<PAGE>
PROSPECTUS SUPPLEMENT Filed Pursuant to Rule 424(b)(5)
(To Prospectus dated May 1, 1998) Registration Statement No. 333-49613
7,500,000 SHARES
[LOGO OF EASTERN ENVIRONMENTAL SERVICES, INC.]
COMMON STOCK
------------
Of the 7,500,000 shares being offered hereby, 7,000,000 shares are being
offered by the Company and 500,000 shares are being offered by certain
stockholders of the Company named herein (the "Selling Stockholders"). The
Company will not receive any of the proceeds from the sale of shares by the
Selling Stockholders. See "Use of Proceeds" and "Principal and Selling
Stockholders."
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "EESI." The last reported sale price of the Company's Common Stock on
the Nasdaq National Market on May 20, 1998 was $26 11/16 per share. See "Price
Range of Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE S-8 OF THIS PROSPECTUS SUPPLEMENT AND
ON PAGE 5 OF THE ACCOMPANYING 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1)(2) COMPANY(2) STOCKHOLDERS(2)
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share $26.375 $1.26 $25.115 $25.115
- ----------------------------------------------------------------------
Total(3) $197,812,500 $9,450,000 $175,805,000 $12,557,500
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) For information regarding indemnification of the several Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $1,000,000. The Company and the
Selling Stockholders will share all expenses of the Offering in proportion
to the number of shares sold, other than the Underwriting Discounts and
Commissions attributable to the shares being offered by the Selling
Stockholders, which will be borne by the respective Selling Stockholders.
(3) The Company has granted the several Underwriters a 30-day option to
purchase up to 1,125,000 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,
Proceeds to Company, and Proceeds to Selling Stockholders will be
$227,484,375, $10,867,500, $204,059,375, and $12,557,500, 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 May
27, 1998 at the office of Smith Barney Inc., 333 West 34th Street, New York,
New York 10001.
----------------
SALOMON SMITH BARNEY
CIBC OPPENHEIMER
MERRILL LYNCH & CO.
PACIFIC GROWTH EQUITIES, INC.
May 20, 1998
<PAGE>
[ART WORK 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 OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS AND IMPOSING 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 EXCHANGE ACT. SEE "UNDERWRITING."
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information appearing elsewhere in this
Prospectus Supplement and the accompanying Prospectus and incorporated herein
and therein by reference. Unless otherwise noted, all financial information and
share and per share data in this Prospectus Supplement (i) assume no exercise
of the Underwriters' over-allotment option and (ii) exclude 3,298,623 shares of
Common Stock issuable upon exercise of outstanding options and warrants at May
1, 1998. As used in this Prospectus Supplement, the term the "Company" includes
Eastern Environmental Services, Inc. and its subsidiaries, unless the context
otherwise indicates. In addition to the other information in this Prospectus
Supplement and the accompanying Prospectus, the factors set forth under "Risk
Factors" in this Prospectus Supplement and in the accompanying Prospectus and
the information set forth under "Disclosure Regarding Forward Looking
Statements" in this Prospectus Supplement should be considered carefully in
evaluating an investment in the Company. The financial information contained in
this Prospectus Supplement is based upon the consolidated financial statements
of the Company included elsewhere in this Prospectus Supplement.
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. From July 1, 1996 through March 31, 1998, the Company
acquired 34 solid waste management businesses, and thereby entered new markets
in Florida, Illinois, Maryland, New Jersey, New York, and Pennsylvania. The
businesses acquired operated 28 solid waste collection and transportation
operations, six landfills, four solid waste transfer and processing facilities,
and two special waste services operations. Largely as a result of these
acquisitions, for the six months ended December 31, 1996 and 1997,
respectively, the Company's revenues increased by 64% (from $65.0 million to
$106.9 million) and its net income increased from $19,000 to $6.5 million, and
for the three months ended March 31, 1997 and 1998, respectively, the Company's
revenues increased by 58% (from $35.0 million to $55.2 million) and its net
income decreased from $1.5 million to $593,000. Subsequent to March 31, 1998,
the Company acquired five solid waste collection operations. The Company also
has entered into definitive agreements to acquire 11 collection and
transportation operations, six transfer stations, and three landfills. There
can be no assurance that any of these pending acquisitions will occur.
The Company currently operates solid waste collection and transportation
operations in southern Florida, southeastern Illinois, New Jersey, the greater
metropolitan New York City area, Pennsylvania and South Carolina, and owns
landfills in Florida, Illinois, Kentucky, Maryland, Pennsylvania, South
Carolina, and West Virginia. Of the Company's revenues for the six months ended
December 31, 1997, approximately 86% was attributable to solid waste collection
and transportation operations, approximately 8% was attributable to solid waste
disposal operations, and approximately 6% was attributable to other waste
management services. Of the Company's revenues for the three months ended March
31, 1998, approximately 83% was attributable to solid waste collection and
transportation operations, approximately 13% was attributable to solid waste
disposal operations, and approximately 4% was attributable to other waste
management services. The Company currently provides solid waste collection
services to approximately 35,000 commercial and industrial customers and
approximately 370,000 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, (iii)
internalizing greater volumes of disposal waste through strategic landfill
acquisitions, and (iv) achieving internal growth. The Company often retains
senior management of acquired companies and implements centralized financial
and administrative controls.
The Company believes that opportunities exist to acquire additional solid
waste collection, transportation, and disposal businesses in the eastern United
States and to expand its operations 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.
S-3
<PAGE>
RECENT DEVELOPMENTS
Since the Company's offering of Common Stock consummated in August 1997, the
Company has expanded and strengthened its market presence through the
acquisition of 21 solid waste management businesses, which include 17
collection and transportation operations, four landfills, one transfer station,
and one special waste disposal operation. As a result of these acquisitions,
the Company has become an integrated provider of solid waste management
services and is positioned to expand its operations in the eastern United
States. Having purchased significant landfill capacity, the Company believes
that through tuck-in acquisitions and increased internalization, it can improve
its operating margins by delivering a greater amount of solid waste to its
landfills.
The Company has entered into definitive agreements to acquire 11 collection
and transportation operations, six transfer stations, and three landfills. The
collection companies include seven tuck-in acquisitions in New York, two tuck-
in acquisitions in Pennsylvania, one tuck-in acquisition in New Jersey, and one
tuck-in acquisition in Florida. The transfer stations include three
acquisitions in New York City, two acquisitions in New Jersey, and one
acquisition in Florida. The landfills include one acquisition in Georgia, one
acquisition in Pennsylvania, and one acquisition in Virginia. There can be no
assurance that any of these pending acquisitions will occur.
Atlantic Waste Disposal, Inc. ("AWD") is one of the pending landfill
acquisitions and Atlantic New York, Inc. ("Atlantic") is one of the pending
transfer station acquisitions. In March 1998, the Company signed definitive
agreements to acquire both operations from Brambles USA for an aggregate
purchase price of $85.6 million. AWD owns a Subtitle D landfill on a 1,315 acre
parcel in Waverly, Virginia, currently operating on 48 acres, which has a
potential capacity of approximately 190 million tons of municipal solid waste,
has rail access, and currently accepts out of state waste, has no maximum daily
volumes and has no limit on hours of operation. Atlantic is a Brooklyn, New
York transfer station with direct rail service and is permitted for 1,000 tons
of municipal solid waste and 75 tons of construction and demolition waste per
day. The closings of such acquisitions are subject to customary closing
conditions, including the requirements of obtaining certain governmental and
other third party consents. The acquisition of the AWD landfill is also subject
to the waiver or expiration of a 90-day right of first refusal to acquire the
AWD landfill held by a third party. Accordingly, there can be no assurance that
the acquisition of AWD and Atlantic will occur. See "Risk Factors - Risks
Associated with Completing Pending Acquisitions," "Business - Acquisition
Program - Pending Acquisitions," and " - Government Regulation."
The City of Bethlehem landfill (the "Bethlehem Landfill") is one of the other
pending landfill acquisitions. In December 1997, the Company signed a
definitive agreement with the City of Bethlehem, Pennsylvania to acquire the
Bethlehem Landfill for an aggregate purchase price of $26.1 million. The
Bethlehem Landfill has net remaining permitted disposal capacity of 880,000
tons, and an approximate life expectancy of 3.75 years on its current permit,
with potential expansion capability increasing its life expectancy by an
additional 12 years. The closing of this acquisition is subject to customary
closing conditions, including the requirements of obtaining certain
governmental and other third party consents. Accordingly, there can be no
assurance that the acquisition of the Bethlehem Landfill will occur. See "Risk
Factors - Risks Associated with Completing Pending Acquisitions" and
"Business - Acquisition Program - Pending Acquisitions."
In the fall of 1997, the Company increased its borrowing capacity, including
its ability to obtain letters of credit, up to $150 million from $100 million.
At May 15, 1998 approximately $69.4 million was outstanding, of which $17.3
million was in letters of credit. This indebtedness was incurred primarily to
fund acquisitions, including 21 solid waste management businesses acquired
between August 1, 1997 and May 15, 1998, and for working capital.
On April 1, 1998, the Company adopted a change in its fiscal year end from
June 30 to December 31. The six month period from July 1, 1997 to December 31,
1997 is a transitional period in connection with this change.
----------------
The Company's principal executive offices are located at 1000 Crawford Place,
Suite 400, Mt. Laurel, New Jersey 08054, and its telephone number is (609) 235-
6009.
S-4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company................. 7,000,000 shares
The Selling Stockholders.... 500,000 shares
----------------
Total..................... 7,500,000 shares
Common Stock to be outstanding
after the Offering........... 32,159,507 shares(1)
Use of proceeds............... For acquisitions, for repayment of outstanding
indebtedness under the Company's revolving
credit facility, and for capital expenditures
and general corporate purposes. The Company will
not receive any of the proceeds from the sale of
shares of Common Stock by the Selling
Stockholders. See "Use of Proceeds."
Nasdaq National Market symbol. EESI
</TABLE>
- --------
(1) Based upon the shares of Common Stock outstanding at May 1, 1998. Excludes
3,298,623 shares of Common Stock issuable upon exercise of outstanding
options and warrants at May 1, 1998 and an additional 4,915,964 shares
reserved for issuance pursuant to future option grants under the Company's
stock option plans. See "Shares Eligible for Future Sale" and
"Underwriting."
RISK FACTORS
An investment in the Common Stock involves significant risks. See "Risk
Factors" beginning on page S-8 of this Prospectus Supplement and page 5 of the
accompanying Prospectus for a discussion of certain factors that should be
considered by prospective purchasers of the Common Stock offered hereby.
S-5
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL PRO FORMA AS ADJUSTED
---------------------------------------------- ----------------------------------------------------------------
THREE MONTHS SIX MONTHS THREE MONTHS
YEAR ENDED SIX MONTHS ENDED ENDED YEAR ENDED ENDED ENDED
JUNE 30, 1997 DECEMBER 31, 1997 MARCH 31, 1998 JUNE 30, 1997(1)(2) DECEMBER 31, 1997(1)(2) MARCH 31, 1998(1)(2)
------------- ----------------- -------------- ------------------- ----------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA:
Revenues........ $ 145,274 $ 106,870 $ 55,193 $ 210,518 $ 125,942 $ 61,789
Cost of
revenues....... 106,109 73,323 34,496 155,050 85,300 38,940
Selling,
general, and
administrative
expenses....... 19,501 13,377 7,023 28,604 14,965 7,583
Depreciation and
amortization... 7,202 6,435 4,332 15,130 9,303 5,144
Merger costs(3). 3,337 2,725 3,945 3,337 2,725 3,945
---------- ---------- ---------- ---------- ---------- ----------
Operating
income......... 9,125 11,010 5,397 8,397 13,649 6,177
Interest
expense, net... (3,164) (1,279) (983) (2,454) (293) (153)
Other income,
net............ 595 256 (121) 1,696 403 (121)
---------- ---------- ---------- ---------- ---------- ----------
Income before
income taxes... 6,556 9,987 4,293 7,639 13,759 5,903
Income tax
expense(3)..... 1,879 3,518 3,700 2,356 5,330 4,535
---------- ---------- ---------- ---------- ---------- ----------
Net income...... $ 4,677 $ 6,469 $ 593 $ 5,283 $ 8,429 $ 1,368
========== ========== ========== ========== ========== ==========
Diluted earnings
per share...... $ .27 $ .26 $ .02 $ .21 $ .26 $ .04
========== ========== ========== ========== ========== ==========
Weighted average
number of
shares
outstanding.... 17,183,952 24,968,299 26,438,209 25,724,386(4) 32,036,541(4) 33,438,209(4)
========== ========== ========== ========== ========== ==========
OTHER DATA:
Cash flow from
operating
activities..... $ 8,747 $ 4,384 $ 9,131
Cash flow from
investing
activities..... (61,737) (60,177) (15,282)
Cash flow from
financing
activities..... 55,963 57,032 4,118
EBITDA(5)....... 16,327 17,445 9,729 $ 23,527 $ 22,952 $ 11,321
EBITDA
margin(6)...... 11.2% 16.3% 17.6% 11.2% 18.2% 18.3%
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
MARCH 31, 1998 MARCH 31, 1998(7) MARCH 31, 1998(2)(7)
-------------- ----------------- --------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......... $ 214 $ 1,596 $ 13,631
Total assets............. 305,793 395,045 431,969
Long term debt and
capitalized leases, less
current portion......... 63,859 149,459 12,722
Total liabilities........ 145,362 234,614 96,666
Total stockholders'
equity.................. 160,431 160,431 335,303
</TABLE>
- -------
(1) The pro forma financial information reflects significant acquisitions by
the Company since July 1, 1996, which include R&A Bender, Inc. and its
affiliates, 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, Pappy, Inc., Soil Remediation of Philadelphia, Inc., and Pine
Grove, Inc., 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, and for the
pending acquisitions of AWD and Atlantic as if such pending acquisitions
had occurred on July 1, 1996. See "Risk Factors--Risks Associated with
Completing Pending Acquisitions." The pro forma statement of operations
data 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 "--Recent Developments" and Unaudited Pro
Forma Financial Information and notes thereto included elsewhere in this
Prospectus Supplement.
(2) Adjusted to reflect (i) the acquisition of the Bethlehem Landfill for $26.1
million in cash and (ii) the sale of 7,000,000 shares of Common Stock
offered by the Company hereby at the public offering price of $26.375 per
share and the application of the estimated net proceeds therefrom. See "Use
of Proceeds" and "Capitalization."
(3) Merger costs incurred during the year ended June 30, 1997 of $3.3 million
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 $904,000 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. Merger costs for the six months ended December 31, 1997 were
$2.7 million relating to the acquisition of Waste X Services, Inc., Hamm's
Sanitation, Inc. and its affiliates, and an additional charge for Apex
Waste Services, Inc., which was
S-6
<PAGE>
acquired on March 31, 1997. Merger costs incurred for the three months ended
March 31, 1998 were $3.9 million relating to the acquisition of Bluegrass
Containment, Inc. ("Bluegrass") on March 9, 1998, Frank Stamato & Company
and its affiliates ("Stamato") on March 31, 1998, and Ecology Systems, Inc.
and its affiliates ("Ecology") on March 31, 1998. Also, the tax provision
for this period includes $1.6 million 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.
(4) Weighted average number of shares outstanding has been calculated on a pro
forma basis to include the shares issued in the Offering.
(5) 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.
(6) EBITDA margin represents EBITDA expressed as a percentage of revenues.
(7) The pro forma financial information reflects the current pending
acquisition by the Company of AWD and Atlantic as if such acquisitions had
occurred as of March 31, 1998. See "--Recent Developments" and Unaudited
Pro Forma Financial Information and notes thereto included elsewhere in
this Prospectus Supplement.
S-7
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock being offered by this Prospectus
Supplement involves a high degree of risk. In addition to the other
information in this Prospectus Supplement and the accompanying Prospectus, the
following factors and the factors set forth under "Risk Factors" in the
accompanying Prospectus should be considered carefully in evaluating an
investment in the Common Stock. To the extent that any risk factor contained
in this Prospectus Supplement conflicts with or supersedes any risk factor
contained in the accompanying Prospectus, the risk factor in this Prospectus
Supplement shall control.
RISKS ASSOCIATED WITH COMPLETING PENDING ACQUISITIONS
The Company has entered into definitive agreements to acquire 11 collection
and transportation operations, six transfer stations, and three landfills, the
completion of which are subject to customary closing conditions, including due
diligence and the requirements of obtaining certain governmental and other
third party consents. No assurance can be given that the closing conditions
will be satisfied or that the parties will be able to obtain such governmental
and other third party consents. Accordingly, there can be no assurance that
any of these pending acquisitions will occur. See "Business - Acquisition
Program - Pending Acquisitions."
Two of these pending acquisitions are AWD and Atlantic. In March 1998, the
Company signed definitive agreements to acquire both of these operations from
Brambles USA for an aggregate purchase price of $85.6 million. AWD owns a
Subtitle D landfill on a 1,315 acre parcel in Waverly, Virginia, currently
operating on 48 acres, and Atlantic is a Brooklyn, New York transfer station.
The closings of such acquisitions are subject to customary closing conditions,
including the requirements of obtaining certain governmental and other third
party consents. The acquisition of the AWD landfill is also subject to the
waiver or expiration of a 90-day right of first refusal to acquire the AWD
landfill held by a third party. The closing of the AWD and Atlantic
acquisitions are contingent upon one another. No assurance can be given that
the closing conditions will be satisfied or that the parties will be able to
obtain such governmental and other third party consents or that the 90-day
right of first refusal to acquire the AWD landfill will not be exercised.
Accordingly, there can be no assurance that the acquisition of AWD and
Atlantic will occur. See "Business -Acquisition Program - Pending
Acquisitions."
Certain portions of this Prospectus Supplement, including "Summary
Supplemental Financial Data," "Capitalization" and "Selected Supplemental
Consolidated Financial Data" contain certain pro forma information with
respect to the pending acquisitions of AWD, Atlantic and the Bethlehem
Landfill. This information is provided for informational purposes only and no
assurances can be given that any of these acquisitions will occur.
The Company intends to use approximately $85.6 million of the net proceeds
from the Offering to purchase AWD and Atlantic and approximately $26.1 million
to purchase the Bethlehem Landfill. To the extent the Company is unable to
close these acquisitions, the net proceeds from the Offering will be used to
fund other acquisitions and for capital expenditures and other general
corporate purposes. See "Use of Proceeds."
HISTORY OF LOSSES; WORKING CAPITAL DEFICITS; CONTINUING CHARGES
The Company has reported net losses in prior fiscal years, including a net
loss to common stockholders of approximately $2.8 million (including $3.0
million in unusual items principally related to the Company's June 1996 change
of control) during the fiscal year ended June 30, 1996. Additionally, the
Company has reported working capital deficits, including $0.5 million and $1.6
million at June 30, 1997 and 1996, 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 not to exceed 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.
S-8
<PAGE>
LIMITED OPERATING HISTORY IN REGARD TO SIGNIFICANT ASSETS
The Company's acquisition of solid waste collection, transportation and
disposal businesses from July 1, 1996 through March 31, 1998 contributed
approximately $139 million or 95% of the Company's revenues for the fiscal
year ended June 30, 1997 and approximately $158 million or 86% of the
Company's assets at June 30, 1997. Because of the Company's relatively limited
operating history with respect to these recently acquired businesses, no
assurances can be given that the Company will be able to replicate or improve
upon their historical financial performance.
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, the Company estimated the total costs
to be approximately $27.8 million for final closure of its landfills, of which
$8.5 million had been accrued at March 31, 1998. The Company makes an accrual
for these costs based on consumed airspace in relation to the 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 $17.1 million. At March
31, 1998, the Company had accrued $5.5 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.
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 32,159,507 shares of Common Stock. Of these
shares, approximately 28,052,406 shares of Common Stock, including the
7,500,000 shares of Common Stock sold in the Offering, will 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 4,107,101 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. Subject to compliance with the Rule, 851,929 of these restricted
shares are currently saleable in the public market, an additional 251,009 of
these restricted shares will become saleable in the public market 90 days
following the date of this Prospectus Supplement and an additional 774,445 of
these restricted shares will become saleable in the public market 180 days
following the date of this Prospectus Supplement.
At May 1, 1998, there were outstanding options and warrants to purchase a
total of 3,298,623 shares of Common Stock and an additional 4,915,964 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 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 May
1, 1998, a total of 723,632 shares of unissued Common Stock (the "Hold Back
Shares") 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 922,833 shares of Common Stock.
Such registration rights may begin to be exercised at various times beginning
July 1998. In addition, the Company has agreed to register 597,655 of the Hold
Back Shares at various
S-9
<PAGE>
times beginning July 1998. The Company has agreed to pay substantially all
expenses incident to such registrations, 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 Company has filed a registration statement on Form S-4 under the
Securities Act (the "Acquisition Shelf") that registers five million shares of
Common Stock for its use in connection with future acquisitions. These shares
generally will be freely tradeable after their issuance by persons who are not
"affiliates;" however, the Company has agreed that resales of these shares
during the 120-day period following the date of this Prospectus Supplement
would require the prior written consent of Smith Barney Inc. At May 1, 1998,
3,613,656 shares of Common Stock remained available for issuance under such
registration statement.
The foregoing notwithstanding, the Company and the directors and certain
executive officers and stockholders of the Company who owned of record an
aggregate of 1,676,164 shares of Common Stock and options and warrants to
purchase 1,722,004 shares of Common Stock at May 1, 1998, and the Selling
Stockholders who will own an aggregate of 500,002 shares after the Offering,
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 Supplement. In addition, the
other executive officers and certain other employees and stockholders of the
Company who owned of record an aggregate of 3,548,693 shares of Common Stock
and options and warrants to purchase 830,315 shares of Common Stock at May 1,
1998 also have agreed to such transferability restrictions, except that the
restrictive period is for 90 days following the date of this Prospectus
Supplement. Notwithstanding this restriction, certain executive officers of
the Company have the right to sell up to an aggregate of 185,000 shares of
Common Stock during the period. Furthermore, certain stockholders of the
Company that acquired 1,386,344 shares of Common Stock under the Company's
Acquisition Shelf in connection with an acquisition by the Company 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, an aggregate of 924,230 shares until March 1999. The
remaining 462,114 shares are also subject to transferability restrictions,
except that the restrictive period will terminate in June 1998. In addition,
Kenneth Chuan-kai Leung, a director of the Company, has agreed with the
Company that in June 1998 he will exercise in full his options to purchase
15,000 shares of Common Stock. Mr. Leung also agreed that he will not sell,
offer to sell, solicit or offer to buy, contract to sell, grant any option to
purchase, or otherwise transfer or dispose of any such shares for a period of
one year from the date of exercise. See "Shares Eligible for Future Sale" and
"Underwriting."
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. No
prediction can be made as to the effect, if any, that future sales of shares,
or the availability of shares for future sale, will have on the market price
of the Common Stock prevailing from time to time. Sales of substantial amounts
of Common Stock (including shares issuable upon the exercise of stock options
and warrants), or the perception that such sales could occur, could adversely
affect prevailing market prices for the Common Stock. See "Shares Eligible for
Future Sale."
RISK FACTORS DISCUSSED IN THE PROSPECTUS
The accompanying Prospectus contains an extensive discussion of risk factors
that should be carefully considered by any prospective investor in the Common
Stock. Among the topics covered are: (i) History of Losses; Working Capital
Deficits; Continuing Charges; (ii) Ability to Manage Growth; (iii) Dependence
on Acquisitions for Growth; (iv) Availability of Acquisition Targets; (v)
Ability to Integrate Acquired Businesses and Achieve Operating Efficiencies;
(vi) Potential Liabilities Associated with Acquisitions; (vii) Need for
S-10
<PAGE>
Additional Capital; Potential Dilution; (viii) Dependence on Key Personnel;
(ix) Dependence on Third Party Landfills; (x) Extensive Permitting and
Licensing Requirements; (xi) Potential Pennsylvania Landfill Restrictions;
(xii) Kentucky Landfill Obligations; (xiii) Government Regulation; (xiv)
Regulation by New York City Trade Waste Commission; (xv) Public Utility
Regulation; (xvi) Possible Legal Action; (xvii) Potential Environmental
Liability; (xviii) Ability to Meet Bonding Requirements; (xix) Limits on
Insurance Coverage; (xx) Waste Reduction Programs; (xxi) Competition;
(xxii) Seasonality; Economic Conditions; (xxiii) Anti-Takeover Provisions;
Change in Control Provisions; (xxiv) Control by Management; (xxv) Volatility
of Stock Price; (xxvi) Lack of Cash Dividends on Common Stock; and (xxvii)
Year 2000 Disclosure.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Prospectus Supplement and the accompanying Prospectus, including
documents incorporated by reference herein and therein, contain certain
statements that are "Forward Looking Statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. Those
statements include, among other things, the discussions of the Company's
business strategy and expectations concerning market position, future
operations, margins, profitability, liquidity, and capital resources. Forward
Looking Statements are included in "Prospectus Supplement Summary," "Summary
Financial Data," "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
elsewhere in this Prospectus Supplement and the accompanying Prospectus.
Although the Company believes that the expectations reflected in Forward
Looking Statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Generally, these statements
relate to business plans or strategies, projected or anticipated benefits or
other consequences of such plans or strategies, number of acquisitions and
projected or anticipated benefits from acquisitions made by or to be made by
the Company, or projections involving anticipated revenues, expenses,
earnings, levels of capital expenditures, liquidity or indebtedness or other
aspects of operating results or financial position. All phases of the
operations of the Company are subject to a number of uncertainties, risks and
other influences, many of which are outside the control of the Company and any
one of which, or a combination of which, could materially affect the results
of the Company's operations and whether the Forward Looking Statements made by
the Company ultimately prove to be accurate. Important factors that could
cause actual results to differ materially from the Company's expectations
include, but are not limited to, those disclosed in this section and under
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" in this Prospectus Supplement and
under "Risk Factors" in the accompanying Prospectus.
S-11
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
7,000,000 shares of Common Stock offered hereby are estimated to be
approximately $174.9 million (approximately $203.1 million if the
Underwriters' over-allotment option is exercised in full). The Company will
not receive any proceeds from the sale of shares of Common Stock by the
Selling Stockholders.
The net proceeds to be received by the Company will be primarily used to
fund acquisitions, including approximately $85.6 million to purchase AWD and
Atlantic from Brambles USA and approximately $26.1 million to purchase the
Bethlehem Landfill, assuming these acquisitions are consummated, and
approximately $52.1 million of the net proceeds will be used to repay all of
the Company's outstanding indebtedness under its revolving credit facility.
The remainder of the net proceeds will be used for capital expenditures and
other general corporate purposes. 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 revolving
credit facility, the Company will be able to redraw on the revolving credit
facility as needed for acquisitions, capital expenditures, and general
corporate purposes. The revolving credit facility provides for borrowing
capacity, including letters of credit, of up to $150 million. Approximately
$69.4 million was outstanding at May 15, 1998, of which $17.3 million was in
letters of credit. The revolving credit facility bears interest based on an
adjusted prime rate or Eurodollar rate (the applicable interest rate was 6.4%
at May 15, 1998), and expires in October 2002. The bank indebtedness under the
revolving credit facility was incurred primarily to fund acquisitions,
including 21 solid waste management businesses between August 1, 1997 and May
15, 1998, and for general corporate purposes. For a description of the
Company's acquisition program, see "Business - Acquisition Program."
There can be no assurance that the acquisitions of AWD, Atlantic and the
Bethlehem Landfill will occur. To the extent the net proceeds are not used to
fund these acquisitions, the net proceeds will be used to fund other
acquisitions and for capital expenditures and other general corporate
purposes. See "Risk Factors - Risks Associated with Completing Pending
Acquisitions."
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 current credit facility prohibits the payment of cash dividends
without prior bank approval.
S-12
<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, 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
TRANSITIONAL PERIOD ENDED DECEMBER 31, 1997:
First Quarter............................................ $19 1/2 $15 1/4
Second Quarter........................................... 26 1/4 18 7/8
YEAR ENDING DECEMBER 31, 1998:
First Quarter............................................ $27 3/4 $19 1/8
Second Quarter (through May 20).......................... 28 3/16 24
</TABLE>
For a recent reported sale price of the Common Stock, see the cover page of
this Prospectus Supplement.
S-13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) at
March 31, 1998, (ii) on a pro forma basis to reflect the pending acquisitions
of AWD and Atlantic as if such pending acquisitions had occurred on March 31,
1998, and (iii) on a pro forma as adjusted basis to reflect the pending
acquisition of the Bethlehem Landfill and the sale by the Company of 7,000,000
shares of Common Stock in the Offering at the public offering price of $26.375
and the application of the estimated net proceeds therefrom, after deducting
the underwriting discounts and commissions and estimated offering expenses.
There can be no assurance that the acquisitions of AWD, Atlantic, and the
Bethlehem Landfill will occur. See "Risk Factors - Risks Associated with
Completing Pending Acquisitions."
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................... $ 4,660 $ 4,931 $ 15,755
======== ======== ========
Long-term debt and capitalized leases, less
current portion(1)......................... $ 63,859 $149,459(3) $ 12,722(4)
Stockholders' equity:
Common Stock, $.01 par value, 50,000,000
shares authorized; 25,179,563 shares
issued and pro forma; 32,179,563 shares
pro forma as adjusted(2).................. 252 252 322
Additional paid-in capital.................. 147,467 147,467 322,269
Retained earnings........................... 12,788 12,788 12,788
-------- -------- --------
160,507 160,507 335,379
Less treasury stock at cost (39,100 shares). (76) (76) (76)
-------- -------- --------
Total stockholders' equity.............. 160,431 160,431 335,303
-------- -------- --------
Total capitalization.................... $224,290 $309,890 $348,025
======== ======== ========
</TABLE>
- --------
(1) The Company's long-term debt primarily reflect obligations of the Company
relating to its credit facilities. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
(2) Excludes 3,298,623 shares of Common Stock issuable upon exercise of
outstanding options and warrants at May 1, 1998 and an additional
4,915,964 shares reserved for issuance pursuant to future option grants
under the Company's stock option plans. In April 1998, the Company amended
its Certificate of Incorporation to, among other things, authorize the
issuance of up to 150,000,000 shares of Common Stock and up to 50,000,000
shares of Preferred Stock. At May 1, 1998, there were issued and
outstanding 25,159,507 shares of Common Stock and no shares of Preferred
Stock.
(3) Long-term debt and capitalized leases, less current portion, pro forma
gives effect to borrowings of $85.6 million to fund the pending
acquisitions of AWD and Atlantic.
(4) Long-term debt and capitalized leases, less current portion, pro forma as
adjusted gives effect to borrowings of $26.1 million to fund the pending
acquisition of the Bethlehem Landfill and the application of the estimated
net proceeds from the Offering.
S-14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXPECT PER SHARE DATA)
The following table presents (i) 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 periods
indicated, and (iii) 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 Supplement. The financial data
as of June 30, 1996 and June 30, 1997, and for each of the three years in the
period ended June 30, 1997 has been derived from the Company's Audited
Consolidated Financial Statements included elsewhere in this Prospectus
Supplement. The financial information derived from the Company's Unaudited
Consolidated Financial Statements as of June 30, 1995 and March 31, 1998 and
for the six months ended December 31, 1997 and 1996 and for the three months
ended March 31, 1998 and 1997 (consisting of normal recurring accruals)
includes all adjustments necessary for a fair presentation of financial
position and results of operations as of the date and for the periods
indicated. The six month period ended December 31, 1997 is a transitional
period in connection with the Company's adoption of a new fiscal year end. The
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 Supplement.
<TABLE>
<CAPTION>
ACTUAL
----------------------------------------------------------------------------------
YEAR ENDED SIX MONTHS THREE MONTHS
JUNE 30, ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------- ---------------------- ----------------------
1995 1996 1997 1996 1997(1) 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues................ $ 91,245 $ 99,988 $ 145,274 $ 64,990 $ 106,870 $ 34,993 $ 55,193
Cost of revenues........ 68,487 80,240 106,109 51,173 73,323 23,588 34,496
Selling, general, and
administrative
expenses............... 13,456 16,003 19,501 7,462 13,377 5,624 7,023
Depreciation and
amortization........... 5,370 5,339 7,202 2,961 6,435 1,935 4,332
Merger costs(2)......... -- -- 3,337 1,856 2,725 1,480 3,945
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss). 3,932 (1,594) 9,125 1,538 11,010 2,366 5,397
Interest expense, net... (1,104) (1,287) (3,164) (992) (1,279) (891) (983)
Other income, net....... 172 145 595 262 256 476 (121)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... 3,000 (2,736) 6,556 808 9,987 1,951 4,293
Income tax expense
(benefit)(2)........... 262 96 1,879 789 3,518 458 3,700
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 2,738 $ (2,832) $ 4,677 $ 19 $ 6,469 $ 1,493 $ 593
========== ========== ========== ========== ========== ========== ==========
Basic earnings (loss)
per share.............. $ .27 $ (.25) $ .29 $ -- $ .28 $ .09 $ .02
========== ========== ========== ========== ========== ========== ==========
Weighted average number
of shares outstanding.. 10,299,624 11,473,345 16,220,259 15,381,031 23,421,362 16,485,291 24,950,459
========== ========== ========== ========== ========== ========== ==========
Diluted earnings (loss)
per share.............. $ .26 $ (.25) $ .27 $ -- $ .26 $ .08 $ .02
========== ========== ========== ========== ========== ========== ==========
Weighted average number
of shares outstanding.. 10,392,232 11,473,345 17,183,952 16,057,320 24,968,299 17,571,454 26,438,209
========== ========== ========== ========== ========== ========== ==========
OTHER DATA:
Cash flow from operating
activities............. $ 8,563 $ 5,970 $ 8,747 $ 3,327 $ 4,384 $ 3,087 $ 9,131
Cash flow from investing
activities............. (8,590) (12,780) (61,737) (45,128) (60,177) (1,981) (15,282)
Cash flow from financing
activities............. 1,041 5,217 55,963 46,961 57,032 (3,352) 4,118
EBITDA(3)............... 9,302 3,745 16,327 4,499 17,445 4,301 9,729
EBITDA margin(4)........ 10.2% 3.7% 11.2% 6.9% 16.3% 12.3% 17.6%
</TABLE>
S-15
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA AS ADJUSTED
---------------------------------------------- ---------------------------------------------------------
SIX MONTHS THREE MONTHS
ENDED ENDED
YEAR ENDED DECEMBER 31, MARCH 31, YEAR ENDED SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1997(5) 1997(5) 1998(5) JUNE 30, 1997(6) DECEMBER 31, 1997(6) MARCH 31, 1998(6)
---------------- ------------ ------------ ---------------- -------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues.......... $ 210,518 $ 125,942 $ 61,789 $ 210,518 $ 125,942 $ 61,789
Cost of revenues.. 155,050 85,300 38,940 155,050 85,300 38,940
Selling, general,
and
administrative
expenses......... 28,604 14,965 7,583 28,604 14,965 7,583
Depreciation and
amortization..... 15,130 9,303 5,144 15,130 9,303 5,144
Merger costs (2).. 3,337 2,725 3,945 3,337 2,725 3,945
----------- ----------- ----------- ----------- ----------- -----------
Operating income
(loss)........... 8,397 13,649 6,177 8,397 13,649 6,177
Interest expense,
net.............. (13,759) (5,131) (2,428) (2,454) (293) (153)
Other income, net. 1,696 403 (121) 1,696 403 (121)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss)
before income
taxes............ (3,666) 8,921 3,628 7,639 13,759 5,903
Income tax expense
(benefit)(2)..... (2,471) 3,201 3,553 2,356 5,330 4,535
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss). $ (1,195) $ 5,720 $ 75 $ 5,283 $ 8,429 $ 1,368
=========== =========== =========== =========== =========== ===========
Basic earnings
(loss) per share. $ (.07) $ .24 $ -- $ .21 $ .28 $ .04
=========== =========== =========== =========== =========== ===========
Weighted average
number of shares
outstanding...... 17,760,693(7) 23,489,604(7) 24,950,459(7) 24,760,693(8) 30,489,604(8) 31,950,459(8)
=========== =========== =========== =========== =========== ===========
Diluted earnings
(loss) per share. $ (.07) $ .23 $ .00 $ .21 $ .26 $ .04
=========== =========== =========== =========== =========== ===========
Weighted average
number of shares
outstanding...... 17,760,693(7) 25,036,541(7) 26,438,209(7) 25,724,386(8) 32,036,541(8) 33,438,209(8)
=========== =========== =========== =========== =========== ===========
OTHER DATA:
EBITDA(3)......... $ 23,527 $ 22,952 $ 11,321 $ 23,527 $ 22,952 $ 11,321
=========== =========== =========== =========== =========== ===========
EBITDA margin(4).. 11.2% 18.2% 18.3% 11.2% 18.2% 18.3%
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------------------------------------- --------- -----------
JUNE 30, JUNE 30, JUNE 30, MARCH 31, MARCH 31, MARCH 31,
1995 1996 1997 1998 1998(9) 1998(10)
-------- -------- -------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (defi-
cit)................... $ 365 $ (1,592) $ (461) $ 214 $ 1,596 $ 13,631
Total assets............ 14,102 49,161 183,183 305,793 395,045 431,969
Long term debt and
capitalized leases,
less current portion... 2,467 13,196 66,914 63,859 149,459 12,722
Total liabilities....... 8,147 32,246 123,339 145,362 234,614 96,666
Total stockholders' eq-
uity................... 5,955 16,915 59,844 160,431 160,431 335,303
</TABLE>
SELECTED FINANCIAL DATA FOOTNOTES
(1) The acquisitions of Pappy, Inc. ("Pappy"), Soil Remediation of
Philadelphia, Inc. ("SRP"), and Pine Grove, Inc. ("Pine Grove") were
effective on August 15, 1997, August 20, 1997, and December 1, 1997,
respectively. Each of these acquisitions was accounted for under the
purchase method; accordingly, their results of operations are included
from the effective dates of the acquisitions.
(2) Merger costs incurred during the year ended June 30, 1997 of $3.3 million
relating to the acquisition of Super Kwik, Inc. and its affiliates
("Super Kwik"), Donno Company, Inc. and its affiliates, and Apex Waste
Services, Inc. ("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
S-16
<PAGE>
elections were terminated. Merger costs for the six months ended December
31, 1997 were $2.7 million relating to the acquisition of Waste X Services,
Inc. ("Waste X"), Hamm's Sanitation, Inc, and its affiliates (collectively,
"Hamm's"), and an additional charge for Apex, which was acquired on March
31, 1997. Merger costs incurred for the three months ended March 31, 1998
were $3.9 million relating to the acquisition of Bluegrass Containment,
Inc. ("Bluegrass") on March 9, 1998, Frank Stamato & Company and its
affiliates ("Stamato") on March 31, 1998, and Ecology Systems, Inc. and its
affiliates ("Ecology") on March 31, 1998. Also, the tax provision for this
period includes $1.6 million 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) EBITDA represents operating income plus depreciation and amortization.
EBITDA does not represent and should not be considered 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 change 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 trend 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 cash flows; 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.
(4) EBITDA margin represents EBITDA expressed as a percentage of revenues.
(5) The pro forma financial information reflects significant acquisitions by
the Company since July 1, 1996, which include R&A Bender, Inc. and its
affiliates, Waste Services, Inc. and its affiliates, as well as Golden
Gate Carting Co. Inc. ("Golden Gate") and Coney Island Rubbish Removal,
Inc. ("Coney Island"), which have closed into escrow, Pappy, SRP, Pine
Grove and AWD and Atlantic as if such acquisitions had occurred on July
1, 1996. It also includes operating data for predecessor operations of
Apex for the three month period ended September 30, 1996. See "Prospectus
Supplement Summary-Recent Developments" and Unaudited Pro Forma Financial
Information and notes thereto included elsewhere in this Prospectus
Supplement.
(6) Adjusted to give effect to the Offering and the application of the
estimated net proceeds therefrom, as described in "Use of Proceeds," as
if the Offering had occurred on July 1, 1996. See "Prospectus Supplement
Summary-Recent Developments" and Unaudited Pro Forma Financial
Information and notes thereto included elsewhere in this Prospectus
Supplement.
(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) The pro forma financial information reflects the pending acquisitions of
AWD and Atlantic by the Company subsequent to March 31, 1998 as if such
acquisitions had occurred as of March 31, 1998. See "Prospectus
Supplement Summary-Recent Developments," "Risk Factors-Risks Associated
with Completing Pending Acquisitions," and Unaudited Pro Forma Financial
Information and notes thereto included elsewhere in this Prospectus
Supplement.
(10) Adjusted to reflect (i) the acquisition of the Bethlehem Landfill for
$26.1 million in cash and (ii) the sale of 7,000,000 shares of Common
Stock offered by the Company hereby at the public offering price of
$26.375 per share and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
S-17
<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 related notes thereto included elsewhere
in this Prospectus Supplement. The consolidated financial statements of the
Company include the financial position and results of operations of (i)
Hamm's, which was acquired on December 1, 1997, (ii) Bluegrass, which was
acquired on March 9, 1998, (iii) Ecology, which was acquired on March 31,
1998, and (iv) Stamato, which was acquired on March 31, 1998. Each of these
transactions was accounted for under the pooling of interests method of
accounting.
On April 1, 1998, the Company adopted a change in its fiscal year end from
June 30 to December 31. The six month period from July 1, 1997 to December 31,
1997 is a transitional period in connection with this change.
The following discussion includes Forward Looking Statements. The accuracy
of such statements depends upon a variety of factors that may affect the
business and operations of the Company. The Company, in an effort to help keep
its stockholders and the public informed about the Company's operations, may
from time to time issue certain statements that contain or may contain
forward-looking information. Generally, these statements relate to business
plans or strategies, projected or anticipated benefits or other consequences
of such plans or strategies, number of acquisitions and projected or
anticipated benefits from acquisitions made by or to be made by the Company,
or projections involving anticipated revenues, expenses, earnings, levels of
capital expenditures, liquidity or indebtedness or other aspects of operating
results or financial position. All phases of the operations of the Company are
subject to a number of uncertainties, risks and other influences, many of
which are outside the control of the Company and any one of which, or a
combination of which, could materially affect the results of the Company's
operations and whether the Forward Looking Statements made by the Company
ultimately prove to be accurate. See "Disclosure Regarding Forward Looking
Statements."
INTRODUCTION
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. Of
the Company's revenues for the six months ended December 31, 1997,
approximately 86% was attributable to solid waste collection and
transportation operations, approximately 8% was attributable to solid waste
disposal operations, and approximately 6% was attributable to other waste
management services. Of the Company's revenues for the three months ended
March 31, 1998, approximately 83% was attributable to solid waste collection
and transportation operations, approximately 13% was attributable to solid
waste disposal operations, and approximately 4% was attributable 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 one to
three year service agreements. Collection services for residential customers
generally are performed under contracts with, or franchises granted by,
municipalities or regional authorities that grant the Company rights to
service all or a portion of the residents in their jurisdictions, except in
rural areas where the Company usually contracts directly with the customer.
Such contracts or franchises generally range in duration from one to five
years. Recently, some municipalities have bid their residential collection
contracts based on the volume of waste collected versus the number of
households serviced. Residential collection fees are either paid by the
municipalities out of tax revenues or service charges or paid directly by
residents receiving the services.
As part of its solid waste collection operations, the Company's seven owned
or operated transfer stations receive solid waste collected primarily by its
various collection operations, compact the waste and transfer it to
S-18
<PAGE>
larger vehicles for transport to landfills. This procedure reduces the
Company's costs by improving its use of collection personnel and equipment.
The Company's solid waste landfills earn revenues from disposal fees charged
to third parties and from disposal fees charged to the Company's collection
and transportation operations that dispose of solid waste at the Company's
landfills. These landfills receive solid waste from the Company's own
collection companies and transfer stations, as well as from independent
collection operators. Over the six months ended December 31, 1997,
approximately 17% of the Company's revenues generated from collection
operations represented solid waste collected by the Company that was delivered
for disposal at its own landfills, and approximately 23% 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. Over
the three months ended March 31, 1998, approximately 40% 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 43% of the Company's revenue generated from landfill disposal
operations represented solid waste disposed of at the Company's landfills that
was delivered by the Company.
The Company's prices for solid waste collection, transportation and disposal
services are typically determined by the volume, weight, or type of waste
collected, as well as other factors including the competitive pricing
environment. The Company's ability to pass on cost increases may be limited by
the terms of its contracts.
COST OF REVENUES
Cost of revenues consists primarily of tipping fees paid to third party
landfills, accruals for future landfill closure and post-closure costs, direct
labor and related taxes and benefits, subcontracted transportation and
equipment rental charges, maintenance and repairs of equipment and facilities,
environmental compliance costs and site maintenance costs for landfills, fuel,
and landfill assessment fees and taxes. See " - Liquidity and Capital
Resources."
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses consist primarily of
management, clerical and administrative salaries and costs and overhead,
professional services, facility rentals and associated costs, financial
insurance bonding premiums, landfill related financial assurance bonding
premiums, and costs relating to marketing and sales.
The Company capitalizes direct incremental costs associated with purchase
acquisitions. Indirect development and acquisition costs, such as executive
salaries, corporate overhead, public relations, and other corporate services
and overhead are expensed as incurred. The Company also charges as an expense
any unamortized capitalized expenditures relating to proposed acquisitions
that will not be consummated.
At March 31, 1998, capitalized costs related directly to proposed
acquisitions that were not yet consummated were approximately $600,000. The
Company periodically reviews the future realization of these capitalized
project costs and makes provisions against capitalized costs that are
associated with projects that are not likely to be completed.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization consists primarily of depreciation of
buildings, vehicles, and machinery and equipment, amortization of capitalized
direct landfill development costs, and amortization expense related to
intangible assets including goodwill. Property and equipment is depreciated
over the estimated useful life of the assets using the straight line method.
Intangible assets, including goodwill, are amortized using the straight line
method for periods not exceeding 40 years.
Certain direct engineering, legal, permitting, construction, and other costs
associated with expansion of landfills, together with related interest costs,
are capitalized and are amortized over the estimated useful life of
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<PAGE>
the site using the unit of production method as airspace is consumed.
Successful permitting of additional landfill disposal capacity improves the
Company's profitability by increasing the airspace over which the Company may
amortize capitalized costs of the landfill. At March 31, 1998, capitalized
costs related directly to the acquisition and expansion of existing and future
landfills and cell development were $99.0 million.
The Company's policy is to charge as an expense any unamortized capitalized
expenditures and advances relating to any landfill that is permanently closed
or any landfill expansion project that is abandoned.
MERGER COSTS
In connection with acquisitions accounted for under the pooling of interests
method, the Company records various merger costs including transaction-related
expenses and costs to bring the acquired assets into conformity with corporate
safety and operational standards.
OTHER INCOME (EXPENSES)
Other income and expense, which includes gains and losses on sales of
equipment, has not historically been material to the Company's results of
operations.
TAXES
In the year ended June 30, 1997, the Company utilized approximately $3.8
million of net operating loss carryforwards for federal income tax purposes.
In subsequent periods, the Company's provision for income taxes should more
closely approximate the statutory tax rates, increased by the effect of
nondeductible amortization expense.
ACQUISITION PROGRAM
In June 1996, the Company initiated an acquisition program to expand its
operations by acquiring solid waste collection, transportation, and disposal
businesses, principally in the eastern United States. Approximately $51.3
million or 93% of the Company's revenues for the three months ended March 31,
1998 and approximately $209.4 million or 68% of the Company's assets at March
31, 1998 resulted from 34 acquisitions consummated by the Company between July
1996 and March 1998. Of these 34 acquisitions, 26 have been accounted for
under the purchase method of accounting and eight have been accounted for
under the pooling of interests method of accounting.
With respect to the 26 acquisitions that have been accounted for under the
purchase method of accounting, goodwill is amortized over a period not to
exceed 40 years, resulting in an annual noncash 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 noncash charges relating to
goodwill. Amortization expense of goodwill was approximately $483,000 for the
three months ended March 31, 1998.
In addition, the Company closed into escrow on May 12, 1997 the pending
acquisitions of Golden Gate and Coney Island pending approval of the
transactions by the New York City Trade Waste Commission (the "TWC").
Estimated consideration relating to the Golden Gate and Coney Island
acquisitions consists of an aggregate of 288,820 unregistered shares of Common
Stock and the assumption of approximately $3.0 million of debt. The
acquisitions of Golden Gate and Coney Island will be accounted for under the
purchase method.
In connection with each of its acquisitions, the Company attempts to
implement a number of cost saving measures, including possible reductions in
management levels and other personnel, the implementation of centralized
management and cost controls, and the elimination of duplicate collection
routes.
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<PAGE>
Because of the relative importance of acquired business and assets to the
Company's financial performance, the Company does not believe that its
historical financial statements are necessarily indicative of future
performance.
SUBSEQUENT ACQUISITIONS
From April 1, 1998 to May 15, 1998, the Company acquired the assets of five
collection companies in separate transactions. Total consideration under the
agreements consists of 6,863 shares of Common Stock, cash of approximately
$2.3 million to the sellers, and the assumption of $124,000 of long term debt.
These transactions will be accounted for using the purchase method of
accounting.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1997
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues............................................... 100.0% 100.0%
Cost of revenues....................................... 62.5 67.4
Selling, general, and administrative expenses.......... 12.7 16.1
Depreciation and amortization.......................... 7.9 5.5
Merger costs........................................... 7.1 4.2
--------- ---------
Operating income....................................... 9.8 6.8
Interest expense, net.................................. (1.8) (2.6)
Other income (expense)................................. (0.2) 1.4
--------- ---------
Income before income taxes............................. 7.8 5.6
Income tax expense..................................... 6.7 1.3
--------- ---------
Net income............................................. 1.1% 4.3%
========= =========
</TABLE>
Revenues for the three months ended March 31, 1998 were $55.2 million
compared to $35.0 million for the three months ended March 31, 1997, an
increase of $20.2 million or 58%. The principal factor affecting the increase
in revenues was the impact of acquisitions accounted for as purchases made in
the past twelve months, primarily consisting of Pappy, Pine Grove, Kelly Run
Sanitation, Inc. and several solid waste collection companies in the New York,
New Jersey and Florida markets, which contributed aggregate revenues of $14.0
million for the three months ended March 31, 1998. The acquisitions accounted
for as poolings of interests (Super Kwik, Apex, Donno Company, Inc. and
affiliates ("Donno"), Hamm's, Bluegrass, Stamato, and Ecology) contributed
revenues of $31.7 million for the three months ended March 31, 1998 compared
to $28.2 million for the same period in 1997, an increase of $3.5 million. An
additional $1.8 million of revenue was generated in the three months ended
March 31, 1998 from two transfer stations which were not in operation during
the three months ended March 31, 1997.
Cost of revenues for the three months ended March 31, 1998, were $34.5
million compared to $23.6 million for the three months ended March 31, 1997,
an increase of $10.9 million. Cost of revenues as a percentage of revenues for
the three months ended March 31, 1998, was 62.5% compared to 67.4% for the
same period in 1997. This decrease in percentage was primarily due to (i) the
acquisition by the Company of three landfills, which operate at higher margins
than the Company's other operations, (ii) economies of scale relating to the
Company's increase in size over the period, and (iii) operating efficiencies.
Selling, general, and administrative expenses for the three months ended
March 31, 1998 were $7.0 million compared to $5.6 million for the three months
ended March 31, 1997, an increase of $1.4 million or 25%. These
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<PAGE>
expenses as a percentage of revenues for the three months ended March 31,
1998, were 12.7% compared to 16.1% for the same period in 1997. The decrease
as a percentage of revenues reflects the elimination of redundant overhead as
acquisitions in certain geographic areas are consolidated, as well as certain
cost controls placed on previously private pooled companies. This decrease was
partially offset by the increased infrastructure, including accounting,
finance, legal and administration, necessary to integrate the acquisitions
consummated.
Depreciation and amortization totaled $4.3 million, or 7.9% of revenues, for
the three months ended March 31, 1998, versus $1.9 million, or 5.5% of
revenues, for the same period in 1997. This increase was primarily due to
increased depreciation and landfill amortization as a result of businesses and
assets acquired as well as amortization of goodwill and other intangibles
associated with the acquisitions.
Merger costs incurred during the three months ended March 31, 1998 were $3.9
million, related to the acquisitions of Bluegrass, Ecology and Stamato. These
acquisitions were accounted for as poolings of interests. Merger costs for the
same period in 1997 were $1.5 million and related to the acquisitions of Donno
and Apex, and included an adjustment related to Super Kwik.
The Company recorded a tax provision of $3.7 million for the three months
ended March 31, 1998. This provision is comprised of $1.8 million of federal
and state taxes at statutory rates, and a $1.9 million one-time tax expense
related to non-deductible merger costs and the establishment of deferred
income tax liabilities for pooled companies which were S Corporations prior to
the date of the merger. The tax provision at March 31, 1997 principally
relates to the recording of deferred income tax liabilities for pooled
companies acquired during the quarter ended March 31, 1997 which were S
Corporations prior to the date of the merger, as well as the recording of
federal and state liabilities for other pooled companies. An effective tax
rate lower than the federal and state statutory rate for the quarter ended
March 31, 1997 is primarily due to the use of net operating loss carryforwards
and income from pooled companies which were taxed as S Corporations.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO
THE SIX MONTHS ENDED DECEMBER 31, 1996
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues................................................. 100.0% 100.0%
Cost of revenues......................................... 68.6 78.7
Selling, general, and administrative expenses............ 12.5 11.5
Depreciation and amortization............................ 6.0 4.6
Merger costs............................................. 2.6 2.9
-------- --------
Operating income......................................... 10.3 2.3
Interest expense, net.................................... (1.2) (1.5)
Other income (expense)................................... 0.3 0.4
-------- --------
Income before income taxes............................... 9.4 1.2
Income tax expense....................................... 3.3 1.2
-------- --------
Net income............................................... 6.1% 0.0%
======== ========
</TABLE>
Revenues for the six months ended December 31, 1997 were $106.9 million
compared to $65.0 million for the six months ended December 31, 1996, an
increase of $41.9 million, or 64.0%. The principal factor affecting the
increase in revenues was the impact of acquisitions accounted for as purchases
made in the past twelve months, primarily consisting of Pappy, Pine Grove, SRP
and several solid waste collection companies in the New York and Florida
markets, which contributed aggregate revenues of $19.7 million for the six
months ended
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<PAGE>
December 31, 1997. The acquisitions of Super Kwik, Donno, Hamm's, Bluegrass,
Stamato and Ecology, which have been accounted for as poolings of interests,
contributed revenue of $57.9 million for the six months ended December 31,
1997 compared to $50.1 million for the six months ended December 31, 1996, an
incremental increase of $7.8 million. Additionally, Apex contributed revenues
of $8.7 million for the six months ended December 31, 1997, as compared to
$4.4 million for the six months ended December 31, 1996. The primary reason
for this increase is that, although the acquisition of Apex was accounted for
as a pooling of interests, Apex did not commence operations until October 1,
1996. Also, because R&A Bender, Inc. was acquired on December 10, 1996, it
contributed only $526,000 to revenues for the six months ended December 31,
1996, as compared to revenues of $4.4 million for the six months ended
December 31, 1997.
Cost of revenues for the six months ended December 31, 1997, was $73.3
million compared to $51.2 million for the six months ended December 31, 1996,
an increase of $22.1 million or 43.2%. Cost of revenues as a percentage of
revenues for the six months ended December 31, 1997 was 68.6% compared to
78.7% for the same period in fiscal 1997. This decrease in percentage was
primarily due to (i) the acquisition by the Company of five landfills, which
operate at higher margins than the Company's other operations, (ii) economies
of scale relating to the Company's increase in size over the period, and (iii)
operating efficiencies.
Selling, general, and administrative expenses for the six months ended
December 31, 1997, were $13.4 million compared to $7.5 million for the six
months ended December 31, 1996, an increase of $5.9 million or 79%. These
expenses as a percentage of revenues for the six months ended December 31,
1997, were 12.5% compared to 11.5% for the same period in fiscal 1997. The
slight increase as a percentage of revenues reflects the increased
infrastructure, including accounting, finance, legal and administration,
necessary to integrate the acquisitions consummated. This increase was
partially offset by the elimination of redundant overhead as acquisitions in
certain geographic areas were consolidated.
Depreciation and amortization totaled $6.4 million, or 6.0% of revenues, for
the six months ended December 31, 1997, versus $3.0 million, or 4.6% of
revenues, for the same period in fiscal 1997. This increase was primarily due
to increased depreciation, landfill amortization, and amortization of goodwill
and other intangibles associated with the acquisitions.
Merger costs incurred during the six months ended December 31, 1997, were
$2.7 million, related to the acquisition of Waste X acquired on August 14,
1997, Hamm's, acquired on December 1, 1997, and an additional charge for Apex,
which was acquired on March 31, 1997. These acquisitions were accounted for as
pooling of interests. Merger costs for the same period in fiscal 1997 were
$1.9 million and related to the acquisition of Super Kwik.
The tax provision of $3.5 million for the six months ended December 31,
1997, principally relates to the recording of federal and state tax
liabilities at statutory rates, adjusted for certain non-deductible items, and
excludes S Corporation income prior to the pooling dates. The tax provision
for the six months ended December 31, 1996, principally relates to the
completion of the merger with Super Kwik, and reflects the recording of a
deferred tax liability as of the date of the merger, the date Super Kwik's S
Corporation election was terminated.
S-23
<PAGE>
RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997 COMPARED TO THE YEAR
ENDED JUNE 30, 1996
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues.............................................. 100.0% 100.0%
Cost of revenues...................................... 73.0 80.2
Selling, general, and administrative expenses......... 13.4 16.0
Depreciation and amortization......................... 5.0 5.3
Merger Costs.......................................... 2.3 --
--------- ---------
Operating income (loss)............................... 6.3 (1.5)
Interest expense, net................................. (2.2) (1.3)
Other income.......................................... 0.4 0.1
--------- ---------
Income (loss) before income taxes..................... 4.5 (2.7)
Income tax expense.................................... 1.3 0.1
--------- ---------
Net income (loss)..................................... 3.2% (2.8)%
========= =========
</TABLE>
Revenues for the year ended June 30, 1997 were $145.3 million compared to
$100.0 million for the year ended June 30, 1996, an increase of $45.3 million
or 45.3%. The principal factors affecting the increase in revenues were (i)
the impact of 14 acquisitions accounted for under the purchase method, which
contributed aggregate revenues of $24.1 million for the year ended June 30,
1997, including the acquisitions of Allied Waste Services, Inc., Waste
Services, Inc., Environmental Waste Systems, Inc., R&A Bender, Inc. and their
respective affiliates, and (ii) the acquisitions of Super Kwik and Donno,
which have been accounted for under the pooling of interests method, and which
contributed revenue of $35.8 million for the year ended June 30, 1997 compared
to $31.9 million for the year ended June 30, 1996, an incremental increase of
$3.9 million. Additionally, the acquisition of Apex, which has been accounted
for under the pooling of interests method, contributed revenues of $13.1
million since its inception of operations on October 1, 1996.
Cost of revenues for the year ended June 30, 1997 was $106.1 million
compared to $80.2 million for the year ended June 30, 1996, an increase of
$25.9 million or 32.2%. Cost of revenues as a percentage of revenues for the
year ended June 30, 1997 was 73.0% compared to 80.2% 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 accounted for as pooling of interests. 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 year ended June 30,
1997 were $19.5 million compared to $16.0 million for the year ended June 30,
1996, an increase of $3.5 million or 21.9%. These expenses as a percentage of
revenues for the year ended June 30 ,1997 were 13.4% compared to 16.0% for the
same period in fiscal 1996. This reduction as a percentage of revenue was
primarily due to (i) certain cost savings related to economies of scale in
restructuring the Company's insurance program and (ii) overall economies
gained through elimination of redundant overhead as a result of integration of
acquisitions. Additionally, in fiscal 1996 the Company incurred unusual
operating costs related to the change in management control of the Company in
June of 1996, and increases in certain reserves.
Depreciation and amortization totaled $7.2 million, or 5.0% of revenues, in
fiscal 1997 versus $5.3 million, or 5.3% of revenues, in fiscal 1996. This
increase was due primarily to increased depreciation, landfill amortization,
and amortization of goodwill and other intangibles associated with the
acquisitions.
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<PAGE>
Merger costs incurred during the year ended June 30, 1997 totaled $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.
Net interest expense for the year ended June 30, 1997 was $3.2 million
compared to $1.3 million for the year ended June 30, 1996, an increase of
approximately $1.9 million. This increase is principally the result of
borrowings under the Company's credit facility relating to (i) acquisitions,
(ii) the purchase of real estate, and (iii) equipment financing in fiscal
1997.
Other income, net, for the year ended June 30, 1997 was $595,000 compared to
$145,000 for the year ended June 30, 1996, an increase in income of $450,000.
This change was primarily due to a $489,000 one-time write down in fiscal 1996
of 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 management control in June 1996.
The tax provision for the year ended June 30, 1997 included $904,000
relating to the recording of a deferred tax provision as of the date of the
mergers with Super Kwik, Donno, and Apex, at which time the pooled entities' S
Corporation elections were terminated and excludes S Corporation income prior
to the pooling dates. The Company's effective tax rate, excluding the impact
of S Corporation status termination and income prior to the pooling dates, was
26.3% for fiscal 1997. The effective tax rate was less than the federal and
state statutory rates primarily due to the reversal of the valuation
allowance. In 1996, the tax expense relates primarily to the C Corporation
earnings of Hamm's, and 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
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.
At March 31, 1998, the Company had working capital of $214,000, including
cash and cash equivalents of $4.7 million. For the three months ended March
31, 1998, net cash provided by operations was approximately $9.1 million, net
cash provided by financing activities was approximately $4.1 million and net
cash used in investing activities was approximately $15.2 million resulting in
an increase in cash and cash equivalents of $2.0 million during this period.
Capital expended during the period included: (i) $5.1 million relating to
acquisitions, (ii) $4.7 million for the purchase of operating equipment and
real estate, and (iii) $5.2 million related to the permitting and development
of landfill space.
On September 25, 1996, the Company entered into a revolving credit facility
with BankBoston, N.A. (formerly known as First National Bank of Boston) and
Bank of America Illinois to provide for borrowings up to $30 million (the
"Credit Facility"). The Credit Facility was increased to $50 million on
January 27, 1997, to $100 million on May 8, 1997, and to $150 million on
October 27, 1997. The Credit Facility is available for repayment of debt,
funding of acquisitions, working capital, and for up to $50 million in standby
letters of credit. At May 15, 1998, approximately $17.3 million in letters of
credit were outstanding under the Credit Facility. Also, at May 15, 1998,
there were approximately $52.1 million of borrowings under the Credit
Facility.
At the Company's option, the interest rate on any loan under the Credit
Facility may be based on an adjusted prime rate or Eurodollar rate, as defined
in the loan agreement. On May 15, 1998, the applicable interest rate was 6.4%.
The facility expires in October 2002. The Credit Facility requires the payment
of a commitment fee, payable in arrears, based in part on the unused balance
and provides for certain restrictions on, among other things, the ability of
the Company to incur borrowings, sell assets, acquire assets, make capital
expenditures or pay cash dividends. The facility also requires the maintenance
of certain financial ratios, including interest
S-25
<PAGE>
coverage ratios and balance sheet and cash flow leverage ratios, and requires
profitable operations. The facility is collateralized by all the stock of the
Company's subsidiaries, whether now owned or hereafter acquired.
In August 1997, the Company issued 5,175,000 shares of Common Stock at
$17.75 per share in a public offering. The net proceeds of $85.3 million after
deducting underwriting discounts, commissions and other offering expenses were
used to reduce outstanding debt under the Credit Facility by $57.5 million
with the remainder to be used for future acquisitions, capital expenditures
and working capital. The Company invested the unused net proceeds in short-
term interest bearing securities.
To date the Company has required substantial amounts of capital and it
expects to continue to expend substantial amounts to support its acquisition
program and the expansion of its disposal and transportation operations. The
Company estimates aggregate capital expenditures, exclusive of acquisitions of
businesses, of approximately $35 million for the twelve months ending December
31, 1998. The Company has addressed its capital needs through private and
public offerings of Common Stock and by establishing the Credit Facility. The
Company believes that the Credit Facility, the funds expected to be generated
from operations, and net proceeds from possible future equity offerings will
provide adequate cash to fund the Company's working capital and other cash
needs for the foreseeable future.
The Company has 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, the Company estimated the total costs
to be approximately $27.8 million for final closure of its landfills, of which
$8.5 million had been accrued at March 31, 1998. The Company makes an accrual
for these costs based on consumed airspace in relation to the 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 $17.1 million. At March 31, 1998,
the Company had accrued $5.5 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.
SEASONALITY AND INFLATION
The Company's revenues tend to be somewhat higher in the spring and summer
months. This is primarily attributable to the fact that the volume of waste
relating to construction and demolition activities tends to increase in the
spring and summer months and 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 PRONOUNCEMENTS
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 adopted SOP 96-1 in the quarter ended September 30, 1997, and the
effect of adoption was not material to the Company.
S-26
<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. From July 1, 1996 through March 31,
1998, the Company acquired 34 solid waste management businesses, and thereby
entered new markets in Florida, Illinois, Maryland, New Jersey, New York, and
Pennsylvania. The businesses acquired operated 28 solid waste collection and
transportation operations, six landfills, four solid waste transfer and
processing facilities, and two special waste services operations. Largely as a
result of these acquisitions, for the six months ended December 31, 1996 and
1997, respectively, the Company's revenues increased by 64% (from $65.0
million to $106.9 million) and its net income increased from $19,000 to $6.5
million, and for the three months ended March 31, 1997 and 1998, respectively,
the Company's revenues increased by 58% (from $35.0 million to $55.2 million)
and its net income decreased from $1.5 million to $593,000. Subsequent to
March 31, 1998, the Company acquired five solid waste collection operations.
The Company also has entered into definitive agreements to acquire 11
collection and transportation operations, six transfer stations, and three
landfills. There can be no assurance, however, that any of these pending
acquisitions will occur.
The Company currently operates solid waste collection and transportation
operations in southern Florida, southeastern Illinois, New Jersey, the greater
metropolitan New York City area, Pennsylvania and South Carolina, and owns
landfills in Florida, Illinois, Kentucky, Maryland, Pennsylvania, South
Carolina, and West Virginia. Of the Company's revenues for the six months
ended December 31, 1997, approximately 86% was attributable to solid waste
collection and transportation operations, approximately 8% was attributable to
solid waste disposal operations, and approximately 6% was attributable to
other waste management services. Of the Company's revenues for the three
months ended March 31, 1998, approximately 83% was attributable to solid waste
collection and transportation operations, approximately 13% was attributable
to solid waste disposal operations, and approximately 4% was attributable to
other waste management services. The Company currently provides solid waste
collection services to approximately 35,000 commercial and industrial
customers and approximately 370,000 residential customers.
INDUSTRY OVERVIEW
Management believes that the United States non-hazardous solid waste
collection and disposal industry generated revenues of approximately $35
billion in 1997. In recent years, the industry has experienced significant
consolidation. The Company believes that this consolidation has been caused
primarily by four factors: (i) the costs of complying with 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 economics 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 (i) increases in the
technical and managerial expertise necessary to operate profitably, (ii)
increases in costs and capital requirements, and (iii) increases 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.
COMPANY 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
S-27
<PAGE>
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, (iii)
internalizing greater volumes of disposal waste through strategic landfill
acquisitions, and (iv) achieving internal growth.
EXPANSION THROUGH ACQUISITIONS. The Company has implemented an 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 New 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 where there are sufficient disposal alternatives to ensure
competitive disposal pricing. The Company may also acquire solid waste
landfills in its targeted new markets with significant currently
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 duplicate 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
implementing 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 by 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.
INTERNALIZING GREATER VOLUMES. After the Company has acquired a landfill, it
seeks to maximize internalization of waste it collects, and thereby intends to
realize higher margins from its operations. The Company also increases the
utilization of its landfills by securing captive waste streams, which includes
developing and acquiring transfer stations, and entering into solid waste
collection contracts.
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.
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, which meet its acquisition criteria. The
Company targets fragmented markets in the eastern United States (i) that can
be served by a Company-operated landfill, a landfill that the Company believes
that it can acquire, or one 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
S-28
<PAGE>
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 and
profitably. The Company is continually analyzing and engaging in discussions
concerning potential acquisitions.
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.
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 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 market 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 with the acquisition, and
which serves as the Company's principal financial tool in evaluating an
acquisition.
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 acquisition, 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 businesses to assure conformity to 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, 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,
lines of credit available under its credit facility, and the proceeds of
possible future equity and debt financing. See "Shares Eligible for Future
Sale."
S-29
<PAGE>
COMPLETED ACQUISITIONS. Since July 1, 1996, the Company has acquired 39
solid waste management businesses. The businesses acquired operated 33 solid
waste collection and transportation operations, six landfills, four solid
waste transfer and processing facilities, and two special waste services
operations. The following is a detailed list of the completed acquisitions:
COMPLETED ACQUISITIONS
JULY 1, 1996 -- MAY 15, 1998
<TABLE>
<CAPTION>
DATE ACQUIRED MARKET
COMPANY (ACCOUNTING METHOD) (LANDFILL SITE) PRINCIPAL BUSINESS
- ------- ------------------- --------------- ------------------
<S> <C> <C> <C>
Middle Island Enter- May 14, 1998 West Virginia Solid waste
prises, Inc. (Purchase) collection
Smith Sanitation April 30, 1998 Northeastern Solid waste
(Purchase) Pennsylvania collection
DeCuollo Disposal Serv- April 30, 1998 Northern New Jersey Solid waste
ice (Purchase) collection
United Container & Recy- April 1, 1998 Southern New Jersey Solid waste
cling, Inc. (Purchase) collection
Richard Peterson & Son April 1, 1998 Southern New Jersey Solid waste
(Purchase) collection
Ecology Systems, Inc., March 31, 1998 New York, New Jersey, Solid waste
et al. (Pooling of Interests) Pennsylvania collection and
transportation
Frank Stamato & Company, March 31, 1998 Northern New Jersey Solid waste
et. al. (Pooling of Interests) collection
Bluegrass Containment, March 9, 1998 Central Kentucky Landfill
Inc. (Pooling of Interests) (Hartford, KY) (construction and
demolition)
Red Ball Sanitation February 25, 1998 New York Solid waste
Corp. (Purchase) collection
Kelly Run Sanitation, February 12, 1998 Western Pennsylvania Landfill
Inc. (Purchase) (Pittsburgh, PA) (municipal solid
waste)
Minchoff Sanitation January 16, 1998 Central Pennsylvania Solid waste
(Purchase) collection
J Scerbo Company & SRS January 7, 1998 Northern New Jersey Solid waste
Recycling (Purchase) collection
Golden Gate Carting Co.,
Haulaway, Inc. and January 7, 1998 Northern New Jersey Solid waste
Recycling Center of (Purchase) collection
N.J.
Lake Region Sanitation January 1, 1998 Northeastern Solid waste
(Purchase) Pennsylvania collection
Berger Waste Management, December 31, 1997 Eastcentral Illinois Solid waste
Inc. (Purchase) collection
Hamm's Sanitation, Inc., December 1, 1997 Northeastern New Solid waste
et al. (Pooling of Interests) Jersey collection
Pine Grove, Inc. December 1, 1997 Central Pennsylvania Solid waste
(Purchase) (Pine Grove, PA) collection, transfer
station, and landfill
(municipal solid
waste)
Schmucker's Disposal September 22, 1997 Southeastern Illinois Solid waste
Services (Purchase) collection
</TABLE>
S-30
<PAGE>
<TABLE>
<CAPTION>
DATE ACQUIRED MARKET
COMPANY (ACCOUNTING METHOD) (LANDFILL SITE) PRINCIPAL BUSINESS
- ------- ------------------- --------------- ------------------
<S> <C> <C> <C>
Soil Remediation of August 20, 1997 Eastern Pennsylvania Special waste
Philadelphia, Inc. (Purchase)
Pappy, Inc. August 15, 1997 Northern Maryland Landfill
(Purchase) (Joppa, MD) (construction and
demolition)
Waste X Services, Inc. August 14, 1997 Southern Florida Solid waste
(Pooling of Interests) collection
Reuben Smith Rubbish July 9, 1997 Southern New Jersey Solid waste
Removal Service, Inc. (Purchase) collection
A-1 Carting Corporation May 27, 1997 Southern Florida Solid waste
(Purchase) collection
Ameri Carting, Inc. May 27, 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, Inc. May 8, 1997 Southern Florida Solid waste
(Purchase) collection
Combined Waste Services, May 8, 1997 Southern Florida Solid waste
Inc. (Purchase) collection
Environmental Waste Sys- May 8, 1997 Southern Florida Solid waste
tems Inc. (Purchase) collection
Environmental Waste
Systems of Palm Beach, May 8, 1997 Southern Florida Solid waste
Inc. (Purchase) collection
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 Interests) Pennsylvania collection; transfer
station and
processing
Donno Company, Inc., et January 31, 1997 Long Island, New York Solid waste
al. (Pooling of Interests) collection and
transfer station
R&A Bender, Inc., et al. December 10, 1996 Southcentral Solid waste
(Purchase) Pennsylvania collection and
(Chambersburg, PA) landfill
(municipal solid
waste)
Bayside of Marion, Inc. November 5, 1996 Central Florida Landfill
(Purchase) (Ocala, FL) (construction and
demolition)
Super Kwik, Inc., et al. September 27, 1996 Southern New Jersey Solid waste
(Pooling of Interests) collection
Olney Sanitary Systems, September 27, 1996 Southeastern Illinois Solid waste
Inc. (Purchase) collection
Eastern Waste of Phila- August 1, 1996 Philadelphia, Solid waste
delphia, Inc., et al. (Purchase) Pennsylvania collection
K Hydraulic Truck Serv- July 27, 1996 Philadelphia, Solid waste
ices, Inc. (Purchase) Pennsylvania collection
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>
S-31
<PAGE>
On April 29, 1997, the Company signed a 12.5-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.
On September 8, 1997, the Company acquired certain assets and real estate
from Clean Ventures, Inc. and PJ's Environmental Services to operate a
transfer station in Brooklyn, New York. In connection with the acquisition,
the Company was assigned two consent orders issued by the New York State
Department of Environmental Conservation (the "DEC") and the New York City
Department of Sanitation (the "DOS"). The consent orders give the Company the
authority to operate the transfer station at a rate of 1,000 tons of municipal
solid waste and 2,500 tons of construction and demolition waste per day.
Municipal solid waste cannot be processed until the Company constructs a
building in which the municipal solid waste will be handled. The Company
expects that it will have the building constructed by July 1998. The consent
order issued by the DEC had an initial term of 90 days and was renewed two
times. The DEC recently decided not to renew its consent order for a further
90 day term. The Company has initiated a legal action against the DEC for its
failure to renew the consent order and the court granted the Company a
temporary restraining order prohibiting the DEC from interfering with the
transfer station's construction and demolition operation. A further hearing
has been scheduled for the end of May 1998, when the court will decide to
continue or remove the restraining order. Though no assurance can be given,
the Company believes it will prevail in the legal action. If the Company does
not prevail, it will not be able to operate the transfer station until it
receives a permit from the DEC. The Company has applied for a permit from the
DEC and the DOS which could take up to one year to be issued.
PENDING ACQUISITIONS. The Company has entered into definitive agreements to
acquire 11 collection and transportation operations, six transfer stations and
three landfills. The collection companies include seven tuck-in acquisitions
in New York, two tuck-in acquisitions in Pennsylvania, one tuck-in acquisition
in New Jersey, and one tuck-in acquisition in Florida. The transfer stations
include three acquisitions in New York City, two acquisitions in New Jersey,
and one acquisition in Florida. The landfills include one acquisition in
Georgia, one acquisition in Pennsylvania, and one acquisition in Virginia.
There can be no assurance that any of these pending acquisitions will occur.
See "Risk Factors - Risks Associated with Completing Pending Acquisitions."
In March 1998, the Company signed definitive agreements to acquire Atlantic
Waste Disposal, Inc. ("AWD") and Atlantic New York, Inc. ("Atlantic") from
Brambles USA for an aggregate purchase price of $85.6 million. AWD owns a
Subtitle D landfill on a 1,315 acre parcel in Waverly, Virginia which has
received Part A Site Suitability approval from the state regulatory agency,
for an approximate 500 acre disposal area. The landfill site has a potential
capacity of approximately 190 million tons of municipal solid waste, depending
on types of wastes received and compaction ratios achieved. A Part B
engineering design Permit from the state regulatory agency is required prior
to cell construction, and construction certification approval is required for
the acceptance of waste. The facility has a Part B Permit for its 48 acre
active disposal area, with 0.5 million cubic yards of remaining capacity,
which is currently operating at 3,000 tons per day by truck and rail service.
An additional 18 acre cell providing 3.2 million cubic yards of capacity has
been constructed and is awaiting construction certification approval which the
Company believes will be granted in the near future. A portion of current and
future development requires wetland relocation approvals. Atlantic is a
Brooklyn, New York transfer station with direct rail service that services
Brooklyn and Queens, New York and is permitted for 1,000 tons of municipal
solid waste and 75 tons of construction and demolition waste per day. Both
acquisition agreements are subject to customary closing conditions, including
the requirements of obtaining certain governmental and other third party
consents. The AWD landfill is also subject to the waiver or expiration of a
90-day right of first refusal to acquire the AWD landfill held by a third
party. The closing of the AWD and Atlantic acquisitions are contingent upon
one another. Accordingly, there can be no assurance that the acquisition of
AWD and Atlantic will occur. See "Risk Factors - Risks Associated with
Completing Pending Acquisitions."
In December 1997, the Company signed a definitive agreement to acquire the
City of Bethlehem landfill (the "Bethlehem Landfill") from the City of
Bethlehem, Pennsylvania for an aggregate purchase price of $26.1
S-32
<PAGE>
million. The Bethlehem Landfill has a net remaining permitted disposal
capacity of 880,000 tons, with an approximate life expectancy of 3.75 years. A
potential expansion of the landfill within the limits of the presently
permitted area would provide an additional disposal capacity of approximately
4 million tons of municipal solid waste, which would potentially increase its
life expectancy by an additional 12 years. This agreement is subject to
customary closing conditions, including the requirements of obtaining certain
governmental and other third party consents. Accordingly, there can be no
assurance that the acquisition of the Bethlehem Landfill will occur. See "Risk
Factors - Risks Associated with Completing Pending Acquisitions."
In May 1997, the Company also entered into definitive agreements to acquire
Golden Gate and Coney Island, solid waste collection companies located in
Brooklyn, New York, for approximately $4.4 million (including approximately
$3.0 million of assumed debt) and $1.2 million, respectively. In May 1997, the
acquisitions were 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. See "Risk Factors-
Risks Associated with Completing Pending Acquisitions."
As part of its acquisition program, the Company reviews acquisition
opportunities on an ongoing basis and is in various stages of negotiating and
closing on the acquisitions of additional solid waste management businesses.
There can be no assurance that any of such acquisition negotiations or
executed agreements will result in the actual acquisitions 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. At May 1, 1998, the Company provided
solid waste collection services to approximately 35,000 commercial and
industrial customers and approximately 370,000 residential customers. The
Company contracts with local generators of solid waste and transports the
waste to a Company-owned or third party landfill or incinerator for disposal
or to a transfer station for additional handling.
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. In certain instances however, 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 customers. 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 versus the number of households serviced.
Residential collection fees are either paid by the municipalities out of tax
revenues or service charges or paid directly by residents receiving the
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.
S-33
<PAGE>
The Company's solid waste collection activities include the ownership of
transfer stations in Long Island, New York, Scranton and Port Clinton,
Pennsylvania, Somerset, Kentucky, and Vincennes, Indiana, and the operation of
additional transfer stations in Brooklyn and Long Island, New York. The
Company's transfer stations receive solid waste primarily from its collection
operations, compact the waste and transfer the waste to larger 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 three
months ended March 31, 1998 approximately 61% of the solid waste disposed of
at the Company's transfer stations was delivered by the Company and
approximately 39% was delivered by third parties.
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. See " -
Government Regulation - State and Local Regulations."
The Company also provides solid waste transportation services for Company-
owned and third party landfills. At May 1, 1998, the Company maintained a
fleet of approximately 340 trailers owned or leased by the Company, or
operated under arrangements with independent owners/operators. 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 $128.6
million, $92.1 million, and $45.8 million for the year ended June 30, 1997,
for the six months ended December 31, 1997, and for the three months ended
March 31, 1998, respectively, representing approximately 88%, 86%, and 83%,
respectively, of the Company's total revenue for such periods.
WASTE DISPOSAL. The Company owns ten non-hazardous solid waste landfills,
nine of which are currently operational with the remaining one expected to be
operational in the fall of 1998. The following table summarizes certain
information concerning the Company's landfills:
COMPANY LANDFILLS
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
UNUSED REMAINING
TOTAL TOTAL PERMITTED PERMITTED LIFE IN
LOCATION ACRES DISPOSAL ACRES CAPACITY(1) YEARS(2)
- -------- ----- --------------- ------------ -----------
<S> <C> <C> <C> <C>
Chambersburg, Pennsylvania....... 278 142 14.3 million 35
Pittsburgh, Pennsylvania......... 306 48 6.0 million 10
Bridgeport, Illinois............. 95 42 5.7 million 20
Somerset, Kentucky(3)............ 244 42 5.5 million 20
Hartford, Kentucky............... 800 56 5.4 million 40
Clarksburg, West Virginia........ 145 45 4.7 million 30
Pine Grove, Pennsylvania......... 157 76 4.0 million 10
Eastover, South Carolina......... 73 39 3.6 million 25
Joppa, Maryland.................. 43 39 2.9 million 15
Ocala, Florida................... 31 31 1.6 million 15
</TABLE>
- --------
(1) Approximate cubic yards of unused airspace at December 31, 1997; total
yards of airspace does not represent total yards of actual waste volume
because liners, daily, intermediate, and final soil cover consume a
portion of the total permitted airspace available for waste.
(2) Approximate figures based on existing volume limitations, anticipated
operations, and current permitted capacity at December 31, 1997. Life
expectancy may fluctuate depending upon the rate and type of waste
disposed.
(3) The Somerset, Kentucky landfill received its final state construction
permit on October 14, 1996 (reissued February 26, 1997) and construction
will begin in the summer of 1998. The landfill is expected to be
operational in the fall of 1998.
----------------
S-34
<PAGE>
Chambersburg, Pennsylvania Landfill. Purchased in December 1996, this
landfill is located near Chambersburg, Pennsylvania and is currently permitted
to accept a quarterly average of 857 tons per day, with a daily maximum of
1,021 tons per day of municipal solid waste and non-hazardous industrial
waste, petroleum contaminated soil, and asbestos waste. See "Risk Factors -
Potential Pennsylvania Landfill Restrictions" in the accompanying Prospectus
with respect to possible limitations on permitted capacity.
Pittsburgh, Pennsylvania Landfill. Purchased in December 1997, this landfill
is located eight miles southeast of Pittsburgh and is currently permitted to
accept a quarterly average of 1,250 tons per day of municipal solid waste and
non-hazardous industrial waste, petroleum contaminated soil and asbestos, with
a daily maximum of 1,750 tons per day.
Bridgeport, Illinois Landfill. In May 1997, Company exercised an option to
purchase this landfill. This landfill is located in southeastern Illinois,
became operational in April 1998 and is currently operating at 180 tons per
day. The landfill is approved to accept municipal solid waste and industrial
and non-hazardous special waste.
Somerset, 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 fall of 1998. The site also includes a
permitted transfer station which is in operation. See "Risk Factors - Kentucky
Landfill Obligations" in the accompanying Prospectus with respect to possible
limitations on permitted capacity.
Hartford, Kentucky Landfill. Purchased in February 1998, this landfill is
located in Ohio County in western Kentucky and currently accepts an average of
289 tons per day of construction and demolition debris and approved industrial
waste. The Solid Waste Disposal Facility Permits do not contain restrictions
on the daily volume of waste accepted. The permit authorizes the acceptance of
waste generated in the following states: Alabama, Arkansas, Georgia, Illinois,
Indiana, Kentucky, Mississippi, Missouri, New Jersey, New York, Ohio,
Pennsylvania, Tennessee, and West Virginia.
Clarksburg, 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.
Pine Grove, Pennsylvania Landfill. Purchased in December 1997, this landfill
is located in the southwestern Schuylkill County between Interstate 81 and PA
Route 125 and is currently permitted to accept 1,500 tons per day of municipal
and residual solid waste, an increase from 1,000 tons per day effective
4/1/98, with a daily maximum of 2,000 tons per day.
Eastover, 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 certain 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.
Joppa, Maryland Landfill. Purchased in August 1997, this landfill is located
near Baltimore, Maryland and is currently permitted to accept construction and
demolition debris, land clearing wastes, carpet and glass from anywhere in the
United States. The landfill does not contain restrictions on the daily volume
of waste accepted. See " - Government Regulation - Permits and Licenses."
Ocala, 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
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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.
The landfill does not contain restrictions on the daily volume of waste
accepted.
Waste disposal services generated revenues of $8.2 million, $9.0 million,
and $7.2 million for the year ended June 30, 1997, for the six months ended
December 31, 1997, and for the three months ended March 31, 1998,
respectively, representing approximately 6%, 8%, and 13%, respectively, of the
Company's total revenue for such periods.
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 treatment, 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 $8.5 million for the year ended June 30, 1997, $5.8 million for
the six months ended December 31, 1997, and $2.2 million for the three months
ended March 31, 1998, representing approximately 6%, 6%, and 4%, respectively,
of the Company's total revenue for such periods. 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. At the conclusion of each acquisition, the Company typically places
financial personnel with the acquired entity to centralize financial
reporting. The Company's day-to-day management is conducted on a decentralized
basis. The management of each operating location is 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,
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.
At May 1, 1998, the Company had a total of 24 operating locations all of
which are located in the eastern United States. Some acquisitions create new
operating locations while others are combined into existing locations. Solid
waste 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 markets.
MARKETING
The solid waste management industry services customers on a local basis. The
Company's marketing program is designed for implementation at the local level.
The Company employs sales people at its operating locations. The salespeople
are supervised by the management of the operating locations. 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 five percent or
more of the Company's consolidated revenues for the three months ended March
31, 1998. 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.
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PROPERTY AND EQUIPMENT
The principal fixed assets used by the Company are its landfills which are
described under " - Services - Waste Disposal." The landfills currently owned
by the Company are situated on sites owned by the Company.
The Company leases approximately 10,000 square feet of office space in Mt.
Laurel, New Jersey for its principal executive offices under a lease expiring
in July 2007. The Company owns real estate, buildings, and other properties
that it employs in substantially all of its solid waste collection,
transportation, and disposal operations.
At May 1, 1998, the Company owned or leased approximately 1,280 items of
equipment, including waste collection vehicles and related support vehicles,
as well as bulldozers, compactors, earth movers, trailers and related heavy
equipment, and vehicles used in landfill operations. At May 1, 1998, the
Company also had approximately 41,000 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. The
Company competes with several large national waste management companies,
including Waste Management, Inc. (formerly WMX Technologies, Inc.), Browning-
Ferris Industries, Inc., USA Waste Services, Inc., and Allied Waste
Industries, Inc. A number of these competitors have significantly greater
financial, marketing, and other resources than the Company. The Company also
competes with numerous well-established smaller, local or regional firms. 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 or results of operations.
The Company competes for waste disposal business on the basis of tipping
fees, geographic location, and quality of operations. The Company's ability to
acquire waste disposal business may be limited by the fact that many landfills
are owned by the Company's major competitors. 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 May 1, 1998, the Company provided residential collection services under
144 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 can be no assurance that the
Company will be the successful bidder or 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
period of time or use any surplus equipment in other service areas, the
Company's business and results of operations could be adversely affected.
However, during the years ended June 30, 1997 and 1996, no one commercial
customer or municipal contract accounted for five percent or more of the total
revenue of the Company.
Increased public environmental awareness and certain mandated state
regulations have resulted in increased recycling efforts in many areas of the
country that are reducing the amount of solid waste destined for landfills.
The increased public awareness and certain state regulations have also
increased waste volume through programs of mandatory collection, disposal, and
clean-up. 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
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volumes. The effect, if any, on such volumes could also vary between regions
of the country as well as within individual market areas in each region.
LEGAL AND ADMINISTRATIVE PROCEEDINGS
Companies in the solid waste management business are frequently subject in
the normal course of business to judicial and administrative proceedings
involving federal, state or local agencies and citizen groups. These
governmental agencies and citizen groups 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 violation or alleged violation of environmental laws or
regulations or require that the Company make expenditures to remediate
potential environmental problems relating to waste disposal of or stored by
the Company or its predecessors, or results from its or its predecessors'
transportation and collection operations. 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 should not have a
material adverse effect on the Company's business or results of operations.
See " - Government Regulation" in this Prospectus Supplement and "Risk
Factors - Possible Legal Action" and " - Potential Environmental Liability" in
the accompanying Prospectus.
EMPLOYEES
At May 1, 1998 the Company had approximately 1,480 full-time employees, of
which approximately 1,220 were employed in collection, transfer and disposal
operations, 180 in clerical, administrative, and sales positions and 80 in
management. Approximately 500 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 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. 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 its landfills, transfer stations, and other
solid waste management facilities, the Company typically must go through
several governmental review processes and obtain one or more permits including
zoning or other land use approvals. Obtaining these permits and zoning or land
use approvals is difficult, time consuming, and expensive, and they are 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
expansion of landfills, it is often necessary to expend considerable time,
effort, and money in complying with the governmental review and permitting
processes necessary to 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 violations to the satisfaction of
the government authorities could lead to curtailed operations, fines, and
penalties or even closure of a landfill or other facility.
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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 and Recovery 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 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. 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 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 contaminated landfill storm water runoff from flowing into
surface waters. The Clean Water Act also requires permits for discharges of
fill material into wetlands. Such permits, which are occasionally required for
landfill construction or expansion, can take the form of categorical
"nationwide permits," for which little paperwork is required, or site specific
permits, which require detailed applications and extensive administrative
review. Site-specific permits are issued by the Army Corps of Engineers, with
input from the relevant state, pursuant to criteria developed by U.S. EPA, and
may require mitigation measures such as the creation of substitute wetlands.
The Company believes that its facilities are in compliance in all material
respects with Clean Water Act requirements. 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
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where there has been, or is threatening to be, 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 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.
One of the Company's solid waste collection subsidiaries is 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 has 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 defend them,
and believes that its liability, if any, would be either 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 effect on the Company's
business and results of operations. See "Risk Factors - Potential
Environmental Liability - Superfund Liability" in the accompanying Prospectus.
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. These federal and state regulations 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 require emissions controls and appropriate
work 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.
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The federal statutes described above contain provisions authorizing, under
certain circumstances, the institution of lawsuits by private citizens.
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 and quantity of waste that may be accepted at a landfill
during a given time period. Certain permits, approvals, and state and local
regulations, may seek to limit a landfill's acceptance of out-of-state waste.
Legislative or regulatory restrictions on the importation of out-of-state
waste generally have not to date withstood judicial challenge. From time to
time, federal legislation is proposed which would allow individual states to
prohibit or limit the disposal of out-of-state waste. Although no such federal
legislation has been enacted to date, if such federal legislation should be
enacted in the future, states in which the Company operates landfills could
limit or prohibit the importation of out-of-state waste. Such legislation
could adversely affect the Company's landfills that receive a significant
portion of out-of-state waste. A restriction on out-of-state waste also could
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.
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
invalidated a local ordinance that sought to impose flow controls on taking
waste out of a locality. However, certain state and local jurisdictions
continue to seek to enforce such restrictions through legislation or contract.
For example, certain counties in New Jersey have recently sought to impose
"economic flow control" by taxing waste collected in the county and disposed
of out of the county of collection. Certain waste management companies,
including the Company, have brought legal action against the counties that
have sought to impose such "economic flow controls." In certain cases, the
Company may elect not to challenge such restrictions based upon various
considerations. Federal legislation has from time to time been proposed to
allow states and localities to impose flow control restrictions. The
restrictions, if enacted, would result in the volume of waste going to
landfills being reduced in certain areas. Flow control restrictions could
adversely affect the Company's ability to operate its landfills at their full
capacities and could reduce the prices that can be charged for landfill
disposal services. These restrictions also may 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.
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Certain of the Company's permits and host agreements restrict the areas from
which waste can be accepted. The restrictions impose operating inefficiencies
on the Company.
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 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 in New York City proposed
by all licensees. Each acquisition or sale 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 September 1997, one of the Company's subsidiaries received a
license from the TWC which enables it to conduct New York City collection
operations. The license, like all TWC licenses, has a term of two years. The
TWC also sets maximum rates for the industry and establishes operational
requirements. 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 in
this region.
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. Rate regulation in West Virginia
and 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. Many states also 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. Some of the state laws
provide for the imposition of liens on property owned by responsible parties.
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 and laws with respect to a landfill
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.
Effective September 1997, the Maryland Department of the Environment adopted
amendments that will require liners and leachate collection systems for new
rubble landfills and landfill expansions. The regulations also require
upgrading of existing landfills by 2001. The Company anticipates that the cost
of compliance with these requirements at its Maryland landfill will not be
material.
In 1997, the South Carolina Department of Health and Environmental Control
adopted new regulations governing industrial waste landfills. These
regulations are pending approval by the General Assembly and are expected to
become effective by August 1998. These regulations impose additional
operating, reporting, record-
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keeping requirements and new closure, post-closure and design requirements on
the Company's South Carolina landfill. To operate after the effective date of
the regulations, the Company may need to upgrade the landfill's design. The
type of upgrades required would depend on the types of industrial waste the
Company would choose to accept for disposal. These regulations are being
evaluated by the Company, and are not expected to have a material adverse
effect on the Company's business and results of operations.
One of the Company's Pennsylvania landfill operations, 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 landfill 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. However, in 1990, the township 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 the height limit 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. If the township seeks to impose this limitation, and is
successful, the existing permitted capacity of the Company's Pennsylvania
landfill would be materially reduced resulting in significant costs to the
Company.
There 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 most states in which the Company operates) 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 also is required to
obtain and maintain in effect various facility permits and other governmental
approvals, including those related to environmental, zoning 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 agreement significant to
its business would have a material adverse effect on the Company's business
and results of operations.
S-43
<PAGE>
CHAMBERSBURG, PENNSYLVANIA LANDFILL. Prior to 1990, the Company's
Chambersburg, 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 groundwater 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 sequenced to be completed over a 12-year period. At
December 31, 1997, the Company had accrued approximately $5.4 million for such
relocation. 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 has not established a specific financial reserve for
potential costs relating to this remediation or any additional potential
liabilities associated with this contamination but it is not expected to be
significant. The Company currently believes that ultimate resolution of these
matters should not be material to it and should not have a material adverse
effect on its 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. See "Risk Factors - Potential Environmental Liability -
Pennsylvania Landfill" in the accompanying Prospectus.
PITTSBURGH, PENNSYLVANIA LANDFILL. An area of the Company's landfill in
Pittsburgh, Pennsylvania which is no longer used for disposal may be the
source of contamination in the groundwater underlying the landfill. To address
this contamination, a groundwater evaluation and abatement plan designed to
control and remediate the contamination from that area has been implemented
and has been approved by the State Regulatory Agency. The Company believes
that the plan can be successfully implemented, however, no assurance is given
that all contamination will be remediated. The Company recently received from
the State Regulatory Agency a permit for development of an approximately 48-
acre expansion area at the landfill. The issuance of the permit is under
appeal by one person on the grounds that the criteria for the permit issuance
were not satisfied. The Company will vigorously contest this appeal, and
believes it will be successful although there can be no assurance on the final
outcome.
SOMERSET, KENTUCKY LANDFILL. The Company ceased operations at its Somerset,
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. On July 1, 1997, the Company recommenced operation of its
transfer station to fulfill the obligations of the disposal franchise until
the Company's expansion area is completed. The Company received a final permit
to construct its expansion area on October 14, 1996 (reissued February 26,
1997). 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 was required to complete an additional hydrogeologic investigation
to confirm the adequacy of the groundwater monitoring program approved in the
final permit. These studies are complete, reconfirming the adequacy of the
groundwater monitoring program, although the Company has not received final
review from the state regulatory agency with respect to the groundwater
monitoring program. The Company believes the ultimate resolution of this
matter will not have a material adverse effect on the Company's business or
results of operations. See "Risk Factors - Kentucky Landfill Obligations" in
the accompanying Prospectus.
MARYLAND LANDFILL. Lead and other contaminants have been detected in a few
of the groundwater monitoring wells of the Maryland landfill. The Company and
the State regulatory agency have agreed on an action plan to investigate
groundwater conditions and to identify potential sources. The Company has
agreed to
S-44
<PAGE>
prepare a contingency plan to identify what actions need to be taken, if after
four quarters of monitoring, the regulatory authority determines that the
landfill is contaminating the groundwater. An independent consultant has
issued a report concluding that the landfill is not contaminating the
groundwater and the elevated lead levels are related to sampling errors.
Although the Company does not believe that the landfill is contaminating the
groundwater, the Company estimates that the costs associated with a
remediation of the lead in the groundwater would be approximately $500,000.
The Company believes that the ultimate resolution of this matter should not
have a material adverse effect on the Company's business or results of
operations.
CLOSURE AND POST-CLOSURE OBLIGATIONS
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, the Company estimated the total costs
to be approximately $27.8 million for final closure of its landfills, of which
$8.5 million had been accrued at March 31, 1998. The Company makes an accrual
for these costs based on consumed airspace in relation to the 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 $17.1 million. At March 31, 1998,
the Company had accrued $5.5 million for such estimated 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.
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 resulting liability 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
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. At March 31, 1998, the Company
had outstanding $18.0 million of bonds to secure its obligations.
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.
S-45
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the current directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Louis D. Paolino, Jr.... 42 Chairman of the Board, President, and Chief Executive Officer
Dennis M. Grimm......... 48 Chief Operating Officer and Executive Vice President
Gregory M. Krzemien..... 38 Chief Financial Officer and Treasurer
Robert M. Kramer........ 45 General Counsel, Executive Vice President, and Secretary
Glen Miller............. 40 Executive Vice President
Willard Miller.......... 61 Executive Vice President
John W. Poling.......... 52 Vice President-Finance
Neal Rodrigue........... 34 Vice President-Operations
Ronald R. Pirollo....... 39 Controller and Chief Accounting Officer
Kenneth Chuan-kai Leung. 53 Director
George O. Moorehead..... 45 Director
Matthew J. Paolino...... 33 Director
Constantine N.
Papadakis.............. 52 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
15 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 USA Waste Services Inc., a waste management corporation, in
September 1993. From September 1993 to June 1996, Mr. Paolino served as Vice
President of USA 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. From November 1995 to January 1996, Mr. Paolino
served on the Board of Directors of Metal Management, Inc., formerly known as
General Parametrics Corp., a publicly traded company. Mr. Paolino received a
B.S. degree in Civil Engineering from Drexel University. Mr. Paolino is the
brother of Matthew J. Paolino, a Director of the Company.
DENNIS M. GRIMM has served as the Chief Operating Officer of the Company
since December 1, 1997. From March to December 1997, Mr. Grimm served as the
Company's Vice President of Operations. Mr. Grimm has over 25 years of
experience in the solid waste industry. From October 1996 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 1994 to 1997, Mr. Grimm
served as President of National Earth Products, Inc. and NEP Sand & Gravel.
From 1984 to 1994, he served as Group Vice President and Regional Manager for
WMX Technologies, Inc. (Northeast Region).
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
S-46
<PAGE>
for over 15 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. From December 1989 to December 1997,
Mr. Kramer 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.
GLEN MILLER has served as Executive Vice President of Collection Operations
of the Company since September 1996. Prior to joining the Company, Mr. Miller
had 23 years in the solid waste industry, most recently as Vice President and
Chief Operating Officer of Super Kwik, Inc. since January 1980 and President
of Waste Maintenance Services, Inc. from May 1987 to September 1996.
WILLARD MILLER has served as an Executive Vice President of the Company
since September 1996. In 1972, Mr. Miller founded Super Kwik, Inc. where he
held the positions of President and Chief Executive Officer for 24 years.
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.
NEAL RODRIGUE has served as Vice President of Operations of the Company
since December 1997. From October 1996 to December 1997 Mr. Rodrigue served as
Vice President of Acquisitions of the Company. From October 1991 to October
1996, Mr. Rodrigue held various financial positions with USA Waste Services,
Inc. Mr. Rodrigue received a B.S. in accounting from Louisiana State
University and is a certified public accountant.
RONALD R. PIROLLO has served as Vice President and Corporate Controller of
the Company since July 1997. Prior to joining the Company, Mr. Pirollo was
with Envirite Corporation for ten years, where he served in various financial
management positions including Vice President-Finance. Mr. Pirollo received a
B.S. degree in Accounting from Villanova University in 1981.
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 Inc. 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. Mr. Leung will resign from the Board of Directors on July 1, 1998.
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 was a principal
stockholder of EMCO Recycling Corp., a company engaged in the business of
metal recycling in Arizona and now 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, 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.
MATTHEW J. PAOLINO was appointed by the Board of Directors in May 1998 to
serve as a Director of the Company. Mr. Paolino has served as Vice President
of Risk Management, Asset Management and Special Waste Divisions of the
Company since 1996. From 1993 to 1996, Mr. Paolino served as Vice President
and General Manager - Soil Remediation Division of USA Waste Services, Inc.,
which was acquired by the Company in August 1997. Mr. Paolino received a B.S.
degree in Civil Engineering from Villanova University in 1986 and a
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<PAGE>
J.D. degree from The Widener School of Law in 1994. Mr. Paolino is the brother
of Louis D. Paolino, Jr., the Chairman of the Board, President, and Chief
Executive Officer of the Company.
CONSTANTINE N. PAPADAKIS, PHD was appointed by the Board of Directors in May
1998 to serve as a Director of the Company. Dr. Papadakis has served as the
President of Drexel University since 1995. From 1986 to 1995, Dr. Papadakis
served as the Dean of the College of Engineering, Geier Professor of
Engineering Education, and Professor of Civil Engineering, at the University
of Cincinnati. Dr. Papadakis is a director of Fidelity Federal Bank, the
Philadelphia Stock Exchange and Corcell, Inc.
EMPLOYEE AGREEMENTS, TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS
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 option
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 December 1997, Mr. Grimm entered into an amended employment agreement
with the Company that provides for an initial base salary of $300,000 and
certain fringe benefits, including life and health insurance and an automobile
allowance. Mr. Grimm's agreement is for a term of four years, subject to
earlier termination by either party. Upon a change in control of the Company,
all of Mr. Grimm's outstanding stock 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.
In June 1996, Mr. Krzemien entered into an 18-month employment agreement
with the Company, subject to earlier termination, that provides for an initial
annual base salary of $90,000 and certain fringe benefits, including life and
health insurance and automobile allowances. Mr. Krzemien's salary was
subsequently increased to $110,000. 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 of the termination. Upon a
change in control, Mr. Krzemien is entitled to receive one year's annual
salary.
In May 1997, Mr. Kramer entered into an amended and restated employment
agreement with the Company that provides for initial annual base salary of
$125,000 and certain fringe benefits, including life and health insurance and
automobile allowances. 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. Mr. Kramer's
agreement terminates in June 2000, subject to earlier termination by either
party. If Mr. Kramer's employment is terminated by the Company 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 stock options shall immediately
vest.
In September 1996, Glen Miller entered into an 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. The term of the agreement is four years, subject to earlier
termination by either party.
S-48
<PAGE>
Upon termination of employment, Mr. Miller is entitled to receive up to six
months annual salary. If a change of control of the Company occurs within
three months of resignation, Mr. Miller is entitled to two years salary. The
agreement also provides that during the term of employment, and for a period
of one year thereafter, Mr. Miller will not compete with the Company in the
waste disposal business in an area that includes southern New Jersey and
Philadelphia, Pennsylvania.
In November 1996, Mr. Poling entered into a three-year employment agreement
with the Company, subject to earlier termination, that provides for an initial
annual base salary of $90,000 and certain fringe benefits, including life and
health insurance and automobile allowances. Upon termination of employment,
Mr. Poling is entitled to receive up to three months of his annual salary.
Upon a change in control, Mr. Poling is entitled to receive one year's annual
salary.
In February 1998, Mr. Rodrigue entered into a three-year employment
agreement with the Company, subject to earlier termination, that provides for
an initial annual base salary of $200,000 and certain fringe benefits,
including life and health insurance and automobile allowances. If Mr.
Rodrigue's employment is terminated by the Company in the event of the
Company's merger, consolidation or other business combination with another
entity where the Company is not the surviving entity or the Company's sale of
substantially all of its assets, he will be entitled to receive $300,000, and
the Company will continue all of his medical insurance benefits for two years
after the date of termination. During the term of employment and for a period
of one year thereafter, Mr. Rodrigue may not directly or indirectly engage in
the waste disposal industry within 75 miles of any Company business operation.
S-49
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, at May 1, 1998, certain information
regarding the beneficial ownership of the Common Stock by: (i) each person
known to the Company to own beneficially, as defined in Rule 13d-3 under the
Exchange Act, five percent or more of the outstanding shares of Common Stock,
based upon Company records, (ii) each of the Company's directors, (iii) each
of the Selling Stockholders, and (iv) all executive officers and directors of
the Company as a group. Except as otherwise indicated, each person has sole
voting power and sole investment power with respect to all shares beneficially
owned by such person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
BEFORE OFFERING(1)(2) NUMBER OF AFTER OFFERING(1)(2)
---------------------------- SHARES --------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- ------------------------ ------------- ----------- ------------- ------ -------
<S> <C> <C> <C> <C> <C>
Willard Miller.......... 1,430,688(3) 5.7% -- 1,430,688(3) 4.4%
230 Orono Place
Sommerdale, NJ 08083
Louis D. Paolino, Jr. .. 1,288,465(4) 5.1 -- 1,288,465(4) 4.0
1000 Crawford Place
Mt. Laurel, NJ 08054
Environmental 889,699 3.5 444,850 444,849 1.4
Opportunities Fund,
L.P.(5) ...............
Environmental
Opportunities Fund
(Cayman), L.P.(5) ..... 110,303 * 55,150 55,153 *
Kenneth Chuan-kai Leung. 1,060,419(6) 4.2 -- 560,419(6) 1.7
George O. Moorehead..... 437,714(7) 1.7 -- 437,714(7) 1.4
Matthew J. Paolino...... 110,583(8) * -- 110,583(8) *
Constantine N. -- * -- -- *
Papadakis..............
All executive officers
and directors as a
group (13 persons)..... 6,069,493(9) 23.1 -- 5,569,493(9) 16.7
</TABLE>
- --------
* Less than 1%.
(1) The inclusion herein of any shares as beneficially owned does not
constitute an admission of beneficial ownership of those shares.
(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 or warrant ("currently exercisable") are treated as
outstanding for purposes of determining beneficial ownership and the
percentage beneficially owned by such individual.
(3) Includes 19,412 shares held of record by W&G Miller Family Limited
Partnership, of which Mr. Miller serves as a general partner, and 131,907
shares purchasable under currently exercisable warrants held by such
partnership.
(4) Includes 35,000 shares held of record by entities controlled by Mr.
Paolino, 82,333 shares held by family members, and 348,391 shares
purchasable under currently exercisable options.
(5) The chief investment officer of Environmental Opportunities Fund, L.P.
and Environmental Opportunities Fund (Cayman), L.P. (the "Funds") is
Kenneth Chuan-kai Leung, a director of the Company.
(6) Includes 60,417 shares purchasable under currently exercisable options.
Also includes an aggregate of 1,000,002 shares held of record by the
Funds prior to the Offering and 500,002 shares to be held by the Funds
after the Offering. See footnote 5 above.
(7) Includes 80,417 shares purchasable under currently exercisable options.
(8) Includes 18,750 shares purchasable under currently exercisable options.
Also includes 3,000 shares held by Mr. Paolino's children.
(9) See footnotes 3 through 8 above. Also includes an aggregate of 1,412,485
shares and 500,305 shares purchasable under currently exercisable options
held by seven executive officers of the Company who are not listed in the
table.
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<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 32,159,507 shares of Common Stock. Of these
shares, approximately 28,052,406 shares of Common Stock, including the
7,500,000 shares of Common Stock sold in the Offering, will 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 4,107,101 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. Subject to compliance with Rule 144, 851,929 of these restricted
shares are currently saleable in the public market, an additional 251,009 of
these restricted shares will become saleable in the public market 90 days
following the date of this Prospectus Supplement and an additional 774,445 of
these restricted shares will become saleable in the public market 180 days
following the date of this Prospectus Supplement.
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 321,595 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 3,298,623 shares of Common Stock,
1,425,079 of which will then be exercisable, and an additional 4,915,964
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,
1996 Stock Option Plan, and 1997 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 May 1, 1998, a total of 723,632 shares of unissued Common
Stock (the "Hold Back Shares") were subject to such hold backs.
Certain stockholders of the Company that hold restricted securities have
registration rights for an aggregate of up to 922,833 shares of Common Stock.
Such registration rights may begin to be exercised at various times beginning
July 1998. In addition, the Company has agreed to register 597,655 of the Hold
Back Shares at various
S-51
<PAGE>
times beginning July 1998. The Company has agreed to pay substantially all
expenses incident to such registrations other than underwriting discounts and
commissions.
The Company has filed a registration statement on Form S-4 under the
Securities Act (the "Acquisition Shelf") that registers five million shares of
Common Stock for its use in connection with future acquisitions. These shares
generally will be freely tradeable after their issuance by persons who are not
affiliates of the Company; however, the Company has agreed that resales of
these shares during the 120-day period following the date of this Prospectus
Supplement would require the prior written consent of Smith Barney Inc. At May
1, 1998, 3,613,656 shares of Common Stock remain available for issuance under
such registration statement.
The foregoing notwithstanding, the Company and the directors and certain
executive officers and stockholders of the Company, who owned of record an
aggregate of 1,676,164 shares of Common Stock and options and warrants to
purchase 1,722,004 shares of Common Stock at May 1, 1998, and the Selling
Stockholders who will own an aggregate of 500,002 shares after the Offering,
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 Supplement. In addition, the
other executive officers and certain other employees and stockholders of the
Company who owned of record an aggregate of 3,548,693 shares of Common Stock
and options and warrants to purchase 830,315 shares of Common Stock at May 1,
1998 also have agreed to such transferability restrictions, except that the
restrictive period is for 90 days following the date of this Prospectus
Supplement. Notwithstanding this restriction, certain executive officers of
the Company have the right to sell up to an aggregate of 185,000 shares of
Common Stock during the period. Furthermore, certain stockholders of the
Company that acquired 1,386,344 shares of Common Stock under the Company's
Acquisition Shelf in connection with an acquisition by the Company 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, an aggregate of 924,230 shares until March 1999. The
remaining 462,114 shares are also subject to transferability restrictions,
except that the restrictive period will terminate in June 1998. In addition,
Kenneth Chuan-kai Leung, a director of the Company, has agreed with the
Company that in June 1998 he will exercise in full his options to purchase
15,000 shares of Common Stock. Mr. Leung also agreed that he 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 such shares for a period of
one year from the date of exercise. See "Underwriting."
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. No
prediction can be made as to the effect, if any, that future sales of shares,
or the availability of shares for future sale, will have on the market price
of the Common Stock prevailing from time to time. Sales of substantial amounts
of Common Stock (including shares issuable upon the exercise of stock options
and warrants), or the perception that such sales could occur, could adversely
affect prevailing market prices for the Common Stock.
S-52
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement, each of the Underwriters named below has severally agreed to
purchase from the Company and the Selling Stockholders, and the Company and
the Selling Stockholders have 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................................................... 3,150,000
CIBC Oppenheimer Corp.............................................. 1,800,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ................................................. 1,800,000
Pacific Growth Equities, Inc....................................... 750,000
---------
Total............................................................ 7,500,000
=========
</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., CIBC Oppenheimer Corp.,
Merrill Lynch & Co. and Pacific Growth Equities, Inc. 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 Supplement and part of the shares to certain
dealers at a price which represents a concession not in excess of $0.75 per
share under the public offering price. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.10 per share to certain
other dealers. After the public offering, the public offering price and such
concessions 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 Supplement, to purchase up to an
additional 1,125,000 shares of Common Stock at the price to the public set
forth on the cover page of this Prospectus Supplement, 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 preceding table bears to the total
number of shares listed in such table.
The Company and its directors and certain of its executive officers and
stockholders, including the Selling Stockholders, have agreed that, for a
period of 120 days from the date of this Prospectus Supplement, 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 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, other than shares of Common Stock issued pursuant
to the Company's Acquisition Shelf, (b) in the case of the aforementioned
directors, executive officers and stockholders of the Company, (i) shares of
Common Stock disposed of as gifts to their "immediate family" or to one or
more trusts established for the benefit of their immediate family, provided
that the recipient of such Common Stock agrees to the foregoing restrictions
on transferability and (ii) the 500,000 shares of Common Stock being offered
by the Selling Stockholders in the Offering, and (c) in the case of certain
directors and executive officers
S-53
<PAGE>
of the Company, up to an aggregate of 185,000 shares of Common Stock. In
addition, other executive officers and certain employees and other
stockholders of the Company designated by the Representatives have also agreed
to transferability restrictions, except that the restrictive period is 90 days
following the date of this Prospectus Supplement. Notwithstanding the
foregoing restrictions on transferability, one executive officer who has
entered into such an agreement may sell shares of Common Stock to pay tax
obligations incurred in connection with the exercise of stock options that
expire during the restrictive period.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters and certain related persons against certain liabilities,
including liabilities under the Securities Act, or to 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 Exchange 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 for 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 a 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.
VALIDITY OF COMMON STOCK
The validity of the issuance of the Common Stock offered 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.
S-54
<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 as of March 31, 1998................. F-4
Pro Forma Consolidated Statement of Operations for the year ended June 30,
1997..................................................................... F-5
Pro Forma Consolidated Statement of Operations for the six months ended
December 31, 1997........................................................ F-6
Pro Forma Consolidated Statement of Operations for the three months ended
March 31, 1998........................................................... F-7
Notes to Unaudited Pro Forma Consolidated Financial Information........... F-8
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors............................................ F-13
Consolidated Balance Sheets as of June 30, 1997 and June 30, 1996......... F-14
Consolidated Statements of Operations for each of the three years in the
period ended June 30, 1997............................................... F-15
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended June 30, 1997.................................. F-16
Consolidated Statements of Cash Flows for each of the three years in the
period ended June 30, 1997............................................... F-17
Notes to Consolidated Financial Statements................................ F-18
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of December 31, 1997.............. F-36
Condensed Consolidated Statements of Operations for the six months ended
December 31, 1997 and 1996............................................... F-37
Condensed Consolidated Statement of Stockholders' Equity for the six
months ended December 31, 1997........................................... F-38
Condensed Consolidated Statements of Cash Flows for the six months ended
December 31, 1997 and 1996............................................... F-39
Notes to Condensed Consolidated Financial Statements...................... F-40
Condensed Consolidated Balance Sheet as of March 31, 1998................. F-44
Condensed Consolidated Statements of Operations for the three months ended
March 31, 1998 and 1997.................................................. F-45
Condensed Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 1998.............................................. F-46
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997.................................................. F-47
Notes to Condensed Consolidated Financial Statements...................... F-48
</TABLE>
F-1
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
SUMMARY PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Consolidated Financial Statements give
retroactive effect to the acquisition with Bluegrass Containment, Inc.
("Bluegrass"), Frank Stamato & Company and its affiliates ("Stamato"), and
Ecology Systems, Inc. and its affiliates ("Ecology") accounted for as poolings
of interests and give effect to certain acquisition transactions described
below and in the Offering.
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 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 City 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").
On August 15, 1997, the Company consummated the acquisition of Pappy, Inc.
("Pappy"). The total purchase price was approximately $12 million, and the
acquisition has been accounted for as a purchase.
On August 20, 1997, the Company purchased all of the stock of Soil
Remediation of Philadelphia, Inc. ("SRP") in exchange for 270,000 shares of
Common Stock. SRP provides remediation services for petroleum contaminated
soil. This transaction has been accounted for as a purchase. Simultaneously,
with the closing of the SRP transaction, the Company entered into an agreement
to acquire all of the stock of USA Waste of Fairless Hills, Inc. and Clean
Soils of Fairless Hills, Inc. (collectively, "Clean Soils"). The closing of
the acquisition of the stock of Clean Soils is pending upon satisfaction of
certain customary closing conditions that the Company believes will be
resolved.
On December 1, 1997, the Company acquired from Delmarva Capital Technology
all of the outstanding stock of Pine Grove, Inc. ("Pine Grove") for
approximately $46.0 million. The purchase price was comprised of approximately
$34.3 million in cash and the assumption of approximately $11.7 million in
debt. The acquisition has been accounted for as a purchase.
On March 25, 1998, the Company entered into stock purchase agreements for
the pending acquisitions of all the outstanding stock of Atlantic Waste
Disposal, Inc. and Atlantic of New York, Inc. (collectively, "Atlantic") for
total anticipated cash consideration to be paid of $85.6 million. The
acquisition is anticipated to be accounted for as a purchase.
The pro forma consolidated statements of operations for the year ended June
30, 1997 and the six months ended December 31, 1997 reflect the results of
operations of the Company as if the above acquisitions of Bender, WSI, Pappy,
SRP, Clean Soils, Pine Grove, and Atlantic had occurred at the beginning of
the periods presented. The pro forma consolidated balance sheet as of March
31, 1998 reflects the financial position of the Company as if the acquisition
of Atlantic had occurred as of March 31, 1998.
F-2
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
SUMMARY PRO FORMA FINANCIAL INFORMATION--(CONTINUED)
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 for the year ended June 30, 1997 includes
the results of operations of the predecessor company of Apex 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 included in this Prospectus Supplement.
F-3
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
EASTERN
ENVIRONMENTAL PRO FORMA PRO FORMA PRO FORMA
SERVICES, INC. ATLANTIC ADJUSTMENTS CONSOLIDATED ADJUSTMENTS AS ADJUSTED
-------------- -------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash
equivalents........... $ 4,660 $ 271 $ -- $ 4,931 $ 10,824 (3) $ 15,755
Accounts receivable,
net of allowance...... 27,434 3,494 -- 30,928 -- 30,928
Deferred income taxes.. 1,833 -- -- 1,833 -- 1,833
Prepaid expenses and
other current assets.. 7,458 289 -- 7,747 -- 7,747
-------- -------- -------- -------- --------- --------
Total current assets.. 41,385 4,054 -- 45,439 10,824 56,263
-------- -------- -------- -------- --------- --------
Net property, plant and
equipment.............. 162,460 33,810 50,953 (1) 247,223 26,100 (2) 273,323
Excess cost over fair
market value of net
assets acquired........ 81,653 -- -- 81,663 -- 81,653
Intangible assets, net.. 14,930 24,528 (24,528)(1) 14,930 -- 14,930
Notes receivable from
stockholders/officers.. 442 -- -- 442 -- 442
Deferred income taxes... -- 9,116 (9,116)(1) -- -- --
Other assets............ 4,923 435 -- 5,358 -- 5,358
-------- -------- -------- -------- --------- --------
Total assets.......... $305,793 $ 71,943 $ 17,309 $395,045 $ 36,924 $431,969
======== ======== ======== ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable....... $ 13,874 $ 723 $ -- $ 14,597 $ -- $ 14,597
Accrued expenses and
other current
liabilities........... 16,462 2,235 (286)(1) 18,411 -- 18,411
Income taxes payable... 877 -- -- 877 -- 877
Current portion of
accrued landfill
closure and other
environmental costs... 4,056 -- -- 4,056 -- 4,056
Current portion of
long-term debt........ 1,211 -- -- 1,211 (1,211)(3) --
Current portion of
capitalized lease
obligations........... 1,177 -- -- 1,177 -- 1,177
Deferred revenue....... 3,514 -- -- 3,514 -- 3,514
Due to affiliated
company............... -- 61,005 (61,005)(1) -- -- --
-------- -------- -------- -------- --------- --------
Total current
liabilities.......... 41,171 63,963 (61,291) 43,843 (1,211) 42,632
-------- -------- -------- -------- --------- --------
Deferred income taxes... 6,242 -- -- 6,242 -- 6,242
Long-term debt, less 62,837 -- 85,600 (1) 148,437 26,100 (2) 11,700
current portion........ (162,837)(3)
Capitalized lease
obligations, less
current portion........ 1,022 -- -- 1,022 -- 1,022
Accrued landfill closure
and other environmental
costs.................. 14,868 945 -- 15,813 -- 15,813
Other liabilities....... 19,222 35 -- 19,257 -- 19,257
Stockholders' equity
Common stock........... 252 -- -- 252 70 (3) 322
Additional paid-in
capital............... 147,467 22,175 (22,175)(1) 147,467 174,802 (3) 322,269
Retained earnings
(deficit)............. 12,788 (15,175) 15,175 (1) 12,788 -- 12,788
Less treasury stock at
cost--39,100 common
shares................ (76) -- -- (76) -- (76)
-------- -------- -------- -------- --------- --------
Total stockholders'
equity............... 160,431 7,000 (7,000) 160,431 174,872 335,303
-------- -------- -------- -------- --------- --------
Total liabilities and
stockholders' equity. $305,793 $ 71,943 $ 17,309 $395,045 $ 36,924 $431,969
======== ======== ======== ======== ========= ========
</TABLE>
F-4
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
EASTERN R&A
ENVIRON- BENDER
MENTAL R&A PROPERTY CLEAN PINE PRO FORMA
SERVICES, INC. BENDER, INC. LTD. WSI PAPPY SRP SOILS GROVE ATLANTIC ADJUSTMENTS
-------------- ------------ -------- ------- ------ ------- ------ ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ (41)(a)
(211)(b)
-------
Revenues........ $145,274 $4,295 $214 $16,597 $2,804 $ 3,649 $1,513 $14,560 $17,189 (252)
Cost of
revenues........ 106,109 2,198 2 9,809 911 6,945 1,755 9,805 14,356 (206)(a)
Selling, general
and
administrative
expenses........ 19,501 1,950 7 3,492 431 704 166 1,274 2,535 (86)(c)
(6)(a)
(211)(b)
(963)(d)
(610)(e)
-------
(1,876)
Depreciation and
amortization.... 7,202 495 10 3,396 108 975 299 4,728 1,979 745 (f)
(1,256)(g)
(2,308)(h)
(119)(i)
51 (j)
(1,583)(k)
-------
(4,470)
Merger costs.... 3,337 -- -- -- -- -- -- -- -- --
-------- ------ ---- ------- ------ ------- ------ ------- ------- -------
Operating income
(loss).......... 9,125 (348) 195 (100) 1,354 (4,975) (707) (1,247) (1,681) 6,300
10 (l)
(1,976)(m)
(1,937)(n)
(530)(o)
714 (p)
-------
Interest
(expense), net.. (3,164) (7) (1,268) 14 -- -- (151) (5,114) (3,719)
Other income, net. 595 246 -- 84 -- -- -- 58 709 --
-------- ------ ---- ------- ------ ------- ------ ------- ------- -------
Income (loss)
before income
taxes........... 6,556 (109) 195 (1,284) 1,368 (4,975) (707) (1,340) (6,086) 2,581
Income tax
(expense)
benefit......... (1,879) -- -- 200 -- 1,990 283 507 2,229 (859)(q)
-------- ------ ---- ------- ------ ------- ------ ------- ------- -------
Net income
(loss).......... $ 4,677 $ (109) $195 $(1,084) $1,368 $(2,985) $ (424) $ (833) $(3,857) $ 1,722
======== ====== ==== ======= ====== ======= ====== ======= ======= =======
Diluted earnings
(loss) per
share...........
Weighted average
number of shares
outstanding.....
<CAPTION>
PRO
FORMA
CONSOLIDATED PREDECESSOR PRO PRO
BEFORE COMPANY APEX FORMA FORMA
PREDECESSOR TO PRO FORMA CONSOLI- ADJUST- AS
COMPANY APEX ADJUSTMENTS DATED MENTS ADJUSTED
------------ ----------- ------------ ------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues........ $205,843 $4,675 $ -- $ 210,518 $ -- $ 210,518
Cost of
revenues........ 151,684 3,366 155,050 -- 155,050
Selling, general
and
administrative
expenses........ 28,184 420 28,604 -- 28,604
Depreciation and
amortization.... 14,722 679 (271)(r) 15,130 -- 15,130
Merger costs.... 3,337 -- -- 3,337 -- 3,337
------------ ----------- ------------ ------------- ---------- --------------
Operating income
(loss).......... 7,916 210 271 8,397 8,397
Interest
(expense), net.. (13,409) (173) (177)(s) (13,759) 11,305(u) (2,454)
Other income, net. 1,692 4 -- 1,696 -- 1,696
------------ ----------- ------------ ------------- ---------- --------------
Income (loss)
before income
taxes........... (3,801) 41 94 (3,666) 11,305 7,639
Income tax
(expense)
benefit......... 2,471 -- -- 2,471 (4,827)(u) (2,356)
------------ ----------- ------------ ------------- ---------- --------------
Net income
(loss).......... $ (1,330) $ 41 $ 94 $ (1,195) $ 6,478 $ 5,283
============ =========== ============ ============= ========== ==============
Diluted earnings
(loss) per
share........... $ (.07) $ .21
============= ==============
Weighted average
number of shares
outstanding..... 17,760,693(t) 25,724,386 (v)
============= ==============
</TABLE>
F-5
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
EASTERN PRO
ENVIRON- PRO ADJUSTMENTS FORMA
MENTAL PRO FORMA FORMA FROM AS
SERVICES, INC. PAPPY PINE GROVE ATLANTIC ADJUSTMENTS CONSOLIDATED OFFERING ADJUSTED
-------------- ----- ---------- -------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $106,870 $197 $6,265 $12,610 $ -- $ 125,942 $ -- $ 125,942
Cost of revenues........ 73,323 92 3,424 8,461 -- 85,300 85,300
Selling, general and
administrative expenses. 13,377 86 387 1,126 (11)(a) 14,965 14,965
Depreciation and
amortization............ 6,435 12 2,172 1,458 140 (b) 9,303 9,303
(958)(c)
44 (d)
Merger costs............ 2,725 -- -- -- -- 2,725 2,725
-------- ---- ------ ------- ----- ---------- ------- ----------
Operating income........ 11,010 7 282 1,565 785 13,649 -- 13,649
Interest (expense)
income, net............. (1,279) 1 (110) (2,812) 1 (e) (5,131) 4,838 (j) (293)
(641)(f)
(291)(g)
Other income, net....... 256 1 3 143 -- 403 -- 403
-------- ---- ------ ------- ----- ---------- ------- ----------
Income (loss) before
income taxes............ 9,987 9 175 (1,104) (146) 8,921 4,838 13,759
Income tax (expense)
benefit................. (3,518) -- (143) 401 59 (h) (3,201) (2,129)(j) (5,330)
-------- ---- ------ ------- ----- ---------- ------- ----------
Net income.............. $ 6,469 $ 9 $ 32 $ (703) $ (87) $ 5,720 $ 2,709 $ 8,429
======== ==== ====== ======= ===== ========== ======= ==========
Diluted earnings per
share................... $ .23 $ .26
========== ==========
Weighted average number
of shares outstanding... 25,036,541 (i) 32,036,541 (k)
========== ==========
</TABLE>
F-6
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
EASTERN PRO
ENVIRON- PRO ADJUSTMENTS FORMA
MENTAL PRO FORMA FORMA FROM AS
SERVICES, INC. ATLANTIC ADJUSTMENTS CONSOLIDATED OFFERING ADJUSTED
-------------- -------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $55,193 $ 6,596 $-- $ 61,789 $ -- $ 61,789
Cost of revenues........ 34,496 4,411 33(a) 38,940 -- 38,940
Selling, general, and
administrative
expenses............... 7,023 560 -- 7,583 -- 7,583
Depreciation and
amortization........... 4,332 812 -- 5,144 -- 5,144
Merger costs............ 3,945 -- -- 3,945 -- 3,945
------- ------- ---- ---------- ------ ----------
Operating income........ 5,397 813 (33) 6,177 -- 6,177
Interest (expense)
income, net............ (983) (1,434) (11)(b) (2,428) 2,275(e) (153)
Other (expense) income,
net.................... (121) -- -- (121) -- (121)
------- ------- ---- ---------- ------ ----------
Income (loss) before
income taxes........... 4,293 (621) (44) 3,628 2,275 5,903
Income tax (expense)
benefit................ (3,700) 147 -- (3,553) (982)(c) (4,535)
------- ------- ---- ---------- ------ ----------
Net income.............. $ 593 $ (474) $(44) $ 75 $1,293 $ 1,368
======= ======= ==== ========== ====== ==========
Diluted earnings per
share.................. $ -- $ .04
========== ==========
Weighted average number
of shares outstanding.. 26,438,209(d) 33,438,209(f)
========== ==========
</TABLE>
F-7
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS
THE UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 HAS
BEEN ADJUSTED TO REFLECT THE FOLLOWING:
(1) On March 25, 1998, the Company entered into stock purchase agreements
for the pending acquisitions of all the outstanding stock of Atlantic Waste
Disposal, Inc. and Atlantic of New York, Inc. (collectively, "Atlantic") for
total anticipated cash consideration to be paid by Eastern Environmental
Services, Inc. of $85.6 million. The acquisition is anticipated to be
accounted for under the purchase method. Pursuant to the terms of the stock
purchase agreements, certain property, equipment, intangible assets, other
assets and working capital will be acquired and certain liabilities will be
assumed. With respect to the closure and post-closure liabilities, the Company
anticipates recording an estimate of closure and post-closure liability for
the entire site utilizing engineering studies and state requirements as
compared to the percentage of airspace utilized at the date of the
acquisition. The allocation of the purchase price is preliminary and assumes
the historical book value of tangible assets approximates fair value. The
actual allocation will be based on management's final evaluation of such
assets and liabilities. The excess of the purchase price over the historic
cost of net assets was allocated to the value of the landfill site; however,
this excess may ultimately be allocated to other specific tangible and
intangible assets. The final allocation of the purchase price and the
resulting effect on operations may differ significantly from the pro forma
amounts included herein. The preliminary allocation of the purchase price is
as follows:
<TABLE>
<S> <C>
Property, equipment, and landfill site......................... $84,763,000
Current assets acquired........................................ 4,054,000
Other assets acquired.......................................... 435,000
Other liabilities.............................................. (2,707,000)
Landfill closure, post-closure, and other environmental costs.. (945,000)
-----------
Borrowings under the Company's revolving credit facility to
affect the acquisition of Atlantic............................ $85,600,000
===========
</TABLE>
(2) To record the pending purchase of the Bethlehem Landfill and certain
related assets for cash consideration of $26.1 million.
(3) To record the issuance of 7,000,000 shares of Common Stock offered in
connection with the Offering at the offering price of $26.375 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, 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.
(b) To reflect the elimination of intercompany rental revenues and expenses
between Bender and Bender Property.
(c) To eliminate intercompany administrative charges related directly to
cost sharing arrangements provided by Pappy's prior parent, which were
terminated as a result of the purchase transaction.
(d) To reflect the decrease in Bender's selling, general, and administration
expenses consisting of a contractual reduction made to the former owners'
salaries of $706,000 and for the termination of Bender's profit
F-8
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 property, equipment, landfill site costs and intangible assets as if
the purchase of Pappy had been completed on July 1, 1996 net of historical
depreciation and amortization expense of Pappy 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.
(g) To adjust depreciation and amortization expense for the change in the
basis of property, equipment and intangible assets as if the purchase of SRP
and Clean Soils had been completed on July 1, 1996 net of historical
depreciation and amortization expense of SRP and Clean Soils.
(h) 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 Pine Grove had been completed on July 1, 1996 net of
historical depreciation and amortization expense of Pine Grove 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.
(i) 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
cost-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.
(j) 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 Atlantic had been completed on July 1, 1996 net of historical
depreciation and amortization expense of Atlantic 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.
(k) 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.
(l) To eliminate interest expense of $10,000 related to debt of Pappy not
acquired by the Company.
(m) To record additional interest expense of $2.0 million from borrowings
(at the Company's average borrowing rate of 8.5% under the Company's revolving
credit facility) of approximately $27.0 million incurred
F-9
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to consummate the acquisition of Pine Grove, net of historical interest
expense of $318,000, excluding interest on debt assumed.
(n) To record additional interest expense of $1.9 million from borrowings
(at the Company's average borrowing rate of 8.5% under the Company's revolving
credit facility) of $85.6 million incurred to consummate the acquisition of
Atlantic, net of historical interest expense of $5.1 million.
(o) To record additional interest expense of $530,000 resulting from
borrowings under the Company's revolving credit facility of approximately
$15.8 million incurred to consummate the acquisition of Bender, net of
historical interest expense of $38,000.
(p) To reflect a reduction in interest expense of $714,000 resulting from
debt not acquired net of Company interest expense of $554,000 on borrowings at
the Company's average borrowing rate of 8.0% to finance acquisitions.
(q) 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 44%
would be $3.4 million, an increase of $1.0 million ($.04 per share).
(r) 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.
(s) To record additional interest expense of $177,000 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 $173,000.
(t) For the purposes of determining pro forma diluted earnings per share,
the issuance of shares of Common Stock as consideration for the purchase of
assets and to reflect the shares issued relating to the mergers, respectively,
were considered to have been outstanding from July 1, 1996.
(u) Reduction in interest expense to reflect the use of proceeds of the
Offering to pay down borrowings on long term debt outstanding, excluding
capitalized leases and revenue bonds, at an average annual interest rate of
8.5%, net of related income tax expense.
(v) For purpose of determining pro forma as adjusted diluted earnings per
share, the issuance of 7,000,000 shares in the Offering were considered to
have been outstanding since July 1, 1996, and the dilutive effect of
outstanding options and warrants have been included.
THE UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX
MONTHS ENDED DECEMBER 31, 1997 HAS BEEN ADJUSTED TO REFLECT THE FOLLOWING:
(a) To eliminate intercompany administrative charges related directly to
cost sharing arrangements provided by Pappy's prior parent, which were
terminated as a result of the purchase transaction.
(b) 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 Pappy had been completed on July 1, 1996 net of
F-10
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
historical depreciation and amortization expense of Pappy 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.
(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 Pine Grove had been completed on July 1, 1996 net of
historical depreciation and amortization expense of Pine Grove 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, equipment, landfill site costs and intangible assets as if
the purchase of Atlantic had been completed on July 1, 1996 net of historical
depreciation and amortization expense of Atlantic 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.
(e) To eliminate interest expense of $1,000 related to debt of Pappy not
acquired by the Company.
(f) To record additional interest expense of $640,000 from borrowings (at
the Company's average borrowing rate of 7.25% under the Company's revolving
credit facility) of approximately $27.0 million incurred to consummate the
acquisition of Pine Grove, net of historical interest expense of $175,000,
excluding interest expense on debt assumed.
(g) To record additional interest expense of $291,000 from borrowings (at
the Company's average borrowing rate of approximately 7.25% under the
Company's revolving credit facility) of $85.6 million incurred to consummate
the acquisition of Atlantic, net of historical interest expense of $2.8
million.
(h) The Company's pro forma tax provision reflects an effective rate of 44%
considering federal and state income taxes and the effect of certain non-
deductible costs principally relating to acquisitions consummated.
(i) For the purposes of determining pro forma diluted earnings per share,
the issuance of shares of Common Stock as consideration for the purchase of
assets and to reflect the shares issued relating to the mergers, respectively,
were considered to have been outstanding from July 1, 1997.
(j) Reduction in interest expense to reflect the use of proceeds of the
Offering to pay down borrowings on long term debt outstanding, excluding
capitalized leases and revenue bonds, at an average interest rate of 7.25%,
net of related income tax expense.
(k) For the purpose of determining pro forma diluted earnings per share as
adjusted, the issuance of 7,000,000 shares in the Offering were considered to
have been outstanding since July 1, 1997.
THE UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 1998 HAS BEEN ADJUSTED TO REFLECT THE FOLLOWING:
(a) 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 Atlantic had been completed on July 1, 1996 net of
F-11
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
historical depreciation and amortization expense of Atlantic 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.
(b) To record additional interest expense of $11,000 from borrowings (at the
Company's average borrowing rate of approximately 6.75% under the Company's
revolving credit facility) of $85.6 million incurred to consummate the
acquisition of Atlantic, net of historical interest expense of $1.4 million.
(c) The Company's pro forma tax provision reflects an effective rate of 77%
considering federal and state income taxes and the effect of certain non-
deductible costs principally relating to acquisitions consummated, plus the
recording of deferred taxes related to the termination of S Corporation status
of pooled companies.
(d) For the purposes of determining pro forma diluted earnings per share,
the issuance of shares of Common Stock as consideration for the purchase of
assets were considered to have been outstanding from January 1, 1998.
(e) Reduction in interest expense to reflect the use of proceeds of the
Offering to pay down borrowings on long term debt outstanding, excluding
capitalized leases and revenue bonds, at an average interest rate of 6.75%,
net of related income tax expense.
(f) For the purpose of determining pro forma diluted earnings per share as
adjusted, the issuance of 7,000,000 shares in the Offering were considered to
have been outstanding since January 1, 1998.
F-12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Eastern Environmental Services, Inc.
We have audited the consolidated balance sheets (restated) of Eastern
Environmental Services, Inc. as of June 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows
(restated) for each of the three years in the period ended June 30, 1997.
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 1996 and 1995 financial statements
of Super Kwik and Donno, which statements reflect total assets constituting
27% in 1996, and total revenues constituting 32% in 1996, and 35% in 1995, of
the related consolidated financial statement 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 and Donno, 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 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 two 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
June 30, 1997 and 1996, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 29, 1998 (except for the
second paragraph of Note 1, as
to which the date is May 11,
1998)
F-13
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (RESTATED)
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 5,453,397 $ 2,480,650
Accounts receivable, less allowance for doubtful
accounts of $2,078,000 and $1,036,000............ 19,251,478 7,945,959
Deferred income taxes............................. 3,369,014 372,445
Tax refund receivable............................. -- 74,467
Prepaid expenses and other current assets......... 5,556,259 3,285,958
------------ -----------
Total current assets............................. 33,630,148 14,159,479
Property and equipment:
Land.............................................. 7,407,856 670,501
Landfill sites.................................... 34,111,494 13,471,186
Buildings and leasehold improvements.............. 7,596,576 2,639,537
Vehicles.......................................... 38,613,136 31,525,735
Machinery and equipment........................... 23,441,315 12,507,835
Furniture and fixtures............................ 1,729,008 1,706,440
------------ -----------
Total property and equipment..................... 112,899,385 62,521,234
Accumulated depreciation and amortization......... 33,691,391 31,310,841
------------ -----------
79,207,994 31,210,393
Assets held for sale............................... 358,758 859,262
Excess cost over fair market value of net assets
acquired, net of $875,000 and $440,000 accumulated
amortization...................................... 60,302,159 372,096
Other intangible assets, net of $3,779,000 and
$3,468,000 accumulated amortization............... 6,747,659 844,313
Notes receivable from officers..................... 432,902 432,902
Other assets (including $533,000 and $433,000 of
restricted cash on deposit for landfill closure
and insurance bonding)............................ 2,503,544 1,282,600
------------ -----------
Total assets..................................... $183,183,164 $49,161,045
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings............................. $ 155,000 $ 595,000
Accounts payable.................................. 10,384,052 6,192,329
Accrued expenses and other current liabilities.... 11,708,860 2,454,833
Income taxes payable.............................. 1,080,123 430,728
Current portion of accrued landfill closure and
other environmental costs........................ 2,428,000 1,070,000
Current portion of long-term debt................. 3,891,833 2,883,412
Current portion of capitalized lease obligations.. 1,474,656 1,499,124
Deferred revenue.................................. 2,968,306 626,117
------------ -----------
Total current liabilities........................ 34,090,830 15,751,543
Deferred income taxes.............................. 5,889,097 673,443
Long-term debt, less current portion............... 65,070,500 10,000,022
Capitalized lease obligations, less current
portion........................................... 1,843,914 3,196,024
Accrued landfill closure and other environmental
costs............................................. 7,293,648 2,625,421
Other liabilities.................................. 9,151,246 --
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares--50,000,000
Issued and outstanding shares--18,608,220 and
11,979,050....................................... 186,082 119,790
Class A common stock (convertible to common
stock), $.01 par value:
Authorized shares--10,000,000
Issued and outstanding shares--none............... -- --
Additional paid-in capital........................ 50,748,718 11,337,554
Retained earnings................................. 8,985,388 5,533,507
------------ -----------
59,920,188 16,990,851
Less treasury stock at cost--39,100 common shares. (76,259) (76,259)
------------ -----------
Total stockholders' equity....................... 59,843,929 16,914,592
------------ -----------
Total liabilities and stockholders' equity....... $183,183,164 $49,161,045
============ ===========
</TABLE>
See accompanying notes.
F-14
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (RESTATED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Revenues............................... $145,273,584 $99,988,418 $91,244,597
Cost of revenues....................... 106,109,330 80,239,389 68,486,847
Selling, general, and administrative
expenses.............................. 19,501,121 16,003,386 13,456,298
Depreciation and amortization.......... 7,202,122 5,339,347 5,369,772
Merger costs........................... 3,336,792 -- --
------------ ----------- -----------
Operating income (loss)................ 9,124,219 (1,593,704) 3,931,680
Interest expense, net.................. (3,163,673) (1,286,995) (1,103,319)
Other income, net...................... 595,010 145,107 171,982
------------ ----------- -----------
Income (loss) before income taxes...... 6,555,556 (2,735,592) 3,000,343
Income tax expense..................... 1,878,578 96,064 262,402
------------ ----------- -----------
Net income (loss)...................... $ 4,676,978 $(2,831,656) $ 2,737,941
============ =========== ===========
Basic earnings (loss) per share........ $ .29 $ (.25) $ .27
============ =========== ===========
Weighted average number of shares
outstanding........................... 16,220,259 11,473,345 10,299,624
============ =========== ===========
Diluted earnings (loss) per share...... $ .27 $ (.25) $ .26
============ =========== ===========
Weighted average number of shares
outstanding........................... 17,183,952 11,473,345 10,392,232
============ =========== ===========
</TABLE>
See accompanying notes.
F-15
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (RESTATED)
<TABLE>
<CAPTION>
NUMBER OF SHARES PAR VALUE
--------------------- -----------------
CLASS A CLASS A ADDITIONAL
COMMON COMMON COMMON COMMON PAID-IN RETAINED TREASURY
STOCK STOCK STOCK STOCK CAPITAL EARNINGS STOCK TOTAL
---------- ---------- -------- -------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1994................... 8,739,496 1,591,201 $ 87,394 $ 15,912 $ 9,666,118 $ 9,527,341 $(76,259) $19,220,506
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 income............. -- -- -- -- -- 2,737,941 -- 2,737,941
Dividends paid to
former stockholders of
pooled companies...... -- -- -- -- -- (2,380,285) -- (2,380,285)
Other................... -- -- -- -- -- 5,701 -- 5,701
---------- ---------- -------- -------- ----------- ----------- -------- -----------
Balance at June 30,
1995................... 9,069,496 1,591,201 90,694 15,912 9,989,068 9,890,698 (76,259) 19,910,113
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............... -- -- -- -- -- (2,831,656) -- (2,831,656)
Dividends paid to
former stockholders of
pooled companies...... -- -- -- -- -- (1,525,500) -- (1,525,500)
Other................... -- -- -- -- -- (35) -- (35)
---------- ---------- -------- -------- ----------- ----------- -------- -----------
Balance at June 30,
1996................... 11,979,050 -- 119,790 -- 11,337,554 5,533,507 (76,259) 16,914,592
Exercise of common
stock options and
warrants.............. 478,076 -- 4,781 -- 425,780 -- -- 430,561
Proceeds from sale 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 the
incorporation of Apex. 796,927 -- 7,970 -- 3,242,030 -- -- 3,250,000
Common stock issued in
purchase acquisitions. 2,636,542 -- 26,365 -- 25,255,278 -- -- 25,281,643
Common stock issued for
consulting services... 5,625 -- 56 -- 44,944 -- -- 45,000
Stock issued to satisfy
debt obligation....... 42,000 -- 420 -- 514,080 -- -- 514,500
Adjustment for
companies with
different fiscal year
end................... (385,958) (385,958)
Net income............. -- -- -- -- -- 4,676,978 -- 4,676,978
Dividends paid to
former stockholders of
pooled companies...... -- -- -- -- -- (839,994) -- (839,994)
Other................... -- -- -- -- -- 855 -- 855
---------- ---------- -------- -------- ----------- ----------- -------- -----------
Balance at June 30,
1997................... 18,608,220 -- $186,082 $ -- $50,748,718 $ 8,985,388 $(76,259) $59,843,929
========== ========== ======== ======== =========== =========== ======== ===========
</TABLE>
See accompanying notes.
F-16
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................... $ 4,676,978 $ (2,831,656) $ 2,737,941
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization........ 7,202,122 5,339,347 5,369,772
Provision for losses on receivables.. 631,871 358,795 472,356
Landfill closure costs............... 512,772 1,317,310 291,804
Noncash severance and transition
costs............................... -- 740,827 --
Noncash compensation expense......... 45,000 138,173 --
Deferred income taxes................ 913,494 3,374 (163,869)
Loss on write-down of assets held for
sale................................ -- 402,616 --
Gain on sale of property and
equipment........................... (679,173) (195,976) (150,145)
Changes in operating assets and
liabilities:
Accounts receivable.................. (8,714,452) (1,453,400) (823,725)
Income taxes......................... 963,375 (20,687) 147,565
Accounts payable..................... 1,612,862 1,118,066 (60,959)
Deferred revenue..................... 2,575,485 237,315 (6,193)
Other................................ (992,851) 816,008 748,258
------------ ------------ -----------
Net cash provided by operating
activities........................... 8,747,483 5,970,112 8,562,805
INVESTING ACTIVITIES
Acquisition of businesses, net of cash
acquired............................. (39,336,838) -- --
Development of landfill sites......... (5,066,039) (2,094,436) (1,783,394)
Proceeds from sale of property and
equipment............................ 989,893 826,859 437,835
Purchase of property and equipment.... (15,869,966) (11,175,467) (6,517,847)
(Advances made) payments received on
notes receivable, net................ (22,090) (243,973) 62,810
Payments for intangible assets........ (2,682,110) (122,500) (574,950)
Landfill closure and insurance bonding
deposits............................. (57,837) 111,485 (18,145)
Other, net............................ 307,654 (81,871) (196,376)
------------ ------------ -----------
Net cash used in investing activities. (61,737,333) (12,779,903) (8,590,067)
FINANCING ACTIVITIES
Proceeds from revolving line of
credit, long-term debt and
capitalized lease obligations........ 69,360,762 10,510,920 7,201,440
Payments on revolving line of credit,
long-term debt and capitalized lease
obligations.......................... (26,194,484) (4,900,202) (4,335,686)
Net (payments) borrowings on note
payable to shareholder/officer....... -- (229,695) 229,705
Proceeds from the incorporation of
Apex................................. 3,250,000 -- --
Proceeds from issuance of common
stock, net of expenses............... 10,386,313 1,361,670 326,250
Dividends paid to former stockholders
of pooled companies.................. (839,994) (1,525,500) (2,380,285)
------------ ------------ -----------
Net cash provided by financing
activities........................... 55,962,597 5,217,193 1,041,424
------------ ------------ -----------
Net increase (decrease) in cash and
cash equivalents..................... 2,972,747 (1,592,598) 1,014,162
Cash and cash equivalents at beginning
of year.............................. 2,480,650 4,073,248 3,059,086
------------ ------------ -----------
Cash and cash equivalents at end of
year................................. $ 5,453,397 $ 2,480,650 $ 4,073,248
============ ============ ===========
</TABLE>
See accompanying notes.
F-17
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(RESTATED)
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.
The accompanying consolidated financial statements include the financial
position and results of operations of (i) Bluegrass Containment, Inc.
("Bluegrass") on March 9, 1998, (ii) Hudson Jersey Sanitation Co., West
Milford Haulage, Inc., Frank Stamato & Company, and Specialized Recycling
Technologies (collectively the "Stamato Companies") on March 31, 1998, and
(iii) Ecology Systems, Inc., Tactical Management Inc., and Transpro Inc.
(collectively the "Ecology Companies") on March 31, 1998. These transactions
were accounted for as poolings of interests. The Company has released post-
combination financial information that included the date of consummation of
these transactions; and accordingly, the consolidated financial statements
have been restated to include the accounts of Bluegrass, the Stamato
Companies, and the Ecology Companies for all periods presented.
Prior to combination, the fiscal year end of both the Ecology Companies and
the Stamato Companies was December 31. The consolidated results of operations
of the Company for the year ended June 30, 1997 include the results of
operations of the Ecology Companies and the Stamato Companies for the same
period while the consolidated results of operations of the Company for the
year ended June 30, 1996 and 1995 include the results of operations of the
Ecology Companies and the Stamato Companies for the year ended December 31,
1996 and 1995. A net decrease to equity of approximately $386,000 has been
made to reflect the activity of the Ecology Companies and the Stamato
Companies for the six-month period ended December 31, 1996. A summary of the
results of operations of the Ecology Companies and the Stamato Companies for
the six-month period ended December 31, 1996 is as follows:
<TABLE>
<S> <C>
Revenues......................... $23,189,000
Net income....................... $ 386,000
</TABLE>
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 primarily throughout 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 ten to 40 years for buildings and improvements, three to 12
years for vehicles, machinery, and equipment, five to 12 years for containers
and three to ten years for furniture and fixtures.
F-18
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(RESTATED)
Landfill site costs include expenditures for acquisition of land and related
airspace, 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 $3,159,000 and $2,701,000 at June
30, 1997 and 1996, respectively.
The Company capitalizes interest costs as part of the cost of developing
landfill sites and constructing disposal space. Interest costs of $178,000,
$84,000, and $48,000 were capitalized for the fiscal years ended June 30,
1997, 1996, and 1995, 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 value
of net assets acquired was $435,000, $81,000, and $75,000, for the fiscal
years ended June 30, 1997, 1996, and 1995, 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 three to 15 years. Amortization of other intangible assets was $350,000,
$233,000, and $330,000, for the fiscal years ended June 30, 1997, 1996, and
1995, 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 costs 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 are accrued and
charged to operations in the period the potential environmental liability is
known.
F-19
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(RESTATED)
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 $2,200,000, $22,000, and $109,000 and financed insurance premiums of
$1,211,000, $462,000, and $458,000 for the fiscal years ended 1997, 1996, and
1995, respectively.
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 classified as deferred revenue.
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.
NEW ACCOUNTING STANDARDS
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 adopted SOP 96-1 in the quarter ended September 30, 1997, and the
effect of adoption was not material to the Company.
2. ACQUISITIONS
ACQUISITIONS ACCOUNTED FOR UNDER THE POOLING OF INTERESTS METHOD
On September 27, 1996, the Company completed its merger with Super Kwik,
Inc. and its affiliate ("Super Kwik") and 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.
F-20
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(RESTATED)
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" or
"Donno") 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) 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.
On December, 1, 1997, the Company completed its merger with Hamm's
Sanitation, Inc. and H.S.S., Inc. (collectively "Hamm's") and 715,032
unregistered shares of Common Stock were issued in exchange for all the
outstanding stock of Hamm's. Hamm's provides municipal solid waste collection
services to approximately 21,000 commercial and residential customers in
several northwestern New Jersey counties. The transaction has been accounted
for using the pooling of interests method of accounting and, accordingly, the
accompanying consolidated financial statements include the accounts of Hamm's
for all periods presented.
On March 9, 1998, the Company completed its merger with Bluegrass and
198,224 unregistered shares of Common Stock were issued in exchange for all
the outstanding stock of Bluegrass. Bluegrass owns and operates a landfill in
Louisville, Kentucky. The transaction has been accounted for using the pooling
of interests method of accounting, and accordingly, the accompanying financial
statements include the accounts of Bluegrass for all periods presented.
On March 31, 1998, the Company completed its merger with the Ecology
Companies and 155,665 unregistered shares of Common Stock were issued in
exchange for all the outstanding stock of the Ecology Companies. The Ecology
Companies operate a hauling operation out of Lyndhurst, New Jersey. The
transaction has been accounted for using the pooling of interests method of
accounting, and accordingly, the accompanying financial statements include the
accounts of the Ecology Companies for all periods presented.
On March 31, 1998, the Company completed its merger with the Stamato
Companies and 1,386,344 unregistered shares of Common Stock were issued in
exchange for all the outstanding stock of the Stamato Companies. The Stamato
Companies provide municipal solid waste collection services in New Jersey. The
transaction has been accounted for using the pooling of interests method of
accounting, and accordingly, the accompanying financial statements include the
accounts of the Stamato Companies for all periods presented.
F-21
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(RESTATED)
A detail of revenues and net income (loss) of the separate companies were as
follows (unaudited):
<TABLE>
<CAPTION>
NET INCOME
REVENUES (LOSS)
------------ -----------
<S> <C> <C>
Year ended June 30, 1997
Eastern Environmental Services, Inc. ........... $ 30,759,984 $ 1,499,755
Pooled companies................................ 114,513,600 3,177,223
------------ -----------
Combined........................................ $145,273,584 $ 4,676,978
============ ===========
Year ended June 30, 1996
Eastern Environmental Services, Inc. ........... $ 7,632,503 $(3,500,043)
Pooled companies................................ 92,355,915 668,387
------------ -----------
Combined........................................ $ 99,988,418 $(2,831,656)
============ ===========
Year ended June 30, 1995
Eastern Environmental Services, Inc. ........... $ 8,650,945 $(1,547,550)
Pooled companies................................ 82,593,652 4,285,491
------------ -----------
Combined........................................ $ 91,244,597 $ 2,737,941
============ ===========
</TABLE>
Super Kwik, Donno, Apex, H.S.S., Inc., Bluegrass, Hudson Jersey Sanitation,
West Milford Haulage, Transpro, Inc. and Tactical Management were Subchapter S
Corporations prior to the mergers, whereby, the taxable income or loss flowed
through to the individual shareholders. The effects of pro forma income taxes
as a C Corporation would result in additional income tax expense of
$1,200,000, $280,000, and $1,500,000 for the years ended June 30, 1997, 1996,
and 1995, respectively.
In the fiscal year ended June 30, 1997, the Company incurred approximately
$1,148,000, $955,000, and $1,234,000 in merger-related costs associated with
the Super Kwik, Donno, and Apex mergers, respectively, of which approximately
$2,040,000 is remaining in accrued liabilities at June 30, 1997. The
$3,337,000 of merger costs includes $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 previous S Corporation elections of Super Kwik, Donno, and Apex,
respectively. This total tax provision of $904,000 is included within income
tax expense for 1997.
ACQUISITIONS ACCOUNTED FOR UNDER THE PURCHASE METHOD
During the fiscal year ended June 30, 1997, the Company consummated fourteen
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 acquisitions, including liabilities assumed, accounted for under the
purchase method were $88,229,000. The excess cost over the fair market value
of the net assets acquired was $54,208,000. This amount is being amortized
over 40 years from the dates of respective acquisitions on a straight-line
basis. Certain purchase price allocations are based on preliminary estimates
as of the acquisition dates.
The unaudited pro forma information set forth below assumes the three
significant acquisitions accounted for under the purchase method had occurred
at the beginning of the periods presented. 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
F-22
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(RESTATED)
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>
YEAR ENDED JUNE 30,
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues........................................ $172,612,000 $160,660,000
Net income...................................... $ 6,525,000 $ 2,621,000
Diluted earnings per share...................... $ .35 $ .19
</TABLE>
The Company closed into escrow on May 12, 1997 the pending acquisitions of
Golden Gate Carting Co. Inc., ("Golden Gate") and Coney Island Rubbish
Removal, Inc. ("Coney Island") pending satisfaction of certain customary
closing conditions which the Company believes will be resolved. Estimated
consideration relating to the Golden Gate and Coney Island acquisitions
consists of 288,820 unregistered shares of Common Stock and the assumption of
approximately $3.0 million of debt. The acquisitions of Golden Gate and Coney
Island will be accounted for under the purchase method.
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>
YEAR ENDED JUNE 30,
---------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Balance at beginning of year............ $1,036,000 $ 977,000 $ 650,000
Additions (charged to expense).......... 632,000 359,000 472,000
Deductions.............................. (785,000) (300,000) (145,000)
Other--purchase price allocation........ 1,195,000 -- --
---------- ---------- ---------
Balance at end of year.................. $2,078,000 $1,036,000 $ 977,000
========== ========== =========
</TABLE>
4. LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS
In September 1996, the Company entered into a new revolving credit facility
with two major banks, BankBoston, 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
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
balances of an existing revolving credit facility and note payable. Subsequent
to June 30, 1997, the Company amended the terms of the credit facility which,
among other things, increased the amount available for borrowings to
$150,000,000 of which $50,000,000 may be utilized for letters of credit. The
amended credit agreement also revised the maturity date to October 2002.
F-23
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(RESTATED)
Debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Revolving credit facility with BankBoston, N.A. and
Bank of America Illinois, maturity date of April
30, 2000, variable interest rates ranging from
8.0% to 8.5%...................................... $55,500,000 $ --
Revolving credit facility.......................... -- 237,500
Note payable....................................... -- 1,096,875
Note payable secured by certain real estate.
Interest at 8.5% payable monthly, principal due
June 2002......................................... 1,450,000 --
Notes payable to various financial institutions,
with various maturities payable through September
2013, interest rates (fixed and variable) ranging
from 6.56% to 12.5%, and monthly installments
ranging from $1,179 to $22,755.................... 4,478,427 5,084,661
Machinery and equipment notes payable, secured by
equipment, with various maturities payable through
February 2005, interest rates ranging from 6% to
13.5%, payable monthly in installments ranging
from $599 to $34,201.............................. 7,958,195 10,422,894
Other.............................................. 2,894,281 736,652
----------- -----------
72,280,903 17,578,582
Less current portion............................... 5,366,489 4,382,536
----------- -----------
$66,914,414 $13,196,046
=========== ===========
</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,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Cost.................................................. $4,280,592 $4,492,355
Accumulated depreciation.............................. 1,403,794 934,210
---------- ----------
$2,876,798 $3,558,145
========== ==========
</TABLE>
Maturities of long-term debt are as follows: 1998--$5,366,489; 1999--
$3,448,719; 2000--$3,240,180; 2001--$1,819,704; 2002 and thereafter--
$58,405,811.
Interest paid on all indebtedness was $3,290,000, $1,351,000, and
$1,088,000, for the fiscal years ended 1997, 1996, and 1995, 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 June 30, 1997 aggregated
$4,242,000.
F-24
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(RESTATED)
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1997 1996
----------- ----------
<S> <C> <C>
Accrued compensation................................. $ 959,496 $ 460,814
Accrued professional fees............................ 277,148 165,500
Miscellaneous taxes.................................. 721,821 178,276
Accrued severance costs.............................. 165,869 583,832
Accrued transition costs............................. 5,136,451 97,000
Other................................................ 4,448,075 969,411
----------- ----------
$11,708,860 $2,454,833
=========== ==========
</TABLE>
6. ACCRUED LANDFILL CLOSURE AND OTHER ENVIRONMENTAL COSTS
The Company owns or operates six 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 thirty 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 June 30, 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 $14,400,000, of which $3,700,000, has been accrued as of June
30, 1997. In addition, 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--$125,000 per year for 30 years after closure at each of the Company's
two municipal solid waste accepting facilities and $13,000--$16,000 per year
for 30 years after closure at the Company's industrial landfill sites. The
Company has accrued $1,700,000 for post-closure obligations as of June 30,
1997.
Funding of closure and post-closure obligations and other environmental
costs accrued to date are estimated as follows: 1998--$2,428,000; 1999--
$1,102,000; 2000--$700,000; 2001 and thereafter--$5,492,000.
Also included in accrued landfill closure and other environmental costs is
$4,000,000 for waste relocation costs at the Company's Chambersburg,
Pennsylvania landfill.
F-25
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(RESTATED)
Pursuant to certain statutory requirements regarding financial assurance for
the closure and post-closure monitoring cost requirements at each of the
Company's landfills, the Company maintains bonding facilities, collateralized
by irrevocable letters of credit and cash deposits. Financial assurance as of
June 30, 1997 is as follows:
<TABLE>
<CAPTION>
CURRENT FINANCIAL
ASSURANCE REQUIREMENTS BONDS DEPOSITS PENDING
---------------------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Kentucky.............. $1,637,000 $1,637,000 $128,000 $3,300,000
Pennsylvania.......... $6,380,000 $3,780,000 -- $2,600,000
West Virginia......... $ 382,000 $ 214,000 $204,000 $6,600,000
Florida............... $ 608,000 -- $ 81,000 $ 527,000
Illinois.............. $ 646,000 $ 646,000 -- --
</TABLE>
Irrevocable letters of credit outstanding at June 30, 1997 related to
closure and post-closure care were $1,126,000.
7. OTHER LIABILITIES
In connection with certain acquisitions made by the Company during 1997, the
Company has accrued liabilities totaling $9,151,246 for common stock and/or
cash issuable to sellers upon satisfactory resolution of certain
contingencies. These amounts have been included in the purchase price
allocations of the respective acquisitions.
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, 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 that expired on June 20, 1997.
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. The Company registered these securities in
February of 1996.
On August 9, 1996, the Company completed a private placement ("Placement")
of 2,500,000 shares of Common Stock at $4.00 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 Placement are not
registered, and registration rights do not commence for two years.
The Company also issued 125,000 shares of Common Stock at $4.00 per share to
a bank at substantially the same terms as the Placement.
F-26
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(RESTATED)
9. STOCK OPTION PLANS
The Company's Stock Option Plans provide for the grant of incentive stock
options or nonqualified 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). Nonqualified 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 nonqualified
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. Nonqualified 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. As of
June 30, 1997, 2,140,745 options have been granted under this Plan including
1,243,922 nonqualified stock options.
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, if 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 4 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.
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>
YEAR ENDED JUNE 30,
----------------------
1997 1996
---------- -----------
<S> <C> <C>
Pro forma net income (loss)......................... $2,984,000 $(3,067,000)
Pro forma diluted earnings (loss) per share......... $ .17 $ (.27)
</TABLE>
F-27
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(RESTATED)
Options outstanding have been granted to officers and employees to purchase
Common Stock at prices ranging from $.01 to $14.50 per share. A summary of the
option transactions is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1997 1996 1995
--------- --------- -------
<S> <C> <C> <C>
Options outstanding, beginning of period...... 880,900 366,900 417,200
Options granted............................... 1,590,736 655,000 20,000
Options exercised............................. (76,945) (140,000) (30,000)
Options canceled.............................. -- (1,000) (40,300)
--------- --------- -------
Options outstanding, end of period............ 2,394,691 880,900 366,900
========= ========= =======
Options exercisable........................... 657,379 338,333 350,650
========= ========= =======
Options available for grant................... 359,264 2,113,667 300,100
========= ========= =======
</TABLE>
The weighted average fair values of options granted during fiscal 1997 and
1996 were $5.14 and $3.14 per share, respectively. The weighted average
exercise price of options outstanding and exercisable at June 30, 1997 was
$4.41.
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 June 30, 1997 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE
--------------- ----------- ---------------- --------
<S> <C> <C> <C>
$ .01-$ 5.00 253,946 1.5 years $ 1.02
$ 5.01-$10.00 1,527,945 8.9 years $ 6.41
$10.01-$14.50 612,800 9.8 years $13.19
---------
$ .01-$14.50 2,394,691 8.4 years $ 7.57
=========
</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 June 30, 1997, 27,311
shares have been issued under the Employee Plans. At June 30, 1997, the
Company has 973,464 warrants outstanding of which 573,464 are exercisable to
purchase shares of Common Stock. Terms of warrants have been established by
the Board of Directors at prices between $1.25 and $14.53 expiring at various
dates through 2007.
F-28
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(RESTATED)
10. INCOME TAXES
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,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation and amortization...... $(3,335,190) $ (794,844)
Landfill permitting costs........................ (3,366,989) --
Other, net....................................... (906,429) (123,583)
----------- -----------
Total deferred tax liabilities................. (7,608,608) (918,427)
Deferred tax assets:
Allowance for doubtful accounts.................. 906,998 158,915
Accrued refurbishing costs....................... 2,191,797 --
Reserve for loss on assets held for sale......... 62,205 255,933
Net operating loss carryforwards................. 194,284 1,484,833
Environmental costs.............................. 1,623,741 --
AMT credit....................................... 109,500 24,376
Reserve for severance and transition costs....... -- 269,232
Other, net....................................... -- 68,140
----------- -----------
Total deferred assets.......................... 5,088,525 2,261,429
Valuation allowance for deferred tax assets........ -- (1,644,000)
----------- -----------
Net deferred tax assets............................ 5,088,525 617,429
----------- -----------
Net deferred tax liabilities....................... $(2,520,083) $ (300,998)
=========== ===========
</TABLE>
At June 30, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of $571,000 that expire through 2011. However, due
to a change in control, these net operating loss carryforwards may be limited.
For financial reporting purposes, the valuation allowance has been reversed
due to the fact that the Company has concluded that it is more likely than not
that the tax benefits will be realized in the future.
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------
1997 1996 1995
---------- ------- ---------
<S> <C> <C> <C>
Current:
Federal...................................... $ 453,347 $29,028 $ 275,016
State........................................ 511,737 63,662 151,255
---------- ------- ---------
965,084 92,690 426,271
Deferred:
Federal...................................... 838,504 600 (65,452)
State........................................ 74,990 2,774 40,693
Operating loss carryforward.................. -- -- (139,110)
---------- ------- ---------
913,494 3,374 (163,869)
---------- ------- ---------
Provision for income taxes................... $1,878,578 $96,064 $ 262,402
========== ======= =========
</TABLE>
F-29
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(RESTATED)
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to the provision for income taxes is:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Tax at U.S. federal statutory rates.... $ 2,235,678 $(1,160,387) $(332,989)
S Corporation income prior to pooling
date.................................. (971,200) -- --
State income taxes, net of federal tax
benefit............................... 326,650 66,436 204,631
Nondeductible costs and other
acquisition accounting adjustments.... 1,019,829 24,918 24,918
S Corporation status termination....... 904,563 -- --
Valuation allowance for deferred tax
assets................................ (1,644,000) 1,154,000 340,000
Other.................................. 7,058 11,097 25,842
----------- ----------- ---------
Provision for income taxes............. $ 1,878,578 $ 96,064 $ 262,402
=========== =========== =========
</TABLE>
Net income tax payments made during fiscal 1997, 1996, and 1995 were
$174,000, $70,000, and $43,000, 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,
insurances, and maintenance expense. Future minimum lease payments under
operating leases with initial or remaining noncancelable lease terms in excess
of one year as of June 30, 1997, are as follows: 1998--$986,000, 1999--
$821,000, 2000--$495,000, 2001--$194,000, and 2002--$35,000. Total rental
expense under operating leases was approximately $623,000, $370,000, and
$411,000 for the fiscal years 1997, 1996, and 1995, 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 Somerset, 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. As of July 1, 1997,
the Company has resumed operation of the transfer station in accordance with
the franchise agreement and expects to continue such operations until
construction begins on the expansion area. Failure to continue to comply with
the franchise agreement, or timely closure of the original disposal area,
could result in the forfeiture of the performance bond of $1,300,000.
F-30
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(RESTATED)
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 June 30, 1997, the Company has accrued for certain potential
environmental remediation activities 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 evaluations. 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, results of operations, or liquidity of the
Company.
The Company carries insurance covering its assets and operations, including
pollution liability coverage. Specifically, each of the Company's five
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 is also 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 consolidated financial position, results of operations, or
liquidity of the Company.
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, results of operations, or 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 $1,835,000. 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 Somerset, 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 decided to
continue to operate the landfill. As the Company proceeds with construction of
the 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 related to recorded severance costs,
$97,000 reflected management's estimate of various transition costs in moving
the Company's corporate offices, and $110,000 related to certain legal and
other professional costs incurred in completing the transaction. Additionally,
management refined its estimates of necessary reserves
F-31
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(RESTATED)
against past-due receivables, outstanding contingencies, and deferred
acquisition 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 related to the Company's cessation of waste acceptance at the
Somerset, 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 reflected the
Company's estimate of operating losses at the Kentucky facility through fiscal
1996, and $189,000 reflected 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 included 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.
During 1995, Hudson Jersey Sanitation Co. agreed to a settlement with the
pension provider for their union known as Central States, Southeast and
Southwest Pension Fund. This settlement pertains to an audit of their pension
contributions. The Company paid $381,588 to satisfy the settlement, which
covers the period from December 31, 1989 to December 31, 1994. The entire
amount was charged to expense in 1995 and has been recorded as other income on
the statement of operations.
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 dated 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 benefits (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.
F-32
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(RESTATED)
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 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, and $414,000 for the fiscal years ended June
30, 1997, 1996, and 1995, respectively.
The notes receivable from officers are due in fiscal 2006. The interest rate
on these loans was 6% at June 30, 1997 and 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 $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 June 30, 1997 was
$750,000.
The Company paid a professional corporation owned by an officer of the
Company approximately $76,000 during fiscal 1997 for legal services rendered
to the Company.
In October 1996, the Company hired a corporation owned by an employee of the
Company for excavation services for the Company's landfills in West Virginia
and Pennsylvania. The Company estimates that the total amount to be paid will
be approximately $850,000. The selected corporation was the lowest bidder that
satisfied all bid requirements for such job.
Bluegrass leased certain operating equipment and employees from Rust of
Kentucky, Inc., a company owned by an individual who also owned 49% of
Bluegrass at the time. Amounts for these transactions totaled $192,000,
$262,000, and $253,000 for the fiscal years ended June 30, 1997, 1996, and
1995, respectively.
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
ACQUISITIONS
On July 9, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Reuben Smith Rubbish Removal Service, Inc.
("Reuben Smith") in exchange for 92,369 unregistered shares of Common Stock
and the assumption of $574,000 of debt. Reuben Smith, which conducts a waste
collection business in Atlantic City, New Jersey, was integrated into Super
Kwik, the Company's southern New Jersey regional collection operation. This
transaction will be accounted for as a purchase.
F-33
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(RESTATED)
On August 15, 1997, the Company completed the purchase of all the stock of
Pappy, Inc. ("Pappy") for total consideration of approximately $12,000,000 in
cash. Pappy operates as the Oak Avenue Landfill and is permitted to accept
construction and demolition debris and other residual wastes. The facility is
located north of Baltimore, Maryland. In addition to local waste, Pappy will
accept waste for the Company's various collection operations located in New
York, New Jersey, and Pennsylvania markets. This transaction will be accounted
for as a purchase.
On August 20, 1997, the Company purchased all of the stock of Soil
Remediation of Philadelphia, Inc. ("SRP") in exchange for 270,000 unregistered
shares of Common Stock. SRP provides remediation services for petroleum
contaminated soil. This transaction will be accounted for as a purchase.
On August 14, 1997, the Company completed its merger with Waste X and
approximately 216,667 unregistered shares of Common Stock were issued in
exchange for all outstanding stock of Waste X. An additional issuance of
Common Stock of up to 30% of the total consideration given may be issuable
pending the resolution of certain specific and general contingencies. Waste X
operates a municipal solid waste collection business in the Miami and Ft.
Lauderdale, Florida markets and was integrated into the Company's South
Florida regional operation. The transaction will be accounted for using the
pooling of interests method. Periods prior to the consummation of the merger
have not been restated to include the accounts and operations of Waste X as
combined results are not materially different from the results as presented.
On December 1, 1997, the Company acquired from Delmarva Capital Technology
all of the outstanding stock of Pine Grove, Inc. ("Pine Grove"), its wholly
owned subsidiary, for approximately $46,000,000. The purchase price was
comprised of approximately $34,300,000 in cash and the assumption of
approximately $11,700,000 of debt. Pine Grove owns 100% of the outstanding
stock of Pine Grove Landfill, Inc., a 174-acre subtitle D solid waste disposal
facility located in east-central Pennsylvania, and Pine Grove Hauling Company,
an integrated solid waste collection company servicing residential and
commercial customers. This transaction will be accounted for using the
purchase method of accounting.
On December 31, 1997, the Company acquired substantially all the assets of
Berger Waste Management, Inc. ("Berger") in exchange for $200,000 in cash. The
assets consisted primarily of vehicles, containers and customer lists. Berger,
which conducted a waste collection business in Illinois, was integrated into
Olney Sanitary System, Inc., the Company's Illinois collection operation. This
transaction will be accounted for using the purchase method of accounting.
From January 1, 1998 to April 1, 1998, the Company acquired the assets of
ten collection companies in separate transactions. Total consideration under
the agreements consists of approximately 240,000 unregistered shares of Common
Stock and cash of approximately $6,600,000 to the sellers. These transactions
will be accounted for using the purchase method of accounting.
On February 12, 1998, the Company acquired the Kelly Run Landfill from USA
Waste Services, Inc. Consideration under the agreement consisted of 250,000
shares of Common Stock in exchange for all the issued and outstanding shares
of Kelly Run Landfill. This transaction will accounted for using the purchase
method of accounting.
SALE OF COMMON STOCK
In August 1997, the Company completed its registration and sale of 5,175,000
shares of Common Stock for $17.75 per share, for the purpose of reducing its
outstanding indebtedness under its credit facility, and to fund future
acquisitions, capital expenditures and working capital needs. Net proceeds,
after deduction of fees and
F-34
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(RESTATED)
related costs, were approximately $85,300,000. The unaudited pro forma diluted
earnings per share for the year ended June 30, 1997, assuming the issuance of
these shares and receipt of related proceeds on July 1, 1996, and the
reduction of outstanding indebtedness and related interest expense, net of
income taxes, would have been $.26 per share.
ANNUAL MEETING OF STOCKHOLDERS
On January 14, 1998, the Company held its Annual Meeting of Stockholders.
The following proposals were submitted to a vote: (i) to amend the Company's
Certificate of Incorporation, as amended, to increase the number of authorized
shares of Common Stock of the Company from 50,000,000 shares to 150,000,000
shares, (ii) to amend the Company's Certificate of Incorporation, as amended,
to eliminate Class A common stock, (iii) to amend the Company's Certificate of
Incorporation, as amended, to create a class of undesignated Preferred Stock
authorizing the Board of Directors to issue up to 50,000,000 shares of such
Preferred Stock, and (iv) to approve and adopt the Company's 1997 Stock Option
Plan. The terms of the 1997 Stock Option Plan are essentially the same as the
1996 Stock Option Plan (see Note 9). The aggregate maximum number of shares of
Common Stock for which options may be granted under the 1997 Stock Option Plan
is 5,000,000. All proposals were adopted by the stockholders.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued a Statement No.
128, Earnings Per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effect of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
restated to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net income (loss)....................... $ 4,676,978 $(2,831,656) $ 2,737,941
=========== =========== ===========
Denominator:
Denominator for basic earnings per
share--weighted average shares......... 16,220,259 11,473,345 10,299,624
Effect of dilutive options and warrants. 963,693 -- 92,608
----------- ----------- -----------
Denominator for diluted earnings per
share.................................... 17,183,952 11,473,345 10,392,232
=========== =========== ===========
Basic earnings (loss) per share........... $ .29 $ (.25) $ .27
=========== =========== ===========
Diluted earnings (loss) per share......... $ .27 $ (.25) $ .26
=========== =========== ===========
</TABLE>
F-35
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (RESTATED)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 6,692,627
Accounts receivable, less allowance for doubtful accounts of
$2,869,000 ................................................... 26,267,643
Deferred income taxes.......................................... 1,410,000
Prepaid expenses and other current assets...................... 4,913,052
------------
Total current assets.......................................... 39,283,322
Property and equipment:
Land........................................................... 12,377,629
Landfill sites................................................. 84,710,540
Buildings and leasehold improvements........................... 10,400,392
Vehicles....................................................... 45,969,093
Machinery and equipment........................................ 29,397,545
Furniture and fixtures......................................... 2,394,509
------------
Total property and equipment.................................. 185,249,708
Accumulated depreciation and amortization....................... 40,024,060
------------
145,225,648
Excess cost over fair market value of net assets acquired, net
of $1,656,000 accumulated amortization......................... 71,285,712
Other intangible assets, net of $5,571,000 accumulated
amortization................................................... 14,545,933
Notes receivable from officers.................................. 432,902
Other assets (including $556,000 of restricted cash on deposit
for landfill closure and insurance bonding).................... 3,443,251
------------
TOTAL ASSETS.................................................. $274,216,768
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 9,858,114
Accrued expenses and other current liabilities................. 13,457,136
Income taxes payable........................................... 351,761
Current portion of accrued landfill closure and other
environmental costs........................................... 2,278,000
Current portion of long-term debt.............................. 3,308,245
Current portion of capitalized lease obligations............... 1,238,789
Deferred revenue............................................... 3,661,501
------------
Total current liabilities..................................... 34,153,546
Deferred income taxes........................................... 3,068,221
Long-term debt, less current portion............................ 55,802,918
Capitalized lease obligations, less current portion............. 1,258,993
Accrued landfill closure and other environmental costs.......... 11,772,644
Other liabilities............................................... 13,221,023
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares--50,000,000
Issued and outstanding shares 24,731,765 ...................... 247,317
Additional paid-in capital..................................... 141,623,620
Retained earnings.............................................. 13,144,745
------------
155,015,682
Less treasury stock at cost--39,100 common shares.............. (76,259)
------------
Total stockholders' equity.................................... 154,939,423
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................... $274,216,768
============
</TABLE>
See accompanying notes.
F-36
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (RESTATED)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-------------------------
1997 1996
------------ -----------
<S> <C> <C>
Revenues............................................. $106,870,060 $64,990,530
Cost of revenues..................................... 73,323,208 51,173,193
Selling, general, and administrative expenses........ 13,376,915 7,461,931
Depreciation and amortization........................ 6,435,331 2,961,019
Merger costs......................................... 2,725,000 1,856,340
------------ -----------
Operating income..................................... 11,009,606 1,538,047
Interest expense, net................................ (1,278,584) (991,903)
Other income, net.................................... 256,281 261,688
------------ -----------
Income before income taxes........................... 9,987,303 807,832
Income tax expense................................... 3,518,187 789,067
------------ -----------
Net income........................................... $ 6,469,116 $ 18,765
============ ===========
Basic earnings per share............................. $ .28 $ --
============ ===========
Weighted average number of shares outstanding........ 23,421,362 15,381,031
============ ===========
Diluted earnings per share........................... $ .26 $ --
============ ===========
Weighted average number of shares outstanding........ 24,968,299 16,057,320
============ ===========
</TABLE>
See accompanying notes.
F-37
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (RESTATED)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
-------- ------------ ----------- -------- ------------
<S> <C> <C> <C> <C> <C>
Balance at June 30,
1997................... $186,082 $ 50,748,718 $ 8,985,388 $(76,259) $ 59,843,929
Exercise of common stock
options and warrants... 3,537 1,739,707 -- -- 1,743,244
Income tax benefit from
exercise of
non-qualified stock
options................ -- 1,245,469 -- -- 1,245,469
Proceeds from sale of
5,175,000 shares of
common stock, less
commissions and
issuance expenses of
$6,579,880............. 51,750 85,224,620 -- -- 85,276,370
Common stock issued for
acquisition accounted
for as a pooling of
interests.............. 2,167 140,833 -- -- 143,000
Transactions of pooled
company................ -- -- (617,150) -- (617,150)
Common stock issued to
satisfy debt
obligation............. 158 291,421 -- -- 291,579
Common stock issued in
purchase acquisitions.. 3,623 2,232,852 -- -- 2,236,475
Dividends to former
stockholders of pooled
companies.............. -- -- 1,690,202 -- 1,690,262
Other................... -- -- (2,347) -- (2,347)
Net income.............. -- -- 6,469,116 -- 6,469,116
-------- ------------ ----------- -------- ------------
Balance at December 31,
1997................... $247,317 $141,623,620 $13,144,745 $(76,259) $154,939,423
======== ============ =========== ======== ============
</TABLE>
See accompanying notes.
F-38
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income......................................... $ 6,469,116 $ 18,765
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 6,435,331 2,961,019
Provision for losses on receivables.............. 711,864 431,567
Landfill closure costs........................... 402,587 161,914
Deferred income taxes............................ (682,485) 650,200
Gain on sale of property and equipment........... (102,668) (184,202)
Changes in operating assets and liabilities:
Accounts receivable............................ (4,314,748) (3,946,902)
Accounts payable............................... (1,958,990) 214,698
Accrued expenses............................... (3,697,760) 1,583,594
Income taxes................................... 404,780 (9,740)
Deferred revenue............................... 630,403 1,268,832
Prepaid expenses and other current assets...... 1,148,202 373,262
Other.......................................... (1,061,251) (196,278)
------------ ------------
Net cash provided by operating activities.......... 4,384,381 3,326,729
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired.... (44,082,331) (34,309,203)
Proceeds from sale of property and equipment....... 635,221 557,226
Development of landfill sites...................... (5,259,781) (1,275,711)
Purchase of property and equipment................. (10,119,058) (9,417,553)
Payments for intangibles........................... (816,713) (540,000)
Landfill closure and insurance bonding deposits.... (534,439) (142,745)
------------ ------------
Net cash used in investing activities.............. (60,177,101) (45,127,986)
FINANCING ACTIVITIES
Proceeds from revolving line of credit, long-term
debt and capital lease obligations................ 36,254,128 40,679,360
Payments on revolving line of credit, long-term
debt and capital lease obligations................ (64,878,530) (6,860,447)
Payments on note payable to shareholder/officer.... -- (59,407)
Proceeds from the incorporation of Apex............ -- 3,250,000
Proceeds from issuance of common stock, net of
expenses and commissions.......................... 87,019,614 10,221,503
Cash dividends paid to former stockholders of
pooled companies.................................. (1,363,262) (270,405)
------------ ------------
Net cash provided by financing activities.......... 57,031,950 46,960,604
------------ ------------
Net increase in cash and cash equivalents.......... 1,239,230 5,159,347
Cash and cash equivalents at beginning of period... 5,453,397 2,231,604
------------ ------------
Cash and cash equivalents at end of period......... $ 6,692,627 $ 7,390,951
============ ============
</TABLE>
See accompanying notes.
F-39
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
(UNAUDITED)
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Eastern Environmental Services, Inc. and its wholly
owned subsidiaries (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. These condensed
consolidated financial statements reflect all adjustments (consisting of
normal recurring accruals), which in the opinion of management, are necessary
for a fair presentation of results of operations for the interim periods
presented. The results of operations for the six month period ended December
31, 1997 is not necessarily indicative of the operating results for the full
year. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These interim financial statements
should be read in conjunction with the audited consolidated financial
statements contained elsewhere in this report.
The Company's Quarterly Report on Form 10-Q for the quarter ended December
31, 1997 (filed February 17, 1998) and the financial statements and notes
thereto contained therein are deemed to be outdated as they are not on a basis
consistent with the consolidated financial statements and notes thereto
included in the Company's Current Report on Form 8-K dated May 20, 1998 as
they do not reflect pooling of interests accounting for three acquisitions
that occurred subsequent to December 31, 1997.
The consolidated financial statements include the financial position and
results of operations of (i) Bluegrass Containment, Inc. ("Bluegrass") on
March 9, 1998, (ii) Hudson Jersey Sanitation Co., West Milford Haulage, Inc.,
Frank Stamato & Company, and Specialized Recycling Technologies (collectively
the "Stamato Companies") on March 31, 1998, and (iii) Ecology Systems, Inc.,
Tactical Management Inc., and Transpro Inc. (collectively the "Ecology
Companies") on March 31, 1998. These transactions were accounted for as
poolings of interests. The Company has released post-combination financial
information that included the date of consummation of these transactions; and
accordingly, the consolidated financial statements have been restated to
include the accounts of Bluegrass, The Stamato Companies, and the Ecology
Companies for all periods presented.
2. BUSINESS COMBINATIONS
From July 2, 1996 to December 31, 1997, the Company expanded its waste
collection and hauling operations through the acquisition of twenty five
businesses. The aggregate of these business acquisitions is significant to the
Company. Twenty of the twenty five acquisitions completed were accounted for
using the purchase method of accounting. Accordingly, assets acquired and
liabilities assumed have been recorded at their estimated fair values at the
dates of acquisition and their results of operations are included in the
accompanying condensed consolidated statements of operations since the date of
acquisition. The excess of purchase price over the estimated fair market value
of identifiable net assets acquired is being amortized on a straight-line
basis over forty years from the date of acquisition. The purchase price
allocations are based on preliminary estimates as of the acquisition dates and
are finalized within one year from the date of acquisition.
On July 9, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Reuben Smith Rubbish Removal Service, Inc.
("Reuben Smith") in exchange for 92,369 unregistered shares of Common Stock
and the assumption of $574,000 of debt. Reuben Smith, which conducts a waste
collection business in Atlantic City, New Jersey, was integrated into Super
Kwik, the Company's southern New Jersey regional collection operation. This
transaction was accounted for as a purchase.
On August 15, 1997, the Company completed the purchase of all the stock of
Pappy, Inc. ("Pappy") for total consideration of approximately $12,000,000 in
cash. Pappy operates as the Oak Avenue Landfill and is
F-40
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(UNAUDITED) (CONTINUED)
permitted to accept construction and demolition debris and other residual
wastes. The facility is located north of Baltimore, Maryland. In addition to
local waste, Pappy will accept waste for the Company's various collection
operations located in New York, New Jersey, and Pennsylvania markets. This
transaction was accounted for as a purchase.
On August 20, 1997, the Company purchased all of the stock of Soil
Remediation of Philadelphia, Inc. ("SRP") in exchange for 270,000 unregistered
shares of Common Stock. SRP provides remediation services for petroleum
contaminated soil. This transaction was accounted for as a purchase.
On August 14, 1997, the Company completed its merger with Waste X and
approximately 216,667 unregistered shares of Common Stock were issued in
exchange for all outstanding stock of Waste X. An additional issuance of the
Common Stock of up to 30% of the total consideration given may be issuable
pending the resolution of certain specific and general contingencies. Waste X
operates a municipal solid waste collection business in the Miami and Ft.
Lauderdale, Florida markets and was integrated into the Company's South
Florida regional operation. The transaction has been accounted for using the
pooling of interests method, and accordingly, the accompanying condensed
consolidated financial statements include the accounts of Waste X for the six
months ended December 31, 1997. Periods prior to the consummation of the
merger were not restated to include the accounts and operations of Waste X as
combined results are not materially different from the results as presented.
On December 1, 1997, the Company completed its merger with Hamm's
Sanitation, Inc. and H.S.S., Inc. (collectively "Hamm's") and 715,032
unregistered shares of Common Stock were issued in exchange for all the
outstanding stock of Hamm's. Hamm's provides municipal solid waste collection
services to approximately 21,000 commercial and residential customers in
several northwestern New Jersey counties. The transaction has been accounted
for using the pooling of interests method of accounting and, accordingly, the
accompanying condensed consolidated financial statements include the accounts
of Hamm's for all periods presented.
On December 1, 1997, the Company acquired from Delmarva Capital Technology
all of the outstanding stock of Pine Grove, Inc. ("Pine Grove"), its wholly
owned subsidiary, for approximately $46,000,000. The purchase price was
comprised of approximately $34,300,000 in cash and the assumption of
approximately $11,700,000 of debt. Pine Grove owns 100% of the outstanding
stock of Pine Grove Landfill, Inc., a 174-acre subtitle D solid waste disposal
facility located in east-central Pennsylvania, and Pine Grove Hauling Company,
an integrated solid waste collection company servicing residential and
commercial customers. This transaction was accounted for using the purchase
method of accounting.
On December 31, 1997, the Company acquired substantially all the assets of
Berger Waste Management, Inc. ("Berger") in exchange for $200,000 in cash. The
assets consisted primarily of vehicles, containers and customer lists. Berger,
which conducted a waste collection business in Illinois, was integrated into
Olney Sanitary System, Inc., the Company's Illinois collection operation. This
transaction was accounted for using the purchase method of accounting.
On March 9, 1998, the Company completed its merger with Bluegrass and
198,224 unregistered shares of Common Stock were issued in exchange for all
the outstanding stock of Bluegrass. Bluegrass owns and operates a landfill in
Louisville, Kentucky. The transaction has been accounted for using the pooling
of interests method of accounting, and accordingly, the accompanying financial
statements include the accounts of Bluegrass for all periods presented.
On March 31, 1998, the Company completed its merger with the Ecology
Companies and 155,665 unregistered shares of Common Stock were issued in
exchange for all the outstanding stock of the Ecology
F-41
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(UNAUDITED) (CONTINUED)
Companies. The Ecology Companies operate a hauling operation out of Lyndhurst,
New Jersey. The transaction has been accounted for using the pooling of
interests method of accounting, and accordingly, the accompanying financial
statements include the accounts of the Ecology Companies for all periods
presented.
On March 31, 1998, the Company completed its merger with the Stamato
Companies and 1,386,344 unregistered shares of Common Stock were issued in
exchange for all the outstanding stock of the Stamato Companies. The Stamato
Companies provide municipal solid waste collection services in New Jersey. The
transaction has been accounted for using the pooling of interests method of
accounting, and accordingly, the accompanying financial statements include the
accounts of the Stamato Companies for all periods presented.
The combined and separate results of operations of the Company and the
pooled companies for the six months ended December 31, 1997 were as follows
(in thousands):
<TABLE>
<CAPTION>
EASTERN
SIX MONTHS ENDED ENVIRONMENTAL ECOLOGY STAMATO
DECEMBER 31, 1997 SERVICES, INC. BLUEGRASS COMPANIES COMPANIES COMBINED
----------------- -------------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Revenues............. $77,959 $1,029 $15,272 $12,610 $106,870
Net income (loss).... $ 4,657 $ 464 $ (70) $ 1,418 $ 6,469
</TABLE>
Combined and separate results of operations of the Company and the pooled
companies for the six months ended December 31, 1996 were as follows (in
thousands):
<TABLE>
<CAPTION>
EASTERN
SIX MONTHS ENDED ENVIRONMENTAL ECOLOGY STAMATO
DECEMBER 31, 1996 SERVICES, INC. BLUEGRASS COMPANIES COMPANIES COMBINED
----------------- -------------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenues.............. $41,349 $453 $12,023 $11,166 $64,991
Net income (loss)..... $ (442) $ 75 $ 130 $ 256 $ 19
</TABLE>
3. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Actual results could differ from those estimates. Such estimates include the
Company's accounting for closure and post-closure obligations; amortization of
landfill development costs; and estimates of reserves such as the allowance
for doubtful accounts receivable, and the Company's estimate of merger costs.
4. INCOME TAXES
The Company has recorded an income tax provision of $3,500,000 for the six
months ended December 31, 1997. This provision primarily relates to the
recording of federal and state tax liabilities at statutory rates, adjusted
for certain non-deductible items, and excludes S Corporation income prior to
the pooling dates.
F-42
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(UNAUDITED) (CONTINUED)
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Numerator:
Net income (loss)................................... $6,469,116 $ 18,765
========== ==========
Denominator:
Denominator for basic earnings per share--weighted
average shares..................................... 23,421,362 15,381,031
Effect of dilutive options and warrants............. 1,546,937 676,289
---------- ----------
Denominator for diluted earnings per share............ 24,968,299 16,057,320
========== ==========
Basic earnings (loss) per share....................... $ .28 $ --
========== ==========
Diluted earnings (loss) per share..................... $ .26 $ --
========== ==========
</TABLE>
6. SUBSEQUENT EVENTS
ACQUISITIONS
From January 1, 1998 to April 1, 1998, the Company acquired the assets of
ten collection companies in separate transactions. Total consideration under
the agreements consists of approximately 240,000 unregistered shares of Common
Stock and cash of approximately $6,600,000 to the sellers. These transactions
will be accounted for using the purchase method of accounting.
On February 12, 1998, the Company acquired the Kelly Run Landfill from USA
Waste Services, Inc. Consideration under the agreement consisted of 250,000
shares of Common Stock in exchange for all the issued and outstanding shares
of Kelly Run Landfill. This transaction will be accounted for using the
purchase method of accounting.
ANNUAL MEETING OF STOCKHOLDERS
On January 14, 1998, the Company held its Annual Meeting of Stockholders.
The following proposals were submitted to a vote: (i) to amend the Company's
Certificate of Incorporation, as amended, to increase the number of authorized
shares of common stock of the Company from 50,000,000 shares to 150,000,000
shares, (ii) to amend the Company's Certificate of Incorporation, as amended,
to eliminate Class A common stock, (iii) to amend the Company's Certificate of
Incorporation, as amended, to create a class of undesignated Preferred Stock
authorizing the Board of Directors to issue up to 50,000,000 shares of such
Preferred Stock, and (iv) to approve and adopt the Company's 1997 Stock Option
Plan. The terms of the 1997 Stock Option Plan are essentially the same as the
Company's 1996 Stock Option Plan. The aggregate maximum number of shares of
Common Stock for which options may be granted under the 1997 Stock Option Plan
is 5,000,000. All proposals were adopted by the stockholders.
F-43
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 4,660,333
Accounts receivable, less allowance for doubtful accounts of
$3,250,000.................................................... 27,434,090
Deferred income taxes.......................................... 1,833,253
Prepaid expenses and other current assets...................... 7,457,376
------------
Total current assets............................................ 41,385,052
Property and equipment:
Land........................................................... 12,166,541
Landfill sites................................................. 98,983,078
Buildings and leasehold improvements........................... 12,914,492
Vehicles....................................................... 47,758,312
Machinery and equipment........................................ 31,437,660
Furniture and fixtures......................................... 2,555,380
------------
Total property and equipment.................................... 205,815,463
Accumulated depreciation and amortization....................... 43,355,879
------------
162,459,584
Excess cost over fair market value of net assets acquired, net
of $2,139,000 accumulated amortization......................... 81,653,339
Other intangible assets, net of $5,910,000 accumulated amortiza-
tion........................................................... 14,929,565
Notes receivable from shareholders/officers..................... 442,402
Other assets (including $1,418,000 of restricted cash on deposit
for landfill closure and insurance bonding).................... 4,923,354
------------
Total assets.................................................... $305,793,296
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 13,874,352
Accrued expenses and other current liabilities................. 16,461,758
Income taxes payable........................................... 876,732
Current portion of accrued landfill closure and other environ-
mental costs.................................................. 4,056,000
Current portion of long-term debt.............................. 1,211,327
Current portion of capital lease obligations................... 1,177,139
Deferred revenue............................................... 3,514,213
------------
Total current liabilities....................................... 41,171,521
Deferred income taxes........................................... 6,242,379
Long-term debt, net of current portion.......................... 62,836,866
Capital lease obligations, net of current portion............... 1,021,575
Accrued landfill closure and other environmental costs.......... 14,868,138
Other liabilities............................................... 19,221,798
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares--50,000,000
Issued and outstanding shares 25,179,563...................... 251,796
Additional paid-in capital..................................... 147,467,268
Retained earnings.............................................. 12,788,214
------------
160,507,278
Less treasury stock at cost--39,100 common shares.............. (76,259)
------------
Total stockholders' equity...................................... 160,431,019
------------
Total liabilities and stockholders' equity...................... $305,793,296
============
</TABLE>
See accompanying notes.
F-44
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
----------- -----------
(RESTATED)
<S> <C> <C>
Revenues.............................................. $55,192,677 $34,992,954
Cost of revenues...................................... 34,495,790 23,588,305
Selling, general and administrative expenses.......... 7,022,510 5,623,797
Depreciation and amortization......................... 4,332,108 1,934,531
Merger costs.......................................... 3,945,000 1,480,452
----------- -----------
Operating income...................................... 5,397,269 2,365,869
Interest expense, net................................. (983,498) (890,613)
Other (expense) income................................ (120,400) 475,738
Income before income taxes............................ 4,293,371 1,950,994
----------- -----------
Income tax expense--See Note 5........................ 3,700,000 457,817
----------- -----------
Net income............................................ $ 593,371 $ 1,493,177
=========== ===========
Basic earnings per share.............................. $ .02 $ .09
=========== ===========
Weighted average number of shares outstanding......... 24,950,459 16,485,291
=========== ===========
Diluted earnings per share............................ $ .02 $ .08
=========== ===========
Weighted average number of shares outstanding......... 26,438,209 17,571,454
=========== ===========
</TABLE>
See accompanying notes.
F-45
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
-------- ------------ ----------- -------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... $247,317 $141,623,620 $13,144,745 $(76,259) $154,939,423
Exercise of common stock
options and warrants... 1,480 436,619 438,099
Common stock issued in
purchase acquisitions.. 2,999 5,407,029 5,410,028
Dividends paid to former
stockholders of pooled
companies.............. (949,902) (949,902)
Net income.............. 593,371 593,371
-------- ------------ ----------- -------- ------------
Balance at March 31,
1998................... $251,796 $147,467,268 $12,788,214 $(76,259) $160,431,019
======== ============ =========== ======== ============
</TABLE>
See accompanying notes.
F-46
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.......................................... $ 593,371 $ 1,493,177
Adjustments to reconcile net income to net cash pro-
vided by operating activities:
Depreciation and amortization..................... 4,332,108 1,934,531
Provision for losses on receivables............... 761,895 132,624
Landfill closure costs............................ 430,173 123,513
Deferred income taxes............................. 2,653,599 253,867
Gain on sale of property and equipment............ (18,604) (468,211)
Changes in operating assets and liabilities:
Accounts receivable............................. (1,496,108) 905,297
Accounts payable................................ 1,137,018 (2,792,580)
Accrued expenses................................ 1,591,682 1,853,462
Income taxes.................................... 786,872 83,012
Deferred revenue................................ (147,288) (1,203,667)
Prepaid expenses and other current assets....... (793,225) 224,631
Other .......................................... (700,267) 547,066
------------ -----------
Net cash provided by operating activities........... 9,131,226 3,086,722
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired..... (5,069,950) --
Proceeds from sale of property and equipment........ 225,077 583,001
Development of landfill sites....................... (5,194,326) (1,179,769)
Purchase of property and equipment.................. (4,706,287) (1,408,482)
Landfill closure and insurance bonding deposits..... (536,498) 23,966
------------ -----------
Net cash used in investing activities............... (15,281,984) (1,981,284)
FINANCING ACTIVITIES
Proceeds from revolving line of credit, long-term
debt and capital lease obligations................. 11,600,000 --
Payments on revolving line of credit, long-term debt
and capital lease obligations...................... (6,969,733) (3,329,493)
Proceeds from issuance of common stock, net of
expenses and commissions........................... 438,099 62,308
Cash dividends paid to former stockholders of pooled
companies.......................................... (949,902) (85,200)
------------ -----------
Net cash provided by (used in) financing activities. 4,118,464 (3,352,385)
------------ -----------
Net decrease in cash and cash equivalents........... (2,032,294) (2,246,947)
Cash and cash equivalents at beginning of period.... 6,692,627 7,390,951
------------ -----------
Cash and cash equivalents at end of period.......... $ 4,660,333 $ 5,144,004
============ ===========
</TABLE>
See accompanying notes.
F-47
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(UNAUDITED)
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Eastern Environmental Services, Inc. and its wholly
owned subsidiaries (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. These condensed
consolidated financial statements reflect all adjustments (consisting of
normal recurring accruals), which in the opinion of management, are necessary
for a fair presentation of results of operations for the interim periods
presented. The Company has restated the previously issued statement of
operations for the three months ended March 31, 1997 to reflect mergers with
Hamm's Sanitation, Inc., and H.S.S., Inc. ("Hamm's") on December 1, 1997,
Bluegrass Containment, Inc. on March 9, 1998, Hudson Jersey Sanitation, Co.,
West Milford Haulage, Inc., Frank Stamato & Company, and Specialized Recycling
Technologies, Inc. (collectively, "Stamato" or the "Stamato Companies") on
March 31, 1998, and Ecology Systems, Inc., Tactical Management, Inc., and
Transpro, Inc. (collectively, "Ecology" or the "Ecology Companies") on March
31, 1998 which were accounted for using the "pooling of interests" method. The
results of operations for the three month period ended March 31, 1998 are not
necessarily indicative of the operating results for the full year. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These interim financial statements should be read in
conjunction with the audited consolidated financial statements and notes
contained in the Company's Form 8-K filed May 20, 1998.
On April 1, 1998, the Company adopted a change in its fiscal year end from
June 30 to December 31; accordingly, the condensed consolidated financial
information included herein is for the three months ended March 31. The
Company intends to file a transition report on Form 10-K for the period ending
December 31, 1997 within 90 days from the date of change.
2. SIGNIFICANT ACCOUNTING POLICIES
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Statement 128,
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants,
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement 130"). Statement 130 establishes standards for reporting and
presentation of comprehensive income and its components. Comprehensive income
is defined as the change in equity of a business enterprise during a period
from transactions and other events and circumstances from nonowner sources and
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The Company adopted
Statement 130 effective January 1, 1998 and there was no effect on the
Company's financial statements upon adoption.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131
establishes standards for reporting information about operating segments in
annual financial statements that requires that those enterprises report
selected information about operating segments in the interim financial reports
issued to shareholders. Statement 131 is effective for fiscal years beginning
after December 15,
F-48
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(UNAUDITED) (CONTINUED)
1997. Adoption is not recognized for interim periods in the initial year of
application. The Company believes that the adoption of Statement 131 will not
have a material effect on the Company's financial statements upon adoption.
3. BUSINESS COMBINATIONS
From July 2, 1996 to March 31, 1998, the Company expanded its waste
collection and hauling operations through the acquisition of 33 businesses.
The aggregate of these business acquisitions is significant to the company.
Twenty-five of the 33 acquisitions completed were accounted for using the
purchase method of accounting. Accordingly, assets acquired and liabilities
assumed have been recorded at their estimated fair values at the dates of
acquisition and their results of operations are included in the accompanying
condensed consolidated statements of operations since the date of acquisition.
The excess of purchase price over the estimated fair market value of
identifiable net assets acquired is being amortized on a straight-line basis
over forty years from the date of acquisition. The purchase price allocations
are based on preliminary estimates as of the acquisition dates and are
finalized within one year from the date of acquisition.
On January 1, 1998, the Company acquired substantially all the assets of
Lake Region Sanitation in exchange for cash consideration of $60,000. This
transaction has been accounted for using the purchase method of accounting.
On January 7, 1998, the Company acquired substantially all the assets of J.
Scerbo Company, Recycling Center of New Jersey, Golden Gate Carting Co., Inc.,
Haulaway, Inc., and S.R.S. Recycling in exchange for 110,095 unregistered
shares of the Company's common stock and approximately $4.3 million of cash.
The assets consisted primarily of vehicles, containers, and customer lists.
These transactions have been accounted for using the purchase method of
accounting.
On January 16, 1998, the Company acquired substantially all the assets of
Minchoff Sanitation in exchange for cash consideration of $650,000. The assets
consisted primarily of vehicles, containers, and customer lists. This
transaction has been accounted for using the purchase method of accounting.
On February 12, 1998, the Company acquired Kelly Run Sanitation, Inc.
("Kelly Run Landfill") from USA Waste Services, Inc. Consideration under the
agreement consisted of 250,000 unregistered shares of common stock of the
Company in exchange for all the issued and outstanding shares of Kelly Run
Landfill. This transaction has been accounted for using the purchase method of
accounting.
On February 24, 1998, the Company acquired the assets of Red Ball Sanitation
Corp. in exchange for 130,000 unregistered shares of the Company's common
stock and cash consideration of $500,000. The assets consisted primarily of
vehicles, containers, and customer lists. This transaction has been accounted
for using the purchase method of accounting.
On March 9, 1998, the Company completed its merger with Bluegrass and
198,224 unregistered shares of the Company's common stock were issued in
exchange for all the outstanding stock of Bluegrass. Bluegrass owns and
operates a landfill in Louisville, Kentucky. The transaction has been
accounted for using the pooling of interests method of accounting, and
accordingly, the accompanying financial statements include the accounts of
Bluegrass for all periods presented.
On March 31, 1998, the Company completed its merger with the Ecology
Companies and 155,665 unregistered shares of the Company's common stock were
issued in exchange for all the outstanding stock of
F-49
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(UNAUDITED) (CONTINUED)
the Ecology Companies. The Ecology Companies operate a hauling operation
located in Lyndhurst, New Jersey. The transaction has been accounted for using
the pooling of interests method of accounting, and accordingly, the
accompanying financial statements include the accounts of the Ecology
Companies for all periods presented.
On March 31, 1998, the Company completed its merger with the Stamato
Companies and 1,386,344 shares of the Company's common stock were issued in
exchange for all the outstanding stock of the Stamato Companies. The Stamato
Companies provide municipal solid waste collection services in New Jersey. The
transaction has been accounted for using the pooling of interests method of
accounting, and accordingly, the accompanying financial statements include the
accounts of the Stamato Companies for all periods presented.
The combined and separate results of operations of the Company, Hamm's,
Bluegrass, Stamato and Ecology for the three months ended March 31, 1998 and
1997 were as follows:
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
REVENUES NET INCOME
----------- -----------
<S> <C> <C>
Eastern Environmental Services, Inc................. $37,577,102 $ 2,760,636
Hamm's.............................................. 3,897,074 734,408 (1)
Bluegrass........................................... 454,260 101,235 (1)
Stamato............................................. 5,929,289 (3,005,423)(1)
Ecology............................................. 7,334,952 2,515 (1)
----------- -----------
Combined............................................ $55,192,677 $ 593,371
=========== ===========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
REVENUES NET INCOME
----------- ----------
<S> <C> <C>
Eastern Environmental Services, Inc..................... $19,512,498 $ 362,230
Hamm's.................................................. 3,890,987 226,442
Bluegrass............................................... 293,132 136,304
Stamato................................................. 5,776,422 701,514
Ecology................................................. 5,519,915 66,687
----------- ----------
Combined................................................ $34,992,954 $1,493,177
=========== ==========
</TABLE>
- --------
(1) Includes merger costs and related tax provision.
4. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Actual results could differ from those estimates. Such estimates include the
Company's accounting for closure and post-closure obligations; amortization of
landfill development costs; and estimates of reserves such as the allowance
for doubtful accounts receivable, and the Company's estimate of merger costs.
5. INCOME TAXES
The Company recorded a tax provision of $3.7 million for the three months
ended March 31, 1998. The provision is comprised of $1.8 million of federal
and state taxes at statutory rates, and a $1.9 million one-time tax expense
related to non-deductible merger costs and the establishment of deferred
income tax liabilities for pooled companies acquired during the quarter ended
March 31, 1998, which were S Corporations prior to the
F-50
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(UNAUDITED) (CONTINUED)
date of the merger. The tax provision at March 31, 1997 principally relates to
the recording of deferred income tax liabilities for pooled companies acquired
during the quarter ended March 31, 1997 which were S Corporations prior to the
date of the merger, as well as the recording of federal and state liabilities
for other pooled companies. An effective tax rate lower than the federal and
state statutory rate for the quarter ended March 31, 1997 is primarily due to
the use of net operating loss carryforwards and income from pooled companies
which were taxed as S Corporations.
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Numerator:
Net income............................................. $ 593,371 $1,493,177
========== ==========
Denominator:
Denominator for basic earnings per share--weighted
average shares........................................ 24,950,459 16,485,291
Effect of dilutive options and warrants................ 1,487,750 1,086,163
---------- ----------
Denominator for diluted earnings per share............... 26,438,209 17,571,454
========== ==========
Basic earnings per share................................. $ .02 $ .09
========== ==========
Diluted earnings per share............................... $ .02 $ .08
========== ==========
</TABLE>
7. SUBSEQUENT EVENTS
From April 1, 1998 to May 11, 1998, the Company acquired the assets of four
collection companies in separate transactions. Total consideration under the
agreements consists of cash of approximately $2.1 million to the sellers and
the assumption of $124,000 of long term debt. These transactions will be
accounted for using the purchase method of accounting.
On March 25, 1998, the Company entered into definitive agreements to acquire
the stock of Atlantic Waste Disposal, Inc. ("AWD") and Atlantic of New York,
Inc. ("Atlantic") for combined cash consideration of approximately $85.6
million. This acquisition is subject to regulatory approval and the waiver or
expiration of a 90 day right of first refusal held by a third party. The
acquisition is expected to close by June 30, 1998 and is anticipated to be
accounted for using the purchase method of accounting.
The Company entered into a definitive agreement in December 1997 with the
City of Bethlehem to acquire certain assets including landfill property for
cash consideration of $26.1 million. The assets are currently used by the City
of Bethlehem to operate a municipal solid waste landfill. The purchase of the
assets, which is subject to Pennsylvania DEP approval of the permit transfer,
is anticipated to close by June 30, 1998.
On May 5, 1998, the Company announced it is commencing a public offering of
7,500,000 shares of its Common Stock. Pursuant to the terms of the offering
Prospectus, the Company will offer 7,000,000 shares of its Common Stock, and
selling stockholders will offer an additional 500,000 shares. The Company has
also granted the underwriters an over-allotment option for an additional
1,125,000 shares.
F-51
<PAGE>
PROSPECTUS
U.S. $400,000,000
[LOGO OF EASTERN ENVIRONMENTAL SERVICES, INC. APPEARS HERE]
COMMON STOCK
PREFERRED STOCK
DEPOSITORY SHARES
DEBT SECURITIES
WARRANTS
----------------
500,000 SHARES
COMMON STOCK
----------------
Eastern Environmental Services, Inc. (the "Company") may offer from time to
time (i) shares of Common Stock, par value $.01 per share ("Common Stock"),
(ii) shares of Preferred Stock, par value $.01 per share ("Preferred Stock"),
in one or more series, which may be issued in form of Depository Shares (as
defined herein) evidenced by Depository Receipts (as defined herein), (iii)
debt securities ("Debt Securities"), which may be either senior debt
securities ("Senior Securities") or subordinated debt securities
("Subordinated Securities"), consisting of debentures, notes and/or other
unsecured evidences of indebtedness in one or more series, or (iv) warrants
("Warrants") to purchase Debt Securities, Preferred Stock or Common Stock, at
an aggregate initial offering price not to exceed U.S. $400,000,000 in
amounts, at prices and on terms to be determined at the time of offering. The
Common Stock, Preferred Stock, Depository Shares, Debt Securities, and
Warrants are collectively referred to herein as the "Securities."
The accompanying Prospectus Supplement sets forth with regard to the
particular Securities in respect of which this Prospectus is being delivered
(i) in the case of Common Stock, the aggregate number of shares offered, the
initial public offering price, and the other terms of the offering thereof;
(ii) in the case of Preferred Stock, the designation, aggregate principal
amount, and stated value and liquidation preference per share, initial public
offering price, dividend rate (or method of calculation), dates on which
dividends shall be payable and dates from which interest shall accrue, any
redemption or sinking fund provisions, any conversion or exchange rights, any
listing of the Preferred Stock on a securities exchange, and any other terms
in connection with the offering and sale of such Preferred Stock; (iii) in the
case of Debt Securities, the title, aggregate principal amount, denominations
(which may be in United States dollars, in any other currency, currencies or
currency unit), maturity, rate, if any (which may be fixed or variable), or
method of calculation thereof, and time of payment of any interest, any terms
for redemption at the option of the Company or the holder, any terms for
sinking fund payments, any conversion or exchange rights, any listing on a
securities exchange and the initial public offering price and any other terms
in connection with the offering and sale of such Debt Securities; (iv) in the
case of Warrants, the number and terms thereof, the designation and the number
of Securities issuable upon their exercise, the exercise price, any listing of
the Warrants or the underlying Securities on a securities exchange and
(Continued on next page)
----------------
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
----------------
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.
The date of this Prospectus is May 1, 1998
<PAGE>
(Continued from previous page)
any other terms in connection with the offering, sale and exercise of the
Warrants; and (v) in the case of Depository Shares, the fractional share of
Preferred Stock represented by each such Depository Share. The Prospectus
Supplement will also contain information, as applicable, about certain United
States Federal income tax considerations relating to the Securities in respect
of which this Prospectus is being delivered. If so specified in the applicable
Prospectus Supplement, Debt Securities of a series may be issued in whole or
in part in the form of one or more temporary or permanent global securities.
The Securities may be sold directly, through agents, underwriters or dealers
as designated from time to time, or through a combination of such methods. See
"Plan of Distribution." If agents of the Company or any dealers or
underwriters are involved in the sale of the Securities in respect of which
this Prospectus is being delivered, the names of such agents, dealers or
underwriters will be set forth in, and any applicable commissions or discounts
will be set forth in or may be calculated from, the Prospectus Supplement with
respect to such Securities.
This Prospectus also relates to an aggregate of 500,000 shares of Common
Stock (the "Stockholder Shares") owned by the Environmental Opportunities
Fund, L.P. and the Environmental Opportunities Fund (Cayman), L.P. (the
"Selling Stockholders") that may be offered for the account of the Selling
Stockholders. The Stockholder Shares will be offered pursuant to this
Prospectus and the applicable Prospectus Supplement only in connection with an
underwritten offering of Securities by the Company.
The Company's Common Stock is included for quotation on the National Market
tier of the Nasdaq Stock Market under the trading symbol "EESI." Any Common
Stock sold by the Company pursuant to a Prospectus Supplement will be
similarly so included, subject to official notice of issuance.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS
SUPPLEMENT, AND IF GIVEN OR MADE SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY AGENT,
UNDERWRITER OR DEALER. THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS
SUPPLEMENT DO NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH THEY RELATE, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
THOSE SECURITIES TO WHICH THEY RELATE IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
THE DELIVERY OF THIS PROSPECTUS AND/OR THE ACCOMPANYING PROSPECTUS SUPPLEMENT
AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN OR THEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE.
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 statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
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 and at the Commission's Regional Offices at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, 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 Company's Common Stock is quoted on the National Market tier of the Nasdaq
Stock Market, and reports, proxy statements 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.
2
<PAGE>
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with any amendments thereto, the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the securities offered hereby. As permitted by the rules and regulations of
the Commission, this Prospectus does not contain all of the information set
forth in the Registration Statement and exhibits thereto. Statements contained
in this Prospectus or in any document incorporated by reference in this
Prospectus as to the contents of any contract or other document referred to
herein or therein are not necessarily complete, and in each instance where
such contract or document has been filed as an exhibit to the Registration
Statement, or other document incorporated by reference, reference is made to
the copy of such contract or other document, each such statement being
qualified in all respects by such reference.
This Prospectus and the Prospectus Supplement contain certain statements of
a forward-looking nature relating to future events or the future financial
performance of the Company. Prospective investors are cautioned that such
statements are only predictions and that actual events or results could differ
materially. In evaluating such statements prospective investors should
specifically consider any factors identified in this Prospectus, the
Prospectus Supplement and in the documents incorporated by reference herein.
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, 1997 (as amended on Form 10-K/A filed October 28, 1997), excluding
the financial statements and notes thereto, selected consolidated financial
data, and the information contained under Management's Discussion and
Analysis of Financial Condition and Results of Operations which have been
(a) superseded by the financial statements and notes thereto, the selected
consolidated financial data, and the information contained under
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Current Report on Form 8-K dated
February 27, 1998 and (b) supplemented by the financial statements and
notes thereto, the selected consolidated financial data, and the
information contained under Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's
Current Report on Form 8-K dated April 29, 1998.
(ii) The Company's Quarterly Reports on Form 10-Q for the quarters ended
September 30, 1997 (filed November 13, 1997) and December 31, 1997 (filed
February 17, 1998); the financial statements and notes thereto contained in
the Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
are deemed to be outdated as they are not on a basis consistent with the
consolidated financial statements and notes thereto included in the
Company's Current Report on Form 8-K dated February 27, 1998 as they do not
reflect:
(a) pooling of interests accounting for an acquisition that occurred
subsequent to September 30, 1997; and
(b) earnings per share information calculated in accordance with the
recently issued pronouncement FASB 128, Earnings Per Share.
(iii) The following Current Reports on Form 8-K of the Company:
(a) five Forms 8-K/A filed July 10, 1997, for the purpose of: (1)
amending the Company's Form 8-K/A dated July 2, 1996; (2) amending the
Company's Form 8-K dated September 27, 1996; (3) amending the Company's
Form 8-K dated December 10, 1996; (4) amending the Company's Form 8-K
dated January 31, 1997; and (5) amending the Company's Form 8-K dated
March 31, 1997;
(b) Form 8-K dated May 12, 1997 (as amended on Form 8-K/A filed July
11, 1997 and as amended on Form 8-K/A filed July 25, 1997);
(c) Form 8-K dated August 15, 1997 (as amended on Form 8-K/A filed
October 10, 1997);
(d) Form 8-K dated August 20, 1997 (as amended on Form 8-K/A filed
November 3, 1997);
(e) Form 8-K dated October 17, 1997;
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(f) Form 8-K dated October 27, 1997;
(g) Form 8-K dated December 1, 1997 (as amended on Form 8-K/A filed
February 17, 1998);
(h) Form 8-K dated December 1, 1997 (as amended on Form 8-K/A filed
February 13, 1998);
(i) Form 8-K dated February 12, 1998 (as amended on Form 8-K/A filed
April 27, 1998);
(j) Form 8-K dated February 27, 1998;
(k) Form 8-K dated March 9, 1998 (as amended on Form 8-K/A filed
April 8, 1998);
(l) Form 8-K dated March 31, 1998 (as amended on Form 8-K/A filed
April 24, 1998);
(m) Form 8-K dated March 31, 1998;
(n) Form 8-K dated April 1, 1998;
(o) Form 8-K dated April 29, 1998; and
(p) Form 8-K dated April 30, 1998.
(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 and reports filed by the Company with the
Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to 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 or reports.
Any statement or information contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement or information so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon written or oral request, a copy of any or
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 for such copies should be submitted in writing to
Eastern Environmental Services, Inc., 1000 Crawford Place, Suite 400, Mt.
Laurel, New Jersey 08054, Attention: Investor Relations, or by telephone to
(609) 235-6009.
THE COMPANY
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. In
June 1996, the Company's Board of Directors and management team implemented an
acquisition program in the solid waste industry.
The Company believes that opportunities exist to acquire 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 400, Mt. Laurel, New Jersey 08054, and its telephone number is
(609) 235-6009.
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RISK FACTORS
In addition to the other information in this Prospectus and any applicable
Prospectus Supplement, the following factors and the factors set forth in the
applicable Prospectus Supplement should be considered carefully in evaluating
an investment in the Securities. To the extent that any risk factor contained
in any Prospectus Supplement conflicts with or supersedes any risk factor
contained in this Prospectus, the risk factor in such Prospectus Supplement
shall control.
HISTORY OF LOSSES; WORKING CAPITAL DEFICITS; CONTINUING CHARGES
The Company has reported net losses and working capital deficits in prior
fiscal years. 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 not to exceed 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.
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.
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.
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
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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.
ABILITY TO INTEGRATE ACQUIRED BUSINESSES AND ACHIEVE OPERATING EFFICIENCIES
The Company is in the process of combining the businesses and assets that it
has recently acquired into an integrated operating structure. This process may
require, among other things, changes in the operation 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.
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 preacquisition
investigations, including liabilities arising from environmental contamination
or noncompliance 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 not expressly
assumed by the Company, may nonetheless be imposed on the Company under
certain legal theories of successor liability, including the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended.
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, if any. 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.
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, the Company's
stockholders may experience dilution in the net tangible book value per share
of Common Stock and a regular infusion of additional Common Stock into the
capital markets. 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 generated cash is not
sufficient to meet the Company's capital needs, the Company will be required
to raise additional funds through bank borrowings (such as its existing credit
facility) and significant additional equity and/or debt financings. No
assurance can be given that additional funding will be available on terms
favorable to the Company.
DEPENDENCE ON KEY PERSONNEL
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. The loss of
the services of Mr. Paolino or one or more of the other executive officers of
the Company
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could have a material adverse effect on the Company's business and results of
operations. The Company does not maintain key-man life insurance policies on
its executive officers.
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 the 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 also is required to
obtain and maintain in effect various facility permits and other governmental
approvals, including those related to environmental, zoning 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.
POTENTIAL PENNSYLVANIA LANDFILL RESTRICTIONS
One of the Company's Pennsylvania landfill operations, 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. However, in 1990, the township 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 the height limit 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. If the township seeks to impose this limitation, and is
successful, the existing permitted capacity of the landfill would be
materially reduced resulting in significant costs to the Company.
KENTUCKY LANDFILL OBLIGATIONS
The Company ceased operations at its Somerset, 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,
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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.
On July 1, 1997, the Company recommenced operation of its transfer station to
fulfill the obligations of the disposal franchise until the Company's
expansion area is completed. The Company received a final permit to construct
its expansion area on October 14, 1996 (reissued February 26, 1997). 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 was
required to complete an additional hydrogeologic investigation to confirm the
adequacy of the groundwater monitoring program approved in the final permit.
These studies are complete and indicate that the groundwater monitoring
program is adequate. The Company, however, has not yet received final approval
from the state regulatory authority with respect to the final permit.
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 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,
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. 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 Regulations' criteria. 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.
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. 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
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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 contaminated landfill storm water runoff from flowing into
surface waters. The Clean Water Act also requires permits for discharges of
fill material into wetlands. These permits, which are occasionally required
for landfill construction or expansion, can take the form of categorical
"nationwide permits," for which little paperwork is required, or site specific
permits, which require detailed applications and extensive administrative
review. Site-specific permits are issued by the Army Corps of Engineers, with
input from the relevant state, pursuant to criteria developed by U.S. EPA, and
may require mitigation measures such as the creation of substitute wetlands.
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. The EPA and the states in
which the Company has operated also have adopted regulations under Title V of
the Clean Air Act requiring permits for certain disposal facilities. These
standards, combined with the new permitting programs established under the
1990 Clean Air Act amendments, will subject many of the Company's landfills to
new permitting requirements and may require the installation of gas recovery
systems. Landfills located in areas with air pollution problems may be subject
to even more extensive air pollution controls and emissions limitations. 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.
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 asbestos waste.
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. Legislative or regulatory restrictions
generally 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 or impose other flow control restrictions. Although no
such federal legislation has been enacted to date, 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
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significant portion of waste originating from other states and on the
Company's collection operations. A restriction on out-of-state waste also
could 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.
Each state in which the Company currently operates, or may operate in the
future, also 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. Many states also 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 clean-up of contaminated sites and
liability for costs and damages associated with such sites. Some of the state
laws provide for the imposition of liens on property owned by responsible
parties. 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.
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 commercial and industrial waste
without a license issued by the TWC and requires TWC approval of all
acquisitions or other business combinations in New York City proposed by all
licensees. Each such acquisition or sale 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 September 1997, one of the Company's subsidiaries received a
license from the TWC which enables it to conduct New York City collections
operations. The license, like all TWC licenses, has a term of two years. The
TWC also sets maximum rates for the industry and establishes operational
requirements. 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. Rate regulation in West Virginia and 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.
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, 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.
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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.
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, clean-up and natural resource damages relating to environmental
contamination, regardless of whether they exercised due care or complied with
all relevant laws and regulations. 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 U.S. 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. 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, one of the Company's Pennsylvania
landfills disposed of municipal solid waste in an unlined disposal area. This
unlined area was operated by the former owner and has caused localized
groundwater 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 solid waste began in April
1997 and is scheduled to be completed over a 12-year period in connection with
new pad construction. At December 31, 1997, the Company had accrued
approximately $5.4 million for such relocation. 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 has not
established a specific financial reserve for potential costs relating to this
remediation or any additional potential liabilities associated with this
contamination, but it is not expected to be significant. The Company currently
believes that ultimate resolution of these matters should not be material to
it and should not have a material adverse effect on its 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 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
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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 has 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 defend them and believes that its
liability, if any, would be either 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 effect on the Company's business and results of operations.
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.
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 is 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.
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 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 most states in
which the Company operates) 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. The
Company competes with several large national waste management companies,
including Waste Management, Inc. (formerly WMX Technologies, Inc.), Browning
Ferris
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Industries, Inc., U.S.A. Waste Services, 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. 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.
The Company provides residential collection services under municipal
contracts with terms ranging from 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 or 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 the volume of waste relating to
construction and demolition activities tends to increase in the spring and
summer months and 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; CHANGE IN CONTROL PROVISIONS
The Company's Certificate of Incorporation authorizes the issuance of up to
50,000,000 shares of Preferred Stock. No shares of Preferred Stock are
outstanding as of the date of this Prospectus. It is not possible to state the
precise effect of Preferred Stock upon the rights of the holders of the
Company's Common Stock until the Board of Directors determines the respective
preferences, limitations and relative rights of the holders of one or more
series or classes of the Preferred Stock. However, such effect might include:
(i) reduction of the amount otherwise available for payment of dividends on
Common Stock, to the extent dividends are payable on any issued shares of
Preferred Stock, and restrictions on dividends on Common Stock if dividends on
the Preferred Stock are in arrears, (ii) dilution of the voting power of the
Common Stock to the extent that the Preferred Stock has voting rights, and
(iii) the holders of Common Stock not being entitled to share in the Company's
assets upon liquidation until satisfaction of any liquidation preference
granted to the Preferred Stock.
The Preferred Stock may be viewed as having the effect of discouraging an
unsolicited attempt by another person or entity to acquire control of the
Company and may therefore have an anti-takeover effect. Issuances of
authorized preferred shares can be implemented and have been implemented by
some companies in recent years with voting or conversion privileges intended
to make acquisition of the Company more difficult or costly. Such an issuance
could discourage or limit the stockholders' participation in certain types of
transactions that might be proposed (such as a tender offer), whether or not
such transactions were favored by the majority of the stockholders, and could
enhance the ability of officers and directors to retain their positions.
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 take over the Company and decrease values
that would otherwise be obtained by stockholders for their Common Stock.
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<PAGE>
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.
CONTROL BY MANAGEMENT
Executive officers and directors of the Company as a group beneficially own
a significant amount of the outstanding Common Stock. 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.
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 ongoing 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.
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 current
credit facility agreement prohibits the payment of cash dividends without
prior bank approval.
YEAR 2000 DISCLOSURE
Currently, there is significant uncertainty regarding the impact of the Year
2000 on information systems, such as those used by the Company. The Company
does not currently believe that the effects of any Year 2000 non-compliance on
the Company's information systems should have any material adverse impact on
the Company's business or results of operations; however, there can be no
assurance that the Company will not incur expenses or experience business
disruption as a result of system problems associated with the century change.
USE OF PROCEEDS
Except as otherwise described in the accompanying Prospectus Supplement, the
net proceeds from the sale of Securities will be used for general corporate
purposes, which may include acquisitions, repayment or refinancing of
indebtedness, working capital, capital expenditures, and repurchases and
redemptions of securities. The Company will not receive any proceeds from any
sale of the Stockholder Shares.
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 term 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.
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RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's consolidated ratio of earnings
to fixed charges for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED JUNE 30,
ENDED ------------------------------
DECEMBER 31, 1997 1997 1996 1995 1994 1993(2)
----------------- ---- ---- ---- ---- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Consolidated ratio of earnings to
fixed charges (1)............... 6.3x 2.7x -- 3.3x 4.0x --
</TABLE>
- --------
(1) The consolidated ratio of earnings to fixed charges was derived from the
Company's supplemental consolidated financial statements included in the
Company's Current Report on Form 8-K dated April 29, 1998.
(2) Subsequent to June 30, 1996, the Company acquired Super Kwik, Inc. and its
affiliates ("Super Kwik"), Donno Company, Inc. and its affiliates
("Donno"), and subsequent to June 30, 1997, the Company acquired Hamm's
Sanitation, Inc. and H.S.S. Inc. ("Hamm's"), Bluegrass Containment, Inc.,
the Stamato Companies, and the Ecology Systems, Inc. in 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 periods prior to the acquisition to
include the results of operations, financial position, and cash flows of
those companies. The consolidated ratio of earnings to fixed charges for
the year ended June 30, 1993 has not been restated to include these
acquisitions.
For purposes of computing the ratio of earnings to fixed charges, "earnings"
consists of earnings before income taxes and fixed charges. "Fixed charges"
consist of interest on all indebtedness and that portion of rental expense
under operating leases that management believes to be representative of
interest. Earnings in 1996 and 1993 were insufficient to cover fixed charges
by $148,000 and $1.5 million, respectively.
Because the Company has no outstanding Preferred Stock, the ratio of
earnings to the sum of fixed charges and preferred stock dividends is the same
as the ratio of earnings to fixed charges.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 150,000,000 shares
of Common Stock, $.01 par value per share, and 50,000,000 shares of Preferred
Stock, $.01 par value per share (the "Preferred Stock"). At April 1, 1998,
there were 25,140,462 shares of Common Stock outstanding and no shares of
Preferred Stock outstanding. In addition, at April 1, 1998, there were
outstanding stock options and warrants for the purchase of a total of
3,336,707 shares of Common Stock and an additional 4,903,464 shares reserved
for issuance pursuant to future option grants under the Company's stock option
plans. The following description of the Company's capital stock is a summary,
does not purport to be complete and is subject in all respects to the
applicable provisions of the Company's Certificate of Incorporation, and the
information herein is qualified in its entirety by this reference.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders. Holders of Common Stock are not
entitled to cumulative voting rights.
Subject to the terms of any outstanding series of Preferred Stock, the
holders of record of the Common Stock are entitled to receive dividends in
such amounts and at such times as may be declared by the Board of Directors.
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, and any amounts required to be paid to the
holders of the Preferred Stock, holders of Common Stock shall be entitled to
share ratably in the remaining assets of the Company. Except as described
above, holders of the 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 validly issued, fully
paid and nonassessable by the Company.
PREFERRED STOCK
The Board of Directors of the Company is empowered, without approval of the
stockholders, to cause the Preferred Stock to be issued in one or more series,
and to determine the numbers of shares of each series and the rights,
preferences and limitations of each series. The specific matters that may be
determined by the Board of Directors include the dividend rights, redemption
rights, liquidation preferences, if any, conversion and exchange rights,
retirement and sinking fund provisions and other rights, qualifications,
limitations and restrictions of any wholly unissued series of Preferred Stock
(or of the entire class of Preferred Stock if none of such shares have been
issued), the number of shares constituting such series and the terms and
conditions of the issue thereof. The rights, preferences and limitations of
any series of Preferred Stock will be set forth in a certificate of
designations adopted by the Board of Directors or a duly authorized committee
thereof. The particular terms of any series of Preferred Stock offered hereby
will be set forth in the Prospectus Supplement relating thereto. The
description of the terms of a particular series of Preferred Stock that will
be set forth in the applicable Prospectus Supplement does not purport to be
complete and is qualified in its entirety by reference to the provisions of
the Company's Certificate of Incorporation and the certificate of designations
relating to each series of the Preferred Stock, which will be filed as an
exhibit to or incorporated by reference in the Registration Statement of which
this Prospectus is a part at or prior to the time of issuance of such series
of the Preferred Stock.
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 "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
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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
has 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 the
extraordinary transaction is approved or not opposed by a majority of the
directors who were directors prior to any such 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 who 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.
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 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.
The inclusion of this provision in the Company's Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation 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 Company's 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.
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<PAGE>
STOCK TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for the Common Stock is American
Stock Transfer and Trust Company.
DESCRIPTION OF DEPOSITARY SHARES
The description set forth below and in any Prospectus Supplement of certain
provisions of the Deposit Agreement (as defined below) and of the Depositary
Shares and Depositary Receipts (as defined below) does not purport to be
complete and is subject to and qualified in its entirety by reference to the
forms of Deposit Agreement and Depositary Receipts relating to each series of
the Preferred Stock which will be filed with the Commission at or prior to the
time of the offering of such series of the Preferred Stock.
GENERAL
The Company may, at its option, elect to offer fractional interests
("Depository Shares") in shares of Preferred Stock, rather than shares of
Preferred Stock. In the event such option is exercised, the Company will
provide for the issuance by a Depositary to the public of receipts
("Depository Receipts") for Depositary Shares, each of which will represent a
fractional interest (to be set forth in the Prospectus Supplement relating to
a particular series of the Preferred Stock which will be filed with the
Commission at or prior to the time of the offering of such series of the
Preferred Stock as described below).
The shares of any series of the Preferred Stock underlying the Depositary
Shares will be deposited under a separate Deposit Agreement (the "Deposit
Agreement") between the Company and a bank or trust company selected by the
Company having its principal office in the United States and having a combined
capital and surplus of at least $50,000,000 (the "Depositary"). The Prospectus
Supplement relating to a series of Depositary Shares will set forth the name
and address of the Depositary. Subject to the terms of the Deposit Agreement,
each owner of a Depositary Share will be entitled, in proportion to the
applicable fractional interest in a share of Preferred Stock underlying such
Depositary Shares, to all the rights and preferences of the Preferred Stock
underlying such Depositary Share (including dividend, voting, redemption,
conversion and liquidation rights).
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the Deposit Agreement.
Pending the preparation of definitive engraved Depositary Receipts, the
Depositary may, upon the written order of the Company, issue temporary
Depositary Receipts substantially identical to (and entitling the holders
thereof to all the rights pertaining to) the definitive Depositary Receipts
but not in definitive form. Definitive Depositary Receipts will be prepared
thereafter without unreasonable delay, and temporary Depositary Receipts will
be exchangeable for definitive Depositary Receipts at the Company's expense.
Upon surrender of Depositary Receipts at the office of the Depositary and
upon payment of the charges provided in the Deposit Agreement and subject to
the terms thereof, a holder of Depositary Shares is entitled to have the
Depositary deliver to such holder the whole shares of Preferred Stock
underlying the Depositary Shares evidenced by the surrendered Depositary
Receipts.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Depositary will distribute all cash dividends or other cash
distributions received in respect of the Preferred Stock to the record holders
of Depositary Shares relating to such Preferred Stock in proportion to the
number of such Depositary Shares owned by such holders on the relevant record
date. The Depositary shall distribute only such amount, however, as can be
distributed without attributing to any holder of Depositary Shares a fraction
of one cent, and any balance not so distributed shall be added to and treated
as part of the next sum received by the Depositary for distribution to record
holders of Depositary Shares.
In the event of a distribution other than in cash, the Depositary will
distribute property received by it to the record holders of Depositary Shares
entitled thereto, unless the Depositary determines that it is not feasible to
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<PAGE>
make such distribution, in which case the Depositary may, with the approval of
the Company, sell such property and distribute the net proceeds from such sale
to such holders.
The Deposit Agreement will also contain provisions relating to the manner in
which any subscription or similar rights offered by the Company to holders of
the Preferred Stock shall be made available to holders of Depositary Shares.
REDEMPTION OF DEPOSITARY SHARES
If a series of the Preferred Stock underlying the Depositary Shares is
subject to redemption, the Depositary Shares will be redeemed from the
proceeds received by the Depositary resulting from the redemption, in whole or
in part, of such series of the Preferred Stock held by the Depositary. The
Depositary shall mail notice of redemption not less than 30 and not more than
60 days prior to the date fixed for redemption to the record holders of the
Depositary Shares to be so redeemed at their respective addresses appearing in
the Depositary's books. The redemption price per Depositary Share will be
equal to the applicable fraction of the redemption price per share payable
with respect to such series of the Preferred Stock. Whenever the Company
redeems shares of Preferred Stock held by the Depositary, the Depositary will
redeem as of the same redemption date the number of Depositary Shares relating
to shares of Preferred Stock so redeemed. If less than all of the Depositary
Shares are to be redeemed, the Depositary Shares to be redeemed will be
selected by lot or pro rata as may be determined by the Depositary.
After the date fixed for redemption, the Depositary Shares so called for
redemption will no longer be deemed to be outstanding and all rights of the
holders of the Depositary Shares will cease, except the right to receive the
moneys payable upon such redemption and any money or other property to which
the holders of such Depositary Shares were entitled upon such redemption upon
surrender to the Depositary of the Depositary Receipts evidencing such
Depositary Shares.
VOTING THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of the Preferred
Stock are entitled to vote, the Depositary will mail the information contained
in such notice of meeting to the record holders of the Depositary Shares
relating to such Preferred Stock. Each record holder of such Depositary Shares
on the record date (which will be the same date as the record date for the
Preferred Stock) will be entitled to instruct the Depositary as to the
exercise of the voting rights pertaining to the number of shares of Preferred
Stock underlying such holder's Depositary Shares. The Depositary will
endeavor, insofar as practicable, to vote the number of shares of Preferred
Stock underlying such Depositary Shares in accordance with such instructions,
and the Company will agree to take all action which may be deemed necessary by
the Depositary in order to enable the Depositary to do so. The Depositary will
abstain from voting shares of Preferred Stock to the extent it does not
receive specific instructions from the holders of Depositary Shares relating
to such Preferred Stock.
AMENDMENT AND TERMINATION OF THE DEPOSITARY AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time be amended by agreement
between the Company and the Depositary. However, any amendment which
materially and adversely alters the rights of the existing holders of
Depositary Shares will not be effective unless such amendment has been
approved by the record holders of at least a majority of the Depositary Shares
then outstanding. A Deposit Agreement may be terminated by the Company or the
Depositary only if (i) all outstanding Depositary Shares relating thereto have
been redeemed or (ii) there has been a final distribution in respect of the
Preferred Stock of the relevant series in connection with any liquidation,
dissolution or winding up of the Company and such distribution has been
distributed to the holders of the related Depositary Shares.
CHARGES OF DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the depositary arrangements. The Company
will pay charges of the Depositary in connection with
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the initial deposit of the Preferred Stock and any redemption of the Preferred
Stock. Holders of Depositary Shares will pay other transfer and other taxes
and governmental charges and such other charges as are expressly provided in
the Deposit Agreement to be for their accounts.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Depositary may resign at any time by delivering to the Company notice of
its election to do so, and the Company may at any time remove the Depositary,
any such resignation or removal to take effect upon the appointment of a
successor Depositary and its acceptance of such appointment. Such successor
Depositary must be appointed within 60 days after delivery of the notice of
resignation or removal and must be a bank or trust company having its
principal office in the United States and having a combined capital and
surplus of at least $50,000,000.
MISCELLANEOUS
The Depositary will forward to the holders of Depositary Shares all reports
and communications from the Company which are delivered to the Depositary and
which the Company is required to furnish to the holders of the Preferred
Stock.
Neither the Depositary nor the Company will be liable if it is prevented or
delayed by law or any circumstance beyond its control in performing its
obligations under the Deposit Agreement. The obligations of the Company and
the Depositary under the Deposit Agreement will be limited to performance in
good faith of their duties thereunder and they will not be obligated to
prosecute or defend any legal proceeding in respect of any Depositary Shares
or Preferred Stock unless satisfactory indemnity is furnished. They may rely
upon written advice of counsel or accountants, or information provided by
persons presenting Preferred Stock for deposit, holders of Depositary Shares
or other persons believed to be competent and on documents believed to be
genuine.
DESCRIPTION OF DEBT SECURITIES
The following sets forth certain general terms and provisions of the
Company's Debt Securities. The extent to which such general provisions do not
apply to any series of Debt Securities will be described in the relevant
Prospectus Supplement.
The Debt Securities constitute either Senior Securities or Subordinated
Securities. The Senior Securities offered hereby are to be issued in one or
more series under an Indenture (as amended or supplemented from time to time,
the "Senior Indenture") to be entered into between the Company and Summit
Bank, as trustee (the "Senior Trustee"). The Subordinated Securities offered
hereby are to be issued in one or more series under an Indenture (as amended
or supplemented from time to time, the "Subordinated Indenture") to be entered
into between the Company and Summit Bank, as trustee (the "Subordinated
Trustee"). The Senior Indenture and the Subordinated Indenture are referred to
collectively herein as the "Indentures" and the Senior Trustee and the
Subordinated Trustee are referred to collectively herein as the "Trustees."
Copies of the Indentures have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part. The Indentures will be
executed by the Company and the Trustees on or prior to the issuance of any
Debt Securities thereunder.
The Company's Amended and Restated Revolving Credit Agreement, dated as of
October 27, 1997 (the "Credit Agreement"), among the Company, BankBoston,
N.A., as Agent, and the bank lenders named therein, currently prohibits the
issuance of the Senior Securities. If the Company determines to issue any such
Senior Securities, the Company must obtain a waiver from the bank lenders in
accordance with the provisions of the Credit Agreement.
The terms of the Debt Securities include those stated in the applicable
Indenture and those made a part of the applicable Indenture by reference to
the Trust Indenture Act of 1939, as amended (the "TIA"). The Debt
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Securities are subject to all such terms and the holders of Debt Securities
are referred to the applicable Indenture and the TIA for a statement of such
terms.
The following summaries of certain provisions of each Indenture and the Debt
Securities are not complete and are qualified in their entirety by reference
to the provisions of each Indenture, including the definitions of capitalized
terms used herein without definition. Numerical references in parentheses are
to sections in the applicable Indenture and unless otherwise indicated
capitalized terms have the meanings given them in the applicable Indenture.
GENERAL
Unless otherwise specified in a Prospectus Supplement, (i) the Senior
Securities, when issued, will rank pari passu in right of payment with all
other unsubordinated obligations of the Company and will rank senior in right
of payment to all subordinated obligations of the Company, and (ii) the
Subordinated Securities, when issued, will be subordinate in right of payment
to the prior payment in full of all Senior Debt (as defined herein), including
all Senior Securities of the Company, and will rank pari passu in right of
payment with all other subordinated obligations of the Company. Holders of
secured obligations of the Company, including secured Debt Securities, will,
however, have claims that are prior to the claims of holders of unsecured Debt
Securities with respect to the assets securing such secured obligations. All
Debt Securities will effectively be subordinate in right of payment to the
prior payment in full of all indebtedness of the Company's subsidiaries and
all other obligations and other liabilities, including trade payables, of the
Company's subsidiaries.
The Indentures do not limit the aggregate amount of Debt Securities which
may be issued thereunder. Except as otherwise provided in the applicable
Prospectus Supplement, the Indentures, as they apply to any series of Debt
Securities, do not limit the incurrence or issuance of other secured or
unsecured debt of the Company, whether under any of the Indentures, or any
other indenture that the Company may enter into in the future or otherwise.
See "--Subordination under the Subordinated Indenture" and the Prospectus
Supplement relating to any offering of Subordinated Securities.
The Debt Securities will be issuable in one or more series pursuant to an
indenture supplement to the applicable Indenture or a resolution of the
Company's Board of Directors or a committee thereof. (Section 2.1 of each
Indenture)
Reference is made to the applicable Prospectus Supplement which will
accompany this Prospectus for a description of the specific series of Debt
Securities being offered thereby, including: (i) the title of such Debt
Securities; (ii) any limit upon the aggregate principal amount of such Debt
Securities; (iii) the date or dates on which the principal of and premium, if
any, on such Debt Securities will mature or the method of determining such
date or dates; (iv) the rate or rates (which may be fixed or variable) at
which such Debt Securities will bear interest, if any, and the method of
calculating such rate or rates; (v) the date or dates from which interest, if
any, will accrue or the method by which such date or dates will be determined;
(vi) the date or dates on which interest, if any, will be payable and the
record date or dates therefor; (vii) the place or places where principal of,
premium, if any, and interest, if any, on such Debt Securities will be payable
or at which Debt Securities may be surrendered for registration of transfer or
exchange; (viii) the period or periods within which, the price or prices at
which, if other than in United States dollars, the currency or currencies
(including currency unit or units) in which, and the other terms and
conditions upon which, such Debt Securities may be redeemed, in whole or in
part, at the option of the Company; (ix) the obligation of the Company to
redeem or purchase such Debt Securities pursuant to any sinking fund or
analogous provisions or upon the happening of a specified event or at the
option of a holder thereof and the period or periods within which, the price
or prices at which, if other than in United States dollars, the currency or
currencies (including currency unit or units) in which, and the other terms
and conditions upon which, such Debt Securities shall be redeemed or
purchased, in whole or in part, pursuant to such obligation; (x) the
denominations in which such Debt Securities are authorized to be issued; (xi)
the currency or currency unit in which Debt Securities may be denominated
and/or the currency or currencies (including currency unit or units) in which
principal of, premium, if any, and interest, if any, on such Debt
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Securities will be payable and whether the Company, or the holders of any such
Debt Securities, may elect to receive payments in respect of such Debt
Securities in a currency or currency unit other than that in which such Debt
Securities are stated to be payable; (xii) if the amount of principal of, or
any premium or interest on, any of such Debt Securities may be determined with
reference to an index or pursuant to a formula or other method, the manner in
which such amounts will be determined; (xiii) if other than the principal
amount thereof, the portion of the principal amount of such Debt Securities
which will be payable upon declaration of the acceleration of the maturity
thereof or the method by which such portion shall be determined; (xiv)
provisions, if any, granting special rights to the holders of Debt Securities
upon the occurrence of such events as may be specified; (xv) any addition to,
or modification or deletion of, any Event of Default or any covenant of the
Company specified in the Indenture with respect to such Debt Securities; (xvi)
the circumstances under which the Company will pay additional amounts on the
Debt Securities held by non-U.S. persons in respect of taxes, assessments or
similar charges; (xvii) whether the Debt Securities will be issued in
registered or bearer form or both; (xviii) the application, if any, of such
means of defeasance or covenant defeasance as may be specified for such Debt
Securities; (xix) whether such Debt Securities are to be issued in whole or in
part in the form of one or more temporary or permanent global securities and,
if so, the identity of the depositary or its nominee, if any, for such global
security or securities and the circumstances under which beneficial owners of
interests in the global security may exchange such interests for certificated
Debt Securities to be registered in the names of or to be held by such
beneficial owners or their nominees; (xx) in the case of the Subordinated
Indenture, the relative degree to which such Debt Securities of the series
shall be senior to or be subordinated to other series of such Debt Securities,
and to other indebtedness of the Company, as the case may be, in right of
payment, whether such other series of Debt Securities and other indebtedness
are outstanding or not; (xxi) whether such Debt Securities are secured or
unsecured and, if secured, the security and related terms in connection
therewith; (xxii) the terms, if any, upon which such Debt Securities may be
converted or exchanged into or for Common Stock, Preferred Stock or other
securities or property of the Company; (xxiii) any restrictions on the
registration, transfer or exchange of the Debt Securities; and (xxiv) any
other terms not inconsistent with the terms of the Indentures pertaining to
such Debt Securities. (Section 3.1 of each Indenture) Unless otherwise
specified in the applicable Prospectus Supplement, the Debt Securities will
not be listed on any securities exchange.
The number of shares of Common Stock or Preferred Stock that will be
issuable upon the conversion or exchange of any Debt Securities issued with
conversion or exchange provisions will be adjusted to prevent dilution
resulting from stock splits, stock dividends or similar transactions, and the
nature and amount of the securities, assets or other property to be received
upon the conversion or exchange of such Debt Securities will be changed as
necessary in the event of any consolidation, merger, combination or similar
transaction. The specific provisions will be set forth in the applicable
Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, Debt
Securities in registered form will be issued in denominations of U.S.$1,000 or
any integral multiples of U.S.$1,000 and Debt Securities in bearer form will
be issued in denominations of U.S.$5,000 or any integral multiples of
U.S.$5,000. (Section 3.2 of each Indenture) Where Debt Securities of any
series are issued in bearer form, the special restrictions and considerations,
including special offering restrictions and material U.S. federal income tax
considerations, applicable to any such Debt Securities and to payments in
respect of and transfers and exchanges of such Debt Securities will be
described in the applicable Prospectus Supplement. Debt Securities in bearer
form will be transferable by delivery. (Section 3.5 of each Indenture)
Debt Securities may be sold at a substantial discount below their stated
principal amount, bearing no interest or interest at a rate which at the time
of issuance is below market rates. Material U.S. federal income tax
consequences and special considerations applicable to any such Debt Securities
will be described in the applicable Prospectus Supplement.
If the purchase price of any of the Debt Securities is payable in one or
more foreign currencies or currency units or if any Debt Securities are
denominated in one or more foreign currencies or currency units or if the
principal of, premium, if any, or interest, if any, on any Debt Securities is
payable in one or more foreign currencies or currency units, the restrictions,
elections, material U.S. federal income tax considerations and other
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information with respect to such issue of Debt Securities and such foreign
currency or currency units will be set forth in the applicable Prospectus
Supplement.
If any index is used to determine the amount of payments of principal of,
premium, if any, or interest, if any, on any series of Debt Securities,
material U.S. federal income tax, accounting and other considerations
applicable thereto will be described in the applicable Prospectus Supplement.
The general provisions of the Indentures do not afford holders of the Debt
Securities protection in the event of a highly leveraged transaction,
restructuring, change in control, merger or similar transaction involving the
Company that may adversely affect holders of the Debt Securities.
PAYMENT, REGISTRATION, TRANSFER AND EXCHANGE
Unless otherwise provided in the applicable Prospectus Supplement, payments
in respect of the Debt Securities will be made in the designated currency at
such office or agency as the Company may designate from time to time, except
that interest payments, if any, on Debt Securities in registered form may be
made (i) by checks mailed to the holders of Debt Securities entitled thereto
at their registered addresses or (ii) by wire transfer to an account
maintained by the holders of the Debt Securities entitled thereto as specified
in the Register. (Sections 3.7(a) and 9.2 of each Indenture) Each payment in
respect of the Debt Securities shall be considered to have been made on the
date such payment is due if there shall have been sent to the Trustee or
paying agent by wire transfer (received by no later than the business day
following such due date), or the Trustee or paying agent otherwise holds, on
such due date sufficient funds to make such payment. (Section 9.1 of each
Indenture) Unless otherwise indicated in an applicable Prospectus Supplement,
scheduled payments of any installment of interest on Debt Securities in
registered form will be made to the person in whose name such Debt Security is
registered at the close of business on the regular record date for such
interest. (Section 3.7(a) of each Indenture)
Payment in respect of Debt Securities in bearer form will be made in the
currency and in the manner designated in the Prospectus Supplement, subject to
any applicable laws and regulations, at such paying agencies outside the
United States as the Company may appoint from time to time. The paying agents
outside the United States, if any, initially appointed by the Company for a
series of Debt Securities will be named in the Prospectus Supplement. Unless
otherwise provided in the applicable Prospectus Supplement, the Company may at
any time designate additional paying agents or rescind the designation of any
paying agents, except that, if Debt Securities of a series are issuable in
registered form, the Company will be required to maintain at least one paying
agent in each place of payment for such series and if Debt Securities of a
series are issuable in bearer form, the Company will be required to maintain
at least one paying agent in a place of payment outside the United States
where Debt Securities of such series and any coupons appertaining thereto may
be presented and surrendered for payment. (Section 9.2 of each Indenture)
Unless otherwise provided in the applicable Prospectus Supplement, Debt
Securities in registered form will be transferable or exchangeable at the
agency of the Company, maintained for such purpose as designated by the
Company, from time to time. (Sections 3.5 and 9.2 of each Indenture) Debt
Securities may be transferred or exchanged without service charge, although
the Company may require a holder to pay any tax or other governmental charge
imposed in connection therewith. (Section 3.5 of each Indenture)
GLOBAL DEBT SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more fully registered global securities (a "Registered Global
Security"). Each Registered Global Security will be registered in the name of
a depositary (the "Depositary") or a nominee for the Depositary identified in
the applicable Prospectus Supplement, will be deposited with such Depositary
or nominee or a custodian therefor and will bear a legend regarding the
restrictions on exchanges and registration of transfer thereof and any such
other matters as may be provided for pursuant to the applicable Indenture. In
such a case, one or more Registered Global Securities will
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be issued in a denomination or aggregate denominations equal to the portion of
the aggregate principal amount of outstanding Debt Securities of the series to
be represented by such Registered Global Security or Securities. (Section 3.3
of each Indenture) Unless and until it is exchanged in whole or in part for
Debt Securities in definitive certificated form, a Registered Global Security
may not be transferred or exchanged except as a whole by the Depositary for
such Registered Global Security to a nominee of such Depositary or by a
nominee of such Depositary to such Depositary or another nominee of such
Depositary or by such Depositary or any such nominee to a successor Depositary
for such series or a nominee of such successor Depositary, or except in the
circumstances described in the applicable Prospectus Supplement. (Section 3.5
of each Indenture)
The specific terms of the depositary arrangement with respect to any portion
of a series of Debt Securities to be represented by a Registered Global
Security will be described in the applicable Prospectus Supplement.
Upon the issuance of any Registered Global Security, and the deposit of such
Registered Global Security with or on behalf of the Depositary for such
Registered Global Security, the Depositary will credit on its book-entry
registration and transfer system the respective principal amounts of the Debt
Securities represented by such Registered Global Security to the accounts of
institutions ("Participants") that have accounts with the Depositary. The
accounts to be credited will be designated by the underwriters or agents
engaging in the distribution of such Debt Securities or by the Company, if
such Debt Securities are offered and sold directly by the Company. Ownership
of beneficial interests in a Registered Global Security will be limited to
Participants or persons that may hold interests through Participants.
Ownership of beneficial interests in a Registered Global Security will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by the Depositary for such Registered Global Security or by
its nominee. Ownership of beneficial interests in such Registered Global
Security by persons who hold through Participants will be shown on, and the
transfer of such beneficial interests within such Participants will be
effected only through, records maintained by such Participants.
So long as the Depositary for a Registered Global Security, or its nominee,
is the owner of such Registered Global Security, such Depositary or such
nominee, as the case may be, will be considered the sole owner or holder of
the Debt Security represented by such Registered Global Security for all
purposes under each Indenture. (Section 3.8 of each Indenture) Accordingly,
each person owning a beneficial interest in such Registered Global Security
must rely on the procedures of the Depositary and, if such person is not a
Participant, on the procedures of the Participant through which such person
owns its interest, to exercise any rights of a holder under such Indenture.
The Company understands that under existing industry practices, if it requests
any action of holders or if an owner of a beneficial interest in a Registered
Global Security desires to give or take any instruction or action which a
holder is entitled to give or take under the Indenture, the Depositary would
authorize the Participants holding the relevant beneficial interests to give
or take such instruction or action, and such Participants would authorize
beneficial owners owning through such Participants to give or take such
instruction or action or would otherwise act upon the instructions of
beneficial owners holding through them.
Unless otherwise specified in the Prospectus Supplement, payments with
respect to principal, premium, if any, and interest, if any, on the Debt
Securities represented by a Registered Global Security registered in the name
of the Depositary or its nominee will be made to such Depositary or its
nominee, as the case may be, as the registered owner of such Registered Global
Security. The Company expects that the Depositary for any Debt Securities
represented by a Registered Global Security, upon receipt of any payment of
principal or interest in respect of such Registered Global Security, will
credit immediately Participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the Registered
Global Security as shown on the records of the Depositary. The Company also
expects that payments by Participants to owners of beneficial interests in
such Registered Global Security held through such Participants will be
governed by standing instructions and customary practices, as is now the case
with securities in bearer form held for the accounts of customers or
registered in "street name," and will be the responsibility of such
Participants. None of the Company, the respective Trustees or any agent of the
Company or the respective Trustees shall have any responsibility or liability
for any aspect of the records relating to or payments made on account of
beneficial
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interests in any Registered Global Security, or for maintaining, supervising
or reviewing any records relating to such beneficial interests. (Section 3.8
of each Indenture)
Unless otherwise specified in the applicable Prospectus Supplement, if the
Depositary for any Debt Securities represented by a Registered Global Security
is at any time unwilling or unable to continue as depositary of such
Registered Global Security and a successor depositary is not appointed by the
Company within 90 days, the Company will issue Debt Securities in certificated
form in exchange for such Registered Global Security. In addition, the Company
in its sole discretion may at any time determine not to have any of the Debt
Securities of a series represented by one or more Registered Global Securities
and, in such event, will issue Debt Securities of such series in certificated
form in exchange for all of the Registered Global Securities representing such
series of Debt Securities. (Section 3.5 of each Indenture)
The Debt Securities of a series may also be issued in whole or in part in
the form of one or more bearer global securities (a "Bearer Global Security")
that will be deposited with a depositary, or with a nominee for such
depositary, identified in the applicable Prospectus Supplement. Any such
Bearer Global Securities may be issued in temporary or permanent form.
(Section 3.4 of each Indenture) The specific terms and procedures, including
the specific terms of the depositary arrangement, with respect to any portion
of a series of Debt Securities to be represented by one or more Bearer Global
Securities will be described in the applicable Prospectus Supplement.
CONSOLIDATION, MERGER OR SALE OF ASSETS
Each Indenture permits the Company to consolidate with or merge into any
person or persons or to sell, transfer or lease its properties and assets as,
or substantially as, an entirety to any person if, (i) the person (other than
the Company) formed by such consolidation, or into which the Company is
merged, or which acquires or leases the properties and assets of the Company,
as, or substantially as, an entirety, is organized and existing under the laws
of the United States, any state thereof or the District of Columbia, (ii) such
person expressly assumes the Company's obligations on the Debt Securities
issued under such Indenture, (iii) immediately after giving effect to such
consolidation, merger, sale, transfer or lease, no Default or Event of Default
under such Indenture exists, and (iv) with respect to any series of Debt
Securities, the Company satisfies any other conditions, if any, established
with respect to such series of Debt Securities pursuant to and in accordance
with Section 3.1 of the applicable Indenture. (Section 7.1 of each Indenture)
EVENTS OF DEFAULT, NOTICE AND CERTAIN RIGHTS ON DEFAULT
Except as otherwise provided in a Prospectus Supplement relating to the Debt
Securities of a particular series, Events of Default with respect to Debt
Securities of any series are defined in each Indenture as: (i) default in the
payment of any interest on any Debt Security of that series, and the
continuance of such default for a period of 30 days; (ii) default in the
payment of any installment of the principal of or any premium on any Debt
Security of that series when due, whether at maturity, upon redemption, by
declaration or otherwise or in the payment of a mandatory sinking fund payment
when and as due by the forms of the Debt Securities of that series; (iii)
failure by the Company to comply with any other covenant or agreement
contained in the Indenture under which the Debt Securities of that series were
issued and the continuance of such default for a period of 90 days after
written notice as provided in such Indenture; (iv) certain events of
bankruptcy, insolvency and reorganization of the Company; and (v) default by
the Company under any indenture or other instrument under which any
indebtedness for borrowed money having an outstanding aggregate principal
amount of at least $25 million has been issued or by which it is governed as a
result of which such indebtedness shall have been accelerated, and such
acceleration is not rescinded, cured or annulled within 30 days after written
notice thereof to the Company by the Trustee for such series or to the Company
and the Trustee for such series by the holders of at least 25% of the
aggregate principal amount of the Debt Securities of such series then
outstanding, provided that such Event of Default will be cured or waived if
the default that resulted in the acceleration of such other indebtedness is
cured or waived, as the case may be. (Section 5.1 of each Indenture) Events of
Default with respect to a specified series of Debt Securities may be deleted
from or added to the Indenture or may be modified
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and, if so deleted, added or modified, will be described in the applicable
Prospectus Supplement. (Sections 3.1 and 5.1 of each Indenture)
Each Indenture provides that the relevant Trustee will, within 90 days after
the occurrence of a Default that is continuing with respect to the Debt
Securities of any series, give to the holders of the Debt Securities of that
series notice of all Defaults known to it unless such Default shall have been
cured or waived; provided that except in the case of a Default in payment of
principal, premium, if any, or interest on the Debt Securities of that series,
such Trustee shall be protected in withholding such notice if it in good faith
determines that withholding such notice is in the interests of holders of the
Debt Securities of that series. (Section 6.2 of each Indenture) "Default"
means any event which is, or after notice or passage of time, or both, would
be, an Event of Default. (Section 1.1 of each Indenture)
Each Indenture provides that, if an Event of Default specified therein
(other than an Event of Default of the type described in clause (iv) of the
second preceding paragraph) occurs with respect to the Debt Securities of any
series and is continuing, the Trustee for such series or the holders of 25% in
aggregate principal amount of all outstanding Debt Securities of that series
(calculated as provided for in each Indenture) may declare the principal of
(or, if the Debt Securities of that series are Original Issue Discount
Securities or Indexed Securities, such portion of the principal amount
specified in the Prospectus Supplement) and accrued interest, if any, on all
the Debt Securities of that series to be due and payable and upon such
declaration, such principal (or, in the case of Original Issue Discount
Securities or Indexed Securities, such portion of the principal amount
specified in the Prospectus Supplement) and interest, if any, shall be
immediately due and payable. If an Event of Default of the type described in
clause (iv) of the second preceding paragraph occurs with respect to the Debt
Securities of any series and is continuing, then the principal of (or, if the
Debt Securities of that series are Original Issue Discount Securities or
Indexed Securities, the applicable portion of such principal amount) and
accrued interest, if any, on all the Debt Securities of that series shall be
immediately due and payable without any declaration or act on the part of the
Trustee for such series or any holder of such Debt Securities. If the
principal of and interest on Subordinated Securities is accelerated as
described in this paragraph, the payment of such principal and interest shall
remain subordinated to the extent provided in Article 15 of the Subordinated
Indenture. (Section 5.2 of each Indenture)
Each Indenture provides that the holders of not less than a majority in
aggregate principal amount of any series of Debt Securities by written notice
to the Trustee for such series may waive, on behalf of the holders of all Debt
Securities of such series, any past Default or Event of Default with respect
to that series and its consequences except a Default or Event of Default in
the payment of the principal of, premium, if any, or interest, if any, on any
Debt Security or with respect to a covenant or provision that cannot be
amended or modified without consent of each holder of such series of Debt
Securities adversely affected. (Section 5.7 of each Indenture)
Reference is made to the Prospectus Supplement relating to each series of
Debt Securities that are Original Issue Discount Securities for the particular
provisions relating to acceleration of the maturity of a portion of the
principal amount of such Original Issue Discount Securities upon the
occurrence of an Event of Default and the continuation thereof.
Each Indenture provides that, if a Default or an Event of Default shall have
occurred and be continuing, the holders of not less than a majority in
aggregate principal amount of the Debt Securities of each series affected
(with each such series voting as a class) may, subject to certain limited
conditions, direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee for such series, or exercising any trust
or power conferred on such Trustee. (Section 5.8 of each Indenture)
Each Indenture includes a covenant that the Company will file annually with
the relevant Trustee a certificate as to the presence or absence of certain
defaults under the terms of such Indenture. (Section 9.5 of each Indenture)
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MODIFICATION AND WAIVER
Each Indenture contains provisions permitting the Company and the relevant
Trustee to enter into one or more supplemental indentures without the consent
of the holders of any of the Debt Securities in order: (i) to evidence the
succession of another entity to the Company, and the assumption of the
covenants and obligations of the Company, under the Debt Securities and such
Indenture by such successor to the Company; (ii) to add to the covenants of
the Company for the benefit of the holders of all or any series of Debt
Securities or surrender any right or power conferred on the Company by such
Indenture; (iii) to add additional Events of Default with respect to any
series of Debt Securities; (iv) to add to or change any provisions to such
extent as necessary to facilitate the issuance or administration of Debt
Securities in bearer form or to facilitate the issuance or administration of
Debt Securities in global form; (v) to change or eliminate any provision
affecting only Debt Securities not yet issued; (vi) to secure the Debt
Securities; (vii) to establish the form or terms of Debt Securities of any
series; (viii) to evidence and provide for successor Trustees or to add or
change any provisions to such extent as necessary to permit or facilitate the
appointment of a separate Trustee or Trustees for specific series of Debt
Securities; (ix) to permit payment in respect of Debt Securities in bearer
form in the United States to the extent allowed by law; (x) to correct or
supplement any defective or inconsistent provisions or to make any other
provisions with respect to matters or questions arising under such Indenture,
provided that any such action does not adversely affect in any material
respect the interests of any holder of Debt Securities of any series then
outstanding; (xi) to cure any ambiguity, correct any mistake or comply with
any mandatory provision of law; (xii) in the case of the Subordinated
Indenture, to modify the subordination provisions thereof in a manner not
adverse to the holders of Subordinated Securities of any series then
outstanding; (xiii) to make provision with respect to any conversion or
exchange rights of holders not adverse to the holders of any Debt Securities
of any series then outstanding with such conversion or exchange rights,
including providing for the conversion or exchange of Debt Securities into
Common Stock or Preferred Stock or other securities or property of the
Company; or (xiv) to effect the qualification of such Indenture under the TIA
or to add provisions expressly required under the TIA. (Section 8.1 of each
Indenture)
Each Indenture also contains provisions permitting the Company, and the
relevant Trustee, with the consent of the holders of a majority in aggregate
principal amount of the outstanding Debt Securities of all series adversely
affected by such supplemental indenture (voting as one class), to execute
supplemental indentures adding any provisions to or changing or eliminating
any of the provisions of such Indenture or any supplemental indenture or
modifying the rights of the holders of Debt Securities of such series, except
that, without the consent of the holder of each Debt Security so affected, no
such supplemental indenture may: (i) change the time for payment of principal
or premium, if any, or interest on any Debt Security; (ii) reduce the
principal on any Debt Security, or change the manner in which the amount of
any of the foregoing is determined; (iii) reduce the interest rate, or reduce
the amount of premium, if any, payable upon the redemption of any Debt
Security or change the manner in which the amount of the premium, if any, or
interest is determined; (iv) reduce the amount of principal payable upon
acceleration of the maturity of any Original Issue Discount or Indexed
Security; (v) change the currency or currency unit in which any Debt Security
or any premium or interest thereon is payable; (vi) impair the right to
institute suit for the enforcement of any payment on or with respect to any
Debt Security after such payment has become due; (vii) reduce the percentage
in principal amount of the outstanding Debt Securities of any series, the
consent of whose holders is required for modification or amendment of such
Indenture or for waiver of compliance with certain provisions of the Indenture
or for waiver of certain defaults, or reduce the quorum or voting requirements
applicable to meetings of holders of Debt Securities issuable in bearer form;
(viii) change the obligation of the Company to maintain an office or agency in
the places and for the purposes specified in such Indenture; (ix) in the case
of the Subordinated Indenture, modify the subordination provisions thereof in
a manner adverse to the holders of Subordinated Securities of any series then
outstanding; (x) modify the provisions that set forth the provisions in each
Indenture that may not be changed without the consent of the holder of each
Debt Security affected thereby; or (xi) make any change adversely affecting
any rights of the holders to convert or exchange convertible or exchangeable
Debt Securities. (Section 8.2 of each Indenture)
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<PAGE>
The Holders of a majority in aggregate principal amount of the Outstanding
Debt Securities of any series may waive compliance by the Company with certain
restrictive provisions of the applicable Indenture. (Section 9.6 of each
Indenture) The Holders of a majority in aggregate principal amount of the
Outstanding Debt Securities of any series may waive any past default under the
applicable Indenture, except a default in the payment of principal, premium or
interest and certain covenants and provisions of the applicable Indenture
which cannot be amended without the consent of the Holder of each Outstanding
Debt Security of such series affected. (Section 5.7 of each Indenture)
SUBORDINATION UNDER THE SUBORDINATED INDENTURE
The payment of the principal of (and premium, if any) and interest on the
Subordinated Securities will, in certain circumstances as set forth in the
Subordinated Indenture, be subordinated in right of payment to the prior
payment in full of all Senior Debt of the Company. Upon any payment or
distribution of assets of the Company, to creditors upon any liquidation,
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshaling of assets and liabilities or any bankruptcy, insolvency
or similar proceedings of the Company, the holders of Senior Debt of the
Company, will be entitled to receive payment in full of the principal of (and
premium, if any) and interest on such Senior Debt, including all amounts due
or to become due on all such Senior Debt, or provision will be made for
payment in cash or cash equivalents or otherwise in a manner satisfactory to
the holders of such Senior Debt, before the holders of Subordinated Securities
of the Company, are entitled to receive any Securities Payments. "Securities
Payment" means any payment or distribution of any kind, whether in cash,
property or securities (including any payment or distribution deliverable by
reason of the payment of any other Debt subordinated to the Subordinated
Securities) on account of the principal of (and premium, if any) or interest
on the Subordinated Securities or on account of the purchase or redemption or
other acquisition of Subordinated Securities by the Company or any subsidiary
of the Company. In the event that, notwithstanding the foregoing, the
Subordinated Trustee or the holder of any Subordinated Securities receives any
Securities Payment before all Senior Debt of the Company is paid in full or
payment thereof is provided for in cash or cash equivalents or otherwise in a
manner satisfactory to the holders of such Senior Debt, then and in such event
such Debt Securities Payment will be required to be paid over or delivered
forthwith to the holders of Senior Debt for application to the payment of all
Senior Debt of the Company, remaining unpaid, to the extent necessary to pay
such Senior Debt in full. (Sections 15.1 and 15.2 of the Subordinated
Indenture)
The Company, may not make any Securities Payments if there has occurred and
is continuing a default in the payment of the principal of (or premium, if
any) or interest on Senior Debt of the Company, or if there has occurred and
is continuing any event of default with respect to Senior Debt of the Company,
which has resulted in such Senior Debt becoming or being declared due and
payable prior to the date on which it would otherwise have become due and
payable (a "Senior Payment Default"). In addition, if any default (other than
a Senior Payment Default), with respect to any Senior Debt of the Company,
permitting after notice or lapse of time (or both) the holders thereof (or a
trustee on behalf thereof) to accelerate the maturity thereof (a "Senior
Nonmonetary Default") has occurred and is continuing and the Company, and the
Subordinated Trustee have received written notice thereof from any holder or
holders of Senior Debt with a principal amount in excess of $50 million, then
the Company may not make any Securities Payments for a period (a "blockage
period") commencing on the date the Company and the Subordinated Trustee
receive such written notice and ending on the earlier of (x) 179 days after
such date and (y) the date, if any, on which the Senior Debt of the Company,
to which such default relates is discharged or such default is waived or
otherwise cured. (Section 15.3 of the Subordinated Indenture)
In any event, not more than one blockage period with respect to any
Subordinated Securities may be commenced during any period of 360 consecutive
days. No Senior Payment Default or Senior Nonmonetary Default that existed or
was continuing on the date of commencement of any blockage period with respect
to the Senior Debt of the Company, will be, or can be, made the basis for the
commencement of a subsequent blockage period, unless such default has been
cured for a period of not less than 90 consecutive days. In the event that,
notwithstanding the foregoing, the Company, makes any Securities Payment to
the Subordinated Trustee or any holder of the Subordinated Securities
prohibited by the subordination provisions, then and in such event such
28
<PAGE>
Securities Payment will be required to be paid over and delivered forthwith to
the holders of the Senior Debt of the Company. (Section 15.3 of the
Subordinated Indenture)
By reason of such subordination, in the event of insolvency, creditors of
the Company, who are not holders of Senior Debt of the Company or of the
Subordinated Securities, may recover less, ratably, than holders of such
Senior Debt and may recover more, ratably, than the holders of the
Subordinated Securities.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person, (i) every
obligation of such Person for money borrowed, (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses, (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities
issued for the account of such Person, (iv) every obligation of such Person
issued or assumed as the deferred purchase price of property or services, (v)
every Capital Lease Obligation of such Person, (vi) the maximum fixed
redemption or repurchase price of Redeemable Interests of such Person at the
time of determination, (vii) every net payment obligation of such Person under
interest rate swap or similar agreements or foreign currency hedge, exchange
or similar agreements at the time of determination and (viii) every obligation
of the type referred to in Clauses (i) through (vii) of another Person and all
dividends of another Person the payment of which, in either case, such Person
has Guaranteed or for which such Person is responsible or liable, directly or
indirectly, jointly or severally, as obligor, Guarantor or otherwise.
"Senior Debt" means, except as otherwise provided in a Prospectus Supplement
relating to any series of Debt Securities, all Debt of the Company (including
Debt of others guaranteed by the Company); provided, however, the following
shall not constitute Senior Debt: (A) any Debt owed to a Person when such
Person is a Subsidiary of the Company; (B) any Debt which by the terms of the
instrument creating or evidencing the same is pari passu or subordinate in
right of payment to the Subordinated Securities; (C) any Debt incurred in
violation of the applicable Indenture; or (D) any Debt which is subordinate in
right of payment in any respect to any other Debt of the Company. For purposes
of this definition, "Debt" includes any obligation to pay principal, premium
(if any), interest, penalties, reimbursement or indemnity amounts, fees and
expenses (including interest accruing on or after the filing of any petition
in bankruptcy or for reorganization relating to the Company, whether or not a
claim for post-petition interest is allowed in such proceeding).
The subordination provisions described above will cease to be applicable to
the applicable Subordinated Securities upon any defeasance or covenant
defeasance of such Subordinated Securities as described under "--Defeasance
and Covenant Defeasance."
The Subordinated Indenture places no limitation on the amount of additional
Senior Debt that may be incurred by the Company. The Company expects from time
to time to incur additional indebtedness constituting Senior Debt.
The Subordinated Indenture provides that the foregoing subordination
provisions, insofar as they relate to any particular issue of Subordinated
Securities, may be changed prior to such issuance. Any such change would be
described in the Prospectus Supplement relating to such Subordinated
Securities. (Section 3.1 of the Subordinated Indenture)
DEFEASANCE AND COVENANT DEFEASANCE
DEFEASANCE AND DISCHARGE. Unless otherwise provided in the applicable
Prospectus Supplement relating to the Debt Securities of a particular series,
the Company, will be discharged from any and all obligations in respect of the
Debt Securities of, or within, any series (except for certain obligations to
register the transfer or exchange of Debt Securities, to replace stolen, lost
or mutilated Debt Securities, to convert or exchange Debt Securities, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the relevant Trustee, in trust, of money and/or Government
Obligations which through the payment of interest and
29
<PAGE>
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and each
installment of interest on such Debt Securities at the maturity of such
payments in accordance with the terms of the applicable Indenture and such
Debt Securities. (Sections 3.1 and 4.4 of each Indenture) Such a trust may
only be established if, among other things, the Company, delivers to the
relevant Trustee an officer's certificate and opinion of counsel (who may be
counsel to the Company) stating that (A) either (i) the Company, has received
from, or there has been published by, the Internal Revenue Service a ruling or
(ii) since the date of the Indenture there has been a change in the applicable
Federal income tax law, to the effect that holders of such Debt Securities
will not recognize income, gain or loss for Federal income tax purposes as a
result of such defeasance and will be subject to Federal income tax on the
same amount and in the same manner and at the same times as would have been
the case if such defeasance had not occurred and (B) all conditions precedent
in the applicable Indenture relating to such defeasance have been complied
with. (Section 4.6 of the Indenture)
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. Unless
otherwise provided in the applicable Prospectus Supplement relating to the
Debt Securities of a particular series, upon the deposit with the relevant
Trustee, in trust, of money and/or Government Obligations which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of,
premium, if any, and each installment of interest on such Debt Securities at
the maturity of such payments in accordance with the terms of such Indenture
and such Debt Securities, the Company may omit to comply with certain
covenants applicable to the Debt Securities of, or within, any series and the
occurrence of any Event of Default described in clause (iii) or clause (v)
under the caption "Events of Default, Notice and Certain Rights on Default"
above or any additional Event of Default established with respect to such
series of Debt Securities pursuant to Section 3.1 of the applicable Indenture,
shall not be deemed to be a Default or Event of Default under such Indenture
and such Debt Securities. The obligations of the Company under such Indenture
and such Debt Securities, other than with respect to the covenants referred to
above, and the Events of Default, other than the Events of Default referred to
above, shall remain in full force and effect. (Sections 3.1 and 4.5 of each
Indenture) Such a trust may only be established if, among other things, the
Company, has delivered to the relevant Trustee an officer's certificate and
opinion of counsel (who may be counsel to the Company) to the effect that (A)
holders of such Debt Securities will not recognize income, gain or loss for
Federal income tax purposes as a result of such defeasance and will be subject
to income tax on the same amount and in the same manner and at the same times
as would have been the case if such defeasance had not occurred and (B) all
conditions precedent in the applicable Indenture relating to such covenant
defeasance have been complied with. (Section 4.6 of the Indenture)
In addition, with respect to the Subordinated Indenture, in order to be
discharged or omit compliance with certain covenants as described above, no
default in the payment of principal of, premium, if any, or interest on any
Senior Debt shall have occurred and be continuing and no other event of
default with respect to the Senior Debt shall have occurred and be continuing
and shall have resulted in such Senior Debt becoming or being declared due and
payable prior to the date it would have become due and payable. (Section 4.6
of the Subordinated Indenture)
In the event the Company exercises its option to omit compliance with
certain covenants of the Indenture with respect to such Debt Securities as
described in the preceding paragraphs and such Debt Securities are declared
due and payable because of the occurrence of any Event of Default other than
an Event of Default described in clause (iii) or (v) under the caption "Events
of Default, Notice and Certain Rights on Default" above, the amount of money
and Government Obligations on deposit with the relevant Trustee will be
sufficient to pay amounts due on such Debt Securities at the time of their
stated maturity but may not be sufficient to pay amounts due on such Debt
Securities at the time of the acceleration resulting from such Event of
Default. However, the Company would remain liable for any such deficiency.
NOTICES
Notices to holders of registered Debt Securities will be given by mail to
the addresses of such holders as they may appear in the Register. (Section 1.6
of each Indenture)
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OWNER OF DEBT SECURITIES
Unless otherwise provided in the applicable Prospectus Supplement relating
to the Debt Securities of a particular series, the Company, the applicable
Trustee and any agent of the Company or the applicable Trustee, may treat the
person in whose name a Debt Security in registered form is registered, and may
treat the bearer of a Debt Security in bearer form, as the absolute owner
thereof (whether or not such Debt Security may be overdue) for the purpose of
receiving payment and for all other purposes. (Section 3.8 of each Indenture)
GOVERNING LAW
The Indentures and the Debt Securities will be governed by, and construed in
accordance with, the laws of the State of New York. (Section 1.12 of each
Indenture)
THE TRUSTEE
Summit Bank is the Trustee under each of the Indentures. Pursuant to the
provisions of the TIA, upon a default under the Senior Indenture or the
Subordinated Indenture, the Trustee may be deemed to have a conflicting
interest, by virtue of its acting as the Trustee under each of the Indentures,
thereby requiring it to resign and be replaced by a successor Trustee under
one or more of the Indentures.
DESCRIPTION OF WARRANTS
GENERAL
The Company may issue Warrants, including Warrants to purchase Debt
Securities ("Debt Warrants"), Preferred Stock, Common Stock or other of its
securities. Warrants may be issued independently or together with any Debt
Securities and may be attached to or separate from such Debt Securities. Each
series of Warrants will be issued under a separate warrant agreement (each a
"Warrant Agreement") to be entered into between the Company and a warrant
agent ("Warrant Agent"). The Warrant Agent will act solely as an agent of the
Company in connection with the Warrants of such series and will not assume any
obligation or relationship of agency or trust for or with any holders or
beneficial owners of Warrants. The description of the terms of the Warrants
that is set forth below, and the description of the terms of the Warrants that
will be set forth in the applicable Prospectus Supplement, do not purport to
be complete and are qualified in their entirety by reference to the Warrant
Agreement and warrant certificate relating to such Warrants.
DEBT WARRANTS
The applicable Prospectus Supplement will describe the following terms of
the Debt Warrants in respect of which this Prospectus is being delivered: (i)
the title of such Debt Warrants; (ii) the aggregate number of such Debt
Warrants; (iii) the price or prices at which such Debt Warrants will be
issued; (iv) the currency or currencies, including composite currencies, in
which the price of such Debt Warrants may be payable; (v) the designation,
aggregate principal amount and terms of the Debt Securities purchasable upon
exercise of such Debt Warrants; (vi) if applicable, the designation and terms
of the Debt Securities with which such Debt Warrants are issued and the number
of such Debt Warrants issued with each such Debt Security; (vii) the currency
or currencies, including composite currencies, in which the principal of or
any premium or interest on the Debt Securities purchasable upon exercise of
such Debt Warrant will be payable; (viii) if applicable, the date on and after
which such Debt Warrants and the related Debt Securities will be separately
transferable; (ix) the price at which and currency or currencies, including
composite currencies, in which the Debt Securities purchasable upon exercise
of such Debt Warrants may be purchased; (x) the date on which the right to
exercise such Debt Warrants shall commence and the date on which such right
shall expire; (xi) if applicable, the minimum or maximum amount of such Debt
Warrants which may be exercised at any one time; (xii) information with
respect to book-entry procedures, if any; (xiii) if applicable, a discussion
of certain United States Federal income tax considerations; and (xiv) any
other terms of such Debt Warrants, including terms, procedures and limitations
relating to the exchange and exercise of such Debt Warrants. Prior to the
exercise of their Debt Warrants, holders
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<PAGE>
of Debt Warrants exercisable for Debt Securities will not have any of the
rights of holders of the Debt Securities purchasable upon such exercise and
will not be entitled to payments of principal of (or premium, if any) or
interest, if any, on the Debt Securities purchasable upon such exercise.
OTHER WARRANTS
The Company may issue other Warrants. The applicable Prospectus Supplement
will describe the following terms of any such other Warrants in respect of
which this Prospectus is being delivered: (i) the title of such Warrants; (ii)
the securities (which may include Preferred Stock or Common Stock) for which
such Warrants are exercisable; (iii) the price or prices at which such
Warrants will be issued; (iv) the currency or currencies, including composite
currencies, in which the price of such Warrants may be payable; (v) if
applicable, the designation and terms of the Debt Securities or Preferred
Stock with which such Warrants are issued and the number of such Warrants
issued with each such Debt Security or share of Preferred Stock; (vi) if
applicable, the date on and after which such Warrants and the related Debt
Securities or Preferred Stock will be separately transferable; (vii) if
applicable, a discussion of certain United States Federal income tax
considerations; and (viii) any other terms of such Warrants, including terms,
procedures and limitations relating to the exchange and exercise of such
Warrants. The applicable Prospectus Supplement will also set forth (a) the
amount of securities called for by such Warrants, and, if applicable, the
amount of Warrants outstanding, and (b) information relating to provisions, if
any, for a change in the exercise price or the expiration date of such
Warrants and the kind, frequency and timing of any notice to be given. Prior
to the exercise of their Warrants for shares of Preferred Stock or Common
Stock, holders of such Warrants will not have any rights of holders of the
Preferred Stock or Common Stock purchasable upon such exercise and will not be
entitled to dividend payments, if any, or voting rights of the Preferred Stock
or Common Stock purchasable upon such exercise.
EXERCISE OF WARRANTS
Each Warrant will entitle the holder thereof to purchase for cash or other
consideration such principal amount or such number of securities of the
Company at such exercise price as shall in each case be set forth in, or be
determinable as set forth in, the Prospectus Supplement relating to the
Warrants offered thereby. Warrants may be exercised as set forth in the
Prospectus Supplement relating to the Warrants offered thereby at any time up
to the close of business on the expiration date set forth in such Prospectus
Supplement. After the close of business on the expiration date (or such later
expiration date as may be extended by the Company), unexercised Warrants will
become void.
Upon receipt of payment and the warrant certificate properly completed and
duly executed at the corporate trust office of the Warrant Agent or any other
office indicated in the applicable Prospectus Supplement, the Company will, as
soon as practicable, forward the securities purchasable upon such exercise. If
less than all of the Warrants represented by such warrant certificate are
exercised, a new warrant certificate will be issued for the remaining
Warrants.
MODIFICATIONS
The Debt Warrant Agreement and the terms of the Debt Warrants and the Debt
Warrant certificates relating to such Debt Warrants may be amended by the
Company and the Debt Warrant Agent, without the consent of the holders, for
the purpose of curing any ambiguity, or of curing, correcting or supplementing
any defective or inconsistent provision therein or in any other manner which
the Company may deem necessary or desirable and which will not adversely
affect the interests of the holders of Debt Warrants in any material respect.
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SELLING STOCKHOLDERS
The following table sets forth as of April 1, 1998 certain information
regarding the beneficial ownership of the Common Stock by each of the Selling
Stockholders prior to and after an offering of all of the Stockholder Shares.
Except as otherwise indicated, each Selling Stockholder has sole voting power
and sole investment power with respect to all shares beneficially owned by
such Selling Stockholder. The chief investment officer of each of the Selling
Stockholders is Kenneth Chuan-kai Leung, a director of the Company. The
applicable Prospectus Supplement also will provide the information set forth
in the following table when the Stockholder Shares are offered in connection
with an underwritten offering of Securities by the Company.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
BEFORE OFFERING NUMBER OF AFTER OFFERING
---------------------- SHARES ----------------------
NUMBER PERCENT BEING OFFERED NUMBER PERCENT
----------- ---------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Environmental Opportuni-
ties Fund, L.P......... 889,699 3.5% 444,850 444,849 1.8%
Environmental Opportuni-
ties Fund (Cayman),
L.P.................... 110,303 * 55,150 55,153 *
</TABLE>
- --------
* Less than 1%.
PLAN OF DISTRIBUTION
The Company may sell Securities to or through one or more underwriters or
dealers and also may sell Securities directly to institutional investors or
other purchasers, or through agents.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
The Company may also make at-the-market offerings of equity securities
through an underwriter or underwriters, acting as principal(s) or as agent(s)
for the Company. The amount of equity securities offered in such offerings
will not exceed in the aggregate ten percent of the aggregate market value of
the Company's outstanding Common Stock held by non-affiliates of Company in
accordance with Rule 415 of the Securities Act.
In connection with the sale of Securities, underwriters or agents may
receive compensation from the Company or from purchasers of Securities for
whom they may act as agents in the form of discounts, concessions or
commissions. Underwriters may sell Securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of Securities may be deemed to be underwriters, and any
discounts or commissions received by them from the Company and any profit on
the resale of Securities by them may be deemed to be underwriting discounts
and commissions, under the Securities Act. Any such underwriter or agent will
be identified, and any such compensation received from the Company will be
described, in the related Prospectus Supplement.
Under agreements which may be entered into by the Company, underwriters and
agents who participate in the distribution of Securities may be entitled to
indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the related Prospectus Supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase Securities from the Company
pursuant to contracts providing for payment and delivery on a future date.
Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Company. The obligations of any purchaser
under any such contract will be subject to the condition that the purchase of
the Securities shall not at the time of delivery be prohibited under the laws
of the jurisdiction to which such purchaser is subject. The underwriters and
such other agents will not have any responsibility in respect of the validity
or performance of such contracts.
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<PAGE>
Certain of the underwriters or agents and their associates may engage in
transactions with and perform services for the Company or its affiliates in
the ordinary course of their respective businesses.
The Securities may or may not be listed on a national securities exchange or
Nasdaq (other than the Common Stock, which is listed on the Nasdaq National
Market). Any Common Stock sold by the Company pursuant to a Prospectus
Supplement will be listed on the Nasdaq National Market. No assurances can be
given that there will be an active trading market for the Securities.
The specific terms and manner of sale of the Securities in respect of which
this Prospectus is being delivered are set forth or summarized in the
Prospectus Supplement.
The Stockholder Shares will be offered pursuant to this Prospectus and the
applicable Prospectus Supplement only in connection with an underwritten
offering of Securities by the Company.
VALIDITY OF SECURITIES
The validity of the Securities offered will be passed upon for the Company
by Drinker Biddle & Reath LLP, Philadelphia, Pennsylvania and for the
Underwriters or agents, if any, by Morgan, Lewis & Bockius LLP, New York, New
York.
EXPERTS
The consolidated financial statements of the Company as of June 30, 1997 and
1996 and for each of the three years in the period ended June 30, 1997
appearing in the Company's Current Report on Form 8-K (dated February 27,
1998), which are incorporated by reference herein, have been audited by Ernst
& Young LLP, independent auditors, as set forth in their report thereon
included therein and incorporated by reference herein which, as to each of the
two 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. Such financial statements are incorporated by reference
herein in reliance upon such reports given upon the authority of such firms as
experts in accounting and auditing.
The supplemental consolidated financial statements of the Company as of June
30, 1997 and 1996 and for each of the three years in the period ended June 30,
1997 appearing in the Company's Current Report on Form 8-K (dated April 29,
1998), which are incorporated by reference herein, have been audited by Ernst
& Young LLP, independent auditors, as set forth in their report thereon
included therein and incorporated by reference herein which, as to each of the
two 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. Such financial statements are incorporated by reference
herein 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 and for the period ended June 30, 1996 and 1995 and at 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 Form 8-K/A dated July 10, 1997, which
are incorporated by reference herein, 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
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8-K/A dated July 10, 1997, which are incorporated by reference herein, 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 Form 8-K/A dated July 10, 1997, which
are incorporated by reference herein, 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 Form 8-K/A dated July 10, 1997, which are incorporated by
reference herein, 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 dated July 10, 1997, which are incorporated by
reference herein, 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 dated July 10, 1997, which are incorporated by reference herein,
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.
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
dated July 11, 1997 and July 25, 1997, which are incorporated by reference
herein, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon included therein and incorporated herein by
reference. Such financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Pappy, Inc. as of October 31, 1996 and 1995 and
for the years then ended appearing in the Company's Current Report on Form 8-K
dated August 15, 1997, as amended by its Form 8-K/A filed October 10, 1997,
which are incorporated by reference herein, 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.
The financial statements of Soil Remediation of Philadelphia, Inc. and USA
Waste of Fairless Hills, Inc. appearing in the Company's Current Report on
Form 8-K dated August 20, 1997 as amended by its Form 8-K/A dated November 3,
1997, which are incorporated by reference herein, 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.
35
<PAGE>
The consolidated financial statements of Pine Grove, Inc. as of December 31,
1996 and for the year then ended appearing in the Company's Current Report on
Form 8-K dated December 1, 1997 as amended by its Form 8-K/A dated February
17, 1998, which are incorporated by reference herein, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. 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 Bluegrass Containment, Inc. appearing in the
Company's Current Report on Form 8-K dated March 9, 1998, as amended by its
Form 8-K/A dated April 8, 1998, which are incorporated by reference herein,
have been audited by Strothman & Company PSC, 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 reports given upon the authority of such firm as experts in
accounting and auditing.
The combined financial statements of Hudson Jersey Sanitation Co. and
affiliates appearing in the Company's Current Report on Form 8-K dated March
31, 1998, as amended by its Form 8-K/A dated April 24, 1998, which are
incorporated by reference herein, have been audited by Mills & DeFilippis,
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 consolidated financial statements of Atlantic Waste Disposal, Inc. and
subsidiaries as of June 30, 1997 and 1996 and for the years then ended
incorporated in this Prospectus by reference from the Company's Current Report
on Form 8-K dated on or about April 30, 1998, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing.
36
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPO-
RATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR IN THE PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTI-
TUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES
OTHER THAN THOSE TO WHICH THEY RELATE, IN ANY JURISDICTION WHERE, OR TO ANY
PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR THE SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT OR IN
THE PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THERE-
OF.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary............................................. S-3
Risk Factors.............................................................. S-8
Disclosure Regarding Forward Looking Statements........................... S-11
Use of Proceeds........................................................... S-12
Dividend Policy........................................................... S-12
Price Range of Common Stock............................................... S-13
Capitalization............................................................ S-14
Selected Consolidated Financial Data...................................... S-15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... S-18
Business.................................................................. S-27
Management................................................................ S-46
Principal and Selling Stockholders........................................ S-50
Shares Eligible for Future Sale........................................... S-51
Underwriting.............................................................. S-53
Validity of Common Stock.................................................. S-54
Index to Financial Statements............................................. F-1
PROSPECTUS
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 3
The Company............................................................... 4
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Ratio of Earnings to Fixed Charges........................................ 15
Description of Capital Stock.............................................. 16
Description of Depository Shares.......................................... 18
Description of Debt Securities............................................ 20
Description of Warrants................................................... 31
Selling Stockholders...................................................... 33
Plan of Distribution...................................................... 33
Validity of Securities.................................................... 34
Experts................................................................... 34
</TABLE>
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7,500,000 SHARES
[LOGO OF EASTERN ENVIRONMENTAL SERVICES, INC. APPEARS HERE]
COMMON STOCK
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PROSPECTUS SUPPLEMENT
MAY 20, 1998
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SALOMON SMITH BARNEY
CIBC OPPENHEIMER
MERRILL LYNCH & CO.
PACIFIC GROWTH EQUITIES, INC.
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