<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 8-K/A
Current Report
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 1, 1997
EASTERN ENVIRONMENTAL SERVICES, INC.
------------------------------------
(Exact name of issuer as specified in charter)
Delaware 0-16102 59-2840783
(State or Other Commission (I.R.S. Employer
Jurisdiction of File Number Identification
Incorporation) Number)
1000 CRAWFORD PLACE, MT. LAUREL, NEW JERSEY 08054
(Address of principal executive offices)
(609)235-6009
(Registrant's telephone number, including area code)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
-------------------------------------
On December 1, 1997, Eastern Environmental Services, Inc. (the
"Registrant") consummated the acquisition of Pine Grove, Inc. ("Pine Grove")
pursuant to the terms of a Stock Purchase Agreement (the "Agreement") dated
October 17, 1997, as amended November 26, 1997. The Agreement, between the
Registrant and Delmarva Capital Technology Company ("Delmarva" or "Seller")
provided for the acquisition of all of the outstanding shares of stock of Pine
Grove, Inc. ("Pine Grove"), a wholly owned subsidiary of Delmarva. Pine Grove
owns one hundred percent (100%) of the issued and outstanding shares of capital
stock of Pine Grove Landfill, Inc. and Pine Grove Hauling Company. The Seller is
not affiliated with the Registrant nor with any of the Registrant's
subsidiaries. The description of the acquisition transaction set forth herein is
qualified in its entirety by reference to the Agreement and its subsequent
amendment, which are incorporated as Exhibits 10.1 and 10.2, respectively.
At closing under the Stock Purchase Agreement, Registrant purchased all of
the outstanding stock of Pine Grove, Inc. for total consideration of
approximately $46 million funded from working capital, borrowings under the
Registrant's revolving credit facility, and the assumption of approximately $12
million of debt. The acquisition is accounted for using the "purchase" method of
accounting.
Pine Grove, Inc. owns the assets and liabilities relating to the Pine Grove
landfill, a 174 acre Subtitle D solid waste disposal facility located in
Eastcentral Pennsylvania. Pine Grove Hauling Company is an integrated waste
collection company servicing residential and commercial customers. The acquired
assets include collection vehicles, containers, landfill equipment, permits and
real estate used in the operation of the landfill and hauling operations. The
Registrant intends to continue to operate the business owned by Pine Grove, Inc.
Substantially, all liabilities, including landfill closure and post-closure
liabilities, were assumed by the Registrant.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA
FINANCIAL INFORMATION AND EXHIBITS.
-----------------------------------
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Report of Independent Auditors
Consolidated Balance Sheet as of December 31, 1996
Consolidated Statement of Operations for the Year Ended
December 31, 1996
Consolidated Statement of Changes in Stockholders' Equity for the Year
Ended December 31, 1996
Consolidated Statement of Cash Flows for the Year Ended December 31, 1996
Notes to Consolidated Financial Statements
Consolidated Balance Sheet as of September 30, 1997 (Unaudited)
Consolidated Statement of Operations for the Nine Months Ended September
30, 1997 (Unaudited)
Consolidated Statement of Cash Flows for the Nine Months Ended September
30, 1997 (Unaudited)
Selected Notes to Consolidated Financial Statements (Unaudited)
(B) PRO FORMA FINANCIAL INFORMATION
Pro Forma Consolidated Statement of Income for the Year Ended June 30, 1997
(Unaudited)
Pro Forma Consolidated Statement of Income for the Three Months Ended
September 30, 1997 (Unaudited)
Pro Forma Consolidated Balance Sheet as of September 30, 1997 (Unaudited)
(C) EXHIBITS
10.1* Stock Purchase Agreement made as of October 17, 1997, by and between
Delmarva Capital Technology Corporation and Eastern Environmental
Services, Inc.
10.2* Amendment dated November 26, 1997 to Stock Purchase Agreement dated
October 17, 1997, by and between Delmarva Capital Technology Corporation
and Eastern Environmental Services, Inc.
23.1 Consent of Ernst & Young LLP
________________________________________________________________________________
* Incorporated by reference
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Eastern Environmental Services, Inc.
Date: February 17, 1998 By: /s/ Gregory M. Krzemien
----------------------------------------
Gregory M. Krzemien, Chief Financial Officer
<PAGE>
Consolidated Financial Statements
Pine Grove, Inc.
Year ended December 31, 1996
with Report of Independent Auditors
<PAGE>
Pine Grove, Inc.
Consolidated Financial Statements
Year ended December 31, 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors................................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheet....................................................2
Consolidated Statement of Operations..........................................4
Consolidated Statement of Changes in Stockholder's Equity.....................5
Consolidated Statement of Cash Flows..........................................6
Notes to Consolidated Financial Statements....................................7
</TABLE>
<PAGE>
Report of Independent Auditors
Stockholder
Pine Grove, Inc.
We have audited the accompanying consolidated balance sheet of Pine Grove, Inc.
as of December 31, 1996, and the related consolidated statements of operations,
changes in stockholder's equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pine Grove, Inc.
at December 31, 1996, and the consolidated results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
December 12, 1997
/s/ Ernst & Young LLP 1
<PAGE>
Pine Grove, Inc.
Consolidated Balance Sheet
December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,844,663
Cash restricted for redemption of bonds 398,469
Accounts receivable 2,057,085
Accounts receivable from parent company 225,046
Other current assets 366,041
---------------
6,891,304
Property and equipment:
Land and landfill sites 27,527,357
Buildings and leasehold improvements 1,234,947
Vehicles 4,756,822
Machinery and equipment 4,550,955
Furniture and fixtures 362,699
---------------
38,432,780
Accumulated depreciation and amortization 25,507,078
---------------
12,925,702
Construction in progress 5,178,386
---------------
Net property and equipment 18,104,088
Funds held by trustees 2,002,200
Intangible assets, net of accumulated amortization
of $5,677,326 6,285,321
Debt issuance costs, net of accumulated amortization
of $51,125 450,160
Other assets 137,289
---------------
Total assets $33,870,362
===============
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 160,186
Accounts payable to parent company 121,448
Accrued expenses and other current liabilities 1,169,010
Variable rate demand bonds 13,500,000
Current portion of accrued landfill closure costs 691,527
Current portion of long-term debt 312,538
Current portion of long-term debt to parent company 470,904
--------------
16,425,613
Accrued landfill closure costs 1,599,975
Long-term debt 648,544
Long-term debt to parent company 1,365,164
Other 593,181
Stockholder's equity:
Common stock, $1 par value, 1,000 shares
authorized, issued, and outstanding 1,000
Paid-in capital 20,469,721
Retained earnings (deficit) (7,232,836)
---------------
Total stockholder's equity 13,237,885
---------------
Total liabilities and stockholder's equity $33,870,362
===============
</TABLE>
See accompanying notes.
3
<PAGE>
Pine Grove, Inc.
Consolidated Statement of Operations
Year ended December 31, 1996
<TABLE>
<S> <C>
Revenues $ 14,144,074
Cost of revenues 9,595,299
Selling, general, and administrative expenses 808,420
Depreciation and amortization 4,858,678
-----------------
Operating loss (1,118,323)
Interest income 481,506
Interest expense (575,881)
Other income 34,484
-----------------
Loss before income taxes (1,178,214)
Income tax benefit 320,931
-----------------
Net loss $ (857,283)
=================
</TABLE>
See accompanying notes.
4
<PAGE>
Pine Grove, Inc.
Consolidated Statement of Changes in Stockholder's Equity
Year ended December 31, 1996
<TABLE>
<CAPTION>
RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $1,000 $21,097,943 $(6,375,553) $14,723,390
Distributions to parent
company - (628,222) - (628,222)
Net loss - - (857,283) (857,283)
------------------------------------------------------------------
Balance at December 31, 1996 $1,000 $20,469,721 $(7,232,836) $13,237,885
==================================================================
</TABLE>
5
<PAGE>
Pine Grove, Inc.
Consolidated Statement of Cash Flows
Year ended December 31, 1996
<TABLE>
<S> <C>
NET LOSS $ (857,283)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 4,425,328
Amortization 433,350
Landfill closure expense 220,991
Deferred income taxes 74,154
Accounts receivable (512,800)
Accounts receivable from parent company (219,645)
Accounts payable (68,213)
Accounts payable to parent company (13,717)
Other, net 1,007,945
-----------------
Net cash provided by operating activities 4,490,110
CASH FLOWS FROM INVESTING ACTIVITIES
Capital additions (5,012,279)
Net decrease in bond proceeds held in trust funds 4,723,352
-----------------
Net cash used by investing activities (288,927)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on variable rate demand bonds (1,500,000)
Payments on other long-term debt (351,623)
Payments on long-term debt to parent company (386,321)
Borrowings of long-term debt from parent company 993,340
Waste hauling acquisition note payments (255,000)
Distributions to parent company (628,222)
Funds restricted for future redemption of bonds (23,394)
-----------------
Net cash used by financing activities (2,151,220)
-----------------
Net increase in cash and cash equivalents 2,049,963
Cash and cash equivalents at beginning of year 1,794,700
-----------------
Cash and cash equivalents at end of year $ 3,844,663
=================
</TABLE>
See accompanying notes.
6
<PAGE>
Pine Grove, Inc.
Consolidated Statement of Changes in Stockholder's Equity
Year ended December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Pine Grove, Inc. ("the Company") operates a landfill and provides waste hauling
services in Pennsylvania. The Company is a wholly-owned subsidiary of Delmarva
Capital Technology Company (DCTC), the ultimate parent of which is Delmarva
Power and Light Company (DP&L).
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.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with an original maturity of
three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated on the basis of cost. The Company provides
depreciation over the estimated useful lives of the assets using the straight-
line method for its property and equipment.
The Company capitalizes interest costs as part of the cost of developing
landfill sites and constructing disposal space. Interest costs of approximately
$310,000 were capitalized for the year ended December 31, 1996.
FUNDS HELD BY TRUSTEES
Funds held by trustees include unexpended, restricted, tax-exempt bond proceeds.
Earnings on such trust funds are also reflected in the balance.
7
<PAGE>
Pine Grove, Inc.
Consolidated Statement of Changes in Stockholder's Equity
Year ended December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets include goodwill, the cost of a landfill expansion agreement,
and other intangible assets. Goodwill and the cost of a landfill expansion
agreement are being amortized using the unit of depletion method based on the
estimated cubic yards of the related landfill capacity to be utilized. Other
intangible assets are being amortized using the straight-line method over their
estimated useful lives ranging from five to fourteen years.
LANDFILL CLOSURE
Accrued landfill closure 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. 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.
REVENUE RECOGNITION
The Company recognizes revenue upon receipt and acceptance of waste material at
its landfill and upon collection of waste material at its waste hauling and
collection operation. Amounts billed prior to services being performed are
included in accrued expenses and other current liabilities as deferred revenue.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist of cash and cash equivalents, and funds
held by trustees. The Company places its cash and cash equivalents with high
quality financial institutions and limits the amount of credit exposure to any
one institution. The funds held by trustees are invested with one institution.
8
<PAGE>
Pine Grove, Inc.
Consolidated Statement of Changes in Stockholder's Equity
Year ended December 31, 1996
2. ACQUISITION OF WASTE HAULING OPERATIONS
Prior to 1993, the Company purchased the stock or assets of two waste hauling
operations located in Pennsylvania. As of December 31, 1996, remaining payments
related to the waste hauling acquisitions are scheduled as follows:
<TABLE>
<S> <C>
1997 $270,000
1998 153,333
1999 140,000
2000 130,000
-------------
693,333
Less: amount representing interest (83,003)
-------------
Present value of deferred obligations $610,330
=============
</TABLE>
The current portion of the above present value of deferred obligations of
$232,315 is included in other current liabilities with the remainder of $378,015
being classified as other long-term liabilities.
3. LONG-TERM DEBT AND CREDIT AGREEMENTS
In August 1995, the Schuylkill County Industrial Development Authority issued,
on behalf of the Company, $15 million of tax-exempt variable rate demand bonds
due on demand or at maturity on October 1, 2019. The bonds currently bear
interest at a daily rate as determined by the remarketing agent. However, at the
option of the Company, the interest rate on the bonds may be converted to a
weekly rate, a monthly rate, a term rate or commercial paper rates as determined
from time to time in accordance with the indenture.
Proceeds from the bonds are being used for (i) construction of new landfill
pads, (ii) capping filled sections of landfill pads, (iii) acquisition of
vehicles and equipment for landfill operations, (iv) construction of a leachate
treatment plant, (v) other miscellaneous capital expenditures associated with
the operation of the landfill, and (vi) bond issuance costs.
In connection with the delivery of the bonds, the Company's bank caused an
irrevocable direct pay letter of credit to be delivered to the Trustee in the
maximum stated amount of $15.2 million. The purpose of this letter of credit is
to provide collateral for the payment of the principal and interest on the
bonds.
9
<PAGE>
Pine Grove, Inc.
Consolidated Statement of Changes in Stockholder's Equity
Year ended December 31, 1996
3. LONG-TERM DEBT AND CREDIT AGREEMENTS (CONTINUED)
Long-term debt consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Tax-exempt variable rate demand revenue
bonds with $1.5 million of principal
redeemed annually through the year 2005
and interest payable monthly at a variable
rate (3.55% average in 1996) $13,500,000
Debt due to DCTC payable in quarterly
installments through the year 2001,
interest rates ranging from 8.75% to 10.25% 1,836,068
Acquisition notes payable in monthly
installments through the year 1999,
interest rates ranging from 9.2% to prime
rate plus 1.5% (9.75% at December 31, 1996) 675,319
Capitalized equipment lease obligations
with interest rates varying between 7.0%
and 11.2%, payable in varying monthly
installments through the year 1998 218,989
Other debt, payable monthly through the
year 2000, interest rates ranging between
8.0% and 8.5% at December 31, 1996 66,774
---------------
16,297,150
Less current portion and due on demand 14,283,442
---------------
$ 2,013,708
===============
</TABLE>
The aggregate scheduled principal payments on long-term debt outstanding as of
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $14,283,442
1998 871,165
1999 747,112
2000 325,650
2001 69,781
---------------
$16,297,150
===============
</TABLE>
10
<PAGE>
Pine Grove, Inc.
Notes to Consolidated Financial Statements (continued)
3. LONG-TERM DEBT AND CREDIT AGREEMENTS (CONTINUED)
Substantially all of the Company's assets, as well as a pledge of the common
stock of the Company, represent secured collateral for the guarantee of certain
parent company debt. Interest paid on indebtedness, net of capitalized amount,
for the year ended December 31, 1996 was approximately $620,000.
4. ACCRUED LANDFILL CLOSURE
State and federal laws and regulations require that the Company place final
cover on all fully used areas of the landfill and perform certain maintenance
and monitoring functions, which include gas and leachate monitoring and facility
maintenance, at the site for thirty years after final closure. Closure will be
incurred as each section of the landfill is filled, and post-closure costs will
be incurred after the date the landfill stops accepting waste. The Company
accrues closure and post-closure costs (included in costs of sales on the
statement of operations) based on landfill capacity used each year.
At December 31, 1996, approximately 28.4 acres of the landfill have been placed
into service of which 88% has been utilized. The Company has capped 15.9 acres
through December 31, 1996, at a cost of approximately $1.8 million. The
estimated capping costs associated with closing the remaining acreage utilized
through December 31, 1996 is $1.0 million.
Total post-closure costs related to the current permitted area and the area
currently in the permitting process are estimated to be $3.8 million. As of
December 31, 1996, 34% of the landfill's estimated total capacity has been
filled and a corresponding liability of $1.3 million has been recorded.
The Solid Waste Management Act of 1980 requires all landfills operating within
the Commonwealth of Pennsylvania to post closure bonds in amounts determined by
the Pennsylvania Department of Environmental Protection. The Company has met
this requirement for the landfill by providing a $3.4 million letter of credit
as of December 31, 1996.
5. LEASES
The Company leases operating equipment and office space under various
noncancelable lease agreements which expire at various dates through August
2000.
11
<PAGE>
Pine Grove, Inc.
Notes to Consolidated Financial Statements (continued)
5. LEASES (CONTINUED)
Future minimum lease payments for the leases with remaining noncancelable lease
terms in excess of one year at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS LEASES LEASES
---------- --------------------------------
<S> <C> <C>
1997 $113,791 $109,200
1998 121,882 62,500
1999 - 62,500
2000 - 41,700
----------------
Total minimum lease payments 235,673 $275,900
================
Less: amount representing interest 16,684
----------------
Present value of net minimum lease payments $218,989
================
</TABLE>
The net book value of leased equipment at December 31, 1996 was $260,504.
Amortization of capital lease equipment, which is included in depreciation
expense, was $64,862 for the year ended December 31, 1996. Operating lease
rental expense for the year ended December 31, 1996 was $120,357.
6. INCOME TAXES
The results of the Company's operations are included in the consolidated federal
income tax return of DP&L. Inclusion of the Company's operations for the year
ended December 31, 1996 had the effect of decreasing current income tax
liabilities of the consolidated group by approximately $321,000. The Company
reimburses or receives payments for such increase or reductions from other
members of the consolidated group which generate the taxable income (loss). Such
payments are made or received to the extent that the consolidated group is able
to utilize the tax benefits generated.
The Commonwealth of Pennsylvania (PA) has reinstated the net operating loss
(NOL) deduction for taxable years beginning in 1995. NOL's from tax years 1989
through 1994 may be utilized until year 1997 subject to an annual $1 million
maximum deduction. As of December 31, 1996, the Company has PA NOL carryforwards
of $4.8 million of which $1.1 million may be utilized.
12
<PAGE>
Pine Grove, Inc.
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
The components of the income tax benefit for the year ended December 31, 1996
are as follows:
<TABLE>
<S> <C>
Income tax (benefit) expense:
Federal:
Current $(395,085)
Deferred 103,426
State:
Current -
Deferred (29,272)
------------------
Total income tax benefit $(320,931)
==================
</TABLE>
The following is a reconciliation of the difference between income tax benefit
and the amount computed by multiplying income from operations before tax by the
federal statutory rate of 35%:
<TABLE>
<S> <C>
Statutory income tax expense $(412,375)
Increase (decrease) in taxes resulting from:
Prior period income taxes (63,671)
State tax, net of federal income tax 15,416
Amortization of goodwill 103,403
Other, net 36,296
------------------
Income tax benefit $(320,931)
==================
</TABLE>
13
<PAGE>
Pine Grove, Inc.
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
The tax effect of temporary difference which give rise to the Company's deferred
tax asset at December 31, 1996 is as follows:
<TABLE>
<S> <C>
Deferred tax assets:
State net operating losses $ 403,427
Valuation allowance (270,289)
Property basis 283,970
Depreciation 370,866
Reserve for bad debt 41,213
Other 48
------------------
Total deferred tax assets 829,235
------------------
Deferred tax liabilities:
Property basis
Depreciation (669,605)
Closure costs (50,292)
Other (2,501)
------------------
Total deferred tax liabilities (722,398)
------------------
Total deferred taxes, net $ 106,837
==================
</TABLE>
The valuation allowance relates to state NOL's currently projected not to be
utilized. Net income tax refunds for the year ended December 31, 1996 were
approximately $87,000.
7. COMMITMENTS
At December 31, 1996, $2.4 million of certain performance bonds and letters of
credit have been issued on behalf of the Company. These performance bonds and
letters of credit are required by municipalities disposing trash at the landfill
and for municipal hauling contracts, which usually extend for periods of 1 to 5
years. The surety company that has issued the performance bonds and the bank
that has issued the letters of credit are indemnified by the Company against any
losses and expenses.
The Company is involved in various other legal and administrative proceedings
within the normal course of its operations. In the opinion of management, the
ultimate disposition of these matters will not have a material effect on the
Company's financial position or results of operations.
14
<PAGE>
Pine Grove, Inc.
Notes to Consolidated Financial Statements (continued)
8. RELATED PARTY TRANSACTIONS
Selling, general, and administrative and expenses include salaries and related
fringe benefit costs of personnel employed by the Company and engaged on a full-
time basis in the management and operation of the Company as well as similar
costs of personnel employed by DP&L and engaged on a less than full-time basis
to provide services to the Company whose costs are allocated or charged to the
Company. The Company reimburses DP&L for the cost of all services provided by
DP&L, including payroll and related services, for the benefit of the Company.
The Company recorded payroll expense and miscellaneous administrative and
general expenses allocated or charged from DP&L of approximately $450,000 for
the year ended December 31, 1996.
9. CHANGE IN ACCOUNTING ESTIMATE
In January 1996, the Company extended the estimated useful life of certain
property and equipment. In the opinion of management, this change better
reflects the estimated period that these assets will provide economic benefits
to the operations of the Company. The effect of this change in accounting
estimate reduced depreciation expense on these assets by approximately $185,000
for the year ended December 31, 1996.
10. SUBSEQUENT EVENT
On December 1, 1997, all of the outstanding stock of the Company was purchased
by Eastern Environmental Services, Inc. for total consideration of approximately
$46,000,000.
15
<PAGE>
PINE GROVE, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash and cash equivalents $ 3,863,077
Cash restricted for redemption of bonds 777,216
Accounts receivable 2,043,212
Other current assets 342,259
------------
Total current assets 7,025,764
Property and equipment 45,341,598
Accumulated depreciation (28,688,728)
------------
Total property, plant and equipment, net 16,652,870
Intangible assets 11,962,647
Accumulated amortization (6,000,855)
------------
Intangible assets, net 5,961,792
Debt issuance costs, net 390,500
Other assets, net 64,978
------------
Total assets $ 30,095,904
============
</TABLE>
See accompanying notes.
<PAGE>
PINE GROVE, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(continued)
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
Current liabilities:
Current portion of long-term debt $ 364,698
Variable rate demand bonds 12,000,000
Accounts payable 207,398
Accrued interest payable 38,000
Correct portion of accrued landfill closure costs 1,552,831
Accrued liabilities 1,251,732
-----------
Total current liabilities 15,414,659
Deferred income taxes 138,035
Accrued landfill closure and post-closure costs 1,251,637
Long-term debt 358,100
-----------
Total liabilities 1,747,772
-----------
Stockholders' equity:
Common stock $1 par value, 1,000 shares
authorized issued and outstanding 1,000
Paid-in capital 20,469,721
Retained earnings (deficit) (7,537,248)
-----------
12,933,473
-----------
Total liabilities and stockholders' equity $30,095,904
===========
</TABLE>
<PAGE>
PINE GROVE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
Revenues $10,474,133
Cost of revenues 6,318,327
Selling, general, administrative expenses 653,236
Depreciation and amortization 3,810,461
-----------
Operating loss (307,891)
Interest income 256,305
Interest expense (337,748)
Other income 40,238
-----------
Loss before income taxes (349,096)
Income tax benefit 44,684
-----------
Net loss $ (304,412)
===========
</TABLE>
See accompanying notes.
<PAGE>
PINE GROVE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $ (304,412)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 3,490,746
Amortization 319,715
Landfill closure expense 512,966
Deferred income taxes 244,870
Accounts receivable 238,919
Accounts payable (74,236)
Other, net (419,727)
-----------
Net cash provided by operating activities 4,008,841
CASH FLOWS FROM INVESTING ACTIVITIES
Capital additions (2,039,528)
Net decrease in bond proceeds held in trust funds 2,002,200
-----------
Net cash used by investing activities (37,328)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on variable rate demand bonds (1,500,000)
Payments on other long-term debt (238,284)
Payments on long-term debt to parent company (1,836,068)
Funds restricted for future redemption of bonds (378,747)
-----------
Net cash used by financing activities (3,953,099)
-----------
Net increase in cash and cash equivalents 18,414
Cash and cash equivalent at beginning of the year 3,844,663
-----------
Cash and cash equivalent at the end of the period $ 3,863,077
===========
</TABLE>
<PAGE>
PINE GROVE, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Pine Grove, Inc. ("the Company") operates a landfill and provides waste hauling
services in Pennsylvania. The Company is a wholly-owned subsidiary of Delmarva
Capital Technology Company (DCTC), the ultimate parent of which is Delmarva
Power and Light Company (DP&L).
USE OF ESTIMATE
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 allowances
for doubtful accounts.
INTERIM FINANCIAL STATEMENTS
The condensed interim financial statements reflect all adjustments (which
include only normal recurring adjustments), which in the opinion of management,
are necessary to present fairly the financial position at September 30, 1997,
and results of operations for the nine months then ended. The results of
operations for the period ended September 30, 1997, are not necessarily
indicative of the operating results for a full year.
2. SUBSEQUENT EVENT
On December 1, 1997, all of the outstanding stock of the Company was purchased
by Eastern Environmental Services, Inc. for total consideration of approximately
$46 million.
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1997
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1997
The following unaudited pro forma consolidated statements of income for the
year ended June 30, 1997 and the three months ended September 30, 1997 give
effect to (i) the acquisition on August 15, 1997 of all the outstanding stock of
Harford Disposal, Inc. ("Harford") by Eastern Environmental Services, Inc. (the
"Registrant") with immediately thereafter, all of the outstanding stock of
Pappy, Inc. being purchased by Harford for total consideration paid by Eastern
Environmental Services, Inc. of approximately $12,000,000. Harford's only
activity was the acquisition of Pappy, Inc. and therefore Pappy, as the
predecessor company, constitutes the business acquired by the Registrant; (ii)
the acquisition on August 20, 1997 of all the outstanding stock of Soil
Remediation of Philadelphia, Inc. ("SRP") by the Registrant for consideration
consisting of 270,000 unregistered shares of the Registrant's common stock
valued at $15.625 per share. Simultaneously, with the closing of the SRP
transaction, the Registrant and its wholly owned subsidiary, Eastern
Environmental Services, Inc. of Fairless Hill, Inc. ("EESI of Fairless"),
entered into an Agreement (the "Fairless Hills Agreement") dated August 20, 1997
with USA Waste Services, Inc. ("USA Waste"), USA Waste of Fairless Hills, Inc.
("USA Fairless"), Clean Soils of Fairless Hills, Inc. ("Clean Soils Fairless")
to evidence a transaction under which EESI of Fairless will acquire all stock of
Clean Soils Fairless and USA Fairless, two companies under common ownership with
SRP by USA Waste. The closing of the acquisition of the stock of Clean Soils
Fairless and USA Fairless are pending upon satisfaction of certain normal
conditions which the Registrant believes will be resolved; and (iii) the
acquisition of Pine Grove, Inc. ("Pine Grove") pursuant to the terms of a Stock
Purchase Agreement for consideration of $46 million including the assumption of
approximately $12 million of debt.
The following unaudited pro forma consolidated Statement of Income for the
year ended June 30, 1997 and the three months ended September 30, 1997 gives
effect to the aforementioned transactions as if the transactions had occurred on
July 1, 1996. The following unaudited pro forma financial data may not be
indicative of what the results of operations or financial position of Eastern
Environmental Services, Inc. would have been, had the transactions to which such
data gives effect had been completed on the date assumed, nor are such data
necessarily indicative of the results of operations or financial position of
Eastern Environmental Services, Inc. that may exist in the future. The following
unaudited pro forma information should be read in conjunction with the notes
thereto, the other pro forma financial statements and notes thereto, and the
consolidated financial statements and notes of Eastern Environmental Services,
Inc. as of June 30, 1997 and for each of the three years in the period then
ended and the historical financial statements of Pine Grove, Inc. appearing
elsewhere in this filing.
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR
THE YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Eastern Pro
Environmental Pro Forma Forma
Services, Inc. Pappy, Inc. SRP Clean Soils Pine Grove Adjustments Consolidated
-------------- ----------- --- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $79,625,420 $2,803,860 $ 3,649,026 $1,513,224 $14,559,569 $ -- $102,151,009
Cost of revenues 53,130,199 910,970 6,944,870 1,755,047 9,804,650 411 (1) 72,546,147
Selling, general and
administrative expenses 12,778,548 430,787 704,137 165,768 1,274,391 (86,918)(2) 15,266,713
Depreciation and 4,742,370 107,914 975,224 299,068 4,727,837 745,434 (1) 8,033,682
amortization (1,256,280)
(2,307,885)(5)
Merger costs 3,336,792 -- -- -- -- -- 3,336,792
----------- ---------- ----------- ---------- ----------- ----------- ---------
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 5,637,511 1,354,189 (4,975,205) (706,659) (1,247,309) 2,905,238 2,967,765
Interest (expense) income, (2,662,729) 13,717 -- -- (151,454) 9,750 (3) (4,766,716)
net (1,976,000)(6)
Other income (expense), net 508,778 552 -- -- 58,372 -- 562,702
----------- ---------- ----------- ---------- ----------- ----------- --------
Income (loss) before 3,483,560 1,368,458 (4,975,205) (706,659) (1,340,391) 938,988 (1,231,249)
income taxes
Income tax (expense) (1,341,205) -- 1,990,082 282,664 507,532 (2,124,328)(7) (685,255)
benefit ----------- ---------- ----------- ---------- ----------- ----------- -----------
Net income (loss) $ 2,142,355 $1,368,458 $(2,985,123) $( 423,995) $ (832,859) $(1,195,340) $(1,916,504)
=========== ========== =========== ========== =========== =========== ===========
Net income (loss) per share $(.14)
Weighted average number of
shares outstanding 14,034,994(8)
===========
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF
INCOME FOR THE YEAR ENDED JUNE 30, 1997
(1) 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.
(2) 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.
(3) To eliminate interest expense of $9,750 related to debt of Pappy, Inc. not
acquired by the Registrant.
(4) 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.
(5) 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.
(6) To record additional interest expense of $1,976,000 from borrowings (at the
Company's average borrowing rate of 8.5% under the Company's revolving
credit facility) of approximately $27 million was incurred to consummate
the acquisition of Pine Grove, net of historical interest expense of
$318,000, excluding interest or debt assumed.
(7) The Company's pro forma effective tax provision is after consideration of
state income taxes and federal and state income taxes related to the
termination of Sub "S" status of certain companies acquired accounted for
as pooling of interests.
(8) For the purposes of determining pro forma earnings per share, the issuance
of shares of Common Stock as consideration for the purchase of assets and
the shares issued relating to the merger, respectively, were considered to
have been outstanding from July 1, 1996.
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Eastern Pro
Environmental Pine Pro Forma Forma
Services, Inc. Pappy, Inc. Grove Adjustments Consolidated
-------------- ----------- ----- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $34,537,908 $197,131 $4,006,830 $ -- $38,741,869
Cost of revenues 21,921,935 92,161 2,282,381 -- 24,296,477
Selling, general and 5,297,123 86,012 325,689 (10,775) (2) 5,698,049
administrative expenses
Depreciation and amortization 2,280,676 11,300 1,407,759 140,158 (1) 2,975,712
(864,181) (4)
Merger costs 500,000 -- -- -- 500,000
----------- -------- ---------- ---------- ----------
Operating income (loss) 4,538,174 7,658 (8,999) 734,798 5,271,631
Interest (expense) income, net (660,842) 1,109 (4,672) 1,197 (3) (1,089,193)
(425,985) (5)
Other income, net 235,840 600 5,250 -- 241,690
----------- -------- ---------- ---------- ----------
Income (loss) before income taxes 4,113,172 9,367 (8,421) 310,010 4,424,128
Income tax (expense) benefit (1,781,000) -- (35,763) (29,237) (6) (1,846,000)
----------- -------- ---------- ---------- ----------
Net income (loss) $ 2,332,172 $ 9,367 $ (44,184) $ 280,773 $2,578,128
=========== ======== ========== ========== ==========
Net income (loss) per share $ .12
==========
Weighted average number of
shares outstanding 21,843,487 (7)
==========
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF
INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(1) 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.
(2) 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.
(3) To eliminate interest expense of $1,197 related to debt of Pappy, Inc.
not acquired by the Registrant.
(4) 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.
(5) To record additional interest expense of $425,985 from borrowings
(at the Company's average borrowing rate of 7.25% under the Company's
revolving credit facility), of approximately $27 million was incurred to
consummate the acquisition of Pine Grove, net of historical interest
expense of $63,390, excluding interest expense on debt assumed.
(6) 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.
(7) For the purposes of determining pro forma earnings per share, the issuance
of shares of Common Stock as consideration for the purchase of assets and
the shares issued relating to the merger, respectively, were considered to
have been outstanding from July 1, 1997.
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
The following unaudited pro forma consolidated balance sheet at September 30,
1997 gives effect to the acquisition of Pine Grove, Inc. ("Pine Grove") pursuant
to the terms of a Stock Purchase Agreement dated October 17, 1997 as amended on
November 26, 1997. The total consideration for the acquisition of Pine Grove
included $34.3 million in cash and the assumption of $11.7 million of debt. The
above transactions are presented as if they had occurred on September 30, 1997.
The following unaudited pro forma financial data may not be indicative of what
the financial condition of EESI would have been, had the transactions to which
such data gives effect been completed on the date assumed, nor are such data
necessarily indicative of the financial condition of EESI that may exist in the
future. The following unaudited pro forma information should be read in
conjunction with the notes thereto, the other pro forma financial statements and
notes thereto, and the historical financial statements and notes of Eastern
Environmental Services, Inc. as filed in the Company's annual report filed on
Form 10-K for the three years ended June 30, 1997 and the historical financial
statements of Pine Grove, Inc. appearing elsewhere in this filing.
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Eastern
Environmental Pine Pro Forma Pro Forma
Services, Inc. Grove Adjustments As Adjusted
--------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents.............. $ 16,833,766 $ 3 ,863,077 $(7,300,000)(2) $ 10,279,136
(3,117,707)(1)
Cash restricted for redemption
of bonds............................. -- 777,216 (777,216)(1) --
Accounts receivable, net of
allowance............................ 19,187,277 2,043,212 (651,799)(1) 20,578,690
Deferred income taxes.................. 4,099,014 -- -- 4,099,014
Prepaid expenses and other current
assets............................... 2,831,378 342,259 (175,824)(1) 2,997,813
------------- ------------ ----------- ------------
Total current assets................. 42,951,435 7,025,764 (12,022,546) 37,954,653
Net property, plant & equipment........... 90,612,139 16,652,870 18,389,327 (1) 125,654,336
Excess cost over fair market value of
net assets acquired.................... 60,671,451 -- 13,497,009 (1) 74,168,460
Intangible assets, net.................... 13,816,644 5,961,792 (5,895,465)(1) 13,882,971
Notes receivable from stockholders /
officers............................... 432,902 -- -- 432,902
Other assets.............................. 2,107,932 455,478 (65,011)(1) 2,498,399
------------- ------------ ----------- -------------
Total assets......................... $ 210,592,503 $ 30,095,904 $13,903,314 $ 254,591,721
============= ============ =========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities on long-term
debt................................. $ 1,016,469 $ 364,698 $ (269,657)(1) $ 1,111,510
Variable rate demand bonds............. -- 12,000,000 (12,000,000)(1) --
Current maturities of obligations
under capital leases................. 1,143,329 -- -- 1,143,329
Accounts payable.......................... 9,282,029 207,398 398,742 (1) 9,888,169
Accrued expenses and other current
liabilities............................ 10,597,623 1,289,732 930,513 (1) 12,817,868
Deferred revenue.......................... 2,733,977 -- 62,792 (1) 2,796,796
Income taxes payable...................... 2,040,623 -- -- 2,040,623
Current portion of accrued landfill
closure and other environmental
costs.................................. 2,028,000 1,552,831 (740,831)(1) 2,840,000
------------- ------------ ----------- -------------
Total current liabilities............ 28,842,050 15,414,659 (11,618,441) 32,638,268
------------- ------------ ----------- -------------
Deferred income taxes..................... 6,249,590 138,035 (138,035)(1) 6,249,590
11,341,900 (1)
Long-term debt............................ 8,791,482 358,100 27,000,000 (2) 47,491,482
Capital lease obligations--
long-term.............................. 1,378,815 -- - 1,378,815
Accrued landfill closure and other
environmental costs.................... 7,415,162 1,251,637 251,363 (1) 8,918,162
Other long-term liabilities............... 13,917,801 -- -- 13,917,801
Stockholders' equity
Common stock........................... 220,314 1,000 (1,000)(1) 220,314
Additional paid-in capital............. 140,459,379 20,469,721 (20,469,721)(1) 140,459,379
Retained earnings (deficit)............ 3,394,169 (7,537,248) 7,537,248 (1) 3,394,169
Less treasury stock at cost--
39,100 common shares................. (76,259) -- -- (76,259)
------------- ------------ ----------- -------------
Total stockholders' equity........... 143,997,603 12,933,473 (12,933,473) 143,997,603
------------- ------------ ----------- -------------
Total liabilities and stockholders'
equity............................ $210,592,503 $ 30,095,904 $13,903,314 $ 254,591,721
=============== ============ =========== =============
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(1) On December 1, 1997, all of the outstanding stock of Pine Grove, Inc.
("Pine Grove") was acquired by Eastern Environmental Services, Inc. for
total consideration paid by Eastern Environmental Services, Inc. of
approximately $46,000,000. The acquisition has been accounted for under the
purchase method. Pursuant to the terms of the Stock Purchase Agreement,
certain property, equipment, intangible assets, other assets and working
capital were acquired and certain liabilities were assumed for
consideration of $ 34.3 million in cash and the assumption of approximately
$11.7 million in debt. With respect to the closure and post-closure
liabilities, the Company recorded 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 preliminary allocation of the purchase price is as
follows:
Property, equipment and landfill site $ 35,042,197
Current assets acquired 2,303,218
Other assets acquired 390,467
Excess cost over fair market value of net
assets acquired 13,497,009
Other identifiable intangible assets 66,327
Other liabilities (2,889,177)
Landfill closure, post-closure, and other
environmental costs (2,315,000)
Debt and capitalized lease obligations (11,795,041)
------------
$ 34,300,000
============
(2) To record borrowings of $27 million under the Company's revolving credit
facility and the utilization of $7,300,000 of working capital to effect the
acquisition of Pine Grove, Inc.
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ---- -----------
23.1 Consent of Ernst & Young LLP
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement of
Eastern Environmental Services, Inc.:
(i) on Form S-8 (Registration No.33-25155, filed on October 24, 1988),
(ii) on Form S-8 (Post-Effective Amendment No.2 to Registration No.
33-21251, filed on May 4, 1990),
(iii) on Form S-8 (Registration No.33-37374, filed on October 18, 1990),
(iv) on Form S-8 (Registration No.33-45250, filed on January 27, 1992),
(v) on Form S-3 (Registration No.333-00283, filed on February 14, 1996),
(vi) on Form S-8 (Post-Effective Amendment No.1 to Registration Statement
No.333-28627, filed on June 20, 1997), and
(vii) on Form S-3 (Post-Effective Amendment No.2 to Registration Statement
No.333-32361 filed October 10, 1997)
of our report dated December 12, 1997, with respect to the consolidated
financial statements of Pine Grove, Inc. included in Eastern Environmental
Services, Inc.'s Current Report on Form 8-K dated October 17, 1997 (as amended
December 1, 1997 and February 17, 1998 on Form 8-K/A), filed with the Securities
and Exchange Commission.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 17, 1998
