distributing company. From April 1990 to August 1994, he
served as President and Chief Operating Officer of U.S.A. Waste Services,
Inc., and as Vice President of Operations at Mid-America Waste Systems, Inc.
from November 1988 to April 1990. Prior to joining Mid-America Waste Systems,
Inc., Mr. Patrick served in various district and regional management positions
with Waste Management, Inc. and Browning-Ferris Industries, Inc. Mr. Patrick
received a B.S. degree in Business Management from Evangel College.
GREGORY M. KRZEMIEN has served as Chief Financial Officer and Treasurer of
the Company since August 1992. From October 1988 to August 1992, Mr. Krzemien
was a senior audit manager with Ernst & Young LLP, and held other positions
with that firm since 1981. Mr. Krzemien received a B.S. degree in Accounting
from Pennsylvania State University and is a certified public accountant.
ROBERT M. KRAMER has served as General Counsel, Executive Vice President and
Secretary of the Company since June 1996. Mr. Kramer is an attorney and has
practiced law since 1979 with various firms, including Blank Rome Comisky &
McCauley, Philadelphia, Pennsylvania and Arent Fox Kitner Plotkin & Kahn,
Washington, D.C. Mr. Kramer has represented public and private companies in
the waste management industry
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<PAGE>
for over 14 years. Since 1989, Mr. Kramer has been the sole partner of Robert
M. Kramer & Associates P.C., a law firm consisting of three lawyers. Although
Mr. Kramer will continue his private practice of law at Robert M. Kramer &
Associates, P.C., he has and will devote a substantial amount of time
performing his duties for the Company. Mr. Kramer since December 1989 has
served on the Board of Directors of American Capital Corporation, a registered
securities broker dealer. Mr. Kramer received a J.D. degree from Temple
University Law School.
JOHN W. POLING has served as a Vice President of Finance of the Company
since November 1996. Mr. Poling has held senior financial positions in
publicly-held environmental services companies since 1979, and served as Vice
President and Treasurer of Smith Technology Inc. from 1994 to 1996, Vice
President, Finance and Chief Financial Officer of Envirogen, Inc. from 1993 to
1994, President of Tier Inc. from December 1992 to September 1993, and Vice
President--Finance and Chief Financial Officer of Roy F. Weston, Inc. from
1989 to 1992. Mr. Poling received a B.S. degree in Accounting from Rutgers
University.
DENNIS M. GRIMM has been employed with the Company since March 1997 and
currently serves as Vice President of Operations. Mr. Grimm has more than 25
years of experience in the solid waste industry. From January to March 1997,
Mr. Grimm was President and Chief Executive Officer of Apex Waste Services,
Inc., which was acquired by the Company in March 1997. From 1984 to 1994, he
served as Group Vice President and Regional Manager for WMX Technologies, Inc.
(Northeast Region).
GEORGE O. MOOREHEAD has served as a Director of the Company since June 1996.
Mr. Moorehead has over 25 years of experience in the solid waste management
industry. Since 1993, Mr. Moorehead has been a director and principal
stockholder of EMCO Recycling Corp., a company engaged in the business of
metal recycling in Arizona and a subsidiary of Metal Management Inc., and has
served as President and Chief Executive Officer of EMCO Recycling Corp. since
February 1995. From 1990 to 1993, Mr. Moorehead was President and Chief
Executive Officer and a director of Custom Disposal, Inc., a solid waste
disposal company serving the Phoenix, Arizona area. Mr. Moorehead is a
director of Metal Management Inc.
KENNETH CHUAN-KAI LEUNG has served as a Director of the Company since June
1996. Mr. Leung has been a Managing Director of investment banking at Sanders
Morris Mundy since March 1995 and Chief Investment Officer of Environmental
Opportunities Fund, L.P. and Environmental Opportunities Fund (Cayman), L.P.
since January 1996. From 1988 to 1994, Mr. Leung was a Managing Director of
Smith Barney Inc. Mr. Leung has over 28 years of experience with the
environmental services industry as a securities analyst and investment banker.
EMPLOYMENT AGREEMENTS
In May 1997, Mr. Paolino entered into an amended and restated employment
agreement with the Company that provides for an initial annual base salary of
$150,000, which has subsequently been increased by the Board to $350,000, and
certain fringe benefits, including life and health insurance and an automobile
allowance. Upon a change in control of the Company, Mr. Paolino is entitled to
receive a bonus in cash or Common Stock equal to $1.00 less than three times
the sum of (i) his annual salary, (ii) any bonus he was paid during the twelve
months prior to the change of control, and (iii) the value of any options
granted to him within the twelve months prior to the change in control. Mr.
Paolino's agreement terminates in June 2002, subject to earlier termination by
either party. If Mr. Paolino's employment is terminated for any reason, he
will be entitled to receive his annual salary in effect at the date of
termination through the term of his employment agreement. During the term of
employment, Mr. Paolino may not directly or indirectly engage in the waste
disposal industry within up to 75 miles of any Company business operation.
In October 1996 and May 1997, Messrs. Patrick and Kramer, respectively,
entered into amended and restated employment agreements with the Company that
provide for initial annual base salaries of $150,000 and $125,000,
respectively, and certain fringe benefits, including life and health insurance
and automobile allowances. Mr. Patrick is further entitled to an annual bonus
of $100,000, payable in cash or Common Stock.
52
<PAGE>
Upon a change in control of the Company, Mr. Kramer is entitled to receive a
bonus in cash or Common Stock equal to $1.00 less than three times the sum of
(i) his annual salary and (ii) any bonus he was paid during the twelve months,
prior to the change of control. Upon a change in control of the Company, Mr.
Patrick is entitled to receive in cash or Common Stock an amount equal to two
times his annual salary plus the greater of (i) $200,000 or (ii) two times the
bonus he was paid by the Company during the twelve months prior to the change
in control. Mr. Patrick's and Mr. Kramer's agreements terminate in June 2000,
subject to earlier termination by either party. If Mr. Kramer's employment is
terminated for any reason, including unsatisfactory performance of his duties,
he will be entitled to receive a severance payment of an amount equal to two
times his then annual salary. In addition, all of his outstanding options
shall immediately vest. During the term of employment and for a period of up
to two years thereafter, Mr. Patrick may not directly or indirectly engage in
the waste disposal industry within up to 75 miles of any Company business
operation.
In June and November 1996, Messrs. Krzemien and Poling entered into
employment agreements with the Company that provide for initial annual base
salaries of $90,000 and certain fringe benefits, including life and health
insurance and automobile allowances. Mr. Krzemien's agreement is for a term of
18 months, and Mr. Poling's agreement is for a term of three years, in each
case subject to earlier termination by either party. Upon termination of
employment, Mr. Krzemien is entitled to receive up to the greater of six
months of his annual salary or the balance of his annual salary for the
remainder of the term of the agreement, depending on the circumstances, and
Mr. Poling is entitled to up to three months salary. Upon a change in control,
Messrs. Krzemien and Poling are further entitled to receive one year's annual
salary.
In May 1997, Mr. Grimm entered into an amended and restated employment
agreement with the Company that provides for an initial base salary of
$150,000 and certain fringe benefits, including life and health insurance and
an automobile allowance. Mr. Grimm's agreement is for a term of 4 years,
subject to earlier termination by either party. Mr. Grimm is further entitled
to an annual bonus of $50,000, payable in cash or Common Stock. Upon a change
in control of the Company, all of Mr. Grimm's outstanding options shall
immediately vest and if his employment with the Company is terminated
thereafter, Mr. Grimm shall be entitled to two times his annual salary. During
the term of employment and for a period of up to one year thereafter, Mr.
Grimm may not directly or indirectly engage in the waste disposal industry
within up to 50 miles of any Company business operation.
At July 9, 1997, the Company's executive officers held options and warrants
to purchase an aggregate of 1,942,265 shares of Common Stock (which generally
vest over a period of four years or less) at exercise prices ranging between
$5.75 and $14.50 per share, of which 493,671 shares were purchasable under
options and warrants that are currently exercisable or exercisable within 60
days after the date of this Prospectus. In addition, one executive held
options to purchase 166,885 shares of Common Stock at exercise prices ranging
between $.01 and $1.50 per share, all of which are currently exercisable.
53
<PAGE>
CERTAIN TRANSACTIONS
In June 1996, the Company elected a new Board of Directors as a result of
the acquisition of 500,000 shares of Common Stock from William C. Skuba by
Louis D. Paolino, Jr., George O. Moorehead, Environmental Opportunities Fund,
L.P., and Environmental Opportunities Fund, (Cayman), L.P. Mr. Skuba resigned
as the Company's Chairman of the Board, Chief Executive Officer, and President
on June 20, 1996. In connection with Mr. Skuba's resignation, the Company
entered into a Severance Agreement with Mr. Skuba (the "Severance Agreement")
pursuant to which virtually all prior agreements between Mr. Skuba and the
Company were terminated, including the Company's obligation to make certain
cash payments to Mr. Skuba upon his resignation from the Company and, in
consideration therefor, the Company, among other things, (i) conveyed to Mr.
Skuba or a company controlled by Mr. Skuba (a) all of the outstanding capital
stock of a corporation that owns certain real property located in Drums,
Pennsylvania (the "Drums Real Property"), (b) certain real and personal
property located in Jasper County, South Carolina, and (c) certain vehicles
owned by the Company, (ii) transferred to Mr. Skuba certain potential business
opportunities that the Company decided that it had no interest in pursuing,
(iii) agreed to provide Mr. Skuba with certain health insurance benefits at
the Company's cost until June 1997, and (iv) agreed to indemnify Mr. Skuba to
the extent provided by the Company's Certificate of Incorporation and to
maintain director and officer liability insurance for him until June 2002.
Pursuant to the Severance Agreement, the Company also entered into two
leases with a company controlled by Mr. Skuba pursuant to which the Company
agreed to lease back a portion of the Drums Real Property. The Company paid
$1,686 a month in rent under one of the leases, which terminated in July 1996.
The Company currently pays $4,969 annually in rent under the other lease,
which remains in effect.
In June 1996, the Company and Mr. Skuba entered into a consulting agreement
(the "Consulting Agreement"), whereby Mr. Skuba has agreed to serve as a
general advisor and consultant to the Company on matters relating to the
Company's acquisition program. In consideration for performing such services,
the Company has agreed to reimburse Mr. Skuba for his secretarial support and
reasonable expenses incurred in connection with such consulting services, as
well as a car allowance. When Mr. Skuba is instrumental in locating an
acquisition which the Company closes, the Company pays Mr. Skuba a commission
mutually agreed upon by the Company and Mr. Skuba. The initial term of the
Consulting Agreement was for a period of six months, which has been extended
to December 31, 1997.
In July 1996, the Company entered into a five-year office lease with
Bluepointe, Inc., (formerly known as Girard Point Transfer, Inc.) a
corporation controlled by Louis D. Paolino, Jr., the Chairman of the Board,
President, and Chief Executive Officer of the Company, for the Company's
executive offices in Mt. Laurel, New Jersey. The lease provides for monthly
rental payments of $6,250 plus increases resulting from increases in the
Consumer Price Index. The lease is terminable at any time by the Company by
payment of a termination fee equal to one year's rent.
In August 1996, the Company acquired all of the assets of Eastern Waste of
Philadelphia, Inc. in consideration of 391,250 shares of Common Stock valued
at $4.00 per share, or $1.6 million in the aggregate. The stockholders of
Eastern Waste of Philadelphia, Inc. are Matthew Paolino and Donald Moorehead,
brothers of Louis D. Paolino, Jr. and George O. Moorehead, respectively.
Substantially all of the assets the Company acquired from Eastern Waste of
Philadelphia, Inc. were acquired by Eastern Waste of Philadelphia, Inc. in May
1996 in separate transactions with Tri-County Disposal & Recycling, Inc. and
National Ecosystems Inc. for an aggregate of $1.6 million in cash and Common
Stock.
In October 1996, the Company hired Premier Concrete, Inc., a corporation
owned by Matthew Paolino ("Premier"), to excavate a new cell for the Company's
landfill in West Virginia. The total amount paid to Premier for the job was
approximately $698,000. Premier was the lowest bidder that satisfied all bid
requirements for such job.
54
<PAGE>
In December 1995 and May 1996, Glen Miller and Willard Miller, executive
officers of the Company, executed promissory notes in favor of Super Kwik,
Inc. in the principal amounts of $83,741 and $350,902, respectively. The notes
bear interest at the rate of six percent per annum and become due and payable
on December 30, 2005 and May 1, 2006, respectively. The total principal amount
outstanding under the notes at June 30, 1997 was $432,902. The Company
acquired Super Kwik, Inc. in September 1996.
In connection with the Company's acquisition of Super Kwik in September
1996, the Company executed a $750,000 mortgage note in favor of Spruce Avenue
Associates, a general partnership whose partners are Glen Miller and Willard
Miller. The note bears interest at the rate of ten percent per annum, payable
semi-annually, and the principal amount becomes due and payable on September
27, 1999. The note is secured by a mortgage on certain real property of the
Company located in Voorhees, New Jersey. The principal amount outstanding
under the mortgage note at June 30, 1997 was $750,000.
Robert J. Powell, a former director of the Company, is the sole shareholder
of The Law Offices of Robert J. Powell, Hazelton, Pennsylvania, which provided
legal services to the Company from fiscal 1994 through July 1996. The Company
paid such firm approximately $78,000 in fiscal 1996 for such legal services.
Robert M. Kramer, the Company's General Counsel, Executive Vice President
and Secretary, is engaged in the practice of law through Robert M. Kramer &
Associates, P.C., a professional corporation owned by Mr. Kramer, which has
rendered legal services to the Company since June 1996. The Company paid such
corporation approximately $46,384 during the nine months ended March 31, 1997
for such legal services.
The Company believes that each of the transactions described above was
entered into on an arm's-length basis in the ordinary course of the Company's
business and on terms no less favorable to the Company than could be obtained
from unaffiliated third parties.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of July 9, 1997 the beneficial ownership
of the Common Stock and as adjusted to reflect the sale of the shares offered
hereby by (i) each person or entity known to the Company to own beneficially
five percent more of the Common Stock, (ii) each director of the Company, and
(iii) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE OF SHARES
NAME OF BENEFICIAL OWNER OWNED(1)(2) PRIOR TO OFFERING AFTER OFFERING
- ------------------------ ---------------- ----------------- --------------
<S> <C> <C> <C>
Willard Miller............. 1,365,688(3) 8.4% 6.6%
230 Orono Place
Sommerdale, NJ 08083
William Leone.............. 1,186,982(4) 7.3 5.7
444 Foch Boulevard
Mineola, NY 11051
Sanders Morris Mundy Inc... 1,156,252(5) 7.1 5.5
3100 Texas Commerce Tower
Houston, TX 77002
Louis D. Paolino, Jr. ..... 1,151,407(6) 7.1 5.5
1000 Crawford Place
Mount Laurel, NJ 08054
Glen Miller................ 1,111,302(7) 6.8 5.3
429 Ocean Avenue
Ocean City, NJ 08226
Kenneth Chuan-kai Leung.... 1,070,836(8) 6.6 5.2
126 East 56th Street
24th Floor
New York, NY 10022
William C. Skuba........... 1,060,976(9) 6.5 5.1
RR #4, Box 4452
Drums, PA 18222
Environmental Opportunities 889,699 5.5 4.3
Fund, L.P. ...............
3100 Texas Commerce Tower
Houston, TX 77002
George O. Moorehead........ 405,834(10) 2.5 2.0
3700 West Lower Buckeye
Phoenix, AZ 85009
All executive officers and
directors as a group
(ten persons)............. 5,948,233(11) 35.0 27.7
</TABLE>
- --------
(1) The inclusion herein of any shares as beneficially owned does not
constitute an admission of beneficial ownership of those shares. Except
as otherwise indicated, each person has sole voting power and sole
investment power with respect to all shares beneficially owned by such
person.
(2) Shares not outstanding but deemed beneficially owned by virtue of the
right of an individual to acquire them within 60 days upon the exercise
of an option are treated as outstanding for purposes of determining
beneficial ownership and the percentage beneficially owned by such
individual.
(3) Includes 19,415 shares held of record by W&G Miller Family Limited
Partnership, of which Mr. Miller serves as a general partner, and 81,907
shares purchasable under currently exercisable warrants held by such
partnership.
(Footnotes continued on next page)
56
<PAGE>
(Footnotes continued from previous page)
(4) Includes 25,000 shares purchasable under currently exercisable warrants.
Also includes 1,159,982 shares held of record by five entities controlled
by either Mr. Leone or WSI Holding Corp. The Vito Leone Trust, of which
Mr. Leone and his brother Paul Leone are the trustees, is the controlling
shareholder of WSI Holding Corp.
(5) Includes 156,250 shares purchasable under currently exercisable warrants.
Also includes 889,699 shares held of record by the Environmental
Opportunities Fund, L.P. and 110,303 shares held of record by the
Environmental Opportunities Fund (Cayman), L.P., entities for which
Environmental Opportunities Management Company, LLC, in which Sanders
Morris Mundy Inc., a representative of the Underwriters in the Offering,
holds a 75% membership interest, serves as the sole general partner.
(6) Includes 35,000 shares held of record by entities controlled by Mr.
Paolino, 171,166 shares held by family members, and 122,500 shares
purchasable under currently exercisable options.
(7) Includes 81,907 shares purchasable under currently exercisable warrants.
(8) Includes 70,834 shares purchasable under currently exercisable options.
Also includes 889,699 and 110,303 shares held of record by the
Environmental Opportunities Fund, L.P. and the Environmental
Opportunities Fund (Cayman), L.P., respectively, for which Mr. Leung
serves as Chief Investment Officer and as to which Environmental
Opportunities Management Company LLC, in which Sanders Morris Mundy Inc.
holds a 75% membership interest and Quirk Carson Peppet Inc. holds a 25%
membership interest, serves as the sole general partner. Does not include
156,250 shares purchasable under currently exercisable warrants held by
Sanders Morris Mundy Inc.
(9) Includes 13,400 shares held by Mr. Skuba's mother over which he exercises
voting control, 9,700 shares held by a trust of which Mr. Skuba is the
trustee, and 25,000 shares purchasable under currently exercisable
warrants held by LH Properties Inc. of which Mr. Skuba is the sole
stockholder.
(10) Includes 70,834 shares purchasable under currently exercisable options.
(11) See footnotes 3, 6, 7, 8 and 10 above. Also includes an aggregate of
468,924 shares and 374,242 shares issuable upon exercise of currently
exercisable options held by five executive officers of the Company who
are not listed in the table.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, $.01 par value per share, and 10,000,000 shares of Class A
Common Stock, $.01 par value per share (the "Class A Common Stock"). At July
9, 1997, there were 16,206,224 shares of Common Stock outstanding and no
shares of Class A Common Stock outstanding. Based upon the number of shares
outstanding as of that date and giving effect to the issuance of the 4,500,000
shares of Common Stock offered hereby, there will be 20,706,224 shares of
Common Stock outstanding upon the closing of the Offering. In addition, at
July 9, 1997, there were outstanding stock options and warrants for the
purchase of a total of 3,368,155 shares of Common Stock and an additional
359,264 shares reserved for issuance pursuant to future option grants under
the Company's stock option plans. All shares of Class A Common Stock
previously issued and outstanding have been converted to Common Stock and are
not subject to reissuance pursuant to terms of the Class A Common Stock. See
"Description of Capital Stock."
COMMON STOCK AND CLASS A COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held and the
holders of Class A Common Stock are entitled to four votes for each share held
on all matters submitted to a vote of stockholders. Both the Common Stock and
Class A Common Stock have non-cumulative voting rights and vote together as a
single class on all matters, except matters specified otherwise by Delaware
law. Issuance of shares of Class A Common Stock could have the effect of
delaying or preventing a change in control of the Company without further
action by the stockholders. The Company has no present plans to issue any
shares of Class A Common Stock in the future.
The respective holders of record of the issued and outstanding Common Stock
and Class A Common Stock are entitled to receive in respect of all said shares
taken as single class, any dividends which may be declared by the Board of
Directors and/or any distributions that may be made, except that in the case
of dividends payable in shares of the Company, or in the case of rights to
subscribe to such shares, holders of shares of Class A Common Stock shall
receive their dividends in, or shall have rights to subscribe to, shares of
Class A Common Stock and holders of shares of Common Stock shall receive their
dividends in, or shall have rights to subscribe to, shares of Common Stock;
and except further that whenever either shares of Common Stock or shares of
Class A Common Stock are split-up or combined, the shares of the other class
shall be proportionately split-up or combined. Upon the liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary,
after payment or provision for payment of the debts or liabilities of the
Company, holders of Common Stock shall be entitled to receive out of the net
assets of the Company the amount of $1.00 per share, prior to any distribution
with respect to Class A Common Stock. After such payment or provision for such
payment to the holders of Common Stock, the holders of Common Stock and the
holders of Class A Common Stock shall be entitled to share ratably (i.e. an
equal amount of assets for each share of either Common Stock or Class A Common
Stock) in the remaining assets of the Company. Each holder of record of a
share of Class A Common Stock may, at any time or from time to time, without
cost to such holder and at such holder's option, convert any whole number or
all of such holder's shares of Class A Common Stock into fully paid and non-
assessable shares of Common Stock at the rate of one share of Common Stock for
each share of Class A Common Stock surrendered for conversion. No shares of
Class A Common Stock that are converted to Common Stock will be reissued.
Except as described above, holders of the Common Stock and Class A Common
Stock have no preemptive, subscription, redemption or conversion rights, nor
are they entitled to the benefit of any sinking fund. The outstanding shares
of Common Stock are, and the shares offered by the Company in the Offering
will be, when issued and paid for, validly issued, fully paid and
nonassessable by the Company.
ANTI-TAKEOVER PROVISIONS
The Company is a Delaware corporation and is subject to Section 203
("Section 203") of the Delaware General Corporation Law (the "DGCL"). In
general, Section 203 prevents an "interested stockholder" (defined generally
as a person owning 15% or more of a corporation's outstanding voting stock)
from engaging in a
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<PAGE>
"business combination" (as defined) with a Delaware corporation for three
years following the time such person became an interested stockholder unless:
(i) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer); or (iii) at the time of or following the time of the
transaction in which such person became an interested stockholder, the
business combination was approved by the board of directors of the corporation
and authorized at a meeting of stockholders by the affirmative vote of the
holders of 66 2/3% of the outstanding voting stock of the corporation not
owned by the interested stockholder. Under Section 203, the restrictions
described above also do not apply to certain business combinations proposed by
an interested stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an interested stockholder during the previous three years or who
became an interested stockholder with the approval of a majority of the
corporation's directors or during certain prescribed times, if such
extraordinary transaction is approved or not opposed by a majority of the
directors who were directors prior to any person becoming an interested
stockholder during the previous three years or were recommended for election
or elected to succeed such directors by a majority of such directors.
Section 203 defines a business combination to include: (i) any merger or
consolidation of the corporation with the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of
the corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder;
(iv) any transaction involving the corporation which has the effect of
increasing the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or (v) the
receipt by the interested stockholder of the benefit of any loans, advances,
guarantees, pledges or other financial benefits provided by or through the
corporation.
In addition, certain of the Company's executive officers that have entered
into employment agreements with the Company will be entitled to receive
certain bonuses in cash or Common Stock upon a change in control of the
Company in such amounts that, in the aggregate, could have an adverse effect
on the Company's liquidity and capital resources. Accordingly, such provisions
could discourage or prevent bids to takeover the Company and decrease values
that would otherwise be obtained by stockholders for their Common Stock. See
"Management--Employment Agreements."
LIMITATIONS ON LIABILITY
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of a director's fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware
law, directors are accountable to corporations and their stockholders for
monetary damages for conduct constituting gross negligence in the exercise of
their duty of care. Delaware law enables corporations to limit available
relief to equitable remedies such as injunction or rescission. The Company's
Certificate of Incorporation ("Certificate of Incorporation") limits the
liability of directors of the Company to the fullest extent permitted by
Delaware law. Specifically, directors of the Company will not be personally
liable for monetary damages for breach of a director's fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from
which the director derived an improper personal benefit.
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<PAGE>
The inclusion of this provision in the Certificate of Incorporation may have
the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefited the Company and its
stockholders. The Certificate of Incorporation provides indemnification to its
officers and directors and certain other persons with respect to certain
matters, and the Company has entered into agreements with each of its
directors and executive officers providing for indemnification with respect to
certain matters.
STOCK TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for the Common Stock is American
Stock Transfer and Trust Company.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales in the public market of substantial amounts of Common Stock could have
an adverse effect on the market price of the Common Stock and may make it more
difficult for the Company to sell its equity securities in the future at times
and prices that it deems appropriate. Upon completion of the Offering, the
Company will have outstanding 20,706,224 shares of Common Stock. Of these
shares, approximately 10,634,084 shares of Common Stock, including the
4,500,000 shares of Common Stock sold in the Offering, will be tradeable
without restriction or limitation under the Securities Act, except to the
extent such shares are subject to the agreement with the Underwriters described
below, and except for any shares owned by "affiliates" of the Company which
will be subject to the resale limitations under Rule 144 of the Securities Act.
The remaining approximately 10,072,140 outstanding shares of Common Stock held
by existing stockholders are "restricted securities" that were issued and sold
by the Company in private transactions in reliance upon exemptions from
registration under the Securities Act and may not be sold in a public
distribution except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption therefrom, including that provided
by Rule 144. Of these restricted securities, 6,016,422 shares will be saleable
in the public market 180 days following the date of this Prospectus subject to
compliance with Rule 144.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the date of acquisition of restricted shares from the Company or an
affiliate of the Company, the acquiror or subsequent holder thereof would be
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the then-outstanding shares of Common Stock
(approximately 207,062 shares after the Offering, assuming no exercise
thereafter of outstanding options or warrants) or the average weekly trading
volume in the Common Stock during the four calendar weeks immediately preceding
the date on which the notice of sale is filed with the Commission, provided
certain manner of sale and notice requirements and requirements as to the
availability of current public information about the Company are satisfied. In
addition, affiliates of the Company must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement,
in order to sell shares of Common Stock that are not restricted securities
(such as shares of Common Stock acquired by affiliates in the Offering). Under
Rule 144(k) as currently in effect, if two years have elapsed since the date of
acquisition of restricted shares from the Company or any "affiliate" of the
Company and the acquiror or subsequent holder is not deemed to have been an
affiliate of the Company for at least 90 days prior to a proposed transaction,
such person would be entitled to sell such shares under Rule 144(k) without
regard to the limitations and requirements described above. As defined in Rule
144, an affiliate of an issuer is a person that directly, or indirectly through
the use of one or more intermediaries, controls, or is controlled by, or is
under common control with, such issuer.
Upon consummation of the Offering, the Company will have outstanding options
and warrants to purchase a total of 3,368,155 shares of Common Stock, 1,346,263
of which will then be exercisable, and an additional 359,264 shares reserved
for issuance pursuant to future option grants under the Company's stock option
plans. The Company has filed registration statements on Form S-8 under the
Securities Act that registers all shares of Common Stock issuable under the
Company's 1987 Stock Option Plan, 1991 Stock Option Plan, and 1996 Stock Option
Plan. Shares covered by such registration statements are eligible for resale in
the public market subject to Rule 144 limitations applicable to affiliates, the
vesting provisions of each option grant (generally up to five years), and the
lock-up agreement described below, if applicable. In addition, in connection
with certain of the Company's acquisitions, the Company has held back a certain
portion of the purchase price that was payable in Common Stock to generally
secure the sellers' indemnification obligations to the Company under the
acquisition agreements. Such Common Stock will be issued to the sellers upon
the occurrence of certain events and/or the satisfaction of certain liabilities
by the sellers. At July 9, 1997, a total of 481,059 shares of Common Stock were
subject to such hold backs.
Certain stockholders of the Company that hold restricted securities have
registration rights for an aggregate of up to 7,800,980 shares of Common Stock
and an additional 788,464 shares of Common Stock issuable upon exercise of
warrants. The Company expects that 45 days after completion of the Offering
5,825,694 of such shares will be covered by an effective registration statement
permitting such shares to be resold by certain of
61
<PAGE>
such stockholders. Of the 5,825,694 shares to be included in such registration
statement, 4,886,790 shares will be subject to restrictions on transferability
as described in the next paragraph. The Company has agreed to pay substantially
all expenses incident to such registration statement, other than underwriting
discounts and commissions.
The Company and the directors and certain executive officers and stockholders
of the Company, who own an aggregate of 2,879,917 shares of Common Stock and
options and warrants to purchase 1,873,254 shares of Common Stock at July 24,
1997, have agreed, except for certain limited exceptions or with the prior
written consent of Smith Barney Inc., that they will not sell, offer to sell,
solicit an offer to buy, contract to sell, grant any option to purchase, or
otherwise transfer or dispose of, any shares of Common Stock, or any securities
convertible into or exercisable or exchangeable for Common Stock, for a period
of 120 days after the date of this Prospectus. In addition, the other executive
officers and certain employees and other stockholders of the Company, who own
an aggregate of 6,943,272 shares of Common Stock and options and warrants to
purchase 1,255,001 shares of Common Stock at July 24, 1997, have also agreed to
such transferability restrictions, except that the restrictive period is for 90
days following the date of this Prospectus. See "Underwriting."
The Company intends to register two million shares of Common Stock under the
Securities Act not earlier than 30 days after the date of the Prospectus for
its use in connection with future acquisitions. These shares generally will be
freely tradable after their issuance by persons not affiliated with the
Company; however, resales of these shares during the 180-day period following
the date of the related shelf registration statement would require the prior
written consent of Smith Barney Inc.
Since the Company has issued, and may continue to issue, a significant number
of shares of Common Stock in connection with acquisitions of other businesses,
the number of outstanding shares of Common Stock that are likely to be eligible
for sale in the future is likely to increase significantly.
62
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, each of
the Underwriters named below have severally agreed to purchase from the
Company, and the Company has agreed to sell to such Underwriter, the
respective number of shares of Common Stock set forth opposite the name of
such Underwriter.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Smith Barney Inc...................................................
Oppenheimer & Co., Inc.............................................
Sanders Morris Mundy Inc...........................................
Pacific Growth Equities, Inc.......................................
Van Kasper & Company...............................................
---------
Total............................................................ 4,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all
shares of Common Stock offered hereby (other than those covered by the over-
allotment option described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., Oppenheimer & Co., Inc.,
Sanders Morris Mundy Inc., Pacific Growth Equities, Inc., and Van Kasper &
Company are acting as representatives (the "Representatives"), propose to
offer part of the shares of Common Stock directly to the public at the
offering price set forth on the cover page of this Prospectus and part of the
shares to certain dealers at a price which represents a concession not in
excess of $ per share under the public offering price. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. The Representatives of the Underwriters have
advised the Company that the Underwriters do not intend to confirm any shares
to any accounts over which they exercise discretionary authority. After the
public offering, the offering price and other selling terms may be changed by
the Representatives.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an additional 675,000
shares of Common Stock at the price to the public set forth on the cover page
of this Prospectus, minus the underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering over-
allotments, if any, in connection with the Offering. To the extent such option
is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares set forth opposite each Underwriter's name in
the proceeding table bears to the total number of shares listed in such table.
The Company and the directors and certain executive officers and
stockholders (the "Stockholders") of the Company designated by the
Representatives have agreed that, for a period of 120 days from the date of
this Prospectus, they will not, without the prior written consent of Smith
Barney Inc., sell, offer to sell, solicit an offer to buy, contract to sell,
grant any option to purchase, or otherwise transfer or dispose of, any shares
of Common Stock, or any securities convertible into or exercisable or
exchangeable for Common Stock, except for (a) in the case of the Company, (i)
the Common Stock offered hereby; (ii) certain exceptions pertaining to the
Company's stock option plans, (iii) issuances of Common Stock upon the
conversion of securities or the exercise
63
<PAGE>
of warrants outstanding on the date the Underwriting Agreement is executed and
(iv) issuances and sales of Common Stock in connection with acquisitions by
the Company, and (b) in the case of the Stockholders and the directors and
executive officers of the Company, shares of Common Stock disposed of as a
gift to his or her "immediate family" or to one or more trusts established for
the benefit of his or her immediate family, provided that the recipient of
such Common Stock agrees to the foregoing restrictions on transferability. In
addition, other executive officers and certain employees and other
stockholders of the Company designated by the Representatives have also agreed
to such transferability restrictions, except that the restrictive period is
for 90 days following the date of this Prospectus. Notwithstanding the
foregoing restrictions on transferability, two employees that have entered
into such agreements may sell their shares of Common Stock to fulfill tax
withholding obligations in connection with an exercise of a stock option
issued under one of the Company's stock option plans that expires during the
restrictive period
In August 1996, Sanders Morris Mundy Inc., one of the Representatives and
the beneficial owner of approximately 7.1% of the issued and outstanding
shares of Common Stock at July 9, 1997, acted as placement agent in connection
with a private placement of 2,500,000 shares of Common Stock by the Company
for $4.00 per share. In connection therewith, Sanders Morris Mundy Inc.
received a warrant to purchase 156,250 shares of Common Stock at an exercise
price of $5.00 per share and a placement fee of $650,000. In the private
placement, Environmental Opportunities Fund, L.P. and Environmental
Opportunities Fund (Cayman), L.P., for which Environmental Opportunities
Management Company, LLC, in which Sanders Morris Mundy Inc. holds a 75%
membership interest, serves as the sole general partner, purchased an
aggregate of 750,000 shares of Common Stock.
Kenneth Chuan-kai Leung, a Managing Director of Sanders Morris Mundy Inc.,
is a director of the Company. Sanders Morris Mundy Inc. has provided and is
currently providing financial advisory services for the Company.
The Company and the Underwriters each have agreed to indemnify the other
against certain liabilities, including liabilities under the Securities Act,
or will contribute to payments that the Underwriters may be required to make
in respect thereof.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid or the purchase of the Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the Common
Stock. A "syndicate covering transaction" is the bid for or the purchase of
the Common Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with the Offering. A "penalty bid"
is an arrangement permitting the Representatives to reclaim the selling
concession otherwise accruing to an Underwriter or syndicate member in
connection with the Offering if the Common Stock originally sold by such
underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed
by such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Drinker Biddle & Reath LLP, Philadelphia,
Pennsylvania, counsel for the Company. Certain legal matters relating to the
offering of the Common Stock will be passed upon for the Underwriters by
Morgan Lewis & Bockius LLP, New York, New York.
64
<PAGE>
EXPERTS
The consolidated financial statements of the Company at March 31, 1997, June
30, 1996 and June 30, 1995, and for the nine months ended March 31, 1997 and
for each of the three years in the period ended June 30, 1996, appearing in
this Prospectus and the Registration Statement of which this Prospectus forms
a part have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and in the
Registration Statement which, as to each of the three years in the period
ended June 30, 1996, is based in part on the reports of Bardall, Weintraub
P.C. and Paternostro, Callahan & DeFreitas, LLP, independent auditors. The
financial statements referred to above are included in reliance upon such
reports given upon the authority of such firms as experts in accounting and
auditing.
The combined financial statements of Allied Environmental Services, Inc. and
affiliates as of June 30, 1996 and 1995 and for the years then ended appearing
in the Company's Current Report on Form 8-K dated July 2, 1996, as amended by
its Forms 8-K/A filed September 16, 1996, May 13, 1997, June 6, 1997, and July
10, 1997, have been audited by BDO Seidman LLP, independent auditors, as set
forth in their report thereon included therein and incorporated by reference
herein. Such financial statements are incorporated by reference herein in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The combined financial statements of Allied Environmental Services, Inc.,
Allied Environmental Services, West, Inc., Allied Mid-Atlantic, Inc., and
Allied Waste Management, Inc. as of June 30, 1994 and for the year then ended
appearing in the Company's Current Report on Form 8-K dated July 2, 1996, as
amended by its Form 8-K/A filed September 16, 1996, May 13, 1997, June 6,
1997, and July 10, 1997, have been audited by B.J. Klinger & Co., P.C.,
independent auditors, as set forth in their report thereon included therein
and incorporated by reference herein. Such financial statements are
incorporated by reference herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The combined financial statements of Super Kwik, Inc. and Waste Maintenance
Services, Inc. appearing in the Company's Current Report on Form 8-K dated
September 27, 1996, as amended by its Forms 8-K/A filed December 9, 1996, June
6, 1997, and July 10, 1997, have been audited by Bardall, Weintraub P.C.,
independent auditors, as set forth in their report thereon included therein
and incorporated by reference herein. Such financial statements are
incorporated by reference herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The financial statements of R&A Bender, Inc. and R&A Property, Ltd.
appearing in the Company's Current Report on Form 8-K dated December 10, 1996,
as amended by its Forms 8-K/A filed February 11, 1997, June 6, 1997, and July
10, 1997, have been audited by Boyer & Ritter, CPAs, independent auditors, as
set forth in their reports thereon included therein and incorporated by
reference herein. Such financial statements are incorporated by reference
herein in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
The combined financial statements of Donno Company, Inc. and affiliates
appearing in the Company's Current Report on Form 8-K dated January 31, 1997,
as amended by its Form 8-K/A filed April 15, 1997 and July 10, 1997, have been
audited by Paternostro, Callahan & DeFreitas, LLP, independent auditors, as
set forth in their report thereon included therein and incorporated by
reference herein. Such financial statements are incorporated by reference
herein in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The financial statements of Apex Waste Services, Inc. appearing in the
Company's Current Report on Form 8-K dated March 31, 1997, as amended by its
Form 8-K/A filed May 15, 1997 and July 10, 1997, have been audited by Daniel
P. Irwin & Associates, P.C., independent auditors, as set forth in their
report thereon included therein and incorporated by reference herein. Such
financial statements are incorporated by reference herein in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
65
<PAGE>
The combined financial statements of Waste Services, Inc. and affiliates as
of December 31, 1996 and for the year then ended appearing in the Company's
Current Report on Form 8-K dated May 12, 1997, as amended by its Forms 8-K/A
filed July 11, 1997 and July 25, 1997, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein
and incorporated by reference herein. Such financial statements are
incorporated by reference herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements, and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy and information statements, and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549-1004 and at the
regional offices of the Commission located at 7 World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may also be
obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549-1004 at prescribed rates. The Commission
maintains a web site at http://www.sec.gov that contains reports, proxy and
information statements, and other information regarding registrants, like the
Company, that file electronically with the Commission. The Common Stock is
quoted on the Nasdaq National Market, and reports and other information
concerning the Company may be inspected at the National Association of
Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006-1500.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus
omits certain of the information contained in the Registration Statement in
accordance with the rules and regulations of the Commission. Reference is
hereby made to the Registration Statement and related exhibits for further
information with respect to the Company and the securities offered hereby. Any
statements contained herein concerning the provisions of any document are not
necessarily complete, and, in such instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference.
66
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been previously filed by the Company with the
Commission and are hereby incorporated by reference in this Prospectus as of
their respective dates:
(i) the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (filed September 27, 1996) (as amended on Form 10-K/A filed
October 28, 1996), excluding the financial statements and the notes thereto
and the information contained under Management's Discussion and Analysis of
Financial Condition and Results of Operations which have been superseded by
the financial statements and the notes thereto and the information
contained under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in this Prospectus;
(ii) the Company's Current Reports on Form 8-K dated June 21, 1996, July
2, 1996 (as amended on Forms 8-K/A filed September 16, 1996, May 13, 1997,
June 6, 1997, and July 10, 1997), September 27, 1996 (as amended on Forms
8-K/A filed December 9, 1996, June 6, 1997, and July 10, 1997), December
10, 1996 (as amended on Forms 8-K/A filed February 11, 1997, June 6, 1997,
and July 10, 1997), January 31, 1997 (as amended on Form 8-K/A filed April
15, 1997 and July 10, 1997), March 31, 1997 (as amended on Form 8-K/A filed
May 15, 1997 and July 10, 1997), May 8, 1997, and May 12, 1997 (as amended
on Forms 8-K/A filed July 11, 1997 and July 25, 1997);
(iii) the Company's Quarterly Reports on Form 10-Q for the quarters ended
September 30, 1996 (filed November 13, 1996), December 31, 1996 (filed
February 14, 1997), and March 31, 1997 (filed May 15, 1997, as amended on
Form 10-Q/A filed May 16, 1997); (the financial statements and the notes
thereto contained in the Reports on Form 10-Q for the quarters ended
September 30, 1996 and December 31, 1996 are deemed to be outdated as they
are not on a basis consistent with the Consolidated Financial Statements
and the notes thereto at and for the period ended March 31, 1997 included
elsewhere in this Prospectus as they do not reflect pooling of interests
accounting for certain acquisitions that occurred subsequent to the
financial statement date) and
(iv) the description of the Common Stock contained in the Registration
Statement on Form 8-A (File No. 0-16102), including all amendments and
reports filed for the purpose of updating such description prior to the
termination of the Offering.
Additionally, all documents filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent
to the date of this Prospectus and prior to the termination of the Offering
shall be deemed to be incorporated by reference in this Prospectus and to be a
part hereof from the date of filing of such documents. Any statement or
information contained herein or in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus
to the extent that a statement or information contained herein or in any other
subsequently filed document that is also incorporated by reference herein
modifies or replaces such a statement or such information. Any such statement
or information so modified or replaced shall not be deemed, except as so
modified or replaced, to constitute a part of this Prospectus.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, upon written or oral request, a copy of any and all
of the documents that have been incorporated by reference in this Prospectus,
other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into the documents that this Prospectus
incorporates. Requests should be submitted by telephone to (609) 235-6009 or
in writing to Eastern Environmental Services, Inc., 1000 Crawford Place, Suite
101, Mt. Laurel, New Jersey 08054, Attention: Investor Relations.
67
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Summary Pro Forma Financial Information................................... F-2
Pro Forma Consolidated Balance Sheet at March 31, 1997.................... F-3
Pro Forma Consolidated Statement of Operations for the Year Ended June 30,
1996..................................................................... F-4
Pro Forma Consolidated Statement of Operations for the Nine Months Ended
March 31, 1997........................................................... F-5
Notes to Unaudited Pro Forma Consolidated Financial Information........... F-6
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors............................................ F-9
Consolidated Balance Sheets at March 31, 1997, June 30, 1996, and June 30,
1995..................................................................... F-10
Consolidated Statements of Operations for the nine months ended March 31,
1997, nine months ended March 31, 1996 (Unaudited), and each of the three
years in the period ended June 30, 1996.................................. F-12
Consolidated Statements of Stockholders' Equity for the nine months ended
March 31, 1997 and each of the three years in the period ended June 30,
1996..................................................................... F-13
Consolidated Statements of Cash Flows for the nine months ended March 31,
1997, nine months ended March 31, 1996 (Unaudited), and each of the three
years in the period ended June 30, 1996.................................. F-14
Notes to Consolidated Financial Statements................................ F-15
</TABLE>
F-1
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
SUMMARY PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Consolidated Financial Statements give
effect to certain acquisition transactions described below and in the
Offering.
On July 2, 1996, the Company consummated the acquisition of Allied
Environmental Services, Inc. and affiliates ("Allied") in exchange for 116,667
unregistered shares of Common Stock. The acquisition has been accounted for as
a purchase.
On December 10, 1996, the Company consummated the acquisition of R&A Bender,
Inc. ("Bender") and certain real estate owned by R&A Bender Property, Ltd.
("Bender Property"). The total purchase price was approximately $17,500,000
and the acquisition has been accounted for as a purchase.
The Company completed the acquisition of Waste Services, Inc. and affiliates
on May 12, 1997 in exchange for 1,159,982 unregistered shares of Common Stock
and the assumption of $6,176,690 of debt. The Company has assumed, as part of
its purchase price, a $6,200,000 liability which will be paid upon the
resolution of certain events and is payable in either cash or a future-maximum
issuance of 221,170 shares of Common Stock. The Company has accounted for this
acquisition as a purchase. In connection with this acquisition, the Company
has also executed definitive purchase agreements to acquire Coney Island
Rubbish Removal, Inc. ("Coney Island") and Golden Gate Carting, Co. Inc.
("Golden Gate"), two hauling companies which operate under common operational
and management control with Waste Services, Inc. Estimated consideration
relating to the Golden Gate and Coney Island acquisitions consists of 288,859
unregistered shares of Common Stock and the assumption of $3,050,273 of debt.
The Golden Gate and Coney Island acquisitions are contingent upon the approval
of the New York Trade Waste Commission. Pending closing of the acquisitions,
the Company is operating the business of Golden Gate and Coney Island under
management agreements. Waste Services, Inc., Golden Gate, and Coney Island are
collectively referred to as ("WSI").
The pro forma consolidated statements of operations for the year ended June
30, 1996 and the nine months ended March 31, 1997 reflect the results of
operations of the Company as if the above acquisitions of Allied, Bender and
WSI had occurred at the beginning of the periods presented. The pro forma
consolidated balance sheet as of March 31, 1997 reflects the financial
position of the Company as if the acquisition of WSI and the Offering had
occurred as of March 31, 1997.
The Company also acquired Apex Waste Services, Inc. ("Apex") on March 31,
1997. This business combination has been accounted for under the pooling of
interests method. Apex began operations on October 1, 1996 as a result of its
acquisition of certain assets of Waste Management, Inc., Northeast
Pennsylvania Division, which was accounted for under the purchase method. The
results of operations of Apex have been included in the Company's consolidated
financial statements since the date of inception of Apex. The pro forma
consolidated financial information includes the results of operations of the
predecessor company of Apex for the year ended June 30, 1996 and for the
period July 1, 1996 to September 30, 1996.
The unaudited pro forma consolidated financial statements are based upon
preliminary estimates, available information, and certain assumptions that
management deems appropriate. Management does not expect material changes to
the final transaction adjustments. The unaudited pro forma consolidated
financial information presented herein is not necessarily indicative of the
results of operations or financial position that the Company would have
obtained had such events occurred at the beginning of the period, as assumed,
or the future results of the Company. The pro forma consolidated financial
information should be read in connection with the consolidated financial
statements and notes thereto include in this Prospectus.
F-2
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AT MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA ADJUSTMENTS PRO FORMA
THE COMPANY WSI ADJUSTMENTS CONSOLIDATED FROM OFFERING AS ADJUSTED
----------- ----------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash
equivalents........... $ 3,906,902 $ 26,650 $ (26,650)(1) $ 3,906,902 $ 36,556,162 $ 40,463,064
Accounts receivable,
net of allowance...... 7,694,765 2,210,957 (2,210,957)(1) 7,694,765 7,694,765
Deferred income taxes.. 1,568,000 -- 1,568,000 1,568,000
Prepaid expenses and
other current assets.. 2,173,656 305,278 (305,278)(1) 2,173,656 2,173,656
----------- ----------- ----------- ------------ ------------ ------------
Total current assets... 15,343,323 2,542,885 (2,542,885) 15,343,323 36,556,162 51,899,485
Net property, plant &
equipment.............. 54,171,729 943,756 992,244 (1) 56,107,729 56,107,729
Assets held for resale.. 395,059 -- 395,059 395,059
Excess cost over fair
market value of net
assets acquired........ 15,764,939 4,879,344 24,986,035 (1) 45,630,318 45,630,318
Intangible assets, net.. 1,720,740 7,292,689 (6,492,689)(1) 2,520,740 2,520,740
Receivables from
affiliated companies... -- 736,238 (736,238)(1) -- --
Deferred income taxes... -- 1,668,000 (1,668,000)(1) -- --
Notes receivable from
stockholders /
officers............... 463,902 799,173 (799,173)(1) 463,902 463,902
Other assets............ 1,493,005 243,735 (243,735)(1) 1,493,005 1,493,005
----------- ----------- ----------- ------------ ------------ ------------
Total assets........... $89,352,697 $19,105,820 $13,495,559 $121,954,076 $ 36,556,162 $158,510,238
=========== =========== =========== ============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities
Current maturities on
long-term debt........ $ 1,285,312 $ 6,981,978 $(6,981,978)(1) $ 1,285,312 $ -- $ 1,285,312
Current maturities of
obligations under
capital leases........ 1,445,100 -- 1,445,100 1,445,100
Accounts payable........ 3,835,667 3,586,644 (3,586,644)(1) 3,835,667 3,835,667
Accrued expenses and
other current
liabilities............ 8,361,616 -- 223,000 (1) 8,584,616 8,584,616
Income taxes payable.... 45,880 1,220,454 (1,220,454)(1) 45,880 45,880
Due to officers......... -- 760,553 (760,553)(1) -- --
Current portion of
accrued landfill
closure and other
environmental costs.... 1,070,000 -- 1,070,000 1,070,000
----------- ----------- ----------- ------------ ------------ ------------
Total current
liabilities........... 16,043,575 12,549,629 (12,326,629) 16,266,575 -- 16,266,575
Deferred income taxes... 3,832,203 -- 3,832,203 3,832,203
Long-term debt.......... 31,736,086 9,980,348 (753,385)(1) 40,963,049 (39,776,963)(2) 1,186,086
Capital lease
obligations--
long-term.............. 2,244,432 -- 2,244,432 2,244,432
Accrued landfill closure
and other environmental
costs.................. 8,172,364 -- 8,172,364 8,172,364
Other long-term
liabilities............ 6,200,000 (1) 6,200,000 6,200,000
Stockholders' equity
Common stock........... 140,958 65,620 (51,132)(1) 155,446 45,000 (2) 200,446
Additional paid-in
capital............... 27,927,552 -- 16,936,928 (1) 44,864,480 76,288,125 (2) 121,152,605
Retained earnings
(deficit)............. (668,214) (3,489,777) 3,489,777 (1) (668,214) (668,214)
Less treasury stock at
cost--
39,100 common shares.. (76,259) -- (76,259) (76,259)
----------- ----------- ----------- ------------ ------------ ------------
Total stockholders'
equity................ 27,324,037 (3,424,157) 20,375,573 44,275,453 76,333,125 120,608,578
----------- ----------- ----------- ------------ ------------ ------------
Total liabilities and
stockholders' equity.. $89,352,697 $19,105,820 $13,495,559 $121,954,076 $ 36,556,162 $158,510,238
=========== =========== =========== ============ ============ ============
</TABLE>
F-3
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
R&A CONSOLIDATED
R&A BENDER BEFORE PREDECESSOR
THE BENDER, PROPERTY, PRO FORMA PREDECESSOR COMPANY TO
COMPANY ALLIED INC. LTD. WSI ADJUSTMENTS COMPANY APEX
----------- ----------- ---------- --------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........ $39,519,173 $10,549,739 $8,454,211 $490,270 $22,802,271 $ (183,919)(a) $81,148,375 $19,042,380
(483,370)(b)
-----------
(667,289)
(734,001)(c)
(390,709)(a)
-----------
Cost of
revenues........ 33,417,442 8,211,825 5,812,906 -- 13,053,202 (1,124,710) 59,370,665 16,115,293
(137,032)(d)
172,515 (c)
(885,723)(e)
(797,459)(f)
(9,807)(a)
(626,962)(g)
(2,787,983)(h)
(483,370)(b)
-----------
Selling, general
and
administrative
expenses........ 9,774,422 3,231,358 2,703,425 41,954 8,463,449 (5,555,821) 18,658,787 2,221,336
----------- ----------- ---------- -------- ----------- ----------- ----------- -----------
Operating (loss)
income.......... (3,672,691) (893,444) (62,120) 448,316 1,285,620 6,013,242 3,118,923 705,751
(1,168,191)(i)
1,311,073 (j)
-----------
Interest
expense......... (629,009) (108,881) (113,115) -- (2,049,230) 142,882 (2,757,353) (746,152)
Other (expense)
income.......... (130,640) (1,817,733) 277,518 3,032 86,024 1,817,733 (k) 235,934 31,365
----------- ----------- ---------- -------- ----------- ----------- ----------- -----------
(Loss) income
from continuing
operations
before income
taxes
(benefit)....... (4,432,340) (2,820,058) 102,283 451,348 (677,586) 7,973,857 597,504 (9,036)
Income tax
(benefit)....... (9,687) -- -- -- (100,000) 100,000 (l) (9,687) --
----------- ----------- ---------- -------- ----------- ----------- ----------- -----------
Net (loss)
income from
continuing
operations...... $(4,422,653) $(2,820,058) $ 102,283 $451,348 $ (577,586) $ 7,873,857 $ 607,191 $ (9,036)
=========== =========== ========== ======== =========== =========== =========== ===========
Earnings per
share...........
Weighted average
number of shares
outstanding.....
<CAPTION>
APEX
PRO FORMA PRO FORMA ADJUSTMENTS PRO FORMA
ADJUSTMENTS CONSOLIDATED FROM OFFERING AS ADJUSTED
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues........ $ -- $100,190,755 $ -- $100,190,755
Cost of
revenues........ (770,634)(m) 74,715,324 -- 74,715,324
Selling, general
and
administrative
expenses........ (312,322)(m) 20,567,801 -- 20,567,801
--------------- ---------------- --------------- ----------------
Operating (loss)
income.......... 1,082,956 4,907,630 -- 4,907,630
Interest
expense......... (650,775)(n) (4,154,280) 3,182,157(o) (972,123)
Other (expense)
income.......... -- 267,299 -- 267,299
--------------- ---------------- --------------- ----------------
(Loss) income
from continuing
operations
before income
taxes
(benefit)....... 432,181 1,020,649 3,182,157 4,202,806
Income tax
(benefit)....... -- (9,687) -- (9,687)(l)
--------------- ---------------- --------------- ----------------
Net (loss)
income from
continuing
operations...... $ 432,181 $ 1,030,336 $3,182,157 $ 4,212,493
=============== ================ =============== ================
Earnings per
share........... $ .09 $ .26
================ ================
Weighted average
number of shares
outstanding..... 11,869,909 (p) 16,369,909 (q)
================ ================
</TABLE>
F-4
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS
ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
R&A CONSOLIDATED
R&A BENDER BEFORE PREDECESSOR APEX
BENDER, PROPERTY, PRO FORMA PREDECESSOR COMPANY TO PRO FORMA
THE COMPANY INC. LTD. WSI ADJUSTMENTS COMPANY APEX ADJUSTMENTS
----------- ---------- --------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........ $52,409,183 $4,294,638 $214,324 $16,596,545 $ (41,019)(a) $73,262,989 $4,675,156 $ --
(210,682)(b)
----------
(251,701)
(196,402)(c)
(206,352)(a)
----------
Cost of 38,026,625 2,692,988 1,602 10,318,674 50,637,135 3,901,842 (192,658)(j)
revenues........ (402,754)
76,769 (c)
(963,807)(d)
(6,085)(a)
(610,088)(e)
(1,583,152)(f)
(210,682)(b)
----------
Selling, general
and
administrative
expenses........ 9,245,947 1,949,947 17,382 6,378,446 (3,297,045) 14,294,677 563,087 (78,081)(j)
Merger costs.... 3,336,792 -- -- -- -- 3,336,792 -- --
----------- ---------- -------- ----------- ---------- ----------- ---------- --------
Operating income 1,799,819 (348,297) 195,340 (100,575) 4,994,385 210,227 270,739
(loss).......... 3,448,098
714,024 (g)
Interest (1,525,509) (7,243) (1,267,642) (529,754)(h) (2,616,124) (172,534) (176,698)(k)
(expense)
income..........
Other income
(expense)....... 461,089 245,746 -- 83,997 -- 790,832 3,596 --
----------- ---------- -------- ----------- ---------- ----------- ---------- --------
Income (loss)
from continuing
operations
before income
taxes........... 735,399 (109,794) 195,340 (1,284,220) 3,632,368 3,169,093 41,289 94,041
Income tax
expense
(benefit)....... 940,405 -- -- (200,000) 200,000 (i) 940,405 -- --
----------- ---------- -------- ----------- ---------- ----------- ---------- --------
Net income
(loss) from
continuing
operations...... $ (205,006) $ (109,794) $195,340 $(1,084,220) $3,432,368 $ 2,228,688 $ 41,289 $ 94,041
=========== ========== ======== =========== ========== =========== ========== ========
Earnings per
shares..........
Weighted average
number of shares
outstanding.....
<CAPTION>
PRO FORMA ADJUSTMENTS PRO FORMA
CONSOLIDATED FROM OFFERING AS ADJUSTED
--------------- --------------- --------------
<S> <C> <C> <C>
Revenues........ $77,938,145 $ -- $77,938,145
Cost of 54,346,319 -- 54,346,319
revenues........
Selling, general
and
administrative
expenses........ 14,779,683 -- 14,779,683
Merger costs.... 3,336,792 -- 3,336,792
--------------- --------------- --------------
Operating income 5,475,351 5,475,351
(loss)..........
Interest (2,965,356) 2,386,618(l) (578,738)
(expense)
income..........
Other income
(expense)....... 794,428 -- 794,428
--------------- --------------- --------------
Income (loss)
from continuing
operations
before income
taxes........... 3,304,423 2,386,618 5,691,041
Income tax
expense
(benefit)....... 940,405 520,532 1,460,937(i)
--------------- --------------- --------------
Net income
(loss) from
continuing
operations...... $ 2,364,018 $1,866,086 $ 4,230,104
=============== =============== ==============
Earnings per
shares.......... $ .15 $ .21
=============== ==============
Weighted average
number of shares
outstanding..... 15,904,446(m) 20,404,446(n)
=============== ==============
</TABLE>
F-5
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS
THE UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 HAS
BEEN ADJUSTED TO REFLECT THE FOLLOWING:
(1) Reflects the acquisition of Waste Services, Inc. and affiliates and the
pending acquisitions of Golden Gate and Coney Island which have been accounted
for using the purchase method. Property, equipment and intangible assets were
acquired for aggregate consideration of $16,951,416 in Common Stock, the
assumption of debt of $9,226,963, the assumption of an approximately
$6,200,000 liability which is contingent upon the resolution of certain events
(payable in either cash or a future maximum issuance of 357,849 shares of
Common Stock) and the recording of a purchase accounting reserve of $223,000
for terminated transitional employee salaries. The excess purchase price over
the estimated fair value of the net assets acquired is being amortized on a
straight-line basis for 40 years from the date of acquisition. The preliminary
allocation of the purchase price is as follows:
<TABLE>
<S> <C>
Property and equipment....................................... $ 1,936,000
Cost over fair value of net assets acquired.................. 29,865,379
Identifiable intangible assets............................... 800,000
-----------
$32,601,379
===========
</TABLE>
(2) To record the issuance of 4,500,000 shares of Common Stock offered in
connection with the Offering at an assumed offering price of $18.25 per share,
and the application of the estimated net proceeds therefrom.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ADJUSTMENTS
THE UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR
ENDED JUNE 30, 1996 HAS BEEN ADJUSTED TO REFLECT THE FOLLOWING:
(a) To reflect the elimination of revenues and operating expenses relating
to certain operations of Bender not acquired by the Company.
(b) To reflect the elimination of intercompany rental revenues and expenses
between Bender and Bender Property.
(c) To adjust depreciation and amortization expense for the change in the
basis of property, equipment, landfill site costs and intangible assets as if
the purchase of Bender and Bender Property had been completed on July 1, 1995
net of historical depreciation and amortization expense of Bender and Bender
Property and to reflect the Company's methodology of amortizing landfill site
costs and closure and post-closure costs. Landfill site costs and closure and
post-closure costs are amortized based upon consumed airspace using the unit-
of-production method of airspace filled during the period in relation to
estimates of total available airspace.
(d) To adjust depreciation and amortization expense for the change in the
basis of property and equipment, net of historical depreciation and
amortization of Allied had the purchase of the assets been completed on July
1, 1995.
(e) To eliminate intercompany administrative charges related directly to
cost sharing arrangements provided by Allied's prior parent, which were
terminated as a result of the purchase transaction. Such administrative
services were absorbed by excess capacity of the Company and the Company has
not hired additional employees to perform these administrative services.
(f) To reflect the decrease in Bender's selling, general and administrative
expenses consisting of contractual reductions to former owners' salaries of
$606,815, and for the termination of Bender's profit sharing plan of $190,644.
The contractual reduction in owner salaries and the termination of Bender's
profit sharing plan were directly attributable to the acquisition transaction.
F-6
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION--(CONTINUED)
(g) To reflect a reduction in WSI's selling, general and administrative
salaries of employees terminated at the time of acquisition pursuant to
restrictive covenants mandated by the New York City Trade Waste Commission as
conditional approval for the Company to consummate the WSI acquisition. The
reduction is net of the estimated cost of replacement employees under
employment contracts.
(h) To adjust depreciation and amortization expense for the change in the
basis of equipment and intangible assets, and the change in the useful lives
and amortization period to conform to Company policies, net of historical
depreciation and amortization, which would have occurred had the acquisition
of WSI been completed at the beginning of the period.
(i) To record additional interest expense of $1,168,191 from borrowings (at
the Company's average borrowing rate of 8%) under the Company's revolving
credit facility of approximately $15,800,000 incurred to consummate the
acquisition of Bender, net of historical interest expense of $113,115.
(j) To reflect a reduction in interest expense of $1,311,073 resulting from
debt not acquired net of Company interest expense of $738,157 on borrowings at
the Company's average borrowing rate of 8.0% to finance the WSI acquisition.
(k) To adjust for the write-off of certain intangible assets of Allied, to
reflect the recording of purchase accounting as if the acquisition was
consummated at the beginning of the year, whereby the Company would have
assigned a value of zero to this intangible asset.
(l) The Company's pro forma effective tax provision is due to the
realization of federal net operating loss carryforwards and the reversal of
the related valuation allowance previously recorded. Excluding the effect of
the valuation allowance, pro forma as adjusted income taxes would be
approximately $1.8 million, or $.11 per share at an effective rate of 42%.
(m) To adjust depreciation and amortization expense for the change of the
basis of property, equipment and intangible assets, net of historical
depreciation and amortization expense of Waste Management, Inc. of Northeast
Pennsylvania (predecessor company to Apex) had the purchase of Waste
Management, Inc. of Northeast Pennsylvania been completed on July 1, 1995.
(n) To record additional interest expense of $650,775 from borrowings of
approximately $16,000,000 (at an interest rate of 8.5%) to consummate the
acquisition of Waste Management of Northeast Pennsylvania, net of historical
interest expense of $746,152.
(o) Reduction in interest expense to reflect the use of proceeds of the
Offering to pay down the debt assumed to be outstanding of $39.8 million
resulting from the business combinations at an average interest rate of 8.0%.
(p) For the purposes of determining pro forma earnings per share, the
issuance of 116,667, 1,448,841, 106,667, and 796,927 shares of Common Stock as
consideration for the purchase of assets of Allied and WSI, the stock of
Bender and to reflect the shares issued relating to the Apex merger,
respectively, were considered to have been outstanding from July 1, 1995.
(q) For the purpose of determining pro forma as adjusted earnings per share,
the issuance of 4,500,000 shares relating to the Offering were considered to
have been outstanding since July 1, 1995.
THE UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE
MONTHS ENDED MARCH 31, 1997 HAS BEEN ADJUSTED TO REFLECT THE FOLLOWING:
(a) To reflect the elimination of revenues and operating expenses relating
to certain operations of Bender not acquired by the Company.
F-7
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION--(CONTINUED)
(b) To reflect the elimination of intercompany rental revenues and expenses
between Bender and Bender Property.
(c) To adjust depreciation and amortization expense for the change in the
basis of property, equipment, landfill site costs and intangible assets as if
the purchase of Bender and Bender Property had been completed on July 1, 1996
net of historical depreciation and amortization expense of Bender and Bender
Property and to reflect the Company's methodology of amortizing landfill site
costs and closure and post-closure costs. Landfill site costs and closure and
post-closure costs are amortized based upon consumed airspace using the unit-
of-production method of airspace filled during the period in relation to
estimates of total available airspace.
(d) To reflect the decrease in Bender's selling, general and administrative
expenses consisting of a contractual reduction made to the former owners'
salaries of $706,807 and for the termination of Bender's profit sharing plan
of $257,000. The contracted reduction in owner salaries and the termination of
Bender's profit sharing plan were directly attributable to the acquisition
transaction.
(e) To reflect a reduction in WSI's selling, general and administrative
salaries of employees terminated at the time of acquisition pursuant to
restrictive covenants mandated by the New York City Trade Waste Commission as
conditional approval for the Company to consummate the WSI acquisition. The
reduction is net of the estimated cost of replacement employees.
(f) To adjust depreciation and amortization expense for the change in the
basis of equipment and intangible assets, net of historical depreciation and
amortization which would have occurred had the purchase of WSI been completed
on July 1, 1996.
(g) To reflect a reduction in interest expense of $714,024 resulting from
debt not acquired net of Company interest expense of $553,618 on borrowings at
the Company's average borrowing rate of 8.0% to finance acquisitions.
(h) To record additional interest expense of $529,754 resulting from
borrowings under the Company's revolving credit facility of approximately
$15,800,000 incurred to consummate the acquisition of Bender, net of
historical interest expense of $38,291.
(i) The Company's pro forma effective tax provision is after consideration
of the realization of federal net operating loss carryforwards and the
reversal of the related valuation allowance previously recorded. Excluding the
effect of the valuation allowance, pro forma taxes at an effective rate of 42%
would be $2.4 million, an increase of $900,000 ($.04 per share).
(j) To adjust depreciation and amortization expense for the change in the
basis of property, equipment and intangible assets, net of historical
depreciation and amortization expense of Waste Management, Inc. of Northeast
Pennsylvania (predecessor company to Apex) had the purchase of Waste
Management Inc. of Northeast Pennsylvania been completed on July 1, 1996.
(k) To record additional interest expense of $176,698 from borrowings of
Apex of $16.4 million (at an interest rate of 8.5%) to consummate the
acquisition of Waste Management of Northeast Pennsylvania, net of historical
interest expense of $172,534.
(l) Reduction in interest expense to reflect the use of proceeds of the
Offering to pay down the balance outstanding at March 31, 1997 on the
revolving credit facility of $39.8 million at an average annual interest rate
of 8.0%.
(m) For the purposes of determining pro forma earnings per share, the
issuance of 63,066 shares of Common Stock as partial consideration for the
purchase of the stock of R&A Bender, Inc., and 1,448,841 shares related to the
acquisition of WSI were considered to have been outstanding from July 1, 1996.
(n) For the purpose of determining pro forma earnings per share as adjusted,
the issuance of 4,500,000 shares relating to the Offering were considered to
have been outstanding since July 1, 1996.
F-8
<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. as of March 31, 1997, June 30, 1996, and June 30,
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the nine months ended March 31, 1997 and 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 did
not audit the financial statements of Super Kwik, Inc. and Donno Company, Inc.
and affiliates, wholly owned subsidiaries, which statements reflect total
assets constituting 46% in 1996 and 44% in 1995, and total revenues
constituting 81% in 1996, 79% in 1995, and 77% in 1994 of the related
consolidated totals. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to
data included for Super Kwik, Inc. and Donno Company, Inc. and affiliates, is
based solely on the reports of the other auditors.
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 and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and, for each of the three years in the
period ended June 30, 1996, the reports of other auditors, the financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of Eastern Environmental Services, Inc. at
March 31, 1997, June 30, 1996, and June 30, 1995, and the consolidated results
of its operations and its cash flows for the nine months ended March 31, 1997
and each of the three years in the period ended June 30, 1996, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
May 13, 1997
F-9
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
MARCH 31, -----------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 3,906,902 $ 1,776,112 $ 2,972,188
Accounts receivable, less allowance for
doubtful accounts of $1,519,000,
$604,000, and $600,000.................. 7,694,765 3,349,159 3,422,000
Deferred income taxes.................... 1,568,000 372,445 168,186
Tax refund receivable.................... -- 74,467 152,871
Prepaid expenses and other current
assets.................................. 2,173,656 1,698,753 1,728,149
----------- ----------- -----------
Total current assets................... 15,343,323 7,270,936 8,443,394
Property and equipment:
Land..................................... 4,166,178 236,517 331,352
Landfill sites........................... 30,571,790 12,673,250 10,804,589
Buildings and leasehold improvements..... 6,441,336 2,098,512 2,392,784
Vehicles................................. 15,623,804 11,806,417 10,886,874
Machinery and equipment.................. 15,098,307 7,553,325 8,264,117
Furniture and fixtures................... 1,390,761 1,485,868 1,315,043
----------- ----------- -----------
Total property and equipment........... 73,292,176 35,853,889 33,994,759
Accumulated depreciation and amortization.. 19,120,447 17,510,520 16,882,942
----------- ----------- -----------
54,171,729 18,343,369 17,111,817
Assets held for sale....................... 395,059 859,262 517,659
Excess cost over fair market value of net
assets acquired, net of $663,000,
$440,000, and $360,000 accumulated
amortization.............................. 15,764,939 372,096 350,412
Other intangible assets, net of $3,344,000,
$3,202,000, and $3,031,000 accumulated
amortization.............................. 1,720,740 662,685 795,016
Notes receivable from officers............. 463,902 432,902 204,001
Other assets (including $538,000, $433,000,
and $545,000 of restricted cash on deposit
for landfill closure and insurance
bonding).................................. 1,493,005 844,837 876,899
----------- ----------- -----------
Total assets........................... $89,352,697 $28,786,087 $28,299,198
=========== =========== ===========
</TABLE>
See accompanying notes.
F-10
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
MARCH 31, ------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings................. $ -- $ 595,000 $ 650,000
Accounts payable...................... 3,835,667 3,559,131 2,977,499
Accrued expenses and other current
liabilities.......................... 8,361,616 2,028,359 1,161,367
Note payable to stockholder/officer... -- -- 42,457
Income taxes payable.................. 45,880 57,739 59,506
Current portion of accrued landfill
closure and other environmental
costs................................ 1,070,000 870,000 870,000
Current portion of long-term debt..... 1,285,312 773,702 1,098,985
Current portion of capital lease
obligations.......................... 1,445,100 1,240,358 1,131,924
----------- ----------- -----------
Total current liabilities........... 16,043,575 9,124,289 7,991,738
Deferred income taxes................... 3,832,203 507,623 325,152
Long-term debt, net of current portion.. 31,736,086 3,534,716 2,962,451
Capital lease obligations, net of
current portion........................ 2,244,432 2,774,124 2,197,430
Accrued landfill closure and other
environmental costs.................... 8,172,364 2,424,137 1,082,246
Commitments and contingencies
Stockholders' equity:
Common Stock, $.01 par value:
Authorized shares--50,000,000
Issued and outstanding shares--
14,095,834, 9,523,785, and
6,614,231.......................... 140,958 95,238 66,142
Class A Common Stock (convertible to
Common Stock), $.01 par value:
Authorized shares--10,000,000
Issued and outstanding shares--0, 0,
and 1,591,201...................... -- -- 15,912
Additional paid-in capital............ 27,927,552 10,661,427 9,312,941
Retained earnings (deficit)........... (668,214) (259,208) 4,421,445
----------- ----------- -----------
27,400,296 10,497,457 13,816,440
Less treasury stock at cost--39,100
common shares........................ (76,259) (76,259) (76,259)
----------- ----------- -----------
Total stockholders' equity.......... 27,324,037 10,421,198 13,740,181
----------- ----------- -----------
Total liabilities and stockholders'
equity............................. $89,352,697 $28,786,087 $28,299,198
=========== =========== ===========
</TABLE>
See accompanying notes.
F-11
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, YEAR ENDED JUNE 30,
-------------------------------------------------------------------
1997 1996 1996 1995 1994
------------- -------------------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 52,409,183 $ 29,020,986 $39,519,173 $40,802,062 $37,314,442
Cost of revenues........ 38,026,625 23,666,269 33,417,442 33,685,537 30,380,304
Selling, general, and
administrative expenses
....................... 9,245,947 5,665,268 9,774,422 7,225,940 7,109,857
Merger costs............ 3,336,792 -- -- -- --
------------- ------------- ----------- ----------- -----------
Operating income
(loss)................. 1,799,819 (310,551) (3,672,691) (109,415) (175,719)
Interest expense........ (1,525,509) (416,590) (629,009) (580,632) (371,918)
Other income (expense).. 461,089 186,538 (130,640) 488,384 226,289
------------- ------------- ----------- ----------- -----------
Income (loss) from
continuing operations
before income taxes ... 735,399 (540,603) (4,432,340) (201,663) (321,348)
Income tax expense (ben-
efit).................. 940,405 -- (9,687) (147,093) (228,700)
------------- ------------- ----------- ----------- -----------
Loss from continuing op-
erations............... (205,006) (540,603) (4,422,653) (54,570) (92,648)
Discontinued operations:
Gain on disposal of
discontinued opera-
tions, net of appli-
cable income taxes of
$260,784............. -- -- -- -- 525,309
------------- ------------- ----------- ----------- -----------
Net (loss) income....... $ (205,006) $ (540,603) $(4,422,653) $ (54,570) $ 432,661
============= ============= =========== =========== ===========
Net (loss) earnings per
share
Continuing opera-
tions................ $ (.02) $ (.06) $ (.49) $ (.01) $ (.01)
Discontinued opera-
tions................ -- -- -- -- .07
------------- ------------- ----------- ----------- -----------
$ (.02) $ (.06) $ (.49) $ (.01) $ .06
============= ============= =========== =========== ===========
Weighted average number
of shares outstanding.. 13,316,698 8,930,968 9,018,080 7,844,359 7,836,332
============= ============= =========== =========== ===========
</TABLE>
See accompanying notes.
F-12
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF SHARES PAR VALUE
--------------------- -----------------
CLASS A CLASS A ADDITIONAL RETAINED
COMMON COMMON COMMON COMMON PAID-IN EARNINGS TREASURY
STOCK STOCK STOCK STOCK CAPITAL (DEFICIT) STOCK TOTAL
---------- ---------- -------- -------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1993................... 6,284,231 1,591,201 $ 62,842 $15,912 $ 8,989,991 $5,066,354 $(76,259) $14,058,840
Net income............. -- -- -- -- -- 432,661 -- 432,661
Dividends declared and
paid to former
stockholders of Donno
Company, Inc. and
affiliates............ -- -- -- -- -- (369,000) -- (369,000)
---------- ---------- -------- ------- ----------- ---------- -------- -----------
Balance at June 30,
1994................... 6,284,231 1,591,201 62,842 15,912 8,989,991 5,130,015 (76,259) 14,122,501
Exercise of Common
Stock options......... 30,000 -- 300 -- 25,950 -- -- 26,250
Issuance of Common
Stock................. 300,000 -- 3,000 -- 297,000 -- -- 300,000
Net loss............... -- -- -- -- -- (54,570) -- (54,570)
Dividends declared and
paid to former
stockholders of Donno
Company, Inc. and
affiliates............ -- -- -- -- -- (654,000) -- (654,000)
---------- ---------- -------- ------- ----------- ---------- -------- -----------
Balance at June 30,
1995................... 6,614,231 1,591,201 66,142 15,912 9,312,941 4,421,445 (76,259) 13,740,181
Exercise of Common
Stock options......... 140,000 -- 1,400 -- 141,100 -- -- 142,500
Exercise of Common
Stock warrants........ 303,353 -- 3,034 -- 424,312 -- -- 427,346
Issuance of Common
Stock................. 875,000 -- 8,750 -- 783,074 -- -- 791,824
Conversion of Common
Stock................. 1,591,201 (1,591,201) 15,912 (15,912) -- -- -- --
Net loss............... -- -- -- -- -- (4,422,653) -- (4,422,653)
Dividends declared and
paid to former
stockholders of Donno
Company, Inc. and
affiliates............ -- -- -- -- -- (258,000) -- (258,000)
---------- ---------- -------- ------- ----------- ---------- -------- -----------
Balance at June 30,
1996................... 9,523,785 -- 95,238 -- 10,661,427 (259,208) (76,259) 10,421,198
Exercise of Common
Stock options and
warrants.............. 405,576 -- 4,055 -- 324,004 -- -- 328,059
Proceeds from sale of
2,670,000 shares of
Common Stock, less
commissions and
issuance expenses of
$724,248.............. 2,670,000 -- 26,700 -- 9,929,052 -- -- 9,955,752
Common Stock issued in
connection with
incorporation of
Apex.................. 796,927 -- 7,970 -- 3,242,030 -- -- 3,250,000
Common Stock issued in
purchase
acquisitions.......... 697,046 -- 6,970 -- 3,751,064 -- -- 3,758,034
Common Stock issued for
consulting services... 2,500 -- 25 -- 19,975 -- -- 20,000
Cash dividends paid to
former stockholders of
Donno Company Inc. and
affiliates............ -- -- -- -- -- (204,000) -- (204,000)
Net loss............... -- -- -- -- -- (205,006) -- (205,006)
---------- ---------- -------- ------- ----------- ---------- -------- -----------
Balance at March 31,
1997................... 14,095,834 -- $140,958 $ -- $27,927,552 $ (668,214) $(76,259) $27,324,037
========== ========== ======== ======= =========== ========== ======== ===========
</TABLE>
See accompanying notes.
F-13
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30,
------------------------- -------------------------------------
1997 1996 1996 1995 1994
------------ ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Loss from continuing
operations............. $ (205,006) $ (540,603) $(4,422,653) $ (54,570) $ (92,648)
Adjustments to reconcile
loss from continuing
operations to net cash
provided by operating
activities of
continuing operations:
Depreciation and
amortization.......... 3,073,817 2,354,427 2,893,712 3,665,360 2,861,884
Provision for losses
on receivables........ 272,834 95,908 304,496 300,481 203,893
Landfill closure
costs................. 206,816 68,517 1,006,211 281,619 312,360
Non-cash severance and
transition costs...... -- -- 740,827 -- --
Non-cash compensation
expense............... -- -- 138,173 -- --
Deferred income
taxes................. 795,761 (13,349) (21,788) (167,974) 19,573
Loss on write-down of
assets held for
sale.................. -- -- 402,616 -- --
Loss (gain) on sale of
property and
equipment............. (136,353) (428) 52,490 (77,579) (21,946)
Changes in operating
assets and
liabilities:
Accounts receivable.. (2,092,988) 28,718 (231,655) 749,534 (667,759)
Income taxes......... 170,914 75,680 76,637 (53,165) 575,093
Other................ 2,858,335 423,351 910,770 454,049 132,943
Accounts payable..... (1,955,278) (120,968) 581,632 (384,252) 1,154,502
------------ ----------- ----------- ----------- -----------
Net cash provided by
operating activities of
continuing operations.. 2,988,852 2,371,253 2,431,468 4,713,503 4,477,895
Net cash provided by
discontinued
operations............. -- -- -- -- 1,533,360
INVESTING ACTIVITIES
Acquisition of
businesses, net of cash
acquired............... (34,232,130) -- -- -- --
Development of landfill
sites.................. (1,857,546) (1,624,597) (1,868,661) (1,361,955) (3,836,701)
Proceeds from sale of
property and
equipment.............. 268,727 55,356 225,309 362,235 532,758
Purchase of property and
equipment.............. (3,660,007) (2,266,307) (3,213,874) (3,633,556) (1,544,529)
Payments received on
notes receivable....... -- -- (213,930) 197,428 234,119
Payments for intangible
assets................. -- (122,500) (122,500) (574,950) (92,500)
Landfill closure and
insurance bonding
deposits............... (53,209) 116,521 111,485 (18,145) 83,398
------------ ----------- ----------- ----------- -----------
Net cash used in
investing activities... (39,534,165) (3,841,527) (5,082,171) (5,028,943) (4,623,455)
FINANCING ACTIVITIES
Proceeds from revolving
line of credit, long
term debt and capital
lease obligations...... 31,693,650 3,498,942 3,801,500 4,916,792 2,523,142
Payments on revolving
line of credit, long
term debt and capital
lease obligations...... (6,316,358) (3,330,561) (3,408,086) (3,235,517) (3,711,181)
Net (payments)
borrowings on note
payable to
shareholder/officer.... (31,000) (42,457) (42,457) 42,457 --
Proceeds from the
incorporation of Apex.. 3,250,000 -- -- -- --
Proceeds from issuance
of Common Stock, net of
expenses............... 10,283,811 861,824 1,361,670 326,250 --
Dividends paid to former
stockholders of Donno
Company, Inc. and
affiliates............. (204,000) (153,000) (258,000) (654,000) (369,000)
------------ ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities............. 38,676,103 834,748 1,454,627 1,395,982 (1,557,039)
------------ ----------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ 2,130,790 (635,526) (1,196,076) 1,080,542 (169,239)
Cash and cash
equivalents at
beginning of year...... 1,776,112 2,972,188 2,972,188 1,891,646 2,060,885
------------ ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
year................... $ 3,906,902 $ 2,336,662 $ 1,776,112 $ 2,972,188 $ 1,891,646
============ =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-14
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying 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.
UNAUDITED FINANCIAL STATEMENTS
The consolidated financial statements for the nine months ended March 31,
1996 are unaudited; however, in the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the consolidated financial statements for the interim period have been
included.
DESCRIPTION OF BUSINESS
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.
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. 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.
PROPERTY AND EQUIPMENT
Property and equipment is stated on the basis of cost. The Company provides
depreciation over the estimated useful lives of assets using the straight-line
method for its property and equipment except for landfill sites. The estimated
useful lives are 20 to 40 years for buildings and improvements, five to ten
years for vehicles, machinery, and equipment, five to ten years for
containers, and five to ten years for furniture and fixtures.
Landfill site costs include expenditures for acquisition of land and related
airspace, in addition to, engineering, permitting, legal, capitalized
interest, and certain direct site preparation costs which management believes
are recoverable. The Company commences depreciation of landfill site costs
when the construction is completed and the constructed area begins to accept
waste. Landfill site costs for facilities currently in use are 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.
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 $2,539,000, $2,701,000, and
$1,341,000 at March 31, 1997, June 30, 1996, and June 30, 1995, respectively.
F-15
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT (CONTINUED)
The Company capitalizes interest costs as part of the cost of developing
landfill sites and constructing disposal space. Interest costs of $125,000,
$84,000, $48,000, and $139,000 were capitalized for the nine months ended
March 31, 1997 and for the fiscal years ended 1996, 1995, and 1994,
respectively.
Depreciation expense includes depreciation recognized on assets under
capitalized lease obligations.
EXCESS COST OVER FAIR MARKET VALUE OF NET ASSETS ACQUIRED
The excess cost over fair market value of net assets acquired is amortized
on a straight-line basis over 40 years commencing on the dates of the
respective acquisitions. Amortization expense of excess cost over fair market
value of net assets acquired was $223,000, $81,000, $75,000, and $77,000 for
the nine months ended March 31, 1997 and for the fiscal years ended 1996,
1995, and 1994, respectively.
OTHER INTANGIBLE ASSETS
Other intangible assets consist principally of noncompete agreements and
waste collection and hauling contracts acquired in the acquisition of landfill
sites and waste collection operations. Noncompete agreements and waste
collection and hauling contracts are currently being amortized over a period
of five to 15 years. Amortization of other intangible assets was $142,000,
$151,000, $230,000, and $239,000 for the nine months ended March 31, 1997 and
for the fiscal years ended 1996, 1995, and 1994, respectively.
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 operations 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 $750,000, $22,000, $109,000, and $267,000 and financed insurance
premiums of $712,000, $462,000, $458,000, and $310,000 for the nine months
ended March 31, 1997 and for the fiscal years ended 1996, 1995, and 1994,
respectively. In fiscal 1996 and 1994, the Company also sold property and
equipment in exchange for notes receivable of $36,000 and $449,000,
respectively.
F-16
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE 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. Amounts billed prior to services being
performed are included in accrued expenses and other current liabilities as
deferred revenue.
EARNINGS PER SHARE
Earnings per share are computed based on the weighted average number of
shares of Common Stock 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 approximates fair value based on current
rates and terms.
LONG-LIVED ASSETS
Long-lived assets consist primarily of property and equipment, excess cost
over fair market value of net assets acquired and other intangible assets. The
recoverability of long-lived assets is evaluated at the operating unit level
by an analysis of operating results and consideration of other significant
events or changes in the business environment. If an operating unit has
current operating losses and based upon projections there is a likelihood that
such operating losses will continue, the Company will evaluate whether
impairment exists on the basis of undiscounted expected future cash flows from
operations before interest for the remaining period. If impairment exists, the
carrying amount of the long-lived assets is reduced to its estimated fair
value.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to
their 1997 presentation.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," which is required to be adopted for fiscal
periods ending after December 15, 1997 (fiscal 1998 for the Company). At that
time, the Company will be required to change the method currently used to
compute earnings per share. Under the new standard, the dilutive effect of
stock options and stock warrants will be excluded from basic earnings per
share. If earnings per share had been calculated under the new requirement,
the effect would not have been material to the periods presented.
In October 1996, the AICPA issued SOP 96-1, Environmental Remediation
Liabilities. The SOP provides guidance with respect to the recognition,
measurement and disclosure of environmental remediation liabilities. The
Company will adopt SOP 96-1 in the first quarter of fiscal 1998 and, based on
current circumstances, does not believe the effect of adoption will be
material.
F-17
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS
ACQUISITIONS ACCOUNTED FOR UNDER THE POOLING OF INTERESTS METHOD
On September 27, 1996, the Company completed its merger with Super Kwik,
Inc. ("Super Kwik") and approximately 2,308,176 unregistered shares of Common
Stock were issued in exchange for all outstanding shares of Super Kwik. Super
Kwik operates a municipal solid waste collection business in southern New
Jersey, operating over 75 collection vehicles and serving more than 29,000
customers. The transaction has been accounted for using the pooling of
interests method; and accordingly, the accompanying consolidated financial
statements include the accounts of Super Kwik for all periods presented.
On January 31, 1997, the Company completed its merger with Donno Company,
Inc., Suffolk Waste Systems, Inc., Residential Services, Inc., and N.R.T.
Realty Corporation (collectively referred to as the "Donno Companies") with
1,137,951 unregistered shares of Common Stock issued in exchange for all
issued and outstanding shares of the Donno Companies. The Donno Companies
operate over 75 vehicles and a transfer station and service over 60,000
residential and commercial customers in Nassau and Suffolk Counties of Long
Island, New York. The transaction has been accounted for using the pooling of
interests method; and accordingly, the accompanying consolidated financial
statements include the accounts of the Donno Companies for all periods
presented.
On March 31, 1997, the Company completed its merger with Apex Waste
Services, Inc. ("Apex"), with 796,927 unregistered shares of Common Stock
(including 2,482 shares representing an adjustment for long-term debt being
less than $15,000,000 at March 31, 1997, the date of closing) issued in
exchange for all issued and outstanding shares of Apex. Apex operates over 65
collection vehicles and a transfer and processing station and provides
services to approximately 10,000 residential and 4,000 commercial customers in
northeastern Pennsylvania. The transaction has been accounted for using the
pooling of interests method. Apex was formed on October 1, 1996 as a result of
the acquisition of certain assets from Waste Management of Pennsylvania,
Incorporated, including $6.2 million excess cost over fair market value of net
assets acquired. The results of operations of Apex have been included in the
Company's consolidated financial statements since the date of inception of
Apex.
F-18
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS (CONTINUED)
ACQUISITIONS ACCOUNTED FOR UNDER THE POOLING OF INTERESTS METHOD (CONTINUED)
Revenues and income (loss) from continuing operations of the separate
companies were as follows:
<TABLE>
<CAPTION>
INCOME (LOSS)
FROM CONTINUING
REVENUES OPERATIONS
----------- ---------------
<S> <C> <C>
Nine months ended March 31, 1997
Eastern Environmental Services, Inc............... $17,264,107 $ 855,357
Super Kwik........................................ 16,936,464 277,888
Donno Companies................................... 9,564,191 (434,038)
Apex.............................................. 8,644,421 (904,213)
----------- -----------
Combined.......................................... $52,409,183 $ (205,006)
=========== ===========
Year ended June 30, 1996
Eastern Environmental Services, Inc............... $ 7,632,503 $(3,500,043)
Super Kwik........................................ 20,521,676 (282,313)
Donno Companies................................... 11,364,994 (640,297)
----------- -----------
Combined.......................................... $39,519,173 $(4,422,653)
=========== ===========
Year ended June 30, 1995
Eastern Environmental Services, Inc............... $ 8,650,945 $(1,547,550)
Super Kwik........................................ 18,865,547 541,287
Donno Companies................................... 13,285,570 951,693
----------- -----------
Combined.......................................... $40,802,062 $ (54,570)
=========== ===========
Year ended June 30, 1994
Eastern Environmental Services, Inc............... $ 8,480,955 $ (722,973)
Super Kwik........................................ 16,000,394 219,293
Donno Companies................................... 12,833,093 411,032
----------- -----------
Combined.......................................... $37,314,442 $ (92,648)
=========== ===========
</TABLE>
Super Kwik, the Donno Companies, and Apex were Subchapter S Corporations
prior to the mergers whereby the taxable income or loss flowed through to the
individual stockholders. The effects of providing pro forma income taxes as a
C Corporation were not presented as such amounts are not material.
In the nine-month period ending March 31, 1997, the Company incurred
approximately $1,148,000, $955,000, and $1,234,000 in merger-related costs
associated with the Super Kwik, the Donno Companies, and Apex mergers,
respectively, of which approximately $2,545,000 is remaining in accrued
liabilities at March 31, 1997. The $3,337,000 of merger costs include $835,000
of transaction-related expenses and $2,502,000 of costs to integrate
operations. Additionally, tax provisions of $660,000, $8,000, and $236,000
were recorded at the date of the mergers relating to net deferred tax
liabilities with respect to the termination of the Super Kwik, the Donno
Companies, and Apex, respectively, previous S corporation elections. This
total tax provision of $904,000 is included within income tax expense for the
nine-month period ending March 31, 1997.
ACQUISITIONS ACCOUNTED FOR UNDER THE PURCHASE METHOD
During the nine-month period ended March 31, 1997, the Company consummated
six acquisitions that were accounted for under the purchase method of
accounting. Results of operations of companies that were acquired and subject
to purchase accounting are included from the dates of such acquisitions. The
total costs of
F-19
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS (CONTINUED)
ACQUISITIONS ACCOUNTED FOR UNDER THE PURCHASE METHOD (CONTINUED)
acquisitions accounted for under the purchase method was $21,145,000. The
excess cost over the fair market value of the net assets acquired was
$9,503,000. The excess cost over the fair market value of the net assets
acquired is being amortized over 40 years from the date of acquisition on a
straight-line basis. The purchase price allocation is based on preliminary
estimates as of the acquisition date.
The unaudited pro forma information set forth below assumes two significant
acquisitions accounted for under the purchase method had occurred at the
beginning of the periods presented. Pro forma results including insignificant
acquisitions would not be materially different from those presented herein. In
addition this information includes the predecessor operations of Apex. Apex
was formed on October 1, 1996 as a result of the acquisition of certain assets
from Waste Management of Pennsylvania, Incorporated. The unaudited pro forma
information is presented for informational purposes only and is not
necessarily indicative of the results of operations that actually would have
been achieved had the acquisitions been consummated at that time:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
MARCH 31, 1997 JUNE 30, 1996
-------------- -------------
<S> <C> <C>
Revenues....................................... $61,341,600 $77,388,484
Net income (loss).............................. $ 4,799,785 $(3,391,838)
Earnings (loss) per share...................... $ .33 $ (.34)
</TABLE>
3. 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.
The following is a rollforward of the Company's allowance for bad debts:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED JUNE 30,
ENDED ------------------------------
MARCH 31, 1997 1996 1995 1994
-------------- --------- --------- --------
<S> <C> <C> <C> <C>
Balance at beginning of
year....................... $ 604,000 $ 600,000 $ 445,000 $301,000
Additions (charged to
expense)................... 273,000 304,000 300,000 204,000
Deductions.................. (280,000) (300,000) (145,000) (60,000)
Other--purchase price
allocation................. 922,000 -- -- --
---------- --------- --------- --------
Balance at end of year...... $1,519,000 $ 604,000 $ 600,000 $445,000
========== ========= ========= ========
</TABLE>
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
MARCH 31, 1997 1996 1995
-------------- ---------- ----------
<S> <C> <C> <C>
Insurance............................... $ 787,590 $ 398,391 $ 617,307
Landfill deposits....................... 134,842 341,522 325,382
Non-trade receivables................... 142,076 112,722 308,475
Performance bonds....................... 180,971 121,811 86,344
Other................................... 928,177 724,307 390,641
---------- ---------- ----------
$2,173,656 $1,698,753 $1,728,149
========== ========== ==========
</TABLE>
F-20
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
In September 1996, the Company entered into a new revolving credit facility
with two major banks, Bank Boston, N.A. and Bank of America Illinois, which
provides for borrowings of up to $100,000,000 (as amended on May 8, 1997) for
repayment of certain debt, funding of acquisitions, and includes up to
$15,000,000 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 loan
agreement. The facility matures on April 30, 2000. The revolving credit
facility, among other conditions, requires the payment of a commitment fee
range of .25% to .50% 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.
Debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
MARCH 31, ---------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Note payable to Bank Boston, N.A. and Bank
of America Illinois, maturity date of
September 1999, variable interest rates
ranging from 8.0% to 8.5%.................. $30,550,000 $ -- $ --
CoreStates Bank, N.A. revolving credit
facility................................... -- 237,500 --
Note payable to First Union National Bank in
monthly installments of $28,125 plus
interest at 7.03%.......................... -- 1,096,875 --
Notes payable to various financial
institutions, with various maturities
payable through September 2013, interest
rates (fixed and variable) ranging from
8.25% to 9.25%, and monthly installments
ranging from $6,092 to $12,500............. 1,340,236 1,608,287 2,440,919
Installment loan that bears interest at 6%
and is being repaid in monthly installments
of $11,600 through February 2000,
decreasing to $6,283 per month through
February 2005.............................. 686,907 772,359 881,525
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 $13,225....................... 3,853,995 4,419,006 3,837,358
Other....................................... 279,792 188,873 230,988
----------- ---------- ----------
36,710,930 8,322,900 7,390,790
Less current portion........................ 2,730,412 2,014,060 2,230,909
----------- ---------- ----------
$33,980,518 $6,308,840 $5,159,881
=========== ========== ==========
</TABLE>
Certain machinery and equipment notes payable discussed above have been
classified as capital lease obligations in the balance sheet. Cost and
accumulated depreciation related to assets under capital leases are as
follows:
<TABLE>
<CAPTION>
JUNE 30,
MARCH 31, ---------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cost.................................... $3,677,649 $3,677,649 $1,994,490
Accumulated depreciation................ 958,540 659,828 197,099
---------- ---------- ----------
$2,719,109 $3,017,821 $1,797,391
========== ========== ==========
</TABLE>
F-21
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
Maturities of long-term debt are as follows: 1998--$2,730,000; 1999--
$1,237,000; 2000--$830,000; 2001--$31,078,000; 2002 and thereafter--$836,000.
Interest paid on all indebtedness was $1,126,000, $699,000, $582,000, and
$520,000 for the nine months ended March 31, 1997, and for the fiscal years
ended 1996, 1995, and 1994, respectively.
Letters of credit have been provided to the Company supporting performances
of landfill closure and post-closure requirements, insurance contracts, and
other contracts. Letters of credit outstanding at March 31, 1997 aggregated
$1,426,000.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
MARCH 31, ---------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Accrued compensation....................... $ 873,147 $ 417,631 $ 104,075
Workers' compensation...................... 284,217 117,382 67,981
Damage claims.............................. 60,500 277,609 187,000
Accrued professional fees.................. 165,531 165,500 46,138
Miscellaneous taxes........................ 231,756 112,941 214,108
Operating loss accrual..................... -- -- 170,000
Accrued severance costs.................... 387,990 583,832 --
Accrued transition costs................... 3,285,138 97,000 --
Deferred revenue........................... 1,327,771 -- --
Other...................................... 1,745,566 256,464 372,065
---------- ---------- ----------
$8,361,616 $2,028,359 $1,161,367
========== ========== ==========
</TABLE>
7. ACCRUED LANDFILL CLOSURE AND OTHER ENVIRONMENTAL COSTS
The Company owns five non-hazardous solid waste landfills, all of which are
permitted and four 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
update underlying assumptions and projected costs and record required
adjustments. The closure and post-closure requirements are established under
the standards of the U.S. Environmental Protection Agency's Subtitle D
regulations as implemented and applied on a state-by-state basis. Final
closure and post-closure accruals consider estimates for the final cap and
cover for the site, methane gas control, leachate management and groundwater
monitoring, and other operational and maintenance costs to be incurred after
the site discontinues accepting waste, which is generally expected to be for a
period of up to 30 years after final site closure. For disposal sites that
were previously operated by others, the Company assessed and recorded a final
closure and post-closure liability at the time the Company assumed closure
responsibility based upon the estimated total closure and post-closure costs
and the percentage of airspace utilized as of such date. Thereafter, the
difference between the final closure and post-closure costs accrued and the
total estimated closure and post-closure costs to be incurred is accrued and
charged to expense as airspace is consumed. As of March 31, 1997, the Company
estimates that the costs of final closure of the currently permitted and
operating areas at the Company's landfills will be approximately $13,593,000,
of which $3,205,000 has been
F-22
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. ACCRUED LANDFILL CLOSURE AND OTHER ENVIRONMENTAL COSTS (CONTINUED)
accrued as of March 31, 1997. 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 $90,000 to $125,000 per year for 30 years after closure at each of
the Company's two municipal solid waste landfills and $10,000 per year for 30
years after closure at the Company's industrial landfill sites. The Company
has accrued $1,502,000 for post-closure obligations as of March 31, 1997.
Funding of closure and post-closure obligations are estimated as follows:
1998--$1,070,000; 1999--$1,230,000; 2000--$400,000; 2001 and thereafter--
$6,542,000.
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, Pennsylvania and West Virginia
landfills. Bonds outstanding at March 31 1997 total $1,322,000 and $315,000,
as closure and post-closure financial assurance, respectively, for the
Company's Kentucky landfill, $3,400,000 as closure and post-closure financial
assurance for the Company's Pennsylvania landfill, and $214,000 as closure
financial assurance for the Company's West Virginia landfill. The bonds are
collateralized by irrevocable letters of credit of $1,126,000 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 and $80,000 as financial
assurance for landfill closure and post-closure for the Company's Florida
landfill. The trust fund and cash deposits are restricted from current
operations and are included within other noncurrent assets.
8. COMMON STOCK
Each share of Common Stock is entitled to one vote.
In 1996, William C. Skuba, the former President, Chief Executive Officer,
Chairman of the Board, and controlling stockholder of the Company, who had
approximately 59% voting control, sold 500,000 shares of 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. These
transactions resulted in a change in voting control whereby the Purchasers
held approximately 39% of the voting control of the Company. The change in
voting control did not, however, result in an accounting change that would
have resulted in a new basis of accounting.
In fiscal 1995, the Company, through a private placement, issued 300,000
shares of 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 Common Stock for
cash of $1.00 per share or $875,000. Certain of the private placements
included the issuance of 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 under the
Securities Act of 1933 in February of 1996.
On August 9, 1996, the Company completed a private placement ("Placement")
of 2,500,000 shares of 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.
F-23
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMON STOCK (CONTINUED)
The Company also issued 125,000 shares of Common Stock at $4 per share to a
bank at substantially the same terms as the August 9, 1996 Placement.
9. STOCK OPTION PLANS
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 1987 and 1991 Stock Option Plans, as amended, 700,000
total shares were 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.
In August 1996, the Company's stockholders 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
Company's 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.
1,793,245 and 607,433 options have been granted under the 1996 plan as of
March 31, 1997 and June 30, 1996, respectively; including 801,780 and 291,308
non-qualified stock options at March 31, 1997 and June 30, 1996, respectively.
The exercise prices of all non-qualified stock options issued under the 1996
plan were at fair market value ranging from $5.75 to $13.00 per share.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that are not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 1997 and 1996; risk-free interest rate of 6%;
dividend yield of 0%; expected volatility of the market price of the Common
Stock of 70%; and a weighted-average expected life of the option of four
years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
F-24
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. STOCK OPTION PLANS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Pro forma
results are not likely to be representative of the effects on reported or pro
forma results of operations for future years. The Company's pro forma
information is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
MARCH 31, JUNE 30,
1997 1996
----------- -----------
<S> <C> <C>
Pro forma net loss................................ $(3,699,000) $(4,803,000)
Pro forma loss per share.......................... $ (.28) $ (.53)
</TABLE>
Outstanding options to purchase shares of Common Stock have been granted to
officers and employees at prices ranging from $.01 to $13.00 per share. A
summary of the option transactions are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED JUNE 30,
MARCH 31, ----------------------------
1997 1996 1995 1994
----------- --------- ------- --------
<S> <C> <C> <C> <C>
Shares underlying options
outstanding, beginning of
period......................... 880,900 366,900 417,200 482,800
Shares underlying options
granted........................ 1,243,236 655,000 20,000 45,000
Shares underlying options
exercised...................... (66,945) (140,000) (30,000) --
Shares underlying options
canceled....................... -- (1,000) (40,300) (110,600)
--------- --------- ------- --------
Shares underlying options
outstanding, end of period..... 2,057,191 880,900 366,900 417,200
========= ========= ======= ========
Shares underlying options
exercisable.................... 547,379 338,333 350,650 337,450
========= ========= ======= ========
Shares available for future
option grants.................. 706,764 2,113,667 300,100 279,800
========= ========= ======= ========
</TABLE>
Compensation expense has been recognized for those options granted with
exercise prices below the fair market value of the Common Stock on the date of
grant.
Stock options outstanding at March 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE AVERAGE
RANGE OF PER SHARE NUMBER OF SHARES REMAINING EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTURAL LIFE PRICE PER SHARE
------------------ ---------------- ----------------- ---------------
<S> <C> <C> <C>
$.01-$5.00 263,946 1.8 years $1.02
$5.01-$10.00 1,527,945 9.2 years 6.41
$10.01-$13.00 265,300 9.9 years 11.86
--------- --------- -----
$.01-$13.00 2,057,191 8.3 years $6.42
========= ========= =====
</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 shares of Common Stock at a purchase price of 85% of
the fair market value at the date of purchase. A total of 450,000 shares of
Common Stock are reserved under the Employee Plans. At March 31, 1997, 27,311
shares have been issued under the Employee Plans.
At March 31, 1997, the Company had outstanding warrants to purchase a total
of 1,015,964 shares of Common Stock of which warrants to purchase a total of
615,964 shares are exercisable. Terms of warrants have been established by the
Board of Directors at prices between $1.25 and $13.00 expiring at various
dates through 2001.
F-25
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
At March 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of $3,727,000, that expire through 2011. However,
due to a change in control, these net operating loss carryforwards may be
limited. For financial reporting purposes, a valuation allowance has been
recognized to offset the deferred tax assets related to those carryforwards as
realization is not assured.
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,
MARCH 31, ---------------------
1997 1996 1995
----------- ---------- ---------
<S> <C> <C> <C>
Deferred tax liabilities:
Tax over book depreciation............... $(3,282,204) $ (629,024) $(624,511)
Other, net............................... (549,999) (123,583) (113,507)
----------- ---------- ---------
Total deferred tax liabilities......... (3,832,203) (752,607) (738,018)
Deferred tax assets:
Allowance for doubtful accounts.......... 707,854 158,915 176,810
Discontinued operations accrual.......... -- -- 68,260
Accrued refurbishing costs............... 943,334 -- --
Reserve for loss on assets held for
sale.................................... 255,933 255,933 122,767
Net operating loss carryforwards......... 1,280,503 1,484,833 642,216
AMT credit............................... 24,376 24,376 24,376
Reserve for severance and transition
costs................................... -- 269,232 --
Other, net............................... -- 68,140 36,623
----------- ---------- ---------
Total deferred assets.................. 3,212,000 2,261,429 1,071,052
Valuation allowance for deferred tax
assets.................................... (1,644,000) (1,644,000) (490,000)
----------- ---------- ---------
Net deferred tax assets.................... 1,568,000 617,429 581,052
----------- ---------- ---------
Net deferred tax liabilities............... $(2,264,203) $ (135,178) $(156,966)
=========== ========== =========
</TABLE>
Significant components of the provision for income taxes (benefit)
attributable to continuing operations are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED FISCAL YEAR ENDED
MARCH 31, -----------------------------
1997 1996 1995 1994
----------- ------- --------- ---------
<S> <C> <C> <C> <C>
Current
Federal........................... $ -- $ -- $ -- $(309,317)
State............................. 144,644 12,101 20,881 61,044
-------- ------- --------- ---------
144,644 12,101 20,881 (248,273)
Deferred
Federal........................... 676,397 -- (66,052) 177,955
State............................. 119,364 (21,788) 37,188 4,724
Operating loss carryforward....... -- -- (139,110) (163,106)
-------- ------- --------- ---------
795,761 (21,788) (167,974) 19,573
-------- ------- --------- ---------
Provision for income taxes
(benefit)........................ $940,405 $(9,687) $(147,093) $(228,700)
======== ======= ========= =========
</TABLE>
F-26
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES (CONTINUED)
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>
NINE MONTHS
ENDED FISCAL YEAR ENDED
MARCH 31, ---------------------------------
1997 1996 1995 1994
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Tax at U.S. statutory rates.... $250,036 $(1,190,015) $(608,505) $(346,369)
State income taxes, net of
federal tax benefit........... 30,619 (9,687) 70,652 50,983
Nondeductible amortization..... 55,519 24,918 24,918 24,918
Valuation allowance for
deferred tax assets........... -- 1,154,000 340,000 --
Permanent items................ (92,783) -- -- --
S Corporation status
termination................... 904,070 -- -- --
Utilization of NOL............. (204,330) -- -- --
Other.......................... (2,726) 11,097 25,842 41,768
-------- ----------- --------- ---------
Provision for income taxes
(benefit)..................... $940,405 $ (9,687) $(147,093) $(228,700)
======== =========== ========= =========
</TABLE>
Net income tax refunds (payments) received during the nine months ended
March 31, 1997 and for the fiscal years ended fiscal 1996, 1995, and 1994 were
$(50,000), $64,000, $(14,000), and $840,000, respectively.
11. 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,
insurance, and maintenance expense. Future minimum lease payments under
operating leases with initial or remaining noncancellable lease terms in
excess of one year as of March 31, 1997 are as follows: 1998--$792,000, 1999--
$638,000, 2000--$322,000, 2001--$84,000, and 2002--$0. Total rental expense
under operating leases was approximately $408,000, $353,000, $411,000, and
$388,000 for the nine months ended March 31, 1997 and for the fiscal years
ended fiscal 1996, 1995, and 1994, respectively.
The Company is subject to extensive and evolving federal, state, and local
environmental laws and regulations in the United States and elsewhere that
have been enacted in response to technological advances and the public's
increased concern over environmental issues. The majority of expenditures
necessary to comply with environmental laws and regulations are made in the
normal course of business. Although the Company, to the best of its knowledge,
is in compliance in all material respects with the laws and regulations
affecting its operations, there is no assurance that the Company will not have
to expend substantial amounts for compliance in the future.
In October 1996, the Company received a final permit to construct its
expansion area at its Kentucky landfill. Prior to the actual construction of
the expansion area, the Company is required to complete certain investigations
to confirm the adequacy of the groundwater monitoring program approved in the
final permit. The final permit also requires closure of the original disposal
area. In addition, the Company has entered into an exclusive waste disposal
franchise agreement with Pulaski County, Kentucky to service the municipal
waste needs of the county at the Company's Kentucky landfill through the year
2002. The Company's obligations under this franchise agreement were suspended
on July 1, 1996 for a one-year period ending July 1, 1997 due to the Company's
cessation of operations at the original permit area and delay in initiating
operations at the expansion area. While management intends to resume the
transfer station operations to fulfill its responsibilities under the
franchise agreement until the initial disposal space is constructed, failure
to service the franchise agreement could result in a forfeiture of the
Company's performance bond.
F-27
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is subject to various contingencies pursuant to environmental
laws and regulations that in the future may require the Company to take action
to correct the effects on the environment of prior disposal practices or
releases of chemicals or petroleum substances by the companies or other
parties. At March 31, 1997, the Company has accrued for certain environmental
remediation activities, specifically related to the removal of several
underground storage tanks, as other long-term accrued environmental costs.
Such accrual amounted to $335,680 and in management's opinion, was appropriate
based on existing facts and circumstances. Under the most adverse
circumstances, however, this potential liability could reach $860,000 as
provided in independent engineering studies and evaluation. In the event that
future remediation expenditures are in excess of amounts accrued, management
does not anticipate that they will have a material adverse effect on the
consolidated financial position or results of operations and liquidity of the
Company.
The Company carries insurance covering its assets and operations, including
pollution liability coverage. Specifically, each of the Company's landfills
has pollution liability coverage of $5,000,000 per occurrence or $5,000,000 in
the aggregate subject to a $500,000 deductible per occurrence. Nevertheless,
there can be no assurance that the Company's insurance will provide sufficient
coverage in the event an environmental claim were made against the Company or
that the Company will be able to maintain in place such insurance at
reasonable costs. An uninsured or underinsured claim against the Company of
sufficient magnitude could have a material adverse effect on its business and
results of operations. The Company also is subject to the risk of claims by
employees and others made after the expiration of the policy coverage period,
including asbestos-related illnesses (such as asbestosis, lung cancer,
mesothelloma and other cancers), which 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. Any claims presented on the
basis of exposure during that period may not be covered by insurance and any
liability resulting therefrom could, consequently, have an adverse effect on
the Company's business and results of operations and liquidity.
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 and liquidity.
Certain of the Company's executive officers have entered into employment
agreements whereby they will be entitled to receive certain bonuses in cash or
common stock upon a change in control of the Company. The Company estimates
that the total of these payments based on current salaries would be
approximately $1,100,000. Such agreements also include severance provisions
and immediate vesting provisions of issued options should the officer be
terminated.
12. UNUSUAL OPERATING COSTS
Unusual operating costs and other adjustments of $3,027,000 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 resulting from a reduction in the
Company's estimate of future probable airspace since the draft permit was
being adjudicated, providing a valuation allowance for possible impairment of
this asset. In October 1996, the Company received approval of its expansion
permit, and in May 1997, the Company has decided to continue to operate the
Kentucky landfill. As the Company proceeds with construction of the Kentucky
landfill, the adequacy of the closure and post-closure accruals will be
reevaluated based on current assessments of future probable airspace and
closure and post-closure cost estimates. Additionally, charges totaling
approximately $879,000 were charged to selling, general and administrative
expenses relating to the change in control of the Company, as discussed in
Note 8. 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
F-28
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. UNUSUAL OPERATING COSTS (CONTINUED)
other professional costs incurred in completing the transaction. Additionally,
management refined its estimates of necessary reserves against past due
receivables, outstanding contingencies, and deferred acquisitions costs and
increased such reserves by $221,000 $468,000, and $70,000, respectively. The
increase in contingency reserves included the $336,000 accrued for certain
long-term environmental remediation activities (see Note 11). Additionally, 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. Finally in the second quarter, management recorded a provision of
$331,000 related to a severance agreement settlement with a unionized
workforce.
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.
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 the anticipated 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.
13. RELATED PARTY TRANSACTIONS
In connection with the consummation of the Stock Purchase Agreement (see
Note 8), the Company entered into a series of agreements with Mr. Skuba,
including a Severance Agreement date June 20, 1996. Pursuant to the severance
agreement, virtually all prior agreements between Mr. Skuba and the Company
were terminated, including the Company's obligation to make certain cash
payments to Mr. Skuba upon his resignation from the Company, and in
consideration therefor, the Company, among other things, (i) conveyed to Mr.
Skuba or a company controlled by Mr. Skuba (a) all of the outstanding capital
stock of a corporation that owns certain real property, (b) certain real and
personal property, and (c) certain vehicles owned by the Company, (ii)
transferred to Mr. Skuba certain potential business opportunities that the
Company decided that it had no interest in pursuing, (iii) agreed to provide
Mr. Skuba with certain health benefits at the Company's cost until June 1997,
and (iv) agreed to indemnify Mr. Skuba to the extent provided by the Company's
Certificate of Incorporation and to maintain director and officer liability
insurance for him until June 2002. The Company recorded a total of $459,100
noncash expense related to the Severance Agreement including $259,600 of
compensation expense, loss on the sale of certain assets of $156,000 and
$43,500 of benefits related to a Consulting Agreement with Mr. Skuba that
expires in June 1998.
The Company entered into an agreement in July 1996 to lease office space
from a company that is controlled by an officer of the Company. The lease is
for a period of five years and provides for a monthly rental of $6,250
F-29
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. RELATED PARTY TRANSACTIONS (CONTINUED)
subject to annual increases derived from increases in the Consumer Price
Index. The lease is terminable at any time by the Company by payment of a
termination fee equal to one year's rent.
The Company received management services from a company that is 50% owned by
certain stockholders of the Company. The amount of these services charged to
expense was $56,000, $590,000, $414,000, and $320,000 for the nine month-
period ended March 31, 1997 and the fiscal years ended June 30, 1996, 1995,
and 1994, respectively.
The notes receivable from officers are due in fiscal 2006. The interest rate
on these loans was 6% at March 31, 1997 and June 30, 1996 and 8% at June 30,
1995.
In August 1996, the Company acquired all of the assets of Eastern Waste of
Philadelphia, Inc. in consideration of 391,250 shares of Common Stock valued
at $4.00 per share or approximately $1,600,000 in the aggregate. The
stockholders of Eastern Waste of Philadelphia, Inc. are brothers of directors
of the Company. Substantially all of the assets the Company acquired from
Eastern Waste of Philadelphia, Inc. were acquired by Eastern Waste of
Philadelphia, Inc. in May 1996 in separate transactions with Tri-County
Disposal & Recycling, Inc. and National Ecosystems Inc. for an aggregate of
approximately $1,600,000 in cash and stock.
In connection with the Company's acquisition of Super Kwik in September
1996, the Company executed a $750,000 mortgage note in favor of Spruce Avenue
Associates, a general partnership whose partners are two officers of the
Company. The note bears interest at the rate of ten percent per annum and is
due and payable on September 27, 1999. The note is secured by mortgage on
certain real property of the Company located in Voorhees, New Jersey. The
principal amount outstanding under the mortgage note at March 31, 1997 was
$750,000.
The Company paid a professional corporation owned by an officer of the
Company approximately $46,000 during the nine months ended March 31, 1997 for
legal services rendered to the Company.
In October 1996, the Company hired a corporation owned by an employee of the
Company to excavate a new cell for the Company's landfill in West Virginia.
The Company estimates that the total amount to be paid will be approximately
$698,000. The selected corporation was the lowest bidder that satisfied all
bid requirements for such job.
The Company believes that each of the transactions described above was
entered into on an arm's-length basis in the ordinary course of the Company's
business and on terms no less favorable to the Company than could be obtained
from unaffiliated third parties.
14. SUBSEQUENT EVENTS
Subsequent to March 31, 1997 the Company acquired seven waste hauling and
collection companies in separate transactions. Consideration included
approximately 1,033,000 unregistered shares of Common Stock, cash of
approximately $4,608,000 to the sellers and assumed debt of approximately
$5,945,000. These transactions will be accounted for using the purchase method
of accounting. Additionally, in May 1997 the Company assumed and renegotiated
a lease agreement and entered into an agreement to operate a solid waste
transfer station in Long Island, New York.
Additionally, on May 12, 1997, the Company completed the acquisition of
Waste Services, Inc. and affiliates ("WSI"), accounted for using the purchase
method. Property and equipment and intangible assets were acquired for
consideration consisting of 1,159,982 unregistered shares of Common Stock and
the assumption of
F-30
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SUBSEQUENT EVENTS (CONTINUED)
$6,176,690 of debt. The Company has accrued an obligation of approximately
$6,200,000 as additional purchase price which will be paid upon the resolution
of certain events and is payable in either cash or a future maximum issuance
of 357,849 shares of Common Stock. As part of this contingency, the Company
also posted a letter of credit in the amount of approximately $2,600,000 and
agreed to pay up to $630,000 relating to a debt WSI owed to one of its
creditors. Such future payment is contingent upon authorization from the New
York City Trade Waste Commission or a court having jurisdiction. The Company
also closed on May 12, 1997 into escrow the pending acquisitions of Golden
Gate Carting Co. Inc. ("Golden Gate") and Coney Island Rubbish Removal, Inc.
("Coney Island") pending satisfaction of certain normal conditions which the
Company believes will be resolved. Estimated consideration relating to the
Golden Gate and Coney Island acquisitions consists of 288,859 unregistered
shares of Common Stock and the assumption of approximately $3,000,000 of debt.
WSI, Golden Gate and Coney Island are operated under common management control
and provide principally commercial waste collection services in Brooklyn,
Queens, and Long Island, New York. The acquisitions of Golden Gate and Coney
Island will also be accounted for under the purchase method.
F-31
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OF-
FERING OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPEC-
TUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RE-
LIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT
RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COM-
PANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSE-
QUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company.............................................................. 18
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Price Range of Common Stock.............................................. 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Consolidated Financial Data..................................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 32
Management............................................................... 51
Certain Transactions..................................................... 54
Principal Stockholders................................................... 56
Description of Capital Stock............................................. 58
Shares Eligible for Future Sale.......................................... 61
Underwriting............................................................. 63
Legal Matters............................................................ 64
Experts.................................................................. 65
Available Information.................................................... 66
Incorporation of Certain Documents by Reference.......................... 67
Index to Financial Statements............................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,500,000 SHARES
[LOGO OF EASTERN ENVIRONMENTAL SERVICES, INC. APPEARS HERE]
COMMON STOCK
-------
PROSPECTUS
, 1997
-------
SMITH BARNEY INC.
OPPENHEIMER & CO., INC.
SANDERS MORRIS MUNDY
PACIFIC GROWTH EQUITIES, INC.
VAN KASPER & COMPANY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses of the issuance and
distribution of the securities being registered hereby, all of which are being
borne by the Company.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 22,543
NASD filing fee................................................. 8,165
Nasdaq National Market listing fee.............................. 17,500
Legal fees and expenses......................................... 550,000*
Accounting fees and expenses.................................... 400,000*
Printing expenses............................................... 225,000*
Blue sky filing and counsel fees and expenses................... 10,000*
Transfer agent and Registrar fees and expenses.................. 5,000*
Miscellaneous expenses.......................................... 36,792*
----------
Total......................................................... $1,275,000*
==========
</TABLE>
- --------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL") provides, in general, that a corporation incorporated under the laws
of the State of Delaware, such as the Company, may indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending, or completed action, suit, or proceeding (other than an action by or
in the right of the corporation) by reason of the fact that such person is or
was a director, officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee, or
agent of another enterprise, against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit, or proceeding if
such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe such person's conduct was unlawful. In the case of an action
by or in the right of the corporation, a Delaware corporation may indemnify
any such person against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or
settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that
the court determines upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses.
Article Tenth, Paragraph (a) of the Certificate of Incorporation provides
that each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit, or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Company or is or was
serving at the request of the Company as a director, officer, employee, or
agent of another company or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
or not the basis of such proceeding is alleged action in an official capacity
as a director, officer, employee, or agent, or in any other capacity while
serving as a director, officer, employee, or agent, shall be indemnified and
held harmless by the Company to the fullest extent authorized by the DGCL, as
the same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment
II-1
<PAGE>
permits the Company to provide broader indemnification rights than said law
permitted the Company to provide prior to such amendment), against all
expense, liability, and loss (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith. Such
indemnification continues as to a person who has ceased to be a director,
officer, employee, or agent or in any other capacity while serving as a
director, officer, employee, or agent and inures to the benefit of his or her
heirs, executors, and administrators; provided, however, that except as
provided in Paragraph (b) of the Article Tenth (described below), the Company
shall indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by such person only if such proceeding
(or part thereof) was authorized by the board of directors of the Company.
Article Tenth Paragraph (a) further provides that such right to
indemnification shall be a contract right and shall include the right to be
paid by the Company the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that, if the DGCL
requires, the payment of such expenses incurred by a director or officer (in
his or her capacity as a director or officer and not in any other capacity in
which service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding shall be made only upon delivery to
the Company of an undertaking, by or on behalf of such director or officer, to
repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under the Certificate of
Incorporation or otherwise. The Company may, by action of its Board of
Directors, provide indemnification to employees and agents of the Company with
the same scope and effect as the foregoing indemnification of directors and
officers. The foregoing right to indemnification and advancement of expenses
is not exclusive.
Article Tenth, Paragraph (b) of the Certificate of Incorporation provides
further that if a claim described under Paragraph (a) of Article Tenth is not
paid in full by the Company within thirty days after a written claim has been
received by the Company, the claimant may at any time thereafter bring suit
against the Company to recover the unpaid amount of the claim and, if
successful, in whole or in part, the claimant shall be entitled to be paid
also the expense of prosecuting such claim. It shall be a defense to any such
action (other than an action brought to enforce a claim for expenses incurred
in defending any proceeding in advance of its final disposition where the
required undertaking, if any is required, has been tendered to the Company)
that the claimant has not met the standards of conduct which make it
permissible under the DGCL for the Company to indemnify the claimant for the
amount claimed, but the burden of providing such defense shall be on the
Company. Neither the failure of the Company (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant
is proper in the circumstances because he or she has met the applicable
standard of conduct set forth in the DGCL, nor an actual determination by the
Company (including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard or
conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
As permitted by Article Eleventh of the Certificate of Incorporation and
Section 145(g) of the DGCL, the directors and officers of the Company and its
subsidiaries are covered by policies of insurance under which they are
insured, within limits and subject to certain limitations, against certain
expenses in connection with the defense of actions, suits or proceedings, and
certain liabilities which might be imposed as a result of such actions, suits
or proceedings, in which they are parties by reason of being or having been
directors or officers; the Company is similarly insured, with respect to
certain payments it might be required to make to its directors or officers
under the applicable statutes and its charter provisions. The Company has also
entered into indemnification agreements with certain of its directors and
officers.
Reference is also made to the indemnification provisions of the Underwriting
Agreement filed as Exhibit 1 and to the first undertaking contained in Item 17
of this Registration Statement.
II-2
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1 Underwriting Agreement
23.1 Consent of Ernst & Young LLP
</TABLE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual reports pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(2) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 3
to Registration Statement on Form S-3 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Mt. Laurel, New Jersey on July 28,
1997.
Eastern Environmental Services, Inc.
/s/ Louis D. Paolino, Jr.
By: _________________________________
LOUIS D. PAOLINO, JR. CHAIRMAN OF
THE BOARD AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to Registration Statement on Form S-3 has been signed by the following
persons, in the capacities indicated, on July 28, 1997.
SIGNATURE TITLE
/s/ Louis D. Paolino, Jr. Chairman of the Board, President
- ------------------------------------- and Chief Executive Officer
LOUIS D. PAOLINO, JR. (Principal Executive Officer)
/s/ Gregory M. Krzemien Chief Financial Officer and
- ------------------------------------- Treasurer (Principal Financial
GREGORY M. KRZEMIEN and Accounting Officer)
George O. Moorehead* Director
- -------------------------------------
GEORGE O. MOOREHEAD
Kenneth C. Leung* Director
- -------------------------------------
KENNETH C. LEUNG
* Gregory M. Krzemien, pursuant to a Power of Attorney executed by each of the
directors and officers noted above and included in the signature page of the
initial filing of this Registration Statement, by signing his name hereto,
does hereby sign and execute this Amendment No. 3 to Registration Statement
on behalf of each of the persons noted above, in the capacities indicated,
and does hereby sign and execute this Amendment No. 3 to Registration
Statement on his own behalf, in the capacity indicated.
/s/ Gregory M. Krzemien
_____________________________________
GREGORY M. KRZEMIEN
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1 Underwriting Agreement
23.1 Consent of Ernst & Young LLP
</TABLE>
<PAGE>
EXHIBIT 1
4,500,000 Shares
EASTERN ENVIRONMENTAL SERVICES, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
, 1997
SMITH BARNEY INC.
OPPENHEIMER & CO., INC.
SANDERS MORRIS MUNDY
PACIFIC GROWTH EQUITIES, INC.
VAN KASPER & COMPANY
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Eastern Environmental Services, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell an aggregate of 4,500,000 shares ("Firm
Shares") of its common stock, $0.01 par value per share (the "Common Stock"), to
the several Underwriters named in Schedule I hereto (the "Underwriters"). The
Company also proposes to sell to the Underwriters, upon the terms and conditions
set forth in Section 2 hereof, up to an additional 675,000 shares (the
"Additional Shares") of Common Stock. The Firm Shares and, to the extent such
Additional Shares are issued, the Additional Shares are hereinafter collectively
referred to as the "Shares".
The Company has implemented an aggressive acquisition program in the waste
management industry. As a consequence, the Company is continually reviewing
acquisition opportunities and is in various stages of negotiations with certain
solid waste collection, transportation and disposal operations.
The Company wishes to confirm as follows its agreement with you (the
"Representatives") and the other several Underwriters on whose behalf you are
acting, in connection with the several purchases of the Shares by the
Underwriters.
<PAGE>
1. Registration Statement and Prospectus. The Company has prepared and
-------------------------------------
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-3 under the Act, including a
prospectus subject to completion relating to the Shares. The term "Registration
Statement" as used in this Agreement means such registration statement
(including all financial schedules and exhibits), as amended at the time it
becomes effective, or, if such registration statement became effective prior to
the execution of this Agreement, as supplemented or amended prior to the
execution of this Agreement. If it is contemplated, at the time this Agreement
is executed, that a post-effective amendment to the registration statement will
be filed and must be declared effective before the offering of the Shares may
commence, the term "Registration Statement" as used in this Agreement means the
registration statement as amended by said post-effective amendment. The term
"Prospectus" as used in this Agreement means the prospectus in the form included
in the Registration Statement, or, if the prospectus included in the
Registration Statement omits information in reliance on Rule 430A under the Act
and such information is included in a prospectus filed with the Commission
pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this
Agreement means the prospectus in the form included in the Registration
Statement as supplemented by the addition of the Rule 430A information contained
in the prospectus filed with the Commission pursuant to Rule 424(b). The term
"Prepricing Prospectus" as used in this Agreement means the prospectus subject
to completion in the form included in the registration statement at the time of
the initial filing of the registration statement with the Commission, and as
such prospectus shall have been amended from time to time prior to the date of
the Prospectus. Any reference in this Agreement to the registration statement,
the Registration Statement, any Prepricing Prospectus or the Prospectus shall be
deemed to refer to and include the documents incorporated by reference therein
pursuant to Item 12 of Form S-3 under the Act, as of the date of the
registration statement, the Registration Statement, such Prepricing Prospectus
or the Prospectus, as the case may be, and any reference to any amendment or
supplement to the registration statement, the Registration Statement, any
Prepricing Prospectus or the Prospectus shall be deemed to refer to and include
any documents filed after such date under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") which, upon filing, are incorporated by
reference therein, as required by paragraph (b) of Item 12 of Form S-3. As used
herein, the term "Incorporated Documents" means the documents which at the time
are incorporated by reference in the registration statement, the Registration
Statement, any Prepricing Prospectus, the Prospectus, or any amendment or
supplement thereto.
2. Agreements to Sell and Purchase. Subject to such adjustments as you
-------------------------------
may determine in order to avoid fractional shares, the Company hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
each Underwriter and, upon the basis of the representations, warranties and
agreements of the Company herein contained and subject to all the terms and
conditions set forth herein, each Underwriter agrees, severally and not jointly,
to purchase from the Company, at a purchase price of $_____ per Share (the
"purchase price per share"), the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I hereto (or such number of Firm Shares
increased as set forth in Section 10 hereof).
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The Company also agrees, subject to all the terms and conditions set forth
herein, to sell to the Underwriters, and, upon the basis of the representations,
warranties and agreements of the Company herein contained and subject to all the
terms and conditions set forth herein, the Underwriters shall have the right to
purchase from the Company, at the purchase price per share, pursuant to an
option (the "over-allotment option") which may be exercised at any time and from
time to time prior to 9:00 P.M., New York City time, on the 30th day after the
date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a
holiday, on the next business day thereafter when the New York Stock Exchange is
open for trading), up to an aggregate of 675,000 Additional Shares from the
Company. Additional Shares may be purchased only for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. Upon
any exercise of the over-allotment option, each Underwriter, severally and not
jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments as you may determine in order to avoid fractional
shares) which bears the same proportion to the aggregate number of Additional
Shares to be purchased by the Underwriters as the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto (or such number
of Firm Shares increased as set forth in Section 10 hereof) bears to the
aggregate number of Firm Shares.
3. Terms of Public Offering. The Company has been advised by you that the
------------------------
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Subject to Section 8
-------------------------------------------
hereof, delivery to the Underwriters of and payment by the Underwriters for the
Firm Shares shall be made at the office of Smith Barney Inc., 388 Greenwich
Street, New York, NY 10013, at 10:00 A.M., New York City time, on
, 1997 (the "Closing Date"). The place of closing for the Firm Shares and the
Closing Date may be varied by agreement between you and the Company.
Subject to Section 8 hereof, delivery to the Underwriters of and payment
for any Additional Shares to be purchased by the Underwriters shall be made at
the aforementioned office of Smith Barney Inc. at such time on such date (the
"Option Closing Date"), which may be the same as the Closing Date but shall in
no event be earlier than the Closing Date nor earlier than two nor later than
ten business days after the giving of the notice hereinafter referred to, as
shall be specified in a written notice from you on behalf of the Underwriters to
the Company of the Underwriters' determination to purchase a number, specified
in such notice, of Additional Shares. The place of closing for any Additional
Shares and the Option Closing Date for such Shares may be varied by agreement
between you and the Company.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 9:30 A.M., New York City time, on the second
business day preceding the Closing Date or any Option Closing Date, as the case
may be. Such certificates shall be made available to you in New York City for
inspection and packaging not later than 9:30 A.M., New York City time, on the
business day next
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preceding the Closing Date or the Option Closing Date, as the case may be. The
certificates evidencing the Firm Shares and any Additional Shares to be
purchased hereunder shall be delivered to you on the Closing Date or the Option
Closing Date, as the case may be, against payment of the purchase price therefor
in immediately available funds.
5. Agreements of the Company. The Company agrees with the several
-------------------------
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
Company will endeavor to cause the Registration Statement or such post-effective
amendment to become effective as soon as possible and will advise you promptly
and, if requested by you, will confirm such advice in writing, when the
Registration Statement or such post-effective amendment has become effective.
(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information; (ii) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iii) within the period of time referred to in paragraph (f)
below, of any change in the Company's condition (financial or other), business,
prospects, properties, net worth or results of operations, or of the happening
of any event or any new information, which makes any statement of a material
fact made in the Registration Statement or the Prospectus (as then amended or
supplemented) untrue or which requires the making of any additions to or changes
in the Registration Statement or the Prospectus (as then amended or
supplemented) in order to state a material fact required by the Act to be stated
therein or necessary in order to make the statements therein not misleading, or
of the necessity to amend or supplement the Prospectus (as then amended or
supplemented) to comply with the Act or any other law. In addition, the Company
shall, during any period in which a Prospectus is required to be delivered,
advise you promptly of any agreement in principle, whether or not reduced to
writing, and of any definitive agreement looking to the acquisition or
disposition of any assets or business. If at any time the Commission shall issue
any stop order suspending the effectiveness of the Registration Statement, the
Company will make every reasonable effort to obtain the withdrawal of such order
at the earliest possible time.
(c) The Company will furnish to you, without charge, (i) six signed
copies of the registration statement as originally filed with the Commission and
of each amendment thereto, including financial statements and all exhibits
thereto, (ii) such number of conformed copies of the registration statement as
originally filed with the Commission and of each amendment thereto, but without
exhibits, as you may request, (iii) such number of copies of the Incorporated
Documents, without exhibits, as you may request, and (iv) six copies of the
exhibits to the Incorporated Documents.
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(d) The Company will not file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus or, prior to the
end of the period of time referred to in the first sentence in subsection (f)
below, file any document which, upon filing becomes an Incorporated Document, of
which you shall not previously have been advised or to which, after you shall
have received a copy of the document proposed to be filed, you shall reasonably
object.
(e) Prior to the execution and delivery of this Agreement, the
Company has delivered to you, without charge, in such quantities as you have
requested, copies of each form of the Prepricing Prospectus. The Company
consents to the use, in accordance with the provisions of the Act and with the
securities or Blue Sky laws of the jurisdictions in which the Shares are offered
by the several Underwriters and by dealers, prior to the date of the Prospectus,
of each Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the opinion of
counsel for the Underwriters a prospectus is required by the Act to be delivered
in connection with sales by any Underwriter or dealer, the Company will
expeditiously deliver to each Underwriter and each dealer, without charge, as
many copies of the Prospectus (and of any amendment or supplement thereto) as
you may request. The Company consents to the use of the Prospectus (and of any
amendment or supplement thereto) in accordance with the provisions of the Act
and with the securities or Blue Sky laws of the jurisdictions in which the
Shares are offered by the several Underwriters and by all dealers to whom Shares
may be sold, both in connection with the offering and sale of the Shares and for
such period of time thereafter as the Prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer. If during such
period of time any event shall occur that in the judgment of the Company or in
the opinion of the Underwriters is required to be set forth in the Prospectus
(as then amended or supplemented) or should be set forth therein in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, or if it is necessary to supplement or amend the
Prospectus (or to file under the Exchange Act any document which, upon filing,
becomes an Incorporated Document) to comply with the Act or any other law, the
Company will forthwith prepare and, subject to the provisions of paragraph (d)
above, file with the Commission an appropriate supplement or amendment thereto
(or to such document), and will expeditiously furnish to the Underwriters and
dealers a reasonable number of copies thereof. In the event that the Company and
you, as Representatives of the several Underwriters, agree that the Prospectus
should be amended or supplemented, the Company, if requested by you, will
promptly issue a press release announcing or disclosing the matters to be
covered by the proposed amendment or supplement.
(g) The Company will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the Shares
for offering and sale by the several Underwriters and by dealers under the
securities or Blue Sky laws of such domestic and foreign jurisdictions as you
may designate and will file such consents to service of process or other
documents necessary or appropriate in order to effect such registration or
qualification; provided that
5
<PAGE>
in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which would
subject it to service of process in suits, other than those arising out of the
offering or sale of the Shares, in any jurisdiction where it is not now so
subject.
(h) The Company will make generally available to its security
holders a consolidated earnings statement, which need not be audited, covering a
twelve-month period commencing after the effective date of the Registration
Statement and ending not later than 15 months thereafter, as soon as practicable
after the end of such period, which consolidated earnings statement shall
satisfy the provisions of Section ll(a) of the Act.
(i) During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to stockholders or filed with the Commission, and (ii) from time to time
such other information concerning the Company as you may reasonably request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 hereof or by notice given by you terminating this
Agreement pursuant to Section 10 or Section 11 hereof) or if this Agreement
shall be terminated by the Underwriters because of any failure or refusal on the
part of the Company to comply with the terms or fulfill any of the conditions of
this Agreement, the Company agrees to reimburse the Representatives for all
reasonable out-of-pocket expenses (including reasonable fees and expenses of
counsel for the Underwriters) incurred by you in connection herewith.
(k) The Company will apply the net proceeds from the sale of the
Shares substantially in accordance with the description set forth in the
Prospectus.
(l) If Rule 430A of the Act is employed, the Company will timely
file the Prospectus pursuant to Rule 424(b) under the Act and will advise you of
the time and manner of such filing.
(m) Except as provided in this Agreement, the Company will not sell,
contract to sell or otherwise dispose of any Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, or grant any
options or warrants to purchase Common Stock, for a period of 120 days after
the date of the Prospectus (the "120-Day Lock-Up Period"), without the prior
written consent of Smith Barney Inc., except that the Company may (i) issue
shares of Common Stock ("Acquisition Shares") in connection with additional
acquisitions so long as the purchaser of such Acquisition Shares agrees to be
bound by a lock-up letter in the same form as those being delivered to you
pursuant to paragraph (n) below pursuant to which such purchaser agrees with the
Company not to sell, offer to sell, solicit an offer to buy, contract to sell,
grant any option to purchase, or otherwise transfer or dispose of, any such
Acquisition Shares at any time before the expiration of the period described in
clause (ii) of paragraph (q) below and that the
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<PAGE>
certificates evidencing such Acquisition Shares shall bear a legend to such
effect, (ii) grant options and/or warrants to purchase shares of Common Stock in
connection with additional acquisitions that are exercisable no earlier than the
expiration of the 120-Day Lock-up Period and (iii) issue shares of Common Stock
pursuant to the exercise of options outstanding on the date hereof under the
Company's 1987 Stock Option Plan, 1991 Stock Option Plan and 1996 Stock Option
Plan and warrants outstanding on the date hereof, as described in the
Registration Statement. The Company further agrees for the express benefit of
the Underwriters that, during the 120-Day Lock-Up Period, it will not, without
the prior written consent of Smith Barney Inc., waive any provision of any
acquisition or related agreement imposing restrictions on the transfer or other
disposition of shares of Common Stock or securities convertible into or
exercisable or exchangeable for Common Stock and will take reasonable steps to
cause its transfer agent to enforce any such provision so as to limit the
transfer or other disposition of shares of Common Stock or securities
convertible into or exercisable or exchangeable for Common Stock during the 120-
Day Lock-Up Period.
(n) The Company has furnished or will furnish to you "lock-up"
letters, (i) in the form of Exhibit A hereto signed by each of its officers and
directors identified on Exhibit A-1 hereto and (ii) in the form of Exhibit B
hereto signed by each stockholder identified on Exhibit B-1 hereto.
(o) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, the Company has not taken, nor will it take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(p) The Company will cause the shares of Common Stock which it
agrees to sell under this Agreement to be listed, subject to notice of issuance,
on the Nasdaq National Market on or before the Closing Date.
(q) The Company will not file any registration statement under the
Act seeking to register any Common Stock, any options or warrants, or any other
securities convertible into or exercisable or exchangeable for Common Stock for
a period of 180 days following the Closing Date, except that the Company may (i)
file a shelf registration statement seeking to register for resale up to
5,825,694 shares of Common Stock not earlier than 15 days following the Closing
Date; provided, however that the Company shall not cause or otherwise permit
such shelf registration statement to be declared effective at any time prior to
the 45th day following the Closing Date; and (ii) file a shelf registration
statement not earlier than 30 days after the date of the Prospectus seeking to
register up to 2,000,000 shares of Common Stock for issuance in connection with
future acquisitions; provided, however, that the Company shall not issue any
-------- -------
such Acquisition Shares unless the purchaser thereof agrees not to sell, offer
to sell, solicit an offer to buy, contract to sell, grant any option to
purchase, or otherwise transfer or dispose of any such Acquisition Shares at any
time prior to the date which is 180 days following the effective date of such
shelf registration statement without the prior written consent of Smith Barney
Inc.
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6. Representations and Warranties of the Company. The Company represents
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and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement thereto,
or filed pursuant to Rule 424 under the Act, complied when so filed in all
material respects with the provisions of the Act. The Commission has not issued
any order preventing or suspending the use of any Prepricing Prospectus.
(b) The Company and the transactions contemplated by this Agreement
meet the requirements for using Form S-3 under the Act. The Registration
Statement in the form in which it became or becomes effective and also in such
form as it may be when any post-effective amendment thereto shall become
effective and the Prospectus and any supplement or amendment thereto when filed
with the Commission under Rule 424(b) under the Act complied or will comply with
the provisions of the Act and did not or will not at any such times contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except that this representation and warranty does not apply to statements in or
omissions from the Registration Statement or the Prospectus or any amendment or
supplement thereto made in reliance upon and in conformity with information
relating to any Underwriter furnished to the Company in writing by or on behalf
of any Underwriter through you expressly for use therein.
(c) The Incorporated Documents heretofore filed, when they were
filed (or, if any amendment with respect to any such document was filed, when
such amendment was filed), conformed with the requirements of the Exchange Act
and the rules and regulations thereunder, and any further Incorporated Documents
so filed will, when they are filed, conform with the requirements of the
Exchange Act and the rules and regulations thereunder; no such document when it
was filed (or, if an amendment with respect to any such document was filed, when
such amendment was filed), contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading; and no such further
document, when it is filed, will contain an untrue statement of a material fact
or will omit to state a material fact required to be stated therein or necessary
in order to make the statements therein not misleading.
(d) The Company has an authorized, issued and outstanding
capitalization as set forth in the Registration Statement and the Prospectus.
All the outstanding shares of capital stock of the Company have been duly
authorized and validly issued, fully paid and nonassessable by the Company and
free of and not issued in violation of any preemptive or similar rights; the
Shares to be issued and sold by the Company have been duly authorized and, when
issued and delivered to the Underwriters against payment therefor in accordance
with the terms hereof, will be validly issued, fully paid and nonassessable by
the Company and will be free of and will not have been issued in violation of
any preemptive or other similar rights. Except as described in the Prospectus,
(a) there are no outstanding options, warrants or other rights calling for the
issuance of, and there are no commitments to issue any shares of, capital stock
of the Company or any security convertible into
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or exchangeable or exercisable for capital stock of the Company, and (b) there
is no holder of any securities of the Company or any other person who has the
right, contractual or otherwise, to cause the Company to sell or otherwise issue
to him or her, or permit him or her to underwrite the sale of, any of the
Shares. The capital stock of the Company conforms to the description thereof in
the Registration Statement and the Prospectus.
(e) The Company is a corporation duly organized and validly existing
in good standing under the laws of the State of Delaware with full corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus, and is
duly registered and qualified to conduct its business and is in good standing in
each jurisdiction or place where the nature of its properties or the conduct of
its business requires such registration or qualification, except where the
failure so to register or qualify does not have a material adverse effect on the
condition (financial or other), business, properties, net worth or results of
operations of the Company and the Subsidiaries (as hereinafter defined) taken as
a whole.
(f) All the Company's subsidiaries, other than those which are
inactive, have no business or operations of any kind, have no assets or
liabilities, have no value, or nominal value, for tax and accounting purposes
and are permitted to be omitted from the list of subsidiaries included as an
exhibit to the Registration Statement pursuant to Item 601(b)(21)(ii) of
Regulation S-K (collectively, the "Subsidiaries"), are identified in an exhibit
to the Registration Statement. Each Subsidiary is a corporation duly organized,
validly existing and in good standing in the jurisdiction of its incorporation,
with full corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration Statement and the
Prospectus, and is duly qualified to conduct its business and is in good
standing in each jurisdiction or place where the nature of its properties or the
conduct of its business requires such qualification, except where the failure so
to qualify would not have material adverse effect on the condition (financial or
other), business, properties, net worth or results of operations of such
Subsidiary; except as described in the Registration Statement and Prospectus,
all the outstanding shares of capital stock of each of the Subsidiaries have
been duly authorized and validly issued, are fully paid and nonassessable, and
are owned by the Company free and clear of any lien, adverse claim, security
interest, equity or other encumbrance. Other than with respect to the
Subsidiaries, the Company does not have, directly or indirectly, any ownership
interest or agreement or agreement in principle to acquire any ownership
interest in any corporation, partnership, joint venture, association or other
business organization.
(g) Each company whose stock or assets is proposed to be acquired by
the Company pursuant to a signed, definitive acquisition agreement on the date
hereof is hereinafter referred to as an "Acquiree Company." Each acquisition
agreement to which the Company is a party on the date hereof relating to an
Acquiree Company is listed on Schedule II hereto (collectively, the "Acquisition
Agreements"). The execution and delivery of, and the performance by the Company
of its obligations under, each of the Acquisition Agreements) have been duly and
validly authorized by the Company and each Acquisition Agreement has been duly
authorized, executed and delivered by the Company and, to the knowledge of the
Company, constitutes the legal, valid and binding
9
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agreement of each other party thereto, enforceable against such parties in
accordance with its terms, except as enforceability thereof may be subject to
the effect of (i) any applicable bankruptcy, fraudulent conveyance, insolvency,
reorganizations, moratorium or other laws affecting creditors' rights generally,
and (ii) general principles of equity (regardless of whether such enforceability
is considered in a proceeding in equity of at law).
(h) There are no legal or governmental proceedings pending or, to
the knowledge of the Company, threatened, against the Company, any of the
Subsidiaries or any of the Acquiree Companies or to which the Company, any of
the Subsidiaries or the Acquiree Companies, or to which any of their respective
properties is subject that are required to be described in the Registration
Statement or the Prospectus but are not described as required, and there are no
agreements, contracts, indentures, leases or other instruments that are required
to be described in the Registration Statement or to any Incorporated Document or
the Prospectus or to be filed as an exhibit to the Registration Statement or to
any Incorporated Document that are not described or filed as required by the Act
or the Exchange Act.
(i) Neither the Company nor any of the Subsidiaries is in violation
of its certificate or articles of incorporation or by-laws, or other
organizational documents, or of any statute, law, ordinance, administrative or
governmental rule or regulation applicable to the Company or any Subsidiaries or
of any judgment, injunction, order or decree of any court or governmental agency
or body having jurisdiction over the Company or the Subsidiaries, or in default
in any material respect in the performance of any obligation, agreement or
condition contained in any bond, debenture, note or any other evidence of
indebtedness or in any material agreement, indenture, lease or other instrument
to which the Company or any of the Subsidiaries is a party or by which any of
them or any of their respective properties may be bound.
(j) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement by the Company nor the consummation by
the Company of the transactions contemplated hereby (A) requires any consent,
approval, authorization or other order of or registration or filing with, any
court, regulatory body, administrative agency or other governmental body, agency
or official (except such as may be required for the registration of the Shares
under the Act and the Exchange Act and compliance with the securities or Blue
Sky laws of various jurisdictions, all of which have been or will be effected in
accordance with this Agreement) or conflicts or will conflict with or
constitutes or will constitute as of the date hereof and on the Closing Date and
any Option Closing Date a breach of, or a default under, the certificate or
articles of incorporation or by-laws, or other organizational documents, of the
Company or any of the Subsidiaries or (B) conflicts or will conflict with or
constitutes or will constitute as of the date hereof and on the Closing Date and
any Option Closing Date a breach of, or a default under, any agreement,
indenture, lease or other instrument to which the Company or any of the
Subsidiaries is a party or by which any of them or any of their respective
properties may be bound, or violates or will violate as of the date hereof and
on the Closing Date and any Option Closing Date any statute, law, regulation or
filing or judgment, injunction, order or decree applicable to the Company or any
of the Subsidiaries or any of their respective properties, or as of the date
hereof and on the Closing Date
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and any Option Closing Date will result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or any of
the Subsidiaries pursuant to the terms of any agreement or instrument to which
any of them is a party or by which any of them may be bound or to which any of
the property or assets of any of them is subject.
(k) All of the accountants who have certified or shall certify any
of the financial statements included or incorporated by reference in the
Registration Statement and the Prospectus (or any amendment or supplement
thereto) are independent public accountants as required by the Act.
(l) The historical consolidated financial statements, together with
the related schedules and notes, included or incorporated by reference in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) and the supplemental consolidated financial statements, together with
the related schedules and notes, included or incorporated by reference in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto), present fairly in all material respects the consolidated financial
position, results of operations, stockholders' equity (and deficit) and cash
flows of the Company and its Subsidiaries [and of one or more of the Acquiree
Companies, as the case may be,] on the basis stated in the Registration
Statement and in such Incorporated Document at the respective dates or for the
respective periods to which they apply. The historical financial statements,
together with the related schedules and notes, contained in each Current Report
on Form 8-K, as amended, included among the Incorporated Documents presented
fairly, as of the date of such Report, the separate financial position, results
of operations, stockholders equity (and deficit) and cash flows of the subject
company on the basis stated in such Report and for the respective periods to
which they apply; all such financial statements and related schedules and notes
have been prepared in accordance with generally accepted accounting principles
in the United States consistently applied throughout the periods involved,
except as disclosed therein; and the summary and selected consolidated financial
and statistical information and data included in the Registration Statement and
the Prospectus (and any amendment or supplement thereto) present fairly the
information shown therein and such data have been compiled on a basis consistent
with the financial statements presented therein and the books and records of the
Company, and its Subsidiaries. The pro forma consolidated financial statements
of the Company and its Subsidiaries, together with the related schedules and
notes, as set forth in the Registration Statement and the Prospectus (and any
amendment or supplement thereto), present fairly the information shown therein,
have been prepared in accordance with the applicable provisions of Article 11 of
Regulation S-X promulgated by the Commission with respect to pro forma financial
statements and have been properly compiled on the pro forma bases described
therein and, in the opinion of the Company, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein, and the other financial and statistical information and data included
in the Registration Statement and the Prospectus (and any amendment or
supplement thereto) are accurately presented and prepared on a basis consistent
with such financial statements and the books and records of the Company and the
Subsidiaries.
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(m) The execution and delivery of, and the performance by the
Company of its obligations under, this Agreement have been duly and validly
authorized by the Company, and this Agreement has been duly executed and
delivered by the Company and constitutes the valid and legally binding agreement
of the Company, enforceable against the Company in accordance with its terms,
except that (i) enforceability may be subject to the effect of any applicable
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium or
other laws affecting the creditors' rights generally and general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law), and (ii) rights to indemnity and contribution hereunder
may be limited by Federal or state securities laws and principles of public
policy.
(n) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), neither
the Company nor any of the Subsidiaries has incurred any liability or
obligation, direct or contingent, or entered into any transaction, not in the
ordinary course of business, that is material to the Company and the
Subsidiaries taken as a whole, and there has not been any change in the capital
stock, or material increase in the short-term debt or long-term debt, of the
Company or any of the Subsidiaries or any material adverse change, or any
development involving or which may reasonably be expected to involve, a
prospective material adverse effect on the condition (financial or other),
business, properties, net worth or results of operations of the Company and the
Subsidiaries taken as a whole.
(o) Each of the Company and the Subsidiaries has good and marketable
title to all property (real and personal) described in the Registration
Statement and the Prospectus or in a document filed as an exhibit to the
Registration Statement as being owned by it, free and clear of all liens,
claims, security interests or other encumbrances, except such as are described
in the Registration Statement and the Prospectus or in a document filed as an
exhibit to the Registration Statement or which are not material to the Company
and/or the applicable Subsidiary, and all the property described in the
Prospectus as being held under lease by the Company or any Subsidiary is held by
the Company or such Subsidiary under valid, subsisting and enforceable leases.
(p) The Company has not distributed and, prior to the later to occur
of (i) the Closing Date and (ii) completion of the distribution of the Shares,
will not distribute any offering material in connection with the offering and
sale of the Shares other than the Registration Statement, the Prepricing
Prospectus, the Prospectus or other materials, if any, permitted by the Act.
(q) The Company and each of the Subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits") as are necessary to own its respective properties and to
conduct its business in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus and except where the
failure to have such permits would not have a material adverse effect on the
condition (financial or other), business, properties, net worth or results of
operations of the Company and the Subsidiaries taken as a whole; the Company and
each of the Subsidiaries has fulfilled and performed all its
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material obligations with respect to such permits and no event has occurred
which allows, or after notice or lapse of time would allow, revocation or
termination thereof or results, or after notice or lapse of time would result,
in any other material impairment of the rights of the holder of any such permit,
subject in each case to such qualification as may be set forth in the
Prospectus; and, except as described in the Prospectus, none of such permits
contains any restriction that is materially burdensome to the Company or any of
the Subsidiaries.
(r) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(s) Neither the Company nor any of its Subsidiaries nor any employee
or agent of the Company or any Subsidiary has made any payment of funds of the
Company or any Subsidiary or received or retained any funds in violation of any
statute, law, rule or regulation, which payment, receipt or retention of funds
is of a character required to be disclosed in the Prospectus.
(t) The Company and each of the Subsidiaries have filed in a timely
manner all tax returns required to be filed with any taxing authority, which
returns are complete and correct and, to the best knowledge of the Company, are
not the subject of any audit proceedings, and neither the Company nor any
Subsidiary is in default in the payment of any taxes which were payable pursuant
to said returns or any assessments with respect thereto, except for such taxes
as are being contested in good faith and as to which adequate reserves have been
provided.
(u) The Company and each of the Subsidiaries have conducted their
respective businesses in compliance with all applicable Federal, state,
provincial, foreign and local laws, regulations, orders, codes and common law
including, without limitation, those promulgated under the Resource Conservation
and Recovery Act of 1976 ("RCRA"), including the Subtitle D Regulations, the
Federal Water Pollution Control Act of 1972 (the "Clean Water Act"), the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the Clean Air Act, and the Occupational Safety and Health Act
("OSHA") and those laws, regulations, orders, codes and common law applicable to
protection of the environment, waste management and waste disposal, health and
safety (collectively, "Environmental Laws") and, to the knowledge of the
Company, under current law there are no existing circumstances that would
prevent, interfere with, or materially increase the cost of the Company's
compliance with RCRA, the Subtitle D Regulations, the Clean Water Act, CERCLA,
OSHA or any other Environmental Laws in the future, except for any lack of
compliance or the existence of any such circumstance as would not have,
individually or in the aggregate, a material adverse effect on the condition
(financial or other), business, properties, net worth or results of operations
of the Company and the Subsidiaries taken as a whole.
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(v) Except as set forth in the Registration Statement and the Prospectus,
there is no claim under any of Environmental Law, including common law (an
"Environmental Claim"), pending or, to the knowledge of the Company, threatened
against the Company or any of the Subsidiaries, and, to the knowledge of the
Company, no Environmental Claim is pending or threatened against any of the
Acquiree Companies that could have a material adverse effect on the condition
(financial or other), business, properties, net worth or results of operations
of the Company and the Subsidiaries, taken as a whole, and, to the Company's
knowledge, there are no past or present actions, activities, circumstances,
events or incidents, including, without limitation, releases of any material
into the environment, that could reasonably be expected to form the basis of any
such claim against the Company, any of the Subsidiaries or any of the Acquiree
Companies.
(w) The Company and each of the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are customary in the businesses in which they are engaged; (ii) all
policies of insurance and fidelity or surety bonds insuring the Company or any
of its Subsidiaries or their respective businesses, assets, employees, officers
and directors are in full force and effect; (iii) the Company and its
Subsidiaries are in compliance with the terms of such policies and instruments
in all material respects; and (iv) there are no claims by the Company or any of
its Subsidiaries under any such policy or instrument as to which any insurance
company is denying liability or defending under a reservation of rights clause.
(x) Each holder of a security of the Company that has any right to require
registration of shares of Common Stock or any other security of the Company
because of the filing of the Registration Statement or consummation of the
transactions contemplated by this Agreement has been notified of the Company's
intent to file the Registration Statement with the Commission and has agreed in
writing to waive such holder's registration rights with respect to the public
offering contemplated hereby.
(y) The Company and the Subsidiaries own or possess valid and enforceable
rights to use all patents, trademarks, trademark registrations, service marks,
service mark registrations, trade names, copyrights, licenses, inventions, trade
secrets and rights described in the Prospectus as being owned by them or any of
them or material to the conduct of their respective businesses, and the Company
is not aware of any claim to the contrary or any challenge by any other person
or entity to the rights of the Company and the Subsidiaries with respect to the
foregoing or of any infringement by any other person or entity with respect to
the foregoing.
(z) The Company is not now, and after sale of the Shares to be sold by it
hereunder and application of the net proceeds from such sale as described in the
Prospectus under the caption "Use of Proceeds" will not be, an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
(aa) The Shares have been approved for quotation, upon notice of issuance,
on the Nasdaq National Market.
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7. Indemnification and Contribution. (a) The Company agrees to indemnify
--------------------------------
and hold harmless each of you and each other Underwriter and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act from and against any and all losses, claims,
damages, liabilities and expenses (including, without limitation, reasonable
costs of investigation and reasonable attorneys fees and expenses) arising out
of, based upon or relating to any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or in any Prepricing
Prospectus or the Prospectus or in any amendment or supplement thereto, or
arising out of, based upon or relating to any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or expenses arise out of or are based upon any untrue
statement or omission of a material fact or alleged untrue statement or omission
of a material fact which has been made therein or omitted therefrom in reliance
upon and in conformity with the information relating to such Underwriter
furnished in writing to the Company by or on behalf of any Underwriter through
you expressly for use in connection therewith (it being understood and agreed
-- ----- ---------- ----------
that the only information furnished by any Underwriter consists of the
information described as such in Section 12 hereof); provided, however, that the
-------- -------
indemnification contained in this paragraph (a) with respect to any Prepricing
Prospectus shall not inure to the benefit of any Underwriter (or to the benefit
of any person controlling such Underwriter) on account of any such loss, claim,
damage, liability or expense arising from the sale of the Shares by such
Underwriter to any person if a copy of the Prospectus shall not have been
delivered or sent to such person within the time required by the Act, and the
untrue statement or alleged untrue statement or omission or alleged omission of
a material fact contained in such Prepricing Prospectus was corrected in the
Prospectus, provided that the Company has delivered the Prospectus to the
several Underwriters in requisite quantity on a timely basis to permit such
delivery or sending. The foregoing indemnity agreement shall be in addition to
any liability which the Company may otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company, such Underwriter or such
controlling person shall promptly notify the Company and the Company shall
assume the defense thereof, including the employment of counsel which shall be
of nationally recognized standing and satisfactory to Smith Barney Inc. and
payment of all fees and expenses. The Company shall not agree to settle any
such action, suit or proceeding without the written consent of Smith Barney
Inc., which consent shall not be unreasonably withheld. Such Underwriter or any
such controlling person shall have the right to employ separate counsel in any
such action, suit or proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Underwriter or such controlling person unless (i) the Company agreed in writing
to pay such fees and expenses, (ii) the Company failed promptly to assume the
defense and employ counsel, or (iii) the named parties to any such action, suit
or proceeding (including any impleaded parties) include both such Underwriter or
such controlling person and the Company and such Underwriter or such controlling
person shall have been advised by its counsel that representation of such
indemnified party and the Company by the same counsel would be inappropriate
under applicable standards of professional conduct (whether or not such
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representation by the same counsel has been proposed) due to actual or potential
differing interests between them (in which case the Company shall not have the
right to assume the defense of such action, suit or proceeding on behalf of such
Underwriter or such controlling person). It is understood, however, that the
Company shall, in connection with any one such action, suit or proceeding or
separate but substantially similar or related actions, suits or proceedings in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of only one
separate firm of attorneys (in addition to any local counsel) at any time for
all such Underwriters and controlling persons having actual or potential
differing interests, which firm shall be designated in writing by Smith Barney
Inc., and that all such fees and expenses shall be reimbursed promptly as they
are incurred. The Company shall not be liable for any settlement of any such
action, suit or proceeding effected without its written consent, but if settled
with such written consent, or if there be a final judgment for the plaintiff in
any such action, suit or proceeding, the Company agrees to indemnify and hold
harmless any Underwriter, to the extent provided in the preceding paragraph, and
any such controlling person from and against any loss, claim, damage, liability
or expense by reason of such settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, and any person who controls the Company within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, to the same extent as the
foregoing indemnity from the Company to each Underwriter, but only with respect
to information relating to such Underwriter furnished in writing by or on behalf
of such Underwriter expressly for use in the Registration Statement, the
Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto
(it being understood and agreed that the only information furnished by any
-- ----- ---------- ----------
Underwriter consists of the information described as such in Section 12 hereof).
If any action, suit or proceeding shall be brought against the Company, any of
its directors, any such officer, or any such controlling person based on the
Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto, and in respect of which indemnity may be sought
against any Underwriter pursuant to this paragraph (c), such Underwriter shall
have the rights and duties given to the Company by paragraph (b) above (except
that if the Company shall have assumed the defense thereof such Underwriter
shall not be required to do so, but may employ separate counsel therein and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at such Underwriter's expense), and the Company, its directors, any
such officer, and any such controlling person shall have the rights and duties
given to the Underwriters by paragraph (b) above. The foregoing indemnity
agreement shall be in addition to any liability which any Underwriter may
otherwise have.
(d) If the indemnification provided for in this Section 7 is unavailable to
an indemnified party under paragraphs (a) or (c) hereof in respect of any
losses, claims, damages, liabilities or expenses referred to therein, then an
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company on
the one hand and the Underwriters on the
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other hand from the offering of the Shares, or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and the
Underwriters on the other in connection with the statements or omissions that
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative benefits received by
the Company on the one hand and the Underwriters on the other shall be deemed to
be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus; provided that, in the
event that the Underwriters shall have purchased any Additional Shares
hereunder, any determination of the relative benefits received by the Company,
or the Underwriters from the offering of the Shares shall include the net
proceeds (before deducting expenses) received by the Company, and the
underwriting discounts and commissions received by the Underwriters, from the
sale of such Additional Shares, in each case computed on the basis of the
respective amounts set forth in the notes to the table on the cover page of the
Prospectus. The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or by the Underwriters on the other hand
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
(e) The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by a pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in paragraph (d) above. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages,
liabilities and expenses referred to in paragraph (d) above shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
any claim or defending any such action, suit or proceeding. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price of the Shares
underwritten by it and distributed to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
indemnify or contribute, as applicable, pursuant to this Section 7 are several
in proportion to the respective numbers of Firm Shares set forth opposite their
names in Schedule I hereto (or such numbers of Firm Shares increased as set
forth in Section 10 hereof) in relation to the aggregate number of Firm Shares
and not joint.
(f) No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened action,
suit or proceeding in
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respect of which any indemnified party is or could have been a party and
indemnity could have been sought hereunder by such indemnified party, unless
such settlement includes an unconditional release of such indemnified party from
all liability on claims that are the subject matter of such action, suit or
proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any person
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter or any person controlling any Underwriter, or to the Company, its
directors or officers, or any person controlling the Company, shall be entitled
to the benefits of the indemnity, contribution and reimbursement agreements
contained in this Section 7.
8. Conditions of Underwriters' Obligations. The several obligations of
---------------------------------------
the Underwriters to purchase the Firm Shares hereunder are subject to the
following conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have been
timely made; no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceeding for that purpose shall have
been instituted or, to the knowledge of the Company or any Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change, or any development involving a prospective
change, in or affecting the condition (financial or other), business,
properties, net worth, or results of operations of the Company or the
Subsidiaries not contemplated by the Prospectus, which in your opinion, as
Representatives of the several Underwriters, would adversely affect the market
for the Shares, or (ii) any event or development relating to or involving the
Company, any Subsidiary or, to the knowledge of the Company, any Acquiree
Company or any officer or director of the Company or any Subsidiary or, to the
knowledge of the Company, any Acquiree Company which makes any statement made in
the Prospectus an untrue statement of a material fact or which, in the opinion
of the Company and its counsel or the Underwriters and their counsel, requires
the making of any addition to or change
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in the Prospectus in order to state a material fact required by the Act or any
other law to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, if amending or supplementing the Prospectus to reflect such event or
development would, in your opinion, as Representatives of the several
Underwriters, adversely affect the market for the Shares.
(c) You shall have received on the Closing Date, an opinion of Drinker
Biddle & Reath LLP, counsel for the Company, dated the Closing Date and
addressed to you, as `Representatives of the several Underwriters, to the effect
that:
(i) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Delaware, with full
corporate power to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus (and any
amendment or supplement thereto as of the date of such opinion), and the Company
is duly qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or qualify does not have a material adverse effect on the
condition (financial or other), business, properties, net worth or results of
operations of the Company and the Subsidiaries taken as a whole;
(ii) Each of the Delaware and Pennsylvania Subsidiaries identified in
Schedule III hereto (collectively, the "Class I Subsidiaries") is a corporation
validly existing in good standing under the laws of the jurisdiction of its
organization, with full corporate power to own, lease, and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus (and any amendment or supplement thereto as of the
date of such opinion) and is duly qualified to conduct its business and is in
good standing in each jurisdiction or place where the nature of its properties
or the conduct of its business requires such registration or qualification,
except where the failure so to register or qualify does not have a material
adverse effect on the condition (financial or other), business, properties, net
worth or results of operations of the Company and the Subsidiaries taken as a
whole; and all the outstanding shares of capital stock of each of the Class I
Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable, and, except as otherwise set forth in the Prospectus, are owned
of record by the Company, free and clear of any security interest, lien, adverse
claim, equity or other encumbrance;
(iii) The authorized and outstanding capital stock of the Company is as
set forth under the caption "Capitalization" in the Prospectus; and the
authorized capital stock of the Company conforms in all material respects as to
legal matters to the description thereof contained in the Prospectus under the
caption "Description of Capital Stock";
(iv) All the shares of capital stock of the Company outstanding prior
to the issuance of the Shares to be issued and sold by the Company hereunder
have been duly authorized and validly issued, and are fully paid and
nonassessable by the Company and were not issued in violation of any statutory
preemptive or, to such counsel's knowledge, other similar rights of any
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holder of the Company's capital stock;
(v) The Shares to be issued and sold to the Underwriters by the
Company hereunder have been duly authorized and, when issued and delivered to
the Underwriters against payment therefor in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable by the Company and will not
have been issued in violation of any statutory preemptive or, to the knowledge
of such counsel, other similar rights that entitle or will entitle any person to
acquire any shares upon the issuance thereof by the Company. To the knowledge of
such counsel after reasonable inquiry, no holders of capital stock of the
Company are entitled to have such securities registered under the Registration
Statement which rights have not been waived;
(vi) The form of certificates for the Shares conforms to the
requirements of the Delaware General Corporation Law;
(vii) Any required filing of the Prospectus pursuant to Rule 424(b)
has been made in accordance with Rule 424(b);
(viii) The Company has the corporate power and authority to enter into
this Agreement and to issue, sell and deliver the Shares to be sold by it to the
Underwriters as provided herein. This Agreement has been duly authorized,
executed and delivered by the Company and is a valid, legal and binding
agreement of the Company, enforceable against the Company in accordance with its
terms, except as enforcement of rights to indemnity and contribution hereunder
may be limited by Federal or state securities laws or principles of public
policy and subject to the qualification that enforceability of the Company's
obligations hereunder may be limited by any applicable bankruptcy, fraudulent
conveyance, insolvency, reorganization, moratorium or other laws affecting the
creditors' rights generally and by general principles of equity;
(ix) None of the Company or the Class I Subsidiaries is in violation
of its certificate or articles of incorporation or by-laws, or other
organizational documents.
(x) Neither the issuance, offer, sale or delivery of the Shares, the
execution, delivery or performance of this Agreement, compliance by the Company
with the provisions hereof, nor consummation by the Company of the transactions
contemplated hereby conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate or articles of
incorporation or by-laws, or other organizational documents, of the Company or
of any of the Class I Subsidiaries, nor (assuming compliance with all applicable
state or foreign securities and Blue Sky laws) will any such action result in
any violation of any existing federal, New Jersey or Pennsylvania statute, law,
rule, regulation, ruling, judgment, injunction, order or decree applicable to
the Company, to the Subsidiaries, or to any of their respective properties or of
any provision of the Delaware General Corporation Law;
(xi) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative agency
or other governmental body,
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agency, or official is required on the part of the Company (except as have been
obtained under the Act and the Exchange Act or such as may be required under
state or foreign securities or Blue Sky laws governing the purchase and
distribution of the Shares) for the valid issuance and sale of the Shares to the
Underwriters as contemplated by this Agreement;
(xii) The Registration Statement and the Prospectus and any
supplements or amendments thereto (except for the financial statements and the
notes thereto and the schedules and other financial and statistical data
included therein, as to which such counsel need not express any opinion) comply
as to form in all material respects with the requirements of the Act; and each
of the Incorporated Documents (except for the financial statements and the notes
thereto and the schedules and other financial and statistical data included
therein, as to which counsel need not express any opinion) complies as to form
in all material respects with the Exchange Act and the rules and regulations of
the Commission thereunder;
(xiii) (A) To the knowledge of such counsel after reasonable inquiry,
other than as described in the Prospectus (or any amendment or supplement
thereto as of the date of such opinion), there are no legal or governmental
proceedings pending or threatened against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries, or any of
their property, is subject which are required to be described in the
Registration Statement or Prospectus (or any amendment or supplement thereto),
(B) there are no agreements, contracts, indentures, leases or other instruments
that are required to be described in the Registration Statement or the
Prospectus (or any amendment or supplement thereto) or to be filed as an exhibit
to the Registration Statement or to an Incorporated Document, as the case may
be, that are not described or filed as required and (C) other than as described
in the Prospectus (or any amendment or supplement thereto), there are no
outstanding options, warrants or other rights calling for the issuance of, and
such counsel knows of no commitment, plan or arrangement to issue any share of
capital stock of the Company or any security convertible into or exercisable or
exchangeable for capital stock of the Company or of any Subsidiary;
(xiv) The statements in the Registration Statement and Prospectus
(including in the Incorporated Documents), insofar as they are descriptions of
contracts, agreements, instruments or other legal documents, or refer to
statements of law or legal conclusions, are accurate summaries thereof and
present fairly the information required to be shown in all material respects;
(xv) Upon delivery of the Shares pursuant to this Agreement and
payment therefor as contemplated herein each Underwriter that has purchased such
Shares in good faith and without notice of any adverse claim within the meaning
of the Uniform Commercial Code as in effect in the State of [New York] will
acquire good title to the Shares, free and clear of any lien, claim, security
interest, or other encumbrance, restriction on transfer or other defect in
title;
(xvi) The Shares, subject to official notice of issuance, have been
approved for listing on the Nasdaq National Market; and
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(xvii) The Company is not an "investment company" or a person
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
In addition, such counsel shall state that based on telephonic confirmation
from the Commission on _____________, 1997, the Registration Statement and all
post-effective amendments, if any, have become effective under the Act and no
stop order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose are pending before or contemplated by
the Commission.
Such counsel shall also state that although such counsel has not undertaken
to determine independently, and does not assume any responsibility for, the
accuracy or completeness of the statements in the Registration Statement, such
counsel has participated in conferences with officers and other representatives
of the Company and its Subsidiaries, representatives of the independent public
accountants of the Company and representatives of the Underwriters at which the
contents of the Registration Statement and the Prospectus (including the
Incorporated Documents) and related matters were reviewed and discussed, and
participated in the preparation of the Registration Statement and the Prospectus
and nothing has come to the attention of such counsel that has caused such
counsel to believe that the Registration Statement (including the Incorporated
Documents) at the time the Registration Statement became effective, or the
Prospectus, as of its date and as of the Closing Date or the Option Closing
Date, as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading or that any amendment or supplement to the Prospectus,
as of its respective date, and as of the Closing Date or the Option Closing
Date, as the case may be, contained any untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no opinion with
respect to the financial statements and the notes thereto and the schedules and
other financial and statistical data included in the Registration Statement or
the Prospectus or any Incorporated Document).
(d) You shall have received on the Closing Date, an opinion of Robert M.
Kramer & Associates, P.C. dated the Closing Date and addressed to you, as
Representatives of the several Underwriters, to the effect that:
(i) The Company and each of the Subsidiaries, to the knowledge of such
counsel, has full authority and all necessary governmental authorizations,
approvals, orders, licenses, certificates, franchises and permits of and from
all governmental regulatory officials and bodies (except where the failure so to
have any such authorizations, approvals, orders, licenses, certificates,
franchises or permits, individually or in the aggregate, would not have a
material adverse effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company and the
Subsidiaries taken as a whole, to own their respective properties and to conduct
their respective businesses as now being conducted, as described in the
Prospectus;
22
<PAGE>
(ii) Except as disclosed in the Prospectus, the Company owns of
record, all the outstanding shares of capital stock of each of the Subsidiaries,
free and clear of any lien, adverse claim, security interest, equity, or other
encumbrance;
(iii) None of the Company or any Subsidiary is in violation of its
certificate or articles of incorporation or by-laws or other organizational
documents or in default in the performance or observance of any material
obligation, agreement or condition contained in any bond, debenture, note or
other evidence of indebtedness, or, to the knowledge of such counsel, other
material agreement, lease or instrument, except as may be disclosed in the
Prospectus;
(iv) Neither the issuance, offer, sale or delivery of the Shares, the
execution, delivery or performance of this Agreement, compliance by the Company
with the provisions hereof, nor consummation by the Company of the transactions
contemplated hereby constitutes or will constitute a breach of, or a default
under, or will result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or of any of the
Subsidiaries pursuant to the terms of any agreement, indenture, lease or other
instrument to which the Company or any of the Subsidiaries is a party or by
which any of them or any of their respective properties is bound which has been
described in or filed as an exhibit to the Registration Statement or to an
Incorporated Document, or is known to such counsel after due inquiry;
(v) Other than as described or contemplated in the Prospectus (or
any supplement thereto), there are no legal or governmental proceedings pending
or, to the knowledge of such counsel, threatened against the Company or any of
the Subsidiaries, or to which the Company or any of the Subsidiaries or any of
their property, is subject, which are required to be described in the
Registration Statement or Prospectus (or any amendment or supplement thereto);
(vi) To the knowledge of such counsel, there are no agreements,
contracts, indentures, leases or other instruments that are required to be
described in the Registration Statement or the Prospectus (or any amendment or
supplement thereto) or to be filed as an exhibit to the Registration Statement
or any Incorporated Document that are not described or filed as required, as the
case may be;
(vii) To the knowledge of such counsel, neither the Company nor any of
the Subsidiaries is in violation of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or any of the
Subsidiaries or of any decree of any court or governmental agency or body having
jurisdiction over the Company or any of the Subsidiaries, except as disclosed in
the Prospectus;
(viii) Except as described in the Prospectus, there are no outstanding
options, warrants or other rights calling for the issuance of, and such counsel
does not know of any commitment, plan or arrangement to issue, any shares of
capital stock of the Company or any security convertible into or exchangeable or
exercisable for capital stock of the Company; and
23
<PAGE>
(ix) Except as described in the Prospectus, there is no holder of any
security of the Company or any other person who has the right, contractual or
otherwise, to cause the Company to sell or otherwise issue to them, or to permit
them to underwrite the sale of, the Shares or the right to have any Common Stock
or other securities of the Company included in the Registration Statement or the
right, as a result of the filing of the Registration Statement, to require
registration under the Act of any shares of Common Stock or other securities of
the Company, which right has not been waived.
(e) You shall have received on the Closing Date, an opinion of each of (i)
Jackson & Kelly, (ii) Day, Smith, Walton & Durham, (iii) Karaganis & White LTD,
(iv) Sherrill & Roof L.L.P., (v) Carlton, Fields, Ward, Emmanuel, Smith &
Cutler, P.A., and (vi) Phillips Nizer Benjamin Krim & Ballon LLP, dated the
Closing Date and addressed to you, as Representatives of the several
Underwriters, to the effect that:
(i) Each of the Subsidiaries identified opposite such counsel's name
in Schedule IV hereto (collectively, the "Class II Subsidiaries") is a
corporation validly existing in good standing under the laws of the jurisdiction
of its organization, with full corporate power and authority to own, lease, and
operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto as of the date of such opinion) and is duly qualified to conduct its
business and is in good standing in each jurisdiction or place where the nature
of its properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not have
a material adverse effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company and the
Subsidiaries taken as a whole;
(ii) All the outstanding shares of capital stock of each of the Class
II Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable, and, except as otherwise set forth in the Prospectus, are owned
of record by the Company, free and clear of any security interest, lien, adverse
claim, equity or other encumbrance;
(iii) None of the Class II Subsidiaries is in violation of its
certificate or articles of incorporation or by-laws, or other organizational
documents; and
(iv) Neither the issuance, offer, sale or delivery of the Shares, the
execution, delivery or performance of this Agreement, compliance by the Company
with the provisions hereof, nor consummation by the Company of the transactions
contemplated hereby conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate or articles of
incorporation or by-laws, or other organizational documents, of any of the Class
II Subsidiaries, nor (assuming compliance with all applicable state or foreign
securities and Blue Sky laws) will any such action result in any violation of
any existing statute, law, rule, regulation, ruling, judgment, injunction, order
or decree of the United States or of the State set forth opposite such counsel's
name on Schedule II hereto applicable to the Company, to the Class II
24
<PAGE>
Subsidiaries, or to any of their respective properties;
(f) You shall have received on the Closing Date an opinion of Morgan, Lewis
& Bockius LLP, counsel for the Underwriters, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, with respect
to the matters referred to in the first sentence of clause (v), clause (vii),
the first sentence of (viii) and clause (xii) of the foregoing paragraph (c) and
such other related matters as you may request. In addition, such counsel shall
state that based on telephonic confirmation from the Commission on
_____________, 1997, the Registration Statement and all post-effective
amendments, if any, have become effective under the Act and no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose are pending before or contemplated by the
Commission.
(g) You shall have received letters addressed to you, as Representatives of
the several Underwriters, and dated the date hereof and the Closing Date from
each of (i) Ernst & Young LLP, (ii) BDO Seidman, LLP, (iii) B.J. Klinger & Co.,
P.C., (iv) Bardall, Weintraub, P.C., (v) Boyer and Ritter, CPAs, (vi)
Paternostro, Callahan & DeFreitas, LLP, (vii) Serra & McGrath, LLP, and (viii)
Erwin & Associates, each of which are independent certified public accountants,
substantially in the forms heretofore approved by you.
(h) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been taken or, to the knowledge of the Company or the Underwriters, shall be
contemplated by the Commission at or prior to the Closing Date; (ii) there shall
not have been any change in the capital stock of the Company nor any material
increase in the short-term or long-term debt of the Company (other than in the
ordinary course of business) from that set forth or contemplated in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto); (iii) there shall not have been, since the respective dates as of
which information is given in the Registration Statement and the Prospectus (or
any amendment or supplement thereto), except as may otherwise be stated in the
Registration Statement and Prospectus (or any amendment or supplement thereto),
any material adverse change in the condition (financial or other), business,
prospects, properties, net worth or results of operations of the Company and the
Subsidiaries taken as a whole; (iv) the Company and the Subsidiaries shall not
have any liabilities or obligations, direct or contingent (whether or not in the
ordinary course of business), that are material to the Company and the
Subsidiaries, taken as a whole, other than those reflected in the Registration
Statement or the Prospectus (or any amendment or supplement thereto); and (v)
all the representations and warranties of the Company contained in this
Agreement shall be true and correct on and as of the date hereof and on and as
of the Closing Date as if made on and as of the Closing Date, and you shall have
received a certificate, dated the Closing Date and signed by the chief executive
officer and the chief financial officer of the Company (or such other officers
as are acceptable to you), to the effect set forth in this Section 8(h) and in
Section 8(i) and 8(j) hereof.
(i) The Company shall not have failed at or prior to the Closing Date to
have performed or complied with any of its agreements herein contained and
required to be performed or
25
<PAGE>
complied with by it hereunder at or prior to the Closing Date.
(j) The Shares shall have been listed or approved for quotation upon notice
of issuance on the Nasdaq National Market.
(k) The Company shall have furnished or caused to be furnished to you such
further certificates and documents as you shall have requested.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you and your counsel.
Any certificate or document signed by any officer of the Company and
delivered to you, as Representatives of the Underwriters, or to counsel for the
Underwriters, shall be deemed a representation and warranty by the Company to
each Underwriter as to the statements made therein.
The several obligations of the Underwriters to purchase Additional Shares
hereunder are subject to the satisfaction on and as of any Option Closing Date
of the conditions set forth in this Section 8, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (c) through (g) and (j) shall be dated the
Option Closing Date in question and the opinions and letter called for by
paragraphs (c), (d) and (e) shall be revised to reflect the sale of Additional
Shares.
9. Expenses. The Company agrees to pay the following costs and expenses
--------
and all other costs and expenses incident to the performance by it of its
obligations hereunder: (i) the preparation, printing or reproduction, and filing
with the Commission of the Registration Statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight or similar charges
and charges for counting and packaging) of such copies of the Registration
Statement, each Prepricing Prospectus, the Prospectus, the Incorporated
Documents and all amendments or supplements to any of them as may be reasonably
requested for use in connection with the offering and sale of the Shares; (iii)
the preparation, printing, authentication, issuance and delivery of certificates
for the Shares, including any stamp taxes in connection with the original
issuance and sale of the Shares; (iv) the printing (or reproduction) and
delivery of this Agreement, the Blue Sky Memorandum and all other agreements or
documents printed (or reproduced) and delivered in connection with the offering
of the Shares; (v) the quotation of the Shares on the Nasdaq National Market;
(vi) the registration or qualification of the Shares for offer and sale under
the securities or Blue Sky laws of the several states as provided in Section
5(g) hereof (including the reasonable fees, expenses and disbursements of
counsel for the Underwriters relating to the preparation, printing or
reproduction, and delivery of the Blue Sky Memorandum and such registration and
qualification, the fees of such counsel not to exceed $15,000); (vii) the filing
fees and the reasonable fees and expenses of counsel for the Underwriters in
connection with any filings required to be made with the National Association of
Securities Dealers, Inc.; (viii) the transportation and other expenses incurred
by or on behalf of Company representatives in connection with
26
<PAGE>
presentations to prospective purchasers of the Shares; and (ix) the fees and
expenses of the Company's accountants and the fees and expenses of counsel
(including local and special counsel) for the Company.
10. Effective Date of Agreement. This Agreement shall become effective:
---------------------------
(i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at
the time this Agreement is executed and delivered, it is necessary for the
registration statement or a post-effective amendment thereto to be declared
effective before the offering of the Shares may commence, when notification of
the effectiveness of the registration statement or such post-effective amendment
has been released by the Commission. Until such time as this Agreement shall
have become effective, it may be terminated by the Company, by notifying you, or
by you, as Representatives of the several Underwriters, by notifying the
Company.
If any one or more of the Underwriters shall fail or refuse to purchase
Shares which it or they are obligated to purchase hereunder on the Closing Date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters are obligated but fail or refuse to purchase is not more than one-
tenth of the aggregate number of Shares which the Underwriters are obligated to
purchase on the Closing Date, each non-defaulting Underwriter shall be
obligated, severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule I hereto bears to the aggregate number of
Firm Shares set forth opposite the names of all non-defaulting Underwriters or
in such other proportion as you may specify in accordance with Section 20 of the
Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares
which such defaulting Underwriter or Underwriters are obligated, but fail or
refuse, to purchase. If any one or more of the Underwriters shall fail or
refuse to purchase Shares which it or they are obligated to purchase on the
Closing Date and the aggregate number of Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Shares which
the Underwriters are obligated to purchase on the Closing Date and arrangements
satisfactory to you and the Company for the purchase of such Shares by one or
more non-defaulting Underwriters or other party or parties approved by you and
the Company are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any such default of any such Underwriter under this Agreement. The
term "Underwriter" as used in this Agreement includes, for all purposes of this
Agreement, any party not listed in Schedule I hereto who, with your approval and
the approval of the Company, purchases Shares which a defaulting Underwriter is
obligated, but fails or refuses, to purchase.
Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
27
<PAGE>
11. Termination of Agreement. This Agreement shall be subject to
------------------------
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company by notice to the Company, if prior to the Closing
Date or any Option Closing Date (if different from the Closing Date and then
only as to the Additional Shares), as the case may be, (i) trading in securities
generally on the New York Stock Exchange, American Stock Exchange or the Nasdaq
National Market shall have been suspended or materially limited, (ii) a general
moratorium on commercial banking activities in New York shall have been declared
by either federal or state authorities, or (iii) there shall have occurred any
outbreak or escalation of hostilities or other international or domestic
calamity, crisis or change in political, financial or economic conditions, the
effect of which on the financial markets of the United States is such as to make
it, in your judgment, impracticable or inadvisable to commence or continue the
offering of the Shares at the offering price to the public set forth on the
cover page of the Prospectus or to enforce contracts for the resale of the
Shares by the Underwriters. Notice of such termination may be given to the
Company by telegram, telecopy or telephone and shall be subsequently confirmed
by letter.
12. Information Furnished by the Underwriters. The statements set forth
-----------------------------------------
in the last paragraph on the cover page, the Regulation M legend and the
stabilization legend on the inside cover page, and the statements in the first,
third and ninth paragraphs under the caption "Underwriting" in any Prepricing
Prospectus and in the Prospectus, constitute the only information furnished by
or on behalf of the Underwriters through you as such information is referred to
in Sections 6(b) and 7 hereof.
13. Miscellaneous. Except as otherwise provided in Sections 5, 10 and 11
-------------
hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company, at the office of the
Company at 1000 Crawford Place, Mt. Laurel, NJ 08054, Attention: Chief Executive
Officer; or (ii) if to you, as Representatives of the several Underwriters, in
care of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013,
Attention: Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the several
Underwriters, the Company, its directors and officers, and the other controlling
persons referred to in Section 7 hereof and their respective successors and
assigns, to the extent provided herein, and no other person shall acquire or
have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Underwriter of any of the Shares in his
status as such purchaser.
14. Applicable Law; Counterparts. This Agreement shall be governed by and
----------------------------
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
28
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters with respect to the matters
addressed herein.
Very truly yours,
EASTERN ENVIRONMENTAL SERVICES, INC.
By:
---------------------------------
Name:
Title:
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
SMITH BARNEY INC.
OPPENHEIMER & CO., INC.
SANDERS MORRIS MUNDY
PACIFIC GROWTH EQUITIES, INC.
VAN KASPER & COMPANY
As Representatives of the Several Underwriters
By: SMITH BARNEY INC.
By:
-------------------------
Name:
Title:
29
<PAGE>
SCHEDULE I
EASTERN ENVIRONMENTAL SERVICES, INC.
<TABLE>
<CAPTION>
Number of
Underwriter Firm Shares
- ----------- -----------
<S> <C>
Smith Barney Inc. ......................
Oppenheimer & Co., Inc. ................
Sanders Morris Mundy....................
Pacific Growth Equities, Inc. ..........
Van Kasper & Company....................
-----------
Total............................ 4,500,000
-----------
</TABLE>
<PAGE>
SCHEDULE II
LIST OF ACQUISITION AGREEMENTS
[To be provided by the Company]
<PAGE>
SCHEDULE III
LIST OF CLASS I SUBSIDIARIES
<TABLE>
<CAPTION>
SUBSIDIARY STATE OF INCORPORATION
---------- ----------------------
<S> <C>
Allied Waste Services, Inc. Delaware
Eastern Waste of New York, Inc. Delaware
Super Kwik, Inc. Pennsylvania
R & A Bender, Inc. Pennsylvania
Eastern Waste of L.I., Inc. Delaware
Eastern Container Corporation Delaware
Apex Waste Services, Inc. Pennsylvania
Eastern Environmental Services Delaware
of Indiana, Inc.
</TABLE>
<PAGE>
SCHEDULE IV
LIST OF CLASS II SUBSIDIARIES
<TABLE>
<CAPTION>
COUNSEL SUBSIDIARY STATE OF INCORPORATION
- ------- ---------- ----------------------
<S> <C> <C>
Jackson & Kelly S & S Grading, Inc. West Virginia
Day, Smith, Walton & Durham Pulaski Grading, Inc. Kentucky
Karaganis & White LTD Olney Sanitary System, Inc. Illinois
Sherrill & Roof L.L.P. Carolina Grading, Inc. South Carolina
Carlton, Fields, Ward, Bayside of Marion, Inc. Florida
Emmanuel, Smith & Cutler,
PA
Eastern Environmental
Services of Florida, Inc.
Waste Services of South
Florida, Inc.
Phillips Nizer Benjamin Donno Company, Inc. New York
Krim & Ballon
Residential Services, Inc.
Suffolk Waste Systems, Inc.
N.R.T. Realty Corp.
</TABLE>
<PAGE>
Exhibit A
to Underwriting Agreement
EASTERN ENVIRONMENTAL SERVICES INC.
LOCK-UP LETTER
, 1997
SMITH BARNEY INC.
OPPENHEIMER & CO., INC.
SANDERS MORRIS MUNDY INC.
PACIFIC GROWTH EQUITIES, INC.
VAN KASPER & COMPANY
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, NY 10013
Ladies and Gentlemen:
The undersigned understands that you and certain other firms propose to
enter into an Underwriting Agreement (the "Underwriting Agreement") providing
for the purchase by you and such other firms (the "Underwriters") of shares (the
"Shares") of Common Stock, par value $0.01 per share (the "Common Stock"), of
Eastern Environmental Services, Inc. (the "Company") and that the Underwriters
propose to reoffer the Shares to the public.
In consideration of the execution of the Underwriting Agreement by the
Underwriters, and for other good and valuable consideration, the undersigned
hereby irrevocably agrees that without the prior written consent of Smith Barney
Inc. the undersigned will not sell, offer to sell, solicit an offer to buy,
contract to sell, grant any option to purchase, or otherwise transfer or dispose
of, any shares of Common Stock, or any securities convertible into or
exercisable or exchangeable for Common Stock, for a period of 120 days after the
date of the final Prospectus relating to the offering of the Shares to the
public by the Underwriters, except that the undersigned may make gifts of such
securities to members of the undersigned's "immediate family" (as such term is
defined under Item 404 of Regulation S-K under the Securities Act of 1933) or
transfer such securities to one or more trusts established for the benefit of
members of the undersigned's immediate family; provided, that any such
--------
transferee agrees in writing to be bound by the terms hereof. Notwithstanding
the foregoing, nothing herein shall prohibit the undersigned from exercising any
options granted to the
<PAGE>
Smith Barney Inc., et al.
, 1997
Page 2
undersigned under any Company stock option or other benefit or incentive plan or
warrants held by the undersigned so long as the shares of Common Stock
underlying such options or warrants are held subject to the terms of this
letter.
The undersigned agrees that the provisions of this agreement shall be
binding also upon the successors, assigns, heirs and personal representatives of
the undersigned.
In furtherance of the foregoing, the Company and American Stock Transfer
and Trust Company, its transfer agent, are hereby authorized to decline to make
any transfer of securities if such transfer would constitute a violation or
breach of this letter agreement.
It is understood that, if the Underwriting Agreement does not become
effective in accordance with its terms on or before August 31, 1997, or if the
Underwriting Agreement (other than the provisions thereof which survive
termination) shall terminate or be terminated prior to payment for and delivery
of the Shares, this letter agreement shall become null and void and of no
further force or effect.
Very truly yours,
-------------------------
[Name of Signatory]
<PAGE>
Exhibit A-1
to Underwriting Agreement
LIST OF OFFICERS AND DIRECTORS
Dennis M. Grimm
Robert M. Kramer
Gregory M. Krzemein
Kenneth C. Leung
George O. Moorehead
Louis D. Paolino, Jr.
Terry W. Patrick
John W. Poling
<PAGE>
Exhibit B
to Underwriting Agreement
EASTERN ENVIRONMENTAL SERVICES INC.
LOCK-UP LETTER
, 1997
SMITH BARNEY INC.
OPPENHEIMER & CO., INC.
SANDERS MORRIS MUNDY INC.
PACIFIC GROWTH EQUITIES, INC.
VAN KASPER & COMPANY
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, NY 10013
Ladies and Gentlemen:
The undersigned understands that you and certain other firms propose to
enter into an Underwriting Agreement (the "Underwriting Agreement") providing
for the purchase by you and such other firms (the "Underwriters") of shares (the
"Shares") of Common Stock, par value $0.01 per share (the "Common Stock"), of
Eastern Environmental Services, Inc. (the "Company") and that the Underwriters
propose to reoffer the Shares to the public.
In consideration of the execution of the Underwriting Agreement by the
Underwriters, and for other good and valuable consideration, the undersigned
hereby irrevocably agrees that without the prior written consent of Smith Barney
Inc. the undersigned will not sell, offer to sell, solicit an offer to buy,
contract to sell, grant any option to purchase, or otherwise transfer or dispose
of, any shares of Common Stock, or any securities convertible into or
exercisable or exchangeable for Common Stock, for a period of 90 days after the
date of the final Prospectus relating to the offering of the Shares to the
public by the Underwriters, except that the undersigned may make gifts of such
securities to members of the undersigned's "immediate family" (as such term is
defined under Item 404 of Regulation S-K under the Securities Act of 1933) or
transfer such securities to one or more trusts established for the benefit of
members of the undersigned's immediate family; provided, that any such
--------
transferee agrees in writing to be bound by the terms hereof. Notwithstanding
the foregoing, nothing herein shall prohibit the undersigned from exercising any
options granted to the
<PAGE>
Smith Barney Inc., et al.
, 1997
Page 2
undersigned under any Company stock option or other benefit or incentive plan or
warrants held by the undersigned so long as the shares of Common Stock
underlying such options or warrants are held subject to the terms of this
letter.
The undersigned agrees that the provisions of this agreement shall be
binding also upon the successors, assigns, heirs and personal representatives of
the undersigned.
In furtherance of the foregoing, the Company and American Stock Transfer
and Trust Company, its transfer agent, are hereby authorized to decline to make
any transfer of securities if such transfer would constitute a violation or
breach of this letter agreement.
It is understood that, if the Underwriting Agreement does not become
effective in accordance with its terms on or before August 31, 1997, or if the
Underwriting Agreement (other than the provisions thereof which survive
termination) shall terminate or be terminated prior to payment for and delivery
of the Shares, this letter agreement shall become null and void and of no
further force or effect.
Very truly yours,
------------------------
[Name of Signatory]
<PAGE>
Exhibit B-1
to Underwriting Agreement
LIST OF STOCKHOLDERS
William C. Skuba
William C. Skuba Charitable Remainder Trust
Robert Donno
Norman Taylor
Thomas King
Sanders Morris Mundy, Inc.
Glen Miller
Willard Miller
W&G Miller Family Partnership, L.P.
Environmental Opportunities Fund (Cayman), L.P.
Michael A. Fioravante
Alan Hershkowitz
Stuart Berry
Kenneth Koretsky
Matthew Paolino
Michael Patrick
Raymond Peraino
Neal W. Rodrigue
Kenneth W. Murdock
BankAmerica Investment Corporation
BankBoston, N.A.
Francis Pasquale
Beatrice Tolin
Carlo J. Piccinonna
Environmental Waste Systems, Inc.
Environmental Waste Systems of Palm Beach, Inc.
C&R Waste Removal, Inc.
A-1 Carting Corp.
Ameri-Carting, Inc.
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated May 13, 1997, in Amendment No. 3 to the Registration
Statement (Form S-3 No. 333-27245) and related Prospectus of Eastern
Environmental Services, Inc. for the registration of 4,500,000 shares of its
common stock, and to the incorporation by reference therein, of our report dated
June 19, 1997, with respect to the combined financial statements of Waste
Services, Inc. and Affiliates, included in Eastern Environmental Services,
Inc's. Current Report on Form 8-K dated May 12, 1997 (as amended July 11, 1997
and July 25, 1997 on Form 8-K/A), filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
July 28, 1997
