<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) April 24, 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 supplemental consolidated financial
statements, selected consolidated financial data (supplemental), and
Management's Discussion and Analysis of Financial Condition and Results of
Operations (supplemental), which reflects the acquisition of Bluegrass
Containment, Inc. on March 9, 1998, the Stamato Companies on March 31, 1998, and
the Ecology Companies on March 31, 1998. Each of these acquisitions was
accounted for as a pooling of interests. Upon release of financial information
covering the period in which these transactions were consummated, these
supplemental financial statements will become the historical financial
statements of the Registrant.
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, 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>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits.
The Exhibits to this Report are listed in the Exhibit Index set forth
elsewhere herein.
________________________________________________________________________________
SIGNATURE
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 hereunto duly authorized.
Eastern Environmental Services, Inc.
By: /s/ Gregory M. Krzemien
-----------------------
Gregory M. Krzemien
Chief Financial Officer
Date: April 29, 1998
<PAGE>
Eastern Environmental Services, Inc.
Supplemental Consolidated Financial Statements
Years ended June 30, 1997, 1996 and 1995
Index to Financial Information
CONTENTS
<TABLE>
<S> <C>
(a) Supplemental Financial Information
Report of Independent Auditors..................................... F-3
Audited Supplemental Consolidated Financial Statements
Supplemental Consolidated Balance Sheets........................... F-4
Supplemental Consolidated Statements of Operations................. F-6
Supplemental Consolidated Statements of Stockholders' Equity....... F-7
Supplemental Consolidated Statements of Cash Flows................. F-8
Notes to Supplemental Consolidated Financial Statements............ F-9
(b) Selected Supplemental Consolidated Financial Data.................... F-25
(c) Management's Discussion and Analysis of Financial Condition and
Results of Operations (Supplemental)............................... F-27
</TABLE>
F-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Eastern Environmental Services, Inc.
We have audited the supplemental consolidated balance sheets of Eastern
Environmental Services, Inc. (formed as a result of the consolidation of Eastern
Environmental Services, Inc., Bluegrass Containment, Inc. the Stamato Companies,
and the Ecology Companies) as of June 30, 1997 and 1996 and the related
supplemental consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended June 30, 1997. The
supplemental consolidated financial statements give retroactive effect to the
mergers of Eastern Environmental Services, Inc. and (i) Bluegrass Containment,
Inc. on March 9, 1998, (ii) the Stamato Companies on March 31, 1998, and (iii)
the Ecology Companies on March 31, 1998 which have been accounted for using the
pooling of interests method as described in the notes to the supplemental
consolidated financial statements. These supplemental financial statements are
the responsibility of the management of Eastern Environmental Services, Inc. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits. We did not audit the 1996 and 1995 financial
statements of Super Kwik, Inc. and Donno Company, Inc. and affiliates, wholly
owned subsidiaries, which statements reflect total assets constituting 27% in
1996, and total revenues constituting 32% in 1996, and 35% in 1995, of the
related supplemental 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, Inc. and Donno
Company, Inc. and affiliates, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and, for each of the two years in the period
ended June 30, 1996, the reports of other auditors, the supplemental financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of Eastern Environmental Services, Inc. at June
30, 1997 and 1996, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended June 30, 1997, after
giving retroactive effect to the mergers of Bluegrass Containment, Inc., the
Stamato Companies, and the Ecology Companies, as described in the notes to the
supplemental consolidated financial statements, in conformity with generally
accepted accounting principles.
Philadelphia, Pennsylvania /s/ Ernst & Young LLP
April 29, 1998
F-3
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
---------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 5,453,397 $ 2,480,650
Accounts receivable, less allowance for doubtful accounts
of $2,078,000 and $1,036,000.............................................. 19,251,478 7,945,959
Deferred income taxes....................................................... 3,369,014 372,445
Tax refund receivable....................................................... -- 74,467
Prepaid expenses and other current assets................................... 5,556,259 3,285,958
------------ ------------
Total current assets..................................................... 33,630,148 14,159,479
Property and equipment:
Land........................................................................ 7,407,856 670,501
Landfill sites.............................................................. 34,111,494 13,471,186
Buildings and leasehold improvements........................................ 7,596,576 2,639,537
Vehicles.................................................................... 38,613,136 31,525,735
Machinery and equipment..................................................... 23,441,315 12,507,835
Furniture and fixtures...................................................... 1,729,008 1,706,440
------------ ------------
Total property and equipment............................................. 112,899,385 62,521,234
Accumulated depreciation and amortization................................... 33,691,391 31,310,841
------------ ------------
79,207,994 31,210,393
Assets held for sale.......................................................... 358,758 859,262
Excess cost over fair market value of net assets acquired, net of
$875,000 and $440,000 accumulated amortization............................... 60,302,159 372,096
Other intangible assets, net of $3,779,000 and $3,468,000 accumulated
amortization................................................................. 6,747,659 844,313
Notes receivable from officers................................................ 432,902 432,902
Other assets (including $533,000 and $433,000 of restricted
cash on deposit for landfill closure and insurance bonding).................. 2,503,544 1,282,600
------------ ------------
Total assets............................................................. $183,183,164 $ 49,161,045
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
--------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings....................................................... $ 155,000 $ 595,000
Accounts payable............................................................ 10,384,052 6,192,329
Accrued expenses and other current liabilities.............................. 11,708,860 2,454,833
Income taxes payable........................................................ 1,080,123 430,728
Current portion of accrued landfill closure and other environmental
costs..................................................................... 2,428,000 1,070,000
Current portion of long-term debt........................................... 3,891,833 2,883,412
Current portion of capital lease obligations................................ 1,474,656 1,499,124
Deferred revenue............................................................ 2,968,306 626,117
------------ -----------
Total current liabilities................................................ 34,090,830 15,751,543
Deferred income taxes......................................................... 5,889,097 673,443
Long-term debt, net of current portion........................................ 65,070,500 10,000,022
Capital lease obligations, net of current portion............................. 1,843,914 3,196,024
Accrued landfill closure and other environmental costs........................ 7,293,648 2,625,421
Other liabilities............................................................. 9,151,246 --
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares--50,000,000
Issued and outstanding shares--18,608,220 and 11,979,050................. 186,082 119,790
Class A common stock (convertible to common stock), $.01 par value:
Authorized shares--10,000,000
Issued and outstanding shares-- none -- --
Additional paid-in capital.................................................. 50,748,718 11,337,554
Retained earnings........................................................... 8,985,388 5,533,507
------------ -----------
59,920,188 16,990,851
Less treasury stock at cost--39,100 common shares........................... (76,259) (76,259)
------------ -----------
Total stockholders' equity............................................... 59,843,929 16,914,592
------------ -----------
Total liabilities and stockholders' equity............................... $183,183,164 $49,161,045
============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------
1997 1996 1995
------------------- --------------- ---------------
<S> <C> <C> <C>
Revenues............................................ $145,273,584 $99,988,418 $91,244,597
Cost of revenues.................................... 106,109,330 80,239,389 68,486,847
Selling, general, and administrative
expenses........................................... 19,501,121 16,003,386 13,456,298
Depreciation and amortization....................... 7,202,122 5,339,347 5,369,772
Merger costs........................................ 3,336,792 -- --
------------ ----------- -----------
Operating income (loss)............................. 9,124,219 (1,593,704) 3,931,680
Interest expense, net............................... (3,163,673) (1,286,995) (1,103,319)
Other income, net................................... 595,010 145,107 171,982
------------ ----------- -----------
Income (loss) before income taxes................... 6,555,556 (2,735,592) 3,000,343
Income tax expense.................................. 1,878,578 96,064 262,402
------------ ----------- -----------
Net income (loss)................................... $ 4,676,978 $(2,831,656) $ 2,737,941
============ =========== ===========
Basic earnings (loss) per share..................... $ .29 $ (.25) $ .27
============ =========== ===========
Weighted average number of shares
outstanding........................................ 16,220,259 11,473,345 10,299,624
============ =========== ===========
Diluted earnings (loss) per share $ .27 $ (.25) $ .26
============ =========== ===========
Weighted average number of shares
outstanding........................................ 17,183,952 11,473,345 10,392,232
============ =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF SHARES PAR VALUE
------------------- -----------------
CLASS A CLASS A ADDITIONAL
COMMON COMMON COMMON COMMON PAID-IN RETAINED TREASURY
STOCK STOCK STOCK STOCK CAPITAL EARNINGS STOCK TOTAL
----- ----- ----- ----- ------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994............. 8,739,496 1,591,201 $ 87,394 $ 15,912 $ 9,666,118 $ 9,527,341 $(76,259) $19,220,506
Exercise of common stock
options............................ 30,000 -- 300 -- 25,950 -- -- 26,250
Issuance of common stock............ 300,000 -- 3,000 -- 297,000 -- -- 300,000
Net income.......................... -- -- -- -- -- 2,737,941 -- 2,737,941
Dividends paid to former
stockholders of pooled companies -- -- -- -- -- (2,380,285) -- (2,380,285)
Other................................ -- -- -- -- -- 5,701 -- 5,701
---------- ---------- -------- -------- ----------- ----------- --------- -----------
Balance at June 30, 1995............. 9,069,496 1,591,201 90,694 15,912 9,989,068 9,890,698 (76,259) 19,910,113
Exercise of common stock
options............................ 140,000 -- 1,400 -- 141,100 -- -- 142,500
Exercise of common stock
warrants........................... 303,353 -- 3,034 -- 424,312 -- -- 427,346
Issuance of common stock............ 875,000 -- 8,750 -- 783,074 -- -- 791,824
Conversion of common stock.......... 1,591,201 (1,591,201) 15,912 (15,912) -- -- -- --
Net loss............................ -- -- -- -- -- (2,831,656) -- (2,831,656)
Dividends paid to former
stockholders of pooled companies -- -- -- -- -- (1,525,500) -- (1,525,500)
Other................................ -- -- -- -- -- (35) -- (35)
---------- ---------- -------- -------- ----------- ----------- --------- -----------
Balance at June 30, 1996............. 11,979,050 -- 119,790 -- 11,337,554 5,533,507 (76,259) 16,914,592
Exercise of common stock
options and warrants............... 478,076 -- 4,781 -- 425,780 -- -- 430,561
Proceeds from sale of
common stock, less
commissions and issuance
expenses of $724,248............... 2,670,000 -- 26,700 -- 9,929,052 -- -- 9,955,752
Common stock issued in
connection with the
incorporation of Apex.............. 796,927 -- 7,970 -- 3,242,030 -- -- 3,250,000
Common stock issued in
purchase acquisitions.............. 2,636,542 -- 26,365 -- 25,255,278 -- -- 25,281,643
Common stock issued for
consulting services................ 5,625 -- 56 -- 44,944 -- -- 45,000
Stock issued to satisfy debt
obligation......................... 42,000 -- 420 -- 514,080 -- -- 514,500
Adjustment for companies
with different fiscal year end.... (385,958) (385,958)
Net income.......................... -- -- -- -- -- 4,676,978 -- 4,676,978
Dividends paid to former
stockholders of pooled companies -- -- -- -- -- (839,994) -- (839,994)
Other................................ -- -- -- -- -- 855 -- 855
---------- ---------- -------- -------- ----------- ----------- --------- -----------
Balance at June 30, 1997............. 18,608,220 -- $186,082 $ -- $50,748,718 $ 8,985,388 $(76,259) $59,843,929
========== ========== ======== ======== =========== =========== ========= ===========
</TABLE>
See accompanying notes.
F-7
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................................... $ 4,676,978 $ (2,831,656) $ 2,737,941
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization..................................... 7,202,122 5,339,347 5,369,772
Provision for losses on receivables............................... 631,871 358,795 472,356
Landfill closure costs............................................ 512,772 1,317,310 291,804
Noncash severance and transition costs............................ -- 740,827 --
Noncash compensation expense...................................... 45,000 138,173 --
Deferred income taxes............................................. 913,494 3,374 (163,869)
Loss on write-down of assets held for sale........................ -- 402,616 --
Gain on sale of property and equipment............................ (679,173) (195,976) (150,145)
Changes in operating assets and liabilities:
Accounts receivable............................................. (8,714,452) (1,453,400) (823,725)
Income taxes.................................................... 963,375 (20,687) 147,565
Accounts payable................................................ 1,612,862 1,118,066 (60,959)
Deferred revenue................................................ 2,575,485 237,315 (6,193)
Other........................................................... (992,851) 816,008 748,258
------------ ------------ ------------
Net cash provided by operating activities........................... 8,747,483 5,970,112 8,562,805
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired..................... (39,336,838) -- --
Development of landfill sites....................................... (5,066,039) (2,094,436) (1,783,394)
Proceeds from sale of property and equipment........................ 989,893 826,859 437,835
Purchase of property and equipment.................................. (15,869,966) (11,175,467) (6,517,847)
(Advances made) payments received on notes receivable, net.......... (22,090) (243,973) 62,810
Payments for intangible assets...................................... (2,682,110) (122,500) (574,950)
Landfill closure and insurance bonding deposits..................... (57,837) 111,485 (18,145)
Other, net.......................................................... 307,654 (81,871) (196,376)
------------ ------------ ------------
Net cash used in investing activities............................... (61,737,333) (12,779,903) (8,590,067)
FINANCING ACTIVITIES
Proceeds from revolving line of credit, long-term
debt and capital lease obligations................................. 69,360,762 10,510,920 7,201,440
Payments on revolving line of credit, long-term debt
and capital lease obligations...................................... (26,194,484) (4,900,202) (4,335,686)
Net (payments) borrowings on note payable to
shareholder/officer................................................ -- (229,695) 229,705
Proceeds from the incorporation of Apex............................. 3,250,000 -- --
Proceeds from issuance of common stock, net
of expenses........................................................ 10,386,313 1,361,670 326,250
Dividends paid to former stockholders of
pooled companies................................................... (839,994) (1,525,500) (2,380,285)
------------ ------------ ------------
Net cash provided by financing activities........................... 55,962,597 5,217,193 1,041,424
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents................ 2,972,747 (1,592,598) 1,014,162
Cash and cash equivalents at beginning of year...................... 2,480,650 4,073,248 3,059,086
------------ ------------ ------------
Cash and cash equivalents at end of year............................ $ 5,453,397 $ 2,480,650 $ 4,073,248
============ ============ ============
</TABLE>
See accompanying notes.
F-8
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying supplemental 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 supplemental consolidated financial statements reflect the merger of
Eastern Environmental Services, Inc. and (i) Bluegrass Containment, Inc.
("Bluegrass") on March 9, 1998, (ii) Hudson Jersey Sanitation Co., West Milford
Haulage, Inc., Frank Stamato & Company, and Specialized Recycling Technologies
(collectively the "Stamato Companies") on March 31, 1998, and (iii) Ecology
Systems, Inc., Tactical Management Inc., and Transpro Inc. (collectively the
"Ecology Companies") on March 31, 1998, which have been accounted for as
poolings of interests. Upon release of financial information covering the
period in which these transactions were consummated, these supplemental
financial statements will become the historical financial statements of the
Company.
Prior to combination, the fiscal year end of both the Ecology Companies and
Stamato Companies was December 31. The consolidated results of operations of
the Company for the year ended June 30, 1997 include the results of operations
of the Ecology Companies and Stamato Companies for the same period while the
consolidated results of operations of the Company for the year ended June 30,
1996 and 1995 include the results of operations of the Ecology Companies and
Stamato Companies for the year ended December 31, 1996 and 1995. A net decrease
to equity of approximately $386,000 has been made to reflect the activity of the
Ecology Companies and Stamato Companies for the six-month period ended December
31, 1996. A summary of the results of operations of the Ecology Companies and
Stamato Companies for the six-month period ended December 31, 1996 is as
follows:
Revenues $23,189,000
Net income $ 386,000
DESCRIPTION OF BUSINESS
The Company is engaged in the business of providing integrated solid waste
management services, consisting of collection, transportation, and disposal
services through nonhazardous waste disposal facilities and waste hauling
operations. The Company's customers include municipal, commercial, industrial,
and residential customers, both local and national companies, in various
geographic regions primarily throughout the eastern United States.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions regarding the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Such
estimates include the Company's accounting for closure and post-closure
obligations, amortization of landfill development costs, and estimates of
reserves such as the allowance for doubtful accounts.
PROPERTY AND EQUIPMENT
Property and equipment is stated on the basis of cost. The Company provides
depreciation over the estimated useful lives of assets using the straight-line
method for its property and equipment except for landfill sites. The estimated
useful lives are 10 to 40 years for buildings and improvements, three to twelve
years for vehicles, machinery, and equipment, five to twelve 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.
F-9
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT (CONTINUED)
Annually, the Company prepares topographic analyses of the sites using
various survey techniques to confirm airspace utilization during the current
year and remaining capacity. Engineering, legal, and other costs associated with
the expansion of permitted capacity of existing sites are deferred until receipt
of all necessary operating permits. Such costs are capitalized and amortized
after receipt of the necessary operating permits. The Company reviews the
realization of landfill development projects on a periodic basis. The portion of
landfill sites currently under development for future expansion and thus
excluded from depreciation totaled $3,159,000 and $2,701,000 at June 30, 1997
and 1996, respectively.
The Company capitalizes interest costs as part of the cost of developing
landfill sites and constructing disposal space. Interest costs of $178,000,
$84,000, and $48,000 were capitalized for the fiscal years ended June 30, 1997,
1996, and 1995, respectively.
Depreciation expense includes depreciation recognized on assets under
capitalized lease obligations.
EXCESS COST OVER FAIR MARKET VALUE OF NET ASSETS ACQUIRED
The excess cost over fair market value of net assets acquired is amortized
on a straight-line basis over 40 years commencing on the dates of the respective
acquisitions. Amortization expense of excess cost over fair value of net assets
acquired was $435,000, $81,000, and $75,000, for the fiscal years ended June 30,
1997, 1996, and 1995, respectively.
OTHER INTANGIBLE ASSETS
Other intangible assets consist principally of noncompete agreements and
waste collection and hauling contracts acquired in the acquisition of landfill
sites and waste collection operations. Noncompete agreements and waste
collection and hauling contracts are currently being amortized over a period of
three to fifteen years. Amortization of other intangible assets was $350,000,
$233,000, and $330,000, for the fiscal years ended June 30, 1997, 1996, and
1995, respectively.
LANDFILL CLOSURE, POST-CLOSURE, AND OTHER ENVIRONMENTAL COSTS
Accrued landfill closure and other environmental costs include the cost of
closure and post-closure monitoring and maintenance of landfills, as well as,
environmental and remediation costs all of which are estimated based on
currently available facts, existing technology and interpretation of presently
enacted laws and regulations. Landfill post-closure costs represent management's
estimate of the current costs of the future obligation associated with
maintaining and monitoring the landfill for generally a 30-year period
subsequent to the closure of the landfill. The Company estimates the future cost
of closure and post-closure costs based on its interpretation of the U.S.
Environmental Protection Agency's Subtitle D technical standards. The Company
periodically updates its estimates of future closure and post-closure costs with
the impact of changes in estimates accounted for on a prospective basis. The
Company recognizes these costs on the unit-of-production method based on
consumed airspace in relation to management's estimate of total available
airspace. Environmental costs relating to remediation work are accrued and
charged to operations in the period the potential environmental liability is
known.
STATEMENT OF CASH FLOWS
For the purposes of reporting cash flows, cash and cash equivalents
consists of money market accounts and certificates of deposit with original
maturities of three months or less.
Noncash investing and financing activities of the Company excluded from the
statement of cash flows include property and equipment additions financed by
debt of $2,200,000, $22,000, and $109,000 and financed insurance premiums of
$1,211,000, $462,000, and $458,000 for the fiscal years ended 1997, 1996, and
1995, respectively.
REVENUE RECOGNITION
The Company recognizes revenues upon receipt and acceptance of waste
material at its landfills and upon collection of waste material at its waste
collection and hauling operations. Amounts billed prior to services being
performed are classified as deferred revenue.
F-10
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 first quarter of fiscal 1998, and the effect of
adoption was not material to the Company.
2. ACQUISITIONS
ACQUISITIONS ACCOUNTED FOR UNDER THE POOLING OF INTERESTS METHOD
On September 27, 1996, the Company completed its merger with Super Kwik,
Inc. (Super Kwik) and 2,308,176 unregistered shares of the Company's common
stock, par value $.01, 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 the Company's common stock, par value $.01,
issued in exchange for all issued and outstanding shares of the Donno Companies.
The Donno Companies operate over 75 vehicles and a transfer station and service
over 60,000 residential and commercial customers in Nassau and Suffolk Counties
of Long Island, New York. The transaction has been accounted for using the
pooling of interests method; and, accordingly, the accompanying consolidated
financial statements include the accounts of the Donno Companies for all periods
presented.
On March 31, 1997, the Company completed its merger with Apex Waste
Services, Inc. ("Apex"), with 796,927 unregistered shares of the Company's
common stock, par value $.01, (including 2,482 shares representing an adjustment
for long-term debt being less than $15,000,000 at March 31, 1997, the date of
closing) 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.
F-11
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACQUISITIONS (CONTINUED)
ACQUISITIONS ACCOUNTED FOR UNDER THE POOLING OF INTERESTS METHOD (CONTINUED)
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 the Company's common stock were issued in exchange for
all the outstanding stock of Hamm's. Hamm's provides municipal solid waste
collection services to approximately 21,000 commercial and residential customers
in several northwestern New Jersey counties. The transaction has been accounted
for using the pooling of interests method of accounting and, accordingly, the
accompanying consolidated financial statements include the accounts of Hamm's
for all periods presented.
On March 9, 1998, the Company completed its merger with Bluegrass and
198,224 unregistered shares of 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 out of Lyndhurst, New Jersey. The
transaction has been accounted for using the pooling of interests method of
accounting, and accordingly, the accompanying financial statements include the
accounts of the Ecology Companies for all periods presented.
On March 31, 1998, the Company completed its merger with the Stamato
Companies and 1,386,344 unregistered shares of 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.
A detail of revenues and net income (loss) of the separate companies were
as follows (unaudited):
<TABLE>
<CAPTION>
NET INCOME
REVENUES (LOSS)
---------------- ---------------
<S> <C> <C>
Year ended June 30, 1997
Eastern Environmental Services, Inc............................................ $ 30,759,984 $ 1,499,755
Pooled companies............................................................... 114,513,600 3,177,223
------------ -----------
Combined....................................................................... $145,273,584 $ 4,676,978
============ ===========
Year ended June 30, 1996
Eastern Environmental Services, Inc............................................ $ 7,632,503 $(3,500,043)
Pooled companies............................................................... 92,355,915 668,387
------------ -----------
Combined....................................................................... $ 99,988,418 $(2,831,656)
============ ===========
Year ended June 30, 1995
Eastern Environmental Services, Inc............................................ $ 8,650,945 $(1,547,550)
Pooled companies............................................................... 82,593,652 4,285,491
------------ -----------
Combined....................................................................... $ 91,244,597 $ 2,737,941
============ ===========
</TABLE>
Super Kwik, Donno, Apex, H.S.S., Bluegrass, Hudson Jersey Sanitation, West
Milford Haulage, Transpro, Inc. and Tactical Management were Subchapter S
Corporations prior to the mergers, whereby, the taxable income or loss flowed
through to the individual shareholders. The effects of pro forma income taxes as
a C Corporation would result in additional income tax expense of $1,200,000,
$280,000, and $1,500,000 for the periods ending June 30, 1997, 1996, and 1995,
respectively.
F-12
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACQUISITIONS (CONTINUED)
ACQUISITIONS ACCOUNTED FOR UNDER THE POOLING OF INTERESTS METHOD (CONTINUED)
In the fiscal year ended June 30, 1997, the Company incurred approximately
$1,148,000, $955,000, and $1,234,000 in merger-related costs associated with the
Super Kwik, Donno, and Apex mergers, respectively, of which approximately
$2,040,000 is remaining in accrued liabilities at June 30, 1997. The $3,337,000
of merger costs includes $835,000 of transaction-related expenses and $2,502,000
of costs to integrate operations. Additionally, tax provisions of $660,000,
$8,000, and $236,000 were recorded at the date of the mergers relating to net
deferred tax liabilities with respect to the termination of the previous S
Corporation elections of Super Kwik, Donno, and Apex, respectively. This total
tax provision of $904,000 is included within income tax expense for 1997.
ACQUISITIONS ACCOUNTED FOR UNDER THE PURCHASE METHOD
During the fiscal year ended June 30, 1997, the Company consummated
fourteen acquisitions that were accounted for under the purchase method of
accounting. Results of operations of companies that were acquired and subject to
purchase accounting are included from the dates of such acquisitions. The total
costs of acquisitions, including liabilities assumed, accounted for under the
purchase method were $88,229,000. The excess cost over the fair market value of
the net assets acquired was $54,208,000. This amount is being amortized over 40
years from the dates of respective acquisitions on a straight-line basis.
Certain purchase price allocations are based on preliminary estimates as of the
acquisition dates.
The unaudited pro forma information set forth below assumes the three
significant acquisitions accounted for under the purchase method had occurred at
the beginning of the periods presented. In addition this information includes
the predecessor operations of Apex. Apex was formed on October 1, 1996 as a
result of the acquisition of certain assets from Waste Management of
Pennsylvania, Incorporated. The unaudited pro forma information is presented for
informational purposes only and is not necessarily indicative of the results of
operations that actually would have been achieved had the acquisitions been
consummated at that time:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1997 1996
---------------- -----------------
<S> <C> <C>
Revenues.................................................. $172,612,000 $160,660,000
Net income................................................ $ 6,525,000 $ 2,621,000
Diluted earnings per share................................ $ .35 $ .19
</TABLE>
The Company closed into escrow on May 12, 1997 the pending acquisitions of
Golden Gate Carting Co. Inc., ("Golden Gate") and Coney Island Rubbish
Removal, Inc. ("Coney Island") pending satisfaction of certain normal
conditions which the Company believes will be resolved. Estimated consideration
relating to the Golden Gate and Coney Island acquisitions consists of 288,820
unregistered shares of the Company's stock and the assumption of approximately
$3.0 million of debt. The acquisitions of Golden Gate and Coney Island will be
accounted for under the purchase method.
3. ACCOUNTS RECEIVABLE
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains an allowance for
doubtful accounts at a level that management believes is sufficient to cover
potential credit losses. The following is a rollforward of the Company's
allowance for bad debts:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
Balance at beginning of year............................. $1,036,000 $ 977,000 $ 650,000
Additions (charged to expense)........................... 632,000 359,000 472,000
Deductions............................................... (785,000) (300,000) (145,000)
Other - purchase price allocation........................ 1,195,000 -- --
---------- ---------- ---------
Balance at end of year................................... $2,078,000 $1,036,000 $ 977,000
========== ========== =========
</TABLE>
F-13
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 $100,000,000 (as amended on May 8, 1997) for
repayment of certain debt, funding of acquisitions, and includes up to
$15,000,000 of standby letters of credit availability. At the Company's option,
the interest rate on any loan under the revolving credit facility will be based
on an adjusted prime rate or Eurodollar rate, as defined in the agreement. The
facility matures on April 30, 2000. The revolving credit facility, among other
conditions, requires the payment of a commitment fee range of .25% to .50% on
the unused balance, payable in arrears, and provides for certain restrictions on
the ability of the Company, to incur borrowings, sell assets, or pay cash
dividends. The facility also requires the maintenance of certain financial
ratios, including interest coverage ratios, leverage ratios, and profitable
operations. The facility is collateralized by all the stock of the Company's
subsidiaries, whether now owned or hereafter acquired. A portion of the credit
facility was utilized to refinance the remaining balances of an existing
revolving credit facility and note payable. Subsequent to June 30, 1997, the
Company amended the terms of the credit facility which, among other things,
increased the amount available for borrowings to $150,000,000 of which
$50,000,000 may be utilized for letters of credit. The amended credit agreement
also revised the maturity date to October 2002.
Debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Revolving credit facility with BankBoston, N.A. and Bank of America
Illinois, maturity date of April 30, 2000, variable interest rates ranging
from 8.0% to 8.5%............................................................... $55,500,000 $ --
Revolving credit facility......................................................... -- 237,500
Note payable...................................................................... -- 1,096,875
Note payable secured by certain real estate. Interest at 8.5% payable
monthly, principal due June 2002................................................ 1,450,000 --
Notes payable to various financial institutions, with various maturities
payable through September 2013, interest rates (fixed and variable)
ranging from 6.56% to 12.5%, and monthly installments ranging from $1,179
to $22,755...................................................................... 4,478,427 5,084,661
Machinery and equipment notes payable, secured by equipment, with various
maturities payable through February 2005, interest rates ranging from 6%
to 13.5%, payable monthly in installments ranging from $599 to $34,201.......... 7,958,195 10,422,894
Other............................................................................. 2,894,281 736,652
----------- -----------
72,280,903 17,578,582
Less current portion.............................................................. 5,366,489 4,382,536
----------- -----------
$66,914,414 $13,196,046
=========== ===========
</TABLE>
Certain machinery and equipment notes payable discussed above have been
classified as capital lease obligations in the balance sheet. Cost and
accumulated depreciation related to assets under capital leases are as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1997 1996
------------- ------------
<S> <C> <C>
Cost............................................. $4,280,592 $4,492,355
Accumulated depreciation......................... 1,403,794 934,210
---------- ----------
$2,876,798 $3,558,145
========== ==========
</TABLE>
Maturities of long-term debt are as follows: 1998--$5,366,489; 1999--
$3,448,719; 2000--$3,240,180; 2001--$1,819,704; 2002 and thereafter--
$58,405,811.
Interest paid on all indebtedness was $3,290,000, $1,351,000, and
$1,088,000, for the fiscal years ended 1997, 1996, and 1995, respectively.
Letters of credit have been provided to the Company supporting performances
of landfill closure and post-closure requirements, insurance contracts, and
other contracts. Letters of credit outstanding at June 30, 1997 aggregated
$4,242,000.
F-14
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Accrued compensation......................................... $ 959,496 $ 460,814
Accrued professional fees.................................... 277,148 165,500
Miscellaneous taxes.......................................... 721,821 178,276
Accrued severance costs...................................... 165,869 583,832
Accrued transition costs..................................... 5,136,451 97,000
Other........................................................ 4,448,075 969,411
----------- ----------
$11,708,860 $2,454,833
=========== ==========
</TABLE>
6. ACCRUED LANDFILL CLOSURE AND OTHER ENVIRONMENTAL COSTS
The Company owns or operates six non-hazardous solid waste landfills, all
of which are permitted and four of which are operating. The Company will have
financial obligations related to closure and post-closure monitoring and
maintenance of these currently permitted and operating landfills. While the
exact amount of future closure and post-closure obligations cannot be
determined, the Company has developed procedures to estimate these total
projected costs based on currently available facts, existing technology, and
presently enacted laws and regulations. Accordingly, the Company will continue
to periodically review and update underlying assumptions and projected costs and
record required adjustments. The closure and post-closure requirements are
established under the standards of the U.S. Environmental Protection Agency's
Subtitle D regulations as implemented and applied on a state-by-state basis.
Final closure and post-closure accruals consider estimates for the final cap and
cover for the site, methane gas control, leachate management and groundwater
monitoring, and other operational and maintenance costs to be incurred after the
site discontinues accepting waste, which is generally expected to be for a
period of up to thirty years after final site closure.
For disposal sites that were previously operated by others, the Company
assessed and recorded a final closure and post-closure liability at the time the
Company assumed closure responsibility based upon the estimated total closure
and post-closure costs and the percentage of airspace utilized as of such date.
Thereafter, the difference between the final closure and post-closure costs
accrued and the total estimated closure and post-closure costs to be incurred is
accrued and charged to expense as airspace is consumed. As of June 30, 1997, the
Company estimates that the costs of final closure of the currently permitted and
operating areas at the Company's landfills will be approximately $14.4 million,
of which $3.7 million has been accrued as of June 30, 1997. In addition, the
Company estimates that the costs of post-closure monitoring of groundwater and
methane gas and other required maintenance procedures for the currently
permitted and expansion areas will approximate $90,000--$125,000 per year for 30
years after closure at each of the Company's two municipal solid waste accepting
facilities and $13,000--$16,000 per year for 30 years after closure at the
Company's industrial landfill sites. The Company has accrued $1.7 million for
post-closure obligations as of June 30, 1997.
Funding of closure and post-closure obligations and other environmental
costs accrued to date are estimated as follows: 1998--$2,428,000; 1999--
$1,102,000; 2000--$700,000; 2001 and thereafter--$5,492,000.
Also included in accrued landfill closure and other environmental costs is
$4.0 million for waste relocation costs at the Company's Pennsylvania landfill.
F-15
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. ACCRUED LANDFILL CLOSURE AND OTHER ENVIRONMENTAL COSTS (CONTINUED)
Pursuant to certain statutory requirements regarding financial assurance
for the closure and post-closure monitoring cost requirements at each of the
Company's landfills, the Company maintains bonding facilities, collateralized by
irrevocable letters of credit and cash deposits. Financial assurance as of June
30, 1997 is as follows:
<TABLE>
<CAPTION>
Current
Financial Assurance
Requirements Bonds Deposits Pending
------------ ----- -------- -------
<S> <C> <C> <C> <C>
Kentucky $1,637,000 $1,637,000 $128,000 $3,300,000
Pennsylvania $6,380,000 $3,780,000 -- $2,600,000
West Virginia $ 382,000 $ 214,000 $204,000 $6,600,000
Florida $ 608,000 -- $ 81,000 $ 527,000
Illinois $ 646,000 $ 646,000 -- --
</TABLE>
Irrevocable letters of credit outstanding at June 30, 1997 related to
closure and post-closure care were $1,126,000.
7. OTHER LIABILITIES
In connection with certain acquisitions made by the Company during 1997,
the Company has accrued liabilities totaling $9,151,246 for common stock and/or
cash issuable to sellers upon satisfactory resolution of certain contingencies.
These amounts have been included in the purchase price allocations of the
respective acquisitions.
8. COMMON STOCK
Each share of 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 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 per share
to a bank at substantially the same terms as the August 9, 1996 Placement.
F-16
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. STOCK OPTION PLANS
The Company's Stock Option Plans provide for the grant of incentive stock
options or nonqualified stock options to directors, officers or employees of the
Company. Under the 1987 and 1991 Stock Option Plans, as amended, 700,000 total
shares were reserved effective January 1, 1991 for issuance upon the exercise of
such options. Incentive stock options have an exercise price of at least 100% of
the fair market value of the common stock at the date of grant (or 110% of fair
market value in the case of employees or officers holding ten percent or more of
the voting stock of the Company). Nonqualified options have an exercise price of
not less than 90% of the fair market value of the common stock at the date of
grant. The options generally expire five years from the date of grant and are
generally exercisable after two years based upon graduated vesting schedules.
In August 1996, the Company's stockholders approved the 1996 Stock Option
Plan providing for the granting of incentive stock options or nonqualified stock
options to directors, officers, or employees of the Company. Under this plan,
2,500,000 shares are reserved for issuance. Incentive stock options have an
exercise price consistent with the provisions of the previously existing plans.
Nonqualified options have an exercise price which is determined by the Company's
Stock Option Committee (''the Committee'') in its discretion. The options
generally expire ten years from the date of grant and are exercisable based upon
graduated vesting schedules as determined by the Committee. As of June 30, 1997,
2,140,745 options have been granted under this Plan including 1,243,922
nonqualified stock options.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that are not developed for use in valuing employee stock
options. Under APB 25, if the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions for grants in 1997 and 1996; risk-free interest rate of 6%; dividend
yield of 0%; expected volatility of the market price of the Company's common
stock of 70%; and a weighted-average expected life of the option of 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Pro forma
results are not likely to be representative of the effects on reported or pro
forma results of operations for future years. The Company's pro forma
information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996
------------- --------------
<S> <C> <C>
Pro forma net income (loss) $2,984,000 $(3,067,000)
Pro forma diluted earnings (loss) per share $ .17 $ (.27)
</TABLE>
F-17
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. STOCK OPTION PLANS (CONTINUED)
Options outstanding have been granted to officers and employees to purchase
common stock at prices ranging from $.01 to $14.50 per share. A summary of the
option transactions is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Options outstanding, beginning of period............ 880,900 366,900 417,200
Options granted..................................... 1,590,736 655,000 20,000
Options exercised................................... (76,945) (140,000) (30,000)
Options canceled.................................... -- (1,000) (40,300)
--------- --------- -------
Options outstanding, end of period.................. 2,394,691 880,900 366,900
========= ========= =======
Options exercisable................................. 657,379 338,333 350,650
========= ========= =======
Options available for grant......................... 359,264 2,113,667 300,100
========= ========= =======
</TABLE>
The weighted average fair values of options granted during fiscal 1997 and
1996 were $5.14 and $3.14 per share, respectively. The weighted average
exercise price of options outstanding and exercisable at June 30, 1997 was
$4.41.
Compensation expense has been recognized for those options granted with
exercise prices below the fair market value of the Company's stock on the date
of grant.
Stock options outstanding at June 30, 1997 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE
---------------- ------------- ----- -----
<S> <C> <C> <C>
$.01 - $5.00 253,946 1.5 years $ 1.02
$5.01 - $10.00 1,527,945 8.9 years $ 6.41
$10.01 - $14.50 612,800 9.8 years $13.19
---------
$.01 - $14.50 2,394,691 8.4 years $ 7.57
=========
</TABLE>
The Company's Employee Stock Bonus Plan and Employee Benefit Stock Purchase
Plan (the Employee Plans) are for eligible employees. Shares are awarded under
the Employee Stock Bonus Plan at the Company's discretion based on the
employees' performance. Under the Employee Benefit Stock Purchase Plan,
employees may purchase shares of common stock at a purchase price of 85% of the
fair market value at the date of purchase. A total of 450,000 common shares are
reserved under the Employee Plans. At June 30, 1997, 27,311 shares have been
issued under the Employee Plans. At June 30, 1997, the Company has 973,464
warrants outstanding of which 573,464 are exercisable to purchase shares of
common stock. Terms of warrants have been established by the Board of Directors
at prices between $1.25 and $14.53 expiring at various dates through 2007.
F-18
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------
1997 1996
------------------ ------------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation and amortization........................ $(3,335,190) $ (794,844)
Landfill permitting costs.......................................... (3,366,989) --
Other, net......................................................... (906,429) (123,583)
----------- -----------
Total deferred tax liabilities................................. (7,608,608) (918,427)
Deferred tax assets:
Allowance for doubtful accounts.................................... 906,998 158,915
Accrued refurbishing costs......................................... 2,191,797 --
Reserve for loss on assets held for sale........................... 62,205 255,933
Net operating loss carryforwards................................... 194,284 1,484,833
Environmental costs................................................. 1,623,741 --
AMT credit......................................................... 109,500 24,376
Reserve for severance and transition costs......................... -- 269,232
Other, net......................................................... -- 68,140
----------- -----------
Total deferred assets.......................................... 5,088,525 2,261,429
Valuation allowance for deferred tax assets.......................... -- (1,644,000)
----------- -----------
Net deferred tax assets.............................................. 5,088,525 617,429
----------- -----------
Net deferred tax liabilities......................................... $(2,520,083) $ (300,998)
=========== ===========
</TABLE>
At June 30, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of $571,000 that expire through 2011. However, due
to a change in control, these net operating loss carryforwards may be limited.
For financial reporting purposes, the valuation allowance has been reversed due
to the fact that the Company has concluded that it is more likely than not that
the tax benefits will be realized in the future.
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------
1997 1996 1995
-------------------- ----------------- ------------------
<S> <C> <C> <C>
Current:
Federal..................................... $ 453,347 $29,028 $ 275,016
State....................................... 511,737 63,662 151,255
---------- ------- ---------
965,084 92,690 426,271
Deferred:
Federal..................................... 838,504 600 (65,452)
State....................................... 74,990 2,774 40,693
Operating loss carryforward................. -- -- (139,110)
---------- ------- ---------
913,494 3,374 (163,869)
---------- ------- ---------
Provision for income taxes.................. $1,878,578 $96,064 $ 262,402
========== ======= =========
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to the provision for income taxes is:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------
1997 1996 1995
------------------ ------------------- ------------------
<S> <C> <C> <C>
Tax at U.S. federal statutory rates.............................. $ 2,235,678 $(1,160,387) $(332,989)
S Corporation income prior to pooling date....................... (971,200) -- --
State income taxes, net of federal tax benefit................... 326,650 66,436 204,631
Nondeductible costs and other acquisition accounting adjustments. 1,019,829 24,918 24,918
S Corporation status termination................................. 904,563 -- --
Valuation allowance for deferred tax assets...................... (1,644,000) 1,154,000 340,000
Other............................................................ 7,058 11,097 25,842
----------- ----------- ---------
Provision for income taxes....................................... $ 1,878,578 $ 96,064 $ 262,402
=========== =========== =========
</TABLE>
Net income tax payments made during fiscal 1997, 1996, and 1995 were
$174,000, $70,000, and $43,000, respectively.
F-19
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
The Company is obligated under various operating leases, primarily for
certain office facilities and transportation equipment. Lease agreements
frequently include renewal options and require that the Company pay for taxes,
insurances, and maintenance expense. Future minimum lease payments under
operating leases with initial or remaining noncancelable lease terms in excess
of one year as of June 30, 1997, are as follows: 1998--$986,000, 1999--$821,000,
2000--$495,000, 2001--$194,000, and 2002--$35,000. Total rental expense under
operating leases was approximately $623,000, $370,000, and $411,000 for the
fiscal years 1997, 1996, and 1995, respectively.
The Company is subject to extensive and evolving federal, state, and local
environmental laws and regulations in the United States and elsewhere that have
been enacted in response to technological advances and the public's increased
concern over environmental issues. The majority of expenditures necessary to
comply with environmental laws and regulations are made in the normal course of
business. Although the Company, to the best of its knowledge, is in compliance
in all material respects with the laws and regulations affecting its operations,
there is no assurance that the Company will not have to expend substantial
amounts for compliance in the future.
In October 1996, the Company received a final permit to construct its
expansion area at its Kentucky landfill. Prior to the actual construction of the
expansion area, the Company is required to complete certain investigations to
confirm the adequacy of the groundwater monitoring program approved in the final
permit. The final permit also requires closure of the original disposal area. In
addition, the Company has entered into an exclusive waste disposal franchise
agreement with Pulaski County, Kentucky, to service the municipal waste needs of
the county at the Company's Kentucky landfill through the year 2002. The
Company's obligations under this franchise agreement were suspended on July 1,
1996 for a one-year period ending July 1, 1997 due to the Company's cessation of
operations at the original permit area and delay in initiating operations at the
expansion area. As of July 1, 1997, the Company has resumed operation of the
transfer station in accordance with the franchise agreement and expects to
continue such operations until construction begins on the expansion area.
Failure to continue to comply with the franchise agreement, or timely closure of
the original disposal area, could result in the forfeiture of the performance
bond of $1.3 million.
The Company is subject to various contingencies pursuant to environmental
laws and regulations that in the future may require the Company to take action
to correct the effects on the environment of prior disposal practices or
releases of chemicals or petroleum substances by the companies or other parties.
At June 30, 1997, the Company has accrued for certain potential environmental
remediation activities as other long-term accrued environmental costs. Such
accrual amounted to $335,680, and in management's opinion, was appropriate based
on existing facts and circumstances. Under the most adverse circumstances,
however, this potential liability could reach $860,000 as provided in
independent engineering studies and evaluations. In the event that future
remediation expenditures are in excess of amounts accrued, management does not
anticipate that they will have a material adverse effect on the consolidated
financial position, results of operations, or liquidity of the Company.
The Company carries insurance covering its assets and operations, including
pollution liability coverage. Specifically, each of the Company's five landfills
has pollution liability coverage of $5,000,000 per occurrence or $5,000,000 in
the aggregate subject to a $500,000 deductible per occurrence. Nevertheless,
there can be no assurance that the Company's insurance will provide sufficient
coverage in the event an environmental claim were made against the Company or
that the Company will be able to maintain in place such insurance at reasonable
costs. An uninsured or underinsured claim against the Company of sufficient
magnitude could have a material adverse effect on its business and results of
operations. The Company is also subject to the risk of claims by employees and
others made after the expiration of the policy coverage period, including
asbestos-related illnesses (such as asbestosis, lung cancer, mesothelloma and
other cancers), which may not become apparent until many years after exposure.
From May 15, 1985 through April 28, 1988, the Company carried claims-made
general liability coverage. Any claims presented on the basis of exposure during
that period may not be covered by insurance and any liability resulting
therefrom could, consequently, have an adverse effect on the consolidated
financial position, results of operations, or liquidity of the Company.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
consolidated financial position, results of operations, or liquidity.
F-20
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Certain of the Company's executive officers have entered into employment
agreements whereby they will be entitled to receive certain bonuses in cash or
common stock upon a change in control of the Company. The Company estimates that
the total of these payments based on current salaries would be approximately
$1,835,000. Such agreements also include severance provisions and immediate
vesting provisions of issued options should the officer be terminated.
12. UNUSUAL OPERATING COSTS
Unusual operating costs and other adjustments of $3,027,000 were included
in the fourth quarter of fiscal 1996 results of operations. A charge of $900,000
to cost of revenues to accrue for certain closure and post-closure monitoring
costs was recorded for the 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 Kentucky
landfill. As the Company proceeds with construction of the Kentucky landfill,
the adequacy of the closure and post-closure accruals will be reevaluated based
on current assessments of future probable airspace and closure and post-closure
cost estimates. Additionally, charges totaling approximately $879,000 were
charged to selling, general, and administrative expenses relating to the change
in control of the Company, as discussed in Note 8. Of the $879,000 charge;
$672,000 related to recorded severance costs; $97,000 reflected management's
estimate of various transition costs in moving the Company's corporate offices;
and $110,000 related to certain legal and other professional costs incurred in
completing the transaction. Additionally, management refined its estimates of
necessary reserves against past-due receivables, outstanding contingencies, and
deferred acquisition costs and increased such reserves by $221,000, $468,000,
and $70,000, respectively. The increase in contingency reserves included the
$336,000 accrued for certain long-term environmental remediation activities (see
Note 11). Additionally, in the fourth quarter, management made a decision to
replace certain of its equipment utilized in the landfill and hauling
operations, in addition to selling certain real estate previously used in
operations and currently being leased to unrelated parties. A charge of $489,000
was recorded to other expenses to write down these assets held for sale to
estimated net realizable value. Finally, in the second quarter, management
recorded a provision of $331,000 related to a severance agreement settlement
with a unionized workforce.
Unusual operating costs of $532,000 were included in the fourth quarter of
fiscal 1995 results of operations. A total charge to cost of revenues of
$339,000 related to the Company's cessation of waste acceptance at the 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.
F-21
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. RELATED PARTY TRANSACTIONS
In connection with the consummation of the Stock Purchase Agreement (see
Note 8), the Company entered into a series of agreements with Mr. Skuba,
including a Severance Agreement dated June 20, 1996. Pursuant to the severance
agreement, virtually all prior agreements between Mr. Skuba and the Company were
terminated, including the Company's obligation to make certain cash payments to
Mr. Skuba upon his resignation from the Company, and in consideration therefor;
the Company, among other benefits (i) conveyed to Mr. Skuba or a company
controlled by Mr. Skuba (a) all of the outstanding capital stock of a
corporation that owns certain real property, (b) certain real and personal
property, and (c) certain vehicles owned by the Company, (ii) transferred to Mr.
Skuba certain potential business opportunities that the Company decided that it
had no interest in pursuing, (iii) agreed to provide Mr. Skuba with certain
health benefits at the Company's cost until June 1997, and (iv) agreed to
indemnify Mr. Skuba to the extent provided by the Company's Certificate of
Incorporation and to maintain director and officer liability insurance for him
until June 2002. The Company recorded a total of $459,100 noncash expense
related to the Severance Agreement including $259,600 of compensation expense,
loss on the sale of certain assets of $156,000, and $43,500 of benefits related
to a Consulting Agreement with Mr. Skuba that expires in June 1998.
The Company entered into an agreement in July 1996 to lease office space
from a company that is controlled by an officer of the Company. The lease is for
a period of five years and provides for a monthly rental of $6,250 subject to
annual increases derived from increases in the Consumer Price Index. The lease
is terminable at any time by the Company by payment of a termination fee equal
to one year's rent.
The Company received management services from a company that is 50% owned
by certain stockholders of the Company. The amount of these services charged to
expense was $56,000, $590,000, and $414,000 for the fiscal years ended June 30,
1997, 1996, and 1995, respectively.
The notes receivable from officers are due in fiscal 2006. The interest
rate on these loans was 6% at June 30, 1997 and 1996, and 8% at June 30, 1995.
In August 1996, the Company acquired all of the assets of Eastern Waste of
Philadelphia, Inc. in consideration of 391,250 shares of common stock valued at
$4.00 per share, or $1,600,000 in the aggregate. The stockholders of Eastern
Waste of Philadelphia, Inc. are brothers of directors of the Company.
Substantially all of the assets the Company acquired from Eastern Waste of
Philadelphia, Inc. were acquired by Eastern Waste of Philadelphia, Inc. in May
1996 in separate transactions with Tri-County Disposal & Recycling, Inc. and
National Ecosystems Inc. for an aggregate of approximately $1,600,000 in cash
and stock.
In connection with the Company's acquisition of Super Kwik in September
1996, the Company executed a $750,000 mortgage note in favor of Spruce Avenue
Associates, a general partnership whose partners are two officers of the
Company. The note bears interest at the rate of ten percent per annum and is due
and payable on September 27, 1999. The note is secured by mortgage on certain
real property of the Company located in Voorhees, New Jersey. The principal
amount outstanding under the mortgage note at June 30, 1997 was $750,000.
The Company paid a professional corporation owned by an officer of the
Company approximately $76,000 during fiscal 1997 for legal services rendered to
the Company.
In October 1996, the Company hired a corporation owned by an employee of
the Company for excavation services for the Company's landfills in West Virginia
and Pennsylvania. The Company estimates that the total amount to be paid will be
approximately $850,000. The selected corporation was the lowest bidder that
satisfied all bid requirements for such job.
Bluegrass leased certain operating equipment and employees from Rust of
Kentucky, Inc., a company owned by an individual who also owned 49% of Bluegrass
at the time. Amounts for these transactions totaled $192,000, $262,000, and
$253,000 for the fiscal years ended June 30, 1997, 1996, and 1995, respectively.
The Company believes that each of the transactions described above was
entered into on an arm's-length basis in the ordinary course of the Company's
business and on terms no less favorable to the Company than could be obtained
from unaffiliated third parties.
F-22
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. SUBSEQUENT EVENTS
ACQUISITIONS
On July 9, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Reuben Smith Rubbish Removal Service, Inc.
("Reuben Smith") in exchange for 92,369 unregistered shares of the Company's
common stock and the assumption of $574,000 of debt. Reuben Smith, which
conducts a waste collection business in Atlantic City, New Jersey, was
integrated into Super Kwik, the Company's southern New Jersey regional
collection operation. This transaction will be accounted for as a purchase.
On August 15, 1997, the Company completed the purchase of all the stock of
Pappy's, Inc. ("Pappy's") for total consideration of approximately $12,000,000
in cash. Pappy's operates as the Oak Avenue Landfill and is permitted to accept
construction and demolition debris and other residual wastes. The facility is
located north of Baltimore, Maryland. In addition to local waste, Pappy's will
accept waste for the Company's various collection operations located in New
York, New Jersey, and Pennsylvania markets. This transaction will be accounted
for as a purchase.
On August 20, 1997, the Company purchased all of the stock of Soil
Remediation of Philadelphia, Inc. ("SRP") in exchange for 270,000 unregistered
shares of the Company's common stock. SRP provides remediation services for
petroleum contaminated soil. This transaction will be accounted for as a
purchase.
On August 14, 1997, the Company completed its merger with Waste X and
approximately 216,667 unregistered shares of the Company's common stock were
issued in exchange for all outstanding stock of Waste X. An additional issuance
of the Company's common stock of up to 30% of the total consideration given may
be issuable pending the resolution of certain specific and general
contingencies. Waste X operates a municipal solid waste collection business in
the Miami and Ft. Lauderdale, Florida markets and was integrated into the
Company's South Florida regional operation. The transaction will be accounted
for using the pooling of interests method. Periods prior to the consummation of
the merger have not been restated to include the accounts and operations of
Waste X as combined results are not materially different from the results as
presented.
On December 1, 1997, the Company acquired from Delmarva Capital Technology
all of the outstanding stock of Pine Grove, Inc. ("Pine Grove"), its wholly
owned subsidiary, for approximately $46 million. The purchase price was
comprised of approximately $34.3 million in cash and the assumption of
approximately $11.7 million of debt. Pine Grove, Inc. owns 100% of the
outstanding stock of Pine Grove Landfill, Inc., a 174 acre subtitle D solid
waste disposal facility located in east-central Pennsylvania, and Pine Grove
Hauling Company, an integrated solid waste collection company servicing
residential and commercial customers. This transaction will be accounted for
using the purchase method of accounting.
On December 31, 1997, the Company acquired substantially all the assets of
Berger Waste Management, Inc. ("Berger") in exchange for $200,000 in cash. The
assets consisted primarily of vehicles, containers and customer lists. Berger,
which conducted a waste collection business in Illinois, was integrated into
Olney Sanitary System, Inc., the Company's Illinois collection operation. This
transaction will be accounted for using the purchase method of accounting.
From January 1, 1998 to April 1, 1998, the Company acquired the assets of
ten collection companies in separate transactions. Total consideration under the
agreements consists of approximately 240,000 unregistered shares of the
Company's stock and cash of approximately $6.6 million to the sellers. These
transactions will be accounted for using the purchase method of accounting.
On February 12, 1998, the Company acquired the Kelly Run Landfill from USA
Waste Services, Inc. Consideration under the agreement consisted of 250,000
shares of common stock of the Company in exchange for all the issued and
outstanding shares of Kelly Run Landfill. This transaction will accounted for
using the purchase method of accounting.
F-23
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENTS (CONTINUED)
SALE OF COMMON STOCK
In August 1997, the Company completed its registration and sale of 5,175,000
shares of common stock, par value $.01, 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 $85.5
million. The unaudited pro forma diluted earnings per share for the year ended
June 30, 1997, assuming the issuance of these shares and receipt of related
proceeds on July 1, 1996, and the reduction of outstanding indebtedness and
related interest expense, net of income taxes, would have been $.26 per share.
ANNUAL MEETING OF SHAREHOLDERS
On January 14, 1998, the Company held its Annual Meeting of the stockholders.
The following proposals were submitted to a vote: (i) to amend the Company's
Certificate of Incorporation, as amended, to increase the number of authorized
shares of Common Stock of the Company from 50 million shares to 150 million
shares, (ii) to amend the Company's Certificate of Incorporation, as amended, to
eliminate Class A common stock, (iii) to amend the Company's Certificate of
Incorporation, as amended, to create a class of undesignated Preferred Stock
authorizing the Board of Directors to issue up to 50 million shares of such
Preferred Stock, (iv) to approve and adopt the Company's 1997 Stock Option Plan.
The terms of the 1997 Stock Option Plan are essentially the same as the 1996
Stock Option Plan (see Note 9). The aggregate maximum number of shares of the
Company's common stock for which options may be granted under the 1997 Stock
Option Plan is 5,000,000. All proposals were adopted by the stockholders.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued a Statement No. 128,
Earnings Per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effect of options, warrants, and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been restated to
conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Year Ended June 30
1997 1996 1995
---------------------- -------------------- --------------------
<S> <C> <C> <C>
Numerator:
Net income (loss) $ 4,676,978 $(2,831,656) $ 2,737,941
====================== ==================== ====================
Denominator:
Denominator for basic
earnings per share - weighted average shares 16,220,259 11,473,345 10,299,624
Effect of dilutive options and warrants 963,693 -- 92,608
---------------------- -------------------- --------------------
Denominator for diluted earnings per share 17,183,952 11,473,345 10,392,232
====================== ==================== ====================
Basic earnings (loss) per share $ 0.29 $ (0.25) $ 0.27
====================== ==================== ====================
Diluted earnings (loss) per share $ 0.27 $ (0.25) $ 0.26
====================== ==================== ====================
</TABLE>
F-24
<PAGE>
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated statement of
operations, balance sheet and other operating data of the Company as of the
dates and for the periods indicated. The financial information 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 supplemental financial statements.
The financial information derived from the Company's supplemental unaudited
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 supplemental consolidated financial data
below should be read in conjunction with the Company's supplemental 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>
YEARS ENDED JUNE 30, /(1)/
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <C>
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 145,274 $ 99,988 $ 91,245 $ 72,900 $ 8,684
Cost of revenues 106,109 80,240 68,487 54,734 4,049
Selling, general and
administrative expenses 19,501 16,003 13,456 11,329 4,907
Depreciation and amortization 7,202 5,339 5,370 4,227 1,809
Merger costs 3,337 -- -- -- --
----------- ----------- ------------ ----------- ----------
Operating income (loss) 9,125 (1,594) 3,932 2,610 (2,081)
Interest expense, net (3,164) (1,287) (1,104) (603) (229)
Other income (expense) 595 145 172 725 123
----------- ----------- ------------ ----------- ----------
Income (loss) from continuing
operations before income taxes 6,556 (2,736) 3,000 2,732 (2,187)
Income tax expense (benefit) 1,879 96 262 (103) (715)
----------- ----------- ------------ ----------- ----------
Net income (loss) from
continuing operations $ 4,677 $ (2,832) $ 2,738 $ 2,835 $ (1,472)
=========== =========== ============ =========== ==========
Basic earnings (loss) per share
from continuing operations $.29 $(.25) $.27 $.28 $(0.34)
=========== =========== ============ =========== ==========
Weighted average number of
shares outstanding 16,220,259 11,473,345 10,299,624 10,291,597 4,392,022
=========== =========== ============ =========== ==========
Fully diluted earnings (loss) per
share from continuing
operations $.27 $(.25) $.26 $.27 $(0.34)
=========== =========== ============ =========== ==========
Weighted average number of
shares outstanding 17,183,952 11,473,345 10,392,232 10,462,898 4,392,022
=========== =========== ============ =========== ==========
OTHER OPERATING DATA:
EBITDA /(2)/ $ 16,327 $ 3,745 $ 9,302 $ 6,837 $ (272)
June 30, /(1)/
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
BALANCE SHEET DATA:
Working capital (deficit) $ (461) $ (1,592) $ 365 $ 2,314 $ 2,199
Total assets $ 183,183 $ 49,161 $ 14,102 $ 36,048 $ 16,792
Long-term debt, less current portion $ 66,914 $ 13,196 $ 2,467 $ 5,593 $ 1,994
Total liabilities $ 123,339 $ 32,246 $ 8,147 $ 19,038 $ 6,988
Total stockholders' equity $ 59,844 $ 16,915 $ 5,955 $ 17,010 $ 9,804
</TABLE>
F-25
<PAGE>
SELECTED FINANCIAL DATA FOOTNOTES
(1) Subsequent to June 30, 1996, the Company acquired Super Kwik, Inc. and its
affiliates ("Super Kwik"), Donno Company, Inc. and its affiliates ("Donno"),
and subsequent to June 30, 1997, the Company acquired Hamm's Sanitation,
Inc. and H.S.S., Inc. ("Hamm's"), Bluegrass Containment, Inc. ("Bluegrass"),
the Stamato Companies, and the Ecology Companies, in separate transactions.
Each of these business combinations was accounted for as a pooling of
interests and, accordingly, the Company's supplemental 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.
F-26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(SUPPLEMENTAL)
The following discussion reviews the Company's operations for the three years
ended June 30, 1997, and should be read in conjunction with the Company's
supplemental consolidated financial statements and related notes thereto
included elsewhere herein. The supplemental financial statements of the Company
include the financial position and results of operations of (1) Bluegrass
Containment, Inc., which was acquired on March 9, 1998, (2) the Ecology
Companies, which were acquired on March 31, 1998, and (3) the Stamato Companies,
which were acquired on March 31, 1998. Each of these transactions was accounted
for under the pooling of interests method of accounting.
The following discussion includes statements that are forward-looking in
nature. 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 shareholders 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 from
acquisitions made by or to be made by the Company, or projections involving
anticipated revenues, earnings or other aspects of operating results. Such
statements are subject to a number of factors that tend to influence the
accuracy of the statements and projections upon which the statements are based.
As noted elsewhere in this report, all phases of the Company's operations are
subject to a number of uncertainties, risks and other influences, many of which,
could materially affect the results of the Company's operations and whether
forward-looking statements made by the Company ultimately prove to be accurate.
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. The
Company's revenues for the year ended June 30, 1997 were comprised of
approximately 87% solid waste collection and transportation operations,
approximately 6% solid waste disposal operations, and approximately 7% 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 five 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 year ended June 30, 1997, approximately 9% 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 13% 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.
F-27
<PAGE>
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 insurance bonding
premiums, landfill related financial assurance bonding premiums, and costs
relating to marketing and sales.
The Company capitalizes direct incremental costs associated with purchase
acquisitions. Indirect development and acquisition costs, such as executive
salaries, corporate overhead, public relations, and other corporate services and
overhead are expensed as incurred. The Company also charges as an expense any
unamortized capitalized expenditures relating to proposed acquisitions that will
not be consummated.
At June 30, 1997, capitalized costs related directly to proposed acquisitions
that were not yet consummated were $281,000. 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 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 June 30, 1997, capitalized costs related
directly to the acquisition and expansion of existing and future landfills and
cell development were $34.1 million.
The Company's policy is to charge as an expense any unamortized capitalized
expenditures and advances relating to any landfill that is permanently closed or
any landfill expansion project that is abandoned.
MERGER COSTS
In connection with acquisitions accounted for under the pooling of interests
method, the Company records various merger costs including transaction-related
expenses and costs to bring the acquired assets into conformity with corporate
safety and operational standards.
OTHER INCOME (EXPENSE)
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.
F-28
<PAGE>
TAXES
In fiscal 1997, the Company utilized approximately $3.8 million of net
operating loss carryforwards for federal income tax purposes. At June 30, 1997,
the Company has available approximately $571,000 of net operating loss
carryforwards for federal income tax purposes. In fiscal 1998, the Company's
provision for income taxes should more closely approximate the statutory tax
rates, increased by the effect of nondeductible amortization expense.
ACQUISITION PROGRAM
The Company has implemented an aggressive acquisition program to expand its
operations by acquiring solid waste collection, transportation, and disposal
businesses, principally in the eastern United States. Exclusive of the
restatement for Hamm's, Bluegrass, Ecology Systems, and Stamato, each of which
was acquired subsequent to June 30, 1997 approximately $73 million or 76% of the
Company's revenues for the year ended June 30, 1997 and approximately $136
million or 82% of the Company's assets at June 30, 1997 resulted from these 17
acquisitions consummated by the Company between July 1996 and June 30, 1997. Of
these 17 acquisitions, 14 have been accounted for under the purchase method of
accounting and three have been accounted for under the pooling of interests
method of accounting.
With respect to the 14 acquisitions that have been accounted for under the
purchase method of accounting, goodwill is amortized over a period of 40 years,
resulting in an annual noncash charge to earnings during the amortization
period. Accordingly, if the Company completes additional acquisitions which are
accounted for under the purchase method of accounting, its financial position
and results of operations may fluctuate significantly from period to period, as
a result of additional noncash charges relating to goodwill. Amortization
expense of goodwill was approximately $435,000 for the year ended June 30, 1997.
In addition, the Company closed into escrow on May 12, 1997 the pending
acquisitions of Golden Gate Carting Co. Inc., ("Golden Gate") and Coney Island
Rubbish Removal, Inc. ("Coney Island") pending satisfaction of certain normal
conditions which the Company believes will be resolved. Estimated consideration
relating to the Golden Gate and Coney Island acquisitions consists of 288,820
unregistered shares of the Company's common stock and the assumption of
approximately $3.0 million of debt. The acquisitions of Golden Gate and Coney
Island will be accounted for under the purchase method.
In connection with each of its acquisitions, the Company attempts to
implement a number of cost saving measures, including possible reductions in
management levels and other personnel, the implementation of centralized
management and cost controls, and the elimination of duplicate collection
routes.
Because of the relative importance of acquired businesses and assets to the
Company's financial performance, the Company does not believe that its
historical financial statements are necessarily indicative of future
performance.
RECENT DEVELOPMENTS
ACQUISITIONS
On July 9, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Reuben Smith Rubbish Removal Service, Inc.
("Reuben Smith") in exchange for 92,369 unregistered shares of the Company's
common stock and the assumption of $574,000 of debt. Reuben Smith, which
conducts a waste collection business in Atlantic City, New Jersey, was
integrated into Super Kwik, the Company's southern New Jersey regional
collection operation. This transaction was accounted for as a purchase.
On August 15, 1997, the Company completed the purchase of all the stock of
Pappy's, Inc. ("Pappy's") for total consideration of approximately $12,000,000
in cash. Pappy's operates as the Oak Avenue Landfill and is permitted to accept
construction and demolition debris and other residual wastes. The facility is
located north of Baltimore, Maryland. In addition to local waste, Pappy's will
accept waste for the Company's various collection operations located in New
York, New Jersey, and Pennsylvania markets. This transaction was accounted for
as a purchase.
F-29
<PAGE>
On August 20, 1997, the Company purchased all of the stock of Soil
Remediation of Philadelphia, Inc. ("SRP") in exchange for 270,000 unregistered
shares of the Company's common stock. SRP provides remediation services for
petroleum contaminated soil. This transaction was accounted for as a purchase.
On August 14, 1997, the Company completed its merger with Waste X and
approximately 216,667 unregistered shares of the Company's common stock were
issued in exchange for all outstanding stock of Waste X. An additional issuance
of the Company's common stock of up to 30% of the total consideration given may
be issuable pending the resolution of certain specific and general
contingencies. Waste X operates a municipal solid waste collection business in
the Miami and Ft. Lauderdale, Florida markets and was integrated into the
Company's South Florida regional operation. The transaction has been accounted
for using the pooling of interests method. Periods prior to the consummation of
the merger have not been restated to include the accounts and operations of
Waste X as combined results are not materially different from the results as
presented.
On December 1, 1997, the Company acquired from Delmarva Capital Technology
all of the outstanding stock of Pine Grove, Inc. ("Pine Grove"), its wholly
owned subsidiary, for approximately $46 million. The purchase price was
comprised of approximately $34.3 million in cash and the assumption of
approximately $11.7 million of debt. Pine Grove, Inc. owns 100% of the
outstanding stock of Pine Grove Landfill, Inc., a 174 acre subtitle D solid
waste disposal facility located in east-central Pennsylvania, and Pine Grove
Hauling Company, an integrated solid waste collection company servicing
residential and commercial customers. This transaction was accounted for using
the purchase method of accounting.
On December 31, 1997, the Company acquired substantially all the assets of
Berger Waste Management, Inc. ("Berger") in exchange for $200,000 in cash. The
assets consisted primarily of vehicles, containers and customer lists. Berger,
which conducted a waste collection business in Illinois, was integrated into
Olney Sanitary System, Inc., the Company's Illinois collection operation. This
transaction was accounted for using the purchase method of accounting.
From January 1, 1998 to April 1, 1998, the Company acquired the assets of ten
collection companies in separate transactions. Total consideration under the
agreements consists of approximately 240,000 unregistered shares of the
Company's stock and cash of approximately $6.6 million to the sellers. These
transactions will be accounted for using the purchase method of accounting.
On February 12, 1998, the Company acquired the Kelly Run Landfill from USA
Waste Services, Inc. Consideration under the agreement consisted of 250,000
shares of common stock of the Company in exchange for all the issued and
outstanding shares of Kelly Run Landfill. This transaction will accounted for
using the purchase method of accounting.
SALE OF COMMON STOCK
In August 1997, the Company completed its registration and sale of 5,175,000
shares of common stock, par value $.01, 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 $85.5
million. The unaudited pro forma diluted earnings per share for the year ended
June 30, 1997, assuming the issuance of these shares and receipt of related
proceeds on July 1, 1996, and the reduction of outstanding indebtedness and
related interest expense, net of income taxes, would have been $.26 per share.
F-30
<PAGE>
RESULTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE
30, 1997
The following table presents, for the periods indicated, the period to period
change in dollars (in thousands) and percent for the various Consolidated
Statements of Operations line items.
<TABLE>
<CAPTION>
PERIOD TO PERIOD INCREASE (DECREASE)
-----------------------------------------------------------------------------
FOR THE YEARS ENDED FOR THE YEARS ENDED JUNE 30,
JUNE 30, 1997 AND 1996 1996 AND 1995
------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Revenues $45,286 45.3% $ 8,743 9.6%
Cost and expenses:
Cost of revenues 25,869 32.2 11,752 17.2
Selling, general and administrative 3,498 21.9 2,547 18.9
Depreciation and amortization 1,863 34.9 (30) (0.6)
Merger costs 3,337 -- -- --
--------------- --------------
34,567 34.0 14,269 16.3
--------------- --------------
Operating income (loss) 10,719 -- (5, 526) --
--------------- --------------
Interest expense, net 1,877 145.8 183 16.6
Other income, net 450 310.3 (27) (15.7)
--------------- --------------
1,427 124.9 210 22.6
--------------- --------------
Income (loss) before income taxes 9,292 -- (5,736) --
Income tax expense 1,783 -- (166) (63.4)
--------------- --------------
Net income (loss) $ 7,509 -- $ (5,570) --
=============== ==============
</TABLE>
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------
1997 1996 1995
---------------- -------------- ----------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 73.0 80.2 75.1
Selling, general and administrative expenses. 13.4 16.0 14.7
Depreciation and amortization 5.0 5.3 5.9
Merger costs 2.3 -- --
---------------- -------------- ----------------
Operating income (loss) 6.3 (1.5) 4.3
Interest expense, net (2.2) (1.3) (1.2)
Other income (expense) 0.4 0.1 0.2
---------------- -------------- ----------------
Income (loss) before income taxes 4.5 (2.7) 3.3
Income tax expense 1.3 0.1 0.3
---------------- -------------- ----------------
Net income (loss) 3.2% (2.8)% 3.0%
================ ============== ================
</TABLE>
F-31
<PAGE>
Revenues for the year ended June 30, 1997 were $145.3 million compared to
$100.0 million for the year ended June 30, 1996, an increase of $45.3 million or
45.3%. The principal factors affecting the increase in revenues were (1) the
impact of 14 acquisitions accounted for under the purchase method, which
contributed aggregate revenues of $24.1 million for the year ended June 30,
1997, including the acquisitions of Allied Waste Services, Inc., Waste Services,
Inc., Environmental Waste Systems, Inc., R & A Bender, Inc., and their
respective affiliates, and (2) the acquisitions of Super Kwik, Inc. and its
affiliates (''Super Kwik''), and Donno Company, Inc. and its affiliates
(''Donno''), which have been accounted for under the pooling of interests
method, and which contributed revenue of $35.8 million for the year ended June
30, 1997 compared to $31.9 million for the year ended June 30, 1996, an increase
of $3.9 million. Additionally, the acquisition of Apex Waste Services, Inc.
(''Apex''), which has been accounted for under the pooling of interests method,
contributed revenues of $13.1 million since its inception of operations on
October 1, 1996.
Revenues increased $8.7 million or 9.6% in fiscal 1996 compared to fiscal
1995. The principal factors affecting the increase in revenues were increased
revenues at Ecology, Super Kwik, and Stamato partially offset by the closure of
the Company's collection operations in South Carolina and declines in revenues
at the Company's landfills in South Carolina and Kentucky. Additionally, during
the year ended June 30, 1995 Donno realized the benefit of a one-time contract
termination settlement of $660,000.
Cost of revenues for the year ended June 30, 1997 were $106.1 million
compared to $80.2 million for the year ended June 30, 1996, an increase of $25.9
million or 32.2%. Cost of revenues as a percentage of revenues for the year
ended June 30, 1997 was 73.0% compared to 80.2% for the same period in fiscal
1996. Cost of revenues as a percentage of revenues decreased during this period
primarily due to the acquisition by the Company of three landfills, which
operated at relatively higher margins than the Company's other operations and
due to the operating efficiencies imposed on previously private acquired
companies accounted for as poolings of interests. A portion of the decrease was
also attributable to economies of scale relating to the Company's increase in
size over the period.
Cost of revenues increased approximately $11.8 million in fiscal 1996
compared to fiscal 1995. The principal factors affecting the increase in cost of
revenues for the year ended June 30, 1996 were (1) a 10% rise in revenues, (2) a
charge of $900,000 for closure and post-closure monitoring costs relating to the
Company's Kentucky landfill, and (3) an increase at Super Kwik due to
acquisitions completed in January and November of 1995.
Selling, general and administrative expenses for the year ended June 30, 1997
were $19.5 million compared to $16.0 million for the year ended June 30, 1996,
an increase of $3.5 million. These expenses as a percentage of revenues for the
year ended June 30, 1997 were 13.4% compared to 16.0% for the same period in
fiscal 1996. This reduction as a percentage of revenue was primarily due to (1)
certain cost savings related to economies of scale in restructuring the
Company's insurance program and (2) overall economies gained through elimination
of redundant overhead as a result of integration of acquisitions. Additionally,
in fiscal 1996 the Company incurred unusual operating costs related to the
change in control of the Company in June of 1996, and increases in certain
reserves.
Selling, general and administrative expenses increased $2.5 million, or 18.9%
in fiscal 1996 as compared to fiscal 1995. These expenses as a percentage of
revenues for the year ended June 30, 1996 were 16.0% compared to 14.7% for the
same period in 1995. The increase resulted primarily from the aforementioned
special charges taken in fiscal 1996.
Depreciation and amortization totaled $7.2 million, or 5.0% of revenues, in
fiscal 1997 versus $5.3 million, or 5.3% of revenues, in fiscal 1996. This
increase was due primarily to increased depreciation and landfill amortization
as a result of businesses and assets acquired as well as amortization of
goodwill and other intangibles associated with the acquisitions.
Depreciation and amortization for the year ended June 30, 1996 of $5.3
million was consistent with the fiscal 1995 amount of $5.4 million.
Merger costs incurred during the year ended June 30, 1997 totaled $3.3
million relating to the acquisitions of Super Kwik, Donno, and Apex. Merger
costs include $835,000 of transactions costs and $2.5 million of costs related
to integrating operations.
Net interest expense for the year ended June 30, 1997 was $3.2 million
compared to $1.3 million for the year ended June 30, 1996, an increase of
approximately $1.9 million. This increase is principally the result of
borrowings under the Company's credit facility relating to (1) acquisitions, (2)
the purchase of real estate and (3) equipment financing in fiscal 1997. Net
interest expense for the year ended June 30, 1996 of $1.3 million was slightly
higher than the $1.1 million expense in fiscal 1995.
F-32
<PAGE>
Other income, net, for the year ended June 30, 1997 was $595,000 compared to
$145,000 for the year ended June 30, 1996, an increase in income of $450,000.
This change was primarily due to a $489,000 one-time write down, in fiscal 1996,
to estimated net realizable value of landfill, hauling and real estate assets no
longer considered integral to the operation of the Company after its change of
control in June 1996. Other income, net, for the year ended June 30, 1996 was
$145,000 as compared to $172,000 for the year ended June 30, 1995. This
decrease was due primarily to the aforementioned write down in fiscal 1996.
The tax provision for the year ended June 30, 1997 included $904,000 relating
to the completion of the mergers with Super Kwik, Donno, and Apex. The provision
reflects the recording of a deferred tax provision as of the date of the
respective mergers, at which time the pooled entities' S corporation elections
were terminated. The Company's effective tax rate, including both federal and
state taxes, was 27.8% for fiscal 1997. The effective tax rate was less than the
federal and state statutory rates primarily due to the reversal of the valuation
allowance and income tax under Subchapter "S" of the Internal Revenue Code. In
1996, the tax expense relates primarily to the recording of previously taxed "C"
corporation earnings related to the merger with Hamm's and a valuation allowance
offsetting the current year tax benefit of net operating loss carryforwards due
to a lack of certainty of realization of these loss carryforwards in future
years as a result of historic reported operating losses. The Company's effective
tax rate, including both federal and state taxes, was 6.6% for fiscal 1995. In
1995, the Company's effective tax rate was lower than the federal statutory
rates primarily due to income which was taxed under Subchapter "S" of the
Internal Revenue Code.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires substantial amounts of capital. The Company's
capital requirements include acquisitions, equipment purchases, and capital
expenditures for cell construction and expansion of its landfills. The Company
plans to meet these capital needs from various financing sources, including
borrowings, internally generated funds, and the issuance of Common Stock.
As of June 30, 1997, the Company had a working capital deficit of $461,000,
including cash and cash equivalents of $5.5 million. For fiscal 1997, net cash
provided by operations was approximately $8.7 million, net cash provided by
financing activities was approximately $56.0 million (including net proceeds of
$10.4 million from private placements of Common Stock) and net cash used in
investing activities was approximately $61.7 million resulting in an increase in
cash and cash equivalents of $3.0 million during fiscal 1997. A significant
portion of the capital expended during the period, approximately $60.3 million,
was used to fund the acquisition of property and equipment, including $39.3
million relating to acquisitions, $15.9 million for the purchase of operating
equipment and real estate, and $5.1 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, which was increased to $50 million on January
27, 1997 and to $150 million on October 27, 1997, is available for repayment of
debt, funding of acquisitions, working capital, and for up to $50 million in
standby letters of credit. As of April 27, 1998, approximately $17.3 million in
letters of credit were outstanding under the Credit Facility. Also, at April 27,
1998, there were borrowings of approximately $49.6 million outstanding 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 April 21, 1998, the applicable interest rate was
6.375%. The facility expires on October 30, 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 completed a secondary public offering in which it
issued 5,175,000 shares of Common Stock at $17.75 per share. The net proceeds
of $85.5 million after deducting underwriting discounts, commissions and other
offering expenses were used to reduce outstanding debt under the Company's
revolving credit agreement 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.
F-33
<PAGE>
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 $27.0 million for the year ending June 30, 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, the funds expected to be generated
from operations, the net proceeds of the recently completed public offering and
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 currently permitted and operating 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 $14.4 million, of which $3.7 million has been accrued as of June
30, 1997. 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 $1.7 million for post-closure
obligations as of June 30, 1997. 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 and Pennsylvania disposal facilities. Bonds outstanding at June 30,
1997 were $1.6 million for the Kentucky landfill, $214,000 for the West Virginia
landfill, and $3.8 million for the Pennsylvania landfill. The bonds are
collateralized by irrevocable letters of credit and trust fund deposits.
Additionally, the Company has on deposit $204,000 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1996, the AICPA issued SOP 96-1, Environmental Remediation
Liabilities. The SOP provides guidance with respect to the recognition,
measurement, and disclosure of environmental remediation liabilities. The
Company adopted SOP 96-1 in the first quarter of fiscal 1998, and the effect of
adoption was not material to the Company.
F-34
<PAGE>
EASTERN ENVIRONMENTAL SERVICES, INC.
EXHIBIT INDEX
Number and
Description of Exhibit
- -----------------------
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule for the Years Ended June 30, 1997 and June 30,
1996 (for SEC use only)
<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), and
(x) on Form S-8 (Registration Statement No. 333-48265)
of our report dated April 29, 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 April 29, 1998
filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 29, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1996
<PERIOD-START> JUL-01-1996 JUL-01-1995
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 5,453,397 2,480,650
<SECURITIES> 0 0
<RECEIVABLES> 21,329,478 8,981,959
<ALLOWANCES> 2,078,000 1,036,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 33,630,148 14,159,479
<PP&E> 112,899,385 62,521,234
<DEPRECIATION> 33,691,391 31,310,841
<TOTAL-ASSETS> 183,183,164 49,161,045
<CURRENT-LIABILITIES> 34,090,830 15,751,543
<BONDS> 66,914,414 13,196,046
0 0
0 0
<COMMON> 186,082 119,790
<OTHER-SE> 59,657,847 16,794,802
<TOTAL-LIABILITY-AND-EQUITY> 183,183,164 49,161,045
<SALES> 0 0
<TOTAL-REVENUES> 145,273,584 99,988,418
<CGS> 0 0
<TOTAL-COSTS> 106,109,330 80,239,389
<OTHER-EXPENSES> 29,445,025 21,197,626
<LOSS-PROVISION> 631,871 358,795
<INTEREST-EXPENSE> 3,163,673 1,286,995
<INCOME-PRETAX> 6,555,556 (2,735,592)
<INCOME-TAX> 1,878,578 96,064
<INCOME-CONTINUING> 4,676,978 (2,831,656)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,676,978 (2,831,656)
<EPS-PRIMARY> .29 (.25)
<EPS-DILUTED> .27 (.25)
</TABLE>
