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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM JULY 1, 1997 TO DECEMBER 31, 1997
COMMISSION FILE NO. 0-16102
EASTERN ENVIRONMENTAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 59-2840783
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1000 CRAWFORD PLACE, SUITE 400, MT. LAUREL, NJ 08054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 235-6009
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicated by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the last sale price of the Registrant's Common Stock at the
close of business on June 23, 1998, was approximately $925,175,940 (Reference is
made to page 25 herein for a statement of assumptions upon which this
calculation is based.)
The number of shares of Common Stock, par value $.01 per share, of the
Registrant outstanding as of June 23, 1998 was 33,837,975.
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PART I
On April 1, 1998, the Company adopted a change in its fiscal year from June
30 to December 31 in order to facilitate greater comparability with its peer
group by the financial community. Consequently, the registrant is filing this
transition report on Form 10-K for the six-month transition period beginning
July 1, 1997 and ending December 31, 1997 in accordance with the rules of the
Securities Exchange Act of 1934, as amended. The six-month transition period of
July 1, 1997 through December 31, 1997 ("transition period") precedes the start
of the new fiscal year. Financial information and other data concerning the
Company and its operations have been filed with the Securities and Exchange
Commission since December 31, 1997, including without limitation its Form 10-Q
for the Quarter ended March 31, 1998. The Company's financial performance during
the transition period is not necessarily indicative of future performance.
ITEM 1. 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 June 25, 1998, the Company
acquired 46 solid waste management businesses, and thereby entered new markets
in Florida, Georgia, Illinois, Maryland, New Jersey, New York, and Pennsylvania.
The businesses acquired operated 39 solid waste collection and transportation
operations, seven landfills, five solid waste transfer and processing
facilities, and two special waste services operations. Largely as a result of
these acquisitions, during 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 results of operations increased from $19,000 to $6.5
million. 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. As of June 23, 1998, the Company provided solid waste collection
services to approximately 41,000 commercial customers and approximately 375,000
residential customers.
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 industry by (i) identifying and penetrating new markets and expanding
its operations in its existing markets through tuck-in acquisitions that are
combined with existing operations, (ii) increasing profitability by integrating
its operations and achieving economies of scale, and (iii) 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.
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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 as the purchase of
equipment, vehicles, parts and tools, vehicle and equipment maintenance, data
processing, financing arrangements, employee benefits, insurance and bonding,
and communications. Through the integration of certain of its solid waste
collection, transportation, and disposal operations, the Company believes that
it will be able to capture profits that would otherwise be paid to third parties
as tipping and other fees.
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 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.
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 cash on hand and funds provided
by operations, lines of credit available under its credit facility, and the
proceeds of possible future equity and debt financing.
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COMPLETED ACQUISITIONS. Since July 1, 1996, the Company has acquired 50
solid waste management businesses. The businesses acquired operated 43 solid
waste collection and transportation operations, seven landfills, five 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 1996-- JUNE 30, 1998
<TABLE>
<CAPTION>
DATE ACQUIRED MARKET
COMPANY (ACCOUNTING METHOD) (LANDFILL SITE) PRINCIPAL BUSINESS
- ------- ------------------- --------------- ------------------
<S> <C> <C> <C>
Steel City Environmental June 30, 1998 Pittsburgh, Pennsylvania Solid waste collection
Services, Inc. (Purchase)
Summit Transport June 30, 1998 New York, New Jersey Special waste collection
Group, Inc. (Pooling) and Pennsylvania and Transportation
Ulster County Sanitation, Inc. June 26, 1998 Goshen, New York Solid waste collection
(Pooling of interests)
All Waste Systems, Inc. June 26, 1998 Kingston, New York Solid waste collection
(Pooling of interests)
Vonger Sanitation June 26, 1998 Pittsburgh, Pennsylvania Solid waste collection
Strawser Disposal Services, Inc. June 25, 1998 Northcentral Pennsylvania Solid waste Collection
(Pooling of Interests)
Peerless Waste Industries, Inc. & June 16, 1998 Southeastern Georgia Landfill
Chesser Island Road Landfill, Inc. (Pooling of Interests) (municipal solid waste)
Manfredi Brothers, Inc., V&S Carting June 1, 1998 Brooklyn, New York Solid waste collection
Corp., and J. Marmo Carting Corp. (Purchase)
Fidati Refuse Removal, Inc. June 1, 1998 Northeastern Pennsylvania Solid waste collection
(Pooling of Interests)
Kimmins Corp., Transcor Waste Services, May 29, 1998 Jacksonville Florida Solid waste collection
Inc., and Kimmins Recycling Corp. (Purchase) and transfer station
Holgate Brothers, Inc. May 29, 1998 Northeastern Pennsylvania Solid waste collection
(Pooling of Interests)
Sunrise Sanitation, Inc. May 28, 1998 Southern Florida Solid waste collection
(Purchase)
Middle Island Enterprises, Inc. May 14, 1998 West Virginia Solid waste collection
(Purchase)
Smith Sanitation April 30, 1998 Northeastern Pennsylvania Solid waste collection
(Purchase)
DeCuollo Disposal Service April 30, 1998 Northern New Jersey Solid waste collection
(Purchase)
United Container & Recycling, Inc. April 1, 1998 Southern New Jersey Solid waste collection
(Purchase)
Richard Peterson & Son April 1, 1998 Southern New Jersey Solid waste collection
(Purchase)
Ecology Systems, Inc., et al March 31, 1998 New York, New Jersey, Solid waste collection and
(Pooling of Interests) Pennsylvania transportation
Frank Stamato & Company, et al. March 31, 1998 Northern New Jersey Solid waste collection
(Pooling of Interests)
Bluegrass Containment, Inc. March 9, 1998 Central Kentucky Landfill
(Pooling of Interests) (Hartford, KY) (construction and
demolition)
Red Ball Sanitation Corp. February 25, 1998 Brooklyn, New York Solid waste collection
(Purchase)
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Kelly Run Sanitation, Inc. February 12, 1998 Western Pennsylvania Landfill
(Purchase) (Pittsburgh, PA) (municipal solid waste)
Minchoff Sanitation January 16, 1998 Central Pennsylvania Solid waste collection
(Purchase)
J. Scerbo Company & SRS Recycling January 7, 1998 Northern New Jersey Solid waste collection
(Purchase)
Golden Gate Carting., Haulaway, Inc. January 7, 1998 Northern New Jersey Solid waste collection
and Recycling Center of N.J. (Purchase)
Lake Region Sanitation January 1, 1998 Northeastern Pennsylvania Solid waste collection
(Purchase)
Berger Waste Management, Inc. December 31, 1997 Eastcentral Illinois Solid waste collection
(Purchase)
Hamm's Sanitation, Inc., et al. December 1, 1997 Northeastern New Jersey Solid waste collection
(Pooling of Interests)
Pine Grove, Inc. December 1, 1997 Central Pennsylvania Solid waste collection,
(Purchase) (Pine Grove, PA) transfer station, and landfill
(municipal solid waste)
Schmucker's Disposal Services September 22, 1997 Southeastern, Illinois Solid waste collection
(Purchase)
Soil Remediation of Philadelphia, Inc. August 20, 1997 Eastern Pennsylvania Special waste
(Purchase)
Pappy, Inc. August 15, 1997 Northeastern Maryland Landfill
(Purchase) (Joppa, MD) (construction & demolition)
Waste X Services, Inc. August 14, 1997 Southern Florida Solid waste collection
(Pooling of Interests)
Reuben Smith Rubbish July 9, 1997 Southern New Jersey Solid waste collection
Removal Service, Inc. (Purchase)
A-1 Carting Corporation May 27, 1997 Southern Florida Solid waste collection
(Purchase)
Ameri Carting, Inc. May 27, 1997 Southern Florida Solid waste collection
(Purchase)
Waste Services, Inc., et al. May 12, 1997 Brooklyn, New York Solid waste collection
(Purchase)
C & R Waste Removal, Inc. May 8, 1997 Southern Florida Solid waste collection
(Purchase)
Combined Waste Services, Inc. May 8, 1997 Southern Florida Solid waste collection
(Purchase)
</TABLE>
5
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<TABLE>
<S> <C> <C> <C>
Environmental Waste Systems Inc. May 8, 1997 Southern Florida Solid waste collection
(Purchase)
Environmental Waste Systems of Palm May 8, 1997 Southern Florida Solid waste collection
Beach, Inc. (Purchase)
Big T Disposal, Inc. April 11, 1997 Southeastern Illinois Solid waste collection and
(Purchase) transfer station
Apex Waste Services, Inc. March 31, 1997 Scranton, Pennsylvania Solid waste collection;
(Pooling of Interests) transfer station and processing
Donno Company, Inc., et al. January 31, 1997 Long Island, New York Solid waste collection and
(Pooling of Interests) transfer station
R&A Bender, Inc., et al. December 10, 1996 Southcentral Pennsylvania Solid waste collection and
(Purchase) (Chambersburg, PA) landfill (municipal solid
waste)
Bayside of Marion, Inc. November 5, 1996 Central Florida Landfill
(Purchase) (Ocala, FL) (construction & demolition)
Super Kwik, Inc., et al. September 27, 1996 Southern New Jersey Solid waste collection
(Pooling of Interests)
Olney Sanitary Systems, Inc. September 17, 1996 Southeastern Illinois Solid waste collection
(Purchase)
Eastern Waste of Philadelphia, Inc., August 1, 1996 Philadelphia, Pennsylvania Solid waste collection
et al. (Purchase)
K Hydraulic Truck Services, Inc. July 27, 1996 Philadelphia, Pennsylvania Solid waste transportation
(Purchase)
Allied Waste Services, Inc., et al. July 2, 1996 New York, New Jersey, Arranges for the transportation
(Purchase) Pennsylvania, California of construction and demolition
waste and disposal of soil and
special waste products
</TABLE>
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 gave 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. In May 1998, the DEC 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 is seeking an injunction.
6
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prohibiting the DEC from interfering with the transfer station's construction
operation. It is anticipated that the court will issue its decision on the
preliminary injunction in July 1998. No assurance can be given that 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. 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.
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.
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 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.
In May 1997, the Company also entered into definitive agreements to acquire
Golden Gate Carting Co., Inc. ("Golden Gate") and Coney Island Rubbish Removal,
Inc. ("Coney Island") solid waste collection companies located in Brooklyn, New
York, for approximately $4.4 million (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.
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SERVICES
The Company's services include solid waste collection, transportation,
disposal, and certain other waste management services.
WASTE COLLECTION AND TRANSPORTATION. At June 23, 1998, the Company provided
solid waste collection services to approximately 41,000 commercial customers and
approximately 375,000 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.
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 six months ended December
31, 1997 approximately 65% of the solid waste disposed of at the Company's
transfer stations was delivered by the Company and approximately 35% 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 June 23, 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.
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Waste collection and transportation services generated revenues of $92.1
million for the six months ended December 31, 1997, representing approximately
86% of the Company's total revenue for that period.
WASTE DISPOSAL. The Company owns eleven non-hazardous solid waste landfills,
ten 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:
<TABLE>
<CAPTION>
COMPANY LANDFILLS
APPROXIMATE
UNUSED
TOTAL TOTAL PERMITTED PERMITTED APPROXIMATE
LOCATION ACRES DISPOSAL ACRES CAPACITY(1) LIFE IN 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
Folkston, Georgia.................. 523 14 0.8 million 3
</TABLE>
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(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 of waste disposed and type
of waste disposal.
(3) The Somerset, Kentucky landfill received its final state construction permit
on October 14, 1996 (reissued February 26, 1997) and construction began in
May of 1998. The landfill is expected to be operational in the fall of 1998.
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Chambersburg, Pennsylvania Landfill. Purchased in December 1996, this
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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 "- Government Regulation -
Permits and Licenses - Chambersburg, Pennsylvania Landfill" with respect to
possible limitations on permitted capacity.
Pittsburgh, Pennsylvania Landfill. Purchased in February 1998, 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.
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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 "- Government Regulation - Permits
and Licenses - Somerset, Kentucky Landfill" with respect to possible limitations
on permitted capacity.
Hartford, Kentucky Landfill. Purchased in March 1998, this landfill is
----------------------------
located in Ohio County in western Kentucky and currently accepts an average of
1,000 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 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.
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 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.
Folkston, Georgia Landfill. Purchased in June 1998, this landfill is located
---------------------------
in Charlton County, Georgia in southeastern Georgia and currently accepts
approximately 300 tons a day of municipal solid waste, construction and
demolition debris, non-hazardous industrial waste, shredded tires, non-
infectious waste, and petroleum contaminated soil from anywhere within the
continental United States.
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Waste disposal services generated revenues of $9.0 million for the six
months ended December 31, 1997 representing approximately 8% of the Company's
total revenue for that period.
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
$5.8 million for the six months ended December 31, 1997, representing
approximately 6% of the Company's total revenue for that period. Revenues from
other waste management services will fluctuate based on the demand for such
services.
OPERATIONS MANAGEMENT
The Company's financial, budgeting, and purchasing functions are centrally
managed. 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.
As of June 23, 1998, the Company had a total of 26 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 six months ended December
31, 1997. The Company does not believe that the loss of any single consumer
would have a material adverse effect on the Company's business or results of
operations.
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
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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 June 23, 1998 the Company provided residential collection services under
146 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 six months ended
December 31, 1997, 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 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.
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.
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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.
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
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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 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.
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.
The federal statutes described above contain provisions authorizing, under
certain circumstances, the institution of lawsuits by private citizens.
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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.
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.
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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 1998, the South Carolina Department of Health and Environmental Control
adopted new regulations governing industrial waste landfills. These regulations
are to become effective August 1998. These regulations impose additional
operating, reporting, record-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
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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.
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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.
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.
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 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
18
<PAGE>
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 June 23, 1998, the Company had outstanding $19.4 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.
19
<PAGE>
EMPLOYEES
At June 23, 1998, the Company had approximately 1,540 full-time employees, of
which approximately 1,260 were employed in collection, transfer and disposal
operations, 190 in clerical, administrative, and sales positions and 90 in
management. Approximately 510 of the Company's employees at eight operating
locations are covered by collective bargaining agreements. Management has not
experienced a work stoppage and considers its employee relations to be good.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Report contains certain statements that are "Forward Looking Statements"
within the meaning of 21E of the Securities Exchange Act of 1934, as amended
(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 "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in this Report. 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 "Other Factors Influencing Future Results," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" in this Report.
OTHER FACTORS INFLUENCING FUTURE RESULTS
RISKS ASSOCIATED WITH COMPLETING PENDING ACQUISITIONS. The Company has
entered into definitive agreements to acquire additional waste management
businesses, the completion of which are subject to closing conditions, including
due diligence and the requirements of obtaining certain governmental and other
third party consents. No assurances 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.
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.
20
<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 June 23, 1998 contributed approximately $102 million
or 95% of the Company's revenues for the six months ended December 31, 1997 and
approximately $254 million or 93% of the Company's assets at December 31,
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 of final
closure of the currently permitted and operating areas at the Company's
landfills to be approximately $22.9 million for final closure of its landfills,
of which $4.7 million had been accrued at December 31, 1997. 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 $14.4 million. At December 31,
1997, the Company had accrued $3.6 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.
ABILITY TO MANAGE GROWTH. The Company's strategy of growing primarily through
acquisitions has placed, and is expected to continue to place, significant
burden on the Company's management and on its operational and other resources.
The Company will need to continue 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 will be the attractiveness of the
Company's Common Stock as an investment to potential acquisition candidates.
Such attractiveness may, in large part, be dependent upon the market price and
capital appreciation prospects of the Common Stock compared to the equity
securities of the Company's competitors. Many of the Company's competitors for
acquisitions are larger, more established companies with significantly greater
capital resources than the Company and whose equity securities may be more
attractive than the Common Stock. To the extent the Common Stock is less
attractive to acquisition candidates, the Company's acquisition program may be
adversely affected.
21
<PAGE>
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 operating methods and strategies of
these separate businesses. The future growth and profitability of the Company
will be substantially dependent upon its ability to operate recently acquired
companies, as well as additional businesses that may be acquired in the future,
and integrate them in the Company's operations. The Company's strategy is to
achieve economies of scale and operating efficiencies through increases in its
size resulting from acquisitions. There can be no assurance that the Company's
efforts to integrate acquired operations will be effective or that expected
efficiencies and economies of scale will be realized. The failure to achieve any
of these results could have a material adverse effect on the Company's business
and results of operations.
POTENTIAL LIABILITIES ASSOCIATED WITH ACQUISITIONS. The businesses acquired
by the Company may have liabilities that the Company does not discover or may be
unable to discover during its pre-acquisition investigations, including
liabilities arising from environmental contamination or non-compliance by prior
owners with environmental laws or regulatory requirements, and for which the
Company, as a successor owner or operator, may be responsible. Certain
environmental liabilities, even if expressly not assumed by the Company, may
nonetheless be imposed on the Company under certain legal theories of successor
liability, including 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 addtional 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 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.
22
<PAGE>
EXTENSIVE PERMITTING AND LICENSING REQUIREMENTS. The Company is required to
obtain and maintain in effect various federal, state and local permits and
licenses in connection with its solid waste collection and transportation
operations. The Company is also required to obtain and maintain in effect
various facility permits and other governmental approvals, including those
related to 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 ENVIRONMENTAL LIABILITY. 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, 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.
23
<PAGE>
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.
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. The
Company anticipates that it will expend approximately $100,000 through December
31, 1998 in order to become 2000 compliant. There can be no assurance however,
that the Company will not incur additional expenses or experience business
disruption as a result of system problems associated with the century change.
ITEM 2. PROPERTIES
The principal fixed assets used by the Company are its landfills which are
described under "Item 1. Business--Services--Waste Disposal." The eleven
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 June 23, 1998, the Company owned or leased approximately 1,330 items of
equipment, including waste collection vehicles and related support vehicles, as
well as bulldozers, compactors, earth movers, and related heavy equipment and
vehicles used in landfill operations. At June 23, 1998, the Company also had
approximately 46,000 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.
ITEM 3. LEGAL PROCEEDINGS
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 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 claims to be
asserted, the Company would vigorously assert all available defenses and
believes that its liability, if any, would either be covered by insurance or,
under applicable law, be the responsibility of the carrier because of its
failure to accept settlement. However, no assurances can be given that insurance
proceeds would cover the entire amount of the claim or that the Company would
prevail in any action against the carrier. Accordingly, there can be no
assurance that the Company's ultimate financial obligations related to this
matter will not have a material adverse affect on the Company's business and
results of operations.
The Company is not currently involved in any material litigation, including
material litigation arising from federal, state or local provisions that have
been enacted for the purpose of protecting the environment. The Company is
routinely involved in certain legal and administrative proceedings. Companies in
the solid waste management business are frequently subject to judicial and
administrative proceedings involving federal, state or local agencies or 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 violations or alleged
24
<PAGE>
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. All such
proceedings arise in the ordinary course of business and the Company believes
that although the outcome of such proceedings cannot be predicted with
certainty, the cost of settlement or judgments arising from such proceedings
will not have a material adverse effect on the Company's business or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security-holders, through the
solicitation of proxies or otherwise, during the quarter ending December 31,
1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET PRICE AND DIVIDENDS OF THE REGISTRANT'S COMMON EQUITY
The Company's Common Stock is traded in the over-the-counter market and quoted
on the Nasdaq National Market under the trading symbol "EESI". The common stock
prices reflect inter-dealer quotations, do not include retail markups, markdowns
or commissions and do not necessarily represent actual transactions.
The following table sets forth, for the fiscal quarters indicated, the high
and low sale prices per share for the Company's Common Stock, as reported by
Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal 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
Fiscal 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
Transition 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
</TABLE>
The closing price for the Common Stock on June 23, 1998 was $31.5625. For
purposes of calculating the aggregate market value of the shares of Common Stock
of the Company held by non-affiliates, as shown on the cover page of this
report, it has been assumed that all the outstanding shares were held by
nonaffiliates except for the shares held by directors and executive officers of
the Company and stockholders owning 10% or more of the outstanding shares.
However, this should not be deemed to constitute an admission that all such
persons are, in fact, affiliates of the Company, or that there are not other
persons who may be deemed to be affiliates of the Company.
As of June 23, 1998, the Company had 316 holders of record and
approximately 4,485 beneficial owners of its Common Stock.
25
<PAGE>
The Company does not anticipate paying any cash dividends in the
foreseeable future and intends to retain all working capital and earnings, if
any, for use in the Company's operations and in the expansion of its business.
Any future determination with respect to the payment of dividends will be at the
discretion of the Board of Directors and will depend upon, among other things,
the Company's results of operations, financial condition and capital
requirements, the terms of any then existing indebtedness, general business
conditions, and such other factors as the Board of Directors deems relevant.
The Company's credit facility prohibits the payment of cash dividends without
prior bank approval.
(b) RECENT SALES OF UNREGISTERED SECURITIES.
The information related to this section was previously provided in the
Company's Form 10-Q's dated September 30, 1997 and December 31, 1997.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated statement of operations,
balance sheet and other operating data of the Company as of the dates and for
the periods indicated. The financial information has been derived from the
Company's audited consolidated financial statements. The selected consolidated
financial data below should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto at December 31, 1997, and
June 30, 1997 and 1996, and for the six month period ended December 31, 1997 and
for each of the three years in the period ended June 30, 1997, and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED JUNE 30, (1)
---------------- ---------------------------------------------------------------------
1997 1997 1996 1995 1994 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................ $ 106,870 $ 145,274 $ 99,988 $ 91,245 $ 72,900 $ 8,684
Cost of revenues .................... 73,323 106,109 80,240 68,487 54,734 4,049
Selling, general and
administrative expenses .......... 13,377 19,501 16,003 13,456 11,329 4,907
Depreciation and amortization......... 6,435 7,202 5,339 5,370 4,227 1,809
Merger costs ........................ 2,725 3,337 -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------
Operating income (loss) ............. 11,010 9,125 (1,594) 3,932 2,610 (2,081)
Interest expense, net ............... (1,279) (3,164) (1,287) (1,104) (603) (229)
Other income (expense) .............. 256 595 145 172 725 123
----------- ----------- ----------- ----------- ----------- ----------
Income (loss) from
continuing operations
before income taxes ................ 9,987 6,556 (2,736) 3,000 2,732 (2,187)
Income tax expense (benefit) ........ 3,518 1,879 96 262 (103) (715)
----------- ----------- ----------- ----------- ----------- ----------
Net income (loss) from
continuing operations .............. $ 6,469 $ 4,677 $ (2,832) $ 2,738 $ 2,835 $ (1,472)
=========== =========== =========== =========== =========== ==========
Basic earnings (loss) per share
from continuing operations ......... $ .28 $ .29 $ (.25) $ .27 $ .28 $ (.34)
=========== =========== =========== =========== =========== ==========
Weighted average number of
shares outstanding ................. 23,421,362 16,220,259 11,473,345 10,299,624 10,291,597 4,392,022
=========== =========== =========== =========== =========== ==========
Diluted earnings (loss) per share
from continuing operations ......... $ .26 $ .27 $ (.25) $ .26 $ .27 $ (.34)
=========== =========== =========== =========== =========== ==========
Weighted average number of
shares outstanding ................. 24,968,299 17,183,952 11,473,345 10,392,232 10,462,898 4,392,022
=========== =========== =========== =========== =========== ==========
OTHER OPERATING DATA:
EBITDA /(2)/.......................... $ 17,445 $ 16,327 $ 3,745 $ 9,302 $ 6,837 $ (272)
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, /(1)/
------------ ------------------------------------------------------
1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........... $ 11,058 $ (461) $(1,592) $ 1,220 $ 2,314 $ 2,199
Total assets........................ $274,639 $183,183 $49,161 $42,400 $36,048 $16,792
Long-term debt and capitalized
leases, less current portion....... $ 57,062 $ 66,914 $13,196 $ 7,627 $ 5,593 $ 1,994
Total liabilities................... $119,700 $123,339 $32,246 $22,696 $19,038 $ 6,988
Total stockholders' equity.......... $154,939 $ 59,844 $16,915 $19,695 $17,010 $ 9,804
</TABLE>
- -------------
SELECTED FINANCIAL DATA FOOTNOTES
(1) Subsequent to June 30, 1996, the Company acquired Super Kwik, Inc. and its
affiliates ("Super Kwik") and Donno Company, Inc. and its affiliates
("Donno") and subsequent to June 30, 1997, the Company acquired Hamm's
Sanitation, Inc. and H.S.S., Inc. ("Hamm's"), and subsequent to December 31,
1997, the Company acquired Bluegrass Containment, Inc. ("Bluegrass"), Frank
Stamato & Company and its affiliates ("Stamato"), and Ecology Systems, Inc.
and its affiliates ("Ecology") 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. June 30, 1993 and the
year then ended included above has not been restated to include these
acquisitions.
(2) 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.
ITEM 7. 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
herein. The consolidated financial statements of the Company include the
financial position and results of operations of (i) Bluegrass, which was
acquired on March 9, 1998, (ii) Ecology, which was acquired on March 31, 1998,
and (iii) 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 from June
30 to December 31 in order to facilitate greater comparability with its peer
group by the financial community. Consequently, the registrant is filing this
transition report on Form 10-K for the six-month transition period beginning
July 1, 1997 and ending December 31, 1997 in accordance with the rules of the
Securities Exchange Act of 1934, as amended. The six-month transition period of
July 1, 1997 through December 31, 1997 ("transition period") precedes the start
of the new fiscal year. Financial information and other data concerning the
Company and its operations have been filed with the Securities and Exchange
Commission since December 31, 1997, including without limitation its Form 10-Q
for the Quarter ended March 31, 1998. The Company's financial performance during
the transition period is not necessarily indicative of future performance.
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
27
<PAGE>
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 "Part I. Item 1. Business -- 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.
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 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.
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.
28
<PAGE>
COST OF REVENUES
Cost of revenues consists primarily of tipping fees paid to third party
landfills, accruals for future landfill closure and post-closure costs, direct
labor and related taxes and benefits, subcontracted transportation and equipment
rental charges, maintenance and repairs of equipment and facilities,
environmental compliance costs and site maintenance costs for landfills, fuel,
and landfill assessment fees and taxes. 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 December 31, 1997, capitalized costs related directly to proposed
acquisitions that were not yet consummated were approximately $492,000. 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 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 December 31, 1997, capitalized costs
related directly to the acquisition and expansion of existing and future
landfills and cell development were $85.0 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.
29
<PAGE>
TAXES
At December 31, 1997, the Company has approximately $3.6 million of net
operating loss carryforwards for federal income tax purposes. For the six month
period ending December 31, 1997, the Company's tax provision reflects an
effective tax rate of approximately 35.2%. Due to management's acquisition
strategy, it's future effective tax rate will differ from federal and state
statutory tax rates primarily due to acquisition related adjustments including
the effects of differences in the treatment of goodwill for book and tax
purposes.
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 $102 million
or 95% of the Company's revenues for the six months ended December 31, 1997 and
approximately $254 million or 93% of the Company's assets at December 31, 1997
resulted from 45 acquisitions consummated by the Company between July 1996 and
June 23, 1998. Of these 45 acquisitions, 34 have been accounted for under the
purchase method of accounting and 11 have been accounted for under the pooling
of interests method of accounting.
With respect to the 34 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 $781,000 for the
six months ended December 31, 1997.
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.
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
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 will be accounted for using the purchase method of
accounting.
On May 29, 1998, the Company acquired certain assets of Kimmins Corp.,
Transcor Waste Services, Inc., and Kimmins Recycling Corp. (collectively,
"Kimmins"). Consideration under the agreement consisted of $11,596,000 of cash
to the sellers. This transaction will be accounted for using the purchase method
of accounting
Additionally, from January 1, 1998 to June 30, 1998, the Company acquired
the assets of 14 collection companies in separate transactions. Total
consideration under the agreements consisted of approximately 384,000 shares of
Common Stock, cash of approximately $13.9 million to the sellers, and the
assumption of approximately $124,000 of long term debt. These transactions will
be accounted for using the purchase method of accounting.
Also, between May 29, 1998 and June 25, 1998, the Company completed mergers
with five companies (three solid waste collection companies, one special waste
collection company and one landfill) in separate transactions. The Company
issued 431,125 shares of its common stock in exchange for all the issued and
outstanding stock of these companies. These transactions will be accounted for
using the pooling of interests method. Periods prior to the consummation of the
merger will not be restated to include the accounts of these companies as
combined results would not be materially different from the results as
presented.
On June 26, 1998, the Company acquired all of the stock of several
residential and commercial waste collection and recycling operations (All Waste
Systems, Inc. and Ulster Sanitation, Inc.)("All Waste and Ulster") and related
companies in exchange for approximately 2,300,000 shares of the Company's common
stock. These combinations are anticipated to be accounted for using the pooling
of interests method of accounting. Revenues and net loss for the year ended
December 31, 1997, for All Waste and Ulster, on a combined basis, were
$31,201,000 and $588,000, respectively.
30
<PAGE>
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
------ ------
(unaudited)
<S> <C> <C>
Revenues.............................. 100.0% 100.0%
Cost of revenues...................... 68.6 78.7
Selling, general and administrative... 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, net..................... 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
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.
31
<PAGE>
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 for transaction costs and costs related to integrating
operations during the six months ended December 31, 1997, were $2.7 million,
related to the acquisition of Waste X acquired on August 14, 1997 and Hamm's,
acquired on December 1, 1997 and mergers consummated in the year ended June 30,
1997. These acquisitions were accounted for as poolings 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 of $789,000 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.
RESULTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30,
1997
The following table presents, for the periods indicated, the period to period
change in dollars (in thousands) and percent for the various Consolidated
Statements of Operations line items.
<TABLE>
<CAPTION>
PERIOD TO PERIOD INCREASE (DECREASE)
-----------------------------------------------------------------------------
FOR THE YEARS ENDED FOR THE YEARS ENDED JUNE 30,
JUNE 30, 1997 AND 1996 1996 AND 1995
------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Revenues $45,286 45.3% $ 8,743 9.6%
Cost and expenses:
Cost of revenues 25,869 32.2 11,752 17.2
Selling, general and administrative 3,498 21.9 2,547 18.9
Depreciation and amortization 1,863 34.9 (30) (0.6)
Merger costs 3,337 -- -- --
--------------- --------------
34,567 34.0 14,269 16.3
--------------- --------------
Operating income (loss) 10,719 -- (5, 526) --
--------------- --------------
Interest expense, net 1,877 145.8 183 16.6
Other income, net 450 310.3 (27) (15.7)
--------------- --------------
1,427 124.9 210 22.6
--------------- --------------
Income (loss) before income taxes 9,292 -- (5,736) --
Income tax expense 1,783 -- (166) (63.4)
--------------- --------------
Net income (loss) $ 7,509 -- $ (5,570) --
=============== ==============
</TABLE>
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 1995
---------------- -------------- ----------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 73.0 80.2 75.1
Selling, general and administrative expenses. 13.4 16.0 14.7
Depreciation and amortization 5.0 5.3 5.9
Merger costs 2.3 -- --
---------------- -------------- ----------------
Operating income (loss) 6.3 (1.5) 4.3
Interest expense, net (2.2) (1.3) (1.2)
Other income, net 0.4 0.1 0.2
---------------- -------------- ----------------
Income (loss) before income taxes 4.5 (2.7) 3.3
Income tax expense 1.3 0.1 0.3
---------------- -------------- ----------------
Net income (loss) 3.2% (2.8)% 3.0%
================ ============== ================
</TABLE>
32
<PAGE>
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 (1) 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 (2) the acquisitions of Super Kwik, Inc. and its
affiliates (''Super Kwik''), and Donno Company, Inc. and its affiliates
(''Donno''), which have been accounted for under the pooling of interests
method, 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 increase
of $3.9 million. Additionally, the acquisition of Apex Waste Services, Inc.
(''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.
Revenues increased $8.7 million or 9.6% in fiscal 1996 compared to fiscal
1995. The principal factors affecting the increase in revenues were increased
revenues at Ecology, Super Kwik, and Stamato partially offset by the closure of
the Company's collection operations in South Carolina and declines in revenues
at the Company's landfills in South Carolina and Kentucky. Additionally, during
the year ended June 30, 1995 Donno realized the benefit of a one-time contract
termination settlement of $660,000.
Cost of revenues for the year ended June 30, 1997 were $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 three 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 poolings 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.
Cost of revenues increased approximately $11.8 million in fiscal 1996
compared to fiscal 1995. The principal factors affecting the increase in cost of
revenues for the year ended June 30, 1996 were (1) a 10% rise in revenues, (2) a
charge of $900,000 for closure and post-closure monitoring costs relating to the
Company's Kentucky landfill, and (3) an increase at Super Kwik due to
acquisitions completed in January and November of 1995.
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. 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 (1)
certain cost savings related to economies of scale in restructuring the
Company's insurance program and (2) 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 control of the Company in June of 1996, and increases in certain
reserves.
Selling, general and administrative expenses increased $2.5 million, or 18.9%
in fiscal 1996 as compared to fiscal 1995. These expenses as a percentage of
revenues for the year ended June 30, 1996 were 16.0% compared to 14.7% for the
same period in 1995. The increase resulted primarily from the aforementioned
special charges taken in fiscal 1996.
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 and landfill amortization
as a result of businesses and assets acquired as well as amortization of
goodwill and other intangibles associated with the acquisitions.
Depreciation and amortization for the year ended June 30, 1996 of $5.3
million was consistent with the fiscal 1995 amount of $5.4 million.
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 transaction 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 (1) acquisitions, (2)
the purchase of real estate and (3) equipment financing in fiscal 1997. Net
interest expense for the year ended June 30, 1996 of $1.3 million was slightly
higher than the $1.1 million expense in fiscal 1995.
33
<PAGE>
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,
to estimated net realizable value of landfill, hauling and real estate assets no
longer considered integral to the operation of the Company after its change of
control in June 1996. Other income, net, for the year ended June 30, 1996 was
$145,000 as compared to $172,000 for the year ended June 30, 1995. This
decrease was due primarily to the aforementioned write down in fiscal 1996.
The tax provision for the year ended June 30, 1997 included $904,000 relating
to the completion of the mergers with Super Kwik, Donno, and Apex. The provision
reflects the recording of a deferred tax provision as of the date of the
respective mergers, at which time the pooled entities' S corporation elections
were terminated. The Company's effective tax rate, including both federal and
state taxes, was 27.8% 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 and income taxed under Subchapter "S" of the Internal Revenue Code. In
1996, the tax expense relates primarily to the recording of previously taxed "C"
corporation earnings related to the merger with 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. The Company's effective
tax rate, including both federal and state taxes, was 6.6% for fiscal 1995. In
1995, the Company's effective tax rate was lower than the federal statutory
rates primarily due to income which was taxed under Subchapter "S" of the
Internal Revenue Code.
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 December 31, 1997, the Company had working capital of $11.1, including
cash and cash equivalents of $6.7 million. For the six months ended December 31,
1997, net cash provided by operations was approximately $4.4 million, net cash
provided by financing activities was approximately $57.0 million and net cash
used in investing activities was approximately $60.2 million resulting in an
increase in cash and cash equivalents of $1.2 million during this period. Cash
expended during the period included: (i) $44.1 million relating to acquisitions,
(ii) $10.1 million for the purchase of operating equipment and real estate, and
(iii) $5.3 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
34
<PAGE>
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 June 23,
1998, all borrowings under this facility have been repaid with the proceeds from
the Offering completed in June 1998.
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 June 23, 1998, the applicable interest rate was
6.375%. 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 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.
In June 1998, the Company completed its registration and sale of 8,625,000
shares for $26.375 which included the sale of 500,000 shares by selling
shareholders and the sale by the Company of 1,125,000 shares to cover
overallotments. Net proceeds to the Company, after deduction of fees and
related costs, were approximately $204,000,000. The unaudited pro forma diluted
earnings per share for the six months ended December 31, 1997 assuming the
issuance of these shares and receipt of related proceeds on July 1, 1997 and the
reduction of outstanding indebtedness and related interest expense, net of
income taxes, would have been $.21 per share.
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 of final closure of the currently permitted and operating areas at the
Company's landfills to be approximately $22.9 million for final closure of its
landfills, of which $4.7 million had been accrued at December 31, 1997. 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 $14.4 million. At
December 31, 1997, the Company had accrued $3.6 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 (i) the volume of waste
relating to construction and demolition activities tends to increase in the
spring and summer months and (ii) the volume of industrial and residential waste
in the regions in which the Company operates tends to decrease during the winter
months. In addition, particularly harsh weather conditions may
35
<PAGE>
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors and consolidated financial statements are
included in Part IV, ITEM 14. of this Report beginning on page F- 1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The 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 Executive Vice President and Chief Operating Officer
Gregory M. Krzemien................. 38 Chief Financial Officer and Treasurer
Robert M. Kramer.................... 45 General Counsel, Executive Vice President and Secretary
Willard Miller...................... 61 Executive Vice President
Glen M. Miller...................... 40 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).
36
<PAGE>
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 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.
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. Willard Miller
is the father of Glen Miller, an Executive Vice President of the Company.
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. Glen Miller is the
son of Willard Miller, an Executive Vice President of the Company.
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.
37
<PAGE>
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 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, as well as persons beneficially owning more than 10% of the
Company's outstanding shares of Common Stock and certain other holders of such
shares (collectively, "Covered Persons"), to file with the United States
Securities and Exchange Commission (the "Commission") and the NASDAQ Stock
Market (the "NASDAQ"), within specified time periods, initial reports of
ownership, and subsequent reports of changes in ownership, of Common Stock and
other equity securities of the Company.
Based solely upon the Company's review of copies of such reports furnished to
it and upon representations of Covered Persons that no other reports were
required, to the Company's knowledge, all of the Section 16(a) filings required
to be made by the Covered Persons with respect to the transition period ended
December 31, 1997 were made on a timely basis, except that one Form 4 was filed
late by each of the following Covered Persons: Gregory M. Krzemien (involving
two transactions), Willard Miller (involving ten transactions), George O.
Moorehead (involving one transaction), Louis D. Paolino, Jr. (involving two
transactions), and Terry Patrick (involving four transactions). All of the late
filings involved either purchases or sales of the Company's Common Stock. The
Company has instituted a compliance program to assist its directors and
executive officers in timely reporting transactions under Section 16.
38
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information for
the Company's transition period ended December 31, 1997 and its fiscal years
ended June 30, 1997 and 1996 concerning the annual, long-term, and other
compensation of each of the Chief Executive Officer of the Company and its next
five most highly compensated executive officers (the "Named Officers"):
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
AWARDS
SECURITIES
NAME AND PERIOD UNDERLYING
PRINCIPAL POSITION ENDED ANNUAL COMPENSATION OPTIONS
- ------------------ ------- ------------------------- ----------
SALARY BONUS
------------ --------
<S> <C> <C> <C> <C>
Louis D. Paolino, Jr. December 31, 1997 $147,229(2) -- 125,000
Chairman of the Board, President and June 30, 1997 $150,000 -- 351,782
Chief Executive Officer June 30, 1996 $ 8,192(3) -- 250,000
Terry W. Patrick December 31, 1997 $124,397(4) -- --
Executive Vice President and Chief June 30, 1997 $158,954 $100,000 100,000
Operating Officer June 30, 1996 -- (5) -- 150,000
Dennis M. Grimm December 31, 1997 $ 77,249(6) -- 100,000
Vice President, June 30, 1997 37,981(7) -- 200,000
Chief Operating Officer June 30, 1996 -- -- --
Willard Miller December 31, 1997 $ 78,359(8) -- --
Executive Vice President June 30, 1997 $109,615(9) -- 281,907
June 30, 1996 -- -- --
Glen Miller December 31, 1997 $ 74,999(10) -- --
Executive Vice President June 30, 1997 $109,615(11) -- 281,907
June 30, 1996 -- -- --
Robert M. Kramer December 31, 1997 $ 65,499(12) -- 10,000
General Counsel, Executive Vice June 30, 1997 $125,000 -- 80,562
President and Secretary June 30, 1996 -- (13) -- 175,000
</TABLE>
- -------------
(1) The columns captioned "Annual Compensation--Other Annual Compensation,"
"Long-Term Compensation--Restricted Stock Awards," "LTIP Payouts," and
"All Other Compensation" have been omitted because, in the first case,
none of the Named Officers received other annual compensation exceeding
either $50,000 or 10% of such officer's total annual salary and bonus and,
in the other cases, because (i) the Company made no restricted stock awards,
(ii) maintained no long-term incentive plan, and (iii) paid no other
compensation to the Named Officers, in each case during the transition
period ended December 31, 1997.
(2) Current annual base compensation is $350,000.
(3) Employment commenced in June 1996.
(4) Mr. Patrick's employment by the Company ceased as of December 1, 1997, at
which time, Mr. Patrick's annual base compensation was $275,000.
(5) Employment commenced in June 1996. No base compensation was paid in the
fiscal year ended June 30, 1996.
(6) Current annual base compensation is $300,000.
39
<PAGE>
(7) Employment commenced in April 1997.
(8) Current annual base compensation is $150,000.
(9) Employment commenced in September 1996.
(10) Current annual base compensation is $150,000.
(11) Employment commenced in September 1996.
(12) Current annual base compensation is $125,000.
(13) Employment commenced in June 1996. No base compensation was paid in the
fiscal year ended June 30, 1996.
The following table sets forth certain information concerning individual
grants of stock options to the Named Officers during the six month transition
period ended December 31, 1997.
OPTION/SAR GRANTS IN SIX MONTH TRANSITION PERIOD (1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
------------------------------- --------------------------
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN EXERCISE
OPTIONS TRANSITION PRICE EXPIRATION
NAME GRANTED PERIOD (1) PER SHARE DATE 5% 10%
- ----- ------------ ----------- --------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Louis D. Paolino, Jr... 125,000(2) 27.4% $19.88 12/18/07 $432,675 $688,963
Terry W. Patrick....... -- -- -- -- -- --
Dennis Grimm........... 100,000(3) 21.9% $19.88 12/18/07 $346,140 $551,170
Willard Miller......... -- -- -- -- -- --
Glen Miller............ -- -- -- -- -- --
Robert M. Kramer....... 10,000(4) 2.2% $19.88 12/18/07 $ 34,614 $ 55,117
</TABLE>
- -------------
(1) The Company granted options to employees to purchase a total of 455,800
shares of Common Stock during the transition period ended December 31, 1997.
All of these grants were made at fair market value.
(2) Options to purchase 62,500 shares vested on the date of the grant and
options to purchase 62,500 shares will vest on December 18, 1998.
(3) The options vest in four equal installments, beginning on December 18, 1998.
(4) Options to purchase 5,000 shares vested on the date of grant and options to
purchase 5,000 shares will vest on December 18, 1998.
The following table sets forth certain information regarding stock options of
the Named Officers during the transition period ended December 31, 1997,
including the number and value of exercisable and unexercisable stock options as
of December 31, 1997.
40
<PAGE>
AGGREGATED/SAR OPTION EXERCISES IN TRANSITION PERIOD AND
TRANSITION PERIOD-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS/SARS AT
TRANSITION PERIOD END TRANSITION PERIOD END(1)
--------------------------- ---------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Louis D. Paolino, Jr........ -- -- 240,891 485,891 $2,056,945 $4,830,745
Terry W. Patrick(2)......... 112,000 $1,987,125 250,000 0 $3,974,500 --
Dennis Grimm................ -- -- 0 300,000 -- $1,909,375
Willard Miller.............. -- -- 81,907 281,907 $1,249,082 $4,299,082
Glen Miller................. -- -- 81,907 281,907 $1,249,082 $4,299,082
Robert M. Kramer............ -- -- 109,031 156,531 $1,714,306 $2,388,931
</TABLE>
- -------------
(1) In-the-money options are price of the option. Values were calculated by
multiplying the closing transaction price of the those for which the fair
Common Stock market value of the as reported on the NASDAQ on December 31,
1997 by the appropriate number of shares of Common Stock underlying
securities and exceeds the exercise subtracting the exercise price, without
regard to termination or vesting contingencies. The closing transaction
price of the Company's Common Stock on December 31, 1997 was $22.00 per
share.
(2) Mr. Patrick's employment with the Company ceased as of December 1, 1997.
COMPENSATION OF DIRECTORS
Since June 20, 1996, the directors of the Company have not received any fees
for attendance at the directors' meetings. Each of the Company's directors
received options or warrants to purchase shares of the Company's Common Stock
for his services as a director. In July 1996, options to purchase 10,000 shares
of the Company's Common Stock at an exercise price of $6.375 per share were
issued to each of Mr. Kenneth C. Leung, Mr. George O. Moorehead, and Mr. Louis
D. Paolino, Jr., with the options becoming fully vested one year from the date
of grant. In October 1996, Messrs. Moorehead and Leung each received options to
purchase 60,834 shares of Common Stock at a per share price of $6.63, with the
options vesting on April 14, 1997. In June 1997, options to purchase 15,000
shares of the Company's Common Stock at an exercise price of $14.50 per share
were issued to Mr. Leung and Mr. Moorehead, with the options becoming fully
vested on June 20, 1998. In May 1998, options to purchase 15,000 and 10,000
shares, respectively, of Common Stock at an exercise price of $28.50 per share
were issued to Matthew Paolino and Constantine Papadakis, which will become
fully vested on May 29, 1999.
All expenses incurred by all directors for attendance at board, committee, and
stockholder meetings are reimbursed by the Company.
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.
41
<PAGE>
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 November 1996, Mr. Patrick entered into an amended and restated employment
agreement with the Company that provided for an initial annual base salary of
$150,000 and certain fringe benefits, including life and health insurance and
automobile allowances. Mr. Patrick's employment with the Company ceased as of
December 1, 1997. Under his amended employment agreement with the Company, Mr.
Patrick was further entitled to an annual bonus of $100,000, payable in cash or
Common Stock. Upon a change in control of the Company, Mr. Patrick was
entitled to receive in cash or Common Stock an amount equal to two times his
annual salary plus the greater of (i) $200,000 or (ii) two times the bonus he
was paid by the Company during the twelve months prior to the change in control.
Mr. Patrick's agreement terminates in June 2000, subject to earlier termination
by either party. For a period of up to two years after December 1, 1997, Mr.
Patrick may not directly or indirectly engage in the waste disposal industry
within up to 75 miles of any Company business operation.
In September 1996, Willard Miller and Glen Miller entered into employment
agreements with the Company that provide for an initial base salary of $150,000
each and certain fringe benefits, including life and health insurance and an
automobile allowance. The term of each agreement is four years, subject to
earlier termination by either party. Upon termination of employment, executive
is entitled to receive up to six months annual salary. If a change of control of
the Company occurs within three months of resignation, executive is entitled to
two years salary. Each agreement also provides that during the term of
employment, and for a period of one year thereafter, executive will not compete
with the Company in the waste disposal business in an area that includes
southern New Jersey and Philadelphia, Pennsylvania.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Throughout the transition period ended December 31, 1997, the Compensation
Committee of the Company's Board of Directors consisted of Louis D. Paolino,
Jr., George O. Moorehead, and Kenneth Chuan-kai Leung. Louis D. Paolino, Jr. is
the Company's Chairman of the Board, Chief Executive Officer, and President.
In August 1997, the Company entered into a ten-year office lease with
Bluepointe, Inc., a corporation controlled by Louis D. Paolino, Jr., the
Chairman of the Board, Chief Executive Officer, and President of the Company,
for the Company's executive offices in Mt. Laurel, New Jersey. The lease
provides for monthly rental payments of $15,277.
In February and March 1998, the Company purchased landfill equipment and
equipment parts from Southern States Equipment, Inc. ("Southern"), a corporation
controlled by Louis D. Paolino (the father of Louis D. Paolino, Jr., the
Chairman of the Board of Directors, Chief Executive Officer and President of the
Company), for approximately $431,000. Additionally, in March 1998, the Company
commissioned Southern to bid and purchase certain equipment for the Company, at
an equipment auction, which Southern was licensed to participate. The commission
paid to Southern for such services was $154,540.
Since July 1997, the Company has utilized a corporation, owned by Matthew J.
Paolino, a Director of the Company, to provide rental equipment in connection
with the development of additional disposal capacity at one of the Company's
landfills in Pennsylvania. The amount paid to the company was approximately
$432,000.
The Company believes that each of the transactions described above were
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.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Throughout the transition period ended December 31, 1997, the Compensation
Committee of the Board of Directors was composed of George O. Moorehead and
Kenneth C. Leung, non-employee directors, and Louis D. Paolino, Jr., the
Company's Chairman of the Board, Chief Executive Officer, and President.
The following report of the Compensation Committee is required by the rules of
the Commission to be included in this Report and addresses the Company's
executive compensation policies for the fiscal year ended June 30, 1997,
42
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the transition period ended December 31, 1997, and certain subsequent
developments. This report shall not be deemed incorporated by reference into any
filing under the Securities Act of 1933, as amended (the "Securities Act"), or
the Exchange Act, by virtue of any general statement in such filing
incorporating this Report by reference, except to the extent that the Company
specifically incorporates the information contained in this section by
reference, and shall not otherwise be deemed filed under either the Securities
Act or the Exchange Act.
GENERAL. The Company's compensation policies for executives are intended to
further the interests of the Company and its stockholders by encouraging growth
of its business through securing, retaining, and motivating management employees
of high caliber who possess the skills necessary to the development and growth
of the Company.
The Company's compensation package consists of three major components: base
compensation, stock options, and performance bonuses. Together these elements
comprise total compensation value. The total compensation paid to the Company's
executive officers is influenced significantly by the need (i) to attract
management employees with a high level of expertise and (ii) to motivate and
retain key executives for the long-term success of the Company and its
stockholders.
The fiscal year ended June 30, 1997 and the transition period ended December
31, 1997 were important periods for the Company. Following the change of control
of the Company in June 1996, the Company's executive management team pursued an
aggressive acquisition and growth strategy. The implementation and management of
this strategy, which included the acquisition of 25 solid waste management
businesses, required unusual amounts of time, attention, and effort from the
Company's executive officers while the financing of the Company's expansion
demanded significant additional time and attention. The Compensation Committee
considered these numerous developments in formulating its executive compensation
policies and practices for the fiscal year ended June 30, 1997 and the
transition period ended December 31, 1997. The Committee commissioned Coopers &
Lybrand LLP to conduct studies of compensation levels in comparable companies
and companies engaged in turn-around situations for each executive position and
in connection with each significant adjustment to executive officer compensation
made during the fiscal year ended June 30, 1997 and the transition period ended
December 31, 1997.
BASE COMPENSATION. The Committee establishes annual base salary levels for
executives based on competitive data, level of experience, position,
responsibility, and individual and Company performance. The Company has sought
to align base compensation levels in the middle to top seventy-five percent of
the range of survey data, which includes direct competitors and companies in
turnaround situations. The Committee has used comparative data provided by
Coopers & Lybrand LLP.
STOCK OPTIONS. The Company grants stock options to its executive management
under its employee stock option plans. Option grants are intended to bring the
total compensation to a level that the Compensation Committee believes is
competitive with amounts paid by the Company's competitors and which will offer
significant returns if the Company is successful and, therefore, significant
incentives to devote the effort called for by the Company's strategy. The
Compensation Committee believes that executives' interests are directly tied to
enhanced stockholder value. Thus, stock options are used to provide the
executive management team with a strong incentive to perform in a manner that
will benefit the long-term success of the Company and its stockholders.
PERFORMANCE BONUSES AND STOCK OPTIONS. The Company supplements base
compensation with awards of performance bonuses in the form of cash and stock
options. In establishing bonuses for the fiscal year ended June 30, 1997 and the
transition period ended December 31, 1997, the Board sought to reward the
extraordinary efforts undertaken by several of its key executive officers and
achievements made by them in accomplishing successfully the many transactions
occurring during these periods.
CHIEF EXECUTIVE OFFICER COMPENSATION. Mr. Paolino, in his capacity as
Chairman of the Board, Chief Executive Officer, and President, participates in
the same compensation programs as the other executive officers. The Committee
has targeted Mr. Paolino's total compensation, including base compensation,
bonuses, and stock options, at a level it believes is competitive with the
amount paid by the Company's competitors and companies in turnaround situations.
Mr. Paolino joined the Company in June 1996 at a base salary of $150,000.
Following a competitive compensation analysis conducted by Coopers & Lybrand,
the Compensation Committee reviewed Mr. Paolino's salary in the context of (i)
the Company's performance and growth discussed above, and (ii) compensation
packages of chief executive
43
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officers at comparable companies. Based on this review, the Compensation
Committee approved an increase to Mr. Paolino's salary to $350,000, a level that
was determined to be more analogous with competition and to compensate Mr.
Paolino more adequately for his services and contributions to the success of the
Company.
PERFORMANCE GRAPH
The following line graph and table compare, for the five most recently
concluded years ended December 31, the yearly percentage change in cumulative
total stockholder return, assuming reinvestment of dividends, on the Company's
Common Stock with the cumulative total return of companies on the NASDAQ and an
index comprised of certain companies in the solid waste industry (the "Selected
Peer Group Index"). (1)
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG EASTERN ENVIRONMENTAL SERVICES, INC., THE NASDAQ STOCK MARKET (U.S.)
INDEX AND A PEER GROUP
[LINE GRAPH APPEARS HERE]
*$100 INVESTED ON 12/31/92 IN STOCK OR INDEX--INCLUDING INVESTMENT OF DIVIDENDS.
YEAR ENDING DECEMBER 31.
(1) The Selected Peer Group Index is comprised of securities of the following
companies: Browning-Ferris Industries, Inc., Waste Management, Inc., U.S.A.
Waste Services, Inc., Allied Waste Industries, Inc., and Superior Services, Inc.
There can be no assurance that the Company's stock performance will continue
into the future with the same or similar trends depicted by the graph above.
The Company neither makes nor endorses any predictions as to future stock
performance.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG EASTERN ENVIRONMENTAL
SERVICES, INC.,
A SELECTED PEER GROUP INDEX AND THE NASDAQ MARKET INDEX
<TABLE>
<CAPTION>
12/92 12/93 12/94 12/95 12/96 12/97
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Eastern Environmental Services. EESI 100 72 64 91 513 1,328
Peer Group Index............... PEER (1) 100 73 77 88 99 109
NASDAQ Stock Market (U.S.)..... NAS 100 115 112 159 195 239
</TABLE>
The Performance Graph set forth above shall not be deemed incorporated by
reference into any filing under the Securities Act of 1993, as amended (the
"Securities Act") or the Securities Exchange Act of 1934, as amended (the
"Exchange Act") by virtue of any general statement in such filing incorporating
this Report by reference, except to the extent that the Company specifically
incorporates the information contained in this selection by reference, and shall
not otherwise be deemed filed under either the Securities Act or the Exchange
Act.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 15, 1998, certain information
regarding the beneficial ownership of the Common Stock by: (i) each of the
Company's directors; (ii) each of the Named Officers; and (iii) all executive
officers and directors of the Company as a group. No person or entity known to
the Company owned 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. Except as otherwise indicated, each person has sole voting
power and sole investment power with respect to all shares beneficially owned by
such person.
44
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE OF
NAME OF BENEFICIAL OWNER OWNED(1)(2) SHARES
- ------------------------ ----------------- --------------
<S> <C> <C>
Willard Miller ...................................................... 1,430,688 (3) 4.2%
Louis D. Paolino, Jr ................................................ 1,288,465 (4) 3.8%
Glen Miller ......................................................... 1,169,802 (5) 3.5%
Kenneth Chuan-kai Leung ............................................. 540,419 (6) 1.6%
George O. Moorehead ................................................. 437,714 (7) 1.3%
Matthew J. Paolino .................................................. 110,583 (8) *
Constantine N. Papadakis ............................................ -- --
Terry W. Patrick .................................................... 187,500 (9) *
Dennis Grimm.......................................................... 344,549 (10) 1.0%
Robert M. Kramer...................................................... 167,781 (11) *
All executive officers and directors as a group (13 persons) ........ 5,720,659 (12) 16.9%
</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) Includes 131,907 shares purchasable under currently exercisable warrants.
(6) Includes 40,417 shares purchasable under currently exercisable options. Also
includes a total of 500,002 shares held of record by the Environmental
Opportunities Fund, L.P. and the Environmental Opportunities Fund (Cayman),
L.P., for which Mr. Leung serves as Chief Investment Officer.
(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) Includes 137,500 shares purchasable under currently exercisable options.
Also includes 50,000 shares held by Beacon Holdings Ltd., an entity
controlled by Mr. Patrick. Mr. Patrick's employment with the Company ceased
as of December 1, 1997.
(10) Includes 65,625 shares purchasable under currently exercisable options.
(11) Includes 157,781 shares purchasable under currently exercisable options.
(12) See footnotes 3 through 8, 10 and 11 above. Also includes an aggregate of
85,666 shares and 144,992 shares purchasable under currently exercisable
options held by four executive officers of the Company who are not listed
in the table.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1995 and May 1996, Glen Miller and Willard Miller, executive
officers of the Company, executed promissory notes in favor of Super Kwik, Inc.
in the principal amounts of $83,741 and $350,902, respectively. The notes bear
interest at the rate of six percent per annum and become due and payable on
December 30, 2005 and May 1, 2006, respectively. The total principal amount
outstanding under the notes at December 31, 1997 was $432,902. The Company
acquired Super Kwik, Inc. in September 1996.
In connection with the Company's acquisition of Super Kwik, Inc. in September
1996, the Company executed a $750,000 mortgage note in favor of Spruce Avenue
Associates, a general partnership whose partners are Glen Miller and Willard
Miller. The note bears interest at the rate of ten percent per annum, payable
semi-annually, and the
45
<PAGE>
principal amount becomes due and payable on September 27, 1999. The note is
secured by a mortgage on certain real property of the Company located in
Voorhees, New Jersey. The principal amount outstanding under the mortgage note
at December 31, 1997 was $750,000.
Robert M. Kramer, the Company's General Counsel, Executive Vice President,
and Secretary, is engaged in the practice of law through Robert M. Kramer &
Associates, P.C., a professional corporation owned by Mr. Kramer, which has
rendered legal services to the Company since June 1996. The Company has paid
such corporation approximately $270,000 between July 1, 1997 and June 1,
1998.
Certain other transactions involving the Company and in which its Chairman,
Chief Executive Officer, and President had a direct or indirect material
interest are described above under the caption "-Compensation Committee
Interlocks and Insider Participation."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.
(a) (1) Consolidated Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1997, and June 30, 1997 and
1996
Consolidated Statements of Operations for the six months ended December 31,
1997 and 1996 (Unaudited) and the years ended June 30, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the six months ended
December 31, 1997 and the years ended June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the six months ended December 31,
1997 and 1996 (Unaudited) and the years ended June 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(a) (2) The requirements of Schedule II have been included in the notes to the
financial statements. All other schedules for which provision is made in
the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
(a) (3) Exhibits:
The following Exhibits are filed as part of this Report (exhibits marked with
an asterisk have been previously filed with the Commission and are incorporated
herein by this reference):
3.1 Certificate of Incorporation, as amended, of the Company.
3.2 By-Laws, as amended, of the Company.
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<PAGE>
* 10.2 1987 Stock Option Plan (Exhibit 10.9 to the Company's Registration
Statement on Form S-1, Registration No. 33-14918 filed on June 9, 1987,
as subsequently amended on August 4, 1987 and August 11, 1987)./(1)/
* 10.3 1988 Employee Stock Bonus Plan (Described on pp. 5-11 of the Prospectus
included in the Company's Registration Statement on Form S-8,
Registration No. 33-25155 filed on October 24, 1988)./(1)/
* 10.4 1988 Employee Stock Purchase Plan (described on pp. 4-8 of the
Prospectus included in Post Effective Amendment No. 2 to the Company's
Registration Statement on Form S-8, Registration No. 33-21251 filed on
May 4, 1990)./(1)/
10.5 1991 Stock Option Plan./(1)/
10.10 Agreement between Pulaski County Solid Waste Management District and
Pulaski Landfill, Inc., dated February 1992.
* 10.19 Agreement Not to Compete among Advanced Analytical Laboratories, Inc.,
GCI Environmental Advisory, Inc. and the Company dated October 22, 1993
(Exhibit 2 to the Company's Current Report on Form 8-K dated October
22, 1993).
* 10.22 Agreement Not to Compete among PDG, Inc., Eastern Environmental Services
of the Northeast, Inc. and Eastern Environmental Services of the
Southeast, Inc. dated January 31, 1994 (Exhibit 2 to the Company's
Current Report on Form 8-K dated January 31, 1994).
* 10.26 Indemnification Agreement dated April 18, 1995 between Eastern
Environmental Services, Inc. and William C. Skuba (Pursuant to
instruction 2 to Item 601 of Regulation S-K, the Indemnification
Agreements, which are substantially identical in all material respects
except as to the parties thereto, between the Company and the following
individuals are not being filed: Gregory M. Krzemien, Michael A.
Fioravante, Timothy W. Sweeney, Stephen C. Stamos, Jr., and Robert J.
Powell). (Exhibit 10.26 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995).
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<PAGE>
*10.29 Amendment dated February 29, 1996 to Severance Agreement dated August
20, 1993, by and between Eastern Environmental Services, Inc. and
William C. Skuba (Pursuant to instruction 2 to Item 601 of Regulation S-
K, the Amendments to the Severance Agreements, which are substantially
identical in all material respects except as to the parties thereto,
between the Company and the following individuals are not being filed:
Gregory M. Krzemien and Michael A. Fioravante). (Exhibit 10.29 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996)./(1)/
*10.30 Severance Agreement dated as of June 20, 1996 between Eastern
Environmental Services, Inc. and William C. Skuba. (Exhibit 10.1 to the
Company's Current Report on Form 8-K dated June 21, 1996, (the "June
1996 Form 8-K"))./(1)/
*10.31 Consulting Agreement dated as of June 20, 1996 between Eastern
Environmental Services, Inc. and William C. Skuba. (Exhibit 10.2 to the
June 1996 Form 8-K)./(1)/
*10.32 Registration Rights Agreement dated as of June 20, 1996 between Eastern
Environmental Services, Inc. and William C. Skuba. (Exhibit 10.3 to the
June 1996 Form 8-K).
*10.33 Agreement for the Sale and Purchase Assets dated June 27, 1996 between
Allied Waste Services, Inc. and Global Spill Management, Inc., Allied
Environmental Services, Inc., Allied Environmental Services West, Inc.,
Stuart H. Berry and Alan Hershkowitz. (Exhibit 10.1 to the Company's
Current Report on Form 8-K dated July 2, 1996).
*10.34 Amended Employment Agreement between the Company and Louis D. Paolino,
Jr., dated May 12, 1997. (Exhibit 10.34 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1997 (the "June 1997 Form
10-K")). /(1)/
*10.35 Employment Agreement between the Company and Terry Patrick dated
November 13, 1996. (Exhibit 10.35 to the June 1997 Form 10-K)/(1)/
*10.36 Amended Employment Agreement between the Company and Robert M. Kramer
dated May 12, 1997. (Exhibit 10.36 to the June 1997 Form 10-K)/(1)/
*10.37 Employment Agreement between the Company and Gregory Krzemien dated June
26, 1996./(1)/
*10.38 1996 Stock Option Plan. (Exhibit 4 to the Company's Registration
Statement on Form S-8, Registration No. 333-28627 filed on June 6, 1997,
as subsequently amended on June 18, 1997.)/(1)/
*10.39 Revolving Credit Agreement dated September 25, 1996, between the
Company, its subsidiaries, the First National Bank of Boston and Bank of
America, Illinois (Exhibit 10.39 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996).
*10.40 First Amendment dated November 14, 1996 to the Revolving Credit
Agreement dated September 25, 1996, between the Company, its
subsidiaries, the First National Bank of Boston and Bank of America,
Illinois (Exhibit 10.40 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996 (the "December 1996 Form 10-
Q")).
*10.41 Second Amendment dated November 26, 1996 to the Revolving Credit
Agreement dated September 25, 1996, between the Company, its
subsidiaries, the First National Bank of Boston and Bank of America,
Illinois (Exhibit 10.41 to the "December 1996 Form 10-Q").
*10.42 Employment Agreement between the Company and Willard Miller dated
September 27, 1996 (Exhibit 10.42 to the "December 1996 Form 10-
Q")./(1)/
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<PAGE>
*10.43 Employment Agreement between the Company and Glen Miller dated September
27, 1996 (Exhibit 10.43 to the "December 1996 Form 10-Q")./(1)/
*10.44 Warrant Agreement dated September 27, 1996, between Eastern
Environmental Services, Inc. and Willard Miller for 281,907 shares
(Pursuant to instruction 2 to Item 601 of Regulation S-K, the Warrant
Agreement, which is substantially identical in all material respects
except as to the party thereto between the Registrant and Glen Miller
has not been filed). (Exhibit 10.44 to the "December 1996 Form 10-
Q")./(1)/
*10.45 Third Amendment dated January 27, 1997 to the Revolving Credit Agreement
dated September 25, 1996, between the Company, its subsidiaries, the
First National Bank of Boston and Bank of America, Illinois (Exhibit
10.45 to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997 (the "March 1997 Form 10-Q")).
*10.46 Fourth Amendment dated March 31, 1997 to the Revolving Credit Agreement
dated September 25, 1996, between the Company, its subsidiaries, the
First National Bank of Boston and Bank of America, Illinois (Exhibit
10.46 to the "March 1997 Form 10-Q").
*10.47 Fifth Amendment dated May 8, 1997 to the Revolving Credit Agreement
dated September 25, 1996, between the Company, its subsidiaries, the
First National Bank of Boston and Bank of America, Illinois (Exhibit
10.47 to the "March 1997 Form 10-Q").
*10.48 Agreement of Merger dated July 29, 1996 between Eastern Environmental
Services, Inc. and Super Kwik, Inc., Waste Maintenance Services, Inc.,
Willard Miller and Glen Miller (Exhibit 10.1 to the Company's Current
Report on Form 8-K dated September 27, 1996 (the "September 27, 1996
Form 8-K")).
*10.49 Registration Rights Agreement dated September 27, 1996 between Eastern
Environmental Services, Inc. and Willard Miller. (Pursuant to
Instruction 2 to Item 601 of Regulation S-K, the Registration Rights
Agreement, which is substantially identical in all material respects
except as to the party thereto, between the Registrant and Glen Miller
is not being filed) (Exhibit 10.2 to the "September 27, 1996 Form 8-K").
*10.50 Agreement for the Sale and Purchase of Stock and Real Estate dated
December 2, 1996 between Richard G Bender, Sr., Alice L. Fields Bender,
Richard G. Bender, Jr., Karen L. Bender, Teresa A. Bender Miller,
Lynetta K. Bender Mowery, Stephen R. Bender, Jeffrey L. Bender, Douglas
R. Bender, (collectively referred to as the "Stockholders"), and R & A
Bender Property, Ltd., a Pennsylvania limited partnership
("Partnership") and Eastern Environmental Services, Inc., a Delaware
corporation.(Exhibit 10.1 to the Company's Current Report on Form 8-K
dated December 10, 1996 (the "December 10, 1996 Form 8-K")).
*10.51 Escrow Agreement dated December 2, 1996, between Richard G. Bender, Sr.,
Alice L. Fields Bender, Richard G. Bender, Jr., Karen L. Bender, Teresa
A. Bender Miller, Lynetta K. Bender Mowery, Stephen R. Bender, Jeffrey
L. Bender, Douglas R. Bender (collectively the "Stockholders"), R&A
Bender Property, Ltd. ("Partnership"), Eastern Environmental Services,
Inc. ("Purchaser"), Robert M. Kramer & Associates, P.C. ("RMK") and
McNees, Wallace & Nurick ("MWN"). (Exhibit 10.2 to the "December 10,
1996 Form 8-K").
*10.52 Warrant Agreement dated December 2, 1996, between Eastern Environmental
Services, Inc. and Karen L. Bender for 8,970 shares (pursuant to
instruction 2 to Item 601 of Regulation S-K, the Warrant Agreements,
which are substantially identical in all material respects except as to
the parties thereto and amount of shares of common stock issuable upon
exercise of the warrant, between the Registrant and the following
individuals not being filed: Richard G. Bender (3,905 shares), Alice L.
Fields (7,380 shares), Richard G. Bender, Jr. (6,660 shares), Teresa A.
Bender Miller (2,680 shares), Lynetta K. Bender Mowery (4,475 shares),
Stephen R. Bender (6,625 shares), Jeffrey L. Bender (6,625 shares), and
Douglas R. Bender (2,680 shares) (Exhibit 10.3 to the "December 10, 1996
Form 8-K")./(1)/
* 10.53 Reorganization Plan and Agreement dated December 31,1996, between Norman
Taylor, Thomas King, Robert Donno, Eastern Environmental Services, Inc.,
and Eastern Waste of Long Island, Inc. and amendment thereto (Exhibit
10.1 to the Company's Current Report on Form 8-K dated January 31,
1997).
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<PAGE>
*10.54 Reorganization Plan and Agreement dated March 31, 1997, by and among
Robert A. Kinsley, Scott R. Wagner, Dennis M. Grimm, William J. Holbrook
(each individually a "Shareholder" and collectively the "Shareholders"),
Apex Waste Services, Inc. ("Company") and Eastern Environmental
Services, Inc. ("Registrant") (Exhibit 10.1 to the Company's Current
Report on Form 8-K dated March 31, 1997).
*10.55 Agreement and Plan of Reorganization made on October 23, 1996 by and
among "Shareholders" ("Shareholder"), Waste Services, Inc. ("Waste"),
New York Waste, Inc. ("NY Waste"), Long Island Waste Services, Inc.
("L.I. Waste"), KC Waste Services, Inc. ("KC Waste") and Curbside
Leasing, Inc. ("Curbside"), Eastern Environmental Services, Inc.
("EESI"), Eastern Waste of New York, Inc. ("EESI New York"), Eastern
Waste of Long Island, Inc. ("EESI L.I.") and Eastern Container
Corporation ("EESI Container"). For the purposes of this Agreement,
EESI, EESI New York, EESI L.I. and EESI Container are collectively
referred to as "Purchasers," Waste, NY Waste, L.I. Waste, KC Waste and
Curbside are collectively referred to as the "Companies" and
individually known as a "Company" and the Companies and the Shareholders
are collectively referred to as the "Sellers." Amendment No. 1, dated
April 14, 1997 to the Agreement and Plan of Reorganization made on
October 23, 1996. Amendment No. 2 dated May 12, 1997, to the Agreement
and Plan of Reorganization made on October 23, 1996. (Exhibit 10.1 to
the Company's Current Report on Form 8-K dated May 12, 1997 (the "May
12, 1996 Form 8-K")).
*10.56 The Agreement and Plan of Reorganization ("Agreement") is made on April
7, 1997 by and among Christopher Pittas, Nicholas Pittas, Jr.
("Shareholders"), Golden Gate Carting Co., Inc. ("Golden Gate"), Eastern
Environmental Services, Inc. ("EESI"), and Eastern Waste of New York,
Inc. ("EESI NY".) For purposes of this Agreement, EESI and EESI NY are
collectively referred to as "Purchasers," Golden Gate may also be
referred to as "Company," and the Company and the Shareholders are
collectively referred to as "Sellers." Amendment No. 1 dated May 12,
1997 to Agreement and Plan of Reorganization made on April 7, 1997
(Exhibit 10.2 to the "May 12, 1997 Form 8-K").
*10.57 The Agreement and Plan of Reorganization (the "Agreement") is made as of
April 7, 1997, by and among Vincent Morea ("Shareholder"), Coney Island
Rubbish Removal, Inc. ("Coney Island"), Eastern Environmental Services,
Inc. ("EESI"), and Eastern Waste of New York, Inc. ("EESI NY"). For
purposes of this Agreement, EESI and EESI NY are collectively referred
to as "Purchasers", Coney Island may also be referred to as "Company"
and the Company and the Shareholder are collectively referred to as the
"Sellers". Amendment No. 1 dated as of May 12, 1997 to Agreement and
Plan of Reorganization made as of April 7, 1997 (Exhibit 10.3 to the
"May 12, 1997 Form 8-K")./(1)/
*10.58 The Agreement "Management Agreement" is made on May 12, 1997, by and
between Golden Gate Carting Co., Inc. and New York Corporation (the
"Company") and Eastern Waste of New York, Inc., a Delaware corporation
(the "Manager") (Exhibit 10.4 to the "May 12, 1997 Form 8-K")./(1)/
*10.59 The Agreement ("Management Agreement") is made as of May 12, 1997, by
and between Coney Island Rubbish Removal, Inc., a New York corporation
(the "Company") and Eastern Waste of New York, Inc., a New York
corporation (the "Manager") (Exhibit 10.5 to the "May 12, 1997 Form 8-
K")./(1)/
*10.60 Amended and Restated Agreement for the Purchase and Sale of Assets
agreement dated May 8, 1997 by and among Eastern Environmental Services,
Inc., a Delaware Corporation ("EESI"); Eastern Environmental Services of
Florida, Inc., a Florida Corporation ("Buyer"); Environmental Waste
Systems, Inc., a Florida Corporation ("Seller"); and Carl Casagrande and
Albert Casagrande, the sole shareholders of Seller (the "Shareholders")
(Exhibit 10.1 to the Company's Current Report on Form 8-K dated May 8,
1997 (the "May 8, 1997 Form 8-K")).
*10.61 Amended and Restated Agreement for the Purchase and Sale of assets
agreement is dated May 8, 1997 by and among Eastern Environmental
Services, Inc., a Delaware Corporation ("EESI"); Eastern Environmental
Services of Florida, Inc., a Florida Corporation ("Buyer");
Environmental Waste Systems of Palm Beach, Inc., a Florida Corporation
("Seller"); and Carlo Casagrande, Albert Casagrande and Dominick
Marzono, the sole shareholders of Seller (the "Sellers"). (Exhibit 10.2
to the "May 8, 1997 Form 8-K").
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*10.62 Amended and Restated Employment Agreement between the Company and Dennis
Grimm dated May 16, 1997./(1)/
*10.63 Employment Agreement between the Company and John Poling dated November
1, 1996./(1)/
*10.64 Amended and Restated 1996 Stock Option Plan./(1)/
*10.65 Agreement for the Sale and Purchase of the Stock of Harford Disposal,
Inc. made as of August 15, 1997, by and between Blake Van Leer (the
"Seller") and Eastern Environmental Services, Inc., ("Purchaser").
(Exhibit 10.1 to the Company's Current Report on Form 8-K dated August
15, 1997 (the "August 15, 1997 Form 8-K")).
*10.66 Agreement for the Sale and Purchase of Stock of Pappy, Inc. made as of
August 15, 1997, by and between Timothy K. Stancill, Jerry L. Stancill,
Terry D. Stancill and Timothy D. Stancill (collectively referred to as
the "Stockholders") and Harford Disposal, Inc., ("Purchaser"). (Exhibit
10.2 to the August 15, 1997 Form 8-K).
*10.67 Consulting Agreement as of August 15, 1997, by and between Eastern
Environmental Services, Inc., Harford Disposal, Inc. and Blake Van Leer.
(Exhibit 10.3 to the August 15, 1997 Form 8-K).
*10.68 Agreement for the Sale and Purchase of the Stock of Soil Remediation of
Philadelphia, Inc. dated as of August 20, 1997, by and between USA Waste
Services, Inc. and Eastern Environmental Services, Inc. (Exhibit 10.1 to
the Company's Current Report on Form 8-K dated August 20, 1997 (the
"August 20, 1997 Form 8-K")).
*10.69 Agreement dated as of August 20, 1997 by and among USA Waste Services,
Inc., USA Waste of Fairles Hills, Inc. ("USA Fairless"), Clean Soils of
Fairless Hills, Inc. ("Clean Soils Fairless"), EESI of Fairless Hills,
Inc. and Eastern Environmental Services, Inc. for the acquisition of the
stock of Clean Soils Fairless and USA Fairless. (Exhibit 10.2 to the
August 20, 1997 Form 8-K).
*10.70 Management Agreement dated July 14, 1997 by and between Soil Remediation
of Philadelphia, Inc., Clean Soils of Fairless Hills, Inc. and Eastern
Waste of Delaware Valley, Inc. (Exhibit 10.3 to the August 20, 1997 Form
8-K).
*10.71 Amended and Restated Revolving Credit Agreement made as of October 27,
1997, by and between Eastern Environmental Services, Inc. and
BankBoston, N.A., Banque Paribas, Bank of America National Trust and
Savings Association, Fleet Bank, N.A., and Summit Bank. (Exhibit 10.1 to
the Company's Current Report on Form 8-K dated October 27, 1997).
*10.72 Merger Agreement dated September 16, 1997, between Eastern Environmental
Services, Inc., Ambrose Hamm, Lillian Hamm, Katherine Caristia, Keilley
Strobeck, individually and by her trustee, Ambrose Hamm, Keith Hamm,
individually by his trustee, Ambrose Hamm, James Caristia and Leah
Caristia. (Exhibit 10.1 to the Company's Current Report on Form 8-K
dated December 1, 1997 (the "December 1, 1997 Form 8-K")).
*10.73 Amendment dated November 7, 1997 to Merger Agreement dated September 16,
1997 by and between the Registrant and the Shareholders of Hamm's and
H.S.S. (Exhibit 10.2 to the December 1, 1997 Form 8-K).
*10.74 Amendment dated December 1, 1997 to Merger Agreement dated September 16,
1997 by and between the Registrant and the Shareholders of Hamm's and
H.S.S. (Exhibit 10.3 to the December 1, 1997 Form 8-K).
*10.75 Stock Purchase Agreement made as of October 17, 1997, by and between
Delmarva Capital Technology Corporation and Eastern Environmental
Services, Inc. (Exhibit 10.1 to the Company's Current Report on Form 8-K
(the "December 1, 1997 Form 8-K")).
51
<PAGE>
*10.76 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. (Exhibit 10.2 to the December
1, 1997 Form 8-K).
*10.77 First Amendment dated November 18, 1997 to the Amended and Restated
Revolving Credit Agreement dated October 27, 1997 between the Company,
its subsidiaries, Bank Boston, N.A., Banque Paribas, Bank of America
National Trust and Savings Association, Fleet Bank, N.A., and Summit
Bank. (Exhibit 10.65 to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1997 (the "December 1997 Form 10-Q")).
*10.78 Amendment No. 1 to Amended and Restated Employment Contract dated
December 17, 1997 by and between the Company and Dennis M. Grimm.
(Exhibit 10.66 to the December 1997 Form 10-Q). /(1)/
*10.79 Eastern Environmental Services, Inc. 1997 Stock Option Plan. (Exhibit
10.67 to the December 1997 Form 10-Q). /(1)/
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
24 Powers of Attorney (Included on the signature page of this Report).
27 Financial Data Schedule.
___________________
* Incorporated by reference
/(1)/ Indicates a management contract or compensation plan or arrangement.
(b) Current Reports on Form 8-K or 8-K/A:
1. On October 10, 1997, the Company filed a report on Form 8-K/A dated August
15, 1997, under Item 7, to provide audited financial statements of the
businesses acquired for the year ended October 31, 1996 and 1995, and
unaudited pro forma financial information for the year ended June 30, 1997
with respect to its acquisition of Pappy, Inc.
2. The Company filed reports on Form 8-K, dated October 17, 1997 and December 1,
1997 under Item 2, to report the pending and completed acquisition of the
outstanding shares of stock of Pine Grove, Inc. Financial statements of Pine
Grove, Inc. and pro forma financial information of the Company required under
"Item 7: Financial Statements and Exhibits" were filed on Form 8-K/A
Amendment No. 1 on February 17, 1998.
3. The Company filed a report on Form 8-K, dated October 27, 1997, under Item 5,
to report a revision to the Company's existing Revolving Credit Facility.
4. On November 3, 1997, the Company filed a report on Form 8-K/A dated August
20, 1997, under Item 7, to provide audited financial statements of the
business acquired for the year ended December 31, 1996 and certain unaudited
pro forma financial information for the year ended June 30, 1997 with respect
to its acquisition of Soil Remediation of Philadelphia, Inc.
5. The Company filed a report on Form 8-K, dated December 1, 1997, under Item 2,
to report the acquisition and merger with Hamm's Sanitation, Inc. and H.S.S.,
Inc. Historic financial statements of the businesses acquired and pro forma
financial information of the Company were not required due to the transaction
being below the financial statement filing requirements as per applicable
regulations under the Securities Exchange Act of 1934.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
EASTERN ENVIRONMENTAL SERVICES, INC.
By: /s/ Louis D. Paolino, Jr.
--------------------------------------------
Louis D. Paolino, Jr.
Chairman of the Board,
Chief Executive Officer,
and President
DATED the 30/th/ day of June, 1998.
KNOW ALL MEN BY THESE PRESENTS that the undersigned does hereby constitute and
appoint Louis D. Paolino, Jr. and Gregory M. Krzemien, or either of them acting
alone, his true and lawful attorney-in-fact and agent, with full power of
substitution and revocation for him and in his name, place and stead, in any and
all capacities, to sign this Report on Form 10-K of Eastern Environmental
Services, Inc. and any and all amendments to the Report and to file the same
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Louis D. Paolino, Jr. Chairman of the Board, 6/30/98
- ---------------------------- Chief Executive Officer,
Louis D. Paolino, Jr. President and Director
(Principal Executive Officer)
/s/ Gregory M. Krzemien Chief Financial Officer 6/30/98
- ---------------------------- and Treasurer (Principal
Gregory M. Krzemien Financial Officer)
/s/ Ronald R. Pirollo Controller 6/30/98
- ---------------------------- (Principal Accounting Officer)
Ronald R. Pirollo
/s/ George O. Moorehead Director 6/30/98
- ----------------------------
George O. Moorehead
/s/ Kenneth C. Leung Director 6/30/98
- ----------------------------
Kenneth C. Leung
/s/ Matthew J. Paolino Director 6/30/98
- ----------------------------
Matthew J. Paolino
/s/ Constantine N. Papadakis Director 6/30/98
- ----------------------------
Constantine N. Papadakis
</TABLE>
53
<PAGE>
Eastern Environmental Services, Inc.
Consolidated Financial Statements
Six Month Transition Period Ended December 31, 1997 and the
Years ended June 30, 1997, 1996 and 1995
CONTENTS
Report of Independent Auditors.................... F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets....................... F-3
Consolidated Statements of Operations............. F-5
Consolidated Statements of Stockholders' Equity... F-6
Consolidated Statements of Cash Flows............. F-7
Notes to Consolidated Financial Statements........ F-8
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Eastern Environmental Services, Inc.
We have audited the accompanying consolidated balance sheets of Eastern
Environmental Services, Inc. as of December 31, 1997, and June 30, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the six-month period ended December 31, 1997 and 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 Company, wholly owned subsidiaries, 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 Company, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and, for each of the 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 December 31, 1997
and June 30, 1997 and 1996, and the consolidated results of its operations and
its cash flows for the six-month period ended December 31, 1997 and 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
June 30, 1998
F-2
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------------
1997 1997 1996
---------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 6,692,627 $ 5,453,397 $ 2,480,650
Accounts receivable, less allowance for doubtful accounts
of $2,869,000, $2,078,000 and $1,036,000............................... 26,267,643 19,251,478 7,945,959
Deferred income taxes..................................................... 4,726,398 3,369,014 372,445
Tax refund receivable..................................................... 2,260,006 -- 74,467
Prepaid expenses and other current assets................................. 4,913,052 5,556,259 3,285,958
------------ ------------ -----------
Total current assets................................................... 44,859,726 33,630,148 14,159,479
Property and equipment:
Land...................................................................... 12,377,629 7,407,856 670,501
Landfill sites............................................................ 84,979,749 34,111,494 13,471,186
Buildings and leasehold improvements...................................... 10,400,392 7,596,576 2,639,537
Vehicles.................................................................. 45,969,093 38,613,136 31,525,735
Machinery and equipment................................................... 29,397,545 23,441,315 12,507,835
Furniture and fixtures.................................................... 2,394,509 1,729,008 1,706,440
------------ ------------ -----------
Total property and equipment........................................... 185,518,917 112,899,385 62,521,234
Accumulated depreciation and amortization................................. 40,024,060 33,691,391 31,310,841
------------ ------------ -----------
145,494,857 79,207,994 31,210,393
Excess cost over fair market value of net assets acquired, net of
$1,656,000, $875,000 and $440,000 accumulated amortization................. 65,862,775 60,302,159 372,096
Other intangible assets, net of $5,586,000, $3,779,000 and $3,468,000
accumulated amortization................................................ 14,545,933 6,747,659 844,313
Notes receivable from officers.............................................. 432,902 432,902 432,902
Other assets (including $556,000, $533,000 and $433,000 of restricted
cash on deposit for landfill closure and insurance bonding)................ 3,443,251 2,862,302 2,141,862
------------ ------------ -----------
Total assets........................................................... $274,639,444 $183,183,164 $49,161,045
============ ============ ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
-----------------------------
1997 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings......................................................... $ -- $ 155,000 $ 595,000
Accounts payable.............................................................. 9,858,114 10,384,052 6,192,329
Accrued expenses and other current liabilities................................ 13,457,136 11,708,860 2,454,833
Income taxes payable.......................................................... -- 1,080,123 430,728
Current portion of accrued landfill closure and other environmental
costs....................................................................... 2,278,000 2,428,000 1,070,000
Current portion of long-term debt............................................. 3,308,245 3,891,833 2,883,412
Current portion of capital lease obligations.................................. 1,238,789 1,474,656 1,499,124
Deferred revenue.............................................................. 3,661,501 2,968,306 626,117
------------ ------------ -----------
Total current liabilities.................................................. 33,801,785 34,090,830 15,751,543
Deferred income taxes........................................................... 3,842,658 5,889,097 673,443
Long-term debt, net of current portion.......................................... 55,802,918 65,070,500 10,000,022
Capital lease obligations, net of current portion............................... 1,258,993 1,843,914 3,196,024
Accrued landfill closure and other environmental costs.......................... 11,772,644 7,293,648 2,625,421
Other liabilities............................................................... 13,221,023 9,151,246 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares--50,000,000
Issued--none
Common stock, $.01 par value:
Authorized shares--150,000,000
Issued and outstanding shares--24,731,765, 18,608,220 and 11,979,050....... 247,317 186,082 119,790
Additional paid-in capital.................................................... 141,623,620 50,748,718 11,337,554
Retained earnings............................................................. 13,144,745 8,985,388 5,533,507
------------ ------------ -----------
155,015,682 59,920,188 16,990,851
Less treasury stock at cost--39,100 common shares............................. (76,259) (76,259) (76,259)
------------ ------------ -----------
Total stockholders' equity................................................. 154,939,423 59,843,929 16,914,592
------------ ------------ -----------
Total liabilities and stockholders' equity................................. $274,639,444 $183,183,164 $49,161,045
============ ============ ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, JUNE 30,
------------------------------ ---------------------------------------------
1997 1996 1997 1996 1995
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues........................................... $106,870,060 $64,990,530 $145,273,584 $99,988,418 $91,244,597
Cost of revenues................................... 73,323,208 51,173,193 106,109,330 80,239,389 68,486,847
Selling, general, and administrative
expenses.......................................... 13,376,915 7,461,931 19,501,121 16,003,386 13,456,298
Depreciation and amortization...................... 6,435,331 2,961,019 7,202,122 5,339,347 5,369,772
Merger costs....................................... 2,725,000 1,856,340 3,336,792 -- --
------------ ----------- ------------ ----------- -----------
Operating income (loss)............................ 11,009,606 1,538,047 9,124,219 (1,593,704) 3,931,680
Interest expense, net.............................. (1,278,584) (991,903) (3,163,673) (1,286,995) (1,103,319)
Other income, net.................................. 256,281 261,688 595,010 145,107 171,982
------------ ----------- ------------ ----------- -----------
Income (loss) before income taxes.................. 9,987,303 807,832 6,555,556 (2,735,592) 3,000,343
Income tax expense................................. 3,518,187 789,067 1,878,578 96,064 262,402
------------ ----------- ------------ ----------- -----------
Net income (loss).................................. $ 6,469,116 $ 18,765 $ 4,676,978 $(2,831,656) $ 2,737,941
============ =========== ============ =========== ===========
Basic earnings (loss) per share.................... $.28 $ -- $.29 $(.25) $.27
============ =========== ============ =========== ===========
Weighted average number of shares
outstanding....................................... 23,421,362 15,381,031 16,220,259 11,473,345 10,299,624
============ =========== ============ ========== ==========
Diluted earnings (loss) per share $.26 $ -- $.27 $(.25) $.26
============ =========== ============ =========== ===========
Weighted average number of shares
outstanding....................................... 24,968,299 16,057,320 17,183,952 11,473,345 10,392,232
============ =========== ============ =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF SHARES PAR VALUE
------------------ ----------------
CLASS A CLASS A ADDITIONAL
COMMON COMMON COMMON COMMON PAID-IN RETAINED
STOCK STOCK STOCK STOCK CAPITAL EARNINGS
---------- ----------- -------- --------- ------------ ------------
<S> <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
Exercise of common stock
options.................................... 30,000 -- 300 -- 25,950 --
Issuance of common stock.................... 300,000 -- 3,000 -- 297,000 --
Net income.................................. -- -- -- -- -- 2,737,941
Dividends paid to former
stockholders of pooled companies........... -- -- -- -- -- (2,380,285)
Other....................................... -- -- -- -- -- 5,701
---------- ---------- -------- -------- ------------ -----------
Balance at June 30, 1995..................... 9,069,496 1,591,201 90,694 15,912 9,989,068 9,890,698
Exercise of common stock
options.................................... 140,000 -- 1,400 -- 141,100 --
Exercise of common stock
warrants................................... 303,353 -- 3,034 -- 424,312 --
Issuance of common stock.................... 875,000 -- 8,750 -- 783,074 --
Conversion of common stock.................. 1,591,201 (1,591,201) 15,912 (15,912) -- --
Net loss.................................... -- -- -- -- -- (2,831,656)
Dividends paid to former
stockholders of pooled companies........... -- -- -- -- -- (1,525,500)
Other....................................... -- -- -- -- -- (35)
---------- ---------- -------- -------- ------------ -----------
Balance at June 30, 1996..................... 11,979,050 -- 119,790 -- 11,337,554 5,533,507
Exercise of common stock
options and warrants....................... 478,076 -- 4,781 -- 425,780 --
Proceeds from sale of
common stock, less
commissions and issuance
expenses of $724,248....................... 2,670,000 -- 26,700 -- 9,929,052 --
Common stock issued in
connection with the
incorporation of Apex...................... 796,927 -- 7,970 -- 3,242,030 --
Common stock issued in
purchase acquisitions...................... 2,636,542 -- 26,365 -- 25,255,278 --
Common stock issued for
consulting services........................ 5,625 -- 56 -- 44,944 --
Stock issued to satisfy debt
obligation................................. 42,000 -- 420 -- 514,080 --
Adjustment for companies
with different fiscal year end............. (385,958)
Net income.................................. -- -- -- -- -- 4,676,978
Dividends paid to former
stockholders of pooled companies........... -- -- -- -- -- (839,994)
Other....................................... -- -- -- -- -- 855
---------- ---------- -------- -------- ------------ -----------
Balance at June 30, 1997..................... 18,608,220 -- 186,082 -- 50,748,718 8,985,388
Exercise of common stock
options and warrants....................... 353,748 3,537 1,739,707 --
Income tax benefit from exercise
of non-qualified stock options............. -- -- 1,245,469 --
Proceeds from sale of 5,175,000
shares of common stock, less
commissions and issuance expenses
of $6,579,880............................ 5,175,000 51,750 85,224,620 --
Common stock issued for acquisition
accounted for as a pooling of
interests................................. 216,667 2,167 140,833 --
Transactions of pooled company.............. -- -- -- (617,150)
Common stock issued to satisfy debt
obligation................................ 15,761 158 291,421 --
Common stock issued in purchase
acquisitions.............................. 362,369 3,623 2,232,852 --
Dividends to former stockholders of
pooled companies.......................... -- -- -- (1,690,262)
Other....................................... -- -- -- (2,347)
Net income.................................. -- -- -- 6,469,116
---------- ---------- -------- -------- ------------ -----------
Balance at December 31, 1997 24,731,765 -- $247,317 -- $141,623,620 $13,144,745
========== ========== ======== ======== ============ ===========
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
TREASURY
STOCK TOTAL
---------- --------------
<S> <C> <C>
Balance at June 30, 1994..................... $(76,259) $ 19,220,506
Exercise of common stock
options.................................... -- 26,250
Issuance of common stock.................... -- 300,000
Net income.................................. -- 2,737,941
Dividends paid to former
stockholders of pooled companies........... -- (2,380,285)
Other....................................... -- 5,701
--------- ------------
Balance at June 30, 1995..................... (76,259) 19,910,113
Exercise of common stock
options.................................... -- 142,500
Exercise of common stock
warrants................................... -- 427,346
Issuance of common stock.................... -- 791,824
Conversion of common stock.................. -- --
Net loss.................................... -- (2,831,656)
Dividends paid to former
stockholders of pooled companies........... -- (1,525,500)
Other....................................... -- (35)
--------- ------------
Balance at June 30, 1996..................... (76,259) 16,914,592
Exercise of common stock
options and warrants....................... -- 430,561
Proceeds from sale of
common stock, less
commissions and issuance
expenses of $724,248....................... -- 9,955,752
Common stock issued in
connection with the
incorporation of Apex...................... -- 3,250,000
Common stock issued in
purchase acquisitions...................... -- 25,281,643
Common stock issued for
consulting services........................ -- 45,000
Stock issued to satisfy debt
obligation................................. -- 514,500
Adjustment for companies
with different fiscal year end............. (385,958)
Net income.................................. -- 4,676,978
Dividends paid to former
stockholders of pooled companies........... -- (839,994)
Other....................................... -- 855
--------- ------------
Balance at June 30, 1997..................... (76,259) 59,843,929
Exercise of common stock
options and warrants....................... -- 1,743,244
Income tax benefit from exercise
of non-qualified stock options........... -- 1,245,469
Proceeds from sale of 5,175,000
shares of common stock, less
commissions and issuance expenses
of $6,579,880............................ -- 85,276,370
Common stock issued for acquisition
accounted for as a pooling of
interests................................. -- 143,000
Transactions of pooled company.............. -- (617,150)
Common stock issued to satisfy debt
obligation................................ -- 291,579
Common stock issued in purchase
acquisitions.............................. -- 2,236,475
Dividends to former stockholders of
pooled companies.......................... -- (1,690,262)
Other....................................... -- (2,347)
Net income.................................. -- 6,469,116
--------- ------------
Balance at December 31, 1997 $(76,259) $154,939,423
========= ============
</TABLE>
F-6
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, YEAR ENDED JUNE 30,
------------------------------- -------------------------------------------
1997 1996 1997 1996 1995
-------------- -------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)................................... $ 6,469,116 $ 18,765 $ 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..................... 6,435,331 2,961,019 7,202,122 5,339,347 5,369,772
Provision for losses on receivables............... 711,864 431,567 631,871 358,795 472,356
Landfill closure costs............................ 402,587 161,914 512,772 1,317,310 291,804
Noncash severance and transition costs............ -- -- -- 740,827 --
Noncash compensation expense...................... -- -- 45,000 138,173 --
Deferred income taxes............................. 3,130,752 650,200 913,494 3,374 (163,869)
Loss on write-down of assets held for sale........ -- -- -- 402,616 --
Gain on sale of property and equipment............ (102,668) (184,202) (679,173) (195,976) (150,145)
Changes in operating assets and liabilities:
Accounts receivable............................. (4,314,748) (3,946,902) (8,714,452) (1,453,400) (823,725)
Income taxes.................................... (3,408,457) (9,740) 963,375 (20,687) 147,565
Accrued expenses................................ (3,697,760) 1,583,594 -- -- --
Accounts payable................................ (1,958,990) 214,698 1,612,862 1,118,066 (60,959)
Deferred revenue................................ 630,403 1,268,832 2,575,485 237,315 (6,193)
Prepaid expenses and other current assets....... 1,148,202 373,262 -- -- --
Other........................................... (1,061,251) (445,324) (992,851) 816,008 748,258
------------ ------------ ------------ ------------ -----------
Net cash provided by operating activities........... 4,384,381 3,077,683 8,747,483 5,970,112 8,562,805
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired..... (44,082,331) (34,309,203) (39,336,838) -- --
Development of landfill sites....................... (5,259,781) (1,275,711) (5,066,039) (2,094,436) (1,783,394)
Proceeds from sale of property and equipment........ 635,221 557,226 989,893 826,859 437,835
Purchase of property and equipment.................. (10,119,058) (9,417,553) (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 intangibles............................ (816,713) (540,000) (2,682,110) (122,500) (574,950)
Landfill closure and insurance bonding deposits..... (534,439) (142,745) (57,837) 111,485 (18,145)
Other, net.......................................... -- -- 307,654 (81,871) (196,376)
------------ ------------ ------------ ------------ -----------
Net cash used in investing activities............... (60,177,101) (45,127,986) (61,737,333) (12,779,903) (8,590,067)
FINANCING ACTIVITIES
Proceeds from revolving line of credit, long-term
debt and capital lease obligations................. 36,254,128 40,679,360 69,360,762 10,510,920 7,201,440
Payments on revolving line of credit, long-term debt
and capital lease obligations...................... (64,878,530) (6,860,447) (26,194,484) (4,900,202) (4,335,686)
Net (payments) borrowings on note payable to
shareholder/officer................................ -- (59,407) -- (229,695) 229,705
Proceeds from the incorporation of Apex............. -- 3,250,000 3,250,000 -- --
Proceeds from issuance of common stock, net
of expenses and commissions........................ 87,019,614 10,221,503 10,386,313 1,361,670 326,250
Cash dividends paid to former stockholders of
pooled companies................................... (1,363,262) (270,405) (839,994) (1,525,500) (2,380,285)
------------ ------------ ------------ ------------ -----------
Net cash provided by financing activities........... 57,031,950 46,960,604 55,962,597 5,217,193 1,041,424
------------ ------------ ------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents 1,239,230 4,910,301 2,972,747 (1,592,598) 1,014,162
Cash and cash equivalents at beginning of period.... 5,453,397 2,480,650 2,480,650 4,073,248 3,059,086
------------ ------------ ------------ ------------ -----------
Cash and cash equivalents at end of period.......... $ 6,692,627 $ 7,390,951 $ 5,453,397 $ 2,480,650 $ 4,073,248
============ ============ ============ ============ ===========
</TABLE>
See accompanying notes.
F-7
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 reflect the merger of the
Company with (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 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:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,189,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 386,000
CHANGE IN YEAR END
On April 1, 1998, the Company changed its fiscal year end from June 30 to
December 31. The accompanying consolidated financial statements include audited
financial statements for the six month transition period ended December 31,
1997.
UNAUDITED FINANCIAL STATEMENTS
The consolidated financial statements for the six months ended December 31,
1996 are unaudited; however, in the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the consolidated financial statements for the interim period have been
included.
DESCRIPTION OF BUSINESS
The Company is engaged in the business of providing integrated solid waste
management services, consisting of collection, transportation, and disposal
services through nonhazardous waste disposal facilities and waste hauling
operations. The Company's customers include municipal, commercial, industrial,
and residential customers, both local and national companies, in various
geographic regions 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.
F-8
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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 $3,453,000, $3,159,000 and $2,701,000 at December 31, 1997,
and 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 $138,000,
$178,000, $84,000, and $48,000 were capitalized for the six months ended
December 31, 1997 and 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 $781,000, $435,000, $81,000, and $75,000, for the six months ended
December 31, 1997 and 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 $583,000, $350,000, $233,000,
and $330,000, for the six months ended December 31, 1997 and 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
F-9
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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 $3,000,000, $2,200,000, $22,000, and $109,000 and financed insurance
premiums of $0, $1,211,000, $462,000, and $458,000 for the six months ended
December 31, 1997 and 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.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No. 131
is effective for financial statements for fiscal years beginning after December
15, 1997. The Company is evaluating the disclosure requirements of SFAS No. 131
and currently believes that its adoption will have no material impact on its
future disclosure requirements.
F-10
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, -----------------------------------------------
1997 1997 1996 1995
---------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)...................................... $ 6,469,116 $ 4,676,978 $(2,831,656) $ 2,737,941
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share weighted
average shares.......................................... 23,421,362 16,220,259 11,473,345 10,299,624
Effect of dilutive options and warrants................... 1,546,937 963,693 -- 92,608
----------- ----------- ----------- -----------
Denominator for diluted earnings per share................ 24,968,299 17,183,952 11,473,345 10,392,232
=========== =========== =========== ===========
Basic earnings (loss) per share........................... $ .28 $ .29 $ (.25) $ .27
=========== =========== =========== ===========
Diluted earnings (loss) per share......................... $ .26 $ .27 $ (.25) $ .26
=========== =========== =========== ===========
</TABLE>
2. ACQUISITIONS
ACQUISITIONS ACCOUNTED FOR UNDER THE POOLING OF INTERESTS METHOD
SIX MONTHS ENDED DECEMBER 31, 1997
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.
1997 FISCAL YEAR
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.
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.
F-11
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
SUBSEQUENT TO DECEMBER 31, 1997
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 post-combination financial information has
been released, 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 post-
combination financial information has been released, 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
post-combination financial information has been released, and accordingly, the
accompanying financial statements include the accounts of the Stamato Companies
for all periods presented.
A detail of revenues and net income (loss) of the separate companies is as
follows (unaudited):
<TABLE>
<CAPTION>
NET INCOME
REVENUES (LOSS)
---------------- ------------------
Six months ended December 31, 1997
<S> <C> <C>
Eastern Environmental Services, Inc......................................... $ 40,193,591 $ 2,562,082
Pooled companies............................................................ 66,676,469 3,907,034
------------ -----------
Combined.................................................................... $106,870,060 $ 6,469,116
============ ===========
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
F-12
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
$780,000, $1,200,000, $280,000, and $1,500,000 for the six months ended December
31, 1997 and the years ended June 30, 1997, 1996, and 1995, respectively.
In the six months ended December 31, 1997, the Company incurred $2,725,000 in
merger related costs associated with the Waste X and Hamm's mergers, and mergers
consummated in the year ended June 30, 1997. At December 31, 1997, approximately
$2,218,000 is remaining in accrued liabilities.
In the fiscal year ended June 30, 1997, the Company incurred approximately
$3,337,000 in merger-related costs associated with the Super Kwik, Donno, and
Apex mergers, of which approximately $2,040,000 and $1,355,000 is remaining in
accrued liabilities at June 30, 1997 and December 31, 1997, respectively. 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
totaling $904,000 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 and is included within
income tax expense for 1997.
ACQUISITIONS ACCOUNTED FOR UNDER THE PURCHASE METHOD
During the six months ended December 31, 1997, the Company consummated six
acquisitions that were accounted for under the purchase method of accounting.
Results of operations of companies that were acquired and subject to purchase
accounting are included from the dates of such acquisitions. The total costs of
acquisitions, including liabilities assumed, accounted for under the purchase
method were $62.9 million. The excess cost over the fair market value of the
net assets acquired was $14.7 million. 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.
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 $88.2 million. The excess cost over the fair market value of the net
assets acquired was $54.2 million. 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 six 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 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>
Six Months Ended Year Ended
December 31, 1997 June 30, 1997
------------------- ------------------
<S> <C> <C>
Revenues $113,332,000 $193,329,000
Net income $ 6,624,000 $ 3,994,000
Diluted earnings per share $ .26 $ .21
</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.
F-13
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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>
SIX MONTHS YEAR ENDED JUNE 30,
ENDED DECEMBER 31, --------------------------------------
1997 1997 1996 1995
------------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of period............... $2,078,000 $1,036,000 $ 977,000 $ 650,000
Additions (charged to expense)............... 712,000 632,000 359,000 472,000
Deductions................................... (341,000) (785,000) (300,000) (145,000)
Other - purchase price allocation............ 420,000 1,195,000 -- --
---------- ---------- ---------- ---------
Balance at end of period..................... $2,869,000 $2,078,000 $1,036,000 $ 977,000
========== ========== ========== =========
</TABLE>
4. LONG-TERM DEBT AND CAPITAL 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 $150,000,000 (as last amended on April 27,
1998) for repayment of certain debt, funding of acquisitions, and includes up to
$50,000,000 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 October 31, 2002. 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.
In September 1997, the Company purchased certain assets from Clean Ventures,
Inc. for cash and notes payable. The notes are non-interest bearing with the
$5,000,000 principal due in September 2000, or earlier upon the occurrence of
certain events. The principal amount of the notes was not discounted and no
interest was imputed due to the uncertainty of the payment stream.
In December 1997, the Company, in connection with the acquisition of Pine
Grove, Inc., assumed the obligation of $11,700,000 of tax exempt variable rate
revenue bonds. Interest is payable monthly based on variable rates. The average
interest rate in December 1997 was 3.76%.
Debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, --------------------------------
1997 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Revolving credit facility with BankBoston, N.A. and Bank of America
Illinois, maturity date of October 2002, variable interest rates
ranging from 8.0% to 8.5%.............................................. $31,000,000 $55,500,000 $ --
Tax exempt revenue bonds, with interest payable monthly
at a variable rate. (3.76% average in Dec. 1997)....................... 11,700,000 --
Notes payable........................................................... 5,000,000 --
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 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......................................... 4,015,842 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 12.4%, payable monthly in installments ranging from
$335 to $34,201........................................................ 6,561,091 7,958,195 10,422,894
Other................................................................... 1,882,012 2,894,281 736,652
----------- ----------- -----------
61,608,945 72,280,903 17,578,582
Less current portion.................................................... 4,547,034 5,366,489 4,382,536
----------- ----------- -----------
$57,061,911 $66,914,414 $13,196,046
=========== =========== ===========
</TABLE>
F-14
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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>
DECEMBER 31, JUNE 30,
-------------------------------
1997 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cost......................................................... $3,896,681 $4,280,592 $4,492,355
Accumulated depreciation..................................... 1,347,582 1,403,794 934,210
---------- ---------- ----------
$2,549,099 $2,876,798 $3,558,145
========== ========== ==========
</TABLE>
Maturities of long-term debt are as follows: 1998--$4,547,034; 1999--
$3,819,352; 2000--$7,216,062; 2001--$1,476,623; 2002 and thereafter--
$44,549,874.
Interest paid on all indebtedness was $1,679,000, $3,290,000, $1,351,000, and
$1,088,000, for the six months ended December 31, 1997 and the fiscal years
ended June 30, 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 December 31, 1997 aggregated
$16,766,000.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------------
1997 1997 1996
------------------ --------------- --------------
<S> <C> <C> <C>
Accrued compensation.................................. $ 1,391,186 $ 959,496 $ 460,814
Accrued professional fees............................. 268,845 277,148 165,500
Miscellaneous taxes................................... 351,768 721,821 178,276
Accrued severance costs............................... 143,742 165,869 583,832
Accrued transaction and transition costs.............. 7,431,244 5,555,181 97,000
Other................................................. 3,870,351 4,029,345 969,411
----------- ----------- ----------
$13,457,136 $11,708,860 $2,454,833
=========== =========== ==========
</TABLE>
6. ACCRUED LANDFILL CLOSURE AND OTHER ENVIRONMENTAL COSTS
The Company owns or operates eleven non-hazardous solid waste landfills, all
of which are permitted and ten 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
F-15
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 December 31, 1997, the Company estimates that the
costs of final closure of the currently permitted and operating areas at the
Company's landfills will be approximately $20.0 million, of which $4.7 million
has been accrued as of December 31, 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 $3.6 million for post-closure
obligations as of December 31, 1997.
Funding of closure and post-closure obligations and other environmental costs
accrued to date are estimated as follows: 1998-$2,278,000; 1999-$1,402,000;
2000-$1,000,000; 2001 and thereafter $9,371,000.
Also included in accrued landfill closure and other environmental costs is
$5.4 million for waste relocation costs at the Company's Chambersburg,
Pennsylvania landfill.
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.
At December 31, 1997 the Company had as financial assurance, irrevocable
letters of credit outstanding of $1,126,000, bonds outstanding of $12,929,000
million, and cash deposits of $378,000.
7. OTHER LIABILITIES
In connection with certain acquisitions made by the Company, the Company has
accrued liabilities totaling $13.2 million 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
On January 14, 1998, the Stockholders of the Company approved (i) an amendment
to 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) an amendment to the Company's Certificate of
Incorporation, as amended, to eliminate Class A common stock, and (iii) an
amendment to the Company's Certificate of Incorporation, as amended, to create a
class of undesignated Preferred Stock.
F-16
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Each share of the Company's Common Stock is entitled to one vote.
In 1996, William C. Skuba, the former President, Chief Executive Officer,
Chairman of the Board, and controlling stockholder of the Company, sold 500,000
shares of the Company's common stock ("Skuba Stock") at a price of $2.00 per
share to a group of investors ("Purchasers") pursuant to a Stock Purchase
Agreement dated as of May 8, 1996 by and among Mr. Skuba and the Purchasers (the
"Stock Purchase Agreement").
Pursuant to the Stock Purchase Agreement, Mr. Skuba also converted all of his
Class A common stock of the Company which carried four votes per share into
common stock which carries one vote per share. Mr. Skuba also granted to the
purchasers an irrevocable proxy over his remaining 1,111,101 shares of common
stock for a period that expired on June 20, 1997.
In fiscal 1995, the Company, through a private placement, issued 300,000
shares of its common stock for cash of $1.00 per share or $300,000, pursuant to
stock subscription agreements with two individual accredited investors. In
fiscal 1996, the Company, through additional private placements of stock with
accredited investors, issued an additional 875,000 shares of its common stock
for cash of $1.00 per share or $875,000. Certain of the private placements
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 its 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 private placement are not
registered, and registration rights do not commence for two years.
The Company also issued 125,000 shares of its common stock at $4.00 per share
to a bank at substantially the same terms as the Placement.
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 related costs, were approximately $85,300,000.
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 December 31,
1997, 2,238,045 options have been granted under this Plan including 1,317,837
nonqualified stock options.
F-17
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company's Board of Directors adopted the Company's 1997 Stock Option Plan
on November 14, 1997 (the "1997 Plan"). The 1997 Plan became effective when
adopted by the Board of Directors. As of December 31, 1997, 315,000 options have
been granted under the 1997 Plan including 300,312 non-qualified stock options.
In January 1998, the Company's stockholders approved the 1997 Plan. Stockholder
approval was required so that issued options would receive incentive stock
option treatment. The 1997 Plan provides for the granting of incentive stock
options to directors, officers, or employees of the Company. Under this plan,
5,000,000 shares are reserved for issuance. Incentive and non-qualified options
have exercise prices with terms of the options consistent with the provisions of
the previously existing plans.
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 45% for the six
months ended December 31, 1997, and 70% for the years ended June 30, 1997 and
1996; 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>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30
------------------------------------
1997 1997 1996
-------------------- ---------------- -----------------
<S> <C> <C> <C>
Pro forma net income (loss) $4,632,000 $993,000 $(3,067,000)
Pro forma diluted earnings (loss) per share $ .19 $ .06 $ (.27)
</TABLE>
Options outstanding have been granted to officers and employees to purchase
common stock at prices ranging from $.01 to $21.00 per share. A summary of the
option transactions is as follows:
<TABLE>
<CAPTION>
Weighted Shares
Average Exercisable
Exercise at
Shares Price End of Period
---------- ---------- --------------
<S> <C> <C> <C>
Options outstanding at June 30, 1994 417,200 $.88 337,450
Granted 20,000 .97
Exercised (30,000) .87
Cancelled (40,300) .99
---------
Options outstanding at June 30, 1995 366,900 .88 350,650
Granted 655,000 5.78
Exercised (140,000) 1.02
Cancelled (1,000) 1.88
---------
Options outstanding at June 30, 1996 880,900 4.50 338,333
Granted 1,590,736 9.07
Exercised (76,945) .79
Cancelled -- --
---------
Options outstanding at June 30, 1997 2,394,691 7.57 657,379
Granted 425,800 18.95
Exercised (245,168) 4.74
Cancelled (12,500) 13.14
---------
Options outstanding at December 31, 1997 2,562,823 9.71 904,635
</TABLE>
F-18
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The weighted average fair values of options granted during the six months
ended December 31, 1997, and for the years ended June 30, 1997 and 1996 were
$8.04, $5.14 and $3.14 per share, respectively. The weighted average exercise
price of options outstanding and exercisable at December 31, 1997 was $6.56.
Compensation expense has been recognized for those options granted with
exercise prices below the fair market value of the Company's stock on the date
of grant.
Stock options outstanding at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
RANGE OF WEIGHTED AVERAGE WEIGHTED
EXERCISE NUMBER REMAINING AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
- -------------- ------------------- -------------------- -----------------
<S> <C> <C> <C>
$ .01 - $5.00 173,941 1.7 years $ 1.09
$ 5.01 - $10.00 1,357,277 8.4 years $ 6.38
$10.01 - $15.00 612,800 9.3 years $13.19
$15.01 - $21.00 417,800 7.9 years $19.00
---------
$ .01 - $21.00 2,561,823 8.1 years $ 9.71
=========
</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 common shares are
reserved under the Employee Plans. At December 31, 1997, 27,311 shares have been
issued under the Employee Plans. At December 31, 1997, the Company has 866,884
warrants outstanding of which 564,884 are exercisable to purchase shares of
common stock. Terms of warrants have been established by the Board of Directors
at prices between $1.50 and $18.75 expiring at various dates through 2007.
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>
DECEMBER 31, JUNE 30,
----------------------------
1997 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Deferred tax liabilities:
Property, equipment and intangibles.................................... $(5,891,475) $(6,702,179) $ (794,844)
Other, net............................................................. (1,152,588) (906,429) (123,583)
----------- ----------- -----------
Total deferred tax liabilities...................................... (7,044,063) (7,608,608) (918,427)
Deferred tax assets:
Allowance for doubtful accounts........................................ 1,142,639 906,998 158,915
Accrued refurbishing costs............................................. 3,119,605 2,191,797 --
Reserve for loss on assets held for sale............................... -- 62,205 255,933
Net operating loss carryforwards....................................... 1,245,464 194,284 1,484,833
Environmental costs.................................................... 2,327,732 1,623,741 --
AMT credit............................................................. 92,363 109,500 24,376
Reserve for severance and transition costs............................. -- -- 269,232
Other, net............................................................. -- -- 68,140
----------- ----------- -----------
Total deferred assets............................................... 7,927,803 5,088,525 2,261,429
Valuation allowance for deferred tax assets.............................. -- -- (1,644,000)
----------- ----------- -----------
Net deferred tax assets.................................................. 7,927,803 5,088,525 617,429
----------- ----------- -----------
Net deferred tax assets (liabilities).................................... $ 883,740 $(2,520,083) $ (300,998)
=========== =========== ===========
</TABLE>
F-19
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of $3,558,000 that expire through 2011. However, due
to a change in control, the Company's ability to use such net operating loss
carryforwards may be limited.
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, --------------------------------
1997 1997 1996 1995
--------------------- -------- -------- --------
<S> <C> <C> <C> <C>
Current:
Federal............................................. $ 199,070 $ 453,347 $29,028 $ 275,016
State............................................... 188,365 511,737 63,662 151,255
---------- ---------- ------- ---------
387,435 965,084 92,690 426,271
Deferred:
Federal............................................. 2,523,594 838,504 600 (65,452)
State............................................... 607,158 74,990 2,774 40,693
Operating loss carryforward......................... -- -- -- (139,110)
---------- ---------- ------- ---------
3,130,752 913,494 3,374 (163,869)
---------- ---------- ------- ---------
Provision for income taxes.......................... $3,518,187 $1,878,578 $96,064 $ 262,402
========== ========== ======= =========
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to the provision for income taxes is:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
------------------ ------------------------------------------
1997 1997 1996 1995
------------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Tax at U.S. federal statutory rates................... $3,482,447 $ 2,235,678 $(1,160,387) $(332,989)
S Corporation income prior to pooling date............ (736,712) (971,200) -- --
State income taxes, net of federal tax benefit........ 537,353 326,650 66,436 204,631
Nondeductible costs and other acquisition accounting
adjustments.......................................... 390,681 1,019,829 24,918 24,918
S Corporation status termination...................... 9,798 904,563 -- --
Valuation allowance for deferred tax assets........... -- (1,644,000) 1,154,000 340,000
Other................................................. (165,380) 7,058 11,097 25,842
---------- ----------- ----------- ---------
Provision for income taxes............................ $3,518,187 $ 1,878,578 $ 96,064 $ 262,402
========== =========== =========== =========
</TABLE>
Income tax payments, net, made during the six months ended December 31, 1997
and the years ended June 30, 1997, 1996, and 1995 were $3,730,000, $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 December 31, 1997, are as follows: 1998-$1,245,000, 1999-
$1,125,000, 2000-$829,000, 2001-$618,000, and 2002-$398,000. Total rental
expense under operating leases was approximately $1,129,000, $623,000, $370,000,
and $411,000 for the six months ended December 31, 1997 and the years ended June
30, 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.
F-20
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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 gave 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. In May 1998, the DEC 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 is seeking an injunction. Management believes that they will be
successful in obtaining the necessary permits to operate this transfer station.
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
December 31, 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 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
$3,200,000. 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
F-21
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 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
F-22
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 expired in June 1998.
The Company entered into an agreement in July 1996 to lease office space from
a company that is controlled by an officer of the Company. The lease is for a
period of five years and provides for a monthly rental of $6,250 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 $0, $56,000, $590,000, and $414,000 for the six months ended
December 31, 1997 and the 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 December 31, 1997, 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 December 31, 1997 was $750,000.
The Company paid a professional corporation owned by an officer of the Company
approximately $198,000 during the six months ended December 31, 1997 and $76,000
in the year ended June 30, 1997 for legal services rendered to the
Company.
Since October 1996, the Company has utilized a corporation, owned by Matthew
J. Paolino, a Director of the Company, to provide excavation services and rental
equipment in connection with the development of additional disposal capacity at
two of the Company's landfills in Pennsylvania and other Company projects. The
amount paid to the corporation was approximately $432,000 and $741,000 for the
six months ended December 31, 1997 and the year ended June 30, 1997,
respectively.
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 $109,000, $192,000,
$262,000, and $253,000 for the six months ended December 31, 1997, the 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
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 will be accounted for using the purchase method of
accounting.
On May 29, 1998, the Company acquired certain assets of Kimmins Corp.,
Transcor Waste Services, Inc., and Kimmins Recycling Corp. (collectively,
"Kimmins"). Consideration under the agreement consisted of $11,596,000 of cash
to the Sellers. This transaction will be accounted for using the Purchase Method
of Accounting.
Additionally, from January 1, 1998 to June 30, 1998, the Company acquired
the assets of 14 collection companies in separate transactions. Total
consideration under the agreements consisted of approximately 384,000 shares of
Common Stock, cash of approximately $13.9 million to the sellers, and the
assumption of approximately $124,000 of long term debt. These transactions will
be accounted for using the purchase method of accounting.
Also, between May 29, 1998 and June 25, 1998, the Company completed mergers
with five companies (three solid waste collection companies, one special waste
collection company and one landfill) in separate transactions. 431,125 shares of
the Company's Common Stock were issued in exchange for all the issued and
outstanding stock of these companies. These transactions will be accounted for
using the Pooling of Interests Method. Periods prior to the consummation of the
merger will not be restated to include the accounts of these companies as
combined results would not be materially different from the results as
presented.
On June 26, 1998, the Company acquired all of the stock of several
residential and commercial waste collection and recycling operations (All Waste
Systems, Inc. and Ulster Sanitation, Inc.)("All Waste and Ulster") and related
companies in exchange for approximately 2,300,000 shares of the Company's common
stock. These combinations are anticipated to be accounted for using the pooling
of interests method of accounting. Revenues and net loss, for the year ended
December 31, 1997, for All Waste and Ulster, on a combined basis, were
$31,201,000 and $588,000, respectively.
In June 1998, the Company completed its registration and sale of 8,625,000
shares, at $26.375 per share, which included the sale of 500,000 shares by
selling shareholders and the sale by the Company of 1,125,000 shares to cover
overallotments. Net proceeds to the Company, after deduction of fees and related
costs, were approximately $204,000,000. The unaudited pro forma diluted earnings
per share for the six months ended December 31, 1997 assuming the issuance of
these shares and receipt of related proceeds on July 1, 1997 and the reduction
of outstanding indebtedness and related interest expense, net of income taxes,
would have been $.21 per share.
On April 1, 1998, the Company adopted a change in its fiscal year end from
June 30 to December 31. The unaudited pro forma information set forth below
represents certain information the calendar year ended December 31, 1997 had the
adoption been made effective January 1, 1997:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
-----------------
(unaudited)
<S> <C>
Revenues ............................. $ 187,153,114
Net income ........................... $ 11,127,329
Diluted earnings per share ........... $ .51
</TABLE>
F-23
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ---- -----------
3.1 Certificate of Incorporation
3.2 By-Laws
10.5 1991 Stock Option Plan
10.10 Agreement between Pulaski County Solid Waste Management District and
Pulaski Landfill, Inc.
21 Subsidiaries of the Company
22 Consent of Ernst & Young LLP
23 Powers of Attorney (Included on the signature page of this Report)
27 Financial Data Schedule
<PAGE>
Exhibit 3.1
-----------
CERTIFICATE OF INCORPORATION
OF
EASTERN ENVIRONMENTAL SERVICES, INC.
(Restated through June 1, 1998)
-------------------------------------------
The undersigned, being a natural person, for the purpose of organizing a
Corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified and
referred to as the "General Corporation Law of the State of Delaware"), hereby
certifies that:
FIRST: The name of the corporation is EASTERN ENVIRONMENTAL SERVICES, INC.
(hereinafter called the "Corporation").
SECOND: The address, including street, number, city and county of the
registered office of the Corporation in the State of Delaware is 229 South State
Street, City of Dover, County of Kent; and the name of the registered agent of
the Corporation in the State of Delaware at such address is The Prentice-Hall
Corporation System, Inc.
THIRD: The nature of the business and the purposes to be conducted and
promoted by the Corporation, which shall be in addition to the authority of the
Corporation to conduct any lawful business, to promote any lawful purpose, and
to engage in any lawful act or activity for which Corporations may be organized
under the General Corporation Law of the State of Delaware, are as follows:
To provide all manner of asbestos abatement contractor services
including the removal, enclosure, encapsulation, repair or other
treatment of asbestos and asbestos containing materials; to consult
with building owners, employers, school officials and others with
respect to asbestos hazards and asbestos abatement; to conduct surveys
and take samples of asbestos containing material; to operate an
asbestos and hazardous materials testing laboratory; to conduct air
and environmental sampling and testing; to provide construction
contractor services including complete interior/exterior construction,
fireproofing, reinsulation, soundproofing and ceiling installation; to
remove, test for, or abate the danger from hazardous substances and to
operate facilities for the disposal of asbestos and hazardous wastes;
and to furnish as principal agent, broker or otherwise the services of
skilled and
<PAGE>
unskilled personnel to perform any of the foregoing
services or activities.
FOURTH: The aggregate number of shares of Common Stock, par value $.01 per
share, which the Corporation shall have authority to issue is 150,000,000
shares. The aggregate number of shares of undesignated Preferred Stock, par
value $.01 per share, which the Corporation shall have authority to issue is
50,000,000 shares.
No holder of any of the shares of Stock of the Corporation, whether now or
hereafter authorized and issued, shall be entitled as of right to purchase or
subscribe for (1) any unissued stock of any class, or (2) any additional shares
of any class to be issued by reason of any increase of the authorized capital
stock of the Corporation of any class, or (3) bonds, certificates of
indebtedness, debentures, or other securities convertible into stock of the
Corporation, or carrying any right to purchase stock of any class, but any such
unissued stock or such additional authorized issue of any stock or of other
securities convertible into stock, or carrying any right to purchase stock, may
be issued and disposed of pursuant to resolution of the Board of Directors to
such persons, firms, corporations or associations and upon such terms as may be
deemed advisable by the Board of Directors in the exercise of its discretion.
The powers, designations, preferences and relative, participating, optional
or other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights
are as follows:
PART I
Undesignated Preferred Stock
1. Issuance in Series. Shares of Preferred Stock may be issued in one or more
series at such time or times, and for such consideration or considerations as
the Board of Directors may determine. All shares of any one series of any such
Preferred Stock will be identical with each other in all respects, except that
shares of one series issued at different times may differ as to dates from which
dividends thereon may be cumulative. All series will rank equally and be
identical in all respects, except as permitted by the following provisions of
Section 2.
2. Authority of the Board with Respect to Series. The Board of Directors is
authorized at any time and from time to time, subject to limitations prescribed
by law and the provisions of this Article FOURTH, to provide for the issuance of
shares of Preferred Stock in one or more series and by filing a certificate
pursuant to the applicable law of the State of Delaware to establish the number
of shares to be included in each such series, and to fix the powers,
designations, preferences and relative, participating, optional or other special
rights and qualifications, limitations or restrictions thereof as are stated and
expressed in the resolution or resolutions providing for the issue thereof
adopted by the Board of Directors, and as are not stated and expressed in the
Certificate of Incorporation including, but not limited to, determination of any
of the following:
(a) the distinctive serial designation and the number of shares
constituting a series;
-2-
<PAGE>
(b) the dividend rate or rates of the shares of a series, whether
dividends are cumulative and, if so, from which date, the payment date or
dates for the dividends, the relative rights of priority, if any, and the
participating or other special rights, if any, with respect to dividends;
(c) the voting powers, full or limited, if any, of the shares of the
series;
(d) whether the shares of the series are redeemable and, if so, the
terms and conditions on which the shares may be redeemed, including the
date or dates upon or after which they shall be redeemable, and the amount
per share payable in case of redemption, which amount may vary under
different conditions and at different redemption dates;
(e) the amount or amounts payable upon the shares of a series in the
event of voluntary or involuntary liquidation, dissolution or winding up of
the Corporation prior to any payment or distribution of the assets of the
Corporation to any other class or series of the same or any other class or
classes of stock of the Corporation ranking junior to that series of
Preferred Stock;
(f) whether the shares of a series are entitled to the benefit of a
sinking or retirement fund to be applied to the purchase or redemption of
shares of that series and, if so entitled, the amount of the fund and the
manner of its application, including the price or prices at which the
shares may be redeemed or purchased through the application of the fund;
(g) whether the shares of a series are convertible into, or
exchangeable for, shares of any other class or series of the same or any
other class or classes of stock of the Corporation and, if so convertible
or exchangeable, the conversion price or prices, or the rates of exchange,
and the adjustments thereof, if any, at which the conversion or exchange
may be made, and any other terms and conditions of the conversion or
exchange; and
(h) any other preferences, privileges and powers, and relative
participating, optional or other special rights, and qualifications,
limitations or restrictions of a series, as the Board of Directors may deem
advisable and as are not inconsistent with the provisions of this
Certificate of Incorporation.
3. Dividends. Before any dividends on any class or classes of stock of the
Corporation ranking junior to the Preferred Stock (other than dividends payable
in shares of any class or classes of stock of the Corporation ranking junior to
the Preferred Stock) may be declared or paid or set apart for payment, the
holders of shares of Preferred Stock of each series are entitled to be paid such
cash dividends, but only when and as declared by the Board of Directors out of
funds legally available therefor, as they may be entitled to in accordance with
the resolution or resolutions adopted by the Board of Directors providing for
the issue of the series, payable on such dates in each year as may be fixed in
the resolution or resolutions. The term "class or classes of stock of the
Corporation ranking junior to the Preferred Stock" means the Common Stock and
any other class or
-3-
<PAGE>
classes of stock of the Corporation hereafter authorized which rank junior to
the Preferred Stock as to dividends or upon liquidation, dissolution or winding
up of the Corporation.
4. Reacquired Shares. Shares of Preferred Stock which have been issued and
reacquired in any manner by the Corporation (excluding, until the Corporation
elects to retire them, shares which are held as treasury shares but including
shares redeemed, shares purchased and retired and shares which have been
converted into shares of Common Stock) will have the status of authorized and
unissued shares of Preferred Stock and may be reissued.
5. Voting Rights. Unless and except to the extent otherwise required by law or
provided in the resolution or resolutions of the Board of Directors creating any
series of Preferred Stock pursuant to this Part I, the holders of Preferred
Stock shall have no voting power with respect to any matter whatsoever.
PART II
Common Stock
1. Junior to Preferred Stock. The Common Stock shall rank junior to the
Preferred Stock with respect to payment of dividends and distribution on
liquidation, dissolution or winding up of the Corporation.
2. Voting Rights. Except as expressly provided by law, or as otherwise
provided in Part I above, all voting rights shall be vested in the holders of
the Common Stock. At each meeting of stockholders of the Corporation, each
holder of Common Stock shall be entitled to one vote for each such share on each
matter to come before the meeting, except as otherwise provided in this
Certificate of Incorporation or by law.
3. Dividends. After all accumulated and unpaid dividends upon all shares of
Preferred Stock for all previous dividend periods shall have been paid and full
dividends on all shares of Preferred Stock for the then current dividend period
shall have been declared and a sum sufficient for the payment thereof set apart
therefor, and after or concurrently with the setting aside of any and all
amounts then or theretofore required to be set aside for any sinking fund
obligation or obligation of a similar nature in respect of any class or series
of preferred stock or any other class or series of stock having preferential
dividend rights, then and not otherwise, dividends may be declared upon and paid
to the holders of the Common Stock to the exclusion of the holders of the
Preferred Stock.
4. Rights Upon Liquidation. In the event of voluntary or involuntary
liquidation or dissolution or winding up of the Corporation, after payment in
full of amounts, if any, required to be paid to the holders of shares of stock
having preferential liquidation rights, including without limitation the holders
of the Preferred Stock, the holders of the Common Stock shall be entitled, to
the exclusion of the holders of shares of stock having preferential liquidation
rights, including without limitation the holders of the Preferred Stock, to
share ratably in all remaining assets of the Corporation."
FIFTH: The name and the mailing address of the incorporator are as follows:
-4-
<PAGE>
NAME MAILING ADDRESS
---- ---------------
Kenneth S. Rose Dreyer and Traub
101 Park Avenue
New York, New York, 10178
SIXTH: The Corporation is to have perpetual existence.
SEVENTH: For the management of the business and for the conduct of the
affairs of the Corporation, and in further definition, limitation and regulation
of the powers of the Corporation and of its directors and of its stockholders or
any class thereof, as the case may be, it is further provided:
1. The management of the business and the conduct of the affairs of
the Corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be
fixed by, or in the manner provided in, the By-Laws. The phrase "Whole
Board" and the phrase "total number of directors" shall be deemed to have
the same meaning, to wit, the total number of directors which the
Corporation would have if there were no vacancies. No election of
directors need be by written ballot.
2. After the original or other By-Laws of the Corporation have been
adopted, amended, or repealed, as the case may be, in accordance with the
provisions of Section 109 of the General Corporation Law of the State of
Delaware, and after the Corporation has received any payment for any of its
stock, the power to adopt, amend or repeal the By-Laws of the Corporation
may be exercised by the Board of Directors of the Corporation; provided,
however, that any provision for the classification of directors of the
Corporation for staggered terms pursuant to the provisions of subsection
(d) of Section 141 of the General Corporation Law of the State of Delaware
shall be set forth in an initial By-Law or in a By-Law adopted by the
stockholders entitled to vote of the Corporation unless provisions for such
classification shall be set forth in this certificate of incorporation.
3. Whenever the Corporation shall be authorized to issue only one
class of stock each outstanding share shall entitle the holder thereof to
notice of, and the right to vote at, any meeting of stockholders. Whenever
the Corporation shall be authorized to issue more than one class of stock
no outstanding share of any class of stock which is denied voting power
under the provisions of the certificate of incorporation shall entitle the
holder thereof to the right to vote at any meeting of stockholders except
as the provisions of paragraph (c)(2) of Section 242 of the General
Corporation Law of the State of Delaware shall otherwise require; provided,
that no share of any such class which is otherwise denied voting power
shall entitle the holder thereof to vote upon the increase or decrease in
the number of authorized shares of said class.
EIGHTH: A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director,
-5-
<PAGE>
except for liability (i) for any breach of the director's duty of loyalty to the
Corporation 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 Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit.
NINTH: (A) RIGHT TO INDEMNIFICATION. Each person who was or is made a
party or is threatened to be made a party or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer,
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including attorney's fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid
in settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators: provided, however, that, except
as provided in paragraph (b) hereof, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the board of directors of the Corporation. The right to
indemnification conferred in this Section shall be a contract right and shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that, if the Delaware General Corporation Law requires, the payment of
such expenses incurred by a director or officer (in his or her capacity as a
director or officer and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this Section or otherwise. The
Corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
(b) RIGHT OF CLAIMANT TO BRING SUIT. If a claim under paragraph (a) of
this Section is not paid in full by the Corporation within thirty days after a
written claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if successful in whole or in part, the claimant shall be entitled
to be paid also the expense of prosecuting such claim. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking, if any is
-6-
<PAGE>
required, has been tendered to the Corporation) that the claimant has not met
the standards of conduct which make it permissible under the Delaware General
Corporation Law for the Corporation to indemnify the claimant for the amount
claimed, but the burden of proving such defense shall be on the Corporation.
Neither the failure of the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he or she met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the claimant has not met such
applicable standard or conduct, shall be a defense to the action or create a
presumption that the claimant has not met the applicable standard of conduct.
(c) NON-EXCLUSIVITY OF RIGHTS. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Section shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, provision of
the Certificate of Incorporation, By-Laws, agreement, vote of stockholders or
disinterested directors or otherwise.
(d) INSURANCE. The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Corporation
or another Corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense liability or
loss under the Delaware General Corporation Law.
TENTH: From time to time any of the provisions of this Certificate of
Incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the Corporation by this
certificate of incorporation are granted subject to the provisions of this
Article TENTH.
-7-
<PAGE>
Exhibit 3.2
-----------
BY-LAWS
-------
OF
EASTERN ENVIRONMENTAL SERVICES, INC.
(Restated through June 1, 1998)
ARTICLE I
---------
STOCKHOLDERS
------------
1. CERTIFICATES REPRESENTING STOCK
-------------------------------
Every holder of stock in the corporation shall be entitled to have a
certificate signed by, or in the name of, the corporation by the Chairman or
Vice-Chairman of the Board of Directors, if any, or by the President or a Vice-
President and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary of the corporation certifying the number of shares owned by
him in the corporation. Any and all signatures on any such certificate may be
facsimiles. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent, or registrar at the date of issue.
Whenever the corporation shall be authorized to issue more than one class
of stock or more than one series of any class of stock, and whenever the
corporation shall issue any shares of its stock as partly paid stock, the
certificates representing shares of any such class or series of any such partly
paid stock shall set forth thereon the statements prescribed by the General
Corporation Law. Any restrictions on the transfer or registration of transfer
of any shares of stock of any class or series shall be noted conspicuously on
the certificate representing such shares.
The corporation may issue a new certificate of stock in place of any
certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the Board of Directors may require the owner of any lost, stolen
or destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify the corporation against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of any such new certificate.
2. FRACTIONAL SHARE INTEREST.
--------------------------
The corporation may, but shall not be required to, issue fractions of a
share. If the corporation does not issue fractions of a share, it shall (i)
arrange for the disposition of fractional interests by those entitled thereto,
(ii) pay in cash the fair value of fractions of a share as of the
<PAGE>
time when those entitled to receive such fractions are determined, or (iii)
issue scrip or warrants in registered or bearer form which shall entitle the
holder to receive a certificate for a full share upon the surrender of such
scrip or warrants aggregating a full share. A certificate for a fractional share
shall, but scrip or warrants shall not unless otherwise provided therein,
entitle the holder to exercise voting rights, to receive dividends thereon, and
to participate in any of the assets of the corporation in the event of
liquidation. The Board of Directors may cause scrip or warrants to be issued
subject to the conditions that they shall become void if not exchanged for
certificates representing full shares before a specified date, or subject to the
conditions that the shares for which scrip or warrants are exchangeable may be
sold by the corporation and the proceeds thereof distributed to the holders of
scrip or warrants, or subject to any other conditions which the Board of
Directors may impose.
3. STOCK TRANSFERS.
----------------
Upon compliance with provisions restricting the transfer or registration of
transfer of shares of stock, if any, transfers or registration of transfers of
shares of stock of the corporation shall be made only on the stock ledger of the
corporation by the registered holder thereof, or by his attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary of
the corporation or with a transfer agent or a registrar, if any, and on
surrender of the certificate or certificates for such shares of stock properly
endorsed and the payment of all taxes due thereon.
4. RECORD DATE FOR STOCKHOLDERS.
-----------------------------
For the purpose of determining the stockholders entitled to notice of or to
vote at any meeting of stockholders or any adjournment thereof, or to express
consent to corporate action in writing without a meeting, or entitled to receive
payment of any dividend or other distribution or the allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or exchange
of stock or for the purpose of any other lawful action, the directors may fix,
in advance, a record date, which shall not be more than sixty days nor less than
ten days before the date of such meeting, nor more than sixty days prior to any
other action. If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held, the record date for determining
stockholders entitled to express consent to corporate action in writing without
a meeting, when no prior action by the Board of Directors is necessary, shall be
the day on which the first written consent is expressed; and the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto. A determination of stockholders or record entitled to notice of or to
vote at any meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board Directors may fix a new record date
for the adjourned meeting.
5. MEANING OF CERTAIN TERMS.
-------------------------
As used herein in respect of the right to notice of a meeting of
stockholders or a waiver thereof or to participate or vote thereat or to consent
or dissent in writing in lieu of a meeting,
-2-
<PAGE>
as the case may be, the term "share" or "shares" or "share of stock" or "shares
of stock" or "stockholder" or "stockholders" refers to an outstanding share or
shares of stock and to a holder or holders of record of outstanding shares of
stock when the corporation is authorized to issue only one class of shares of
stock, and said reference is also intended to include any outstanding share or
shares of stock and any holder or holders of record of outstanding shares of
stock of any class upon which or upon whom the certificate of incorporation
confers such rights where there are two or more classes or series of shares of
stock or upon which or upon whom the General Corporation Law confers such rights
notwithstanding that the certificate of incorporation may provide for more than
one class or series of shares of stock, one or more of which are limited or
denied such rights thereunder; provided, however, that no such right shall vest
in the event of an increase or decrease in the authorized number of shares of
stock of any class or series which is otherwise denied voting rights under the
provisions of the certificate of incorporation, except as any provision of law
may otherwise require.
6. STOCKHOLDER MEETINGS.
---------------------
-TIME. The annual meeting shall be held on the date and at the time fixed,
-----
from time to time, by the directors, provided, that the first annual meeting
shall be held on a date within 13 months after the organization of the
corporation, and each successive annual meeting shall be held on a date within
13 months after the date of the preceding annual meeting. A special meeting
shall be held on the date and at the time fixed by the directors.
-PLACE. Annual meetings and special meetings shall be held at such place,
------
within or without the State of Delaware, as the directors may, from time to
time, fix. Whenever the directors shall fail to fix such place, the meeting
shall be held at the registered office of the corporation in the State of
Delaware.
-CALL. Annual meetings and special meetings may be called by the directors
-----
of by any officer instructed by the directors to call the meeting.
-NOTICE OR WAIVER OF NOTICE . Written notice of all meetings shall be
----------------------------
given, stating the place, date and hour of the meeting and stating the place
within the city or other municipality or community at which the list of
stockholders of the corporation may be examined. The notice of an annual
meeting shall state that the meeting is called for the election of directors and
for the transaction of other business which may properly come before the
meeting, and shall, (if any other action which could be taken at a special
meeting is to be taken at such annual meeting) state the purpose or purposes.
The notice of a special meeting shall in all instances state the purpose or
purposes for which the meeting is called. The notice of any meeting shall also
include, or be accompanied by, any additional statements, information or
documents prescribed by the General Corporation Law. Except as otherwise
provided by the General Corporation Law, a copy of the notice of any meeting
shall be given, personally or by mail, not less than 10 days nor more than 60
days before the date of the meeting, unless the lapse of the prescribed period
of time shall have been waived, and directed to each stockholder at his record
address or at such other address which he may have furnished by request in
writing to the Secretary of the Corporation. Notice by mail shall be deemed to
be given when deposited, with postage thereon prepaid, in the United States
mail. If a meeting is adjourned to
-3-
<PAGE>
another time, not more than 30 days hence, and/or to another place, and if an
announcement of the adjourned time and/or place is made at the meeting, it shall
not be necessary to give notice of the adjourned meeting unless the directors,
after adjournment, fix a new record date for the adjourned meeting. Notice need
not be given to any stockholder who submits a written waiver of notice signed by
him before or after the time stated herein. Attendance of a stockholder at a
meeting of stockholders shall constitute a waiver of notice of such meeting,
except when the stockholder attends the meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice.
-STOCKHOLDER LIST. The officer who has charge of the stock ledger of the
-----------------
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city or other municipality or community where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present. The stock ledger shall be the only evidence as to who are stockholders
entitled to examine the stock ledger, the list required by this section or the
books of the corporation, or to vote at any meeting of stockholders.
-CONDUCT OF MEETING. Meetings of the stockholders shall be presided over
-------------------
by one of the following officers in the order of seniority and if present and
acting the Chairman of the Board, if any, the Vice-Chairman of the Board, if
any, the President, a Vice-President, or, if none of the foregoing is in office
and present and acting, by a chairman to be chosen by the stockholders. The
Secretary of the corporation, or in his absence, an Assistant Secretary, shall
act as secretary of every meeting, but if neither the Secretary nor an Assistant
Secretary is present the Chairman of the meeting shall appoint a secretary of
the meeting.
-PROXY REPRESENTATION. Every stockholder may authorize another person or
---------------------
persons to act for him by proxy in all matters in which a stockholder is
entitled to participate, whether by waiving notice of any meeting, voting or
participating at a meeting, or expressing consent or dissent without a meeting.
Every proxy must be signed by the stockholder or by his attorney-in-fact. No
proxy shall be voted or acted upon after three years from its date unless such
proxy provides for a longer period. A duly executed proxy shall be irrevocable
if it states that it is irrevocable and, if, and only as long as, it is coupled
with an interest sufficient in law to support an irrevocable power. A proxy may
be made irrevocable regardless of whether the interest with which it is coupled
is an interest in the stock itself or an interest in the corporation generally.
-INSPECTORS. The directors, in advance of any meeting, may, but need not,
-----------
appoint one or more inspectors of election to act at the meeting or any
adjournment thereof. If an
-4-
<PAGE>
inspector or inspectors are not appointed, the person presiding at the meeting
may, but need not, appoint one or more inspectors. In case any person who may be
appointed as an inspector fails to appear or act, the vacancy may be filled by
appointment made by the directors in advance of the meeting or at the meeting by
the person presiding thereat. Each inspector, if any, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of inspector at such meeting with strict impartiality and according to
the best of his ability. The inspectors, if any, shall determine the number of
shares of stock outstanding and the voting power of each, the shares of stock
represented at the meeting, the existence of a quorum, the validity and effect
of proxies, and shall receive votes, ballots or consents, hear and determine all
challenges and questions arising in connection with the right to vote, count and
tabulate all votes, ballots or consents, determine the result, and do such acts
as are proper to conduct the election or vote with fairness to all stockholders.
On request of the person presiding at the meeting, the inspector or inspectors,
if any, shall make a report in writing of any challenge, question or matter
determined by him or them and execute a certificate of any fact found by him or
them.
-QUORUM. The holders of a majority of the outstanding shares of stock
-------
shall constitute a quorum at a meeting of stockholders for the transaction of
any business. The stockholders present may adjourn the meeting despite the
absence of a quorum.
-VOTING. Each share of Common Stock is entitled to one vote and each share
-------
of Class A Common Stock is entitled to four votes on all matters to be voted on
by the stockholders of the Company, including the election of directors. Both
the Common Stock and Class A Common Stock have non-cumulative voting rights and
vote together as a single class on all matters, except that under Delaware law,
under certain circumstances, such as amendments to the Certificate of
Incorporation which would adversely affect or subordinate the rights of either
class, the Common Stock and the Class A Common Stock vote separately as classes
and the requisite vote of each class is necessary to authorize such action. In
the election of directors, and for any other action, voting need not be by
ballot.
7. STOCKHOLDER ACTION WITHOUT MEETINGS. Any action required by the General
------------------------------------
Corporation Law to be taken at any annual or special meeting of stockholders, or
any action which may be taken an any annual or special meeting of stockholders,
may be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt notice of
the taking of the corporate action without a meeting by less than unanimous
written consent shall be given to those stockholders who have not consented in
writing.
-5-
<PAGE>
ARTICLE II
----------
DIRECTORS
---------
1. FUNCTIONS AND DEFINITION. The business and affairs of the corporation
-------------------------
shall be managed by or under the direction of the Board of Directors of the
corporation. The Board of Directors shall have the authority to fix the
compensation of the members thereof. The use of the phrase "whole board" herein
refers to the total number of directors which the corporation would have if
there were no vacancies.
2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, a citizen
--------------------------
of the United States, or a resident of the State of Delaware. The Board of
Directors shall consist of five persons. Thereafter the number of directors
constituting the whole board shall be at least one. Subject to the foregoing
limitation and except for the first Board of Directors, such number may be fixed
from time to time by action of the stockholders or of the directors, or, if the
number is not fixed, the number shall be three. The number of directors may be
increased or decreased by action of the stockholders or of the directors.
3. ELECTION AND TERM. The first Board of Directors, unless the members
-----------------
thereof shall have been named in the certificate of incorporation, shall be
elected by the incorporator or incorporators and shall hold office until the
first annual meeting of stockholders and until their successors are elected and
qualified or until their earlier resignation or removal. Any director may resign
at any time upon written notice to the corporation. Thereafter, directors who
are elected at an annual meeting of stockholders, and directors who are elected
in the interim to fill vacancies and newly created directorships, shall hold
office until the next annual meeting of stockholders and until their successors
are elected and qualified or until their earlier resignation or removal. In the
interim between annual meetings of stockholders or of special meetings of
stockholders called for the election of directors and/or for the removal of one
or more directors and for the filling of any vacancy in the Board of Directors,
including unfilled vacancies resulting from the removal of directors for cause
or without cause may be filled by the vote of a majority of the remaining
directors then in office, although less than a quorum, or by the sole remaining
director.
4. MEETINGS.
---------
-TIME. Meetings shall be held at such time as the Board shall fix, except
-----
that the first meeting of a newly elected Board shall be held as soon after its
election as the directors may conveniently assemble.
-PLACE. Meetings shall be held at such place within or without the State
------
of Delaware as shall be fixed by the Board.
-CALL. No call shall be required for regular meetings for which the time
-----
and place have been fixed. Special meetings may be called by or at the
direction of the Chairman of the Board, if any, the Vice-Chairman of the Board,
if any, or the President, or of a majority of the directors in office.
-6-
<PAGE>
-NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for
----------------------------------------
regular meetings for which the time and place have been fixed. Written, oral,
or any other mode of notice of the time and place for any special meeting shall
be given at least one day in advance of any such meeting. Notice need not be
given to any director or to any member of a committee of directors who submits a
written waiver of notice signed by him before or after the time stated therein.
Attendance of any such person at a meeting shall constitute a waiver of notice
of such meeting, except when he attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
directors need be specified in any written waiver of notice.
-QUORUM AND ACTION. A majority of the whole Board shall constitute a
------------------
quorum except when a vacancy or vacancies prevents such majority, whereupon a
majority of the directors in office shall constitute a quorum, provided, that
such majority shall constitute at least one-third of the whole Board. A
majority of the directors present, whether or not a quorum is present, may
adjourn a meeting to another time and place. Except as herein otherwise
provided, and except as otherwise provided by the General Corporation Law, the
vote of the majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board. The quorum and voting provisions herein
stated shall not be construed as conflicting with any provisions of the General
Corporation Law and these By-Laws which govern a meeting of directors held to
fill vacancies and newly created directorships in the Board or action of
disinterested directors.
Any member or members of the Board of Directors or of any committee
designated by the Board, may participate in a meeting of the Board, or any such
committee, as the case may be, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other.
-CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if present
------------------------
and acting, shall preside at all meetings. Otherwise, the Vice-Chairman of the
Board, if any and if present and acting, or the President, if present and
acting, or any other director chosen by the Board, shall preside.
5. REMOVAL OF DIRECTORS. Except as may otherwise be provided by the General
---------------------
Corporation Law, any director or the entire Board of Directors may be removed,
with our without cause, by the holders of a majority of the shares then entitled
to vote at an election of directors.
6. COMMITTEES. The Board of Directors may, by resolution passed by a majority
-----------
of the whole Board, designate one or more committees, each committee to consist
of one or more of the directors of the corporation. The Board may designate one
or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. In the absence
of disqualification of any member of any such committee or committees, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another
-7-
<PAGE>
member of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member. Any such committee, to the extent provided in the
resolution of the Board, shall have and may exercise the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation with the exception of any authority the delegation of which is
prohibited by Section 141 of the General Corporation Law, and may authorize the
seal of the corporation to be affixed to all papers which may require it.
7. WRITTEN ACTION. Any action required or permitted to be taken at any
---------------
meeting of the Board of Directors or any committee thereof may be taken without
a meeting if all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
ARTICLE III
-----------
OFFICERS
--------
The officers of the corporation shall consist of a Chairman of the Board,
who shall be the Chief Executive Officer, a President, a Secretary, a Treasurer,
and, if deemed, necessary, expedient, or desirable by the Board of Directors, a
Vice-Chairman of the Board, an Executive Vice-President, one or more other Vice-
Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers,
and such other officers with such titles as the resolution of the Board of
Directors choosing them shall designate. Except as may otherwise be provided in
the resolution of the Board of Directors choosing him, no officer other than the
Chairman or Vice-Chairman of the Board, if any, need be a director. Any number
of offices may be held by the same person, as the directors may determine.
Unless otherwise provided in the resolution choosing him, each officer
shall be chosen for a term which shall continue until the meeting of the Board
of Directors following the next annual meeting of stockholders and until his
successor shall have been chosen and qualified.
All officers of the corporation shall have such authority and perform such
duties in the management and operation of the corporation as shall be prescribed
in the resolutions of the Board of Directors designating and choosing such
officers and prescribing their authority and duties, and shall have such
additional authority and duties as are incident to their office except to the
extent that such resolutions may be inconsistent therewith. The Secretary or an
Assistant Secretary of the corporation shall record all of the proceedings of
all meetings and actions in writing of stockholders, directors, and committees
of directors, and shall exercise such additional authority and perform such
additional duties as the Board shall assign to him. Any officer may be removed,
with or without cause, by the Board of Directors. Any vacancy in any office may
be filled by the Board of Directors.
-8-
<PAGE>
ARTICLE IV
----------
CORPORATE SEAL
--------------
The corporate seal shall be in such form as the Board of Directors shall
prescribe.
ARTICLE V
---------
FISCAL YEAR
-----------
The fiscal year of the corporation shall be fixed, and shall be subject to
change, by the Board of Directors.
ARTICLE VI
----------
CONTROL OVER BY-LAWS
--------------------
Subject to the provisions of the certificate of incorporation and the
provisions of the General Corporation Law, the power to amend, alter or repeal
these By-Laws and to adopt new By-Laws may be exercised by the Board of
Directors or by the stockholders.
-9-
<PAGE>
Exhibit 10.5
------------
EASTERN ENVIRONMENTAL SERVICES, INC.
1991 STOCK OPTION PLAN
ARTICLE I
General
1.1 Purpose. This incentive stock option and nonqualified stock option
-------
plan (the "Plan") is established to promote the interests of Eastern
Environmental Services, Inc. (the "Corporation") and its stockholders by
enabling the Corporation, through the granting of stock options, to attract and
retain personnel for the Corporation and its subsidiaries, and to provide
additional incentive to such personnel to increase their stock ownership in the
Corporation. It is intended that those options issued pursuant to the provisions
of the Plan relating to incentive stock options shall constitute incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, and the regulation promulgated thereunder, or any statute or
regulation of similar import.
1.2 Administration.
--------------
(a) The incentive stock option and nonqualified stock option provisions
of the Plan shall be administered by the Board of Directors of the Corporation,
and the Board of Directors may delegate such administration to a committee
appointed by the Board of Directors of the Corporation (the "Committee"). The
Committee shall consist of not less than two (2) nor more than five (5) persons,
each of whom shall be a member of the Corporation's Board of Directors not
eligible to receive any stock option under the Plan. The Board of Directors may
from time to time remove members from, or add members to , the Committee.
Vacancies on the Committee, howsoever caused, shall be filled by the Board of
Directors. In the event that the Board of Directors elects not to delegate such
administration to the Committee, all references herein to the Committee shall be
deemed to refer to the Board of Directors.
(b) The Committee shall select one of its members as chairman, and
shall hold meetings at such time and places as it may determine. The acts of a
majority of the Committee at which a quorum is present, or acts reduced to or
approved in writing by a majority of the members of the Committee, shall be
valid acts of the Committee.
(c) Subject to the provisions of the Plan, the Committee shall have
full authority, in its discretion: (1) to determine the employees of the
Corporation and its subsidiaries to whom stock options shall be granted; (2) to
determine the time or times at which stock options shall be granted; (3) to
determine whether an eligible employee shall be granted an incentive stock
option, a nonqualified stock option or any combination thereof; (4) to determine
the option price of the shares subject to each stock option; (5) to determine
the time or times when each stock option becomes exercisable and the duration of
any stock option period; and (6) to interpret the Plan and the stock options
granted hereunder, and to prescribe, amend and rescind rules and
APPENDIX "A"
------------
A-1
<PAGE>
regulations with respect thereto. The interpretation and construction by the
Committee of any provision of the Plan over which it has discretionary authority
or of any option granted hereunder shall be final and conclusive.
(d) No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any stock option
granted hereunder.
1.3 Eligible Employees. A stock option may be granted to any employee
------------------
of the Corporation or of a subsidiary (who may or may not be an officer or
member of the Board of Directors), with the exceptions only of (a) with respect
to the incentive stock options granted under the Plan, employees who cannot
qualify for the benefits of incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended, and (b) with respect to all
provisions of the Plan, members of the Committee and any other members of the
Board of Directors who are not otherwise employees of the Corporation.
1.4 Stock Subject to the Plan.
-------------------------
(a) The stock subject to the stock options under the Plan shall be
shares of common stock of the Corporation, par value $0.0l per share, which
shares may be, in whole or in part, either authorized but unissued shares or
issued shares held in the treasury. The aggregate number of shares that may be
issued upon the exercise of stock options granted under the Plan shall not
exceed 500,000 shares of common stock, which limitation shall be subject to
adjustment as provided in Article IV of the Plan.
(b) If a stock option is surrendered or for any other reason ceases to
be exercisable in whole or in part, the shares of common stock that are subject
to such option, but as to which the option has not been exercised, shall again
become available for offering under the Plan.
ARTICLE II
Terms and Conditions of Incentive Stock Options
-----------------------------------------------
Any incentive stock option ("ISO") granted pursuant to the Plan shall be
authorized by the Committee and shall be evidenced by certificates or agreements
in such form as the Committee from time to time shall approve, which
certificates or agreements shall comply with and be subject to the terms and
conditions hereinafter specified.
2.1 Number of Shares. Each ISO shall state the number of shares to
----------------
which it pertains.
2.2 Option Price. Each ISO shall state the option price, which price
------------
shall be determined by the Committee in its discretion. In no event, however,
shall such price be less than 100% of the fair market value of the shares of
common stock of the Corporation (determined under Article IV of the Plan) on the
date of the granting of the ISO; or, in the case of an individual who owns
A-2
<PAGE>
(at the time the option is granted) more than 10% of the total combined voting
power of all classes of stock of the Corporation or of a parent or subsidiary
corporation (a "10% stockholder"), shall such price be less than 110% of such
fair market value.
2.3 Method of Payment. Each ISO shall state the method of payment of
-----------------
the ISO price upon the exercise of the ISO. The method of payment stated in the
ISO shall include payment (a) in United States dollars in cash or by check, bank
draft or money order payable to the order of the Corporation, or (b) in the
discretion of and in the manner determined by the Committee, by the delivery of
shares of common stock of the Corporation already owned by the optionee, or (c)
by any other legally permissible means acceptable to the Committee at the time
of grant of the ISO, or (d) in the discretion of the Committee, through a
combination of (a), (b) and (c) of this paragraph 2.3. If the option price is
paid in whole or in part through the delivery of shares of common stock, the
decision of the Committee with respect to the fair market value of such shares
shall be final and conclusive.
2.4 Term and Exercise of Options. No ISO shall be exercisable either in
----------------------------
whole or in part prior to twelve (12) months form the date it is granted. No ISO
shall be exercisable after the expiration of ten (10) years from the date it is
granted; or, in the case of a 10% stockholder, no ISO shall be exercisable after
the expiration of five (5) years from the date it is granted. Not less than one
hundred (100) shares may be exercised at any one time unless the number
exercised is the total number at the time exercisable under the ISO.
Within the limits described above, the Committee may impose additional
requirements on the exercise of ISOs, including, but without limitation, the
number of shares covered by the ISO that become eligible to be exercised in any
year and the expiration date of the option. Subject to the provisions of the
Plan and any other terms and conditions the Committee deems appropriate, the
Committee in its discretion also may accelerate the time at which an ISO may be
exercised if, under previously established exercise terms, such ISO was not
immediately exercisable in full.
2.5 Additional Limitations on Exercise of Options. An optionee may hold
---------------------------------------------
and exercise more than one ISO, but only on the terms and subject to the
restrictions hereafter set forth. The aggregate fair market value (determined as
of the time an ISO is granted) of the common stock of the Corporation with
respect to which ISOs are exercisable for the first time by any employee in any
calendar year under the Plan and under all other incentive stock option plans of
the Corporation and any parent and subsidiary corporations of the Corporation
(as those terms are defined in Section 425 of the Internal Revenue Code of 1986,
as amended) shall not exceed $100,000.
2.6 Notice of Grant of Option. Upon the granting of any ISO to an
-------------------------
employee, the Committee shall promptly cause such employee to be notified of the
fact that such ISO has been granted. The date on which the Committee approves
the grant of an ISO shall be considered to be the date on which such ISO is
granted.
A-3
<PAGE>
2.7 Death or Other Termination of Employment.
----------------------------------------
(a) In the event that an optionee (i) shall cease to be employed by the
Corporation or a subsidiary because of his discharge for dishonesty, or because
he violated any material provision of any employment or other agreement between
him and the Corporation or a subsidiary, or (ii) shall voluntarily resign or
terminate his employment with the Corporation or a subsidiary under or followed
by such circumstances as would constitute a breach of any material provision of
any employment or other agreement between him and the Corporation or a
subsidiary, or (iii) shall have committed an act of dishonesty not discovered by
the Corporation or a subsidiary prior to the cessation of his employment but
that would have resulted in a discharge if discovered prior to such date, or
(iv) shall, either before or after cessation of his employment with the
Corporation or a subsidiary, without the written consent of his employer or
former employer, use (except for the benefit of his employer or former employer)
or disclose to any other person any confidential information relating to the
continuation or proposed continuation of his employer's or former employer's
business or any trade secrets of the Corporation or a subsidiary obtained as a
result of or in connection with such employment, or (v) shall, either before or
after cessation of his employment with the Corporation or subsidiary, without
the written consent of his employer or former employer, directly or indirectly,
give advice to, or serve as an employee, director, officer, partner or trustee
of, or in any similar capacity with, or otherwise directly or indirectly
participate in the management, operation, or control of, or have any direct or
indirect financial interest in, any corporation, partnership, or other
organization that directly or indirectly competes in any respect with the
Corporation or its subsidiaries, then forthwith from the happening of any such
event, any ISO then held by him shall terminate and become void to the extent
that it then remains unexercised. In the event that an optionee shall cease to
be employed by the Corporation or a subsidiary for any reason other than his
death or one or more of the reasons set forth in the immediately preceding
sentence, subject to the conditions that no option shall be exercisable after
the expiration of ten (10) years from the date it is granted, or, in the case of
a 10% stockholder, five (5) years from the date it is granted, such optionee
shall have the right to exercise the ISO at any time within three (3) months
after such termination of employment to the extent his right to exercise such
ISO has accrued pursuant to this Article II at the date of such termination and
had not previously been exercised; such three-month limit shall be increased to
one (1) year for any optionee who ceases to be employed by the Corporation or a
subsidiary because he is disabled (within the meaning of Section 22(e)(3) of the
Internal Revenue Code of 1986, as amended) or who dies during the three-month
period, and the ISO may be exercised within such extended time by the optionee
or, in the case of death, the personal representative of the optionee or by any
person or persons who shall have acquired the ISO directly from the optionee by
bequest or inheritance. Whether an authorized leave of absence or absence for
military or governmental service shall constitute termination of employment for
purposes of the Plan shall be determined by the Committee, whose determination
shall be final and conclusive.
(b) In the event that an optionee shall die while in the employ of the
Corporation or a parent or subsidiary corporation and shall not have fully
exercised any ISO, the ISO may be exercised, subject to the conditions that no
ISO shall be exercisable after the expiration of ten (10) years from the date it
is granted, or, in the case of a 10% stockholder, five (5) years from the date
it is granted, to the extent that the optionee's right to exercise such ISO
A-4
<PAGE>
had accrued pursuant to this Article II at the time of his death and had not
previously been exercised, at any time within one (1) year after the optionee's
death, by the personal representative of the optionee or by any person or
persons who shall have acquired the ISO directly from the optionee by bequest or
inheritance, in the case of death.
(c) No ISO shall be transferable by the optionee otherwise than by will
or the laws of descent and distribution.
(d) During the lifetime of the optionee, the ISO shall be exercisable
only by him and shall not be assignable or transferable and no other person
shall acquire any rights therein.
2.8 Rights as a Stockholder. An optionee shall have no rights as a
-----------------------
stockholder with respect to any shares covered by his ISO until the date of the
issuance of a stock certificate to him for such shares after exercise of the
ISO. No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other rights
for which the record date is prior to the date such stock certificate is issued,
except as provided in Article IV.
2.9 Modification, Extension and Renewal of Options. Subject to the
----------------------------------------------
terms and conditions and within the limitations of the Plan, the Committee may
modify, extend or renew outstanding ISOs granted under the Plan, or accept the
surrender of outstanding ISOs (to the extent not theretofore exercised) and
authorize the granting of new options in substitution therefor (to the extent
not theretofore exercised). The Committee shall not, however, modify any
outstanding ISOs so as to specify a lower option price or accept the surrender
of outstanding ISOs and authorize the granting of new options in substitution
therefor specifying a lower option price. Notwithstanding the foregoing,
however, no modification of an ISO shall, without the consent of the optionee,
alter or impair any of the rights or obligations under any ISO theretofore
granted under the Plan.
2.10 Listing and Registration of Shares. Each ISO shall be subject to
----------------------------------
the requirement that if at any time the Committee shall determine, in its
discretion, that the listing, registration or qualification of the shares
covered thereby upon any securities exchange or under any state or federal laws,
or the consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of, or in connection with, the granting of such ISO or
the issuance or purchase of shares thereunder, such ISO may not be exercised
unless and until such listing, registration, qualification, consent or approval
shall have been effected or obtained free of any conditions not acceptable to
the Committee. Notwithstanding anything in the Plan to the contrary, if the
provisions of this paragraph 2.10 become operative, and if, as a result thereof,
the exercise of an ISO is delayed, then and in that event, the term of the ISO
shall not be affected.
2.11 Other Provisions. The ISO certificates or agreements authorized
----------------
under the Plan shall contain such other provisions, including, without
limitation, restrictions upon the exercise of the ISO, as the Committee shall
deem advisable. Any such certificate or agreement shall contain such limitations
and restrictions upon the exercise of the ISO as shall be necessary in order
that such ISO will be an incentive stock option as defined in Section 422 of the
Internal Revenue Code of 1986, as amended, or to conform to any change in the
law.
A-5
<PAGE>
ARTICLE III
Terms and Conditions of Nonqualified Stock Options
--------------------------------------------------
Any non qualified stock option ("NSO") granted pursuant to the Plan
shall be authorized by the Committee and shall be evidenced by certificates or
agreements in such form as the Committee from time to time shall approve, which
certificates or agreements shall comply with and be subject to the terms and
conditions hereinafter specified.
3.1 Number of Shares. Each NSO shall stated the number of shares to
----------------
which it pertains.
3.2 Option Price. Each NSO shall state the option price, which price
------------
shall be determined by the Committee in its discretion.
3.3 Method of Payment. Each NSO shall state the method of payment of
-----------------
the NSO price upon the exercise of the NSO.
3.4 Term, Exercise and Transfer of Options.
--------------------------------------
(a) No NSO shall be exercisable after the expiration of ten (10) years
from the date it is granted. Not less than one hundred (100) shares may be
exercised at any one time unless the number exercised is the total number at the
time exercisable under the NSO. Within the limits described above, the Committee
may impose additional requirements on the exercise of NSOs.
(b) No NSO shall be transferable by the optionee otherwise than by will
or the laws of descent and distribution.
(c) During the lifetime of the optionee, the NSO shall be exercisable
only by him and shall not he assignable or transferable and no other person
shall acquire any rights therein.
3.5 Notice of Grant of Option. Upon the granting of any NSO to an
-------------------------
employee, the Committee shall promptly cause such employee to be notified of the
fact that such NSO has been granted. The date on which the Committee approves
the grant of an NSO shall be considered to be the date on which such NSO is
granted.
3.6 Rights as a Stockholder. An optionee shall have no rights as a
-----------------------
stockholder with respect to any shares covered by his NSO until the date of the
issuance of a stock certificate to him for such shares after exercise of the
NSO. No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other rights
for which the record date is prior to the date such stock certificate is issued,
except as provided in Article IV.
A-6
<PAGE>
ARTICLE IV
Miscellaneous
-------------
4.1 Stock Adjustments.
-----------------
(a) In the event of any increase or decrease in the number of issued
shares of common stock of the Corporation resulting from a stock split or other
division or consolidation of shares or the payment of a stock dividend (but only
on the common stock) or any other increase or decrease in the number of such
shares effected without any receipt of consideration by the Corporation, then,
in any such event, the number of shares of common stock that remain available
under the Plan, the number of shares of common stock covered by each outstanding
option, and the purchase price per share of common stock covered by each
outstanding option shall be proportionately and appropriately adjusted for any
such increase or decrease.
(b) Subject to any required action by the stockholders, if any change
occurs in the shares of common stock of the Corporation by reason of any
recapitalization, reorganization, merger, consolidation, split-up, combination
or exchange of shares, or of any similar change affecting the shares of common
stock of the Corporation, then, in any such event, the number and type of shares
covered by each outstanding option, and the purchase price per share of common
stock covered by each outstanding option, shall be proportionately and
appropriately adjusted for any such change. A dissolution or liquidation of the
Corporation shall cause each outstanding option to terminate.
(c) In the event of a change in the common stock of the Corporation as
presently constituted that is limited to a change of all of its authorized
shares with par value into the same number of shares with a different par value
or without par value, the shares resulting from any change shall be deemed to be
shares of common stock within the meaning of the Plan.
(d) To the extent that the foregoing adjustments relate to stock or
securities of the Corporation, such adjustments shall be made by, and in the
discretion of, the Committee, whose determination in that respect shall be
final, binding and conclusive; provided however, that any ISO granted pursuant
to this Plan shall not be adjusted in a manner that causes such ISO to fail to
continue to qualify as an incentive stock option within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended.
(e) Except as hereinabove expressly provided in this paragraph 4.1, an
optionee shall have no rights by reason of any division or consolidation of
shares of stock of any class or the payment of any stock dividend or any other
increase or decrease in number of shares of stock of any class or by reason of
any dissolution, liquidation, merger or consolidation, or spin-off of assets or
stock of another corporation; and any issuance by the Corporation of shares of
stock of any class, securities convertible into shares of stock of any class or
warrants or options for shares of stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of common stock subject to the option.
A-7
<PAGE>
(f) The grant of any option pursuant to the Plan shall not affect in
any way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate, or to dissolve, to liquidate, to sell,
or to transfer all or any part of its business or assets.
4.2 Fair Market Value of Stock. For purposes of this Plan, the "fair
--------------------------
market value of the shares of the common stock of the Corporation" shall mean
the closing price, on the date of grant of any ISO (or, if there is no closing
price, then the closing bid price), of the Corporation's common stock as
reported on the Composite Tape, or if not reported thereon, then such price as
reported in the trading reports of the principal securities exchange in the
United States on which such stock is listed, or if such stock is not listed on a
securities exchange in the United States, the closing price on the over-the-
counter market as reported by the National Association of Securities Dealers
Automated Quotation System NASDAQ, or NASDAQ's successor, or if not reported on
NASDAQ, the fair market value of such stock as determined by the Committee in
good faith and based on all relevant factors.
4.3 Term of the Plan. The ISOs and NSOs may be granted pursuant to the
----------------
provisions of the Plan from time to time within a period of ten (10) years from
the date the Plan is adopted by the Board of Directors of the Corporation, or
the date the Plan is approved by the stockholders, whichever is earlier.
4.4 Amendment of the Plan. The Board of Directors of the Corporation
---------------------
may, insofar as permitted by law, from time to time, with respect to any shares
at the time not subject to stock options, suspend, discontinue or terminate the
Plan or revise or amend it in any respect whatsoever. However, the Plan may not,
without the approval of the stockholders, be amended in any manner that will
cause incentive stock options issued under it to fail to meet the requirements
of incentive stock options as defined in Section 422 of the Internal Revenue
Code of 1986, as amended.
4.5 Incentive Stock Option Plan. Except as provided in the Plan, the
---------------------------
Plan shall not affect the terms and conditions of any incentive stock options
heretofore or hereafter granted to any employee of the Corporation under any
incentive stock option plan of the Corporation or any parent or subsidiary
corporation; nor shall the Plan affect any of the rights of any employee to whom
such incentive stock option or options have been granted.
4.6 Application of Funds. The proceeds received by the Corporation from
--------------------
the sale of common stock pursuant to stock options will be used for general
corporate purposes.
4.7 No Obligation to Exercise. The granting of any stock option under
-------------------------
the Plan shall impose no obligation upon any optionee to exercise such stock
option.
4.8 No Implied Rights to Employees. The existence of the Plan, and the
------------------------------
granting of options under the Plan, shall in no way give any employee the right
to continued employment, give any employee the right to receive any options or
any additional options under the Plan, or otherwise provide any employee any
rights not specifically set forth in the Plan or in any options granted under
the Plan.
A-8
<PAGE>
Exhibit 10.10
-------------
A G R E E M E N T
-----------------
* * * * * * *
THIS AGREEMENT, made and entered into this the ____ day of February,
1992, by and between the Pulaski County Solid Waste Management District
organized under the laws of the State of Kentucky, hereinafter referred to as
the District and Pulaski Landfill, Inc., of 4140 South Highway 27, Somerset,
Kentucky 42501, hereinafter, referred to as the Operator.
W I T N E S S E T H:
WHEREAS, the Operator is qualified to operate a sanitary landfill for
the disposal of solid waste; and
WHEREAS, the District desires the Operator to operate the area
designated to be used for sanitary landfill operations;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, the District and the Operator hereby agree as
follows:
1. Disposal Site. All solid waste shall be disposed of at such
-------------
locations as may be approved by the District from time to time. This may be an
approved landfill within Pulaski County, Kentucky, or it may be an approved
transfer station if the solid waste is to be transported out of Pulaski County
for disposal.
2. Consideration. The Operator shall pay to the District the sum of
-------------
Five Hundred and 00/100 ($500.00) Dollars, plus a monthly fee equal to four (4%)
percent of the Operator's gross revenue from all municipal solid waste generated
by customers within Pulaski County, Kentucky, and if the landfill is located
within Pulaski County, Kentucky, four (4%) percent of Operator's gross revenue
from special waste from any source during the term of the
<PAGE>
franchise agreement, and five (5%) percent of the Operator's gross revenue from
all out of District municipal solid waste disposed of in the landfill. Any waste
disposed of in the landfill by related organizations of the Operator shall be
included in gross revenue at the rates normally charged for that type of
service.
The Operator shall provide, at its own expense, to the District's
Accountant an annual audit, which will be conducted in accordance with
Government Auditing Standards (The Yellow Book) and must be tendered within
ninety (90) days following the close of the Operator's Fiscal year. The
Operator's audit shall reconcile waste received to revenue reported and shall
audit any adjustments to reported revenue. The auditor's workpapers shall be
made available to the District's accountants upon request.
All fees due herein shall be paid quarterly and shall be paid within
thirty (30) days of the end of each quarter. Each payment shall be accompanied
by a letter from the Operator's CPA or Chief Financial Officer that reflects
complete computation of the amount submitted.
3. Fees. (a) The Operator shall charge no more than the following
fees:
(Price per Cubic Yard)
<TABLE>
<CAPTION>
EFFECTIVE DATE Compacted Non-Compacted Cars Trucks
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current 5.94 5.94 5.00 10.00
- ---------------------------------------------------------------------------------------------------------------------
5/1/92 6.29 5.94 5.00 10.00
- ---------------------------------------------------------------------------------------------------------------------
1/1/93 6.79 6.11 6.00 11.00
- ---------------------------------------------------------------------------------------------------------------------
1/1/94 7.12 6.41 7.00 12.00
- ---------------------------------------------------------------------------------------------------------------------
1/1/95 7.49 6.74 8.00 13.00
- ---------------------------------------------------------------------------------------------------------------------
1/1/96 7.86 7.07 8.48 14.00
- ---------------------------------------------------------------------------------------------------------------------
1/1/97 7.98 7.18 9.00 15.00
- ---------------------------------------------------------------------------------------------------------------------
1/1/98 8.20 7.38 9.50 16.50
- ---------------------------------------------------------------------------------------------------------------------
1/1/99 8.35 7.52 11.00 17.00
- ---------------------------------------------------------------------------------------------------------------------
1/1/2000 8.35 7.93 12.00 18.00
- ---------------------------------------------------------------------------------------------------------------------
1/1/2001 8.35 8.35 13.00 19.00
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE>
(b) Bulky or other items (including tires and baled waste) that
require special handling will be subject to a separate rate or handling charge
as reasonably determined by the Operator and approved by the District.
(c) The base rates set out in this paragraph (3) shall be adjusted
annually based upon the average annual increase in the Consumer Price Index,
beginning January 1, 1993, and continuing on January 1, of each year thereafter.
The Operator and the District also acknowledge that the rates set forth in this
paragraph (3) may be subject to increase by the amount of any future franchise,
surcharge or license fees imposed by federal, state, county or other
authorities.
4. Business Hours. The Operator shall keep the Sanitary Landfill
--------------
operation open and fully staffed fifty-two (52) weeks a year from at least 8:00
a.m., to 4:30 p.m., Monday through Friday and from 9:00 a.m., to 12:00 noon, on
Saturday. National holidays and holidays of the Commonwealth of Kentucky shall
be excepted. Operator shall be entitled to adopt and enforce reasonable
operating procedures and restrictions governing the packaging and presentation
of waste, slotting of disposal times, ingress and egress, manifests, records and
other operation matter, which shall be presented to the District in advance for
its approval.
5. Materials to be Disposed of. The Operator shall accept all solid
---------------------------
waste created within the jurisdiction of the district or that for which the
district has accepted responsibility upon payment of fees as scheduled,
provided, however, that junked automobiles, bedsprings, liquid wastes, motors,
capacitors, and batteries shall be excluded from the foregoing and all other
matters excluded by the rules and regulations of the Commonwealth of Kentucky.
The Operator shall have, in its sole discretion, the right to reject any load of
waste, or to require further testing
-3-
<PAGE>
or removal from its premises of any load of waste, if the Operator determines or
has reasonable basis to believe that the load contains material it is not
permitted by law to accept.
6. Term. The term of this agreement shall be for ten (10) years,
----
beginning on the 13th day of February, 1992, and ending at midnight on the
12th day of February, 2002.
7. Inspection. The District, or its agents, may make inspections of
----------
the sanitary landfill site through designated personnel at all reasonable
times.
8. Operation of Site. The Operator shall have the exclusive right and
-----------------
responsibility for the operation of the sanitary landfill within the
jurisdiction of the district in accordance with the provisions of this Agreement
for the term of this Agreement and any extension thereof.
9. Compliance with Laws. The Operator shall operate the disposal site
--------------------
in compliance with all applicable laws, ordinances and regulations and any
additions or amendments thereto, including the Solid Waste Disposal Act of the
State of Kentucky, the rules and regulations of the State Board of Health, the
City of Somerset, and the Pulaski County Board of Health, the Ordinances of the
City of Somerset, the Solid Waste Ordinance of Pulaski County, Kentucky, and as
required and in accordance with State statutes the Solid Waste Plan as approved
and lawfully enacted by the District from time to time.
10. Labor and Equipment. The Operator shall furnish all labor, tools
-------------------
and equipment necessary for the operation of the site and shall be responsible
for all required maintenance thereof. Supervision by an experienced and
qualified person shall be provided at all times the sanitary landfill is open
for use or operation.
-4-
<PAGE>
11. Service Facilities. The Operator shall construct and maintain, at
------------------
his expense, all facilities, improvements and buildings within the site
necessary for the operation of the site.
12. Salvage. Neither scavenging nor salvage operations shall be
-------
permitted at the operating face of the sanitary landfill.
13. Title to Waste. Title to the waste shall vest in the owner of the
--------------
fee simple estate as it is deposited in the landfill for permanent disposal.
14. Change in Regulations. In the event that compliance with
---------------------
subsequent statutes, ordinances, requirements, rules and/or regulations results
in a change in operating costs such that an adjustment in the gate rates would
be deemed appropriate, then there shall be a reasonable adjustment in the gate
rates. The Operator shall provide data to the District to verify any requested
change in gate rates.
15. Change in Sanitary Landfill Site. In the event it becomes
--------------------------------
necessary to transfer the sanitary landfill or transfer station operations to
another site, or additional sites, then it becomes the responsibility of the
Operator to provide said additional site or sites, at his expense which sites
must meet with the approval of the District and the Commonwealth of Kentucky.
16. Performance Bond. The Operator shall furnish a Performance Bond to
----------------
the District for the faithful performance of this Agreement, said bond to be
executed by a surety company licensed to do business in this State, and to be in
a penal sum equal to $500,000.00. Said Performance Bond shall be furnished
annually by the Operator on the first day of each year
-5-
<PAGE>
of the Agreement or any extension thereof, and shall indemnify the District
against any loss resulting from any failure or performance by the Operator.
17. Payment Bond. The Operator shall, within ten (10) days of the
------------
execution of this agreement, deliver or cause to be delivered to the District a
bond in the amount of $100,000.00 executed by a surety company licensed to do
business in this State, guaranteeing payment of wages to all employees of the
Operator at the site or sites and the cost of all supplies, materials, and
insurance premiums required in fulfilling this Agreement.
18. Indemnity. The Operator hereby binds himself to indemnify and hold
---------
harmless the District from all claims, demands and/or actions, legal and/or
equitable, arising from the Operator's operation of all disposal sites. The
Operator further agrees to obtain and keep continuously in effect public
liability and property damage insurance in an amount of not less than
$100,000.00 for any one person and $500,000.00 for any one accident, and not
less than $50,000.00 property damage insurance, which policy or policies shall
be for the protection of the Operator, or the District as their interests may
appeal. Proof of such insurance shall be furnished by the Operator to the
District by certificates of insurance, with a minimum cancellation time of ten
(10) days, said time to commence after delivery of said notice to the District
at the address shown above. Such policy may be written to allow the first Two
Hundred Fifty ($250.00) Dollars of liability for damage to property to be
deductible.
19. Workmen's Compensation. The Operator, if and when he comes within
----------------------
the provisions of the workmen's compensation act of Kentucky, shall carry in a
company authorized to transact business in the State of Kentucky, a policy of
insurance fulfilling all
-6-
<PAGE>
requirements of the Workmen's Compensation Act of Kentucky, including all legal
requirements for occupational diseases.
20. Standard of Performance. In the event that the Operator shall fail
-----------------------
to dispose of materials herein provided to be disposed of for a period in excess
of five (5) consecutive days, and provided such failure is not due to war,
insurrection, riot, Act of God, or any other cause or causes beyond the
Operator's control, the District may, at its option, after written notice to the
Operator as provided herein, take over and operate any or all of the Operator's
equipment used in the performance of this Agreement, and provide for such
operation until such matter is resolved and the Operator is again able to carry
out its operations under this Agreement. Any and all operating expense incurred
by the District in so doing may be deducted by it from any compensation which
might be due to the Operator hereunder, from any source whatever.
If the Operator is unable for any cause to resume performance at the
end of thirty (30) calendar days, all liability of the District under this
contract to the Operator shall cease and the District shall be free to negotiate
with other Operators for the operation of said site or sites. Such operation
with another operator shall not release the Operator herein of its liability to
the district for such breach of this agreement. In the event that this contract
is negotiated with another operator, third-party liability of the Operator
herein shall terminate insofar as same arises from tortuous conduct in operation
and control of sites.
21. Assignment. No assignment of this Agreement or any right occurring
----------
under this Agreement shall be made in whole or part by the Operator without the
express written
-7-
<PAGE>
consent of the District, nor shall any subcontract be 1st under this Agreement
without the express written consent of the District, and in the event of any
assignment or subcontract the assignee or subcontractor shall assume the
liability of the Operator, but the Operator shall not be relieved of any
liability due to any assignment or subcontract.
22. Books and Records. The Operator shall keep daily records of wastes
-----------------
received and the District shall have the right to inspect the same insofar as
they pertain to the operation of the sanitary landfill site for the purpose of
analysis of the financial condition of said operation. The records should
include the type, weight and volume of solid waste received, the portion of the
landfill used, (determined by cross section and survey) and any deviations made
from the plan of operation and equipment maintenance, cost records, and rates
charged each customer. Records of the actual billings to Operator's customers
shall be available for inspection by the District's accountant. The Operator
shall submit a proposed record and accounting system for approval. The Operator
shall provide the District with copies of all reports it files with any State or
Federal agency at the time that such reports are filed.
23. Bankruptcy. This Contract shall terminate in the case of
----------
bankruptcy, voluntary or involuntary, or insolvency of the Operator. The time of
termination in the event of bankruptcy shall be the day and time of filing of
the petition in Bankruptcy.
24. Number of Copies. This Agreement may be executed in any number of
----------------
counterparts, all of which shall have the full force and effect of an original
for all purposes.
25. Law to Govern. This Agreement shall be governed by the laws of the
-------------
State of Kentucky, both as to interpretation and performance.
-8-
<PAGE>
26. Modification. This Agreement constitutes the entire agreement and
------------
understanding between the parties hereto, and it shall not be considered
modified, altered, changed or amended in any respect, unless in writing and
signed by the parties hereto.
27. Right to Require Performance. The Failure of the District at any
----------------------------
time to require performance by the Operator of any provisions hereof, shall in
no way effect the right of the District thereafter to enforce same. Nor shall
waiver by the District of any breach of any provisions hereof be taken or held
to be a waiver of any succeeding breach of such provision or as a waiver of any
provision itself.
28. Illegal Provisions. If any provision of this Agreement shall be
------------------
declared illegal, void, or unenforceable, the other provision shall not be
effected, but shall remain in full force and effect.
29. Notice. A letter addressed and sent by certified United States
----------------
mail to either party at its business address shown hereinafter shall be
sufficient notice whenever required for any purpose in this Agreement, to-wit:
Pulaski County Solid
Waste Management District
P.O. Box 989
Somerset, KY 42502
Pulaski Landfill, Inc.
4140 South Hwy. 27
Somerset, KY 42501
-9-
<PAGE>
30. Authorized Capacity. It is expressly understood and contemplated
-------------------
that the Operator is authorized to accept municipal solid waste from within and
outside of Pulaski County in the following amounts, unless increased under the
County's Solid Waste Plan, for the term of this Agreement:
Estimated 10-Year Waste Generation (1991-2001)
----------------------------------------------
In Area Waste: 500,913 tons
Out of Area Waste: 875,324 tons
31. Operator shall furnish to the District all of the background
information required by the Commonwealth of Kentucky under KRS 224.861, and such
information shall also be provided to the District by any assignee contemplated
under paragraph 21 above, and also by any transferee of a majority ownership of
the Operator.
IN TESTIMONY WHEREOF, witness the signatures of the parties hereto
this the day and date first above written.
DISTRICT:
--------
PULASKI COUNTY SOLID WASTE
MANAGEMENT DISTRICT
BY: /s/ Smith Vanhook
------------------------------
SMITH VANHOOK, CHAIRMAN
ATTEST: /s/ Mary Creekmore
--------------------------
MARY CREEKMORE, SECRETARY
OPERATOR:
--------
BY: /s/ William Skuba
------------------------------
WILLIAM C. SKUBA, PRESIDENT
-10-
<PAGE>
STATE OF PENNSYLVANIA
COUNTY LUZERNE . . . SCT:
Acknowledged before me by Pulaski Landfill, Inc., by and through its
President, William C. Skuba, on this 27th day of February, 1992.
My Commission Expires:
1/17/94 /s/ Barbara Chesrasaro
------------------------------
Notary Public
PREPARED IN THE LAW OFFICE OF
- --------------------------------
JOHN T. MANDT
Attorney at Law
P.O. Box 25
Somerset, Kentucky 42502
(606) 679-3504
-11-
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
SUBSIDIARY STATE OF INCORPORATION
- ---------- ----------------------
Pulaski Grading, Inc. Kentucky
Carolina Grading, Inc. South Carolina
S&S Grading, Inc. West Virginia
Allied Waste Services, Inc. Delaware
Olney Sanitary System, Inc. Illinois
Eastern Waste of New York, Inc. Delaware
Bayside of Marion, Inc. Florida
Super Kwik, Inc. Pennsylvania
Donno Company, Inc. New York
R&A Bender, Inc. Pennsylvania
Eastern Waste of L.I., Inc. Delaware
Eastern Container Corporation Delaware
Apex Waste Services, Inc. Pennsylvania
Eastern Environmental Services of Indiana, Inc. Delaware
Eastern Environmental Services of Florida, Inc. Florida
Waste Services of South Florida, Inc. Florida
Residential Services, Inc. New York
Suffolk Waste Systems, Inc. New York
N.R.T. Realty Corp. New York
EESI of Fairless Hills, Inc. Delaware
Eastern Transfer of New York, Inc. Delaware
Soil Remediation of Philadelphia, Inc. Delaware
Harford Disposal, Inc. Maryland
Pappy, Inc. Maryland
Waste X Services, Inc. Florida
Pine Grove, Inc. Delaware
Pine Grove Hauling, Inc. Pennsylvania
Pine Grove Landfill, Inc. Pennsylvania
Hamm's Sanitation, Inc. New Jersey
H.S.S. Inc. New Jersey
Kelly Run Sanitation, Inc. Pennsylvania
Bluegrass Containment, Inc. Kentucky
Hudson Jersey Sanitation Co. New Jersey
West Milford Haulage, Inc. New Jersey
Specialized Recycling Technologies New Jersey
Frank Stamato & Co. New Jersey
Eastern Recycling of NJ, Inc. Delaware
Eastern Waste of NJ, Inc. Delaware
Ecology Systems, Inc. New Jersey
Tactical Management, Inc. New Jersey
Transpro, Inc. New Jersey
S&S Grading of Illinois, Inc. Illinois
Eastern Waste of Bethlehem, Inc. Delaware
Eastern Waste of West Virginia, Inc. Delaware
Chesser Island Road Landfill, Inc. Georgia
Middle Island Enterprises, Inc. West Virginia
Strawser Disposal Services, Inc. Pennsylvania
Vonger Sanitation Pennsylvania
Steel City Environmental Services, Inc. Pennsylvania
All Waste Systems, Inc. New York
Ulster County Sanitation, Inc. New York
Summit Transport Group, Inc. Pennsylvania
<PAGE>
Exhibit 22
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements of
Eastern Environmental Services, Inc.:
(i) on Form S-8 (Registration Statement No. 33-25155),
(ii) on Form S-8 (Registration Statement No. 33-21251),
(iii) on Form S-8 (Registration Statement No. 33-37374),
(iv) on Form S-8 (Registration Statement No. 33-45250),
(v) on Form S-3 (Registration Statement No. 333-00283),
(vi) on Form S-8 (Registration Statement No. 333-28627),
(vii) on Form S-3 (Registration Statement No. 333-32361),
(viii) on Form S-3 (Registration Statement No. 333-47089),
(ix) on Form S-4 (Registration Statement No. 333-37845), and
(x) on Form S-8 (Registration Statement No. 333-48265)
(xi) on Form S-3 (Registration Statement No. 333-49613)
(xii) on Form S-3 (Registration Statement No. 333-56247)
of our report dated June 30, 1998, with respect to the consolidated financial
statements of Eastern Environmental Services, Inc. included in this Report (Form
10-K) for the transition period from July 1, 1997 to December 31, 1997
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
June 30, 1998
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