<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 8-K
Current Report
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) September 22, 1998
EASTERN ENVIRONMENTAL SERVICES, INC.
------------------------------------
(Exact name of issuer as specified in charter)
Delaware 0-16102 59-2840783
(State or Other Jurisdiction Commission (I.R.S. Employer
Or Incorporation or File Number Identification
Organization) Number)
1000 CRAWFORD PLACE, MT. LAUREL, NEW JERSEY 08054
(Address of principal executive offices)
(609)235-6009
(Registrant's telephone number, including area code)
<PAGE>
ITEM 5. OTHER EVENTS
REPORTING OF CERTAIN FINANCIAL AND OTHER INFORMATION FOR REGISTRATION AND OTHER
PURPOSES
The Registrant is filing herewith audited restated consolidated financial
statements, selected consolidated financial data (restated) and Management's
Discussion and Analysis of Financial Condition and Results of Operations
(restated), which reflects the acquisitions of All Waste Systems, Inc. and
affiliated companies and Ulster Sanitation, Inc. and affiliated companies on
June 26, 1998. Each of these acquisitions was accounted for as a pooling of
interests. The restated financial statements become the historical financial
statements of the Company.
Such financial information is attached hereto as Exhibit 99 and incorporated
herein by reference. Exhibit 99 is hereby incorporated by reference into the
Registrant's Registration Statements on Form S-3, file numbers 333-00283, 333-
32361, 333-47089, 333-49613, 333-56247 on Form S-4, file number 333-37845 and on
Form S-8, file numbers 33-25155, 33-21251, 33-37374, 33-45250, 333-28627, 333-
48265.
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
EXHIBIT INDEX
Number and
Description of Exhibit
- -----------------------
23.1 Consent of Ernst & Young LLP
23.2 Consent of Paternostro, Callahan & DeFreitas, LLP
23.3 Consent of Bardall, Weintraub P.C.
27.1 Financial Data Schedule for the Six Month Transition Period Ended
December 31, 1997 (for SEC use only)
99 Financial Information
<PAGE>
EXHIBIT 23.1
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),
(x) on Form S-8 (Registration Statement No. 333-48265),
(xi) on Form S-3 (Registration Statement No. 333-49613), and
(xii) on Form S-3 (Registration Statement No. 333-56247)
of our report dated September 16, 1998, with respect to the consolidated
financial statements of Eastern Environmental Services, Inc. included in Eastern
Environmental Services, Inc.'s Current Report on Form 8-K dated September 22,
1998 filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
September 22, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Eastern Environmental Services,
Inc.'s current report on Form 8-K dated September 22, 1998 of our report dated
March 3, 1997, with respect to the combined financial statements of Donno
Company, Inc. and affiliates included in Eastern Environmental Services, Inc.'s
Current Report on Form 8-K/A dated July 10, 1997 (amending the Company's Form 8-
K dated January 31, 1997), both filed with the Securities and Exchange
Commission.
/s/ Paternostro, Callahan & DeFreitas, LLP
------------------------------------------
PATERNOSTRO, CALLAHAN & DEFREITAS, LLP
Mineola, New York
September 21, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Eastern Environmental Services,
Inc.'s Current Report on Form 8-K dated September 22, 1998 of our reports dated
September 30, 1996, with respect to the combined comparative financial
statements of Super Kwik, Inc. and Waste Maintenance Services, Inc. included in
Eastern Environmental Services, Inc.'s Current Report on Form 8-K dated
September 27, 1996 (as amended on Form 8-K/A filed December 9, 1996, June 6,
1997 and July 10, 1997), filed with the Securities and Exchange Commission.
/s/ Bardall, Weintraub P.C.
---------------------------
BARDALL, WEINTRAUB P.C.
Turnersville, New Jersey
September 21, 1998
<PAGE>
EXHIBIT 99
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
Index to Financial Information
CONTENTS
(a) Financial Information
Reports of Independent Auditors............................. F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets (Restated)...................... F-5
Consolidated Statements of Operations (Restated)............ F-7
Consolidated Statements of Stockholders' Equity (Restated).. F-8
Consolidated Statements of Cash Flows (Restated)............ F-10
Notes to Consolidated Financial Statements (Restated)....... F-11
(b) Selected Consolidated Financial Data (Restated)................ F-29
(c) Management's Discussion and Analysis of Financial Condition and
Results of Operations (Restated)............................. F-30
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 financial statements of All Waste and Ulster,
and the 1996 and 1995 financial statements of Super Kwik and Donno Company,
wholly owned subsidiaries, which statements reflect total assets constituting 4%
at December 31, 1997, 6% at June 30, 1997, and 41% at June 30, 1996 and total
revenues constituting 11% for the six-month period ended December 31, 1997, 15%,
45%, and 49% for the years ended June 30, 1997, 1996 and 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, Donno Company, All Waste, and Ulster is
based solely on the reports of 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 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
September 16, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of All Waste Systems, Inc. and
Affiliated Companies.
We have audited the accompanying combined balance sheets of All Waste Systems,
Inc. and Affiliated companies as of December 31, 1997, June 30, 1997, December
31, 1996 and December 31, 1995 and the related combined statements of
operations and retained earnings and combined cash flows for the six months
ended December 31, 1997, the twelve months ended June 30, 1997, the twelve
months ended December 31, 1996 and the twelve months ended December 31, 1995.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to in the first
paragraph, present fairly, in all material respects, the combined financial
position of All Waste Systems, Inc. and Affiliated companies as of December 31,
1997, June 30, 1997, December 31, 1996 and December 31, 1995 and the results of
their operations and their cash flows for the six-month period ended December
31, 1997, the twelve months ended June 30, 1997, the twelve months ended
December 31, 1996 and the twelve months ended December 31, 1995 in conformity
with generally accepted accounting principles.
/s/ Christopher Rayner & Associates
Rockville Centre, New York
August 21, 1998
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Ulster Sanitation, Inc. and
Affiliated Companies.
We have audited the accompanying combined balance sheets of Ulster Sanitation,
Inc. and Affiliated companies as of December 31, 1997, June 30, 1997, December
31, 1996 and December 31, 1995 and the related combined statements of operations
and retained earnings and member's capital and combined cash flows for the six
months ended December 31, 1997, the twelve months ended June 30, 1997, the
twelve months ended December 31, 1996 and the twelve months ended December 31,
1995. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to in the first
paragraph, present fairly, in all material respects, the combined financial
position of Ulster Sanitation, Inc. and Affiliated companies as of December 31,
1997, June 30, 1997, December 31, 1996 and December 31, 1995 and the results of
their operations and their cash flows for the six-month period ended December
31, 1997, the twelve months ended June 30, 1997, the twelve months ended
December 31, 1996 and the twelve months ended December 31, 1995 in conformity
with generally accepted accounting principles.
/s/ Christopher Rayner & Associates
Rockville Centre, New York
August 21, 1998
F-4
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (RESTATED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------
1997 1997 1996
------------------ ----------------- -----------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 7,298,606 $ 5,890,125 $ 2,934,859
Accounts receivable, less allowance for doubtful accounts of
$4,465,000, $3,436,000 and $2,394,000......................... 27,980,376 20,683,420 9,171,911
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....................... 5,327,714 5,841,290 3,404,241
------------ ------------ ------------
Total current assets.......................................... 47,593,100 35,783,849 15,957,923
Property and equipment:
Land............................................................ 12,526,002 7,556,229 818,874
Landfill sites.................................................. 84,979,749 34,111,494 13,471,186
Buildings and leasehold improvements............................ 13,074,520 10,182,860 5,198,109
Vehicles........................................................ 53,332,816 46,175,662 38,450,190
Machinery and equipment......................................... 34,245,731 28,273,399 17,381,689
Furniture and fixtures.......................................... 2,605,735 1,982,287 1,949,163
------------ ------------ ------------
Total property and equipment.................................. 200,764,553 128,281,931 77,269,211
Accumulated depreciation and amortization........................ (50,379,811) (44,192,495) (41,215,449)
------------ ------------ ------------
150,384,742 84,089,436 36,053,762
Excess cost over fair market value of net assets acquired, net
of $3,932,000, $3,008,000 and $2,541,000 accumulated
amortization.................................................... 68,418,962 62,983,467 3,162,459
Other intangible assets, net of $11,181,000, $9,049,000 and
$8,564,000 accumulated amortization............................. 15,189,345 7,721,719 2,048,944
Notes receivable from officers................................... 432,902 432,902 620,643
Other assets (including $556,000, $533,000 and $433,000 of
restricted cash on deposit for landfill closure and insurance
bonding)........................................................ 3,519,649 2,931,494 2,482,992
------------ ------------ ------------
Total assets.................................................. $285,538,700 $193,942,867 $ 60,326,723
============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (RESTATED)
<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.......................................... 11,916,759 12,235,259 8,802,707
Accrued expenses and other current liabilities............ 16,049,049 12,771,882 3,275,846
Income taxes payable...................................... 97,323 1,322,189 539,174
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.......................... 8,715,624 8,785,529 8,067,181
Current portion of capital lease obligations............... 1,238,789 1,474,656 1,499,124
Note payable to stockholder................................ 402,413 186,413 273,585
Deferred revenue........................................... 4,248,990 3,540,412 963,217
------------ ------------ -----------
Total current liabilities.............................. 44,946,947 42,899,340 25,085,834
Deferred income taxes...................................... 3,927,658 5,980,956 765,302
Long-term debt, net of current portion..................... 67,083,094 77,105,492 21,816,372
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--26,762,963,
20,639,418 and 14,010,248............................. 267,629 206,394 140,102
Additional paid-in capital................................. 136,314,660 45,439,758 6,028,594
Retained earnings.......................................... 6,822,311 4,098,378 745,333
------------ ------------ -----------
143,404,600 49,744,530 6,914,029
Less treasury stock at cost--39,100 common shares.......... (76,259) (76,259) (76,259)
------------ ------------ -----------
Total stockholders' equity............................ 143,328,341 49,668,271 6,837,770
------------ ------------ -----------
Total liabilities and stockholders' equity............ $285,538,700 $193,942,867 $60,326,723
============ ============ ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (RESTATED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
-------------------------------- ----------------------------------------------------
1997 1996 1997 1996 1995
---------------- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues............................... $119,525,736 $77,361,652 $170,148,035 $123,835,423 $116,467,726
Cost of revenues....................... 80,786,714 60,021,247 122,701,508 96,030,155 85,548,655
Selling, general, and administrative
expenses.............................. 17,824,725 9,796,473 25,257,710 22,009,594 19,527,188
Depreciation and amortization.......... 7,522,896 4,123,896 9,454,911 7,469,657 7,596,380
Merger costs........................... 2,725,000 1,856,340 3,336,792 -- --
------------ ----------- ------------ ------------ ------------
Operating income (loss)................ 10,666,401 1,563,696 9,397,114 (1,673,983) 3,795,503
Interest expense, net.................. (2,112,799) (1,575,885) (4,427,503) (2,419,826) (1,489,657)
Other income, net...................... 305,825 331,423 1,044,382 255,009 186,599
------------ ----------- ------------ ------------ ------------
Income (loss) before income taxes...... 8,859,427 319,234 6,013,993 (3,838,800) 2,492,445
Income tax expense..................... 3,540,571 766,384 1,874,933 82,335 489,534
------------ ----------- ------------ ------------ ------------
Net income (loss)...................... $ 5,318,856 $ (447,150) $ 4,139,060 $ (3,921,135) $ 2,002,911
============ =========== ============ ============ ============
Basic earnings (loss) per share........ $.21 $(.03) $.23 $(.29) $.16
============ =========== ============ ============ ============
Weighted average number of shares
outstanding........................... 25,452,560 17,412,229 18,251,457 13,504,543 12,330,822
============ =========== ============ ============ ============
Diluted earnings (loss) per share...... $.20 $(.03) $.22 $(.29) $.16
============ =========== ============ ============ ============
Weighted average number of shares
outstanding........................... 26,999,497 17,412,229 19,215,150 13,504,543 12,423,430
============ =========== ============ ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (RESTATED)
<TABLE>
<CAPTION>
NUMBER OF SHARES PAR VALUE
----------------------- -----------------------
CLASS A CLASS A ADDITIONAL
COMMON COMMON COMMON COMMON PAID-IN RETAINED
STOCK STOCK STOCK STOCK CAPITAL EARNINGS
---------- ----------- --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994.................................. 10,770,694 1,591,201 $107,707 $ 15,912 $ 4,357,157 $ 7,312,382
Exercise of common stock options........................ 30,000 -- 300 -- 25,950 --
Issuance of common stock................................ 300,000 -- 3,000 -- 297,000 --
Net income.............................................. -- -- -- -- -- 2,002,911
Dividends paid to former stockholders of pooled
companies............................................. -- -- -- -- -- (2,380,285)
Other................................................... -- -- -- -- -- 5,701
---------- ---------- -------- -------- ------------ -----------
Balance at June 30, 1995.................................. 11,100,694 1,591,201 111,007 15,912 4,680,107 6,940,709
Exercise of common stock options........................ 140,000 -- 1,400 -- 141,100 --
Exercise of common stock warrants....................... 303,353 -- 3,033 -- 424,313 --
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................................................ -- -- -- -- -- (3,921,135)
Dividends paid to former stockholders of pooled
companies............................................. -- -- -- -- -- (2,273,625)
Other................................................... -- -- -- -- -- (616)
---------- ---------- -------- -------- ------------ -----------
Balance at June 30, 1996.................................. 14,010,248 -- 140,102 -- 6,028,594 745,333
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.......... -- -- -- -- -- 53,124
year end.............................................
Net income.............................................. -- -- -- -- -- 4,139,060
Dividends paid to former stockholders of pooled
companies............................................. -- -- -- -- -- (839,994)
Other................................................... -- -- -- -- -- 855
---------- ---------- -------- -------- ------------ -----------
Balance at June 30, 1997.................................. 20,639,418 -- 206,394 -- 45,439,758 4,098,378
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 paid to former stockholders of pooled
companies............................................. -- -- -- -- -- (1,975,426)
Other................................................... -- -- -- -- -- (2,347)
Net income.............................................. -- -- -- -- -- 5,318,856
---------- ---------- -------- -------- ------------ -----------
Balance at December 31, 1997.............................. 26,762,963 -- $267,629 -- $136,314,660 $ 6,822,311
========== ========== ======== ======== ============ ===========
</TABLE>
See accompanying notes.
F-8
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (RESTATED)
<TABLE>
<CAPTION>
TREASURY
STOCK TOTAL
---------- -------------
<S> <C> <C>
Balance at June 30, 1994.................................................................. $(76,259) $ 11,716,899
Exercise of common stock options.......................................................... -- 26,250
Issuance of common stock.................................................................. -- 300,000
Net income................................................................................ -- 2,002,911
Dividends paid to former stockholders of pooled companies................................. -- (2,380,285)
Other..................................................................................... -- 5,701
--------- ------------
Balance at June 30, 1995.................................................................. (76,259) 11,671,476
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................................................................................. -- (3,921,135)
Dividends paid to former stockholders of pooled companies................................ -- (2,273,625)
Other.................................................................................... -- (616)
--------- ------------
Balance at June 30, 1996.................................................................. (76,259) 6,837,770
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.................................. -- 53,124
Net income............................................................................... -- 4,139,060
Dividends paid to former stockholders of pooled companies................................ -- (839,994)
Other.................................................................................... -- 855
--------- ------------
Balance at June 30, 1997.................................................................. (76,259) 49,668,271
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 paid to former stockholders of pooled companies................................ -- (1,975,426)
Other.................................................................................... -- (2,347)
Net income............................................................................... -- 5,318,856
--------- ------------
Balance at December 31, 1997.............................................................. $(76,259) $143,328,341
========= ============
</TABLE>
See accompanying notes.
F-9
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, YEAR ENDED JUNE 30,
------------------------------- ------------------------------------------
1997 1996 1997 1996 1995
--------------- -------------- ------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................... $ 5,318,856 $ (447,150) $ 4,139,060 $ (3,921,135) $ 2,002,911
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization...................... 7,522,896 4,123,896 9,454,911 7,469,657 7,596,380
Provision for losses on receivables................ 947,986 811,984 1,149,009 856,473 834,648
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.............................. 3,123,893 592,467 855,761 (54,359) (163,869)
Loss on write-down of assets held for sale......... -- -- -- 402,616 --
Gain on sale of property and equipment............. (64,912) (187,252) (698,688) (134,787) (154,720)
Changes in operating assets and liabilities:
Accounts receivable............................. (4,208,916) (3,791,209) (9,086,099) (1,856,680) (973,492)
Income taxes.................................... (3,396,482) 24,985 993,400 39,626 75,830
Accrued expenses................................ (2,322,286) 1,193,893 -- -- --
Accounts payable................................ (2,390,388) 1,081,611 1,992,643 1,345,325 461,935
Deferred revenue................................ 645,786 1,258,094 2,799,753 217,442 40,929
Prepaid expenses and other current assets....... 1,018,242 530,746 -- -- --
Other........................................... (1,138,840) (1,976,988) (2,088,309) 1,016,773 329,307
-------------- ------------- ------------ ------------ -----------
Net cash provided by operating activities............ 5,458,422 3,376,991 10,069,213 7,577,261 10,341,663
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................... (10,608,638) (9,417,553) (16,345,337) (12,473,526) (6,517,847)
(Advances made) payments received on notes
receivable, net.................................... -- -- (22,090) 9,405 46,026
Payments for intangibles............................. (816,713) (540,000) (2,682,110) (1,158,308) (574,950)
Landfill closure and insurance bonding
deposits........................................... (534,439) (142,745) (57,837) 111,485 (18,145)
Other, net........................................... -- -- 307,654 (94,058) (196,376)
-------------- ------------- ------------ ------------ -----------
Net cash used in investing activities................ (60,666,681) (45,127,986) (62,212,704) (14,872,579) (8,606,851)
FINANCING ACTIVITIES
Proceeds from revolving line of credit,
long-term debt and capital lease obligations....... 36,254,128 40,679,360 69,360,762 11,891,222 7,201,440
Payments on revolving line of credit,
long-term debt and capital lease
obligations........................................ (65,509,740) (7,254,858) (27,039,422) (5,298,714) (5,753,096)
Net (payments) borrowings on note payable to
shareholder/officer................................ 216,000 35,686 (18,902) (376,902) (39,853)
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 (used in) financing activities.. 56,616,740 46,661,286 55,098,757 6,051,776 (645,544)
-------------- ------------- ------------ ------------ -----------
Net increase (decrease) in cash and cash
equivalents........................................ 1,408,481 4,910,291 2,955,266 (1,243,542) 1,089,268
Cash and cash equivalents at beginning
of period.......................................... 5,890,125 2,934,859 2,934,859 4,178,401 3,089,133
-------------- ------------- ------------ ------------ -----------
Cash and cash equivalents at end of period........... $ 7,298,606 $ 7,845,150 $ 5,890,125 $ 2,934,859 $ 4,178,401
============== ============= ============ ============ ===========
</TABLE>
See accompanying notes.
F-10
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) (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, (iii) Ecology Systems, Inc., Tactical Management
Inc., and Transpro Inc. (collectively the "Ecology Companies") on March 31,
1998, (iv) All Waste Systems, Inc., ARB Enterprises, Inc., Northern Recycling,
Inc., and All Waste Recycling, Inc. (collectively, "All Waste" or the "All Waste
Companies") on June 26, 1998, and (v) Ulster County Sanitation, Inc., Ulster
County Rolloff, Inc., Art Sperl Disposal, L.L.C., Edgemere Development, Inc.,
and Regional Recycling, Inc. (collectively, "Ulster" or the "Ulster Companies")
on June 26, 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, the Ecology Companies, All Waste, and Ulster for all periods
presented.
Prior to combination, the fiscal year end of the Ecology Companies, the
Stamato Companies, the All Waste Companies and the Ulster Companies was December
31. The consolidated results of operations of the Company for the six-month
periods ended December 31, 1997 and 1996 and the year ended June 30, 1997
include the results of operations of the Ecology Companies, the Stamato
Companies, the All Waste Companies and the Ulster Companies for the same
periods, 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, the Stamato Companies, the All Waste Companies and the Ulster
Companies for the year ended December 31, 1996 and 1995. A net increase to
equity of approximately $53,000 has been made to reflect the activity of the
Ecology Companies, the Stamato Companies, the All Waste Companies and the Ulster
Companies for the six-month period ended December 31, 1996. A summary of the
unaudited results of operations of the Ecology Companies, the Stamato Companies,
the All Waste Companies and the Ulster Companies for the six-month period ended
December 31, 1996 is as follows:
<TABLE>
<S> <C>
Revenues........................................................................ $35,560,000
Net loss........................................................................ $ (80,000)
</TABLE>
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.
F-11
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions regarding the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Such
estimates include the Company's accounting for closure and post-closure
obligations, amortization of landfill development costs, and estimates of
reserves such as the allowance for doubtful accounts.
PROPERTY AND EQUIPMENT
Property and equipment is stated on the basis of cost. The Company provides
depreciation over the estimated useful lives of assets using the straight-line
method for its property and equipment except for landfill sites. The estimated
useful lives are ten to 40 years for buildings and improvements, three to 12
years for vehicles, machinery, and equipment, five to 12 years for containers
and three to ten years for furniture and fixtures.
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 $868,000, $596,000, $229,000, and $246,000, 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 $959,000,
$975,000, $766,000, and $842,000, 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
F-12
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) (CONTINUED)
available facts, existing technology and interpretation of presently enacted
laws and regulations. Landfill post-closure costs represent management's
estimate of the current costs of the future obligation associated with
maintaining and monitoring the landfill for generally a 30-year period
subsequent to the closure of the landfill. The Company estimates the future cost
of closure and post-closure costs based on its interpretation of the U.S.
Environmental Protection Agency's Subtitle D technical standards. The Company
periodically updates its estimates of future closure and post-closure costs with
the impact of changes in estimates accounted for on a prospective basis. The
Company recognizes these costs on the unit-of-production method based on
consumed airspace in relation to management's estimate of total available
airspace. Environmental costs relating to remediation work are accrued and
charged to operations in the period the potential environmental liability is
known.
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 $3,174,000, $5,135,000, $560,000, and $1,328,000, financed insurance
premiums of $0, $1,211,000, $462,000, and $458,000, and non-cash distributions
to a shareholder of $285,000, $300,000, $0, and $0 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
F-13
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) (CONTINUED)
years beginning after December 15, 1997. The Company believes that its adoption
of statement will not have a material impact on the Company's financial
statements.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued 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
DECEMBER 31, YEAR ENDED JUNE 30,
------------------------------------------------
1997 1997 1996 1995
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss).............................. $ 5,318,856 $ 4,139,060 $(3,921,135) $ 2,002,911
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share
weighted average shares.................... 25,452,560 18,251,457 13,504,543 12,330,822
Effect of dilutive options and warrants........ 1,546,937 963,693 -- 92,608
----------- ----------- ----------- -----------
Denominator for diluted earnings per share..... 26,999,497 19,215,150 13,504,543 12,423,430
=========== =========== =========== ===========
Basic earnings (loss) per share................ $ .21 $ .23 $ (.29) $ .16
=========== =========== =========== ===========
Diluted earnings (loss) per share.............. $ .20 $ .22 $ (.29) $ .16
=========== =========== =========== ===========
</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
F-14
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) (CONTINUED)
using the pooling of interests method; and, accordingly, the accompanying
consolidated financial statements include the accounts of the Donno Companies
for all periods presented.
On March 31, 1997, the Company completed its merger with Apex Waste
Services, Inc. ("Apex"), with 796,927 unregistered shares of Common Stock
(including 2,482 shares representing an adjustment for long-term debt being less
than $15,000,000 at March 31, 1997) issued in exchange for all issued and
outstanding shares of Apex. Apex operates over 65 collection vehicles and a
transfer and processing station and provides services to approximately 10,000
residential and 4,000 commercial customers in Northeastern Pennsylvania. The
transaction has been accounted for using the pooling of interests method. Apex
was formed on October 1, 1996 as a result of the acquisition of certain assets
from Waste Management of Pennsylvania, Incorporated, including $6.2 million
excess cost over fair market value of net assets acquired. The results of
operations of Apex have been included in the Company's consolidated financial
statements since the date of inception of Apex.
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.
On June 26, 1998, the Company completed its merger with the All Waste
Companies and 1,696,058 shares of common stock of the Company were issued in
exchange for all the outstanding stock of the All Waste Companies. The All Waste
Companies provide collection services to commercial and residential customers in
southern New York and operate a municipal solid waste transfer station in
Goshen, New York. 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 All Waste Companies for all periods presented.
Also on June 26, 1998, the Company completed its merger with the Ulster
Companies and 335,140 shares of common stock of the Company were issued in
exchange for all the outstanding stock of the Ulster Companies. The Ulster
Companies provide collection services to commercial and residential customers in
southern New York and operate a municipal solid waste transfer station in
Kingston, New York. 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 Ulster Companies for all periods presented.
F-15
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) (CONTINUED)
A detail of revenues and net income (loss) of the separate companies is as
follows (unaudited):
<TABLE>
<CAPTION>
NET INCOME
REVENUES (LOSS)
------------ -----------
<S> <C> <C>
Six months ended December 31, 1997
Eastern Environmental Services, Inc.................................. $ 40,193,591 $ 2,562,082
Pooled companies..................................................... 79,332,145 2,756,774
------------ -----------
Combined............................................................. $119,525,736 $ 5,318,856
============ ===========
Year ended June 30, 1997
Eastern Environmental Services, Inc.................................. $ 30,759,984 $ 1,499,755
Pooled companies..................................................... 139,388,051 2,639,305
------------ -----------
Combined............................................................. $170,148,035 $ 4,139,060
============ ===========
Year ended June 30, 1996
Eastern Environmental Services, Inc.................................. $ 7,632,503 $(3,500,043)
Pooled companies..................................................... 116,202,920 (421,092)
------------ -----------
Combined............................................................. $123,835,423 $(3,921,135)
============ ===========
Year ended June 30, 1995
Eastern Environmental Services, Inc.................................. $ 8,650,945 $(1,547,550)
Pooled companies..................................................... 107,816,781 3,550,461
------------ -----------
Combined............................................................. $116,467,726 $ 2,002,911
============ ===========
</TABLE>
Super Kwik, Donno, Apex, H.S.S., Inc., Bluegrass, Hudson Jersey Sanitation,
West Milford Haulage, Transpro, Inc., Tactical Management, All Waste Recycling,
Inc., Ulster County Roll-off, Inc., Edgemere Development, Inc., Regional
Recycling, Inc. and Art Sperl Disposal, L.L.C. were Subchapter S Corporations or
limited liability companies prior to the mergers, whereby, the taxable income or
loss flowed through to the individual shareholders. The effects of pro forma
income taxes as a C Corporation would result in additional income tax expense of
$880,000, $1,360,000, $300,000, and $1,605,000 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.
F-16
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) (CONTINUED)
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.............................................................. $125,988,000 $218,204,000
Net income............................................................ $ 5,474,000 $ 3,456,000
Diluted earnings per share............................................ $ .20 $ .16
</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"). On August 26, 1998, the Company completed the
acquisition of Coney Island for 129,470 unregistered shares of common stock and
the assumption of approximately $50,000 of debt. The acquisition of Golden Gate
is pending satisfaction of certain customary closing conditions which the
Company believes will be resolved. Estimated consideration relating to the
Golden Gate acquisition consists of approximately 157,500 unregistered shares of
Common Stock and the assumption of approximately $3.0 million of debt. The
acquisition of Golden Gate will be accounted for under the purchase method.
3. ACCOUNTS RECEIVABLE
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains an allowance for
doubtful accounts at a level that management believes is sufficient to cover
potential credit losses. The following is a rollforward of the Company's
allowance for bad debts:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED DECEMBER 31, YEAR ENDED JUNE 30,
--------------------------------------
1997 1997 1996 1995
------------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of period.............................. $3,436,000 $ 2,394,000 $1,960,000 $1,292,000
Additions (charged to expense).............................. 948,000 1,149,000 857,000 834,000
Deductions.................................................. (339,000) (1,302,000) (423,000) (166,000)
Other -- purchase price allocation.......................... 420,000 1,195,000 -- --
---------- ----------- ---------- ----------
Balance at end of period.................................... $4,465,000 $ 3,436,000 $2,394,000 $1,960,000
========== =========== ========== ==========
</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 August 14,
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.
F-17
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) (CONTINUED)
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>
DECEMBER 31, JUNE 30,
--------------------------
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 to an individual. Interest at 9.5%. $8.582 principal and
interest payable weekly until 2007...................................... 3,393,378 3,512,560 3,623,897
Demand note payable to an individual , interest at 10%................... 2,453,194 2,325,060 2,325,060
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....................................................... 4,573,942 4,778,427 5,384,661
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......................................................... 11,197,923 13,045,255 16,528,348
Other.................................................................... 7,528,063 8,598,289 5,382,360
----------- ----------- -----------
78,296,500 89,209,591 34,578,701
Less current portion..................................................... 9,954,413 10,260,185 9,566,305
----------- ----------- -----------
$68,342,087 $78,949,406 $25,012,396
=========== =========== ===========
</TABLE>
Certain machinery and equipment notes payable discussed above have been
classified as capital lease obligations in the balance sheet. Cost and
accumulated depreciation related to assets under capital leases are as follows:
<TABLE>
<CAPTION>
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--$9,954,413; 1999--
$6,279,394; 2000--$8,444,674; 2001--$2,576,256; 2002 and thereafter--
$51,041,763.
Interest paid on all indebtedness was $2,520,000, $4,640,000, $2,511,000,
and $2,419,000, 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.
F-18
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)(Continued)
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................................................ 1,428,142 165,869 583,832
Accrued transaction and transition costs............................... 7,431,244 5,555,181 97,000
Other.................................................................. 5,177,864 5,092,367 1,790,424
----------- ----------- ----------
$16,049,049 $12,771,882 $3,275,846
=========== =========== ==========
</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 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,
and cash deposits of $378,000.
F-19
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)(Continued)
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.
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
F-20
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)(Continued)
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.
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.
F-21
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)(Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Pro forma
results are not likely to be representative of the effects on reported or pro
forma results of operations for future years. The Company's pro forma
information is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED ------------------------------
DECEMBER 31,
YEAR ENDED JUNE 30
------------------------------
1997 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Pro forma net income (loss).............................................. $3,482,000 $455,000 $(4,156,000)
Pro forma diluted earnings (loss) per share.............................. $ .13 $ .02 $ (.31)
</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
Average Shares
Exercise Exercisable 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>
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
F-22
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) (CONTINUED)
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. (1,348,588) (1,201,004) (418,158)
---------------- -------------- --------------
Total deferred tax liabilities................... (7,240,063) (7,903,183) (1,213,002)
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........................................... 111,000 202,716 270,856
---------------- -------------- --------------
Total deferred assets............................ 8,038,803 5,291,241 2,464,145
Valuation allowance for deferred tax assets............. -- -- (1,644,000)
---------------- -------------- --------------
Net deferred tax assets................................. 8,038,803 5,291,241 820,145
---------------- -------------- --------------
Net deferred tax assets (liabilities)................... $ 798,740 $ (2,611,942) $ (392,857)
=============== ============= =============
</TABLE>
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
DECEMBER 31, YEAR ENDED JUNE 30,
---------------------------------------
1997 1997 1996 1995
--------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Current:
Federal............................................. $ 228,313 $ 507,435 $ 73,032 $ 502,157
State............................................... 188,365 511,737 63,662 151,246
---------- ---------- -------- ---------
416,678 1,019,172 136,694 653,403
Deferred:
Federal............................................. 2,516,735 780,771 (57,133) (65,452)
State............................................... 607,158 74,990 2,774 40,693
Operating loss carryforward......................... -- -- -- (139,110)
---------- ---------- -------- ---------
3,123,893 855,761 (54,359) (163,869)
---------- ---------- -------- ---------
Provision for income taxes.......................... $3,540,571 $1,874,933 $ 82,335 $ 489,534
========== ========== ======== =========
</TABLE>
F-23
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) (CONTINUED)
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.......................... $3,100,799 $ 2,104,898 $(1,174,116) $(105,848)
S Corporation income prior to pooling date................... (820,223) (1,109,136) -- --
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........................................................ 322,163 272,129 11,097 25,833
---------- ----------- ----------- ---------
Provision for income taxes................................... $3,540,571 $ 1,874,933 $ 82,335 $ 489,534
========== =========== =========== =========
</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 $3,747,000, $206,000,
$97,000, and $342,000, 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 $1,210,000, $697,000, $510,000, and $727,000 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.
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 is
completed 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
F-24
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) (CONTINUED)
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
$20.0 million. Such agreements also include severance provisions and immediate
vesting provisions of issued options should the officer be terminated.
12. UNUSUAL OPERATING COSTS
Unusual operating costs and other adjustments of $3,027,000 were included in
the fourth quarter of fiscal 1996 results of operations. A charge of $900,000 to
cost of revenues to accrue for certain closure and post-closure monitoring costs
was recorded for the Somerset, Kentucky landfill resulting from a reduction in
the Company's estimate of future probable airspace since the draft permit was
being adjudicated, providing a valuation allowance for possible impairment of
this asset. In October 1996, the Company received approval of its expansion
permit, and in May 1997, the Company decided to continue to operate the
landfill. As the Company proceeds with construction of the landfill, the
adequacy of the closure and post-closure accruals will be reevaluated based on
current assessments of future probable airspace and closure and post-closure
cost estimates. Additionally, charges totaling approximately $879,000 were
charged to selling, general, and administrative expenses relating to the change
in control of the Company, as discussed in Note 8. Of the $879,000 charge,
$672,000 related to recorded severance costs, $97,000 reflected management's
estimate of various transition costs in moving the Company's corporate offices,
and $110,000 related to certain legal and other professional costs incurred in
completing the transaction. Additionally, management refined its estimates of
necessary reserves 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
F-25
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) (CONTINUED)
down these assets held for sale to estimated net realizable value. Finally, in
the second quarter, management recorded a provision of $331,000 related to a
severance agreement settlement with a unionized workforce.
Unusual operating costs of $532,000 were included in the fourth quarter of
fiscal 1995 results of operations. A total charge to cost of revenues of
$339,000 related to the Company's cessation of waste acceptance at the Somerset,
Kentucky landfill on June 30, 1995, and the Company's decision to simultaneously
permit and operate a waste transfer facility to continue to service the waste
needs of the local host county under the ten-year waste disposal franchise
agreement previously awarded to the Company expiring in the year 2002. Of the
$339,000 of unusual operating costs, $150,000 reflected the Company's estimate
of operating losses at the Kentucky facility through fiscal 1996, and $189,000
reflected a noncash charge to write off remaining capitalized costs relating to
a disposal cell closed on June 30, 1995.
Additionally, a charge of $78,000 was recorded in the fourth quarter of fiscal
1995 to reduce the remaining net assets of All Waste Refuse Services, Inc.
("AWRS"), the Company's waste collection business located in Beaufort County,
South Carolina, to their estimated net realizable value at June 30, 1995. The
$78,000 charge included a write-down of $58,000 for certain operating assets,
receivables, and supplies inventory and the establishment of a reserve at June
30, 1995, for the anticipated loss on final divestiture of assets of $20,000.
During fiscal 1995, the Board of Directors of the Company made a decision to
exit the local hauling business in Beaufort County as a result of limited
integration with the Company's landfill operation and continued operating losses
resulting from significant competitive pressures. The majority of the operating
assets of AWRS were sold in fiscal 1995 through several asset sale transactions.
Also in 1995, the Company refined its estimate of necessary reserves against
past-due receivables resulting in a charge to operations of $118,000.
During 1995, Hudson Jersey Sanitation Co. agreed to a settlement with the
pension provider for their union known as Central States, Southeast and
Southwest Pension Fund. This settlement pertains to an audit of their pension
contributions. The Company paid $381,588 to satisfy the settlement, which covers
the period from December 31, 1989 to December 31, 1994. The entire amount was
charged to expense in 1995 and has been recorded as other income on the
statement of operations.
13. RELATED PARTY TRANSACTIONS
In connection with the consummation of the Stock Purchase Agreement (see Note
8), the Company entered into a series of agreements with Mr. Skuba, including a
Severance Agreement dated June 20, 1996. Pursuant to the severance agreement,
virtually all prior agreements between Mr. Skuba and the Company were
terminated, including the Company's obligation to make certain cash payments to
Mr. Skuba upon his resignation from the Company, and in consideration therefor;
the Company, among other benefits (i) conveyed to Mr. Skuba or a company
controlled by Mr. Skuba (a) all of the outstanding capital stock of a
corporation that owns certain real property, (b) certain real and personal
property, and (c) certain vehicles owned by the Company, (ii) transferred to Mr.
Skuba certain potential business opportunities that the Company decided that it
had no interest in pursuing, (iii) agreed to provide Mr. Skuba with certain
health benefits at the Company's cost until June 1997, and (iv) agreed to
indemnify Mr. Skuba to the extent provided by the Company's Certificate of
Incorporation and to maintain director and officer liability insurance for him
until June 2002. The Company recorded a total of $459,100 noncash expense
related to the Severance Agreement including $259,600 of compensation expense,
loss on the sale of certain assets of $156,000, and $43,500 of benefits related
to a Consulting Agreement with Mr. Skuba that 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.
F-26
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) (CONTINUED)
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.
On July 17, 1998, the Company acquired the City of Bethlehem Landfill (the
"Bethlehem Landfill") from the City of Bethlehem, Pennsylvania for an aggregate
purchase price of $26.1 million in cash.
On July 23, 1998, the Company acquired Atlantic Waste Disposal, Inc. ("AWD")
and Atlantic New York, Inc. ("Atlantic") from Brambles USA for an aggregate
purchase price of $91.0 million. AWD owns a Subtitle D landfill in Waverly,
Virginia, and Atlantic is a Brooklyn, New York transfer station. This
transaction will be accounted for using the purchase method of accounting.
On August 20, 1998, the Company completed its merger with Allegro Enterprises,
Inc., Regional Recycling, Inc., Lee Bin Containers, Inc., Madison Enterprises,
Inc., Frank and Joe Savino Partnership, Allegro Transportation and Recycling,
Inc., Allegro Carting and Recycling, Inc. and Joseph Savino and Sons, Inc.
(collectively, the "Savino Companies") and approximately 506,000 shares of the
Company's common stock will be issued in exchange for all of the outstanding
common stock of the Savino Companies. The acquisition is to be accounted for
using the pooling of interests method. Revenues
F-27
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) (CONTINUED)
were $12.3 million and $23.5 million for the six months ended December 31, 1997
for the year ended June 30, 1997, respectively. Unaudited net income is
approximated at break even for the twelve months ended June 30, 1997 and a net
loss of $3.5 million to $4.0 million for the six months ended December 31, 1997
largely as a result of non-recurring items including the accrual of certain
regulatory fines and penalties.
On September 4, 1998, the Company acquired all of the outstanding stock of
Kimmins Recycling, Corp. ("Kimmins") for total consideration of approximately
$40.8 million in cash and approximately 555,000 shares of common stock. The
acquisition is accounted for using the purchase method of accounting.
Additionally, from January 1, 1998 to September 15, 1998, the Company acquired
the assets of 15 collection companies in separate transactions. Total
consideration under the agreements consisted of approximately 367,000 shares of
Common Stock, cash of approximately $14.0 million to the sellers, and the
assumption of approximately $172,000 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.
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........................................ $212,312,119
Net income...................................... $ 9,905,066
Diluted earnings per share...................... $ .42
</TABLE>
On August 16, 1998, the Company entered into a merger agreement with Waste
Management, Inc. The merger agreement provides for each shareholder of the
Company to receive .6406 shares of Waste Management, Inc. common stock for each
share of the Company's Common Stock held. The consummation of the merger is
subject to approval by the Company's shareholders, certain governmental
approvals, and other customary closing conditions. The merger is anticipated to
be completed by December 31, 1998.
F-28
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA (RESTATED)
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 as of June 30,
1997 and 1996, and for each of the three years in the period ended June 30, 1997
has been derived from the Company's audited financial statements. The financial
information derived from the Company's audited restated consolidated financial
statements as of June 30, 1995, 1994, and 1993 and for each of the two years in
the period ended June 30, 1994, includes all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of financial position and
results of operations as of the dates and for the periods indicated. The
selected restated consolidated financial data below should be read in
conjunction with the Company's restated audited consolidated financial
statements and notes thereto at June 30, 1997 and 1996, and for the three years
in the period ended June 30, 1997, and Management's Discussion and Analysis of
Financial Condition and Results of Operations, contained elsewhere in this
report.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, YEARS ENDED JUNE 30, /(1)/
------------- -------------------------------------------------------------------
1997 1997 1996 1995 1994 1993
------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $ 119,525 $ 170,148 $ 123,835 $ 116,468 $ 95,478 $ 8,684
Cost of revenues.................. 80,787 122,701 96,030 85,549 69,819 4,049
Selling, general and
administrative expenses ......... 17,824 25,258 22,009 19,527 15,798 4,907
Depreciation and amortization..... 7,523 9,455 7,470 7,596 6,375 1,809
Merger costs...................... 2,725 3,337 - - - -
------------ ----------- ----------- ----------- ----------- ----------
Operating income (loss)........... 10,666 9,397 (1,674) 3,796 3,486 (2,081)
Interest expense, net............. (2,113) (4,427) (2,420) (1,490) (1,474) (229)
Other income (expense)............ 306 1,044 255 187 994 123
------------ ----------- ----------- ----------- ----------- ----------
Income (loss) from continuing
operations before income taxes... 8,859 6,014 (3,839) 2,493 3,006 (2,187)
Income tax expense (benefit)...... 3,540 1,875 82 490 (24) (715)
------------ ----------- ----------- ----------- ----------- ----------
Net income (loss) from continuing
operations....................... $ 5,319 $ 4,139 $ (3,921) $ 2,003 $ 3,030 $ (1,472)
============ =========== =========== =========== =========== ==========
Basic earnings (loss) per share
from continuing operations....... $ .21 $ .23 $ (.29) $ .16 $ .25 $ (.34)
============ =========== =========== =========== =========== ==========
Weighted average number of shares
outstanding...................... 25,452,560 18,251,457 13,504,543 12,330,822 12,322,795 4,392,022
============ =========== =========== =========== =========== ==========
Diluted earnings (loss) per share
from continuing operations....... $ .20 $ .22 $ (.29) $ .16 $ .24 $ (.34)
============ =========== =========== =========== =========== ==========
Weighted average number of shares
outstanding...................... 26,999,497 19,215,150 13,504,543 12,423,430 12,494,096 4,392,022
============ =========== =========== =========== =========== ==========
OTHER OPERATING DATA:
EBITDA/(2)/....................... $ 18,189 $ 18,852 $ 5,796 $ 11,392 $ 9,861 $ (272)
</TABLE>
<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).............. $ 2,646 $ (7,115) $(9,128) $(6,149) $(1,698) $ 2,199
Total assets........................... $285,539 $193,943 $60,327 $52,719 $47,898 $16,792
Long-term debt and capitalized leases,
less current portion................ $ 68,342 $ 78,949 $25,012 $16,910 $19,014 $ 1,994
Total liabilities...................... $142,211 $144,275 $53,489 $41,048 $36,181 $ 6,988
Total stockholders' equity............. $143,328 $ 49,668 $ 6,838 $11,671 $11,717 $ 9,804
</TABLE>
F-29
<PAGE>
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"),
Ecology Systems, Inc. and its affiliates ("Ecology"), All Waste Systems,
Inc. and its affiliates ("All Waste"), and Ulster Sanitation, Inc. and its
affiliates ("Ulster") 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.
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,
(iii) Stamato, which was acquired on March 31,1998, (iv) All Waste, which was
acquired on June 26, 1998, and (v) Ulster, which was acquired on June 26, 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 has previously filed a
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 as subsequently amended and its Form 10-Q
for the quarter ended June 30, 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 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."
F-30
<PAGE>
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 88%
was attributable to solid waste collection and transportation operations,
approximately 7% was attributable to solid waste disposal operations, and
approximately 5% 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 15% 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.
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
F-31
<PAGE>
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
Merger costs include transaction related expenses, contractual costs,
severance and other termination benefits and certain transition costs related to
integrating operations incurred in connection with acquisitions accounted for
under the pooling of interests method.
OTHER INCOME (EXPENSES)
Other income and expense, which includes gains and losses on sales of
equipment, has not historically been material to the Company's results of
operations.
TAXES
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 40%. 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 $115 million
or 97% of the Company's revenues for the six months ended December 31, 1997 and
approximately $265 million or 93% of the Company's assets at December 31, 1997
resulted from 56 acquisitions consummated by the Company between July 1996 and
September 15, 1998. Of these 56 acquisitions, 40 have been accounted for under
the purchase method of accounting and 16 have been accounted for under the
pooling of interests method of accounting.
With respect to the 40 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
F-32
<PAGE>
additional noncash charges relating to goodwill. Amortization expense of
goodwill was approximately $868,000 for the six months ended December 31, 1997.
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"). On August 26, 1998, the Company completed the
acquisition of Coney Island for 129,470 unregistered shares of common stock and
the assumption of approximately $50,000 of debt. The acquisition of Golden Gate
is pending satisfaction of certain customary closing conditions which the
Company believes will be resolved. Estimated consideration relating to the
Golden Gate acquisition consists of approximately 157,500 unregistered shares of
Common Stock and the assumption of approximately $3.0 million of debt. The
acquisition of Golden Gate 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.
On July 17, 1998, the Company acquired the City of Bethlehem Landfill (the
"Bethlehem Landfill") from the City of Bethlehem, Pennsylvania for an aggregate
purchase price of $26.1 million in cash.
On July 23, 1998, the Company acquired Atlantic Waste Disposal, Inc. ("AWD")
and Atlantic New York, Inc. ("Atlantic") from Brambles USA for an aggregate
purchase price of $91.0 million. AWD owns a Subtitle D landfill in Waverly,
Virginia, and Atlantic is a Brooklyn, New York transfer station. This
transaction will be accounted for using the purchase method of accounting.
On August 20, 1998, the Company completed its merger with Allegro Enterprises,
Inc., Regional Recycling, Inc., Lee Bin Containers, Inc., Madison Enterprises,
Inc., Frank and Joe Savino Partnership, Allegro Transportation and Recycling,
Inc., Allegro Carting and Recycling, Inc. and Joseph Savino and Sons, Inc.
(collectively, the "Savino Companies") and approximately 506,000 shares of the
Company's common stock will be issued in exchange for all of the outstanding
common stock of the Savino Companies. The acquisition is to be accounted for
using the pooling of interests method.
On September 4, 1998, the Company acquired all of the outstanding stock of
Kimmins Recycling, Corp. ("Kimmins") for total consideration of approximately
$40.8 million in cash and approximately 555,000 shares of common stock. The
acquisition is accounted for using the purchase method of accounting.
Additionally, from January 1, 1998 to September 15, 1998, the Company acquired
the assets of 15 collection companies in separate transactions. Total
consideration under the agreements consisted of approximately 367,000 shares of
Common Stock, cash of approximately $14.0 million to the sellers, and the
assumption of approximately $172,000 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.
PENDING MERGER
On August 16, 1998, the Company entered into a merger agreement with Waste
Management, Inc. The merger agreement provides for each shareholder of the
Company to receive .6406 shares of Waste Management, Inc. common stock for each
share of the Company's Common Stock held. The consummation of the merger is
subject to approval by the Company's shareholders, certain governmental
approvals, and other customary closing conditions. The merger is anticipated to
be completed by December 31, 1998.
F-33
<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
------------- --------------
<S> <C> <C>
(UNAUDITED)
Revenues 100.0% 100.0%
Cost of revenues 67.6 77.6
Selling, general and administrative 14.9 12.7
Depreciation and amortization 6.3 5.3
Merger costs 2.3 2.4
----- -----
Operating income 8.9 2.0
Interest expense, net (1.8) (2.0)
Other income, net 0.3 0.4
----- -----
Income before income taxes 7.4 0.4
Income tax expense 3.0 1.0
----- -----
Net income (loss) 4.4% (0.6)%
===== =====
</TABLE>
Revenues for the six months ended December 31, 1997 were $119.5 million
compared to $77.4 million for the six months ended December 31, 1996, an
increase of $42.1 million, or 54.4%. 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, Ecology, All Waste and Ulster, which have been accounted for as
poolings of interests, contributed revenue of $70.6 million for the six months
ended December 31, 1997 compared to $62.5 million for the six months ended
December 31, 1996, an incremental increase of $8.1 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 $80.8
million compared to $60.0 million for the six months ended December 31, 1996, an
increase of $20.8 million or 34.7%. Cost of revenues as a percentage of revenues
for the six months ended December 31, 1997 was 67.6% compared to 77.6% 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 $17.8 million compared to $9.8 million for the six
months ended December 31, 1996, an increase of $8.0 million or 81.6%. These
expenses as a percentage of revenues for the six months ended December 31, 1997,
were 14.9% compared to 12.7% for the same period in fiscal 1997. The slight
increase as a percentage of revenues reflects the increased infrastructure,
including accounting, finance, legal and administration, necessary to integrate
the acquisitions consummated. This increase was partially offset by the
elimination of redundant overhead as acquisitions in certain geographic areas
were consolidated.
Depreciation and amortization totaled $7.5 million, or 6.3% of revenues,
for the six months ended December 31, 1997, versus $4.1 million, or 5.3% 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.
F-34
<PAGE>
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 $766,000 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 FOR THE YEARS
ENDED JUNE 30, ENDED JUNE 30,
1997 AND 1996 1996 AND 1995
----------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenues....................................................... $46,313 37.4% $ 7,368 6.3%
Cost and expenses:
Cost of revenues............................................... 26,672 27.8 10,482 12.3
Selling, general and administrative............................ 3,248 14.8 2,482 12.7
Depreciation and amortization.................................. 1,985 26.6 (127) (1.7)
Merger costs................................................... 3,337 -- -- --
------- -------
35,242 28.1 12,837 11.4
------- -------
Operating income (loss)........................................ 11,071 -- (5,469) --
------- -------
Interest expense, net.......................................... 2,008 83.0 930 62.4
Other income, net.............................................. 789 309.4 68 36.4
------- -------
1,219 56.3 862 66.2
------- -------
Income (loss) before income taxes.............................. 9,852 -- (6,331) --
Income tax expense............................................. 1,792 -- (407) (83.1)
------- -------
Net income (loss).............................................. $ 8,060 -- $(5,924) --
======= =======
</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:............................................................ 72.1 77.6 73.5
Selling, general and administrative expenses................................. 14.8 17.8 16.8
Depreciation and amortization................................................ 5.6 6.0 6.5
Merger costs................................................................. 2.0 -- --
----- ----- -----
Operating income (loss)...................................................... 5.5 (1.4) 3.2
Interest expense, net........................................................ (2.6) (1.9) (1.3)
Other income, net............................................................ 0.6 0.2 0.2
----- ----- -----
Income (loss) before income taxes............................................ 3.5 (3.1) 2.1
Income tax expense........................................................... 1.1 0.1 0.4
----- ----- -----
Net income (loss)............................................................ 2.4% (3.2)% 1.7%
===== ===== =====
</TABLE>
Revenues for the year ended June 30, 1997 were $170.1 million compared to
$123.8 million for the year ended June 30, 1996, an increase of $46.3 million or
37.4%. 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
F-35
<PAGE>
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 $7.4 million or 6.3% 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 $122.7 million
compared to $96.0 million for the year ended June 30, 1996, an increase of $26.7
million or 27.8%. Cost of revenues as a percentage of revenues for the year
ended June 30, 1997 was 72.1% compared to 77.6% for the same period in fiscal
1996. Cost of revenues as a percentage of revenues decreased during this period
primarily due to the acquisition by the Company of 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 $10.5 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 6.3% 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 $25.3 million compared to $22.0 million for the year ended June 30,
1996, an increase of $3.3 million. These expenses as a percentage of revenues
for the year ended June 30, 1997 were 14.8% compared to 17.8% 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
12.7% in fiscal 1996 as compared to fiscal 1995. These expenses as a percentage
of revenues for the year ended June 30, 1996 were 17.8% compared to 16.8% for
the same period in 1995. The increase resulted primarily from the aforementioned
special charges taken in fiscal 1996.
Depreciation and amortization totaled $9.5 million, or 5.6% of revenues, in
fiscal 1997 versus $7.5 million, or 6.0% 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 $7.5
million was consistent with the fiscal 1995 amount of $7.6 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 $4.4 million
compared to $2.4 million for the year ended June 30, 1996, an increase of
approximately $2.0 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 $2.4 million was slightly
higher than the $1.5 million expense in fiscal 1995.
F-36
<PAGE>
Other income, net, for the year ended June 30, 1997 was $1.0 million
compared to $255,000 for the year ended June 30, 1996, an increase in income of
$.7 million. 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 $255,000 as compared to $187,000 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 31.2% 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
19.6% 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 $2.6, including
cash and cash equivalents of $7.3 million. For the six months ended December 31,
1997, net cash provided by operations was approximately $5.5 million, net cash
provided by financing activities was approximately $56.6 million and net cash
used in investing activities was approximately $60.7 million resulting in an
increase in cash and cash equivalents of $1.4 million during this period. Cash
expended during the period included: (i) $44.1 million relating to acquisitions,
(ii) $10.6 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 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
September 18, 1998, borrowings under this facility were $69,500,000.
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 September 18, 1998, the applicable interest rate was
6.31%. 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 over
allotments. Net
F-37
<PAGE>
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
$.17 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 $40 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 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.
F-38
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,298,606
<SECURITIES> 0
<RECEIVABLES> 32,445,376
<ALLOWANCES> 4,465,000
<INVENTORY> 0
<CURRENT-ASSETS> 47,593,100
<PP&E> 200,764,553
<DEPRECIATION> 50,379,811
<TOTAL-ASSETS> 285,538,700
<CURRENT-LIABILITIES> 44,946,947
<BONDS> 68,342,087
0
0
<COMMON> 267,629
<OTHER-SE> 143,060,712
<TOTAL-LIABILITY-AND-EQUITY> 285,538,700
<SALES> 0
<TOTAL-REVENUES> 119,525,736
<CGS> 0
<TOTAL-COSTS> 80,786,714
<OTHER-EXPENSES> 26,818,810
<LOSS-PROVISION> 947,986
<INTEREST-EXPENSE> 2,112,799
<INCOME-PRETAX> 8,859,427
<INCOME-TAX> 3,540,571
<INCOME-CONTINUING> 5,318,856
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,318,856
<EPS-PRIMARY> .21
<EPS-DILUTED> .20
</TABLE>
