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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1998 COMMISSION FILE NO. 0-16102
EASTERN ENVIRONMENTAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
59-2840783
(I.R.S. Employer Identification No.)
1000 CRAWFORD PLACE, SUITE 400, MOUNT LAUREL, NJ 08054
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NO., INCLUDING AREA CODE: (609) 235-6009
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock:
As of May 11, 1998 25,159,507 Shares of Common Stock
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EASTERN ENVIRONMENTAL SERVICES, INC.
FORM 10-Q/A
QUARTER ENDED MARCH 31, 1997
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION AS AMENDED. *
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets - March 31, 1998 2
and December 31, 1997 (Restated)
Condensed Consolidated Statements of Operations for the three 4
months ended March 31, 1998 and 1997 (Restated)
Condensed Consolidated Statement of Stockholders' Equity 5
for the three months ended March 31, 1998
Condensed Consolidated Statements of Cash Flows for the 6
three months ended March 31, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 2 - Changes in Securities 15
Item 4 - Submission of Matters to a vote of Security Holders 16
Item 6 - Exhibits and Reports on Form 8-K 17
</TABLE>
* See Note 2 to Condensed Consolidated Financial Statements.
1
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PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
EASTERN ENVIRONMENTAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
----------- ---------------
(RESTATED) (RESTATED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,660,333 $ 6,692,627
Accounts receivable, less allowance for doubtful
accounts of $3,250,000 and $2,869,000 27,434,090 26,267,643
Deferred income taxes 1,833,253 1,410,000
Prepaid expenses and other current assets 7,457,376 4,913,052
------------ ------------
Total current assets 41,385,052 39,283,322
Property and equipment:
Land 12,166,541 12,377,629
Landfill sites 98,983,078 84,710,540
Buildings and leasehold improvements 12,914,492 10,400,392
Vehicles 47,758,312 45,969,093
Machinery and equipment 31,437,660 29,397,545
Furniture and fixtures 2,555,380 2,394,509
------------ ------------
Total property and equipment 205,815,463 185,249,708
Accumulated depreciation and amortization 43,355,879 40,024,060
------------ ------------
162,459,584 145,225,648
Excess cost over fair market value of net assets acquired,
net of $2,139,000 and $1,656,000 accumulated amortization 81,653,339 71,285,712
Other intangible assets, net of $5,910,000 and
$5,571,000 accumulated amortization 14,929,565 14,545,933
Notes receivable from shareholders/officers 442,402 432,902
Other assets (including $1,418,000 and $566,000 of restricted
cash on deposit for landfill closure and insurance bonding) 4,923,354 3,443,251
------------ ------------
TOTAL ASSETS $305,793,296 $274,216,768
============ ============
</TABLE>
2
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<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------ ---------------
(RESTATED) (RESTATED)
<S> <C> <C>
Current liabilities:
Accounts payable $ 13,874,352 $ 9,858,114
Accrued expenses and other current liabilities 14,276,758 13,457,136
Income taxes payable 1,772,732 351,761
Current portion of accrued landfill closure and other
environmental costs 4,056,000 2,278,000
Current portion of long-term debt 1,211,327 3,308,245
Current portion of capital lease obligations 1,177,139 1,238,789
Deferred revenue 3,514,213 3,661,501
------------ ------------
Total current liabilities 39,882,521 34,153,546
Deferred income taxes 6,242,379 3,068,221
Long-term debt, net of current portion 62,836,866 55,802,918
Capital lease obligations, net of current portion 1,021,575 1,258,993
Accrued landfill closure and other environmental costs 14,868,138 11,772,644
Other liabilities 19,221,798 13,221,023
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 150,000,000
Issued and outstanding shares 25,179,563 and 24,731,765 251,796 247,317
Additional paid-in capital 147,467,268 141,623,620
Retained earnings 14,077,214 13,144,745
------------ ------------
161,796,278 155,015,682
Less treasury stock at cost - 39,100 common shares (76,259) (76,259)
------------ ------------
Total stockholders' equity 161,720,019 154,939,423
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $305,793,296 $274,216,768
============ ============
</TABLE>
See accompanying notes.
3
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EASTERN ENVIRONMENTAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
------------ -------------
(RESTATED) (RESTATED)
<S> <C> <C>
Revenues $55,192,677 $34,992,954
Cost of revenues 34,495,790 23,588,305
Selling, general and administrative expenses 7,022,510 5,623,797
Depreciation and amortization 4,332,108 1,934,531
Merger costs 1,760,000 1,480,452
----------- -----------
Operating income 7,582,269 2,365,869
Interest expense, net (983,498) (890,613)
Other (expense) income (120,400) 475,738
----------- -----------
Income before income taxes 6,478,371 1,950,994
Income tax expense - See Note 5 4,596,000 457,817
----------- -----------
Net income $ 1,882,371 $ 1,493,177
=========== ===========
Basic earnings per share $.08 $.09
=========== ===========
Weighted average number of shares outstanding 24,950,459 16,485,291
=========== ===========
Diluted earnings per share $.07 $.08
=========== ===========
Weighted average number of shares outstanding 26,438,209 17,571,454
=========== ===========
</TABLE>
See accompanying notes.
4
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EASTERN ENVIRONMENTAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
-------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 $247,317 $141,623,620 $13,144,745 $(76,259) $154,939,423
Exercise of
common stock
options and warrants 1,480 436,619 438,099
Common stock issued
in purchase acquisitions 2,999 5,407,029 5,410,028
Dividends paid to former
stockholders of pooled
companies (949,902) (949,902)
Net income (restated) 1,882,371 1,882,371
-------- ------------ ----------- --------- ------------
Balance at
March 31, 1998 (restated) $251,796 $147,467,268 $14,077,214 $(76,259) $161,720,019
======== ============ =========== ========= ============
</TABLE>
See accompanying notes.
5
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
----------- ------------
(Restated)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,882,371 $ 1,493,177
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 4,332,108 1,934,531
Provision for losses on receivables 761,895 132,624
Landfill closure costs 430,173 123,513
Deferred income taxes 2,653,599 253,867
Gain on sale of property and equipment (18,604) (468,211)
Changes in operating assets and liabilities:
Accounts receivable (1,496,108) 905,297
Accounts payable 1,137,018 (2,792,580)
Accrued expenses (593,318) 1,853,462
Income taxes 1,682,872 83,012
Deferred revenue (147,288) (1,203,667)
Prepaid expenses and other current assets (793,225) 224,631
Other (700,267) 547,066
------------ -----------
Net cash provided by operating activities 9,131,226 3,086,722
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (5,069,950) --
Proceeds from sale of property and equipment 225,077 583,001
Development of landfill sites (5,194,326) (1,179,769)
Purchase of property and equipment (4,706,287) (1,408,482)
Landfill closure and insurance bonding deposits (536,498) 23,966
------------ -----------
Net cash used in investing activities (15,281,984) (1,981,284)
FINANCING ACTIVITIES
Proceeds from revolving line of credit, long-term debt
and capital lease obligations 11,600,000 --
Payments on revolving line of credit, long-term debt
and capital lease obligations (6,969,733) (3,329,493)
Proceeds from issuance of common stock, net of
expenses and commissions 438,099 62,308
Cash dividends paid to former stockholders of
pooled companies (949,902) (85,200)
------------ -----------
Net cash provided by (used in) financing activities 4,118,464 (3,352,385)
------------ -----------
Net decrease in cash and cash equivalents (2,032,294) (2,246,947)
Cash and cash equivalents at beginning of period 6,692,627 7,390,951
------------ -----------
Cash and cash equivalents at end of period $ 4,660,333 $ 5,144,004
============ ===========
</TABLE>
See accompanying notes.
6
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EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Eastern Environmental Services, Inc. and its wholly owned
subsidiaries (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. These condensed consolidated
financial statements reflect all adjustments (consisting of normal recurring
accruals), which in the opinion of management, are necessary for a fair
presentation of results of operations for the interim periods presented. The
Company has restated the previously issued Statement of Operations for the three
months ended March 31, 1997 to reflect mergers with Hamm's Sanitation, Inc., and
H.S.S., Inc. ("Hamm's") on December 1, 1997, Bluegrass Containment, Inc. on
March 9, 1998, Hudson Jersey Sanitation, Co., West Milford Haulage, Inc. , Frank
Stamato & Company, and Specialized Recycling Technologies, Inc. (collectively,
"Stamato" or the "Stamato Companies") on March 31, 1998, and Ecology Systems,
Inc., Tactical Management, Inc., and Transpro, Inc. (collectively, "Ecology" or
the "Ecology Companies") on March 31, 1998 which were accounted for using the
"pooling of interests" method. Additionally, the balance sheet at December 31,
1997 has been restated to reflect the Bluegrass, Stamato and Ecology mergers.
The Company has restated the previously issued Condensed Consolidated Financial
Statements as of and for the three months ended March 31, 1998 for the matter
described in Note 2. The results of operations for the three month period ended
March 31, 1998 are not necessarily indicative of the operating results for the
full year. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These interim financial statements
should be read in conjunction with the audited consolidated financial statements
and notes contained in the Company's Form 8-K filed April 29, 1998.
On April 1, 1998 the Company's Board of Directors resolved to change the
Company's fiscal year end from June 30 to December 31. Accordingly, the
condensed consolidated financial information included herein is for the three
months ended March 31. The Company intends to file a Transition Report on Form
10-K for the period ending December 31, 1997 within 90 days from the date of
change.
2. MERGER COSTS
In connection with acquisitions accounted for under the pooling of interests
method, the Company accrues various merger costs at the date of the merger,
including transaction-related expenses, contractual costs, severance and other
termination benefits and certain transition costs related to integrating
operations.
The Company has determined that certain transition merger costs, principally
related to bringing acquired assets into conformity with corporate safety and
operational standards are more appropriately recorded as merger costs when
incurred. Accordingly, the Company has restated the first quarter of 1998 to
reduce merger costs by approximately $2.2 million before income taxes, which
increased net income reported for the first quarter of 1998 by approximately
$1.3 million or $.05 per basic and diluted share. The Company expects to incur
and record merger costs of similar amounts relating to these activities in
future periods. Such amounts recorded prior to 1998 were not material and
accordingly, periods prior to January 1, 1998 are not affected.
3. SIGNIFICANT ACCOUNTING POLICIES
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share. Statement 128, replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary restated, to conform to the
Statement 128 requirements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement No. 130"). Statement 130 establishes standards for reporting and
presentation of comprehensive income and its components. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources and
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The Company adopted Statement
130 effective January 1, 1998 and there was no effect on the Company's Financial
Statements upon adoption.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement No. 131"). Statement 131
establishes standards for reporting information about operating segments in
annual financial statements that requires that those enterprises report selected
information about operating segments in the interim financial reports issued to
shareholders. Statement 131 is effective for fiscal years beginning after
December 15, 1997. Adoption is not recognized for interim periods in the initial
year of application. The Company believes that the adoption of statement
131 will not have a material effect on the Company's Financial Statements upon
adoption.
4. BUSINESS COMBINATIONS
From July 2, 1996 to March 31, 1998, the Company expanded its waste collection
and hauling operations through the acquisition of 33 businesses. The aggregate
of these business acquisitions is significant to the company. Twenty-five of the
33 acquisitions completed were accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed have been
recorded at their estimated fair values at the dates of acquisition and their
results of operations are included in the accompanying condensed consolidated
statements of operations since the date
7
<PAGE>
of acquisition. The excess of purchase price over the estimated fair market
value of identifiable net assets acquired is being amortized on a straight-line
basis over forty years from the date of acquisition. The purchase price
allocations are based on preliminary estimates as of the acquisition dates and
are finalized within one year from the date of acquisition.
On January 1, 1998, the Company acquired substantially all the assets of Lake
Region Sanitation in exchange for cash consideration of $60,000. This
transaction has been accounted for using the purchase method of accounting.
On January 7, 1998, the Company acquired substantially all the assets of J.
Scerbo Company, Recycling Center of New Jersey, Golden Gate Carting Co., Inc.,
Haulaway, Inc., and S.R.S. Recycling in exchange for 110,095 unregistered shares
of the Company's common stock and approximately $4.3 million of cash. The
assets consisted primarily of vehicles, containers, and customer lists. These
transactions have been accounted for using the purchase method of accounting.
On January 16, 1998, the Company acquired substantially all the assets of
Minchoff Sanitation in exchange for cash consideration of $650,000. The assets
consisted primarily of vehicles, containers, and customer lists. This
transaction has been accounted for using the purchase method of accounting.
On February 12, 1998, the Company acquired Kelly Run Sanitation, Inc. ("Kelly
Run Landfill") from USA Waste Services, Inc. Consideration under the agreement
consisted of 250,000 unregistered shares of common stock of the Company in
exchange for all the issued and outstanding shares of Kelly Run Landfill. This
transaction has been accounted for using the purchase method of accounting.
On February 24, 1998, the Company acquired the assets of Red Ball Sanitation
Corp. in exchange for 130,000 unregistered shares of the Company's common stock
and cash consideration of $500,000. The assets consisted primarily of vehicles,
containers, and customer lists. This transaction has been accounted for using
the purchase method of accounting.
On March 9, 1998, the Company completed its merger with Bluegrass and 198,224
unregistered shares of the Company's common stock were issued in exchange for
all the outstanding stock of Bluegrass. Bluegrass owns and operates a landfill
in Louisville, Kentucky. The transaction has been accounted for using the
pooling of interests method of accounting, and accordingly, the accompanying
financial statements include the accounts of Bluegrass for all periods
presented.
On March 31, 1998, the Company completed its merger with the Ecology Companies
and 155,665 unregistered shares of the Company's common stock were issued in
exchange for all the outstanding stock of the Ecology Companies. The Ecology
Companies operate a hauling operation located in Lyndhurst, New Jersey. The
transaction has been accounted for using the pooling of interests method of
accounting, and accordingly, the accompanying financial statements include the
accounts of the Ecology Companies for all periods presented.
On March 31, 1998, the Company completed its merger with the Stamato Companies
and 1,386,344 shares of the Company's common stock were issued in exchange for
all the outstanding stock of the Stamato Companies. The Stamato Companies
provide municipal solid waste collection services in New Jersey. The
transaction has been accounted for using the pooling of interests method of
accounting, and accordingly, the accompanying financial statements include the
accounts of the Stamato Companies for all periods presented.
8
<PAGE>
The combined and separate results of operations of the Company, Hamm's,
Bluegrass, Stamato & Ecology for the three months ended March 31, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
Revenues Net Income
----------- ------------
<S> <C> <C>
Eastern Environmental Services, Inc. $37,577,102 $ 2,760,636
Hamm's 3,897,074 734,408 (1)
Bluegrass 454,260 120,235 (1)
Stamato 5,929,289 (2,012,423) (1)
Ecology 7,334,952 279,515 (1)
----------- -----------
Combined $55,192,677 $ 1,882,371
=========== ===========
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
Revenues Net Income
----------- ------------
<S> <C> <C>
Eastern Environmental Services, Inc. $19,512,498 $ 362,230
Hamm's 3,890,987 226,442
Bluegrass 293,132 136,304
Stamato 5,776,422 701,514
Ecology 5,519,915 66,687
----------- -----------
Combined $34,992,954 $ 1,493,177
=========== ===========
</TABLE>
(1) Includes merger costs and related tax provision.
5. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual results could
differ from those estimates. Such estimates include the Company's accounting
for closure and post-closure obligations; amortization of landfill development
costs; and estimates of reserves such as the allowance for doubtful accounts
receivable, and the Company's estimate of merger costs.
6. INCOME TAXES
The Company recorded a tax provision of $4.6 million for the three months ended
March 31, 1998. This provision is comprised of $2.7 million of federal and state
taxes at statutory rates, and a $1.9 million one-time tax expense related to
non-deductible merger costs and the establishment of deferred income tax
liabilities for pooled companies acquired during the quarter ended March 31,
1998 which were S Corporations prior to the date of the merger. The tax
provision at March 31, 1997 principally relates to the recording of deferred
income tax liabilities for pooled companies acquired during the quarter ended
March 31, 1997 which were S Corporations prior to the date of the merger, as
well as the recording of federal and state liabilities for other pooled
companies. An effective tax rate lower than the federal and state statutory
rate for the quarter ended March 31, 1997 is primarily due to the use of net
operating loss carryforwards and income from pooled companies which were taxed
as S Corporations.
9
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7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
3 Months Ended
-------------------------
3/31/98 3/31/97
------------- ----------
<S> <C> <C>
Numerator:
Net income $ 1,882,371 $ 1,493,177
=========== ===========
Denominator:
Denominator for basic earnings
per share - weighted average shares 24,950,459 16,485,291
Effect of dilutive options and warrants 1,487,750 1,086,163
----------- -----------
Denominator for diluted earnings per share 26,438,209 17,571,454
=========== ===========
Basic earnings per share $ .08 $ .09
=========== ===========
Diluted earnings per share $ .07 $ .08
=========== ===========
</TABLE>
8. SUBSEQUENT EVENTS
Subsequent to March 31, 1998, the Company acquired the assets of four collection
companies in separate transactions. Total consideration under the agreements
consists of cash of approximately $2.1 million to the sellers and the assumption
of $124,000 of long term debt. These transactions will be accounted for using
the purchase method of accounting.
On March 25, 1998, the Company entered into definitive agreements to acquire the
stock of Atlantic Waste Disposal, Inc. ("AWD") and Atlantic of New York, Inc.
("Atlantic") for combined cash consideration of approximately $86 million. This
acquisition is subject to regulatory approval and the waiver or expiration of a
90 day right of first refusal held by a third party. The acquisition is expected
to close by June 30, 1998 and is anticipated to be accounted for using the
purchase method of accounting.
The Company entered into a definitive agreement in December 1997 with the City
of Bethlehem to acquire certain assets including landfill property for cash
consideration of $26.1 million. The assets are currently used by the City of
Bethlehem to operate a municipal solid waste landfill. The purchase of the
assets, which is subject to Pennsylvania DEP approval of the permit transfer, is
anticipated to close by June 30, 1998.
On May 5, 1998, the Company announced it is commencing a public offering of
7,500,000 shares of its common stock. Pursuant to the terms of the offering
Prospectus, the Company will offer 7,000,000 shares of its common stock, and a
selling stockholder will offer an additional 500,000 shares. The Company has
also granted the underwriters an over allotment option for an additional
1,125,000 shares.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1997.
REVENUES
The Company is a non-hazardous solid waste management company specializing in
the collection, transportation, and disposal of residential, industrial,
commercial, and special waste, principally in the eastern United States. The
Company's revenues for the three months ended March 31, 1998 were comprised of
approximately 83% solid waste collection and transportation operations,
approximately 13% solid waste disposal operations, and approximately 4% 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 three 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. For the three months ended March 31, 1998, approximately 40% of the
Company's revenue generated from collection operations represented solid waste
collected by the Company that was delivered for disposal at its own landfills,
and approximately 43% of the Company's revenue generated from landfill disposal
operations represented solid waste disposed of at the Company's landfills that
was delivered by the Company.
The Company's prices for solid waste collection, transportation, and disposal
services are typically determined by the volume, weight, or type of waste
collected, as well as other factors including the competitive pricing
environment. The Company's ability to pass on cost increases may be limited by
the terms of its contracts.
COST OF REVENUES
Cost of revenues consists primarily of tipping fees paid to third party
landfills, accruals for future landfill closure and post-closure costs, direct
labor and related taxes and benefits, subcontracted transportation and equipment
rental charges, maintenance and repairs of equipment and facilities,
environmental compliance costs and site maintenance costs for landfills, fuel,
and landfill assessment fees and taxes.
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 assurance bonding
premiums, and costs relating to marketing and sales.
11
<PAGE>
The Company capitalizes direct incremental costs associated with purchase
acquisitions. Indirect development and acquisition costs, such as executive
salaries, corporate overhead, public relations, and other corporate services and
overhead are expensed as incurred. The Company also charges as an expense any
unamortized capitalized expenditures relating to proposed acquisitions that will
not be consummated.
At March 31, 1998, capitalized costs related directly to proposed acquisitions
that were not yet consummated were approximately $.6 million. 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 lives of the assets using the straight line method. Intangible
assets, including goodwill, are amortized over their useful lives using the
straight line method.
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 March 31, 1998, capitalized costs related
directly to the acquisition and expansion of existing and future landfills and
cell development were $99.0 million.
The Company's policy is to charge as an expense any unamortized capitalized
expenditures and advances relating to any landfill that is permanently closed or
any landfill expansion project that is abandoned.
MERGER COSTS
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 (EXPENSE) INCOME
Other income and expense, which includes gains and losses on the sale of
equipment, has not historically been material to the Company's results of
operations.
TAXES
The Company recorded a tax provision of $4.6 million for the three months ended
March 31, 1998. This provision is comprised of $2.7 million of federal and state
taxes at statutory rates, and a $1.9 million one-time tax expense related to
non-deductible merger costs and the establishment of deferred income tax
liabilities for pooled companies acquired during the quarter ended March 31,
1998 which were S Corporations prior to the date of the merger. The tax
provision at March 31, 1997 principally relates to the recording of deferred
income tax liabilities for pooled companies acquired during the quarter ended
March 31, 1997 which were S Corporations prior to the date of the merger, as
well as the recording of federal and state liabilities for other pooled
companies. An effective tax rate lower than the federal and state statutory
rate for the quarter ended March 31, 1997 is primarily due to the use of net
operating loss carryforwards and income from pooled companies which were taxed
as S Corporations.
12
<PAGE>
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------
1998 1997
-------- ----------
(RESTATED)
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of revenues 62.5 67.4
Selling, general and administrative expenses 12.7 16.1
Depreciation and amortization 7.9 5.5
Merger costs 3.2 4.2
-------- ----------
Operating income 13.7 6.8
Interest expense, net (1.8) (2.6)
Other income (expense) (0.2) 1.4
-------- ----------
Income before income taxes 11.7 5.6
Income tax expense 8.3 1.3
-------- ----------
Net income 3.4% 4.3%
======== ==========
</TABLE>
Revenues for the three months ended March 31, 1998 were $55.2 million compared
to $35.0 million for the three months ended March 31, 1997, an increase of $20.2
million, or 58%. The principal factor affecting the increase in revenues was the
impact of acquisitions accounted for as purchases made in the past twelve
months, primarily consisting of Pappy, Inc., Pine Grove, Inc., Kelly Run
Sanitation, Inc. and several solid waste collection companies in the New York,
New Jersey and Florida markets, which contributed aggregate revenues of $14.0
million for the three months ended March 31, 1998. The acquisitions accounted
for as poolings of interests (Super Kwik, Apex, Donno, Hamm's, Bluegrass,
Stamato, and Ecology) contributed revenues of $31.7 million for the three months
ended March 31, 1998 compared to $28.2 million for the same period in 1997, an
increase of $3.5 million. An additional $1.8 million of revenue was generated in
the three months ended March 31, 1998 from two transfer stations which were not
in operation during the three months ended March 31, 1997.
Cost of revenues for the three months ended March 31, 1998, were $34.5 million
compared to $23.6 million for the three months ended March 31, 1997, an increase
of $10.9 million. Cost of revenues as a percentage of revenues for the three
months ended March 31, 1998, was 62.5 % compared to 67.4% for the same period in
1997. This decrease in percentage was primarily due to (1) the acquisition by
the Company of three landfills, which operate at higher margins than the
Company's other operations, (2) economies of scale relating to the Company's
increase in size over the period, and (3) operating efficiencies.
Selling, general, and administrative expenses for the three months ended March
31, 1998, were $7.0 million compared to $5.6 million for the three months ended
March 31, 1997, an increase of $1.4 million or 25%. These expenses as a
percentage of revenues for the three months ended March 31, 1998, were 12.7 %
compared to 16.1 % for the same period in 1997. The decrease as a percentage of
revenues reflects the elimination of redundant overhead
13
<PAGE>
as acquisitions in certain geographic areas are consolidated, as well as certain
cost controls placed on previously private pooled companies. This decrease was
partially offset by the increased infrastructure, including accounting, finance,
legal and administration, necessary to integrate the acquisitions consummated.
Depreciation and amortization totaled $4.3 million, or 7.9 % of revenues, for
the three months ended March 31, 1998, versus $1.9 million, or 5.5 % of
revenues, for the same period in 1997. This increase was primarily due to
increased depreciation and landfill amortization as a result of businesses and
assets acquired as well as amortization of goodwill and other intangibles
associated with the acquisitions.
Merger costs incurred during the three months ended March 31, 1998, were $1.8
million, related to the acquisitions of Bluegrass, Ecology and Stamato. These
acquisitions were accounted for as poolings of interests. Merger costs for the
same period in 1997 were $1.5 million and related to the acquisitions of Donno
and Apex, and included an adjustment related to Super Kwik.
The Company recorded a tax provision of $4.6 million for the three months ended
March 31, 1998. This provision is comprised of $2.7 million of federal and state
taxes at statutory rates, and a $1.9 million one-time tax expense related to
non-deductible merger costs and the establishment of deferred income tax
liabilities for pooled companies acquired during the quarter ended March 31,
1998 which were S Corporations prior to the date of the merger. The tax
provision at March 31, 1997 principally relates to the recording of deferred
income tax liabilities for pooled companies acquired during the quarter ended
March 31, 1997 which were S Corporations prior to the date of the merger, as
well as the recording of federal and state liabilities for other pooled
companies. An effective tax rate lower than the federal and state statutory rate
for the quarter ended March 31, 1997 is primarily due to the use of net
operating loss carryforwards and income from pooled companies which were taxed
as S Corporations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires substantial amounts of capital. The Company's
capital requirements include acquisitions, equipment purchases, and capital
expenditures for cell construction and expansion of its landfills. The Company
plans to meet these capital needs from various financing sources, including
borrowings, internally generated funds, and the issuance of common stock.
As of March 31, 1998, the Company had working capital of $1.5 million, including
cash and cash equivalents of $4.7 million. For the three months ended March 31,
1998, net cash provided by operations was approximately $9.1 million, net cash
provided by financing activities was approximately $4.1 million and net cash
used in investing activities was approximately $15.2 million resulting in an
increase in cash and cash equivalents of $2.0 million during this period.
Capital expended during the period, included: (1) $5.1 million relating to
acquisitions, (2) $4.7 million for the purchase of operating equipment and real
estate, and (3) $5.2 million related to the permitting and development of
landfill space.
In October 1997, the Company amended its revolving credit facility with
BankBoston, N.A. to provide for borrowings up to $150 million. The facility is
available for repayment of debt, funding of acquisitions, working capital, and
for up to $50 million in letters of credit. As of May 11, 1998, approximately
$17.3 million in letters of credit were outstanding under the Credit Facility.
Also, at May 11, 1998, there were $51.6 million of borrowings under the Credit
Facility.
At the Company's option, the interest rate on any loan under the Credit Facility
may be based on an adjusted prime rate or Eurodollar rate, as defined in the
loan agreement. On May 11, 1998, the applicable interest rate was 6.375%. The
facility expires on 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.
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
14
<PAGE>
Company estimates aggregate capital expenditures, exclusive of acquisitions of
businesses, of approximately $35 million for the year ending December 31, 1998.
The Company has addressed its capital needs through private and public offerings
of Common Stock and by establishing a revolving credit facility. The Company
believes that the revolving credit facility and 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 financial obligations related to closure and post-closure
monitoring and maintenance of the Company's landfills. While the exact amount of
future closure and post-closure obligations cannot be determined, the Company
estimates that the costs of final closure of the currently permitted and
operating areas at the Company's landfills will be approximately $27.8 million,
of which $8.5 million has been accrued as of March 31, 1998. The Company makes
an accrual for these costs based on consumed airspace in relation to
Management's estimate of total available airspace of the landfills. In addition,
the Company has accrued $5.5 million for post-closure obligations as of March
31, 1998.
The Company maintains a bonding facility pursuant to certain statutory
requirements regarding financial assurance for the closure and post-closure
monitoring cost requirements for its Kentucky, West Virginia, Pennsylvania,
Florida, and Maryland disposal facilities. Bonds outstanding at March 31, 1998
were $1.7 million for the Kentucky landfill, $214,000 for the West Virginia
landfill, $7.2 million for the Pennsylvania landfills, and $220,000 for the
Maryland landfill. The bonds are collateralized by irrevocable letters of credit
and trust fund deposits. Additionally, the Company has on deposit $430,000 as
financial assurance for landfill closure and post-closure obligations for closed
disposal areas. The trust fund and the certificates of deposit are restricted
from current operations and are included within other noncurrent assets. The
Company's Kentucky landfill bonding requirement will increase by $3.0 million
for closure and $300,000 for post-closure of the expansion area permitted
October 14, 1996 (reissued February 26, 1997). The Company anticipates that the
West Virginia bonding requirements will substantially increase when West
Virginia's solid waste program is approved by the federal government. Financial
assurance requirements could increase to approximately $3.1 million for closure
and $3.7 million for post-closure monitoring and care. In connection with the
Illinois landfill, which the Company has exercised an option to acquire, the
Company has agreed to indemnify a surety providing financial assurance for
closure and post-closure care requirements for an unlined landfill located
adjacent to the Illinois landfill in the amount of $646,000 in the event the
owner of the adjacent landfill defaults on its closure and/or post-closure care
obligations. Additional collateral requirements may be imposed upon the Company
as a result of additional landfill acquisitions or changes in current
regulations which may adversely effect its profitability. The Company
anticipates providing financial assurance incrementally, as permitted by
regulations, over the life of a facility as disposal cells are constructed and
certified for acceptance of waste.
SEASONALITY AND INFLATION
The Company's revenues tend to be somewhat 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.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(C) Private Placements:
On March 9, 1998, the Company completed its merger with Bluegrass with
198,224 unregistered shares of common stock of the Company, par value
$.01 per share, issued in exchange for all issued and outstanding
shares of Bluegrass.
15
<PAGE>
On March 31, 1998, the Company completed its merger with the Ecology
Companies with 155,665 unregistered shares of common stock of the Company,
par value $.01 per share, issued in exchange for all issued and outstanding
shares of the Ecology Companies.
On February 12, 1998, the Company completed the acquisition of Kelly Run
Sanitation, Inc., with 250,000 unregistered shares of common stock of the
Company, par value $.01 per share, issued in exchange for all issued and
outstanding shares of Kelly Run Sanitation, Inc.
On January 7, 1998, the Company acquired substantially all the assets
Recycling Center of New Jersey, Golden Gate Carting Co, Inc., and Haulaway,
Inc in exchange for 110,995 unregistered shares of the Company's common
stock, par value $.01 per share, and approximately $1.36 million of cash.
On February 24, 1998, the Company acquired the assets of Red Ball
Sanitation Corp. in exchange for 130,000 unregistered shares of the
Company's common stock, par value $.01 per share, and $500,000 of cash.
Under the private placements described above, the Company has agreed under
certain circumstances to register certain of the Shares for the above
transactions, except for Bluegrass and Kelly Run Sanitation, Inc., for
resale under the Securities Act of 1933 (the "Act"). The sale of the Shares
was exempt from the registration provisions of the Act pursuant to Section
4(2) of the Act and/or Regulation D promulgated under the Act for
transactions not involving a public offering, based on the fact that the
private placements were made to accredited investors who had access to
financial and other relevant data concerning the Company, its financial
condition, business and assets. The securities sold in the private
placements may not be reoffered or resold absent registration under the Act
or available exemptions from such registration requirements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the stockholders of Eastern Environmental Services,
Inc. was held on January 14, 1998. The following proposals were submitted
to a vote: (i) to approve for a one-year term for the Election of
Directors, expiring at the next Annual Meeting, (ii) to amend the Company's
Certificate of Incorporation, as amended, to increase the number of
authorized shares of Common Stock of the Company from 50 million shares to
150 million shares, (iii) to amend the Company's Certificate of
Incorporation, as amended, to eliminate Class A common stock, (iv) to amend
the Company's Certificate of Incorporation, as amended, to create a class
of undesignated Preferred Stock authorizing the Board of Directors to issue
up to 50 million shares of such Preferred Stock, (v) to approve and adopt
the Company's 1997 Stock Option Plan, and (vi) to ratify the appointment of
Ernst & Young, LLP as independent accountants to examine the financial
statements of the Company for the fiscal year ending June 30, 1998. All
proposals were adopted by the shareholders. The voting was as follows:
<TABLE>
<CAPTION>
Directors: Votes For Votes Against Abstentions Broker Non-Votes
- ---------- --------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
Louis D. Paolino, Jr. 19,752,863 - 259,742 -
George Moorehead 19,752,863 - 259,742 -
Kenneth Chuan-kai Leung 19,752,863 - 259,742 -
Increase authorized shares of
Common Stock to 150 million shares 16,792,185 3,200,975 19,445 -
Eliminate Class A common stock 19,118,142 376,077 67,234 451,152
Authorize 50 million shares of Preferred
Stock 12,083,201 3,891,920 68,764 3,968,720
Approve the Company's 1997 Stock
Option Plan 12,824,808 3,195,841 23,236 3,968,720
Ratify appointment of Ernst & Young 19,244,272 755,273 13,060 -
</TABLE>
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.68 Employment Contract dated February 9, 1998 by and between the
Company and Neal Rodrigue.
27 Financial Data Schedules (Electronic filed only).
(b) Current Reports on Form 8-K or 8-K/A:
On February 17, 1998 the Company filed a report on Form 8-K/A dated
December 1, 1997, under Item 7, to provide audited financial
statements of the businesses acquired for the year ended December 31,
1996 and unaudited pro forma financial information for the year ended
June 30, 1997 and the three months ended September 30, 1997 with
respect to its acquisition of Pine Grove, Inc.
The Company filed a report on Form 8-K/A dated February 13, 1998,
under Item 7, indicating that audited financial statements and
unaudited pro forma financial information related to the Hamm's
Sanitation, Inc. and H.S.S., Inc. merger were not required due to the
transaction being below the financial statement filing requirements as
per applicable regulations under the Securities and Exchange Act of
1934.
The Company filed a report on Form 8-K, dated February 12, 1998, under
Item 2, to report the acquisition of Kelly Run Sanitation, Inc.
Historic financial statements of the businesses acquired and pro forma
financial information of the Company were not required due to the
transaction being below the financial statement filing requirements as
per applicable regulations under the Securities Exchange Act of 1934.
The Company filed a report on Form 8-K, dated February 27, 1998 to
file restated historic financial statements for the three years ended
June 30, 1997, including notes thereto, the selected consolidated
financial data, and the information contained under Management's
Discussion and Analysis of Financial Condition and Results of
Operation to reflect the merger with Hamm's Sanitation, Inc. and
H.S.S., Inc. accounted for as pooling of interests.
The Company filed a report on Form 8-K, dated March 9, 1998 under Item
2, to report the acquisition of Bluegrass Containment, Inc. Financial
statements of Bluegrass Containment, Inc. and pro forma financial
information of the Company required under "Item 7: Financial
Statements and Exhibits" were filed on Form 8-K/A Amendment No. 1 on
April 8, 1998.
The Company filed a report on Form 8-K, dated March 31, 1998 under
Item 2, to report the completed acquisition and merger with the
Stamato Companies. Historic combined financial statements of the
Stamato Companies and pro forma financial information of the Company
required under "Item 7: Financial Statements and Exhibits" were filed
on Form 8-K/A Amendment No. 1 on April 24, 1998.
The Company filed a report on Form 8-K/A, dated March 31, 1998, under
Item 2, to report the acquisition and merger with the Ecology
Companies. Historic combined financial statements of the businesses
acquired and pro forma financial information of the Company were not
required due to the transaction being below the financial statement
filing requirements as per applicable regulations under the Securities
and Exchange Act of 1934.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
EASTERN ENVIRONMENTAL SERVICES, INC.
BY: /s/ Louis D. Paolino, Jr.
-------------------------------------
Louis D. Paolino, Jr., Chairman
BY: /s/ Gregory M. Krzemien
-------------------------------------
Gregory M. Krzemien, Chief Financial Officer
BY: /s/ Ronald R. Pirollo
-------------------------------------
Ronald R. Pirollo, Controller (Principal Accounting Officer)
DATE: August 14, 1998
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 4,660,333
<SECURITIES> 0
<RECEIVABLES> 30,684,090
<ALLOWANCES> 3,250,000
<INVENTORY> 0
<CURRENT-ASSETS> 41,385,052
<PP&E> 205,815,463
<DEPRECIATION> 43,355,879
<TOTAL-ASSETS> 305,793,296
<CURRENT-LIABILITIES> 39,882,521
<BONDS> 63,858,441
0
0
<COMMON> 251,796
<OTHER-SE> 161,544,482
<TOTAL-LIABILITY-AND-EQUITY> 305,793,296
<SALES> 0
<TOTAL-REVENUES> 55,192,677
<CGS> 0
<TOTAL-COSTS> 34,495,790
<OTHER-EXPENSES> 12,352,723
<LOSS-PROVISION> 761,895
<INTEREST-EXPENSE> 983,498
<INCOME-PRETAX> 6,478,371
<INCOME-TAX> 4,596,000
<INCOME-CONTINUING> 1,882,371
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,882,371
<EPS-PRIMARY> .08
<EPS-DILUTED> .07
</TABLE>
